32003R1725
13.10.2003 IL-ĠURNAL UFFIĊJALI TA’ L-UNJONI EWROPEA L 261/1
IR-REGOLAMENT TAL-KUMMISSJONI (KE) Nru 1725/2003
tad-29 ta’ Settembru 2003
li jadotta ċerti standards internazzjonali internazzjonali tal-kontab ilità bi qbil mar-Regolament (KE)
Nru 1606/2002 tal-Parlament Ewropew u tal-Kunsill
(Test b’relevanza għaż-ŻEE)
IL-KUMMISSJONI TAL-KOMUNITAJIET EWROPEJ,
Wara li kkunsidrat it-Trattat li jistabbilixxi l-Komunità Ewropea.
Wara li kkunsidrat ir-Regolament (KE) Nru 1606/2002 tal-
Parlament Ewropew u tal-Kunsill tad-19 ta’ Lulju 2002 dwarl-applikazzjoni tal-istandards internazzjonali tal- kontabilità (
1), u
partikolarment l-Artikolu 3(3) tiegħu,
Billi:
(1) Ir-Regolament(KE)Nru1606/2002jeħtieġligħalkullsena
finanzjarja li tibda fi, jew wara l-ewwel ta’ Jannar 2005,
kumpaniji nnegozzjati publikament irregolati bil-liġi ta’Stat Membru għandhom taħt ċerti kondizzjonijiet jippre-paraw il-kontijiet konsolidati tagħhom b’konformità mal-istandardsinternazzjonalital-kontabilitàkifdefinitfl-Arti-kolu 2ta’ dak ir-Regolament.
(2) Il-Kummissjoni, wara li kkunsidrat il-parir mogħti
mill-Kumitat Tekniku tal-Kontabilità, ikkonkludiet lil-istandardsinternazzjonalital-kontabilitàeżistentifl-14ta’Settembru2002jilħqul-kriterjigħall-adozzjonikifstabbi-liti fl-Artikolu 3 tar-Regolament (KE) Nru 1606/2002.
(3) Il-Kummissjoni għandha wkoll tikkunsidra l-proġetti kur-
renti tal-iżviluppi għal dak l-għan biex temenda il-ħafnastandards eżistenti. L-istandards internazzjonali tal-kontabilità li jirriżultaw mill-finalizzazzjoni ta’ dawnil-proposti għandhom ikunu meqjusa għall-adozzjoni ladarba dawk l-istandards ikunu finali. L-eżistenza ta’ dawnl-emendi kif proposti għall-istandards eżistentim’għandhomx impatt fuq id-deċiżjoni tal-Kummissjoni litikkonferma l-istandards eżistenti, apparti milli fil-każi ta’IAS 32 Strumenti Finanzjarji: żvelar u preżentazzjoni, IAS39 Strumenti Finanzjarji: ir-rikonoxximent u l-kejl unumru żgħir tal-interpretazzjonijiet relatati ma dawnl-istandards, SIC 5 Klassifika tal-istrumenti finanzjarji —Twettieq kontinġenti tad-dispożizzjonijiet, SIC 16 IshmaKapitali — strumenti ta’ ekwità proprja akkwistati mill-ġdid (titoli tat-teżor) u SIC 17 Ekwità — l-ispejjeż tat-transazzjoni ta’ ekwità.
(4) L-eżistenzata’standardsta’kwalitàgħoljalijittrattawmal-
istrumenti finanzjarji, inklużi d-derivattivi, hija importantifis-suq kapitali tal-Komunità. B’dana kollu, fil-każi ta’ IAS32 u IAS 39, emendi li bħal issa qiegħdin jiġu kkunsidratijistgħu jkunu hekk konsiderabbli li jkun xieraq li ma jku-nux adottati dawn l-istandards fiż-żmien preżenti. Mallil-proġett preżenti ta’ titjib ikun komplut u l-istandardsriveduti jkunu maħruġa, il-Kummissjoni għandhatikkunsidra, bħala materja ta’ prijorità, l-adozzjoni tal-istandards riveduti biex tressaq aktar ir-Regolament (KE)Nru 1606/2002.
(5) Għalhekk, l-istandards internazzjonali tal-kontabilità
kollhaeżistentifl-14ta’Settembru2002,appartimilliIAS32,IAS39ul-interpretazzjonijietrelatatigħandhomikunuadottati.
(6) Il-miżuri li hemm provvediment dwarhom f’dan
ir-Regolament huma bi qbil ma’ l-opinjoni tal-KumitatRegolatorju tal-kontabilità.
ADOTTAT DAN IR-REGOLAMENT,
L-Artikolu 1
L-istandards internazzjonali tal-kontabilità stabbiliti fl-Annesshuma adottati.
L-Artikolu 2
Danir-Regolamentgħandujidħolfis-seħħfit-tieletjumlijiġiwaral-pubblikazzjoni tiegħu fil-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea.
(1) ĠU L 243, tal-11.9.2002, p. 1.4 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Danir-Regolamentgħandujorbotfl-intiertiegħuuhuwadirettamentappl ikabblifl-IstatiMembri
kollha.
Magħmul fi Brussel, id-29 ta’ Settembru 2003.
Għall-Kummissjoni
Frederik BOLKESTEIN
Membru tal-Kumissjoni13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 5
ANNEX
INTERNATIONAL ACCOUNTING STANDARDS
IAS 1: Presentation of financial statements (revised 1997)
IAS 2: Inventories (revised 1993)IAS 7: Cash flow statements (revised 1992)IAS 8: Profitorlossfortheperiod,fundamentalerrorsandchangesinacco untingpolicies(revised
1993)
IAS 10: Events after the balance sheet date (revised 1999)IAS 11: Construction contracts (revised 1993)IAS 12: Income taxes (revised 2000)IAS 14: Segment reporting (revised 1997)IAS 15: Information reflecting the effects of changing prices (reformatt ed 1994)
IAS 16: Property, plant and equipment (revised 1998)IAS 17: Leases (revised 1997)IAS 18: Revenue (revised 1993)IAS 19: Employee benefits (revised 2002)IAS 20: Accounting for government grants and disclosure of government ass istance (reformatted
1994)
IAS 21: The effects of changes in foreign exchange rates (revised 1993)IAS 22: Business combinations (revised 1998)IAS 23: Borrowing costs (revised 1993)IAS 24: Related party disclosures (reformatted 1994)IAS 26: Accounting and reporting by retirement benefit plans (reformatte d 1994)
IAS 27: Consolidated financial statements and accounting for investment s in subsidiaries (revised
2000)
IAS 28: Accounting for investments in associates (revised 2000)
IAS 29: Financial reporting in hyperinflationary economies (reformatte d 1994)
IAS 30: Disclosuresinthefinancialstatementsofbanksandsimilarfinan cialinstitutions(reformatted
1994)
IAS 31: Financial reporting of investments in joint ventures (revised 200 0)
IAS 33: Earnings per share (1997)IAS 34: Interim financial reporting (1998)IAS 35: Discontinuing operations (1998)IAS 36: Impairment of assets (1998)IAS 37: Provisions, contingent liabilities and contingent assets (1998)IAS 38: Intangible assets (1998)IAS 40: Investment property (2000)IAS 41: Agriculture (2001)6 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERPRETATIONS OF THE STANDING INTERPRETATIONS COMMITTEE
SIC-1: Consistency — Different cost formulas for inventories
SIC-2: Consistency — Capitalisation of borrowing costsSIC-3: Elimination of unrealised profits and losses on transactions with associates
SIC-6: Costs of modifying existing softwareSIC-7: Introduction of the euroSIC-8: First-time application of IASs as the primary basis of accountingSIC-9: Business combinations — Classification either as acquisitions or unitings of interests
SIC-10: Government assistance — No specific relation to operating activi ties
SIC-11: Foreign exchange — Capitalisation of losses resulting from sever e currency devaluations
SIC-12: Consolidation — Special purpose entitiesSIC-13: Jointly controlled entities — Non-monetary contributions by ven turers
SIC-14: Property, plant and equipment — Compensation for the impairment o r loss of items
SIC-15: Operating leases — IncentivesSIC-18: Consistency — Alternative methodsSIC-19: Reportingcurrency—Measurementandpresentationoffinancials tatementsunderIAS21
and IAS 29
SIC-20: Equity accounting method — Recognition of lossesSIC-21: Income taxes — Recovery of revalued non-depreciable assetsSIC-22: Business combinations — Subsequent adjustment of fair values and goodwill initially
reported
SIC-23: Property, plant and equipment — Major inspection or overhaul cost s
SIC-24: Earnings per share — Financial instruments and other contracts th at may be settled in sha-
res
SIC-25: Income taxes — Changes in the tax status of an enterprise or its shar eholders
SIC-27: Evaluating the substance of transactions involving the legal for m of a lease
SIC-28: Business combinations — “Date of exchange” and fair value of equit y instruments
SIC-29: Disclosure — Service concession arrangements
SIC-30: Reporting currency — Translation from measurement currency to pr esentation currency
SIC-31: Revenue — Barter transactions involving advertising servicesSIC-32: Intangible assets — Web site costsSIC-33: Consolidation and equity method — Potential voting rights and all ocation of ownership
interests
Note:Any appendices to those standards and interpretations are not considered as part of those standards and interpretations and
shall therefore not be reproduced.
Reproduction allowed within the European Economic Area. All existing rig hts reserved outside the EEE,
with the exception of the right to reproduce for the purposes of personal us e or other fair dealing. Further
information can be obtained from the IASB at www.iasb.org.uk.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 7
INTERNATIONAL ACCOUNTING STANDARD IAS 1
(REVISED 1997)
Presentation of financial statements
ThisrevisedInternationalAccountingStandardsupersedesIAS1,disclo sureofaccountingpolicies,IAS5,information
to be disclosed in financial statements, and IAS 13, presentation of curre nt assets and current liabilities, which were
approved by the Board in reformatted versions in 1994. IAS 1 (revised 1997) was approved by the IASC Board in
July 1997 and became effective for financial statements covering periods beginning on or after 1 July 1998.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraphs 63(c), 64, 65(a)
and74(c).TheamendedtextbecomeseffectivewhenIAS10(revised1999)be comeseffective,i.e.forannualfinancial
statements covering periods beginning on or after 1 January 2000.
The following SIC interpretations relate to IAS 1:
— SIC-8: first-time application of IASs as the primary basis of accounting ,
— SIC-18: consistency — alternative methods,— SIC-27: evaluating the substance of transactions in the legal form of a le ase,
— SIC-29: disclosure — Service concession arrangements.
Introduction
1.This Standard (“IAS 1 (revised 1997)”) replaces International Accountin g Standards IAS 1, disclosure of
accountingpolicies,IAS5,informationtobedisclosedinfinancialstat ements,andIAS13,presentationofcurrent
assetsandcurrentliabilities.IAS1(revised)iseffectiveforaccounti ngperiodsbeginningonorafter1July1998
although, because the requirements are consistent with those in existing Standards, earlier application is
encouraged.
2.TheStandardupdatestherequirementsintheStandardsitreplaces,consi stentwiththeIASCframeworkforthe
preparationandpresentationoffinancialstatements.Inaddition,itis designedtoimprovethequalityoffinancial
statements presented using International Accounting Standards by:
(a) ensuring that financial statements that state compliance with IAS com ply with each applicable Standard,
including all disclosure requirements;
(b) ensuring that departures from IAS requirements are restricted to extr emely rare cases (instances of
non-compliance will be monitored and further guidance issued when approp riate);
(c) providing guidance on the structure of financial statements includin g minimum requirements for each
primary statement, accounting policies and notes, and an illustrative ap pendix; and
(d) establishing(basedontheframework)practicalrequirementsonissu essuchasmateriality,goingconcern,the
selection of accounting policies when no Standard exists, consistency an d the presentation of comparative
information.
3.To deal with users’ demands for more comprehensive information on “perfor mance”, measured more broadly
than the “profit” shown in the income statement, the Standard establishes a new requirement for a primary
financial statement showing those gains and losses not currently present ed in the income statement. The new
statement may be presented either as a “traditional” equity reconciliati on in column form, or as a statement of
performance in its own right. The IASC Board agreed in principle, in April 1 997, to undertake a review of the
way in which performance is measured and reported. The project is likely to consider, initially, the interaction
between performance reporting and the objectives of reporting in the IASC framework. Therefore, IASC will
develop proposals in this area.8 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4.The Standard applies to all enterprises reporting in accordance with IAS, including banks and insurance
companies. The minimum structures are designed to be sufficiently flexib le that they can be adapted for use by
any enterprise. Banks, for example, should be able to develop a presentati on which complies with this Standard
andthemoredetailedrequirementsinIAS30,disclosuresinthefinancial statementsofbanksandsimilarfinancial
institutions.
CONTENTS
Paragraphs
Objective
Scope 10
Purpose of financial statements 10Responsibility for financial statements 11Components of financial statements 11Overall considerations 12
Fair presentation and compliance with international accounting standar ds 12
Accounting policies 13
Going concern 13
Accrual basis of accounting 14
Consistency of presentation 14
Materiality and aggregation 15
Offsetting 16
Comparative information 16
Structure and content 17
Introduction 17
Identification of financial statements 17Reporting period 18
Timeliness 18
Balance sheet 18
The current/non-current distinction 18Current assets 19
Current liabilities 19
Information to be presented on the face of the balance sheet 20Information to be presented either on the face of the balance sheet or in the notes 2113/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 9
Income statement 22
Information to be presented on the face of the income statement 22
Information to be presented either on the face of the income statement or in the notes 23
Changes in equity 24
Cash flow statement 25
Notes to the financial statements 25Structure 25
Presentation of accounting policies 26Other disclosures 27
Effective date 27
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementation guidance in this Standard, and in the context of the Prefac e to International Accounting Standards.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribethebasisforpresentationo fgeneralpurposefinancialstatements,inorder
toensurecomparabilitybothwiththeenterprise’sownfinancialstateme ntsofpreviousperiodsandwiththefinancial
statements of other enterprises. To achieve this objective, this Standar d sets out overall considerations for the
presentation of financial statements, guidelines for their structure an d minimum requirements for the content of
financial statements. The recognition, measurement and disclosure of sp ecific transactions and events is dealt with
in other International Accounting Standards.
SCOPE
1.This Standard should be applied in the presentation of all general purpose financial statements prepared and
presented in accordance with International Accounting Standards.
2.Generalpurposefinancialstatementsarethoseintendedtomeettheneeds ofuserswhoarenotinapositionto
demand reports tailored to meet their specific information needs. Genera l purpose financial statements include
thosethatarepresentedseparatelyorwithinanotherpublicdocumentsuc hasanannualreportoraprospectus.
This Standard does not apply to condensed interim financial information. This Standard applies equally to the
financialstatementsofanindividualenterpriseandtoconsolidatedfin ancialstatementsforagroupofenterprises.
However,itdoesnotprecludethepresentationofconsolidatedfinancial statementscomplyingwithInternational
Accounting Standards and financial statements of the parent company unde r national requirements within the
same document, as long as the basis of preparation of each is clearly disclo sed in the statement of accounting
policies.
3.This Standard applies to all types of enterprises including banks and insu rance enterprises. Additional
requirements for banks and similar financial institutions, consistent w ith the requirements of this Standard, are
set out in IAS 30, disclosures in the financial statements of banks and simi lar financial institutions.
4.This Standard uses terminology that is suitable for an enterprise with a pr ofit objective. Public sector business
enterprises may therefore apply the requirements of this Standard. Non-p rofit, government and other public
sectorenterprisesseekingtoapplythisStandardmayneedtoamendthedes criptionsusedforcertainlineitems
in the financial statements and for the financial statements themselves. Such enterprises may also present
additional components of the financial statements.10 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
PURPOSE OF FINANCIAL STATEMENTS
5. Financial statements are a structured financial representation of the financial position of and the transactions
undertaken by an enterprise. The objective of general purpose financial s tatements is to provide information
about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users
in making economic decisions. Financial statements also show the results of management’s stewardship of the
resources entrusted to it. To meet this objective, financial statements p rovide information about an enterprise’s:
(a) assets;
(b) liabilities;(c) equity;(d) income and expenses, including gains and losses; and(e) cash flows.
Thisinformation,alongwithotherinformationinthenotestofinancials tatements,assistsusersinpredictingthe
enterprise’s future cash flows and in particular the timing and certainty of the generation of cash and cash
equivalents.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
6.The board of directors and/or other governing body of an enterprise is resp onsible for the preparation and
presentation of its financial statements.
COMPONENTS OF FINANCIAL STATEMENTS
7.A complete set of financial statements includes the following components :
(a) balance sheet;
(b) income statement;(c) a statement showing either:
(i) all changes in equity; or(ii) changes in equity other than those arising from capital transactions with owners and distributions to
owners;
(d) cash flow statement; and(e) accounting policies and explanatory notes.
8.
Enterprisesareencouragedtopresent,outsidethefinancialstatements ,afinancialreviewbymanagementwhich
describesandexplainsthemainfeaturesoftheenterprise’sfinancialpe rformanceandfinancialpositionandthe
principal uncertainties it faces. Such a report may include a review of:
(a) themainfactorsandinfluencesdeterminingperformance,includingc hangesintheenvironmentinwhichthe
enterpriseoperates,theenterprise’sresponsetothosechangesandthei reffect,andtheenterprise’spolicyfor
investment to maintain and enhance performance, including its dividend p olicy;
(b) the enterprise’s sources of funding, the policy on gearing and its risk management policies; and
(c) the strengths and resources of the enterprise whose value is not reflec ted in the balance sheet under
International Accounting Standards.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 11
9.Manyenterprisespresent,outsidethefinancialstatements,additional statementssuchasenvironmentalreports
and value added statements, particularly in industries where environmen tal factors are significant and when
employeesareconsideredtobeanimportantusergroup.Enterprisesareen couragedtopresentsuchadditional
statements if management believes they will assist users in making econom ic decisions.
OVERALL CONSIDERATIONS
Fair presentation and compliance with international accounting standar ds
10.Financial statements should present fairly the financial position, fina ncial performance and cash flows of an
enterprise.TheappropriateapplicationofInternationalAccountingSt andards,withadditionaldisclosurewhen
necessary, results, in virtually all circumstances, in financial statem ents that achieve a fair presentation.
11.AnenterprisewhosefinancialstatementscomplywithInternationalAcco untingStandardsshoulddisclosethat
fact.FinancialstatementsshouldnotbedescribedascomplyingwithInte rnationalAccountingStandardsunless
they comply with all the requirements of each applicable Standard and each applicable interpretation of the
Standing Interpretations Committee (1).
12.Inappropriateaccountingtreatmentsarenotrectifiedeitherbydisclos ureoftheaccountingpoliciesusedorby
notes or explanatory material.
13.In the extremely rare circumstances when management concludes that compl iance with a requirement in a
Standard would be misleading, and therefore that departure from a require ment is necessary to achieve a fair
presentation, an enterprise should disclose:
(a) that management has concluded that the financial statements fairly pr esent the enterprise’s financial
position, financial performance and cash flows;
(b) thatithascompliedinallmaterialrespectswithapplicableInternat ionalAccountingStandardsexceptthat
it has departed from a Standard in order to achieve a fair presentation;
(c) the Standard from which the enterprise has departed, the nature of the d eparture, including the treatment
that the Standard would require, the reason why that treatment would be mis leading in the circumstances
and the treatment adopted; and
(d) thefinancialimpactofthedepartureontheenterprise’snetprofitor loss,assets,liabilities,equityandcash
flows for each period presented.
14.Financial statements have sometimes been described as being “based on” or “complying with the significant
requirements of” or “in compliance with the accounting requirements of” I nternational Accounting Standards.
Often there is no further information, although it is clear that significa nt disclosure requirements, if not
accountingrequirements,arenotmet.Suchstatementsaremisleadingbec ausetheydetractfromthereliability
and understandability of the financial statements. In order to ensure tha t financial statements that state
compliance with International Accounting Standards will meet the standa rd required by users internationally,
thisStandardincludesanoverallrequirementthatfinancialstatements shouldgiveafairpresentation,guidance
on how the fair presentation requirement is met, and further guidance for d etermining the extremely rare
circumstances when a departure is necessary. It also requires prominent d isclosure of the circumstances
surroundingadeparture.Theexistenceofconflictingnationalrequirem entsisnot,initself,sufficienttojustify
a departure in financial statements prepared using International Accoun ting Standards.
(1) See also SIC-8: first-time application of IASs as the primary basis of acc ounting.12 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
15.In virtually all circumstances, a fair presentation is achieved by compli ance in all material respects with
applicable International Accounting Standards. A fair presentation req uires:
(a) selecting and applying accounting policies in accordance with paragr aph 20;
(b) presenting information, including accounting policies, in a manner w hich provides relevant, reliable,
comparable and understandable information; and
(c) providing additional disclosures when the requirements in Internati onal Accounting Standards are
insufficienttoenableuserstounderstandtheimpactofparticulartrans actionsoreventsontheenterprise’s
financial position and financial performance.
16.Inextremelyrarecircumstances,applicationofaspecificrequirementi nanInternationalAccountingStandard
might result in misleading financial statements. This will be the case onl y when the treatment required by the
Standardisclearlyinappropriateandthusafairpresentationcannotbea chievedeitherbyapplyingtheStandard
or through additional disclosure alone. Departure is not appropriate sim ply because another treatment would
also give a fair presentation.
17.When assessing whether a departure from a specific requirement in Interna tional Accounting Standards is
necessary, consideration is given to:
(a) the objective of the requirement and why that objective is not achieved or is not relevant in the particular
circumstances; and
(b) the way in which the enterprise’s circumstances differ from those of ot her enterprises which follow the
requirement.
18.Becausethecircumstancesrequiringadepartureareexpectedtobeextrem elyrareandtheneedforadeparture
will be a matter for considerable debate and subjective judgement, it is im portant that users are aware that the
enterprisehasnotcompliedinallmaterialrespectswithInternationalA ccountingStandards.Itisalsoimportant
that they are given sufficient information to enable them to make an inform ed judgement on whether the
departure is necessary and to calculate the adjustments that would be requ ired to comply with the Standard.
IASC will monitor instances of non-compliance that are brought to its atte ntion (by enterprises, their auditors
andregulators,forexample)andwillconsidertheneedforclarification throughinterpretationsoramendments
to Standards, as appropriate, to ensure that departures remain necessary only in extremely rare circumstances.
19.When,inaccordancewithspecificprovisionsinthatStandard,anInterna tionalAccountingStandardisapplied
before its effective date, that fact should be disclosed.
ACCOUNTING POLICIES
20.Managementshouldselectandapplyanenterprise’saccountingpoliciess othatthefinancialstatementscomply
with all the requirements of each applicable International Accounting St andard and interpretation of the
Standing Interpretations Committee. Where there is no specific requirem ent, management should develop
policies to ensure that the financial statements provide information tha t is:
(a) relevant to the decision-making needs of users; and
(b) reliable in that they:
(i) represent faithfully the results and financial position of the enterp rise;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13
(ii) reflect the economic substance of events and transactions and not mer ely the legal form (1);
(iii)are neutral, that is free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
21.Accountingpoliciesarethespecificprinciples,bases,conventions,ru lesandpracticesadoptedbyanenterprise
in preparing and presenting financial statements.
22.In the absence of a specific International Accounting Standard and an inte rpretation of the Standing
Interpretations Committee, management uses its judgement in developing an accounting policy that provides
the most useful information to users of the enterprise’s financial statem ents. In making this judgement,
management considers:
(a) therequirementsandguidanceinInternationalAccountingStandards dealingwithsimilarandrelatedissues;
(b) the definitions, recognition and measurement criteria for assets, li abilities, income and expenses set out in
the IASC framework; and
(c) pronouncementsofotherstandardsettingbodiesandacceptedindustr ypracticestotheextent,butonlyto
the extent, that these are consistent with (a) and (b) of this paragraph.
GOING CONCERN
23.When preparing financial statements, management should make an assessme nt of an enterprise’s ability to
continue as a going concern. Financial statements should be prepared on a g oing concern basis unless
management either intends to liquidate the enterprise or to cease trading , or has no realistic alternative but to
do so. When management is aware, in making its assessment, of material unce rtainties related to events or
conditionswhichmaycastsignificantdoubtupontheenterprise’sabilit ytocontinueasagoingconcern,those
uncertaintiesshouldbedisclosed.Whenthefinancialstatementsarenot preparedonagoingconcernbasis,that
factshouldbedisclosed,togetherwiththebasisonwhichthefinancialst atementsarepreparedandthereason
why the enterprise is not considered to be a going concern.
24.Inassessingwhetherthegoingconcernassumptionisappropriate,manage menttakesintoaccountallavailable
information for the foreseeable future, which should be at least, but is no t limited to, 12 months from the
balance sheet date. The degree of consideration depends on the facts in eac h case. When an enterprise has a
historyofprofitableoperationsandreadyaccesstofinancialresources ,aconclusionthatthegoingconcernbasis
of accounting is appropriate may be reached without detailed analysis. In other cases, management may need
to consider a wide range of factors surrounding current and expected profi tability, debt repayment schedules
and potential sources of replacement financing before it can satisfy itse lf that the going concern basis is
appropriate.
ACCRUAL BASIS OF ACCOUNTING
25.Anenterpriseshouldprepareitsfinancialstatements,exceptforcashfl owinformation,undertheaccrualbasis
of accounting.
(1) See also SIC-27: evaluating the substance of transactions in the legal fo rm of a lease.14 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
26.Undertheaccrualbasisofaccounting,transactionsandeventsarerecogn isedwhentheyoccur(andnotascash
oritsequivalentisreceivedorpaid)andtheyarerecordedintheaccounti ngrecordsandreportedinthefinancial
statements of the periods to which they relate. Expenses are recognised in the income statement on the basis
of a direct association between the costs incurred and the earning of speci fic items of income (matching).
However,theapplicationofthematchingconceptdoesnotallowtherecogn itionofitemsinthebalancesheet
which do not meet the definition of assets or liabilities.
CONSISTENCY OF PRESENTATION
27.The presentation and classification of items in the financial statements should be retained from one period to
the next unless:
(a) a significant change in the nature of the operations of the enterprise o r a review of its financial statement
presentation demonstrates that the change will result in a more appropria te presentation of events or
transactions; or
(b) a change in presentation is required by an International Accounting St andard or an interpretation of the
Standing Interpretations Committee (1).
28.Asignificantacquisitionordisposal,orareviewofthefinancialstatem entpresentation,mightsuggestthatthe
financial statements should be presented differently. Only if the revise d structure is likely to continue, or if the
benefit of an alternative presentation is clear, should an enterprise cha nge the presentation of its financial
statements.Whensuchchangesinpresentationaremade,anenterpriserec lassifiesitscomparativeinformation
inaccordancewithparagraph38.Achangeinpresentationtocomplywithna tionalrequirementsispermitted
as long as the revised presentation is consistent with the requirements of this Standard.
MATERIALITY AND AGGREGATION
29.Each material item should be presented separately in the financial statem ents. Immaterial amounts should be
aggregated with amounts of a similar nature or function and need not be pres ented separately.
30.Financial statements result from processing large quantities of transac tions which are structured by being
aggregated into groups according to their nature or function. The final st age in the process of aggregation and
classification is the presentation of condensed and classified data whic h form line items either on the face of
thefinancialstatementsorinthenotes.Ifalineitemisnotindividually material,itisaggregatedwithotheritems
eitheronthefaceofthefinancialstatementsorinthenotes.Anitemthati snotsufficientlymaterialtowarrant
separate presentation on the face of the financial statements may neverth eless be sufficiently material that it
should be presented separately in the notes.
31.In this context, information is material if its non-disclosure could infl uence the economic decisions of users
takenonthebasisofthefinancialstatements.Materialitydependsonthe sizeandnatureoftheitemjudgedin
the particular circumstances of its omission. In deciding whether an item or an aggregate of items is material,
the nature and the size of the item are evaluated together. Depending on the circumstances, either the nature
orthesizeoftheitemcouldbethedeterminingfactor.Forexample,indivi dualassetswiththesamenatureand
function are aggregated even if the individual amounts are large. However , large items which differ in nature
or function are presented separately.
32.Materiality provides that the specific disclosure requirements of Inter national Accounting Standards need not
be met if the resulting information is not material.
(1) See also SIC-18: consistency — alternative methods.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 15
OFFSETTING
33.Assets and liabilities should not be offset except when offsetting is requ ired or permitted by another
International Accounting Standard.
34.Items of income and expense should be offset when, and only when:
(a) an International Accounting Standard requires or permits it; or
(b) gains,lossesandrelatedexpensesarisingfromthesameorsimilartra nsactionsandeventsarenotmaterial.
Such amounts should be aggregated in accordance with paragraph 29.
35.Itisimportantthatbothassetsandliabilities,andincomeandexpenses, whenmaterial,arereportedseparately.
Offsettingineithertheincomestatementorthebalancesheet,exceptwhe noffsettingreflectsthesubstanceof
the transaction or event, detracts from the ability of users to understand the transactions undertaken and to
assess the future cash flows of the enterprise. The reporting of assets net of valuation allowances, for example
obsolescence allowances on inventories and doubtful debts allowances on receivables, is not offsetting.
36.IAS 18, revenue, defines the term revenue and requires it to be measured at t he fair value of consideration
received or receivable, taking into account the amount of any trade discou nts and volume rebates allowed by
theenterprise.Anenterpriseundertakes,inthecourseofitsordinaryac tivities,othertransactionswhichdonot
generate revenue but which are incidental to the main revenue generating a ctivities. The results of such
transactionsarepresented,whenthispresentationreflectsthesubstan ceofthetransactionorevent,bynetting
any income with related expenses arising on the same transaction. For exam ple:
(a) gains and losses on the disposal of non-current assets, including inve stments and operating assets, are
reported by deducting from the proceeds on disposal the carrying amount of the asset and related selling
expenses;
(b) expenditurethatisreimbursedunderacontractualarrangementwitha thirdparty(asub-lettingagreement,
for example) is netted against the related reimbursement; and
(c) extraordinaryitemsmaybepresentednetofrelatedtaxationandminor ityinterestwiththegrossamounts
shown in the notes.
37.Inaddition,gainsandlossesarisingfromagroupofsimilartransactions arereportedonanetbasis,forexample
foreignexchangegainsandlossesorgainsandlossesarisingonfinancial instrumentsheldfortradingpurposes.
Such gains and losses are, however, reported separately if their size, nat ure or incidence is such that separate
disclosureisrequiredbyIAS8,Netprofitorlossfortheperiod,fundamen talerrorsandchangesinaccounting
policies.
COMPARATIVE INFORMATION
38.Unless an International Accounting Standard permits or requires otherwi se, comparative information should
be disclosed in respect of the previous period for all numerical informati on in the financial statements.
Comparativeinformationshouldbeincludedinnarrativeanddescriptive informationwhenitisrelevanttoan
understanding of the current period’s financial statements.
39.In some cases narrative information provided in the financial statements for the previous period(s) continues
toberelevantinthecurrentperiod.Forexample,detailsofalegaldisput e,theoutcomeofwhichwasuncertain
at the last balance sheet date and is yet to be resolved, are disclosed in the current period. Users benefit from
informationthattheuncertaintyexistedatthelastbalancesheetdate,a ndthestepsthathavebeentakenduring
the period to resolve the uncertainty.16 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
40.When the presentation or classification of items in the financial stateme nts is amended, comparative amounts
should be reclassified, unless it is impracticable to do so, to ensure comp arability with the current period, and
the nature, amount of, and reason for, any reclassification should be disc losed. When it is impracticable to
reclassifycomparativeamounts,anenterpriseshoulddisclosethereaso nfornotreclassifyingandthenatureof
the changes that would have been made if amounts were reclassified.
41.Circumstancesmayexistwhenitisimpracticabletoreclassifycomparati veinformationtoachievecomparability
withthecurrentperiod.Forexample,datamaynothavebeencollectedinth epreviousperiod(s)inawaywhich
allows reclassification, and it may not be practicable to recreate the inf ormation. In such circumstances, the
nature of the adjustments to comparative amounts that would have been made are disclosed. IAS 8 deals with
the adjustments required to comparative information following a change i n accounting policy that is applied
retrospectively.
STRUCTURE AND CONTENT
Introduction
42.This Standard requires certain disclosures on the face of the financial st atements, requires other line items to
be disclosed either on the face of the financial statements or in the notes, and sets out recommended formats
asanappendixtotheStandardwhichanenterprisemayfollowasappropriat einitsowncircumstances.IAS7
provides a structure for the presentation of the cash flow statement.
43.This Standard uses the term disclosure in a broad sense, encompassing item s presented on the face of each
financialstatementaswellasinthenotestothefinancialstatements.Di sclosuresrequiredbyotherInternational
AccountingStandardsaremadeinaccordancewiththerequirementsofthos eStandards.Unlessthisoranother
Standardspecifiestothecontrary,suchdisclosuresaremadeeitheronth efaceoftherelevantfinancialstatement
or in the notes.
Identification of financial statements
44.Financialstatementsshouldbeclearlyidentifiedanddistinguishedfro motherinformationinthesamepublished
document.
45.International Accounting Standards apply only to the financial statemen ts, and not to other information
presented in an annual report or other document. Therefore, it is importan t that users are able to distinguish
information that is prepared using International Accounting Standards f rom other information which may be
useful to users but is not the subject of Standards.
46.Eachcomponentofthefinancialstatementsshouldbeclearlyidentified. Inaddition,thefollowinginformation
should be prominently displayed, and repeated when it is necessary for a pr oper understanding of the
information presented:
(a) the name of the reporting enterprise or other means of identification;
(b) whether the financial statements cover the individual enterprise or a group of enterprises;
(c) the balance sheet date or the period covered by the financial statement s, whichever is appropriate to the
related component of the financial statements;
(d) the reporting currency; and
(e) the level of precision used in the presentation of figures in the financ ial statements.
47.The requirements in paragraph 46 are normally met by presenting page headi ngs and abbreviated column
headings on each page of the financial statements. Judgement is required i n determining the best way of
presentingsuchinformation.Forexample,whenthefinancialstatements arereadelectronically,separatepages
may not be used; the above items are then presented frequently enough to ens ure a proper understanding of
the information given.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 17
48.Financial statements are often made more understandable by presenting in formation in thousands or millions
ofunitsofthereportingcurrency.Thisisacceptableaslongasthelevelo fprecisioninpresentationisdisclosed
and relevant information is not lost.
Reporting period
49.Financialstatementsshouldbepresentedatleastannually.When,inexce ptionalcircumstances,anenterprise’s
balance sheet date changes and annual financial statements are presented for a period longer or shorter than
one year, an enterprise should disclose, in addition to the period covered by the financial statements:
(a) the reason for a period other than one year being used; and
(b) thefactthatcomparativeamountsfortheincomestatement,changesin equity,cashflowsandrelatednotes
are not comparable.
50.In exceptional circumstances an enterprise may be required to, or decide t o, change its balance sheet date, for
example following the acquisition of the enterprise by another enterpris e with a different balance sheet date.
When this is the case, it is important that users are aware that the amounts s hown for the current period and
comparativeamountsarenotcomparableandthatthereasonforthechangei nbalancesheetdateisdisclosed.
51.Normally,financialstatementsareconsistentlypreparedcoveringaone yearperiod.However,someenterprises
prefer to report, for example, for a 52 week period for practical reasons. T his Standard does not preclude this
practice, as the resulting financial statements are unlikely to be materi ally different to those that would be
presented for one year.
Timeliness
52.The usefulness of financial statements is impaired if they are not made ava ilable to users within a reasonable
periodafterthebalancesheetdate.Anenterpriseshouldbeinapositiont oissueitsfinancialstatementswithin
six months of the balance sheet date. Ongoing factors such as the complexit y of an enterprise’s operations are
notsufficientreasonforfailingtoreportonatimelybasis.Morespecifi cdeadlinesaredealtwithbylegislation
and market regulation in many jurisdictions.
Balance sheet
The current/non-current distinction
53.Eachenterpriseshoulddetermine,basedonthenatureofitsoperations,w hetherornottopresentcurrentand
non-current assets and current and non-current liabilities as separate c lassifications on the face of the balance
sheet. Paragraphs 57 to 65 of this Standard apply when this distinction is m ade. When an enterprise chooses
not to make this classification, assets and liabilities should be present ed broadly in order of their liquidity.
54.Whichevermethodofpresentationisadopted,anenterpriseshoulddisclo se,foreachassetandliabilityitemthat
combinesamountsexpectedtoberecoveredorsettledbothbeforeandafter 12monthsfromthebalancesheet
date, the amount expected to be recovered or settled after more than 12 mont hs.
55.Whenanenterprisesuppliesgoodsorserviceswithinaclearlyidentifiab leoperatingcycle,separateclassification
ofcurrentandnon-currentassetsandliabilitiesonthefaceofthebalanc esheetprovidesusefulinformationby
distinguishing the net assets that are continuously circulating as worki ng capital from those used in the
enterprise’s long-term operations. It also highlights assets that are ex pected to be realised within the current
operating cycle, and liabilities that are due for settlement within the sa me period.18 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
56.Informationaboutthematuritydatesofassetsandliabilitiesisusefuli nassessingtheliquidityandsolvencyof
an enterprise. IAS 32, financial instruments: disclosure and presentati on, requires disclosure of the maturity
dates of both financial assets and financial liabilities. Financial asse ts include trade and other receivables and
financialliabilitiesincludetradeandotherpayables.Informationont heexpecteddateofrecoveryandsettlement
ofnon-monetaryassetsandliabilitiessuchasinventoriesandprovision sisalsousefulwhetherornotassetsand
liabilities are classified between current and non-current. For example , an enterprise discloses the amount of
inventories which are expected to be recovered after more than one year fro m the balance sheet date.
Current assets
57.An asset should be classified as a current asset when it:
(a) is expected to be realised in, or is held for sale or consumption in, the n ormal course of the enterprise’s
operating cycle; or
(b) is held primarily for trading purposes or for the short-term and expect ed to be realised within 12 months
of the balance sheet date; or
(c) is cash or a cash equivalent asset which is not restricted in its use.
All other assets should be classified as non-current assets.
58. This Standard uses the term “non-current” to include tangible, intang ible, operating and financial assets of a
long-term nature. It does not prohibit the use of alternative description s as long as the meaning is clear.
59. Theoperatingcycleofanenterpriseisthetimebetweentheacquisitio nofmaterialsenteringintoaprocessand
itsrealisationincashoraninstrumentthatisreadilyconvertibleintoc ash.Currentassetsincludeinventoriesand
trade receivables that are sold, consumed and realised as part of the norma l operating cycle even when they are
not expected to be realised within 12 months of the balance sheet date. Mark etable securities are classified as
current assets if they are expected to be realised within 12 months of the ba lance sheet date; otherwise they are
classified as non-current assets.
Current liabilities
60.A liability should be classified as a current liability when it:
(a) is expected to be settled in the normal course of the enterprise’s opera ting cycle; or
(b) is due to be settled within 12 months of the balance sheet date.
All other liabilities should be classified as non-current liabilities.
61. Current liabilities can be categorised in a similar way to current asse ts. Some current liabilities, such as trade
payablesandaccrualsforemployeeandotheroperatingcosts,formpartof theworkingcapitalusedinthenormal
operating cycle of the business. Such operating items are classified as cu rrent liabilities even if they are due to
be settled after more than 12 months from the balance sheet date.
62. Other current liabilities are not settled as part of the current operat ing cycle, but are due for settlement within
12 months of the balance sheet date. Examples are the current portion of int erest-bearing liabilities, bank
overdrafts,dividendspayable,incometaxesandothernon-tradepayable s.Interest-bearingliabilitiesthatprovide
the financing for working capital on a long-term basis, and are not due for s ettlement within 12 months, are
non-current liabilities.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 19
63. Anenterpriseshouldcontinuetoclassifyitslong-terminterest-bea ringliabilitiesasnon-current,evenwhenthey
are due to be settled within 12 months of the balance sheet date if:
(a) the original term was for a period of more than 12 months;
(b) the enterprise intends to refinance the obligation on a long-term basi s; and
(c) that intention is supported by an agreement to refinance, or to resched ule payments, which is completed
before the financial statements are authorised for issue.
The amount of any liability that has been excluded from current liabilitie s in accordance with this paragraph,
togetherwithinformationinsupportofthispresentation,shouldbedisc losedinthenotestothebalancesheet.
64. Some obligations that are due to be repaid within the next operating cyc le may be expected to be refinanced or
“rolledover”atthediscretionoftheenterpriseand,therefore,arenote xpectedtousecurrentworkingcapitalof
the enterprise. Such obligations are considered to form part of the enterp rise’s long-term financing and should
beclassifiedasnon-current.However,insituationsinwhichrefinancin gisnotatthediscretionoftheenterprise
(as would be the case if there were no agreement to refinance), the refinanc ing cannot be considered automatic
andtheobligationisclassifiedascurrentunlessthecompletionofarefi nancingagreementbeforeauthorisation
ofthefinancialstatementsforissueprovidesevidencethatthesubstanc eoftheliabilityatthebalancesheetdate
was long-term.
65. Some borrowing agreements incorporate undertakings by the borrower ( covenants) which have the effect that
the liability becomes payable on demand if certain conditions related to t he borrower’s financial position are
breached. In these circumstances, the liability is classified as non-cur rent only when:
(a) thelenderhasagreed,priortotheauthorisationofthefinancialstat ementsforissue,nottodemandpayment
as a consequence of the breach; and
(b) it is not probable that further breaches will occur within 12 months of t he balance sheet date.
Information to be presented on the face of the balance sheet
66.As a minimum, the face of the balance sheet should include line items which p resent the following amounts:
(a) property, plant and equipment;
(b) intangible assets;(c) financial assets (excluding amounts shown under (d), (f) and (g));(d) investments accounted for using the equity method;(e) inventories;(f) trade and other receivables;(g) cash and cash equivalents;(h) trade and other payables;(i) tax liabilities and assets as required by IAS 12, income taxes;(j) provisions;(k) non-current interest-bearing liabilities;(l) minority interest; and(m)issued capital and reserves.20 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
67. Additional line items, headings and sub-totals should be presented on the face of the balance sheet when an
International Accounting Standard requires it, or when such presentatio n is necessary to present fairly the
enterprise’s financial position.
68.This Standard does not prescribe the order or format in which items are to be presented. Paragraph 66 simply
providesalistofitemsthataresodifferentinnatureorfunctionthatthe ydeserveseparatepresentationonthe
face of the balance sheet. Illustrative formats are set out in the Appendix to this Standard. Adjustments to the
line items above include the following:
(a) lineitemsareaddedwhenanotherInternationalAccountingStandardr equiresseparatepresentationonthe
faceofthebalancesheet,orwhenthesize,natureorfunctionofanitemiss uchthatseparatepresentation
would assist in presenting fairly the enterprise’s financial position; a nd
(b) the descriptions used and the ordering of items may be amended accordin g to the nature of the enterprise
anditstransactions,toprovideinformationthatisnecessaryforanover allunderstandingoftheenterprise’s
financial position. For example, a bank amends the above descriptions in o rder to apply the more specific
requirementsinparagraphs18to25ofIAS30,disclosuresinthefinancial statementsofbanksandsimilar
financial institutions.
69.Thelineitemslistedinparagraph66arebroadinnatureandneednotbelimi tedtoitemsfallingwithinthescope
of other Standards. For example, the line item intangible assets includes goodwill and assets arising from
development expenditure.
70.The judgement on whether additional items are separately presented is bas ed on an assessment of:
(a) the nature and liquidity of assets and their materiality, leading, in m ost cases, to the separate presentation
of, goodwill and assets arising from development expenditure, monetary a nd non-monetary assets and
current and non-current assets;
(b) their function within the enterprise, leading, for example, to the sep arate presentation of operating and
financial assets, inventories, receivables and cash and cash equivalent assets; and
(c) the amounts, nature and timing of liabilities, leading, for example, t o the separate presentation of
interest-bearing and non-interest-bearing liabilities and provisions , classified as current or non-current if
appropriate.
71.Assetsandliabilitiesthatdifferinnatureorfunctionaresometimessub jecttodifferentmeasurementbases.For
example certain classes of property, plant and equipment may be carried at cost, or at revalued amounts in
accordancewithIAS16.Theuseofdifferentmeasurementbasesfordiffere ntclassesofassetssuggeststhattheir
nature or function differs and therefore that they should be presented as s eparate line items.
Information to be presented either on the face of the balance sheet or in the notes
72.Anenterpriseshoulddisclose,eitheronthefaceofthebalancesheetorin thenotestothebalancesheet,further
sub-classifications of the line items presented, classified in a manner a ppropriate to the
enterprise’soperations.Eachitemshouldbesub-classified,whenappro priate,byitsnatureand,amountspayable
to and receivable from the parent enterprise, fellow subsidiaries and ass ociates and other related parties should
be disclosed separately.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 21
73. The detail provided in sub-classifications, either on the face of the b alance sheet or in the notes, depends on the
requirements of International Accounting Standards and the size, nature and function of the amounts involved.
Thefactorssetoutinparagraph70arealsousedtodecidethebasisofsub-c lassification.Thedisclosureswillvary
for each item, for example:
(a) tangible assets are classified by class as described in IAS 16, propert y, plant and equipment;
(b) receivables are analysed between amounts receivable from trade custo mers, other members of the group,
receivables from related parties, prepayments and other amounts;
(c) inventoriesaresub-classified,inaccordancewithIAS2,inventorie s,intoclassificationssuchasmerchandise,
production supplies, materials, work in progress and finished goods;
(d) provisions are analysed showing separately provisions for employee b enefit costs and any other items
classified in a manner appropriate to the enterprise’s operations; and
(e) equity capital and reserves are analysed showing separately the vario us classes of paid in capital, share
premium and reserves.
74.An enterprise should disclose the following, either on the face of the bala nce sheet or in the notes:
(a) for each class of share capital:
(i) the number of shares authorised;(ii) the number of shares issued and fully paid, and issued but not fully pai d;
(iii) par value per share, or that the shares have no par value;(iv) a reconciliation of the number of shares outstanding at the beginning and at the end of the year;
(v) the rights, preferences and restrictions attaching to that class incl uding restrictions on the distribution
of dividends and the repayment of capital;
(vi) sharesintheenterpriseheldbytheenterpriseitselforbysubsidiar iesorassociatesoftheenterprise;and
(vii)shares reserved for issuance under options and sales contracts, inc luding the terms and amounts;
(b) a description of the nature and purpose of each reserve within owners’ e quity;
(c) theamountofdividendsthatwereproposedordeclaredafterthebalanc esheetdatebutbeforethefinancial
statements were authorised for issue; and
(d) the amount of any cumulative preference dividends not recognised.
Anenterprisewithoutsharecapital,suchasapartnership,shoulddisclo seinformationequivalenttothatrequired
above,showingmovementsduringtheperiodineachcategoryofequityinte restandtherights,preferencesand
restrictions attaching to each category of equity interest.
Income statement
Information to be presented on the face of the income statement
75.Asaminimum,thefaceoftheincomestatementshouldincludelineitemswhi chpresentthefollowingamounts:
(a) revenue;
(b) the results of operating activities;(c) finance costs;22 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(d) share of profits and losses of associates and joint ventures accounted for using the equity method;
(e) tax expense;
(f) profit or loss from ordinary activities;(g) extraordinary items;(h) minority interest; and
(i) net profit or loss for the period.
Additional line items, headings and sub-totals should be presented on the face of the income statement when
required by an International Accounting Standard, or when such presentat ion is necessary to present fairly the
enterprise’s financial performance.
76. The effects of an enterprise’s various activities, transactions and e vents differ in stability, risk and predictability,
and the disclosure of the elements of performance assists in an understand ing of the performance achieved and
in assessing future results. Additional line items are included on the fac e of the income statement and the
descriptions used and the ordering of items are amended when this is necess ary to explain the elements of
performance.Factorstobetakenintoconsiderationincludemateriality andthenatureandfunctionofthevarious
components of income and expenses. For example, a bank amends the descript ions in order to apply the more
specificrequirementsinparagraphs9to17ofIAS30.Incomeandexpenseit emsareoffsetonlywhenthecriteria
in paragraph 34 are met.
Information to be presented either on the face of the income statement or in the notes
77.Anenterpriseshouldpresent,eitheronthefaceoftheincomestatementor inthenotestotheincomestatement,
ananalysisofexpensesusingaclassificationbasedoneitherthenatureo fexpensesortheirfunctionwithinthe
enterprise.
78. Enterprises are encouraged to present the analysis in paragraph 77 on t he face of the income statement.
79.Expense items are further sub-classified in order to highlight a range of c omponents of financial performance
whichmaydifferintermsofstability,potentialforgainorlossandpredi ctability.Thisinformationisprovided
in one of two ways.
80.Thefirstanalysisisreferredtoasthenatureofexpensemethod.Expenses areaggregatedintheincomestatement
accordingtotheirnature,(forexampledepreciation,purchasesofmater ials,transportcosts,wagesandsalaries,
advertising costs), and are not reallocated amongst various functions wi thin the enterprise. This method is
simple to apply in many smaller enterprises because no allocations of oper ating expenses between functional
classifications is necessary. An example of a classification using the na ture of expense method is as follows:
Revenue X
Other operating income X
Changes in inventories of finished goods and work in progress XRaw materials and consumables used XStaff costs XDepreciation and amortisation expense XOther operating expenses X
Total operating expenses (X)Profit from operating activities X13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 23
81. The change in finished goods and work in progress during the period repr esents an adjustment to production
expenses to reflect the fact that either production has increased invento ry levels or that sales in excess of
production have reduced inventory levels. In some jurisdictions, an incr ease in finished goods and work in
progress during the period is presented immediately following revenue in the above analysis. However, the
presentation used should not imply that such amounts represent income.
82.The second analysis is referred to as the function of expense or “cost of sal es” method and classifies expenses
according to their function as part of cost of sales, distribution or admin istrative activities. This presentation
often provides more relevant information to users than the classificatio n of expenses by nature, but the
allocation of costs to functions can be arbitrary and involves considerab le judgement. An example of a
classification using the function of expense method is as follows:
Revenue X
Cost of sales (X)
Gross profit X
Other operating income X
Distribution costs (X)
Administrative expenses (X)Other operating expenses (X)
Profit from operating activities X
83.Enterprises classifying expenses by function should disclose additiona l information on the nature of expenses,
including depreciation and amortisation expense and staff costs.
84.Thechoiceofanalysisbetweenthecostofsalesmethodandthenatureofexp endituremethoddependsonboth
historicalandindustryfactorsandthenatureoftheorganisation.Bothm ethodsprovideanindicationofthose
costs which might be expected to vary, directly or indirectly, with the lev el of sales or production of the
enterprise.Becauseeachmethodofpresentationhasmeritfordifferentt ypesofenterprise,thisStandardrequires
a choice between classifications based on that which most fairly presents the elements of the enterprise’s
performance.However,becauseinformationonthenatureofexpensesisus efulinpredictingfuturecashflows,
additional disclosure is required when the cost of sales classification i s used.
85.Anenterpriseshoulddisclose,eitheronthefaceoftheincomestatemento rinthenotes,theamountofdividends
per share, declared or proposed, for the period covered by the financial st atements.
CHANGES IN EQUITY
86.An enterprise should present, as a separate component of its financial sta tements, a statement showing:
(a) the net profit or loss for the period;
(b) each item of income and expense, gain or loss which, as required by other Standards, is recognised directly
in equity, and the total of these items; and
(c) the cumulative effect of changes in accounting policy and the correcti on of fundamental errors dealt with
under the Benchmark treatments in IAS 8.24 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
In addition, an enterprise should present, either within this statement o r in the notes:
(d) capital transactions with owners and distributions to owners;
(e) thebalanceofaccumulatedprofitorlossatthebeginningoftheperiod andatthebalancesheetdate,andthe
movements for the period; and
(f) areconciliationbetweenthecarryingamountofeachclassofequityca pital,sharepremiumandeachreserve
at the beginning and the end of the period, separately disclosing each move ment.
87. Changesinanenterprise’sequitybetweentwobalancesheetdatesrefl ecttheincreaseordecreaseinitsnetassets
orwealthduringtheperiod,undertheparticularmeasurementprinciples adoptedanddisclosedinthefinancial
statements. Except for changes resulting from transactions with shareho lders, such as capital contributions and
dividends,theoverallchangeinequityrepresentsthetotalgainsandlos sesgeneratedbytheenterprisesactivities
during the period.
88. IAS8,netprofitorlossfortheperiod,fundamentalerrorsandchanges inaccountingpolicies,requiresallitems
of income and expense recognised in a period to be included in the determina tion of net profit or loss for the
periodunlessanInternationalAccountingStandardrequiresorpermitso therwise.OtherStandardsrequiregains
and losses, such as revaluation surpluses and deficits and certain foreig n exchange differences, to be recognised
directly as changes in equity along with capital transactions with and dis tributions to the enterprise’s owners.
Since it is important to take into consideration all gains and losses in ass essing the changes in an enterprise’s
financialpositionbetweentwobalancesheetdates,thisStandardrequir esaseparatecomponentofthefinancial
statementswhichhighlightsanenterprise’stotalgainsandlosses,incl udingthosethatarerecogniseddirectlyin
equity.
89. Therequirementsinparagraph86maybemetinanumberofways.Theappro achadoptedinmanyjurisdictions
follows a columnar format which reconciles between the opening and closin g balances of each element within
shareholders’equity,includingitems(a)to(f).Analternativeistopre sentaseparatecomponentofthefinancial
statements which presents only items (a) to (c). Under this approach, the i tems described in (d) to (f) are shown
in the notes to the financial statements. Both approaches are illustrated in the appendix to this Standard.
Whichever approach is adopted, paragraph 86 requires a sub-total of the it ems in (b) to enable users to derive
the total gains and losses arising from the enterprise’s activities durin g the period.
Cash flow statement
90.IAS7setsoutrequirementsforthepresentationofthecashflowstatement andrelateddisclosures.Itstatesthat
cashflowinformationisusefulinprovidingusersoffinancialstatement swithabasistoassesstheabilityofthe
enterprise to generate cash and cash equivalents and the needs of the enter prise to utilise those cash flows.
Notes to the financial statements
Structure
91.The notes to the financial statements of an enterprise should:
(a) present information about the basis of preparation of the financial st atements and the specific accounting
policies selected and applied for significant transactions and events;
(b) disclose the information required by International Accounting Stand ards that is not presented elsewhere in
the financial statements; and
(c) provide additional information which is not presented on the face of th e financial statements but that is
necessary for a fair presentation (1).
92.Notes to the financial statements should be presented in a systematic mann er. Each item on the face of the
balancesheet,incomestatementandcashflowstatementshouldbecross-r eferencedtoanyrelatedinformation
in the notes.
(1) See also SIC-29: disclosure — service concession arrangements.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 25
93.Notes to the financial statements include narrative descriptions or more detailed analyses of amounts shown
onthefaceofthebalancesheet,incomestatement,cashflowstatementand statementofchangesinequity,as
well as additional information such as contingent liabilities and commit ments. They include information
requiredandencouragedtobedisclosedbyInternationalAccountingStan dards,andotherdisclosuresnecessary
to achieve a fair presentation.
94.Notes are normally presented in the following order which assists users in understanding the financial
statements and comparing them with those of other enterprises:
(a) statement of compliance with International Accounting Standards (se e paragraph 11);
(b) statement of the measurement basis (bases) and accounting policies ap plied;
(c) supporting information for items presented on the face of each financi al statement in the order in which
each line item and each financial statement is presented; and
(d) other disclosures, including:
(i) contingencies, commitments and other financial disclosures; and
(ii) non-financial disclosures.
95.Insomecircumstances,itmaybenecessaryordesirabletovarytheorderin gofspecificitemswithinthenotes.
For example, information on interest rates and fair value adjustments may be combined with information on
maturities of financial instruments although the former are income state ment disclosures and the latter relate
to the balance sheet. Nevertheless, a systematic structure for the notes i s retained as far as practicable.
96.Information about the basis of preparation of the financial statements an d specific accounting policies may be
presented as a separate component of the financial statements.
Presentation of accounting policies
97.The accounting policies section of the notes to the financial statements s hould describe the following:
(a) the measurement basis (or bases) used in preparing the financial state ments; and
(b) each specific accounting policy that is necessary for a proper underst anding of the financial statements.
98.In addition to the specific accounting policies used in the financial stat ements, it is important for users to be
awareofthemeasurementbasis(bases)used(historicalcost,currentcos t,realisablevalue,fairvalueorpresent
value) because they form the basis on which the whole of the financial state ments are prepared. When more
than one measurement basis is used in the financial statements, for exampl e when certain non-current assets
are revalued, it is sufficient to provide an indication of the categories o f assets and liabilities to which each
measurement basis is applied.
99.Indecidingwhetheraspecificaccountingpolicyshouldbedisclosed,man agementconsiderswhetherdisclosure
would assist users in understanding the way in which transactions and even ts are reflected in the reported
performance and financial position. The accounting policies that an ente rprise might consider presenting
include, but are not restricted to, the following:
(a) revenue recognition;(b) consolidation principles, including subsidiaries and associates;(c) business combinations;(d) joint ventures;(e) recognition and depreciation/amortisation of tangible and intangib le assets;
(f) capitalisation of borrowing costs and other expenditure;26 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(g) construction contracts;
(h) investment properties;(i) financial instruments and investments;(j) leases;(k) research and development costs;(l) inventories;(m)taxes, including deferred taxes;(n) provisions;(o) employee benefit costs;(p) foreign currency translation and hedging;(q) definition of business and geographical segments and the basis for all ocation of costs between segments;
(r) definition of cash and cash equivalents;(s) inflation accounting; and(t) government grants.Other International Accounting Standards specifically require disclos ure of accounting policies in many of
these areas.
100. Each enterprise considers the nature of its operations and the polici es which the user would expect to be
disclosed for that type of enterprise. For example, all private sector ent erprises would be expected to disclose
an accounting policy for income taxes, including deferred taxes and tax as sets. When an enterprise has
significant foreign operations or transactions in foreign currencies, d isclosure of accounting policies for the
recognitionofforeignexchangegainsandlossesandthehedgingofsuchga insandlosseswouldbeexpected.
In consolidated financial statements, the policy used for determining go odwill and minority interest is
disclosed.
101. Anaccountingpolicymaybesignificantevenifamountsshownforcurr entandpriorperiodsarenotmaterial.
It is also appropriate to disclose an accounting policy for each policy not covered by existing International
Accounting Standards, but selected and applied in accordance with paragr aph 20.
Other disclosures
102.An enterprise should disclose the following if not disclosed elsewhere in information published with the
financial statements:
(a) thedomicileandlegalformoftheenterprise,itscountryofincorpora tionandtheaddressoftheregistered
office (or principal place of business, if different from the registered o ffice);
(b) a description of the nature of the enterprise’s operations and its prin cipal activities;
(c) the name of the parent enterprise and the ultimate parent enterprise of the group; and
(d) either the number of employees at the end of the period or the average for the period.
EFFECTIVE DATE
103.This International Accounting Standard becomes operative for financial statements covering periods
beginning on or after 1 July 1998. Earlier application is encouraged.
104.ThisInternationalAccountingStandardsupersedesIAS1,disclosureofa ccountingpolicies,IAS5,information
to be disclosed in financial statements, and IAS 13, presentation of curre nt assets and current liabilities,
approved by the Board in reformatted versions in 1994.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 27
INTERNATIONAL ACCOUNTING STANDARD IAS 2
(REVISED 1993)
Inventories
This revised International Accounting Standard supersedes IAS 2, valuat ion and presentation of inventories in the
contextofthehistoricalcostsystem,approvedbytheBoardinOctober197 5.TherevisedStandardbecameeffective
for financial statements covering periods beginning on or after 1 January 1995.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraph 28. The amended text
is effective for annual financial statements covering periods beginning on or after 1 January 2000.
In December 2000, IAS 41, agriculture, amended paragraph 1 and inserted pa ragraph 16A. The amended text is
effective for annual financial statements covering periods beginning on or after 1 January 2003.
One SIC interpretation relates to IAS 2:
— SIC-1: Consistency — different cost formulas for inventories.
CONTENTS
Paragraphs
Objective
Scope 29
Definitions 29
Measurement of inventories 29
Cost of inventories 30
Costs of purchase 30
Costs of conversion 30
Other costs 31
Cost of inventories of a service provider 31Cost of agricultural produce harvested from biological assets 31Techniques for the measurement of cost 31Cost formulas 31
Benchmark treatment 32
Allowed alternative treatment 32
Net realisable value 32
Recognition as an expense 33
Disclosure 33
Effective date 3428 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribetheaccountingtreatmentfo rinventoriesunderthehistoricalcostsystem.
A primary issue in accounting for inventories is the amount of cost to be rec ognised as an asset and carried forward
untiltherelatedrevenuesarerecognised.ThisStandardprovidespracti calguidanceonthedeterminationofcostand
its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance
on the cost formulas that are used to assign costs to inventories.
SCOPE
1. ThisStandardshouldbeappliedinfinancialstatementspreparedinthe contextofthehistoricalcostsystemin
accounting for inventories other than:
(a) workinprogressarisingunderconstructioncontracts,includingdir ectlyrelatedservicecontracts(seeIAS11,
construction contracts);
(b) financial instruments; and
(c) producers’inventoriesoflivestock,agriculturalandforestproduc ts,andmineralorestotheextentthatthey
are measured at net realisable value in accordance with well established p ractices in certain industries;
(d) biological assets related to agricultural activity (see IAS 41 Agricu lture).
2.This Standard supersedes IAS 2, valuation and presentation of inventorie s in the context of the historical cost
system, approved in 1975.
3.Theinventoriesreferredtoinparagraph1(c)aremeasuredatnetrealisab levalueatcertainstagesofproduction.
Thisoccurs,forexample,whenagriculturalcropshavebeenharvestedorm ineraloreshavebeenextractedand
saleisassuredunderaforwardcontractoragovernmentguarantee,orwhen ahomogenousmarketexistsand
there is a negligible risk of failure to sell. These inventories are exclud ed from the scope of this Standard.
DEFINITIONS
4.The following terms are used in this Standard with the meanings specified:
Inventories are assets:(a) held for sale in the ordinary course of business;(b) in the process of production for such sale; or(c) intheformofmaterialsorsuppliestobeconsumedintheproductionpro cessorintherenderingofservices.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
5.Inventoriesencompassgoodspurchasedandheldforresaleincluding,for example,merchandisepurchasedby
a retailer and held for resale, or land and other property held for resale. I nventories also encompass finished
goods produced, or work in progress being produced, by the enterprise and i nclude materials and supplies
awaiting use in the production process. In the case of a service provider, i nventories include the costs of the
service, as described in paragraph 16, for which the enterprise has not yet recognised the related revenue (see
IAS 18, revenue).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 29
MEASUREMENT OF INVENTORIES
6. Inventories should be measured at the lower of cost and net realisable va lue.
Cost of inventories
7.The cost of inventories should comprise all costs of purchase, costs of con version and other costs incurred in
bringing the inventories to their present location and condition.
Costs of purchase
8.Thecostsofpurchaseofinventoriescomprisethepurchaseprice,importd utiesandothertaxes(otherthanthose
subsequentlyrecoverablebytheenterprisefromthetaxingauthorities) ,andtransport,handlingandothercosts
directly attributable to the acquisition of finished goods, materials an d services. Trade discounts, rebates and
other similar items are deducted in determining the costs of purchase.
9.The costs of purchase may include foreign exchange differences which aris e directly on the recent acquisition
of inventories invoiced in a foreign currency in the rare circumstances pe rmitted in the allowed alternative
treatment in IAS 21, The effects of changes in foreign exchange rates. Thes e exchange differences are limited
to those resulting from a severe devaluation or depreciation of a currency against which there is no practical
means of hedging and that affects liabilities which cannot be settled and w hich arise on the recent acquisition
of the inventories.
Costs of conversion
10.The costs of conversion of inventories include costs directly related to t he units of production, such as direct
labour. They also include a systematic allocation of fixed and variable pr oduction overheads that are incurred
in converting materials into finished goods. Fixed production overheads are those indirect costs of production
that remain relatively constant regardless of the volume of production, s uch as depreciation and maintenance
of factory buildings and equipment, and the cost of factory management and administration. Variable
production overheads are those indirect costs of production that vary dir ectly, or nearly directly, with the
volume of production, such as indirect materials and indirect labour.
11.Theallocationoffixedproductionoverheadstothecostsofconversionis basedonthenormalcapacityofthe
production facilities. Normal capacity is the production expected to be a chieved on average over a number of
periodsorseasonsundernormalcircumstances,takingintoaccountthelo ssofcapacityresultingfromplanned
maintenance. The actual level of production may be used if it approximates normal capacity. The amount of
fixedoverheadallocatedtoeachunitofproductionisnotincreasedasaco nsequenceoflowproductionoridle
plant.Unallocatedoverheadsarerecognisedasanexpenseintheperiodin whichtheyareincurred.Inperiods
ofabnormallyhighproduction,theamountoffixedoverheadallocatedtoe achunitofproductionisdecreased
so that inventories are not measured above cost. Variable production over heads are allocated to each unit of
production on the basis of the actual use of the production facilities.
12.A production process may result in more than one product being produced sim ultaneously. This is the case,
for example, when joint products are produced or when there is a main produc t and a by-product. When the
costs of conversion of each product are not separately identifiable, they are allocated between the products on
a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each
product either at the stage in the production process when the products bec ome separately identifiable, or at
the completion of production. Most by-products, by their nature, are imma terial. When this is the case, they
are often measured at net realisable value and this value is deducted from t he cost of the main product. As a
result, the carrying amount of the main product is not materially differen t from its cost.30 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Other costs
13.Other costs are included in the cost of inventories only to the extent that t hey are incurred in bringing the
inventories to their present location and condition. For example, it may b e appropriate to include
non-productionoverheadsorthecostsofdesigningproductsforspecific customersinthecostofinventories.
14.Examplesofcostsexcludedfromthecostofinventoriesandrecognisedase xpensesintheperiodinwhichthey
are incurred are:
(a) abnormal amounts of wasted materials, labour, or other production cos ts;
(b) storagecosts,unlessthosecostsarenecessaryintheproductionproc esspriortoafurtherproductionstage;
(c) administrative overheads that do not contribute to bringing inventor ies to their present location and
condition; and
(d) selling costs.
15.In limited circumstances, borrowing costs are included in the cost of inve ntories. These circumstances are
identified in the allowed alternative treatment in IAS 23, borrowing cost s.
Cost of inventories of a service provider
16.The cost of inventories of a service provider consists primarily of the lab our and other costs of personnel
directlyengagedinprovidingtheservice,includingsupervisoryperson nel,andattributableoverheads.Labour
and other costs relating to sales and general administrative personnel ar e not included but are recognised as
expenses in the period in which they are incurred.
Cost of agricultural produce harvested from biological assets
16A.UnderIAS41,agriculture,inventoriescomprisingagriculturalproduce thatanenterprisehasharvestedfrom
its biological assets are measured on initial recognition at their fair va lue less estimated point-of-sale costs
at the point of harvest. This is the cost of the inventories at that date for a pplication of this Standard.
Techniques for the measurement of cost
17.Techniques for the measurement of the cost of inventories, such as the stan dard cost method or the retail
method,maybeusedforconvenienceiftheresultsapproximatecost.Stand ardcoststakeintoaccountnormal
levels of materials and supplies, labour, efficiency and capacity utilis ation. They are regularly reviewed and, if
necessary, revised in the light of current conditions.
18.The retail method is often used in the retail industry for measuring invent ories of large numbers of rapidly
changingitems,thathavesimilarmarginsandforwhichitisimpracticabl etouseothercostingmethods.The
costoftheinventoryisdeterminedbyreducingthesalesvalueoftheinven torybytheappropriatepercentage
grossmargin.Thepercentageusedtakesintoconsiderationinventorywhi chhasbeenmarkeddowntobelow
its original selling price. An average percentage for each retail departm ent is often used.
Cost formulas
19. The cost of inventories of items that are not ordinarily interchangeab le and goods or services produced and
segregated for specific projects should be assigned by using specific ide ntification of their individual costs.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 31
20.Specific identification of cost means that specific costs are attributed to identified items of inventory. This is
an appropriate treatment for items that are segregated for a specific proj ect, regardless of whether they have
been bought or produced. However, specific identification of costs is ina ppropriate when there are large
numbers of items of inventory which are ordinarily interchangeable. In su ch circumstances, the method of
selectingthoseitemsthatremainininventoriescouldbeusedtoobtainpr edeterminedeffectsonthenetprofit
or loss for the period.
Benchmark treatment
21. The cost of inventories, other than those dealt with in paragraph 19, sh ould be assigned by using the first-in,
first-out (FIFO) or weighted average cost formulas (1).
22.The FIFO formula assumes that the items of inventory which were purchased f irst are sold first, and
consequently the items remaining in inventory at the end of the period are t hose most recently purchased or
produced. Under the weighted average cost formula, the cost of each item is determined from the weighted
average of the cost of similar items at the beginning of a period and the cost of similar items purchased or
producedduringtheperiod.Theaveragemaybecalculatedonaperiodicbas is,oraseachadditionalshipment
is received, depending upon the circumstances of the enterprise.
Allowed alternative treatment
23. The cost of inventories, other than those dealt with in paragraph 19, sh ould be assigned by using the last-in,
first-out (LIFO) formula (1).
24.The LIFO formula assumes that the items of inventory which were purchased o r produced last are sold first,
and consequently the items remaining in inventory at the end of the period a re those first purchased or
produced.
Net realisable value
25.The cost of inventories may not be recoverable if those inventories are dam aged, if they have become wholly
orpartiallyobsolete,oriftheirsellingpriceshavedeclined.Thecosto finventoriesmayalsonotberecoverable
iftheestimatedcostsofcompletionortheestimatedcoststobeincurredt omakethesalehaveincreased.The
practice of writing inventories down below cost to net realisable value is consistent with the view that assets
should not be carried in excess of amounts expected to be realised from thei r sale or use.
26.Inventories are usually written down to net realisable value on an item by i tem basis. In some circumstances,
however,itmaybeappropriatetogroupsimilarorrelateditems.Thismayb ethecasewithitemsofinventory
relating to the same product line that have similar purposes or end uses, ar e produced and marketed in the
samegeographicalarea,andcannotbepracticablyevaluatedseparatelyf romotheritemsinthatproductline.
It is not appropriate to write inventories down based on a classification o f inventory, for example, finished
goods, or all the inventories in a particular industry or geographical seg ment. Service providers generally
accumulate costs in respect of each service for which a separate selling pr ice will be charged. Therefore, each
such service is treated as a separate item.
27.Estimatesofnetrealisablevaluearebasedonthemostreliableevidencea vailableatthetimetheestimatesare
made as to the amount the inventories are expected to realise. These estima tes take into consideration
fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that
such events confirm conditions existing at the end of the period.
(1) See also SIC-1: consistency — different cost formulas for inventories.32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
28.Estimates of net realisable value also take into consideration the purpos e for which the inventory is held. For
example, the net realisable value of the quantity of inventory held to sati sfy firm sales or service contracts is
basedonthecontractprice.Ifthesalescontractsareforlessthantheinv entoryquantitiesheld,thenetrealisable
value of the excess is based on general selling prices. Provisions or conti ngent liabilities may arise from firm
sales contracts in excess of inventory quantities held or from firm purcha se contracts. Such provisions or
contingent liabilities are dealt with under IAS 37, provisions, continge nt liabilities and contingent assets.
29.Materials and other supplies held for use in the production of inventories are not written down below cost if
the finished products in which they will be incorporated are expected to be sold at or above cost. However,
whenadeclineinthepriceofmaterialsindicatesthatthecostofthefinis hedproductswillexceednetrealisable
value, the materials are written down to net realisable value. In such circ umstances, the replacement cost of
the materials may be the best available measure of their net realisable val ue.
30.A new assessment is made of net realisable value in each subsequent period. When the circumstances which
previously caused inventories to be written down below cost no longer exis t, the amount of the write-down
is reversed so that the new carrying amount is the lower of the cost and the re vised net realisable value. This
occurs,forexample,whenanitemofinventory,whichiscarriedatnetreal isablevaluebecauseitssellingprice
has declined, is still on hand in a subsequent period and its selling price h as increased.
RECOGNITION AS AN EXPENSE
31. When inventories are sold, the carrying amount of those inventories sh ould be recognised as an expense in
the period in which the related revenue is recognised. The amount of any wri te-down of inventories to net
realisablevalueandalllossesofinventoriesshouldberecognisedasane xpenseintheperiodthewrite-down
or loss occurs. The amount of any reversal of any write-down of inventories , arising from an increase in net
realisable value, should be recognised as a reduction in the amount of inve ntories recognised as an expense
in the period in which the reversal occurs.
32.The process of recognising as an expense the carrying amount of inventorie s sold results in the matching of
costs and revenues.
33.Some inventories may be allocated to other asset accounts, for example, in ventory used as a component of
self-constructedproperty,plantorequipment.Inventoriesallocatedt oanotherassetinthiswayarerecognised
as an expense during the useful life of that asset.
DISCLOSURE
34. The financial statements should disclose:
(a) the accounting policies adopted in measuring inventories, including the cost formula used;
(b) the total carrying amount of inventories and the carrying amount in cla ssifications appropriate to the
enterprise;
(c) the carrying amount of inventories carried at net realisable value;
(d) theamountofanyreversalofanywrite-downthatisrecognisedasincom eintheperiodinaccordancewith
paragraph 31;
(e) the circumstances or events that led to the reversal of a write-down of i nventories in accordance with
paragraph 31; and
(f) the carrying amount of inventories pledged as security for liabilitie s.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 33
35.Information about the carrying amounts held in different classification s of inventories and the extent of the
changes in these assets is useful to financial statement users. Common cla ssifications of inventories are
merchandise,productionsupplies,materials,workinprogressandfinis hedgoods.Theinventoriesofaservice
provider may simply be described as work in progress.
36. WhenthecostofinventoriesisdeterminedusingtheLIFOformulainacc ordancewiththeallowedalternative
treatment in paragraph 23, the financial statements should disclose the d ifference between the amount of
inventories as shown in the balance sheet and either:
(a) the lower of the amount arrived at in accordance with paragraph 21 and ne t realisable value; or
(b) the lower of current cost at the balance sheet date and net realisable va lue.
37. The financial statements should disclose either:
(a) the cost of inventories recognised as an expense during the period; or
(b) theoperatingcosts,applicabletorevenues,recognisedasanexpense duringtheperiod,classifiedbytheir
nature.
38.Thecostofinventoriesrecognisedasanexpenseduringtheperiodconsist softhosecostspreviouslyincluded
in the measurement of the items of inventory sold and unallocated producti on overheads and abnormal
amountsofproductioncostsofinventories.Thecircumstancesoftheente rprisemayalsowarranttheinclusion
of other costs, such as distribution costs.
39.Some enterprises adopt a different format for the income statement which r esults in different amounts being
disclosed instead of the cost of inventories recognised as an expense duri ng the period. Under this different
format,anenterprisedisclosestheamountsofoperatingcosts,applicab letorevenuesfortheperiod,classified
by their nature. In this case, the enterprise discloses the costs recognis ed as an expense for raw materials and
consumables,labourcostsandotheroperatingcoststogetherwiththeamo untofthenetchangeininventories
for the period.
40.Awrite-downtonetrealisablevaluemaybeofsuchsize,incidenceornatur etorequiredisclosureunderIAS8,
net profit or loss for the period, fundamental errors and changes in accoun ting policies.
EFFECTIVE DATE
41. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.
INTERNATIONAL ACCOUNTING STANDARD IAS 7
(REVISED 1992)
Cash flow statements
ThisrevisedInternationalAccountingStandardsupersedesias7,statem entofchangesinfinancialposition,approved
bytheboardinoctober1977.therevisecameeffectiveforfinancialstate mentscoveringperiodsbeginningonorafter
1 January 1994.34 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
CONTENTS
Paragraphs
Objective 36
Scope 36
Benefits of cash flow information 36
Definitions 37
Cash and cash equivalents 37
Presentation of a cash flow statement 37Operating activities 38
Investing activities 38
Financing activities 39
Reporting cash flows from operating activities 39Reporting cash flows from investing and financing activities 40Reporting cash flows on a net basis 40Foreign currency cash flows 41
Extraordinary items 41
Interest and dividends 41
Taxes on income 42
Investments in subsidiaries, associates and joint ventures 42Acquisitions and disposals of subsidiaries and other business units 42Non-cash transactions 43
Components of cash and cash equivalents 43Other disclosures 43
Effective date 4413/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 35
The standards, which have been set in bold italic type should be read in the c ontext of the background material and
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
Information about the cash flows of an enterprise is useful in providing us ers of financial statements with a basis to
assesstheabilityoftheenterprisetogeneratecashandcashequivalents andtheneedsoftheenterprisetoutilisethose
cash flows. The economic decisions that are taken by users require an evalu ation of the ability of an enterprise to
generate cash and cash equivalents and the timing and certainty of their ge neration.
TheobjectiveofthisStandardistorequiretheprovisionofinformationa boutthehistoricalchangesincashandcash
equivalents of an enterprise by means of a cash flow statement which classi fies cash flows during the period from
operating, investing and financing activities.
SCOPE
1. An enterprise should prepare a cash flow statement in accordance with th e requirements of this Standard and
should present it as an integral part of its financial statements for each p eriod for which financial statements
are presented.
2.This Standard supersedes IAS 7, statement of changes in financial positio n, approved in July 1977.
3.Usersofanenterprise’sfinancialstatementsareinterestedinhowtheen terprisegeneratesandusescashandcash
equivalents.Thisisthecaseregardlessofthenatureoftheenterprise’s activitiesandirrespectiveofwhethercash
canbeviewedastheproductoftheenterprise,asmaybethecasewithafinan cialinstitution.Enterprisesneed
cash for essentially the same reasons however different their principal r evenue-producing activities might be.
They need cash to conduct their operations, to pay their obligations, and t o provide returns to their investors.
Accordingly, this Standard requires all enterprises to present a cash flo w statement.
BENEFITS OF CASH FLOW INFORMATION
4.Acashflowstatement,whenusedinconjunctionwiththerestofthefinanci alstatements,providesinformation
that enables users to evaluate the changes in net assets of an enterprise, i ts financial structure (including its
liquidityandsolvency)anditsabilitytoaffecttheamountsandtimingof cashflowsinordertoadapttochanging
circumstances and opportunities. Cash flow information is useful in asse ssing the ability of the enterprise to
generatecashandcashequivalentsandenablesuserstodevelopmodelstoa ssessandcomparethepresentvalue
ofthefuturecashflowsofdifferententerprises.Italsoenhancesthecom parabilityofthereportingofoperating
performance by different enterprises because it eliminates the effects o f using different accounting treatments
for the same transactions and events.
5.Historicalcashflowinformationisoftenusedasanindicatoroftheamoun t,timingandcertaintyoffuturecash
flows. It is also useful in checking the accuracy of past assessments of fut ure cash flows and in examining the
relationship between profitability and net cash flow and the impact of cha nging prices.36 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
DEFINITIONS
6.The following terms are used in this Standard with the meanings specified:
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are read ily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value.Cash flows are inflows and outflows of cash and cash equivalents.Operatingactivitiesaretheprincipalrevenue-producingactivitiesof theenterpriseandotheractivitiesthatare
not investing or financing activities.Investingactivitiesaretheacquisitionanddisposaloflong-termasset sandotherinvestmentsnotincludedin
cash equivalents.Financing activities are activities that result in changes in the size and composition of the equity capital and
borrowings of the enterprise.
Cash and cash equivalents
7.Cashequivalentsareheldforthepurposeofmeetingshort-termcashcommi tmentsratherthanforinvestment
or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known
amount of cash and be subject to an insignificant risk of changes in value. T herefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, thr ee months or less from the date of
acquisition. Equity investments are excluded from cash equivalents unle ss they are, in substance, cash
equivalents,forexampleinthecaseofpreferredsharesacquiredwithina shortperiodoftheirmaturityandwith
a specified redemption date.
8.Bank borrowings are generally considered to be financing activities. How ever, in some countries, bank
overdrafts which are repayable on demand form an integral part of an enterp rise’s cash management. In these
circumstances, bank overdrafts are included as a component of cash and cas h equivalents. A characteristic of
such banking arrangements is that the bank balance often fluctuates from b eing positive to overdrawn.
9.Cash flows exclude movements between items that constitute cash or cash eq uivalents because these
components are part of the cash management of an enterprise rather than par t of its operating, investing and
financing activities. Cash management includes the investment of excess cash in cash equivalents.
PRESENTATION OF A CASH FLOW STATEMENT
10. The cash flow statement should report cash flows during the period clas sified by operating, investing and
financing activities.
11.An enterprise presents its cash flows from operating, investing and finan cing activities in a manner which is
mostappropriatetoitsbusiness.Classificationbyactivityprovidesin formationthatallowsuserstoassessthe
impact of those activities on the financial position of the enterprise and the amount of its cash and cash
equivalents. This information may also be used to evaluate the relationsh ips among those activities.
12.A single transaction may include cash flows that are classified different ly. For example, when the cash
repayment of a loan includes both interest and capital, the interest eleme nt may be classified as an operating
activity and the capital element is classified as a financing activity.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 37
Operating activities
13. The amount of cash flows arising from operating activities is a key indi cator of the extent to which the
operations of the enterprise have generated sufficient cash flows to repa y loans, maintain the operating
capabilityoftheenterprise,paydividendsandmakenewinvestmentswith outrecoursetoexternalsourcesof
financing. Information about the specific components of historical oper ating cash flows is useful, in
conjunction with other information, in forecasting future operating cas h flows.
14. Cash flows from operating activities are primarily derived from the pr incipal revenue-producing activities of
the enterprise. Therefore, they generally result from the transactions a nd other events that enter into the
determination of net profit or loss. Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;(c) cash payments to suppliers for goods and services;(d) cash payments to and on behalf of employees;(e) cashreceiptsandcashpaymentsofaninsuranceenterpriseforpremium sandclaims,annuitiesandother
policy benefits;
(f) cash payments or refunds of income taxes unless they can be specificall y identified with financing and
investing activities; and
(g) cash receipts and payments from contracts held for dealing or trading p urposes.
Some transactions, such as the sale of an item of plant, may give rise to a gai n or loss which is included in
the determination of net profit or loss. However, the cash flows relating t o such transactions are cash flows
from investing activities.
15. Anenterprisemayholdsecuritiesandloansfordealingortradingpurp oses,inwhichcasetheyaresimilarto
inventory acquired specifically for resale. Therefore, cash flows arisi ng from the purchase and sale of dealing
ortradingsecuritiesareclassifiedasoperatingactivities.Similarly ,cashadvancesandloansmadebyfinancial
institutionsareusuallyclassifiedasoperatingactivitiessincetheyr elatetothemainrevenue-producingactivity
of that enterprise.
Investing activities
16. The separate disclosure of cash flows arising from investing activiti es is important because the cash flows
representtheextenttowhichexpenditureshavebeenmadeforresourcesin tendedtogeneratefutureincome
and cash flows. Examples of cash flows arising from investing activities a re:
(a) cash payments to acquire property, plant and equipment, intangibles a nd other long-term assets. These
paymentsincludethoserelatingtocapitaliseddevelopmentcostsandsel f-constructedproperty,plantand
equipment;
(b) cash receipts from sales of property, plant and equipment, intangible s and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other enterpris es and interests in joint ventures
(otherthanpaymentsforthoseinstrumentsconsideredtobecashequivale ntsorthoseheldfordealingor
trading purposes);
(d) cash receipts from sales of equity or debt instruments of other enterpr ises and interests in joint ventures
(otherthanreceiptsforthoseinstrumentsconsideredtobecashequivale ntsandthoseheldfordealingor
trading purposes);
(e) cash advances and loans made to other parties (other than advances and l oans made by a financial
institution);
(f) cash receipts from the repayment of advances and loans made to other par ties (other than advances and
loans of a financial institution);38 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(g) cashpaymentsforfuturescontracts,forwardcontracts,optioncontr actsandswapcontractsexceptwhen
thecontractsareheldfordealingortradingpurposes,orthepaymentsare classifiedasfinancingactivities;
and
(h) cashreceiptsfromfuturescontracts,forwardcontracts,optioncont ractsandswapcontractsexceptwhen
the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are
classified in the same manner as the cash flows of the position being hedged .
Financing activities
17.The separate disclosure of cash flows arising from financing activities i s important because it is useful in
predictingclaimsonfuturecashflowsbyprovidersofcapitaltotheenter prise.Examplesofcashflowsarising
from financing activities are:
(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the enterprise’s shares;(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgage s and other short or long-term
borrowings;
(d) cash repayments of amounts borrowed; and(e) cash payments by a lessee for the reduction of the outstanding liabilit y relating to a finance lease.
REPORTING CASH FLOWS FROM OPERATING ACTIVITIES
18.An enterprise should report cash flows from operating activities using ei ther:
(a) thedirectmethod,wherebymajorclassesofgrosscashreceiptsandgro sscashpaymentsaredisclosed;or
(b) the indirect method, whereby net profit or loss is adjusted for the effe cts of transactions of a non-cash
nature,anydeferralsoraccrualsofpastorfutureoperatingcashreceipt sorpayments,anditemsofincome
or expense associated with investing or financing cash flows.
19. Enterprises are encouraged to report cash flows from operating activi ties using the direct method. The direct
methodprovidesinformationwhichmaybeusefulinestimatingfuturecash flowsandwhichisnotavailable
under the indirect method. Under the direct method, information about maj or classes of gross cash receipts
and gross cash payments may be obtained either:
(a) from the accounting records of the enterprise; or(b) by adjusting sales, cost of sales (interest and similar income and inte rest expense and similar charges for
a financial institution) and other items in the income statement for:(i) changes during the period in inventories and operating receivables an d payables;
(ii) other non-cash items; and(iii)other items for which the cash effects are investing or financing cas h flows.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 39
20. Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit
or loss for the effects of:
(a) changes during the period in inventories and operating receivables an d payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, unr ealised foreign currency gains and
losses, undistributed profits of associates, and minority interests; an d
(c) all other items for which the cash effects are investing or financing ca sh flows.
Alternatively, the net cash flow from operating activities may be present ed under the indirect method by
showing the revenues and expenses disclosed in the income statement and th e changes during the period in
inventories and operating receivables and payables.
REPORTING CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
21. An enterprise should report separately major classes of gross cash rec eipts and gross cash payments arising
from investing and financing activities, except to the extent that cash fl ows described in paragraphs 22 and
24 are reported on a net basis.
REPORTING CASH FLOWS ON A NET BASIS
22.Cash flows arising from the following operating, investing or financing a ctivities may be reported on a net
basis:
(a) cash receipts and payments on behalf of customers when the cash flows re flect the activities of the
customer rather than those of the enterprise; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the
maturities are short.
23. Examples of cash receipts and payments referred to in paragraph 22(a) a re:
(a) the acceptance and repayment of demand deposits of a bank;(b) funds held for customers by an investment enterprise; and(c) rents collected on behalf of, and paid over to, the owners of properties .
Examples of cash receipts and payments referred to in paragraph 22(b) are a dvances made for, and the
repayment of:(a) principal amounts relating to credit card customers;(b) the purchase and sale of investments; and(c) other short-term borrowings, for example, those which have a maturity period of three months or less.
24.
Cashflowsarisingfromeachofthefollowingactivitiesofafinancialins titutionmaybereportedonanetbasis:
(a) cash receipts and payments for the acceptance and repayment of deposit s with a fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits from other fi nancial institutions; and
(c) cash advances and loans made to customers and the repayment of those adv ances and loans.40 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
FOREIGN CURRENCY CASH FLOWS
25. Cash flows arising from transactions in a foreign currency should be re corded in an enterprise’s reporting
currency by applying to the foreign currency amount the exchange rate betw een the reporting currency and
the foreign currency at the date of the cash flow.
26. Thecashflowsofaforeignsubsidiaryshouldbetranslatedattheexcha ngeratesbetweenthereportingcurrency
and the foreign currency at the dates of the cash flows.
27.Cash flows denominated in a foreign currency are reported in a manner consi stent with IAS 21, accounting
fortheeffectsofchangesinforeignexchangerates.Thispermitstheuseo fanexchangeratethatapproximates
theactualrate.Forexample,aweightedaverageexchangerateforaperiod maybeusedforrecordingforeign
currency transactions or the translation of the cash flows of a foreign sub sidiary. However, IAS 21 does not
permituseoftheexchangerateatthebalancesheetdatewhentranslatingt hecashflowsofaforeignsubsidiary.
28.Unrealised gains and losses arising from changes in foreign currency exch ange rates are not cash flows.
However, the effect of exchange rate changes on cash and cash equivalents h eld or due in a foreign currency
isreportedinthecashflowstatementinordertoreconcilecashandcasheq uivalentsatthebeginningandthe
endoftheperiod.Thisamountispresentedseparatelyfromcashflowsfrom operating,investingandfinancing
activities and includes the differences, if any, had those cash flows been reported at end of period exchange
rates.
EXTRAORDINARY ITEMS
29. Thecashflowsassociatedwithextraordinaryitemsshouldbeclassifi edasarisingfromoperating,investingor
financing activities as appropriate and separately disclosed.
30.Thecashflowsassociatedwithextraordinaryitemsaredisclosedseparat elyasarisingfromoperating,investing
orfinancingactivitiesinthecashflowstatement,toenableuserstounde rstandtheirnatureandeffectonthe
present and future cash flows of the enterprise. These disclosures are in a ddition to the separate disclosures
of the nature and amount of extraordinary items required by IAS 8, net profi t or loss for the period,
fundamental errors and changes in accounting policies.
INTEREST AND DIVIDENDS
31. Cashflowsfrominterestanddividendsreceivedandpaidshouldeachbe disclosedseparately.Eachshouldbe
classified in a consistent manner from period to period as either operatin g, investing or financing activities.
32.The total amount of interest paid during a period is disclosed in the cash fl ow statement whether it has been
recognised as an expense in the income statement or capitalised in accorda nce with the allowed alternative
treatment in IAS 23, borrowing costs.
33.Interest paid and interest and dividends received are usually classified as operating cash flows for a financial
institution. However, there is no consensus on the classification of thes e cash flows for other enterprises.
Interest paid and interest and dividends received may be classified as ope rating cash flows because they enter
intothedeterminationofnetprofitorloss.Alternatively,interestpai dandinterestanddividendsreceivedmay
beclassifiedasfinancingcashflowsandinvestingcashflowsrespective ly,becausetheyarecostsofobtaining
financial resources or returns on investments.
34.Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial
resources. Alternatively, dividends paid may be classified as a componen t of cash flows from operating
activitiesinordertoassistuserstodeterminetheabilityofanenterpri setopaydividendsoutofoperatingcash
flows.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 41
TAXES ON INCOME
35. Cashflowsarisingfromtaxesonincomeshouldbeseparatelydisclosed andshouldbeclassifiedascashflows
from operating activities unless they can be specifically identified wit h financing and investing activities.
36.Taxesonincomeariseontransactionsthatgiverisetocashflowsthatarec lassifiedasoperating,investingor
financing activities in a cash flow statement. While tax expense may be rea dily identifiable with investing or
financing activities, the related tax cash flows are often impracticable to identify and may arise in a different
period from the cash flows of the underlying transaction. Therefore, taxe s paid are usually classified as cash
flowsfromoperatingactivities.However,whenitispracticabletoident ifythetaxcashflowwithanindividual
transactionthatgivesrisetocashflowsthatareclassifiedasinvesting orfinancingactivitiesthetaxcashflow
is classified as an investing or financing activity as appropriate. When t ax cash flows are allocated over more
than one class of activity, the total amount of taxes paid is disclosed.
INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
37.Whenaccountingforaninvestmentinanassociateorasubsidiaryaccounte dforbyuseoftheequityorcost
method, an investor restricts its reporting in the cash flow statement to t he cash flows between itself and the
investee, for example, to dividends and advances.
38.Anenterprisewhichreportsitsinterestinajointlycontrolledentity(s eeIAS31,financialreportingofinterests
in joint ventures) using proportionate consolidation, includes in its co nsolidated cash flow statement its
proportionate share of the jointly controlled entity’s cash flows. An ent erprise which reports such an interest
usingtheequitymethodincludesinitscashflowstatementthecashflowsi nrespectofitsinvestmentsinthe
jointlycontrolledentity,anddistributionsandotherpaymentsorrecei ptsbetweenitandthejointlycontrolled
entity.
ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES AND OTHER BUSINESS UNITS
39. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units
should be presented separately and classified as investing activities.
40.Anenterpriseshoulddisclose,inaggregate,inrespectofbothacquisiti onsanddisposalsofsubsidiariesorother
business units during the period each of the following:
(a) the total purchase or disposal consideration;
(b) the portion of the purchase or disposal consideration discharged by me ans of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiary or business un it acquired or disposed of; and
(d) theamountoftheassetsandliabilitiesotherthancashorcashequival entsinthesubsidiaryorbusinessunit
acquired or disposed of, summarised by each major category.
41.The separate presentation of the cash flow effects of acquisitions and dis posals of subsidiaries and other
businessunitsassinglelineitems,togetherwiththeseparatedisclosur eoftheamountsofassetsandliabilities
acquired or disposed of, helps to distinguish those cash flows from the cas h flows arising from the other
operating,investingandfinancingactivities.Thecashfloweffectsofd isposalsarenotdeductedfromthoseof
acquisitions.
42.The aggregate amount of the cash paid or received as purchase or sale consid eration is reported in the cash
flow statement net of cash and cash equivalents acquired or disposed of.42 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
NON-CASH TRANSACTIONS
43. Investingandfinancingtransactionsthatdonotrequiretheuseofcas horcashequivalentsshouldbeexcluded
from a cash flow statement. Such transactions should be disclosed elsewhe re in the financial statements in a
way that provides all the relevant information about these investing and f inancing activities.
44.Many investing and financing activities do not have a direct impact on curr ent cash flows although they do
affectthecapitalandassetstructureofanenterprise.Theexclusionofn on-cashtransactionsfromthecashflow
statement is consistent with the objective of a cash flow statement as thes e items do not involve cash flows
in the current period. Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabili ties or by means of a finance lease;
(b) the acquisition of an enterprise by means of an equity issue; and
(c) the conversion of debt to equity.
COMPONENTS OF CASH AND CASH EQUIVALENTS
45. Anenterpriseshoulddisclosethecomponentsofcashandcashequivale ntsandshouldpresentareconciliation
of the amounts in its cash flow statement with the equivalent items reporte d in the balance sheet.
46.Inviewofthevarietyofcashmanagementpracticesandbankingarrangemen tsaroundtheworldandinorder
to comply with IAS 1, presentation of financial statements, an enterprise discloses the policy which it adopts
in determining the composition of cash and cash equivalents.
47.Theeffectofanychangeinthepolicyfordeterminingcomponentsofcashan dcashequivalents,forexample,
a change in the classification of financial instruments previously consi dered to be part of an enterprise’s
investmentportfolio,isreportedinaccordancewithIAS8,netprofitorl ossfortheperiod,fundamentalerrors
and changes in accounting policies.
OTHER DISCLOSURES
48. An enterprise should disclose, together with a commentary by manageme nt, the amount of significant cash
and cash equivalent balances held by the enterprise that are not available for use by the group.
49.There are various circumstances in which cash and cash equivalent balance s held by an enterprise are not
available for use by the group. Examples include cash and cash equivalent b alances held by a subsidiary that
operates in a country where exchange controls or other legal restrictions apply when the balances are not
available for general use by the parent or other subsidiaries.
50.Additional information may be relevant to users in understanding the fina ncial position and liquidity of an
enterprise. Disclosure of this information, together with a commentary b y management, is encouraged and
may include:
(a) the amount of undrawn borrowing facilities that may be available for fu ture operating activities and to
settle capital commitments, indicating any restrictions on the use of the se facilities;
(b) theaggregateamountsofthecashflowsfromeachofoperating,investi ngandfinancingactivitiesrelated
to interests in joint ventures reported using proportionate consolidati on;
(c) the aggregate amount of cash flows that represent increases in operati ng capacity separately from those
cash flows that are required to maintain operating capacity; and13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 43
(d) theamountofthecashflowsarisingfromtheoperating,investingandf inancingactivitiesofeachreported
industry and geographical segment (see IAS 14, segment reporting).
51.The separate disclosure of cash flows that represent increases in operati ng capacity and cash flows that are
required to maintain operating capacity is useful in enabling the user to d etermine whether the enterprise is
investingadequatelyinthemaintenanceofitsoperatingcapacity.Anent erprisethatdoesnotinvestadequately
in the maintenance of its operating capacity may be prejudicing future pro fitability for the sake of current
liquidity and distributions to owners.
52.The disclosure of segmental cash flows enables users to obtain a better und erstanding of the relationship
between the cash flows of the business as a whole and those of its component p arts and the availability and
variability of segmental cash flows.
EFFECTIVE DATE
53. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1994.
INTERNATIONAL ACCOUNTING STANDARD IAS 8
(REVISED 1993)
Net profit or loss for the period, fundamental errors and changes in accoun ting policies
IAS35,discontinuingoperations,supersedesparagraphs4and19to22ofI AS8.IAS35alsosupersedesthedefinition
of discontinued operations in paragraph 6 of IAS 8. IAS 35 is operative for f inancial statements covering periods
beginning on or after 1 January 1999.
IAS 40, investment property, amended paragraph 44, which also is now set in bold italic type. IAS 40 is operative
for annual financial statements covering periods beginning on or after 1 J anuary 2001.
One SIC interpretation relates to IAS 8:
— SIC-8: first-time Application of IASs as the primary basis of accounting .
CONTENTS
Paragraph
Objective 45
Scope 45
Definitions 45
Net profit or loss for the period 46
Extraordinary items 46
Profit or loss from ordinary activities 47(Paragraphs deleted)Changes in accounting estimates 47Fundamental errors 4844 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Benchmark treatment 48
Allowed alternative treatment 49
Changes in accounting policy 49
Adoption of an International Accounting Standard 50
Other changes in accounting policies — benchmark treatment 50Other changes in accounting policies — allowed alternative treatment 51Effective date 51
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the classification, disclo sure and accounting treatment of certain items
in the income statement so that all enterprises prepare and present an inco me statement on a consistent basis. This
enhances comparability both with the enterprise’s financial statements of previous periods and with the financial
statementsofotherenterprises.Accordingly,thisStandardrequiresth eclassificationanddisclosureofextraordinary
itemsandthedisclosureofcertainitemswithinprofitorlossfromordina ryactivities.Italsospecifiestheaccounting
treatment for changes in accounting estimates, changes in accounting pol icies and the correction of fundamental
errors.
SCOPE
1. ThisStandardshouldbeappliedinpresentingprofitorlossfromordina ryactivitiesandextraordinaryitemsin
the income statement and in accounting for changes in accounting estimate s, fundamental errors and changes
in accounting policies.
2.This Standard supersedes IAS 8, unusual and prior period items and changes in accounting policies, approved
in 1977.
3.ThisStandarddealswith,amongotherthings,thedisclosureofcertainit emsofnetprofitorlossfortheperiod.
These disclosures are made in addition to any other disclosures required b y other International Accounting
Standards, including IAS 1, presentation of financial statements.
4.(Deleted)
5.Thetaxeffectsofextraordinaryitems,fundamentalerrorsandchangesin accountingpoliciesareaccountedfor
and disclosed in accordance with IAS 12, income taxes. Where IAS 12 refers t o unusual items, this should be
read as extraordinary items as defined in this Standard.
DEFINITIONS
6. The following terms are used in this Standard with the meanings specifie d:
Extraordinaryitemsareincomeorexpensesthatarisefromeventsortrans actionsthatareclearlydistinctfrom
the ordinary activities of the enterprise and therefore are not expected t o recur frequently or regularly.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 45
Ordinaryactivitiesareanyactivitieswhichareundertakenbyanenterpr iseaspartofitsbusinessandsuchrelated
activities in which the enterprise engages in furtherance of, incidental to, or arising from these activities.
Fundamental errors are errors discovered in the current period that are of such significance that the financial
statements of one or more prior periods can no longer be considered to have b een reliable at the date of their
issue.
Accountingpoliciesarethespecificprinciples,bases,conventions,ru lesandpracticesadoptedbyanenterprise
in preparing and presenting financial statements.
NET PROFIT OR LOSS FOR THE PERIOD
7. Allitemsofincomeandexpenserecognisedinaperiodshouldbeincluded inthedeterminationofthenetprofit
or loss for the period unless an International Accounting Standard requir es or permits otherwise.
8.Normally, all items of income and expense recognised in a period are includ ed in the determination of the net
profitorlossfortheperiod.Thisincludesextraordinaryitemsandtheef fectsofchangesinaccountingestimates.
However, circumstances may exist when certain items may be excluded from n et profit or loss for the current
period. This Standard deals with two such circumstances: the correction o f fundamental errors and the effect
of changes in accounting policies.
9.OtherInternationalAccountingStandardsdealwithitemswhichmaymeett heframeworkdefinitionsofincome
or expense but which are usually excluded from the determination of the net profit or loss. Examples include
revaluationsurpluses(seeIAS16,property,plantandequipment)andgai nsandlossesarisingonthetranslation
of the financial statements of a foreign entity (see IAS 21, the effects of c hanges in foreign exchange rates).
10. The net profit or loss for the period comprises the following component s, each of which should be disclosed
on the face of the income statement:
(a) profit or loss from ordinary activities; and(b) extraordinary items.
Extraordinary items
11. The nature and the amount of each extraordinary item should be separate ly disclosed.
12.Virtuallyallitemsofincomeandexpenseincludedinthedeterminationof netprofitorlossfortheperiodarise
in the course of the ordinary activities of the enterprise. Therefore, onl y on rare occasions does an event or
transaction give rise to an extraordinary item.
13.Whetheraneventortransactionisclearlydistinctfromtheordinaryacti vitiesoftheenterpriseisdetermined
bythenatureoftheeventortransactioninrelationtothebusinessordina rilycarriedonbytheenterpriserather
than by the frequency with which such events are expected to occur. Therefo re, an event or transaction may
be extraordinary for one enterprise but not extraordinary for another ent erprise because of the differences
between their respective ordinary activities. For example, losses susta ined as a result of an earthquake may
qualify as an extraordinary item for many enterprises. However, claims fr om policyholders arising from an
earthquakedonotqualifyasanextraordinaryitemforaninsuranceenterp risethatinsuresagainstsuchrisks.
14.Examples of events or transactions that generally give rise to extraordin ary items for most enterprises are:
(a) the expropriation of assets; or(b) an earthquake or other natural disaster.
15.
The disclosure of the nature and amount of each extraordinary item may be ma de on the face of the income
statement, or when this disclosure is made in the notes to the financial sta tements, the total amount of all
extraordinary items is disclosed on the face of the income statement.46 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Profit or loss from ordinary activities
16. When items of income and expense within profit or loss from ordinary act ivities are of such size, nature or
incidencethattheirdisclosureisrelevanttoexplaintheperformanceof theenterprisefortheperiod,thenature
and amount of such items should be disclosed separately.
17.Althoughtheitemsofincomeandexpensedescribedinparagraph16arenote xtraordinaryitems,thenature
and amount of such items may be relevant to users of financial statements in understanding the financial
position and performance of an enterprise and in making projections about financial position and
performance. Disclosure of such information is usually made in the notes t o the financial statements.
18.Circumstances which may give rise to the separate disclosure of items of in come and expense in accordance
with paragraph 16 include:
(a) the write-down of inventories to net realisable value or property, pla nt and equipment to recoverable
amount, as well as the reversal of such write-downs;
(b) a restructuring of the activities of an enterprise and the reversal of a ny provisions for the costs of
restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of long-term investments;(e) discontinued operations;(f) litigation settlements; and(g) other reversals of provisions.
19-22. (Deleted — see IAS 35, discontinuing operations.)
Changes in accounting estimates
23.As a result of the uncertainties inherent in business activities, many fin ancial statement items cannot be
measuredwithprecisionbutcanonlybeestimated.Theestimationprocess involvesjudgementsbasedonthe
latest information available. Estimates may be required, for example, of bad debts, inventory obsolescence or
the useful lives or expected pattern of consumption of economic benefits o f depreciable assets. The use of
reasonableestimatesisanessentialpartofthepreparationoffinancial statementsanddoesnotunderminetheir
reliability.
24.An estimate may have to be revised if changes occur regarding the circumsta nces on which the estimate was
based or as a result of new information, more experience or subsequent deve lopments. By its nature, the
revision of the estimate does not bring the adjustment within the definiti ons of an extraordinary item or a
fundamental error.
25.Sometimes it is difficult to distinguish between a change in accounting po licy and a change in an accounting
estimate.Insuchcases,thechangeistreatedasachangeinanaccountinge stimate,withappropriatedisclosure.
26. Theeffectofachangeinanaccountingestimateshouldbeincludedinth edeterminationofnetprofitorloss
in:
(a) the period of the change, if the change affects the period only; or(b) the period of the change and future periods, if the change affects both.
27.
A change in an accounting estimate may affect the current period only or bot h the current period and future
periods.Forexample,achangeintheestimateoftheamountofbaddebtsaff ectsonlythecurrentperiodand
thereforeisrecognisedimmediately.However,achangeintheestimatedu sefullifeortheexpectedpatternof
consumptionofeconomicbenefitsofadepreciableassetaffectsthedepre ciationexpenseinthecurrentperiod
andineachperiodduringtheremainingusefullifeoftheasset.Inbothcas es,theeffectofthechangerelating
to the current period is recognised as income or expense in the current peri od. The effect, if any, on future
periods is recognised in future periods.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 47
28. Theeffectofachangeinanaccountingestimateshouldbeincludedinth esameincomestatementclassification
as was used previously for the estimate.
29.Toensurethecomparabilityoffinancialstatementsofdifferentperiods ,theeffectofachangeinanaccounting
estimateforestimateswhichwerepreviouslyincludedintheprofitorlos sfromordinaryactivitiesisincluded
inthatcomponentofnetprofitorloss.Theeffectofachangeinanaccounti ngestimateforanestimatewhich
was previously included as an extraordinary item is reported as an extraor dinary item.
30. The nature and amount of a change in an accounting estimate that has a mat erial effect in the current period
or which is expected to have a material effect in subsequent periods should be disclosed. If it is impracticable
to quantify the amount, this fact should be disclosed.
FUNDAMENTAL ERRORS
31.Errors in the preparation of the financial statements of one or more prior p eriods may be discovered in the
currentperiod.Errorsmayoccurasaresultofmathematicalmistakes,mis takesinapplyingaccountingpolicies,
misinterpretation of facts, fraud or oversights. The correction of these errors is normally included in the
determination of net profit or loss for the current period.
32.Onrareoccasions,anerrorhassuchasignificanteffectonthefinancials tatementsofoneormorepriorperiods
thatthosefinancialstatementscannolongerbeconsideredtohavebeenre liableatthedateoftheirissue.These
errorsarereferredtoasfundamentalerrors.Anexampleofafundamentale rroristheinclusioninthefinancial
statements of a previous period of material amounts of work in progress and receivables in respect of
fraudulent contracts which cannot be enforced. The correction of fundame ntal errors that relate to prior
periods requires the restatement of the comparative information or the pr esentation of additional pro forma
information.
33.Thecorrectionoffundamentalerrorscanbedistinguishedfromchangesin accountingestimates.Accounting
estimates by their nature are approximations that may need revision as add itional information becomes
known.Forexample,thegainorlossrecognisedontheoutcomeofacontinge ncywhichpreviouslycouldnot
be estimated reliably does not constitute the correction of a fundamental error.
Benchmark treatment
34. The amount of the correction of a fundamental error that relates to prio r periods should be reported by
adjusting the opening balance of retained earnings. Comparative informa tion should be restated, unless it is
impracticable to do so.
35.The financial statements, including the comparative information for pri or periods, are presented as if the
fundamental error had been corrected in the period in which it was made. The refore, the amount of the
correction that relates to each period presented is included within the ne t profit or loss for that period. The
amount of the correction relating to periods prior to those included in the comparative information in the
financialstatementsisadjustedagainsttheopeningbalanceofretained earningsintheearliestperiodpresented.
Any other information reported with respect to prior periods, such as hist orical summaries of financial data,
is also restated.
36.The restatement of comparative information does not necessarily give ris e to the amendment of financial
statements which have been approved by shareholders or registered or file d with regulatory authorities.
However, national laws may require the amendment of such financial statem ents.
37. An enterprise should disclose the following:
(a) the nature of the fundamental error;
(b) the amount of the correction for the current period and for each prior pe riod presented;
(c) the amount of the correction relating to periods prior to those include d in the comparative information;
and
(d) the fact that comparative information has been restated or that it is im practicable to do so.48 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Allowed alternative treatment
38. Theamountofthecorrectionofafundamentalerrorshouldbeincludedi nthedeterminationofnetprofitor
loss for the current period. Comparative information should be presented as reported in the financial
statementsofthepriorperiod.Additionalproformainformation,prepar edinaccordancewithparagraph34,
should be presented unless it is impracticable to do so.
39.Thecorrectionofthefundamentalerrorisincludedinthedeterminationo fthenetprofitorlossforthecurrent
period.However,additionalinformationispresented,oftenasseparate columns,toshowthenetprofitorloss
of the current period and any prior periods presented as if the fundamental error had been corrected in the
period when it was made. It may be necessary to apply this accounting treatm ent in countries where the
financial statements are required to include comparative information wh ich agrees with the financial
statements presented in prior periods.
40. An enterprise should disclose the following:
(a) the nature of the fundamental error;
(b) the amount of the correction recognised in net profit or loss for the cur rent period; and
(c) the amount of the correction included in each period for which pro forma information is presented and
the amount of the correction relating to periods prior to those included in the pro forma information. If
it is impracticable to present pro forma information, this fact should be d isclosed.
CHANGES IN ACCOUNTING POLICIES
41. Users need to be able to compare the financial statements of an enterpri se over a period of time to identify
trends in its financial position, performance and cash flows. Therefore, the same accounting policies are
normally adopted in each period.
42.Achangeinaccountingpolicyshouldbemadeonlyifrequiredbystatute,or byanaccountingstandardsetting
body,orifthechangewillresultinamoreappropriatepresentationofeve ntsortransactionsinthefinancial
statements of the enterprise.
43. A more appropriate presentation of events or transactions in the finan cial statements occurs when the new
accounting policy results in more relevant or reliable information about the financial position, performance
or cash flows of the enterprise.
44.The following are not changes in accounting policies:
(a) the adoption of an accounting policy for events or transactions that di ffer in substance from previously
occurring events or transactions; and
(b) theadoptionofanewaccountingpolicyforeventsortransactionswhic hdidnotoccurpreviouslyorthat
were immaterial.
Theinitialadoptionofapolicytocarryassetsatrevaluedamountsundert heallowedalternativetreatmentin
IAS 16, property, plant and equipment, or IAS 38, intangible assets, is a ch ange in accounting policy but it
isdealtwithasarevaluationinaccordancewithIAS16orIAS38,rathertha ninaccordancewiththisStandard.
Therefore, paragraphs 49 to 57 of this Standard are not applicable to such c hanges in accounting policy.
45. Achangeinaccountingpolicyisappliedretrospectivelyorprospecti velyinaccordancewiththerequirements
of this Standard. Retrospective application results in the new accountin g policy being applied to events and
transactionsasifthenewaccountingpolicyhadalwaysbeeninuse.Theref ore,theaccountingpolicyisapplied
to events and transactions from the date of origin of such items. Prospecti ve application means that the new
accounting policy is applied to the events and transactions occurring aft er the date of the change. No
adjustmentsrelatingtopriorperiodsaremadeeithertotheopeningbalan ceofretainedearningsorinreporting
the net profit or loss for the current period because existing balances are not recalculated. However, the new
accounting policy is applied to existing balances as from the date of the ch ange. For example, an enterprise
maydecidetochangeitsaccountingpolicyforborrowingcostsandcapital isethosecostsinconformitywith
the allowed alternative treatment in IAS 23, Borrowing Costs. Under prosp ective application, the new policy
only applies to borrowing costs that are incurred after the date of the chan ge in accounting policy.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 49
Adoption of an International Accounting Standard
46. AchangeinaccountingpolicywhichismadeontheadoptionofanInterna tionalAccountingStandardshould
beaccountedforinaccordancewiththespecifictransitionalprovisions ,ifany,inthatInternationalAccounting
Standard. In the absence of any transitional provisions, the change in acc ounting policy should be applied in
accordance with the benchmark treatment in paragraphs 49, 52 and 53 or the a llowed alternative treatment
in paragraphs 54, 56 and 57.
47.The transitional provisions in an International Accounting Standard may require either a retrospective or a
prospective application of a change in accounting policy.
48.When an enterprise has not adopted a new International Accounting Standar d which has been published by
the International Accounting Standards Committee but which has not yet co me into effect, the enterprise is
encouraged to disclose the nature of the future change in accounting polic y and an estimate of the effect of
the change on its net profit or loss and financial position.
Other changes in accounting policies — benchmark treatment
49. Achangeinaccountingpolicyshouldbeappliedretrospectivelyunles stheamountofanyresultingadjustment
that relates to prior periods is not reasonably determinable. Any resulti ng adjustment should be reported as
anadjustmenttotheopeningbalanceofretainedearnings.Comparativein formationshouldberestatedunless
it is impracticable to do so (1).
50.Thefinancialstatements,includingthecomparativeinformationforpri orperiods,arepresentedasifthenew
accounting policy had always been in use. Therefore, comparative informa tion is restated in order to reflect
the new accounting policy. The amount of the adjustment relating to period s prior to those included in the
financial statements is adjusted against the opening balance of retained earnings of the earliest period
presented.Anyotherinformationwithrespecttopriorperiods,suchashi storicalsummariesoffinancialdata,
is also restated.
51.The restatement of comparative information does not necessarily give ris e to the amendment of financial
statements which have been approved by shareholders or registered or file d with regulatory authorities.
However, national laws may require the amendment of such financial statem ents.
52. The change in accounting policy should be applied prospectively when t he amount of the adjustment to the
opening balance of retained earnings required by paragraph 49 cannot be re asonably determined.
53. Whenachangeinaccountingpolicyhasamaterialeffectonthecurrentp eriodoranypriorperiodpresented,
or may have a material effect in subsequent periods, an enterprise should d isclose the following:
(a) the reasons for the change;
(b) the amount of the adjustment for the current period and for each period p resented;
(c) theamountoftheadjustmentrelatingtoperiodspriortothoseinclude dinthecomparativeinformation;
and
(d) the fact that comparative information has been restated or that it is im practicable to do so.
(1) SIC-8: first-time application of IASs as the primary basis of accounting . This states that it is not appropriate to recognise the
cumulativeeffectofchangesresultingfromthetransitionfromnational GAAPtoIASintheincomestatement(i.e.,theallowed
alternative treatment set out in IAS 8.54 is not applicable to the first-ti me application of IAS as the primary accounting basis).50 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Other changes in accounting policies — allowed alternative treatment
54. Achangeinaccountingpolicyshouldbeappliedretrospectivelyunles stheamountofanyresultingadjustment
that relates to prior periods is not reasonably determinable. Any resulti ng adjustment should be included in
thedeterminationofthenetprofitorlossforthecurrentperiod.Compara tiveinformationshouldbepresented
as reported in the financial statements of the prior period. Additional pr o forma comparative information,
prepared in accordance with paragraph 49, should be presented unless it is impracticable to do so (1).
55.Adjustments resulting from a change in accounting policy are included in t he determination of the net profit
or loss for the period. However, additional comparative information is pr esented, often as separate columns,
in order to show the net profit or loss and the financial position of the curr ent period and any prior periods
presentedasifthenewaccountingpolicyhadalwaysbeenapplied.Itmaybe necessarytoapplythisaccounting
treatmentincountrieswherethefinancialstatementsarerequiredtoinc ludecomparativeinformationwhich
agrees with the financial statements presented in prior periods.
56. Thechangeinaccountingpolicyshouldbeappliedprospectivelywhent heamounttobeincludedinnetprofit
or loss for the current period required by paragraph 54 cannot be reasonabl y determined.
57. Whenachangeinaccountingpolicyhasamaterialeffectonthecurrentp eriodoranypriorperiodpresented,
or may have a material effect in subsequent periods, an enterprise should d isclose the following:
(a) the reasons for the change;
(b) the amount of the adjustment recognised in net profit or loss in the curr ent period; and
(c) the amount of the adjustment included in each period for which pro forma information is presented and
the amount of the adjustment relating to periods prior to those included in the financial statements. If it
is impracticable to present pro forma information, this fact should be dis closed.
EFFECTIVE DATE
58. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.
INTERNATIONAL ACCOUNTING STANDARD IAS 10
(REVISED 1999)
Events after the balance sheet date
This International Accounting Standard was approved by the IASC Board in M arch 1999 and became effective for
annual financial statements covering periods beginning on or after 1 Janu ary 2000.
INTRODUCTION
IAS 10, events after the balance sheet date, replaces those parts of IAS 10, contingencies and events occurring after
the balance sheet date, that have not already been superseded by IAS 37, pro visions, contingent liabilities and
contingent assets. The new Standard makes the following limited changes:
(a) new disclosures about the date of the authorisation of the financial st atements for issue;
(b) deletion of the option to recognise a liability for dividends that are s tated to be in respect of the period covered
by the financial statements and are proposed or declared after the balance sheet date but before the financial
statements are authorised for issue. An enterprise may give the required d isclosure of such dividends
eitheronthefaceofthebalancesheetasaseparatecomponentofequityori nthenotestothefinancialstatements;
(1) SIC-8: first-time application of IASs as the primary basis of accounting . This states that it is not appropriate to recognise the
cumulativeeffectofchangesresultingfromthetransitionfromnational GAAPtoIASintheincomestatement(i.e.,theallowed
alternative treatment set out in IAS 8.54 is not applicable to the first-ti me application of IAS as the primary accounting basis).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 51
(c) confirmationthatanenterpriseshouldupdatedisclosuresthatrelat etoconditionsthatexistedatthebalancesheet
date in the light of any new information that it receives after the balance s heet date about those conditions;
(d) deletionoftherequirementtoadjustthefinancialstatementswherea neventafterthebalancesheetdateindicates
that the going concern assumption is not appropriate for part of the enterp rise. Under IAS 1, presentation of
financial statements, the going concern assumption applies to an enterpr ise as a whole;
(e) certain refinements to the examples of adjusting and non-adjusting ev ents; and
(f) various drafting improvements.
CONTENTS
Paragraph
Objective 52
Scope 53
Definitions 53
Recognition and measurement 54
Adjusting events after the balance sheet date 54
Non-adjusting events after the balance sheet date 54Dividends 54
Going concern 55
Disclosure 55
Date of authorisation for issue 55
Updating disclosure about conditions at the balance sheet date 55Non-adjusting events after the balance sheet date 56Effective date 56
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe:
(a) when an enterprise should adjust its financial statements for events a fter the balance sheet date; and
(b) the disclosures that an enterprise should give about the date when the f inancial statements were authorised for
issue and about events after the balance sheet date.
The Standard also requires that an enterprise should not prepare its finan cial statements on a going concern basis if
events after the balance sheet date indicate that the going concern assump tion is not appropriate.52 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
SCOPE
1. This Standard should be applied in the accounting for, and disclosure of , events after the balance sheet date.
DEFINITIONS
2. The following terms are used in this Standard with the meanings specifie d:
Events after the balance sheet date are those events, both favourable and u nfavourable, that occur between
thebalancesheetdateandthedatewhenthefinancialstatementsareautho risedforissue.Twotypesofevents
can be identified:
(a) those that provide evidence of conditions that existed at the balance s heet date (adjusting events after the
balance sheet date); and
(b) thosethatareindicativeofconditionsthataroseafterthebalancesh eetdate(non-adjustingeventsafterthe
balance sheet date).
3.The process involved in authorising the financial statements for issue wi ll vary depending upon the
management structure, statutory requirements and procedures followed i n preparing and finalising the
financial statements.
4.Insomecases,anenterpriseisrequiredtosubmititsfinancialstatement stoitsshareholdersforapprovalafter
the financial statements have already been issued. In such cases, the fina ncial statements are authorised for
issue on the date of original issuance, not on the date when shareholders ap prove the financial statements.
Example
The management of an enterprise completes draft financial statements for the year to 31 December 20X1
on 28 February 20X2. On 18 March 20X2, the board of directors reviews the fin ancial statements and
authorises them for issue. The enterprise announces its profit and select ed other financial information on
19 March 20X2. The financial statements are made available to shareholder s and others on 1 April 20X2.
The annual meeting of shareholders approves the financial statements on 1 5 May 20X2 and the approved
financial statements are then filed with a regulatory body on 17 May 20X2.
The financial statements are authorised for issue on 18 March 20X2 (date of Board authorisation for issue).
5.In some cases, the management of an enterprise is required to issue its fina ncial statements to a supervisory
board(madeupsolelyofnon-executives)forapproval.Insuchcases,thef inancialstatementsareauthorised
for issue when the management authorises them for issue to the supervisory board.
Example
On 18 March 20X2, the management of an enterprise authorises financial sta tements for issue to its
supervisory board. The supervisory board is made up solely of non-executi ves and may include
representatives of employees and other outside interests. The superviso ry board approves the financial
statements on 26 March 20X2. The financial statements are made available t o shareholders and others on
1 April 20X2. The annual meeting of shareholders receives the financial st atements on 15 May 20X2 and
the financial statements are then filed with a regulatory body on 17 May 20X 2.
Thefinancialstatementsareauthorisedforissueon18March20X2(dateof managementauthorisationfor
issue to the supervisory board).
6.Events after the balance sheet date include all events up to the date when th e financial statements are
authorised for issue, even if those events occur after the publication of a profit announcement or of other
selected financial information.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 53
RECOGNITION AND MEASUREMENT
Adjusting events after the balance sheet date
7. An enterprise should adjust the amounts recognised in its financial sta tements to reflect adjusting events after
the balance sheet date.
8.The following are examples of adjusting events after the balance sheet dat e that require an enterprise to adjust
the amounts recognised in its financial statements, or to recognise items that were not previously recognised:
(a) the resolution after the balance sheet date of a court case which, becau se it confirms that an enterprise
already had a present obligation at the balance sheet date, requires the en terprise to adjust a provision
already recognised, or to recognise a provision instead of merely disclos ing a contingent liability;
(b) thereceiptofinformationafterthebalancesheetdateindicatingtha tanassetwasimpairedatthebalance
sheet date, or that the amount of a previously recognised impairment loss f or that asset needs to be
adjusted. For example:
(i) the bankruptcy of a customer which occurs after the balance sheet date u sually confirms that a loss
alreadyexistedatthebalancesheetdateonatradereceivableaccountand thattheenterpriseneedsto
adjust the carrying amount of the trade receivable account; and
(ii) the sale of inventories after the balance sheet date may give evidence about their net realisable value
at the balance sheet date;
(c) thedeterminationafterthebalancesheetdateofthecostofassetspur chased,ortheproceedsfromassets
sold, before the balance sheet date;
(d) the determination after the balance sheet date of the amount of profit s haring or bonus payments, if the
enterprisehadapresentlegalorconstructiveobligationatthebalances heetdatetomakesuchpayments
as a result of events before that date (see IAS 19, employee benefits); and
(e) the discovery of fraud or errors that show that the financial statement s were incorrect.
Non-adjusting events after the balance sheet date
9. Anenterpriseshouldnotadjusttheamountsrecognisedinitsfinancial statementstoreflectnon-adjustingevents
after the balance sheet date.
10.An example of a non-adjusting event after the balance sheet date is a declin e in market value of investments
between the balance sheet date and the date when the financial statements a re authorised for issue. The fall in
marketvaluedoesnotnormallyrelatetotheconditionoftheinvestmentsa tthebalancesheetdate,butreflects
circumstances that have arisen in the following period. Therefore, an ent erprise does not adjust the amounts
recognisedinitsfinancialstatementsfortheinvestments.Similarly,t heenterprisedoesnotupdatetheamounts
disclosed for the investments as at the balance sheet date, although it may need to give additional disclosure
under paragraph 20.
Dividends
11.If dividends to holders of equity instruments (as defined in IAS 32, financ ial instruments: disclosure and
presentation) are proposed or declared after the balance sheet date, an en terprise should not recognise those
dividends as a liability at the balance sheet date.54 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
12.IAS1,presentationoffinancialstatements,requiresanenterprisetodi sclosetheamountofdividendsthatwere
proposedordeclaredafterthebalancesheetdatebutbeforethefinancial statementswereauthorisedforissue.
IAS 1 permits an enterprise to make this disclosure either:
(a) on the face of the balance sheet as a separate component of equity; or
(b) in the notes to the financial statements.
GOING CONCERN
13. Anenterpriseshouldnotprepareitsfinancialstatementsonagoingco ncernbasisifmanagementdetermines
after the balance sheet date either that it intends to liquidate the enterp rise or to cease trading, or that it has
no realistic alternative but to do so.
14.Deterioration in operating results and financial position after the bala nce sheet date may indicate a need to
consider whether the going concern assumption is still appropriate. If th e going concern assumption is no
longer appropriate, the effect is so pervasive that this Standard require s a fundamental change in the basis of
accounting, rather than an adjustment to the amounts recognised within th e original basis of accounting.
15.IAS 1, presentation of financial statements, requires certain disclosur es if:
(a) the financial statements are not prepared on a going concern basis; or
(b) management is aware of material uncertainties related to events or con ditions that may cast significant
doubt upon the enterprise’s ability to continue as a going concern. The eve nts or conditions requiring
disclosure may arise after the balance sheet date.
DISCLOSURE
Date of authorisation for issue
16. An enterprise should disclose the date when the financial statements w ere authorised for issue and who gave
thatauthorisation.Iftheenterprise’sownersorothershavethepowerto amendthefinancialstatementsafter
issuance, the enterprise should disclose that fact.
17.It is important for users to know when the financial statements were author ised for issue, as the financial
statements do not reflect events after this date.
Updating disclosure about conditions at the balance sheet date
18. If an enterprise receives information after the balance sheet date abo ut conditions that existed at the balance
sheet date, the enterprise should update disclosures that relate to these conditions, in the light of the new
information.
19.In some cases, an enterprise needs to update the disclosures in its financi al statements to reflect information
receivedafterthebalancesheetdate,evenwhentheinformationdoesnota ffecttheamountsthattheenterprise
recognisesinitsfinancialstatements.Oneexampleoftheneedtoupdated isclosuresiswhenevidencebecomes
available after the balance sheet date about a contingent liability that e xisted at the balance sheet date. In
addition to considering whether it should now recognise a provision under IAS 37, provisions, contingent
liabilitiesandcontingentassets,anenterpriseupdatesitsdisclosure saboutthecontingentliabilityinthelight
of that evidence.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 55
Non-adjusting events after the balance sheet date
20. Where non-adjusting events after the balance sheet date are of such imp ortance that non-disclosure would
affecttheabilityoftheusersofthefinancialstatementstomakepropere valuationsanddecisions,anenterprise
shoulddisclosethefollowinginformationforeachsignificantcategory ofnon-adjustingeventafterthebalance
sheet date:
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimat e cannot be made.
21.Thefollowingareexamplesofnon-adjustingeventsafterthebalanceshee tdatethatmaybeofsuchimportance
thatnon-disclosurewouldaffecttheabilityoftheusersofthefinancial statementstomakeproperevaluations
and decisions:
(a) amajorbusinesscombinationafterthebalancesheetdate(IAS22,busi nesscombinations,requiresspecific
disclosures in such cases) or disposing of a major subsidiary;
(b) announcing a plan to discontinue an operation, disposing of assets or s ettling liabilities attributable to a
discontinuingoperationorenteringintobindingagreementstosellsuch assetsorsettlesuchliabilities(see
IAS 35, discontinuing operations);
(c) major purchases and disposals of assets, or expropriation of major ass ets by government;
(d) the destruction of a major production plant by a fire after the balance s heet date;
(e) announcing, or commencing the implementation of, a major restructuri ng (see IAS 37, provisions,
contingent liabilities and contingent assets);
(f) major ordinary share transactions and potential ordinary share trans actions after the balance sheet date
(IAS 33, earnings per share, encourages an enterprise to disclose a descri ption of such transactions, other
than capitalisation issues and share splits);
(g) abnormally large changes after the balance sheet date in asset prices o r foreign exchange rates;
(h) changes in tax rates or tax laws enacted or announced after the balance s heet date that have a significant
effect on current and deferred tax assets and liabilities (see IAS 12, inco me taxes);
(i) entering into significant commitments or contingent liabilities, fo r example, by issuing significant
guarantees; and
(j) commencing major litigation arising solely out of events that occurre d after the balance sheet date.
EFFECTIVE DATE
22. This International Accounting Standard becomes operative for annual financial statements covering periods
beginning on or after 1 January 2000.
23.In 1998, IAS 37, provisions, contingent liabilities and contingent asset s, superseded the parts of IAS 10,
contingencies and events occurring after the balance sheet date, that dea lt with contingencies. This Standard
supersedes the rest of that Standard.56 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 11
(REVISED 1993)
Construction Contracts
This revised International Accounting Standard supersedes IAS 11, accou nting for construction contracts, approved
bytheBoardin1978.TherevisedStandardbecameeffectiveforfinancials tatementscoveringperiodsbeginningon
or after 1 January 1995.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraph 45. The amended text
becomeseffectivewhenIAS10(revised1999)becomeseffective,i.e.fora nnualfinancialstatementscoveringperiods
beginning on or after 1 January 2000.
CONTENTS
Paragraphs
Objective 57
Scope 57
Definitions 58
Combining and segmenting construction contracts 58
Contract revenue 59
Contract costs 60
Recognition of contract revenue and expenses 61Recognition of expected losses 63
Changes in estimates 63
Disclosure 63
Effective date 64
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment of revenue and costs associated with
construction contracts. Because of the nature of the activity undertaken in construction contracts, the date at which
the contract activity is entered into and the date when the activity is comp leted usually fall into different accounting
periods. Therefore, the primary issue in accounting for construction con tracts is the allocation of contract revenue
and contract costs to the accounting periods in which construction work is performed. This Standard uses the
recognition criteria established in the framework for the preparation an d presentation of financial statements to
determine when contract revenue and contract costs should be recognised a s revenue and expenses in the income
statement. It also provides practical guidance on the application of thes e criteria.
SCOPE
1. This Standard should be applied in accounting for construction contrac ts in the financial statements of
contractors.
2.This Standard supersedes IAS 11, accounting for construction contracts, approved in 1978.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 57
DEFINITIONS
3. The following terms are used in this Standard with the meanings specifie d:
A construction contract is a contract specifically negotiated for the con struction of an asset or a combination
ofassetsthatarecloselyinterrelatedorinterdependentintermsofthei rdesign,technologyandfunctionortheir
ultimate purpose or use.
A fixed price contract is a construction contract in which the contractor a grees to a fixed contract price, or a
fixed rate per unit of output, which in some cases is subject to cost escalat ion clauses.
Acostpluscontractisaconstructioncontractinwhichthecontractorisr eimbursedforallowableorotherwise
defined costs, plus a percentage of these costs or a fixed fee.
4.Aconstructioncontractmaybenegotiatedfortheconstructionofasingle assetsuchasabridge,building,dam,
pipeline,road,shiportunnel.Aconstructioncontractmayalsodealwith theconstructionofanumberofassets
which are closely interrelated or interdependent in terms of their design , technology and function or their
ultimate purpose or use; examples of such contracts include those for the c onstruction of refineries and other
complex pieces of plant or equipment.
5.For the purposes of this Standard, construction contracts include:
(a) contractsfortherenderingofserviceswhicharedirectlyrelatedtot heconstructionoftheasset,forexample,
those for the services of project managers and architects; and
(b) contracts for the destruction or restoration of assets, and the restor ation of the environment following the
demolition of assets.
6.Construction contracts are formulated in a number of ways which, for the pu rposes of this Standard, are
classified as fixed price contracts and cost plus contracts. Some constru ction contracts may contain
characteristics of both a fixed price contract and a cost plus contract, fo r example in the case of a cost plus
contractwithanagreedmaximumprice.Insuchcircumstances,acontracto rneedstoconsideralltheconditions
in paragraphs 23 and 24 in order to determine when to recognise contract rev enue and expenses.
COMBINING AND SEGMENTING CONSTRUCTION CONTRACTS
7.The requirements of this Standard are usually applied separately to each c onstruction contract. However, in
certaincircumstances,itisnecessarytoapplytheStandardtothesepara telyidentifiablecomponentsofasingle
contractortoagroupofcontractstogetherinordertoreflectthesubstan ceofacontractoragroupofcontracts.
8. When a contract covers a number of assets, the construction of each asset should be treated as a separate
construction contract when:
(a) separate proposals have been submitted for each asset;
(b) eachassethasbeensubjecttoseparatenegotiationandthecontractor andcustomerhavebeenabletoaccept
or reject that part of the contract relating to each asset; and
(c) the costs and revenues of each asset can be identified.
9. A group of contracts, whether with a single customer or with several cust omers, should be treated as a single
construction contract when:
(a) the group of contracts is negotiated as a single package;(b) thecontractsaresocloselyinterrelatedthattheyare,ineffect,par tofasingleprojectwithanoverallprofit
margin; and58 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) the contracts are performed concurrently or in a continuous sequence.
10. A contract may provide for the construction of an additional asset at th e option of the customer or may be
amendedtoincludetheconstructionofanadditionalasset.Theconstruct ionoftheadditionalassetshouldbe
treated as a separate construction contract when:
(a) the asset differs significantly in design, technology or function fro m the asset or assets covered by the
original contract; or
(b) the price of the asset is negotiated without regard to the original cont ract price.
CONTRACT REVENUE
11. Contract revenue should comprise:
(a) the initial amount of revenue agreed in the contract; and
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and(ii) they are capable of being reliably measured.
12.
Contract revenue is measured at the fair value of the consideration receiv ed or receivable. The measurement
of contract revenue is affected by a variety of uncertainties that depend o n the outcome of future events. The
estimates often need to be revised as events occur and uncertainties are re solved. Therefore, the amount of
contract revenue may increase or decrease from one period to the next. For e xample:
(a) a contractor and a customer may agree variations or claims that increas e or decrease contract revenue in
a period subsequent to that in which the contract was initially agreed;
(b) the amount of revenue agreed in a fixed price contract may increase as a r esult of cost escalation clauses;
(c) the amount of contract revenue may decrease as a result of penalties ari sing from delays caused by the
contractor in the completion of the contract; or
(d) when a fixed price contract involves a fixed price per unit of output, co ntract revenue increases as the
number of units is increased.
13.A variation is an instruction by the customer for a change in the scope of the work to be performed under
thecontract.Avariationmayleadtoanincreaseoradecreaseincontractr evenue.Examplesofvariationsare
changes in the specifications or design of the asset and changes in the dura tion of the contract. A variation
is included in contract revenue when:
(a) it is probable that the customer will approve the variation and the amou nt of revenue arising from the
variation; and
(b) the amount of revenue can be reliably measured.
14.Aclaimisanamountthatthecontractorseekstocollectfromthecustomero ranotherpartyasreimbursement
forcostsnotincludedinthecontractprice.Aclaimmayarisefrom,forexa mple,customercauseddelays,errors
in specifications or design, and disputed variations in contract work. Th e measurement of the amounts of
revenue arising from claims is subject to a high level of uncertainty and of ten depends on the outcome of
negotiations. Therefore, claims are only included in contract revenue wh en:
(a) negotiationshavereachedanadvancedstagesuchthatitisprobableth atthecustomerwillaccepttheclaim;
and
(b) the amount that it is probable will be accepted by the customer can be mea sured reliably.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 59
15.Incentive payments are additional amounts paid to the contractor if speci fied performance standards are met
orexceeded.Forexample,acontractmayallowforanincentivepaymenttot hecontractorforearlycompletion
of the contract. Incentive payments are included in contract revenue when :
(a) thecontractissufficientlyadvancedthatitisprobablethatthespec ifiedperformancestandardswillbemet
or exceeded; and
(b) the amount of the incentive payment can be measured reliably.
CONTRACT COSTS
16. Contract costs should comprise:
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be a llocated to the contract; and
(c) such other costs as are specifically chargeable to the customer under t he terms of the contract.
17. Costs that relate directly to a specific contract include:
(a) site labour costs, including site supervision;(b) costs of materials used in construction;(c) depreciation of plant and equipment used on the contract;(d) costs of moving plant, equipment and materials to and from the contract site;
(e) costs of hiring plant and equipment;(f) costs of design and technical assistance that is directly related to th e contract;
(g) the estimated costs of rectification and guarantee work, including ex pected warranty costs; and
(h) claims from third parties.
These costs may be reduced by any incidental income that is not included in c ontract revenue, for example
incomefromthesaleofsurplusmaterialsandthedisposalofplantandequi pmentattheendofthecontract.
18.
Costs that may be attributable to contract activity in general and can be al located to specific contracts
include:
(a) insurance;
(b) costs of design and technical assistance that is not directly related t o a specific contract; and
(c) construction overheads.
Suchcostsareallocatedusingmethodsthataresystematicandrationalan dareappliedconsistentlytoallcosts
havingsimilarcharacteristics.Theallocationisbasedonthenormallev elofconstructionactivity.Construction
overheads include costs such as the preparation and processing of constru ction personnel payroll. Costs that
may be attributable to contract activity in general and can be allocated to specific contracts also include
borrowing costs when the contractor adopts the allowed alternative treat ment in IAS 23, borrowing costs.
19. Costs that are specifically chargeable to the customer under the terms of t he contract may include some
general administration costs and development costs for which reimbursem ent is specified in the terms of
the contract.60 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
20. Costs that cannot be attributed to contract activity or cannot be alloc ated to a contract are excluded from
the costs of a construction contract. Such costs include:
(a) general administration costs for which reimbursement is not specifie d in the contract;
(b) selling costs;
(c) research and development costs for which reimbursement is not specifi ed in the contract; and
(d) depreciation of idle plant and equipment that is not used on a particula r contract.
21. Contract costs include the costs attributable to a contract for the period from the date of securing the
contracttothefinalcompletionofthecontract.However,coststhatrela tedirectlytoacontractandwhich
areincurredinsecuringthecontractarealsoincludedaspartofthecontr actcostsiftheycanbeseparately
identified and measured reliably and it is probable that the contract will be obtained. When costs incurred
in securing a contract are recognised as an expense in the period in which th ey are incurred, they are not
included in contract costs when the contract is obtained in a subsequent pe riod.
RECOGNITION OF CONTRACT REVENUE AND EXPENSES
22. Whentheoutcomeofaconstructioncontractcanbeestimatedreliably, contractrevenueandcontractcosts
associated with the construction contract should be recognised as revenu e and expenses respectively by
reference to the stage of completion of the contract activity at the balanc e sheet date. An expected loss on
theconstructioncontractshouldberecognisedasanexpenseimmediately inaccordancewithparagraph36.
23. Inthecaseofafixedpricecontract,theoutcomeofaconstructioncont ractcanbeestimatedreliablywhen
all the following conditions are satisfied:
(a) total contract revenue can be measured reliably;(b) it is probable that the economic benefits associated with the contract will flow to the enterprise;
(c) boththecontractcoststocompletethecontractandthestageofcontra ctcompletionatthebalancesheet
date can be measured reliably; and
(d) thecontractcostsattributabletothecontractcanbeclearlyidentif iedandmeasuredreliablysothatactual
contract costs incurred can be compared with prior estimates.
24. In the case of a cost plus contract, the outcome of a construction contra ct can be estimated reliably when
all the following conditions are satisfied:
(a) it is probable that the economic benefits associated with the contract will flow to the enterprise; and
(b) the contract costs attributable to the contract, whether or not specif ically reimbursable, can be clearly
identified and measured reliably.
25.
The recognition of revenue and expenses by reference to the stage of comple tion of a contract is often
referredtoasthepercentageofcompletionmethod.Underthismethod,con tractrevenueismatchedwith
the contract costs incurred in reaching the stage of completion, resultin g in the reporting of revenue,
expenses and profit which can be attributed to the proportion of work compl eted. This method provides
useful information on the extent of contract activity and performance dur ing a period.
26. Under the percentage of completion method, contract revenue is recognise d as revenue in the income
statementintheaccountingperiodsinwhichtheworkisperformed.Contra ctcostsareusuallyrecognised
as an expense in the income statement in the accounting periods in which the work to which they relate
is performed. However, any expected excess of total contract costs over to tal contract revenue for the
contract is recognised as an expense immediately in accordance with parag raph 36.
27. A contractor may have incurred contract costs that relate to future activi ty on the contract. Such contract
costsarerecognisedasanassetprovideditisprobablethattheywillbere covered.Suchcostsrepresentan
amount due from the customer and are often classified as contract work in pr ogress.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 61
28. Theoutcomeofaconstructioncontractcanonlybeestimatedreliablyw henitisprobablethattheeconomic
benefitsassociatedwiththecontractwillflowtotheenterprise.Howeve r,whenanuncertaintyarisesabout
thecollectabilityofanamountalreadyincludedincontractrevenue,and alreadyrecognisedintheincome
statement,theuncollectableamountortheamountinrespectofwhichreco veryhasceasedtobeprobable
is recognised as an expense rather than as an adjustment of the amount of con tract revenue.
29. Anenterpriseisgenerallyabletomakereliableestimatesafterithasagr eedtoacontractwhichestablishes:
(a) each party’s enforceable rights regarding the asset to be constructed ;
(b) the consideration to be exchanged; and
(c) the manner and terms of settlement.
It is also usually necessary for the enterprise to have an effective intern al financial budgeting and reporting
system. The enterprise reviews and, when necessary, revises the estimate s of contract revenue and contract
costs as the contract progresses. The need for such revisions does not nece ssarily indicate that the outcome
of the contract cannot be estimated reliably.
30. Thestageofcompletionofacontractmaybedeterminedinavarietyofways. Theenterpriseusesthemethod
that measures reliably the work performed. Depending on the nature of the c ontract, the methods may
include:
(a) theproportionthatcontractcostsincurredforworkperformedtodate beartotheestimatedtotalcontract
costs;
(b) surveys of work performed; or
(c) completion of a physical proportion of the contract work.
Progress payments and advances received from customers often do not refle ct the work performed.
31. Whenthestageofcompletionisdeterminedbyreferencetothecontractcos tsincurredtodate,onlythose
contractcoststhatreflectworkperformedareincludedincostsincurred todate.Examplesofcontractcosts
which are excluded are:
(a) contract costs that relate to future activity on the contract, such as c osts of materials that have been
delivered to a contract site or set aside for use in a contract but not yet ins talled, used or applied during
contract performance, unless the materials have been made specially for t he contract; and
(b) payments made to subcontractors in advance of work performed under the subcontract.
32. When the outcome of a construction contract cannot be estimated reliab ly:
(a) revenue should be recognised only to the extent of contract costs incur red that it is probable will be
recoverable; and
(b) contract costs should be recognised as an expense in the period in which they are incurred.
Anexpectedlossontheconstructioncontractshouldberecognisedasanex penseimmediatelyinaccordance
with paragraph 36.
33. Duringtheearlystagesofacontractitisoftenthecasethattheoutcomeof thecontractcannotbeestimated
reliably. Nevertheless, it may be probable that the enterprise will recov er the contract costs incurred.
Therefore, contract revenue is recognised only to the extent of costs incu rred that are expected to be
recoverable.Astheoutcomeofthecontractcannotbeestimatedreliably, noprofitisrecognised.However,
eventhoughtheoutcomeofthecontractcannotbeestimatedreliably,itma ybeprobablethattotalcontract
costswillexceedtotalcontractrevenues.Insuchcases,anyexpectedexc essoftotalcontractcostsovertotal
contractrevenueforthecontractisrecognisedasanexpenseimmediately inaccordancewithparagraph36.62 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
34. Contractcoststhatarenotprobableofbeingrecoveredarerecognised asanexpenseimmediately.Examples
of circumstances in which the recoverability of contract costs incurred m ay not be probable and in which
contract costs may need to be recognised as an expense immediately include contracts:
(a) which are not fully enforceable, that is, their validity is seriously i n question;
(b) the completion of which is subject to the outcome of pending litigation or legislation;
(c) relating to properties that are likely to be condemned or expropriated ;
(d) where the customer is unable to meet its obligations; or
(e) where the contractor is unable to complete the contract or otherwise me et its obligations under the
contract.
35. Whentheuncertaintiesthatpreventedtheoutcomeofthecontractbein gestimatedreliablynolongerexist,
revenue and expenses associated with the construction contract should be recognised in accordance with
paragraph 22 rather than in accordance with paragraph 32.
RECOGNITION OF EXPECTED LOSSES
36. When it is probable that total contract costs will exceed total contrac t revenue, the expected loss should be
recognised as an expense immediately.
37.The amount of such a loss is determined irrespective of:
(a) whether or not work has commenced on the contract;(b) the stage of completion of contract activity; or(c) theamountofprofitsexpectedtoariseonothercontractswhicharenot treatedasasingleconstruction
contract in accordance with paragraph 9.
CHANGES IN ESTIMATES
38.Thepercentageofcompletionmethodisappliedonacumulativebasisineac haccountingperiodtothecurrent
estimates of contract revenue and contract costs. Therefore, the effect o f a change in the estimate of contract
revenue or contract costs, or the effect of a change in the estimate of the ou tcome of a contract, is accounted
for as a change in accounting estimate (see IAS 8, Net profit or loss for the p eriod, fundamental errors and
changesinaccountingpolicies).Thechangedestimatesareusedinthedet erminationoftheamountofrevenue
andexpensesrecognisedintheincomestatementintheperiodinwhichthec hangeismadeandinsubsequent
periods.
DISCLOSURE
39. An enterprise should disclose:
(a) the amount of contract revenue recognised as revenue in the period;
(b) the methods used to determine the contract revenue recognised in the pe riod; and
(c) the methods used to determine the stage of completion of contracts in pr ogress.
40. An enterprise should disclose each of the following for contracts in pr ogress at the balance sheet date:
(a) the aggregate amount of costs incurred and recognised profits (less re cognised losses) to date;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 63
(b) the amount of advances received; and
(c) the amount of retentions.
41.Retentions are amounts of progress billings which are not paid until the sa tisfaction of conditions specified
in the contract for the payment of such amounts or until defects have been re ctified. Progress billings are
amounts billed for work performed on a contract whether or not they have bee n paid by the customer.
Advances are amounts received by the contractor before the related work is performed.
42. An enterprise should present:
(a) the gross amount due from customers for contract work as an asset; and(b) the gross amount due to customers for contract work as a liability.
43.
The gross amount due from customers for contract work is the net amount of:
(a) costs incurred plus recognised profits; less(b) the sum of recognised losses and progress billingsfor all contracts in progress for which costs incurred plus recognised pro fits (less recognised losses) exceeds
progress billings.
44.
The gross amount due to customers for contract work is the net amount of:
(a) costs incurred plus recognised profits; less(b) the sum of recognised losses and progress billingsfor all contracts in progress for which progress billings exceed costs inc urred plus recognised profits (less
recognised losses).
45.
Anenterprisedisclosesanycontingentliabilitiesandcontingentasset sinaccordancewithIAS37,provisions,
contingent liabilities and contingent assets. Contingent liabilities a nd contingent assets may arise from such
items as warranty costs, claims, penalties or possible losses.
EFFECTIVE DATE
46. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.
INTERNATIONAL ACCOUNTING STANDARD IAS 12
(REVISED 2000)
Income taxes
In October 1996, the Board approved a revised Standard, IAS 12 (revised 199 6), income taxes which superseded
IAS 12 (reformatted 1994), accounting for taxes on income. The revised Sta ndard became effective for financial
statements covering periods beginning on or after 1 January 1998.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraph 88. The amended text
became effective for annual financial statements covering periods begin ning on or after 1 January 2000.
In April 2000, paragraphs 20, 62(a), 64 and Appendix A, paragraphs A10, A11 and B8 were amended to revise
cross-references and terminology as a result of the issuance of IAS 40, inv estment property.64 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
In October 2000, the Board approved amendments to IAS 12 which added paragr aphs 52A, 52B, 65A, 81(i), 82A,
87A, 87B, 87C and 91 and deleted paragraphs 3 and 50. The limited revisions s pecify the accounting treatment for
incometaxconsequencesofdividends.Therevisedtextwaseffectivefora nnualfinancialstatementscoveringperiods
beginning on or after 1 January 2001.
The following SIC interpretations relate to IAS 12:
— SIC-21: income taxes — recovery of revalued non-depreciable assets, and— SIC-25: income taxes — changes in the tax status of an enterprise or its sha reholders.
INTRODUCTION
This Standard (“IAS 12 (revised)”) replaces IAS 12, accounting for taxes o n income (“the original IAS 12”). IAS 12
(revised)iseffectiveforaccountingperiodsbeginningonorafter1Janu ary1998.Themajorchangesfromtheoriginal
IAS 12 are as follows.
1. The original IAS 12 required an enterprise to account for deferred tax us ing either the deferral method or a
liability method which is sometimes known as the income statement liabili ty method. IAS 12 (revised)
prohibitsthedeferralmethodandrequiresanotherliabilitymethodwhic hissometimesknownasthebalance
sheet liability method.
The income statement liability method focuses on timing differences, whe reas the balance sheet liability
method focuses on temporary differences. Timing differences are differe nces between taxable profit and
accounting profit that originate in one period and reverse in one or more su bsequent periods. Temporary
differences are differences between the tax base of an asset or liability a nd its carrying amount in the balance
sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
All timing differences are temporary differences. Temporary difference s also arise in the following
circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the
same way as transactions that do give rise to timing differences:
(a) subsidiaries,associatesorjointventureshavenotdistributedthei rentireprofitstotheparentorinvestor;
(b) assets are revalued and no equivalent adjustment is made for tax purpos es; and
(c) thecostofabusinesscombinationthatisanacquisitionisallocatedt otheidentifiableassetsandliabilities
acquired, by reference to their fair values but no equivalent adjustment i s made for tax purposes.
Furthermore, there are some temporary differences which are not timing di fferences, for example those
temporary differences that arise when:(a) the non-monetary assets and liabilities of a foreign operation that is integral to the operations of the
reporting entity are translated at historical exchange rates;
(b) non-monetary assets and liabilities are restated under IAS 29, financ ial reporting in hyperinflationary
economies; or
(c) the carrying amount of an asset or liability on initial recognition dif fers from its initial tax base.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 65
2. TheoriginalIAS12permittedanenterprisenottorecognisedeferredta xassetsandliabilitieswheretherewas
reasonable evidence that timing differences would not reverse for some co nsiderable period ahead. IAS 12
(revised) requires an enterprise to recognise a deferred tax liability or (subject to certain conditions) asset for
all temporary differences, with certain exceptions noted below.
3. The original IAS 12 required that:
(a) deferred tax assets arising from timing differences should be recogni sed when there was a reasonable
expectation of realisation; and
(b) deferredtaxassetsarisingfromtaxlossesshouldberecognisedasana ssetonlywheretherewasassurance
beyond any reasonable doubt that future taxable income would be sufficien t to allow the benefit of the
loss to be realised. The original IAS 12 permitted (but did not require) an e nterprise to defer recognition
of the benefit of tax losses until the period of realisation.
IAS12(revised)requiresthatdeferredtaxassetsshouldberecognisedwh enitisprobablethattaxableprofits
will be available against which the deferred tax asset can be utilised. Whe re an enterprise has a history of tax
losses,theenterpriserecognisesadeferredtaxassetonlytotheextentt hattheenterprisehassufficienttaxable
temporary differences or there is convincing other evidence that suffici ent taxable profit will be available.
4. As an exception to the general requirement set out in paragraph 2 above, I AS 12 (revised) prohibits the
recognition of deferred tax liabilities and deferred tax assets arising f rom certain assets or liabilities whose
carrying amount differs on initial recognition from their initial tax bas e. Because such circumstances do not
giverisetotimingdifferences,theydidnotresultindeferredtaxassets orliabilitiesundertheoriginalIAS12.
5. The original IAS 12 required that taxes payable on undistributed profit s of subsidiaries and associates should
berecognisedunlessitwasreasonabletoassumethatthoseprofitswillno tbedistributedorthatadistribution
wouldnotgiverisetoataxliability.However,IAS12(revised)prohibits therecognitionofsuchdeferredtax
liabilities (and those arising from any related cumulative translation a djustment) to the extent that:
(a) the parent, investor or venturer is able to control the timing of the rev ersal of the temporary difference;
and
(b) it is probable that the temporary difference will not reverse in the for eseeable future.
Where this prohibition has the result that no deferred tax liabilities hav e been recognised, IAS 12 (revised)
requires an enterprise to disclose the aggregate amount of the temporary d ifferences concerned.
6. The original IAS 12 did not refer explicitly to fair value adjustments ma de on a business combination. Such
adjustments give rise to temporary differences and IAS 12 (revised) requi res an enterprise to recognise the
resulting deferred tax liability or (subject to the probability criterio n for recognition) deferred tax asset with
acorrespondingeffectonthedeterminationoftheamountofgoodwillorne gativegoodwill.However,IAS12
(revised)prohibitstherecognitionofdeferredtaxliabilitiesarising fromgoodwillitself(ifamortisationofthe
goodwill is not deductible for tax purposes) and of deferred tax assets ari sing from negative goodwill that is
treated as deferred income.
7. TheoriginalIAS12permitted,butdidnotrequire,anenterprisetoreco gniseadeferredtaxliabilityinrespect
of asset revaluations. IAS 12 (revised) requires an enterprise to recogni se a deferred tax liability in respect of
asset revaluations.66 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
8. The tax consequences of recovering the carrying amount of certain asset s or liabilities may depend on the
manner of recovery or settlement, for example:
(a) in certain countries, capital gains are not taxed at the same rate as oth er taxable income; and
(b) in some countries, the amount that is deducted for tax purposes on sale o f an asset is greater than the
amount that may be deducted as depreciation.
The original IAS 12 gave no guidance on the measurement of deferred tax asse ts and liabilities in such cases.
IAS12(revised)requiresthatthemeasurementofdeferredtaxliabilitie sanddeferredtaxassetsshouldbebased
onthetaxconsequencesthatwouldfollowfromthemannerinwhichtheenter priseexpectstorecoverorsettle
the carrying amount of its assets and liabilities.
9. TheoriginalIAS12didnotstateexplicitlywhetherdeferredtaxassets andliabilitiesmaybediscounted.IAS12
(revised) prohibits discounting of deferred tax assets and liabilities. An amendment to paragraph 39(i) of
IAS22,businesscombinations,prohibitsdiscountingofdeferredtaxass etsandliabilitiesacquiredinabusiness
combination. Previously, paragraph 39(i) of IAS 22 neither prohibited no r required discounting of deferred
tax assets and liabilities resulting from a business combination.
10. TheoriginalIAS12didnotspecifywhetheranenterpriseshouldclassi fydeferredtaxbalancesascurrentassets
andliabilitiesorasnon-currentassetsandliabilities.IAS12(revised )requiresthatanenterprisewhichmakes
the current/non-current distinction should not classify deferred tax as sets and liabilities as current assets and
liabilities.
11. The original IAS 12 stated that debit and credit balances representing deferred taxes may be offset. IAS 12
(revised) establishes more restrictive conditions on offsetting, based largely on those for financial assets and
liabilities in IAS 32, financial instruments: disclosure and presentati on.
12. The original IAS 12 required disclosure of an explanation of the relati onship between tax expense and
accounting profit if not explained by the tax rates effective in the report ing enterprise’s country. IAS 12
(revised) requires this explanation to take either or both of the followin g forms:
(i) anumericalreconciliationbetweentaxexpense(income)andtheprodu ctofaccountingprofitmultiplied
by the applicable tax rate(s); or
(ii) a numerical reconciliation between the average effective tax rate an d the applicable tax rate.
IAS12(revised)alsorequiresanexplanationofchangesintheapplicable taxrate(s)comparedtotheprevious
accounting period.
13. New disclosures required by IAS 12 (revised) include:
(a) in respect of each type of temporary difference, unused tax losses and u nused tax credits:
(i) the amount of deferred tax assets and liabilities recognised; and(ii) the amount of the deferred tax income or expense recognised in the inco me statement, if this is not
apparent from the changes in the amounts recognised in the balance sheet;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 67
(b) in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued op eration; and
(c) the amount of a deferred tax asset and the nature of the evidence support ing its recognition, when:
(i) the utilisation of the deferred tax asset is dependent on future taxabl e profits in excess of the profits
arising from the reversal of existing taxable temporary differences; and
(ii) the enterprise has suffered a loss in either the current or preceding p eriod in the tax jurisdiction to
which the deferred tax asset relates.
CONTENTS
Paragraphs
Objective
Scope 69
Definitions 70
Tax base 70
Recognition of current tax liabilities and current tax assets 71Recognition of deferred tax liabilities and deferred tax assets 72Taxable temporary differences 72
Business combinations 72
Assets carried at fair value 74
Goodwill 74
Initial recognition of an asset or liability 75Deductible temporary differences 75Negative goodwill 78
Initial recognition of an asset or liability 78Unused tax losses and unused tax credits 78Re-assessment of unrecognised deferred tax assets 79Investments in subsidiaries, branches and associates and interests in jo int ventures 79
Measurement 80
Recognition of current and deferred tax 8368 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Income statement 83
Items credited or charged directly to equity 83
Deferred tax arising from a business combination 85Presentation 86
Tax assets and tax liabilities 86
Offset 86
Tax expense 87
Tax expense (income) related to profit or loss from ordinary activities 87Exchange differences on deferred foreign tax liabilities or assets 87Disclosure 87
Effective date 90
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment fo r income taxes. The principal issue in
accounting for income taxes is how to account for the current and future tax consequences of:
(a) thefuturerecovery(settlement)ofthecarryingamountofassets(lia bilities)thatarerecognisedinanenterprise’s
balance sheet; and
(b) transactions and other events of the current period that are recognise d in an enterprise’s financial statements.
It is inherent in the recognition of an asset or liability that the reportin g enterprise expects to recover or settle the
carryingamountofthatassetorliability.Ifitisprobablethatrecovery orsettlementofthatcarryingamountwillmake
future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax
consequences,thisStandardrequiresanenterprisetorecogniseadeferr edtaxliability(deferredtaxasset),withcertain
limited exceptions.
ThisStandardrequiresanenterprisetoaccountforthetaxconsequenceso ftransactionsandothereventsinthesame
way that it accounts for the transactions and other events themselves. Thu s, for transactions and other events
recognised in the income statement, any related tax effects are also recog nised in the income statement. For
transactionsandothereventsrecogniseddirectlyinequity,anyrelated taxeffectsarealsorecogniseddirectlyinequity.
Similarly,therecognitionofdeferredtaxassetsandliabilitiesinabus inesscombinationaffectstheamountofgoodwill
or negative goodwill arising in that business combination.ThisStandardalsodealswiththerecognitionofdeferredtaxassetsarisi ngfromunusedtaxlossesorunusedtaxcredits,
thepresentationofincometaxesinthefinancialstatementsandthediscl osureofinformationrelatingtoincometaxes.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 69
SCOPE
1. This Standard should be applied in accounting for income taxes.
2.ForthepurposesofthisStandard,incometaxesincludealldomesticandfo reigntaxeswhicharebasedontaxable
profits.Incometaxesalsoincludetaxes,suchaswithholdingtaxes,whic harepayablebyasubsidiary,associate
or joint venture on distributions to the reporting enterprise.
3.(Deleted)
4.ThisStandarddoesnotdealwiththemethodsofaccountingforgovernmentg rants(seeIAS20,accountingfor
governmentgrantsanddisclosureofgovernmentassistance)orinvestmen ttaxcredits.However,thisStandard
does deal with the accounting for temporary differences that may arise fro m such grants or investment tax
credits.
DEFINITIONS
5. The following terms are used in this Standard with the meanings specifie d:
Accounting profit is net profit or loss for a period before deducting tax ex pense.
Taxable profit (tax loss) is the profit (loss) for a period, determined in a ccordance with the rules established by
the taxation authorities, upon which income taxes are payable (recoverab le).
Tax expense (tax income) is the aggregate amount included in the determina tion of net profit or loss for the
period in respect of current tax and deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period.Deferredtaxliabilitiesaretheamountsofincometaxespayableinfuture periodsinrespectoftaxabletemporary
differences.Deferred tax assets are the amounts of income taxes recoverable in future p eriods in respect of:
(a) deductible temporary differences;(b) the carryforward of unused tax losses; and(c) the carryforward of unused tax credits.Temporary differences are differences between the carrying amount of an a sset or liability in the balance sheet
and its tax base. Temporary differences may be either:(a) taxable temporary differences, which are temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is
recovered or settled; or
(b) deductible temporary differences, which are temporary differences t hat will result in amounts that are
deductible in determining taxable profit (tax loss) of future periods whe n the carrying amount of the asset
or liability is recovered or settled.
The tax base of an asset or liability is the amount attributed to that asset o r liability for tax purposes.
6.
Taxexpense(taxincome)comprisescurrenttaxexpense(currenttaxincom e)anddeferredtaxexpense(deferred
tax income).70 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Tax base
7. The tax base of an asset is the amount that will be deductible for tax purpo ses against any taxable economic
benefits that will flow to an enterprise when it recovers the carrying amou nt of the asset. If those economic
benefits will not be taxable, the tax base of the asset is equal to its carryi ng amount.
Examples
1.A machine cost 100. For tax purposes, depreciation of 30 has already been de ducted in the current and
priorperiodsandtheremainingcostwillbedeductibleinfutureperiods, eitherasdepreciationorthrough
a deduction on disposal. Revenue generated by using the machine is taxable , any gain on disposal of the
machine will be taxable and any loss on disposal will be deductible for tax p urposes. The tax base of the
machine is 70.
2.Interestreceivablehasacarryingamountof100.Therelatedinterestrev enuewillbetaxedonacashbasis.
The tax base of the interest receivable is nil.
3.Tradereceivableshaveacarryingamountof100.Therelatedrevenuehasal readybeenincludedintaxable
profit (tax loss). The tax base of the trade receivables is 100.
4.Dividendsreceivablefromasubsidiaryhaveacarryingamountof100.Thed ividendsarenottaxable.In
substance, the entire carrying amount of the asset is deductible against t he economic benefits.
Consequently, the tax base of the dividends receivable is 100 (1).
5.Aloanreceivablehasacarryingamountof100.Therepaymentoftheloanwil lhavenotaxconsequences.
The tax base of the loan is 100.
8. The tax base of a liability is its carrying amount, less any amount that wi ll be deductible for tax purposes in
respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of
the resulting liability is its carrying amount, less any amount of the reve nue that will not be taxable in future
periods.
Examples
1.Current liabilities include accrued expenses with a carrying amount of 10 0. The related expense will be
deducted for tax purposes on a cash basis. The tax base of the accrued expens es is nil.
2.Currentliabilitiesincludeinterestrevenuereceivedinadvance,witha carryingamountof100.Therelated
interest revenue was taxed on a cash basis. The tax base of the interest rece ived in advance is nil.
3.Current liabilities include accrued expenses with a carrying amount of 10 0. The related expense has
already been deducted for tax purposes. The tax base of the accrued expense s is 100.
4.Currentliabilitiesincludeaccruedfinesandpenaltieswithacarryinga mountof100.Finesandpenalties
are not deductible for tax purposes. The tax base of the accrued fines and pe nalties is 100 (2).
5.Aloanpayablehasacarryingamountof100.Therepaymentoftheloanwillha venotaxconsequences.
The tax base of the loan is 100.
(1) Underthisanalysis,thereisnotaxabletemporarydifference.Analtern ativeanalysisisthattheaccrueddividendsreceivablehave
a tax base of nil and that a tax rate of nil is applied to the resulting taxable temporary difference of 100. Under both analyses,
there is no deferred tax liability.
(2) Under this analysis, there is no deductible temporary difference. An alt ernative analysis is that the accrued fines and penalties
payable have a tax base of nil and that a tax rate of nil is applied to the resul ting deductible temporary difference of 100. Under
both analyses, there is no deferred tax asset.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 71
9. Some items have a tax base but are not recognised as assets and liabilitie s in the balance sheet. For example,
research costs are recognised as an expense in determining accounting pro fit in the period in which they are
incurred but may not be permitted as a deduction in determining taxable pro fit (tax loss) until a later period.
Thedifferencebetweenthetaxbaseoftheresearchcosts,beingtheamount thetaxationauthoritieswillpermit
asadeductioninfutureperiods,andthecarryingamountofnilisadeducti bletemporarydifferencethatresults
in a deferred tax asset.
10. Wherethetaxbaseofanassetorliabilityisnotimmediatelyapparent, itishelpfultoconsiderthefundamental
principle upon which this Standard is based: that an enterprise should, wi th certain limited exceptions,
recognise a deferred tax liability (asset) whenever recovery or settleme nt of the carrying amount of an asset
orliabilitywouldmakefuturetaxpaymentslarger(smaller)thantheywou ldbeifsuchrecoveryorsettlement
were to have no tax consequences. Example C following Paragraph 52 illustr ates circumstances when it may
behelpfultoconsiderthisfundamentalprinciple,forexample,whenthet axbaseofanassetorliabilitydepends
on the expected manner of recovery or settlement.
11. Inconsolidatedfinancialstatements,temporarydifferencesaredet erminedbycomparingthecarryingamounts
of assets and liabilities in the consolidated financial statements with t he appropriate tax base. The tax base is
determined by reference to a consolidated tax return in those jurisdictio ns in which such a return is filed. In
other jurisdictions, the tax base is determined by reference to the tax ret urns of each enterprise in the group.
RECOGNITION OF CURRENT TAX LIABILITIES AND CURRENT TAX ASSETS
12. Currenttaxforcurrentandpriorperiodsshould,totheextentunpaid, berecognisedasaliability.Iftheamount
alreadypaidinrespectofcurrentandpriorperiodsexceedstheamountdue forthoseperiods,theexcessshould
be recognised as an asset.
13. The benefit relating to a tax loss that can be carried back to recover cur rent tax of a previous period should
be recognised as an asset.
14.When a tax loss is used to recover current tax of a previous period, an enterp rise recognises the benefit as an
assetintheperiodinwhichthetaxlossoccursbecauseitisprobablethatt hebenefitwillflowtotheenterprise
and the benefit can be reliably measured.
RECOGNITION OF DEFERRED TAX LIABILITIES AND DEFERRED TAX ASSETS
Taxable temporary differences
15.A deferred tax liability should be recognised for all taxable temporary di fferences, unless the deferred tax
liability arises from:
(a) goodwill for which amortisation is not deductible for tax purposes; or
(b) the initial recognition of an asset or liability in a transaction which :
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for taxable temporary differences associated with investments in subsidiaries, branches and
associates, and interests in joint ventures, a deferred tax liability sho uld be recognised in accordance with
paragraph 39.72 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
16. Itisinherentintherecognitionofanassetthatitscarryingamountwi llberecoveredintheformofeconomic
benefits that flow to the enterprise in future periods. When the carrying a mount of the asset exceeds its tax
base,theamountoftaxableeconomicbenefitswillexceedtheamountthatw illbeallowedasadeductionfor
taxpurposes.Thisdifferenceisataxabletemporarydifferenceandtheob ligationtopaytheresultingincome
taxes in future periods is a deferred tax liability. As the enterprise reco vers the carrying amount of the asset,
thetaxabletemporarydifferencewillreverseandtheenterprisewillhav etaxableprofit.Thismakesitprobable
that economic benefits will flow from the enterprise in the form of tax paym ents. Therefore, this Standard
requirestherecognitionofalldeferredtaxliabilities,exceptincerta incircumstancesdescribedinparagraphs15
and 39.
Example
An asset which cost 150 has a carrying amount of 100. Cumulative depreciati on for tax purposes is 90 and
the tax rate is 25 %.
The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90). To recover the carrying
amountof100,theenterprisemustearntaxableincomeof100,butwillonly beabletodeducttaxdepreciation
of 60. Consequently, the enterprise will pay income taxes of 10 (40 at 25 %) w hen it recovers the carrying
amount of the asset. The difference between the carrying amount of 100 and t he tax base of 60 is a taxable
temporary difference of 40. Therefore, the enterprise recognises a defer red tax liability of 10 (40 at 25 %)
representing the income taxes that it will pay when it recovers the carryin g amount of the asset.
17. Sometemporarydifferencesarisewhenincomeorexpenseisincludedin accountingprofitinoneperiodbut
is included in taxable profit in a different period. Such temporary differ ences are often described as timing
differences. The following are examples of temporary differences of this kind which are taxable temporary
differences and which therefore result in deferred tax liabilities:
(a) interestrevenueisincludedinaccountingprofitonatimeproportion basisbutmay,insomejurisdictions,
beincludedintaxableprofitwhencashiscollected.Thetaxbaseofanyrec eivablerecognisedinthebalance
sheet with respect to such revenues is nil because the revenues do not affec t taxable profit until cash is
collected;
(b) depreciation used in determining taxable profit (tax loss) may differ from that used in determining
accountingprofit.Thetemporarydifferenceisthedifferencebetweenth ecarryingamountoftheassetand
its tax base which is the original cost of the asset less all deductions in re spect of that asset permitted by
thetaxationauthoritiesindeterminingtaxableprofitofthecurrentand priorperiods.Ataxabletemporary
difference arises, and results in a deferred tax liability, when tax depre ciation is accelerated (if tax
depreciationislessrapidthanaccountingdepreciation,adeductiblete mporarydifferencearises,andresults
in a deferred tax asset); and
(c) developmentcostsmaybecapitalisedandamortisedoverfutureperiod sindeterminingaccountingprofit
but deducted in determining taxable profit in the period in which they are i ncurred. Such development
costshaveataxbaseofnilastheyhavealreadybeendeductedfromtaxablep rofit.Thetemporarydifference
is the difference between the carrying amount of the development costs and their tax base of nil.
18. Temporary differences also arise when:
(a) thecostofabusinesscombinationthatisanacquisitionisallocatedt otheidentifiableassetsandliabilities
acquired by reference to their fair values but no equivalent adjustment is made for tax purposes (see
paragraph 19);
(b) assets are revalued and no equivalent adjustment is made for tax purpos es (see paragraph 20);13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 73
(c) goodwill or negative goodwill arises on consolidation (see paragraph s 21 and 32);
(d) thetaxbaseofanassetorliabilityoninitialrecognitiondiffersfro mitsinitialcarryingamount,forexample
when an enterprise benefits from non-taxable government grants related t o assets (see paragraphs 22
and 33); or
(e) the carrying amount of investments in subsidiaries, branches and asso ciates or interests in joint ventures
becomes different from the tax base of the investment or interest (see para graphs 38 to 45).
Business combinations
19.Inabusinesscombinationthatisanacquisition,thecostoftheacquisiti onisallocatedtotheidentifiableassets
and liabilities acquired by reference to their fair values at the date of th e exchange transaction. Temporary
differences arise when the tax bases of the identifiable assets and liabil ities acquired are not affected by the
business combination or are affected differently. For example, when the c arrying amount of an asset is
increasedtofairvaluebutthetaxbaseoftheassetremainsatcosttothepr eviousowner,ataxabletemporary
differenceariseswhichresultsinadeferredtaxliability.Theresultin gdeferredtaxliabilityaffectsgoodwill(see
paragraph 66).
Assets carried at fair value
20.International Accounting Standards permit certain assets to be carried a t fair value or to be revalued (see, for
example, IAS 16, property, plant and equipment, IAS 38, intangible assets , IAS 39, financial instruments:
recognition and measurement, and IAS 40, investment property). In some ju risdictions, the revaluation or
other restatement of an asset to fair value affects taxable profit (tax los s) for the current period. As a result,
the tax base of the asset is adjusted and no temporary difference arises. In other jurisdictions, the revaluation
or restatement of an asset does not affect taxable profit in the period of th e revaluation or restatement and,
consequently,thetaxbaseoftheassetisnotadjusted.Nevertheless,the futurerecoveryofthecarryingamount
will result in a taxable flow of economic benefits to the enterprise and the amount that will be deductible for
tax purposes will differ from the amount of those economic benefits. The di fference between the carrying
amount of a revalued asset and its tax base is a temporary difference and giv es rise to a deferred tax liability
or asset. This is true even if:
(a) the enterprise does not intend to dispose of the asset. In such cases, th e revalued carrying amount of the
asset will be recovered through use and this will generate taxable income w hich exceeds the depreciation
that will be allowable for tax purposes in future periods; or
(b) tax on capital gains is deferred if the proceeds of the disposal of the as set are invested in similar assets. In
such cases, the tax will ultimately become payable on sale or use of the simi lar assets.
Goodwill
21.Goodwillistheexcessofthecostofanacquisitionovertheacquirer’sint erestinthefairvalueoftheidentifiable
assets and liabilities acquired. Many taxation authorities do not allow t he amortisation of goodwill as a
deductibleexpenseindeterminingtaxableprofit.Moreover,insuchjuri sdictions,thecostofgoodwillisoften
not deductible when a subsidiary disposes of its underlying business. In s uch jurisdictions, goodwill has a tax
base of nil. Any difference between the carrying amount of goodwill and its tax base of nil is a taxable
temporary difference. However, this Standard does not permit the recogni tion of the resulting deferred tax
liability because goodwill is a residual and the recognition of the deferr ed tax liability would increase the
carrying amount of goodwill.74 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Initial recognition of an asset or liability
22. Atemporarydifferencemayariseoninitialrecognitionofanassetorl iability,forexampleifpartorallofthe
cost of an asset will not be deductible for tax purposes. The method of accou nting for such a temporary
difference depends on the nature of the transaction which led to the initia l recognition of the asset:
(a) in a business combination, an enterprise recognises any deferred tax l iability or asset and this affects the
amount of goodwill or negative goodwill (see paragraph 19);
(b) if the transaction affects either accounting profit or taxable profit , an enterprise recognises any deferred
tax liability or asset and recognises the resulting deferred tax expense o r income in the income statement
(see paragraph 59);
(c) if the transaction is not a business combination, and affects neither a ccounting profit nor taxable profit,
an enterprise would, in the absence of the exemption provided by paragraph s 15 and 24, recognise the
resultingdeferredtaxliabilityorassetandadjustthecarryingamounto ftheassetorliabilitybythesame
amount.Suchadjustmentswouldmakethefinancialstatementslesstransp arent.Therefore,thisStandard
does not permit an enterprise to recognise the resulting deferred tax liab ility or asset, either on initial
recognition or subsequently (see example on next page). Furthermore, an e nterprise does not recognise
subsequent changes in the unrecognised deferred tax liability or asset as the asset is depreciated.
23. In accordance with IAS 32, financial instruments: disclosure and pres entation, the issuer of a compound
financial instrument (for example, a convertible bond) classifies the in strument’s liability component as a
liabilityandtheequitycomponentasequity.Insomejurisdictions,thet axbaseoftheliabilitycomponenton
initial recognition is equal to the initial carrying amount of the sum of th e liability and equity components.
The resulting taxable temporary difference arises from the initial recog nition of the equity component
separately from the liability component. Therefore, the exception set ou t in paragraph 15(b) does not apply.
Consequently, an enterprise recognises the resulting deferred tax liabi lity. In accordance with paragraph 61,
the deferred tax is charged directly to the carrying amount of the equity co mponent. In accordance with
paragraph 58, subsequent changes in the deferred tax liability are recogn ised in the income statement as
deferred tax expense (income).
Example illustrating paragraph 22(c)
Anenterpriseintendstouseanassetwhichcost1 000throughoutitsuseful lifeoffiveyearsandthendispose
ofitforaresidualvalueofnil.Thetaxrateis40%.Depreciationoftheass etisnotdeductiblefortaxpurposes.
On disposal, any capital gain would not be taxable and any capital loss woul d not be deductible.
As it recovers the carrying amount of the asset, the enterprise will earn ta xable income of 1 000 and pay tax
of400.Theenterprisedoesnotrecognisetheresultingdeferredtaxliabi lityof400becauseitresultsfromthe
initial recognition of the asset.
Inthefollowingyear,thecarryingamountoftheassetis800.Inearningta xableincomeof800,theenterprise
willpaytaxof320.Theenterprisedoesnotrecognisethedeferredtaxliab ilityof320becauseitresultsfrom
the initial recognition of the asset.
Deductible temporary differences
24.A deferred tax asset should be recognised for all deductible temporary dif ferences to the extent that it is
probablethattaxableprofitwillbeavailableagainstwhichthedeductib letemporarydifferencecanbeutilised,
unless the deferred tax asset arises from:
(a) negativegoodwillwhichistreatedasdeferredincomeinaccordancewi thIAS22,businesscombinations;
or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 75
(b) the initial recognition of an asset or liability in a transaction which :
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for deductible temporary differences associated with investme nts in subsidiaries, branches and
associates, and interests in joint ventures, a deferred tax asset should b e recognised in accordance with
paragraph 44.
25. Itisinherentintherecognitionofaliabilitythatthecarryingamoun twillbesettledinfutureperiodsthrough
an outflow from the enterprise of resources embodying economic benefits. When resources flow from the
enterprise, part or all of their amounts may be deductible in determining t axable profit of a period later than
theperiodinwhichtheliabilityisrecognised.Insuchcases,atemporary differenceexistsbetweenthecarrying
amount of the liability and its tax base. Accordingly, a deferred tax asset arises in respect of the income taxes
that will be recoverable in the future periods when that part of the liabili ty is allowed as a deduction in
determiningtaxableprofit.Similarly,ifthecarryingamountofanasset islessthanitstaxbase,thedifference
gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.
Example
An enterprise recognises a liability of 100 for accrued product warranty c osts. For tax purposes, the product
warranty costs will not be deductible until the enterprise pays claims. Th e tax rate is 25 %.
The tax base of the liability is nil (carrying amount of 100, less the amount that will be deductible for tax
purposes in respect of that liability in future periods). In settling the l iability for its carrying amount, the
enterprise will reduce its future taxable profit by an amount of 100 and, co nsequently, reduce its future tax
payments by 25 (100 at 25 %). The difference between the carrying amount of 1 00 and the tax base of nil is
adeductibletemporarydifferenceof100.Therefore,theenterprisereco gnisesadeferredtaxassetof25(100
at 25 %), provided that it is probable that the enterprise will earn suffici ent taxable profit in future periods to
benefit from a reduction in tax payments.
26. The following are examples of deductible temporary differences which result in deferred tax assets:
(a) retirement benefit costs may be deducted in determining accounting pr ofit as service is provided by the
employee,butdeductedindeterminingtaxableprofiteitherwhencontrib utionsarepaidtoafundbythe
enterprise or when retirement benefits are paid by the enterprise. A tempo rary difference exists between
the carrying amount of the liability and its tax base; the tax base of the lia bility is usually nil. Such a
deductible temporary difference results in a deferred tax asset as econom ic benefits will flow to the
enterprise in the form of a deduction from taxable profits when contributi ons or retirement benefits are
paid;
(b) research costs are recognised as an expense in determining accounting profit in the period in which they
are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later
period.Thedifferencebetweenthetaxbaseoftheresearchcosts,beingth eamountthetaxationauthorities
will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary
difference that results in a deferred tax asset;
(c) in a business combination that is an acquisition, the cost of the acquis ition is allocated to the assets and
liabilities recognised, by reference to their fair values at the date of th e exchange transaction. When a
liabilityisrecognisedontheacquisitionbuttherelatedcostsarenotde ductedindeterminingtaxableprofits
untilalaterperiod,adeductibletemporarydifferenceariseswhichresu ltsinadeferredtaxasset.Adeferred
tax asset also arises where the fair value of an identifiable asset acquire d is less than its tax base. In both
cases, the resulting deferred tax asset affects goodwill (see paragraph 6 6); and76 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(d) certainassetsmaybecarriedatfairvalue,ormayberevalued,without anequivalentadjustmentbeingmade
for tax purposes (see paragraph 20). A deductible temporary difference ar ises if the tax base of the asset
exceeds its carrying amount.
27. Thereversalofdeductibletemporarydifferencesresultsindeductio nsindeterminingtaxableprofitsoffuture
periods.However,economicbenefitsintheformofreductionsintaxpayme ntswillflowtotheenterpriseonly
if it earns sufficient taxable profits against which the deductions can be offset. Therefore, an enterprise
recognises deferred tax assets only when it is probable that taxable profi ts will be available against which the
deductible temporary differences can be utilised.
28. Itisprobablethattaxableprofitwillbeavailableagainstwhichaded uctibletemporarydifferencecanbeutilised
when there are sufficient taxable temporary differences relating to the s ame taxation authority and the same
taxable entity which are expected to reverse:
(a) in the same period as the expected reversal of the deductible temporary difference; or
(b) in periods into which a tax loss arising from the deferred tax asset can b e carried back or forward.
In such circumstances, the deferred tax asset is recognised in the period i n which the deductible temporary
differences arise.
29. Whenthereareinsufficienttaxabletemporarydifferencesrelatingt othesametaxationauthorityandthesame
taxable entity, the deferred tax asset is recognised to the extent that:
(a) it is probable that the enterprise will have sufficient taxable profit relating to the same taxation authority
and the same taxable entity in the same period as the reversal of the deducti ble temporary difference (or
intheperiodsintowhichataxlossarisingfromthedeferredtaxassetcanb ecarriedbackorforward).In
evaluating whether it will have sufficient taxable profit in future perio ds, an enterprise ignores taxable
amounts arising from deductible temporary differences that are expected to originate in future periods,
becausethedeferredtaxassetarisingfromthesedeductibletemporarydi fferenceswillitselfrequirefuture
taxable profit in order to be utilised; or
(b) tax planning opportunities are available to the enterprise that will c reate taxable profit in appropriate
periods.
30. Tax planning opportunities are actions that the enterprise would take in order to create or increase taxable
income in a particular period before the expiry of a tax loss or tax credit ca rryforward. For example, in some
jurisdictions, taxable profit may be created or increased by:(a) electing to have interest income taxed on either a received or receivab le basis;
(b) deferring the claim for certain deductions from taxable profit;(c) selling, and perhaps leasing back, assets that have appreciated but fo r which the tax base has not been
adjusted to reflect such appreciation; and
(d) selling an asset that generates non-taxable income (such as, in some ju risdictions, a government bond) in
order to purchase another investment that generates taxable income.
Wheretaxplanningopportunitiesadvancetaxableprofitfromalaterperi odtoanearlierperiod,theutilisation
ofataxlossortaxcreditcarryforwardstilldependsontheexistenceoffu turetaxableprofitfromsourcesother
than future originating temporary differences.
31. When an enterprise has a history of recent losses, the enterprise consi ders the guidance in paragraphs 35
and 36.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 77
Negative goodwill
32.This Standard does not permit the recognition of a deferred tax asset arisi ng from deductible temporary
differences associated with negative goodwill which is treated as deferr ed income in accordance with IAS 22,
business combinations, because negative goodwill is a residual and the re cognition of the deferred tax asset
would increase the carrying amount of negative goodwill.
Initial recognition of an asset or liability
33.Onecasewhenadeferredtaxassetarisesoninitialrecognitionofanasset iswhenanon-taxablegovernment
grant related to an asset is deducted in arriving at the carrying amount of t he asset but, for tax purposes, is
notdeductedfromtheasset’sdepreciableamount(inotherwordsitstaxba se);thecarryingamountoftheasset
is less than its tax base and this gives rise to a deductible temporary diffe rence. Government grants may also
be set up as deferred income in which case the difference between the deferr ed income and its tax base of nil
is a deductible temporary difference. Whichever method of presentation a n enterprise adopts, the enterprise
does not recognise the resulting deferred tax asset, for the reason given i n paragraph 22.
Unused tax losses and unused tax credits
34.A deferred tax asset should be recognised for the carryforward of unused ta x losses and unused tax credits to
theextentthatitisprobablethatfuturetaxableprofitwillbeavailable againstwhichtheunusedtaxlossesand
unused tax credits can be utilised.
35.Thecriteriaforrecognisingdeferredtaxassetsarisingfromthecarryfo rwardofunusedtaxlossesandtaxcredits
are the same as the criteria for recognising deferred tax assets arising fr om deductible temporary differences.
However,theexistenceofunusedtaxlossesisstrongevidencethatfuture taxableprofitmaynotbeavailable.
Therefore,whenanenterprisehasahistoryofrecentlosses,theenterpri serecognisesadeferredtaxassetarising
from unused tax losses or tax credits only to the extent that the enterprise has sufficient taxable temporary
differences or there is convincing other evidence that sufficient taxabl e profit will be available against which
the unused tax losses or unused tax credits can be utilised by the enterpris e. In such circumstances,
paragraph 82 requires disclosure of the amount of the deferred tax asset an d the nature of the evidence
supporting its recognition.
36. An enterprise considers the following criteria in assessing the proba bility that taxable profit will be available
against which the unused tax losses or unused tax credits can be utilised:
(a) whethertheenterprisehassufficienttaxabletemporarydifferences relatingtothesametaxationauthority
and the same taxable entity, which will result in taxable amounts against w hich the unused tax losses or
unused tax credits can be utilised before they expire;
(b) whether it is probable that the enterprise will have taxable profits be fore the unused tax losses or unused
tax credits expire;
(c) whether the unused tax losses result from identifiable causes which ar e unlikely to recur; and
(d) whethertaxplanningopportunities(seeparagraph30)areavailablet otheenterprisethatwillcreatetaxable
profit in the period in which the unused tax losses or unused tax credits can be utilised.
To the extent that it is not probable that taxable profit will be available a gainst which the unused tax losses
or unused tax credits can be utilised, the deferred tax asset is not recogni sed.78 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Reassessment of unrecognised deferred tax assets
37.Ateachbalancesheetdate,anenterprisereassessesunrecogniseddeferr edtaxassets.Theenterpriserecognises
apreviouslyunrecogniseddeferredtaxassettotheextentthatithasbeco meprobablethatfuturetaxableprofit
willallowthedeferredtaxassettoberecovered.Forexample,animprovem entintradingconditionsmaymake
itmoreprobablethattheenterprisewillbeabletogeneratesufficientta xableprofitinthefutureforthedeferred
taxassettomeettherecognitioncriteriasetoutinparagraphs24or34.An otherexampleiswhenanenterprise
reassessesdeferredtaxassetsatthedateofabusinesscombinationorsub sequently(seeparagraphs67and68).
Investments in subsidiaries, branches and associates and interests in jo int ventures
38. Temporarydifferencesarisewhenthecarryingamountofinvestmentsi nsubsidiaries,branchesandassociates
orinterestsinjointventures(namelytheparentorinvestor’sshareofth enetassetsofthesubsidiary,branch,
associate or investee, including the carrying amount of goodwill) become s different from the tax base (which
isoftencost)oftheinvestmentorinterest.Suchdifferencesmayarisein anumberofdifferentcircumstances,
for example:
(a) the existence of undistributed profits of subsidiaries, branches, as sociates and joint ventures;
(b) changes in foreign exchange rates when a parent and its subsidiary are b ased in different countries; and
(c) a reduction in the carrying amount of an investment in an associate to it s recoverable amount.
Inconsolidatedfinancialstatements,thetemporarydifferencemaybedi fferentfromthetemporarydifference
associatedwiththatinvestmentintheparent’sseparatefinancialstate mentsiftheparentcarriestheinvestment
in its separate financial statements at cost or revalued amount.
39.An enterprise should recognise a deferred tax liability for all taxable te mporary differences associated with
investments in subsidiaries, branches and associates, and interests in j oint ventures, except to the extent that
both of the following conditions are satisfied:
(a) the parent, investor or venturer is able to control the timing of the rev ersal of the temporary difference;
and
(b) it is probable that the temporary difference will not reverse in the for eseeable future.
40. As a parent controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of
temporary differences associated with that investment (including the te mporary differences arising not only
fromundistributedprofitsbutalsofromanyforeignexchangetranslatio ndifferences).Furthermore,itwould
often be impracticable to determine the amount of income taxes that would b e payable when the temporary
differencereverses.Therefore,whentheparenthasdeterminedthatthos eprofitswillnotbedistributedinthe
foreseeable future the parent does not recognise a deferred tax liability . The same considerations apply to
investments in branches.
41. An enterprise accounts in its own currency for the non-monetary assets and liabilities of a foreign operation
that is integral to the enterprise’s operations (see IAS 21, the effects of changes in foreign exchange rates).
Where the foreign operation’s taxable profit or tax loss (and, hence, the t ax base of its non-monetary assets
and liabilities) is determined in the foreign currency, changes in the exc hange rate give rise to temporary
differences. Because such temporary differences relate to the foreign op eration’s own assets and liabilities,
rather than to the reporting enterprise’s investment in that foreign oper ation, the reporting enterprise
recognises the resulting deferred tax liability or (subject to paragraph 24) asset. The resulting deferred tax is
charged or credited in the income statement (see paragraph 58).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 79
42. An investor in an associate does not control that enterprise and is usua lly not in a position to determine its
dividend policy. Therefore, in the absence of an agreement requiring that the profits of the associate will not
be distributed in the foreseeable future, an investor recognises a deferr ed tax liability arising from taxable
temporary differences associated with its investment in the associate. I n some cases, an investor may not be
able to determine the amount of tax that would be payable if it recovers the c ost of its investment in an
associate, but can determine that it will equal or exceed a minimum amount. In such cases, the deferred tax
liability is measured at this amount.
43. The arrangement between the parties to a joint venture usually deals wi th the sharing of the profits and
identifieswhetherdecisionsonsuchmattersrequiretheconsentofallth eventurersoraspecifiedmajorityof
theventurers.Whentheventurercancontrolthesharingofprofitsanditi sprobablethattheprofitswillnot
be distributed in the foreseeable future, a deferred tax liability is not r ecognised.
44.An enterprise should recognise a deferred tax asset for all deductible tem porary differences arising from
investmentsinsubsidiaries,branchesandassociates,andinterestsinj ointventures,totheextentthat,andonly
to the extent that, it is probable that:
(a) the temporary difference will reverse in the foreseeable future; and
(b) taxable profit will be available against which the temporary differen ce can be utilised.
45. Indecidingwhetheradeferredtaxassetisrecognisedfordeductiblet emporarydifferencesassociatedwithits
investmentsinsubsidiaries,branchesandassociates,anditsinterests injointventures,anenterpriseconsiders
the guidance set out in paragraphs 28 to 31.
MEASUREMENT
46.Currenttaxliabilities(assets)forthecurrentandpriorperiodsshould bemeasuredattheamountexpectedto
be paid to (recovered from) the taxation authorities, using the tax rates ( and tax laws) that have been enacted
or substantively enacted by the balance sheet date.
47.Deferred tax assets and liabilities should be measured at the tax rates tha t are expected to apply to the period
whentheassetisrealisedortheliabilityissettled,basedontaxrates(a ndtaxlaws)thathavebeenenactedor
substantively enacted by the balance sheet date.
48. Currentanddeferredtaxassetsandliabilitiesareusuallymeasuredu singthetaxrates(andtaxlaws)thathave
been enacted. However, in some jurisdictions, announcements of tax rates (and tax laws) by the government
have the substantive effect of actual enactment, which may follow the anno uncement by a period of several
months. In these circumstances, tax assets and liabilities are measured u sing the announced tax rate (and tax
laws).
49. When different tax rates apply to different levels of taxable income, d eferred tax assets and liabilities are
measured using the average rates that are expected to apply to the taxable p rofit (tax loss) of the periods in
which the temporary differences are expected to reverse.
50. (Deleted)
51.The measurement of deferred tax liabilities and deferred tax assets shoul d reflect the tax consequences that
would follow from the manner in which the enterprise expects, at the balanc e sheet date, to recover or settle
the carrying amount of its assets and liabilities.80 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
52. In some jurisdictions, the manner in which an enterprise recovers (set tles) the carrying amount of an asset
(liability) may affect either or both of:
(a) thetaxrateapplicablewhentheenterpriserecovers(settles)thecar ryingamountoftheasset(liability);and
(b) the tax base of the asset (liability).
In such cases, an enterprise measures deferred tax liabilities and deferr ed tax assets using the tax rate and the
tax base that are consistent with the expected manner of recovery or settle ment.
ExampleA
An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20 % woul d apply if the asset
were sold and a tax rate of 30 % would apply to other income.
Theenterpriserecognisesadeferredtaxliabilityof8(40at20%)ifitexp ectstoselltheassetwithoutfurther
use and a deferred tax liability of 12 (40 at 30 %) if it expects to retain the a sset and recover its carrying
amount through use.
Example B
An asset with a cost of 100 and a carrying amount of 80 is revalued to 150. No eq uivalent adjustment is
madefortaxpurposes.Cumulativedepreciationfortaxpurposesis30andt hetaxrateis30%.Iftheasset
issoldformorethancost,thecumulativetaxdepreciationof30willbeinc ludedintaxableincomebutsale
proceeds in excess of cost will not be taxable.
The tax base of the asset is 70 and there is a taxable temporary difference of 80. If the enterprise expects
to recover the carrying amount by using the asset, it must generate taxable income of 150, but will only
beabletodeductdepreciationof70.Onthisbasis,thereisadeferredtaxl iabilityof24(80at30%).Ifthe
enterpriseexpectstorecoverthecarryingamountbysellingtheassetimm ediatelyforproceedsof150,the
deferred tax liability is computed as follows:
Taxable temporary difference Tax rate Deferred tax liability
Cumulative tax depreciation 30 30 % 9
Proceeds in excess of cost 50 nil —
Total 80 9
Note:inaccordancewithparagraph61,theadditionaldeferredtaxthatariseso ntherevaluationischarged
directly to equity.
Example C
The facts are as in example B, except that if the asset is sold for more than co st, the cumulative tax
depreciationwillbeincludedintaxableincome(taxedat30%)andthesale proceedswillbetaxedat40%,
after deducting an inflation-adjusted cost of 110.
Iftheenterpriseexpectstorecoverthecarryingamountbyusingtheasset ,itmustgeneratetaxableincome
of150,butwillonlybeabletodeductdepreciationof70.Onthisbasis,the taxbaseis70,thereisataxable
temporary difference of 80 and there is a deferred tax liability of 24 (80 at 30 %), as in example B.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 81
Iftheenterpriseexpectstorecoverthecarryingamountbysellingtheass etimmediatelyforproceedsof150,
the enterprise will be able to deduct the indexed cost of 110. The net procee ds of 40 will be taxed at 40 %.
In addition, the cumulative tax depreciation of 30 will be included in taxa ble income and taxed at 30 %. On
thisbasis,thetaxbaseis80(110less30),thereisataxabletemporarydif ferenceof70andthereisadeferred
tax liability of 25 (40 at 40 % plus 30 at 30 %). If the tax base is not immediate ly apparent in this example,
it may be helpful to consider the fundamental principle set out in paragrap h 10.
Note :in accordance with paragraph 61, the additional deferred tax that arises o n the revaluation is charged
directly to equity.
52A. Insomejurisdictions,incometaxesarepayableatahigherorlowerra teifpartorallofthenetprofitorretained
earnings is paid out as a dividend to shareholders of the enterprise. In som e other jurisdictions, income taxes
may be refundable or payable if part or all of the net profit or retained earn ings is paid out as a dividend to
shareholders of the enterprise. In these circumstances, current and defe rred tax assets and liabilities are
measured at the tax rate applicable to undistributed profits.
52B. In the circumstances described in paragraph 52A, the income tax conse quences of dividends are recognised
whenaliabilitytopaythedividendisrecognised.Theincometaxconseque ncesofdividendsaremoredirectly
linkedtopasttransactionsoreventsthantodistributionstoowners.The refore,theincometaxconsequences
ofdividendsarerecognisedinnetprofitorlossfortheperiodasrequired byparagraph58excepttotheextent
that the income tax consequences of dividends arise from the circumstance s described in paragraph 58(a)
and (b).
Example illustrating paragraphs 52A and 52B
The following example deals with the measurement of current and deferred t ax assets and liabilities for an
enterpriseinajurisdictionwhereincometaxesarepayableatahigherrat eonundistributedprofits(50%)with
an amount being refundable when profits are distributed. The tax rate on di stributed profits is 35 %. At the
balance sheet date, 31 December 20X1, the enterprise does not recognise a l iability for dividends proposed
or declared after the balance sheet date. As a result, no dividends are reco gnised in the year 20X1. Taxable
income for 20X1 is 100 000. The net taxable temporary difference for the yea r 20X1 is 40 000.
The enterprise recognises a current tax liability and a current income tax expense of 50 000. No asset is
recognisedfortheamountpotentiallyrecoverableasaresultoffuturedi vidends.Theenterprisealsorecognises
adeferredtaxliabilityanddeferredtaxexpenseof20 000(40 000at50%)re presentingtheincometaxesthat
theenterprisewillpaywhenitrecoversorsettlesthecarryingamountsof itsassetsandliabilitiesbasedonthe
tax rate applicable to undistributed profits.
Subsequently, on 15 March 20X2 the enterprise recognises dividends of 10 0 00 from previous operating
profits as a liability.On 15 March 20X2, the enterprise recognises the recovery of income taxes of 1 500 (15 % of the dividends
recognised as a liability) as a current tax asset and as a reduction of curre nt income tax expense for 20X2.
53.
Deferred tax assets and liabilities should not be discounted.
54. The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed
scheduling of the timing of the reversal of each temporary difference. In m any cases such scheduling is
impracticableorhighlycomplex.Therefore,itisinappropriatetorequi rediscountingofdeferredtaxassetsand
liabilities. To permit, but not to require, discounting would result in de ferred tax assets and liabilities which
would not be comparable between enterprises. Therefore, this Standard do es not require or permit the
discounting of deferred tax assets and liabilities.82 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
55. Temporarydifferencesaredeterminedbyreferencetothecarryingamo untofanassetorliability.Thisapplies
even where that carrying amount is itself determined on a discounted basis , for example in the case of
retirement benefit obligations (see IAS 19, employee benefits).
56.Thecarryingamountofadeferredtaxassetshouldbereviewedateachbalan cesheetdate.Anenterpriseshould
reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of part or all of that d eferred tax asset to be utilised. Any
such reduction should be reversed to the extent that it becomes probable th at sufficient taxable profit will be
available.
RECOGNITION OF CURRENT AND DEFERRED TAX
57. Accounting for the current and deferred tax effects of a transaction or other event is consistent with the
accounting for the transaction or event itself. Paragraphs 58 to 68 implem ent this principle.
Income statement
58.Currentanddeferredtaxshouldberecognisedasincomeoranexpenseandin cludedinthenetprofitorloss
for the period, except to the extent that the tax arises from:
(a) a transaction or event which is recognised, in the same or a different pe riod, directly in equity (see
paragraphs 61 to 65); or
(b) a business combination that is an acquisition (see paragraphs 66 to 68) .
59. Most deferred tax liabilities and deferred tax assets arise where inco me or expense is included in accounting
profitinoneperiod,butisincludedintaxableprofit(taxloss)inadiffe rentperiod.Theresultingdeferredtax
is recognised in the income statement. Examples are when:
(a) interest, royalty or dividend revenue is received in arrears and is inc luded in accounting profit on a time
apportionment basis in accordance with IAS 18, revenue, but is included in taxable profit (tax loss) on a
cash basis; and
(b) costsofintangibleassetshavebeencapitalisedinaccordancewithIA S38,intangibleassets,andarebeing
amortised in the income statement, but were deducted for tax purposes when they were incurred.
60. The carrying amount of deferred tax assets and liabilities may change e ven though there is no change in the
amount of the related temporary differences. This can result, for example , from:
(a) a change in tax rates or tax laws;(b) a reassessment of the recoverability of deferred tax assets; or(c) a change in the expected manner of recovery of an asset.
The resulting deferred tax is recognised in the income statement, except t o the extent that it relates to items
previously charged or credited to equity (see paragraph 63).
Items credited or charged directly to equity
61.Currenttaxanddeferredtaxshouldbechargedorcrediteddirectlytoequi tyifthetaxrelatestoitemsthatare
credited or charged, in the same or a different period, directly to equity.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 83
62. InternationalAccountingStandardsrequireorpermitcertainitemst obecreditedorchargeddirectlytoequity.
Examples of such items are:
(a) a change in carrying amount arising from the revaluation of property, p lant and equipment (see IAS 16,
property, plant and equipment);
(b) an adjustment to the opening balance of retained earnings resulting fr om either a change in accounting
policythatisappliedretrospectivelyorthecorrectionofafundamental error(seeIAS8,netprofitorloss
for the period, fundamental errors and changes in accounting policies);
(c) exchange differences arising on the translation of the financial stat ements of a foreign entity (see IAS 21,
the effects of changes in foreign exchange rates); and
(d) amounts arising on initial recognition of the equity component of a com pound financial instrument (see
paragraph 23).
63. Inexceptionalcircumstancesitmaybedifficulttodeterminetheamou ntofcurrentanddeferredtaxthatrelates
to items credited or charged to equity. This may be the case, for example, wh en:
(a) there are graduated rates of income tax and it is impossible to determin e the rate at which a specific
component of taxable profit (tax loss) has been taxed;
(b) a change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in
part) to an item that was previously charged or credited to equity; or
(c) anenterprisedeterminesthatadeferredtaxassetshouldberecognise d,orshouldnolongerberecognised
in full, and the deferred tax asset relates (in whole or in part) to an item th at was previously charged or
credited to equity.
In such cases, the current and deferred tax related to items that are credit ed or charged to equity is based on
areasonableprorataallocationofthecurrentanddeferredtaxoftheenti tyinthetaxjurisdictionconcerned,
or other method that achieves a more appropriate allocation in the circums tances.
64. IAS16,property,plantandequipment,doesnotspecifywhetheranente rpriseshouldtransfereachyearfrom
revaluation surplus to retained earnings an amount equal to the differenc e between the depreciation or
amortisation on a revalued asset and the depreciation or amortisation bas ed on the cost of that asset. If an
enterprise makes such a transfer, the amount transferred is net of any rela ted deferred tax. Similar
considerations apply to transfers made on disposal of an item of property, plant or equipment.
65. When an asset is revalued for tax purposes and that revaluation is relat ed to an accounting revaluation of an
earlier period, or to one that is expected to be carried out in a future perio d, the tax effects of both the asset
revaluation and the adjustment of the tax base are credited or charged to eq uity in the periods in which they
occur. However, if the revaluation for tax purposes is not related to an acc ounting revaluation of an earlier
period, or to one that is expected to be carried out in a future period, the ta x effects of the adjustment of the
tax base are recognised in the income statement.
65A. When an enterprise pays dividends to its shareholders, it may be requi red to pay a portion of the dividends
to taxation authorities on behalf of shareholders. In many jurisdictions , this amount is referred to as a
withholding tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the
dividends.84 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Deferred tax arising from a business combination
66. As explained in paragraphs 19 and 26(c), temporary differences may ari se in a business combination that is
an acquisition. In accordance with IAS 22, business combinations, an ente rprise recognises any resulting
deferred tax assets (to the extent that they meet the recognition criteria in paragraph 24) or deferred tax
liabilities as identifiable assets and liabilities at the date of the acqu isition. Consequently, those deferred tax
assets and liabilities affect goodwill or negative goodwill. However, in accordance with paragraphs 15(a)
and 24(a), an enterprise does not recognise deferred tax liabilities aris ing from goodwill itself (if amortisation
of the goodwill is not deductible for tax purposes) and deferred tax assets arising from non-taxable negative
goodwill which is treated as deferred income.
67. Asaresultofabusinesscombination,anacquirermayconsideritproba blethatitwillrecoveritsowndeferred
tax asset that was not recognised prior to the business combination. For ex ample, the acquirer may be able
toutilisethebenefitofitsunusedtaxlossesagainstthefuturetaxablep rofitoftheacquiree.Insuchcases,the
acquirer recognises a deferred tax asset and takes this into account in det ermining the goodwill or negative
goodwill arising on the acquisition.
68. When an acquirer did not recognise a deferred tax asset of the acquiree a s an identifiable asset at the date of
a business combination and that deferred tax asset is subsequently recogn ised in the acquirer’s consolidated
financialstatements,theresultingdeferredtaxincomeisrecognisedin theincomestatement.Inaddition,the
acquirer:
(a) adjuststhegrosscarryingamountofthegoodwillandtherelatedaccum ulatedamortisationtotheamounts
that would have been recorded if the deferred tax asset had been recognised as an identifiable asset at the
date of the business combination; and
(b) recognises the reduction in the net carrying amount of the goodwill as a n expense.
However, the acquirer does not recognise negative goodwill, nor does it in crease the carrying amount of
negative goodwill.
Example
Anenterpriseacquiredasubsidiarywhichhaddeductibletemporarydiffe rencesof300.Thetaxrateatthetime
of the acquisition was 30 %. The resulting deferred tax asset of 90 was not re cognised as an identifiable asset
in determining the goodwill of 500 resulting from the acquisition. The goo dwill is amortised over 20 years.
Twoyearsaftertheacquisition,theenterpriseassessedthatfuturetaxa bleprofitwouldprobablybesufficient
for the enterprise to recover the benefit of all the deductible temporary d ifferences.
The enterprise recognises a deferred tax asset of 90 (300 at 30 %) and, in the income statement, deferred tax
income of 90. It also reduces the cost of the goodwill by 90 and the accumulat ed amortisation by 9
(representingtwoyears’amortisation).Thebalanceof81isrecogniseda sanexpenseintheincomestatement.
Consequently,thecostofthegoodwill,andtherelatedaccumulatedamort isation,arereducedtotheamounts
(410and41)thatwouldhavebeenrecordedifadeferredtaxassetof90hadbe enrecognisedasanidentifiable
asset at the date of the business combination.
If the tax rate has increased to 40 %, the enterprise recognises a deferred t ax asset of 120 (300 at 40 %) and,
in the income statement, deferred tax income of 120. If the tax rate has decr eased to 20 %, the enterprise
recognisesadeferredtaxassetof60(300at20%)anddeferredtaxincomeof 60.Inbothcases,theenterprise
alsoreducesthecostofthegoodwillby90andtheaccumulatedamortisatio nby9andrecognisesthebalance
of 81 as an expense in the income statement.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 85
PRESENTATION
Tax assets and tax liabilities
69. Taxassetsandtaxliabilitiesshouldbepresentedseparatelyfromoth erassetsandliabilitiesinthebalancesheet.
Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities.
70. When an enterprise makes a distinction between current and non-curren t assets and liabilities in its financial
statements, it should not classify deferred tax assets (liabilities) as c urrent assets (liabilities).
Offset
71. An enterprise should offset current tax assets and current tax liabili ties if, and only if, the enterprise:
(a) has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settl e the liability simultaneously.
72.Althoughcurrenttaxassetsandliabilitiesareseparatelyrecognisedan dmeasuredtheyareoffsetinthebalance
sheetsubjecttocriteriasimilartothoseestablishedforfinancialinst rumentsinIAS32,financialinstruments:
disclosure and presentation. An enterprise will normally have a legally e nforceable right to set off a current
taxassetagainstacurrenttaxliabilitywhentheyrelatetoincometaxesl eviedbythesametaxationauthority
and the taxation authority permits the enterprise to make or receive a sing le net payment.
73.Inconsolidatedfinancialstatements,acurrenttaxassetofoneenterpri seinagroupisoffsetagainstacurrent
tax liability of another enterprise in the group if, and only if, the enterp rises concerned have a legally
enforceable right to make or receive a single net payment and the enterpris es intend to make or receive such
a net payment or to recover the asset and settle the liability simultaneous ly.
74. An enterprise should offset deferred tax assets and deferred tax liabi lities if, and only if:
(a) the enterprise has a legally enforceable right to set off current tax as sets against current tax liabilities; and
(b) the deferred tax assets and the deferred tax liabilities relate to inco me taxes levied by the same taxation
authority on either:
(i) the same taxable entity; or(ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis,
ortorealisetheassetsandsettletheliabilitiessimultaneously,ineac hfutureperiodinwhichsignificant
amounts of deferred tax liabilities or assets are expected to be settled or recovered.
75.
To avoid the need for detailed scheduling of the timing of the reversal of ea ch temporary difference, this
Standardrequiresanenterprisetosetoffadeferredtaxassetagainstade ferredtaxliabilityofthesametaxable
entity if, and only if, they relate to income taxes levied by the same taxati on authority and the enterprise has
a legally enforceable right to set off current tax assets against current t ax liabilities.
76.In rare circumstances, an enterprise may have a legally enforceable right of set-off, and an intention to settle
net, for some periods but not for others. In such rare circumstances, detai led scheduling may be required to
establish reliably whether the deferred tax liability of one taxable enti ty will result in increased tax payments
inthesameperiodinwhichadeferredtaxassetofanothertaxableentitywi llresultindecreasedpaymentsby
that second taxable entity.86 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Tax expense
Tax expense (income) related to profit or loss from ordinary activities
77. The tax expense (income) related to profit or loss from ordinary activi ties should be presented on the face of
the income statement.
Exchange differences on deferred foreign tax liabilities or assets
78.IAS21,theeffectsofchangesinforeignexchangerates,requirescertain exchangedifferencestoberecognised
asincomeorexpensebutdoesnotspecifywheresuchdifferencesshouldbep resentedintheincomestatement.
Accordingly, where exchange differences on deferred foreign tax liabili ties or assets are recognised in the
income statement, such differences may be classified as deferred tax expe nse (income) if that presentation is
considered to be the most useful to financial statement users.
Disclosure
79.The major components of tax expense (income) should be disclosed separate ly.
80. Components of tax expense (income) may include:
(a) current tax expense (income);
(b) any adjustments recognised in the period for current tax of prior perio ds;
(c) the amount of deferred tax expense (income) relating to the originatio n and reversal of temporary
differences;
(d) theamountofdeferredtaxexpense(income)relatingtochangesintaxr atesortheimpositionofnewtaxes;
(e) the amount of the benefit arising from a previously unrecognised tax lo ss, tax credit or temporary
difference of a prior period that is used to reduce current tax expense;
(f) the amount of the benefit from a previously unrecognised tax loss, tax c redit or temporary difference of
a prior period that is used to reduce deferred tax expense;
(g) deferred tax expense arising from the write-down, or reversal of a prev ious write-down, of a deferred tax
asset in accordance with paragraph 56; and
(h) the amount of tax expense (income) relating to those changes in account ing policies and fundamental
errors which are included in the determination of net profit or loss for the period in accordance with the
allowed alternative treatment in IAS 8, net profit or loss for the period, f undamental errors and changes
in accounting policies.
81.The following should also be disclosed separately:
(a) the aggregate current and deferred tax relating to items that are charg ed or credited to equity;
(b) tax expense (income) relating to extraordinary items recognised duri ng the period;
(c) an explanation of the relationship between tax expense (income) and ac counting profit in either or both
of the following forms:
(i) a numerical reconciliation between tax expense (income) and the produ ct of accounting profit
multiplied by the applicable tax rate(s), disclosing also the basis on whi ch the applicable tax rate(s) is
(are) computed; or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 87
(ii) anumericalreconciliationbetweentheaverageeffectivetaxratean dtheapplicabletaxrate,disclosing
also the basis on which the applicable tax rate is computed;
(d) an explanation of changes in the applicable tax rate(s) compared to the previous accounting period;
(e) the amount (and expiry date, if any) of deductible temporary differenc es, unused tax losses, and unused
tax credits for which no deferred tax asset is recognised in the balance she et;
(f) the aggregate amount of temporary differences associated with invest ments in subsidiaries, branches and
associates and interests in joint ventures, for which deferred tax liabil ities have not been recognised (see
paragraph 39);
(g) inrespectofeachtypeoftemporarydifference,andinrespectofeacht ypeofunusedtaxlossesandunused
tax credits:
(i) the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period
presented;
(ii) the amount of the deferred tax income or expense recognised in the inco me statement, if this is not
apparent from the changes in the amounts recognised in the balance sheet;
(h) in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) theprofitorlossfromtheordinaryactivitiesofthediscontinuedop erationfortheperiod,togetherwith
the corresponding amounts for each prior period presented; and
(i) theamountofincometaxconsequencesofdividendstoshareholdersoft heenterprisethatwereproposed
or declared before the financial statements were authorised for issue, bu t are not recognised as a liability
in the financial statements.
82.Anenterpriseshoulddisclosetheamountofadeferredtaxassetandthenat ureoftheevidencesupportingits
recognition, when:
(a) theutilisationofthedeferredtaxassetisdependentonfuturetaxabl eprofitsinexcessoftheprofitsarising
from the reversal of existing taxable temporary differences; and
(b) theenterprisehassufferedalossineitherthecurrentorprecedingpe riodinthetaxjurisdictiontowhich
the deferred tax asset relates.
82A.In the circumstances described in paragraph 52A, an enterprise should dis close the nature of the potential
incometaxconsequencesthatwouldresultfromthepaymentofdividendsto itsshareholders.Inaddition,the
enterpriseshoulddisclosetheamountsofthepotentialincometaxconseq uencespracticablydeterminableand
whether there are any potential income tax consequences not practicably d eterminable.
83. An enterprise discloses the nature and amount of each extraordinary it em either on the face of the income
statementorinthenotestothefinancialstatements.Whenthisdisclosur eismadeinthenotestothefinancial
statements, the total amount of all extraordinary items is disclosed on th e face of the income statement, net
of the aggregate related tax expense (income). Although financial statem ent users may find the disclosure of
the tax expense (income) related to each extraordinary item useful, it is s ometimes difficult to allocate tax
expense (income) between such items. Under these circumstances tax expen se (income) relating to
extraordinary items may be disclosed in the aggregate.88 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
84. The disclosures required by paragraph 81(c) enable users of financial statements to understand whether the
relationshipbetweentaxexpense(income)andaccountingprofitisunusu alandtounderstandthesignificant
factors that could affect that relationship in the future. The relationsh ip between tax expense (income) and
accounting profit may be affected by such factors as revenue that is exempt from taxation, expenses that are
notdeductibleindeterminingtaxableprofit(taxloss),theeffectoftax lossesandtheeffectofforeigntaxrates.
85. In explaining the relationship between tax expense (income) and accou nting profit, an enterprise uses an
applicabletaxratethatprovidesthemostmeaningfulinformationtotheu sersofitsfinancialstatements.Often,
the most meaningful rate is the domestic rate of tax in the country in which t he enterprise is domiciled,
aggregatingthetaxrateappliedfornationaltaxeswiththeratesapplied foranylocaltaxeswhicharecomputed
on a substantially similar level of taxable profit (tax loss). However, fo r an enterprise operating in several
jurisdictions,itmaybemoremeaningfultoaggregateseparatereconcili ationspreparedusingthedomesticrate
in each individual jurisdiction. The following example illustrates how t he selection of the applicable tax rate
affects the presentation of the numerical reconciliation.
86. The average effective tax rate is the tax expense (income) divided by th e accounting profit.
87. It would often be impracticable to compute the amount of unrecognised d eferred tax liabilities arising from
investments in subsidiaries, branches and associates and interests in jo int ventures (see paragraph 39).
Therefore,thisStandardrequiresanenterprisetodisclosetheaggregat eamountoftheunderlyingtemporary
differences but does not require disclosure of the deferred tax liabiliti es. Nevertheless, where practicable,
enterprisesareencouragedtodisclosetheamountsoftheunrecognisedde ferredtaxliabilitiesbecausefinancial
statement users may find such information useful.
87A. Paragraph 82A requires an enterprise to disclose the nature of the pot ential income tax consequences that
wouldresultfromthepaymentofdividendstoitsshareholders.Anenterpr isedisclosestheimportantfeatures
oftheincometaxsystemsandthefactorsthatwillaffecttheamountofthep otentialincometaxconsequences
of dividends.
87B. Itwouldsometimesnotbepracticabletocomputethetotalamountofth epotentialincometaxconsequences
that would result from the payment of dividends to shareholders. This may b e the case, for example, where
anenterprisehasalargenumberofforeignsubsidiaries.However,evenin suchcircumstances,someportions
of the total amount may be easily determinable. For example, in a consolida ted group, a parent and some of
itssubsidiariesmayhavepaidincometaxesatahigherrateonundistribut edprofitsandbeawareoftheamount
that would be refunded on the payment of future dividends to shareholders f rom consolidated retained
earnings.Inthiscase,thatrefundableamountisdisclosed.Ifapplicabl e,theenterprisealsodisclosesthatthere
are additional potential income tax consequences not practicably determ inable. In the parent’s separate
financial statements, if any, the disclosure of the potential income tax c onsequences relates to the parent’s
retained earnings.
87C. Anenterpriserequiredtoprovidethedisclosuresinparagraph82Ama yalsoberequiredtoprovidedisclosures
related to temporary differences associated with investments in subsidi aries, branches and associates or
interests in joint ventures. In such cases, an enterprise considers this i n determining the information to be
disclosedunderparagraph82A.Forexample,anenterprisemayberequired todisclosetheaggregateamount
oftemporarydifferencesassociatedwithinvestmentsinsubsidiariesfo rwhichnodeferredtaxliabilitieshave
beenrecognised(seeparagraph81(f)).Ifitisimpracticabletocomputet heamountsofunrecogniseddeferred
taxliabilities(seeparagraph87)theremaybeamountsofpotentialincom etaxconsequencesofdividendsnot
practicably determinable related to these subsidiaries.
88. Anenterprisedisclosesanytax-relatedcontingentliabilitiesandc ontingentassetsinaccordancewithIAS37,
provisions, contingent liabilities and contingent assets. Contingent l iabilities and contingent assets may arise,
for example, from unresolved disputes with the taxation authorities. Sim ilarly, where changes in tax rates or
tax laws are enacted or announced after the balance sheet date, an enterpri se discloses any significant effect
ofthosechangesonitscurrentanddeferredtaxassetsandliabilities(se eIAS10,eventsafterthebalancesheet
date).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 89
Example illustrating paragraph 85
In19X2,anenterprisehasaccountingprofitinitsownjurisdiction(coun tryA)of1 500(19X1:2 000)and
incountryBof1 500(19X1:500).Thetaxrateis30%incountryAand20%incou ntryB.IncountryA,
expenses of 100 (19X1: 200) are not deductible for tax purposes.
The following is an example of a reconciliation to the domestic tax rate.
19X1 19X2
Accounting profit 2 500 3 000
Tax at the domestic rate of 30 % 750 900
Tax effect of expenses that are not deductible for
tax purposes 60 30
Effect of lower tax rates in country B (50) (150)
Tax expense 760 780
The following is an example of a reconciliation prepared by aggregating se parate reconciliations for each
national jurisdiction. Under this method, the effect of differences betw een the reporting enterprise’s own
domestic tax rate and the domestic tax rate in other jurisdictions does not appear as a separate item in the
reconciliation.Anenterprisemayneedtodiscusstheeffectofsignifica ntchangesineithertaxrates,orthe
mix of profits earned in different jurisdictions, in order to explain chan ges in the applicable tax rate(s), as
required by paragraph 81(d).
Accounting profit 2 500 3 000
Tax at the domestic rates applicable to profits in
the country concerned 750 750
Tax effect of expenses that are not deductible for
tax purposes60 30
Tax expense 760 780
EFFECTIVE DATE
89. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January, 1998, except as specified in paragraph 91. If an enter prise applies this Standard for
financialstatementscoveringperiodsbeginningbefore1January1998,t heenterpriseshoulddisclosethefact
it has applied this Standard instead of IAS 12, accounting for taxes on inco me, approved in 1979.
90.This Standard supersedes IAS 12, accounting for taxes on income, approved in 1979.
91. Paragraphs 52A, 52B, 65A, 81(i), 82A, 87A, 87B, 87C and the deletion of p aragraphs 3 and 50 become
operative for annual financial statements (1) covering periods beginning on or after 1 January 2001. Earlier
adoption is encouraged. If earlier adoption affects the financial statem ents, an enterprise should disclose that
fact.
(1) Paragraph 91 refers to “annual financial statements” in line with more ex plicit language for writing effective dates adopted
in 1998. Paragraph 89 refers to “financial statements”.90 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 14
(REVISED 1997)
Segment reporting
ThisrevisedInternationalAccountingStandardsupersedesIAS14,repor tingfinancialinformationbysegment,which
was approved by the Board in a reformatted version in 1994. The revised Stan dard became operative for financial
statements covering periods beginning on or after 1 July 1998.
Paragraphs 116 and 117 of IAS 36, impairment of assets, set out certain disc losure requirements for reporting
impairment losses by segment.
INTRODUCTION
ThisStandard(“IAS14(revised)”)replacesIAS14,reportingfinanciali nformationbysegment(“theoriginalIAS14”).
IAS 14 (revised) is effective for accounting periods beginning on or after 1 July 1998. The major changes from the
original IAS 14 are as follows:
1.The original IAS 14 applied to enterprises whose securities are publicly t raded and other economically
significant entities. IAS 14 (revised) applies to enterprises whose equi ty or debt securities are publicly traded,
including enterprises in the process of issuing equity or debt securities in a public securities market, but not
to other economically significant entities.
2.The original IAS 14 required that information be reported for industry seg ments and geographical segments.
It provided only general guidance for identifying industry segments and g eographical segments. It suggested
that internal organisational groupings may provide a basis for determini ng reportable segments, or segment
reporting may require reclassification of data. IAS 14 (revised) require s that information be reported for
businesssegmentsandgeographicalsegments.Itprovidesmoredetailedg uidancethantheoriginalIAS14for
identifying business segments and geographical segments. It requires th at an enterprise look to its internal
organisationalstructureandinternalreportingsystemforthepurposeo fidentifyingthosesegments.Ifinternal
segments are based neither on groups of related products and services nor o n geography, IAS 14 (revised)
requiresthatanenterpriseshouldlooktothenextlowerlevelofinternal segmentationtoidentifyitsreportable
segments.
3.The original IAS 14 required that the same quantity of information be repor ted for both industry segments
andgeographicalsegments.IAS14(revised)providesthatonebasisofseg mentationisprimaryandtheother
is secondary, with considerably less information required to be disclose d for secondary segments.
4.TheoriginalIAS14wassilentonwhethersegmentinformationmustbeprepa redusingtheaccountingpolicies
adopted for the consolidated or enterprise financial statements. IAS 14 ( revised) requires that the same
accounting policies be followed.
5.The original IAS 14 had allowed differences in the definition of segment re sult among enterprises. IAS 14
(revised)providesmoredetailedguidancethantheoriginalIAS14astosp ecificitemsofrevenueandexpense
that should be included in or excluded from segment revenue and segment exp ense. Accordingly, IAS 14
(revised) provides for a standardised measure of segment result, but only to the extent that items of revenue
and operating expense can be directly attributed or reasonably allocated to segments.
6.IAS 14 (revised) requires “symmetry” in the inclusion of items in segment r esult and in segment assets. If, for
example,segmentresultreflectsdepreciationexpense,thedepreciable assetmustbeincludedinsegmentassets.
The original IAS 14 was silent on this matter.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 91
7. The original IAS 14 was silent on whether segments deemed too small for se parate reporting could be
combinedwithothersegmentsorexcludedfromallreportablesegments.IA S14(revised)providesthatsmall
internallyreportedsegmentsthatarenotrequiredtobeseparatelyrepor tedmaybecombinedwitheachother
if they share a substantial number of the factors that define a business seg ment or geographical segment, or
theymaybecombinedwithasimilarsignificantsegmentforwhichinformat ionisreportedinternallyifcertain
conditions are met.
8.The original IAS 14 was silent on whether geographical segments should be b ased on where the enterprise’s
assets are located (the origin of its sales) or on where its customers are lo cated (the destination of its sales).
IAS 14 (revised) requires that, whichever is the basis of an enterprise’s g eographical segments, several items
of data must be presented on the other basis if significantly different.
9.TheoriginalIAS14requiredfourprincipalitemsofinformationforbothi ndustrysegmentsandgeographical
segments:
(a) sales or other operating revenues, distinguishing between revenue de rived from customers outside the
enterprise and revenue derived from other segments;
(b) segment result;
(c) segment assets employed; and(d) the basis of inter-segment pricing.
For an enterprise’s primary basis of segment reporting (business segment s or geographical segments), IAS 14
(revised) requires those same four items of information plus:
(a) segment liabilities;(b) cost of property, plant, equipment, and intangible assets acquired du ring the period;
(c) depreciation and amortisation expense;(d) non-cash expenses other than depreciation and amortisation; and(e) theenterprise’sshareofthenetprofitorlossofanassociate,jointv enture,orotherinvestmentaccounted
forundertheequitymethodifsubstantiallyalloftheassociate’soperat ionsarewithinonlythatsegment,
and the amount of the related investment.
For an enterprise’s secondary basis of segment reporting, IAS 14 (revised ) drops the original IAS 14
requirementforsegmentresultandreplacesitwiththecostofproperty,p lant,equipment,andintangibleassets
acquired during the period.
10.
The original IAS 14 was silent on whether prior period segment information presented for comparative
purposes should be restated for a material change in segment accounting po licies. IAS 14 (revised) requires
restatement unless it is impracticable to do so.
11.IAS 14 (revised) requires that if total revenue from external customers fo r all reportable segments combined
islessthan75%oftotalenterpriserevenue,thenadditionalreportables egmentsshouldbeidentifieduntilthe
75 % level is reached.
12.The original IAS 14 allowed a different method of pricing inter-segment tr ansfers to be used in segment data
thanwasactuallyusedtopricethetransfers.IAS14(revised)requiresth atinter-segmenttransfersbemeasured
on the basis that the enterprise actually used to price the transfers.
13.IAS 14 (revised) requires disclosure of revenue for any segment not deemed reportable because it earns a
majorityofitsrevenuefromsalestoothersegmentsifthatsegment’sreve nuefromsalestoexternalcustomers
is 10 % or more of total enterprise revenue. The original IAS 14 had no compar able requirement.92 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
CONTENTS
Paragraphs
Objective 93
Scope 94
Definitions 94
Definitions from other international accounting standards 94
Definitions of business segment and geographical segment 94Definitions of segment revenue, expense, result, assets, and liabilitie s9 6
Identifying reportable segments 98Primary and secondary segment reporting formats 98Business and geographical segments 99Reportable segments 100
Segment accounting policies 102
Disclosure 102
Primary reporting format 102
Secondary segment information 104Illustrative segment disclosures 105Other disclosure matters 105
Effective date 107
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoestablishprinciplesforreportingfi nancialinformationbysegment—information
aboutthedifferenttypesofproductsandservicesanenterpriseproduces andthedifferentgeographicalareasinwhich
it operates — to help users of financial statements:
(a) better understand the enterprise’s past performance;(b) better assess the enterprise’s risks and returns; and(c) make more informed judgements about the enterprise as a whole.
Manyenterprisesprovidegroupsofproductsandservicesoroperateingeo graphicalareasthataresubjecttodiffering
ratesofprofitability,opportunitiesforgrowth,futureprospects,and risks.Informationaboutanenterprise’sdifferent
typesofproductsandservicesanditsoperationsindifferentgeographic alareas—oftencalledsegmentinformation
—isrelevanttoassessingtherisksandreturnsofadiversifiedormultina tionalenterprisebutmaynotbedeterminable
fromtheaggregateddata.Therefore,segmentinformationiswidelyregar dedasnecessarytomeetingtheneedsofusers
of financial statements.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 93
SCOPE
1. This Standard should be applied in complete sets of published financial statements that comply with
International Accounting Standards.
2.A complete set of financial statements includes a balance sheet, income st atement, cash flow statement, a
statement showing changes in equity, and notes, as provided in IAS 1, prese ntation of financial statements.
3. This Standard should be applied by enterprises whose equity or debt secu rities are publicly traded and by
enterprises that are in the process of issuing equity or debt securities in public securities markets.
4.If an enterprise whose securities are not publicly traded prepares financ ial statements that comply with
InternationalAccountingStandards,thatenterpriseisencouragedtodi sclosefinancialinformationbysegment
voluntarily.
5. Ifanenterprisewhosesecuritiesarenotpubliclytradedchoosestodis closesegmentinformationvoluntarilyin
financialstatementsthatcomplywithInternationalAccountingStandar ds,thatenterpriseshouldcomplyfully
with the requirements of this Standard.
6. Ifasinglefinancialreportcontainsbothconsolidatedfinancialstat ementsofanenterprisewhosesecuritiesare
publicly traded and the separate financial statements of the parent or one or more subsidiaries, segment
informationneedbepresentedonlyonthebasisoftheconsolidatedfinanc ialstatements.Ifasubsidiaryisitself
an enterprise whose securities are publicly traded, it will present segme nt information in its own separate
financial report.
7. Similarly,ifasinglefinancialreportcontainsboththefinancialsta tementsofanenterprisewhosesecuritiesare
publicly traded and the separate financial statements of an equity method associate or joint venture in which
theenterprisehasafinancialinterest,segmentinformationneedbepres entedonlyonthebasisoftheenterprise’s
financial statements. If the equity method associate or joint venture is i tself an enterprise whose securities are
publicly traded, it will present segment information in its own separate f inancial report.
DEFINITIONS
Definitions from other international accounting standards
8. ThefollowingtermsareusedinthisStandardwiththemeaningsspecifie dinIAS7,cashflowstatements;IAS8,
net profit or loss for the period, fundamental errors and changes in accoun ting policies; and IAS 18, revenue:
Operating activities are the principal revenue-producing activities of an enterprise and other activities that are
not investing or financing activities.
Accountingpoliciesarethespecificprinciples,bases,conventions,ru lesandpracticesadoptedbyanenterprise
in preparing and presenting financial statements.Revenueisthegrossinflowofeconomicbenefitsduringtheperiodarising inthecourseoftheordinaryactivities
of an enterprise when those inflows result in increases in equity, other th an increases relating to contributions
from equity participants.
Definitions of business segment and geographical segment
9. The terms business segment and geographical segment are used in this Sta ndard with the following meanings:
A business segment is a distinguishable component of an enterprise that is engaged in providing an individual
product or service or a group of related products or services and that is sub ject to risks and returns that are
different from those of other business segments. Factors that should be co nsidered in determining whether
products and services are related include:94 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(a) the nature of the products or services;
(b) the nature of the production processes;(c) the type or class of customer for the products or services;(d) the methods used to distribute the products or provide the services; an d
(e) ifapplicable,thenatureoftheregulatoryenvironment,forexample, banking,insurance,orpublicutilities.
Ageographicalsegmentisadistinguishablecomponentofanenterpriseth atisengagedinprovidingproducts
orserviceswithinaparticulareconomicenvironmentandthatissubjectt orisksandreturnsthataredifferent
fromthoseofcomponentsoperatinginothereconomicenvironments.Facto rsthatshouldbeconsideredin
identifying geographical segments include:
(a) similarity of economic and political conditions;(b) relationships between operations in different geographical areas;(c) proximity of operations;(d) special risks associated with operations in a particular area;(e) exchange control regulations; and(f) the underlying currency risks.A reportable segment is a business segment or a geographical segment ident ified based on the foregoing
definitions for which segment information is required to be disclosed by t his Standard.
10.
Thefactorsinparagraph9foridentifyingbusinesssegmentsandgeograph icalsegmentsarenotlistedinany
particular order.
11.Asinglebusinesssegmentdoesnotincludeproductsandserviceswithsign ificantlydifferingrisksandreturns.
While there may be dissimilarities with respect to one or several of the fac tors in the definition of a business
segment, the products and services included in a single business segment a re expected to be similar with
respect to a majority of the factors.
12.Similarly, a geographical segment does not include operations in economi c environments with significantly
differingrisksandreturns.Ageographicalsegmentmaybeasinglecountr y,agroupoftwoormorecountries,
or a region within a country.
13.The predominant sources of risks affect how most enterprises are organise d and managed. Therefore,
paragraph 27 of this Standard provides that an enterprise’s organisation al structure and its internal financial
reportingsystemisthebasisforidentifyingitssegments.Therisksandr eturnsofanenterpriseareinfluenced
both by the geographical location of its operations (where its products ar e produced or where its service
delivery activities are based) and also by the location of its markets (whe re its products are sold or services
are rendered). The definition allows geographical segments to be based on either:
(a) the location of an enterprise’s production or service facilities and o ther assets; or
(b) the location of its markets and customers.
14. An enterprise’s organisational and internal reporting structure wil l normally provide evidence of whether its
dominantsourceofgeographicalrisksresultsfromthelocationofitsass ets(theoriginofitssales)orthelocationof
itscustomers(thedestinationofitssales).Accordingly,anenterprise lookstothisstructuretodeterminewhetherits
geographical segments should be based on the location of its assets or on th e location of its customers.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 95
15.Determiningthecompositionofabusinessorgeographicalsegmentinvolv esacertainamountofjudgement.
In making that judgement, enterprise management takes into account the ob jective of reporting financial
informationbysegmentassetforthinthisStandardandthequalitativech aracteristicsoffinancialstatements
as identified in the IASC framework for the preparation and presentation o f financial statements. Those
qualitative characteristics include the relevance, reliability, and co mparability over time of financial
information that is reported about an enterprise’s different groups of pr oducts and services and about its
operations in particular geographical areas, and the usefulness of that i nformation for assessing the risks and
returns of the enterprise as a whole.
Definitions of segment revenue, expense, result, assets, and liabilitie s
16.The following additional terms are used in this Standard with the meanings specified:
Segment revenue is revenue reported in the enterprise’s income statement that is directly attributable to a
segmentandtherelevantportionofenterpriserevenuethatcanbeallocat edonareasonablebasistoasegment,
whether from sales to external customers or from transactions with other s egments of the same enterprise.
Segment revenue does not include:
(a) extraordinary items;(b) interest or dividend income, including interest earned on advances or loans to other segments, unless the
segment’s operations are primarily of a financial nature; or
(c) gains on sales of investments or gains on extinguishment of debt unless the segment’s operations are
primarily of a financial nature.
Segment revenue includes an enterprise’s share of profits or losses of ass ociates, joint ventures, or other
investments accounted for under the equity method only if those items are i ncluded in consolidated or total
enterprise revenue.Segmentrevenueincludesajointventurer’sshareoftherevenueofajoint lycontrolledentitythatisaccounted
forbyproportionateconsolidationinaccordancewithIAS31,financialr eportingofinterestsinjointventures.
Segment expense is expense resulting from the operating activities of a se gment that is directly attributable to
thesegmentandtherelevantportionofanexpensethatcanbeallocatedona reasonablebasistothesegment,
including expenses relating to sales to external customers and expenses r elating to transactions with other
segments of the same enterprise. Segment expense does not include:
(a) extraordinary items;(b) interest, including interest incurred on advances or loans from other segments, unless the segment’s
operations are primarily of a financial nature;
(c) losses on sales of investments or losses on extinguishment of debt unle ss the segment’s operations are
primarily of a financial nature;
(d) an enterprise’s share of losses of associates, joint ventures, or othe r investments accounted for under the
equity method;
(e) income tax expense; or(f) general administrative expenses, head-office expenses, and other ex penses that arise at the enterprise level
and relate to the enterprise as a whole. However, costs are sometimes incur red at the enterprise level on
behalfofasegment.Suchcostsaresegmentexpensesiftheyrelatetothese gment’soperatingactivitiesand
they can be directly attributed or allocated to the segment on a reasonable basis.
Segmentexpenseincludesajointventurer’sshareoftheexpensesofajoin tlycontrolledentitythatisaccounted
for by proportionate consolidation in accordance with IAS 31.96 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
For a segment’s operations that are primarily of a financial nature, inter est income and interest expense may
be reported as a single net amount for segment reporting purposes only if th ose items are netted in the
consolidated or enterprise financial statements.
Segmentresultissegmentrevenuelesssegmentexpense.Segmentresultis determinedbeforeanyadjustments
for minority interest.Segment assets are those operating assets that are employed by a segment in its operating activities and that
either are directly attributable to the segment or can be allocated to the s egment on a reasonable basis.
If a segment’s segment result includes interest or dividend income, its se gment assets include the related
receivables, loans, investments, or other income-producing assets.
Segment assets do not include income tax assets.Segmentassetsincludeinvestmentsaccountedforundertheequitymethod onlyiftheprofitorlossfromsuch
investments is included in segment revenue. Segment assets include a join t venturer’s share of the operating
assets of a jointly controlled entity that is accounted for by proportiona te consolidation in accordance with
IAS 31.Segment assets are determined after deducting related allowances that ar e reported as direct offsets in the
enterprise’s balance sheet.Segmentliabilitiesarethoseoperatingliabilitiesthatresultfromthe operatingactivitiesofasegmentandthat
either are directly attributable to the segment or can be allocated to the s egment on a reasonable basis.
Ifasegment’ssegmentresultincludesinterestexpense,itssegmentliab ilitiesincludetherelatedinterest-bearing
liabilities.Segmentliabilitiesincludeajointventurer’sshareoftheliabilitieso fajointlycontrolledentitythatisaccounted
for by proportionate consolidation in accordance with IAS 31.Segment liabilities do not include income tax liabilities.Segment accounting policies are the accounting policies adopted for prep aring and presenting the financial
statements of the consolidated group or enterprise as well as those accoun ting policies that relate specifically
to segment reporting.
17.
Thedefinitionsofsegmentrevenue,segmentexpense,segmentassets,and segmentliabilitiesincludeamounts
of such items that are directly attributable to a segment and amounts of suc h items that can be allocated to a
segmentonareasonablebasis.Anenterpriselookstoitsinternalfinanci alreportingsystemasthestartingpoint
for identifying those items that can be directly attributed, or reasonabl y allocated, to segments. That is, there
isapresumptionthatamountsthathavebeenidentifiedwithsegmentsfori nternalfinancialreportingpurposes
aredirectlyattributableorreasonablyallocabletosegmentsforthepur poseofmeasuringthesegmentrevenue,
segment expense, segment assets, and segment liabilities of reportable s egments.
18.Insomecases,however,arevenue,expense,asset,orliabilitymayhavebe enallocatedtosegmentsforinternal
financialreportingpurposesonabasisthatisunderstoodbyenterprisem anagementbutthatcouldbedeemed
subjective, arbitrary, or difficult to understand by external users of fi nancial statements. Such an allocation
would not constitute a reasonable basis under the definitions of segment r evenue, segment expense, segment
assets,andsegmentliabilitiesinthisStandard.Conversely,anenterpr isemaychoosenottoallocatesomeitem
ofrevenue,expense,asset,orliabilityforinternalfinancialreportin gpurposes,eventhoughareasonablebasis
fordoingsoexists.Suchanitemisallocatedpursuanttothedefinitionso fsegmentrevenue,segmentexpense,
segment assets, and segment liabilities in this Standard.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 97
19. Examples of segment assets include current assets that are used in the o perating activities of the segment,
property, plant, and equipment, assets that are the subject of finance lea ses (IAS 17, leases), and intangible
assets. If a particular item of depreciation or amortisation is included i n segment expense, the related asset is
alsoincludedinsegmentassets.Segmentassetsdonotincludeassetsused forgeneralenterpriseorhead-office
purposes. Segment assets include operating assets shared by two or more se gments if a reasonable basis for
allocation exists. Segment assets include goodwill that is directly attr ibutable to a segment or that can be
allocatedtoasegmentonareasonablebasis,andsegmentexpenseincludes relatedamortisationofgoodwill.
20.Examplesofsegmentliabilitiesincludetradeandotherpayables,accrue dliabilities,customeradvances,product
warranty provisions, and other claims relating to the provision of goods a nd services. Segment liabilities do
not include borrowings, liabilities related to assets that are the subjec t of finance leases (IAS 17), and other
liabilities that are incurred for financing rather than operating purpos es. If interest expense is included in
segmentresult,therelatedinterest-bearingliabilityisincludedinse gmentliabilities.Theliabilitiesofsegments
whose operations are not primarily of a financial nature do not include bor rowings and similar liabilities
becausesegmentresultrepresentsanoperating,ratherthananet-of-fin ancing,profitorloss.Further,because
debt is often issued at the head-office level on an enterprise-wide basis, it is often not possible to directly
attribute, or reasonably allocate, the interest-bearing liability to th e segment.
21.Measurements of segment assets and liabilities include adjustments to th e prior carrying amounts of the
identifiablesegmentassetsandsegmentliabilitiesofacompanyacquire dinabusinesscombinationaccounted
forasapurchase,evenifthoseadjustmentsaremadeonlyforthepurposeof preparingconsolidatedfinancial
statements and are not recorded in either the parent’s or the subsidiary’s separate financial statements.
Similarly, if property, plant, and equipment has been revalued subsequen t to acquisition in accordance with
the alternative accounting treatment allowed by IAS 16, then measurement s of segment assets reflect those
revaluations.
22.Some guidance for cost allocation can be found in other International Acco unting Standards. For example,
paragraphs8to16ofIAS2,inventories,provideguidanceforattributing andallocatingcoststoinventories,
and paragraphs 16 to 21 of IAS 11, construction contracts, provide guidanc e for attributing and allocating
costs to contracts. That guidance may be useful in attributing or allocati ng costs to segments.
23.IAS 7, cash flow statements, provides guidance as to whether bank overdraf ts should be included as a
component of cash or should be reported as borrowings.
24.Segmentrevenue,segmentexpense,segmentassets,andsegmentliabiliti esaredeterminedbeforeintra-group
balancesandintra-grouptransactionsareeliminatedaspartoftheconso lidationprocess,excepttotheextent
that such intra-group balances and transactions are between group enterp rises within a single segment.
25.While the accounting policies used in preparing and presenting the financ ial statements of the enterprise as
a whole are also the fundamental segment accounting policies, segment acc ounting policies include, in
addition, policies that relate specifically to segment reporting, such a s identification of segments, method of
pricing inter-segment transfers, and basis for allocating revenues and e xpenses to segments.
IDENTIFYING REPORTABLE SEGMENTS
Primary and secondary segment reporting formats
26. The dominant source and nature of an enterprise’s risks and returns sho uld govern whether its primary
segmentreportingformatwillbebusinesssegmentsorgeographicalsegme nts.Iftheenterprise’srisksandrates
ofreturnareaffectedpredominantlybydifferencesintheproductsandse rvicesitproduces,itsprimaryformat
for reporting segment information should be business segments, with seco ndary information reported
geographically.Similarly,iftheenterprise’srisksandratesofreturn areaffectedpredominantlybythefactthat
it operates in different countries or other geographical areas, its prima ry format for reporting segment
information should be geographical segments, with secondary informatio n reported for groups of related
products and services.98 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
27. Anenterprise’sinternalorganisationalandmanagementstructurean ditssystemofinternalfinancialreporting
to the board of directors and the chief executive officer should normally b e the basis for identifying the
predominant source and nature of risks and differing rates of return facin g the enterprise and, therefore, for
determining which reporting format is primary and which is secondary, exc ept as provided in
subparagraphs (a) and (b) below:
(a) if an enterprise’s risks and rates of return are strongly affected both by differences in the products and
services it produces and by differences in the geographical areas in which it operates, as evidenced by a
“matrixapproach”tomanagingthecompanyandtoreportinginternallytot heboardofdirectorsandthe
chief executive officer, then the enterprise should use business segment s as its primary segment reporting
format and geographical segments as its secondary reporting format; and
(b) if an enterprise’s internal organisational and management structure and its system of internal financial
reportingtotheboardofdirectorsandthechiefexecutiveofficerarebas edneitheronindividualproducts
or services or on groups of related products/services nor on geography, th e directors and management of
theenterpriseshoulddeterminewhethertheenterprise’srisksandretur nsarerelatedmoretotheproducts
andservicesitproducesormoretothegeographicalareasinwhichitopera tesand,asaconsequence,should
choose either business segments or geographical segments as the enterpri se’s primary segment reporting
format, with the other as its secondary reporting format.
28.Formostenterprises,thepredominantsourceofrisksandreturnsdetermi neshowtheenterpriseisorganised
and managed. An enterprise’s organisational and management structure an d its internal financial reporting
system normally provide the best evidence of the enterprise’s predominan t source of risks and returns for
purpose of its segment reporting. Therefore, except in rare circumstance s, an enterprise will report segment
information in its financial statements on the same basis as it reports int ernally to top management. Its
predominantsourceofrisksandreturnsbecomesitsprimarysegmentrepor tingformat.Itssecondarysource
of risks and returns becomes its secondary segment reporting format.
29.A“matrixpresentation”—bothbusinesssegmentsandgeographicalsegmen tsasprimarysegmentreporting
formatswithfullsegmentdisclosuresoneachbasis—oftenwillprovideus efulinformationifanenterprise’s
risksandratesofreturnarestronglyaffectedbothbydifferencesinthep roductsandservicesitproducesand
by differences in the geographical areas in which it operates. This Standa rd does not require, but does not
prohibit, a “matrix presentation”.
30.In some cases, an enterprise’s organisation and internal reporting may ha ve developed along lines unrelated
either to differences in the types of products and services they produce or to the geographical areas in which
they operate. For instance, internal reporting may be organised solely by legal entity, resulting in internal
segments composed of groups of unrelated products and services. In those u nusual cases, the internally
reportedsegmentdatawillnotmeettheobjectiveofthisStandard.Accord ingly,paragraph27(b)requiresthe
directors and management of the enterprise to determine whether the enter prise’s risks and returns are more
product/service driven or geographically driven and to choose either bus iness segments or geographical
segmentsastheenterprise’sprimarybasisofsegmentreporting.Theobje ctiveistoachieveareasonabledegree
ofcomparabilitywithotherenterprises,enhanceunderstandabilityoft heresultinginformation,andmeetthe
expressed needs of investors, creditors, and others for information abou t product/service-related and
geographically-related risks and returns.
Business and geographical segments
31. An enterprise’s business and geographical segments for external repo rting purposes should be those
organisational units for which information is reported to the board of dir ectors and to the chief executive
officer for the purpose of evaluating the unit’s past performance and for m aking decisions about future
allocations of resources, except as provided in paragraph 32.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 99
32. If an enterprise’s internal organisational and management structure and its system of internal financial
reporting to the board of directors and the chief executive officer are bas ed neither on individual products or
servicesorongroupsofrelatedproducts/servicesnorongeography,para graph27(b)requiresthatthedirectors
and management of the enterprise should choose either business segments o r geographical segments as the
enterprise’sprimarysegmentreportingformatbasedontheirassessment ofwhichreflectstheprimarysource
of the enterprise’s risks and returns, with the other its secondary report ing format. In that case, the directors
and management of the enterprise must determine its business segments and geographical segments for
externalreportingpurposesbasedonthefactorsinthedefinitionsinpar agraph9ofthisStandard,ratherthan
on the basis of its system of internal financial reporting to the board of di rectors and chief executive officer,
consistent with the following:
(a) ifoneormoreofthesegmentsreportedinternallytothedirectorsandm anagementisabusinesssegment
or a geographical segment based on the factors in the definitions in paragr aph 9 but others are not,
subparagraph (b) should be applied only to those internal segments that do not meet the definitions in
paragraph 9 (that is, an internally reported segment that meets the defini tion should not be further
segmented);
(b) forthosesegmentsreportedinternallytothedirectorsandmanagemen tthatdonotsatisfythedefinitions
inparagraph9,managementoftheenterpriseshouldlooktothenextlowerl evelofinternalsegmentation
that reports information along product and service lines or geographical lines, as appropriate under the
definitions in paragraph 9; and
(c) ifsuchaninternallyreportedlower-levelsegmentmeetsthedefiniti onofbusinesssegmentorgeographical
segmentbasedonthefactorsinparagraph9,thecriteriainparagraphs34a nd35foridentifyingreportable
segments should be applied to that segment.
33.Under this Standard, most enterprises will identify their business and ge ographical segments as the
organisational units for which information is reported to the board of dir ectors (particularly the supervisory
non-management directors, if any) and to the chief executive officer (the senior operating decision maker,
which in some cases may be a group of several people) for the purpose of evalu ating each unit’s past
performance and for making decisions about future allocations of resourc es. And even if an enterprise must
apply paragraph 32 because its internal segments are not along product/se rvice or geographical lines, it will
looktothenextlowerlevelofinternalsegmentationthatreportsinforma tionalongproductandservicelines
orgeographicallinesratherthanconstructsegmentssolelyforexternal reportingpurposes.Thisapproachof
lookingtoanenterprise’sorganisationalandmanagementstructureandi tsinternalfinancialreportingsystem
to identify the enterprise’s business and geographical segments for exte rnal reporting purposes is sometimes
called the “management approach”, and the organisational components for which information is reported
internally are sometimes called “operating segments”.
Reportable segments
34. Twoormoreinternallyreportedbusinesssegmentsorgeographicalseg mentsthataresubstantiallysimilarmay
be combined as a single business segment or geographical segment. Two or mo re business segments or
geographical segments are substantially similar only if:
(a) they exhibit similar long-term financial performance; and
(b) they are similar in all of the factors in the appropriate definition in p aragraph 9.
35. A business segment or geographical segment should be identified as a re portable segment if a majority of its
revenue is earned from sales to external customers and:
(a) its revenue from sales to external customers and from transactions wit h other segments is 10 % or more
of the total revenue, external and internal, of all segments; or100 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) itssegmentresult,whetherprofitorloss,is10%ormoreofthecombine dresultofallsegmentsinprofit
or the combined result of all segments in loss, whichever is the greater in a bsolute amount; or
(c) its assets are 10 % or more of the total assets of all segments.
36. If an internally reported segment is below all of the thresholds of sign ificance in paragraph 35:
(a) that segment may be designated as a reportable segment despite its size ;
(b) ifnotdesignatedasareportablesegmentdespiteitssize,thatsegmen tmaybecombinedintoaseparately
reportable segment with one or more other similar internally reported seg ment(s) that are also below all
ofthethresholdsofsignificanceinparagraph35(twoormorebusinessseg mentsorgeographicalsegments
are similar if they share a majority of the factors in the appropriate defin ition in paragraph 9); and
(c) ifthatsegmentisnotseparatelyreportedorcombined,itshouldbeinc ludedasanunallocatedreconciling
item.
37. Iftotalexternalrevenueattributabletoreportablesegmentsconsti tuteslessthan75%ofthetotalconsolidated
orenterpriserevenue,additionalsegmentsshouldbeidentifiedasrepor tablesegments,eveniftheydonotmeet
the10%thresholdsinparagraph35,untilatleast75%oftotalconsolidate dorenterpriserevenueisincluded
in reportable segments.
38.The10%thresholdsinthisStandardarenotintendedtobeaguidefordeterm iningmaterialityforanyaspect
of financial reporting other than identifying reportable business and ge ographical segments.
39.Bylimitingreportablesegmentstothosethatearnamajorityoftheirreve nuefromsalestoexternalcustomers,
this Standard does not require that the different stages of vertically int egrated operations be identified as
separate business segments. However, in some industries, current practi ce is to report certain vertically
integrated activities as separate business segments even if they do not ge nerate significant external sales
revenue. For instance, many international oil companies report their ups tream activities (exploration and
production) and their downstream activities (refining and marketing) as separate business segments even if
most or all of the upstream product (crude petroleum) is transferred inter nally to the enterprise’s refining
operation.
40.This Standard encourages, but does not require, the voluntary reporting o f vertically integrated activities as
separate segments, with appropriate description including disclosure o f the basis of pricing inter-segment
transfers as required by paragraph 75.
41. If an enterprise’s internal reporting system treats vertically integ rated activities as separate segments and the
enterprise does not choose to report them externally as business segments , the selling segment should be
combinedintothebuyingsegment(s)inidentifyingexternallyreportabl ebusinesssegmentsunlessthereisno
reasonablebasisfordoingso,inwhichcasethesellingsegmentwouldbein cludedasanunallocatedreconciling
item.
42. A segment identified as a reportable segment in the immediately preced ing period because it satisfied the
relevant 10 % thresholds should continue to be a reportable segment for the current period notwithstanding
thatitsrevenue,result,andassetsallnolongerexceedthe10%threshold s,ifthemanagementoftheenterprise
judges the segment to be of continuing significance.
43. If a segment is identified as a reportable segment in the current period because it satisfies the relevant 10 %
thresholds,priorperiodsegmentdatathatispresentedforcomparativep urposesshouldberestatedtoreflect
the newly reportable segment as a separate segment, even if that segment di d not satisfy the 10 % thresholds
in the prior period, unless it is impracticable to do so.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 101
SEGMENT ACCOUNTING POLICIES
44. Segment information should be prepared in conformity with the account ing policies adopted for preparing
and presenting the financial statements of the consolidated group or ente rprise.
45.There is a presumption that the accounting policies that the directors and management of an enterprise have
chosentouse,inpreparingitsconsolidatedorenterprise-widefinancia lstatements,arethosethatthedirectors
and management believe are the most appropriate for external reporting pu rposes. Since the purpose of
segment information is to help users of financial statements better under stand and make more informed
judgementsabouttheenterpriseasawhole,thisStandardrequirestheuse ,inpreparingsegmentinformation,
oftheaccountingpoliciesthatthedirectorsandmanagementhavechosen. Thatdoesnotmean,however,that
theconsolidatedorenterpriseaccountingpoliciesaretobeappliedtore portablesegmentsasifthesegments
were separate stand-alone reporting entities. A detailed calculation do ne in applying a particular accounting
policy at the enterprise-wide level may be allocated to segments if there i s a reasonable basis for doing so.
Pensioncalculations,forexample,oftenaredoneforanenterpriseasawh ole,buttheenterprise-widefigures
may be allocated to segments based on salary and demographic data for the se gments.
46.This Standard does not prohibit the disclosure of additional segment info rmation that is prepared on a basis
otherthantheaccountingpoliciesadoptedfortheconsolidatedorenterp risefinancialstatementsprovidedthat
(a)theinformationisreportedinternallytotheboardofdirectorsandth echiefexecutiveofficerforpurposes
ofmakingdecisionsaboutallocatingresourcestothesegmentandassessi ngitsperformanceand(b)thebasis
of measurement for this additional information is clearly described.
47. Assetsthatarejointlyusedbytwoormoresegmentsshouldbeallocated tosegmentsif,andonlyif,theirrelated
revenues and expenses also are allocated to those segments.
48.Thewayinwhichasset,liability,revenue,andexpenseitemsareallocate dtosegmentsdependsonsuchfactors
as the nature of those items, the activities conducted by the segment, and t he relative autonomy of that
segment. It is not possible or appropriate to specify a single basis of allo cation that should be adopted by all
enterprises. Nor is it appropriate to force allocation of enterprise asse t, liability, revenue, and expense items
thatrelatejointlytotwoormoresegments,iftheonlybasisformakingtho seallocationsisarbitraryordifficult
to understand. At the same time, the definitions of segment revenue, segme nt expense, segment assets, and
segment liabilities are interrelated, and the resulting allocations sho uld be consistent. Therefore, jointly used
assets are allocated to segments if, and only if, their related revenues an d expenses also are allocated to those
segments. For example, an asset is included in segment assets if, and only i f, the related depreciation or
amortisation is deducted in measuring segment result.
DISCLOSURE
49.Paragraphs50to67specifythedisclosuresrequiredforreportablesegme ntsforanenterprise’sprimarysegment
reporting format. Paragraphs 68 to 72 identify the disclosures required f or an enterprise’s secondary reporting
format.Enterprisesareencouragedtopresentalloftheprimary-segment disclosuresidentifiedinparagraphs50
to67foreachreportablesecondarysegment,althoughparagraphs68to72r equireconsiderablylessdisclosure
onthesecondarybasis.Paragraphs74to83addressseveralothersegmentd isclosurematters.AppendixBtothis
Standard illustrates application of these disclosure standards.
Primary reporting format
50. The disclosure requirements in paragraphs 51 to 67 should be applied to each reportable segment based on
an enterprise’s primary reporting format.102 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
51. An enterprise should disclose segment revenue for each reportable seg ment. Segment revenue from sales to
externalcustomersandsegmentrevenuefromtransactionswithothersegm entsshouldbeseparatelyreported.
52. An enterprise should disclose segment result for each reportable segm ent.
53.Ifanenterprisecancomputesegmentnetprofitorlossorsomeothermeasur eofsegmentprofitabilityother
than segment result without arbitrary allocations, reporting of such amo unt(s) is encouraged in addition to
segment result, appropriately described. If that measure is prepared on a basis other than the accounting
policies adopted for the consolidated or enterprise financial statement s, the enterprise will include in its
financial statements a clear description of the basis of measurement.
54.An example of a measure of segment performance above segment result on the i ncome statement is gross
marginonsales.Examplesofmeasuresofsegmentperformancebelowsegmen tresultontheincomestatement
are profit or loss from ordinary activities (either before or after income taxes) and net profit or loss.
55. An enterprise should disclose the total carrying amount of segment ass ets for each reportable segment.
56. An enterprise should disclose segment liabilities for each reportabl e segment.
57. An enterprise should disclose the total cost incurred during the perio d to acquire segment assets that are
expectedtobeusedduringmorethanoneperiod(property,plant,equipmen t,andintangibleassets)foreach
reportable segment. While this sometimes is referred to as capital additi ons or capital expenditure, the
measurement required by this principle should be on an accrual basis, not a cash basis.
58. An enterprise should disclose the total amount of expense included in s egment result for depreciation and
amortisation of segment assets for the period for each reportable segment .
59. An enterprise is encouraged, but not required to disclose the nature an d amount of any items of segment
revenue and segment expense that are of such size, nature, or incidence tha t their disclosure is relevant to
explain the performance of each reportable segment for the period.
60.IAS8requiresthat“whenitemsofincomeorexpensewithinprofitorlossfr omordinaryactivitiesareofsuch
size, nature, or incidence that their disclosure is relevant to explain th e performance of the enterprise for the
period, the nature and amount of such items should be disclosed separately ”. IAS 8 offers a number of
examples, including write-downs of inventories and property, plant, and equipment, provisions for
restructurings, disposals of property, plant, and equipment and long-te rm investments, discontinued
operations, litigation settlements, and reversals of provisions. Parag raph 59 is not intended to change the
classificationofanysuchitemsofrevenueorexpensefromordinarytoext raordinary(asdefinedinIAS8)or
tochangethemeasurementofsuchitems.Thedisclosureencouragedbythat paragraph,however,doeschange
thelevelatwhichthesignificanceofsuchitemsisevaluatedfordisclosu repurposesfromtheenterpriselevel
to the segment level.
61. Anenterpriseshoulddisclose,foreachreportablesegment,thetotal amountofsignificantnon-cashexpenses,
otherthandepreciationandamortisationforwhichseparatedisclosurei srequiredbyparagraph58,thatwere
included in segment expense and, therefore, deducted in measuring segmen t result.
62.IAS 7 requires that an enterprise present a cash flow statement that separa tely reports cash flows from
operating, investing, and financing activities. IAS 7 notes that disclos ing cash flow information for each
reportable industry and geographical segment is relevant to understandi ng the enterprise’s overall financial
position, liquidity, and cash flows. IAS 7 encourages the disclosure of su ch information. This Standard also
encourages the segment cash flow disclosures that are encouraged by IAS 7. Additionally, it encourages
disclosure of significant non-cash revenues that were included in segmen t revenue and, therefore, added in
measuring segment result.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 103
63. An enterprise that provides the segment cash flow disclosures that are encouraged by IAS 7 need not also
disclose depreciation and amortisation expense pursuant to paragraph 58 or non-cash expenses pursuant to
paragraph 61.
64. An enterprise should disclose, for each reportable segment, the aggre gate of the enterprise’s share of the net
profit or loss of associates, joint ventures, or other investments accoun ted for under the equity method if
substantially all of those associates’ operations are within that single segment.
65.Whileasingleaggregateamountisdisclosedpursuanttotheprecedingpar agraph,eachassociate,jointventure,
or other equity method investment is assessed individually to determine w hether its operations are
substantially all within a segment.
66. If an enterprise’s aggregate share of the net profit or loss of associat es, joint ventures, or other investments
accountedforundertheequitymethodisdisclosedbyreportablesegment, theaggregateinvestmentsinthose
associates and joint ventures should also be disclosed by reportable segm ent.
67. Anenterpriseshouldpresentareconciliationbetweentheinformatio ndisclosedforreportablesegmentsand
the aggregated information in the consolidated or enterprise financial s tatements. In presenting the
reconciliation,segmentrevenueshouldbereconciledtoenterprisereve nuefromexternalcustomers(including
disclosure of the amount of enterprise revenue from external customers no t included in any segment’s
revenue);segmentresultsshouldbereconciledtoacomparablemeasureof enterpriseoperatingprofitorloss
aswellastoenterprisenetprofitorloss;segmentassetsshouldbereconc iledtoenterpriseassets;andsegment
liabilities should be reconciled to enterprise liabilities.
Secondary segment information
68.Paragraphs 50 to 67 identify the disclosure requirements to be applied to e ach reportable segment based on
an enterprise’s primary reporting format. Paragraphs 69 to 72 identify th e disclosure requirements to be
applied to each reportable segment based on an enterprise’s secondary rep orting format, as follows:
(a) if an enterprise’s primary format is business segments, the required s econdary-format disclosures are
identified in paragraph 69;
(b) if an enterprise’s primary format is geographical segments based on lo cation of assets (where the
enterprise’s products are produced or where its service delivery operati ons are based), the required
secondary-format disclosures are identified in paragraphs 70 and 71;
(c) if an enterprise’s primary format is geographical segments based on th e location of its customers (where
its products are sold or services are rendered), the required secondary-f ormat disclosures are identified in
paragraphs 70 and 72.
69. Ifanenterprise’sprimaryformatforreportingsegmentinformationi sbusinesssegments,itshouldalsoreport
the following information:
(a) segment revenue from external customers by geographical area based on the geographical location of its
customers,foreachgeographicalsegmentwhoserevenuefromsalestoexte rnalcustomersis10%ormore
of total enterprise revenue from sales to all external customers;
(b) the total carrying amount of segment assets by geographical location o f assets, for each geographical
segment whose segment assets are 10 % or more of the total assets of all geogr aphical segments; and104 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) thetotalcostincurredduringtheperiodtoacquiresegmentassetstha tareexpectedtobeusedduringmore
thanoneperiod(property,plant,equipment,andintangibleassets)byge ographicallocationofassets,for
each geographical segment whose segment assets are 10 % or more of the total assets of all geographical
segments.
70. Ifanenterprise’sprimaryformatforreportingsegmentinformationi sgeographicalsegments(whetherbased
on location of assets or location of customers), it should also report the f ollowing segment information for
each business segment whose revenue from sales to external customers is 10 % or more of total enterprise
revenue from sales to all external customers or whose segment assets are 10 % or more of the total assets of
all business segments:
(a) segment revenue from external customers;
(b) the total carrying amount of segment assets; and(c) thetotalcostincurredduringtheperiodtoacquiresegmentassetstha tareexpectedtobeusedduringmore
than one period (property, plant, equipment, and intangible assets).
71. If an enterprise’s primary format for reporting segment information i s geographical segments that are based
on location of assets, and if the location of its customers is different fro m the location of its assets, then the
enterpriseshouldalsoreportrevenuefromsalestoexternalcustomersfo reachcustomer-basedgeographical
segmentwhoserevenuefromsalestoexternalcustomersis10%ormoreoftot alenterpriserevenuefromsales
to all external customers.
72. If an enterprise’s primary format for reporting segment information i s geographical segments that are based
on location of customers, and if the enterprise’s assets are located in dif ferent geographical areas from its
customers, then the enterprise should also report the following segment i nformation for each asset-based
geographicalsegmentwhoserevenuefromsalestoexternalcustomersorse gmentassetsare10%ormoreof
related consolidated or total enterprise amounts:
(a) the total carrying amount of segment assets by geographical location o f the assets; and
(b) thetotalcostincurredduringtheperiodtoacquiresegmentassetstha tareexpectedtobeusedduringmore
than one period (property, plant, equipment, and intangible assets) by lo cation of the assets.
Illustrative segment disclosures
73.Appendix B to this Standard presents an illustration of the disclosures fo r primary and secondary reporting
formats that are required by this Standard.
Other disclosure matters
74. Ifabusinesssegmentorgeographicalsegmentforwhichinformationis reportedtotheboardofdirectorsand
chiefexecutiveofficerisnotareportablesegmentbecauseitearnsamajo rityofitsrevenuefromsalestoother
segments, but none the less its revenue from sales to external customers is 10 % or more of total enterprise
revenuefromsalestoallexternalcustomers,theenterpriseshoulddiscl osethatfactandtheamountsofrevenue
from (a) sales to external customers and (b) internal sales to other segmen ts.
75. In measuring and reporting segment revenue from transactions with oth er segments, inter-segment transfers
shouldbemeasuredonthebasisthattheenterpriseactuallyusedtopricet hosetransfers.Thebasisofpricing
inter-segment transfers and any change therein should be disclosed in the financial statements.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 105
76. Changes in accounting policies adopted for segment reporting that hav e a material effect on segment
information should be disclosed, and prior period segment information pr esented for comparative purposes
shouldberestatedunlessitisimpracticabletodoso.Suchdisclosuresho uldincludeadescriptionofthenature
of the change, the reasons for the change, the fact that comparative inform ation has been restated or that it
isimpracticabletodoso,andthefinancialeffectofthechange,ifitisre asonablydeterminable.Ifanenterprise
changestheidentificationofitssegmentsanditdoesnotrestatepriorpe riodsegmentinformationonthenew
basis because it is impracticable to do so, then for the purpose of comparis on the enterprise should report
segment data for both the old and the new bases of segmentation in the year in which it changes the
identification of its segments.
77.Changesinaccountingpoliciesadoptedbytheenterprisearedealtwithin IAS8.IAS8requiresthatchanges
in accounting policy should be made only if required by statute, or by an acc ounting standard-setting body,
or if the change will result in a more appropriate presentation of events or transactions in the financial
statements of the enterprise.
78.Changes in accounting policies adopted at the enterprise level that affec t segment information are dealt with
inaccordancewithIAS8.UnlessanewInternationalAccountingStandards pecifiesotherwise,IAS8requires
that a change in accounting policy should be applied retrospectively and t hat prior period information be
restatedunlessitisimpracticabletodoso(benchmarktreatment)orthat thecumulativeadjustmentresulting
from the change be included in determining the enterprise’s net profit or l oss for the current period (allowed
alternative treatment). If the benchmark treatment is followed, prior pe riod segment information will be
restated. If the allowed alternative is followed, the cumulative adjustm ent that is included in determining the
enterprise’s net profit or loss is included in segment result if it is an ope rating item that can be attributed or
reasonably allocated to segments. In the latter case, IAS 8 may require sep arate disclosure if its size, nature,
orincidenceissuchthatthedisclosureisrelevanttoexplaintheperform anceoftheenterprisefortheperiod.
79.Some changes in accounting policies relate specifically to segment repor ting. Examples include changes in
identification of segments and changes in the basis for allocating revenu es and expenses to segments. Such
changes can have a significant impact on the segment information reported but will not change aggregate
financial information reported for the enterprise. To enable users to und erstand the changes and to assess
trends,priorperiodsegmentinformationthatisincludedinthefinancia lstatementsforcomparativepurposes
is restated, if practicable, to reflect the new accounting policy.
80.Paragraph 75 requires that, for segment reporting purposes, inter-segme nt transfers should be measured on
the basis that the enterprise actually used to price those transfers. If an enterprise changes the method that it
actuallyusestopriceinter-segmenttransfers,thatisnotachangeinacc ountingpolicyforwhichpriorperiod
segmentdatashouldberestatedpursuanttoparagraph76.However,paragr aph75requiresdisclosureofthe
change.
81. An enterprise should indicate the types of products and services inclu ded in each reported business segment
and indicate the composition of each reported geographical segment, both primary and secondary, if not
otherwise disclosed in the financial statements or elsewhere in the finan cial report.
82.To assess the impact of such matters as shifts in demand, changes in the pric e of inputs or other factors of
production,andthedevelopmentofalternativeproductsandprocesseson abusinesssegment,itisnecessary
toknowtheactivitiesencompassedbythatsegment.Similarly,toassesst heimpactofchangesintheeconomic
andpoliticalenvironmentontherisksandratesofreturnsofageographic alsegment,itisimportanttoknow
the composition of that geographical segment.106 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
83.Previously reported segments that no longer satisfy the quantitative thr esholds are not reported separately.
They may no longer satisfy those thresholds, for example, because of a decl ine in demand or a change in
managementstrategyorbecauseapartoftheoperationsofthesegmenthasb eensoldorcombinedwithother
segments. An explanation of the reasons why a previously reported segment is no longer reported may also
be useful in confirming expectations regarding declining markets and cha nges in enterprise strategies.
EFFECTIVE DATE
84. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 July 1998. Earlier application is encouraged. If an enterpris e applies this Standard for financial
statementscoveringperiodsbeginningbefore1July1998insteadoftheor iginalIAS14,theenterpriseshould
disclosethatfact.Iffinancialstatementsincludecomparativeinforma tionforperiodspriortotheeffectivedate
orearliervoluntaryadoptionofthisStandard,restatementofsegmentda taincludedthereintoconformtothe
provisionsofthisStandardisrequiredunlessitisnotpracticabletodos o,inwhichcasetheenterpriseshould
disclose that fact.
INTERNATIONAL ACCOUNTING STANDARD IAS 15
(REFORMATTED 1994)
Information reflecting the effects of changing prices
ThisreformattedInternationalAccountingStandardsupersedestheStan dardoriginallyapprovedbytheBoardinJune
1981. It is presented in the revised format adopted for International Acco unting Standards in 1991 onwards. No
substantive changes have been made to the original approved text. Certain terminology has been changed to bring
it into line with current IASC practice.
CONTENTS
Paragraphs
Board Statement October 1989
Scope 108
Explanation 108
Responding to changing prices 108General purchasing power approach 109Current cost approach 109
Current status 110
Minimum disclosures 110
Other disclosures 111
Effective date 111
BOARD STATEMENT OCTOBER 1989
At its meeting in October 1989, the Board of IASC approved the following sta tement to be added to IAS 15,
information reflecting the effects of changing prices:13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 107
“The international consensus on the disclosure of information reflectin g the effects of changing prices that was
anticipatedwhenIAS15wasissuedhasnotbeenreached.Asaresult,theBoa rdofIASChasdecidedthatenterprises
need not disclose the information required by IAS 15 in order that their fin ancial statements conform with
International Accounting Standards. However, the Board encourages ente rprises to present such information and
urges those that do to disclose the items required by IAS 15”.
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in reflecting the effects of changing pr ices on the measurements used in the
determination of an enterprise’s results of operation and financial posi tion.
2.This International Accounting Standard supersedes IAS 6, accounting res ponses to changing prices.
3.ThisStandardappliestoenterpriseswhoselevelsofrevenues,profit,as setsoremploymentaresignificantinthe
economic environment in which they operate. When both parent company and c onsolidated financial
statements are presented, the information called for by this Standard nee d only be presented on the basis of
consolidated information.
4.TheinformationcalledforbythisStandardisnotrequiredforasubsidiar yoperatinginthecountryofdomicile
of its parent if consolidated information on this basis is presented by the parent. For subsidiaries operating in
a country other than the country of domicile of the parent, the information called for by this Standard is only
required when it is accepted practice for similar information to be presen ted by enterprises of economic
significance in that country.
5.Presentation of information reflecting the effects of changing prices is encouraged for other entities in the
interest of promoting more informative financial reporting.
EXPLANATION
6.Prices change over time as the result of various specific or general econom ic and social forces. Specific forces
such as changes in supply and demand and technological changes may cause in dividual prices to increase or
decreasesignificantlyandindependentlyofeachother.Inaddition,gen eralforcesmayresultinachangeinthe
general level of prices and therefore in the general purchasing power of mo ney.
7.In most countries financial statements are prepared on the historical cos t basis of accounting without regard
eithertochangesinthegenerallevelofpricesortochangesinspecificpr icesofassetsheld,excepttotheextent
that property, plant and equipment may have been revalued or inventories o r other current assets reduced to
net realisable value. The information required by this Standard is design ed to make users of an enterprise’s
financialstatementsawareoftheeffectsofchangingpricesontheresult sofitsoperations.Financialstatements,
however, whether prepared under the historical cost method or under a meth od that reflects the effects of
changing prices, are not intended to indicate directly the value of the ent erprise as a whole.
RESPONDING TO CHANGING PRICES
8. Enterprises to which this Standard applies should present information disclosing the items set out in
paragraphs 21 to 23 using an accounting method reflecting the effects of ch anging prices.108 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
9.Financialinformationintendedasaresponsetotheeffectsofchangingpr icesispreparedinanumberofways.
Onewayshowsfinancialinformationintermsofgeneralpurchasingpower. Anotherwayshowscurrentcost
in place of historical cost, recognising changes in specific prices of ass ets. A third way combines features of
both these methods.
10.Underlyingtheseresponsesaretwobasicapproachestothedetermination ofincome.Onerecognisesincome
afterthegeneralpurchasingpoweroftheshareholders’equityintheente rprisehasbeenmaintained.Theother
recognises income after the operating capacity of the enterprise has been maintained, and may or may not
include a general price level adjustment.
General purchasing power approach
11.The general purchasing power approach involves the restatement of some or all of the items in the financial
statementsforchangesinthegeneralpricelevel.Proposalsonthissubje ctemphasisethatgeneralpurchasing
power restatements change the unit of account but do not change the underly ing measurement bases. Under
thisapproach,incomenormallyreflectstheeffects,usinganappropriat eindex,ofgeneralpricelevelchanges
on depreciation, cost of sales and net monetary items and is reported after the general purchasing power of
the shareholders’ equity in the enterprise has been maintained.
Current cost approach
12.The current cost approach is found in a number of different methods. In gene ral, these use replacement cost
as the primary measurement basis. If, however, replacement cost is higher than both net realisable value and
present value, the higher of net realisable value and present value is usua lly used as the measurement basis.
13.Thereplacementcostofaspecificassetisnormallyderivedfromthecurre ntacquisitioncostofasimilarasset,
neworused,orofanequivalentproductivecapacityorservicepotential. Netrealisablevalueusuallyrepresents
the net current selling price of the asset. Present value represents a curr ent estimate of future net receipts
attributable to the asset, appropriately discounted.
14.Specific price indices are often used as a means to determine current costs for items, particularly if no recent
transaction involving those items has occurred, no price lists are availa ble or the use of price lists is not
practical.
15.Currentcostmethodsgenerallyrequirerecognitionoftheeffectsondepr eciationandcostofsalesofchanges
inpricesspecifictotheenterprise.Mostsuchmethodsalsorequiretheap plicationofsomeformofadjustments
which have in common a general recognition of the interaction between chan ging prices and the financing
of an enterprise. As discussed in paragraphs 16 to 18, opinions differ on th e form these adjustments should
take.
16.Somecurrentcostmethodsrequireanadjustmentreflectingtheeffectsof changingpricesonallnetmonetary
items, including long-term liabilities, leading to a loss from holding ne t monetary assets or to a gain from
having net monetary liabilities when prices are rising, and vice versa. Ot her methods limit this adjustment to
the monetary assets and liabilities included in the working capital of the enterprise. Both types of adjustment
recognisethatnotonlynon-monetaryassetsbutalsomonetaryitemsareim portantelementsoftheoperating
capacityoftheenterprise.Anormalfeatureofthecurrentcostmethodsde scribedaboveisthattheyrecognise
income after the operating capacity of the enterprise has been maintained .
17.Another view is that it is unnecessary to recognise in the income statement the additional replacement cost
of assets to the extent that they are financed by borrowing. Methods based o n this view report income after
theportionoftheenterprise’soperatingcapacitythatisfinancedbyits shareholdershasbeenmaintained.This
maybeachieved,forexample,byreducingthetotaloftheadjustmentforde preciation,costofsales,and,where
themethodrequiresit,monetaryworkingcapital,intheproportionthatf inancebyborrowingbearstofinance
by the total of borrowing and equity capital.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 109
18.Some current cost methods apply a general price level index to the amount of shareholders’ interests. This
indicatestheextenttowhichshareholders’equityintheenterprisehasb eenmaintainedintermsofthegeneral
purchasingpowerwhentheincreaseinthereplacementcostoftheassetsar isingduringtheperiodislessthan
the decrease in the purchasing power of the shareholders’ interests durin g the same period. Sometimes this
calculation is merely noted to enable a comparison to be made between net as sets in terms of general
purchasingpowerandnetassetsintermsofcurrentcosts.Underothermeth ods,whichrecogniseincomeafter
the general purchasing power of shareholders’ equity in the enterprise ha s been maintained, the difference
between the two net assets figures is treated as a gain or loss accruing to th e shareholders.
Current status
19.Whilefinancialinformationissometimesprovidedusingthevariousmeth odsforreflectingthechangingprices
described above, either in primary or supplementary financial statement s, there is not yet an international
consensus on the subject. Consequently, the International Accounting St andards Committee believes that
further experimentation is necessary before consideration can be given t o requiring enterprises to prepare
primary financial statements using a comprehensive and uniform system fo r reflecting changing prices.
Meanwhile,evolutionofthesubjectwouldbeassistedifenterprisesthat presentprimaryfinancialstatements
on the historical cost basis also provide supplementary information refl ecting the effects of price changes.
20.Thereisavarietyofproposalsastotheitemstobeincludedinsuchinforma tion,rangingfromafewincome
statement items to extensive income statement and balance sheet disclosu res. It is desirable that there be an
internationally established minimum of items to be included in the inform ation.
MINIMUM DISCLOSURES
21. The items to be presented are:
(a) theamountoftheadjustmenttoortheadjustedamountofdepreciationo fproperty,plantandequipment;
(b) the amount of the adjustment to or the adjusted amount of cost of sales;
(c) the adjustments relating to monetary items, the effect of borrowing, o r equity interests when such
adjustmentshavebeentakenintoaccountindeterminingincomeunderthea ccountingmethodadopted;
and
(d) the overall effect on results of the adjustments described in (a) and (b ) and, where appropriate, (c), as well
asanyotheritemsreflectingtheeffectsofchangingpricesthatarerepor tedundertheaccountingmethod
adopted.
22. Whenacurrentcostmethodisadoptedthecurrentcostofproperty,plan tandequipment,andofinventories,
should be disclosed.
23. Enterprisesshoulddescribethemethodsadoptedtocomputetheinform ationcalledforinparagraphs21and
22, including the nature of any indices used.
24. The information required by paragraphs 21 to 23 should be provided on a s upplementary basis unless such
information is presented in the primary financial statements.
25.In most countries, such information is supplementary to, but not a part of, the primary financial statements.
ThisStandarddoesnotapplytotheaccountingandreportingpoliciesrequ iredtobeusedbyanenterprisein
the preparation of its primary financial statements, unless those financ ial statements are presented on a basis
that reflects the effects of changing prices.110 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
OTHER DISCLOSURES
26.Enterprisesareencouragedtoprovideadditionaldisclosures,andinpar ticularadiscussionofthesignificance
of the information in the circumstances of the enterprise. Disclosure of a ny adjustments to tax provisions or
tax balances is usually helpful.
EFFECTIVE DATE
27. This International Accounting Standard supersedes IAS 6, accounting responses to changing prices, and
becomes operative for financial statements covering periods beginning o n or after 1 January 1983.
INTERNATIONAL ACCOUNTING STANDARD IAS 16
(REVISED 1998)
Property, plant and equipment
IAS 16, accounting for property, plant and equipment, was approved in Marc h 1982.
In December 1993, IAS 16 was revised as part of the project on Comparability and improvements of financial
statements. It became IAS 16, property, plant and equipment (IAS 16 (revis ed 1993)).
In July 1997, when IAS 1, presentation of financial statements, was approv ed, paragraph 66(e) of IAS 16 (revised
1993) (now paragraph 60(e) of this Standard) was amended.
InAprilandJuly1998,variousparagraphsofIAS16(revised1993)wererev isedtobeconsistentwithIAS22(revised
1998), business combinations, IAS 36, impairment of assets, and IAS 37, pr ovisions, contingent liabilities and
contingent assets. The revised Standard (IAS 16 (revised 1998)) became op erative for annual financial statements
covering periods beginning on or after 1 July 1999.In April 2000, paragraph 4 was amended by IAS 40, investment property. IAS 4 0 became operative for annual
financial statements covering periods beginning on or after 1 January 200 1.
InJanuary2001,paragraph2wasamendedbyIAS41,Agriculture.IAS41isop erativeforannualfinancialstatements
covering periods beginning on or after 1 January 2003.
The following SIC interpretations relate to IAS 16:
— SIC-14: property, plant and equipment — compensation for the impairment or loss of items.
— SIC-23: property, plant and equipment — major inspection or overhaul cos ts.
CONTENTS
Paragraphs
Objective 112
Scope 112
Definitions 113
Recognition of property, plant and equipment 113
Initial measurement of property, plant and equipment 114Components of cost 11413/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 111
Exchanges of assets 115
Subsequent expenditure 115
Measurement subsequent to initial Recognition 116
Benchmark treatment 116
Allowed alternative treatment 116Revaluations 116
Depreciation 118
Review of useful life 119
Review of depreciation method 119Recoverability of the carrying amount — impairment losses 119Retirements and disposals 120
Disclosure 120
Effective date 122
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment fo r property, plant and equipment. The
principal issues in accounting for property, plant and equipment are the t iming of recognition of the assets, the
determination of their carrying amounts and the depreciation charges to b e recognised in relation to them.
This Standard requires an item of property, plant and equipment to be recog nised as an asset when it satisfies the
definition and recognition criteria for an asset in the framework for the p reparation and presentation of financial
statements.
SCOPE
1.This Standard should be applied in accounting for property, plant and equi pment except when another
International Accounting Standard requires or permits a different accou nting treatment.
2. This Standard does not apply to:
(a) biological assets related to agricultural activity (see IAS 41, agric ulture); and
(b) mineralrights,theexplorationforandextractionofminerals,oil,n aturalgasandsimilarnon-regenerative
resources.
However,thisStandarddoesapplytoproperty,plantandequipmentusedto developormaintaintheactivities
or assets covered in (a) or (b) but separable from those activities or asset s.
3. In some circumstances International Accounting Standards permit the i nitial recognition of the carrying
amount of property, plant and equipment to be determined using an approach different from that prescribed
in this Standard. For example, IAS 22 (revised 1998), business combinatio ns, requires property, plant and
equipmentacquiredinabusinesscombinationtobemeasuredinitiallyatf airvalueevenwhenitexceedscost.
However, in such cases all other aspects of the accounting treatment for th ese assets, including depreciation,
are determined by the requirements of this Standard.112 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4. An enterprise applies IAS 40, investment property, rather than this Sta ndard to its investment property. An
enterprise applies this Standard to property being constructed or develo ped for future use as investment
property.Oncetheconstructionordevelopmentiscomplete,theenterpri seappliesIAS40.IAS40alsoapplies
to existing investment property that is being redeveloped for continued f uture use as investment property.
5.This Standard does not deal with certain aspects of the application of a com prehensive system reflecting the
effectsofchangingprices(seeIAS15,informationreflectingtheeffect sofchangingprices,andIAS29,financial
reportinginhyperinflationaryeconomies).However,enterprisesapply ingsuchasystemarerequiredtocomply
with all aspects of this Standard, except for those that deal with the measu rement of property, plant and
equipment subsequent to its initial recognition.
DEFINITIONS
6. The following terms are used in this Standard with the meanings specifie d:
Property, plant and equipment are tangible assets that:
(a) are held by an enterprise for use in the production or supply of goods or s ervices, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciableamountisthecostofanasset,orotheramountsubstitutedfor costinthefinancialstatements,less
its residual value.Useful life is either:(a) the period of time over which an asset is expected to be used by the enterp rise; or
(b) the number of production or similar units expected to be obtained from t he asset by the enterprise.
Costistheamountofcashorcashequivalentspaidorthefairvalueoftheot herconsiderationgiventoacquire
an asset at the time of its acquisition or construction.Residual value is the net amount which the enterprise expects to obtain for an asset at the end of its useful life
after deducting the expected costs of disposal.Fair value is the amount for which an asset could be exchanged between knowl edgeable, willing parties in an
arm’s length transaction.An impairment loss is the amount by which the carrying amount of an asset exc eeds its recoverable amount.
Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any
accumulated depreciation and accumulated impairment losses thereon.
RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT
7. An item of property, plant and equipment should be recognised as an asset when:
(a) it is probable that future economic benefits associated with the asset will flow to the enterprise; and
(b) the cost of the asset to the enterprise can be measured reliably.
8.Property, plant and equipment is often a major portion of the total assets o f an enterprise, and therefore is
significant in the presentation of its financial position. Furthermore, the determination of whether an
expenditure represents an asset or an expense can have a significant effec t on an enterprise’s reported results
of operations.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 113
9. In determining whether an item satisfies the first criterion for recogn ition, an enterprise needs to assess the
degree of certainty attaching to the flow of future economic benefits on th e basis of the available evidence at
the time of initial recognition. Existence of sufficient certainty that t he future economic benefits will flow to
the enterprise necessitates an assurance that the enterprise will receiv e the rewards attaching to the asset and
will undertake the associated risks. This assurance is usually only avail able when the risks and rewards have
passedtotheenterprise.Beforethisoccurs,thetransactiontoacquiret heassetcanusuallybecancelledwithout
significant penalty and, therefore, the asset is not recognised.
10.The second criterion for recognition is usually readily satisfied becaus e the exchange transaction evidencing
the purchase of the asset identifies its cost. In the case of a self-constru cted asset, a reliable measurement of
the cost can be made from the transactions with parties external to the ente rprise for the acquisition of the
materials, labour and other inputs used during the construction process.
11.In identifying what constitutes a separate item of property, plant and equ ipment, judgement is required in
applying the criteria in the definition to specific circumstances or spec ific types of enterprises. It may be
appropriate to aggregate individually insignificant items, such as moul ds, tools and dies, and to apply the
criteria to the aggregate value. Most spare parts and servicing equipment are usually carried as inventory and
recognised as an expense as consumed. However, major spare parts and stand -by equipment qualify as
property, plant and equipment when the enterprise expects to use them duri ng more than one period.
Similarly,ifthesparepartsandservicingequipmentcanbeusedonlyinco nnectionwithanitemofproperty,
plant and equipment and their use is expected to be irregular, they are acco unted for as property, plant and
equipment and are depreciated over a time period not exceeding the useful l ife of the related asset.
12.Incertaincircumstances,itisappropriatetoallocatethetotalexpendi tureonanassettoitscomponentparts
andaccountforeachcomponentseparately.Thisisthecasewhenthecompon entassetshavedifferentuseful
livesorprovidebenefitstotheenterpriseinadifferentpatternthusnec essitatinguseofdifferentdepreciation
rates and methods. For example, an aircraft and its engines need to be treat ed as separate depreciable assets
if they have different useful lives.
13.Property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such
property, plant and equipment, while not directly increasing the future e conomic benefits of any particular
existingitemofproperty,plantandequipmentmaybenecessaryinorderfo rtheenterprisetoobtainthefuture
economic benefits from its other assets. When this is the case, such acquis itions of property, plant and
equipment qualify for recognition as assets, in that they enable future ec onomic benefits from related assets
tobederivedbytheenterpriseinexcessofwhatitcouldderiveiftheyhadn otbeenacquired.However,such
assets are only recognised to the extent that the resulting carrying amoun t of such an asset and related assets
does not exceed the total recoverable amount of that asset and its related a ssets. For example, a chemical
manufacturer may have to install certain new chemical handling processes in order to comply with
environmental requirements on the production and storage of dangerous ch emicals; related plant
enhancements are recognised as an asset to the extent they are recoverable because, without them, the
enterprise is unable to manufacture and sell chemicals.
INITIAL MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT
14.An item of property, plant and equipment which qualifies for recognition a s an asset should initially be
measured at its cost.
Components of cost
15.The cost of an item of property, plant and equipment comprises its purchase price, including import duties
and non-refundable purchase taxes, and any directly attributable costs o f bringing the asset to working
condition for its intended use; any trade discounts and rebates are deduct ed in arriving at the purchase price.
Examples of directly attributable costs are:
(a) the cost of site preparation;
(b) initial delivery and handling costs;114 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) installation costs;
(d) professional fees such as for architects and engineers; and(e) the estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is
recognised as a provision under IAS 37, provisions, contingent liabiliti es and contingent assets.
16.
Whenpaymentforanitemofproperty,plantandequipmentisdeferredbeyon dnormalcreditterms,itscost
isthecashpriceequivalent;thedifferencebetweenthisamountandtheto talpaymentsisrecognisedasinterest
expense over the period of credit unless it is capitalised in accordance wi th the allowed alternative treatment
in IAS 23, borrowing costs.
17.Administration and other general overhead costs are not a component of the cost of property, plant and
equipment unless they can be directly attributed to the acquisition of the asset or bringing the asset to its
workingcondition.Similarly,start-upandsimilarpre-productioncost sdonotformpartofthecostofanasset
unless they are necessary to bring the asset to its working condition. Init ial operating losses incurred prior to
an asset achieving planned performance are recognised as an expense.
18.The cost of a self-constructed asset is determined using the same principl es as for an acquired asset. If an
enterprisemakessimilarassetsforsaleinthenormalcourseofbusiness, thecostoftheassetisusuallythesame
asthecostofproducingtheassetsforsale(seeIAS2,inventories).There fore,anyinternalprofitsareeliminated
inarrivingatsuchcosts.Similarly,thecostofabnormalamountsofwaste dmaterial,labour,orotherresources
incurredintheproductionofaself-constructedassetisnotincludedint hecostoftheasset.IAS23establishes
criteria which need to be satisfied before interest costs can be recognise d as a component of property, plant
and equipment cost.
19.Thecostofanassetheldbyalesseeunderafinanceleaseisdeterminedusin gtheprinciplessetoutinIAS17,
leases.
20.The carrying amount of property, plant and equipment may be reduced by appl icable government grants in
accordance with IAS 20, accounting for government grants and disclosure o f government assistance.
Exchanges of assets
21.Anitemofproperty,plantandequipmentmaybeacquiredinexchangeorpart exchangeforadissimilaritem
of property, plant and equipment or other asset. The cost of such an item is m easured at the fair value of the
asset received, which is equivalent to the fair value of the asset given up a djusted by the amount of any cash
or cash equivalents transferred.
22.An item of property, plant and equipment may be acquired in exchange for a si milar asset that has a similar
useinthesamelineofbusinessandwhichhasasimilarfairvalue.Anitemof property,plantandequipment
mayalsobesoldinexchangeforanequityinterestinasimilarasset.Inbot hcases,sincetheearningsprocess
isincomplete,nogainorlossisrecognisedonthetransaction.Instead,t hecostofthenewassetisthecarrying
amount of the asset given up. However, the fair value of the asset received m ay provide evidence of an
impairmentintheassetgivenup.Underthesecircumstancestheassetgive nupiswrittendownandthiswritten
downvalueassignedtothenewasset.Examplesofexchangesofsimilarasse tsincludetheexchangeofaircraft,
hotels, service stations and other real estate properties. If other asset s such as cash are included as part of the
exchange transaction this may indicate that the items exchanged do not hav e a similar value.
SUBSEQUENT EXPENDITURE
23. Subsequentexpenditurerelatingtoanitemofproperty,plantandequi pmentthathasalreadybeenrecognised
shouldbeaddedtothecarryingamountoftheassetwhenitisprobablethatf utureeconomicbenefits,inexcess
of the originally assessed standard of performance of the existing asset, will flow to the enterprise. All other
subsequent expenditure should be recognised as an expense in the period in which it is incurred.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 115
24. Subsequentexpenditureonpropertyplantandequipmentisonlyrecogn isedasanassetwhentheexpenditure
improves the condition of the asset beyond its originally assessed standa rd of performance. Examples of
improvements which result in increased future economic benefits include :
(a) modification of an item of plant to extend its useful life, including an increase in its capacity;
(b) upgrading machine parts to achieve a substantial improvement in the qu ality of output; and
(c) adoption of new production processes enabling a substantial reductio n in previously assessed operating
costs.
25.Expenditure on repairs or maintenance of property, plant and equipment is made to restore or maintain the
future economic benefits that an enterprise can expect from the originall y assessed standard of performance
of the asset. As such, it is usually recognised as an expense when incurred. For example, the cost of servicing
oroverhaulingplantandequipmentisusuallyanexpensesinceitrestores ,ratherthanincreases,theoriginally
assessed standard of performance.
26.The appropriate accounting treatment for expenditure incurred subseque nt to the acquisition of an item of
property, plant and equipment depends on the circumstances which were tak en into account on the initial
measurementandrecognitionoftherelateditemofproperty,plantandequ ipmentandwhetherthesubsequent
expenditure is recoverable. For instance, when the carrying amount of the item of property, plant and
equipment already takes into account a loss in economic benefits, the subs equent expenditure to restore the
future economic benefits expected from the asset is capitalised provided that the carrying amount does not
exceed the recoverable amount of the asset. This is also the case when the pu rchase price of an asset already
reflects the enterprise’s obligation to incur expenditure in the future w hich is necessary to bring the asset to
itsworkingcondition.Anexampleofthismightbetheacquisitionofabuil dingrequiringrenovation.Insuch
circumstances, the subsequent expenditure is added to the carrying amoun t of the asset to the extent that it
can be recovered from future use of the asset.
27.Major components of some items of property, plant and equipment may requir e replacement at regular
intervals. For example, a furnace may require relining after a specified n umber of hours of usage or aircraft
interiors such as seats and galleys may require replacement several times during the life of the airframe. The
componentsareaccountedforasseparateassetsbecausetheyhaveusefull ivesdifferentfromthoseoftheitems
of property, plant and equipment to which they relate. Therefore, provide d the recognition criteria in
paragraph 7 are satisfied, the expenditure incurred in replacing or renew ing the component is accounted for
as the acquisition of a separate asset and the replaced asset is written off .
MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
Benchmark treatment
28. Subsequent to initial recognition as an asset, an item of property, pla nt and equipment should be carried at
its cost less any accumulated depreciation and any accumulated impairmen t losses.
Allowed alternative treatment
29. Subsequent to initial recognition as an asset, an item of property, pla nt and equipment should be carried at a
revaluedamount,beingitsfairvalueatthedateoftherevaluationlessan ysubsequentaccumulateddepreciation
and subsequent accumulated impairment losses. Revaluations should be ma de with sufficient regularity such
that the carrying amount does not differ materially from that which would b e determined using fair value at
the balance sheet date.
Revaluations
30.The fair value of land and buildings is usually its market value. This value is determined by appraisal normally
undertaken by professionally qualified valuers.116 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
31. The fair value of items of plant and equipment is usually their market va lue determined by appraisal. When
thereisnoevidenceofmarketvaluebecauseofthespecialisednatureofth eplantandequipmentandbecause
these items are rarely sold, except as part of a continuing business, they a re valued at their depreciated
replacement cost.
32.The frequency of revaluations depends upon the movements in the fair value s of the items of property, plant
and equipment being revalued. When the fair value of a revalued asset diffe rs materially from its carrying
amount, a further revaluation is necessary. Some items of property, plant and equipment may experience
significant and volatile movements in fair value thus necessitating annu al revaluation. Such frequent
revaluations are unnecessary for items of property, plant and equipment w ith only insignificant movements
in fair value. Instead, revaluation every three or five years may be suffic ient.
33.When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the
revaluation is either:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying
amountoftheassetafterrevaluationequalsitsrevaluedamount.Thismet hodisoftenusedwhenanasset
is revalued by means of an index to its depreciated replacement cost; or
(b) eliminated against the gross carrying amount of the asset and the net am ount restated to the revalued
amount of the asset. For example, this method is used for buildings which ar e revalued to their market
value.
The amount of the adjustment arising on the restatement or elimination of a ccumulated depreciation forms
partoftheincreaseordecreaseincarryingamountwhichisdealtwithinac cordancewithparagraphs37and
38.
34. Whenanitemofproperty,plantandequipmentisrevalued,theentirecl assofproperty,plantandequipment
to which that asset belongs should be revalued.
35.A class of property, plant and equipment is a grouping of assets of a similar nature and use in an enterprise’s
operations. The following are examples of separate classes:
(a) land;
(b) land and buildings;(c) machinery;(d) ships;(e) aircraft;
(f) motor vehicles;(g) furniture and fixtures; and(h) office equipment.
36.
The items within a class of property, plant and equipment are revalued simu ltaneously in order to avoid
selective revaluation of assets and the reporting of amounts in the financ ial statements which are a mixture
ofcostsandvaluesasatdifferentdates.However,aclassofassetsmayber evaluedonarollingbasisprovided
revaluationoftheclassofassetsiscompletedwithinashortperiodoftim eandprovidedtherevaluationsare
kept up to date.
37. Whenanasset’scarryingamountisincreasedasaresultofarevaluatio n,theincreaseshouldbecrediteddirectly
to equity under the heading of revaluation surplus. However, a revaluatio n increase should be recognised as
income to the extent that it reverses a revaluation decrease of the same ass et previously recognised as an
expense.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 117
38. When an asset’s carrying amount is decreased as a result of a revaluatio n, the decrease should be recognised
as an expense. However, a revaluation decrease should be charged directly against any related revaluation
surplus to the extent that the decrease does not exceed the amount held in th e revaluation surplus in respect
of that same asset.
39.The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus
isrealised.Thewholesurplusmayberealisedontheretirementordisposa loftheasset.However,someofthe
surplusmayberealisedastheassetisusedbytheenterprise;insuchacase ,theamountofthesurplusrealised
is the difference between depreciation based on the revalued carrying amo unt of the asset and depreciation
based on the asset’s original cost. The transfer from revaluation surplus to retained earnings is not made
through the income statement.
40.The effects on taxes on income, if any, resulting from the revaluation of pr operty, plant and equipment are
dealt with in IAS 12, income taxes.
DEPRECIATION
41. Thedepreciableamountofanitemofproperty,plantandequipmentshou ldbeallocatedonasystematicbasis
over its useful life. The depreciation method used should reflect the patt ern in which the asset’s economic
benefits are consumed by the enterprise. The depreciation charge for each period should be recognised as an
expense unless it is included in the carrying amount of another asset.
42.As the economic benefits embodied in an asset are consumed by the enterpris e, the carrying amount of the
assetisreducedtoreflectthisconsumption,normallybycharginganexpe nsefordepreciation.Adepreciation
charge is made even if the value of the asset exceeds its carrying amount.
43.Theeconomicbenefitsembodiedinanitemofproperty,plantandequipment areconsumedbytheenterprise
principally through the use of the asset. However, other factors such as te chnical obsolescence and wear and
tear while an asset remains idle often result in the diminution of the econo mic benefits that might have been
expected to be available from the asset. Consequently, all the following f actors need to be considered in
determining the useful life of an asset:
(a) the expected usage of the asset by the enterprise. Usage is assessed by r eference to the asset’s expected
capacity or physical output;
(b) the expected physical wear and tear, which depends on operational fact ors such as the number of shifts
forwhichtheassetistobeusedandtherepairandmaintenanceprogrammeof theenterprise,andthecare
and maintenance of the asset while idle;
(c) technical obsolescence arising from changes or improvements in produ ction, or from a change in the
market demand for the product or service output of the asset; and
(d) legal or similar limits on the use of the asset, such as the expiry dates o f related leases.
44.The useful life of an asset is defined in terms of the asset’s expected utili ty to the enterprise. The asset
management policy of an enterprise may involve the disposal of assets afte r a specified time or after
consumptionofacertainproportionoftheeconomicbenefitsembodiedint heasset.Therefore,theusefullife
ofanassetmaybeshorterthanitseconomiclife.Theestimationoftheusef ullifeofanitemofproperty,plant
and equipment is a matter of judgement based on the experience of the enterp rise with similar assets.
45.Landandbuildingsareseparableassetsandaredealtwithseparatelyfora ccountingpurposes,evenwhenthey
are acquired together. Land normally has an unlimited life and, therefore , is not depreciated. Buildings have
a limited life and, therefore, are depreciable assets. An increase in the v alue of the land on which a building
stands does not affect the determination of the useful life of the building .118 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
46.The depreciable amount of an asset is determined after deducting the resid ual value of the asset. In practice,
the residual value of an asset is often insignificant and therefore is imma terial in the calculation of the
depreciableamount.Whenthebenchmarktreatmentisadoptedandtheresid ualvalueislikelytobesignificant,
theresidualvalueisestimatedatthedateofacquisitionandisnotsubseq uentlyincreasedforchangesinprices.
However, when the allowed alternative treatment is adopted, a new estimat e is made at the date of any
subsequent revaluation of the asset. The estimate is based on the residual value prevailing at the date of the
estimate for similar assets which have reached the end of their useful live s and which have operated under
conditions similar to those in which the asset will be used.
47.Avarietyofdepreciationmethodscanbeusedtoallocatethedepreciablea mountofanassetonasystematic
basisoveritsusefullife.Thesemethodsincludethestraight-linemetho d,thediminishingbalancemethodand
thesum-of-the-unitsmethod.Straight-linedepreciationresultsinaco nstantchargeovertheusefullifeofthe
asset. The diminishing balance method results in a decreasing charge over the useful life of the asset. The
sum-of-the-unitsmethodresultsinachargebasedontheexpecteduseorou tputoftheasset.Themethodused
for an asset is selected based on the expected pattern of economic benefits and is consistently applied from
period to period unless there is a change in the expected pattern of economi c benefits from that asset.
48.Thedepreciationchargeforaperiodisusuallyrecognisedasanexpense.H owever,insomecircumstances,the
economic benefits embodied in an asset are absorbed by the enterprise in pr oducing other assets rather than
givingrisetoanexpense.Inthiscase,thedepreciationchargecomprises partofthecostoftheotherassetand
is included in its carrying amount. For example, the depreciation of manuf acturing plant and equipment is
includedinthecostsofconversionofinventories(seeIAS2,inventories ).Similarly,depreciationofproperty,
plant and equipment used for development activities may be included in the cost of an intangible asset that
is recognised under IAS 38, intangible assets.
Review of Useful Life
49. Theusefullifeofanitemofproperty,plantandequipmentshouldberev iewedperiodicallyand,ifexpectations
are significantly different from previous estimates, the depreciation c harge for the current and future periods
should be adjusted.
50.During the life of an asset it may become apparent that the estimate of the us eful life is inappropriate. For
example,theusefullifemaybeextendedbysubsequentexpenditureonthea ssetwhichimprovesthecondition
of the asset beyond its originally assessed standard of performance. Alte rnatively, technological changes or
changesinthemarketfortheproductsmayreducetheusefullifeoftheasse t.Insuchcases,theusefullifeand,
therefore, the depreciation rate is adjusted for the current and future pe riods.
51.Therepairandmaintenancepolicyoftheenterprisemayalsoaffecttheuse fullifeofanasset.Thepolicymay
result in an extension of the useful life of the asset or an increase in its re sidual value. However, the adoption
of such a policy does not negate the need to charge depreciation.
Review of depreciation method
52. The depreciation method applied to property, plant and equipment shou ld be reviewed periodically and, if
therehasbeenasignificantchangeintheexpectedpatternofeconomicben efitsfromthoseassets,themethod
should be changed to reflect the changed pattern. When such a change in depr eciation method is necessary
the change should be accounted for as a change in accounting estimate and th e depreciation charge for the
current and future periods should be adjusted.
RECOVERABILITY OF THE CARRYING AMOUNT — IMPAIRMENT LOSSES
53.To determine whether an item of property, plant and equipment is impaired, an enterprise applies IAS 36,
impairmentofassets.ThatStandardexplainshowanenterprisereviewsth ecarryingamountofitsassets,how
it determines the recoverable amount of an asset and when it recognises or r everses an impairment loss (1).
(1) See also SIC-14: property, plant and equipment — compensation for the imp airment or loss of items.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 119
54.IAS 22, business combinations, explains how to deal with an impairment los s recognised before the end of
the first annual accounting period commencing after a business combinati on that is an acquisition.
RETIREMENTS AND DISPOSALS
55. Anitemofproperty,plantandequipmentshouldbeeliminatedfromtheb alancesheetondisposalorwhen
theassetispermanentlywithdrawnfromuseandnofutureeconomicbenefit sareexpectedfromitsdisposal.
56. Gains or losses arising from the retirement or disposal of an item of pro perty, plant and equipment should
bedeterminedasthedifferencebetweentheestimatednetdisposalprocee dsandthecarryingamountofthe
asset and should be recognised as income or expense in the income statement .
57.When an item of property, plant and equipment is exchanged for a similar ass et, under the circumstances
describedinparagraph22,thecostoftheacquiredassetisequaltothecar ryingamountoftheassetdisposed
of and no gain or loss results.
58.Sale and leaseback transactions are accounted for in accordance with IAS 1 7, leases.
59.Property, plant and equipment that is retired from active use and held for d isposal is carried at its carrying
amountatthedatewhentheassetisretiredfromactiveuse.Atleastateach financialyearend,anenterprise
tests the asset for impairment under IAS 36, impairment of Assets, and reco gnises any impairment loss
accordingly.
DISCLOSURE
60. The financial statements should disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount. When more than one basis has
been used, the gross carrying amount for that basis in each category should be disclosed;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;(d) the gross carrying amount and the accumulated depreciation (aggregat ed with accumulated impairment
losses) at the beginning and end of the period;
(e) a reconciliation of the carrying amount at the beginning and end of the p eriod showing:
(i) additions;
(ii) disposals;(iii) acquisitions through business combinations;(iv) increasesordecreasesduringtheperiodresultingfromrevaluation sunderparagraphs29,37and38
and from impairment losses recognised or reversed directly in equity unde r IAS 36, impairment of
assets (if any);
(v) impairment losses recognised in the income statement during the perio d under IAS 36 (if any);
(vi) impairment losses reversed in the income statement during the period under IAS 36 (if any);
(vii) depreciation;(viii) thenetexchangedifferencesarisingonthetranslationofthefina ncialstatementsofaforeignentity;
and
(ix) other movements.120 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Comparative information is not required for the reconciliation in (e).
61. The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plan t and equipment pledged as security
for liabilities;
(b) theaccountingpolicyfortheestimatedcostsofrestoringthesiteofi temsofproperty,plantorequipment;
(c) theamountofexpenditureonaccountofproperty,plantandequipmenti nthecourseofconstruction;and
(d) the amount of commitments for the acquisition of property, plant and eq uipment.
62.Theselectionofthedepreciationmethodandtheestimationoftheusefull ifeofassetsaremattersofjudgement.
Therefore,disclosureofthemethodsadoptedandtheestimatedusefulliv esordepreciationratesprovidesusers
offinancialstatementswithinformationwhichallowsthemtoreviewthep oliciesselectedbymanagementand
enables comparisons to be made with other enterprises. For similar reason s, it is necessary to disclose the
depreciation allocated in a period and the accumulated depreciation at th e end of that period.
63.An enterprise discloses the nature and effect of a change in an accounting e stimate that has a material effect
in the current period or which is expected to have a material effect in subse quent periods in accordance with
IAS8,netprofitorlossfortheperiod,fundamentalerrorsandchangesina ccountingpolicy.Suchdisclosure
may arise from changes in estimate with respect to:
(a) residual values;
(b) theestimatedcostsofdismantlingandremovingitemsofproperty,pla ntorequipmentandrestoringthe
site;
(c) useful lives; and
(d) depreciation method.
64. Whenitemsofproperty,plantandequipmentarestatedatrevaluedamou ntsthefollowingshouldbedisclosed:
(a) the basis used to revalue the assets;(b) the effective date of the revaluation;(c) whether an independent valuer was involved;(d) the nature of any indices used to determine replacement cost;(e) thecarryingamountofeachclassofproperty,plantandequipmentthat wouldhavebeenincludedinthe
financial statements had the assets been carried under the benchmark trea tment in paragraph 28; and
(f) the revaluation surplus, indicating the movement for the period and an y restrictions on the distribution
of the balance to shareholders.
65. Anenterprisedisclosesinformationonimpairedproperty,plantande quipmentunderIAS36,impairmentof
assets, in addition to the information required by paragraph 60(e)(iv) to (vi).
66. Financial statement users also find the following information releva nt to their needs:
(a) the carrying amount of temporarily idle property, plant and equipment ;
(b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
(c) the carrying amount of property, plant and equipment retired from acti ve use and held for disposal; and
(d) when the benchmark treatment is used, the fair value of property, plant and equipment when this is
materially different from the carrying amount.
Therefore, enterprises are encouraged to disclose these amounts.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 121
EFFECTIVE DATE
67. This International Accounting Standard becomes operative for annual financial statements covering periods
beginningonorafter1July1999.Earlierapplicationisencouraged.Ifan enterpriseappliesthisStandardfor
annual financial statements covering periods beginning before 1 July 199 9, the enterprise should:
(a) disclose that fact; and
(b) adoptIAS22(revised1998),businesscombinations,IAS36,impairmen tofassets,andIAS37,provisions,
contingent liabilities and contingent assets, at the same time.
68.This Standard supersedes IAS 16, property, plant and equipment, approved in 1993.
INTERNATIONAL ACCOUNTING STANDARD IAS 17
(REVISED 1997)
Leases
ThisrevisedInternationalAccountingStandardsupersedesIAS17,accou ntingforleases,whichwasapprovedbythe
Board in a reformatted version in 1994. The revised Standard became operat ive for financial statements covering
periods beginning on or after 1 January 1999.
In April 2000, paragraphs 1, 19, 24, 45 and 48 were amended, and paragraph 48 A inserted by IAS 40, investment
property. IAS 40 is effective for annual financial statements covering pe riods beginning on or after 1 January 2001.
In January 2001, paragraphs 1, 24 and 48A were amended by IAS 41, agricultur e. IAS 41 is effective for annual
financial statements covering periods beginning on or after 1 January 200 3.
The following SIC interpretations relate to IAS 17:
— SIC-15: operating leases — incentives,— SIC-27: evaluating the substance of transactions in the legal form of a le ase.
INTRODUCTION
This Standard (“IAS 17 (revised)”) replaces IAS 17, accounting for leases (“the original IAS 17”). IAS 17 (revised) is
effective for accounting periods beginning on or after 1 January 1999.
ThisStandardsetsoutimprovementsovertheoriginalIAS17itreplacesba sedonareviewconductedinthecontext
of the limited revision that identified changes considered essential to c omplete a core set of standards acceptable for
cross-borderfundingandstock-exchangelisting.TheIASCBoardhasagre edtoundertakeamorefundamentalreform
in the area of lease accounting standards.
The major changes from the original IAS 17 are as follows:
1. The original IAS 17 defined a lease as an arrangement whereby the lessor c onveys the right to use an asset in
returnforrentpayablebyalessee.IAS17(revised)modifiesthedefiniti onbysubstitutingtheterm“rent”with
“a payment or series of payments”.122 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
2. Instipulatingthattheclassificationofleasesshouldbebasedonthee xtenttowhichrisksandrewardsincident
to ownership of a leased asset lie with the lessor or lessee, justified by th e application of the principle of
substanceoverform,theoriginalIAS17providedexamplesofsituationsa sindicatorsthataleaseisafinance
lease. IAS 17 (revised) has added additional classification indicators t o further facilitate the classification
process.
3. TheoriginalIAS17usedtheterm“usefullife”intheexamplesreferredi ntheaboveforpurposesofcomparison
totheleasetermintheclassificationprocess.IAS17(revised)usesthet erm“economiclife”,takingintoaccount
that an asset might be used by one or more users.
4. The original IAS 17 required the disclosure of contingent rents but was s ilent as to whether contingent rents
shouldbeincludedorexcludedinthecomputationofminimumleasepayment s.IAS17(revised)requiresthat
contingent rents be excluded from minimum lease payments.
5. The original IAS 17 was silent on the accounting treatment of initial dir ect costs incurred by a lessee in
negotiating and securing leasing arrangements. IAS 17 provides guidance by requiring costs that are directly
attributabletoactivitiesperformedbyalesseeforsecuringafinancele ase,tobeincludedintheamountofthe
leased asset.
6. The original IAS 17 provided a free choice of method in the allocation of f inance income by a lessor, namely
the recognition of income basing on a pattern reflecting a constant period ic rate of return based on either:
(a) the lessor’s net investment outstanding in respect of the finance leas e; or
(b) the lessor’s net cash investment outstanding in respect of the finance lease.
IAS17(revised)requiresthattherecognitionoffinanceincomeshouldbe basedreflectingaconstantperiodic
rateofreturnbasingononemethod,namelythelessor’snetinvestmentout standinginrespectofthefinance
lease.
7. IAS 17 (revised) draws reference to the International Accounting Stand ard dealing with impairment of assets
inprovidingguidanceontheneedtoassessthepossibilityofanimpairmen tofassets.TheoriginalIAS17did
not address the matter.
8. IAS 17 (revised) mandates enhanced disclosures by both lessees and less ors for operating and finance leases
through black letter lettering in comparison to the disclosure items requ ired under the original IAS 17.
New disclosures required by IAS 17 (revised) include:
(a) thetotalofminimumleasepaymentsreconciledtothepresentvaluesof leaseliabilitiesinthreeperiodic
bands: not later than one year; later than one year and not later than five ye ars; and later than five years
(required of a lessee);
(b) the total gross investment in the lease reconciled to the present value of minimum lease payments
receivableinthreeperiodicbands:notlaterthanoneyear;laterthanone yearandnotlaterthanfiveyears;
and later than five years (required of a lessor);
(c) the related finance charges in (a) and (b) above;(d) the future minimum sublease payments expected to be received under non -cancellable subleases at
balance sheet date;
(e) the accumulated allowance for uncollectible minimum lease payments r eceivable; and
(f) contingent rents recognised in income by lessors.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 123
9. The original IAS 17 included Appendices 1 to 3 which represented example s of situations in which a lease
would normally be classified as a finance lease. The appendices have been o mitted in IAS 17 (revised) in the
light of the additional indicators included therein to further clarify th e lease classification process.
10. It is noted that the provisions relating to the sale and leaseback trans actions, in particular, the requirements
involving a leaseback that is an operating lease, contain rules that presc ribe a wide range of circumstances,
based on relative amounts of fair value, carrying amount and selling price . IAS 17 (revised) includes an
appendix as further guidance in interpreting the requirements.
CONTENTS
Paragraphs
Objective 124
Scope 124
Definitions 125
Classification of leases 127
Leases in the financial statements of lessees 128
Finance leases 128
Operating leases 130
Leases in the financial statements of lessors 130Finance leases 130
Operating leases 132
Sale and leaseback transactions 133Transitional provisions 133
Effective date 133
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribe,forlesseesandlessors,th eappropriateaccountingpoliciesanddisclosure
to apply in relation to finance and operating leases.
SCOPE
1.This Standard should be applied in accounting for all leases other than:
(a) leaseagreementstoexplorefororuseminerals,oil,naturalgasandsi milarnon-regenerativeresources;and
(b) licensing agreements for such items as motion picture, video recordin gs, plays, manuscripts, patents and
copyrights.124 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
However, this Standard should not be applied to the measurement by:
(a) lessees of investment property held under finance leases (See IAS 40, i nvestment property);
(b) lessors of investment property leased out under operating leases (see IAS 40, investment property);
(c) lessees of biological assets held under finance leases (see IAS 41, agr iculture); or
(d) lessors of biological assets leased out under operating leases (see IA S 41, agriculture).
2.ThisStandardappliestoagreementsthattransfertherighttouseassetse venthoughsubstantialservicesbythe
lessor may be called for in connection with the operation or maintenance of such assets. On the other hand,
this Standard does not apply to agreements that are contracts for services that do not transfer the right to use
assets from one contracting party to the other.
DEFINITIONS
3. The following terms are used in this Standard with the meanings specifie d:
Aleaseisanagreementwherebythelessorconveystothelesseeinreturnfo rapaymentorseriesofpayments
the right to use an asset for an agreed period of time.Afinanceleaseisaleasethattransferssubstantiallyalltherisksandre wardsincidenttoownershipofanasset.
Title may or may not eventually be transferred.An operating lease is a lease other than a finance lease.A non-cancellable lease is a lease that is cancellable only:(a) upon the occurrence of some remote contingency;(b) with the permission of the lessor;(c) if the lessee enters into a new lease for the same or an equivalent asset w ith the same lessor; or
(d) upon payment by the lessee of an additional amount such that, at incepti on, continuation of the lease is
reasonably certain.
The inception of the lease is the earlier of the date of the lease agreement o r of a commitment by the parties
to the principal provisions of the lease.
Theleasetermisthenon-cancellableperiodforwhichthelesseehascontr actedtoleasetheassettogetherwith
any further terms for which the lessee has the option to continue to lease th e asset, with or without further
payment, which option at the inception of the lease it is reasonably certai n that the lessee will exercise.
Minimum lease payments are the payments over the lease term that the lessee is, or can be required, to make
excludingcontingentrent,costsforservicesandtaxestobepaidbyandre imbursedtothelessor,togetherwith:
(a) in the case of the lessee, any amounts guaranteed by the lessee or by a par ty related to the lessee; or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 125
(b) in the case of the lessor, any residual value guaranteed to the lessor by either:
(i) the lessee;
(ii) a party related to the lessee; or(iii)an independent third party financially capable of meeting this guar antee.
However, if the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower
than the fair value at the date the option becomes exercisable that, at the i nception of the lease, is reasonably
certain to be exercised, the minimum lease payments comprise the minimum p ayments payable over the lease
term and the payment required to exercise this purchase option.Fair value is the amount for which an asset could be exchanged or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.Economic life is either:
(a) the period over which an asset is expected to be economically usable by o ne or more users; or
(b) the number of production or similar units expected to be obtained from t he asset by one or more users.
Useful life is the estimated remaining period, from the beginning of the le ase term, without limitation by the
lease term, over which the economic benefits embodied in the asset are expe cted to be consumed by the
enterprise.Guaranteed residual value is:(a) inthecaseofthelessee,thatpartoftheresidualvaluewhichisguaran teedbythelesseeorbyapartyrelated
to the lessee (the amount of the guarantee being the maximum amount that cou ld, in any event, become
payable); and
(b) inthecaseofthelessor,thatpartoftheresidualvaluewhichisguaran teedbythelesseeorbyathirdparty
unrelated to the lessor who is financially capable of discharging the obli gations under the guarantee.
Unguaranteedresidualvalueisthatportionoftheresidualvalueofthele asedasset,therealisationofwhichby
the lessor is not assured or is guaranteed solely by a party related to the le ssor.
Gross investment in the lease is the aggregate of the minimum lease payment s under a finance lease from the
standpoint of the lessor and any unguaranteed residual value accruing to t he lessor.
Unearned finance income is the difference between:(a) the aggregate of the minimum lease payments under a finance lease from t he standpoint of the lessor and
any unguaranteed residual value accruing to the lessor; and
(b) the present value of (a), at the interest rate implicit in the lease.Net investment in the lease is the gross investment in the lease less unearn ed finance income.
Theinterestrateimplicitintheleaseisthediscountratethat,attheinc eptionofthelease,causestheaggregate
presentvalueof(a)theminimumleasepaymentsand(b)theunguaranteedre sidualvaluetobeequaltothefair
value of the leased asset.Thelessee’sincrementalborrowingrateofinterestistherateofinteres tthelesseewouldhavetopayonasimilar
leaseor,ifthatisnotdeterminable,theratethat,attheinceptionofthe lease,thelesseewouldincurtoborrow
over a similar term, and with a similar security, the funds necessary to pur chase the asset.126 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Contingentrentisthatportionoftheleasepaymentsthatisnotfixedinam ountbutisbasedonafactorother
thanjustthepassageoftime(e.g.,percentageofsales,amountofusage,p riceindices,marketratesofinterest).
4. The definition of a lease includes contracts for the hire of an asset whic h contain a provision giving the hirer
an option to acquire title to the asset upon the fulfilment of agreed condit ions. These contracts are sometimes
known as hire purchase contracts.
CLASSIFICATION OF LEASES
5.The classification of leases adopted in this Standard is based on the exten t to which risks and rewards incident
to ownership of a leased asset lie with the lessor or the lessee. Risks inclu de the possibilities of losses from idle
capacity or technological obsolescence and of variations in return due to changing economic conditions.
Rewardsmayberepresentedbytheexpectationofprofitableoperationove rtheasset’seconomiclifeandofgain
from appreciation in value or realisation of a residual value.
6.Aleaseisclassifiedasafinanceleaseifittransferssubstantiallyallt herisksandrewardsincidenttoownership.
A lease is classified as an operating lease if it does not transfer substant ially all the risks and rewards incident
to ownership.
7.Since the transaction between a lessor and a lessee is based on a lease agree ment common to both parties, it
is appropriate to use consistent definitions. The application of these de finitions to the differing circumstances
of the two parties may sometimes result in the same lease being classified d ifferently by lessor and lessee.
8.Whetheraleaseisafinanceleaseoranoperatingleasedependsonthesubst anceofthetransactionratherthan
the form of the contract (1). Examples of situations which would normally lead to a lease being classi fied as a
finance lease are:
(a) the lease transfers ownership of the asset to the lessee by the end of the lease term;
(b) thelesseehastheoptiontopurchasetheassetatapricewhichisexpect edtobesufficientlylowerthanthe
fairvalueatthedatetheoptionbecomesexercisablesuchthat,attheince ptionofthelease,itisreasonably
certain that the option will be exercised;
(c) the lease term is for the major part of the economic life of the asset even if title is not transferred;
(d) at the inception of the lease the present value of the minimum lease paym ents amounts to at least
substantially all of the fair value of the leased asset; and
(e) the leased assets are of a specialised nature such that only the lessee c an use them without major
modifications being made.
9.Indicators of situations which individually or in combination could also lead to a lease being classified as a
finance lease are:
(a) ifthelesseecancancelthelease,thelessor’slossesassociatedwith thecancellationarebornebythelessee;
(b) gainsorlossesfromthefluctuationinthefairvalueoftheresidualfa lltothelessee(forexampleintheform
of a rent rebate equalling most of the sales proceeds at the end of the lease) ; and
(c) the lessee has the ability to continue the lease for a secondary period a t a rent which is substantially lower
than market rent.
(1) See also SIC-27: evaluating the substance of transactions in the legal fo rm of a lease.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 127
10.Leaseclassificationismadeattheinceptionofthelease.Ifatanytimeth elesseeandthelessoragreetochange
theprovisionsofthelease,otherthanbyrenewingthelease,inamannerth atwouldhaveresultedinadifferent
classification of the lease under the criteria in paragraphs 5 to 9 had the c hanged terms been in effect at the
inception of the lease, the revised agreement is considered as a new agreem ent over its term. Changes in
estimates(forexample,changesinestimatesoftheeconomiclifeorofthe residualvalueoftheleasedproperty)
orchangesincircumstances(forexample,defaultbythelessee),however ,donotgiverisetoanewclassification
of a lease for accounting purposes.
11.Leasesoflandandbuildingsareclassifiedasoperatingorfinanceleases inthesamewayasleasesofotherassets.
However,acharacteristicoflandisthatitnormallyhasanindefiniteeco nomiclifeand,iftitleisnotexpected
to pass to the lessee by the end of the lease term, the lessee does not receive substantially all of the risks and
rewardsincidenttoownership.Apremiumpaidforsuchaleaseholdreprese ntspre-paidleasepaymentswhich
are amortised over the lease term in accordance with the pattern of benefit s provided.
LEASES IN THE FINANCIAL STATEMENTS OF LESSEES
Finance leases
12. Lessees should recognise finance leases as assets and liabilities in t heir balance sheets at amounts equal at the
inceptionoftheleasetothefairvalueoftheleasedpropertyor,iflower, atthepresentvalueoftheminimum
lease payments. In calculating the present value of the minimum lease paym ents the discount factor is the
interest rate implicit in the lease, if this is practicable to determine; i f not, the lessee’s incremental borrowing
rate should be used.
13.Transactionsandothereventsareaccountedforandpresentedinaccordan cewiththeirsubstanceandfinancial
realityandnotmerelywithlegalform.Whilethelegalformofaleaseagree mentisthatthelesseemayacquire
nolegaltitletotheleasedasset,inthecaseoffinanceleasesthesubstan ceandfinancialrealityarethatthelessee
acquires the economic benefits of the use of the leased asset for the major p art of its economic life in return
forenteringintoanobligationtopayforthatrightanamountapproximati ngtothefairvalueoftheassetand
the related finance charge.
14.If such lease transactions are not reflected in the lessee’s balance sheet , the economic resources and the level
of obligations of an enterprise are understated, thereby distorting fina ncial ratios. It is therefore appropriate
thatafinanceleaseberecognisedinthelessee’sbalancesheetbothasana ssetandasanobligationtopayfuture
lease payments. At the inception of the lease, the asset and the liability f or the future lease payments are
recognised in the balance sheet at the same amounts.
15.Itisnotappropriatefortheliabilitiesforleasedassetstobepresented inthefinancialstatementsasadeduction
fromtheleasedassets.Ifforthepresentationofliabilitiesonthefaceo fthebalancesheetadistinctionismade
between current and non-current liabilities, the same distinction is mad e for lease liabilities.
16.Initialdirectcostsareoftenincurredinconnectionwithspecificleasi ngactivities,asinnegotiatingandsecuring
leasing arrangements. The costs identified as directly attributable to a ctivities performed by the lessee for a
finance lease, are included as part of the amount recognised as an asset und er the lease.
17.Lease payments should be apportioned between the finance charge and the re duction of the outstanding
liability. The finance charge should be allocated to periods during the le ase term so as to produce a constant
periodic rate of interest on the remaining balance of the liability for eac h period.
18.Inpractice,inallocatingthefinancechargetoperiodsduringtheleaset erm,someformofapproximationmay
be used to simplify the calculation.128 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
19. Afinanceleasegivesrisetoadepreciationexpensefordepreciableas setsaswellasafinanceexpenseforeach
accounting period. The depreciation policy for depreciable leased asset s should be consistent with that for
depreciableassetswhichareowned,andthedepreciationrecognisedshou ldbecalculatedonthebasissetout
inIAS16,property,plantandequipmentandIAS38,intangibleassets.Ift hereisnoreasonablecertaintythat
the lessee will obtain ownership by the end of the lease term, the asset shou ld be fully depreciated over the
shorter of the lease term or its useful life.
20.Thedepreciableamountofaleasedassetisallocatedtoeachaccountingpe riodduringtheperiodofexpected
use on a systematic basis consistent with the depreciation policy the less ee adopts for depreciable assets that
are owned. If there is reasonable certainty that the lessee will obtain own ership by the end of the lease term,
the period of expected use is the useful life of the asset; otherwise the ass et is depreciated over the shorter of
the lease term or its useful life.
21.The sum of the depreciation expense for the asset and the finance expense fo r the period is rarely the same
as the lease payments payable for the period, and it is, therefore, inappro priate simply to recognise the lease
payments payable as an expense in the income statement. Accordingly, the a sset and the related liability are
unlikely to be equal in amount after the inception of the lease.
22.Todeterminewhetheraleasedassethasbecomeimpaired,thatiswhentheex pectedfutureeconomicbenefits
fromthatassetarelowerthanitscarryingamount,anenterpriseappliest heInternationalAccountingStandard
dealing with impairment of assets, that sets out the requirements for how a n enterprise should perform the
review of the carrying amount of its assets, how it should determine the rec overable amount of an asset and
when it should recognise, or reverse, an impairment loss.
23. Lessees should, in addition to the requirements of IAS 32, financial in struments: disclosure and presentation,
make the following disclosures for finance leases:
(a) for each class of asset, the net carrying amount at the balance sheet dat e;
(b) areconciliationbetweenthetotalofminimumleasepaymentsatthebal ancesheetdate,andtheirpresent
value.Inaddition,anenterpriseshoulddisclosethetotalofminimumlea sepaymentsatthebalancesheet
date, and their present value, for each of the following periods:
(i) not later than one year;(ii) later than one year and not later than five years;(iii)later than five years;
(c) contingent rents recognised in income for the period;(d) the total of future minimum sublease payments expected to be received u nder non-cancellable subleases
at the balance sheet date; and
(e) a general description of the lessees significant leasing arrangement s including, but not limited to, the
following:
(i) the basis on which contingent rent payments are determined;(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii)restrictions imposed by lease arrangements, such as those concerni ng dividends, additional debt, and
further leasing.
24.
Inaddition,therequirementsondisclosureunderIAS16,property,plant andequipment,IAS36,impairment
ofassets,IAS38,intangibleassets,IAS40,investmentpropertyandIAS4 1,agriculture,applytotheamounts
of leased assets under finance leases that are accounted for by the lessee a s acquisitions of assets.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 129
Operating leases
25. Lease payments under an operating lease should be recognised as an expe nse in the income statement on a
straightlinebasisovertheleasetermunlessanothersystematicbasisis morerepresentativeofthetimepattern
of the user’s benefit (1).
26.For operating leases, lease payments (excluding costs for services such a s insurance and maintenance) are
recognised as an expense in the income statement on a straight line basis un less another systematic basis is
representative of the time pattern of the user’s benefit, even if the payme nts are not on that basis.
27.Lessees should, in addition to the requirements of IAS 32, financial instr uments: disclosure and presentation,
make the following disclosures for operating leases:
(a) the total of future minimum lease payments under non-cancellable oper ating leases for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;(iii)later than five years;
(b) the total of future minimum sublease payments expected to be received u nder non-cancellable subleases
at the balance sheet date;
(c) lease and sublease payments recognised in income for the period, with s eparate amounts for minimum
lease payments, contingent rents, and sublease payments;
(d) a general description of the lessee’s significant leasing arrangemen ts including, but not limited to, the
following:(i) the basis on which contingent rent payments are determined;(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii)restrictions imposed by lease arrangements, such as those concerni ng dividends, additional debt, and
further leasing.
LEASES IN THE FINANCIAL STATEMENTS OF LESSORS
Finance leases
28. Lessors should recognise assets held under a finance lease in their bal ance sheets and present them as a
receivable at an amount equal to the net investment in the lease.
29.Underafinanceleasesubstantiallyalltherisksandrewardsincidenttol egalownershiparetransferredbythe
lessor, and thus the lease payment receivable is treated by the lessor as re payment of principal and finance
income to reimburse and reward the lessor for its investment and services.
30. The recognition of finance income should be based on a pattern reflecti ng a constant periodic rate of return
on the lessor’s net investment outstanding in respect of the finance lease .
31.A lessor aims to allocate finance income over the lease term on a systematic and rational basis. This income
allocationisbasedonapatternreflectingaconstantperiodicreturnont helessor’snetinvestmentoutstanding
in respect of the finance lease. Lease payments relating to the accounting period, excluding costs for services,
are applied against the gross investment in the lease to reduce both the pri ncipal and the unearned finance
income.
(1) See also SIC-15: operating leases — incentives.130 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
32.Estimatedunguaranteedresidualvaluesusedincomputingthelessor’sgr ossinvestmentinaleasearereviewed
regularly.Iftherehasbeenareductionintheestimatedunguaranteedres idualvalue,theincomeallocationover
the lease term is revised and any reduction in respect of amounts already ac crued is recognised immediately.
33.Initial direct costs, such as commissions and legal fees, are often incurr ed by lessors in negotiating and
arranging a lease. For finance leases, these initial direct costs are incu rred to produce finance income and are
either recognised immediately in income or allocated against this income over the lease term. The latter may
be achieved by recognising as an expense the cost as incurred and recognisi ng as income in the same period
a portion of the unearned finance income equal to the initial direct costs.
34. Manufacturer or dealer lessors should recognise selling profit or los s in income for the period, in accordance
withthepolicyfollowedbytheenterpriseforoutrightsales.Ifartifici allylowratesofinterestarequoted,selling
profitshouldberestrictedtothatwhichwouldapplyifacommercialrateo finterestwerecharged.Initialdirect
costs should be recognised as an expense in the income statement at the ince ption of the lease.
35.Manufacturersordealersoftenoffertocustomersthechoiceofeitherbuy ingorleasinganasset.Afinancelease
of an asset by a manufacturer or dealer lessor gives rise to two types of inco me:
(a) the profit or loss equivalent to the profit or loss resulting from an out right sale of the asset being leased,
at normal selling prices, reflecting any applicable volume or trade disco unts; and
(b) the finance income over the lease term.
36.The sales revenue recorded at the commencement of a finance lease term by a m anufacturer or dealer lessor
isthefairvalueoftheasset,or,iflower,thepresentvalueoftheminimum leasepaymentsaccruingtothelessor,
computedatacommercialrateofinterest.Thecostofsalerecognisedatth ecommencementoftheleaseterm
is the cost, or carrying amount if different, of the leased property less th e present value of the unguaranteed
residual value. The difference between the sales revenue and the cost of sa le is the selling profit, which is
recognised in accordance with the policy followed by the enterprise for sa les.
37.Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers.
The use of such a rate would result in an excessive portion of the total incom e from the transaction being
recognised at the time of sale. If artificially low rates of interest are qu oted, selling profit would be restricted
to that which would apply if a commercial rate of interest were charged.
38.Initialdirectcostsarerecognisedasanexpenseatthecommencementofth eleasetermbecausetheyaremainly
related to earning the manufacturer’s or dealer’s selling profit.
39. Lessors should, in addition to the requirements in IAS 32, financial in struments: disclosure and presentation,
make the following disclosures for finance leases:
(a) a reconciliation between the total gross investment in the lease at the balance sheet date, and the present
value of minimum lease payments receivable at the balance sheet date. In ad dition, an enterprise should
disclosethetotalgrossinvestmentintheleaseandthepresentvalueofmi nimumleasepaymentsreceivable
at the balance sheet date, for each of the following periods:
(i) not later than one year;(ii) later than one year and not later than five years;(iii)later than five years;
(b) unearned finance income;(c) the unguaranteed residual values accruing to the benefit of the lessor ;
(d) the accumulated allowance for uncollectible minimum lease payments r eceivable;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 131
(e) contingent rents recognised in income; and
(f) a general description of the lessor’s significant leasing arrangemen ts.
40.Asanindicatorofgrowthitisoftenusefultoalsodisclosethegrossinves tmentlessunearnedincomeinnew
business added during the accounting period, after deducting the relevan t amounts for cancelled leases.
Operating leases
41. Lessorsshouldpresentassetssubjecttooperatingleasesintheirbal ancesheetsaccordingtothenatureofthe
asset.
42. Leaseincomefromoperatingleasesshouldberecognisedinincomeonas traightlinebasisovertheleaseterm,
unless another systematic basis is more representative of the time patter n in which use benefit derived from
the leased asset is diminished (1).
43.Costs,includingdepreciation,incurredinearningtheleaseincomearer ecognisedasanexpense.Leaseincome
(excluding receipts for services provided such as insurance and maintena nce) is recognised in income on a
straight line basis over the lease term even if the receipts are not on such a basis, unless another systematic
basisismorerepresentativeofthetimepatterninwhichusebenefitderiv edfromtheleasedassetisdiminished.
44.Initial direct costs incurred specifically to earn revenues from an opera ting lease are either deferred and
allocated to income over the lease term in proportion to the recognition of rent income, or are recognised as
an expense in the income statement in the period in which they are incurred.
45. The depreciation of depreciable leased assets should be on a basis cons istent with the lessor’s normal
depreciationpolicyforsimilarassets,andthedepreciationchargeshou ldbecalculatedonthebasissetoutin
IAS 16, property, plant and equipment and IAS 38, intangible assets.
46.Todeterminewhetheraleasedassethasbecomeimpaired,thatiswhentheex pectedfutureeconomicbenefits
fromthatassetarelowerthanitscarryingamount,anenterpriseappliest heInternationalAccountingStandard
dealing with impairment of assets that sets out the requirements for how an enterprise should perform the
review of the carrying amount of its assets, how it should determine the rec overable amount of an asset and
when it should recognise, or reverse, an impairment loss.
47.A manufacturer or dealer lessor does not recognise any selling profit on en tering into an operating lease
because it is not the equivalent of a sale.
48. Lessors should, in addition to the requirements of IAS 32, financial in struments: disclosure and presentation,
make the following disclosures for operating leases:
(a) thefutureminimumleasepaymentsundernon-cancellableoperatingle asesintheaggregateandforeach
of the following periods:
(i) not later than one year;(ii) later than one year and not later than five years;(iii)later than five years;
(b) total contingent rents recognised in income; and
(c) a general description of the lessor’s significant leasing arrangemen ts.
48A.
Inaddition,therequirementsondisclosureunderIAS16,property,plant andequipment,IAS36,impairment
ofassets,IAS38,intangibleassets,IAS40,investmentpropertyandIAS4 1,agriculture,applytoassetsleased
out under operating leases.
(1) See also SIC-15: operating leases — incentives.132 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
SALE AND LEASEBACK TRANSACTIONS
49.A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the same asset
back to the vendor. The lease payment and the sale price are usually interde pendent as they are negotiated as
a package. The accounting treatment of a sale and leaseback transaction de pends upon the type of lease
involved.
50. If a sale and leaseback transaction results in a finance lease, any exce ss of sales proceeds over the carrying
amountshouldnotbeimmediatelyrecognisedasincomeinthefinancialsta tementsofaseller-lessee.Instead,
it should be deferred and amortised over the lease term.
51.Iftheleasebackisafinancelease,thetransactionisameanswherebythel essorprovidesfinancetothelessee,
with the asset as security. For this reason it is not appropriate to regard a n excess of sales proceeds over the
carrying amount as income. Such excess, is deferred and amortised over the lease term.
52. Ifasaleandleasebacktransactionresultsinanoperatinglease,andi tisclearthatthetransactionisestablished
atfairvalue,anyprofitorlossshouldberecognisedimmediately.Ifthes alepriceisbelowfairvalue,anyprofit
or loss should be recognised immediately except that, if the loss is compen sated by future lease payments at
below market price, it should be deferred and amortised in proportion to th e lease payments over the period
forwhichtheassetisexpectedtobeused.Ifthesalepriceisabovefairval ue,theexcessoverfairvalueshould
be deferred and amortised over the period for which the asset is expected to be used.
53.If the leaseback is an operating lease, and the lease payments and the sale p rice are established at fair value,
there has in effect been a normal sale transaction and any profit or loss is r ecognised immediately.
54. For operating leases, if the fair value at the time of a sale and leasebac k transaction is less than the carrying
amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value
should be recognised immediately.
55.Forfinanceleases,nosuchadjustmentisnecessaryunlesstherehasbeena nimpairmentinvalue,inwhichcase
the carrying amount is reduced to recoverable amount in accordance with th e International Accounting
Standard dealing with impairment of assets.
56.Disclosure requirements for lessees and lessors apply equally to sale and leaseback transactions. The required
description of the significant leasing arrangements leads to disclosure of unique or unusual provisions of the
agreement or terms of the sale and leaseback transactions.
57.Sale and leaseback transactions may meet the separate disclosure criteri a in IAS 8, net profit or loss for the
period, fundamental errors and changes in accounting policies, paragrap h 16.
TRANSITIONAL PROVISIONS
58. Retrospective application of this Standard is encouraged but not requ ired. If the Standard is not applied
retrospectively, the balance of any pre-existing finance lease is deemed to have been properly determined by
the lessor and should be accounted for thereafter in accordance with the pr ovisions of this Standard.
EFFECTIVE DATE
59. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1999. If an enterprise applies this Standard for finan cial statements covering periods
beginningbefore1January1999,theenterpriseshoulddisclosethefactt hatithasappliedthisStandardinstead
of IAS 17, accounting for leases, approved in 1982.
60.This Standard supersedes IAS 17, accounting for leases, approved in 1982.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 133
INTERNATIONAL ACCOUNTING STANDARD IAS 18
(REVISED 1993)
Revenue
In1998,IAS39,financialinstruments:recognitionandmeasurement,ame ndedparagraph11ofIAS18byinserting
a cross-reference to IAS 39.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraph 36. The amended text
became effective for annual financial statements covering periods begin ning on or after 1 January 2000.
In January 2001, IAS 41, agriculture, amended paragraph 6. IAS 41 is effect ive for annual financial statements
covering periods beginning on or after 1 January 2003.
The following SIC interpretations relate to IAS 18:
— SIC-27: evaluating the substance of transactions in the legal form of a le ase,
— SIC-31: revenue — barter transactions involving advertising services.
CONTENTS
Paragraphs
Objective 134
Scope 135
Definitions 136
Measurement of revenue 136
Identification of the transaction 137
Sale of goods 137
Rendering of services 138
Interest, royalties and dividends 139Disclosure 140
Effective date 140
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
Income is defined in the framework for the preparation and presentation of financial statements as increases in
economic benefits during the accounting period in the form of inflows or en hancements of assets or decreases of
liabilitiesthatresultinincreasesinequity,otherthanthoserelating tocontributionsfromequityparticipants.Income
encompassesbothrevenueandgains.Revenueisincomethatarisesintheco urseofordinaryactivitiesofanenterprise
and is referred to by a variety of different names including sales, fees, in terest, dividends and royalties. The objective
of this Standard is to prescribe the accounting treatment of revenue arisi ng from certain types of transactions and
events.134 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Theprimaryissueinaccountingforrevenueisdeterminingwhentorecogni serevenue.Revenueisrecognisedwhen
it is probable that future economic benefits will flow to the enterprise an d these benefits can be measured reliably.
ThisStandardidentifiesthecircumstancesinwhichthesecriteriawillb emetand,therefore,revenuewillberecognised.
It also provides practical guidance on the application of these criteria.
SCOPE
1. ThisStandardshouldbeappliedinaccountingforrevenuearisingfromt hefollowingtransactionsandevents:
(a) the sale of goods;
(b) the rendering of services; and(c) the use by others of enterprise assets yielding interest, royalties an d dividends.
2.
This Standard supersedes IAS 18, revenue recognition, approved in 1982.
3.Goodsincludesgoodsproducedbytheenterpriseforthepurposeofsaleand goodspurchasedforresale,such
as merchandise purchased by a retailer or land and other property held for r esale.
4.The rendering of services typically involves the performance by the enter prise of a contractually agreed task
over an agreed period of time. The services may be rendered within a single p eriod or over more than one
period.Somecontractsfortherenderingofservicesaredirectlyrelated toconstructioncontracts,forexample,
thosefortheservicesofprojectmanagersandarchitects.Revenuearisin gfromthesecontractsisnotdealtwith
in this Standard but is dealt with in accordance with the requirements for c onstruction contracts as specified
in IAS 11, construction contracts.
5.The use by others of enterprise assets gives rise to revenue in the form of:
(a) interest — charges for the use of cash or cash equivalents or amounts due to the enterprise;
(b) royalties — charges for the use of long-term assets of the enterprise, f or example, patents, trademarks,
copyrights and computer software; and
(c) dividends — distributions of profits to holders of equity investments in proportion to their holdings of a
particular class of capital.
6.This Standard does not deal with revenue arising from:
(a) lease agreements (see IAS 17, leases);
(b) dividends arising from investments which are accounted for under the e quity method (see IAS 28,
accounting for investments in associates);
(c) insurance contracts of insurance enterprises;(d) changes in the fair value of financial assets and financial liabilitie s or their disposal (see IAS 39, financial
instruments: recognition and measurement);
(e) changes in the value of other current assets;(f) initialrecognitionandfromchangesinthefairvalueofbiologicalas setsrelatedtoagriculturalactivity(see
IAS 41, agriculture);
(g) initial recognition of agricultural produce (see IAS 41, agriculture ); and
(h) the extraction of mineral ores.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 135
DEFINITIONS
7. The following terms are used in this Standard with the meanings specifie d:
Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary
activities of an enterprise when those inflows result in increases in equi ty, other than increases relating to
contributions from equity participants.
Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilit ysettled,betweenknowledgeable,
willing parties in an arm’s length transaction.
8.Revenueincludesonlythegrossinflowsofeconomicbenefitsreceivedand receivablebytheenterpriseonits
own account. Amounts collected on behalf of third parties such as sales tax es, goods and services taxes and
value added taxes are not economic benefits which flow to the enterprise an d do not result in increases in
equity. Therefore, they are excluded from revenue. Similarly, in an agenc y relationship, the gross inflows of
economic benefits include amounts collected on behalf of the principal an d which do not result in increases
inequityfortheenterprise.Theamountscollectedonbehalfoftheprinci palarenotrevenue.Instead,revenue
is the amount of commission.
MEASUREMENT OF REVENUE
9. Revenue should be measured at the fair value of the consideration receiv ed or receivable (1).
10.Theamountofrevenuearisingonatransactionisusuallydeterminedbyagr eementbetweentheenterpriseand
thebuyeroruseroftheasset.Itismeasuredatthefairvalueoftheconside rationreceivedorreceivabletaking
into account the amount of any trade discounts and volume rebates allowed b y the enterprise.
11.In most cases, the consideration is in the form of cash or cash equivalents a nd the amount of revenue is the
amount of cash or cash equivalents received or receivable. However, when t he inflow of cash or cash
equivalentsisdeferred,thefairvalueoftheconsiderationmaybelessth anthenominalamountofcashreceived
orreceivable.Forexample,anenterprisemayprovideinterestfreecredi ttothebuyeroracceptanotereceivable
bearing a below-market interest rate from the buyer as consideration for t he sale of goods. When the
arrangement effectively constitutes a financing transaction, the fair v alue of the consideration is determined
by discounting all future receipts using an imputed rate of interest. The i mputed rate of interest is the more
clearly determinable of either:
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount of the instrument t o the current cash sales price of
the goods or services.
The difference between the fair value and the nominal amount of the conside ration is recognised as interest
revenue in accordance with paragraphs 29 and 30 and in accordance with IAS 3 9, financial instruments:
recognition and measurement.
12.Whengoodsorservicesareexchangedorswappedforgoodsorserviceswhich areofasimilarnatureandvalue,
theexchangeisnotregardedasatransactionwhichgeneratesrevenue.Thi sisoftenthecasewithcommodities
likeoilormilkwheresuppliersexchangeorswapinventoriesinvariouslo cationstofulfildemandonatimely
basis in a particular location. When goods are sold or services are rendere d in exchange for dissimilar goods
orservices,theexchangeisregardedasatransactionwhichgeneratesrev enue.Therevenueismeasuredatthe
fairvalueofthegoodsorservicesreceived,adjustedbytheamountofanyc ashorcashequivalentstransferred.
When the fair value of the goods or services received cannot be measured rel iably, the revenue is measured
at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents
transferred.
(1) See also SIC-31: revenue — barter transactions involving advertising se rvices.136 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
IDENTIFICATION OF THE TRANSACTION
13.TherecognitioncriteriainthisStandardareusuallyappliedseparately toeachtransaction.However,incertain
circumstances, it is necessary to apply the recognition criteria to the se parately identifiable components of a
single transaction in order to reflect the substance of the transaction. F or example, when the selling price of
aproductincludesanidentifiableamountforsubsequentservicing,that amountisdeferredandrecognisedas
revenueovertheperiodduringwhichtheserviceisperformed.Conversely ,therecognitioncriteriaareapplied
to two or more transactions together when they are linked in such a way that t he commercial effect cannot
be understood without reference to the series of transactions as a whole. F or example, an enterprise may sell
goods and, at the same time, enter into a separate agreement to repurchase t he goods at a later date, thus
negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together.
SALE OF GOODS
14. Revenue from the sale of goods should be recognised when all the followi ng conditions have been satisfied:
(a) the enterprise has transferred to the buyer the significant risks and r ewards of ownership of the goods;
(b) the enterprise retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transact ion will flow to the enterprise; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
15.The assessment of when an enterprise has transferred the significant risk s and rewards of ownership to the
buyerrequiresanexaminationofthecircumstancesofthetransaction.In mostcases,thetransferoftherisks
andrewardsofownershipcoincideswiththetransferofthelegaltitleort hepassingofpossessiontothebuyer.
This is the case for most retail sales. In other cases, the transfer of risks and rewards of ownership occurs at
a different time from the transfer of legal title or the passing of possessi on.
16.If the enterprise retains significant risks of ownership, the transactio n is not a sale and revenue is not
recognised. An enterprise may retain a significant risk of ownership in a n umber of ways. Examples of
situations in which the enterprise may retain the significant risks and re wards of ownership are:
(a) whentheenterpriseretainsanobligationforunsatisfactoryperform ancenotcoveredbynormalwarranty
provisions;
(b) when the receipt of the revenue from a particular sale is contingent on t he derivation of revenue by the
buyer from its sale of the goods;
(c) when the goods are shipped subject to installation and the installatio n is a significant part of the contract
which has not yet been completed by the enterprise; and
(d) when the buyer has the right to rescind the purchase for a reason specifi ed in the sales contract and the
enterprise is uncertain about the probability of return.
17.If an enterprise retains only an insignificant risk of ownership, the tran saction is a sale and revenue is
recognised. For example, a seller may retain the legal title to the goods so lely to protect the collectability of
theamountdue.Insuchacase,iftheenterprisehastransferredthesignif icantrisksandrewardsofownership,
the transaction is a sale and revenue is recognised. Another example of an e nterprise retaining only an
insignificant risk of ownership may be a retail sale when a refund is offere d if the customer is not satisfied.
Revenue in such cases is recognised at the time of sale provided the seller c an reliably estimate future returns
and recognises a liability for returns based on previous experience and ot her relevant factors.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 137
18.Revenue is recognised only when it is probable that the economic benefits a ssociated with the transaction
willflowtotheenterprise.Insomecases,thismaynotbeprobableuntilth econsiderationisreceivedoruntil
anuncertaintyisremoved.Forexample,itmaybeuncertainthataforeigng overnmentalauthoritywillgrant
permission to remit the consideration from a sale in a foreign country. Whe n the permission is granted, the
uncertainty is removed and revenue is recognised. However, when an uncert ainty arises about the
collectability of an amount already included in revenue, the uncollectab le amount or the amount in respect
ofwhichrecoveryhasceasedtobeprobableisrecognisedasanexpense,rat herthanasanadjustmentofthe
amount of revenue originally recognised.
19.Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this
process is commonly referred to as the matching of revenues and expenses. E xpenses, including warranties
and other costs to be incurred after the shipment of the goods can normally b e measured reliably when the
otherconditionsfortherecognitionofrevenuehavebeensatisfied.Howe ver,revenuecannotberecognised
when the expenses cannot be measured reliably; in such circumstances, any consideration already received
for the sale of the goods is recognised as a liability.
RENDERING OF SERVICES
20. When the outcome of a transaction involving the rendering of services c an be estimated reliably, revenue
associatedwiththetransactionshouldberecognisedbyreferencetothes tageofcompletionofthetransaction
at the balance sheet date. The outcome of a transaction can be estimated rel iably when all the following
conditions are satisfied:
(a) the amount of revenue can be measured reliably;(b) it is probable that the economic benefits associated with the transact ion will flow to the enterprise;
(c) the stage of completion of the transaction at the balance sheet date can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the tra nsaction can be measured
reliably (
1)(2).
21.The recognition of revenue by reference to the stage of completion of a tran saction is often referred to as the
percentage of completion method. Under this method, revenue is recognise d in the accounting periods in
which the services are rendered. The recognition of revenue on this basis p rovides useful information on the
extent of service activity and performance during a period. IAS 11, constr uction contracts, also requires the
recognition of revenue on this basis. The requirements of that Standard ar e generally applicable to the
recognition of revenue and the associated expenses for a transaction invo lving the rendering of services.
22.Revenueisrecognisedonlywhenitisprobablethattheeconomicbenefitsa ssociatedwiththetransactionwill
flow to the enterprise. However, when an uncertainty arises about the coll ectability of an amount already
included in revenue, the uncollectable amount, or the amount in respect of which recovery has ceased to be
probable, is recognised as an expense, rather than as an adjustment of the a mount of revenue originally
recognised.
23.An enterprise is generally able to make reliable estimates after it has agr eed to the following with the other
parties to the transaction:
(a) each party’s enforceable rights regarding the service to be provided a nd received by the parties;
(b) the consideration to be exchanged; and
(c) the manner and terms of settlement.
It is also usually necessary for the enterprise to have an effective intern al financial budgeting and reporting
system.Theenterprisereviewsand,whennecessary,revisestheestimate sofrevenueastheserviceisperformed.
The need for such revisions does not necessarily indicate that the outcome of the transaction cannot be
estimated reliably.
(1) See also SIC-27: evaluating the substance of transactions in the legal fo rm of a lease.
(2) See also SIC-31: revenue — barter transactions involving advertising se rvices.138 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
24. The stage of completion of a transaction may be determined by a variety o f methods. An enterprise uses the
methodthatmeasuresreliablytheservicesperformed.Dependingonthena tureofthetransaction,themethods
may include:
(a) surveys of work performed;(b) services performed to date as a percentage of total services to be perfo rmed; or
(c) the proportion that costs incurred to date bear to the estimated total c osts of the transaction. Only costs
thatreflectservicesperformedtodateareincludedincostsincurredtod ate.Onlycoststhatreflectservices
performed or to be performed are included in the estimated total costs of th e transaction.
Progress payments and advances received from customers often do not refle ct the services performed.
25.
Forpracticalpurposes,whenservicesareperformedbyanindeterminaten umberofactsoveraspecifiedperiod
oftime,revenueisrecognisedonastraightlinebasisoverthespecifiedp eriodunlessthereisevidencethatsome
othermethodbetterrepresentsthestageofcompletion.Whenaspecificac tismuchmoresignificantthanany
other acts, the recognition of revenue is postponed until the significant act is executed.
26. Whentheoutcomeofthetransactioninvolvingtherenderingofservice scannotbeestimatedreliably,revenue
should be recognised only to the extent of the expenses recognised that are recoverable.
27.During the early stages of a transaction, it is often the case that the outco me of the transaction cannot be
estimated reliably. Nevertheless, it may be probable that the enterprise will recover the transaction costs
incurred. Therefore, revenue is recognised only to the extent of costs inc urred that are expected to be
recoverable. As the outcome of the transaction cannot be estimated reliab ly, no profit is recognised.
28.Whentheoutcomeofatransactioncannotbeestimatedreliablyanditisnot probablethatthecostsincurred
will be recovered, revenue is not recognised and the costs incurred are rec ognised as an expense. When the
uncertainties that prevented the outcome of the contract being estimated reliably no longer exist, revenue is
recognised in accordance with paragraph 20 rather than in accordance with paragraph 26.
INTEREST, ROYALTIES AND DIVIDENDS
29. Revenuearisingfromtheusebyothersofenterpriseassetsyieldingin terest,royaltiesanddividendsshouldbe
recognised on the bases set out in paragraph 30 when:
(a) it is probable that the economic benefits associated with the transact ion will flow to the enterprise; and
(b) the amount of the revenue can be measured reliably.
30. Revenue should be recognised on the following bases:
(a) interestshouldberecognisedonatimeproportionbasisthattakesint oaccounttheeffectiveyieldonthe
asset;
(b) royalties should be recognised on an accrual basis in accordance with t he substance of the relevant
agreement; and
(c) dividends should be recognised when the shareholder’s right to receiv e payment is established.
31.The effective yield on an asset is the rate of interest required to discount the stream of future cash receipts
expectedoverthelifeoftheassettoequatetotheinitialcarryingamount oftheasset.Interestrevenueincludes
theamountofamortisationofanydiscount,premiumorotherdifferencebe tweentheinitialcarryingamount
of a debt security and its amount at maturity.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 139
32.When unpaid interest has accrued before the acquisition of an interest-be aring investment, the subsequent
receiptofinterestisallocatedbetweenpre-acquisitionandpost-acqui sitionperiods;onlythepost-acquisition
portion is recognised as revenue. When dividends on equity securities are declared from pre-acquisition net
income,thosedividendsaredeductedfromthecostofthesecurities.Ifit isdifficulttomakesuchanallocation
except on an arbitrary basis, dividends are recognised as revenue unless t hey clearly represent a recovery of
part of the cost of the equity securities.
33.Royalties accrue in accordance with the terms of the relevant agreement an d are usually recognised on that
basis unless, having regard to the substance of the agreement, it is more ap propriate to recognise revenue on
some other systematic and rational basis.
34.Revenueisrecognisedonlywhenitisprobablethattheeconomicbenefitsa ssociatedwiththetransactionwill
flow to the enterprise. However, when an uncertainty arises about the coll ectability of an amount already
included in revenue, the uncollectable amount, or the amount in respect of which recovery has ceased to be
probable, is recognised as an expense, rather than as an adjustment of the a mount of revenue originally
recognised.
DISCLOSURE
35. An enterprise should disclose:
(a) theaccountingpoliciesadoptedfortherecognitionofrevenueinclud ingthemethodsadoptedtodetermine
the stage of completion of transactions involving the rendering of servic es;
(b) theamountofeachsignificantcategoryofrevenuerecognisedduringt heperiodincludingrevenuearising
from:
(i) the sale of goods;(ii) the rendering of services;(iii)interest;(iv) royalties;(v) dividends; and
(c) the amount of revenue arising from exchanges of goods or services inclu ded in each significant category
of revenue.
36.
Anenterprisedisclosesanycontingentliabilitiesandcontingentasset sinaccordancewithIAS37,provisions,
contingent liabilities and contingent assets. Contingent liabilities a nd contingent assets may arise from items
such as warranty costs, claims, penalties or possible losses.
EFFECTIVE DATE
37. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.
INTERNATIONAL ACCOUNTING STANDARD IAS 19
(REVISED 2002)
Employee Benefits
This revised International Accounting Standard supersedes IAS 19, retir ement benefit costs, which was approved by
the Board in a revised version in 1993. This revised Standard became operat ive for financial statements covering
periods beginning on or after 1 January 1999.
InMay1999,IAS10(revised1999),eventsafterthebalancesheetdate,ame ndedparagraphs20(b),35,125and141.
Theseamendmentsbecameoperativeforannualfinancialstatementscover ingperiodsbeginningonorafter1January
2000.140 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
ThisStandardwasamendedin2000tochangethedefinitionofplanassetsan dtointroducerecognition,measurement
and disclosure requirements for reimbursements. These amendments becam e operative for accounting periods
beginning on or after 1 January 2001.
Further amendments were made in 2002 to prevent the recognition of gains so lely as a result of actuarial losses or
past service cost and the recognition of losses solely as a result of actuar ial gains. These amendments take effect for
accounting periods ending on or after 31 May 2002. Earlier application is e ncouraged.
INTRODUCTION
1.TheStandardprescribestheaccountinganddisclosurebyemployersforem ployeebenefits.ItreplacesIAS19,
retirement benefit costs, which was approved in 1993. The major changes fr om the old IAS 19 are set out in
theBasisforconclusions(AppendixD).TheStandarddoesnotdealwithrep ortingbyemployeebenefitplans
(see IAS 26, accounting and reporting by retirement benefit plans).
2.The Standard identifies five categories of employee benefits:
(a) short-term employee benefits, such as wages, salaries and social secu rity contributions, paid annual leave
andpaidsickleave,profit-sharingandbonuses(ifpayablewithin12mont hsoftheendoftheperiod)and
non-monetary benefits (such as medical care, housing, cars and free or sub sidised goods or services) for
current employees;
(b) post-employmentbenefitssuchaspensions,otherretirementbenefit s,post-employmentlifeinsuranceand
post-employment medical care;
(c) other long-term employee benefits, including long-service leave or s abbatical leave, jubilee or other
long-servicebenefits,long-termdisabilitybenefitsand,iftheyarepa yable12monthsormoreaftertheend
of the period, profit-sharing, bonuses and deferred compensation;
(d) termination benefits; and
(e) equity compensation benefits.
3.TheStandardrequiresanenterprisetorecogniseshort-termemployeeben efitswhenanemployeehasrendered
service in exchange for those benefits.
4.Post-employmentbenefitplansareclassifiedaseitherdefinedcontribu tionplansordefinedbenefitplans.The
Standard gives specific guidance on the classification of multi-employe r plans, State plans and plans with
insured benefits.
5.Underdefinedcontributionplans,anenterprisepaysfixedcontribution sintoaseparateentity(afund)andwill
havenolegalorconstructiveobligationtopayfurthercontributionsift hefunddoesnotholdsufficientassets
topayallemployeebenefitsrelatingtoemployeeserviceinthecurrentan dpriorperiods.TheStandardrequires
anenterprisetorecognisecontributionstoadefinedcontributionplanw henanemployeehasrenderedservice
in exchange for those contributions.
6.All other post-employment benefit plans are defined benefit plans. Defin ed benefit plans may be unfunded,
or they may be wholly or partly funded. The Standard requires an enterprise to:
(a) account not only for its legal obligation, but also for any constructiv e obligation that arises from the
enterprise’s practices;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 141
(b) determine the present value of defined benefit obligations and the fai r value of any plan assets with
sufficient regularity that the amounts recognised in the financial state ments do not differ materially from
the amounts that would be determined at the balance sheet date;
(c) use the projected unit credit method to measure its obligations and cos ts;
(d) attributebenefittoperiodsofserviceundertheplan’sbenefitformu la,unlessanemployee’sserviceinlater
years will lead to a materially higher level of benefit than in earlier year s;
(e) use unbiased and mutually compatible actuarial assumptions about dem ographic variables (such as
employee turnover and mortality) and financial variables (such as future increases in salaries, changes in
medical costs and certain changes in State benefits). Financial assumpti ons should be based on market
expectations, at the balance sheet date, for the period over which the obli gations are to be settled;
(f) determinethediscountratebyreferencetomarketyieldsatthebalanc esheetdateonhighqualitycorporate
bonds (or, in countries where there is no deep market in such bonds, governm ent bonds) of a currency
and term consistent with the currency and term of the post-employment bene fit obligations;
(g) deductthefairvalueofanyplanassetsfromthecarryingamountoftheo bligation.Certainreimbursement
rights that do not qualify as plan assets are treated in the same way as plan a ssets, except that they are
presented as a separate asset, rather than as a deduction from the obligati on;
(h) limit the carrying amount of an asset so that it does not exceed the net to tal of:
(i) any unrecognised past service cost and actuarial losses; plus
(ii) thepresentvalueofanyeconomicbenefitsavailableintheformofref undsfromtheplanorreductions
in future contributions to the plan;
(i) recognise past service cost on a straight-line basis over the average p eriod until the amended benefits
become vested;
(j) recognise gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment
or settlement occurs. The gain or loss should comprise any resulting chang e in the present value of the
definedbenefitobligationandofthefairvalueoftheplanassetsandtheu nrecognisedpartofanyrelated
actuarial gains and losses and past service cost; and
(k) recognise a specified portion of the net cumulative actuarial gains an d losses that exceed the greater of:
(i) 10 % of the present value of the defined benefit obligation (before dedu cting plan assets); and
(ii) 10 % of the fair value of any plan assets.The portion of actuarial gains and losses to be recognised for each defined benefit plan is the excess that
fell outside the 10 % “corridor” at the previous reporting date, divided by the expected average remaining
working lives of the employees participating in that plan.TheStandardalsopermitssystematicmethodsoffasterrecognition,prov idedthatthesamebasisisapplied
to both gains and losses and the basis is applied consistently from period t o period. Such permitted
methods include immediate recognition of all actuarial gains and losses.142 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
7.The Standard requires a simpler method of accounting for other long-term e mployee benefits than for
post-employment benefits: actuarial gains and losses and past service co st are recognised immediately.
8.Termination benefits are employee benefits payable as a result of either: an enterprise’s decision to terminate
anemployee’semploymentbeforethenormalretirementdate;oranemploye e’sdecisiontoacceptvoluntary
redundancyinexchangeforthosebenefits.Theeventwhichgivesrisetoan obligationistheterminationrather
than employee service. Therefore, an enterprise should recognise termin ation benefits when, and only when,
the enterprise is demonstrably committed to either:
(a) terminate the employment of an employee or group of employees before th e normal retirement date; or
(b) provide termination benefits as a result of an offer made in order to enc ourage voluntary redundancy.
9.Anenterpriseisdemonstrablycommittedtoaterminationwhen,andonlywh en,theenterprisehasadetailed
formal plan (with specified minimum contents) for the termination and is w ithout realistic possibility of
withdrawal.
10.Where termination benefits fall due more than 12 months after the balance s heet date, they should be
discounted.Inthecaseofanoffermadetoencouragevoluntaryredundancy ,themeasurementoftermination
benefits should be based on the number of employees expected to accept the o ffer.
11.Equity compensation benefits are employee benefits under which either: e mployees are entitled to receive
equity financial instruments issued by the enterprise (or its parent); or the amount of the enterprise’s
obligationtoemployeesdependsonthefuturepriceofequityfinancialin strumentsissuedbytheenterprise.
The Standard requires certain disclosures about such benefits, but does n ot specify recognition and
measurement requirements.
12.TheStandardiseffectiveforaccountingperiodsbeginningonorafter1Ja nuary1999.Earlierapplicationis
encouraged.OnfirstadoptingtheStandard,anenterpriseispermittedto recogniseanyresultingincreasein
its liability for post-employment benefits over not more than five years. If the adoption of the standard
decreases the liability, an enterprise is required to recognise the decre ase immediately.
13.This Standard was amended in 2000 to amend the definition of plan assets and to introduce recognition,
measurementanddisclosurerequirementsforreimbursements.Theseamen dmentstakeeffectforaccounting
periods beginning on or after 1 January 2001. Earlier application is encou raged.
CONTENTS
Paragraphs
Objective 145
Scope 145
Definitions 146
Short-term employee benefits 149
Recognition and measurement 149All short-term employee benefits 149Short-term compensated absences 149Profit-sharing and bonus plans 15013/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 143
Disclosure 151
Post-employment benefits: distinction between defined contribution pl ans and defined benefit plans 151
Multi-employer plans 152
State plans 154
Insured benefits 154
Post-employment benefits: defined contribution plans 155
Recognition and measurement 155Disclosure 155
Post-employment benefits: defined benefit plans 155Recognition and measurement 156Accounting for the constructive obligation 156Balance sheet 156
Income statement 159
Recognition and measurement: present value of defined benefit obligatio ns and current service cost 159
Actuarial valuation method 159
Attributing benefit to periods of service 160Actuarial assumptions 163
Actuarial assumptions: discount rate 164
Actuarial assumptions: salaries, benefits and medical costs 164Actuarial gains and losses 166
Past service cost 167
Recognition and measurement: plan assets 168Fair value of plan assets 168
Reimbursements 168
Return on plan assets 169
Business combinations 170
Curtailments and settlements 170
Presentation 172144 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Offset 172
Current/non-current distinction 172
Financial components of post-employment benefit costs 172Disclosure 172
Other long-term employee benefits 174Recognition and measurement 175Disclosure 175
Termination benefits 176
Recognition 176
Measurement 177
Disclosure 177
Equity compensation benefits 177
Recognition and measurement 177Disclosure 177
Transitional provisions 179
Effective date 180
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting and disclosu re for employee benefits. The Standard
requires an enterprise to recognise:
(a) aliabilitywhenanemployeehasprovidedserviceinexchangeforemplo yeebenefitstobepaidinthefuture;and
(b) anexpensewhentheenterpriseconsumestheeconomicbenefitarisingf romserviceprovidedbyanemployeein
exchange for employee benefits.
SCOPE
1. This Standard should be applied by an employer in accounting for employe e benefits.
2.This Standard does not deal with reporting by employee benefit plans (see I AS 26, accounting and reporting
by retirement benefit plans).
3.This Standard applies to all employee benefits, including those provided :
(a) under formal plans or other formal agreements between an enterprise an d individual employees, groups
of employees or their representatives;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 145
(b) under legislative requirements, or through industry arrangements, w hereby enterprises are required to
contribute to national, State, industry or other multi-employer plans; o r
(c) by those informal practices that give rise to a constructive obligatio n. Informal practices give rise to a
constructive obligation where the enterprise has no realistic alternati ve but to pay employee benefits. An
example of a constructive obligation is where a change in the enterprise’s informal practices would cause
unacceptable damage to its relationship with employees.
4.Employee benefits include:
(a) short-term employee benefits, such as wages, salaries and social secu rity contributions, paid annual leave
andpaidsickleave,profit-sharingandbonuses(ifpayablewithin12mont hsoftheendoftheperiod)and
non-monetary benefits (such as medical care, housing, cars and free or sub sidised goods or services) for
current employees;
(b) post-employmentbenefitssuchaspensions,otherretirementbenefit s,post-employmentlifeinsuranceand
post-employment medical care;
(c) other long-term employee benefits, including long-service leave or s abbatical leave, jubilee or other
long-service benefits, long-term disability benefits and, if they are no t payable wholly within 12 months
after the end of the period, profit-sharing, bonuses and deferred compens ation;
(d) termination benefits; and
(e) equity compensation benefits.
Because each category identified in (a) to (e) has different characterist ics, this Standard establishes separate
requirements for each category.
5.Employee benefits include benefits provided to either employees or their dependants and may be settled by
payments (or the provision of goods or services) made either directly to th e employees, to their spouses,
children or other dependants or to others, such as insurance companies.
6.Anemployeemayprovideservicestoanenterpriseonafull-time,part-tim e,permanent,casualortemporary
basis. For the purpose of this Standard, employees include directors and o ther management personnel.
DEFINITIONS
7. The following terms are used in this Standard with the meanings specifie d:
Employee benefits are all forms of consideration given by an enterprise in exchange for service rendered by
employees.
Short-termemployeebenefitsareemployeebenefits(otherthanterminat ionbenefitsandequitycompensation
benefits) which fall due wholly within 12 months after the end of the period in which the employees render
the related service.Post-employment benefits are employee benefits (other than termination benefits and equity compensation
benefits) which are payable after the completion of employment.Post-employment benefit plans are formal or informal arrangements under which an enterprise provides
post-employment benefits for one or more employees.146 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Defined contribution plans are post-employment benefit plans under whic h an enterprise pays fixed
contributions into a separate entity (a fund) and will have no legal or cons tructive obligation to pay further
contributionsifthefunddoesnotholdsufficientassetstopayallemploy eebenefitsrelatingtoemployeeservice
in the current and prior periods.
Defined benefit plans are post-employment benefit plans other than defin ed contribution plans.
Multi-employer plans are defined contribution plans (other than State pl ans) or defined benefit plans (other
than State plans) that:(a) pool the assets contributed by various enterprises that are not under c ommon control; and
(b) use those assets to provide benefits to employees of more than one enter prise, on the basis that
contributionandbenefitlevelsaredeterminedwithoutregardtotheiden tityoftheenterprisethatemploys
the employees concerned.
Otherlong-termemployeebenefitsareemployeebenefits(otherthanpost -employmentbenefits,termination
benefits and equity compensation benefits) which do not fall due wholly wi thin 12 months after the end of
the period in which the employees render the related service.Termination benefits are employee benefits payable as a result of either:(a) an enterprise’s decision to terminate an employee’s employment befor e the normal retirement date; or
(b) an employee’s decision to accept voluntary redundancy in exchange for those benefits.
Equity compensation benefits are employee benefits under which either:
(a) employees are entitled to receive equity financial instruments issue d by the enterprise (or its parent); or
(b) the amount of the enterprise’s obligation to employees depends on the f uture price of equity financial
instruments issued by the enterprise.
Equity compensation plans are formal or informal arrangements under whic h an enterprise provides equity
compensation benefits for one or more employees.Vested employee benefits are employee benefits that are not conditional o n future employment.
The present value of a defined benefit obligation is the present value, wit hout deducting any plan assets, of
expectedfuturepaymentsrequiredtosettletheobligationresultingfro memployeeserviceinthecurrentand
prior periods.Current service cost is the increase in the present value of the defined ben efit obligation resulting from
employee service in the current period.Interest cost is the increase during a period in the present value of a defin ed benefit obligation which arises
because the benefits are one period closer to settlement.Plan assets comprise:(a) assets held by a long-term employee benefit fund; and(b) qualifying insurance policies.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 147
Assetsheldbyalong-termemployeebenefitfundareassets(otherthannon -transferablefinancialinstruments
issued by the reporting enterprise) that:
(a) are held by an entity (a fund) that is legally separate from the reportin g enterprise and exists solely to pay
or fund employee benefits; and
(b) areavailabletobeusedonlytopayorfundemployeebenefits,arenotav ailabletothereportingenterprise’s
own creditors (even in bankruptcy), and cannot be returned to the reportin g enterprise, unless either:
(i) the remaining assets of the fund are sufficient to meet all the related e mployee benefit obligations of
the plan or the reporting enterprise; or
(ii) the assets are returned to the reporting enterprise to reimburse it fo r employee benefits already paid.
Aqualifyinginsurancepolicyisaninsurancepolicyissuedbyaninsurert hatisnotarelatedparty(asdefined
in IAS 24, related party disclosures) of the reporting enterprise, if the p roceeds of the policy:
(a) can be used only to pay or fund employee benefits under a defined benefit plan; and
(b) are not available to the reporting enterprise’s own creditors (even in bankruptcy) and cannot be paid to
the reporting enterprise, unless either:(i) theproceedsrepresentsurplusassetsthatarenotneededforthepolic ytomeetalltherelatedemployee
benefit obligations; or
(ii) theproceedsarereturnedtothereportingenterprisetoreimburseit foremployeebenefitsalreadypaid.
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable,
willing parties in an arm’s length transaction.The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with
realisedandunrealisedgainsorlossesontheplanassets,lessanycostso fadministeringtheplanandlessany
tax payable by the plan itself.Actuarial gains and losses comprise:(a) experienceadjustments(theeffectsofdifferencesbetweentheprevi ousactuarialassumptionsandwhathas
actually occurred); and
(b) the effects of changes in actuarial assumptions.
Past service cost is the increase in the present value of the defined benefi t obligation for employee service in
priorperiods,resultinginthecurrentperiodfromtheintroductionof,o rchangesto,post-employmentbenefits
or other long-term employee benefits. Past service cost may be either posi tive (where benefits are introduced
or improved) or negative (where existing benefits are reduced).148 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
SHORT-TERM EMPLOYEE BENEFITS
8.Short-term employee benefits include items such as:
(a) wages, salaries and social security contributions;
(b) short-term compensated absences (such as paid annual leave and paid si ck leave) where the absences are
expectedtooccurwithin12monthsaftertheendoftheperiodinwhichtheem ployeesrendertherelated
employee service;
(c) profit-sharingandbonusespayablewithin12monthsaftertheendofth eperiodinwhichtheemployees
render the related service; and
(d) non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) for
current employees.
9.Accountingforshort-termemployeebenefitsisgenerallystraightforwa rdbecausenoactuarialassumptionsare
requiredtomeasuretheobligationorthecostandthereisnopossibilityo fanyactuarialgainorloss.Moreover,
short-term employee benefit obligations are measured on an undiscounted basis.
Recognition and measurement
All short-term employee benefits
10. When an employee has rendered service to an enterprise during an accoun ting period, the enterprise should
recognisetheundiscountedamountofshort-termemployeebenefitsexpec tedtobepaidinexchangeforthat
service:
(a) asaliability(accruedexpense),afterdeductinganyamountalreadyp aid.Iftheamountalreadypaidexceeds
the undiscounted amount of the benefits, an enterprise should recognise t hat excess as an asset (prepaid
expense) to the extent that the prepayment will lead to, for example, a redu ction in future payments or a
cash refund; and
(b) as an expense, unless another International Accounting Standard requ ires or permits the inclusion of the
benefits in the cost of an asset (see, for example, IAS 2, inventories, and I AS 16, property, plant and
equipment).
Paragraphs 11, 14 and 17 explain how an enterprise should apply this requir ement to short-term employee
benefits in the form of compensated absences and profit-sharing and bonus plans.
Short-term compensated absences
11. Anenterpriseshouldrecognisetheexpectedcostofshort-termemploy eebenefitsintheformofcompensated
absences under paragraph 10 as follows:
(a) inthecaseofaccumulatingcompensatedabsences,whentheemployeesr enderservicethatincreasestheir
entitlement to future compensated absences; and
(b) in the case of non-accumulating compensated absences, when the absenc es occur.
12.An enterprise may compensate employees for absence for various reasons in cluding vacation, sickness and
short-term disability, maternity or paternity, jury service and militar y service. Entitlement to compensated
absences falls into two categories:
(a) accumulating; and(b) non-accumulating.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 149
13. Accumulating compensated absences are those that are carried forward and can be used in future periods if
thecurrentperiod’sentitlementisnotusedinfull.Accumulatingcompen satedabsencesmaybeeithervesting
(in other words, employees are entitled to a cash payment for unused entitl ement on leaving the enterprise)
or non-vesting (when employees are not entitled to a cash payment for unuse d entitlement on leaving). An
obligationarisesasemployeesrenderservicethatincreasestheirentit lementtofuturecompensatedabsences.
The obligation exists, and is recognised, even if the compensated absence s are non-vesting, although the
possibility that employees may leave before they use an accumulated non-v esting entitlement affects the
measurement of that obligation.
14. An enterprise should measure the expected cost of accumulating compen sated absences as the additional
amount that the enterprise expects to pay as a result of the unused entitlem ent that has accumulated at the
balance sheet date.
15.The method specified in the previous paragraph measures the obligation at the amount of the additional
payments that are expected to arise solely from the fact that the benefit ac cumulates. In many cases, an
enterprise may not need to make detailed computations to estimate that the re is no material obligation for
unused compensated absences. For example, a sick leave obligation is like ly to be material only if there is a
formal or informal understanding that unused paid sick leave may be taken a s paid vacation.
Example illustrating paragraphs 14 and 15
Anenterprisehas100employees,whoareeachentitledtofiveworkingdays ofpaidsickleaveforeachyear.
Unusedsickleavemaybecarriedforwardforonecalendaryear.Sickleavei stakenfirstoutofthecurrentyear’s
entitlement and then out of any balance brought forward from the previous y ear (a LIFO basis). At
31 December 20X1, the average unused entitlement is two days per employee. The enterprise expects, based
onpastexperiencewhichisexpectedtocontinue,that92employeeswillta kenomorethanfivedaysofpaid
sick leave in 20X2 and that the remaining eight employees will take an avera ge of six and a half days each.
The enterprise expects that it will pay an additional 12 days of sick pay as a result of the unused entitlement
that has accumulated at 31 December 20X1 (one and a half days each, for eight employees). Therefore, the
enterprise recognises a liability equal to 12 days of sick pay.
16.Non-accumulating compensated absences do not carry forward: they lapse i f the current period’s entitlement
is not used in full and do not entitle employees to a cash payment for unused e ntitlement on leaving the
enterprise.Thisiscommonlythecaseforsickpay(totheextentthatunuse dpastentitlementdoesnotincrease
futureentitlement),maternityorpaternityleaveandcompensatedabsen cesforjuryserviceormilitaryservice.
An enterprise recognises no liability or expense until the time of the abse nce, because employee service does
not increase the amount of the benefit.
Profit-sharing and bonus plans
17. An enterprise should recognise the expected cost of profit-sharing an d bonus payments under paragraph 10
when, and only when:
(a) the enterprise has a present legal or constructive obligation to make s uch payments as a result of past
events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the enterprise has no real istic alternative but to make the
payments.150 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
18. Undersomeprofit-sharingplans,employeesreceiveashareoftheprof itonlyiftheyremainwiththeenterprise
for a specified period. Such plans create a constructive obligation as emp loyees render service that increases
theamounttobepaidiftheyremaininserviceuntiltheendofthespecified period.Themeasurementofsuch
constructiveobligationsreflectsthepossibilitythatsomeemployeesm ayleavewithoutreceivingprofit-sharing
payments.
Example illustrating paragraph 18
A profit-sharing plan requires an enterprise to pay a specified proportio n of its net profit for the year to
employees who serve throughout the year. If no employees leave during the y ear, the total profit-sharing
payments for the year will b e3%o fn e t profit. The enterprise estimates that staff turnover will reduce the
payments to 2,5 % of net profit.
The enterprise recognises a liability and an expense of 2,5 % of net profit.
19.An enterprise may have no legal obligation to pay a bonus. Nevertheless, in some cases, an enterprise has a
practice of paying bonuses. In such cases, the enterprise has a constructi ve obligation because the enterprise
has no realistic alternative but to pay the bonus. The measurement of the co nstructive obligation reflects the
possibility that some employees may leave without receiving a bonus.
20.Anenterprisecanmakeareliableestimateofitslegalorconstructiveobl igationunderaprofit-sharingorbonus
plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amoun t of the benefit;
(b) the enterprise determines the amounts to be paid before the financial s tatements are authorised for issue;
or
(c) past practice gives clear evidence of the amount of the enterprise’s co nstructive obligation.
21.Anobligationunderprofit-sharingandbonusplansresultsfromemployee serviceandnotfromatransaction
withtheenterprise’sowners.Therefore,anenterpriserecognisestheco stofprofit-sharingandbonusplansnot
as a distribution of net profit but as an expense.
22.Ifprofit-sharingandbonuspaymentsarenotduewhollywithin12monthsaf tertheendoftheperiodinwhich
the employees render the related service, those payments are other long-t erm employee benefits (see
paragraphs 126 to 131). If profit-sharing and bonus payments meet the defi nition of equity compensation
benefits, an enterprise treats them under paragraphs 144 to 152.
Disclosure
23.Although this Standard does not require specific disclosures about short -term employee benefits, other
InternationalAccountingStandardsmayrequiredisclosures.Forexampl e,whererequiredbyIAS24,related
party disclosures, an enterprise discloses information about employee b enefits for key management
personnel.IAS1,presentationoffinancialstatements,requiresthatan enterpriseshoulddisclosestaffcosts.
POST-EMPLOYMENT BENEFITS: DISTINCTION BETWEEN DEFINED CONTRIBUTION PL ANS AND DEFINED
BENEFIT PLANS
24.Post-employment benefits include, for example:
(a) retirement benefits, such as pensions; and
(b) other post-employment benefits, such as post-employment life insura nce and post-employment medical
care.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 151
Arrangementswherebyanenterpriseprovidespost-employmentbenefitsa repost-employmentbenefitplans.
An enterprise applies this Standard to all such arrangements whether or no t they involve the establishment
of a separate entity to receive contributions and to pay benefits.
25.Post-employment benefit plans are classified as either defined contribu tion plans or defined benefit plans,
depending on the economic substance of the plan as derived from its princip al terms and conditions. Under
defined contribution plans:
(a) theenterprise’slegalorconstructiveobligationislimitedtotheam ountthatitagreestocontributetothe
fund. Thus, the amount of the post-employment benefits received by the emp loyee is determined by the
amount of contributions paid by an enterprise (and perhaps also the employ ee) to a post-employment
benefitplanortoaninsurancecompany,togetherwithinvestmentreturns arisingfromthecontributions;
and
(b) in consequence, actuarial risk (that benefits will be less than expect ed) and investment risk (that assets
invested will be insufficient to meet expected benefits) fall on the emplo yee.
26.Examplesofcaseswhereanenterprise’sobligationisnotlimitedtotheam ountthatitagreestocontributeto
the fund are when the enterprise has a legal or constructive obligation thr ough:
(a) a plan benefit formula that is not linked solely to the amount of contrib utions;
(b) a guarantee, either indirectly through a plan or directly, of a specifi ed return on contributions; or
(c) thoseinformalpracticesthatgiverisetoaconstructiveobligation. Forexample,aconstructiveobligation
mayarisewhereanenterprisehasahistoryofincreasingbenefitsforform eremployeestokeeppacewith
inflation even where there is no legal obligation to do so.
27.Under defined benefit plans:
(a) the enterprise’s obligation is to provide the agreed benefits to curre nt and former employees; and
(b) actuarial risk (that benefits will cost more than expected) and invest ment risk fall, in substance, on the
enterprise. If actuarial or investment experience are worse than expecte d, the enterprise’s obligation may
be increased.
28.Paragraphs 29 to 42 explain the distinction between defined contribution plans and defined benefit plans in
the context of multi-employer plans, State plans and insured benefits.
Multi-employer plans
29. An enterprise should classify a multi-employer plan as a defined contr ibution plan or a defined benefit plan
underthetermsoftheplan(includinganyconstructiveobligationthatgo esbeyondtheformalterms).Where
a multi-employer plan is a defined benefit plan, an enterprise should:
(a) account for its proportionate share of the defined benefit obligation , plan assets and cost associated with
the plan in the same way as for any other defined benefit plan; and
(b) disclose the information required by paragraph 120.152 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
30. Whensufficientinformationisnotavailabletousedefinedbenefitac countingforamulti-employerplanthat
is a defined benefit plan, an enterprise should:
(a) account for the plan under paragraphs 44 to 46 as if it were a defined cont ribution plan;
(b) disclose:
(i) the fact that the plan is a defined benefit plan; and
(ii) the reason why sufficient information is not available to enable the e nterprise to account for the plan
as a defined benefit plan; and
(c) to the extent that a surplus or deficit in the plan may affect the amount o f future contributions, disclose
in addition:(i) any available information about that surplus or deficit;(ii) the basis used to determine that surplus or deficit; and(iii)the implications, if any, for the enterprise.
31.
One example of a defined benefit multi-employer plan is one where:
(a) the plan is financed on a pay-as-you-go basis such that: contributions are set at a level that is expected to
besufficienttopaythebenefitsfallingdueinthesameperiod;andfuture benefitsearnedduringthecurrent
period will be paid out of future contributions; and
(b) employees’benefitsaredeterminedbythelengthoftheirserviceandt heparticipatingenterpriseshaveno
realistic means of withdrawing from the plan without paying a contributio n for the benefits earned by
employeesuptothedateofwithdrawal.Suchaplancreatesactuarialriskf ortheenterprise:iftheultimate
costofbenefitsalreadyearnedatthebalancesheetdateismorethanexpec ted,theenterprisewillhaveto
either increase its contributions or persuade employees to accept a reduc tion in benefits. Therefore, such
a plan is a defined benefit plan.
32.Where sufficient information is available about a multi-employer plan wh ich is a defined benefit plan, an
enterprise accounts for its proportionate share of the defined benefit ob ligation, plan assets and
post-employmentbenefitcostassociatedwiththeplaninthesamewayasfo ranyotherdefinedbenefitplan.
However,insomecases,anenterprisemaynotbeabletoidentifyitsshareo ftheunderlyingfinancialposition
and performance of the plan with sufficient reliability for accounting pu rposes. This may occur if:
(a) the enterprise does not have access to information about the plan that s atisfies the requirements of this
Standard; or
(b) the plan exposes the participating enterprises to actuarial risks ass ociated with the current and former
employees of other enterprises, with the result that there is no consisten t and reliable basis for allocating
the obligation, plan assets and cost to individual enterprises participa ting in the plan.
In those cases, an enterprise accounts for the plan as if it were a defined co ntribution plan and discloses the
additional information required by paragraph 30.
33.Multi-employerplansaredistinctfromgroupadministrationplans.Agro upadministrationplanismerelyan
aggregation of single employer plans combined to allow participating emp loyers to pool their assets for
investmentpurposesandreduceinvestmentmanagementandadministratio ncosts,buttheclaimsofdifferent
employers are segregated for the sole benefit of their own employees. Grou p administration plans pose no
particular accounting problems because information is readily availabl e to treat them in the same way as any
othersingleemployerplanandbecausesuchplansdonotexposethepartici patingenterprisestoactuarialrisks
associatedwiththecurrentandformeremployeesofotherenterprises.Th edefinitionsinthisStandardrequire
an enterprise to classify a group administration plan as a defined contrib ution plan or a defined benefit plan
in accordance with the terms of the plan (including any constructive oblig ation that goes beyond the formal
terms).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 153
34. Defined benefit plans that pool the assets contributed by various ente rprises under common control, for
example, a parent and its subsidiaries, are not multi-employer plans. The refore, an enterprise treats all such
plans as defined benefit plans.
35.IAS37,provisions,contingentliabilitiesandcontingentassets,requi resanenterprisetorecognise,ordisclose
informationabout,certaincontingentliabilities.Inthecontextofamu lti-employerplan,acontingentliability
may arise from, for example:
(a) actuarial losses relating to other participating enterprises becaus e each enterprise that participates in a
multi-employer plan shares in the actuarial risks of every other particip ating enterprise; or
(b) any responsibility under the terms of a plan to finance any shortfall in the plan if other enterprises cease
to participate.
State plans
36.AnenterpriseshouldaccountforaStateplaninthesamewayasforamulti-e mployerplan(seeparagraphs29
and 30).
37.Stateplansareestablishedbylegislationtocoverallenterprises(oral lenterprisesinaparticularcategory,for
example, a specific industry) and are operated by national or local govern ment or by another body (for
example, an autonomous agency created specifically for this purpose) whi ch is not subject to control or
influence by the reporting enterprise. Some plans established by an enter prise provide both compulsory
benefits which substitute for benefits that would otherwise be covered un der a State plan and additional
voluntary benefits. Such plans are not State plans.
38.State plans are characterised as defined benefit or defined contribution in nature based on the enterprise’s
obligationundertheplan.ManyStateplansarefundedonapay-as-you-gob asis:contributionsaresetatalevel
thatisexpectedtobesufficienttopaytherequiredbenefitsfallingduei nthesameperiod;futurebenefitsearned
during the current period will be paid out of future contributions. Nevert heless, in most State plans, the
enterprisehasnolegalorconstructiveobligationtopaythosefutureben efits:itsonlyobligationistopaythe
contributions as they fall due and if the enterprise ceases to employ membe rs of the State plan, it will have
no obligation to pay the benefits earned by its own employees in previous ye ars. For this reason, State plans
arenormallydefinedcontributionplans.However,intherarecaseswhena Stateplanisadefinedbenefitplan,
an enterprise applies the treatment prescribed in paragraphs 29 and 30.
Insured benefits
39. An enterprise may pay insurance premiums to fund a post-employment ben efit plan. The enterprise should
treat such a plan as a defined contribution plan unless the enterprise will have (either directly, or indirectly
through the plan) a legal or constructive obligation to either:
(a) pay the employee benefits directly when they fall due; or
(b) pay further amounts if the insurer does not pay all future employee bene fits relating to employee service
in the current and prior periods.
Iftheenterpriseretainssuchalegalorconstructiveobligation,theent erpriseshouldtreattheplanasadefined
benefit plan.
40.The benefits insured by an insurance contract need not have a direct or auto matic relationship with the
enterprise’sobligationforemployeebenefits.Post-employmentbenefi tplansinvolvinginsurancecontractsare
subject to the same distinction between accounting and funding as other fu nded plans.154 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
41. Whereanenterprisefundsapost-employmentbenefitobligationbycon tributingtoaninsurancepolicyunder
which the enterprise (either directly, indirectly through the plan, thro ugh the mechanism for setting future
premiums or through a related party relationship with the insurer) retain s a legal or constructive obligation,
the payment of the premiums does not amount to a defined contribution arran gement. It follows that the
enterprise:
(a) accounts for a qualifying insurance policy as a plan asset (see paragra ph 7); and
(b) recognises other insurance policies as reimbursement rights (if the p olicies satisfy the criteria in
paragraph 104A).
42.Where an insurance policy is in the name of a specified plan participant or a group of plan participants and
theenterprisedoesnothaveanylegalorconstructiveobligationtocover anylossonthepolicy,theenterprise
has no obligation to pay benefits to the employees and the insurer has sole r esponsibility for paying the
benefits.Thepaymentoffixedpremiumsundersuchcontractsis,insubsta nce,thesettlementoftheemployee
benefit obligation, rather than an investment to meet the obligation. Con sequently, the enterprise no longer
has an asset or a liability. Therefore, an enterprise treats such payments as contributions to a defined
contribution plan.
POST-EMPLOYMENT BENEFITS: DEFINED CONTRIBUTION PLANS
43.Accountingfordefinedcontributionplansisstraightforwardbecauseth ereportingenterprise’sobligationfor
each period is determined by the amounts to be contributed for that period. Consequently, no actuarial
assumptionsarerequiredtomeasuretheobligationortheexpenseandther eisnopossibilityofanyactuarial
gain or loss. Moreover, the obligations are measured on an undiscounted ba sis, except where they do not fall
due wholly within 12 months after the end of the period in which the employee s render the related service.
Recognition and measurement
44. When an employee has rendered service to an enterprise during a period, the enterprise should recognise the
contribution payable to a defined contribution plan in exchange for that s ervice:
(a) as a liability (accrued expense), after deducting any contribution al ready paid. If the contribution already
paidexceedsthecontributiondueforservicebeforethebalancesheetdat e,anenterpriseshouldrecognise
that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a
reduction in future payments or a cash refund; and
(b) as an expense, unless another International Accounting Standard requ ires or permits the inclusion of the
contribution in the cost of an asset (see, for example, IAS 2, inventories, and IAS 16, property, plant and
equipment).
45. Wherecontributionstoadefinedcontributionplandonotfallduewhol lywithin12monthsaftertheendof
the period in which the employees render the related service, they should b e discounted using the discount
rate specified in paragraph 78.
Disclosure
46. An enterprise should disclose the amount recognised as an expense for d efined contribution plans.
47.Where required by IAS 24, related party disclosures, an enterprise disclo ses information about contributions
to defined contribution plans for key management personnel.
POST-EMPLOYMENT BENEFITS: DEFINED BENEFIT PLANS
48.Accounting for defined benefit plans is complex because actuarial assump tions are required to measure the
obligation and the expense and there is a possibility of actuarial gains an d losses. Moreover, the obligations
are measured on a discounted basis because they may be settled many years af ter the employees render the
related service.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 155
Recognition and measurement
49.Defined benefit plans may be unfunded, or they may be wholly or partly funde d by contributions by an
enterprise, and sometimes its employees, into an entity, or fund, that is l egally separate from the reporting
enterpriseandfromwhichtheemployeebenefitsarepaid.Thepaymentoffu ndedbenefitswhentheyfalldue
depends not only on the financial position and the investment performance of the fund but also on an
enterprise’s ability (and willingness) to make good any shortfall in the f und’s assets. Therefore, the enterprise
is, in substance, underwriting the actuarial and investment risks associ ated with the plan. Consequently, the
expense recognised for a defined benefit plan is not necessarily the amoun t of the contribution due for the
period.
50.Accounting by an enterprise for defined benefit plans involves the follow ing steps:
(a) usingactuarialtechniquestomakeareliableestimateoftheamountof benefitthatemployeeshaveearned
in return for their service in the current and prior periods. This requires an enterprise to determine how
much benefit is attributable to the current and prior periods (see paragra phs 67 to 71) and to make
estimates(actuarialassumptions)aboutdemographicvariables(suchas employeeturnoverandmortality)
and financial variables (such as future increases in salaries and medical costs) that will influence the cost
of the benefit (see paragraphs 72 to 91);
(b) discountingthatbenefitusingtheprojectedunitcreditmethodinord ertodeterminethepresentvalueof
the defined benefit obligation and the current service cost (see paragrap hs 64 to 66);
(c) determining the fair value of any plan assets (see paragraphs 102 to 104 );
(d) determining the total amount of actuarial gains and losses and the amou nt of those actuarial gains and
losses that should be recognised (see paragraphs 92 to 95);
(e) whereaplanhasbeenintroducedorchanged,determiningtheresulting pastservicecost(seeparagraphs96
to 101); and
(f) where a plan has been curtailed or settled, determining the resulting g ain or loss (see paragraphs 109
to 115).
Where an enterprise has more than one defined benefit plan, the enterprise applies these procedures for each
material plan separately.
51.In some cases, estimates, averages and computational shortcuts may provi de a reliable approximation of the
detailed computations illustrated in this Standard.
Accounting for the constructive obligation
52. Anenterpriseshouldaccountnotonlyforitslegalobligationunderth eformaltermsofadefinedbenefitplan,
butalsoforanyconstructiveobligationthatarisesfromtheenterprise’ sinformalpractices.Informalpractices
give rise to a constructive obligation where the enterprise has no realist ic alternative but to pay employee
benefits.Anexampleofaconstructiveobligationiswhereachangeinthee nterprise’sinformalpracticeswould
cause unacceptable damage to its relationship with employees.
53.Theformaltermsofadefinedbenefitplanmaypermitanenterprisetotermi nateitsobligationundertheplan.
Nevertheless,itisusuallydifficultforanenterprisetocancelaplanif employeesaretoberetained.Therefore,
intheabsenceofevidencetothecontrary,accountingforpost-employmen tbenefitsassumesthatanenterprise
which is currently promising such benefits will continue to do so over the r emaining working lives of
employees.
Balance sheet
54. The amount recognised as a defined benefit liability should be the net t otal of the following amounts:
(a) the present value of the defined benefit obligation at the balance shee t date (see paragraph 64);156 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) plus any actuarial gains (less any actuarial losses) not recognised be cause of the treatment set out in
paragraphs 92 to 93;
(c) minus any past service cost not yet recognised (see paragraph 96);
(d) minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to be
settled directly (see paragraphs 102 to 104).
55.The present value of the defined benefit obligation is the gross obligatio n, before deducting the fair value of
any plan assets.
56. Anenterpriseshoulddeterminethepresentvalueofdefinedbenefitob ligationsandthefairvalueofanyplan
assetswithsufficientregularitythattheamountsrecognisedinthefina ncialstatementsdonotdiffermaterially
from the amounts that would be determined at the balance sheet date.
57.ThisStandardencourages,butdoesnotrequire,anenterprisetoinvolvea qualifiedactuaryinthemeasurement
ofallmaterialpost-employmentbenefitobligations.Forpracticalreas ons,anenterprisemayrequestaqualified
actuarytocarryoutadetailedvaluationoftheobligationbeforethebala ncesheetdate.Nevertheless,theresults
of that valuation are updated for any material transactions and other mate rial changes in circumstances
(including changes in market prices and interest rates) up to the balance s heet date.
58. The amount determined under paragraph 54 may be negative (an asset). An enterprise should measure the
resulting asset at the lower of:
(a) the amount determined under paragraph 54; and(b) the total of:
(i) anycumulativeunrecognisednetactuariallossesandpastservicecos t(seeparagraphs92,93and96);
and
(ii) the present value of any economic benefits available in the form of ref unds from the plan or
reductions in future contributions to the plan. The present value of these economic benefits should
be determined using the discount rate specified in paragraph 78.
58A. The application of paragraph 58 should not result in a gain being recog nised solely as a result of an actuarial
lossorpastservicecostinthecurrentperiodorinalossbeingrecognised solelyasaresultofanactuarialgain
inthecurrentperiod.Theenterpriseshouldthereforerecogniseimmedia telyunderparagraph54thefollowing,
totheextentthattheyarisewhilethedefinedbenefitassetisdetermined inaccordancewithparagraph58(b):
(a) netactuariallossesofthecurrentperiodandpastservicecostofthec urrentperiodtotheextentthatthey
exceedanyreductioninthepresentvalueoftheeconomicbenefitsspecifi edinparagraph58(b)(ii).Ifthere
is no change or an increase in the present value of the economic benefits, th e entire net actuarial losses
ofthecurrentperiodandpastservicecostofthecurrentperiodshouldber ecognisedimmediatelyunder
paragraph 54,
(b) net actuarial gains of the current period after the deduction of past se rvice cost of the current period to
the extent that they exceed any increase in the present value of the economi c benefits specified in
paragraph58(b)(ii).Ifthereisnochangeoradecreaseinthepresentvalu eoftheeconomicbenefits,the
entirenetactuarialgainsofthecurrentperiodafterthedeductionofpas tservicecostofthecurrentperiod
should be recognised immediately under paragraph 54.
58B.
Paragraph 58A applies to an enterprise only if it has, at the beginning or en d of the accounting period, a
surplus (1) in a defined benefit plan and cannot, based on the current terms of the plan , recover that surplus
fullythroughrefundsorreductionsinfuturecontributions.Insuchcase s,pastservicecostandactuariallosses
that arise in the period, the recognition of which is deferred under paragr aph 54, will increase the amount
specified in paragraph 58(b)(i). If that increase is not offset by an equal decrease in the present value of
economicbenefitsthatqualifyforrecognitionunderparagraph58(b)(ii ),therewillbeanincreaseinthenettotal
specified by paragraph 58(b) and, hence, a recognised gain. Paragraph 58A prohibits the recognition
(1) A surplus is an excess of the fair value of the plan assets over the present v alue of the defined benefit obligation.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 157
of a gain in these circumstances. The opposite effect arises with actuaria l gains that arise in the period, the
recognition of which is deferred under paragraph 54, to the extent that the actuarial gains reduce cumulative
unrecognised actuarial losses. Paragraph 58A prohibits the recognition of a loss in these circumstances. For
examples of the application of this paragraph, see Appendix C.
59.Anassetmayarisewhereadefinedbenefitplanhasbeenoverfundedorincer taincaseswhereactuarialgains
are recognised. An enterprise recognises an asset in such cases because:
(a) the enterprise controls a resource, which is the ability to use the surp lus to generate future benefits;
(b) that control is a result of past events (contributions paid by the enter prise and service rendered by the
employee); and
(c) futureeconomicbenefitsareavailabletotheenterpriseintheformof areductioninfuturecontributions
or a cash refund, either directly to the enterprise or indirectly to anothe r plan in deficit.
60.The limit in paragraph 58(b) does not over-ride the delayed recognition of certain actuarial losses (see
paragraphs 92 and 93) and certain past service cost (see paragraph 96), oth er than as specified in
paragraph 58A. However, that limit does over-ride the transitional optio n in paragraph 155(b).
Paragraph 120(c)(vi) requires an enterprise to disclose any amount not re cognised as an asset because of the
limit in paragraph 58(b).
Example illustrating paragraph 60
A defined benefit plan has the following characteristics:
Present value of the obligation 1,1Fair value of plan assets (1 190)
(90)
Unrecognised actuarial losses (110)Unrecognised past service cost (70)UnrecognisedincreaseintheliabilityoninitialadoptionoftheStandar dunderparagraph155(b) (50)
Negative amount determined under paragraph 54 (320)
Present value of available future refunds and reductions in future contri butions 90
The limit under paragraph 58(b) is computed as follows:unrecognised actuarial losses 110unrecognised past service cost 70present value of available future refunds and reductions in future contri butions 90
Limit 270
270 is less than 320. Therefore, the enterprise recognises an asset of 270 a nd discloses that the limit reduced
the carrying amount of the asset by 50 (see paragraph 120(c)(vi)).158 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Income statement
61. An enterprise should recognise the net total of the following amounts a s expense or (subject to the limit in
paragraph 58(b)) income, except to the extent that another International Accounting Standard requires or
permits their inclusion in the cost of an asset:
(a) current service cost (see paragraphs 63 to 91);
(b) interest cost (see paragraph 82);(c) the expected return on any plan assets (see paragraphs 105 to 107) and on any reimbursement rights
(paragraph 104A);
(d) actuarial gains and losses, to the extent that they are recognised unde r paragraphs 92 and 93;
(e) past service cost, to the extent that paragraph 96 requires an enterpri se to recognise it; and
(f) the effect of any curtailments or settlements (see paragraphs 109 and 1 10).
62.
Other International Accounting Standards require the inclusion of certa in employee benefit costs within the
cost of assets such as inventories or property, plant and equipment (see IA S 2, inventories, and IAS 16,
property,plantandequipment).Anypost-employmentbenefitcostsinclu dedinthecostofsuchassetsinclude
the appropriate proportion of the components listed in paragraph 61.
Recognition and measurement: present value of defined benefit obligatio ns and current service cost
63.Theultimatecostofadefinedbenefitplanmaybeinfluencedbymanyvariab les,suchasfinalsalaries,employee
turnoverandmortality,medicalcosttrendsand,forafundedplan,theinv estmentearningsontheplanassets.
The ultimate cost of the plan is uncertain and this uncertainty is likely to persist over a long period of time.
In order to measure the present value of the post-employment benefit oblig ations and the related current
service cost, it is necessary to:
(a) apply an actuarial valuation method (see paragraphs 64 to 66);(b) attribute benefit to periods of service (see paragraphs 67 to 71); and(c) make actuarial assumptions (see paragraphs 72 to 91).
Actuarial valuation method
64. Anenterpriseshouldusetheprojectedunitcreditmethodtodetermine thepresentvalueofitsdefinedbenefit
obligations and the related current service cost and, where applicable, p ast service cost.
65.The projected unit credit method (sometimes known as the accrued benefit m ethod pro-rated on service or
asthebenefit/yearsofservicemethod)seeseachperiodofserviceasgivi ngrisetoanadditionalunitofbenefit
entitlement (see paragraphs 67 to 71) and measures each unit separately to build up the final obligation (see
paragraphs 72 to 91).
66.Anenterprisediscountsthewholeofapost-employmentbenefitobligatio n,evenifpartoftheobligationfalls
due within 12 months of the balance sheet date.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 159
Example illustrating paragraph 65
Alumpsumbenefitispayableonterminationofserviceandequalt o1%offinalsalaryforeachyearofservice.
Thesalaryinyear1is10 000andisassumedtoincreasea t7%(compound)eachyear.Thediscountrateused
is10%perannum.Thefollowingtableshowshowtheobligationbuildsupfor anemployeewhoisexpected
toleaveattheendofyear5,assumingthattherearenochangesinactuarial assumptions.Forsimplicity,this
example ignores the additional adjustment needed to reflect the probabil ity that the employee may leave the
enterprise at an earlier or later date.
Year 1 2 3 4 5
Benefit attributed to:
— prior years 0 131 262 393 524— current year (1 % of final salary) 131
131 131 131 131
— current and prior years 131 262 393 524 655
Opening obligation — 89 196 324 476Interest at 10 % — 9 20 33 48Current service cost 89
98 108 119 131
Closing obligation 89 196 324 476 655
Note: 1. The opening obligation is the present value of benefit attributed to prior years.
2. The current service cost is the present value of benefit attributed to th e current year.
3. The closing obligation is the present value of benefit attributed to cur rent and prior years.
Attributing benefit to periods of service
67. In determining the present value of its defined benefit obligations an d the related current service cost and,
whereapplicable,pastservicecost,anenterpriseshouldattributebene fittoperiodsofserviceundertheplan’s
benefitformula.However,ifanemployee’sserviceinlateryearswilllea dtoamateriallyhigherlevelofbenefit
than in earlier years, an enterprise should attribute benefit on a straigh t-line basis from:
(a) the date when service by the employee first leads to benefits under the p lan (whether or not the benefits
are conditional on further service); until
(b) the date when further service by the employee will lead to no material am ount of further benefits under
the plan, other than from further salary increases.
68.The projected unit credit method requires an enterprise to attribute bene fit to the current period (in order to
determine current service cost) and the current and prior periods (in orde r to determine the present value of
defined benefit obligations). An enterprise attributes benefit to perio ds in which the obligation to provide
post-employment benefits arises. That obligation arises as employees re nder services in return for
post-employmentbenefitswhichanenterpriseexpectstopayinfuturerep ortingperiods.Actuarialtechniques
allow an enterprise to measure that obligation with sufficient reliabili ty to justify recognition of a liability.160 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Examples illustrating paragraph 68
1.Adefinedbenefitplanprovidesalump-sumbenefitof100payableonretire mentforeachyearofservice.
Abenefitof100isattributedtoeachyear.Thecurrentservicecostisthep resentvalueof100.Thepresent
value of the defined benefit obligation is the present value of 100, multip lied by the number of years of
service up to the balance sheet date.
Ifthebenefitispayableimmediatelywhentheemployeeleavestheenterpr ise,thecurrentservicecostand
the present value of the defined benefit obligation reflect the date at whi ch the employee is expected to
leave.Thus,becauseoftheeffectofdiscounting,theyarelessthantheam ountsthatwouldbedetermined
if the employee left at the balance sheet date.
2.Aplanprovidesamonthlypensionof0,2%offinalsalaryforeachyearofser vice.Thepensionispayable
from the age of 65.Benefit equal to the present value, at the expected retirement date, of a mo nthly pension of 0,2 % of the
estimated final salary payable from the expected retirement date until th e expected date of death is
attributedtoeachyearofservice.Thecurrentservicecostisthepresent valueofthatbenefit.Thepresent
valueofthedefinedbenefitobligationisthepresentvalueofmonthlypen sionpaymentsof0,2%offinal
salary,multipliedbythenumberofyearsofserviceuptothebalancesheet date.Thecurrentservicecost
and the present value of the defined benefit obligation are discounted bec ause pension payments begin
at the age of 65.
69.
Employee service gives rise to an obligation under a defined benefit plan e ven if the benefits are conditional
onfutureemployment(inotherwordstheyarenotvested).Employeeservic ebeforethevestingdategivesrise
to a constructive obligation because, at each successive balance sheet da te, the amount of future service that
an employee will have to render before becoming entitled to the benefit is r educed. In measuring its defined
benefit obligation, an enterprise considers the probability that some em ployees may not satisfy any vesting
requirements. Similarly, although certain post-employment benefits, f or example, post-employment medical
benefits, become payable only if a specified event occurs when an employee is no longer employed, an
obligation is created when the employee renders service that will provide entitlement to the benefit if the
specified event occurs. The probability that the specified event will occ ur affects the measurement of the
obligation, but does not determine whether the obligation exists.
Examples illustrating paragraph 69
1.A plan pays a benefit of 100 for each year of service. The benefits vest after ten years of service.
A benefit of 100 is attributed to each year. In each of the first 10 years, the current service cost and the
present value of the obligation reflect the probability that the employee may not complete 10 years of
service.
2.Aplanpaysabenefitof100foreachyearofservice,excludingservicebefo retheageof25.Thebenefits
vest immediately.
No benefit is attributed to service before the age of 25 because service bef ore that date does not lead to
benefits (conditional or unconditional). A benefit of 100 is attributed t o each subsequent year.
70.The obligation increases until the date when further service by the employ ee will lead to no material amount
of further benefits. Therefore, all benefit is attributed to periods endi ng on or before that date. Benefit is
attributedtoindividualaccountingperiodsundertheplan’sbenefitfor mula.However,ifanemployee’sservice
inlateryearswillleadtoamateriallyhigherlevelofbenefitthaninearl ieryears,anenterpriseattributesbenefit
on a straight-line basis until the date when further service by the employe e will lead to no material amount
offurtherbenefits.Thatisbecausetheemployee’sservicethroughoutth eentireperiodwillultimatelyleadto
benefit at that higher level.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 161
Examples illustrating paragraph 70
1.Aplanpaysalump-sumbenefitof1 000thatvestsafter10yearsofservice.T heplanprovidesnofurther
benefit for subsequent service.
A benefit of 100 (1 000 divided by 10) is attributed to each of the first 10 yea rs. The current service cost
ineachofthefirst10yearsreflectstheprobabilitythattheemployeemay notcomplete10yearsofservice.
No benefit is attributed to subsequent years.
2.Aplanpaysalump-sumretirementbenefitof2 000toallemployeeswhoarest illemployedattheageof
55after20yearsofservice,orwhoarestillemployedattheageof65,regar dlessoftheirlengthofservice.
Foremployeeswhojoinbeforetheageof35,servicefirstleadstobenefits undertheplanattheageof35
(anemployeecouldleaveattheageof30andreturnattheageof33,withnoef fectontheamountortiming
of benefits). Those benefits are conditional on further service. Also, se rvice beyond the age of 55 will lead
to no material amount of further benefits. For these employees, the enterp rise attributes benefit of 100
(2 000 divided by 20) to each year from the age of 35 to the age of 55.
For employees who join between the ages of 35 and 45, service beyond 20 years will lead to no material
amountoffurtherbenefits.Fortheseemployees,theenterpriseattribut esbenefitof100(2 000dividedby
20) to each of the first 20 years.For an employee who joins at the age of 55, service beyond 10 years will lead t o no material amount of
further benefits. For this employee, the enterprise attributes benefit o f 200 (2 000 divided by 10) to each
of the first 10 years.Forallemployees,thecurrentservicecostandthepresentvalueoftheobl igationreflecttheprobabilitythat
the employee may not complete the necessary period of service.
3.
Apost-employmentmedicalplanreimburses40%ofanemployee’spost-empl oymentmedicalcostsifthe
employeeleavesaftermorethan10andlessthan20yearsofserviceand50%o fthosecostsiftheemployee
leaves after 20 or more years of service.
Undertheplan’sbenefitformula,theenterpriseattribute s4%ofthe presentvalueoftheexpectedmedical
costs(40%dividedby10)toeachofthefirst10yearsand1%(10%dividedby1 0)toeachofthesecond
10years.Thecurrentservicecostineachyearreflectstheprobabilityth attheemployeemaynotcomplete
the necessary period of service to earn part or all of the benefits. For empl oyees expected to leave within
10 years, no benefit is attributed.
4.Apost-employmentmedicalplanreimburses10%ofanemployee’spost-empl oymentmedicalcostsifthe
employeeleavesaftermorethan10andlessthan20yearsofserviceand50%o fthosecostsiftheemployee
leaves after 20 or more years of service.
Service in later years will lead to a materially higher level of benefit tha n in earlier years. Therefore, for
employeesexpectedtoleaveafter20ormoreyears,theenterpriseattribu tesbenefitonastraight-linebasis
underparagraph68.Servicebeyond20yearswillleadtonomaterialamount offurtherbenefits.Therefore,
thebenefitattributedtoeachofthefirst20yearsis2,5%ofthepresentva lueoftheexpectedmedicalcosts
(50 % divided by 20).162 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Foremployeesexpectedtoleavebetween10and20years,thebenefitattrib utedtoeachofthefirst10years
i s1%o ft h e present value of the expected medical costs. For these employees, no benef it is attributed to
service between the end of the 10th year and the estimated date of leaving.
For employees expected to leave within 10 years, no benefit is attributed.
71.Where the amount of a benefit is a constant proportion of final salary for ea ch year of service, future salary
increaseswillaffecttheamountrequiredtosettletheobligationthatex istsforservicebeforethebalancesheet
date, but do not create an additional obligation. Therefore:
(a) forthepurposeofparagraph67(b),salaryincreasesdonotleadtofurt herbenefits,eventhoughtheamount
of the benefits is dependent on final salary; and
(b) theamountofbenefitattributedtoeachperiodisaconstantproportio nofthesalarytowhichthebenefit
is linked.
Example illustrating paragraph 71
Employees are entitled to a benefit o f3%o ffinal salary for each year of service before the age of 55.
Benefitof3%ofestimatedfinalsalaryisattributedtoeachyearuptothea geof55.Thisisthedatewhenfurther
service by the employee will lead to no material amount of further benefits under the plan. No benefit is
attributed to service after that age.
Actuarial assumptions
72. Actuarial assumptions should be unbiased and mutually compatible.73.
Actuarial assumptions are an enterprise’s best estimates of the variable s that will determine the ultimate cost
of providing post-employment benefits. Actuarial assumptions comprise :
(a) demographic assumptions about the future characteristics of current and former employees (and their
dependants) who are eligible for benefits. Demographic assumptions deal with matters such as:
(i) mortality, both during and after employment;
(ii) rates of employee turnover, disability and early retirement;(iii)the proportion of plan members with dependants who will be eligible f or benefits; and
(iv) claim rates under medical plans; and
(b) financial assumptions, dealing with items such as:
(i) the discount rate (see paragraphs 78 to 82);(ii) future salary and benefit levels (see paragraphs 83 to 87);(iii)inthecaseofmedicalbenefits,futuremedicalcosts,including,wh erematerial,thecostofadministering
claims and benefit payments (see paragraphs 88 to 91); and
(iv) the expected rate of return on plan assets (see paragraphs 105 to 107).
74.
Actuarial assumptions are unbiased if they are neither imprudent nor exce ssively conservative.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 163
75.Actuarialassumptionsaremutuallycompatibleiftheyreflecttheeconom icrelationshipsbetweenfactorssuch
asinflation,ratesofsalaryincrease,thereturnonplanassetsanddisco untrates.Forexample,allassumptions
which depend on a particular inflation level (such as assumptions about in terest rates and salary and benefit
increases) in any given future period assume the same inflation level in th at period.
76.An enterprise determines the discount rate and other financial assumptio ns in nominal (stated) terms, unless
estimatesinreal(inflation-adjusted)termsaremorereliable,forexam ple,inahyperinflationaryeconomy(see
IAS 29, financial reporting in hyperinflationary economies), or where th e benefit is index-linked and there is
a deep market in index-linked bonds of the same currency and term.
77. Financial assumptions should be based on market expectations, at the b alance sheet date, for the period over
which the obligations are to be settled.
Actuarial assumptions: discount rate
78. The rate used to discount post-employment benefit obligations (both f unded and unfunded) should be
determinedbyreferencetomarketyieldsatthebalancesheetdateonhighq ualitycorporatebonds.Incountries
wherethereisnodeepmarketinsuchbonds,themarketyields(atthebalanc esheetdate)ongovernmentbonds
shouldbeused.Thecurrencyandtermofthecorporatebondsorgovernmentb ondsshouldbeconsistentwith
the currency and estimated term of the post-employment benefit obligatio ns.
79.One actuarial assumption which has a material effect is the discount rate. The discount rate reflects the time
value of money but not the actuarial or investment risk. Furthermore, the d iscount rate does not reflect the
enterprise-specific credit risk borne by the enterprise’s creditors, no r does it reflect the risk that future
experience may differ from actuarial assumptions.
80.The discount rate reflects the estimated timing of benefit payments. In pr actice, an enterprise often achieves
thisbyapplyingasingleweightedaveragediscountratethatreflectsthe estimatedtimingandamountofbenefit
payments and the currency in which the benefits are to be paid.
81.Insomecases,theremaybenodeepmarketinbondswithasufficientlylongm aturitytomatchtheestimated
maturity of all the benefit payments. In such cases, an enterprise uses cur rent market rates of the appropriate
termtodiscountshortertermpayments,andestimatesthediscountratefo rlongermaturitiesbyextrapolating
current market rates along the yield curve. The total present value of a def ined benefit obligation is unlikely
to be particularly sensitive to the discount rate applied to the portion of benefits that is payable beyond the
final maturity of the available corporate or government bonds.
82.Interestcostiscomputedbymultiplyingthediscountrateasdetermineda tthestartoftheperiodbythepresent
value of the defined benefit obligation throughout that period, taking ac count of any material changes in the
obligation. The present value of the obligation will differ from the liabi lity recognised in the balance sheet
because the liability is recognised after deducting the fair value of any p lan assets and because some actuarial
gains and losses, and some past service cost, are not recognised immediate ly. (Appendix A illustrates the
computation of interest cost, among other things.)
Actuarial assumptions: salaries, benefits and medical costs
83. Post-employment benefit obligations should be measured on a basis tha t reflects:
(a) estimated future salary increases;
(b) thebenefitssetoutinthetermsoftheplan(orresultingfromanyconst ructiveobligationthatgoesbeyond
those terms) at the balance sheet date; and164 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) estimated future changes in the level of any State benefits that affect the benefits payable under a defined
benefit plan, if, and only if, either:
(i) those changes were enacted before the balance sheet date; or(ii) past history, or other reliable evidence, indicates that those State benefits will change in some
predictable manner, for example, in line with future changes in general pr ice levels or general salary
levels.
84.
Estimates of future salary increases take account of inflation, seniorit y, promotion and other relevant factors,
such as supply and demand in the employment market.
85.Iftheformaltermsofaplan(oraconstructiveobligationthatgoesbeyond thoseterms)requireanenterprise
tochangebenefitsinfutureperiods,themeasurementoftheobligationre flectsthosechanges.Thisisthecase
when, for example:
(a) theenterprisehasapasthistoryofincreasingbenefits,forexample, tomitigatetheeffectsofinflation,and
there is no indication that this practice will change in the future; or
(b) actuarial gains have already been recognised in the financial stateme nts and the enterprise is obliged, by
eithertheformaltermsofaplan(oraconstructiveobligationthatgoesbe yondthoseterms)orlegislation,
to use any surplus in the plan for the benefit of plan participants (see para graph 98(c)).
86.Actuarialassumptionsdonotreflectfuturebenefitchangesthatarenots etoutintheformaltermsoftheplan
(or a constructive obligation) at the balance sheet date. Such changes wil l result in:
(a) past service cost, to the extent that they change benefits for service b efore the change; and
(b) current service cost for periods after the change, to the extent that th ey change benefits for service after
the change.
87.Some post-employment benefits are linked to variables such as the level of State retirement benefits or State
medical care. The measurement of such benefits reflects expected changes in such variables, based on past
history and other reliable evidence.
88. Assumptions about medical costs should take account of estimated futu re changes in the cost of medical
services, resulting from both inflation and specific changes in medical c osts.
89.Measurement of post-employment medical benefits requires assumptions a bout the level and frequency of
future claims and the cost of meeting those claims. An enterprise estimate s future medical costs on the basis
ofhistoricaldataabouttheenterprise’sownexperience,supplementedw herenecessarybyhistoricaldatafrom
otherenterprises,insurancecompanies,medicalprovidersorothersour ces.Estimatesoffuturemedicalcosts
considertheeffectoftechnologicaladvances,changesinhealthcareuti lisationordeliverypatternsandchanges
in the health status of plan participants.
90.The level and frequency of claims is particularly sensitive to the age, hea lth status and sex of employees (and
theirdependants)andmaybesensitivetootherfactorssuchasgeographic allocation.Therefore,historicaldata
isadjustedtotheextentthatthedemographicmixofthepopulationdiffer sfromthatofthepopulationused
as a basis for the historical data. It is also adjusted where there is reliab le evidence that historical trends will
not continue.
91.Somepost-employmenthealthcareplansrequireemployeestocontributet othemedicalcostscoveredbythe
plan.Estimatesoffuturemedicalcoststakeaccountofanysuchcontribut ions,basedonthetermsoftheplan
at the balance sheet date (or based on any constructive obligation that goe s beyond those terms).Changes in13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 165
those employee contributions result in past service cost or, where applic able,
curtailments. The cost of meeting claims may be reduced by benefits from St ate or other medical providers
(see paragraphs 83(c) and 87).
Actuarial gains and losses
92. Inmeasuringitsdefinedbenefitliabilityunderparagraph54,anente rpriseshould,subjecttoparagraph58A,
recognise a portion (as specified in paragraph 93) of its actuarial gains a nd losses as income or expense if the
net cumulative unrecognised actuarial gains and losses at the end of the pr evious reporting period exceeded
the greater of:
(a) 10%ofthepresentvalueofthedefinedbenefitobligationatthatdate( beforedeductingplanassets);and
(b) 10 % of the fair value of any plan assets at that date.
These limits should be calculated and applied separately for each defined benefit plan.
93. Theportionofactuarialgainsandlossestoberecognisedforeachdefi nedbenefitplanistheexcessdetermined
underparagraph92,dividedbytheexpectedaverageremainingworkingliv esoftheemployeesparticipating
in that plan. However, an enterprise may adopt any systematic method that r esults in faster recognition of
actuarial gains and losses, provided that the same basis is applied to both gains and losses and the basis is
appliedconsistentlyfromperiodtoperiod.Anenterprisemayapplysuchs ystematicmethodstoactuarialgains
and losses even if they fall within the limits specified in paragraph 92.
94.Actuarialgainsandlossesmayresultfromincreasesordecreasesineithe rthepresentvalueofadefinedbenefit
obligationorthefairvalueofanyrelatedplanassets.Causesofactuaria lgainsandlossesinclude,forexample:
(a) unexpectedly high or low rates of employee turnover, early retirement or mortality or of increases in
salaries, benefits (if the formal or constructive terms of a plan provide f or inflationary benefit increases)
or medical costs;
(b) theeffectofchangesinestimatesoffutureemployeeturnover,earlyr etirementormortalityorofincreases
insalaries,benefits(iftheformalorconstructivetermsofaplanprovid eforinflationarybenefitincreases)
or medical costs;
(c) the effect of changes in the discount rate; and
(d) differences between the actual return on plan assets and the expected r eturn on plan assets (see
paragraphs 105 to 107).
95.In the long term, actuarial gains and losses may offset one another. Theref ore, estimates of post-employment
benefit obligations are best viewed as a range (or “corridor”) around the b est estimate. An enterprise is
permitted, but not required, to recognise actuarial gains and losses that fall within that range. This Standard
requiresanenterprisetorecognise,asaminimum,aspecifiedportionoft heactuarialgainsandlossesthatfall
outsidea“corridor”ofplusorminus10%.(AppendixAillustratesthetrea tmentofactuarialgainsandlosses,
amongotherthings.)TheStandardalsopermitssystematicmethodsoffast errecognition,providedthatthose
methods satisfy the conditions set out in paragraph 93. Such permitted met hods include, for example,
immediate recognition of all actuarial gains and losses, both within and o utside the “corridor”.
Paragraph 155(b)(iii) explains the need to consider any unrecognised par t of the transitional liability in
accounting for subsequent actuarial gains.166 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Past service cost
96. Inmeasuringitsdefinedbenefitliabilityunderparagraph54,anente rpriseshould,subjecttoparagraph58A,
recognise past service cost as an expense on a straight-line basis over the average period until the benefits
become vested. To the extent that the benefits are already vested immediat ely following the introduction of,
or changes to, a defined benefit plan, an enterprise should recognise past service cost immediately.
97.Past service cost arises when an enterprise introduces a defined benefit p lan or changes the benefits payable
under an existing defined benefit plan. Such changes are in return for empl oyee service over the period until
thebenefitsconcernedarevested.Therefore,pastservicecostisrecogn isedoverthatperiod,regardlessofthe
fact that the cost refers to employee service in previous periods. Past ser vice cost is measured as the change
in the liability resulting from the amendment (see paragraph 64).
Example illustrating paragraph 97
An enterprise operates a pension plan that provides a pension o f2%o ffinal salary for each year of service.
Thebenefitsbecomevestedafterfiveyearsofservice.On1January20X5th eenterpriseimprovesthepension
to2,5%offinalsalaryforeachyearofservicestartingfrom1January20X1 .Atthedateoftheimprovement,
the present value of the additional benefits for service from 1 January 20X 1 to 1 January 20X5 is as follows:
Employees with more than five years’ service at 1/1/X5 150
Employees with less than five years’ service at 1/1/X5 (average period unt il vesting: three years) 120
270
The enterprise recognises 150 immediately because those benefits are alr eady vested. The enterprise
recognises 120 on a straight-line basis over three years from 1 January 20X 5.
98.Past service cost excludes:
(a) the effect of differences between actual and previously assumed salar y increases on the obligation to pay
benefits for service in prior years (there is no past service cost because a ctuarial assumptions allow for
projected salaries);
(b) under and over estimates of discretionary pension increases where an e nterprise has a constructive
obligationtograntsuchincreases(thereisnopastservicecostbecausea ctuarialassumptionsallowforsuch
increases);
(c) estimatesofbenefitimprovementsthatresultfromactuarialgainsth athavealreadybeenrecognisedinthe
financial statements if the enterprise is obliged, by either the formal te rms of a plan (or a constructive
obligation that goes beyond those terms) or legislation, to use any surplu s in the plan for the benefit of
plan participants, even if the benefit increase has not yet been formally a warded (the resulting increase in
the obligation is an actuarial loss and not past service cost, see paragrap h 85(b));
(d) the increase in vested benefits when, in the absence of new or improved b enefits, employees complete
vesting requirements (there is no past service cost because the estimated cost of benefits was recognised
as current service cost as the service was rendered); and13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 167
(e) the effect of plan amendments that reduce benefits for future service ( a curtailment).
99.An enterprise establishes the amortisation schedule for past service cos t when the benefits are introduced or
changed. It would be impracticable to maintain the detailed records neede d to identify and implement
subsequentchangesinthatamortisationschedule.Moreover,theeffecti slikelytobematerialonlywherethere
isacurtailmentorsettlement.Therefore,anenterpriseamendstheamort isationscheduleforpastservicecost
only if there is a curtailment or settlement.
100.Where an enterprise reduces benefits payable under an existing defined be nefit plan, the resulting reduction
in the defined benefit liability is recognised as (negative) past service cost over the average period until the
reduced portion of the benefits becomes vested.
101.Where an enterprise reduces certain benefits payable under an existing de fined benefit plan and, at the same
time,increasesotherbenefitspayableundertheplanforthesameemploye es,theenterprisetreatsthechange
as a single net change.
Recognition and measurement: plan assets
Fair value of plan assets
102.Thefairvalueofanyplanassetsisdeductedindeterminingtheamountreco gnisedinthebalancesheetunder
paragraph 54. When no market price is available, the fair value of plan asse ts is estimated; for example, by
discountingexpectedfuturecashflowsusingadiscountratethatreflect sboththeriskassociatedwiththeplan
assets and the maturity or expected disposal date of those assets (or, if th ey have no maturity, the expected
period until the settlement of the related obligation).
103.Plan assets exclude unpaid contributions due from the reporting enterpri se to the fund, as well as any
non-transferable financial instruments issued by the enterprise and hel d by the fund. Plan assets are reduced
byanyliabilitiesofthefundthatdonotrelatetoemployeebenefits,fore xample,tradeandotherpayablesand
liabilities resulting from derivative financial instruments.
104.Whereplanassetsincludequalifyinginsurancepoliciesthatexactlymat chtheamountandtimingofsomeor
allofthebenefitspayableundertheplan,thefairvalueofthoseinsuranc epoliciesisdeemedtobethepresent
valueoftherelatedobligations,asdescribedinparagraph54(subjectto anyreductionrequirediftheamounts
receivable under the insurance policies are not recoverable in full).
Reimbursements
104A.When,andonlywhen,itisvirtuallycertainthatanotherpartywillreimbu rsesomeoralloftheexpenditure
required to settle a defined benefit obligation, an enterprise should rec ognise its right to reimbursement as
aseparateasset.Theenterpriseshouldmeasuretheassetatfairvalue.In allotherrespects,anenterpriseshould
treat that asset in the same way as plan assets. In the income statement, the expense relating to a defined
benefit plan may be presented net of the amount recognised for a reimbursem ent.
104B.Sometimes, an enterprise is able to look to another party, such as an insure r, to pay part or all of the
expenditure required to settle a defined benefit obligation. Qualifying insurance policies, as defined in
paragraph7,areplanassets.Anenterpriseaccountsforqualifyinginsur ancepoliciesinthesamewayasfor
all other plan assets and paragraph 104A does not apply (see paragraphs 39 t o 42 and 104).168 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
104C. When an insurance policy is not a qualifying insurance policy, that i nsurance policy is not a plan asset.
Paragraph 104A deals with such cases: the enterprise recognises its right to reimbursement under the
insurance policy as a separate asset, rather than as a deduction in determi ning the defined benefit liability
recognised under paragraph 54; in all other respects, the enterprise trea ts that asset in the same way as plan
assets. In particular, the defined benefit liability recognised under pa ragraph 54 is increased (reduced) to the
extent that net cumulative actuarial gains (losses) on the defined benefi t obligation and on the related
reimbursement right remain unrecognised under paragraphs 92 and 93. Para graph 120(c)(vii) requires the
enterprise to disclose a brief description of the link between the reimbur sement right and the related
obligation.
Example illustrating paragraphs 104A-C
Present value of obligation 1 241
Unrecognised actuarial gains 17Liability recognised in balance sheet 1 258Rights under insurance policies that exactly match the amount and timing o f some of the
benefits payable under the plan. Those benefits have a present value of 1 09 2. 1 092
The unrecognised actuarial gains of 17 are the net cumulative actuarial ga ins on the obligation and on the
reimbursement rights.
104D.If the right to reimbursement arises under an insurance policy that exactl y matches the amount and timing
ofsomeorallofthebenefitspayableunderadefinedbenefitplan,thefair valueofthereimbursementright
is deemed to be the present value of the related obligation, as described in paragraph 54 (subject to any
reduction required if the reimbursement is not recoverable in full).
Return on plan assets
105.Theexpectedreturnonplanassetsisonecomponentoftheexpenserecognis edintheincomestatement.The
differencebetweentheexpectedreturnonplanassetsandtheactualretur nonplanassetsisanactuarialgain
orloss;itisincludedwiththeactuarialgainsandlossesonthedefinedbe nefitobligationindeterminingthe
net amount that is compared with the limits of the 10 % “corridor” specified in paragraph 92.
106.Theexpectedreturnonplanassetsisbasedonmarketexpectations,attheb eginningoftheperiod,forreturns
over the entire life of the related obligation. The expected return on plan assets reflects changes in the fair
value of plan assets held during the period as a result of actual contributi ons paid into the fund and actual
benefits paid out of the fund.
107.In determining the expected and actual return on plan assets, an enterpris e deducts expected administration
costs, other than those included in the actuarial assumptions used to meas ure the obligation.
Example illustrating paragraph 106
At1January20X1,thefairvalueofplanassetswas10 000andnetcumulative unrecognisedactuarialgains
were 760. On 30 June 20X1, the plan paid benefits of 1 900 and received contri butions of 4 900. At
31 December 20X1, the fair value of plan assets was 15 000 and the present val ue of the defined benefit
obligation was 14 792. Actuarial losses on the obligation for 20X1 were 60.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 169
At1January20X1,thereportingenterprisemadethefollowingestimates, basedonmarketpricesatthatdate:
(%)
Interest and dividend income, after tax payable by the fund 9,25
Realised and unrealised gains on plan assets (after tax) 2,00Administration costs (1,00)
Expected rate of return 10,25
For 20X1, the expected and actual return on plan assets are as follows:
Return on 10 000 held for 12 months at 10,25 % 1 025Returnon3000heldforsixmonthsa t5%(equivalentto10,25%annually,compoundedevery
six months) 150
Expected return on plan assets for 20X1 1 175
Fair value of plan assets at 31 December 20X1 15 000Less fair value of plan assets at 1 January 20X1 (10000)Less contributions received (4900)Add benefits paid 1 900
Actual return on plan assets 2 000
Thedifferencebetweentheexpectedreturnonplanassets(1 175)andtheac tualreturnonplanassets(2 000)
is an actuarial gain of 825. Therefore, the cumulative net unrecognised ac tuarial gains are 1 525 (760 plus
825less60).Underparagraph92,thelimitsofthecorridoraresetat1 500( greaterof:(i)10%of15 000and
(ii) 10 % of 14 792). In the following year (20X2), the enterprise recognise s in the income statement an
actuarial gain of 25 (1 525 less 1 500) divided by the expected average remai ning working life of the
employees concerned.
Theexpectedreturnonplanassetsfor20X2willbebasedonmarketexpectat ionsat1/1/X2forreturnsover
the entire life of the obligation.
Business combinations
108.In a business combination that is an acquisition, an enterprise recognise s assets and liabilities arising from
post-employment benefits at the present value of the obligation less the f air value of any plan assets (see
IAS22,businesscombinations).Thepresentvalueoftheobligationinclu desallofthefollowing,evenifthe
acquiree had not yet recognised them at the date of the acquisition:
(a) actuarialgainsandlossesthatarosebeforethedateoftheacquisitio n(whetherornottheyfellinsidethe
10 % “corridor”);
(b) past service cost that arose from benefit changes, or the introduction of a plan, before the date of the
acquisition; and
(c) amounts that, under the transitional provisions of paragraph 155(b), the acquiree had not recognised.
Curtailments and settlements
109.Anenterpriseshouldrecognisegainsorlossesonthecurtailmentorsettl ementofadefinedbenefitplanwhen
the curtailment or settlement occurs. The gain or loss on a curtailment or s ettlement should comprise:
(a) any resulting change in the present value of the defined benefit obliga tion;170 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) any resulting change in the fair value of the plan assets;
(c) any related actuarial gains and losses and past service cost that, unde r paragraphs 92 and 96, had not
previously been recognised.
110.Before determining the effect of a curtailment or settlement, an enterpri se should remeasure the obligation
(andtherelatedplanassets,ifany)usingcurrentactuarialassumptions (includingcurrentmarketinterestrates
and other current market prices).
111. A curtailment occurs when an enterprise either:
(a) isdemonstrablycommittedtomakeamaterialreductioninthenumberof employeescoveredbyaplan;
or
(b) amends the terms of a defined benefit plan such that a material element o f future service by current
employees will no longer qualify for benefits, or will qualify only for red uced benefits.
Acurtailmentmayarisefromanisolatedevent,suchastheclosingofaplan t,discontinuanceofanoperation
or termination or suspension of a plan. An event is material enough to quali fy as a curtailment if the
recognitionofacurtailmentgainorlosswouldhaveamaterialeffectonth efinancialstatements.Curtailments
areoftenlinkedwitharestructuring.Therefore,anenterpriseaccounts foracurtailmentatthesametimeas
for a related restructuring.
112. A settlement occurs when an enterprise enters into a transaction that eliminates all further legal or
constructiveobligationforpartorallofthebenefitsprovidedunderade finedbenefitplan,forexample,when
alump-sumcashpaymentismadeto,oronbehalfof,planparticipantsinexc hangefortheirrightstoreceive
specified post-employment benefits.
113. Insomecases,anenterpriseacquiresaninsurancepolicytofundsome oralloftheemployeebenefitsrelating
to employee service in the current and prior periods. The acquisition of su ch a policy is not a settlement if
theenterpriseretainsalegalorconstructiveobligation(seeparagraph 39)topayfurtheramountsiftheinsurer
does not pay the employee benefits specified in the insurance policy. Para graphs 104A to D deal with the
recognition and measurement of reimbursement rights under insurance pol icies that are not plan assets.
114. Asettlementoccurstogetherwithacurtailmentifaplanisterminate dsuchthattheobligationissettledand
the plan ceases to exist. However, the termination of a plan is not a curtail ment or settlement if the plan is
replaced by a new plan that offers benefits that are, in substance, identic al.
115. Where a curtailment relates to only some of the employees covered by a p lan, or where only part of an
obligationissettled,thegainorlossincludesaproportionateshareoft hepreviouslyunrecognisedpastservice
cost and actuarial gains and losses (and of transitional amounts remainin g unrecognised under
paragraph155(b)).Theproportionateshareisdeterminedonthebasisoft hepresentvalueoftheobligations
beforeandafterthecurtailmentorsettlement,unlessanotherbasisismo rerationalinthecircumstances.For
example, it may be appropriate to apply any gain arising on a curtailment or settlement of the same plan to
first eliminate any unrecognised past service cost relating to the same pl an.
Example illustrating paragraph 115
An enterprise discontinues a business segment and employees of the discon tinued segment will earn no
further benefits. This is a curtailment without a settlement. Using curre nt actuarial assumptions (including
current market interest rates and other current market prices) immediate ly before the curtailment, the
enterprise has a defined benefit obligation with a net present value of 1 00 0, plan assets with a fair value of
820andnetcumulativeunrecognisedactuarialgainsof50.Theenterprise hadfirstadoptedtheStandardone
year before. This increased the net liability by 100, which the enterprise chose to recognise over five years
(see paragraph 155(b)). The curtailment reduces the net present value of t he obligation by 100 to 900.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 171
Ofthepreviouslyunrecognisedactuarialgainsandtransitionalamounts ,10%(100/1000)relatestothepartofthe
obligation that was eliminated through the curtailment. Therefore, the e ffect of the curtailment is as follows:
Before curtailment Curtailment gain After curtailment
Net present value of obligation 1 000 (100) 900
Fair value of plan assets (820) — (820)
180 (100) 80
Unrecognised actuarial gains 50 (5) 45Unrecognised transitional amount
(100 × 4/5) (80) 8 (72)
Net liability recognised in balance sheet 150 (97) 53
Presentation
Offset
116. Anenterpriseshouldoffsetanassetrelatingtooneplanagainstalia bilityrelatingtoanotherplanwhen,and
only when, the enterprise:
(a) hasalegallyenforceablerighttouseasurplusinoneplantosettleobl igationsundertheotherplan;and
(b) intends either to settle the obligations on a net basis, or to realise th e surplus in one plan and settle its
obligation under the other plan simultaneously.
117.The offsetting criteria are similar to those established for financial in struments in IAS 32, financial
instruments: disclosure and presentation.
Current/non-current distinction
118.Someenterprisesdistinguishcurrentassetsandliabilitiesfromnon-cu rrentassetsandliabilities.ThisStandard
does not specify whether an enterprise should distinguish current and non -current portions of assets and
liabilities arising from post-employment benefits.
Financial components of post-employment benefit costs
119.This Standard does not specify whether an enterprise should present curre nt service cost, interest cost and
the expected return on plan assets as components of a single item of income o r expense on the face of the
income statement.
Disclosure
120.An enterprise should disclose the following information about defined be nefit plans:
(a) the enterprise’s accounting policy for recognising actuarial gains a nd losses;
(b) a general description of the type of plan;172 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) a reconciliation of the assets and liabilities recognised in the balan ce sheet, showing at least:
(i) the present value at the balance sheet date of defined benefit obligati ons that are wholly unfunded;
(ii) thepresentvalue(beforedeductingthefairvalueofplanassets)att hebalancesheetdateofdefined
benefit obligations that are wholly or partly funded;
(iii) the fair value of any plan assets at the balance sheet date;
(iv) the net actuarial gains or losses not recognised in the balance sheet ( see paragraph 92);
(v) the past service cost not yet recognised in the balance sheet (see parag raph 96);
(vi) any amount not recognised as an asset, because of the limit in paragrap h 58(b);
(vii) the fair value at the balance sheet date of any reimbursement right re cognised as an asset under
paragraph104A(withabriefdescriptionofthelinkbetweenthereimburse mentrightandtherelated
obligation); and
(viii) the other amounts recognised in the balance sheet;
(d) the amounts included in the fair value of plan assets for:
(i) each category of the reporting enterprise’s own financial instrument s; and
(ii) any property occupied by, or other assets used by, the reporting enter prise;
(e) areconciliationshowingthemovementsduringtheperiodinthenetlia bility(orasset)recognisedinthe
balance sheet;
(f) the total expense recognised in the income statement for each of the fol lowing, and the line item(s) of
the income statement in which they are included:(i) current service cost;(ii) interest cost;(iii) expected return on plan assets;(iv) expected return on any reimbursement right recognised as an asset und er paragraph 104A;
(v) actuarial gains and losses;(vi) past service cost; and
(vii) the effect of any curtailment or settlement;
(g) the actual return on plan assets, as well as the actual return on any reim bursement right recognised as
an asset under paragraph 104A; and
(h) the principal actuarial assumptions used as at the balance sheet date, including, where applicable:
(i) the discount rates;(ii) theexpectedratesofreturnonanyplanassetsfortheperiodspresent edinthefinancialstatements;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 173
(iii) the expected rates of return for the periods presented in the financi al statements on any
reimbursement right recognised as an asset under paragraph 104A;
(iv) the expected rates of salary increases (and of changes in an index or ot her variable specified in the
formal or constructive terms of a plan as the basis for future benefit incre ases);
(v) medical cost trend rates; and
(vi) any other material actuarial assumptions used.An enterprise should disclose each actuarial assumption in absolute term s (for example, as an absolute
percentage) and not just as a margin between different percentages or othe r variables.
121. Paragraph 120(b) requires a general description of the type of plan. S uch a description distinguishes, for
example,flatsalarypensionplansfromfinalsalarypensionplansandfro mpost-employmentmedicalplans.
Further detail is not required.
122. Whenanenterprisehasmorethanonedefinedbenefitplan,disclosure smaybemadeintotal,separatelyfor
each plan, or in such groupings as are considered to be the most useful. It ma y be useful to distinguish
groupings by criteria such as the following:
(a) thegeographicallocationoftheplans,forexample,bydistinguishin gdomesticplansfromforeignplans;
or
(b) whether plans are subject to materially different risks, for example, by distinguishing flat salary pension
plans from final salary pension plans and from post-employment medical pl ans.
Whenanenterpriseprovidesdisclosuresintotalforagroupingofplans,s uchdisclosuresareprovidedinthe
form of weighted averages or of relatively narrow ranges.
123. Paragraph 30 requires additional disclosures about multi-employer defined benefit plans that are treated as
if they were defined contribution plans.
124. Where required by IAS 24, related party disclosures, an enterprise di scloses information about:
(a) related party transactions with post-employment benefit plans; and(b) post-employment benefits for key management personnel.
125. Where required by IAS 37, provisions, contingent liabilities and con tingent assets, an enterprise discloses
information about contingent liabilities arising from post-employment benefit obligations.
OTHER LONG-TERM EMPLOYEE BENEFITS
126.Other long-term employee benefits include, for example:
(a) long-term compensated absences such as long-service or sabbatical le ave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;(d) profit-sharingandbonusespayable12monthsormoreaftertheendofth eperiodinwhichtheemployees
render the related service; and
(e) deferred compensation paid 12 months or more after the end of the period in which it is earned.174 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
127.The measurement of other long-term employee benefits is not usually subje ct to the same degree of
uncertaintyasthemeasurementofpost-employmentbenefits.Furthermor e,theintroductionof,orchanges
to,otherlong-termemployeebenefitsrarelycausesamaterialamountofp astservicecost.Forthesereasons,
thisStandardrequiresasimplifiedmethodofaccountingforotherlong-t ermemployeebenefits.Thismethod
differs from the accounting required for post-employment benefits as fol lows:
(a) actuarial gains and losses are recognised immediately and no ’corrido r’ is applied; and
(b) all past service cost is recognised immediately.
Recognition and measurement
128.The amount recognised as a liability for other long-term employee benefit s should be the net total of the
following amounts:
(a) the present value of the defined benefit obligation at the balance shee t date (see paragraph 64);
(b) minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to
be settled directly (see paragraphs 102 to 104).
Inmeasuringtheliability,anenterpriseshouldapplyparagraphs49to91 ,excludingparagraphs54and61.
An enterprise should apply paragraph 104A in recognising and measuring an y reimbursement right.
129.Forotherlong-termemployeebenefits,anenterpriseshouldrecogniseth enettotalofthefollowingamounts
as expense or (subject to paragraph 58) income, except to the extent that an other International Accounting
Standard requires or permits their inclusion in the cost of an asset:
(a) current service cost (see paragraphs 63 to 91);
(b) interest cost (see paragraph 82);(c) the expected return on any plan assets (see paragraphs 105 to 107) and on any reimbursement right
recognised as an asset (see paragraph 104A);
(d) actuarial gains and losses, which should all be recognised immediatel y;
(e) past service cost, which should all be recognised immediately; and(f) the effect of any curtailments or settlements (see paragraphs 109 and 1 10).
130. One form of other long-term employee benefit is long-term disability benefit. If the level of benefit depends
on the length of service, an obligation arises when the service is rendered . Measurement of that obligation
reflects the probability that payment will be required and the length of ti me for which payment is expected
to be made. If the level of benefit is the same for any disabled employee rega rdless of years of service, the
expected cost of those benefits is recognised when an event occurs that cau ses a long-term disability.
Disclosure
131.AlthoughthisStandarddoesnotrequirespecificdisclosuresaboutother long-termemployeebenefits,other
InternationalAccountingStandardsmayrequiredisclosures,forexampl e,wheretheexpenseresultingfrom
suchbenefitsisofsuchsize,natureorincidencethatitsdisclosureisre levanttoexplaintheperformanceof
the enterprise for the period (see IAS 8, net profit or loss for the period, f undamental errors and changes in
accountingpolicies).WhererequiredbyIAS24,relatedpartydisclosure s,anenterprisedisclosesinformation
about other long-term employee benefits for key management personnel.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 175
TERMINATION BENEFITS
132. This Standard deals with termination benefits separately from other employee benefits because the event
which gives rise to an obligation is the termination rather than employee s ervice.
Recognition
133.An enterprise should recognise termination benefits as a liability and an expense when, and only when, the
enterprise is demonstrably committed to either:
(a) terminatetheemploymentofanemployeeorgroupofemployeesbeforeth enormalretirementdate;or
(b) provide termination benefits as a result of an offer made in order to enc ourage voluntary redundancy.
134.Anenterpriseisdemonstrablycommittedtoaterminationwhen,andonlywh en,theenterprisehasadetailed
formal plan for the termination and is without realistic possibility of wi thdrawal. The detailed plan should
include, as a minimum:
(a) the location, function, and approximate number of employees whose ser vices are to be terminated;
(b) the termination benefits for each job classification or function; and
(c) the time at which the plan will be implemented. Implementation should b egin as soon as possible and
theperiodoftimetocompleteimplementationshouldbesuchthatmaterial changestotheplanarenot
likely.
135.An enterprise may be committed, by legislation, by contractual or other ag reements with employees or their
representativesorbyaconstructiveobligationbasedonbusinesspracti ce,customoradesiretoactequitably,
to make payments (or provide other benefits) to employees when it terminat es their employment. Such
paymentsareterminationbenefits.Terminationbenefitsaretypicallyl ump-sumpayments,butsometimesalso
include:
(a) enhancement of retirement benefits or of other post-employment benef its, either indirectly through an
employee benefit plan or directly; and
(b) salary until the end of a specified notice period if the employee render s no further service that provides
economic benefits to the enterprise.
136.Some employee benefits are payable regardless of the reason for the employ ee’s departure. The payment of
such benefits is certain (subject to any vesting or minimum service requir ements) but the timing of their
payment is uncertain. Although such benefits are described in some countr ies as termination indemnities, or
terminationgratuities,theyarepost-employmentbenefits,ratherthan terminationbenefitsandanenterprise
accountsforthemaspost-employmentbenefits.Someenterprisesprovide alowerlevelofbenefitforvoluntary
termination at the request of the employee (in substance, a post-employme nt benefit) than for involuntary
termination at the request of the enterprise. The additional benefit paya ble on involuntary termination is a
termination benefit.
137.Termination benefits do not provide an enterprise with future economic be nefits and are recognised as an
expense immediately.
138.Where an enterprise recognises termination benefits, the enterprise may also have to account for a
curtailment of retirement benefits or other employee benefits (see parag raph 109).176 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Measurement
139. Where termination benefits fall due more than 12 months after the bala nce sheet date, they should be
discounted using the discount rate specified in paragraph 78.
140. In the case of an offer made to encourage voluntary redundancy, the mea surement of termination benefits
should be based on the number of employees expected to accept the offer.
Disclosure
141.Wherethereisuncertaintyaboutthenumberofemployeeswhowillacceptan offerofterminationbenefits,
a contingent liability exists. As required by IAS 37, provisions, conting ent liabilities and contingent assets,
an enterprise discloses information about the contingent liability unle ss the possibility of an outflow in
settlement is remote.
142.AsrequiredbyIAS8,netprofitorlossfortheperiod,fundamentalerrorsa ndchangesinaccountingpolicies,
an enterprise discloses the nature and amount of an expense if it is of such s ize, nature or incidence that its
disclosure is relevant to explain the performance of the enterprise for th e period. Termination benefits may
result in an expense needing disclosure in order to comply with this requir ement.
143.Where required by IAS 24, related party disclosures, an enterprise disclo ses information about termination
benefits for key management personnel.
EQUITY COMPENSATION BENEFITS
144. Equity compensation benefits include benefits in such forms as:
(a) shares,shareoptions,andotherequityinstruments,issuedtoemploy eesatlessthanthefairvalueatwhich
those instruments would be issued to a third party; and
(b) cashpayments,theamountofwhichwilldependonthefuturemarketpric eofthereportingenterprise’s
shares.
Recognition and measurement
145.ThisStandarddoesnotspecifyrecognitionandmeasurementrequirements forequitycompensationbenefits.
Disclosure
146. The disclosures required below are intended to enable users of financ ial statements to assess the effect of
equity compensation benefits on an enterprise’s financial position, per formance and cash flows. Equity
compensation benefits may affect:
(a) an enterprise’s financial position by requiring the enterprise to iss ue equity financial instruments or
convert financial instruments, for example, when employees, or employee compensation plans, hold
share options or have partially satisfied the vesting provisions that wil l enable them to acquire share
options in the future; and
(b) an enterprise’s performance and cash flows by reducing the amount of ca sh or other employee benefits
that the enterprise provides to employees in exchange for their services.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 177
147.An enterprise should disclose:
(a) the nature and terms (including any vesting provisions) of equity comp ensation plans;
(b) the accounting policy for equity compensation plans;
(c) the amounts recognised in the financial statements for equity compens ation plans;
(d) thenumberandterms(including,whereapplicable,dividendandvotin grights,conversionrights,exercise
dates,exercisepricesandexpirydates)oftheenterprise’sownequityfi nancialinstrumentswhichareheld
byequitycompensationplans(and,inthecaseofshareoptions,byemploye es)atthebeginningandend
of the period. The extent to which employees’ entitlements to those instru ments are vested at the
beginning and end of the period should be specified;
(e) thenumberandterms(including,whereapplicable,dividendandvotin grights,conversionrights,exercise
dates, exercise prices and expiry dates) of equity financial instruments issued by the enterprise to equity
compensationplansortoemployees(oroftheenterprise’sownequityfina ncialinstrumentsdistributed
by equity compensation plans to employees) during the period and the fair v alue of any consideration
received from the equity compensation plans or the employees;
(f) thenumber,exercisedatesandexercisepricesofshareoptionsexerci sedunderequitycompensationplans
during the period;
(g) thenumberofshareoptionsheldbyequitycompensationplans,orheldb yemployeesundersuchplans,
that lapsed during the period; and
(h) theamount,andprincipalterms,ofanyloansorguaranteesgrantedbyt hereportingenterpriseto,oron
behalf of, equity compensation plans.
148.An enterprise should also disclose:
(a) thefairvalue,atthebeginningandendoftheperiod,oftheenterprise ’sownequityfinancialinstruments
(other than share options) held by equity compensation plans; and
(b) the fair value, at the date of issue, of the enterprise’s own equity fina ncial instruments (other than share
options) issued by the enterprise to equity compensation plans or to emplo yees, or by equity
compensation plans to employees, during the period.
Ifitisnotpracticabletodeterminethefairvalueoftheequityfinancial instruments(otherthanshareoptions),
that fact should be disclosed.
149. Whenanenterprisehasmorethanoneequitycompensationplan,disclo suresmaybemadeintotal,separately
for each plan, or in such groupings as are considered most useful for assess ing the enterprise’s obligations
toissueequityfinancialinstrumentsundersuchplansandthechangesint hoseobligationsduringthecurrent
period. Such groupings may distinguish, for example, the location and sen iority of the employee groups
covered. When an enterprise provides disclosures in total for a grouping o f plans, such disclosures are
provided in the form of weighted averages or of relatively narrow ranges.
150. Whenanenterprisehasissuedshareoptionstoemployees,ortoemploy eecompensationplans,disclosures
maybemadeintotal,orinsuchgroupingsasareconsideredmostusefulfora ssessingthenumberandtiming
of shares that may be issued and the cash that may be received as a result. For example, it may be useful to
distinguish options that are “out-of-the-money” (where the exercise pri ce exceeds the current market price)
from options that are “in-the-money” (where the current market price exce eds the exercise price).
Furthermore, it may be useful to combine the disclosures in groupings that do not aggregate options with
a wide range of exercise prices or exercise dates.178 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
151. The disclosures required by paragraphs 147 and 148 are intended to mee t the objectives of this Standard.
Additional disclosure may be required to satisfy the requirements of IAS 2 4, related party disclosures, if an
enterprise:
(a) provides equity compensation benefits to key management personnel;
(b) provides equity compensation benefits in the form of instruments issu ed by the enterprise’s parent; or
(c) enters into related party transactions with equity compensation plan s.
152. In the absence of specific recognition and measurement requirements for equity compensation plans,
informationaboutthefairvalueofthereportingenterprise’sfinancial instrumentsusedinsuchplansisuseful
tousersoffinancialstatements.However,becausethereisnoconsensuso ntheappropriatewaytodetermine
the fair value of share options, this Standard does not require an enterpri se to disclose their fair value.
TRANSITIONAL PROVISIONS
153. Thissectionspecifiesthetransitionaltreatmentfordefinedbenef itplans.Whereanenterprisefirstadoptsthis
Standard for other employee benefits, the enterprise applies IAS 8, net pr ofit or loss for the period,
fundamental errors and changes in accounting policies.
154.On first adopting this Standard, an enterprise should determine its trans itional liability for defined benefit
plans at that date as:
(a) the present value of the obligation (see paragraph 64) at the date of ado ption;
(b) minus the fair value, at the date of adoption, of plan assets (if any) out of which the obligations are to
be settled directly (see paragraphs 102 to 104);
(c) minus any past service cost that, under paragraph 96, should be recogni sed in later periods.
155.If the transitional liability is more than the liability that would have be en recognised at the same date under
theenterprise’spreviousaccountingpolicy,theenterpriseshouldmake anirrevocablechoicetorecognisethat
increase as part of its defined benefit liability under paragraph 54:
(a) immediately,underIAS8,netprofitorlossfortheperiod,fundamenta lerrorsandchangesinaccounting
policies; or
(b) as an expense on a straight-line basis over up to five years from the date of adoption. If an enterprise
chooses (b), the enterprise should:
(i) applythelimitdescribedinparagraph58(b)inmeasuringanyassetrec ognisedinthebalancesheet;
(ii) disclose at each balance sheet date: (1) the amount of the increase tha t remains unrecognised; and
(2) the amount recognised in the current period;
(iii) limit the recognition of subsequent actuarial gains (but not negati ve past service cost) as follows. If
anactuarialgainistoberecognisedunderparagraphs92and93,anenterpr iseshouldrecognisethat
actuarial gain only to the extent that the net cumulative unrecognised act uarial gains (before
recognition of that actuarial gain) exceed the unrecognised part of the tr ansitional liability; and
(iv) includetherelatedpartoftheunrecognisedtransitionalliability indetermininganysubsequentgain
or loss on settlement or curtailment.
If the transitional liability is less than the liability that would have be en recognised at the same date under
theenterprise’spreviousaccountingpolicy,theenterpriseshouldreco gnisethatdecreaseimmediatelyunder
IAS 8.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 179
156. On the initial adoption of the Standard, the effect of the change in acc ounting policy includes all actuarial
gains and losses that arose in earlier periods even if they fall inside the 1 0 % “corridor” specified in
paragraph 92.
Example illustrating paragraphs 154 to 156
At31December1998,anenterprise’sbalancesheetincludesapensionliab ilityof100.Theenterpriseadopts
theStandardasof1January1999,whenthepresentvalueoftheobligationu ndertheStandardis1 300and
the fair value of plan assets is 1 000. On 1 January 1993, the enterprise had i mproved pensions (cost for
non-vested benefits: 160; and average remaining period at that date until vesting: 10 years).
The transitional effect is as follows:
Present value of the obligation 1 300Fair value of plan assets (1000)Less: past service cost to be recognised in later periods (160 × 4/10) (64)
Transitional liability 236
Liability already recognised 100
Increase in liability 136
The enterprise may choose to recognise the increase of 136 either immediat ely or over up to 5 years. The
choice is irrevocable.
At 31 December 1999, the present value of the obligation under the Standard is 1 400 and the fair value
ofplanassetsis1 050.Netcumulativeunrecognisedactuarialgainssince thedateofadoptingtheStandard
are 120. The expected average remaining working life of the employees part icipating in the plan was eight
years. The enterprise has adopted a policy of recognising all actuarial ga ins and losses immediately, as
permitted by paragraph 93.The effect of the limit in paragraph 155(b)(iii) is as follows.
Net cumulative unrecognised actuarial gains 120
Unrecognised part of transitional liability (136 × 4/5) (109)
Maximum gain to be recognised (paragraph 155(b)(iii)) 11
EFFECTIVE DATE
157.This International Accounting Standard becomes operative for financial statements covering periods
beginning on or after 1 January 1999, except as specified in paragraphs 159 and 159A. Earlier adoption is
encouraged.IfanenterpriseappliesthisStandardtoretirementbenefit costsforfinancialstatementscovering
periods beginning before 1 January 1999, the enterprise should disclose t he fact that it has applied this
Standard instead of IAS 19, retirement benefit costs, approved in 1993.
158.This Standard supersedes IAS 19, retirement benefit costs, approved in 19 93.
159.The following become operative for annual financial statements (1) covering periods beginning on or after
1 January 2001:
(a) thereviseddefinitionofplanassetsinparagraph7andtherelateddef initionsofassetsheldbyalong-term
employee benefit fund and qualifying insurance policy; and
(1) Paragraphs 159 and 159A refer to “annual financial statements” in line wi th more explicit language for writing effective dates
adopted in 1998. Paragraph 157 refers to “financial statements”.180 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) the recognition and measurement requirements for reimbursements in p aragraphs 104A, 128 and 129
and related disclosures in paragraphs 120(c)(vii), 120(f)(iv), 120(g) a nd 120(h)(iii).
Earlier adoption is encouraged. If earlier adoption affects the financia l statements, an enterprise should
disclose that fact.
159A.The amendment in paragraph 58A becomes operative for annual financial sta tements (1) covering periods
ending on or after 31 May 2002. Earlier adoption is encouraged. If earlier a doption affects the financial
statements, an enterprise should disclose that fact.
160. IAS8,netprofitorlossfortheperiod,fundamentalerrorsandchange sinaccountingpolicies,applieswhen
an enterprise changes its accounting policies to reflect the changes spec ified in paragraphs 159 and 159A.
In applying those changes retrospectively, as required by the benchmark a nd allowed alternative treatments
in IAS 8, the enterprise treats those changes as if they had been adopted at t he same time as the rest of this
Standard.
INTERNATIONAL ACCOUNTING STANDARD IAS 20
(REFORMATTED 1994)
Accounting for government grants and disclosure of government assistanc e
This reformatted International Accounting Standard supersedes the Stan dard originally approved by the Board in
November 1982. It is presented in the revised format adopted for Internati onal Accounting Standards in 1991
onwards.Nosubstantivechangeshavebeenmadetotheoriginalapprovedte xt.Certainterminologyhasbeenchanged
to bring it into line with current IASC practice.
In May 1999, IAS 10 (revised 1999), events after the balance sheet date, ame nded paragraph 11. The amended text
was effective for financial statements covering annual periods beginnin g on or after 1 January 2000.
In January 2001, IAS 41, agriculture, amended paragraph 2. The amended tex t becomes effective for financial
statements covering annual periods beginning on or after 1 January 2003.
One SIC interpretation relates to IAS 20:
— SIC-10: government assistance — no specific relation to operating activ ities.
CONTENTS
Paragraphs
Scope 182
Definitions 182
Government grants 183
Non-monetary government grants 185
Presentation of grants related to assets 185Presentation of grants related to income 185Repayment of government grants 185
(1) Paragraphs 159 and 159A refer to “annual financial statements” in line wi th more explicit language for writing effective dates
adopted in 1998. Paragraph 157 refers to “financial statements”.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 181
Government assistance 186
Disclosure 186
Transitional provisions 186
Effective date 186
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in accounting for, and in the disclosure of, government grants and in the
disclosure of other forms of government assistance.
2. This Standard does not deal with:
(a) the special problems arising in accounting for government grants in fi nancial statements reflecting the
effects of changing prices or in supplementary information of a similar na ture;
(b) government assistance that is provided for an enterprise in the form of benefits that are available in
determining taxable income or are determined or limited on the basis of inc ome tax liability (such as
income tax holidays, investment tax credits, accelerated depreciation a llowances and reduced income tax
rates);
(c) government participation in the ownership of the enterprise;
(d) government grants covered by IAS 41, agriculture.
DEFINITIONS
3. The following terms are used in this Standard with the meanings specifie d:
Government refers to government, government agencies and similar bodies whether local, national or
international.
Government assistance is action by government designed to provide an econ omic benefit specific to an
enterprise or range of enterprises qualifying under certain criteria. Go vernment assistance for the purpose of
this Standard does not include benefits provided only indirectly through action affecting general trading
conditions, such as the provision of infrastructure in development areas or the imposition of trading
constraints on competitors.Governmentgrantsareassistancebygovernmentintheformoftransfersof resourcestoanenterpriseinreturn
forpastorfuturecompliancewithcertainconditionsrelatingtotheoper atingactivitiesoftheenterprise.They
exclude those forms of government assistance which cannot reasonably hav e a value placed upon them and
transactions with government which cannot be distinguished from the norm al trading transactions of the
enterprise (
1).
Grants related to assets are government grants whose primary condition is that an enterprise qualifying for
them should purchase, construct or otherwise acquire long-term assets. S ubsidiary conditions may also be
attached restricting the type or location of the assets or the periods duri ng which they are to be acquired or
held.
(1) See also SIC — 10: government assistance — no specific relation to operati ng activities.182 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Grants related to income are government grants other than those related to assets.
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed
conditions.
Fair value is the amount for which an asset could be exchanged between a know ledgeable, willing buyer and
a knowledgeable, willing seller in an arm’s length transaction.
4.Government assistance takes many forms varying both in the nature of the as sistance given and in the
conditions which are usually attached to it. The purpose of the assistance may be to encourage an enterprise
to embark on a course of action which it would not normally have taken if the a ssistance was not provided.
5.The receipt of government assistance by an enterprise may be significant f or the preparation of the financial
statements for two reasons. Firstly, if resources have been transferred, an appropriate method of accounting
forthetransfermustbefound.Secondly,itisdesirabletogiveanindicat ionoftheextenttowhichtheenterprise
has benefited from such assistance during the reporting period. This faci litates comparison of an enterprise’s
financial statements with those of prior periods and with those of other en terprises.
6.Government grants are sometimes called by other names such as subsidies, s ubventions, or premiums.
GOVERNMENT GRANTS
7. Government grants, including non-monetary grants at fair value, shoul d not be recognised until there is
reasonable assurance that:
(a) the enterprise will comply with the conditions attaching to them; and(b) the grants will be received.
8.Agovernmentgrantisnotrecogniseduntilthereisreasonableassurancet hattheenterprisewillcomplywith
the conditions attaching to it, and that the grant will be received. Receip t of a grant does not of itself provide
conclusive evidence that the conditions attaching to the grant have been o r will be fulfilled.
9.Themannerinwhichagrantisreceiveddoesnotaffecttheaccountingmetho dtobeadoptedinregardtothe
grant. Thus a grant is accounted for in the same manner whether it is receive d in cash or as a reduction of a
liability to the government.
10.Aforgivableloanfromgovernmentistreatedasagovernmentgrantwhenthe reisreasonableassurancethat
the enterprise will meet the terms for forgiveness of the loan.
11.Once a government grant is recognised, any related contingent liability o r contingent asset is treated in
accordance with IAS 37, provisions, contingent liabilities and continge nt assets.
12. Governmentgrantsshouldberecognisedasincomeovertheperiodsnece ssarytomatchthemwiththerelated
costs which they are intended to compensate, on a systematic basis. They sh ould not be credited directly to
shareholders’ interests.
13.Twobroadapproachesmaybefoundtotheaccountingtreatmentofgovernmen tgrants:thecapitalapproach,
under which a grant is credited directly to shareholders’ interests, and t he income approach, under which a
grant is taken to income over one or more periods.
14.Those in support of the capital approach argue as follows:
(a) governmentgrantsareafinancingdeviceandshouldbedealtwithassuc hinthebalancesheetratherthan
be passed through the income statement to offset the items of expense which they finance. Since no
repayment is expected, they should be credited directly to shareholders’ interests; and13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 183
(b) itisinappropriatetorecognisegovernmentgrantsintheincomestate ment,sincetheyarenotearnedbut
represent an incentive provided by government without related costs.
15.Arguments in support of the income approach are as follows:
(a) since government grants are receipts from a source other than sharehol ders, they should not be credited
directly to shareholders’ interests but should be recognised as income in appropriate periods;
(b) government grants are rarely gratuitous. The enterprise earns them th rough compliance with their
conditions and meeting the envisaged obligations. They should therefore be recognised as income and
matched with the associated costs which the grant is intended to compensat e; and
(c) as income and other taxes are charges against income, it is logical to de al also with government grants,
which are an extension of fiscal policies, in the income statement.
16.It is fundamental to the income approach that government grants be recogni sed as income on a systematic
and rational basis over the periods necessary to match them with the relate d costs. Income recognition of
governmentgrantsonareceiptsbasisisnotinaccordancewiththeaccrual accountingassumption(seeIAS1,
presentationoffinancialstatements)andwouldonlybeacceptableifnob asisexistedforallocatingagrantto
periods other than the one in which it was received.
17.In most cases the periods over which an enterprise recognises the costs or e xpenses related to a government
grantarereadilyascertainableandthusgrantsinrecognitionofspecifi cexpensesarerecognisedasincomein
the same period as the relevant expense. Similarly, grants related to depr eciable assets are usually recognised
as income over the periods and in the proportions in which depreciation on t hose assets is charged.
18.Grantsrelatedtonon-depreciableassetsmayalsorequirethefulfilment ofcertainobligationsandwouldthen
be recognised as income over the periods which bear the cost of meeting the o bligations. As an example, a
grant of land may be conditional upon the erection of a building on the site a nd it may be appropriate to
recognise it as income over the life of the building.
19.Grantsaresometimesreceivedaspartofapackageoffinancialorfiscalai dstowhichanumberofconditions
areattached.Insuchcases,careisneededinidentifyingtheconditionsg ivingrisetocostsandexpenseswhich
determine the periods over which the grant will be earned. It may be appropr iate to allocate part of a grant
on one basis and part on another.
20.A government grant that becomes receivable as compensation for expenses o r losses already incurred or for
the purpose of giving immediate financial support to the enterprise with n o future related costs should be
recognisedasincomeoftheperiodinwhichitbecomesreceivable,asanext raordinaryitemifappropriate(see
IAS 8, net profit or loss for the period, fundamental errors and changes in a ccounting policies).
21.In certain circumstances, a government grant may be awarded for the purpos e of giving immediate financial
support to an enterprise rather than as an incentive to undertake specific expenditures. Such grants may be
confined to an individual enterprise and may not be available to a whole cla ss of beneficiaries. These
circumstances may warrant recognising a grant as income in the period in wh ich the enterprise qualifies to
receiveit,asanextraordinaryitemifappropriate,withdisclosuretoen surethatitseffectisclearlyunderstood.
22.Agovernmentgrantmaybecomereceivablebyanenterpriseascompensation forexpensesorlossesincurred
in a previous accounting period. Such a grant is recognised as income of the period in which it becomes
receivable,asanextraordinaryitemifappropriate,withdisclosuretoe nsurethatitseffectisclearlyunderstood.184 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Non-monetary government grants
23.Agovernmentgrantmaytaketheformofatransferofanon-monetaryasset,s uchaslandorotherresources,
fortheuseoftheenterprise.Inthesecircumstancesitisusualtoassesst hefairvalueofthenon-monetaryasset
and to account for both grant and asset at that fair value. An alternative co urse that is sometimes followed is
to record both asset and grant at a nominal amount.
Presentation of grants related to assets
24. Government grants related to assets, including non-monetary grants a t fair value, should be presented in the
balance sheet either by setting up the grant as deferred income or by deduct ing the grant in arriving at the
carrying amount of the asset.
25.Two methods of presentation in financial statements of grants (or the appr opriate portions of grants) related
to assets are regarded as acceptable alternatives.
26.Onemethodsetsupthegrantasdeferredincomewhichisrecognisedasincom eonasystematicandrational
basis over the useful life of the asset.
27.The other method deducts the grant in arriving at the carrying amount of the asset. The grant is recognised
as income over the life of a depreciable asset by way of a reduced depreciati on charge.
28.The purchase of assets and the receipt of related grants can cause major mov ements in the cash flow of an
enterprise. For this reason and in order to show the gross investment in ass ets, such movements are often
disclosedasseparateitemsinthecashflowstatementregardlessofwheth erornotthegrantisdeductedfrom
the related asset for the purpose of balance sheet presentation.
Presentation of grants related to income
29.Grants related to income are sometimes presented as a credit in the income s tatement, either separately or
under a general heading such as “Other income”; alternatively, they are de ducted in reporting the related
expense.
30.Supporters of the first method claim that it is inappropriate to net income and expense items and that
separation of the grant from the expense facilitates comparison with othe r expenses not affected by a grant.
For the second method it is argued that the expenses might well not have been incurred by the enterprise if
the grant had not been available and presentation of the expense without of fsetting the grant may therefore
be misleading.
31.Both methods are regarded as acceptable for the presentation of grants rel ated to income. Disclosure of the
grant may be necessary for a proper understanding of the financial stateme nts. Disclosure of the effect of the
grants on any item of income or expense which is required to be separately di sclosed is usually appropriate.
Repayment of government grants
32. A government grant that becomes repayable should be accounted for as a r evision to an accounting estimate
(seeIAS8,netprofitorlossfortheperiod,fundamentalerrorsandchange sinaccountingpolicies).Repayment
of a grant related to income should be applied first against any unamortise d deferred credit set up in respect
of the grant. To the extent that the repayment exceeds any such deferred cre dit, or where no deferred credit
exists,therepaymentshouldberecognisedimmediatelyasanexpense.Rep aymentofagrantrelatedtoanasset
should be recorded by increasing the carrying amount of the asset or reduci ng the deferred income balance
bytheamountrepayable.Thecumulativeadditionaldepreciationthatwou ldhavebeenrecognisedtodateas
an expense in the absence of the grant should be recognised immediately as a n expense.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 185
33.Circumstances giving rise to repayment of a grant related to an asset may re quire consideration to be given
to the possible impairment of the new carrying amount of the asset.
GOVERNMENT ASSISTANCE
34.Excludedfromthedefinitionofgovernmentgrantsinparagraph3arecerta informsofgovernmentassistance
whichcannotreasonablyhaveavalueplaceduponthemandtransactionswit hgovernmentwhichcannotbe
distinguished from the normal trading transactions of the enterprise.
35.Examplesofassistancethatcannotreasonablyhaveavalueplaceduponthe marefreetechnicalormarketing
adviceandtheprovisionofguarantees.Anexampleofassistancethatcann otbedistinguishedfromthenormal
tradingtransactionsoftheenterpriseisagovernmentprocurementpolic ythatisresponsibleforaportionof
the enterprise’s sales. The existence of the benefit might be unquestione d but any attempt to segregate the
trading activities from government assistance could well be arbitrary.
36.The significance of the benefit in the above examples may be such that discl osure of the nature, extent and
duration of the assistance is necessary in order that the financial statem ents may not be misleading.
37.Loans at nil or low interest rates are a form of government assistance, but t he benefit is not quantified by the
imputation of interest.
38.In this Standard, government assistance does not include the provision of infrastructure by improvement to
the general transport and communication network and the supply of improve d facilities such as irrigation or
water reticulation which is available on an ongoing indeterminate basis f or the benefit of an entire local
community.
DISCLOSURE
39.The following matters should be disclosed:
(a) the accounting policy adopted for government grants, including the me thods of presentation adopted in
the financial statements;
(b) the nature and extent of government grants recognised in the financial statements and an indication of
other forms of government assistance from which the enterprise has direct ly benefited; and
(c) unfulfilled conditions and other contingencies attaching to governm ent assistance that has been
recognised.
TRANSITIONAL PROVISIONS
40.An enterprise adopting the Standard for the first time should:
(a) comply with the disclosure requirements, where appropriate; and
(b) either:
(i) adjustitsfinancialstatementsforthechangeinaccountingpolicyin accordancewithIAS8,netprofit
or loss for the period, fundamental errors and changes in accounting polic ies; or
(ii) apply the accounting provisions of the Standard only to grants or port ions of grants becoming
receivable or repayable after the effective date of the Standard.
EFFECTIVE DATE
41. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1984.186 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 21
(REVISED 1993)
The effects of changes in foreign exchange rates
This revised International Accounting Standard supersedes IAS 21, accou nting for the effects of changes in foreign
exchangerates,andbecameeffectiveforfinancialstatementscoveringp eriodsbeginningonorafter1January1995.
IAS21doesnotdealwithhedgeaccountingforforeigncurrencyitems(othe rthanitemsthathedgeanetinvestment
in a foreign entity). IAS 39, financial instruments: recognition and meas urement deals with this topic.
In1998,paragraph2ofIAS21wasamendedtorefertoIAS39,financialinstr uments:recognitionandmeasurement.
In 1999, paragraph 46 was amended to replace references to IAS 10, continge ncies and events occurring after the
balance sheet date, by references to IAS 10 (revised 1999), events after th e balance sheet date.
The following SIC interpretations relate to IAS 21:
— SIC-7: introduction of the euro,— SIC-11: foreign exchange — capitalisation of losses resulting from seve re currency devaluations,
— SIC-19: reporting currency — measurement and presentation of financial statements under IAS 21 and IAS 29,
— SIC-30: reporting currency — translation from measurement currency to p resentation currency.
CONTENTS
Paragraphs
Objective 188
Scope 188
Definitions 189
Foreign currency transactions 189
Initial recognition 189
Reporting at subsequent balance sheet dates 190Recognition of exchange differences 190Net investment in a foreign entity 191Allowed alternative treatment 191Financial statements of foreign operations 191Classification of foreign operations 191Foreign operations that are integral to the operations of the reporting en terprise 192
Foreign entities 193
Disposal of a foreign entity 19413/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 187
Change in the classification of a foreign operation 194
All changes in foreign exchange rates 195Tax effects of exchange differences 195Disclosure 195
Transitional provisions 196
Effective date 196
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
An enterprise may carry on foreign activities in two ways. It may have trans actions in foreign currencies or it may
have foreign operations. In order to include foreign currency transactio ns and foreign operations in the financial
statements of an enterprise, transactions must be expressed in the enterp rise’s reporting currency and the financial
statements of foreign operations must be translated into the enterprise’ s reporting currency.
The principal issues in accounting for foreign currency transactions and foreign operations are to decide which
exchangeratetouseandhowtorecogniseinthefinancialstatementsthefi nancialeffectofchangesinexchangerates.
SCOPE
1. This Standard should be applied:
(a) in accounting for transactions in foreign currencies; and
(b) in translating the financial statements of foreign operations that ar e included in the financial statements
of the enterprise by consolidation, proportionate consolidation or by th e equity method (1).
2.This Standard does not deal with hedge accounting for foreign currency ite ms other than the classification of
exchange differences arising on a foreign currency liability accounted f or as a hedge of a net investment in a
foreignentity.Otheraspectsofhedgeaccounting,includingthecriteri atousehedgeaccounting,aredealtwith
in IAS 39, financial instruments: recognition and measurement.
3.This Standard supersedes IAS 21, accounting for the effects of changes in f oreign exchange rates, approved in
1983.
4.This Standard does not specify the currency in which an enterprise present s its financial statements. However,
an enterprise normally uses the currency of the country in which it is domic iled. If it uses a different currency,
this Standard requires disclosure of the reason for using that currency. T his Standard also requires disclosure
of the reason for any change in the reporting currency (2).
(1) See also SIC-7: introduction of the euro.
(2) See also SIC-19: reporting currency — measurement and presentation of fi nancial statements under IAS 21 and IAS 29.188 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
5.This Standard does not deal with the restatement of an enterprise’s financ ial statements from its reporting
currency into another currency for the convenience of users accustomed to that currency or for similar
purposes (1).
6.This Standard does not deal with the presentation in a cash flow statement o f cash flows arising from
transactionsinaforeigncurrencyandthetranslationofcashflowsofafo reignoperation(seeIAS7,cashflow
statements).
DEFINITIONS
7. The following terms are used in this Standard with the meanings specifie d:
Foreign operation is a subsidiary, associate, joint venture or branch of t he reporting enterprise, the activities
of which are based or conducted in a country other than the country of the rep orting enterprise.
Foreign entity is a foreign operation, the activities of which are not an in tegral part of those of the reporting
enterprise.
Reporting currency is the currency used in presenting the financial state ments.
Foreign currency is a currency other than the reporting currency of an ente rprise.
Exchange rate is the ratio for exchange of two currencies.Exchangedifferenceisthedifferenceresultingfromreportingthesamen umberofunitsofaforeigncurrency
in the reporting currency at different exchange rates.Closing rate is the spot exchange rate at the balance sheet date.Net investment in a foreign entity is the reporting enterprise’s share in t he net assets of that entity.
Monetary items are money held and assets and liabilities to be received or p aid in fixed or determinable
amounts of money.Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilit ysettled,betweenknowledgeable,
willing parties in an arm’s length transaction.
FOREIGN CURRENCY TRANSACTIONS
Initial recognition
8.A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign
currency, including transactions arising when an enterprise either:
(a) buys or sells goods or services whose price is denominated in a foreign c urrency;
(b) borrows or lends funds when the amounts payable or receivable are denom inated in a foreign currency;
(c) becomes a party to an unperformed foreign exchange contract; or
(d) otherwise acquires or disposes of assets, or incurs or settles liabili ties, denominated in a foreign currency.
(1) See also SIC-30: reporting currency — translation from measurement curr ency to presentation currency.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 189
9. Aforeigncurrencytransactionshouldberecorded,oninitialrecognit ioninthereportingcurrency,byapplying
to the foreign currency amount the exchange rate between the reporting cur rency and the foreign currency
at the date of the transaction.
10.The exchange rate at the date of the transaction is often referred to as the s pot rate. For practical reasons, a
ratethatapproximatestheactualrateatthedateofthetransactionisoft enused,forexample,anaveragerate
foraweekoramonthmightbeusedforalltransactionsineachforeigncurre ncyoccurringduringthatperiod.
However, if exchange rates fluctuate significantly, the use of the averag e rate for a period is unreliable.
Reporting at subsequent balance sheet dates
11. At each balance sheet date:
(a) foreign currency monetary items should be reported using the closing r ate;
(b) non-monetaryitemswhicharecarriedintermsofhistoricalcostdenom inatedinaforeigncurrencyshould
be reported using the exchange rate at the date of the transaction; and
(c) non-monetaryitemswhicharecarriedatfairvaluedenominatedinafor eigncurrencyshouldbereported
using the exchange rates that existed when the values were determined.
12.The carrying amount of an item is determined in accordance with the relevan t International Accounting
Standards.Forexample,certainfinancialinstrumentsandproperty,pla ntandequipmentmaybemeasuredat
fairvalueorathistoricalcost.Whetherthecarryingamountisdetermine dbasedonhistoricalcostorfairvalue,
the amounts so determined for foreign currency items are then reported in t he reporting currency in
accordance with this Standard.
Recognition of exchange differences
13.Paragraphs 15 to 18 set out the accounting treatment required by this Stand ard in respect of exchange
differencesonforeigncurrencytransactions.Theseparagraphsinclude thebenchmarktreatmentforexchange
differencesthatresultfromaseveredevaluationordepreciationofacur rencyagainstwhichthereisnopractical
means of hedging and that affects liabilities which cannot be settled and w hich arise directly on the recent
acquisition of assets invoiced in a foreign currency. The allowed alterna tive treatment for such exchange
differences is set out in paragraph 21.
14.ThisStandarddoesnotdealwithhedgeaccountingforforeigncurrencyite msotherthantheclassificationof
exchange differences arising on a foreign currency liability accounted f or as a hedge of a net investment in a
foreignentity.Otheraspectsofhedgeaccounting,includingthecriteri atousehedgeaccounting,aredealtwith
in IAS 39, financial instruments: recognition and measurement.
15. Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary
items at rates different from those at which they were initially recorded d uring the period, or reported in
previousfinancialstatements,shouldberecognisedasincomeorasexpen sesintheperiodinwhichtheyarise,
with the exception of exchange differences dealt with in accordance with p aragraphs 17 and 19.
16.An exchange difference results when there is a change in the exchange rate b etween the transaction date and
thedateofsettlementofanymonetaryitemsarisingfromaforeigncurrenc ytransaction.Whenthetransaction
is settled within the same accounting period as that in which it occurred, a ll the exchange difference is
recognised in that period. However, when the transaction is settled in a su bsequent accounting period, the
exchangedifferencerecognisedineachinterveningperioduptotheperio dofsettlementisdeterminedbythe
change in exchange rates during that period.190 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Net investment in a foreign entity
17. Exchangedifferencesarisingonamonetaryitemthat,insubstance,fo rmspartofanenterprise’snetinvestment
inaforeignentityshouldbeclassifiedasequityintheenterprise’sfina ncialstatementsuntilthedisposalofthe
net investment, at which time they should be recognised as income or as expe nses in accordance with
paragraph 37.
18.An enterprise may have a monetary item that is receivable from, or payable t o, a foreign entity. An item for
whichsettlementisneitherplannednorlikelytooccurintheforeseeable futureis,insubstance,anextension
to,ordeductionfrom,theenterprise’snetinvestmentinthatforeignent ity.Suchmonetaryitemsmayinclude
long-term receivables or loans but do not include trade receivables or tra de payables.
19. Exchange differences arising on a foreign currency liability account ed for as a hedge of an enterprise’s net
investment in a foreign entity should be classified as equity in the enterp rise’s financial statements until the
disposalofthenetinvestment,atwhichtimetheyshouldberecognisedasi ncomeorasexpensesinaccordance
with paragraph 37.
Allowed alternative treatment
20.The benchmark treatment for exchange differences dealt with in paragraph 21 is set out in paragraph 15.
21. Exchange differences may result from a severe devaluation or deprecia tion of a currency against which there
isnopracticalmeansofhedgingandthataffectsliabilitieswhichcannot besettledandwhicharisedirectlyon
therecentacquisitionofanassetinvoicedinaforeigncurrency.Suchexc hangedifferencesshouldbeincluded
in the carrying amount of the related asset, provided that the adjusted car rying amount does not exceed the
lower of the replacement cost and the amount recoverable from the sale or us e of the asset (1).
22.Exchange differences are not included in the carrying amount of an asset wh en the enterprise is able to settle
orhedgetheforeigncurrencyliabilityarisingontheacquisitionofthea sset.However,exchangelossesarepart
ofthedirectlyattributablecostsoftheassetwhentheliabilitycannotb esettledandthereisnopracticalmeans
ofhedging,forexamplewhen,asaresultofexchangecontrols,thereisade layinobtainingforeigncurrency.
Therefore, under the allowed alternative treatment, the cost of an asset i nvoiced in a foreign currency is
regarded as the amount of reporting currency that the enterprise ultimate ly has to pay to settle its liabilities
arising directly on the recent acquisition of the asset.
FINANCIAL STATEMENTS OF FOREIGN OPERATIONS
Classification of foreign operations
23. The method used to translate the financial statements of a foreign oper ation depends on the way in which
it is financed and operates in relation to the reporting enterprise. For th is purpose, foreign operations are
classified as either “foreign operations that are integral to the operati ons of the reporting enterprise” or
“foreign entities”.
24. A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if
itwereanextensionofthereportingenterprise’soperations.Forexampl e,suchaforeignoperationmightonly
sellgoodsimportedfromthereportingenterpriseandremittheproceedst othereportingenterprise.Insuch
cases,achangeintheexchangeratebetweenthereportingcurrencyandthe currencyinthecountryofforeign
operationhasanalmostimmediateeffectonthereportingenterprise’sca shflowfromoperations.Therefore,
the change in the exchange rate affects the individual monetary items held by the foreign operation rather
than the reporting enterprise’s net investment in that operation.
(1) See also SIC-11: foreign exchange — capitalisation of losses resulting f rom severe currency devaluations.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 191
25. In contrast, a foreign entity accumulates cash and other monetary item s, incurs expenses, generates income
and perhaps arranges borrowings, all substantially in its local currency . It may also enter into transactions
inforeigncurrencies,includingtransactionsinthereportingcurrency .Whenthereisachangeintheexchange
rate between the reporting currency and the local currency, there is littl e or no direct effect on the present
andfuturecashflowsfromoperationsofeithertheforeignentityorthere portingenterprise.Thechangein
the exchange rate affects the reporting enterprise’s net investment in th e foreign entity rather than the
individual monetary and non-monetary items held by the foreign entity.
26. Thefollowingareindicationsthataforeignoperationisaforeignent ityratherthanaforeignoperationthat
is integral to the operations of the reporting enterprise:
(a) while the reporting enterprise may control the foreign operation, the activities of the foreign operation
are carried out with a significant degree of autonomy from those of the repo rting enterprise;
(b) transactions with the reporting enterprise are not a high proportion o f the foreign operation’s activities;
(c) the activities of the foreign operation are financed mainly from its ow n operations or local borrowings
rather than from the reporting enterprise;
(d) costs of labour, material and other components of the foreign operatio n’s products or services are
primarily paid or settled in the local currency rather than in the reportin g currency;
(e) the foreign operation’s sales are mainly in currencies other than the r eporting currency; and
(f) cashflowsofthereportingenterpriseareinsulatedfromtheday-to-d ayactivitiesoftheforeignoperation
rather than being directly affected by the activities of the foreign opera tion.
The appropriate classification for each operation can, in principle, be e stablished from factual information
relatedtotheindicatorslistedabove.Insomecases,theclassification ofaforeignoperationaseitheraforeign
entity or an integral operation of the reporting enterprise may not be clea r, and judgement is necessary to
determine the appropriate classification.
Foreign operations that are integral to the operations of the reporting en terprise
27. The financial statements of a foreign operation that is integral to the operations of the reporting enterprise
should be translated using the standards and procedures in paragraphs 8 to 22 as if the transactions of the
foreign operation had been those of the reporting enterprise itself.
28. Theindividualitemsinthefinancialstatementsoftheforeignoperat ionaretranslatedasifallitstransactions
had been entered into by the reporting enterprise itself. The cost and depr eciation of property, plant and
equipment is translated using the exchange rate at the date of purchase of t he asset or, if the asset is carried
at fair value, using the rate that existed on the date of the valuation. The c ost of inventories is translated at
the exchange rates that existed when those costs were incurred. The recove rable amount or realisable value
of an asset is translated using the exchange rate that existed when the reco verable amount or net realisable
value was determined. For example, when the net realisable value of an item of inventory is determined in
a foreign currency, that value is translated using the exchange rate at the date as at which the net realisable
value is determined. The rate used is therefore usually the closing rate. A n adjustment may be required to
reduce thecarrying amount of an asset in the financial statements of the re porting enterprise to its192 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
recoverable amount or net realisable value even when no such adjustment is necessary in the financial
statements of the foreign operation. Alternatively, an adjustment in the financial statements of the foreign
operation may need to be reversed in the financial statements of the report ing enterprise.
29.Forpracticalreasons,aratethatapproximatestheactualrateatthedate ofthetransactionisoftenused,for
example, an average rate for a week or a month might be used for all transacti ons in each foreign currency
occurring during that period. However, if exchange rates fluctuate signi ficantly, the use of the average rate
for a period is unreliable.
Foreign entities
30.In translating the financial statements of a foreign entity for incorpora tion in its financial statements, the
reporting enterprise should use the following procedures:
(a) the assets and liabilities, both monetary and non-monetary, of the for eign entity should be translated at
the closing rate;
(b) incomeandexpenseitemsoftheforeignentityshouldbetranslatedate xchangeratesatthedatesofthe
transactions, except when the foreign entity reports in the currency of a h yperinflationary economy, in
which case income and expense items should be translated at the closing rat e; and
(c) all resulting exchange differences should be classified as equity unt il the disposal of the net investment.
31. Forpracticalreasons,aratethatapproximatestheactualexchangera tes,forexampleanaveragerateforthe
period, is often used to translate income and expense items of a foreign ope ration.
32. Thetranslationofthefinancialstatementsofaforeignentityresult sintherecognitionofexchangedifferences
arising from:
(a) translating income and expense items at the exchange rates at the dates of transactions and assets and
liabilities at the closing rate;
(b) translating the opening net investment in the foreign entity at an exch ange rate different from that at
which it was previously reported; and
(c) other changes to equity in the foreign entity.
These exchange differences are not recognised as income or expenses for th e period because the changes in
theexchangerateshavelittleornodirecteffectonthepresentandfuture cashflowsfromoperationsofeither
theforeignentityorthereportingenterprise.Whenaforeignentityisco nsolidatedbutisnotwhollyowned,
accumulatedexchangedifferencesarisingfromtranslationandattribut abletominorityinterestsareallocated
to, and reported as part of, the minority interest in the consolidated bala nce sheet.
33. Any goodwill arising on the acquisition of a foreign entity and any fair value adjustments to the carrying
amounts of assets and liabilities arising on the acquisition of that forei gn entity are treated as either:
(a) assets and liabilities of the foreign entity and translated at the clos ing rate in accordance with
paragraph 30; or
(b) assets and liabilities of the reporting entity which either are alread y expressed in the reporting currency
orarenon-monetaryforeigncurrencyitemswhicharereportedusingtheex changerateatthedateofthe
transaction in accordance with paragraph 1 (b).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 193
34. The incorporation of the financial statements of a foreign entity in th ose of the reporting enterprise follows
normal consolidation procedures, such as the elimination of intra-group balances and intra-group
transactionsofasubsidiary(seeInternationalAccountingStandardsIA S27,consolidatedfinancialstatements
andaccountingforinvestmentsinsubsidiaries,andIAS31,financialrep ortingofinterestsinjointventures).
However,anexchangedifferencearisingonanintra-groupmonetaryitem, whethershort-termorlong-term,
cannot be eliminated against a corresponding amount arising on other intr a-group balances because the
monetary item represents a commitment to convert one currency into anothe r and exposes the reporting
enterprise to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial
statementsofthereportingenterprise,suchanexchangedifferencecont inuestoberecognisedasincomeor
anexpenseor,ifitarisesfromthecircumstancesdescribedinparagraphs 17and19,itisclassifiedasequity
until the disposal of the net investment.
35. Whenthefinancialstatementsofaforeignentityaredrawnuptoadiffe rentreportingdatefromthatofthe
reporting enterprise, the foreign entity often prepares, for purposes of incorporation in the financial
statements of the reporting enterprise, statements as at the same date as t he reporting enterprise. When it is
impracticable to do this, IAS 27, consolidated financial statements and a ccounting for investments in
subsidiaries, allows the use of financial statements drawn up to a differe nt reporting date provided that the
difference is no greater than three months. In such a case, the assets and li abilities of the foreign entity are
translated at the exchange rate at the balance sheet date of the foreign ent ity. Adjustments are made when
appropriate for significant movements in exchange rates up to the balance sheet date of the reporting
enterprise in accordance with IAS 27, consolidated financial statements and accounting for investments in
subsidiaries, and IAS 28, accounting for investments in associates.
36.Thefinancialstatementsofaforeignentitythatreportsinthecurrencyo fahyperinflationaryeconomyshould
be restated in accordance with IAS 29, financial reporting in hyperinflat ionary economies, before they are
translated into the reporting currency of the reporting enterprise. When the economy ceases to be
hyperinflationaryandtheforeignentitydiscontinuesthepreparationa ndpresentationoffinancialstatements
prepared in accordance with IAS 29, financial reporting in hyperinflatio nary economies, it should use the
amounts expressed in the measuring unit current at the date of discontinua tion as the historical costs for
translation into the reporting currency of the reporting enterprise.
Disposal of a foreign entity
37. On the disposal of a foreign entity, the cumulative amount of the exchan ge differences which have been
deferred and which relate to that foreign entity should be recognised as in come or as expenses in the same
period in which the gain or loss on disposal is recognised.
38.Anenterprisemaydisposeofitsinterestinaforeignentitythroughsale, liquidation,repaymentofsharecapital,
or abandonment of all, or part of, that entity. The payment of a dividend for ms part of a disposal only when
it constitutes a return of the investment. In the case of a partial disposal , only the proportionate share of the
relatedaccumulatedexchangedifferencesisincludedinthegainorloss. Awrite-downofthecarryingamount
ofaforeignentitydoesnotconstituteapartialdisposal.Accordingly,n opartofthedeferredforeignexchange
gain or loss is recognised at the time of a write-down.
Change in the classification of a foreign operation
39. Whenthereisachangeintheclassificationofaforeignoperation,the translationproceduresapplicabletothe
revised classification should be applied from the date of the change in the classification.
40.Achangeinthewayinwhichaforeignoperationisfinancedandoperatesinr elationtothereportingenterprise
may lead to a change in the classification of that foreign operation. When a foreign operation that is integral
to the operations of the reporting enterprise is reclassified as a foreign entity, exchange differences arising on
thetranslationofnon-monetaryassetsatthedateofthereclassificatio nareclassifiedasequity.Whenaforeign194 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
entity is reclassified as a foreign operation that is integral to the opera tion of thereporting enterprise, the
translatedamountsfornon-monetaryitemsatthedateofthechangearetre atedasthehistoricalcostforthose
itemsintheperiodofchangeandsubsequentperiods.Exchangedifference swhichhavebeendeferredarenot
recognised as income or expenses until the disposal of the operation.
ALL CHANGES IN FOREIGN EXCHANGE RATES
Tax Effects of Exchange Differences
41.Gains and losses on foreign currency transactions and exchange differenc es arising on the translation of the
financial statements of foreign operations may have associated tax effec ts which are accounted for in
accordance with IAS 12, income taxes.
DISCLOSURE
42. An enterprise should disclose:
(a) the amount of exchange differences included in the net profit or loss fo r the period;
(b) netexchangedifferencesclassifiedasequityasaseparatecomponent ofequity,andareconciliationofthe
amount of such exchange differences at the beginning and end of the period; and
(c) theamountofexchangedifferencesarisingduringtheperiodwhichisi ncludedinthecarryingamountof
an asset in accordance with the allowed alternative treatment in paragrap h 21.
43. Whenthereportingcurrencyisdifferentfromthecurrencyofthecount ryinwhichtheenterpriseisdomiciled,
the reason for using a different currency should be disclosed. The reason f or any change in the reporting
currency should also be disclosed (1).
44. When there is a change in the classification of a significant foreign op eration, an enterprise should disclose:
(a) the nature of the change in classification;
(b) the reason for the change;(c) the impact of the change in classification on shareholders’ equity; an d
(d) the impact on net profit or loss for each prior period presented had the c hange in classification occurred
at the beginning of the earliest period presented.
45. Anenterpriseshoulddisclosethemethodselectedinaccordancewithp aragraph33totranslategoodwilland
fair value adjustments arising on the acquisition of a foreign entity.
46.
Anenterprisedisclosestheeffectonforeigncurrencymonetaryitemsoro nthefinancialstatementsofaforeign
operation of a change in exchange rates occurring after the balance sheet d ate if the change is of such
importance that non-disclosure would affect the ability of users of the fi nancial statements to make proper
evaluations and decisions (see IAS 10, events after the balance sheet date ).
47.Disclosure is also encouraged of an enterprise’s foreign currency risk ma nagement policy.
(1) See also SIC-30: reporting currency — translation from measurement curr ency to presentation currency.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 195
TRANSITIONAL PROVISIONS
48. OnthefirstoccasionthatanenterpriseappliesthisStandard,theent erpriseshould,exceptwhentheamount
isnotreasonablydeterminable,classifyseparatelyanddisclosethecum ulativebalance,atthebeginningofthe
period, of exchange differences deferred and classified as equity in prev ious periods.
EFFECTIVE DATE
49. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.
INTERNATIONAL ACCOUNTING STANDARD IAS 22
(REVISED 1998)
Business combinations
IAS 22, accounting for business combinations, was approved in November 19 83.
In December 1993, IAS 22 was revised as part of the project on comparability and improvements of financial
statements. It became IAS 22, business combinations (IAS 22 (revised 1993 )).
In October 1996, paragraphs 39(i) and 69 of IAS 22 (i.e. paragraphs 39(i) an d 85 of this Standard), were revised to
be consistent with IAS 12 (revised 1996), income taxes. The revisions beca me operative for annual financial
statements covering periods beginning on or after 1 January 1998.
InJuly1998,variousparagraphsofIAS22wererevisedtobeconsistentwit hIAS36,impairmentofassets,IAS37,
provisions, contingent liabilities and contingent assets, and IAS 38, in tangible assets, and the treatment of negative
goodwill was also revised. The revised Standard (IAS 22 (revised 1998)) be came operative for annual financial
statements covering periods beginning on or after 1 July 1999.InOctober1998,theIASCstaffpublishedseparatelya“Basisforconclusi onsforIAS38,intangibleassetsandIAS22
(revised1998)”.TheportionoftheBasisforconclusionsthatreferstoth erevisionsmadetoIAS22in1998isincluded
as Appendix A.In 1999, paragraph 97 was amended to replace references to IAS 10, continge ncies and events occurring after the
balance sheet date, by references to IAS 10 (revised 1999), events after th e balance sheet date. In addition,
paragraphs 30 and 31(c) were amended to be consistent with IAS 10 (revised 1 999). The amended text became
effective for annual financial statements covering periods beginning on or after 1 January 2000.
The following SIC Interpretations relate to IAS 22:
— SIC-9: business combinations — classification either as acquisitions o r unitings of interests,
— SIC-22: business combinations — subsequent adjustment of fair values an d goodwill initially reported,
— SIC-28: business combinations — “date of exchange” and fair value of equi ty instruments.196 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
CONTENTS
Paragraphs
Objective 198
Scope 198
Definitions 199
Nature of a business combination 200
Acquisitions 200
Reverse acquisitions 200
Unitings of interests 201
Acquisitions 201
Accounting for acquisitions 201
Date of acquisition 202
Cost of acquisition 202
Recognition of identifiable assets and liabilities 203Allocation of cost of acquisition 204Benchmark treatment 204
Allowed alternative treatment 205
Successive share purchases 205
Determining the fair values of identifiable assets and liabilities acqui red 205
Goodwill arising on acquisition 207Recognition and measurement 207Amortisation 207
Recoverability of the carrying amount — impairment losses 209Negative goodwill arising on acquisition 209Recognition and measurement 209Presentation 210
Adjustment to purchase consideration contingent on future events 210Subsequent changes in cost of acquisition 210Subsequent identification or changes in value of identifiable assets and liabilities 210
Unitings of interests 21113/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 197
Accounting for unitings of interests 211
All business combinations 212
Taxes on income 212
Disclosure 213
Transitional Provisions 215
Effective Date 218
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribetheaccountingtreatmentfo rbusinesscombinations.TheStandardcovers
bothanacquisitionofoneenterprisebyanotherandalsotheraresituatio nofaunitingofinterestswhenanacquirer
cannot be identified. Accounting for an acquisition involves determinat ion of the cost of the acquisition, allocation
ofthecostovertheidentifiableassetsandliabilitiesoftheenterprise beingacquiredandaccountingfortheresulting
goodwill or negative goodwill, both at acquisition and subsequently. Oth er accounting issues include the
determination of the minority interest amount, accounting for acquisiti ons which occur over a period of time,
subsequent changes in the cost of acquisition or in the identification of a ssets and liabilities, and the disclosures
required.
SCOPE
1.This Standard should be applied in accounting for business combinations.
2. A business combination may be structured in a variety of ways which are de termined for legal, taxation or
otherreasons.Itmayinvolvethepurchasebyanenterpriseoftheequityof anotherenterpriseorthepurchase
of the net assets of a business enterprise. It may be effected by the issue of shares or by the transfer of cash,
cash equivalents or other assets. The transaction may be between the share holders of the combining
enterprisesorbetweenoneenterpriseandtheshareholdersoftheotheren terprise.Thebusinesscombination
mayinvolvetheestablishmentofanewenterprisetohavecontroloverthec ombiningenterprises,thetransfer
ofthenetassetsofoneormoreofthecombiningenterprisestoanotherente rpriseorthedissolutionofone
ormoreofthecombiningenterprises.Whenthesubstanceofthetransactio nisconsistentwiththedefinition
of a business combination in this Standard, the accounting and disclosure requirements contained in this
Standard are appropriate irrespective of the particular structure adopt ed for the combination.
3. Abusinesscombinationmayresultinaparent-subsidiaryrelationship inwhichtheacquireristheparentand
the acquiree a subsidiary of the acquirer. In such circumstances, the acqu irer applies this Standard in its
consolidated financial statements. It includes its interest in the acqui ree in its separate financial statements
asaninvestmentinasubsidiary(seeIAS27,consolidatedfinancialstate mentsandaccountingforinvestments
in subsidiaries).198 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4. A business combination may involve the purchase of the net assets, inclu ding any goodwill, of another
enterprise rather than the purchase of the shares in the other enterprise. Such a business combination does
notresultinaparent-subsidiaryrelationship.Insuchcircumstances,t heacquirerappliesthisStandardinits
separate financial statements and consequently in its consolidated fina ncial statements.
5. Abusinesscombinationmaygiverisetoalegalmerger.Whiletherequire mentsforlegalmergersdifferamong
countries, a legal merger is usually a merger between two companies in whic h either:
(a) the assets and liabilities of one company are transferred to the other c ompany and the first company is
dissolved; or
(b) the assets and liabilities of both companies are transferred to a new co mpany and both the original
companies are dissolved.
Many legal mergers arise as part of the restructuring or reorganisation of a group and are not dealt with in
thisStandardbecausetheyaretransactionsamongenterprisesundercomm oncontrol.However,anybusiness
combination that resulted in the two companies becoming members of the sam e group is dealt with as an
acquisition or as a uniting of interests in consolidated financial statem ents under the requirements of this
Standard.
6. ThisStandarddoesnotdealwiththeseparatefinancialstatementsofap arentotherthaninthecircumstances
described in paragraph 4. Separate financial statements are prepared usi ng different reporting practices in
different countries in order to meet a variety of needs.
7. This Standard does not deal with:
(a) transactions among enterprises under common control; and
(b) interests in joint ventures (see IAS 31, financial reporting of intere sts in joint ventures) and the financial
statements of joint ventures.
DEFINITIONS
8. The following terms are used in this Standard with the meanings specifie d:
Abusinesscombinationisthebringingtogetherofseparateenterprisesi ntooneeconomicentityasaresult
ofoneenterpriseunitingwithorobtainingcontroloverthenetassetsand operationsofanotherenterprise.
An acquisition is a business combination in which one of the enterprises, t he acquirer, obtains control over
the net assets and operations of another enterprise, the acquiree, in exch ange for the transfer of assets,
incurrence of a liability or issue of equity.
A uniting of interests is a business combination in which the shareholders of the combining enterprises
combine control over the whole, or effectively the whole, of their net asse ts and operations to achieve a
continuingmutualsharingintherisksandbenefitsattachingtothecombi nedentitysuchthatneitherparty
can be identified as the acquirer.Control is the power to govern the financial and operating policies of an en terprise so as to obtain benefits
from its activities.A parent is an enterprise that has one or more subsidiaries.A subsidiary is an enterprise that is controlled by another enterprise (kn own as the parent).
Minority interest is that part of the net results of operations and of net as sets of a subsidiary attributable to
interests which are not owned, directly or indirectly through subsidiari es, by the parent.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 199
Fairvalueistheamountforwhichanassetcouldbeexchangedoraliability settledbetweenknowledgeable,
willing parties in an arm’s length transaction.
Monetary assets are money held and assets to be received in fixed or determi nable amounts of money.
Dateofacquisitionisthedateonwhichcontrolofthenetassetsandoperat ionsoftheacquireeiseffectively
transferred to the acquirer.
NATURE OF A BUSINESS COMBINATION
9. Inaccountingforabusinesscombination,anacquisitionisinsubstanc edifferentfromaunitingofinterests
and the substance of the transaction needs to be reflected in the financial statements (1). Accordingly, a
different accounting method is prescribed for each.
Acquisitions
10.In virtually all business combinations one of the combining enterprises o btains control over the other
combiningenterprise,therebyenablinganacquirertobeidentified.Con trolispresumedtobeobtainedwhen
one of the combining enterprises acquires more than one half of the voting r ights of the other combining
enterpriseunless,inexceptionalcircumstances,itcanbeclearlydemon stratedthatsuchownershipdoesnot
constitute control. Even when one of the combining enterprises does not ac quire more than one half of the
voting rights of the other combining enterprise, it may still be possible t o identify an acquirer when one of
the combining enterprises, as a result of the business combination, acqui res:
(a) powerovermorethanonehalfofthevotingrightsoftheotherenterpris ebyvirtueofanagreementwith
other investors;
(b) power to govern the financial and operating policies of the other enter prise under a statute or an
agreement;
(c) power to appoint or remove the majority of the members of the board of dir ectors or equivalent
governing body of the other enterprise; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body
of the other enterprise.
11.Although it may sometimes be difficult to identify an acquirer, there are u sually indications that one exists.
For example:
(a) thefairvalueofoneenterpriseissignificantlygreaterthanthatoft heothercombiningenterprise.Insuch
cases, the larger enterprise is the acquirer;
(b) the business combination is effected through an exchange of voting com mon shares for cash. In such
cases, the enterprise giving up cash is the acquirer; or
(c) the business combination results in the management of one enterprise b eing able to dominate the
selection of the management team of the resulting combined enterprise. In such cases the dominant
enterprise is the acquirer.
Reverse acquisitions
12.Occasionallyanenterpriseobtainsownershipofthesharesofanotherent erprisebutaspartoftheexchange
transactionissuesenoughvotingshares,asconsideration,suchthatcon trolofthecombinedenterprisepasses
to the owners of the enterprise whose shares have been acquired. This situa tion is described as a reverse
acquisition. Although legally the enterprise issuing the shares may be re garded as the parent or
continuingenterprise, the enterprise whose shareholders now control th e combined enterprise is the
(1) See also SIC-9: business combinations — classification either as acquis itions or unitings of interests.200 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
acquirerenjoyingthevotingorotherpowersidentifiedinparagraph10.T heenterpriseissuingthesharesis
deemed to have been acquired by the other enterprise; the latter enterpris e is deemed to be the acquirer and
applies the purchase method to the assets and liabilities of the enterpris e issuing the shares.
Unitings of interests
13.In exceptional circumstances, it may not be possible to identify an acquir er. Instead of a dominant party
emerging, the shareholders of the combining enterprises join in a substan tially equal arrangement to share
control over the whole, or effectively the whole, of their net assets and op erations. In addition, the
managementsofthecombiningenterprisesparticipateinthemanagemento fthecombinedentity.Asaresult,
theshareholdersofthecombiningenterprisessharemutuallyintherisks andbenefitsofthecombinedentity.
Such a business combination is accounted for as a uniting of interests.
14.Amutualsharingofrisksandbenefitsisusuallynotpossiblewithoutasub stantiallyequalexchangeofvoting
common shares between the combining enterprises. Such an exchange ensure s that the relative ownership
interests of the combining enterprises, and consequently their relative risks and benefits in the combined
enterprise, are maintained and the decision-making powers of the parties are preserved. However, for a
substantiallyequalshareexchangetobeeffectiveinthisregardthereca nnotbeasignificantreductioninthe
rights attaching to the shares of one of the combining enterprises, otherw ise the influence of that party is
weakened.
15.In order to achieve a mutual sharing of the risks and benefits of the combine d entity:
(a) the substantial majority, if not all, of the voting common shares of the combining enterprises are
exchanged or pooled;
(b) the fair value of one enterprise is not significantly different from th at of the other enterprise; and
(c) the shareholders of each enterprise maintain substantially the same v oting rights and interest in the
combined entity, relative to each other, after the combination as before.
16.The mutual sharing of the risks and benefits of the combined entity diminis hes and the likelihood that an
acquirer can be identified increases when:
(a) the relative equality in fair values of the combining enterprises is re duced and the percentage of voting
common shares exchanged decreases;
(b) financial arrangements provide a relative advantage to one group of sh areholders over the other
shareholders. Such arrangements may take effect either prior to or after t he business combination; and
(c) one party’s share of the equity in the combined entity depends on how the business which it previously
controlled performs subsequent to the business combination.
ACQUISITIONS
Accounting for acquisitions
17. A business combination which is an acquisition should be accounted for by use of the purchase method of
accounting as set out in the standards contained in paragraphs 19 to 76.
18.Theuseofthepurchasemethodresultsinanacquisitionofanenterprisebe ingaccountedforsimilarlytothe
purchase of other assets. This is appropriate since an acquisition involv es a transaction in which assets are
transferred,liabilitiesareincurredorcapitalisissuedinexchangefo rcontrolofthenetassetsandoperations
ofanotherenterprise.Thepurchasemethodusescostasthebasisforrecor dingtheacquisitionandrelieson
the exchange transaction underlying the acquisition for determination o f the cost.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 201
Date of acquisition
19.As from the date of acquisition, an acquirer should:
(a) incorporate into the income statement the results of operations of the acquiree; and
(b) recognise in the balance sheet the identifiable assets and liabilitie s of the acquiree and any goodwill or
negative goodwill arising on the acquisition.
20.Thedateofacquisitionisthedateonwhichcontrolofthenetassetsandope rationsoftheacquireeiseffectively
transferred to the acquirer and the date when application of the purchase m ethod commences. The results of
operationsofanacquiredbusinessareincludedinthefinancialstatemen tsoftheacquirerasfromthedateof
acquisition, which is the date on which control of the acquiree is effectiv ely transferred to the acquirer. In
substance,thedateofacquisitionisthedatefromwhentheacquirerhasth epowertogovernthefinancialand
operating policies of an enterprise so as to obtain benefits from its activ ities. Control is not deemed to have
been transferred to the acquirer until all conditions necessary to protec t the interests of the parties involved
have been satisfied. However, this does not necessitate a transaction bei ng closed or finalised at law before
control effectively passes to the acquirer. In assessing whether control has effectively been transferred, the
substance of the acquisition needs to be considered.
Cost of acquisition
21. An acquisition should be accounted for at its cost, being the amount of c ash or cash equivalents paid or the
fair value, at the date of exchange, of the other purchase consideration gi ven by the acquirer in exchange for
control over the net assets of the other enterprise, plus any costs directl y attributable to the acquisition (1).
22.Whenanacquisitioninvolvesmorethanoneexchangetransactionthecosto ftheacquisitionistheaggregate
costoftheindividualtransactions.Whenanacquisitionisachievedinst ages,thedistinctionbetweenthedate
of acquisition and the date of the exchange transaction is important. Whil e accounting for the acquisition
commences as from the date of acquisition, it uses cost and fair value infor mation determined as at the date
of each exchange transaction.
23.Monetary assets given and liabilities incurred are measured at their fair values at the date of the exchange
transaction.Whensettlementofthepurchaseconsiderationisdeferred, thecostoftheacquisitionisthepresent
value of the consideration, taking into account any premium or discount li kely to be incurred in settlement,
and not the nominal value of the payable.
24.In determining the cost of the acquisition, marketable securities issued by the acquirer are measured at their
fair value which is their market price as at the date of the exchange transac tion, provided that undue
fluctuationsorthenarrownessofthemarketdonotmakethemarketpricean unreliableindicator.Whenthe
marketpriceononeparticulardateisnotareliableindicator,pricemove mentsforareasonableperiodbefore
and after the announcement of the terms of the acquisition need to be consid ered. When the market is
unreliableornoquotationexists,thefairvalueofthesecuritiesissued bytheacquirerisestimatedbyreference
to their proportional interest in the fair value of the acquirer’s enterpr ise or by reference to the proportional
interestinthefairvalueoftheenterpriseacquired,whicheveristhemor eclearlyevident.Purchaseconsideration
whichispaidincashtoshareholdersoftheacquireeasanalternativetose curitiesmayalsoprovideevidence
(1) SIC-28: business combinations — “date of exchange” and fair value of equi ty instruments.202 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
of the total fair value given. All aspects of the acquisition, including si gnificant factors influencing the
negotiations,needtobeconsidered,andindependentvaluationsmaybeus edasanaidindeterminingthefair
value of securities issued.
25.Inadditiontothepurchaseconsideration,theacquirermayincurdirectc ostsrelatingtotheacquisition.These
include the costs of registering and issuing equity securities, and profe ssional fees paid to accountants, legal
advisers, valuers and other consultants to effect the acquisition. Gener al administrative costs, including the
costs of maintaining an acquisitions department, and other costs which ca nnot be directly attributed to the
particular acquisition being accounted for, are not included in the cost o f the acquisition but are recognised
as an expense as incurred.
Recognition of identifiable assets and liabilities
26.Theidentifiableassetsandliabilitiesacquiredthatarerecognisedund erparagraph19shouldbethoseofthe
acquiree that existed at the date of acquisition together with any liabili ties recognised under paragraph 31.
They should be recognised separately as at the date of acquisition if, and o nly if:
(a) itisprobablethatanyassociatedfutureeconomicbenefitswillflowt o,orresourcesembodyingeconomic
benefits will flow from, the acquirer; and
(b) a reliable measure is available of their cost or fair value.
27. Assets and liabilities that are recognised under paragraph 26 are desc ribed in this Standard as identifiable
assets and liabilities. To the extent that assets and liabilities are purc hased which do not satisfy these
recognitioncriteriathereisaresultantimpactontheamountofgoodwill ornegativegoodwillarisingonthe
acquisition, because goodwill or negative goodwill is determined as the r esidual cost of acquisition after
recognising the identifiable assets and liabilities.
28. Theidentifiableassetsandliabilitiesoverwhichtheacquirerobtai nscontrolmayincludeassetsandliabilities
which were not previously recognised in the financial statements of the ac quiree. This may be because they
didnotqualifyforrecognitionpriortotheacquisition.Thisisthecase, forexample,whenataxbenefitarising
from tax losses of the acquiree qualifies for recognition as an identifiab le asset as a result of the acquirer
earning sufficient taxable income.
29.Subjecttoparagraph31,liabilitiesshouldnotberecognisedatthedateo facquisitioniftheyresultfromthe
acquirer’s intentions or actions. Liabilities should also not be recogni sed for future losses or other costs
expected to be incurred as a result of the acquisition, whether they relate to the acquirer or the acquiree.
30. Theliabilitiesreferredtoinparagraph29arenotliabilitiesofthea cquireeatthedateofacquisition.Therefore,
they are not relevant in allocating the cost of acquisition. None the less, this Standard contains one specific
exception to this general principle. This exception applies if the acquir er has developed plans that relate to
the acquiree’s business and an obligation comes into existence as a direct consequence of the acquisition.
Because these plans are an integral part of the acquirer’s plan for the acqu isition, this Standard requires an
enterprisetorecogniseaprovisionfortheresultingcosts(seeparagrap h31).ForthepurposeofthisStandard,
identifiableassetsandliabilitiesacquiredincludetheprovisionsrec ognisedunderparagraph31.Paragraph31
laysdownstrictconditionsdesignedtoensurethattheplanswereaninteg ralpartoftheacquisitionandthat
withinashorttime—theearlierofthreemonthsafterthedateofacquisiti onandthedatewhenthefinancial
statementsareauthorisedforissuetheacquirerhasdevelopedtheplansi nawaythatrequirestheenterprise
to recognise a restructuring provision under IAS 37, provisions, conting ent liabilities and contingent assets.
This Standard also requires an enterprise to reverse such provisions if th e plan is not implemented in the
manner expected or within the time originally expected (see paragraph 75) and to disclose information on
such provisions (see paragraph 92).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 203
31. At the date of acquisition, the acquirer should recognise a provision t hat was not a liability of the acquiree
at that date if, and only if, the acquirer has:
(a) at, or before, the date of acquisition, developed the main features of a plan that involves terminating or
reducing the activities of the acquiree and that relates:
(i) to compensating employees of the acquiree for termination of their emp loyment;
(ii) to closing facilities of the acquiree;(iii)to eliminating product lines of the acquiree; or(iv) to terminating contracts of the acquiree that have become onerous bec ause the acquirer has
communicated to the other party at, or before, the date of acquisition that the contract will be
terminated;
(b) byannouncingthemainfeaturesoftheplanat,orbefore,thedateofacq uisition,raisedavalidexpectation
in those affected by the plan that it will implement the plan; and
(c) by the earlier of three months after the date of acquisition and the date when the annual financial
statementsareauthorisedforissue,developedthosemainfeaturesintoa detailedformalplanidentifying
at least:(i) the business or part of a business concerned;(ii) the principal locations affected;(iii)the location, function, and approximate number of employees who wil l be compensated for
terminating their services;
(iv) the expenditures that will be undertaken; and(v) when the plan will be implemented.
Anyprovisionrecognisedunderthisparagraphshouldcoveronlythecosts oftheitemslistedin(a)(i)to(iv).
Allocation of cost of acquisition
Benchmark treatment
32.Theidentifiableassetsandliabilitiesrecognisedunderparagraph26sh ouldbemeasuredattheaggregateof:
(a) the fair value of the identifiable assets and liabilities acquired as a t the date of the exchange transaction
to the extent of the acquirer’s interest obtained in the exchange transact ion; and
(b) theminority’sproportionofthepre-acquisitioncarryingamountsof theidentifiableassetsandliabilities
of the subsidiary.
Any goodwill or negative goodwill should be accounted for under this Stand ard.
33. Thecostofanacquisitionisallocatedtotheidentifiableassetsandl iabilitiesrecognisedunderparagraph26
by reference to their fair values at the date of the exchange transaction. H owever, the cost of the acquisition
onlyrelatestothepercentageoftheidentifiableassetsandliabilities purchasedbytheacquirer.Consequently,
when an acquirer purchases less than all the shares of the other enterprise , the resulting minority interest is
stated at the minority’s proportion of the pre-acquisition carrying amou nts of the net identifiable assets of
the subsidiary. This is because the minority’s proportion has not been par t of the exchange transaction to
effect the acquisition.204 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Allowed alternative treatment
34. Theidentifiableassetsandliabilitiesrecognisedunderparagraph2 6shouldbemeasuredattheirfairvaluesas
atthedateofacquisition.Anygoodwillornegativegoodwillshouldbeacc ountedforunderthisStandard.Any
minority interest should be stated at the minority’s proportion of the fai r values of the identifiable assets and
liabilities recognised under paragraph 26.
35.Underthisapproach,thenetidentifiableassetsoverwhichtheacquirerh asobtainedcontrolarestatedattheir
fairvalues,regardlessofwhethertheacquirerhasacquiredalloronlyso meofthecapitaloftheotherenterprise
or has acquired the assets directly. Consequently, any minority interest is stated at the minority’s proportion
of the fair values of the net identifiable assets of the subsidiary.
Successive share purchases
36.Anacquisitionmayinvolvemorethanoneexchangetransaction,asforexam plewhenitisachievedinstages
by successive purchases on a stock exchange. When this occurs, each signif icant transaction is treated
separately for the purpose of determining the fair values of the identifia ble assets and liabilities acquired and
for determining the amount of any goodwill or negative goodwill on that tra nsaction. This results in a
step-by-stepcomparisonofthecostoftheindividualinvestmentswithth eacquirer’spercentageinterestinthe
fair values of the identifiable assets and liabilities acquired at each si gnificant step.
37.Whenanacquisitionisachievedbysuccessivepurchases,thefairvalueso ftheidentifiableassetsandliabilities
may vary at the date of each exchange transaction. If all the identifiable a ssets and liabilities relating to an
acquisition are restated to fair values at the time of successive purchase s, any adjustment relating to the
previously held interest of the acquirer is a revaluation and is accounted for as such.
38.Prior to qualifying as an acquisition, a transaction may qualify as an inve stment in an associate and be
accounted for by use of the equity method under IAS 28, accounting for inves tments in associates. If so, the
determination of fair values for the identifiable assets and liabilities acquired and the recognition of goodwill
or negative goodwill occurs notionally as from the date when the equity met hod is applied. When the
investmentdidnotqualifypreviouslyasanassociate,thefairvaluesoft heidentifiableassetsandliabilitiesare
determinedasatthedateofeachsignificantstepandgoodwillornegative goodwillisrecognisedfromthedate
of acquisition.
Determining the fair values of identifiable assets and liabilities acqui red
39. General guidelines for arriving at the fair values of identifiable ass ets and liabilities acquired are as follows:
(a) marketable securities at their current market values;
(b) non-marketablesecuritiesatestimatedvaluesthattakeintoconside rationfeaturessuchaspriceearnings
ratios, dividend yields and expected growth rates of comparable securiti es of enterprises with similar
characteristics;
(c) receivablesatthepresentvaluesoftheamountstobereceived,determ inedatappropriatecurrentinterest
rates, less allowances for uncollectability and collection costs, if nec essary. However, discounting is not
required for short-term receivables when the difference between the nomi nal amount of the receivable
and the discounted amount is not material;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 205
(d) inventories:
(i) finished goods and merchandise at selling prices less the sum of (a) the costs of disposal and (b) a
reasonable profit allowance for the selling effort of the acquirer based o n profit for similar finished
goods and merchandise;
(ii) work in progress at selling prices of finished goods less the sum of (a) costs to complete, (b) costs of
disposal and (c) a reasonable profit allowance for the completing and sell ing effort based on profit
for similar finished goods; and
(iii)raw materials at current replacement costs;
(e) land and buildings at their market value;
(f) plant and equipment at market value, normally determined by appraisal . When there is no evidence of
marketvaluebecauseofthespecialisednatureoftheplantandequipmento rbecausetheitemsarerarely
sold, except as part of a continuing business, they are valued at their depr eciated replacement cost;
(g) intangible assets, as defined in IAS 38, intangible assets, at fair val ue determined:
(i) by reference to an active market as defined in IAS 38; and(ii) ifnoactivemarketexists,onabasisthatreflectstheamountthatthe enterprisewouldhavepaidfor
the asset in an arm’s length transaction between knowledgeable willing pa rties, based on the best
informationavailable(seeIAS38forfurtherguidanceondeterminingthe fairvalueofanintangible
asset acquired in a business combination);
(h) netemployeebenefitassetsorliabilitiesfordefinedbenefitplansa tthepresentvalueofthedefinedbenefit
obligation less the fair value of any plan assets. However, an asset is only recognised to the extent that
itisprobablethatitwillbeavailabletotheenterpriseintheformofrefu ndsfromtheplanorareduction
in future contributions;
(i) tax assets and liabilities at the amount of the tax benefit arising from tax losses or the taxes payable in
respect of the net profit or loss, assessed from the perspective of the comb ined entity or group resulting
from the acquisition. The tax asset or liability is determined after allow ing for the tax effect of restating
identifiable assets and liabilities to their fair values and is not discou nted. The tax assets include any
deferred tax asset of the acquirer that was not recognised prior to the busi ness combination, but which,
as a consequence of the business combination, now satisfies the recogniti on criteria in IAS 12, income
taxes;
(j) accounts and notes payable, long-term debt, liabilities, accruals an d other claims payable at the present
valuesofamountstobedisbursedinmeetingtheliabilitydeterminedatap propriatecurrentinterestrates.
However, discounting is not required for short-term liabilities when the difference between the nominal
amount of the liability and the discounted amount is not material;
(k) onerous contracts and other identifiable liabilities of the acquiree at the present values of amounts to be
disbursed in meeting the obligation determined at appropriate current in terest rates; and
(l) provisionsforterminatingorreducingactivitiesoftheacquireetha tarerecognisedunderparagraph31,
at an amount determined under IAS 37, provisions, contingent liabilities and contingent assets.
Certain of the guidelines above assume that fair values will be determined by the use of discounting. When
theguidelinesdonotrefertotheuseofdiscounting,discountingmayorma ynotbeusedindeterminingthe
fair values of identifiable assets and liabilities.206 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
40. If the fair value of an intangible asset cannot be measured by reference to an active market (as defined in
IAS 38, intangible assets), the amount recognised for that intangible ass et at the date of the acquisition
should be limited to an amount that does not create or increase negative goo dwill that arises on the
acquisition (see paragraph 59).
Goodwill arising on acquisition
Recognition and measurement
41. Any excess of the cost of the acquisition over the acquirer’s interest i n the fair value of the identifiable assets
and liabilities acquired as at the date of the exchange transaction should be described as goodwill and
recognised as an asset.
42.Goodwillarisingonacquisitionrepresentsapaymentmadebytheacquirer inanticipationoffutureeconomic
benefits.Thefutureeconomicbenefitsmayresultfromsynergybetweenth eidentifiableassetsacquiredorfrom
assetswhich,individually,donotqualifyforrecognitioninthefinanci alstatementsbutforwhichtheacquirer
is prepared to make a payment in the acquisition.
43. Goodwillshouldbecarriedatcostlessanyaccumulatedamortisationa ndanyaccumulatedimpairmentlosses.
Amortisation
44. Goodwillshouldbeamortisedonasystematicbasisoveritsusefullife .Theamortisationperiodshouldreflect
the best estimate of the period during which future economic benefits are e xpected to flow to the enterprise.
There is a rebuttable presumption that the useful life of goodwill will not exceed 20 years from initial
recognition.
45. The amortisation method used should reflect the pattern in which the fu ture economic benefits arising from
goodwillareexpectedtobeconsumed.Thestraight-linemethodshouldbea doptedunlessthereispersuasive
evidence that another method is more appropriate in the circumstances.
46. The amortisation for each period should be recognised as an expense.
47.Withthepassageoftime,goodwilldiminishes,reflectingthefactthatit sservicepotentialisdecreasing.Insome
cases,thevalueofgoodwillmayappearnottodecreaseovertime.Thisisbe causethepotentialforeconomic
benefits that was purchased initially is being progressively replaced by the potential for economic benefits
resultingfromsubsequentenhancementsofgoodwill.Inotherwords,theg oodwillthatwaspurchasedisbeing
replaced by internally generated goodwill. IAS 38, intangible assets, pr ohibits the recognition of internally
generatedgoodwillasanasset.Therefore,itisappropriatethatgoodwil lisamortisedonasystematicbasisover
the best estimate of its useful life.
48.Many factors need to be considered in estimating the useful life of goodwil l including:
(a) the nature and foreseeable life of the acquired business;
(b) the stability and foreseeable life of the industry to which the goodwil l relates;
(c) public information on the characteristics of goodwill in similar busi nesses or industries and typical
lifecycles of similar businesses;
(d) the effects of product obsolescence, changes in demand and other econo mic factors on the acquired
business;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 207
(e) theservicelifeexpectanciesofkeyindividualsorgroupsofemployee sandwhethertheacquiredbusiness
could be efficiently managed by another management team;
(f) the level of maintenance expenditure or of funding required to obtain t he expected future economic
benefits from the acquired business and the company’s ability and intent t o reach such a level;
(g) expected actions by competitors or potential competitors; and
(h) the period of control over the acquired business and legal, regulatory or contractual provisions affecting
its useful life.
49.Becausegoodwillrepresents,amongotherthings,futureeconomicbenefi tsfromsynergyorassetsthatcannot
berecognisedseparately,itisdifficulttoestimateitsusefullife.Est imatesofitsusefullifebecomelessreliable
asthelengthoftheusefullifeincreases.ThepresumptioninthisStandar disthatgoodwilldoesnotnormally
have a useful life in excess of 20 years from initial recognition.
50.In rare cases, there may be persuasive evidence that the useful life of good will will be a specific period longer
than 20 years. Although examples are difficult to find, this may occur when the goodwill is so clearly related
toanidentifiableassetoragroupofidentifiableassetsthatitcanreaso nablybeexpectedtobenefittheacquirer
over the useful life of the identifiable asset or group of assets. In these c ases, the presumption that the useful
life of goodwill will not exceed 20 years is rebutted and the enterprise:
(a) amortises the goodwill over the best estimate of its useful life;
(b) estimates the recoverable amount of the goodwill at least annually to i dentify any impairment loss (see
paragraph 56); and
(c) discloses the reasons why the presumption is rebutted and the factor(s ) that played a significant role in
determining the useful life of the goodwill (see paragraph 88(b)).
51.The useful life of goodwill is always finite. Uncertainty justifies estim ating the useful life of goodwill on a
prudent basis, but it does not justify estimating a useful life that is unre alistically short.
52.There will rarely, if ever, be persuasive evidence to support an amortisat ion method for goodwill other than
the straight-line basis, especially if that other method results in a lowe r amount of accumulated amortisation
than under the straight-line method. The amortisation method is applied c onsistently from period to period
unless there is a change in the expected pattern of economic benefits from g oodwill.
53.When accounting for an acquisition, there may be circumstances in which th e goodwill on acquisition does
not reflect future economic benefits that are expected to flow to the acqui rer. For example, since negotiating
the purchase consideration, there may have been a decline in the expected f uture cash flows from the net
identifiable assets acquired. In this case, an enterprise tests the goodw ill for impairment under IAS 36,
impairment of assets, and accounts for any impairment loss accordingly.
54. The amortisation period and the amortisation method should be reviewe d at least at each financial year end.
Iftheexpectedusefullifeofgoodwillissignificantlydifferentfrompr eviousestimates,theamortisationperiod
should be changed accordingly. If there has been a significant change in th e expected pattern of economic
benefits from goodwill, the method should be changed to reflect the change d pattern. Such changes should
beaccountedforaschangesinaccountingestimatesunderIAS8,netprofit orlossfortheperiod,fundamental
errors and changes in accounting policies, by adjusting the amortisation charge for the current and future
periods.208 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Recoverability of the carrying amount — impairment losses
55.Todeterminewhethergoodwillisimpaired,anenterpriseappliesIAS36,i mpairmentofassets.IAS36explains
how an enterprise reviews the carrying amount of its assets, how it determi nes the recoverable amount of an
asset and when it recognises or reverses an impairment loss.
56. In addition to following the requirements included in IAS 36, impairme nt of assets, an enterprise should, at
least at each financial year end, estimate in accordance with IAS 36 the rec overable amount of goodwill that
is amortised over a period exceeding 20 years from initial recognition, ev en if there is no indication that it is
impaired.
57.It is sometimes difficult to identify whether goodwill is impaired, parti cularly if it has a long useful life. As a
consequence, this Standard requires, as a minimum, an annual calculation of the recoverable amount of
goodwill if its useful life exceeds 20 years from initial recognition.
58.Therequirementforanannualimpairmenttestofgoodwillapplieswheneve rthecurrenttotalestimateduseful
life of the goodwill exceeds 20 years from its initial recognition. Theref ore, if the useful life of goodwill was
estimatedtobelessthan20yearsatinitialrecognition,buttheestimate dusefullifeissubsequentlyextended
to exceed 20 years from when the goodwill was initially recognised, an ente rprise performs the impairment
test required under paragraph 56 and gives the disclosure required under p aragraph 88(b).
Negative goodwill arising on acquisition
Recognition and measurement
59. Any excess, as at the date of the exchange transaction, of the acquirer’ s interest in the fair values of the
identifiable assets and liabilities acquired over the cost of the acquisi tion, should be recognised as negative
goodwill.
60.The existence of negative goodwill may indicate that identifiable assets have been overstated and identifiable
liabilities have been omitted or understated. It is important to ensure th at this is not the case before negative
goodwill is recognised.
61. To the extent that negative goodwill relates to expectations of future losses and expenses that are identified
intheacquirer’splanfortheacquisitionandcanbemeasuredreliably,bu twhichdonotrepresentidentifiable
liabilitiesatthedateofacquisition(seeparagraph26),thatportionof negativegoodwillshouldberecognised
as income in the income statement when the future losses and expenses are re cognised. If these identifiable
futurelossesandexpensesarenotrecognisedintheexpectedperiod,nega tivegoodwillshouldbetreatedunder
paragraph 62 (a) and (b).
62. To the extent that negative goodwill does not relate to identifiable ex pected future losses and expenses that
can be measured reliably at the date of acquisition, negative goodwill sho uld be recognised as income in the
income statement as follows:
(a) theamountofnegativegoodwillnotexceedingthefairvaluesofacquir edidentifiablenon-monetaryassets
should be recognised as income on a systematic basis over the remaining wei ghted average useful life of
the identifiable acquired depreciable/amortisable assets; and
(b) the amount of negative goodwill in excess of the fair values of acquired identifiable non-monetary assets
should be recognised as income immediately.
63.To the extent that negative goodwill does not relate to expectations of fut ure losses and expenses that have
been identified in the acquirer’s plan for the acquisition and can be measu red reliably, negative goodwill is a
gain which is recognised as income when the future economic benefits embod ied in the identifiable
depreciable/amortisable assets acquired are consumed. In the case of mon etary assets, the gain is recognised
as income immediately.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 209
Presentation
64. Negativegoodwillshouldbepresentedasadeductionfromtheassetsof thereportingenterprise,inthesame
balance sheet classification as goodwill.
Adjustments to purchase consideration contingent on future events
65. Whentheacquisitionagreementprovidesforanadjustmenttothepurch aseconsiderationcontingentonone
or more future events, the amount of the adjustment should be included in th e cost of the acquisition as at
the date of acquisition if the adjustment is probable and the amount can be m easured reliably.
66.Acquisition agreements may allow for adjustments to be made to the purchas e consideration in the light of
one or more future events. The adjustments may be contingent on a specified level of earnings being
maintainedorachievedinfutureperiodsoronthemarketpriceofthesecur itiesissuedaspartofthepurchase
consideration being maintained.
67.Wheninitiallyaccountingforanacquisition,itisusuallypossibletoes timatetheamountofanyadjustment
to the purchase consideration, even though some uncertainty exists, with out impairing the reliability of the
information.Ifthefutureeventsdonotoccur,ortheestimateneedstober evised,thecostoftheacquisition
is adjusted with a consequential effect on goodwill, or negative goodwill , as the case may be.
Subsequent changes in cost of acquisition
68. The cost of the acquisition should be adjusted when a contingency affec ting the amount of the purchase
considerationisresolvedsubsequenttothedateoftheacquisition,soth atpaymentoftheamountisprobable
and a reliable estimate of the amount can be made.
69.Thetermsofanacquisitionmayprovideforanadjustmentofthepurchaseco nsiderationiftheresultsfrom
the acquiree’s operations exceed or fall short of an agreed level after acq uisition. When the adjustment
subsequently becomes probable and a reliable estimate can be made of the am ount, the acquirer treats the
additionalconsiderationasanadjustmenttothecostofacquisition,wit haconsequentialeffectongoodwill,
or negative goodwill, as the case may be.
70.In some circumstances, the acquirer may be required to make subsequent pay ment to the seller as
compensation for a reduction in the value of the purchase consideration. T his is the case when the acquirer
hasguaranteedthemarketpriceofsecuritiesordebtissuedasconsiderat ionandhastomakeafurtherissue
ofsecuritiesordebtforthepurposeofrestoringtheoriginallydetermin edcostofacquisition.Insuchcases,
there is no increase in the cost of acquisition and, consequently, no adjus tment to goodwill or negative
goodwill.Instead,theincreaseinsecuritiesordebtissuedrepresentsa reductioninthepremiumoranincrease
in the discount on the initial issue.
Subsequent identification or changes in value of identifiable assets and liabilities(1)
71.Identifiableassetsandliabilities,whichareacquiredbutwhichdonots atisfythecriteriainparagraph26for
separaterecognitionwhentheacquisitionisinitiallyaccountedfor,sh ouldberecognisedsubsequentlyasand
when they satisfy the criteria. The carrying amounts of identifiable asse ts and liabilities acquired should be
adjustedwhen,subsequenttoacquisition,additionalevidencebecomesa vailabletoassistwiththeestimation
oftheamountsassignedtothoseidentifiableassetsandliabilitieswhen theacquisitionwasinitiallyaccounted
for. The amount assigned to goodwill or negative goodwill should also be ad justed, when necessary, to the
extent that:
(a) the adjustment does not increase the carrying amount of goodwill above its recoverable amount, as
defined in IAS 36, impairment of assets; and
(1) See also SIC-22: business combinations — subsequent adjustment of fair v alues and goodwill initially reported.210 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) such adjustment is made by the end of the first annual accounting period commencing after acquisition
(except for the recognition of an identifiable liability under paragraph 31, for which the timeframe in
paragraph 31(c) applies);
otherwisetheadjustmentstotheidentifiableassetsandliabilitiessho uldberecognisedasincomeorexpense.
72. Identifiable assets and liabilities of an acquiree may not have been re cognised at the time of acquisition
because they did not meet the recognition criteria for identifiable asset s and liabilities or the acquirer was
unawareoftheirexistence.Similarly,thefairvaluesassignedatthedat eofacquisitiontotheidentifiableassets
and liabilities acquired may need to be adjusted as additional evidence be comes available to assist with the
estimation of the value of the identifiable asset or liability at the date o f acquisition. When the identifiable
assets or liabilities are recognised or the carrying amounts are adjusted after the end of the first annual
accountingperiod(excludinginterimperiods)commencingafteracquisi tion,incomeorexpenseisrecognised
rather than an adjustment to goodwill or negative goodwill. This timelimi t, while arbitrary in its length,
prevents goodwill and negative goodwill from being reassessed and adjust ed indefinitely.
73. Under paragraph 71, the carrying amount of goodwill (negative goodwil l) is adjusted if, for example, there
isanimpairmentlossbeforetheendofthefirstannualaccountingperiodc ommencingafteracquisitionfor
an identifiable asset acquired and the impairment loss does not relate to s pecific events or changes in
circumstances occurring after the date of acquisition.
74. When,subsequenttoacquisitionbutpriortotheendofthefirstannual accountingperiodcommencingafter
acquisition, the acquirer becomes aware of the existence of a liability wh ich had existed at the date of
acquisition or of an impairment loss that does not relate to specific event s or changes in circumstances
occurring after the date of acquisition, goodwill is not increased above i ts recoverable amount determined
under IAS 36.
75.Ifprovisionsforterminatingorreducingactivitiesoftheacquireewere recognisedunderparagraph31,these
provisions should be reversed if, and only if:
(a) the outflow of economic benefits is no longer probable; or
(b) the detailed formal plan is not implemented:
(i) in the manner set out in the detailed formal plan; or(ii) within the time established in the detailed formal plan.
Suchareversalshouldbereflectedasanadjustmenttogoodwillornegativ egoodwill(andminorityinterests,
ifappropriate),sothatnoincomeorexpenseisrecognisedinrespectofit .Theadjustedamountofgoodwill
should be amortised prospectively over its remaining useful life. The adj usted amount of negative goodwill
should be dealt with under paragraph 62(a) and (b).
76. Nosubsequentadjustmentisnormallynecessaryinrespectofprovisio nsrecognisedunderparagraph31,as
the detailed formal plan is required to identify the expenditures that wil l be undertaken. If the expenditures
have not occurred in the expected period, or are no longer expected to occur , it is necessary to adjust the
provision for terminating or reducing activities of the acquiree, with a c orresponding adjustment to the
amountofgoodwillornegativegoodwill(andminorityinterests,ifappro priate).Ifsubsequently,thereisany
obligation that is required to be recognised under IAS 37, provisions, con tingent liabilities and contingent
assets, the enterprise recognises a corresponding expense.
UNITINGS OF INTERESTS
Accounting for unitings of interests
77. A uniting of interests should be accounted for by use of the pooling of in terests method as set out in
paragraphs 78, 79 and 82.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 211
78. In applying the pooling of interests method, the financial statement i tems of the combining enterprises for
the period in which the combination occurs and for any comparative periods disclosed should be included
in the financial statements of the combined enterprises as if they had been combined from the beginning of
the earliest period presented. The financial statements of an enterprise should not incorporate a uniting of
interests to which the enterprise is a party if the date of the uniting of int erests is after the date of the most
recent balance sheet included in the financial statements.
79. Anydifferencebetweentheamountrecordedassharecapitalissuedplu sanyadditionalconsiderationinthe
formofcashorotherassetsandtheamountrecordedforthesharecapitalac quiredshouldbeadjustedagainst
equity.
80.Thesubstanceofaunitingofinterestsisthatnoacquisitionhasoccurred andtherehasbeenacontinuation
ofthemutualsharingofrisksandbenefitsthatexistedpriortothebusine sscombination.Useofthepooling
of interests method recognises this by accounting for the combined enterp rises as though the separate
businesses were continuing as before, though now jointly owned and manage d. Accordingly, only minimal
changes are made in aggregating the individual financial statements.
81.Since a uniting of interests results in a single combined entity, a single u niform set of accounting policies is
adopted by that entity. Therefore, the combined entity recognises the ass ets, liabilities and equity of the
combining enterprises at their existing carrying amounts adjusted only a s a result of conforming the
combining enterprises’ accounting policies and applying those policies to all periods presented. There is no
recognition of any new goodwill or negative goodwill. Similarly, the effe cts of all transactions between the
combiningenterprises,whetheroccurringbeforeoraftertheunitingofi nterests,areeliminatedinpreparing
the financial statements of the combined entity.
82. Expenditures incurred in relation to a uniting of interests should be r ecognised as expenses in the period in
which they are incurred.
83.Expenditures incurred in relation to a uniting of interests include regis tration fees, costs of furnishing
informationtoshareholders,findersandconsultantsfees,andsalaries andotherexpensesrelatedtoservices
ofemployeesinvolvedinachievingthebusinesscombination.Theyalsoin cludeanycostsorlossesincurred
in combining operations of the previously separate businesses.
ALL BUSINESS COMBINATIONS
Taxes on income
84. Insomecountries,theaccountingtreatmentforabusinesscombinatio nmaydifferfromthatappliedunder
their respective income tax laws. Any resulting deferred tax liabilities and deferred tax assets are recognised
under IAS 12, income taxes.
85. Thepotentialbenefitofincometaxlosscarryforwards,orotherdefer redtaxassets,ofanacquiredenterprise,
whichwerenotrecognisedasanidentifiableassetbytheacquirerattheda teofacquisition,maysubsequently
be realised. When this occurs, the acquirer recognises the benefit as inco me under IAS 12, income taxes. In
addition, the acquirer:
(a) adjusts the gross carrying amount of the goodwill and the related accum ulated amortisation to the
amounts that would have been recorded if the deferred tax asset had been rec ognised as an identifiable
asset at the date of the business combination; and
(b) recognises the reduction in the net carrying amount of the goodwill as a n expense.
However, this procedure does not create negative goodwill, nor does it inc rease the carrying amount of
negative goodwill.212 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
DISCLOSURE
86.For all business combinations, the following disclosures should be made i n the financial statements for the
period during which the combination has taken place:
(a) the names and descriptions of the combining enterprises;
(b) the method of accounting for the combination;(c) the effective date of the combination for accounting purposes; and(d) any operations resulting from the business combination which the ente rprise has decided to dispose of.
87.
For a business combination which is an acquisition, the following additio nal disclosures should be made in
the financial statements for the period during which the acquisition has t aken place:
(a) the percentage of voting shares acquired; and(b) the cost of acquisition and a description of the purchase consideratio n paid or contingently payable.
88.
For goodwill, the financial statements should disclose:
(a) the amortisation period(s) adopted;(b) if goodwill is amortised over more than 20 years, the reasons why the pre sumption that the useful life
of goodwill will not exceed 20 years from initial recognition is rebutted. In giving these reasons, the
enterprise should describe the factor(s) that played a significant role i n determining the useful life of the
goodwill;
(c) if goodwill is not amortised on the straight-line basis, the basis used and reason why that basis is more
appropriate than the straight-line basis;
(d) the line item(s) of the income statement in which the amortisation of go odwill is included; and
(e) a reconciliation of the carrying amount of goodwill at the beginning an d end of the period showing:
(i)
the gross amount and the accumulated amortisation (aggregated with accum ulated impairment
losses), at the beginning of the period;
(ii)any additional goodwill recognised during the period;
(iii)any adjustments resulting from subsequent identification or changes in v alue of identifiable assets
and liabilities;
(iv)any goodwill derecognised on the disposal of all or part of the business to w hich it relates during
the period;
(v)amortisation recognised during the period;
(vi)impairment losses recognised during the period under IAS 36, impairment o f assets (if any);
(vii)impairment losses reversed during the period under IAS 36 (if any);
(viii)other changes in the carrying amount during the period (if any); and
(ix)the gross amount and the accumulated amortisation (aggregated with accum ulated impairment
losses), at the end of the period.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 213
Comparative information is not required.
89. When an enterprise describes the factor(s) that played a significant r ole in determining the useful life of
goodwillthatisamortisedovermorethan20years,theenterpriseconside rsthelistoffactorsinparagraph48.
90. An enterprise discloses information on impaired goodwill under IAS 36 in addition to the information
required by paragraph 88(e)(vi) and (vii).
91.For negative goodwill, the financial statements should disclose:
(a) to the extent that negative goodwill is treated under paragraph 61, a de scription, the amount and the
timing of the expected future losses and expenses;
(b) the period(s) over which negative goodwill is recognised as income;
(c) the line item(s) of the income statement in which negative goodwill is r ecognised as income; and
(d) a reconciliation of the carrying amount of negative goodwill at the beg inning and end of the period
showing:(i) the gross amount of negative goodwill and the accumulated amount of neg ative goodwill already
recognised as income, at the beginning of the period;
(ii) any additional negative goodwill recognised during the period;(iii)anyadjustmentsresultingfromsubsequentidentificationorchang esinvalueofidentifiableassetsand
liabilities;
(iv) any negative goodwill derecognised on the disposal of all or part of th e business to which it relates
during the period;
(v) negativegoodwillrecognisedasincomeduringtheperiod,showingsep aratelytheportionofnegative
goodwill recognised as income under paragraph 61 (if any);
(vi) other changes in the carrying amount during the period (if any); and(vii)the gross amount of negative goodwill and the accumulated amount of n egative goodwill already
recognised as income, at the end of the period.
Comparative information is not required.
92.The disclosure requirements of IAS 37, provisions, contingent liabiliti es and contingent assets, apply to
provisions recognised under paragraph 31 for terminating or reducing the activities of an acquiree. These
provisions should be treated as a separate class of provisions for the purp ose of disclosure under IAS 37. In
addition,theaggregatecarryingamountoftheseprovisionsshouldbedis closedforeachindividualbusiness
combination.
93.In an acquisition, if the fair values of the identifiable assets and liabil ities or the purchase consideration can
only be determined on a provisional basis at the end of the period in which th e acquisition took place, this
should be stated and reasons given. When there are subsequent adjustments to such provisional fair values,
those adjustments should be disclosed and explained in the financial stat ements of the period concerned.
94.Forabusinesscombinationwhichisaunitingofinterests,thefollowinga dditionaldisclosuresshouldbemade
in the financial statements for the period during which the uniting of inte rests has taken place:
(a) descriptionandnumberofsharesissued,togetherwiththepercentage ofeachenterprise’svotingshares
exchanged to effect the uniting of interests;
(b) amounts of assets and liabilities contributed by each enterprise; and(c) salesrevenue,otheroperatingrevenues,extraordinaryitemsandthe netprofitorlossofeachenterprise
prior to the date of the combination that are included in the net profit or lo ss shown by the combined
enterprise’s financial statements.214 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
95. General disclosures required to be made in consolidated financial sta tements are contained in IAS 27,
consolidated financial statements and accounting for investments in sub sidiaries.
96.For business combinations effected after the balance sheet date, the info rmation required by paragraphs 86
to94shouldbedisclosed.Ifitisimpracticabletodiscloseanyofthisinf ormation,thisfactshouldbedisclosed.
97. Business combinations which have been effected after the balance shee t date and before the date on which
thefinancialstatementsofoneofthecombiningenterprisesareauthoris edforissuearedisclosediftheyare
ofsuchimportancethatnon-disclosurewouldaffecttheabilityoftheuse rsofthefinancialstatementstomake
proper evaluations and decisions (see IAS 10, events after the balance she et date).
98. In certain circumstances, the effect of the combination may be to allow the financial statements of the
combinedenterprisetobepreparedinaccordancewiththegoingconcernas sumption.Thismightnothave
beenpossibleforoneorbothofthecombiningenterprises.Thismayoccur, forexample,whenanenterprise
withcashflowdifficultiescombineswithanenterprisehavingaccesstoc ashthatcanbeusedintheenterprise
with a need for cash. If this is the case, disclosure of this information in t he financial statements of the
enterprise having the cash flow difficulties is relevant.
TRANSITIONAL PROVISIONS
99. At the date when this Standard becomes effective (or at the date of adopt ion, if earlier), it should be applied
as set out in the following tables. In all cases other than those detailed in the following tables, this Standard
should be applied retrospectively, unless it is impracticable to do so.
100. The effect of adopting this Standard on its effective date (or earlier ) should be recognised under IAS 8, net
profitorlossfortheperiod,fundamentalerrorsandchangesinaccountin gpolicies,thatis,asanadjustment
either to the opening balance of retained earnings of the earliest period p resented (IAS 8 benchmark
treatment) or to the net profit or loss for the current period (IAS 8 allowed alternative treatment).
101. In the first annual financial statements issued under this Standard, an enterprise should disclose the
transitional provisions adopted where transitional provisions under th is Standard permit a choice.
Transitional provisions — Restatement of goodwill and negative goodwill
Circumstances Requirements
1. Business combination that was an acquisition and arose in annual financ ial statements covering periods
beginning before 1 January 1995.
(a) Goodwill (negative goodwill) was written
off against reserves.Restatement of the goodwill (negative goodwill) is encouraged, but
not required. If the goodwill (negative goodwill) is restated:
(i) restategoodwillandnegativegoodwillforallacquisitionsbefore
1 January 1995;
(ii) determine the amount assigned to the goodwill (negative
goodwill) at the date of acquisition under paragraph 41 (59) of
this Standard and recognise the goodwill (negative goodwill)accordingly; and
(iii)determine the accumulated amortisation of the goodwill (the
accumulatedamountofnegativegoodwillrecognisedasincome)sincethedateofacquisitionunderparagraphs44to54(61to63)of this Standard and recognise it accordingly.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 215
(b) Goodwill (negative goodwill) was recog-
nised initially as an asset (deferred
income)butnotattheamountthatwouldhave been assigned under para-graph 41 (59) of this Standard.Restatement of the goodwill (negative goodwill) is encouraged, butnotrequired.Ifthegoodwill(negativegoodwill)isrestated,applytherequirements under circumstances 1(a).
If the goodwill (negative goodwill) is not restated, the amount
assignedtothegoodwill(negativegoodwill)atthedateofacquisitionis deemed to have been properly determined.
Fortheamortisationofgoodwill(recognitionofnegativegoodwillas
income), see circumstances 3 or 4.
2.Business combination that was an acquisition and arose in annual financia l statements covering periods
beginning on or after 1 January 1995, but before this Standard is effective (or before the date of adoption of
this Standard, if earlier).
(a) At the date of acquisition, the cost of the
acquisition exceeded the acquirer’sinterestinthefairvalueoftheidentifiableassets and liabilities.If the goodwill was recognised as an asset and the amount assignedto it at the date of acquisition was determined under paragraph 41of this Standard, see transitional provisions for amortisation undercircumstances 3 or 4.
Otherwise:(i) determine the amount that would have been assigned to the
goodwill at the date of acquisition under paragraph 41 of this
Standard and recognise the goodwill accordingly;
(ii) determine the related accumulated amortisation of the goodwill
that would have been recognised under IAS 22 (revised 1993)andrecogniseitaccordingly(the20yearlimitinIAS22(revised1993) applies); and
(iii)amortiseanyremainingcarryingamountofthegoodwilloverits
remaining useful life determined under this Standard (treatmentas in circumstances 4).
(b) At the date of acquisition:
(i) the cost of the acquisition was less than
the acquirer’s interest in the fair value of
the identifiable assets and liabilities; and
(ii) the fair values of the identifiable non-
monetary assets acquired were reduceduntil the excess was eliminated(benchmark treatment under IAS 22(revised 1993)).Restatementofthenegativegoodwillisencouraged,butnotrequired.If the negative goodwill is restated:
(i) restatenegativegoodwillforallacquisitionsafter1January1995;(ii) determine the amount that would have been assigned to the
negative goodwill at the date of acquisition under paragraph 59
ofthisStandardandrecognisethenegativegoodwillaccordingly;
(iii)determine the related accumulated amount of negative goodwill
thatwouldhavebeenrecognisedasincomeunderIAS22(revised1993) and recognise it accordingly; and
(iv) recognise any remaining carrying amount of the negative
goodwill as income over the remaining weighted average usefullife of the identifiable depreciable/amortisable non-monetaryassets acquired (treatment as in circumstances 4).216 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
If the negative goodwill is not restated, the amount assigned to the
negativegoodwill(ifany)atthedateofacquisitionisdeemedtohavebeen properly determined. For the recognition of negative goodwillas income, see circumstances 3 or 4.
(c) At the date of acquisition:
(i) the cost of the acquisition was less than
the acquirer’s interest in the fair value of
the identifiable assets and liabilities; and
(ii) the fair values of the identifiable non-
monetary assets acquired were notreduced to eliminate the excess (allowedalternative treatment under IAS 22(revised 1993)).If the negative goodwill was recognised and the amount assigned toit at the date of acquisition was determined under paragraph 59 ofthis Standard, see transitional provisions for the recognition ofnegative goodwill as income under circumstances 3 and 4.Otherwise:
(i) determine the amount that would have been assigned to the
negative goodwill at the date of acquisition under paragraph 59
ofthisStandardandrecognisethenegativegoodwillaccordingly;
(ii) determine the related accumulated amount of the negative
goodwill that would have been recognised as income underIAS 22 (revised 1993) and recognise it accordingly; and
(iii)recognise any remaining carrying amount of the negative
goodwill as income over the remaining weighted average usefullife of the identifiable depreciable/amortisable non-monetaryassets acquired (treatment as in circumstances 4).
3. Goodwillwasrecognisedasanassetbut
was not previously amortised or theamortisation charge was deemed to benil.
Negative goodwill was recognised
initiallyasaseparateiteminthebalancesheetbutwasnotsubsequentlyrecogni-sedasincomeortheamountofnegativegoodwill to be recognised as incomewas deemed to be nil.Restatethecarryingamountofthegoodwill(negativegoodwill)asifthe amortisation of goodwill (amount of negative goodwill recogni-sedasincome)hadalwaysbeendeterminedunderthisStandard(seeparagraphs 44 to 54 (61 to 63)).
4. Goodwill (negative goodwill) was
previously amortised (recognised asincome).Do not restate the carrying amount of the goodwill (negativegoodwill) for any difference between accumulated amortisation(accumulatednegativegoodwillrecognisedasincome)inprioryearsand that calculated under this Standard and:
(i) amortiseanycarryingamountofthegoodwilloveritsremaining
useful life determined under this Standard (see paragraphs 44
to 54); and
(ii) recognise any carrying amount of the negative goodwill as
income over the remaining weighted average useful life of theidentifiable depreciable/amortisable non-monetary assetsacquired (see paragraph 62(a)).
(i.e.anychangeistreatedinthesamewayasachangeinaccountingestimate under IAS 8, net profit or loss for the period, fundamentalerrors and changes in accounting policies).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 217
EFFECTIVE DATE
102. ThisInternationalAccountingStandardbecomesoperativeforannua lfinancialstatementscoveringperiods
beginningonorafter1July1999.Earlierapplicationisencouraged.Ifan enterpriseappliesthisStandardfor
annual financial statements covering periods beginning before 1 July 199 9, the enterprise should:
(a) disclose that fact; and
(b) adopt IAS 36, impairment of assets, IAS 37, provisions, contingent lia bilities and contingent assets, and
IAS 38, intangible assets, at the same time.
103.This Standard supersedes IAS 22, business combinations, approved in 1993 .
INTERNATIONAL ACCOUNTING STANDARD IAS 23
(REVISED 1993)
Borrowing costs
ThisrevisedInternationalAccountingStandardsupersedesIAS23,capit alisationofborrowingcosts,approvedbythe
BoardinMarch1984.TherevisedStandardbecameeffectiveforfinancials tatementscoveringperiodsbeginningon
or after 1 January 1995.
One SIC interpretation relates to IAS 23:
— SIC-2: consistency — capitalisation of borrowing costs.
CONTENTS
Paragraphs
Objective 219
Scope 219
Definitions 219
Borrowing costs — benchmark treatment 220
Recognition 220
Disclosure 220
Borrowing costs — allowed alternative treatment 220Recognition 220
Borrowing costs eligible for capitalisation 220Excess of the carrying amount of the qualifying asset over recoverable amo unt 221
Commencement of capitalisation 221Suspension of capitalisation 222
Cessation of capitalisation 222218 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Disclosure 222
Transitional provisions 222
Effective date 222
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment fo r borrowing costs. This Standard generally
requires the immediate expensing of borrowing costs. However, the Standa rd permits, as an allowed alternative
treatment, the capitalisation of borrowing costs that are directly attri butable to the acquisition, construction or
production of a qualifying asset.
SCOPE
1. This Standard should be applied in accounting for borrowing costs.
2.This Standard supersedes IAS 23, capitalisation of borrowing costs, appr oved in 1983.
3.ThisStandarddoesnotdealwiththeactualorimputedcostofequity,inclu dingpreferredcapitalnotclassified
as a liability.
DEFINITIONS
4. The following terms are used in this Standard with the meanings specifie d:
Borrowing costs are interest and other costs incurred by an enterprise in c onnection with the borrowing of
funds.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale.
5.Borrowing costs may include:
(a) interest on bank overdrafts and short-term and long-term borrowings;(b) amortisation of discounts or premiums relating to borrowings;(c) amortisation of ancillary costs incurred in connection with the arran gement of borrowings;
(d) finance charges in respect of finance leases recognised in accordance with IAS 17, leases; and
(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs.
6.
Examplesofqualifyingassetsareinventoriesthatrequireasubstantial periodoftimetobringthemtoasaleable
condition, manufacturing plants, power generation facilities and inves tment properties. Other investments,
andthoseinventoriesthatareroutinelymanufacturedorotherwiseprodu cedinlargequantitiesonarepetitive
basis over a short period of time, are not qualifying assets. Assets that ar e ready for their intended use or sale
when acquired also are not qualifying assets.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 219
BORROWING COSTS — BENCHMARK TREATMENT
Recognition
7. Borrowing costs should be recognised as an expense in the period in which they are incurred.
8.Underthebenchmarktreatmentborrowingcostsarerecognisedasanexpens eintheperiodinwhichtheyare
incurred regardless of how the borrowings are applied.
Disclosure
9. The financial statements should disclose the accounting policy adopte d for borrowing costs.
BORROWING COSTS — ALLOWED ALTERNATIVE TREATMENT
Recognition
10. Borrowing costs should be recognised as an expense in the period in whic h they are incurred, except to the
extent that they are capitalised in accordance with paragraph 11.
11. Borrowing costs that are directly attributable to the acquisition, co nstruction or production of a qualifying
asset should be capitalised as part of the cost of that asset. The amount of b orrowing costs eligible for
capitalisation should be determined in accordance with this Standard (1).
12.Under the allowed alternative treatment, borrowing costs that are direct ly attributable to the acquisition,
construction or production of an asset are included in the cost of that asse t. Such borrowing costs are
capitalisedaspartofthecostoftheassetwhenitisprobablethattheywil lresultinfutureeconomicbenefits
totheenterpriseandthecostscanbemeasuredreliably.Otherborrowingc ostsarerecognisedasanexpense
in the period in which they are incurred.
Borrowing costs eligible for capitalisation
13.The borrowing costs that are directly attributable to the acquisition, co nstruction or production of a
qualifyingassetarethoseborrowingcoststhatwouldhavebeenavoidedif theexpenditureonthequalifying
asset had not been made. When an enterprise borrows funds specifically for the purpose of obtaining a
particular qualifying asset, the borrowing costs that directly relate to that qualifying asset can be readily
identified.
14.It may be difficult to identify a direct relationship between particular b orrowings and a qualifying asset and
to determine the borrowings that could otherwise have been avoided. Such a difficulty occurs, for example,
whenthefinancingactivityofanenterpriseiscoordinatedcentrally.Di fficultiesalsoarisewhenagroupuses
a range of debt instruments to borrow funds at varying rates of interest, an d lends those funds on various
bases to other enterprises in the group. Other complications arise throug h the use of loans denominated in
or linked to foreign currencies, when the group operates in highly inflati onary economies, and from
fluctuations in exchange rates. As a result, the determination of the amou nt of borrowing costs that are
directlyattributabletotheacquisitionofaqualifyingassetisdifficu ltandtheexerciseofjudgementisrequired.
15. Totheextentthatfundsareborrowedspecificallyforthepurposeofob tainingaqualifyingasset,theamount
ofborrowingcostseligibleforcapitalisationonthatassetshouldbedet erminedastheactualborrowingcosts
incurred on that borrowing during the period less any investment income on the temporary investment of
those borrowings.
(1) See also SIC-2: consistency — capitalisation of borrowing costs.220 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
16.The financing arrangements for a qualifying asset may result in an enterpr ise obtaining borrowed funds and
incurringassociatedborrowingcostsbeforesomeorallofthefundsareus edforexpendituresonthequalifying
asset. In such circumstances, the funds are often temporarily invested pe nding their expenditure on the
qualifyingasset.Indeterminingtheamountofborrowingcostseligiblef orcapitalisationduringaperiod,any
investment income earned on such funds is deducted from the borrowing cost s incurred.
17. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the
amount of borrowing costs eligible for capitalisation should be determin ed by applying a capitalisation rate
totheexpendituresonthatasset.Thecapitalisationrateshouldbethewe ightedaverageoftheborrowingcosts
applicable to the borrowings of the enterprise that are outstanding durin g the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset. The amo unt of borrowing costs capitalised
during a period should not exceed the amount of borrowing costs incurred du ring that period.
18.In some circumstances, it is appropriate to include all borrowings of the p arent and its subsidiaries when
computing a weighted average of the borrowing costs; in other circumstanc es, it is appropriate for each
subsidiary to use a weighted average of the borrowing costs applicable to i ts own borrowings.
Excess of the carrying amount of the qualifying asset over recoverable amo unt
19.Whenthecarryingamountortheexpectedultimatecostofthequalifyingas setexceedsitsrecoverableamount
ornetrealisablevalue,thecarryingamountiswrittendownorwrittenoff inaccordancewiththerequirements
of other International Accounting Standards. In certain circumstances, the amount of the write-down or
write-off is written back in accordance with those other International Ac counting Standards.
Commencement of capitalisation
20. The capitalisation of borrowing costs as part of the cost of a qualifyin g asset should commence when:
(a) expenditures for the asset are being incurred;
(b) borrowing costs are being incurred; and(c) activities that are necessary to prepare the asset for its intended use or sale are in progress.
21.
Expenditures on a qualifying asset include only those expenditures that h ave resulted in payments of cash,
transfers of other assets or the assumption of interest-bearing liabilit ies. Expenditures are reduced by any
progress payments received and grants received in connection with the ass et (see IAS 20, accounting for
governmentgrantsanddisclosureofgovernmentassistance).Theaverage carryingamountoftheassetduring
a period, including borrowing costs previously capitalised, is normally a reasonable approximation of the
expenditures to which the capitalisation rate is applied in that period.
22.The activities necessary to prepare the asset for its intended use or sale e ncompass more than the physical
construction of the asset. They include technical and administrative wor k prior to the commencement of
physicalconstruction,suchastheactivitiesassociatedwithobtaining permitspriortothecommencementof
the physical construction. However, such activities exclude the holding of an asset when no production or
development that changes the asset’s condition is taking place. For examp le, borrowing costs incurred while
landisunderdevelopmentarecapitalisedduringtheperiodinwhichactiv itiesrelatedtothedevelopmentare
being undertaken. However, borrowing costs incurred while land acquired for building purposes is held
without any associated development activity do not qualify for capitalis ation.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 221
Suspension of capitalisation
23. Capitalisationofborrowingcostsshouldbesuspendedduringextende dperiodsinwhichactivedevelopment
is interrupted.
24.Borrowing costs may be incurred during an extended period in which the acti vities necessary to prepare an
assetforitsintendeduseorsaleareinterrupted.Suchcostsarecostsofh oldingpartiallycompletedassetsand
donotqualifyforcapitalisation.However,capitalisationofborrowing costsisnotnormallysuspendedduring
aperiodwhensubstantialtechnicalandadministrativeworkisbeingcarr iedout.Capitalisationofborrowing
costsisalsonotsuspendedwhenatemporarydelayisanecessarypartofthe processofgettinganassetready
for its intended use or sale. For example, capitalisation continues durin g the extended period needed for
inventories to mature or the extended period during which high water level s delay construction of a bridge,
if such high water levels are common during the construction period in the g eographic region involved.
Cessation of capitalisation
25. Capitalisation of borrowing costs should cease when substantially al l the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
26.Anassetisnormallyreadyforitsintendeduseorsalewhenthephysicalcon structionoftheassetiscomplete
even though routine administrative work might still continue. If minor mo difications, such as the decoration
of a property to the purchaser’s or user’s specification, are all that are o utstanding, this indicates that
substantially all the activities are complete.
27. Whentheconstructionofaqualifyingassetiscompletedinpartsandea chpartiscapableofbeingusedwhile
construction continues on other parts, capitalisation of borrowing cost s should cease when substantially all
the activities necessary to prepare that part for its intended use or sale a re completed.
28.A business park comprising several buildings, each of which can be used ind ividually is an example of a
qualifying asset for which each part is capable of being usable while const ruction continues on other parts.
An example of a qualifying asset that needs to be complete before any part ca n be used is an industrial plant
involving several processes which are carried out in sequence at differen t parts of the plant within the same
site, such as a steel mill.
DISCLOSURE
29. The financial statements should disclose:
(a) the accounting policy adopted for borrowing costs;
(b) the amount of borrowing costs capitalised during the period; and(c) the capitalisation rate used to determine the amount of borrowing cost s eligible for capitalisation.
TRANSITIONAL PROVISIONS
30. WhentheadoptionofthisStandardconstitutesachangeinaccountingp olicy,anenterpriseisencouragedto
adjust its financial statements in accordance with IAS 8, net profit or los s for the period, fundamental errors
and changes in accounting policies. Alternatively, enterprises followi ng the allowed alternative treatment
should capitalise only those borrowing costs incurred after the effectiv e date of the Standard which meet the
criteria for capitalisation.
EFFECTIVE DATE
31. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1995.222 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 24
(REFORMATTED 1994)
Related party disclosures
This reformatted International Accounting Standard supersedes the Stan dard originally approved by the Board in
March1984.ItispresentedintherevisedformatadoptedforInternationa lAccountingStandardsin1991onwards.
Nosubstantivechangeshavebeenmadetotheoriginalapprovedtext.Certa interminologyhasbeenchangedtobring
it into line with current IASC practice.
CONTENTS
Paragraphs
Scope 223
Definitions 224
The related party issue 225
Disclosure 226
Effective date 227
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1.This Standard should be applied in dealing with related parties and transa ctions between a reporting
enterpriseanditsrelatedparties.TherequirementsofthisStandardapp lytothefinancialstatementsofeach
reporting enterprise.
2.This Standard applies only to those related party relationships describe d in paragraph 3, as modified by
paragraph 6.
3. This Standard deals only with those related party relationships descri bed in (a) to (e) below:
(a) enterprises that directly, or indirectly through one or more intermed iaries, control, or are controlled by,
or are under common control with, the reporting enterprise. (This include s holding companies,
subsidiaries and fellow subsidiaries);
(b) associates (see IAS 28, accounting for investments in associates);
(c) individualsowning,directlyorindirectly,aninterestinthevoting powerofthereportingenterprisethat
gives them significant influence over the enterprise, and close members o f the family (1), of any such
individual;
(d) key management personnel, that is, those persons having authority and responsibility for planning,
directing and controlling the activities of the reporting enterprise, in cluding directors and officers of
companies and close members of the families of such individuals; and
(1) Close members of the family of an individual are those that may be expected to influence, or be influenced by, that person in
their dealings with the enterprise.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 223
(e) enterprises in which a substantial interest in the voting power is owne d, directly or indirectly, by any
person described in (c) or (d) or over which such a person is able to exercise significant influence. This
includesenterprisesownedbydirectorsormajorshareholdersoftherepo rtingenterpriseandenterprises
that have a member of key management in common with the reporting enterpris e.
In considering each possible related party relationship, attention is di rected to the substance of the
relationship, and not merely the legal form.
4.No disclosure of transactions is required:
(a) in consolidated financial statements in respect of intra-group trans actions;
(b) inparentfinancialstatementswhentheyaremadeavailableorpublish edwiththeconsolidatedfinancial
statements;
(c) infinancialstatementsofawholly-ownedsubsidiaryifitsparentisi ncorporatedinthesamecountryand
provides consolidated financial statements in that country; and
(d) in financial statements of State-controlled enterprises of transact ions with other State-controlled
enterprises.
DEFINITIONS
5. The following terms are used in this Standard with the meanings specifie d:
Related party — parties are considered to be related if one party has the abi lity to control the other party or
exercise significant influence over the other party in making financial a nd operating decisions.
Related party transactio n — a transfer of resources or obligations between related parties, regard less of
whether a price is charged.
Control—ownership,directly,orindirectlythroughsubsidiaries,ofmo rethanonehalfofthevotingpower
of an enterprise, or a substantial interest in voting power and the power to direct, by statute or agreement,
the financial and operating policies of the management of the enterprise.Significantinfluence(forthepurposeofthisStandard)—participation inthefinancialandoperatingpolicy
decisionsofanenterprise,butnotcontrolofthosepolicies.Significan tinfluencemaybeexercisedinseveral
ways,usuallybyrepresentationontheboardofdirectorsbutalsoby,fore xample,participationinthepolicy
makingprocess,materialintercompanytransactions,interchangeofman agerialpersonnelordependenceon
technical information. Significant influence may be gained by share owne rship, statute or agreement. With
share ownership, significant influence is presumed in accordance with th e definition contained in IAS 28,
accounting for investments in associates.
6.
In the context of this Standard, the following are deemed not to be related p arties:
(a) twocompaniessimplybecausetheyhaveadirectorincommon,notwithst andingparagraphs3(d)and(e),
(butitisnecessarytoconsiderthepossibility,andtoassessthelikelih ood,thatthedirectorwouldbeable
to affect the policies of both companies in their mutual dealings);224 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) (i) providers of finance;
(ii) trade unions;
(iii)public utilities;(iv) government departments and agencies,
in the course of their normal dealings with an enterprise by virtue only of t hose dealings (although they
may circumscribe the freedom of action of an enterprise or participate in i ts decision-making process);
and
(c) a single customer, supplier, franchisor, distributor, or general age nt with whom an enterprise transacts
a significant volume of business merely by virtue of the resulting economi c dependence.
THE RELATED PARTY ISSUE
7.Relatedpartyrelationshipsareanormalfeatureofcommerceandbusiness .Forexample,enterprisesfrequently
carry on separate parts of their activities through subsidiary or associa ted enterprises and acquire interests in
other enterprises — for investment purposes or for trading reasons — that a re of sufficient proportions that
the investing company can control or exercise significant influence on th e financial and operating decisions
of its investee.
8.Arelatedpartyrelationshipcouldhaveaneffectonthefinancialpositio nandoperatingresultsofthereporting
enterprise. Related parties may enter into transactions which unrelated parties would not enter into. Also,
transactions between related parties may not be effected at the same amoun ts as between unrelated parties.
9.Theoperatingresultsandfinancialpositionofanenterprisemaybeaffec tedbyarelatedpartyrelationshipeven
ifrelatedpartytransactionsdonotoccur.Themereexistenceoftherelat ionshipmaybesufficienttoaffectthe
transactions of the reporting enterprise with other parties. For example , a subsidiary may terminate relations
with a trading partner on acquisition by the parent of a fellow subsidiary e ngaged in the same trade as the
formerpartner.Alternatively,onepartymayrefrainfromactingbecause ofthesignificantinfluenceofanother
— for example, a subsidiary may be instructed by its parent not to engage in r esearch and development.
10.Becausethereisaninherentdifficultyformanagementtodeterminetheef fectofinfluenceswhichdonotlead
to transactions, disclosure of such effects is not required by this Standa rd.
11.Accountingrecognitionofatransferofresourcesisnormallybasedonthe priceagreedbetweentheparties.
Between unrelated parties the price is an arm’s length price. Related part ies may have a degree of flexibility
in the price-setting process that is not present in transactions between u nrelated parties.
12.A variety of methods is used to price transactions between related parties .
13.One way of determining a price for a transaction between related parties is by the comparable uncontrolled
price method, which sets the price by reference to comparable goods sold in an economically comparable
markettoabuyerunrelatedtotheseller.Wherethegoodsorservicessuppl iedinarelatedpartytransaction,
and the conditions relating thereto, are similar to those in normal tradin g transactions, this method is often
used. It is also often used for determining the cost of finance.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 225
14.Where goods are transferred between related parties before sale to an inde pendent party, the resale price
method is often used. This reduces the resale price by a margin, representi ng an amount from which the
re-seller would seek to cover his costs and make an appropriate profit, to a rrive at a transfer price to the
re-seller. There are problems of judgement in determining a compensation appropriate to the re-seller’s
contributiontotheprocess.Thismethodisalsousedfortransfersofothe rresources,suchasrightsandservices.
15.Anotherapproachisthecost-plusmethod,whichseekstoaddanappropriat emark-uptothesupplier’scost.
Difficultiesmaybeexperiencedindeterminingboththeelementsofcosta ttributableandthemark-up.Among
the yardsticks that may assist in determining transfer prices are compara ble returns in similar industries on
turnover or capital employed.
16.Sometimes prices of related party transactions are not determined under o ne of the methods described in
paragraphs13to15.Sometimes,nopriceischarged—asintheexamplesofth efreeprovisionofmanagement
services and the extension of free credit on a debt.
17.Sometimes, transactions would not have taken place if the relationship ha d not existed. For example, a
company that sold a large proportion of its production to its parent compan y at cost might not have found
an alternative customer if the parent company had not purchased the goods.
DISCLOSURE
18.In many countries the laws require financial statements to give disclosur es about certain categories of related
parties. In particular, attention is focused on transactions with the dir ectors of an enterprise, especially their
remunerationandborrowings,becauseofthefiduciarynatureoftheirrel ationshipwiththeenterprise,aswell
as disclosures of significant intercompany transactions and investment s in and balances with group and
associated companies and with directors. IAS 27, consolidated financial statements and accounting for
investments in subsidiaries, and IAS 28, accounting for investments in as sociates require disclosure of a list
of significant subsidiaries and associates. IAS 8, net profit or loss for t he period, fundamental errors and
changes in accounting policies, requires disclosure of extraordinary it ems and items of income and expense
within profit or loss from ordinary activities that are of such size, natur e or incidence that their disclosure is
relevant to explain the performance of the enterprise for the period.
19.Thefollowingareexamplesofsituationswhererelatedpartytransaction smayleadtodisclosuresbyareporting
enterprise in the period which they affect:
— purchases or sales of goods (finished or unfinished),
— purchases or sales of property and other assets,— rendering or receiving of services,
— agency arrangements,— leasing arrangements,— transfer of research and development,— licence agreements,— finance (including loans and equity contributions in cash or in kind),— guarantees and collaterals, and— management contracts.226 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
20. Related party relationships where control exists should be disclosed irrespective of whether there have been
transactions between the related parties.
21.In order for a reader of financial statements to form a view about the effect s of related party relationships on
a reporting enterprise, it is appropriate to disclose the related party re lationship where control exists,
irrespective of whether there have been transactions between the related parties.
22.If there have been transactions between related parties, the reporting en terprise should disclose the nature of
therelatedpartyrelationshipsaswellasthetypesoftransactionsandth eelementsofthetransactionsnecessary
for an understanding of the financial statements.
23.The elements of transactions necessary for an understanding of the financ ial statements would normally
include:
(a) an indication of the volume of the transactions, either as an amount or a s an appropriate proportion;
(b) amounts or appropriate proportions of outstanding items; and
(c) pricing policies.
24. Items of a similar nature may be disclosed in aggregate except when sepa rate disclosure is necessary for an
understandingoftheeffectsofrelatedpartytransactionsonthefinanci alstatementsofthereportingenterprise.
25.Disclosure of transactions between members of a group is unnecessary in co nsolidated financial statements
because consolidated financial statements present information about th e parent and subsidiaries as a single
reporting enterprise. Transactions with associated enterprises accoun ted for under the equity method are not
eliminated and therefore require separate disclosure as related party tr ansactions.
EFFECTIVE DATE
26. This International Accounting Standard becomes operative for financ ial statements covering the periods
beginning on or after 1 January 1986.
INTERNATIONAL ACCOUNTING STANDARD IAS 26
(REFORMATTED 1994)
Accounting and reporting by retirement benefit plans
ThisreformattedInternationalAccountingStandardsupersedestheStan dardoriginallyapprovedbytheBoardinJune
1986. It is presented in the revised format adopted for International Acco unting Standards in 1991 onwards. No
substantive changes have been made to the original approved text. Certain terminology has been changed to bring
it into line with current IASC practice.
CONTENTS
Paragraphs
Scope 228
Definitions 229
Defined contribution plans 22913/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 227
Defined benefit plans 230
Actuarial present value of promised retirement benefits 231
Frequency of actuarial valuations 232Report content 232
All plans 233
Valuation of plan assets 233
Disclosure 233
Effective date 234
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in the reports of retirement benefit pla ns where such reports are prepared.
2.Retirement benefit plans are sometimes referred to by various other names , such as “pension schemes”,
“superannuationschemes”or“retirementbenefitschemes”.ThisStandar dregardsaretirementbenefitplanas
a reporting entity separate from the employers of the participants in the p lan. All other International
AccountingStandardsapplytothereportsofretirementbenefitplanstot heextentthattheyarenotsuperseded
by this Standard.
3.This Standard deals with accounting and reporting by the plan to all partic ipants as a group. It does not deal
with reports to individual participants about their retirement benefit r ights.
4.IAS 19, employee benefits, is concerned with the determination of the cost of retirement benefits in the
financial statements of employers having plans. Hence this Standard comp lements IAS 19.
5.Retirementbenefitplansmaybedefinedcontributionplansordefinedben efitplans.Manyrequirethecreation
of separate funds, which may or may not have separate legal identity and may or may not have trustees, to
which contributions are made and from which retirement benefits are paid. This Standard applies regardless
of whether such a fund is created and regardless of whether there are truste es.
6.Retirementbenefitplanswithassetsinvestedwithinsurancecompaniesa resubjecttothesameaccountingand
funding requirements as privately invested arrangements. Accordingly, they are within the scope of this
Standard unless the contract with the insurance company is in the name of a s pecified participant or a group
of participants and the retirement benefit obligation is solely the respo nsibility of the insurance company.
7.This Standard does not deal with other forms of employment benefits such as employment termination
indemnities, deferred compensation arrangements, long-service leave b enefits, special early retirement or
redundancyplans,healthandwelfareplansorbonusplans.Governmentsoc ialsecuritytypearrangementsare
also excluded from the scope of this Standard.228 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
DEFINITIONS
8.The following terms are used in this Standard with the meanings specified:
Retirement benefit plans are arrangements whereby an enterprise provide s benefits for its employees on or
after termination of service (either in the form of an annual income or as a l ump sum) when such benefits,
ortheemployer’scontributionstowardsthem,canbedeterminedorestima tedinadvanceofretirementfrom
the provisions of a document or from the enterprise’s practices.
Definedcontributionplansareretirementbenefitplansunderwhichamou ntstobepaidasretirementbenefits
are determined by contributions to a fund together with investment earnin gs thereon.
Definedbenefitplansareretirementbenefitplansunderwhichamountsto bepaidasretirementbenefitsare
determined by reference to a formula usually based on employees’ earnings and/or years of service.
Fundingisthetransferofassetstoanentity(thefund)separatefromthee mployer’senterprisetomeetfuture
obligations for the payment of retirement benefits.
For the purposes of this Standard the following terms are also used:
Participants are the members of a retirement benefit plan and others who ar e entitled to benefits under the
plan.Net assets available for benefits are the assets of a plan less liabilities other than the actuarial present value
of promised retirement benefits.Actuarial present value of promised retirement benefits is the present va lue of the expected payments by a
retirement benefit plan to existing and past employees, attributable to t he service already rendered.
Vested benefits are benefits, the rights to which, under the conditions of a retirement benefit plan, are not
conditional on continued employment.
9. Someretirementbenefitplanshavesponsorsotherthanemployers;this Standardalsoappliestothereports
of such plans.
10. Most retirement benefit plans are based on formal agreements. Some pla ns are informal but have acquired
adegreeofobligationasaresultofemployers’establishedpractices.Wh ilesomeplanspermitemployersto
limittheirobligationsundertheplans,itisusuallydifficultforanemp loyertocancelaplanifemployeesare
to be retained. The same basis of accounting and reporting applies to an inf ormal plan as to a formal plan.
11. Many retirement benefit plans provide for the establishment of separa te funds into which contributions are
madeandoutofwhichbenefitsarepaid.Suchfundsmaybeadministeredbypa rtieswhoactindependently
in managing fund assets. Those parties are called trustees in some countri es. The term trustee is used in this
Standard to describe such parties regardless of whether a trust has been fo rmed.
12. Retirementbenefitplansarenormallydescribedaseitherdefinedcon tributionplansordefinedbenefitplans,
eachhavingtheirowndistinctivecharacteristics.Occasionallyplanse xistthatcontaincharacteristicsofboth.
Such hybrid plans are considered to be defined benefit plans for the purpos es of this Standard.
DEFINED CONTRIBUTION PLANS
13. The report of a defined contribution plan should contain a statement of net assets available for benefits and
a description of the funding policy.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 229
14.Under a defined contribution plan, the amount of a participant’s future be nefits is determined by the
contributions paid by the employer, the participant, or both, and the oper ating efficiency and investment
earningsofthefund.Anemployer’sobligationisusuallydischargedbyco ntributionstothefund.Anactuary’s
adviceisnotnormallyrequiredalthoughsuchadviceissometimesusedtoe stimatefuturebenefitsthatmay
be achievable based on present contributions and varying levels of future contributions and investment
earnings.
15.Theparticipantsareinterestedintheactivitiesoftheplanbecausethey directlyaffecttheleveloftheirfuture
benefits.Participantsareinterestedinknowingwhethercontributions havebeenreceivedandpropercontrol
has been exercised to protect the rights of beneficiaries. An employer is i nterested in the efficient and fair
operation of the plan.
16.Theobjectiveofreportingbyadefinedcontributionplanisperiodically toprovideinformationabouttheplan
and the performance of its investments. That objective is usually achieve d by providing a report including
the following:
(a) adescriptionofsignificantactivitiesfortheperiodandtheeffecto fanychangesrelatingtotheplan,and
its membership and terms and conditions;
(b) statements reporting on the transactions and investment performance for the period and the financial
position of the plan at the end of the period; and
(c) a description of the investment policies.
DEFINED BENEFIT PLANS
17.The report of a defined benefit plan should contain either:
(a) a statement that shows:
(i) the net assets available for benefits;
(ii) theactuarialpresentvalueofpromisedretirementbenefits,distin guishingbetweenvestedbenefitsand
non-vested benefits; and
(iii)the resulting excess or deficit; or
(b) a statement of net assets available for benefits including either:
(i) anotedisclosingtheactuarialpresentvalueofpromisedretirementb enefits,distinguishingbetween
vested benefits and non-vested benefits; or
(ii) a reference to this information in an accompanying actuarial report.
If an actuarial valuation has not been prepared at the date of the report, th e most recent valuation should
be used as a base and the date of the valuation disclosed.
18.Forthepurposesofparagraph17,theactuarialpresentvalueofpromisedr etirementbenefitsshouldbebased
on the benefits promised under the terms of the plan on service rendered to d ate using either current salary
levels or projected salary levels with disclosure of the basis used. The ef fect of any changes in actuarial
assumptionsthathavehadasignificanteffectontheactuarialpresentva lueofpromisedretirementbenefits
should also be disclosed.
19.Thereportshouldexplaintherelationshipbetweentheactuarialpresent valueofpromisedretirementbenefits
and the net assets available for benefits, and the policy for the funding of promised benefits.230 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
20. Underadefinedbenefitplan,thepaymentofpromisedretirementbenef itsdependsonthefinancialposition
oftheplanandtheabilityofcontributorstomakefuturecontributionsto theplanaswellastheinvestment
performance and operating efficiency of the plan.
21. A defined benefit plan needs the periodic advice of an actuary to assess the financial condition of the plan,
review the assumptions and recommend future contribution levels.
22. Theobjectiveofreportingbyadefinedbenefitplanisperiodicallyto provideinformationaboutthefinancial
resources and activities of the plan that is useful in assessing the relati onships between the accumulation of
resources and plan benefits over time. This objective is usually achieved by providing a report including the
following:
(a) adescriptionofsignificantactivitiesfortheperiodandtheeffecto fanychangesrelatingtotheplan,and
its membership and terms and conditions;
(b) statements reporting on the transactions and investment performance for the period and the financial
position of the plan at the end of the period;
(c) actuarial information either as part of the statements or by way of a sep arate report; and
(d) a description of the investment policies.
Actuarial present value of promised retirement benefits
23.Thepresentvalueoftheexpectedpaymentsbyaretirementbenefitplanmay becalculatedandreportedusing
current salary levels or projected salary levels up to the time of retireme nt of participants.
24.The reasons given for adopting a current salary approach include:
(a) the actuarial present value of promised retirement benefits, being th e sum of the amounts presently
attributabletoeachparticipantintheplan,canbecalculatedmoreobjec tivelythanwithprojectedsalary
levels because it involves fewer assumptions;
(b) increases in benefits attributable to a salary increase become an obli gation of the plan at the time of the
salary increase; and
(c) the amount of the actuarial present value of promised retirement benef its using current salary levels is
generallymorecloselyrelatedtotheamountpayableintheeventoftermin ationordiscontinuanceofthe
plan.
25.Reasons given for adopting a projected salary approach include:
(a) financial information should be prepared on a going concern basis, irr espective of the assumptions and
estimates that must be made;
(b) under final pay plans, benefits are determined by reference to salarie s at or near retirement date; hence
salaries, contribution levels and rates of return must be projected; and
(c) failure to incorporate salary projections, when most funding is based on salary projections, may result
in the reporting of an apparent overfunding when the plan is not overfunded , or in reporting adequate
funding when the plan is underfunded.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 231
26.Theactuarialpresentvalueofpromisedretirementbenefitsbasedoncurr entsalariesisdisclosedinthereport
of a plan to indicate the obligation for benefits earned to the date of the re port. The actuarial present value
of promised retirement benefits based on projected salaries is disclosed to indicate the magnitude of the
potentialobligationonagoingconcernbasiswhichisgenerallythebasis forfunding.Inadditiontodisclosure
of the actuarial present value of promised retirement benefits, sufficie nt explanation may need to be given
soastoindicateclearlythecontextinwhichtheactuarialpresentvalueo fpromisedretirementbenefitsshould
be read. Such explanation may be in the form of information about the adequa cy of the planned future
funding and of the funding policy based on salary projections. This may be i ncluded in the financial
information or in the actuary’s report.
Frequency of actuarial valuations
27.Inmanycountries,actuarialvaluationsarenotobtainedmorefrequently thaneverythreeyears.Ifanactuarial
valuationhasnotbeenpreparedatthedateofthereport,themostrecentva luationisusedasabaseandthe
date of the valuation disclosed.
Report content
28. For defined benefit plans, information is presented in one of the follo wing formats which reflect different
practices in the disclosure and presentation of actuarial information:
(a) astatementisincludedinthereportthatshowsthenetassetsavailabl eforbenefits,theactuarialpresent
value of promised retirement benefits, and the resulting excess or defici t. The report of the plan also
contains statements of changes in net assets available for benefits and ch anges in the actuarial present
valueofpromisedretirementbenefits.Thereportmayincludeaseparatea ctuary’sreportsupportingthe
actuarial present value of promised retirement benefits;
(b) a report that includes a statement of net assets available for benefits and a statement of changes in net
assets available for benefits. The actuarial present value of promised re tirement benefits is disclosed in a
note to the statements. The report may also include a report from an actuary supporting the actuarial
present value of promised retirement benefits; and
(c) a report that includes a statement of net assets available for benefits and a statement of changes in net
assetsavailableforbenefitswiththeactuarialpresentvalueofpromise dretirementbenefitscontainedin
a separate actuarial report.
Ineachformatatrustees’reportinthenatureofamanagementordirectors ’reportandaninvestmentreport
may also accompany the statements.
29. Those in favour of the formats described in paragraphs 28(a) and 28(b) b elieve that the quantification of
promisedretirementbenefitsandotherinformationprovidedunderthose approacheshelpuserstoassessthe
currentstatusoftheplanandthelikelihoodoftheplan’sobligationsbei ngmet.Theyalsobelievethatfinancial
reportsshouldbecompleteinthemselvesandnotrelyonaccompanyingstat ements.However,somebelieve
that the format described in paragraph 28(a) could give the impression tha t a liability exists, whereas the
actuarial present value of promised retirement benefits does not in their opinion have all the characteristics
of a liability.
30. Thosewhofavourtheformatdescribedinparagraph28(c)believethatt heactuarialpresentvalueofpromised
retirementbenefitsshouldnotbeincludedinastatementofnetassetsava ilableforbenefitsasintheformat
described in paragraph 28(a) or even be disclosed in a note as in 28(b), beca use it will be compared directly
with plan assets and such a comparison may not be valid. They contend that ac tuaries do not necessarily
compareactuarialpresentvalueofpromisedretirementbenefitswithmar ketvaluesofinvestmentsbutmay
instead assess the present value of cash flows expected from the investmen ts. Therefore, those in favour of232 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
this format believe that such a comparison is unlikely to reflect the actua ry’s overall
assessment of the plan and that it may be misunderstood. Also, some believe that, regardless of whether
quantified, the information about promised retirement benefits should b e contained solely in the separate
actuarial report where a proper explanation can be provided.
31. This Standard accepts the views in favour of permitting disclosure of t he information concerning promised
retirementbenefitsinaseparateactuarialreport.Itrejectsarguments againstthequantificationoftheactuarial
present value of promised retirement benefits. Accordingly, the formats described in paragraphs 28(a) and
28(b) are considered acceptable under this Standard, as is the format desc ribed in paragraph 28(c) so long
asthefinancialinformationcontainsareferenceto,andisaccompaniedb y,anactuarialreportthatincludes
the actuarial present value of promised retirement benefits.
ALL PLANS
Valuation of plan assets
32. Retirement benefit plan investments should be carried at fair value. I n the case of marketable securities fair
value is market value. Where plan investments are held for which an estimat e of fair value is not possible
disclosure should be made of the reason why fair value is not used.
33.Inthecaseofmarketablesecuritiesfairvalueisusuallymarketvaluebec ausethisisconsideredthemostuseful
measureofthesecuritiesatthereportdateandoftheinvestmentperforma ncefortheperiod.Thosesecurities
that have a fixed redemption value and that have been acquired to match the o bligations of the plan, or
specific parts thereof, may be carried at amounts based on their ultimate r edemption value assuming a
constant rate of return to maturity. Where plan investments are held for wh ich an estimate of fair value is
not possible, such as total ownership of an enterprise, disclosure is made of the reason why fair value is not
used. To the extent that investments are carried at amounts other than mark et value or fair value, fair value
isgenerallyalsodisclosed.Assetsusedintheoperationsofthefundarea ccountedforinaccordancewiththe
applicable International Accounting Standards.
Disclosure
34.Thereportofaretirementbenefitplan,whetherdefinedbenefitordefine dcontribution,shouldalsocontain
the following information:
(a) a statement of changes in net assets available for benefits;
(b) a summary of significant accounting policies; and(c) a description of the plan and the effect of any changes in the plan during the period.
35. Reports provided by retirement benefit plans include the following, i f applicable:
(a) a statement of net assets available for benefits disclosing:
(i) assets at the end of the period suitably classified;(ii) the basis of valuation of assets;(iii)detailsofanysingleinvestmentexceedingeithe r5%ofthenet assetsavailableforbenefitso r5%of
any class or type of security;
(iv) details of any investment in the employer; and(v) liabilities other than the actuarial present value of promised retire ment benefits;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 233
(b) a statement of changes in net assets available for benefits showing the following:
(i) employer contributions;
(ii) employee contributions;(iii)investment income such as interest and dividends;(iv) other income;(v) benefitspaidorpayable(analysed,forexample,asretirement,death anddisabilitybenefits,andlump
sum payments);
(vi) administrative expenses;(vii)other expenses;(viii)taxes on income;(ix) profits and losses on disposal of investments and changes in value of i nvestments; and
(x) transfers from and to other plans;
(c) a description of the funding policy;(d) for defined benefit plans, the actuarial present value of promised ret irement benefits (which may
distinguish between vested benefits and non-vested benefits) based on th e benefits promised under the
terms of the plan, on service rendered to date and using either current sala ry levels or projected salary
levels; this information may be included in an accompanying actuarial rep ort to be read in conjunction
with the related financial information; and
(e) fordefinedbenefitplans,adescriptionofthesignificantactuarial assumptionsmadeandthemethodused
to calculate the actuarial present value of promised retirement benefits .
36. The report of a retirement benefit plan contains a description of the pl an, either as part of the financial
information or in a separate report. It may contain the following:
(a) the names of the employers and the employee groups covered;(b) the number of participants receiving benefits and the number of other p articipants, classified as
appropriate;
(c) the type of plan — defined contribution or defined benefit;
(d) a note as to whether participants contribute to the plan;(e) a description of the retirement benefits promised to participants;(f) a description of any plan termination terms; and(g) changes in items (a) to (f) during the period covered by the report.
It is not uncommon to refer to other documents that are readily available to users and in which the plan is
described, and to include only information on subsequent changes in the re port.
EFFECTIVE DATE
37. This International Accounting Standard becomes operative for financ ial statements of retirement benefit
plans covering periods beginning on or after 1 January 1988.234 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 27
(REVISED 2000)
Consolidated financial statements and accounting for investments in sub sidiaries
ThisreformattedInternationalAccountingStandardsupersedestheStan dardoriginallyapprovedbytheBoardinJune
1988. It is presented in the revised format adopted for International Acco unting Standards in 1991 onwards. No
substantive changes have been made to the original approved text. Certain terminology has been changed to bring
it into line with current IASC practice.
In December 1998, paragraphs 13, 24, 29 and 30 were amended to replace refer ences to IAS 25, accounting for
investments, by references to IAS 39, financial instruments: recognitio n and measurement.
InOctober2000,paragraph13wasamendedtomakethewordingconsistentwi thsimilarparagraphsinotherrelated
International Accounting Standards.
The following SIC interpretations relate to IAS 27:
— SIC-12: consolidation — special purpose entities,— SIC-33: consolidation and equity method — potential voting rights and al location of ownership interests
CONTENTS
Paragraphs
Scope 235
Definitions 236
Presentation of consolidated financial statements 236
Scope of consolidated financial statements 237Consolidation procedures 237
Accounting for investments in subsidiaries in a parent’s separate financ ial statements 239
Disclosure 240
Effective date 240
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in the preparation and presentation of c onsolidated financial statements for
a group of enterprises under the control of a parent.
2. This Standard should also be applied in accounting for investments in su bsidiaries in a parent’s separate
financial statements.
3.This Standard supersedes IAS 3, consolidated financial statements, exce pt insofar as that Standard deals with
accounting for investments in associates (see IAS 28, accounting for inve stment in associates).
4.Consolidatedfinancialstatementsareencompassedbytheterm“financia lstatements”includedinthe“Preface
to International Accounting Standards”. Therefore, consolidated finan cial statements are prepared in
accordance with International Accounting Standards.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 235
5.This Standard does not deal with:
(a) methodsofaccountingforbusinesscombinationsandtheireffectsonc onsolidation,includinggoodwill
arising on a business combination (see IAS 22 (revised 1998), business com binations);
(b) accounting for investments in associates (see IAS 28, accounting for i nvestments in associates); and
(c) accountingforinvestmentsinjointventures(seeIAS31,financialre portingofinterestsinjointventures).
DEFINITIONS
6. The following terms are used in this Standard with the meanings specifie d:
Control (for the purpose of this Standard) is the power to govern the financ ial and operating policies of an
enterprise so as to obtain benefits from its activities.
A subsidiary is an enterprise that is controlled by another enterprise (kn own as the parent).
A parent is an enterprise that has one or more subsidiaries.A group is a parent and all its subsidiaries.Consolidated financial statements are the financial statements of a grou p presented as those of a single
enterprise.Minority interest is that part of the net results of operations and of net as sets of a subsidiary attributable to
interests which are not owned, directly or indirectly through subsidiari es, by the parent.
PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
7. A parent, other than a parent mentioned in paragraph 8, should present co nsolidated financial statements.
8. A parent that is a wholly owned subsidiary, or is virtually wholly owned, need not present consolidated
financialstatementsprovided,inthecaseofonethatisvirtuallywholly owned,theparentobtainstheapproval
of the owners of the minority interest. Such a parent should disclose the re asons why consolidated financial
statements have not been presented together with the bases on which subsid iaries are accounted for in its
separatefinancialstatements.Thenameandregisteredofficeofitspare ntthatpublishesconsolidatedfinancial
statements should also be disclosed.
9. Users of the financial statements of a parent are usually concerned with , and need to be informed about, the
financial position, results of operations and changes in financial posit ion of the group as a whole. This need
isservedbyconsolidatedfinancialstatements,whichpresentfinancial informationaboutthegroupasthatof
a single enterprise without regard for the legal boundaries of the separat e legal entities.
10. A parent that is itself wholly owned by another enterprise may not alway s present consolidated financial
statementssincesuchstatementsmaynotberequiredbyitsparentandthen eedsofotherusersmaybebest
servedbytheconsolidatedfinancialstatementsofitsparent.Insomecou ntries,aparentisalsoexemptedfrom
presenting consolidated financial statements if it is virtually wholly o wned by another enterprise and the
parentobtainstheapprovaloftheownersoftheminorityinterest.Virtua llywhollyownedisoftentakento
mean that the parent owns 90 % or more of the voting power.236 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
SCOPE OF CONSOLIDATED FINANCIAL STATEMENTS
11.A parent which issues consolidated financial statements should consolid ate all subsidiaries, foreign and
domestic, other than those referred to in paragraph 13.
12. The consolidated financial statements include all enterprises that a re controlled by the parent, other than
those subsidiaries excluded for the reasons set out in paragraph 13. Contr ol is presumed to exist when the
parent owns, directly or indirectly through subsidiaries, more than one h alf of the voting power of an
enterpriseunless,inexceptionalcircumstances,itcanbeclearlydemon stratedthatsuchownershipdoesnot
constitutecontrol.Controlalsoexistsevenwhentheparentownsonehalf orlessofthevotingpowerofan
enterprise when there is (1)(2).
(a) power over more than one half of the voting rights by virtue of an agreeme nt with other investors;
(b) power to govern the financial and operating policies of the enterprise under a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of dir ectors or equivalent
governing body; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body.
13.A subsidiary should be excluded from consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired and held exclusively with a view
to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly impair its ability to transfer funds to
the parent.
SuchsubsidiariesshouldbeaccountedforinaccordancewithIAS39,finan cialinstruments:recognitionand
measurement.
14. A subsidiary is not excluded from consolidation because its business a ctivities are dissimilar from those of
theotherenterpriseswithinthegroup.Betterinformationisprovidedby consolidatingsuchsubsidiariesand
disclosing additional information in the consolidated financial statem ents about the different business
activitiesofsubsidiaries.Forexample,thedisclosuresrequiredbyIAS 14,segmentreporting,helptoexplain
the significance of different business activities within the group.
CONSOLIDATION PROCEDURES
15.In preparing consolidated financial statements, the financial statemen ts of the parent and its subsidiaries are
combinedonaline-by-linebasisbyaddingtogetherlikeitemsofassets,l iabilities,equity,incomeandexpenses.
In order that the consolidated financial statements present financial in formation about the group as that of a
single enterprise, the following steps are then taken (2):
(a) thecarryingamountoftheparent’sinvestmentineachsubsidiaryandt heparent’sportionofequityofeach
subsidiary are eliminated (see IAS 22 (revised 1998), business combinati ons, which also describes the
treatment of any resultant goodwill);
(1) See also SIC-12: consolidation — special purpose entities.
(2) See also SIC-33: consolidation and equity method — potential voting righ ts and allocation of ownership interests.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 237
(b) minorityinterestsinthenetincomeofconsolidatedsubsidiariesfor thereportingperiodareidentifiedand
adjusted against the income of the group in order to arrive at the net income attributable to the owners
of the parent; and
(c) minority interests in the net assets of consolidated subsidiaries are identified and presented in the
consolidatedbalancesheetseparatelyfromliabilitiesandtheparentsh areholders’equity.Minorityinterests
in the net assets consist of:
(i) theamountatthedateoftheoriginalcombinationcalculatedinaccord ancewithIAS22(revised1998),
business combinations; and
(ii) the minority’s share of movements in equity since the date of the combi nation.
16.Taxes payable by either the parent or its subsidiaries on distribution to t he parent of the profits retained in
subsidiaries are accounted for in accordance with IAS 12, income taxes.
17. Intragroup balances and intragroup transactions and resulting unrea lised profits should be eliminated in full.
Unrealised losses resulting from intragroup transactions should also be eliminated unless cost cannot be
recovered.
18.Intragroupbalancesandintragrouptransactions,includingsales,expe nsesanddividends,areeliminatedinfull.
Unrealised profits resulting from intragroup transactions that are incl uded in the carrying amount of assets,
such as inventory and fixed assets, are eliminated in full. Unrealised los ses resulting from intragroup
transactionsthataredeductedinarrivingatthecarryingamountofasset sarealsoeliminatedunlesscostcannot
berecovered.Timingdifferencesthatarisefromtheeliminationofunrea lisedprofitsandlossesresultingfrom
intragroup transactions are dealt with in accordance with IAS 12, income t axes.
19. Whenthefinancialstatementsusedintheconsolidationaredrawnupto differentreportingdates,adjustments
should be made for the effects of significant transactions or other events that occur between those dates and
the date of the parent’s financial statements. In any case the difference b etween reporting dates should be no
more than three months.
20.Thefinancialstatementsoftheparentanditssubsidiariesusedinthepre parationoftheconsolidatedfinancial
statementsareusuallydrawnuptothesamedate.Whenthereportingdatesa redifferent,thesubsidiaryoften
prepares,forconsolidationpurposes,statementsasatthesamedateasth egroup.Whenitisimpracticableto
do this, financial statements drawn up to different reporting dates may be used provided the difference is no
greaterthanthreemonths.Theconsistencyprincipledictatesthatthele ngthofthereportingperiodsandany
difference in the reporting dates should be the same from period to period.
21. Consolidated financial statements should be prepared using uniform a ccounting policies for like transactions
andothereventsinsimilarcircumstances.Ifitisnotpracticabletouseu niformaccountingpoliciesinpreparing
theconsolidatedfinancialstatements,thatfactshouldbedisclosedtog etherwiththeproportionsoftheitems
in the consolidated financial statements to which the different accounti ng policies have been applied.
22.Inmanycases,ifamemberofthegroupusesaccountingpoliciesotherthant hoseadoptedintheconsolidated
financial statements for like transactions and events in similar circums tances, appropriate adjustments are
made to its financial statements when they are used in preparing the consol idated financial statements.
23.Theresultsofoperationsofasubsidiaryareincludedintheconsolidated financialstatementsasfromthedate
of acquisition, which is the date on which control of the acquired subsidia ry is effectively transferred to the
buyer, in accordance with IAS 22 (revised 1998), business combinations. T he results of operations of a
subsidiary disposed of are included in the consolidated income statement until the date of disposal which is
thedateonwhichtheparentceasestohavecontrolofthesubsidiary.Thedi fferencebetweentheproceedsfrom
the disposal of the subsidiary and the carrying amount of its assets less li abilities as of the date238 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
of disposal is recognised in the consolidated income statement as the prof it or loss on the disposal of the
subsidiary.Inordertoensurethecomparabilityofthefinancialstateme ntsfromoneaccountingperiodtothe
next, supplementary information is often provided about the effect of the acquisition and disposal of
subsidiariesonthefinancialpositionatthereportingdateandtheresul tsforthereportingperiodandonthe
corresponding amounts for the preceding period.
24. An investment in an enterprise should be accounted for in accordance wi th IAS 39, financial instruments:
recognitionandmeasurement,fromthedatethatitceasestofallwithinth edefinitionofasubsidiaryanddoes
not become an associate as defined in IAS 28, accounting for investments in associates.
25.Thecarryingamountoftheinvestmentatthedatethatitceasestobeasubsi diaryisregardedascostthereafter.
26. Minority interests should be presented in the consolidated balance sh eet separately from liabilities and the
parentshareholders’equity.Minorityinterestsintheincomeofthegrou pshouldalsobeseparatelypresented.
27.Thelossesapplicabletotheminorityinaconsolidatedsubsidiarymayexc eedtheminorityinterestintheequity
ofthesubsidiary.Theexcess,andanyfurtherlossesapplicabletothemin ority,arechargedagainstthemajority
interestexcepttotheextentthattheminorityhasabindingobligationto ,andisableto,makegoodthelosses.
If the subsidiary subsequently reports profits, the majority interest is allocated all such profits until the
minority’s share of losses previously absorbed by the majority has been re covered.
28.If a subsidiary has outstanding cumulative preferred shares which are hel d outside the group, the parent
computes its share of profits or losses after adjusting for the subsidiary ’s preferred dividends, whether or not
dividends have been declared.
ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES IN A PARENT’S SEPARATE FINANC IAL STATEMENTS
29. In a parent’s separate financial statements, investments in subsidia ries that are included in the consolidated
financial statements should be either:
(a) carried at cost;
(b) accounted for using the equity method as described in IAS 28, accountin g for investments in associates;
or
(c) accountedforasavailable-for-salefinancialassetsasdescribedin IAS39,financialinstruments:recognition
and measurement.
30. Investments in subsidiaries that are excluded from consolidated fina ncial statements should be either:
(a) carried at cost;
(b) accounted for using the equity method as described in IAS 28, accountin g for investments in associates;
or
(c) accountedforasavailable-for-salefinancialassetsasdescribedin IAS39,financialinstruments:recognition
and measurement.
31.In many countries separate financial statements are presented by a parent in order to meet legal or other
requirements.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 239
DISCLOSURE
32. In addition to those disclosures required by paragraphs 8 and 21, the fo llowing disclosures should be made:
(a) in consolidated financial statements a listing of significant subsid iaries including the name, country of
incorporationorresidence,proportionofownershipinterestand,ifdif ferent,proportionofvotingpower
held;
(b) in consolidated financial statements, where applicable:
(i) the reasons for not consolidating a subsidiary;
(ii) the nature of the relationship between the parent and a subsidiary of w hich the parent does not own,
directly or indirectly through subsidiaries, more than one half of the vot ing power;
(iii)the name of an enterprise in which more than one half of the voting powe r is owned, directly or
indirectly through subsidiaries, but which, because of the absence of con trol, is not a subsidiary; and
(iv) theeffectoftheacquisitionanddisposalofsubsidiariesonthefina ncialpositionatthereportingdate,
the results for the reporting period and on the corresponding amounts for t he preceding period; and
(c) intheparent’sseparatefinancialstatements,adescriptionoftheme thodusedtoaccountforsubsidiaries.
EFFECTIVE DATE
33. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1990.
INTERNATIONAL ACCOUNTING STANDARD IAS 28
(REVISED 2000)
Accounting for investments in associates
IAS 28 was approved by the Board in November 1988.
InNovember1994,thetextofIAS28wasreformattedtobepresentedinthere visedformatadoptedforInternational
Accounting Standards in 1991 (IAS 28 (reformatted 1994)). No substantive changes were made to the original
approved text. Certain terminology was changed to bring it into line with I ASC practice at the time.
In July 1998, paragraphs 23 and 24 of IAS 28 (reformatted 1994) were revised to be consistent with IAS 36,
impairment of assets.
InDecember1998,IAS39,financialinstruments:recognitionandmeasure ment,amendedparagraphs7,12and14
of IAS 28. The amendments replace references to IAS 25, accounting for inve stments, by references to IAS 39.
InMarch1999,paragraph26wasamendedtoreplacereferencestoIAS10,con tingenciesandeventsoccurringafter
the balance sheet date, by references to IAS 10 (revised 1999), events afte r the balance sheet date, and to conform
the terminology to that in IAS 37, provisions, contingent liabilities and contingent assets.
In October 2000, paragraph 8 was revised to be consistent with similar para graphs in other related International
AccountingStandardsandparagraph10wasdeleted.Thechangestoparagra ph8and10ofIAS28becomeeffective
when an enterprise applies IAS 39 for the first time.240 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
The following SIC interpretations relate to IAS 28:
— SIC-3: elimination of unrealised profits and losses on transactions wit h associates, and
— SIC-20: equity accounting method — recognition of losses,— SIC-33: consolidation and equity method — potential voting rights and al location of ownership interests.
CONTENTS
Paragraphs
Scope 241
Definitions 241
Significant influence 242
The equity method 242
The cost method 242
Consolidated Financial Statements 243
Separate Financial Statements of the Investor 243Application of the Equity Method 244Impairment losses 245
Income Taxes 245
Contingencies 245
Disclosure 245
Effective Date 246
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in accounting by an investor for investm ents in associates.
2.This Standard supersedes IAS 3, consolidated financial statements, in so far as that Standard deals with
accounting for investments in associates.
DEFINITIONS
3. The following terms are used in this Standard with the meanings specifie d:
An associate is an enterprise in which the investor has significant influe nce and which is neither a subsidiary
nor a joint venture of the investor.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 241
Significantinfluenceisthepowertoparticipateinthefinancialandope ratingpolicydecisionsoftheinvestee
but is not control over those policies.
Control (for the purpose of this Standard) is the power to govern the financ ial and operating policies of an
enterprise so as to obtain benefits from its activities.A subsidiary is an enterprise that is controlled by another enterprise (kn own as the parent).
Theequitymethodisamethodofaccountingwherebytheinvestmentisiniti allyrecordedatcostandadjusted
thereafter for the post acquisition change in the investor’s share of net a ssets of the investee. The income
statement reflects the investor’s share of the results of operations of th e investee.
Thecostmethodisamethodofaccountingwherebytheinvestmentisrecorde datcost.Theincomestatement
reflects income from the investment only to the extent that the investor re ceives distributions from
accumulated net profits of the investee arising subsequent to the date of a cquisition.
Significant influence
4.If an investor holds, directly or indirectly through subsidiaries, 20 % or more of the voting power of the
investee,itispresumedthattheinvestordoeshavesignificantinfluenc e,unlessitcanbeclearlydemonstrated
thatthisisnotthecase (1).Conversely,iftheinvestorholds,directlyorindirectlythroughsubs idiaries,lessthan
20 % of the voting power of the investee, it is presumed that the investor doe s not have significant influence,
unless such influence can be clearly demonstrated. A substantial or major ity ownership by another investor
does not necessarily preclude an investor from having significant influe nce.
5.Theexistenceofsignificantinfluencebyaninvestorisusuallyevidence dinoneormoreofthefollowingways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy making processes;(c) material transactions between the investor and the investee;(d) interchange of managerial personnel; or(e) provision of essential technical information.
Equity method
6.Under the equity method, the investment is initially recorded at cost and t he carrying amount is increased or
decreased to recognise the investor’s share of the profits or losses of the investee after the date of acquisition.
Distributions received from an investee reduce the carrying amount of the investment. Adjustments to the
carrying amount may also be necessary for alterations in the investor’s pr oportionate interest in the investee
arisingfromchangesintheinvestee’sequitythathavenotbeenincludedi ntheincomestatement.Suchchanges
include those arising from the revaluation of property, plant, equipment and investments, from foreign
exchangetranslationdifferencesandfromtheadjustmentofdifferences arisingonbusinesscombinations (1).
Cost method
7.Under the cost method, an investor records its investment in the investee a t cost. The investor recognises
incomeonlytotheextentthatitreceivesdistributionsfromtheaccumula tednetprofitsoftheinvesteearising
subsequent to the date of acquisition by the investor. Distributions rece ived in excess of such profits are
considered a recovery of investment and are recorded as a reduction of the c ost of the investment.
(1) See also SIC-33: consolidation and equity method — potential voting righ ts and allocation of ownership interests.242 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
CONSOLIDATED FINANCIAL STATEMENTS
8.Aninvestmentinanassociateshouldbeaccountedforinconsolidatedfina ncialstatementsundertheequity
method except when:
(a) theinvestmentisacquiredandheldexclusivelywithaviewtoitssubse quentdisposalinthenearfuture;
or
(b) itoperatesunderseverelong-termrestrictionsthatsignificantlyi mpairitsabilitytotransferfundstothe
investor.
SuchinvestmentsshouldbeaccountedforinaccordancewithIAS39,financ ialinstruments:recognitionand
measurement.
9. The recognition of income on the basis of distributions received may not be an adequate measure of the
income earned by an investor on an investment in an associate because the di stributions received may bear
little relationship to the performance of the associate. As the investor h as significant influence over the
associate, the investor has a measure of responsibility for the associate ’s performance and, as a result, the
returnonitsinvestment.Theinvestoraccountsforthisstewardshipbyex tendingthescopeofitsconsolidated
financialstatementstoincludeitsshareofresultsofsuchanassociatea ndsoprovidesananalysisofearnings
and investment from which more useful ratios can be calculated. As a result , the application of the equity
method provides more informative reporting of the net assets and net incom e of the investor.
10. Deleted
11.An investor should discontinue the use of the equity method from the date th at:
(a) itceasestohavesignificantinfluenceinanassociatebutretains,ei therinwholeorinpart,itsinvestment;
or
(b) the use of the equity method is no longer appropriate because the associ ate operates under severe
long-term restrictions that significantly impair its ability to transfe r funds to the investor.
The carrying amount of the investment at that date should be regarded as cos t thereafter.
SEPARATE FINANCIAL STATEMENTS OF THE INVESTOR
12. An investment in an associate that is included in the separate financia l statements of an investor that issues
consolidatedfinancialstatementsandthatisnotheldexclusivelywitha viewtoitsdisposalinthenearfuture
should be either:
(a) carried at cost;
(b) accounted for using the equity method as described in this Standard; or(c) accounted for as an available-for-sale financial asset as described i n IAS 39, financial instruments:
recognition and measurement.
13.
Thepreparationofconsolidatedfinancialstatementsdoesnot,initself ,obviatetheneedforseparatefinancial
statements for an investor.
14. An investment in an associate that is included in the financial stateme nts of an investor that does not issue
consolidated financial statements should be either:
(a) carried at cost;(b) accounted for using the equity method as described in this Standard if t he equity method would be
appropriate for the associate if the investor issued consolidated financ ial statements; or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 243
(c) accounted for under IAS 39, financial instruments: recognition and me asurement, as an available-for-sale
financial asset or a financial asset held for trading based on the definiti ons in IAS 39.
15.Aninvestorthathasinvestmentsinassociatesmaynotissueconsolidated financialstatementsbecauseitdoes
not have subsidiaries. It is appropriate that such an investor provides th e same information about its
investments in associates as those enterprises that issue consolidated f inancial statements.
APPLICATION OF THE EQUITY METHOD
16.Many of the procedures appropriate for the application of the equity metho d are similar to the consolidation
proceduressetoutinIAS27,consolidatedfinancialstatementsandAccou ntingforInvestmentsinSubsidiaries.
Furthermore, the broad concepts underlying the consolidation procedure s used in the acquisition of a
subsidiary are adopted on the acquisition of an investment in an associate (1).
17.Aninvestmentinanassociateisaccountedforundertheequitymethodfrom thedateonwhichitfallswithin
the definition of an associate. On acquisition of the investment any diffe rence (whether positive or negative)
between the cost of acquisition and the investor’s share of the fair values of the net identifiable assets of the
associateisaccountedforinaccordancewithIAS22,businesscombinatio ns.Appropriateadjustmentstothe
investor’s share of the profits or losses after acquisition are made to acc ount for:
(a) depreciation of the depreciable assets, based on their fair values; an d
(b) amortisationofthedifferencebetweenthecostoftheinvestmentandt heinvestor’sshareofthefairvalues
of the net identifiable assets.
18.Themostrecentavailablefinancialstatementsoftheassociateareusedb ytheinvestorinapplyingtheequity
method; they are usually drawn up to the same date as the financial statemen ts of the investor. When the
reporting dates of the investor and the associate are different, the assoc iate often prepares, for the use of the
investor, statements as at the same date as the financial statements of the investor. When it is impracticable
todothis,financialstatementsdrawnuptoadifferentreportingdatemay beused.Theconsistencyprinciple
dictatesthatthelengthofthereportingperiods,andanydifferenceinth ereportingdates,areconsistentfrom
period to period.
19.Whenfinancialstatementswithadifferentreportingdateareused,adjus tmentsaremadefortheeffectsofany
significant events or transactions between the investor and the associat e that occur between the date of the
associate’s financial statements and the date of the investor’s financia l statements.
20.Theinvestor’sfinancialstatementsareusuallypreparedusinguniforma ccountingpoliciesforliketransactions
and events in similar circumstances. In many cases, if an associate uses ac counting policies other than those
adoptedbytheinvestorforliketransactionsandeventsinsimilarcircum stances,appropriateadjustmentsare
madetotheassociate’sfinancialstatementswhentheyareusedbytheinve storinapplyingtheequitymethod.
If it is not practicable for such adjustments to be calculated, that fact is generally disclosed.
21.If an associate has outstanding cumulative preferred shares, held by outs ide interests, the investor computes
itsshareofprofitsorlossesafteradjustingforthepreferreddividends ,whetherornotthedividendshavebeen
declared.
(1) See also SIC-3: elimination of unrealised profits and losses on transact ions with associates.244 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
22.If,undertheequitymethod,aninvestor’sshareoflossesofanassociatee qualsorexceedsthecarryingamount
of an investment, the investor ordinarily discontinues including its sha re of further losses. The investment is
reportedatnilvalue.Additionallossesareprovidedfortotheextenttha ttheinvestorhasincurredobligations
or made payments on behalf of the associate to satisfy obligations of the as sociate that the investor has
guaranteed or otherwise committed. If the associate subsequently report s profits, the investor resumes
including its share of those profits only after its share of the profits equ als the share of net losses not
recognised (1).
Impairment losses
23. If there is an indication that an investment in an associate may be impai red, an enterprise applies IAS 36,
impairment of assets. In determining the value in use of the investment, an enterprise estimates:
(a) its share of the present value of the estimated future cash flows expect ed to be generated by the investee
asawhole,includingthecashflowsfromtheoperationsoftheinvesteeand theproceedsontheultimate
disposal of the investment; or
(b) the present value of the estimated future cash flows expected to arise f rom dividends to be received from
the investment and from its ultimate disposal.
Under appropriate assumptions, both methods give the same result. Any res ulting impairment loss for the
investment is allocated in accordance with IAS 36. Therefore, it is alloca ted first to any remaining goodwill
(see paragraph 17).
24. The recoverable amount of an investment in an associate is assessed for each individual associate, unless an
individualassociatedoesnotgeneratecashinflowsfromcontinuinguset hatarelargelyindependentofthose
from other assets of the reporting enterprise.
INCOME TAXES
25.Incometaxesarisingfrominvestmentsinassociatesareaccountedforina ccordancewithIAS12,incometaxes.
CONTINGENCIES
26.In accordance with IAS 37, provisions, contingent liabilities and contin gent assets, the investor discloses:
(a) its share of the contingent liabilities and capital commitments of an a ssociate for which it is also
contingently liable; and
(b) those contingent liabilities that arise because the investor is sever ally liable for all the liabilities of the
associate.
DISCLOSURE
27. The following disclosures should be made:
(a) an appropriate listing and description of significant associates inc luding the proportion of ownership
interest and, if different, the proportion of voting power held; and
(b) the methods used to account for such investments.
28. Investments in associates accounted for using the equity method shoul d be classified as long-term assets and
disclosedasaseparateiteminthebalancesheet.Theinvestor’sshareoft heprofitsorlossesofsuchinvestments
should be disclosed as a separate item in the income statement. The investo r’s share of any extraordinary or
prior period items should also be separately disclosed.
(1) See also SIC-20: equity accounting method — recognition of losses.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 245
EFFECTIVE DATE
29. Except for paragraphs 23 and 24, this International Accounting Standa rd becomes operative for financial
statements covering periods beginning on or after 1 January 1990.
30. Paragraphs23and24becomeoperativewhenIAS36becomesoperative,i. e.forannualfinancialstatements
covering periods beginning on or after 1 July 1999, unless IAS 36 is applied for earlier periods.
31.Paragraphs 23 and 24 of this Standard were approved in July 1998 to supersed e paragraphs 23 and 24 of
IAS 28, accounting for investments in associates, reformatted in 1994.
INTERNATIONAL ACCOUNTING STANDARD IAS 29
(REFORMATTED 1994)
Financial reporting in hyperinflationary economies
This reformatted International Accounting Standard supersedes the Stan dard originally approved by the Board in
April 1989. It is presented in the revised format adopted for Internationa l Accounting Standards in 1991 onwards.
Nosubstantivechangeshavebeenmadetotheoriginalapprovedtext.Certa interminologyhasbeenchangedtobring
it into line with current IASC practice.
The following SIC interpretations relate to IAS 29:
— SIC-19: reporting currency — measurement and presentation of financial statements under IAS 21 and IAS 29,
— SIC-30: reporting currency — translation from measurement currency to p resentation currency.
CONTENTS
Paragraphs
Scope 247
The restatement of financial statements 247
Historical cost financial statements 248Balance sheet 248
Income statement 249
Gain or loss on net monetary position 249Current cost financial statements 250Balance sheet 250
Income statement 250
Gain or loss on net monetary position 250Taxes 250
Cash flow statement 250
Corresponding figures 250246 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Consolidated financial statements 250
Selection and use of the general price index 251Economies ceasing to be hyperinflationary 251Disclosures 251
Effective date 251
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied to the primary financial statements, in cluding the consolidated financial
statements, of any enterprise that reports in the currency of a hyperinfla tionary economy.
2.In a hyperinflationary economy, reporting of operating results and finan cial position in the local currency
without restatement is not useful. Money loses purchasing power at such a r ate that comparison of amounts
from transactions and other events that have occurred at different times, even within the same accounting
period, is misleading.
3.This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of
judgement when restatement of financial statements in accordance with th is Standard becomes necessary.
Hyperinflationisindicatedbycharacteristicsoftheeconomicenvironm entofacountrywhichinclude,butare
not limited to, the following:
(a) the general population prefers to keep its wealth in non-monetary asse ts or in a relatively stable foreign
currency. Amounts of local currency held are immediately invested to main tain purchasing power;
(b) the general population regards monetary amounts not in terms of the loc al currency but in terms of a
relatively stable foreign currency. Prices may be quoted in that currency ;
(c) salesandpurchasesoncredittakeplaceatpricesthatcompensatefort heexpectedlossofpurchasingpower
during the credit period, even if the period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or exce eds, 100 %.
4.Itispreferablethatallenterprisesthatreportinthecurrencyofthesam ehyperinflationaryeconomyapplythis
Standardfromthesamedate.Nevertheless,thisStandardappliestothefi nancialstatementsofanyenterprise
fromthebeginningofthereportingperiodinwhichitidentifiestheexist enceofhyperinflationinthecountry
in whose currency it reports.
THE RESTATEMENT OF FINANCIAL STATEMENTS
5.Priceschangeovertimeastheresultofvariousspecificorgeneralpoliti cal,economicandsocialforces.Specific
forcessuchaschangesinsupplyanddemandandtechnologicalchangesmayc auseindividualpricestoincrease
ordecreasesignificantlyandindependentlyofeachother.Inaddition,g eneralforcesmayresultinchangesin
the general level of prices and therefore in the general purchasing power o f money.
6.Inmostcountries,primaryfinancialstatementsarepreparedonthehisto ricalcostbasisofaccountingwithout
regard either to changes in the general level of prices or to increases in sp ecific prices of assets held, except
totheextentthatproperty,plantandequipmentandinvestmentsmayberev alued.Someenterprises,however,
present primary financial statements that are based on a current cost appr oach that reflects the effects of
changes in the specific prices of assets held.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 247
7.Inahyperinflationaryeconomy,financialstatements,whethertheyareb asedonahistoricalcostapproachor
a current cost approach, are useful only if they are expressed in terms of th e measuring unit current at the
balancesheetdate.Asaresult,thisStandardappliestotheprimaryfinan cialstatementsofenterprisesreporting
in the currency of a hyperinflationary economy. Presentation of the infor mation required by this Standard as
a supplement to unrestated financial statements is not permitted. Furthe rmore, separate presentation of the
financial statements before restatement is discouraged.
8. Thefinancialstatementsofanenterprisethatreportsinthecurrencyo fahyperinflationaryeconomy,whether
they are based on a historical cost approach or a current cost approach, sho uld be stated in terms of the
measuring unit current at the balance sheet date. The corresponding figur es for the previous period required
by IAS 1, presentation of financial statements, and any information in res pect of earlier periods should also
be stated in terms of the measuring unit current at the balance sheet date.
9. The gain or loss on the net monetary position should be included in net inc ome and disclosed separately.
10.The restatement of financial statements in accordance with this Standard requires the application of certain
proceduresaswellasjudgement.Theconsistentapplicationoftheseproc eduresandjudgementsfromperiod
toperiodismoreimportantthanthepreciseaccuracyoftheresultingamou ntsincludedintherestatedfinancial
statements.
Historical cost financial statements
Balance sheet
11.Balancesheetamountsnotalreadyexpressedintermsofthemeasuringunit currentatthebalancesheetdate
are restated by applying a general price index.
12.Monetary items are not restated because they are already expressed in term s of the monetary unit current at
the balance sheet date. Monetary items are money held and items to be receiv ed or paid in money.
13.Assets and liabilities linked by agreement to changes in prices, such as in dex linked bonds and loans, are
adjusted in accordance with the agreement in order to ascertain the amount outstanding at the balance sheet
date. These items are carried at this adjusted amount in the restated balan ce sheet.
14.Allotherassetsandliabilitiesarenon-monetary.Somenon-monetaryite msarecarriedatamountscurrentat
the balance sheet date, such as net realisable value and market value, so th ey are not restated. All other
non-monetary assets and liabilities are restated.
15.Most non-monetary items are carried at cost or cost less depreciation; hen ce they are expressed at amounts
current at their date of acquisition. The restated cost, or cost less depre ciation, of each item is determined by
applyingtoitshistoricalcostandaccumulateddepreciationthechangei nageneralpriceindexfromthedate
ofacquisitiontothebalancesheetdate.Hence,property,plantandequip ment,investments,inventoriesofraw
materialsandmerchandise,goodwill,patents,trademarksandsimilaras setsarerestatedfromthedatesoftheir
purchase. Inventories of partly-finished and finished goods are restate d from the dates on which the costs of
purchase and of conversion were incurred.
16.Detailed records of the acquisition dates of items of property, plant and e quipment may not be available or
capableofestimation.Intheserarecircumstances,itmaybenecessary,i nthefirstperiodofapplicationofthis
Standard, to use an independent professional assessment of the value of th e items as the basis for their
restatement.
17.A general price index may not be available for the periods for which the rest atement of property, plant and
equipment is required by this Standard. In these rare circumstances, it ma y be necessary to use an estimate
based, for example, on the movements in the exchange rate between the repor ting currency and a relatively
stable foreign currency.248 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
18. Somenon-monetaryitemsarecarriedatamountscurrentatdatesothert hanthatofacquisitionorthatofthe
balancesheet,forexampleproperty,plantandequipmentthathasbeenrev aluedatsomeearlierdate.Inthese
cases, the carrying amounts are restated from the date of the revaluation.
19.The restated amount of a non-monetary item is reduced, in accordance with a ppropriate International
Accounting Standards, when it exceeds the amount recoverable from the ite m’s future use (including sale or
other disposal). Hence, in such cases, restated amounts of property, plan t and equipment, goodwill, patents
and trade marks are reduced to recoverable amount, restated amounts of inv entories are reduced to net
realisable value and restated amounts of current investments are reduced to market value.
20.An investee that is accounted for under the equity method may report in the c urrency of a hyperinflationary
economy. The balance sheet and income statement of such an investee are res tated in accordance with this
Standardinordertocalculatetheinvestor’sshareofitsnetassetsandre sultsofoperations.Wheretherestated
financial statements of the investee are expressed in a foreign currency t hey are translated at closing rates.
21.Theimpactofinflationisusuallyrecognisedinborrowingcosts.Itisnot appropriatebothtorestatethecapital
expenditurefinancedbyborrowingandtocapitalisethatpartoftheborro wingcoststhatcompensatesforthe
inflation during the same period. This part of the borrowing costs is recog nised as an expense in the period
in which the costs are incurred.
22.Anenterprisemayacquireassetsunderanarrangementthatpermitsittode ferpaymentwithoutincurringan
explicitinterestcharge.Whereitisimpracticabletoimputetheamounto finterest,suchassetsarerestatedfrom
the payment date and not the date of purchase.
23.IAS 21, the effects of changes in foreign exchange rates, permits an enterp rise to include foreign exchange
differences on borrowings in the carrying amount of assets following a sev ere and recent devaluation. Such
apracticeisnotappropriateforanenterprisereportinginthecurrencyo fahyperinflationaryeconomywhen
the carrying amount of the asset is restated from the date of its acquisitio n.
24.AtthebeginningofthefirstperiodofapplicationofthisStandard,theco mponentsofowners’equity,except
retained earnings and any revaluation surplus, are restated by applying a general price index from the dates
the components were contributed or otherwise arose. Any revaluation surp lus that arose in previous periods
is eliminated. Restated retained earnings are derived from all the other a mounts in the restated balance sheet.
25.At the end of the first period and in subsequent periods, all components of o wners’ equity are restated by
applying a general price index from the beginning of the period or the date o f contribution, if later. The
movements for the period in owners’ equity are disclosed in accordance wit h IAS 1, presentation of financial
statements.
Income statement
26.This Standard requires that all items in the income statement are expresse d in terms of the measuring unit
current at the balance sheet date. Therefore all amounts need to be restate d by applying the change in the
general price index from the dates when the items of income and expenses wer e initially recorded in the
financial statements.
Gain or loss on net monetary position
27.In a period of inflation, an enterprise holding an excess of monetary asset s over monetary liabilities loses
purchasing power and an enterprise with an excess of monetary liabilities over monetary assets gains
purchasingpowertotheextenttheassetsandliabilitiesarenotlinkedto apricelevel.Thisgainorlossonthe
netmonetarypositionmaybederivedasthedifferenceresultingfromther estatementofnon-monetaryassets,
owners’equityandincomestatementitemsandtheadjustmentofindexlink edassetsandliabilities.Thegain
orlossmaybeestimatedbyapplyingthechangeinageneralpriceindextoth eweightedaveragefortheperiod
of the difference between monetary assets and monetary liabilities.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 249
28.The gain or loss on the net monetary position is included in net income. The a djustment to those assets and
liabilitieslinkedbyagreementtochangesinpricesmadeinaccordancewi thparagraph13isoffsetagainstthe
gain or loss on net monetary position. Other income statement items, such a s interest income and expense,
and foreign exchange differences related to invested or borrowed funds, a re also associated with the net
monetary position. Although such items are separately disclosed, it may b e helpful if they are presented
together with the gain or loss on net monetary position in the income statem ent.
Current cost financial statements
Balance sheet
29.Itemsstatedatcurrentcostarenotrestatedbecausetheyarealreadyexpr essedintermsofthemeasuringunit
current at the balance sheet date. Other items in the balance sheet are rest ated in accordance with
paragraphs 11 to 25.
Income statement
30.Thecurrentcostincomestatement,beforerestatement,generallyreport scostscurrentatthetimeatwhichthe
underlyingtransactionsoreventsoccurred.Costofsalesanddepreciati onarerecordedatcurrentcostsatthe
time of consumption; sales and other expenses are recorded at their money a mounts when they occurred.
Thereforeallamountsneedtoberestatedintothemeasuringunitcurrenta tthebalancesheetdatebyapplying
a general price index.
Gain or loss on net monetary position
31.Thegainorlossonthenetmonetarypositionisaccountedforinaccordance withparagraphs27and28.The
currentcostincomestatementmay,however,alreadyincludeanadjustmen treflectingtheeffectsofchanging
prices on monetary items in accordance with paragraph 16 of IAS 15, informa tion reflecting the effects of
changing prices. Such an adjustment is part of the gain or loss on net moneta ry position.
Taxes
32.TherestatementoffinancialstatementsinaccordancewiththisStandard maygiverisetodifferencesbetween
taxableincomeandaccountingincome.Thesedifferencesareaccountedfo rinaccordancewithIAS12,income
taxes.
Cash flow statement
33.This Standard requires that all items in the cash flow statement are expres sed in terms of the measuring unit
current at the balance sheet date.
Corresponding figures
34.Correspondingfiguresforthepreviousreportingperiod,whethertheywe rebasedonahistoricalcostapproach
or a current cost approach, are restated by applying a general price index s o that the comparative financial
statementsarepresentedintermsofthemeasuringunitcurrentattheendo fthereportingperiod.Information
thatisdisclosedinrespectofearlierperiodsisalsoexpressedintermso fthemeasuringunitcurrentattheend
of the reporting period.
Consolidated financial statements
35.A parent that reports in the currency of a hyperinflationary economy may ha ve subsidiaries that also report
in the currencies of hyperinflationary economies. The financial stateme nts of any such subsidiary need to be
restatedbyapplyingageneralpriceindexofthecountryinwhosecurrency itreportsbeforetheyareincluded
in the consolidated financial statements issued by its parent. Where such a subsidiary is a foreign subsidiary,
itsrestatedfinancialstatementsaretranslatedatclosingrates.Thefi nancialstatementsofsubsidiariesthatdo
notreportinthecurrenciesofhyperinflationaryeconomiesaredealtwit hinaccordancewithIAS21,theeffects
of changes in foreign exchange rates.250 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
36.If financial statements with different reporting dates are consolidated , all items, whether non-monetary or
monetary, need to be restated into the measuring unit current at the date of the consolidated financial
statements.
Selection and use of the general price index
37.The restatement of financial statements in accordance with this Standard requires the use of a general price
index that reflects changes in general purchasing power. It is preferable that all enterprises that report in the
currency of the same economy use the same index.
ECONOMIES CEASING TO BE HYPERINFLATIONARY
38. When an economy ceases to be hyperinflationary and an enterprise disco ntinues the preparation and
presentation of financial statements prepared in accordance with this St andard, it should treat the amounts
expressedinthemeasuringunitcurrentattheendofthepreviousreportin gperiodasthebasisforthecarrying
amounts in its subsequent financial statements.
DISCLOSURES
39. The following disclosures should be made (1):
(a) thefactthatthefinancialstatementsandthecorrespondingfiguresf orpreviousperiodshavebeenrestated
for the changes in the general purchasing power of the reporting currency a nd, as a result, are stated in
terms of the measuring unit current at the balance sheet date;
(b) whether the financial statements are based on a historical cost approa ch or a current cost approach; and
(c) the identity and level of the price index at the balance sheet date and th e movement in the index during
the current and the previous reporting period.
40.The disclosures required by this Standard are needed to make clear the basi s of dealing with the effects of
inflation in the financial statements. They are also intended to provide o ther information necessary to
understand that basis and the resulting amounts.
EFFECTIVE DATE
41. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1990.
INTERNATIONAL ACCOUNTING STANDARD IAS 30
(REFORMATTED 1994)
Disclosures in the financial statements of banks and similar financial in stitutions
ThisreformattedInternationalAccountingStandardsupersedestheStan dardoriginallyapprovedbytheBoardinJune
1990. It is presented in the revised format adopted for International Acco unting Standards in 1991 onwards. No
substantive changes have been made to the original approved text. Certain terminology has been changed to bring
it into line with current IASC practice.
In1998,paragraphs24and25ofIAS30wereamended.Theamendmentsreplace referencestoIAS25,accounting
for investments, by references to IAS 39, financial instruments: recogni tion and measurement.
In 1999, paragraphs 26, 27, 50 and 51 of IAS 30 were amended. These amendment s replace references to IAS 10,
contingencies and events occurring after the balance sheet date, by refer ences to IAS 37, provisions, contingent
liabilities and contingent assets, and conform the terminology used to th at in IAS 37.
(1) See also SIC-30: reporting currency — translation from measurement curr ency to presentation currency.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 251
CONTENTS
Paragraphs
Scope 252
Background 253
Accounting policies 253
Income statement 253
Balance sheet 255
Contingencies and commitments including off balance sheet items 256
Maturities of assets and liabilities 257Concentrations of assets, liabilities and off balance sheet items 258Losses on loans and advances 258General banking risks 259
Assets pledged as security 260
Trust activities 260
Related party transactions 260
Effective date 261
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. This Standard should be applied in the financial statements of banks and similar financial institutions
(subsequently referred to as banks).
2.For the purposes of this Standard, the term “bank” includes all financial i nstitutions, one of whose principal
activities is to take deposits and borrow with the objective of lending and investing and which are within the
scope of banking or similar legislation. The Standard is relevant to such e nterprises whether or not they have
the word “bank” in their name.
3.Banksrepresentasignificantandinfluentialsectorofbusinessworldwi de.Mostindividualsandorganisations
make use of banks, either as depositors or borrowers. Banks play a major rol e in maintaining confidence in
the monetary system through their close relationship with regulatory aut horities and governments and the
regulations imposed on them by those governments. Hence there is consider able and widespread interest in
thewell-beingofbanks,andinparticulartheirsolvencyandliquidityan dtherelativedegreeofriskthatattaches
to the different types of their business. The operations, and thus the acco unting and reporting requirements,
ofbanksaredifferentfromthoseofothercommercialenterprises.ThisSt andardrecognisestheirspecialneeds.
Italsoencouragesthepresentationofacommentaryonthefinancialstate mentswhichdealswithsuchmatters
as the management and control of liquidity and risk.
4.This Standard supplements other International Accounting Standards whi ch also apply to banks unless they
are specifically exempted in a Standard.252 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
5.ThisStandardappliestotheseparatefinancialstatementsandtheconsol idatedfinancialstatementsofabank.
Where a group undertakes banking operations, this Standard is applicable in respect of those operations on
a consolidated basis.
BACKGROUND
6.The users of the financial statements of a bank need relevant, reliable and comparable information which
assists them in evaluating the financial position and performance of the b ank and which is useful to them
in making economic decisions. They also need information which gives them a better understanding of the
specialcharacteristicsoftheoperationsofabank.Usersneedsuchinfor mationeventhoughabankissubject
to supervision and provides the regulatory authorities with information that is not always available to the
public. Therefore disclosures in the financial statements of a bank need t o be sufficiently comprehensive to
meet the needs of users, within the constraint of what it is reasonable to re quire of management.
7.Theusersofthefinancialstatementsofabankareinterestedinitsliquid ityandsolvencyandtherisksrelated
to the assets and liabilities recognised on its balance sheet and to its off balance sheet items. Liquidity refers
to the availability of sufficient funds to meet deposit withdrawals and ot her financial commitments as they
falldue.Solvencyreferstotheexcessofassetsoverliabilitiesand,hen ce,totheadequacyofthebank’scapital.
A bank is exposed to liquidity risk and to risks arising from currency fluct uations, interest rate movements,
changes in market prices and from counterparty failure. These risks may be reflected in the financial
statements, but users obtain a better understanding if management provid es a commentary on the financial
statements which describes the way it manages and controls the risks assoc iated with the operations of the
bank.
ACCOUNTING POLICIES
8. Banksusedifferingmethodsfortherecognitionandmeasurementofitem sintheirfinancialstatements.While
harmonisationofthesemethodsisdesirable,itisbeyondthescopeofthis Standard.Inordertocomplywith
IAS 1, presentation of financial statements, and thereby enable users to u nderstand the basis on which the
financial statements of a bank are prepared, accounting policies dealing with the following items may need
to be disclosed:
(a) the recognition of the principal types of income (see paragraphs 10 and 11);
(b) the valuation of investment and dealing securities (see paragraphs 24 and 25);
(c) the distinction between those transactions and other events that resu lt in the recognition of assets and
liabilitiesonthebalancesheetandthosetransactionsandothereventst hatonlygiverisetocontingencies
and commitments (see paragraphs 26 to 29);
(d) the basis for the determination of losses on loans and advances and for w riting off uncollectable loans
and advances (see paragraphs 43 to 49); and
(e) thebasisforthedeterminationofchargesforgeneralbankingrisksan dtheaccountingtreatmentofsuch
charges (see paragraphs 50 to 52).
SomeofthesetopicsarethesubjectofexistingInternationalAccounting Standardswhileothersmaybedealt
with at a later date.
INCOME STATEMENT
9. Abankshouldpresentanincomestatementwhichgroupsincomeandexpens esbynatureanddisclosesthe
amounts of the principal types of income and expenses.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 253
10. In addition to the requirements of other International Accounting Sta ndards, the disclosures in the income
statement or the notes to the financial statements should include, but are not limited to, the following items
of income and expenses:
— interest and similar income,
— interest expense and similar charges,
— dividend income,— fee and commission income,— fee and commission expense,— gains less losses arising from dealing securities,— gains less losses arising from investment securities,— gains less losses arising from dealing in foreign currencies,— other operating income,— losses on loans and advances,— general administrative expenses, and— other operating expenses.
11.
The principal types of income arising from the operations of a bank include interest, fees for services,
commissionsanddealingresults.Eachtypeofincomeisseparatelydisclo sedinorderthatuserscanassessthe
performanceofabank.Suchdisclosuresareinadditiontothoseofthesour ceofincomerequiredbyIAS14,
segment reporting.
12.Theprincipaltypesofexpensesarisingfromtheoperationsofabankinclu deinterest,commissions,losseson
loans and advances, charges relating to the reduction in the carrying amou nt of investments and general
administrative expenses. Each type of expense is separately disclosed in order that users can assess the
performance of a bank.
13. Incomeandexpenseitemsshouldnotbeoffsetexceptforthoserelating tohedgesandtoassetsandliabilities
which have been offset in accordance with paragraph 23.
14.Offsetting in cases other than those relating to hedges and to assets and li abilities which have been offset as
described in paragraph 23 prevents users from assessing the performance o f the separate activities of a bank
and the return that it obtains on particular classes of assets.
15.Gains and losses arising from each of the following are normally reported o n a net basis:
(a) disposals and changes in the carrying amount of dealing securities;(b) disposals of investment securities; and(c) dealings in foreign currencies.
16.
Interest income and interest expense are disclosed separately in order to give a better understanding of the
composition of, and reasons for changes in, net interest.
17.Net interest is a product of both interest rates and the amounts of borrowin g and lending. It is desirable for
managementtoprovideacommentaryaboutaverageinterestrates,average interestearningassetsandaverage
interest-bearing liabilities for the period. In some countries, governm ents provide assistance to banks by
makingdepositsandothercreditfacilitiesavailableatinterestratesw hicharesubstantiallybelowmarketrates.
In these cases, management’s commentary often discloses the extent of the se deposits and facilities and their
effect on net income.254 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
BALANCE SHEET
18. A bank should present a balance sheet that groups assets and liabilitie s by nature and lists them in an order
that reflects their relative liquidity.
19. In addition to the requirements of other International Accounting Sta ndards, the disclosures in the balance
sheet or the notes to the financial statements should include, but are not l imited to, the following assets and
liabilities:
Assets:
— cash and balances with the central bank,— treasury bills and other bills eligible for rediscounting with the centr al bank,
— government and other securities held for dealing purposes,— placements with, and loans and advances to, other banks,— other money market placements,— loans and advances to customers, and— investment securities.Liabilities:— deposits from other banks,— other money market deposits,— amounts owed to other depositors,— certificates of deposits,— promissory notes and other liabilities evidenced by paper, and— other borrowed funds.
20.
The most useful approach to the classification of the assets and liabiliti es of a bank is to group them by their
nature and list them in the approximate order of their liquidity; this may e quate broadly to their maturities.
Current and non-current items are not presented separately because most a ssets and liabilities of a bank can
be realised or settled in the near future.
21.Thedistinctionbetweenbalanceswithotherbanksandthosewithotherpar tsofthemoneymarketandfrom
other depositors is relevant information because it gives an understandi ng of a bank’s relations with, and
dependence on, other banks and the money market. Hence, a bank discloses se parately:
(a) balances with the central bank;
(b) placements with other banks;(c) other money market placements;(d) deposits from other banks;(e) other money market deposits; and(f) other deposits.
22.
A bank generally does not know the holders of its certificates of deposit be cause they are usually traded on
an open market. Hence, a bank discloses separately deposits that have been obtained through the issue of its
own certificates of deposit or other negotiable paper.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 255
23. Theamountatwhichanyassetorliabilityisstatedinthebalancesheet shouldnotbeoffsetbythededuction
of another liability or asset unless a legal right of set-off exists and the offsetting represents the expectation
as to the realisation or settlement of the asset or liability.
24. A bank should disclose the fair values of each class of its financial ass ets and liabilities as required by IAS 32,
financial instruments: disclosure and presentation, and IAS 39, financi al instruments: recognition and
measurement.
25.IAS 39 provides for four classifications of financial assets: loans and re ceivables originated by the enterprise,
held-to-maturity investments, financial assets held for trading, and av ailable-for-sale financial assets. A bank
will disclose the fair values of its financial assets for these four classi fications, as a minimum.
CONTINGENCIES AND COMMITMENTS INCLUDING OFF BALANCE SHEET ITEMS
26. A bank should disclose the following contingent liabilities and commi tments:
(a) the nature and amount of commitments to extend credit that are irrevoca ble because they cannot be
withdrawn at the discretion of the bank without the risk of incurring signi ficant penalty or expense; and
(b) the nature and amount of contingent liabilities and commitments arisi ng from off balance sheet items
including those relating to:
(i) directcreditsubstitutesincludinggeneralguaranteesofindebtedn ess,bankacceptanceguaranteesand
standby letters of credit serving as financial guarantees for loans and se curities;
(ii) certain transaction-related contingent liabilities including per formance bonds, bid bonds, warranties
and standby letters of credit related to particular transactions;
(iii)short-term self-liquidating trade-related contingent liabiliti es arising from the movement of goods,
such as documentary credits where the underlying shipment is used as secur ity;
(iv) those sale and repurchase agreements not recognised in the balance sh eet;
(v) interest and foreign exchange rate related items including swaps, opt ions and futures; and
(vi) other commitments, note issuance facilities and revolving underwri ting facilities.
27.IAS 37, provisions, contingent liabilities and contingent assets, deals generally with accounting for, and
disclosure of, contingent liabilities. The Standard is of particular rel evance to banks because banks often
become engaged in many types of contingent liabilities and commitments, s ome revocable and others
irrevocable,whicharefrequentlysignificantinamountandsubstantial lylargerthanthoseofothercommercial
enterprises.
28.Manybanksalsoenterintotransactionsthatarepresentlynotrecognised asassetsorliabilitiesinthebalance
sheetbutwhichgiverisetocontingenciesandcommitments.Suchoffbalan cesheetitemsoftenrepresentan
important part of the business of a bank and may have a significant bearing o n the level of risk to which the
bank is exposed. These items may add to, or reduce, other risks, for example by hedging assets or liabilities
on the balance sheet. Off balance sheet items may arise from transactions c arried out on behalf of customers
or from the bank’s own trading position.
29.The users of the financial statements need to know about the contingencies and irrevocable commitments of
a bank because of the demands they may put on its liquidity and solvency and t he inherent possibility of
potential losses. Users also require adequate information about the natu re and amount of off balance sheet
transactions undertaken by a bank.256 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
MATURITIES OF ASSETS AND LIABILITIES
30.A bank should disclose an analysis of assets and liabilities into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity dat e.
31. The matching and controlled mismatching of the maturities and interes t rates of assets and liabilities is
fundamental to the management of a bank. It is unusual for banks ever to be co mpletely matched since
business transacted is often of uncertain term and of different types. An u nmatched position potentially
enhances profitability but can also increase the risk of losses.
32. Thematuritiesofassetsandliabilitiesandtheabilitytoreplace,at anacceptablecost,interest-bearingliabilities
astheymature,areimportantfactorsinassessingtheliquidityofabanka nditsexposuretochangesininterest
rates and exchange rates. In order to provide information that is relevant for the assessment of its liquidity,
a bank discloses, as a minimum, an analysis of assets and liabilities into r elevant maturity groupings.
33. The maturity groupings applied to individual assets and liabilities d iffer between banks and in their
appropriateness to particular assets and liabilities. Examples of perio ds used include the following:
(a) up to 1 month;
(b) from 1 month to 3 months;(c) from 3 months to 1 year;(d) from 1 year to 5 years; and(e) from 5 years and over.
Frequentlytheperiodsarecombined,forexample,inthecaseofloansanda dvances,bygroupingthoseunder
one year and those over one year. When repayment is spread over a period of ti me, each instalment is
allocated to the period in which it is contractually agreed or expected to b e paid or received.
34. It is essential that the maturity periods adopted by a bank are the same f or assets and liabilities. This makes
clear the extent to which the maturities are matched and the consequent dep endence of the bank on other
sources of liquidity.
35. Maturities could be expressed in terms of:
(a) the remaining period to the repayment date;
(b) the original period to the repayment date; or(c) the remaining period to the next date at which interest rates may be chan ged.
Theanalysisofassetsandliabilitiesbytheirremainingperiodstothere paymentdatesprovidesthebestbasis
toevaluatetheliquidityofabank.Abankmayalsodiscloserepaymentmatu ritiesbasedontheoriginalperiod
to the repayment date in order to provide information about its funding and business strategy. In addition,
abankmaydisclosematuritygroupingsbasedontheremainingperiodtothe nextdateatwhichinterestrates
may be changed in order to demonstrate its exposure to interest rate risks. Management may also provide,
in its commentary on the financial statements, information about interes t rate exposure and about the way
it manages and controls such exposures.
36. Inmanycountries,depositsmadewithabankmaybewithdrawnondemanda ndadvancesgivenbyabank
mayberepayableondemand.However,inpractice,thesedepositsandadvan cesareoftenmaintainedforlong
periodswithoutwithdrawalorrepayment;hence,theeffectivedateofrep aymentislaterthanthecontractual
date.Nevertheless,abankdisclosesananalysisexpressedintermsofcon tractualmaturitieseventhoughthe
contractual repayment period is often not the effective period because co ntractual dates reflect the liquidity
risks attaching to the bank’s assets and liabilities.
37. Someassetsofabankdonothaveacontractualmaturitydate.Theperiod inwhichtheseassetsareassumed
to mature is usually taken as the expected date on which the assets will be re alised.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 257
38. Theusers’evaluationoftheliquidityofabankfromitsdisclosureofm aturitygroupingsismadeinthecontext
of local banking practices, including the availability of funds to banks. In some countries, short-term funds
areavailable,inthenormalcourseofbusiness,fromthemoneymarketor,i nanemergency,fromthecentral
bank. In other countries, this is not the case.
39. Inordertoprovideuserswithafullunderstandingofthematuritygrou pings,thedisclosuresinthefinancial
statements may need to be supplemented by information as to the likelihood of repayment within the
remaining period. Hence, management may provide, in its commentary on the financial statements,
information about the effective periods and about the way it manages and co ntrols the risks and exposures
associated with different maturity and interest rate profiles.
CONCENTRATIONS OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS
40. Abankshoulddiscloseanysignificantconcentrationsofitsassets,l iabilitiesandoffbalancesheetitems.Such
disclosures should be made in terms of geographical areas, customer or ind ustry groups or other
concentrations of risk. A bank should also disclose the amount of signific ant net foreign currency exposures.
41.A bank discloses significant concentrations in the distribution of its as sets and in the source of its liabilities
because it is a useful indication of the potential risks inherent in the rea lisation of the assets and the funds
available to the bank. Such disclosures are made in terms of geographical a reas, customer or industry groups
orotherconcentrationsofriskwhichareappropriateinthecircumstance softhebank.Asimilaranalysisand
explanationofoffbalancesheetitemsisalsoimportant.Geographicalar easmaycompriseindividualcountries,
groups of countries or regions within a country; customer disclosures may deal with sectors such as
governments, public authorities, and commercial and business enterpris es. Such disclosures are made in
addition to any segment information required by IAS 14, segment reporting .
42.The disclosure of significant net foreign currency exposures is also a use ful indication of the risk of losses
arising from changes in exchange rates.
LOSSES ON LOANS AND ADVANCES
43. A bank should disclose the following:
(a) theaccountingpolicywhichdescribesthebasisonwhichuncollectabl eloansandadvancesarerecognised
as an expense and written off;
(b) details of the movements in the provision for losses on loans and advanc es during the period. It should
discloseseparatelytheamountrecognisedasanexpenseintheperiodforl ossesonuncollectableloansand
advances, the amount charged in the period for loans and advances written o ff and the amount credited
in the period for loans and advances previously written off that have been r ecovered;
(c) the aggregate amount of the provision for losses on loans and advances a t the balance sheet date; and
(d) theaggregateamountincludedinthebalancesheetforloansandadvanc esonwhichinterestisnotbeing
accrued and the basis used to determine the carrying amount of such loans an d advances.
44. Any amounts set aside in respect of losses on loans and advances in addit ion to those losses that have been
specifically identified or potential losses which experience indicates are present in the portfolio of loans and
advances should be accounted for as appropriations of retained earnings. Any credits resulting from the
reductionofsuchamountsresultinanincreaseinretainedearningsandar enotincludedinthedetermination
of net profit or loss for the period.258 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
45.It is inevitable that in the ordinary course of business, banks suffer loss es on loans, advances and other credit
facilities as a result of their becoming partly or wholly uncollectable. T he amount of losses which have been
specifically identified is recognised as an expense and deducted from the carrying amount of the appropriate
categoryofloansandadvancesasaprovisionforlossesonloansandadvanc es.Theamountofpotentiallosses
not specifically identified but which experience indicates are present i n the portfolio of loans and advances is
also recognised as an expense and deducted from the total carrying amount o f loans and advances as a
provision for losses on loans and advances. The assessment of these losses depends on the judgement of
management; it is essential, however, that management applies its assess ments in a consistent manner from
period to period.
46.Local circumstances or legislation may require or allow a bank to set aside amounts for losses on loans and
advances in addition to those losses which have been specifically identif ied and those potential losses which
experienceindicatesarepresentintheportfolioofloansandadvances.A nysuchamountssetasiderepresent
appropriationsofretainedearningsandnotexpensesindeterminingnetp rofitorlossfortheperiod.Similarly,
anycreditsresultingfromthereductionofsuchamountsresultinanincre aseinretainedearningsandarenot
included in the determination of net profit or loss for the period.
47.Users of the financial statements of a bank need to know the impact that loss es on loans and advances have
hadonthefinancialpositionandperformanceofthebank;thishelpsthemj udgetheeffectivenesswithwhich
the bank has employed its resources. Therefore a bank discloses the aggreg ate amount of the provision for
lossesonloansandadvancesatthebalancesheetdateandthemovementsint heprovisionduringtheperiod.
Themovementsintheprovision,includingtheamountspreviouslywritten offthathavebeenrecoveredduring
the period, are shown separately.
48.Abankmaydecidenottoaccrueinterestonaloanoradvance,forexamplewhe ntheborrowerismorethan
aparticularperiodinarrearswithrespecttothepaymentofinterestorpr incipal.Abankdisclosestheaggregate
amount of loans and advances at the balance sheet date on which interest is n ot being accrued and the basis
used to determine the carrying amount of such loans and advances. It is also desirable that a bank discloses
whether it recognises interest income on such loans and advances and the im pact which the non-accrual of
interest has on its income statement.
49.Whenloansandadvancescannotberecovered,theyarewrittenoffandcharg edagainsttheprovisionforlosses.
In some cases, they are not written off until all the necessary legal proced ures have been completed and the
amount of the loss is finally determined. In other cases, they are written o ff earlier, for example when the
borrower has not paid any interest or repaid any principal that was due in a s pecified period. As the time at
which uncollectable loans and advances are written off differs, the gross amount of loans and advances and
of the provisions for losses may vary considerably in similar circumstanc es. As a result, a bank discloses its
policy for writing off uncollectable loans and advances.
GENERAL BANKING RISKS
50. Any amounts set aside for general banking risks, including future loss es and other unforeseeable risks or
contingenciesshouldbeseparatelydisclosedasappropriationsofretai nedearnings.Anycreditsresultingfrom
the reduction of such amounts result in an increase in retained earnings an d should not be included in the
determination of net profit or loss for the period.
51.Localcircumstancesorlegislationmayrequireorallowabanktosetaside amountsforgeneralbankingrisks,
includingfuturelossesorotherunforeseeablerisks,inadditiontothec hargesforlossesonloansandadvances
determined in accordance with paragraph 45. A bank may also be required or a llowed to set aside amounts
for contingencies. Such amounts for general banking risks and contingenc ies do not qualify for recognition
as provisions under IAS 37, provisions, contingent liabilities and conti ngent assets. Therefore, a bank
recognisessuchamountsasappropriationsofretainedearnings.Thisisn ecessarytoavoidtheoverstatement
ofliabilities,understatementofassets,undisclosedaccrualsandprov isionsandtheopportunitytodistortnet
income and equity.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 259
52.The income statement cannot present relevant and reliable information ab out the performance of a bank if
netprofitorlossfortheperiodincludestheeffectsofundisclosedamoun tssetasideforgeneralbankingrisks
oradditionalcontingencies,orundisclosedcreditsresultingfromther eversalofsuchamounts.Similarly,the
balance sheet cannot provide relevant and reliable information about the financial position of a bank if the
balance sheet includes overstated liabilities, understated assets or un disclosed accruals and provisions.
ASSETS PLEDGED AS SECURITY
53.Abankshoulddisclosetheaggregateamountofsecuredliabilitiesandthe natureandcarryingamountofthe
assets pledged as security.
54.Insomecountries,banksarerequired,eitherbylawornationalcustom,to pledgeassetsassecuritytosupport
certaindepositsandotherliabilities.Theamountsinvolvedareoftensu bstantialandsomayhaveasignificant
impact on the assessment of the financial position of a bank.
TRUST ACTIVITIES
55.Bankscommonlyactastrusteesandinotherfiduciarycapacitiesthatresu ltintheholdingorplacingofassets
onbehalfofindividuals,trusts,retirementbenefitplansandotherinst itutions.Providedthetrusteeorsimilar
relationship is legally supported, these assets are not assets of the bank and, therefore, are not included in its
balance sheet. If the bank is engaged in significant trust activities, dis closure of that fact and an indication of
theextentofthoseactivitiesismadeinitsfinancialstatementsbecause ofthepotentialliabilityifitfailsinits
fiduciary duties. For this purpose, trust activities do not encompass saf e custody functions.
RELATED PARTY TRANSACTIONS
56.IAS 24, related party disclosures, deals generally with the disclosures o f related party relationships and
transactions between a reporting enterprise and its related parties. In s ome countries, the law or regulatory
authorities prevent or restrict banks entering into transactions with re lated parties whereas in others such
transactionsarepermitted.IAS24,isofparticularrelevanceinthepres entationofthefinancialstatementsof
a bank in a country that permits such transactions.
57.Certain transactions between related parties may be effected on differen t terms from those with unrelated
parties. For example, a bank may advance a larger sum or charge lower intere st rates to a related party than
it would in otherwise identical circumstances to an unrelated party; adva nces or deposits may be moved
between related parties more quickly and with less formality than is possi ble when unrelated parties are
involved. Even when related party transactions arise in the ordinary cour se of a bank’s business, information
about such transactions is relevant to the needs of users and its disclosur e is required by IAS 24.
58.When a bank has entered into transactions with related parties, it is appro priate to disclose the nature of the
related party relationship, the types of transactions, and the elements o f transactions necessary for an
understanding of the financial statements of the bank. The elements that w ould normally be disclosed to
conform with IAS 24 include a bank’s lending policy to related parties and, in respect of related party
transactions, the amount included in or the proportion of:
(a) each of loans and advances, deposits and acceptances and promissory no tes; disclosures may include the
aggregate amounts outstanding at the beginning and end of the period, as we ll as advances, deposits,
repayments and other changes during the period;260 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) each of the principal types of income, interest expense and commission s paid;
(c) the amount of the expense recognised in the period for losses on loans an d advances and the amount of
the provision at the balance sheet date; and
(d) irrevocable commitments and contingencies and commitments arising f rom off balance sheet items.
EFFECTIVE DATE
59. This International Accounting Standard becomes operative for the fin ancial statements of banks covering
periods beginning on or after 1 January 1991.
INTERNATIONAL ACCOUNTING STANDARD IAS 31
(REVISED 2000)
Financial reporting of interests in joint ventures
IAS 31 was approved by the Board in November 1990.
InNovember1994,thetextofIAS31wasreformattedtobepresentedinthere visedformatadoptedforInternational
Accounting Standards in 1991. No substantive changes were made to the orig inal text. Certain terminology was
changed to be in line with IASC practice at the time.In July 1998, to be consistent with IAS 36, impairment of assets, paragraph s 39 and 40 were revised and a new
paragraph 41 was added.In December 1998, paragraphs 35 and 42 of IAS 31 were amended to replace refe rences to IAS 25, accounting for
investments, by references to IAS 39, financial instruments: recognitio n and measurement.
In March 1999, IAS 10 (revised 1999), events after the balance sheet date, a mended paragraph 45 to be consistent
with the terminology in IAS 37, provisions, contingent liabilities and co ntingent assets.
In October 2000, paragraph 35 was revised to be consistent with similar par agraphs in other related International
AccountingStandards.Thechangetoparagraph35becomeseffectivewhena nenterpriseappliesIAS39forthefirst
time.
One SIC interpretation relates to IAS 31:
— SIC-13: jointly controlled entities — non-monetary contributions by ve nturers.
CONTENTS
Paragraphs
Scope 262
Definitions 262
Forms of joint venture 263
Contractual arrangement 26313/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 261
Jointly controlled operations 264
Jointly controlled assets 264
Jointly controlled entities 265
Consolidated financial statements of a venturer 266
Benchmark treatment — proportionate consolidation 266Allowed alternative treatment — equity method 267Exceptions to benchmark and allowed alternative treatments 267Separate financial statements of a venturer 267Transactions between a venturer and joint venture 268Reporting interests in joint ventures in the financial statements of an in vestor 268
Operators of joint ventures 268
Disclosure 268
Effective date 269
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
SCOPE
1. ThisStandardshouldbeappliedinaccountingforinterestsinjointven turesandthereportingofjointventure
assets,liabilities,incomeandexpensesinthefinancialstatementsofv enturersandinvestors,regardlessofthe
structures or forms under which the joint venture activities take place.
DEFINITIONS
2. The following terms are used in this Standard with the meanings specifie d:
A joint venture is a contractual arrangement whereby two or more parties un dertake an economic activity
which is subject to joint control.
Control is the power to govern the financial and operating policies of an ec onomic activity so as to obtain
benefits from it.Joint control is the contractually agreed sharing of control over an econo mic activity.
Significantinfluenceisthepowertoparticipateinthefinancialandope ratingpolicydecisionsofaneconomic
activity but is not control or joint control over those policies.A venturer is a party to a joint venture and has joint control over that joint venture.
Aninvestorinajointventureisapartytoajointventureanddoesnothavej ointcontroloverthatjointventure.262 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Proportionate consolidation is a method of accounting and reporting wher eby a venturer’s share of each of
theassets,liabilities,incomeandexpensesofajointlycontrolledenti tyiscombinedonaline-by-linebasiswith
similaritemsintheventurer’sfinancialstatementsorreportedassepar atelineitemsintheventurer’sfinancial
statements.
Theequitymethodisamethodofaccountingandreportingwherebyanintere stinajointlycontrolledentity
isinitiallyrecordedatcostandadjustedthereafterforthepostacquisi tionchangeintheventurer’sshareofnet
assets of the jointly controlled entity. The income statement reflects th e venturer’s share of the results of
operations of the jointly controlled entity.
Forms of joint venture
3.Joint ventures take many different forms and structures. This Standard id entifies three broad types — jointly
controlledoperations,jointlycontrolledassetsandjointlycontrolle dentities—whicharecommonlydescribed
as, and meet the definition of, joint ventures. The following characteris tics are common to all joint ventures:
(a) two or more venturers are bound by a contractual arrangement; and
(b) the contractual arrangement establishes joint control.
Contractual arrangement
4.The existence of a contractual arrangement distinguishes interests whic h involve joint control from
investments in associates in which the investor has significant influenc e (see IAS 28, accounting for
investmentsinassociates).Activitieswhichhavenocontractualarrang ementtoestablishjointcontrolarenot
joint ventures for the purposes of this Standard.
5.The contractual arrangement may be evidenced in a number of ways, for examp le by a contract between the
venturersorminutesofdiscussionsbetweentheventurers.Insomecases, thearrangementisincorporatedin
thearticlesorotherby-lawsofthejointventure.Whateveritsform,thec ontractualarrangementisusuallyin
writing and deals with such matters as:
(a) the activity, duration and reporting obligations of the joint venture ;
(b) theappointmentoftheboardofdirectorsorequivalentgoverningbody ofthejointventureandthevoting
rights of the venturers;
(c) capital contributions by the venturers; and
(d) the sharing by the venturers of the output, income, expenses or results of the joint venture.
6.Thecontractualarrangementestablishesjointcontroloverthejointven ture.Sucharequirementensuresthat
nosingleventurerisinapositiontocontrolunilaterallytheactivity.T hearrangementidentifiesthosedecisions
in areas essential to the goals of the joint venture which require the conse nt of all the venturers and those
decisions which may require the consent of a specified majority of the vent urers.
7.The contractual arrangement may identify one venturer as the operator or m anager of the joint venture. The
operatordoesnotcontrolthejointventurebutactswithinthefinanciala ndoperatingpolicieswhichhavebeen
agreed by the venturers in accordance with the contractual arrangement an d delegated to the operator. If the
operatorhasthepowertogovernthefinancialandoperatingpoliciesofth eeconomicactivity,itcontrolsthe
venture and the venture is a subsidiary of the operator and not a joint ventu re.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 263
JOINTLY CONTROLLED OPERATIONS
8.Theoperationofsomejointventuresinvolvestheuseoftheassetsandothe rresourcesoftheventurersrather
than the establishment of a corporation, partnership or other entity, or a financial structure that is separate
fromtheventurersthemselves.Eachventurerusesitsownproperty,plant andequipmentandcarriesitsown
inventories.Italsoincursitsownexpensesandliabilitiesandraisesit sownfinance,whichrepresentitsown
obligations. The joint venture activities may be carried out by the ventur er’s employees alongside the
venturer’ssimilaractivities.Thejointventureagreementusuallyprov idesameansbywhichtherevenuefrom
the sale of the joint product and any expenses incurred in common are shared among the venturers.
9.An example of a jointly controlled operation is when two or more venturers c ombine their operations,
resources and expertise in order to manufacture, market and distribute jo intly a particular product, such as
anaircraft.Differentpartsofthemanufacturingprocessarecarriedout byeachoftheventurers.Eachventurer
bearsitsowncostsandtakesashareoftherevenuefromthesaleoftheaircr aft,suchsharebeingdetermined
in accordance with the contractual arrangement.
10. Inrespectofitsinterestsinjointlycontrolledoperations,aventur ershouldrecogniseinitsseparatefinancial
statements and consequently in its consolidated financial statements:
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from the sale of goods or services by
the joint venture.
11.Becausetheassets,liabilities,incomeandexpensesarealreadyrecogni sedintheseparatefinancialstatements
of the venturer, and consequently in its consolidated financial statemen ts, no adjustments or other
consolidation procedures are required in respect of these items when the v enturer presents consolidated
financial statements.
12.Separateaccountingrecordsmaynotberequiredforthejointventureitse lfandfinancialstatementsmaynot
be prepared for the joint venture. However, the venturers may prepare mana gement accounts so that they
may assess the performance of the joint venture.
JOINTLY CONTROLLED ASSETS
13. Somejointventuresinvolvethejointcontrol,andoftenthejointowne rship,bytheventurersofoneormore
assets contributed to, or acquired for the purpose of, the joint venture an d dedicated to the purposes of the
joint venture. The assets are used to obtain benefits for the venturers. Ea ch venturer may take a share of the
output from the assets and each bears an agreed share of the expenses incurr ed.
14. These joint ventures do not involve the establishment of a corporation , partnership or other entity, or a
financialstructurethatisseparatefromtheventurersthemselves.Each venturerhascontroloveritsshareof
future economic benefits through its share in the jointly controlled asse t.
15. Manyactivitiesintheoil,gasandmineralextractionindustriesinvo lvejointlycontrolledassets;forexample,
a number of oil production companies may jointly control and operate an oil pipeline. Each venturer uses
the pipeline to transport its own product in return for which it bears an agr eed proportion of the expenses
ofoperatingthepipeline.Anotherexampleofajointlycontrolledasseti swhentwoenterprisesjointlycontrol
a property, each taking a share of the rents received and bearing a share of t he expenses.
16.In respect of its interest in jointly controlled assets, a venturer should recognise in its separate financial
statements and consequently in its consolidated financial statements:
(a) its share of the jointly controlled assets, classified according to th e nature of the assets;
(b) any liabilities which it has incurred;264 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;
(d) any income from the sale or use of its share of the output of the joint vent ure, together with its share of
any expenses incurred by the joint venture; and
(e) any expenses which it has incurred in respect of its interest in the join t venture.
17. In respect of its interest in jointly controlled assets, each venturer includes in its accounting records and
recognises in its separate financial statements and consequently in its c onsolidated financial statements:
(a) its share of the jointly controlled assets, classified according to th e nature of the assets rather than as an
investment. For example, a share of a jointly controlled oil pipeline is cl assified as property, plant and
equipment;
(b) any liabilities which it has incurred, for example those incurred in fi nancing its share of the assets;
(c) its share of any liabilities incurred jointly with other venturers in r elation to the joint venture;
(d) any income from the sale or use of its share of the output of the joint vent ure, together with its share of
any expenses incurred by the joint venture; and
(e) anyexpenseswhichithasincurredinrespectofitsinterestinthejoin tventure,forexamplethoserelated
to financing the venturer’s interest in the assets and selling its share of the output.
Becausetheassets,liabilities,incomeandexpensesarealreadyrecogni sedintheseparatefinancialstatements
of the venturer, and consequently in its consolidated financial statemen ts, no adjustments or other
consolidation procedures are required in respect of these items when the v enturer presents consolidated
financial statements.
18. The treatment of jointly controlled assets reflects the substance and economic reality and, usually, the legal
form of the joint venture. Separate accounting records for the joint ventu re itself may be limited to those
expenses incurred in common by the venturers and ultimately borne by the ve nturers according to their
agreed shares. Financial statements may not be prepared for the joint vent ure, although the venturers may
prepare management accounts so that they may assess the performance of the joint venture.
JOINTLY CONTROLLED ENTITIES
19.A jointly controlled entity is a joint venture which involves the establis hment of a corporation, partnership
orotherentityinwhicheachventurerhasaninterest.Theentityoperates inthesamewayasotherenterprises,
except that a contractual arrangement between the venturers establishes joint control over the economic
activity of the entity.
20.A jointly controlled entity controls the assets of the joint venture, incu rs liabilities and expenses and earns
income. It may enter into contracts in its own name and raise finance for the purposes of the joint venture
activity.Eachventurerisentitledtoashareoftheresultsofthejointly controlledentity,althoughsomejointly
controlled entities also involve a sharing of the output of the joint ventu re.
21.A common example of a jointly controlled entity is when two enterprises com bine their activities in a
particular line of business by transferring the relevant assets and liabi lities into a jointly controlled entity.
Anotherexampleariseswhenanenterprisecommencesabusinessinaforeig ncountryinconjunctionwith
thegovernmentorotheragencyinthatcountry,byestablishingaseparate entitywhichisjointlycontrolled
by the enterprise and the government or agency.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 265
22.Manyjointlycontrolledentitiesaresimilarinsubstancetothosejointv enturesreferredtoasjointlycontrolled
operationsorjointlycontrolledassets.Forexample,theventurersmayt ransferajointlycontrolledasset,such
as an oil pipeline, into a jointly controlled entity, for tax or other reaso ns. Similarly, the venturers may
contribute into a jointly controlled entity assets which will be operated jointly. Some jointly controlled
operations also involve the establishment of a jointly controlled entity to deal with particular aspects of the
activity, for example, the design, marketing, distribution or after-sal es service of the product.
23.Ajointlycontrolledentitymaintainsitsownaccountingrecordsandprep aresandpresentsfinancialstatements
in the same way as other enterprises in conformity with the appropriate nat ional requirements and
International Accounting Standards.
24.Eachventurerusuallycontributescashorotherresourcestothejointlyc ontrolledentity.Thesecontributions
are included in the accounting records of the venturer and recognised in it s separate financial statements as
an investment in the jointly controlled entity.
Consolidated financial statements of a venturer
Benchmark treatment — proportionate consolidation
25. Initsconsolidatedfinancialstatements,aventurershouldreportit sinterestinajointlycontrolledentityusing
one of the two reporting formats for proportionate consolidation.
26.Whenreportinganinterestinajointlycontrolledentityinconsolidated financialstatements,itisessentialthat
a venturer reflects the substance and economic reality of the arrangement , rather than the joint venture’s
particular structure or form. In a jointly controlled entity, a venturer h as control over its share of future
economic benefits through its share of the assets and liabilities of the ve nture. This substance and economic
realityisreflectedintheconsolidatedfinancialstatementsofthevent urerwhentheventurerreportsitsinterests
intheassets,liabilities,incomeandexpensesofthejointlycontrolled entitybyusingoneofthetworeporting
formats for proportionate consolidation described in paragraph 28.
27.The application of proportionate consolidation means that the consolida ted balance sheet of the venturer
includes its share of the assets that it controls jointly and its share of th e liabilities for which it is jointly
responsible.Theconsolidatedincomestatementoftheventurerincludes itsshareoftheincomeandexpenses
of the jointly controlled entity. Many of the procedures appropriate for t he application of proportionate
consolidationaresimilartotheproceduresfortheconsolidationofinve stmentsinsubsidiaries,whichareset
out in IAS 27, consolidated financial statements and accounting for inves tments in subsidiaries.
28.Different reporting formats may be used to give effect to proportionate co nsolidation. The venturer may
combine its share of each of the assets, liabilities, income and expenses o f the jointly controlled entity with
thesimilaritemsinitsconsolidatedfinancialstatementsonaline-by-l inebasis.Forexample,itmaycombine
itsshareofthejointlycontrolledentity’sinventorywiththeinventory oftheconsolidatedgroupanditsshare
ofthejointlycontrolledentity’sproperty,plantandequipmentwiththe sameitemsoftheconsolidatedgroup.
Alternatively, the venturer may include separate line items for its share of the assets, liabilities, income and
expensesofthejointlycontrolledentityinitsconsolidatedfinancials tatements.Forexample,itmayshowits
share of the current assets of the jointly controlled entity separately as part of the current assets of the
consolidatedgroup;itmayshowitsshareoftheproperty,plantandequipm entofthejointlycontrolledentity
separatelyaspartoftheproperty,plantandequipmentoftheconsolidate dgroup.Boththesereportingformats
resultinthereportingofidenticalamountsofnetincomeandofeachmajor classificationofassets,liabilities,
income and expenses; both formats are acceptable for the purposes of this S tandard.
29.Whatever format is used to give effect to proportionate consolidation, it is inappropriate to offset any assets
orliabilitiesbythedeductionofotherliabilitiesorassetsoranyincom eorexpensesbythedeductionofother
expensesorincome,unlessalegalrightofset-offexistsandtheoffsetti ngrepresentstheexpectationastothe
realisation of the asset or the settlement of the liability.266 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
30. Aventurershoulddiscontinuetheuseofproportionateconsolidation fromthedateonwhichitceasestohave
joint control over a jointly controlled entity.
31.A venturer discontinues the use of proportionate consolidation from the d ate on which it ceases to share in
the control of a jointly controlled entity. This may happen, for example, w hen the venturer disposes of its
interest or when external restrictions are placed on the jointly controll ed entity such that it can no longer
achieve its goals.
Allowed alternative treatment — equity method
32. Initsconsolidatedfinancialstatements,aventurershouldreportit sinterestinajointlycontrolledentityusing
the equity method.
33.Some venturers report their interests in jointly controlled entities usi ng the equity method, as described in
IAS28,accountingforinvestmentsinassociates.Theuseoftheequitymet hodissupportedbythosewhoargue
thatitisinappropriatetocombinecontrolleditemswithjointlycontrol leditemsandbythosewhobelievethat
venturershavesignificantinfluence,ratherthanjointcontrol,inajoi ntlycontrolledentity.ThisStandarddoes
notrecommendtheuseoftheequitymethodbecauseproportionateconsolid ationbetterreflectsthesubstance
and economic reality of a venturer’s interest in a jointly controlled enti ty, that is control over the venturer’s
shareofthefutureeconomicbenefits.Nevertheless,thisStandardpermi tstheuseoftheequitymethod,asan
allowed alternative treatment, when reporting interests in jointly cont rolled entities.
34.A venturer should discontinue the use of the equity method from the date on w hich it ceases to have joint
control over, or have significant influence in, a jointly controlled enti ty.
Exceptions to benchmark and allowed alternative treatments
35. A venturer should account for the following interests in accordance wi th IAS 39, financial instruments:
recognition and measurement:
(a) aninterestinajointlycontrolledentitywhichisacquiredandheldex clusivelywithaviewtoitssubsequent
disposal in the near future; and
(b) aninterestinajointlycontrolledentitywhichoperatesundersevere long-termrestrictionsthatsignificantly
impair its ability to transfer funds to the venturer.
36.The use of either proportionate consolidation or the equity method is inap propriate when the interest in a
jointly controlled entity is acquired and held exclusively with a view to i ts subsequent disposal in the near
future. It is also inappropriate when the jointly controlled entity opera tes under severe long-term restrictions
which significantly impair its ability to transfer funds to the venturer.
37. From the date on which a jointly controlled entity becomes a subsidiary of a venturer, the venturer accounts
for its interest in accordance with IAS 27, consolidated financial statem ents and accounting for investments
in subsidiaries.
Separate financial statements of a venturer
38.In many countries separate financial statements are presented by a ventur er in order to meet legal or other
requirements.Suchseparatefinancialstatementsarepreparedinordert omeetavarietyofneedswiththeresult
thatdifferentreportingpracticesareinuseindifferentcountries.Acc ordingly,thisStandarddoesnotindicate
a preference for any particular treatment.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 267
TRANSACTIONS BETWEEN A VENTURER AND A JOINT VENTURE
39. Whenaventurercontributesorsellsassetstoajointventure,recogni tionofanyportionofagainorlossfrom
thetransactionshouldreflectthesubstanceofthetransaction.Whileth eassetsareretainedbythejointventure,
andprovidedtheventurerhastransferredthesignificantrisksandrewar dsofownership,theventurershould
recognise only that portion of the gain or loss which is attributable to the interests of the other venturers (1).
Theventurershouldrecognisethefullamountofanylosswhenthecontribu tionorsaleprovidesevidenceof
a reduction in the net realisable value of current assets or an impairment l oss.
40. Whenaventurerpurchasesassetsfromajointventure,theventurersho uldnotrecogniseitsshareoftheprofits
of the joint venture from the transaction until it resells the assets to an i ndependent party. A venturer should
recogniseitsshareofthelossesresultingfromthesetransactionsinthe samewayasprofitsexceptthatlosses
shouldberecognisedimmediatelywhentheyrepresentareductioninthene trealisablevalueofcurrentassets
or an impairment loss.
41.To assess whether a transaction between a venturer and a joint venture prov ides evidence of impairment of
an asset, the venturer determines the recoverable amount of the asset unde r IAS 36, impairment of assets. In
determining value in use, future cash flows from the asset are estimated ba sed on continuing use of the asset
and its ultimate disposal by the joint venture.
REPORTING INTERESTS IN JOINT VENTURES IN THE FINANCIAL STATEMENTS OF AN IN VESTOR
42. An investor in a joint venture, which does not have joint control, shoul d report its interest in a joint venture
in its consolidated financial statements in accordance with IAS 39, finan cial instruments: recognition and
measurement,or,ifithassignificantinfluenceinthejointventure,ina ccordancewithIAS28,accountingfor
investmentsinassociates.Intheseparatefinancialstatementsofaninv estorthatissuesconsolidatedfinancial
statements, it may also report the investment at cost.
OPERATORS OF JOINT VENTURES
43. Operators or managers of a joint venture should account for any fees in a ccordance with IAS 18, revenue.
44.One or more venturers may act as the operator or manager of a joint venture. O perators are usually paid a
management fee for such duties. The fees are accounted for by the joint vent ure as an expense.
DISCLOSURE
45. Aventurershoulddisclosetheaggregateamountofthefollowingconti ngentliabilities,unlesstheprobability
of loss is remote, separately from the amount of other contingent liabilit ies:
(a) any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures and its
share in each of the contingent liabilities which have been incurred joint ly with other venturers;
(b) itsshareofthecontingentliabilitiesofthejointventuresthemselv esforwhichitiscontingentlyliable;and
(c) thosecontingentliabilitiesthatarisebecausetheventurerisconti ngentlyliablefortheliabilitiesoftheother
venturers of a joint venture.
(1) See also SIC-13: jointly controlled entities — non-monetary contributi ons by venturers.268 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
46. A venturer should disclose the aggregate amount of the following commi tments in respect of its interests in
joint ventures separately from other commitments:
(a) any capital commitments of the venturer in relation to its interests in joint ventures and its share in the
capital commitments that have been incurred jointly with other venturers ; and
(b) its share of the capital commitments of the joint ventures themselves.
47. Aventurershoulddisclosealistinganddescriptionofinterestsinsi gnificantjointventuresandtheproportion
of ownership interest held in jointly controlled entities. A venturer whi ch reports its interests in jointly
controlledentitiesusingtheline-by-linereportingformatforproport ionateconsolidationortheequitymethod
shoulddisclosetheaggregateamountsofeachofcurrentassets,long-ter massets,currentliabilities,long-term
liabilities, income and expenses related to its interests in joint ventur es.
48. Aventurerwhichdoesnotissueconsolidatedfinancialstatements,be causeitdoesnothavesubsidiaries,should
disclose the information required in paragraphs 45, 46 and 47.
49.Itisappropriatethataventurerwhichdoesnotprepareconsolidatedfina ncialstatementsbecauseitdoesnot
have subsidiaries provides the same information about its interests in jo int ventures as those venturers that
issue consolidated financial statements.
EFFECTIVE DATE
50. Exceptforparagraphs39,40and41,thisInternationalAccountingSta ndardbecomesoperativeforfinancial
statements covering periods beginning on or after 1 January 1992.
51. Paragraphs 39, 40 and 41 become operative when IAS 36 becomes operative , i.e. for annual financial
statements covering periods beginning on or after 1 July 1999, unless IAS 3 6 is applied for earlier periods.
52.Paragraphs 39 and 40 of this Standard were approved in July 1998 to supersed e paragraphs 39 and 40 of
IAS 31, financial reporting of interests in joint ventures, reformatted i n 1994. Paragraph 41 of this Standard
was added in July 1998 between paragraphs 40 and 41 of IAS 31 reformatted in 1 994.
INTERNATIONAL ACCOUNTING STANDARD IAS 33
Earnings per share
This International Accounting Standard was approved by the IASC Board in J anuary 1997 and became effective for
financial statements covering periods beginning on or after 1 January 199 8.
In 1999, paragraph 45 was amended to replace references to IAS 10, continge ncies and events occurring after the
balance sheet date, by references to IAS 10 (revised 1999), events after th e balance sheet date.
The following SIC interpretation relates to IAS 33:
— SIC-24: earnings per share — financial instruments and other contracts t hat may be settled in shares.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 269
CONTENTS
Paragraphs
Objective 270
Scope 270
Enterprises whose shares are publicly traded 270
Enterprises whose shares are not publicly traded 271Definitions 271
Measurement 272
Basic earnings per share 272
Earnings — basic 272
Per share — basic 272
Diluted earnings per share 275
Earnings — diluted 276
Per share — diluted 277
Dilutive potential ordinary shares 278Restatement 280
Presentation 281
Disclosure 281
Effective date 282
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribeprinciplesforthedetermin ationandpresentationofearningspershare
which will improve performance comparisons among different enterprises in the same period and among different
accountingperiodsforthesameenterprise.ThefocusofthisStandardiso nthedenominatoroftheearningspershare
calculation. Even though earnings per share data has limitations because of different accounting policies used for
determining “earnings”, a consistently determined denominator enhance s financial reporting.
SCOPE
Enterprises whose shares are publicly traded
1. ThisStandardshouldbeappliedbyenterpriseswhoseordinarysharesor potentialordinarysharesarepublicly
tradedandbyenterprisesthatareintheprocessofissuingordinaryshare sorpotentialordinarysharesinpublic
securities markets.270 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
2. When both parent and consolidated financial statements are presented, the information called for by this
Standard need be presented only on the basis of consolidated information.
3.Users of the financial statements of a parent are usually concerned with, a nd need to be informed about, the
results of operations of the group as a whole.
Enterprises whose shares are not publicly traded
4. An enterprise which has neither ordinary shares nor potential ordinary shares which are publicly traded, but
which discloses earnings per share, should calculate and disclose earnin gs per share in accordance with this
Standard.
5.Anenterprisewhichhasneitherordinarysharesnorpotentialordinarysh areswhicharepubliclytradedisnot
required to disclose earnings per share. However, comparability in finan cial reporting among enterprises is
maintained if any such enterprise that chooses to disclose earnings per sh are calculates earnings per share in
accordance with the principles in this Standard.
DEFINITIONS
6. The following terms are used in this Standard with the meanings specifie d:
An ordinary share is an equity instrument that is subordinate to all other c lasses of equity instruments.
A potential ordinary share is a financial instrument or other contract tha t may entitle its holder to ordinary
shares.
Warrants or options are financial instruments that give the holder the rig ht to purchase ordinary shares.
7.Ordinary shares participate in the net profit for the period only after oth er types of shares such as preference
shares.Anenterprisemayhavemorethanoneclassofordinaryshares.Ordi narysharesofthesameclasswill
have the same rights to receive dividends.
8.Examples of potential ordinary shares are:
(a) debt or equity instruments, including preference shares, that are con vertible into ordinary shares;
(b) share warrants and options;(c) employee plans that allow employees to receive ordinary shares as part of their remuneration and other
share purchase plans; and
(d) shares which would be issued upon the satisfaction of certain conditio ns resulting from contractual
arrangements, such as the purchase of a business or other assets.
9. The following terms are used with the meanings specified in IAS 32, finan cial instruments: disclosure and
presentation:
Afinancialinstrumentisanycontractthatgivesrisetobothafinanciala ssetofoneenterpriseandafinancial
liability or equity instrument of another enterprise.An equity instrument is any contract that evidences a residual interest in the assets of an enterprise after
deducting all of its liabilities.Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilit ysettled,betweenknowledgeable,
willing parties in an arm’s length transaction.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 271
MEASUREMENT
Basic earnings per share
10. Basic earnings per share should be calculated by dividing the net profi t or loss for the period attributable to
ordinary shareholders by the weighted average number of ordinary shares o utstanding during the period.
Earnings — basic
11. For the purpose of calculating basic earnings per share, the net profit or loss for the period attributable to
ordinary shareholders should be the net profit or loss for the period after deducting preference dividends.
12.Allitemsofincomeandexpensewhicharerecognisedinaperiod,including taxexpense,extraordinaryitems
and minority interests, are included in the determination of the net profi t or loss for the period (see IAS 8,
netprofitorlossfortheperiod,fundamentalerrorsandchangesinaccoun tingpolicies).Theamountofnet
profitattributabletopreferenceshareholders,includingpreferenced ividendsfortheperiod,isdeductedfrom
the net profit for the period (or added to the net loss for the period) in orde r to calculate the net profit or
loss for the period attributable to ordinary shareholders.
13.The amount of preference dividends that is deducted from the net profit for the period is:
(a) the amount of any preference dividends on non-cumulative preference s hares declared in respect of the
period; and
(b) the full amount of the required preference dividends for cumulative pr eference shares for the period,
whetherornotthedividendshavebeendeclared.Theamountofpreferenced ividendsfortheperioddoes
not include the amount of any preference dividends for cumulative prefere nce shares paid or declared
during the current period in respect of previous periods.
Per share — basic
14.Forthepurposeofcalculatingbasicearningspershare,thenumberofordi narysharesshouldbetheweighted
average number of ordinary shares outstanding during the period.
15. The weighted average number of ordinary shares outstanding during the period reflects the fact that the
amount of shareholders’ capital may have varied during the period as a resu lt of a larger or lesser number
of shares being outstanding at any time. It is the number of ordinary shares outstanding at the beginning of
the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied
by a time-weighting factor. The time-weighting factor is the number of day s that the specific shares are
outstanding as a proportion of the total number of days in the period; a reas onable approximation of the
weighted average is adequate in many circumstances.
Example: weighted average number of shares
Shares
issuedTreasury
sharesShares
outstanding
1 January 20X1 Balance at beginning of year 2 000 300 1 700
31 May 20X1 Issue of new shares for cash 800 — 2 5001 December 20X1 Purchaseoftreasurysharesforcash — 250 2 25031 December 20X1 Balance at end of year 2 800 550 2 250
Computation of weighted average:
1700 × 512 + 2500 × 612 + 2250 × 112=2146 shares or:
1700 × 1212 + 800 × 712 - 250 × 112 = 2146 shares272 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
16. In most cases, shares are included in the weighted average number of sha res from the date consideration is
receivable (which is generally the date of their issue), for example:
(a) ordinary shares issued in exchange for cash are included when cash is re ceivable;
(b) ordinary shares issued on the voluntary reinvestment of dividends on o rdinary or preference shares are
included at the dividend payment date;
(c) ordinary shares issued as a result of the conversion of a debt instrumen t to ordinary shares are included
as of the date interest ceases accruing;
(d) ordinary shares issued in place of interest or principal on other finan cial instruments are included as of
the date interest ceases accruing;
(e) ordinarysharesissuedinexchangeforthesettlementofaliabilityof theenterpriseareincludedasofthe
settlement date;
(f) ordinary shares issued as consideration for the acquisition of an asse t other than cash are included as of
the date on which the acquisition is recognised; and
(g) ordinary shares issued for the rendering of services to the enterprise are included as the services are
rendered.
Intheseandothercasesthetimingoftheinclusionofordinarysharesisde terminedbythespecifictermsand
conditions attaching to their issue. Due consideration should be given to the substance of any contract
associated with the issue.
17. Ordinarysharesissuedaspartofthepurchaseconsiderationofabusin esscombinationwhichisanacquisition
are included in the weighted average number of shares as of the date of the ac quisition because the acquirer
incorporates the results of the operations of the acquiree into its income statement as from the date of
acquisition. Ordinary shares issued as part of a business combination whi ch is a uniting of interests are
included in the calculation of the weighted average number of shares for al l periods presented because the
financial statements of the combined enterprise are prepared as if the com bined entity had always existed.
Therefore, the number of ordinary shares used for the calculation of basic earnings per share in a business
combinationwhichisaunitingofinterestsistheaggregateoftheweighte daveragenumberofsharesofthe
combined enterprises, adjusted to equivalent shares of the enterprise wh ose shares are outstanding after the
combination.
18. Where ordinary shares are issued in partly paid form, these partly paid shares are treated as a fraction of an
ordinarysharetotheextentthattheywereentitledtoparticipateindivi dendsrelativetoafullypaidordinary
share during the financial period.
19. Ordinaryshareswhichareissuableuponthesatisfactionofcertainco nditions(contingentlyissuableshares)
areconsideredoutstanding,andincludedinthecomputationofbasicearn ingspersharefromthedatewhen
allnecessaryconditionshavebeensatisfied.Outstandingordinaryshar esthatarecontingentlyreturnable(that
is subject to recall) are treated as contingently issuable shares.
20.Theweightedaveragenumberofordinarysharesoutstandingduringtheper iodandforallperiodspresented
shouldbeadjustedforevents,otherthantheconversionofpotentialordi naryshares,thathavechangedthe
number of ordinary shares outstanding, without a corresponding change in resources.
21. Ordinarysharesmaybeissued,orthenumberofsharesoutstandingmayb ereduced,withoutacorresponding
change in resources. Examples include:
(a) a capitalisation or bonus issue (known in some countries as a stock divi dend);13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 273
(b) abonuselementinanyotherissue,forexampleabonuselementinaright sissuetoexistingshareholders;
(c) a share split; and
(d) a reverse share split (consolidation of shares).
22. In a capitalisation or bonus issue or a share split, ordinary shares are issued to existing shareholders for no
additional consideration. Therefore, the number of ordinary shares outs tanding is increased without an
increase in resources. The number of ordinary shares outstanding before t he event is adjusted for the
proportionate change in the number of ordinary shares outstanding as if th e event had occurred at the
beginning of the earliest period reported. For example, on a two-for-one b onus issue, the number of shares
outstanding prior to the issue is multiplied by a factor of three to obtain t he new total number of shares, or
by a factor of two to obtain the number of additional shares.
23. Withreferenceto21(b),theissueofordinarysharesatthetimeofexer ciseorconversionofpotentialordinary
shareswillnotusuallygiverisetoabonuselement,sincethepotentialor dinaryshareswillusuallyhavebeen
issuedforfullvalue,resultinginaproportionatechangeintheresource savailabletotheenterprise.Inarights
issue, the exercise price is often less than the fair value of the shares. Th erefore such a rights issue includes
a bonus element. The number of ordinary shares to be used in calculating bas ic earnings per share for all
periods prior to the rights issue is the number of ordinary shares outstand ing prior to the issue, multiplied
by the following factor:
Fair value per share immediately prior to the exercise of rights
Theortical ex‐rights fair value per share
The theoretical ex-rights fair value per share is calculated by adding the aggregate fair value of the shares
immediately prior to the exercise of the rights to the proceeds from the exe rcise of the rights, and dividing
by the number of shares outstanding after the exercise of the rights. Where the rights themselves are to be
publicly traded separately from the shares prior to the exercise date, fai r value for the purposes of this
calculation is established at the close of the last day on which the shares a re traded together with the rights.
Example — bonus issue
Net profit 20X0 180
Net profit 20X1 600Ordinary shares outstanding until 30 September
20X1200
Bonus issue 1 October 20X1 Two ordinary shares for each ordinary share
outstanding at 30 September 20X1
200 × 2 = 400
Earnings per share 20X1
600
(200 + 400)= 1,00
Adjusted earnings per share 20X0 180
(200 + 400)= 0,30
Since the bonus issue is an issue without consideration, the issue is treat ed as if it had occurred prior to the beginning of
20X0, the earliest period reported.274 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Example — rights issue
Net profit 20X0:1 100; 20X1:1 500; 20X2:1 800
Shares outstanding prior to rights issue 500 sharesRights issue One new share for each five outstanding (100 new
shares total)
Exercise price: 5,00Last date to exercise rights: 1 March 20X1
Fair value of one ordinary share immediately prior
to exercise on 1 March 20X1 11,00
Computation of theoretical ex-rights value per share
Fair value off all outstanding share + total amount received from exercise of rights
Number of sharesoutstanding prior to exercise+number of shares issuedin the exercise
(11,00 × 500 shares )+(5,00 × 100 shares )
500 shares +100 shares
Theoretical ex-rights value per share = 10,00
Computation of adjustment factor
Fair share per share prior to exercise of rights
Theoretical ex‐rights value per share11,00
10,00= 1,1
Computation of earnings per share
20X0 20X1 20X2
20X0 EPS as originally reported: 1 100/500 shares 2,20
20X0 EPS restated for rights issue: 1 100/(500 shares × 1,1) 2,0020X1 EPS including effects of rights issue
1500
(500 × 1,1 ×2
12)+(600 ×10
12)2,54
20X2 EPS 1 800/600 shares 3,00
Diluted earnings per share
24. For the purpose of calculating diluted earnings per share, the net prof it attributable to ordinary shareholders
and the weighted average number of shares outstanding should be adjusted f or the effects of all dilutive
potential ordinary shares (1).
25.Thecalculationofdilutedearningspershareisconsistentwiththecalcu lationofbasicearningspersharewhile
giving effect to all dilutive potential ordinary shares that were outstan ding during the period, that is:
(a) thenetprofitfortheperiodattributabletoordinarysharesisincrea sedbytheafter-taxamountofdividends
and interest recognised in the period in respect of the dilutive potential ordinary shares and adjusted for
any other changes in income or expense that would result from the conversio n of the dilutive potential
ordinary shares.
(1) See also, SIC-24: earnings per share — financial instruments and other co ntracts that may be settled in shares.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 275
(b) theweightedaveragenumberofordinarysharesoutstandingisincreas edbytheweightedaveragenumber
of additional ordinary shares which would have been outstanding assuming the conversion of all dilutive
potential ordinary shares.
Earnings — diluted
26. For the purpose of calculating diluted earnings per share, the amount o f net profit or loss for the period
attributable to ordinary shareholders, as calculated in accordance with paragraph 11, should be adjusted by
the after-tax effect:
(a) anydividendsondilutivepotentialordinaryshareswhichhavebeende ductedinarrivingatthenetprofit
attributable to ordinary shareholders as calculated in accordance with p aragraph 11;
(b) interest recognised in the period for the dilutive potential ordinary shares; and
(c) any other changes in income or expense that would result from the conver sion of the dilutive potential
ordinary shares.
27.After the potential ordinary shares are converted into ordinary shares, t he dividends, interest and other
income or expense associated with those potential ordinary shares will no longer be incurred. Instead, the
new ordinary shares will be entitled to participate in the net profit attri butable to ordinary shareholders.
Therefore, the net profit for the period attributable to ordinary shareho lders calculated in accordance with
paragraph11isincreasedbytheamountofdividends,interestandotherin comeorexpensethatwillbesaved
ontheconversionofthedilutivepotentialordinarysharesintoordinary shares.Theexpensesassociatedwith
potential ordinary shares include fees and discount or premium that are ac counted for as yield adjustments
(seeIAS32).Theamountsofdividends,interestandotherincomeorexpens eareadjustedforanytaxes,borne
by the enterprise, that are attributable to them.
Example — convertible bonds
Net profit 1 004
Ordinary shares outstanding 1 000Basic earnings per share 1,0Convertible bonds 100Each block of 10 bonds is convertible into three ordinary sharesInterest expense for the current year relating to the
liability component of the convertible bond10
Currentanddeferredtaxrelatingtothatinterestexpense 4
Note:
the interest expense includes amortisation of the discount arising on ini tial recognition of the liability
component (see IAS 32).
Adjusted net profit 1004 + 1 0–4=1010
Numberofordinarysharesresultingfromconversionof
bond30
Number of ordinary shares used to compute dilutedearnings per share1000 + 30 = 1030
Diluted earnings per share
1 000
1030= 0,98276 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
28. The conversion of some potential ordinary shares may lead to consequen tial changes in other income or
expenses.Forexample,thereductionofinterestexpenserelatedtopoten tialordinarysharesandtheresulting
increase in net profit for the period may lead to an increase in the expense r elating to a non-discretionary
employee profit sharing plan. For the purpose of calculating diluted earn ings per share, the net profit or loss
for the period is adjusted for any such consequential changes in income or e xpense.
Per share — diluted
29. Forthepurposeofcalculatingdilutedearningspershare,thenumbero fordinarysharesshouldbetheweighted
average number of ordinary shares calculated in accordance with paragrap hs 14 and 20, plus the weighted
average number of ordinary shares which would be issued on the conversion o f all the dilutive potential
ordinary shares into ordinary shares. Dilutive potential ordinary share s should be deemed to have been
converted into ordinary shares at the beginning of the period or, if later, the date of the issue of the potential
ordinary shares.
30.Thenumberofordinaryshareswhichwouldbeissuedontheconversionofdil utivepotentialordinaryshares
is determined from the terms of the potential ordinary shares. The computa tion assumes the most
advantageous conversion rate or exercise price from the standpoint of the holder of the potential ordinary
shares.
31.As in the computation of basic earnings per share, ordinary shares whose is sue is contingent upon the
occurrence of certain events shall be considered outstanding and include d in the computation of diluted
earningspershareiftheconditionshavebeenmet(theeventsoccurred).C ontingentlyissuablesharesshould
be included as of the beginning of the period (or as of the date of the conting ent share agreement, if later). If
theconditionshavenotbeenmet,thenumberofcontingentlyissuableshar esincludedinthedilutedearnings
per share computation is based on the number of shares that would be issuabl e if the end of the reporting
periodwastheendofthecontingencyperiod.Restatementisnotpermitted iftheconditionsarenotmetwhen
thecontingencyperiodexpires.Theprovisionsofthisparagraphapplyeq uallytopotentialordinarysharesthat
are issuable upon the satisfaction of certain conditions (contingently i ssuable potential ordinary shares).
32.A subsidiary, joint venture or associate may issue potential ordinary sha res which are convertible into either
ordinary shares of the subsidiary, joint venture or associate, or ordinar y shares of the reporting enterprise. If
these potential ordinary shares of the subsidiary, associate or joint ven ture have a dilutive effect on the
consolidatedbasicearningspershareofthereportingenterprise,theya reincludedinthecalculationofdiluted
earnings per share.
33. Forthepurposeofcalculatingdilutedearningspershare,anenterpri seshouldassumetheexerciseofdilutive
optionsandotherdilutivepotentialordinarysharesoftheenterprise.T heassumedproceedsfromtheseissues
should be considered to have been received from the issue of shares at fair v alue. The difference between the
numberofsharesissuedandthenumberofsharesthatwouldhavebeenissued atfairvalueshouldbetreated
as an issue of ordinary shares for no consideration.
34.Fair value for this purpose is calculated on the basis of the average price o f the ordinary shares during the
period.
35.Options and other share purchase arrangements are dilutive when they woul d result in the issue of ordinary
shares for less than fair value. The amount of the dilution is fair value les s the issue price. Therefore, in order
to calculate diluted earnings per share, each such arrangement is treated as consisting of:
(a) a contract to issue a certain number of ordinary shares at their average fair value during the period. The
shares so to be issued are fairly priced and are assumed to be neither diluti ve nor anti-dilutive. They are
ignored in the computation of diluted earnings per share; and13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 277
(b) a contract to issue the remaining ordinary shares for no consideration . Such ordinary shares generate no
proceeds and have no effect on the net profit attributable to ordinary shar es outstanding. Therefore such
shares are dilutive and they are added to the number of ordinary shares outs tanding in the computation
of diluted earnings per share.
Example — effects of share options on diluted earnings per share
Net profit for year 20X1 1 200 000
Weighted average number of ordinary shares
outstanding during year 20X1 500 000 shares
Averagefairvalueofoneordinaryshareduringyear
20X1 20,00
Weighted average number of shares under option
during year 20X1 100 000 shares
Exercise price for shares under option during year
20X1 15,00
Computation of earnings per share per share earnings shares
Net profit for year 20X1 1 200 000Weighted average shares outstanding during year
20X1500 000
Basic earnings per share 2,40
Number of shares under option 100 000
Number of shares that would have been issued at
fair value:
(100000 × 15,00)/20,00 (
*) (75 000)
Diluted earnings per share 2,29 1 200 000 525 000
(*) The earnings have not been increased as the total number of shares has been increased only by the number of shares
(25 000) deemed for the purpose of the computation to have been issued for no consideration (see 35(b) above).
36.This method of calculating the effect of options and other share purchase a rrangements produces the same
result as the treasury stock method which is used in some countries. This do es not imply that the enterprise
has entered into a transaction to purchase its own shares, which may not be p racticable in certain
circumstances or legal in some jurisdictions.
37.Totheextentthatpartlypaidsharesarenotentitledtoparticipateindiv idendsduringthefinancialperiodthey
are considered the equivalent of warrants or options.
Dilutive potential ordinary shares
38. Potentialordinarysharesshouldbetreatedasdilutivewhen,andonly when,theirconversiontoordinaryshares
would decrease net profit per share from continuing ordinary operations.
39.An enterprise uses net profit from continuing ordinary activities as “the control number” that is used to
establishwhetherpotentialordinarysharesaredilutiveoranti-diluti ve.Thenetprofitfromcontinuingordinary
activitiesisthenetprofitfromordinaryactivities(asdefinedinIAS8) afterdeductingpreferencedividendsand
after excluding items relating to discontinued operations; therefore, i t excludes extraordinary items and the
effects of changes in accounting policies and of corrections of fundament al errors.278 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
40. Potentialordinarysharesareanti-dilutivewhentheirconversiontoord inaryshareswouldincreaseearnings
per share from continuing ordinary operations or decrease loss per share f rom continuing ordinary
operations. The effects of anti-dilutive potential ordinary shares are i gnored in calculating diluted earnings
per share.
41. Inconsideringwhetherpotentialordinarysharesaredilutiveoranti-di lutive,eachissueorseriesofpotential
ordinarysharesisconsideredseparatelyratherthaninaggregate.These quenceinwhichpotentialordinary
shares are considered may affect whether or not they are dilutive. Therefo re, in order to maximise the
dilutionofbasicearningspershare,eachissueorseriesofpotentialord inarysharesisconsideredinsequence
from the most dilutive to the least dilutive.
Example — determining the order in which to include dilutive securities in the calculation of weighted
average Number of Shares
Earnings — net profit attributable to ordinary
shareholders 10 000 000
Ordinary shares outstanding 2 000 000Average fair value of one ordinary share during year 75,00
Potential ordinary shares
Options 100 000 with exercise price of 60
Convertible preference shares 800 000 shares entitled to a cumulative div idend of 8 per
share. Each preference share is convertible to two ordinary
shares
5 % convertible bond Nominal amount 100 000 000. Each 1 000 bond isconvertibleto20ordinaryshares.Thereisnoamortisationofpremium or discount affecting the determination of interestexpense
Tax rate 40 %
Increase in earnings attributable to ordinary shareholders on conversio n of potential ordinary shares
Increase in
earningsIncrease in
number of
ordinary sharesEarnings per
incremental share
Options
Increase in earnings nilIncremental shares issued for no consideration
100000 × 75 – 607520 000 nil
Convertible preference shares
Increase in net profi t 8 × 800 000 6 400 000
Incremental share s 2 × 800 000 1 600 000 4,00
5 % convertible bondsIncrease in net profit
100000000 × 0,05 × (1 – 0,4)3 000 000
Incremental shares 100 000 × 20 2 000 000 1,5013/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 279
Computation of diluted earnings per share
Net profit
attributableOrdinary shares Per share
As reported options 10 000 000 2 000 000 5,00
20 000
10 000 000 2 020 000 4,95 dilutive
5 % convertible bonds 3 000 000 2 000 000
13 000 000 4 020 000 3,23 dilutive
Convertible preference shares 6 400 000 1 600 000
19 400 000 5 620 000 3,45 anti-dilutive
Since diluted earnings per share are increased when taking the convertibl e preference shares into account (from 3,23
to3,45),theconvertiblepreferencesharesareanti-dilutiveandareign oredinthecalculationofdilutedearningspershare.
Therefore, diluted earnings per share are 3,23.
This example does not illustrate the classification of convertible finan cial instruments between liabilities and equity or the
classification of related interest and dividends between expenses and eq uity as required by IAS 32.
42.Potential ordinary shares are weighted for the period they were outstandi ng. Potential ordinary shares that
were cancelled or allowed to lapse during the reporting period are include d in the computation of diluted
earningspershareonlyfortheportionoftheperiodduringwhichtheywere outstanding.Potentialordinary
shares that have been converted into ordinary shares during the reporting period are included in the
calculation of diluted earnings per share from the beginning of the period to the date of conversion; from
thedateofconversion,theresultingordinarysharesareincludedinboth basicanddilutedearningspershare.
RESTATEMENT
43. Ifthenumberofordinaryorpotentialordinarysharesoutstandinginc reasesasaresultofacapitalisationor
bonus issue or share split or decreases as a result of a reverse share split, the calculation of basic and diluted
earnings per share for all periods presented should be adjusted retrospec tively. If these changes occur after
the balance sheet date but before issue of the financial statements, the pe r share calculations for those and
anypriorperiodfinancialstatementspresentedshouldbebasedonthenew numberofshares.Whenpershare
calculationsreflectsuchchangesinthenumberofshares,thatfactshoul dbedisclosed.Inaddition,basicand
diluted earnings per share of all periods presented should be adjusted for :
(a) the effects of fundamental errors, and adjustments resulting from cha nges in accounting policies, dealt
with in accordance with the benchmark treatment in IAS 8; and
(b) the effects of a business combination which is a uniting of interests.
44.An enterprise does not restate diluted earnings per share of any prior peri od presented for changes in the
assumptions used or for the conversion of potential ordinary shares into o rdinary shares outstanding.280 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
45.Anenterpriseisencouragedtodiscloseadescriptionofordinarysharetr ansactionsorpotentialordinaryshare
transactions, other than capitalisation issues and share splits, which o ccur after the balance sheet date when
theyareofsuchimportancethatnon-disclosurewouldaffecttheabilityo ftheusersofthefinancialstatements
to make proper evaluations and decisions (see IAS 10, events after the bala nce sheet date). Examples of such
transactions include:
(a) the issue of shares for cash;
(b) theissueofshareswhentheproceedsareusedtorepaydebtorpreferenc esharesoutstandingatthebalance
sheet date;
(c) the redemption of ordinary shares outstanding;(d) theconversionorexerciseofpotentialordinaryshares,outstanding atthebalancesheetdate,intoordinary
shares;
(e) the issue of warrants, options or convertible securities; and(f) the achievement of conditions that would result in the issue of conting ently issuable shares.
46.
Earnings per share amounts are not adjusted for such transactions occurri ng after the balance sheet date
because such transactions do not affect the amount of capital used to produ ce the net profit or loss for the
period.
PRESENTATION
47. Anenterpriseshouldpresentbasicanddilutedearningspershareonth efaceoftheincomestatementforeach
classofordinarysharesthathasadifferentrighttoshareinthenetprofi tfortheperiod.Anenterpriseshould
present basic and diluted earnings per share with equal prominence for all periods presented.
48. This Standard requires an enterprise to present basic and diluted earn ings per share, even if the amounts
disclosed are negative (a loss per share).
DISCLOSURE
49. An enterprise should disclose the following:
(a) theamountsusedasthenumeratorsincalculatingbasicanddilutedear ningspershare,andareconciliation
of those amounts to the net profit or loss for the period; and
(b) theweightedaveragenumberofordinarysharesusedasthedenominator incalculatingbasicanddiluted
earnings per share, and a reconciliation of these denominators to each oth er.
50.Financial instruments and other contracts generating potential ordinar y shares may incorporate terms and
conditionswhichaffectthemeasurementofbasicanddilutedearningsper share.Thesetermsandconditions
maydeterminewhetherornotanypotentialordinarysharesaredilutivean d,ifso,theeffectontheweighted
average number of shares outstanding and any consequent adjustments to th e net profit attributable to
ordinary shareholders. Whether or not the disclosure of the terms and cond itions is required by IAS 32 such
disclosure is encouraged by this Standard.
51. Ifanenterprisediscloses,inadditiontobasicanddilutedearningsp ershare,pershareamountsusingareported
componentofnetprofitotherthannetprofitorlossfortheperiodattribu tabletoordinaryshareholders,such
amountsshouldbecalculatedusingtheweightedaveragenumberofordinar ysharesdeterminedinaccordance
with this Standard. If a component of net profit is used which is not reporte d as a line item in the income
statement,areconciliationshouldbeprovidedbetweenthecomponentuse dandalineitemwhichisreported
in the income statement. Basic and diluted per share amounts should be disc losed with equal prominence.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 281
52.AnenterprisemaywishtodisclosemoreinformationthanthisStandardreq uires.Suchinformationmayhelp
theuserstoevaluatetheperformanceoftheenterpriseandmaytakethefor mofpershareamountsforvarious
components of net profit. Such disclosures are encouraged. However, when such amounts are disclosed, the
denominators are calculated in accordance with this Standard in order to e nsure the comparability of the per
share amounts disclosed.
EFFECTIVE DATE
53. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1998. Earlier application is encouraged.
INTERNATIONAL ACCOUNTING STANDARD IAS 34
Interim financial reporting
ThisInternationalAccountingStandardwasapprovedbytheIASCBoardinF ebruary1998andbecameeffectivefor
financial statements covering periods beginning on or after 1 January 199 9.
In April 2000, Appendix C, paragraph 7, was amended by IAS 40, investment pr operty.
INTRODUCTION
1.This Standard (“IAS 34”) addresses interim financial reporting, a matter not covered in a prior International
Accounting Standard. IAS 34 is effective for accounting periods beginnin g on or after 1 January 1999.
2.An interim financial report is a financial report that contains either a co mplete or condensed set of financial
statements for a period shorter than an enterprise’s full financial year.
3.ThisStandarddoesnotmandatewhichenterprisesshouldpublishinterimf inancialreports,howfrequently,or
howsoonaftertheendofaninterimperiod.InIASC’sjudgement,thosematt ersshouldbedecidedbynational
governments, securities regulators, stock exchanges, and accountancy b odies. This Standard applies if a
companyisrequiredorelectstopublishaninterimfinancialreportinacc ordancewithInternationalAccounting
Standards.
4.This Standard:
(a) defines the minimum content of an interim financial report, including disclosures; and
(b) identifies the accounting recognition and measurement principles th at should be applied in an interim
financial report.
5.Minimum content of an interim financial report is a condensed balance shee t, condensed income statement,
condensed cash flow statement, condensed statement showing changes in eq uity, and selected explanatory
notes.
6.Onthepresumptionthatanyonewhoreadsanenterprise’sinterimreportwi llalsohaveaccesstoitsmostrecent
annual report, virtually none of the notes to the annual financial stateme nts are repeated or updated in the
interim report. Instead, the interim notes include primarily an explanat ion of the events and changes that are
significanttoanunderstandingofthechangesinfinancialpositionandp erformanceoftheenterprisesincethe
last annual reporting date.
7.Anenterpriseshouldapplythesameaccountingpoliciesinitsinterimfin ancialreportasareappliedinitsannual
financial statements, except for accounting policy changes made after th e date of the most recent annual
financial statements that are to be reflected in the next annual financial statements. The frequency of an
enterprise’s reporting — annual, half-yearly, or quarterly — should not a ffect the measurement of its annual
results.Toachievethatobjective,measurementsforinterimreportingp urposesaremadeonayear-to-datebasis.282 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
8.AnappendixtothisStandardprovidesguidanceforapplyingthebasicreco gnitionandmeasurementprinciples
atinterimdatestovarioustypesofasset,liability,income,andexpense .Incometaxexpenseforaninterimperiod
isbasedonanestimatedaverageannualeffectiveincometaxrate,consist entwiththeannualassessmentoftaxes.
9.In deciding how to recognise, classify, or disclose an item for interim fin ancial reporting purposes, materiality
is to be assessed in relation to the interim period financial data, not fore casted annual data.
CONTENTS
Paragraphs
Objective 284
Scope 284
Definitions 284
Content of an interim financial report 284
Minimum components of an interim financial report 285Form and content of interim financial statements 285Selected explanatory notes 286
Disclosure of compliance with IAS 287Periods for which interim financial statements are required to be present ed 287
Materiality 288
Disclosure in annual financial statements 288Recognition and measurement 288Same accounting policies as annual 288Revenues received seasonally, cyclically, or occasionally 290Costs incurred unevenly during the financial year 290Applying the recognition and measurement principles 290Use of estimates 290
Restatement of previously reported interim periods 290Effective date 291
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 283
OBJECTIVE
The objective of this Standard is to prescribe the minimum content of an int erim financial report and to prescribe
theprinciplesforrecognitionandmeasurementincompleteorcondensedf inancialstatementsforaninterimperiod.
Timely and reliable interim financial reporting improves the ability of i nvestors, creditors, and others to understand
an enterprise’s capacity to generate earnings and cash flows and its finan cial condition and liquidity.
SCOPE
1.ThisStandarddoesnotmandatewhichenterprisesshouldberequiredtopub lishinterimfinancialreports,how
frequently,orhowsoonaftertheendofaninterimperiod.However,govern ments,securitiesregulators,stock
exchanges,andaccountancybodiesoftenrequireenterpriseswhosedebto requitysecuritiesarepubliclytraded
to publish interim financial reports. This Standard applies if an enterpr ise is required or elects to publish an
interimfinancialreportinaccordancewithInternationalAccountingSt andards.TheInternationalAccounting
StandardsCommitteeencouragespubliclytradedenterprisestoprovidei nterimfinancialreportsthatconform
totherecognition,measurement,anddisclosureprinciplessetoutinthi sStandard.Specifically,publiclytraded
enterprises are encouraged:
(a) to provide interim financial reports at least as of the end of the first h alf of their financial year; and
(b) to make their interim financial reports available not later than 60 day s after the end of the interim period.
2.Each financial report, annual or interim, is evaluated on its own for confo rmity to International Accounting
Standards. The fact that an enterprise may not have provided interim finan cial reports during a particular
financialyearormayhaveprovidedinterimfinancialreportsthatdonotc omplywiththisStandarddoesnot
prevent the enterprise’s annual financial statements from conforming to International Accounting Standards
if they otherwise do so.
3.If an enterprise’s interim financial report is described as complying wit h International Accounting Standards,
itmustcomplywithalloftherequirementsofthisStandard.Paragraph19r equirescertaindisclosuresinthat
regard.
DEFINITIONS
4. The following terms are used in this Standard with the meanings specifie d:
Interim period is a financial reporting period shorter than a full financi al year.
Interim financial report means a financial report containing either a com plete set of financial statements (as
describedinIAS1,presentationoffinancialstatements)orasetofconde nsedfinancialstatements(asdescribed
in this Standard) for an interim period.
CONTENT OF AN INTERIM FINANCIAL REPORT
5.IAS 1 defines a complete set of financial statements as including the follo wing components:
(a) balance sheet;
(b) income statement;(c) statement showing either (i) all changes in equity or (ii) changes in eq uity other than those arising from
capital transactions with owners and distributions to owners;
(d) cash flow statement; and
(e) accounting policies and explanatory notes.284 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
6.Intheinterestoftimelinessandcostconsiderationsandtoavoidrepetit ionofinformationpreviouslyreported,
an enterprise may be required to or may elect to provide less information at interim dates as compared with
its annual financial statements. This Standard defines the minimum conte nt of an interim financial report as
including condensed financial statements and selected explanatory note s. The interim financial report is
intendedtoprovideanupdateonthelatestcompletesetofannualfinancia lstatements.Accordingly,itfocuses
on new activities, events, and circumstances and does not duplicate infor mation previously reported.
7.Nothing in this Standard is intended to prohibit or discourage an enterpri se from publishing a complete set
of financial statements (as described in IAS 1) in its interim financial re port, rather than condensed financial
statements and selected explanatory notes. Nor does this Standard prohib it or discourage an enterprise from
includingincondensedinterimfinancialstatementsmorethantheminimu mlineitemsorselectedexplanatory
notes as set out in this Standard. The recognition and measurement guidanc e in this Standard applies also to
complete financial statements for an interim period, and such statements would include all of the disclosures
requiredbythisStandard(particularlytheselectednotedisclosuresin paragraph16)aswellasthoserequired
by other International Accounting Standards.
Minimum components of an interim financial report
8. An interim financial report should include, at a minimum, the following components:
(a) condensed balance sheet;
(b) condensed income statement;(c) condensed statement showing either (i) all changes in equity or (ii) ch anges in equity other than those
arising from capital transactions with owners and distributions to owner s;
(d) condensed cash flow statement; and(e) selected explanatory notes.
Form and content of interim financial statements
9. If an enterprise publishes a complete set of financial statements in its interim financial report, the form and
content of those statements should conform to the requirements of IAS 1 for a complete set of financial
statements.
10. Ifanenterprisepublishesasetofcondensedfinancialstatementsini tsinterimfinancialreport,thosecondensed
statements should include, at a minimum, each of the headings and subtotal s that were included in its most
recentannualfinancialstatementsandtheselectedexplanatorynotesas requiredbythisStandard.Additional
lineitemsornotesshouldbeincludediftheiromissionwouldmakethecond ensedinterimfinancialstatements
misleading.
11. Basic and diluted earnings per share should be presented on the face of a n income statement, complete or
condensed, for an interim period.
12.IAS 1 provides guidance on the structure of financial statements and inclu des an appendix, “Illustrative
financial statement structure”, that provides further guidance on major headings and subtotals.
13.WhileIAS1requiresthatastatementshowingchangesinequitybepresente dasaseparatecomponentofan
enterprise’s financial statements, it permits information about change s in equity arising from capital
transactions with owners and distributions to owners to be shown either on the face of the statement or,
alternatively,inthenotes.Anenterprisefollowsthesameformatinitsi nterimstatementshowingchangesin
equity as it did in its most recent annual statement.
14.Aninterimfinancialreportispreparedonaconsolidatedbasisiftheente rprise’smostrecentannualfinancial
statements were consolidated statements. The parent’s separate financi al statements are not consistent or
comparable with the consolidated statements in the most recent annual fin ancial report. If an enterprise’s
annualfinancialreportincludedtheparent’sseparatefinancialstatem entsinadditiontoconsolidatedfinancial
statements,thisStandardneitherrequiresnorprohibitstheinclusiono ftheparent’sseparatestatementsinthe
enterprise’s interim financial report.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 285
Selected explanatory notes
15.Auserofanenterprise’sinterimfinancialreportwillalsohaveaccessto themostrecentannualfinancialreport
ofthatenterprise.Itisunnecessary,therefore,forthenotestoaninter imfinancialreporttoproviderelatively
insignificantupdatestotheinformationthatwasalreadyreportedinthe notesinthemostrecentannualreport.
At an interim date, an explanation of events and transactions that are sign ificant to an understanding of the
changes in financial position and performance of the enterprise since the last annual reporting date is more
useful.
16. An enterprise should include the following information, as a minimum, in the notes to its interim financial
statements, if material and if not disclosed elsewhere in the interim fina ncial report. The information should
normallybereportedonafinancialyear-to-datebasis.However,theente rpriseshouldalsodiscloseanyevents
or transactions that are material to an understanding of the current inter im period:
(a) a statement that the same accounting policies and methods of computati on are followed in the interim
financial statements as compared with the most recent annual financial st atements or, if those policies or
methods have been changed, a description of the nature and effect of the cha nge;
(b) explanatory comments about the seasonality or cyclicality of interim operations;
(c) thenatureandamountofitemsaffectingassets,liabilities,equity, netincome,orcashflowsthatareunusual
because of their nature, size, or incidence;
(d) thenatureandamountofchangesinestimatesofamountsreportedinpri orinterimperiodsofthecurrent
financial year or changes in estimates of amounts reported in prior financ ial years, if those changes have
a material effect in the current interim period;
(e) issuances, repurchases, and repayments of debt and equity securities ;
(f) dividends paid (aggregate or per share) separately for ordinary share s and other shares;
(g) segment revenue and segment result for business segments or geographi cal segments, whichever is the
enterprise’s primary basis of segment reporting (disclosure of segment d ata is required in an enterprise’s
interimfinancialreportonlyifIAS14,segmentreporting,requiresthat enterprisetodisclosesegmentdata
in its annual financial statements);
(h) material events subsequent to the end of the interim period that have no t been reflected in the financial
statements for the interim period;
(i) the effect of changes in the composition of the enterprise during the in terim period, including business
combinations, acquisition or disposal of subsidiaries and long-term inv estments, restructurings, and
discontinuing operations; and
(j) changes in contingent liabilities or contingent assets since the last annual balance sheet date.
17.Examples of the kinds of disclosures that are required by paragraph 16 are s et out below. Individual
International Accounting Standards provide guidance regarding disclos ures for many of these items:
(a) the write-down of inventories to net realisable value and the reversal of such a write-down;
(b) recognition of a loss from the impairment of property, plant, and equip ment, intangible assets, or other
assets, and the reversal of such an impairment loss;
(c) the reversal of any provisions for the costs of restructuring;286 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(d) acquisitions and disposals of items of property, plant, and equipment ;
(e) commitments for the purchase of property, plant, and equipment;
(f) litigation settlements;(g) corrections of fundamental errors in previously reported financial d ata;
(h) extraordinary items;(i) any debt default or any breach of a debt covenant that has not been correc ted subsequently; and
(j) related party transactions.
18.
Other International Accounting Standards specify disclosures that shou ld be made in financial statements. In
that context, financial statements means complete sets of financial stat ements of the type normally included
inanannualfinancialreportandsometimesincludedinotherreports.The disclosuresrequiredbythoseother
International Accounting Standards are not required if an enterprise’s i nterim financial report includes only
condensed financial statements and selected explanatory notes rather th an a complete set of financial
statements.
Disclosure of compliance with IAS
19. If an enterprise’s interim financial report is in compliance with this International Accounting Standard, that
factshouldbedisclosed.Aninterimfinancialreportshouldnotbedescri bedascomplyingwithInternational
Accounting Standards unless it complies with all of the requirements of ea ch applicable Standard and each
applicable interpretation of the Standing Interpretations Committee.
Periods for which interim financial statements are required to be present ed
20. Interim reports should include interim financial statements (conden sed or complete) for periods as follows:
(a) balance sheet as of the end of the current interim period and a comparati ve balance sheet as of the end
of the immediately preceding financial year;
(b) income statements for the current interim period and cumulatively for the current financial year to date,
withcomparativeincomestatementsforthecomparableinterimperiods(c urrentandyear-to-date)ofthe
immediately preceding financial year;
(c) statementshowingchangesinequitycumulativelyforthecurrentfina ncialyeartodate,withacomparative
statement for the comparable year-to-date period of the immediately prec eding financial year; and
(d) cash flow statement cumulatively for the current financial year to dat e, with a comparative statement for
the comparable year-to-date period of the immediately preceding financi al year.
21.For an enterprise whose business is highly seasonal, financial informati on for the 12 months ending on the
interim reporting date and comparative information for the prior 12-mont h period may be useful.
Accordingly, enterprises whose business is highly seasonal are encourag ed to consider reporting such
information in addition to the information called for in the preceding par agraph.
22.Appendix A illustrates the periods required to be presented by an enterpri se that reports half-yearly and an
enterprise that reports quarterly.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 287
Materiality
23. In deciding how to recognise, measure, classify, or disclose an item fo r interim financial reporting purposes,
materiality should be assessed in relation to the interim period financia l data. In making assessments of
materiality,itshouldberecognisedthatinterimmeasurementsmayrelyo nestimatestoagreaterextentthan
measurements of annual financial data.
24.The “Preface to International Accounting Standards” states that “Intern ational Accounting Standards are not
intended to apply to immaterial items.” The framework states that “inform ation is material if its omission or
misstatementcouldinfluencetheeconomicdecisionsofuserstakenonthe basisofthefinancialstatements”.
IAS8,netprofitorlossfortheperiod,fundamentalerrorsandchangesina ccountingpolicies,requiresseparate
disclosure of material extraordinary items, unusual ordinary items, dis continued operations, changes in
accounting estimates, fundamental errors, and changes in accounting pol icies. IAS 8 does not contain
quantified guidance as to materiality.
25.While judgement is always required in assessing materiality for financia l reporting purposes, this Standard
bases the recognition and disclosure decision on data for the interim peri od by itself for reasons of
understandability of the interim figures. Thus, for example, unusual or e xtraordinary items, changes in
accountingpoliciesorestimates,andfundamentalerrorsarerecognised anddisclosedbasedonmaterialityin
relation to interim period data to avoid misleading inferences that might result from nondisclosure. The
overriding goal is to ensure that an interim financial report includes all information that is relevant to
understanding an enterprise’s financial position and performance durin g the interim period.
DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS
26. If an estimate of an amount reported in an interim period is changed sign ificantly during the final interim
period of the financial year but a separate financial report is not publish ed for that final interim period, the
natureandamountofthatchangeinestimateshouldbedisclosedinanoteto theannualfinancialstatements
for that financial year.
27.IAS 8 requires disclosure of the nature and (if practicable) the amount of a change in estimate that either has
amaterialeffectinthecurrentperiodorisexpectedtohaveamaterialeff ectinsubsequentperiods.Paragraph
16(d) of this Standard requires similar disclosure in an interim financia l report. Examples include changes in
estimateinthefinalinterimperiodrelatingtoinventorywrite-downs,r estructurings,orimpairmentlossesthat
were reported in an earlier interim period of the financial year. The discl osure required by the preceding
paragraph is consistent with the IAS 8 requirement and is intended to be nar row in scope — relating only to
thechangeinestimate.Anenterpriseisnotrequiredtoincludeadditiona linterimperiodfinancialinformation
in its annual financial statements.
RECOGNITION AND MEASUREMENT
Same accounting policies as annual
28. An enterprise should apply the same accounting policies in its interim financial statements as are applied in
its annual financial statements, except for accounting policy changes ma de after the date of the most recent
annual financial statements that are to be reflected in the next annual fin ancial statements. However, the
frequencyofanenterprise’sreporting(annual,half-yearly,orquarter ly)shouldnotaffectthemeasurementof
itsannualresults.Toachievethatobjective,measurementsforinterimr eportingpurposesshouldbemadeon
a year-to-date basis.288 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
29.Requiring that an enterprise apply the same accounting policies in its int erim financial statements as in its
annualstatementsmayseemtosuggestthatinterimperiodmeasurementsar emadeasifeachinterimperiod
standsaloneasanindependentreportingperiod.However,byprovidingth atthefrequencyofanenterprise’s
reportingshouldnotaffectthemeasurementofitsannualresults,paragr aph28acknowledgesthataninterim
period is a part of a larger financial year. Year-to-date measurements may involve changes in estimates of
amountsreportedinpriorinterimperiodsofthecurrentfinancialyear.B uttheprinciplesforrecognisingassets,
liabilities, income, and expenses for interim periods are the same as in an nual financial statements.
30.To illustrate:
(a) the principles for recognising and measuring losses from inventory wr ite-downs, restructurings, or
impairmentsinaninterimperiodarethesameasthosethatanenterprisewo uldfollowifitpreparedonly
annualfinancialstatements.However,ifsuchitemsarerecognisedandme asuredinoneinterimperiodand
theestimatechangesinasubsequentinterimperiodofthatfinancialyear ,theoriginalestimateischanged
in the subsequent interim period either by accrual of an additional amount of loss or by reversal of the
previously recognised amount;
(b) a cost that does not meet the definition of an asset at the end of an interi m period is not deferred on the
balance sheet either to await future information as to whether it has met th e definition of an asset or to
smooth earnings over interim periods within a financial year; and
(c) incometaxexpenseisrecognisedineachinterimperiodbasedonthebes testimateoftheweightedaverage
annual income tax rate expected for the full financial year. Amounts accru ed for income tax expense in
one interim period may have to be adjusted in a subsequent interim period of that financial year if the
estimate of the annual income tax rate changes.
31.Undertheframeworkforthepreparationandpresentationoffinancialsta tements(theframework),recognition
isthe“processofincorporatinginthebalancesheetorincomestatementa nitemthatmeetsthedefinitionof
anelementandsatisfiesthecriteriaforrecognition”.Thedefinitionso fassets,liabilities,income,andexpenses
are fundamental to recognition, both at annual and interim financial repo rting dates.
32.For assets, the same tests of future economic benefits apply at interim dat es and at the end of an enterprise’s
financial year. Costs that, by their nature, would not qualify as assets at financial year end would not qualify
at interim dates either. Similarly, a liability at an interim reporting da te must represent an existing obligation
at that date, just as it must at an annual reporting date.
33.Anessentialcharacteristicofincome(revenue)andexpensesisthatther elatedinflowsandoutflowsofassets
andliabilitieshavealreadytakenplace.Ifthoseinflowsoroutflowshav etakenplace,therelatedrevenueand
expensearerecognised;otherwisetheyarenotrecognised.Theframework saysthat“expensesarerecognised
in the income statement when a decrease in future economic benefits relate d to a decrease in an asset or an
increase of a liability has arisen that can be measured reliably ………. [The] framework does not allow the
recognition of items in the balance sheet which do not meet the definition o f assets or liabilities”.
34.In measuring the assets, liabilities, income, expenses, and cash flows re ported in its financial statements, an
enterprise that reports only annually is able to take into account informa tion that becomes available
throughout the financial year. Its measurements are, in effect, on a year- to-date basis.
35.An enterprise that reports half-yearly uses information available by mid -year or shortly thereafter in making
the measurements in its financial statements for the first six-month peri od and information available by
year-end or shortly thereafter for the 12-month period. The 12-month meas urements will reflect possible
changesinestimatesofamountsreportedforthefirstsix-monthperiod.T heamountsreportedintheinterim13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 289
financialreportforthefirstsix-monthperiodarenotretrospectivelya djusted.Paragraphs16(d)and26require,
however, that the nature and amount of any significant changes in estimate s be disclosed.
36.An enterprise that reports more frequently than half-yearly measures inc ome and expenses on a year-to-date
basis for each interim period using information available when each set of financial statements is being
prepared.Amountsofincomeandexpensesreportedinthecurrentinterimp eriodwillreflectanychangesin
estimates of amounts reported in prior interim periods of the financial ye ar. The amounts reported in prior
interimperiodsarenotretrospectivelyadjusted.Paragraphs16(d)and2 6require,however,thatthenatureand
amount of any significant changes in estimates be disclosed.
Revenues received seasonally, cyclically, or occasionally
37. Revenues that are received seasonally, cyclically, or occasionally w ithin a financial year should not be
anticipatedordeferredasofaninterimdateifanticipationordeferralw ouldnotbeappropriateattheendof
the enterprise’s financial year.
38.Examples include dividend revenue, royalties, and government grants. Ad ditionally, some enterprises
consistently earn more revenues in certain interim periods of a financial year than in other interim periods,
for example, seasonal revenues of retailers. Such revenues are recognise d when they occur.
Costs incurred unevenly during the financial year
39. Costs that are incurred unevenly during an enterprise’s financial yea r should be anticipated or deferred for
interim reporting purposes if, and only if, it is also appropriate to antic ipate or defer that type of cost at the
end of the financial year.
Applying the recognition and measurement principles
40.Appendix B provides examples of applying the general recognition and meas urement principles set out in
paragraphs 28 to 39.
Use of estimates
41. The measurement procedures to be followed in an interim financial repo rt should be designed to ensure that
the resulting information is reliable and that all material financial inf ormation that is relevant to an
understanding of the financial position or performance of the enterprise is appropriately disclosed. While
measurements in both annual and interim financial reports are often based on reasonable estimates, the
preparationofinterimfinancialreportsgenerallywillrequireagreate ruseofestimationmethodsthanannual
financial reports.
42.Appendix C provides examples of the use of estimates in interim periods.
RESTATEMENT OF PREVIOUSLY REPORTED INTERIM PERIODS
43. A change in accounting policy, other than one for which the transition i s specified by a new International
Accounting Standard, should be reflected by:
(a) restatingthefinancialstatementsofpriorinterimperiodsofthecur rentfinancialyearandthecomparable
interim periods of prior financial years (see paragraph 20), if the enterp rise follows the benchmark
treatment under IAS 8; or
(b) restating the financial statements of prior interim periods of the cur rent financial year, if the enterprise
follows the allowed alternative treatment under IAS 8. In this case, compa rable interim periods of prior
financial years are not restated.290 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
44.One objective of the preceding principle is to ensure that a single account ing policy is applied to a particular
classoftransactionsthroughoutanentirefinancialyear.UnderIAS8,ac hangeinaccountingpolicyisreflected
by retrospective application, with restatement of prior period financia l data, if practicable. However, if the
amount of the adjustment relating to prior financial years is not reasonab ly determinable, then under IAS 8
thenewpolicyisappliedprospectively.Anallowedalternativeistoincl udetheentirecumulativeretrospective
adjustmentinthedeterminationofnetprofitorlossfortheperiodinwhic htheaccountingpolicyischanged.
The effect of the principle in paragraph 43 is to require that within the cur rent financial year any change in
accounting policy be applied retrospectively to the beginning of the fina ncial year.
45.To allow accounting changes to be reflected as of an interim date within the financial year would allow two
differing accounting policies to be applied to a particular class of trans actions within a single financial year.
The result would be interim allocation difficulties, obscured operating results, and complicated analysis and
understandability of interim period information.
EFFECTIVE DATE
46. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1999. Earlier application is encouraged.
INTERNATIONAL ACCOUNTING STANDARD IAS 35
Discontinuing Operations
This International Accounting Standard was approved by the IASC Board in A pril 1998 and became effective for
financial statements covering periods beginning on or after 1 January 199 9.
This Standard supersedes paragraphs 19 to 22 of IAS 8, net profit or loss for the period, fundamental errors and
changes in accounting policies.
In 1999, paragraph 8 of the introduction, paragraphs 20, 21, 29, 30 and 32 of the Standard, and paragraph 4 of
AppendixBwereamendedtoconformtotheterminologyusedinIAS10(revise d1999),eventsafterthebalancesheet
date and IAS 37, provisions, contingent liabilities and contingent asset s.
INTRODUCTION
1.ThisStandard(IAS35)addressespresentationanddisclosuresrelatingt odiscontinuingoperations.Thatmatter
had been dealt with relatively briefly in paragraphs 19 to 22 of IAS 8, net pr ofit or loss for the period,
fundamental errors and changes in accounting policies. IAS 35 supersedes those paragraphs of IAS 8. IAS 35
is effective for financial statements for periods beginning on or after 1 J anuary 1999. Earlier application is
encouraged.
2.The objectives of IAS 35 are to establish a basis for segregating informati on about a major operation that an
enterprise is discontinuing from information about its continuing opera tions and to specify minimum
disclosuresaboutadiscontinuingoperation.Distinguishingdiscontin uingandcontinuingoperationsimproves
theabilityofinvestors,creditors,andotherusersoffinancialstateme ntstomakeprojectionsoftheenterprise’s
cash flows, earnings-generating capacity, and financial position.
3.Adiscontinuingoperationisarelativelylargecomponentofanenterpris e—suchasabusinessorgeographical
segment under IAS 14, segment reporting — that the enterprise, pursuant to a single plan, either is disposing
of substantially in its entirety or is terminating through abandonment or piecemeal sale.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 291
4.This Standard uses the term “discontinuing operation” rather than the tra ditional “discontinued operation”
because “discontinued operation” (past tense) implies that recognition of a discontinuance is necessary only at
or near the end of the process of discontinuing the operation. This Standar d requires that disclosures about a
discontinuing operation begin earlier than that — when a detailed formal p lan for disposal has been adopted
and announced or when the enterprise has already contracted for the dispos al.
5.This is a presentation and disclosure Standard. It focuses on how to presen t a discontinuing operation in an
enterprise’s financial statements and what information to disclose. It d oes not establish any new principles for
decidingwhenandhowtorecogniseandmeasuretheincome,expenses,cashf lows,andchangesinassetsand
liabilities relating to a discontinuing operation. Instead, it requires that enterprises follow the recognition and
measurement principles in other International Accounting Standards.
6.Under this Standard, information about a planned discontinuance must ini tially be disclosed in the first set of
financial statements issued by an enterprise after (a) it has entered into an agreement to sell substantially all of
theassetsofthediscontinuingoperationor(b)itsboardofdirectorsoro thersimilargoverningbodyhasboth
approved and announced the planned discontinuance. Required disclosure s include:
— a description of the discontinuing operation,
— the business or geographical segment(s) in which it is reported,— the date and nature of the initial disclosure event,— the timing of expected completion,
— the carrying amounts of the total assets and the total liabilities to be di sposed of,
— the amounts of revenue, expenses, and pre-tax profit or loss attributabl e to the discontinuing operation,
and related income tax expense,
— the net cash flows attributable to the operating, investing, and financi ng activities of the discontinuing
operation,
— the amount of any gain or loss that is recognised on the disposal of assets o r settlement of liabilities
attributable to the discontinuing operation, and related income tax expe nse, and
— the net selling prices, after disposal costs, from the sale of those net as sets for which the enterprise has
entered into one or more binding sale agreements, and the expected timing t hereof, and the carrying
amounts of those net assets.
7.
Financial statements for periods after initial disclosure must update th ose disclosures, including a description
of any significant changes in the amount or timing of cash flows relating to the assets and liabilities to be
disposed of or settled and the causes of those changes.
8.The disclosures would be made if a plan for disposal is approved and publicl y announced after the end of an
enterprise’sfinancialreportingperiodbutbeforethefinancialstatem entsforthatperiodareauthorisedforissue.
The disclosures continue until completion of the disposal.
9.Comparative information for prior periods that is presented in financial statements prepared after initial
disclosure must be restated to segregate the continuing and discontinuin g assets, liabilities, income, expenses,
and cash flows. By separating discontinuing and continuing operations re trospectively, the ability of a user of
financial statements to make projections is improved.292 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
CONTENTS
Paragraphs
Objective 293
Scope 294
Definitions 294
Discontinuing operation 294
Initial disclosure event 295
Recognition and measurement 296
Provisions 296
Impairment losses 296
Presentation and disclosure 297
Initial disclosure 297
Other disclosures 298
Updating disclosures 298
Separate disclosure for each discontinuing operation 298Presentation of the required disclosures 299Face of financial statements or notes 299Not an extraordinary item 299
Restricted use of the term “discontinuing operation” 299Illustrative disclosures 299
Restatement of prior periods 299
Disclosure in interim financial reports 299Effective date 299
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to establish principles for reporting in formation about discontinuing operations,
thereby enhancing the ability of users of financial statements to make pro jections of an enterprise’s cash flows,
earnings-generatingcapacity,andfinancialpositionbysegregatingin formationaboutdiscontinuingoperationsfrom
information about continuing operations.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 293
SCOPE
1.This Standard applies to all discontinuing operations of all enterprises .
DEFINITIONS
Discontinuing operation
2.A discontinuing operation is a component of an enterprise:
(a) that the enterprise, pursuant to a single plan, is:
(i) disposing of substantially in its entirety, such as by selling the comp onent in a single transaction, by
demerger or spin-off of ownership of the component to the enterprise’s sha reholders;
(ii) disposing of piecemeal, such as by selling off the component’s assets and settling its liabilities
individually; or
(iii)terminating through abandonment;
(b) that represents a separate major line of business or geographical area of operations; and
(c) that can be distinguished operationally and for financial reporting p urposes.
3.Under criterion (a) of the definition (paragraph 2(a)), a discontinuing o peration may be disposed of in its
entirety or piecemeal, but always pursuant to an overall plan to discontin ue the entire component.
4.Ifanenterprisesellsacomponentsubstantiallyinitsentirety,theresu ltcanbeanetgainornetloss.Forsuch
a discontinuance, there is a single date at which a binding sale agreement i s entered into, although the actual
transfer of possession and control of the discontinuing operation may occ ur at a later date. Also, payments
to the seller may occur at the time of the agreement, at the time of the transf er, or over an extended future
period.
5.Instead of disposing of a major component in its entirety, an enterprise ma y discontinue and dispose of the
component by selling its assets and settling its liabilities piecemeal (i ndividually or in small groups). For
piecemeal disposals, while the overall result may be a net gain or a net loss , the sale of an individual asset or
settlement of an individual liability may have the opposite effect. Moreo ver, there is no single date at which
an overall binding sale agreement is entered into. Rather, the sales of ass ets and settlements of liabilities may
occuroveraperiodofmonthsorperhapsevenlonger,andtheendofafinanci alreportingperiodmayoccur
part way through the disposal period. To qualify as a discontinuing operat ion, the disposal must be pursuant
to a single co-ordinated plan.
6.Anenterprisemayterminateanoperationbyabandonmentwithoutsubstant ialsalesofassets.Anabandoned
operation would be a discontinuing operation if it satisfies the criteria in the definition. However, changing
the scope of an operation or the manner in which it is conducted is not an aban donment because that
operation, although changed, is continuing.
7.Business enterprises frequently close facilities, abandon products or e ven product lines, and change the size
of their work force in response to market forces. While those kinds of termi nations generally are not, in and
ofthemselves,discontinuingoperationsasthattermisusedinthisStand ard,theycanoccurinconnectionwith
a discontinuing operation.
8.Examples of activities that do not necessarily satisfy criterion (a) of pa ragraph 2, but that might do so in
combination with other circumstances, include:
(a) gradual or evolutionary phasing out of a product line or class of servic e;294 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) discontinuing, even if relatively abruptly, several products within an ongoing line of business;
(c) shifting of some production or marketing activities for a particular l ine of business from one location to
another;
(d) closing of a facility to achieve productivity improvements or other co st savings; and
(e) selling a subsidiary whose activities are similar to those of the paren t or other subsidiaries.
9.A reportable business segment or geographical segment as defined in IAS 14 , segment reporting, would
normally satisfy criterion (b) of the definition of a discontinuing opera tion (paragraph 2(b)), that is, it would
representaseparatemajorlineofbusinessorgeographicalareaofoperat ions.Apartofasegmentasdefined
in IAS 14 may also satisfy criterion (b) of the definition. For an enterpris e that operates in a single business
orgeographicalsegmentandthereforedoesnotreportsegmentinformatio n,amajorproductorserviceline
may also satisfy the criteria of the definition.
10.IAS 14 permits, but does not require, that different stages of vertically i ntegrated operations be identified as
separate business segments. Such vertically integrated business segmen ts may satisfy criterion (b) of the
definition of a discontinuing operation.
11.A component can be distinguished operationally and for financial reporti ng purposes — criterion (c) of the
definition (paragraph 2(c)) — if:
(a) its operating assets and liabilities can be directly attributed to it;
(b) its income (gross revenue) can be directly attributed to it; and(c) at least a majority of its operating expenses can be directly attribute dt oi t .
12.
Assets, liabilities, income, and expenses are directly attributable to a component if they would be eliminated
when the component is sold, abandoned or otherwise disposed of. Interest a nd other financing cost is
attributed to a discontinuing operation only if the related debt is simila rly attributed.
13.As defined in this Standard, discontinuing operations are expected to occ ur relatively infrequently. Some
changesthatarenotclassifiedasdiscontinuingoperationsmayqualifya srestructurings(seeIAS37,provisions,
contingent liabilities and contingent assets).
14.Also, some infrequently occurring events that do not qualify either as dis continuing operations or
restructuringsmayresultinitemsofincomeorexpensethatrequiresepar atedisclosurepursuanttoIAS8,net
profitorlossfortheperiod,fundamentalerrorsandchangesinaccountin gpolicies,becausetheirsize,nature,
or incidence make them relevant to explain the performance of the enterpri se for the period.
15.The fact that a disposal of a component of an enterprise is classified as a di scontinuing operation under this
Standard does not, in itself, bring into question the enterprise’s abilit y to continue as a going concern. IAS 1,
presentation of financial statements, requires disclosure of uncertain ties relating to an enterprise’s ability to
continue as a going concern and of any conclusion that an enterprise is not a going concern.
Initial disclosure event
16. Withrespecttoadiscontinuingoperation,theinitialdisclosureeve ntistheoccurrenceofoneofthefollowing,
whichever occurs earlier:
(a) the enterprise has entered into a binding sale agreement for substanti ally all of the assets attributable to
the discontinuing operation; or
(b) theenterprise’sboardofdirectorsorsimilargoverningbodyhasboth (i)approvedadetailed,formalplan
for the discontinuance and (ii) made an announcement of the plan.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 295
RECOGNITION AND MEASUREMENT
17. An enterprise should apply the principles of recognition and measurem ent that are set out in other
InternationalAccountingStandardsforthepurposeofdecidingwhenandh owtorecogniseandmeasurethe
changesinassetsandliabilitiesandtheincome,expenses,andcashflows relatingtoadiscontinuingoperation.
18.This Standard does not establish any recognition and measurement princip les. Rather, it requires that an
enterprisefollowrecognitionandmeasurementprinciplesestablishedi notherStandards.TwoStandardsthat
are likely to be relevant in this regard are:
(a) IAS 36, impairment of assets; and
(b) IAS 37, provisions, contingent liabilities and contingent assets.
19.Other Standards that may be relevant include IAS 19, employee benefits, wi th respect to recognition of
termination benefits, and IAS 16, property, plant and equipment, with res pect to disposals of those kinds of
assets.
Provisions
20.AdiscontinuingoperationisarestructuringasthattermisdefinedinIAS 37,provisions,contingentliabilities
and contingent assets. IAS 37 provides guidance for certain of the require ments of this Standard, including:
(a) what constitutes a “detailed, formal plan for the discontinuance” as t hat term is used in paragraph 16(b)
of this Standard; and
(b) what constitutes an “announcement of the plan” as that term is used in pa ragraph 16(b) of this Standard.
21.IAS 37 defines when a provision should be recognised. In some cases, the eve nt that obligates the enterprise
occursaftertheendofafinancialreportingperiodbutbeforethefinanci alstatementsforthatperiodhavebeen
authorisedforissue.Paragraph29ofthisStandardrequiresdisclosures aboutadiscontinuingoperationinsuch
cases.
Impairment losses
22.The approval and announcement of a plan for discontinuance is an indicatio n that the assets attributable to
thediscontinuingoperationmaybeimpairedorthatanimpairmentlosspre viouslyrecognisedforthoseassets
should be increased or reversed. Therefore, in accordance with IAS 36, imp airment of assets, an enterprise
estimates the recoverable amount of each asset of the discontinuing opera tion (the higher of the asset’s net
selling price and its value in use) and recognises an impairment loss or rev ersal of a prior impairment loss, if
any.
23.In applying IAS 36 to a discontinuing operation, an enterprise determines whether the recoverable amount
of an asset of a discontinuing operation is assessed for the individual ass et or for the asset’s cash-generating
unit(definedinIAS36asthesmallestidentifiablegroupofassetsthatin cludestheassetunderreviewandthat
generatescashinflowsfromcontinuingusethatarelargelyindependento fthecashinflowsfromotherassets
or groups of assets). For example:
(a) if the enterprise sells the discontinuing operation substantially in its entirety, none of the assets of the
discontinuing operation generate cash inflows independently from other assets within the discontinuing
operation. Therefore, recoverable amount is determined for the disconti nuing operation as a whole and
animpairmentloss,ifany,isallocatedamongtheassetsofthediscontinu ingoperationinaccordancewith
IAS 36;
(b) if the enterprise disposes of the discontinuing operation in other way s such as piecemeal sales, the
recoverable amount is determined for individual assets, unless the asset s are sold in groups; and
(c) iftheenterpriseabandonsthediscontinuingoperation,therecovera bleamountisdeterminedforindividual
assets as set out in IAS 36.296 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
24.Afterannouncementofaplan,negotiationswithpotentialpurchasersoft hediscontinuingoperationoractual
binding sale agreements may indicate that the assets of the discontinuing operation may be further impaired
orthatimpairmentlossesrecognisedfortheseassetsinpriorperiodsmay havedecreased.Asaconsequence,
when such events occur, an enterprise re-estimates the recoverable amoun t of the assets of the discontinuing
operation and recognises resulting impairment losses or reversals of imp airment losses in accordance with
IAS 36.
25.A price in a binding sale agreement is the best evidence of an asset’s (cash- generating unit’s) net selling price
oroftheestimatedcashinflowfromultimatedisposalindeterminingthea sset’s(cash-generatingunit’s)value
in use.
26.The carrying amount (recoverable amount) of a discontinuing operation in cludes the carrying amount
(recoverable amount) of any goodwill that can be allocated on a reasonable and consistent basis to that
discontinuing operation.
PRESENTATION AND DISCLOSURE
Initial disclosure
27. An enterprise should include the following information relating to a d iscontinuing operation in its financial
statements beginning with the financial statements for the period in whic h the initial disclosure event (as
defined in paragraph 16) occurs:
(a) a description of the discontinuing operation;
(b) the business or geographical segment(s) in which it is reported in acco rdance with IAS 14;
(c) the date and nature of the initial disclosure event;(d) the date or period in which the discontinuance is expected to be complet ed if known or determinable;
(e) thecarryingamounts,asofthebalancesheetdate,ofthetotalassetsa ndthetotalliabilitiestobedisposed
of;
(f) the amounts of revenue, expenses, and pre-tax profit or loss from ordin ary activities attributable to the
discontinuingoperationduringthecurrentfinancialreportingperiod, andtheincometaxexpenserelating
thereto as required by paragraph 81(h) of IAS 12; and
(g) the amounts of net cash flows attributable to the operating, investing , and financing activities of the
discontinuing operation during the current financial reporting period.
28.
Inmeasuringtheassets,liabilities,revenues,expenses,gains,losses ,andcashflowsofadiscontinuingoperation
for the purpose of the disclosures required by this Standard, such items ca n be attributed to a discontinuing
operationiftheywillbedisposedof,settled,reduced,oreliminatedwhe nthediscontinuanceiscompleted.To
the extent that such items continue after completion of the discontinuanc e, they should not be allocated to
the discontinuing operation.
29. If an initial disclosure event occurs after the end of an enterprise’s f inancial reporting period but before the
financial statements for that period are authorised for issue, those fina ncial statements should include the
disclosures specified in paragraph 27 for the period covered by those fina ncial statements.
30.For example, the board of directors of an enterprise whose financial year e nds 31 December 20X5 approves
a plan for a discontinuing operation on 15 December 20X5 and announces that plan on 10 January 20X6.
Theboardauthorisesthefinancialstatementsfor20X5forissueon20Marc h20X6.Thefinancialstatements
for 20X5 include the disclosures required by paragraph 27.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 297
Other disclosures
31. When an enterprise disposes of assets or settles liabilities attribut able to a discontinuing operation or enters
into binding agreements for the sale of such assets or the settlement of suc h liabilities, it should include in its
financial statements the following information when the events occur:
(a) for any gain or loss that is recognised on the disposal of assets or settl ement of liabilities attributable to
thediscontinuingoperation,(i)theamountofthepre-taxgainorlossand (ii)incometaxexpenserelating
to the gain or loss, as required by paragraph 81(h) of IAS 12; and
(b) the net selling price or range of prices (which is after deducting the ex pected disposal costs) of those net
assetsforwhichtheenterprisehasenteredintooneormorebindingsaleag reements,theexpectedtiming
of receipt of those cash flows, and the carrying amount of those net assets.
32.The asset disposals, liability settlements, and binding sale agreements referred to in the preceding paragraph
mayoccurconcurrentlywiththeinitialdisclosureevent,orintheperiod inwhichtheinitialdisclosureevent
occurs,orinalaterperiod.InaccordancewithIAS10,eventsafterthebal ancesheetdate,ifsomeoftheassets
attributabletoadiscontinuingoperationhaveactuallybeensoldoraret hesubjectofoneormorebindingsale
agreementsenteredintoafterthefinancialyearendbutbeforetheboarda pprovesthefinancialstatementsfor
issue,thefinancialstatementsincludethedisclosuresrequiredbypara graph31ifnon-disclosurewouldaffect
the ability of the users of the financial statements to make proper evaluat ions and decisions.
Updating the disclosures
33. Inadditiontothedisclosuresinparagraphs27and31,anenterprisesh ouldincludeinitsfinancialstatements
for periods subsequent to the one in which the initial disclosure event occ urs a description of any significant
changesintheamountortimingofcashflowsrelatingtotheassetsandliab ilitiestobedisposedoforsettled
and the events causing those changes.
34.Examples of events and activities that would be disclosed include the natu re and terms of binding sale
agreementsfortheassets,ademergeroftheassetsviaspin-offofasepara teequitysecuritytotheenterprise’s
shareholders, and legal or regulatory approvals.
35. Thedisclosuresrequiredbyparagraphs27to34shouldcontinueinfina ncialstatementsforperiodsuptoand
includingtheperiodinwhichthediscontinuanceiscompleted.Adisconti nuanceiscompletedwhentheplan
is substantially completed or abandoned, though payments from the buyer( s) to the seller may not yet be
completed.
36. Ifanenterpriseabandonsorwithdrawsfromaplanthatwaspreviouslyr eportedasadiscontinuingoperation,
that fact and its effect should be disclosed.
37.For the purpose of applying the preceding paragraph, disclosure of the eff ect includes reversal of any prior
impairment loss or provision that was recognised with respect to the disco ntinuing operation.
Separate disclosure for each discontinuing operation
38. Any disclosures required by this Standard should be presented separat ely for each discontinuing operation.298 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Presentation of the required disclosures
Face of financial statements or notes
39. The disclosures required by paragraphs 27 to 37 may be presented either in the notes to the financial
statements or on the face of the financial statements except that the discl osure of the amount of the pre-tax
gain or loss recognised on the disposal of assets or settlement of liabilit ies attributable to the discontinuing
operation (paragraph 31(a)) should be shown on the face of the income state ment.
40.The disclosures required by paragraphs 27(f) and 27(g) are encouraged to b e presented on the face of the
income statement and cash flow statement, respectively.
Not an extraordinary item
41. A discontinuing operation should not be presented as an extraordinary item.
42.IAS8definesextraordinaryitemsas“incomeorexpensesthatarisefromev entsortransactionsthatareclearly
distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or
regularly.” The two examples of extraordinary items cited in IAS 8 are expr opriations of assets and natural
disasters,bothofwhicharetypesofeventsthatarenotwithinthecontrol ofthemanagementoftheenterprise.
As defined in this Standard, a discontinuing operation must be based on a si ngle plan by an enterprise’s
management to sell or otherwise dispose of a major portion of the business.
Restricted use of the term “discontinuing operation”
43. A restructuring, transaction, or event that does not meet the definiti on of a discontinuing operation in this
Standard should not be called a discontinuing operation.
Illustrative disclosures
44.Appendix A provides examples of the presentation and disclosures require d by this Standard.
Restatement of prior periods
45. Comparative information for prior periods that is presented in financ ial statements prepared after the initial
disclosure event should be restated to segregate continuing and disconti nuing assets, liabilities, income,
expenses, and cash flows in a manner similar to that required by paragraphs 27 to 43.
46.Appendix B illustrates application of the preceding paragraph.
Disclosure in interim financial reports
47. Thenotestoaninterimfinancialreportshoulddescribeanysignifica ntactivitiesoreventssincetheendofthe
most recent annual reporting period relating to a discontinuing operatio n and any significant changes in the
amount or timing of cash flows relating to the assets and liabilities to be d isposed of or settled.
48.ThisprincipleisconsistentwiththeapproachinIAS34,interimfinancia lreporting,thatthenotestoaninterim
financial report are intended to explain significant changes since the la st annual reporting date.
EFFECTIVE DATE
49. ThisInternationalAccountingStandardbecomesoperativeforfinanc ialstatementscoveringperiodsbeginning
on or after 1 January 1999. Earlier application is encouraged in financial statements for periods ending after
this Standard is published.
50.This Standard supersedes paragraphs 19 to 22 of IAS 8, net profit or loss for the period, fundamental errors
and changes in accounting policies.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 299
INTERNATIONAL ACCOUNTING STANDARD IAS 36
Impairment of assets
This International Accounting Standard was approved by the IASC Board in A pril 1998 and becomes effective for
financial statements covering periods beginning on or after 1 July 1999.
In July 1998, the approval of IAS 38, intangible assets, and IAS 22 (revised 1998), business combinations, resulted
inchangesincross-referencesandterminologytotheintroductionandpa ragraphs39,40and110.Inaddition,IAS38
added a definition of “active market” to paragraph 5. Finally, a minor word ing inconsistency in Appendix A,
paragraphs A47, A48 and A57, was corrected.In April 2000, IAS 40, investment property, amended paragraph 1. The amend ment is effective for financial
statements covering periods beginning on or after 1 January 2001.In January 2001, IAS 41, Agriculture amended paragraph 1. The amendment is effective for financial statements
covering periods beginning on or after 1 January 2003.
INTRODUCTION
1. ThisStandard(“IAS36”)prescribestheaccountinganddisclosurefori mpairmentofallassets.Itreplacesthe
requirementsforassessingtherecoverabilityofanassetandrecognisin gimpairmentlossesthatwereincluded
in:
(a) IAS 16 (revised 1993), property, plant and equipment (see IAS 16 (revis ed 1998));
(b) IAS 22 (revised 1993), business combinations (see IAS 22 (revised 1998 ));
(c) IAS 28 (reformatted 1994), accounting for investments in associates ( see IAS 28 (revised 1998)); and
(d) IAS 31 (reformatted 1994), financial reporting of interests in joint v entures (see IAS 31 (revised 1998)).
The major changes from previous requirements and explanations for the pri nciples in IAS 36 are set out in
a separate basis for conclusions.
2. IAS 36 does not cover impairment of inventories, deferred tax assets, as sets arising from construction
contracts, assets arising from employee benefits or most financial asset s.
3. IAS36requiresthattherecoverableamountofanassetshouldbeestimat edwheneverthereisanindication
thattheassetmaybeimpaired.Inspecificcases,theInternationalAccou ntingStandardapplicabletoanasset
mayincluderequirementsforadditionalreviews.Forexample,IAS38,int angibleassets,andIAS22(revised
1998),businesscombinations,requirethattherecoverableamountofint angibleassetsandgoodwillthatare
amortised over more than 20 years should be estimated annually.
4. IAS36requiresanimpairmentlosstoberecognised(anassetisimpaired )wheneverthecarryingamountof
an asset exceeds its recoverable amount. An impairment loss should be reco gnised in the income statement
for assets carried at cost and treated as a revaluation decrease for assets carried at revalued amount.
5. IAS 36 requires recoverable amount to be measured as the higher of net sel ling price and value in use:
(a) netsellingpriceistheamountobtainablefromthesaleofanassetinan arm’slengthtransactionbetween
knowledgeable, willing parties, after deducting any direct incremental disposal costs; and
(b) value in use is the present value of estimated future cash flows expecte d to arise from continuing use of
an asset and from its disposal at the end of its useful life.300 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
6. In determining an asset’s value in use, IAS 36 requires that an enterpris e should use, among other things:
(a) cash flow projections based on reasonable and supportable assumption s that:
(i) reflect the asset in its current condition; and
(ii) represent management’s best estimate of the set of economic conditio ns that will exist over the
remaining useful life of the asset; and
(b) apre-taxdiscountratethatreflectscurrentmarketassessmentsofth etimevalueofmoneyandtherisks
specific to the asset. The discount rate should not reflect risks for which future cash flows have been
adjusted.
7. Recoverableamountshouldbeestimatedforanindividualasset.Ifitis notpossibletodoso,IAS36requires
an enterprise to determine recoverable amount for the cash-generating un it to which the asset belongs. A
cash-generating unit is the smallest identifiable group of assets that ge nerates cash inflows from continuing
use that are largely independent of the cash inflows from other assets or gr oups of assets. However, if the
output produced by an asset or group of assets is traded in an active market, this asset or group of assets
should be identified as a separate cash-generating unit, even if some or al l of the production of this asset or
groupofassetsisusedinternally.AppendixA,illustrativeexamples,in cludesexamplesontheidentification
of cash-generating units.
8. In testing a cash-generating unit for impairment, IAS 36 requires that g oodwill and corporate assets (such
as head office assets) that relate to the cash-generating unit should be co nsidered. IAS 36 specifies how this
should be done.
9. Principlesforrecognisingandmeasuringimpairmentlossesforacash- generatingunitarethesameasthose
foranindividualasset.IAS36specifieshowtodeterminethecarryingamo untofacash-generatingunitand
how to allocate an impairment loss between the assets of the unit.
10. IAS36requiresthatanimpairmentlossrecognisedinprioryearsshoul dbereversedif,andonlyif,therehas
been a change in the estimates used to determine recoverable amount since t he last impairment loss was
recognised.However,animpairmentlossisreversedonlytotheextenttha titdoesnotincreasethecarrying
amount of an asset above the carrying amount that would have been determine d for the asset (net of
amortisation or depreciation) had no impairment loss been recognised in p rior years. A reversal of an
impairment loss should be recognised in the income statement for assets ca rried at cost and treated as a
revaluation increase for assets carried at revalued amount.
11. IAS 36 requires that an impairment loss for goodwill should not be rever sed unless:
(a) theimpairmentlosswascausedbyaspecificexternaleventofanexcept ionalnaturethatisnotexpected
to recur; and
(b) subsequent external events have reversed the effect of that event.
12. When impairment losses are recognised (reversed), IAS 36 requires cer tain information to be disclosed:
(a) by class of assets; and
(b) by reportable segments based on the enterprise’s primary format (only required if an enterprise applies
IAS 14, segment reporting).
IAS 36 requires further disclosure if impairment losses recognised (reve rsed) during the period are material
to the financial statements of the reporting enterprise as a whole.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 301
13. On first adoption, IAS 36 should be applied on a prospective basis only. Impairment losses recognised
(reversed)shouldbetreatedunderIAS36andnotunderthebenchmarkorthe allowedalternativetreatment
for other changes in accounting policies in IAS 8, net profit or loss for the period, fundamental errors and
changes in accounting policies.
14. IAS36iseffectiveforaccountingperiodsbeginningonorafter1July1 999.Earlierapplicationisencouraged.
CONTENTS
Paragraphs
Objective 303
Scope 303
Definitions 304
Identifying an asset that may be impaired 305
Measurement of recoverable amount 306Net selling price 307
Value in use 308
Basis for estimates of future cash flows 308Composition of estimates of future cash flows 309Foreign currency future cash flows 310Discount rate 311
Recognition and measurement of an impairment loss 312Cash-generating units 312
Identification of the cash-generating unit to which an asset belongs 312Recoverable amount and carrying amount of a cash-generating unit 314Goodwill 315
Corporate assets 316
Impairment loss for a cash-generating unit 317Reversal of an impairment loss 318Reversal of an impairment loss for an individual asset 319Reversal of an impairment loss for a cash-generating unit 320Reversal of an impairment loss for goodwill 320Disclosure 321
Transitional provisions 322
Effective date 322302 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the procedures that an enter prise applies to ensure that its assets are
carriedatnomorethantheirrecoverableamount.Anassetiscarriedatmor ethanitsrecoverableamountifitscarrying
amount exceeds the amount to be recovered through use or sale of the asset. I f this is the case, the asset is described
asimpairedandtheStandardrequirestheenterprisetorecogniseanimpai rmentloss.TheStandardalsospecifieswhen
an enterprise should reverse an impairment loss and it prescribes certain disclosures for impaired assets.
SCOPE
1.This Standard should be applied in accounting for the impairment of all ass ets, other than:
(a) inventories (see IAS 2, inventories);
(b) assets arising from construction contracts (see IAS 11, construction contracts);
(c) deferred tax assets (see IAS 12, income taxes);
(d) assets arising from employee benefits (see IAS 19, employee benefits) ;
(e) financialassetsthatareincludedinthescopeofIAS32,financialins truments:disclosureandpresentation;
(f) investment property that is measured at fair value (see IAS 40, investm ent Property); and
(g) biologicalassetsrelatedtoagriculturalactivitythataremeasured atfairvaluelessestimatedpoint-of-sale
costs (see IAS 41, agriculture).
2. This Standard does not apply to inventories, assets arising from constr uction contracts, deferred tax assets
or assets arising from employee benefits because existing International Accounting Standards applicable to
these assets already contain specific requirements for recognising and m easuring these assets.
3. This Standard applies to:
(a) subsidiaries, as defined in IAS 27, consolidated financial statement s and accounting for investments in
subsidiaries;
(b) associates, as defined in IAS 28, accounting for investments in associ ates; and
(c) joint ventures, as defined in IAS 31, financial reporting of interests in joint ventures.
For impairment of other financial assets, refer to IAS 39, Financial Instr uments: Recognition and
Measurement.
4. This Standard applies to assets that are carried at revalued amount (fai r value) under other International
Accounting Standards, such as the allowed alternative treatment in IAS 16 , property, plant and equipment.
However, identifying whether a revalued asset may be impaired depends on t he basis used to determine fair
value:
(a) iftheasset’sfairvalueisitsmarketvalue,theonlydifferencebetwe entheasset’sfairvalueanditsnetselling
price is the direct incremental costs to dispose of the asset:13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 303
(i) if the disposal costs are negligible, the recoverable amount of the rev alued asset is necessarily close
to,orgreaterthan,itsrevaluedamount(fairvalue).Inthiscase,aftert herevaluationrequirementshave
been applied, it is unlikely that the revalued asset is impaired and recove rable amount need not be
estimated; and
(ii) if the disposal costs are not negligible, net selling price of the reva lued asset is necessarily less than
its fair value. Therefore, the revalued asset will be impaired if its value in use is less than its revalued
amount (fair value). In this case, after the revaluation requirements hav e been applied, an enterprise
applies this Standard to determine whether the asset may be impaired; and
(b) iftheasset’sfairvalueisdeterminedonabasisotherthanitsmarketv alue,itsrevaluedamount(fairvalue)
maybegreaterorlowerthanitsrecoverableamount.Hence,afterthereval uationrequirementshavebeen
applied, an enterprise applies this Standard to determine whether the ass et may be impaired.
DEFINITIONS
5. The following terms are used in this Standard with the meanings specifie d:
Recoverable amount is the higher of an asset’s net selling price and its val ue in use.
Value in use is the present value of estimated future cash flows expected to arise from the continuing use of
an asset and from its disposal at the end of its useful life.
Net selling price is the amount obtainable from the sale of an asset in an arm ’s length transaction between
knowledgeable, willing parties, less the costs of disposal.Costsofdisposalareincrementalcostsdirectlyattributabletothedisp osalofanasset,excludingfinancecosts
and income tax expense.An impairment loss is the amount by which the carrying amount of an asset exc eeds its recoverable amount.
Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any
accumulated depreciation (amortisation) and accumulated impairment lo sses thereon.
Depreciation (amortisation) is the systematic allocation of the depreci able amount of an asset over its useful
life (
1).
Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements,
less its residual value.Useful life is either:(a) the period of time over which an asset is expected to be used by the enterp rise; or
(b) the number of production or similar units expected to be obtained from t he asset by the enterprise.
Acash-generatingunitisthesmallestidentifiablegroupofassetsthatg eneratescashinflowsfromcontinuing
use that are largely independent of the cash inflows from other assets or gr oups of assets.
(1) Inthecaseofanintangibleassetorgoodwill,theterm“amortisation”is generallyusedinsteadof“depreciation”.Bothtermshave
the same meaning.304 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Corporate assets are assets other than goodwill that contribute to the fut ure cash flows of both the
cash-generating unit under review and other cash-generating units.
An active market is a market where all the following conditions exist:(a) the items traded within the market are homogeneous;(b) willing buyers and sellers can normally be found at any time; and(c) prices are available to the public.
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
6.Paragraphs7to14specifywhenrecoverableamountshouldbedetermined.T heserequirementsusetheterm
“an asset” but apply equally to an individual asset or a cash-generating un it.
7.An asset is impaired when the carrying amount of the asset exceeds its recov erable amount. Paragraphs 9 to
11describesomeindicationsthatanimpairmentlossmayhaveoccurred:if anyofthoseindicationsispresent,
an enterprise is required to make a formal estimate of recoverable amount. If no indication of a potential
impairment loss is present, this Standard does not require an enterprise t o make a formal estimate of
recoverable amount.
8. An enterprise should assess at each balance sheet date whether there is a ny indication that an asset may be
impaired. If any such indication exists, the enterprise should estimate t he recoverable amount of the asset.
9. In assessing whether there is any indication that an asset may be impaire d, an enterprise should consider, as
a minimum, the following indications:
External sources of information(a) duringtheperiod,anasset’smarketvaluehasdeclinedsignificantly morethanwouldbeexpectedasaresult
of the passage of time or normal use;
(b) significantchangeswithanadverseeffectontheenterprisehavetake nplaceduringtheperiod,orwilltake
place in the near future, in the technological, market, economic or legal e nvironment in which the
enterprise operates or in the market to which an asset is dedicated;
(c) marketinterestratesorothermarketratesofreturnoninvestmentsha veincreasedduringtheperiod,and
thoseincreasesarelikelytoaffectthediscountrateusedincalculating anasset’svalueinuseanddecrease
the asset’s recoverable amount materially;
(d) the carrying amount of the net assets of the reporting enterprise is mor e than its market capitalisation;
Internal sources of information
(e) evidence is available of obsolescence or physical damage of an asset;(f) significant changes with an adverse effect on the enterprise have take n place during the period, or are
expected to take place in the near future, in the extent to which, or manner i n which, an asset is used or
is expected to be used. These changes include plans to discontinue or restr ucture the operation to which
an asset belongs or to dispose of an asset before the previously expected da te; and
(g) evidence is available from internal reporting that indicates that the economic performance of an asset is,
or will be, worse than expected.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 305
10.The list in paragraph 9 is not exhaustive. An enterprise may identify other indications that an asset may be
impaired and these would also require the enterprise to determine the asse t’s recoverable amount.
11.Evidence from internal reporting that indicates that an asset may be impai red includes the existence of:
(a) cash flows for acquiring the asset, or subsequent cash needs for operat ing or maintaining it, that are
significantly higher than those originally budgeted;
(b) actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than
those budgeted;
(c) a significant decline in budgeted net cash flows or operating profit, o r a significant increase in budgeted
loss, flowing from the asset; or
(d) operating losses or net cash outflows for the asset, when current perio d figures are aggregated with
budgeted figures for the future.
12.The concept of materiality applies in identifying whether the recoverabl e amount of an asset needs to be
estimated.Forexample,ifpreviouscalculationsshowthatanasset’srec overableamountissignificantlygreater
thanitscarryingamount,theenterpriseneednotre-estimatetheasset’s recoverableamountifnoeventshave
occurredthatwouldeliminatethatdifference.Similarly,previousanal ysismayshowthatanasset’srecoverable
amount is not sensitive to one (or more) of the indications listed in paragr aph 9.
13.Asanillustrationofparagraph12,ifmarketinterestratesorothermarke tratesofreturnoninvestmentshave
increased during the period, an enterprise is not required to make a formal estimate of an asset’s recoverable
amount in the following cases:
(a) if the discount rate used in calculating the asset’s value in use is unli kely to be affected by the increase in
these market rates. For example, increases in short-term interest rates m ay not have a material effect on
the discount rate used for an asset that has a long remaining useful life; or
(b) ifthediscountrateusedincalculatingtheasset’svalueinuseislike lytobeaffectedbytheincreaseinthese
market rates but previous sensitivity analysis of recoverable amount sho ws that:
(i) itisunlikelythattherewillbeamaterialdecreaseinrecoverableamo untbecausefuturecashflowsare
also likely to increase. For example, in some cases, an enterprise may be ab le to demonstrate that it
adjusts its revenues to compensate for any increase in market rates; or
(ii) the decrease in recoverable amount is unlikely to result in a material impairment loss.
14.If there is an indication that an asset may be impaired, this may indicate th at the remaining useful life, the
depreciation(amortisation)methodortheresidualvaluefortheassetne edtobereviewedandadjustedunder
theInternationalAccountingStandardapplicabletotheasset,evenifno impairmentlossisrecognisedforthe
asset.
MEASUREMENT OF RECOVERABLE AMOUNT
15.This Standard defines recoverable amount as the higher of an asset’s net se lling price and value in use.
Paragraphs16to56setouttherequirementsformeasuringrecoverableamo unt.Theserequirementsusethe
term “an asset” but apply equally to an individual asset or a cash-generati ng unit.306 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
16.Itisnotalwaysnecessarytodeterminebothanasset’snetsellingpricean ditsvalueinuse.Forexample,ifeither
of these amounts exceeds the asset’s carrying amount, the asset is not impa ired and it is not necessary to
estimate the other amount.
17.It may be possible to determine net selling price, even if an asset is not tra ded in an active market. However,
sometimesitwillnotbepossibletodeterminenetsellingpricebecauseth ereisnobasisformakingareliable
estimate of the amount obtainable from the sale of the asset in an arm’s leng th transaction between
knowledgeableandwillingparties.Inthiscase,therecoverableamounto ftheassetmaybetakentobeitsvalue
in use.
18.If there is no reason to believe that an asset’s value in use materially exce eds its net selling price, the asset’s
recoverableamountmaybetakentobeitsnetsellingprice.Thiswilloften bethecaseforanassetthatisheld
fordisposal.Thisisbecausethevalueinuseofanassetheldfordisposalw illconsistmainlyofthenetdisposal
proceeds,sincethefuturecashflowsfromcontinuinguseoftheassetunti litsdisposalarelikelytobenegligible.
19.Recoverableamountisdeterminedforanindividualasset,unlesstheasse tdoesnotgeneratecashinflowsfrom
continuing use that are largely independent of those from other assets or g roups of assets. If this is the case,
recoverableamountisdeterminedforthecash-generatingunittowhichth eassetbelongs(seeparagraphs64
to 87), unless either:
(a) the asset’s net selling price is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its net selling pr ice and net selling price can be
determined.
20.In some cases, estimates, averages and computational shortcuts may provi de a reasonable approximation of
the detailed computations illustrated in this Standard for determining n et selling price or value in use.
Net selling price
21.The best evidence of an asset’s net selling price is a price in a binding sale agreement in an arm’s length
transaction, adjusted for incremental costs that would be directly attri butable to the disposal of the asset.
22.If there is no binding sale agreement but an asset is traded in an active mark et, net selling price is the asset’s
market price less the costs of disposal. The appropriate market price is us ually the current bid price. When
current bid prices are unavailable, the price of the most recent transacti on may provide a basis from which
toestimatenetsellingprice,providedthattherehasnotbeenasignifica ntchangeineconomiccircumstances
between the transaction date and the date at which the estimate is made.
23.If there is no binding sale agreement or active market for an asset, net sell ing price is based on the best
information available to reflect the amount that an enterprise could obta in, at the balance sheet date, for the
disposaloftheassetinanarm’slengthtransactionbetweenknowledgeabl e,willingparties,afterdeductingthe
costs of disposal. In determining this amount, an enterprise considers th e outcome of recent transactions for
similar assets within the same industry. Net selling price does not reflec t a forced sale, unless management is
compelled to sell immediately.
24.Costsofdisposal,otherthanthosethathavealreadybeenrecognisedasli abilities,aredeductedindetermining
net selling price. Examples of such costs are legal costs, stamp duty and si milar transaction taxes, costs of
removing the asset, and direct incremental costs to bring an asset into con dition for its sale. However,
termination benefits (as defined in IAS 19, employee benefits) and costs a ssociated with reducing or
reorganisingabusinessfollowingthedisposalofanassetarenotdirecti ncrementalcoststodisposeoftheasset.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 307
25.Sometimes,thedisposalofanassetwouldrequirethebuyertotakeoverali abilityandonlyasinglenetselling
price is available for both the asset and the liability. Paragraph 77 expla ins how to deal with such cases.
Value in use
26. Estimating the value in use of an asset involves the following steps:
(a) estimatingthefuturecashinflowsandoutflowstobederivedfromcont inuinguseoftheassetandfrom
its ultimate disposal; and
(b) applying the appropriate discount rate to these future cash flows.
Basis for estimates of future cash flows
27. In measuring value in use:
(a) cash flow projections should be based on reasonable and supportable as sumptions that represent
management’sbestestimateofthesetofeconomicconditionsthatwillexi stovertheremainingusefullife
of the asset. Greater weight should be given to external evidence;
(b) cash flow projections should be based on the most recent financial budg ets/forecasts that have been
approved by management. Projections based on these budgets/forecasts sh ould cover a maximum period
of five years, unless a longer period can be justified; and
(c) cashflowprojectionsbeyondtheperiodcoveredbythemostrecentbudg ets/forecastsshouldbeestimated
byextrapolatingtheprojectionsbasedonthebudgets/forecastsusingas teadyordeclininggrowthratefor
subsequent years, unless an increasing rate can be justified. This growth rate should not exceed the
long-termaveragegrowthratefortheproducts,industries,orcountryor countriesinwhichtheenterprise
operates, or for the market in which the asset is used, unless a higher rate c an be justified.
28.Detailed,explicitandreliablefinancialbudgets/forecastsoffuturec ashflowsforperiodslongerthanfiveyears
aregenerallynotavailable.Forthisreason,management’sestimatesoff uturecashflowsarebasedonthemost
recent budgets/forecasts for a maximum of five years. Management may use c ash flow projections based on
financial budgets/forecasts over a period longer than five years if manag ement is confident that these
projections are reliable and it can demonstrate its ability, based on past experience, to forecast cash flows
accurately over that longer period.
29.Cash flow projections until the end of an asset’s useful life are estimated by extrapolating the cash flow
projectionsbasedonthefinancialbudgets/forecastsusingagrowthrate forsubsequentyears.Thisrateissteady
or declining, unless an increase in the rate matches objective informatio n about patterns over a product or
industry lifecycle. If appropriate, the growth rate is zero or negative.
30.Whereconditionsareveryfavourable,competitorsarelikelytoenterthe marketandrestrictgrowth.Therefore,
enterpriseswillhavedifficultyinexceedingtheaveragehistoricalgro wthrateoverthelongterm(say,20years)
fortheproducts,industries,orcountryorcountriesinwhichtheenterpr iseoperates,orforthemarketinwhich
the asset is used.
31.Inusinginformationfromfinancialbudgets/forecasts,anenterpriseco nsiderswhethertheinformationreflects
reasonable and supportable assumptions and represents management’s bes t estimate of the set of economic
conditions that will exist over the remaining useful life of the asset.308 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Composition of estimates of future cash flows
32.Estimates of future cash flows should include:
(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generat e the cash inflows from continuing
use of the asset (including cash outflows to prepare the asset for use) and t hat can be directly attributed,
or allocated on a reasonable and consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the as set at the end of its useful life.
33. Estimatesoffuturecashflowsandthediscountratereflectconsisten tassumptionsaboutpriceincreasesdue
togeneralinflation.Therefore,ifthediscountrateincludestheeffect ofpriceincreasesduetogeneralinflation,
future cash flows are estimated in nominal terms. If the discount rate excl udes the effect of price increases
due to general inflation, future cash flows are estimated in real terms (bu t include future specific price
increases or decreases).
34. Projections of cash outflows include future overheads that can be attr ibuted directly, or allocated on a
reasonable and consistent basis, to the use of the asset.
35. When the carrying amount of an asset does not yet include all the cash out flows to be incurred before it is
ready for use or sale, the estimate of future cash outflows includes an esti mate of any further cash outflow
that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a
building under construction or for a development project that is not yet co mpleted.
36. To avoid double counting, estimates of future cash flows do not include :
(a) cash inflows from assets that generate cash inflows from continuing us e that are largely independent of
the cash inflows from the asset under review (for example, financial asset s such as receivables); and
(b) cash outflows that relate to obligations that have already been recogn ised as liabilities (for example,
payables, pensions or provisions).
37.Future cash flows should be estimated for the asset in its current conditio n. Estimates of future cash flows
should not include estimated future cash inflows or outflows that are expe cted to arise from:
(a) a future restructuring to which an enterprise is not yet committed; or(b) future capital expenditure that will improve or enhance the asset in ex cess of its originally assessed
standard of performance.
38. Because future cash flows are estimated for the asset in its current con dition, value in use does not reflect:
(a) future cash outflows or related cost savings (for example reductions i n staff costs) or benefits that are
expected to arise from a future restructuring to which an enterprise is not yet committed; or
(b) future capital expenditure that will improve or enhance the asset in ex cess of its originally assessed
standard of performance or the related future benefits from this future ex penditure.
39. A restructuring is a programme that is planned and controlled by manage ment and that materially changes
eitherthescopeofthebusinessundertakenbyanenterpriseorthemanneri nwhichthebusinessisconducted.
IAS 37, provisions, contingent liabilities and contingent assets, gives guidance that may clarify when an
enterprise is committed to a restructuring.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 309
40. When an enterprise becomes committed to a restructuring, some assets a re likely to be affected by this
restructuring. Once the enterprise is committed to the restructuring:
(a) in determining value in use, estimates of future cash inflows and cash o utflows reflect the cost savings
andotherbenefitsfromtherestructuring(basedonthemostrecentfinanc ialbudgets/forecaststhathave
been approved by management); and
(b) estimates of future cash outflows for the restructuring are dealt with in a restructuring provision under
IAS 37, provisions, contingent liabilities and contingent assets.
Appendix A, Example 5, illustrates the effect of a future restructuring on a value in use calculation.
41. Until an enterprise incurs capital expenditure that improves or enhan ces an asset in excess of its originally
assessed standard of performance, estimates of future cash flows do not in clude the estimated future cash
inflows that are expected to arise from this expenditure (see Appendix A, E xample 6).
42. Estimatesoffuturecashflowsincludefuturecapitalexpenditurenec essarytomaintainorsustainanassetat
its originally assessed standard of performance.
43.Estimates of future cash flows should not include:
(a) cash inflows or outflows from financing activities; or
(b) income tax receipts or payments.
44. Estimated future cash flows reflect assumptions that are consistent w ith the way the discount rate is
determined. Otherwise, the effect of some assumptions will be counted twi ce or ignored. Because the time
value of money is considered by discounting the estimated future cash flow s, these cash flows exclude cash
inflows or outflows from financing activities. Similarly, since the disc ount rate is determined on a pre-tax
basis, future cash flows are also estimated on a pre-tax basis.
45.The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life
should be the amount that an enterprise expects to obtain from the disposal of the asset in an arm’s length
transaction between knowledgeable, willing parties, after deducting th e estimated costs of disposal.
46. The estimate of net cash flows to be received (or paid) for the disposal o f an asset at the end of its useful life
is determined in a similar way to an asset’s net selling price, except that, in estimating those net cash flows:
(a) anenterpriseusespricesprevailingatthedateoftheestimateforsim ilarassetsthathavereachedtheend
oftheirusefullifeandthathaveoperatedunderconditionssimilartotho seinwhichtheassetwillbeused;
and
(b) thosepricesareadjustedfortheeffectofbothfuturepriceincreases duetogeneralinflationandspecific
future price increases (decreases). However, if estimates of future cash flows from the asset’s continuing
use and the discount rate exclude the effect of general inflation, this eff ect is also excluded from the
estimate of net cash flows on disposal.
Foreign currency future cash flows
47.Future cash flows are estimated in the currency in which they will be genera ted and then discounted using a
discountrateappropriateforthatcurrency.Anenterprisetranslatesth epresentvalueobtainedusingthespot
exchange rate at the balance sheet date (described in IAS 21, the effects of changes in foreign exchange rates,
as the closing rate).310 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Discount rate
48.Thediscountrate(orrates)shouldbeapre-taxrate(orrates)thatreflec t(s)currentmarketassessmentsofthe
timevalueofmoneyandtherisksspecifictotheasset.Thediscountrate(s )shouldnotreflectrisksforwhich
future cash flow estimates have been adjusted.
49. A rate that reflects current market assessments of the time value of mon ey and the risks specific to the asset
isthereturnthatinvestorswouldrequireiftheyweretochooseaninvestm entthatwouldgeneratecashflows
of amounts, timing and risk profile equivalent to those that the enterpris e expects to derive from the asset.
This rate is estimated from the rate implicit in current market transactio ns for similar assets or from the
weighted average cost of capital of a listed enterprise that has a single as set (or a portfolio of assets) similar
in terms of service potential and risks to the asset under review.
50. Whenanasset-specificrateisnotdirectlyavailablefromthemarket, anenterpriseusessurrogatestoestimate
the discount rate. The purpose is to estimate, as far as possible, a market a ssessment of:
(a) the time value of money for the periods until the end of the asset’s usefu l life; and
(b) the risks that the future cash flows will differ in amount or timing from estimates.
51. As a starting point, the enterprise may take into account the following rates:
(a) the enterprise’s weighted average cost of capital determined using te chniques such as the capital asset
pricing model;
(b) the enterprise’s incremental borrowing rate; and
(c) other market borrowing rates.
52. These rates are adjusted:
(a) toreflectthewaythatthemarketwouldassessthespecificrisksassoc iatedwiththeprojectedcashflows;
and
(b) to exclude risks that are not relevant to the projected cash flows.
Consideration is given to risks such as country risk, currency risk, price risk and cash flow risk.
53. To avoid double counting, the discount rate does not reflect risks for w hich future cash flow estimates have
been adjusted.
54. Thediscountrateisindependentoftheenterprise’scapitalstructur eandthewaytheenterprisefinancedthe
purchaseoftheassetbecausethefuturecashflowsexpectedtoarisefroma nassetdonotdependontheway
in which the enterprise financed the purchase of the asset.
55. When the basis for the rate is post-tax, that basis is adjusted to reflec t a pre-tax rate.
56. An enterprise normally uses a single discount rate for the estimate of a n asset’s value in use. However, an
enterpriseusesseparatediscountratesfordifferentfutureperiodswhe revalueinuseissensitivetoadifference
in risks for different periods or to the term structure of interest rates.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 311
RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS
57.Paragraphs 58 to 63 set out the requirements for recognising and measuring impairment losses for an
individualasset.Recognitionandmeasurementofimpairmentlossesfora cash-generatingunitaredealtwith
in paragraphs 88 to 93.
58. If,andonlyif,therecoverableamountofanassetislessthanitscarry ingamount,thecarryingamountofthe
asset should be reduced to its recoverable amount. That reduction is an imp airment loss.
59. Animpairmentlossshouldberecognisedasanexpenseintheincomestat ementimmediately,unlesstheasset
is carried at revalued amount under another International Accounting Sta ndard (for example, under the
allowed alternative treatment in IAS 16, property, plant and equipment). Any impairment loss of a revalued
asset should be treated as a revaluation decrease under that other Interna tional Accounting Standard.
60.An impairment loss on a revalued asset is recognised as an expense in the inc ome statement. However, an
impairment loss on a revalued asset is recognised directly against any rev aluation surplus for the asset to the
extentthattheimpairmentlossdoesnotexceedtheamountheldinthereval uationsurplusforthatsameasset.
61. Whentheamountestimatedforanimpairmentlossisgreaterthanthecar ryingamountoftheassettowhich
it relates, an enterprise should recognise a liability if, and only if, tha t is required by another International
Accounting Standard.
62. After the recognition of an impairment loss, the depreciation (amorti sation) charge for the asset should be
adjusted in future periods to allocate the asset’s revised carrying amoun t, less its residual value (if any), on a
systematic basis over its remaining useful life.
63.If an impairment loss is recognised, any related deferred tax assets or lia bilities are determined under IAS 12,
income taxes, by comparing the revised carrying amount of the asset with it s tax base (see Appendix A,
Example 3).
CASH-GENERATING UNITS
64. Paragraphs 65 to 93 set out the requirements for identifying the cash-g enerating unit to which an asset
belongs and determining the carrying amount of, and recognising impairme nt losses for, cash-generating
units.
Identification of the cash-generating unit to which an asset belongs
65.If there is any indication that an asset may be impaired, recoverable amoun t should be estimated for the
individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an enterprise
should determine the recoverable amount of the cash-generating unit to wh ich the asset belongs (the asset’s
cash-generating unit).
66. The recoverable amount of an individual asset cannot be determined if:
(a) theasset’svalueinusecannotbeestimatedtobeclosetoitsnetsellin gprice(forexample,whenthefuture
cash flows from continuing use of the asset cannot be estimated to be neglig ible); and
(b) theassetdoesnotgeneratecashinflowsfromcontinuingusethatarela rgelyindependentofthosefrom
other assets. In such cases, value in use and, therefore, recoverable amou nt, can be determined only for
the asset’s cash-generating unit.312 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Example
Aminingenterpriseownsaprivaterailwaytosupportitsminingactivitie s.Theprivaterailwaycouldbesold
only for scrap value and the private railway does not generate cash inflows from continuing use that are
largely independent of the cash inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railwa y because the value in use of the
privaterailwaycannotbedeterminedanditisprobablydifferentfromscr apvalue.Therefore,theenterprise
estimates the recoverable amount of the cash-generating unit to which the private railway belongs, that is,
the mine as a whole.
67. Asdefinedinparagraph5,anasset’scash-generatingunitisthesmall estgroupofassetsthatincludestheasset
and that generates cash inflows from continuing use that are largely indep endent of the cash inflows from
other assets or groups of assets. Identification of an asset’s cash-gener ating unit involves judgement. If
recoverable amount cannot be determined for an individual asset, an enter prise identifies the lowest
aggregation of assets that generate largely independent cash inflows fro m continuing use.
Example
Abuscompanyprovidesservicesundercontractwithamunicipalitythatre quiresminimumserviceoneach
of five separate routes. Assets devoted to each route and the cash flows fro m each route can be identified
separately. One of the routes operates at a significant loss.
Because the enterprise does not have the option to curtail any one bus route , the lowest level of identifiable
cashinflowsfromcontinuingusethatarelargelyindependentofthecashi nflowsfromotherassetsorgroups
of assets is the cash inflows generated by the five routes together. The cas h-generating unit for each route is
the bus company as a whole.
68. Cashinflowsfromcontinuinguseareinflowsofcashandcashequivalen tsreceivedfrompartiesoutsidethe
reporting enterprise. In identifying whether cash inflows from an asset ( or group of assets) are largely
independentofthecashinflowsfromotherassets(orgroupsofassets),an enterpriseconsidersvariousfactors
including how management monitors the enterprise’s operations (such as b y product lines, businesses,
individual locations, districts or regional areas or in some other way) or how management makes decisions
about continuing or disposing of the enterprise’s assets and operations. Appendix A, Example 1, gives
examples of identification of a cash-generating unit.
69.Ifanactivemarketexistsfortheoutputproducedbyanassetoragroupofas sets,thisassetorgroupofassets
should be identified as a cash-generating unit, even if some or all of the ou tput is used internally. If this is
the case, management’s best estimate of future market prices for the outpu t should be used:
(a) indeterminingthevalueinuseofthiscash-generatingunit,whenesti matingthefuturecashinflowsthat
relate to the internal use of the output; and
(b) indeterminingthevalueinuseofothercash-generatingunitsofthere portingenterprise,whenestimating
the future cash outflows that relate to the internal use of the output.
70. Evenifpartoralloftheoutputproducedbyanassetoragroupofassetsi susedbyotherunitsofthereporting
enterprise (for example, products at an intermediate stage of a productio n process), this asset or group of
assetsformsaseparatecash-generatingunitiftheenterprisecouldsell thisoutputonanactivemarket.This
isbecausethisassetorgroupofassetscouldgeneratecashinflowsfromco ntinuingusethatwouldbelargely13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 313
independentofthecashinflowsfromotherassetsorgroupsofassets.Inus inginformationbasedonfinancial
budgets/forecaststhatrelatestosuchacash-generatingunit,anenterp riseadjuststhisinformationifinternal
transferpricesdonotreflectmanagement’sbestestimateoffuturemarke tpricesforthecash-generatingunit’s
output.
71.Cash-generating units should be identified consistently from period to p eriod for the same asset or types of
assets, unless a change is justified.
72. Ifanenterprisedeterminesthatanassetbelongstoadifferentcash-g eneratingunitthaninpreviousperiods,
orthatthetypesofassetsaggregatedfortheasset’scash-generatinguni thavechanged,paragraph117requires
certain disclosures about the cash-generating unit, if an impairment los s is recognised or reversed for the
cash-generating unit and is material to the financial statements of the re porting enterprise as a whole.
Recoverable amount and carrying amount of a cash-generating unit
73. Therecoverableamountofacash-generatingunitisthehigheroftheca sh-generatingunit’snetsellingprice
and value in use. For the purpose of determining the recoverable amount of a cash-generating unit, any
reference in paragraphs 16 to 56 to “an asset” is read as a reference to “a cas h-generating unit”.
74.The carrying amount of a cash-generating unit should be determined consis tently with the way the
recoverable amount of the cash-generating unit is determined.
75. The carrying amount of a cash-generating unit:
(a) includes the carrying amount of only those assets that can be attribute d directly, or allocated on a
reasonableandconsistentbasis,tothecash-generatingunitandthatwil lgeneratethefuturecashinflows
estimated in determining the cash-generating unit’s value in use; and
(b) does not include the carrying amount of any recognised liability, unle ss the recoverable amount of the
cash-generating unit cannot be determined without consideration of this liability.
Thisisbecausenetsellingpriceandvalueinuseofacash-generatingunit aredeterminedexcludingcashflows
that relate to assets that are not part of the cash-generating unit and liab ilities that have already been
recognised in the financial statements (see paragraphs 24 and 36).
76. Whereassetsaregroupedforrecoverabilityassessments,itisimport anttoincludeinthecash-generatingunit
all assets that generate the relevant stream of cash inflows from continui ng use. Otherwise, the
cash-generating unit may appear to be fully recoverable when in fact an imp airment loss has occurred. In
some cases, although certain assets contribute to the estimated future ca sh flows of a cash-generating unit,
they cannot be allocated to the cash-generating unit on a reasonable and co nsistent basis. This might be the
caseforgoodwillorcorporateassetssuchasheadofficeassets.Paragrap hs79to87explainhowtodealwith
these assets in testing a cash-generating unit for impairment.
77. It may be necessary to consider certain recognised liabilities in orde r to determine the recoverable amount
of a cash-generating unit. This may occur if the disposal of a cash-generat ing unit would require the buyer
to take over a liability. In this case, the net selling price (or the estimat ed cash flow from ultimate disposal)
of the cash-generating unit is the estimated selling price for the assets o f the cash-generating unit and the
liabilitytogether,lessthecostsofdisposal.Inordertoperformameani ngfulcomparisonbetweenthecarrying
amount of the cash-generating unit and its recoverable amount, the carryi ng amount of the liability is
deducted in determining both the cash-generating unit’s value in use and i ts carrying amount.314 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Example
A company operates a mine in a country where legislation requires that the o wner must restore the site on
completion of its mining operations. The cost of restoration includes the replacement of the overburden,
which must be removed before mining operations commence. A provision for t he costs to replace the
overburden was recognised as soon as the overburden was removed. The amoun t provided was recognised
as part of the cost of the mine and is being depreciated over the mine’s usefu l life. The carrying amount of
the provision for restoration costs is 500, which is equal to the present va lue of the restoration costs.
The enterprise is testing the mine for impairment. The cash-generating un it for the mine is the mine as a
whole. The enterprise has received various offers to buy the mine at a price of around 800; this price
encompasses the fact that the buyer will take over the obligation to restor e the overburden. Disposal costs
fortheminearenegligible.Thevalueinuseofthemineisapproximately1 2 00,excludingrestorationcosts.
The carrying amount of the mine is 1 000.
The net selling price for the cash-generating unit is 800. This amount cons iders restoration costs that have
alreadybeenprovidedfor.Asaconsequence,thevalueinuseforthecash-g eneratingunitisdeterminedafter
consideration of the restoration costs and is estimated to be 700 (1 200 les s 500). The carrying amount of
the cash-generating unit is 500, which is the carrying amount of the mine (1 000) less the carrying amount
of the provision for restoration costs (500).
78. For practical reasons, the recoverable amount of a cash-generating un it is sometimes determined after
considerationofassetsthatarenotpartofthecash-generatingunit(for example,receivablesorotherfinancial
assets) or liabilities that have already been recognised in the financial statements (for example, payables,
pensions and other provisions). In such cases, the carrying amount of the c ash-generating unit is increased
by the carrying amount of those assets and decreased by the carrying amount of those liabilities.
Goodwill
79.Goodwillarisingonacquisitionrepresentsapaymentmadebyanacquireri nanticipationoffutureeconomic
benefits. The future economic benefits may result from synergy between th e identifiable assets acquired or
fromassetswhich,individually,donotqualifyforrecognitioninthefin ancialstatements.Goodwilldoesnot
generate cash flows independently from other assets or groups of assets an d, therefore, the recoverable
amount of goodwill as an individual asset cannot be determined. As a conseq uence, if there is an indication
that goodwill may be impaired, recoverable amount is determined for the ca sh-generating unit to which
goodwillbelongs.Thisamountisthencomparedtothecarryingamountofth iscash-generatingunitandany
impairment loss is recognised in accordance with paragraph 88.
80. Intestingacash-generatingunitforimpairment,anenterpriseshoul didentifywhethergoodwillthatrelates
to this cash-generating unit is recognised in the financial statements. I f this is the case, an enterprise should:
(a) perform a “bottom-up” test, that is, the enterprise should:
(i) identifywhetherthecarryingamountofgoodwillcanbeallocatedonar easonableandconsistentbasis
to the cash-generating unit under review; and
(ii) then,comparetherecoverableamountofthecash-generatingunitund erreviewtoitscarryingamount
(including the carrying amount of allocated goodwill, if any) and recogni se any impairment loss in
accordance with paragraph 88.
Theenterpriseshouldperformthesecondstepofthe“bottom-up”testeven ifnoneofthecarryingamount
ofgoodwillcanbeallocatedonareasonableandconsistentbasistothecas h-generatingunitunderreview;
and13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 315
(b) if, in performing the “bottom-up” test, the enterprise could not alloc ate the carrying amount of goodwill
on a reasonable and consistent basis to the cash-generating unit under rev iew, the enterprise should also
perform a “top-down” test, that is, the enterprise should:
(i) identify the smallest cash-generating unit that includes the cash-ge nerating unit under review and to
which the carrying amount of goodwill can be allocated on a reasonable and c onsistent basis (the
“larger” cash-generating unit); and
(ii) then, compare the recoverable amount of the larger cash-generating u nit to its carrying amount
(includingthecarryingamountofallocatedgoodwill)andrecogniseanyi mpairmentlossinaccordance
with paragraph 88.
81.Whenever a cash-generating unit is tested for impairment, an enterprise c onsiders any goodwill that is
associatedwiththefuturecashflowstobegeneratedbythecash-generati ngunit.Ifgoodwillcanbeallocated
on a reasonable and consistent basis, an enterprise applies the “bottom-u p” test only. If it is not possible to
allocate goodwill on a reasonable and consistent basis, an enterprise app lies both the “bottom-up” test and
“top-down” test (see Appendix A, Example 7).
82.The“bottom-up”testensuresthatanenterpriserecognisesanyimpairmen tlossthatexistsforacash-generating
unit, including for goodwill that can be allocated on a reasonable and cons istent basis. Whenever it is
impracticable to allocate goodwill on a reasonable and consistent basis i n the “bottom-up” test, the
combination of the “bottom-up” and the “top-down” test ensures that an ent erprise recognises:
(a) first,anyimpairmentlossthatexistsforthecash-generatingunitex cludinganyconsiderationofgoodwill;
and
(b) then,anyimpairmentlossthatexistsforgoodwill.Becauseanenterpr iseappliesthe“bottom-up”testfirst
toallassetsthatmaybeimpaired,anyimpairmentlossidentifiedforthel argercash-generatingunitinthe
“top-down” test relates only to goodwill allocated to the larger unit.
83.If the “top-down” test is applied, an enterprise formally determines the r ecoverable amount of the larger
cash-generating unit, unless there is persuasive evidence that there is n o risk that the larger cash-generating
unit is impaired (see paragraph 12).
Corporate assets
84.Corporate assets include group or divisional assets such as the building o f a headquarters or a division of the
enterprise, EDP equipment or a research centre. The structure of an enterp rise determines whether an asset
meetsthisStandard’sdefinitionofcorporateassetsforaparticularcas h-generatingunit.Keycharacteristicsof
corporateassetsarethattheydonotgeneratecashinflowsindependently fromotherassetsorgroupsofassets
and their carrying amount cannot be fully attributed to the cash-generati ng unit under review.
85.Because corporate assets do not generate separate cash inflows, the recov erable amount of an individual
corporate asset cannot be determined unless management has decided to dis pose of the asset. As a
consequence,ifthereisanindicationthatacorporateassetmaybeimpair ed,recoverableamountisdetermined
for the cash-generating unit to which the corporate asset belongs, compar ed to the carrying amount of this
cash-generating unit and any impairment loss is recognised in accordance with paragraph 88.316 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
86. In testing a cash-generating unit for impairment, an enterprise shoul d identify all the corporate assets that
relatetothecash-generatingunitunderreview.Foreachidentifiedcorp orateasset,anenterpriseshouldthen
apply paragraph 80, that is:
(a) ifthecarryingamountofthecorporateassetcanbeallocatedonareaso nableandconsistentbasistothe
cash-generating unit under review, an enterprise should apply the “botto m-up” test only; and
(b) ifthecarryingamountofthecorporateassetcannotbeallocatedonare asonableandconsistentbasisto
thecash-generatingunitunderreview,anenterpriseshouldapplybothth e“bottom-up”and“top-down”
tests.
87.An example of how to deal with corporate assets can be found in Appendix A, Ex ample 8.
Impairment loss for a cash-generating unit
88.An impairment loss should be recognised for a cash-generating unit if, and only if, its recoverable amount
is less than its carrying amount. The impairment loss should be allocated t o reduce the carrying amount of
the assets of the unit in the following order:
(a) first, to goodwill allocated to the cash-generating unit (if any); and
(b) then,totheotherassetsoftheunitonapro-ratabasisbasedonthecarr yingamountofeachassetinthe
unit.
These reductions in carrying amounts should be treated as impairment loss es on individual assets and
recognised in accordance with paragraph 59.
89.Inallocatinganimpairmentlossunderparagraph88,thecarryingamounto fanassetshouldnotbereduced
below the highest of:
(a) its net selling price (if determinable);
(b) its value in use (if determinable); and(c) zero.
Theamountoftheimpairmentlossthatwouldotherwisehavebeenallocated totheassetshouldbeallocated
to the other assets of the unit on a pro-rata basis.
90. Thegoodwillallocatedtoacash-generatingunitisreducedbeforered ucingthecarryingamountoftheother
assets of the unit because of its nature.
91. If there is no practical way to estimate the recoverable amount of each i ndividual asset of a cash-generating
unit,thisStandardrequiresanarbitraryallocationofanimpairmentlos sbetweentheassetsofthatunit,other
than goodwill, because all assets of a cash-generating unit work together .
92. If the recoverable amount of an individual asset cannot be determined ( see paragraph 66):
(a) an impairment loss is recognised for the asset if its carrying amount is greater than the higher of its net
selling price and the results of the allocation procedures described in pa ragraphs 88 and 89; and
(b) no impairment loss is recognised for the asset if the related cash-gene rating unit is not impaired. This
applies even if the asset’s net selling price is less than its carrying amou nt.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 317
Example
Amachinehassufferedphysicaldamagebutisstillworking,althoughnota swellasitusedto.Thenetselling
priceofthemachineislessthanitscarryingamount.Themachinedoesnotg enerateindependentcashinflows
from continuing use. The smallest identifiable group of assets that inclu des the machine and generates cash
inflows from continuing use that are largely independent of the cash inflo ws from other assets is the
production line to which the machine belongs. The recoverable amount of th e production line shows that
the production line taken as a whole is not impaired.
Assumption 1: budgets/forecasts approved by management reflect no commi tment of management to
replace the machine.
The recoverable amount of the machine alone cannot be estimated since the m achine’s value in use:
(a) may differ from its net selling price; and
(b) canbedeterminedonlyforthecash-generatingunittowhichthemachin ebelongs(theproductionline).
The production line is not impaired, therefore, no impairment loss is reco gnised for the machine.
Nevertheless,theenterprisemayneedtoreassessthedepreciationperio dorthedepreciationmethodforthe
machine. Perhaps, a shorter depreciation period or a faster depreciation method is required to reflect the
expected remaining useful life of the machine or the pattern in which econo mic benefits are consumed by
the enterprise.
Assumption2:budgets/forecastsapprovedbymanagementreflectacommit mentofmanagementtoreplace
the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal
are estimated to be negligible.The machine’s value in use can be estimated to be close to its net selling pri ce. Therefore, the recoverable
amountofthemachinecanbedeterminedandnoconsiderationisgiventothe cash-generatingunittowhich
the machine belongs (the production line). Since the machine’s net sellin g price is less than its carrying
amount, an impairment loss is recognised for the machine.
93.
After the requirements in paragraphs 88 and 89 have been applied, a liabili ty should be recognised for any
remaining amount of an impairment loss for a cash-generating unit if, and o nly if, that is required by other
International Accounting Standards.
REVERSAL OF AN IMPAIRMENT LOSS
94.Paragraphs 95 to 101 set out the requirements for reversing an impairment l oss recognised for an asset or
a cash-generating unit in prior years. These requirements use the term “an asset” but apply equally to an
individual asset or a cash-generating unit. Additional requirements are set out for an individual asset in
paragraphs 102 to 106, for a cash generating unit in paragraphs 107 to 108 an d for goodwill in
paragraphs 109 to 112.
95. An enterprise should assess at each balance sheet date whether there is any indication that an impairment
lossrecognisedforanassetinprioryearsmaynolongerexistormayhavede creased.Ifanysuchindication
exists, the enterprise should estimate the recoverable amount of that ass et.
96.Inassessingwhetherthereisanyindicationthatanimpairmentlossrecog nisedforanassetinprioryearsmay
no longer exist or may have decreased, an enterprise should consider, as a m inimum, the following
indications:
External sources of information
(a)the asset’s market value has increased significantly during the period;
(b)significant changes with a favourable effect on the enterprise have taken place during the period, or will
take place in the near future, in the technological, market, economic or le gal environment in which the
enterprise operates or in the market to which the asset is dedicated;318 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) market interest rates or other market rates of return on investments ha ve decreased during the period,
and those decreases are likely to affect the discount rate used in calculat ing the asset’s value in use and
increase the asset’s recoverable amount materially;
Internal sources of information
(d)significant changes with a favourable effect on the enterprise have taken place during the period, or are
expected to take place in the near future, in the extent to which, or manner i n which, the asset is used
or is expected to be used. These changes include capital expenditure that h as been incurred during the
period to improve or enhance an asset in excess of its originally assessed s tandard of performance or a
commitment to discontinue or restructure the operation to which the asset belongs; and
(e)evidence is available from internal reporting that indicates that the eco nomic performance of the asset
is, or will be, better than expected.
97.Indications of a potential decrease in an impairment loss in paragraph 96 m ainly mirror the indications of
a potential impairment loss in paragraph 9. The concept of materiality app lies in identifying whether an
impairment loss recognised for an asset in prior years may need to be revers ed and the recoverable amount
of the asset determined.
98.If there is an indication that an impairment loss recognised for an asset ma y no longer exist or may have
decreased, this may indicate that the remaining useful life, the deprecia tion (amortisation) method or the
residual value may need to be reviewed and adjusted in accordance with the I nternational Accounting
Standard applicable to the asset, even if no impairment loss is reversed fo r the asset.
99. An impairment loss recognised for an asset in prior years should be reve rsed if, and only if, there has been
achangeintheestimatesusedtodeterminetheasset’srecoverableamount sincethelastimpairmentlosswas
recognised.Ifthisisthecase,thecarryingamountoftheassetshouldbei ncreasedtoitsrecoverableamount.
That increase is a reversal of an impairment loss.
100.Areversalofanimpairmentlossreflectsanincreaseintheestimatedserv icepotentialofanasset,eitherfrom
useorsale,sincethedatewhenanenterpriselastrecognisedanimpairmen tlossforthatasset.Anenterprise
isrequiredtoidentifythechangeinestimatesthatcausestheincreasein estimatedservicepotential.Examples
of changes in estimates include:
(a) achangeinthebasisforrecoverableamount(i.e.,whetherrecoverabl eamountisbasedonnetsellingprice
or value in use);
(b) if recoverable amount was based on value in use: a change in the amount or timing of estimated future
cash flows or in the discount rate; or
(c) ifrecoverableamountwasbasedonnetsellingprice:achangeinestima teofthecomponentsofnetselling
price.
101.Anasset’svalueinusemaybecomegreaterthantheasset’scarryingamount simplybecausethepresentvalue
of future cash inflows increases as they become closer. However, the servi ce potential of the asset has not
increased.Therefore,animpairmentlossisnotreversedjustbecauseoft hepassageoftime(sometimescalled
the“unwinding”ofthediscount),eveniftherecoverableamountoftheass etbecomeshigherthanitscarrying
amount.
Reversal of an impairment loss for an individual asset
102. The increased carrying amount of an asset due to a reversal of an impair ment loss should not exceed the
carryingamountthatwouldhavebeendetermined(netofamortisationorde preciation)hadnoimpairment
loss been recognised for the asset in prior years.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 319
103.Anyincreaseinthecarryingamountofanassetabovethecarryingamountth atwouldhavebeendetermined
(net of amortisation or depreciation) had no impairment loss been recogni sed for the asset in prior years is
a revaluation. In accounting for such a revaluation, an enterprise applie s the International Accounting
Standard applicable to the asset.
104. A reversal of an impairment loss for an asset should be recognised as in come immediately in the income
statement, unless the asset is carried at revalued amount under another In ternational Accounting Standard
(forexample,undertheallowedalternativetreatmentinIAS16,property ,plantandequipment).Anyreversal
of an impairment loss on a revalued asset should be treated as a revaluation increase under that other
International Accounting Standard.
105.A reversal of an impairment loss on a revalued asset is credited directly to equity under the heading
revaluationsurplus.However,totheextentthatanimpairmentlossonthe samerevaluedassetwaspreviously
recognisedasanexpenseintheincomestatement,areversalofthatimpair mentlossisrecognisedasincome
in the income statement.
106. After a reversal of an impairment loss is recognised, the depreciatio n (amortisation) charge for the asset
should be adjusted in future periods to allocate the asset’s revised carry ing amount, less its residual value (if
any), on a systematic basis over its remaining useful life.
Reversal of an impairment loss for a cash-generating unit
107.A reversal of an impairment loss for a cash-generating unit should be alloc ated to increase the carrying
amount of the assets of the unit in the following order:
(a) first,assetsotherthangoodwillonapro-ratabasisbasedonthecarry ingamountofeachassetintheunit;
and
(b) then, to goodwill allocated to the cash-generating unit (if any), if th e requirements in paragraph 109 are
met.
Theseincreasesincarryingamountsshouldbetreatedasreversalsofimpa irmentlossesforindividualassets
and recognised in accordance with paragraph 104.
108.In allocating a reversal of an impairment loss for a cash-generating unit u nder paragraph 107, the carrying
amount of an asset should not be increased above the lower of:
(a) its recoverable amount (if determinable); and
(b) the carrying amount that would have been determined (net of amortisati on or depreciation) had no
impairment loss been recognised for the asset in prior years.
The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset
should be allocated to the other assets of the unit on a pro-rata basis.
Reversal of an impairment loss for goodwill
109. Asanexceptiontotherequirementinparagraph99,animpairmentloss recognisedforgoodwillshouldnot
be reversed in a subsequent period unless:
(a) theimpairmentlosswascausedbyaspecificexternaleventofanexcept ionalnaturethatisnotexpected
to recur; and
(b) subsequent external events have occurred that reverse the effect of th at event.
110.IAS38,intangibleassets,prohibitstherecognitionofinternallygener atedgoodwill.Anysubsequentincrease
intherecoverableamountofgoodwillislikelytobeanincreaseininterna llygeneratedgoodwill,unlessthe
increase relates clearly to the reversal of the effect of a specific extern al event of an exceptional nature.320 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
111.ThisStandarddoesnotpermitanimpairmentlosstobereversedforgoodwil lbecauseofachangeinestimates
(for example, a change in the discount rate or in the amount and timing of fut ure cash flows of the
cash-generating unit to which goodwill relates).
112.Aspecificexternaleventisaneventthatisoutsideofthecontroloftheen terprise.Examplesofexternalevents
ofanexceptionalnatureincludenewregulationsthatsignificantlycurt ailtheoperatingactivities,ordecrease
the profitability, of the business to which the goodwill relates.
DISCLOSURE
113. For each class of assets, the financial statements should disclose:
(a) the amount of impairment losses recognised in the income statement dur ing the period and the line
item(s) of the income statement in which those impairment losses are inclu ded;
(b) the amount of reversals of impairment losses recognised in the income s tatement during the period and
the line item(s) of the income statement in which those impairment losses a re reversed;
(c) the amount of impairment losses recognised directly in equity during t he period; and
(d) the amount of reversals of impairment losses recognised directly in eq uity during the period.
114.A class of assets is a grouping of assets of similar nature and use in an enter prise’s operations.
115.Theinformationrequiredinparagraph113maybepresentedwithotherinfo rmationdisclosedfortheclass
of assets. For example, this information may be included in a reconciliati on of the carrying amount of
property, plant and equipment, at the beginning and end of the period, as re quired under IAS 16, property,
plant and equipment.
116. An enterprise that applies IAS 14, segment reporting, should disclos e the following for each reportable
segment based on an enterprise’s primary format (as defined in IAS 14):
(a) the amount of impairment losses recognised in the income statement and directly in equity during the
period; and
(b) the amount of reversals of impairment losses recognised in the income s tatement and directly in equity
during the period.
117. If an impairment loss for an individual asset or a cash-generating uni t is recognised or reversed during the
periodandismaterialtothefinancialstatementsofthereportingenterp riseasawhole,anenterpriseshould
disclose:
(a) the events and circumstances that led to the recognition or reversal of the impairment loss;
(b) the amount of the impairment loss recognised or reversed;
(c) for an individual asset:
(i) the nature of the asset; and(ii) the reportable segment to which the asset belongs, based on the enterp rise’s primary format (as
defined in IAS 14, segment reporting, if the enterprise applies IAS 14);13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 321
(d) for a cash-generating unit:
(i) a description of the cash-generating unit (such as whether it is a produ ct line, a plant, a business
operation, a geographical area, a reportable segment as defined in IAS 14 o r other);
(ii) theamountoftheimpairmentlossrecognisedorreversedbyclassofas setsandbyreportablesegment
based on the enterprise’s primary format (as defined in IAS 14, if the enter prise applies IAS 14); and
(iii)if the aggregation of assets for identifying the cash-generating un it has changed since the previous
estimateofthecash-generatingunit’srecoverableamount(ifany),thee nterpriseshoulddescribethe
current and former way of aggregating assets and the reasons for changing t he way the
cash-generating unit is identified;
(e) whether the recoverable amount of the asset (cash-generating unit) is its net selling price or its value in
use;
(f) if recoverable amount is net selling price, the basis used to determine net selling price (such as whether
selling price was determined by reference to an active market or in some oth er way); and
(g) if recoverable amount is value in use, the discount rate(s) used in the c urrent estimate and previous
estimate (if any) of value in use.
118. If impairment losses recognised (reversed) during the period are mat erial in aggregate to the financial
statements of the reporting enterprise as a whole, an enterprise should di sclose a brief description of the
following:
(a) the main classes of assets affected by impairment losses (reversals of impairment losses) for which no
information is disclosed under paragraph 117; and
(b) the main events and circumstances that led to the recognition (reversa l) of these impairment losses for
which no information is disclosed under paragraph 117.
119.Anenterpriseisencouragedtodisclosekeyassumptionsusedtodetermine therecoverableamountofassets
(cash-generating units) during the period.
TRANSITIONAL PROVISIONS
120. This Standard should be applied on a prospective basis only. Impairme nt losses (reversals of impairment
losses) that result from adoption of this International Accounting Stand ard should be recognised in
accordancewiththisStandard(i.e.,intheincomestatementunlessanass etiscarriedatrevaluedamount.An
impairmentloss(reversalofimpairmentloss)onarevaluedassetshouldb etreatedasarevaluationdecrease
(increase)).
121.Before the adoption of this Standard, various International Accounting S tandards included requirements
broadly similar to those included in this Standard for the recognition and reversal of impairment losses.
However, changes may arise from previous assessments because this Standa rd details how to measure
recoverable amount and how to consider an asset’s cash-generating unit. I t would be difficult to determine
retrospectively what the estimate of recoverable amount would have been. Therefore, on adoption of this
Standard,anenterprisedoesnotapplythebenchmarkortheallowedaltern ativetreatmentforotherchanges
inaccountingpoliciesinIAS8,netprofitorlossfortheperiod,fundamen talerrorsandchangesinaccounting
policies.
EFFECTIVE DATE
122. This International Accounting Standard becomes operative for finan cial statements covering periods
beginningonorafter1July1999.Earlierapplicationisencouraged.Ifan enterpriseappliesthisStandardfor
financial statements covering periods beginning before 1 July 1999, the e nterprise should disclose that fact.322 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
INTERNATIONAL ACCOUNTING STANDARD IAS 37
Provisions, contingent liabilities and contingent assets
This International Accounting Standard was approved by the IASC Board in J uly 1998 and became effective for
financial statements covering periods beginning on or after 1 July 1999.
INTRODUCTION
1. IAS37prescribestheaccountinganddisclosureforallprovisions,con tingentliabilitiesandcontingentassets,
except:
(a) those resulting from financial instruments that are carried at fair va lue;
(b) those resulting from executory contracts, except where the contract i s onerous. Executory contracts are
contracts under which neither party has performed any of its obligations o r both parties have partially
performed their obligations to an equal extent;
(c) those arising in insurance enterprises from contracts with policyhol ders; or
(d) those covered by another International Accounting Standard.
Provisions
2.TheStandarddefinesprovisionsasliabilitiesofuncertaintimingoramo unt.Aprovisionshouldberecognised
when, and only when:
(a) an enterprise has a present obligation (legal or constructive) as a res ult of a past event;
(b) it is probable (i.e. more likely than not) that an outflow of resources e mbodying economic benefits will
be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. The Stan dard notes that it is only in
extremely rare cases that a reliable estimate will not be possible.
3.TheStandarddefinesaconstructiveobligationasanobligationthatderi vesfromanenterprise’sactionswhere:
(a) by an established pattern of past practice, published policies or a suf ficiently specific current statement,
the enterprise has indicated to other parties that it will accept certain r esponsibilities; and
(b) as a result, the enterprise has created a valid expectation on the part o f those other parties that it will
discharge those responsibilities.
4.In rare cases, for example in a law suit, it may not be clear whether an enterp rise has a present obligation.
In these cases, a past event is deemed to give rise to a present obligation if , taking account of all available
evidence, it is more likely than not that a present obligation exists at the balance sheet date. An enterprise
recognises a provision for that present obligation if the other recogniti on criteria described above are met.
If it is more likely than not that no present obligation exists, the enterpr ise discloses a contingent liability,
unless the possibility of an outflow of resources embodying economic bene fits is remote.
5.The amount recognised as a provision should be the best estimate of the expe nditure required to settle the
present obligation at the balance sheet date, in other words, the amount th at an enterprise would rationally
pay to settle the obligation at the balance sheet date or to transfer it to a t hird party at that time.
6.The Standard requires that an enterprise should, in measuring a provision :
(a) takerisksanduncertaintiesintoaccount.However,uncertaintydoes notjustifythecreationofexcessive
provisions or a deliberate overstatement of liabilities;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 323
(b) discounttheprovisions,wheretheeffectofthetimevalueofmoneyism aterial,usingapre-taxdiscount
rate(orrates)thatreflect(s)currentmarketassessmentsofthetimeval ueofmoneyandthoserisksspecific
to the liability that have not been reflected in the best estimate of the exp enditure. Where discounting is
used, the increase in the provision due to the passage of time is recognised as an interest expense;
(c) take future events, such as changes in the law and technological change s, into account where there is
sufficient objective evidence that they will occur; and
(d) not take gains from the expected disposal of assets into account, even i f the expected disposal is closely
linked to the event giving rise to the provision.
7.Anenterprisemayexpectreimbursementofsomeoralloftheexpenditurere quiredtosettleaprovision(for
example, through insurance contracts, indemnity clauses or suppliers’ w arranties). An enterprise should:
(a) recognise a reimbursement when, and only when, it is virtually certain that reimbursement will be
receivediftheenterprisesettlestheobligation.Theamountrecognised forthereimbursementshouldnot
exceed the amount of the provision; and
(b) recognise the reimbursement as a separate asset. In the income stateme nt, the expense relating to a
provision may be presented net of the amount recognised for a reimbursemen t.
8.Provisions should be reviewed at each balance sheet date and adjusted to re flect the current best estimate. If
itisnolongerprobablethatanoutflowofresourcesembodyingeconomicbe nefitswillberequiredtosettle
the obligation, the provision should be reversed.
9.A provision should be used only for expenditures for which the provision wa s originally recognised.
Provisions — specific applications
10.TheStandardexplainshowthegeneralrecognitionandmeasurementrequir ementsforprovisionsshouldbe
applied in three specific cases: future operating losses; onerous contra cts; and restructurings.
11.Provisionsshouldnotberecognisedforfutureoperatinglosses.Anexpec tationoffutureoperatinglossesis
anindicationthatcertainassetsoftheoperationmaybeimpaired.Inthis case,anenterpriseteststheseassets
for impairment under IAS 36, impairment of assets.
12.Ifanenterprisehasacontractthatisonerous,thepresentobligationund erthecontractshouldberecognised
and measured as a provision. An onerous contract is one in which the unavoid able costs of meeting the
obligations under the contract exceed the economic benefits expected to b e received under it.
13.The Standard defines a restructuring as a programme that is planned and con trolled by management, and
materially changes either:
(a) the scope of a business undertaken by an enterprise; or
(b) the manner in which that business is conducted.
14.Aprovisionforrestructuringcostsisrecognisedonlywhenthegeneralre cognitioncriteriaforprovisionsare
met. In this context, a constructive obligation to restructure arises onl y when an enterprise:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;(ii) the principal locations affected;(iii)the location, function, and approximate number of employees who wil l be compensated for
terminating their services;324 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out t he restructuring by starting to
implement that plan or announcing its main features to those affected by it .
15.A management or board decision to restructure does not give rise to a constr uctive obligation at the balance
sheet date unless the enterprise has, before the balance sheet date:
(a) started to implement the restructuring plan; or(b) communicatedtherestructuringplantothoseaffectedbyitinasuffic ientlyspecificmannertoraiseavalid
expectation in them that the enterprise will carry out the restructuring.
16.
Where a restructuring involves the sale of an operation, no obligation ari ses for the sale until the enterprise
is committed to the sale, i.e. there is a binding sale agreement.
17.Arestructuringprovisionshouldincludeonlythedirectexpendituresar isingfromtherestructuring,whichare
those that are both:
(a) necessarily entailed by the restructuring; and(b) notassociatedwiththeongoingactivitiesoftheenterprise.Thus,ar estructuringprovisiondoesnotinclude
such costs as: retraining or relocating continuing staff; marketing; or i nvestment in new systems and
distribution networks.
Contingent liabilities
18.TheStandardsupersedesthepartsofIAS10,contingenciesandeventsoccu rringafterthebalancesheetdate (1),
that deal with contingencies. The Standard defines a contingent liabilit y as:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the
occurrenceornon-occurrenceofoneormoreuncertainfutureeventsnotwh ollywithinthecontrolofthe
enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) itisnotprobablethatanoutflowofresourcesembodyingeconomicbene fitswillberequiredtosettle
the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient relia bility.
19.An enterprise should not recognise a contingent liability. An enterprise should disclose a contingent liability,
unless the possibility of an outflow of resources embodying economic bene fits is remote.
Contingent assets
20.The Standard defines a contingent asset as a possible asset that arises fro m past events and whose existence
willbeconfirmedonlybytheoccurrenceornon-occurrenceofoneormoreun certainfutureeventsnotwholly
within the control of the enterprise. An example is a claim that an enterpri se is pursuing through legal
processes, where the outcome is uncertain.
21.Anenterpriseshouldnotrecogniseacontingentasset.Acontingentasset shouldbedisclosedwhereaninflow
of economic benefits is probable.
22.When the realisation of income is virtually certain, then the related asse t is not a contingent asset and its
recognition is appropriate.
(1) IAS 10, contingencies and events occurring after the balance sheet date, was superseded by IAS 10 (revised 1999), events after
the balance sheet date, effective 1 January 2000.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 325
Effective date
23.TheStandardbecomesoperativeforannualfinancialstatementscovering periodsbeginningonorafter1July
1999. Earlier application is encouraged.
CONTENTS
Paragraphs
Objective 327
Scope 327
Definitions 328
Provisions and other liabilities 329
Relationship between provisions and contingent liabilities 329Recognition 329
Provisions 329
Present obligation 330
Past event 330
Probable outflow of resources embodying economic benefits 331Reliable estimate of the obligation 331Contingent liabilities 331
Contingent assets 332
Measurement 332
Best estimate 332
Risk and uncertainties 333
Present value 333
Future events 333
Expected disposals of assets 334
Reimbursements 334
Changes in provisions 334
Use of provisions 334
Application of the recognition and measurement rules 335Future operating losses 335
Onerous contracts 335
Restructuring 335
Disclosure 337
Transitional provisions 338
Effective date 339326 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to ensure that appropriate recognition c riteria and measurement bases are applied
to provisions, contingent liabilities and contingent assets and that suf ficient information is disclosed in the notes to
the financial statements to enable users to understand their nature, timi ng and amount.
SCOPE
1. This Standard should be applied by all enterprises in accounting for pro visions, contingent liabilities and
contingent assets, except:
(a) those resulting from financial instruments that are carried at fair va lue;
(b) those resulting from executory contracts, except where the contract i s onerous;
(c) those arising in insurance enterprises from contracts with policyhol ders; and
(d) those covered by another International Accounting Standard.
2.This Standard applies to financial instruments (including guarantees) t hat are not carried at fair value.
3.Executory contracts are contracts under which neither party has performe d any of its obligations or both
partieshavepartiallyperformedtheirobligationstoanequalextent.Th isStandarddoesnotapplytoexecutory
contracts unless they are onerous.
4.ThisStandardappliestoprovisions,contingentliabilitiesandconting entassetsofinsuranceenterprisesother
than those arising from contracts with policyholders.
5.Where another International Accounting Standard deals with a specific ty pe of provision, contingent liability
orcontingentasset,anenterpriseappliesthatStandardinsteadofthisS tandard.Forexample,certaintypesof
provisions are also addressed in Standards on:
(a) construction contracts (see IAS 11, construction contracts);
(b) income taxes (see IAS 12, income taxes);(c) leases (see IAS 17, leases). However, as IAS 17 contains no specific req uirements to deal with operating
leases that have become onerous, this Standard applies to such cases; and
(d) employee benefits (see IAS 19, employee benefits).
6.
Someamountstreatedasprovisionsmayrelatetotherecognitionofrevenu e,forexamplewhereanenterprise
gives guarantees in exchange for a fee. This Standard does not address the r ecognition of revenue. IAS 18,
revenue, identifies the circumstances in which revenue is recognised and provides practical guidance on the
application of the recognition criteria. This Standard does not change th e requirements of IAS 18.
7.This Standard defines provisions as liabilities of uncertain timing or am ount. In some countries the term
“provision”isalsousedinthecontextofitemssuchasdepreciation,impa irmentofassetsanddoubtfuldebts:
these are adjustments to the carrying amounts of assets and are not address ed in this Standard.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 327
8.OtherInternationalAccountingStandardsspecifywhetherexpenditures aretreatedasassetsorasexpenses.
These issues are not addressed in this Standard. Accordingly, this Standa rd neither prohibits nor requires
capitalisation of the costs recognised when a provision is made.
9.This Standard applies to provisions for restructuring (including discon tinuing operations). Where a
restructuring meets the definition of a discontinuing operation, additi onal disclosures may be required by
IAS 35, discontinuing operations.
DEFINITIONS
10.The following terms are used in this Standard with the meanings specified:
A provision is a liability of uncertain timing or amount.
Aliabilityisapresentobligationoftheenterprisearisingfrompasteve nts,thesettlementofwhichisexpected
to result in an outflow from the enterprise of resources embodying economi c benefits.
An obligating event is an event that creates a legal or constructive obliga tion that results in an enterprise
having no realistic alternative to settling that obligation.A legal obligation is an obligation that derives from:(a) a contract (through its explicit or implicit terms);(b) legislation; or(c) other operation of law.A constructive obligation is an obligation that derives from an enterpris e’s actions where:
(a) by an established pattern of past practice, published policies or a suf ficiently specific current statement,
the enterprise has indicated to other parties that it will accept certain r esponsibilities; and
(b) as a result, the enterprise has created a valid expectation on the part o f those other parties that it will
discharge those responsibilities.
A contingent liability is:(a) a possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wh olly within the control of
the enterprise; or
(b) a present obligation that arises from past events but is not recognised because:
(i) itisnotprobablethatanoutflowofresourcesembodyingeconomicbene fitswillberequiredtosettle
the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient relia bility.
Acontingentassetisapossibleassetthatarisesfrompasteventsandwhos eexistencewillbeconfirmedonly
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the enterprise.An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received under it.
Arestructuringisaprogrammethatisplannedandcontrolledbymanagemen t,andmateriallychangeseither:
(a) the scope of a business undertaken by an enterprise; or(b) the manner in which that business is conducted.328 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Provisions and other liabilities
11. Provisions can be distinguished from other liabilities such as trade p ayables and accruals because there is
uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
(a) tradepayablesareliabilitiestopayforgoodsorservicesthathavebe enreceivedorsuppliedandhavebeen
invoiced or formally agreed with the supplier; and
(b) accrualsareliabilitiestopayforgoodsorservicesthathavebeenrec eivedorsuppliedbuthavenotbeen
paid, invoiced or formally agreed with the supplier, including amounts du e to employees (for example,
amounts relating to accrued vacation pay). Although it is sometimes neces sary to estimate the amount
or timing of accruals, the uncertainty is generally much less than for prov isions.
Accruals are often reported as part of trade and other payables, whereas pr ovisions are reported separately.
Relationship between provisions and contingent liabilities
12.In a general sense, all provisions are contingent because they are uncerta in in timing or amount. However,
within this Standard the term “contingent” is used for liabilities and ass ets that are not recognised because
theirexistencewillbeconfirmedonlybytheoccurrenceornon-occurrenc eofoneormoreuncertainfuture
eventsnotwhollywithinthecontroloftheenterprise.Inaddition,thete rm“contingentliability”isusedfor
liabilities that do not meet the recognition criteria.
13.This Standard distinguishes between:
(a) provisions — which are recognised as liabilities (assuming that a reli able estimate can be made) because
theyarepresentobligationsanditisprobablethatanoutflowofresource sembodyingeconomicbenefits
will be required to settle the obligations; and
(b) contingent liabilities — which are not recognised as liabilities beca use they are either:
(i) possibleobligations,asithasyettobeconfirmedwhethertheenterpr isehasapresentobligationthat
could lead to an outflow of resources embodying economic benefits; or
(ii) presentobligationsthatdonotmeettherecognitioncriteriainthis Standard(becauseeitheritisnot
probable that an outflow of resources embodying economic benefits will be required to settle the
obligation, or a sufficiently reliable estimate of the amount of the oblig ation cannot be made).
RECOGNITION
Provisions
14.A provision should be recognised when:
(a) an enterprise has a present obligation (legal or constructive) as a res ult of a past event (1);
(b) it is probable that an outflow of resources embodying economic benefit s will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
(1) See also SIC-6: costs of modifying existing software.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 329
Present obligation
15. Inrarecasesitisnotclearwhetherthereisapresentobligation.Inth esecases,apasteventisdeemedtogive
risetoapresentobligationif,takingaccountofallavailableevidence, itismorelikelythannotthatapresent
obligation exists at the balance sheet date.
16.Inalmostallcasesitwillbeclearwhetherapasteventhasgivenrisetoapr esentobligation.Inrarecases,for
exampleinalawsuit,itmaybedisputedeitherwhethercertaineventshave occurredorwhetherthoseevents
result in a present obligation. In such a case, an enterprise determines wh ether a present obligation exists at
the balance sheet date by taking account of all available evidence, includ ing, for example, the opinion of
experts. The evidence considered includes any additional evidence provi ded by events after the balance sheet
date. On the basis of such evidence:
(a) where it is more likely than not that a present obligation exists at the b alance sheet date, the enterprise
recognises a provision (if the recognition criteria are met); and
(b) where it is more likely that no present obligation exists at the balance sheet date, the enterprise discloses
a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is
remote (see paragraph 86).
Past event
17.A past event that leads to a present obligation is called an obligating even t. For an event to be an obligating
event,itisnecessarythattheenterprisehasnorealisticalternativeto settlingtheobligationcreatedbytheevent.
This is the case only:
(a) where the settlement of the obligation can be enforced by law; or
(b) inthecaseofaconstructiveobligation,wheretheevent(whichmaybea nactionoftheenterprise)creates
valid expectations in other parties that the enterprise will discharge th e obligation.
18.Financialstatementsdealwiththefinancialpositionofanenterpriseat theendofitsreportingperiodandnot
its possible position in the future. Therefore, no provision is recognise d for costs that need to be incurred to
operate in the future. The only liabilities recognised in an enterprise’s balance sheet are those that exist at the
balance sheet date.
19.Itisonlythoseobligationsarisingfrompasteventsexistingindependen tlyofanenterprise’sfutureactions(i.e.
thefutureconductofitsbusiness)thatarerecognisedasprovisions.Exa mplesofsuchobligationsarepenalties
or clean-up costs for unlawful environmental damage, both of which would l ead to an outflow of resources
embodying economic benefits in settlement regardless of the future actio ns of the enterprise. Similarly, an
enterpriserecognisesaprovisionforthedecommissioningcostsofanoil installationoranuclearpowerstation
totheextentthattheenterpriseisobligedtorectifydamagealreadycaus ed.Incontrast,becauseofcommercial
pressures or legal requirements, an enterprise may intend or need to carry out expenditure to operate in a
particular way in the future (for example, by fitting smoke filters in a cer tain type of factory). Because the
enterprise can avoid the future expenditure by its future actions, for exa mple by changing its method of
operation, it has no present obligation for that future expenditure and no provision is recognised.
20.Anobligationalwaysinvolvesanotherpartytowhomtheobligationisowed .Itisnotnecessary,however,to
knowtheidentityofthepartytowhomtheobligationisowed—indeedtheobl igationmaybetothepublic
atlarge.Becauseanobligationalwaysinvolvesacommitmenttoanotherpa rty,itfollowsthatamanagement
or board decision does not give rise to a constructive obligation at the bal ance sheet date unless the decision
has been communicated before the balance sheet date to those affected by it in a sufficiently specific manner
to raise a valid expectation in them that the enterprise will discharge its responsibilities.330 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
21.An event that does not give rise to an obligation immediately may do so at a la ter date, because of changes
in the law or because an act (for example, a sufficiently specific public st atement) by the enterprise gives rise
to a constructive obligation. For example, when environmental damage is c aused there may be no obligation
toremedytheconsequences.However,thecausingofthedamagewillbecome anobligatingeventwhenanew
law requires the existing damage to be rectified or when the enterprise pub licly accepts responsibility for
rectification in a way that creates a constructive obligation.
22.Where details of a proposed new law have yet to be finalised, an obligation a rises only when the legislation
is virtually certain to be enacted as drafted. For the purpose of this Stand ard, such an obligation is treated as
alegalobligation.Differencesincircumstancessurroundingenactment makeitimpossibletospecifyasingle
event that would make the enactment of a law virtually certain. In many case s it will be impossible to be
virtually certain of the enactment of a law until it is enacted.
Probable outflow of resources embodying economic benefits
23.For a liability to qualify for recognition there must be not only a present o bligation but also the probability
of an outflow of resources embodying economic benefits to settle that obli gation. For the purpose of this
Standard (1),anoutflowofresourcesorothereventisregardedasprobableiftheeven tismorelikelythannot
to occur, i.e. the probability that the event will occur is greater than the probability that it will not. Where it
is not probable that a present obligation exists, an enterprise discloses a contingent liability, unless the
possibility of an outflow of resources embodying economic benefits is rem ote (see paragraph 86).
24.Where there are a number of similar obligations (e.g. product warranties o r similar contracts) the probability
thatanoutflowwillberequiredinsettlementisdeterminedbyconsiderin gtheclassofobligationsasawhole.
Althoughthelikelihoodofoutflowforanyoneitemmaybesmall,itmaywell beprobablethatsomeoutflow
of resources will be needed to settle the class of obligations as a whole. If that is the case, a provision is
recognised (if the other recognition criteria are met).
Reliable estimate of the obligation
25.Theuseofestimatesisanessentialpartofthepreparationoffinancialst atementsanddoesnotunderminetheir
reliability.Thisisespeciallytrueinthecaseofprovisions,whichbyth eirnaturearemoreuncertainthanmost
other balance sheet items. Except in extremely rare cases, an enterprise w ill be able to determine a range of
possible outcomes and can therefore make an estimate of the obligation tha t is sufficiently reliable to use in
recognising a provision.
26.Intheextremelyrarecasewherenoreliableestimatecanbemade,aliabili tyexiststhatcannotberecognised.
That liability is disclosed as a contingent liability (see paragraph 86).
Contingent liabilities
27.An enterprise should not recognise a contingent liability.
28.Acontingentliabilityisdisclosed,asrequiredbyparagraph86,unlesst hepossibilityofanoutflowofresources
embodying economic benefits is remote.
29.Whereanenterpriseisjointlyandseverallyliableforanobligation,the partoftheobligationthatisexpected
tobemetbyotherpartiesistreatedasacontingentliability.Theenterpr iserecognisesaprovisionforthepart
of the obligation for which an outflow of resources embodying economic ben efits is probable, except in the
extremely rare circumstances where no reliable estimate can be made.
30.Contingent liabilities may develop in a way not initially expected. There fore, they are assessed continually to
determinewhetheranoutflowofresourcesembodyingeconomicbenefitsha sbecomeprobable.Ifitbecomes
probable that an outflow of future economic benefits will be required for a n item previously dealt with as a
contingentliability,aprovisionisrecognisedinthefinancialstateme ntsoftheperiodinwhichthechangein
probability occurs (except in the extremely rare circumstances where no r eliable estimate can be made).
(1) The interpretation of “probable” in this Standard as “more likely than no t” does not necessarily apply in other International
Accounting Standards.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 331
Contingent assets
31. An enterprise should not recognise a contingent asset.
32.Contingent assets usually arise from unplanned or other unexpected event s that give rise to the possibility
of an inflow of economic benefits to the enterprise. An example is a claim th at an enterprise is pursuing
through legal processes, where the outcome is uncertain.
33.Contingentassetsarenotrecognisedinfinancialstatementssincethism ayresultintherecognitionofincome
thatmayneverberealised.However,whentherealisationofincomeisvirt uallycertain,thentherelatedasset
is not a contingent asset and its recognition is appropriate.
34.A contingent asset is disclosed, as required by paragraph 89, where an infl ow of economic benefits is
probable.
35.Contingent assets are assessed continually to ensure that developments a re appropriately reflected in the
financialstatements.Ifithasbecomevirtuallycertainthataninflowof economicbenefitswillarise,theasset
and the related income are recognised in the financial statements of the pe riod in which the change occurs.
If an inflow of economic benefits has become probable, an enterprise discl oses the contingent asset (see
paragraph 89).
MEASUREMENT
Best estimate
36.The amount recognised as a provision should be the best estimate of the expe nditure required to settle the
present obligation at the balance sheet date.
37. Thebestestimateoftheexpenditurerequiredtosettlethepresentobl igationistheamountthatanenterprise
would rationally pay to settle the obligation at the balance sheet date or t o transfer it to a third party at that
time. It will often be impossible or prohibitively expensive to settle or t ransfer an obligation at the balance
sheet date. However, the estimate of the amount that an enterprise would ra tionally pay to settle or transfer
theobligationgivesthebestestimateoftheexpenditurerequiredtosett lethepresentobligationatthebalance
sheet date.
38. The estimates of outcome and financial effect are determined by the jud gement of the management of the
enterprise,supplementedbyexperienceofsimilartransactionsand,ins omecases,reportsfromindependent
experts.Theevidenceconsideredincludesanyadditionalevidenceprovi dedbyeventsafterthebalancesheet
date.
39. Uncertainties surrounding the amount to be recognised as a provision a re dealt with by various means
according to the circumstances. Where the provision being measured invol ves a large population of items,
theobligationisestimatedbyweightingallpossibleoutcomesbytheiras sociatedprobabilities.Thenamefor
this statistical method of estimation is “expected value”. The provision will therefore be different depending
on whether the probability of a loss of a given amount is, for example, 60 % or 90 %. Where there is a
continuous range of possible outcomes, and each point in that range is as li kely as any other, the mid-point
of the range is used.
Example
An enterprise sells goods with a warranty under which customers are covere d for the cost of repairs of any
manufacturingdefectsthatbecomeapparentwithinthefirstsixmonthsaf terpurchase.Ifminordefectswere
detected in all products sold, repair costs of 1 000 000 would result. If maj or defects were detected in all
productssold,repaircostsof4millionwouldresult.Theenterprise’spa stexperienceandfutureexpectations
indicate that, for the coming year, 75 % of the goods sold will have no defect s, 20 % of the goods sold will
have minor defects an d5%o ft h e goods sold will have major defects. In accordance with paragraph 24, an
enterprise assesses the probability of an outflow for the warranty obliga tions as a whole.
The expected value of the cost of repairs is:
(7 5%o fn i l)+(20 % of1000000 )+(5 % of4000000 )= 400000332 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
40. Where a single obligation is being measured, the individual most likel y outcome may be the best estimate
oftheliability.However,eveninsuchacase,theenterpriseconsidersot herpossibleoutcomes.Whereother
possibleoutcomesareeithermostlyhigherormostlylowerthanthemostli kelyoutcome,thebestestimate
will be a higher or lower amount. For example, if an enterprise has to rectif y a serious fault in a major plant
that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed
atthefirstattemptatacostof1 000,butaprovisionforalargeramountism adeifthereisasignificantchance
that further attempts will be necessary.
41. The provision is measured before tax, as the tax consequences of the pro vision, and changes in it, are dealt
with under IAS 12, income taxes.
Risks and uncertainties
42. The risks and uncertainties that inevitably surround many events and c ircumstances should be taken into
account in reaching the best estimate of a provision.
43.Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is
measured.Cautionisneededinmakingjudgementsunderconditionsofunce rtainty,sothatincomeorassets
are not overstated and expenses or liabilities are not understated. Howev er, uncertainty does not justify the
creationofexcessiveprovisionsoradeliberateoverstatementofliabil ities.Forexample,iftheprojectedcosts
of a particularly adverse outcome are estimated on a prudent basis, that ou tcome is not then deliberately
treatedasmoreprobablethanisrealisticallythecase.Careisneededtoa voidduplicatingadjustmentsforrisk
and uncertainty with consequent overstatement of a provision.
44.Disclosure of the uncertainties surrounding the amount of the expenditur e is made under paragraph 85(b).
Present value
45. Wheretheeffectofthetimevalueofmoneyismaterial,theamountofapr ovisionshouldbethepresentvalue
of the expenditure expected to be required to settle the obligation.
46.Becauseofthetimevalueofmoney,provisionsrelatingtocashoutflowsth atarisesoonafterthebalancesheet
datearemoreonerousthanthosewherecashoutflowsofthesameamountaris elater.Provisionsaretherefore
discounted, where the effect is material.
47. Thediscountrate(orrates)shouldbeapre-taxrate(orrates)thatref lect(s)currentmarketassessmentsofthe
timevalueofmoneyandtherisksspecifictotheliability.Thediscountra te(s)shouldnotreflectrisksforwhich
future cash flow estimates have been adjusted.
Future events
48. Future events that may affect the amount required to settle an obligati on should be reflected in the amount
of a provision where there is sufficient objective evidence that they will occur.
49.Expected future events may be particularly important in measuring provis ions. For example, an enterprise
may believe that the cost of cleaning up a site at the end of its life will be re duced by future changes in
technology. The amount recognised reflects a reasonable expectation of t echnically qualified, objective
observers, taking account of all available evidence as to the technology t hat will be available at the time of
theclean-up.Thusitisappropriatetoinclude,forexample,expectedcos treductionsassociatedwithincreased
experience in applying existing technology or the expected cost of applyi ng existing technology to a larger
ormorecomplexclean-upoperationthanhaspreviouslybeencarriedout.H owever,anenterprisedoesnot
anticipatethedevelopmentofacompletelynewtechnologyforcleaningup unlessitissupportedbysufficient
objective evidence.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 333
50.The effect of possible new legislation is taken into consideration in meas uring an existing obligation when
sufficient objective evidence exists that the legislation is virtually c ertain to be enacted. The variety of
circumstances that arise in practice makes it impossible to specify a sing le event that will provide sufficient,
objective evidence in every case. Evidence is required both of what legisl ation will demand and of whether it
is virtually certain to be enacted and implemented in due course. In many ca ses sufficient objective evidence
will not exist until the new legislation is enacted.
Expected disposal of assets
51. Gains from the expected disposal of assets should not be taken into acco unt in measuring a provision.
52.Gains on the expected disposal of assets are not taken into account in measu ring a provision, even if the
expected disposal is closely linked to the event giving rise to the provisi on. Instead, an enterprise recognises
gains on expected disposals of assets at the time specified by the Internat ional Accounting Standard dealing
with the assets concerned.
REIMBURSEMENTS
53. Where some or all of the expenditure required to settle a provision is ex pected to be reimbursed by another
party,thereimbursementshouldberecognisedwhen,andonlywhen,itisvi rtuallycertainthatreimbursement
willbereceivediftheenterprisesettlestheobligation.Thereimbursem entshouldbetreatedasaseparateasset.
The amount recognised for the reimbursement should not exceed the amount o f the provision.
54. In the income statement, the expense relating to a provision may be pres ented net of the amount recognised
for a reimbursement.
55.Sometimes,anenterpriseisabletolooktoanotherpartytopaypartorallo ftheexpenditurerequiredtosettle
a provision (for example, through insurance contracts, indemnity clause s or suppliers’ warranties). The other
party may either reimburse amounts paid by the enterprise or pay the amount s directly.
56.In most cases the enterprise will remain liable for the whole of the amount i n question so that the enterprise
wouldhavetosettlethefullamountifthethirdpartyfailedtopayforanyr eason.Inthissituation,aprovision
is recognised for the full amount of the liability, and a separate asset for the expected reimbursement is
recognisedwhenitisvirtuallycertainthatreimbursementwillbereceiv ediftheenterprisesettlestheliability.
57.In some cases, the enterprise will not be liable for the costs in question if the third party fails to pay. In such
a case the enterprise has no liability for those costs and they are not inclu ded in the provision.
58.As noted in paragraph 29, an obligation for which an enterprise is jointly a nd severally liable is a contingent
liability to the extent that it is expected that the obligation will be sett led by the other parties.
Changes in provisions
59. Provisions should be reviewed at each balance sheet date and adjusted t o reflect the current best estimate. If
it is no longer probable that an outflow of resources embodying economic be nefits will be required to settle
the obligation, the provision should be reversed.
60.Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage
of time. This increase is recognised as borrowing cost.
Use of provisions
61. A provision should be used only for expenditures for which the provisio n was originally recognised.334 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
62.Only expenditures that relate to the original provision are set against it . Setting expenditures against a
provision that was originally recognised for another purpose would conce al the impact of two different
events.
APPLICATION OF THE RECOGNITION AND MEASUREMENT RULES
Future operating losses
63. Provisions should not be recognised for future operating losses.
64.Future operating losses do not meet the definition of a liability in paragr aph 10 and the general recognition
criteria set out for provisions in paragraph 14.
65.Anexpectationoffutureoperatinglossesisanindicationthatcertainas setsoftheoperationmaybeimpaired.
An enterprise tests these assets for impairment under IAS 36, impairment o f assets.
Onerous contracts
66. Ifanenterprisehasacontractthatisonerous,thepresentobligation underthecontractshouldberecognised
and measured as a provision.
67. Manycontracts(forexample,someroutinepurchaseorders)canbecanc elledwithoutpayingcompensation
totheotherparty,andthereforethereisnoobligation.Othercontractse stablishbothrightsandobligations
foreachofthecontractingparties.Whereeventsmakesuchacontractoner ous,thecontractfallswithinthe
scopeofthisStandardandaliabilityexistswhichisrecognised.Executo rycontractsthatarenotonerousfall
outside the scope of this Standard.
68. This Standard defines an onerous contract as a contract in which the una voidable costs of meeting the
obligationsunderthecontractexceedtheeconomicbenefitsexpectedtob ereceivedunderit.Theunavoidable
costs under a contract reflect the least net cost of exiting from the contra ct, which is the lower of the cost
of fulfilling it and any compensation or penalties arising from failure to fulfil it.
69. Before a separate provision for an onerous contract is established, an enterprise recognises any impairment
loss that has occurred on assets dedicated to that contract (see IAS 36, imp airment of assets).
Restructuring
70. The following are examples of events that may fall under the definition of restructuring:
(a) sale or termination of a line of business;
(b) the closure of business locations in a country or region or the relocati on of business activities from one
country or region to another;
(c) changes in management structure, for example, eliminating a layer of m anagement; and
(d) fundamental reorganisations that have a material effect on the nature and focus of the enterprise’s
operations.
71. Aprovisionforrestructuringcostsisrecognisedonlywhenthegenera lrecognitioncriteriaforprovisionsset
out in paragraph 14 are met. Paragraphs 72 to 83 set out how the general recog nition criteria apply to
restructurings.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 335
72.A constructive obligation to restructure arises only when an enterprise:
(a) has a detailed formal plan for the restructuring identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;(iii)the location, function, and approximate number of employees who wil l be compensated for
terminating their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented; and
(b) has raised a valid expectation in those affected that it will carry out t he restructuring by starting to
implement that plan or announcing its main features to those affected by it .
73. Evidence that an enterprise has started to implement a restructuring p lan would be provided, for example,
bydismantlingplantorsellingassetsorbythepublicannouncementofthe mainfeaturesoftheplan.Apublic
announcement of a detailed plan to restructure constitutes a constructiv e obligation to restructure only if it
is made in such a way and in sufficient detail (i.e. setting out the main feat ures of the plan) that it gives rise
to valid expectations in other parties such as customers, suppliers and em ployees (or their representatives)
that the enterprise will carry out the restructuring.
74. For a plan to be sufficient to give rise to a constructive obligation whe n communicated to those affected by
it, its implementation needs to be planned to begin as soon as possible and t o be completed in a timeframe
thatmakessignificantchangestotheplanunlikely.Ifitisexpectedthat therewillbealongdelaybeforethe
restructuringbeginsorthattherestructuringwilltakeanunreasonably longtime,itisunlikelythattheplan
willraiseavalidexpectationonthepartofothersthattheenterpriseisa tpresentcommittedtorestructuring,
because the timeframe allows opportunities for the enterprise to change i ts plans.
75. A management or board decision to restructure taken before the balance sheet date does not give rise to a
constructive obligation at the balance sheet date unless the enterprise h as, before the balance sheet date:
(a) started to implement the restructuring plan; or(b) announced the main features of the restructuring plan to those affecte d by it in a sufficiently specific
manner to raise a valid expectation in them that the enterprise will carry o ut the restructuring.
Insomecases,anenterprisestartstoimplementarestructuringplan,ora nnouncesitsmainfeaturestothose
affected,onlyafterthebalancesheetdate.Disclosuremayberequiredun derIAS10,eventsafterthebalance
sheetdate,iftherestructuringisofsuchimportancethatitsnon-disclo surewouldaffecttheabilityoftheusers
of the financial statements to make proper evaluations and decisions.
76. Althoughaconstructiveobligationisnotcreatedsolelybyamanageme ntdecision,anobligationmayresult
from other earlier events together with such a decision. For example, nego tiations with employee
representatives for termination payments, or with purchasers for the sal e of an operation, may have been
concluded subject only to board approval. Once that approval has been obta ined and communicated to the
otherparties,theenterprisehasaconstructiveobligationtorestructu re,iftheconditionsofparagraph72are
met.
77. Insomecountries,theultimateauthorityisvestedinaboardwhosemem bershipincludesrepresentativesof
interests other than those of management (e.g. employees) or notificatio n to such representatives may be
necessarybeforetheboarddecisionistaken.Becauseadecisionbysuchab oardinvolvescommunicationto
these representatives, it may result in a constructive obligation to rest ructure.336 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
78.No obligation arises for the sale of an operation until the enterprise is co mmitted to the sale, i.e. there is a
binding sale agreement.
79. Even when an enterprise has taken a decision to sell an operation and ann ounced that decision publicly, it
cannot be committed to the sale until a purchaser has been identified and th ere is a binding sale agreement.
Until there is a binding sale agreement, the enterprise will be able to chan ge its mind and indeed will have
to take another course of action if a purchaser cannot be found on acceptabl e terms. When the sale of an
operation is envisaged as part of a restructuring, the assets of the operat ion are reviewed for impairment,
underIAS36,impairmentofassets.Whenasaleisonlypartofarestructuri ng,aconstructiveobligationcan
arise for the other parts of the restructuring before a binding sale agreem ent exists.
80.A restructuring provision should include only the direct expenditures ar ising from the restructuring, which
are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the enterprise.
81. A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff;(b) marketing; or(c) investment in new systems and distribution networks.
These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the
balance sheet date. Such expenditures are recognised on the same basis as i f they arose independently of a
restructuring.
82. Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless
they relate to an onerous contract as defined in paragraph 10.
83. Asrequiredbyparagraph51,gainsontheexpecteddisposalofassetsar enottakenintoaccountinmeasuring
a restructuring provision, even if the sale of assets is envisaged as part o f the restructuring.
DISCLOSURE
84.For each class of provision, an enterprise should disclose:
(a) the carrying amount at the beginning and end of the period;
(b) additional provisions made in the period, including increases to exis ting provisions;
(c) amounts used (i.e. incurred and charged against the provision) during the period;
(d) unused amounts reversed during the period; and(e) the increase during the period in the discounted amount arising from th e passage of time and the effect
of any change in the discount rate.
Comparative information is not required.
85.An enterprise should disclose the following for each class of provision:
(a) a brief description of the nature of the obligation and the expected tim ing of any resulting outflows of
economic benefits;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 337
(b) an indication of the uncertainties about the amount or timing of those o utflows. Where necessary to
provide adequate information, an enterprise should disclose the major as sumptions made concerning
future events, as addressed in paragraph 48; and
(c) theamountofanyexpectedreimbursement,statingtheamountofanyass etthathasbeenrecognisedfor
that expected reimbursement.
86.Unless the possibility of any outflow in settlement is remote, an enterpri se should disclose for each class of
contingent liability at the balance sheet date a brief description of the n ature of the contingent liability and,
where practicable:
(a) an estimate of its financial effect, measured under paragraphs 36 to 52 ;
(b) an indication of the uncertainties relating to the amount or timing of a ny outflow; and
(c) the possibility of any reimbursement.
87. In determining which provisions or contingent liabilities may be aggr egated to form a class, it is necessary
to consider whether the nature of the items is sufficiently similar for a si ngle statement about them to fulfil
therequirementsofparagraphs85(a)and(b)and86(a)and(b).Thus,itmay beappropriatetotreatasasingle
class of provision amounts relating to warranties of different products, but it would not be appropriate to
treatasasingleclassamountsrelatingtonormalwarrantiesandamountst hataresubjecttolegalproceedings.
88. Where a provision and a contingent liability arise from the same set of c ircumstances, an enterprise makes
thedisclosuresrequiredbyparagraphs84to86inawaythatshowsthelinkb etweentheprovisionandthe
contingent liability.
89.Where an inflow of economic benefits is probable, an enterprise should dis close a brief description of the
natureofthecontingentassetsatthebalancesheetdate,and,wherepract icable,anestimateoftheirfinancial
effect, measured using the principles set out for provisions in paragraph s3 6t o5 2 .
90. Itisimportantthatdisclosuresforcontingentassetsavoidgivingmi sleadingindicationsofthelikelihoodof
income arising.
91.Whereanyoftheinformationrequiredbyparagraphs86and89isnotdisclos edbecauseitisnotpracticable
to do so, that fact should be stated.
92.Inextremelyrarecases,disclosureofsomeoralloftheinformationrequi redbyparagraphs84to89canbe
expected to prejudice seriously the position of the enterprise in a disput e with other parties on the subject
matteroftheprovision,contingentliabilityorcontingentasset.Insuc hcases,anenterpriseneednotdisclose
theinformation,butshoulddisclosethegeneralnatureofthedispute,to getherwiththefactthat,andreason
why, the information has not been disclosed.
Transitional provisions
93. The effect of adopting this Standard on its effective date (or earlier) should be reported as an adjustment to
theopeningbalanceofretainedearningsfortheperiodinwhichtheStanda rdisfirstadopted.Enterprisesare
encouraged, but not required, to adjust the opening balance of retained ea rnings for the earliest period
presentedandtorestatecomparativeinformation.Ifcomparativeinform ationisnotrestated,thisfactshould
be disclosed.
94.The Standard requires a different treatment from IAS 8, net profit or loss f or the period, fundamental errors
and changes in accounting policies. IAS 8 requires comparative informati on to be restated (benchmark
treatment) or additional pro forma comparative information on a restated basis to be disclosed (allowed
alternative treatment) unless it is impracticable to do so.338 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
EFFECTIVE DATE
95. ThisInternationalAccountingStandardbecomesoperativeforannual financialstatementscoveringperiods
beginningonorafter1July1999.Earlierapplicationisencouraged.Ifan enterpriseappliesthisStandardfor
periods beginning before 1 July 1999, it should disclose that fact.
96.This Standard supersedes the parts of IAS 10, contingencies and events occ urring after the balance sheet
date (1), that deal with contingencies.
INTERNATIONAL ACCOUNTING STANDARD IAS 38
Intangible assets
This International Accounting Standard was approved by the IASC Board in J uly 1998 and became effective for
financial statements covering periods beginning on or after 1 July 1999.
This Standard supersedes:
(a) IAS 4, depreciation accounting, with respect to the amortisation (dep reciation) of intangible assets; and
(b) IAS 9, research and development costs.
InOctober1998,theIASCstaffpublishedseparatelya“Basisforconclusi onsforIAS38,intangibleassetsandIAS22
(revised 1998)”. Copies are available from IASC’s Publications Departme nt.
In 1998, IAS 39, financial instruments: recognition and measurement, ame nded paragraph 2(f) of IAS 38 to replace
the reference to IAS 25, accounting for investments, by reference to IAS 39 . Footnote 1 was also deleted.
One SIC interpretation relates to IAS 38:
— SIC-6: costs of modifying existing software,— SIC-32: Intangible assets — Web site costs.
INTRODUCTION
1. IAS 38 prescribes the accounting and disclosure for intangible assets t hat are not specifically dealt with in
other International Accounting Standards. IAS 38 does not apply to financ ial assets, mineral rights and
expenditure on the exploration for, or development and extraction of, min erals, oil, natural gas and similar
non-regenerative resources and intangible assets arising in insurance e nterprises from contracts with
policyholders.IAS38applies,amongotherthings,toexpenditureonadve rtising,training,start-up,research
and development activities.
2. An intangible asset is an identifiable non-monetary asset without phys ical substance held for use in the
production or supply of goods or services, for rental to others, or for admi nistrative purposes. An asset is a
resource:
(a) controlled by an enterprise as a result of past events; and(b) from which future economic benefits are expected to flow to the enterpr ise.
(1) IAS 10: contingencies and events occurring after the balance sheet date, was superseded by IAS 10 (revised 1999), events after
the balance sheet date, effective 1 January 2000.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 339
3. IAS 38 requires an enterprise to recognise an intangible asset (at cost) if, and only if:
(a) itisprobablethatthefutureeconomicbenefitsthatareattributable totheassetwillflowtotheenterprise;
and
(b) the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externa lly or generated internally. IAS 38
includes additional recognition criteria for internally generated inta ngible assets.
4. IAS 38 specifies that internally generated goodwill, brands, masthead s, publishing titles, customer lists and
items similar in substance should not be recognised as assets.
5. If an intangible item does not meet both the definition and the criteria f or the recognition of an intangible
asset, IAS 38 requires the expenditure on this item to be recognised as an ex pense when it is incurred.
However, if the item is acquired in a business combination that is an acquis ition, this expenditure (included
in the cost of acquisition) should form part of the amount attributed to goo dwill (negative goodwill) at the
date of acquisition.
6. IAS 38 requires all expenditure on research to be recognised as an expens e when it is incurred. Examples of
otherexpenditurethatwillnotgiverisetoanintangibleassetthatcanbe recognisedinthefinancialstatements
are as follows:
(a) expenditure on starting up an operation or a business (start-up costs) ;
(b) expenditure on training;
(c) expenditure on advertising and/or promotion; and(d) expenditure on relocating or reorganising part or all of an enterprise .
Expenditure on these items is recognised as an expense when it is incurred.
7. IAS 38 requires that subsequent expenditure on an intangible asset afte r its purchase or completion should
be recognised as an expense when it is incurred unless:
(a) it is probable that this expenditure will enable the asset to generate f uture economic benefits in excess
of its originally assessed standard of performance; and
(b) the expenditure can be measured and attributed to the asset reliably.
If these conditions are met, the subsequent expenditure should be added to the cost of the intangible asset.
8. If expenditure on an intangible item was initially recognised as an expe nse by a reporting enterprise in
previous annual financial statements or interim financial reports, IAS 3 8 prohibits the enterprise from
recognising this expenditure as part of the cost of an intangible asset at a later date.
9. After initial recognition, IAS 38 requires an intangible asset to be mea sured under one of the following two
treatments:
(a) benchmark treatment: cost less any accumulated amortisation and any a ccumulated impairment losses;
or
(b) allowed alternative treatment: revalued amount less any subsequent a ccumulated amortisation and any
subsequent accumulated impairment losses. The revalued amount should be the fair value of the asset.
However,thistreatmentispermittedif,andonlyif,fairvaluecanbedete rminedbyreferencetoanactive
market for the intangible asset. In addition, once an enterprise elects th is treatment, IAS 38requires340 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
revaluations to be made with sufficient regularity such that the carrying amount of the intangible asset
doesnotdiffermateriallyfromthatwhichwouldbedeterminedusingfairv alueatthebalancesheetdate.
IAS 38 also specifies how intangible assets should be revalued and whether a revaluation increase
(decrease) should be recognised in the income statement or directly in equ ity.
10. IAS 38 requires that an intangible asset should be amortised on a system atic basis over the best estimate of
its useful life. There is a rebuttable presumption that the useful life of a n intangible asset will not exceed
20yearsfromthedatewhentheassetisavailableforuse.IAS38doesnotper mitanenterprisetoassignan
infinite useful life to an intangible asset. Amortisation should commenc e when the asset is available for use.
11. Inrarecases,theremaybepersuasiveevidencethattheusefullifeofa nintangibleassetwillbeaspecificperiod
longer than 20 years. In these cases, IAS 38 requires an enterprise:
(a) to amortise the intangible asset over the best estimate of its useful li fe;
(b) to estimate the recoverable amount of the intangible asset at least ann ually to identify whether there is
any impairment loss; and
(c) to disclose the reasons why the presumption that the useful life of an in tangible asset will not exceed
20 years is rebutted and the factor(s) that played a significant role in det ermining the useful life of the
intangible asset.
12. IAS 38 requires that the amortisation method used should reflect the pa ttern in which the asset’s economic
benefits are consumed by the enterprise. If that pattern cannot be determi ned reliably, the straight-line
method should be adopted. The amortisation charge should be recognised as an expense unless another
International Accounting Standard permits or requires it to be included i n the carrying amount of another
asset.
13. IAS 38 requires the residual value of an intangible asset to be assumed t o be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of i ts useful life; or
(b) there is an active market for that type of asset and it is probable that su ch a market will exist at the end
of the asset’s useful life.
14. To assess whether an intangible asset may be impaired, an enterprise ap plies IAS 36, impairment of assets.
Also, IAS 38 requires an enterprise to estimate the recoverable amount of a n intangible asset that is not yet
available for use at least annually.
15. IAS38iseffectiveforaccountingperiodsbeginningonorafter1July1 999.Earlierapplicationisencouraged.
16. On first application, IAS 38 includes transitional provisions that re quire retrospective application:
(a) wheneverthisisnecessarytoeliminateanitemthatnolongerqualifie sforrecognitionunderIAS38;or
(b) if the previous measurement of an intangible asset contradicted the pr inciples set out in IAS 38 (for
example,ifanintangibleassetwasnotamortisedorwasrevaluedbutnotby referencetoanactivemarket).
Inothercases,prospectiveapplicationoftherecognitionandamortisat ionrequirementsiseitherrequired(for
example,IAS38prohibitstherecognitionofaninternallygeneratedinta ngibleassetthatwasnotpreviously
recognised) or permitted (for example, IAS 38 encourages the recognition of an intangible asset that was
acquired in a business combination that was an acquisition and that was not previously recognised).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 341
CONTENTS
Paragraphs
Objective 343
Scope 343
Definitions 344
Intangible assets 345
Identifiability 346
Control 346
Future economic benefits 347
Recognition and initial measurement of an intangible asset 347
Separate acquisition 347
Acquisition as part of a business combination 348Acquisition by way of a government grant 348Exchanges of assets 349
Internally generated goodwill 349
Internally generated intangible assets 349Research phase 350
Development phase 350
Cost of an internally generated intangible asset 351Recognition of an expense 352
Past expenses not to be recognised as an asset 353Subsequent expenditure 353
Measurement subsequent to initial recognition 353Benchmark treatment 353
Allowed alternative treatment 353Amortisation 355
Amortisation period 355
Amortisation method 357
Residual value 357
Review of amortisation period and amortisation method 357342 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Recoverability of the carrying amount — impairment losses 358
Retirements and disposals 359
Disclosure 359
General 359
Intangible assets carried under the allowed alternative treatment 361Research and development expenditure 361Other information 361
Transitional provisions 361
Effective date 364
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment fo r intangible assets that are not dealt with
specifically in another International Accounting Standard. This Standa rd requires an enterprise to recognise an
intangibleassetif,andonlyif,certaincriteriaaremet.TheStandardal sospecifieshowtomeasurethecarryingamount
of intangible assets and requires certain disclosures about intangible a ssets.
SCOPE
1. This Standard should be applied by all enterprises in accounting for int angible assets, except:
(a) intangible assets that are covered by another International Accounti ng Standard;
(b) financial assets, as defined in IAS 32, financial instruments: disclo sure and presentation;
(c) mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil,
natural gas and similar non-regenerative resources; and
(d) intangible assets arising in insurance enterprises from contracts wi th policyholders.
2.IfanotherInternationalAccountingStandarddealswithaspecifictypeo fintangibleasset,anenterpriseapplies
that Standard instead of this Standard. For example, this Standard does no t apply to:
(a) intangible assets held by an enterprise for sale in the ordinary course of business (see IAS 2, inventories,
and IAS 11, construction contracts);
(b) deferred tax assets (see IAS 12, income taxes);
(c) leases that fall within the scope of IAS 17, leases;
(d) assets arising from employee benefits (see IAS 19, employee benefits) ;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 343
(e) goodwill arising on a business combination (see IAS 22, business combi nations); and
(f) financial assets as defined in IAS 32, financial instruments: disclos ure and presentation. The recognition
andmeasurementofsomefinancialassetsarecoveredby:IAS27,consolida tedfinancialstatementsand
accounting for investments in subsidiaries; IAS 28, accounting for inves tments in associates; IAS 31,
financial reporting of interests in joint ventures; and IAS 39, financial instruments: recognition and
measurement.
3.Some intangible assets may be contained in or on a physical substance such a s a compact disk (in the case
ofcomputersoftware),legaldocumentation(inthecaseofalicenceorpat ent)orfilm.Indeterminingwhether
an asset that incorporates both intangible and tangible elements should b e treated under IAS 16, property,
plant and equipment, or as an intangible asset under this Standard, judgem ent is required to assess which
element is more significant. For example, computer software for a compute r controlled machine tool that
cannot operate without that specific software is an integral part of the re lated hardware and it is treated as
property,plantandequipment.Thesameappliestotheoperatingsystemof acomputer.Wherethesoftware
is not an integral part of the related hardware, computer software is treat ed as an intangible asset.
4.This Standard applies to, among other things, expenditure on advertising , training, start-up, research and
development activities. Research and development activities are direct ed to the development of knowledge.
Therefore,althoughtheseactivitiesmayresultinanassetwithphysical substance(forexample,aprototype),
the physical element of the asset is secondary to its intangible component , that is the knowledge embodied
in it.
5.Inthecaseofafinancelease,theunderlyingassetmaybeeithertangibleo rintangible.Afterinitialrecognition,
a lessee deals with an intangible asset held under a finance lease under thi s Standard. Rights under licensing
agreements for items such as motion picture films, video recordings, play s, manuscripts, patents and
copyrights are excluded from the scope of IAS 17 and fall within the scope of this Standard.
6.Exclusions from the scope of an International Accounting Standard may occ ur if certain activities or
transactions are so specialised that they give rise to accounting issues t hat may need to be dealt with in a
differentway.Suchissuesariseintheexpenditureontheexplorationfor ,ordevelopmentandextractionof,
oil,gasandmineraldepositsinextractiveindustriesandinthecaseofco ntractsbetweeninsuranceenterprises
andtheirpolicyholders.Therefore,thisStandarddoesnotapplytoexpen ditureonsuchactivities.However,
thisStandardappliestootherintangibleassetsused(suchascomputerso ftware),andotherexpenditure(such
as start-up costs), in extractive industries or by insurance companies.
DEFINITIONS
7.The following terms are used in this Standard with the meanings specified:
An intangible asset is an identifiable non-monetary asset without physic al substance held for use in the
production or supply of goods or services, for rental to others, or for admi nistrative purposes.
An asset is a resource:
(a) controlled by an enterprise as a result of past events; and(b) from which future economic benefits are expected to flow to the enterpr ise.
Monetary assets are money held and assets to be received in fixed or determi nable amounts of money.
Research is original and planned investigation undertaken with the prosp ect of gaining new scientific or
technical knowledge and understanding.344 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Developmentistheapplicationofresearchfindingsorotherknowledgeto aplanordesignfortheproduction
of new or substantially improved materials, devices, products, processe s, systems or services prior to the
commencement of commercial production or use.
Amortisationisthesystematicallocationofthedepreciableamountofan intangibleassetoveritsusefullife.
Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements,
less its residual value.Useful life is either:(a) the period of time over which an asset is expected to be used by the enterp rise; or
(b) the number of production or similar units expected to be obtained from t he asset by the enterprise.
Costistheamountofcashorcashequivalentspaidorthefairvalueoftheot herconsiderationgiventoacquire
an asset at the time of its acquisition or production.
Residual value is the net amount which an enterprise expects to obtain for a n asset at the end of its useful
life after deducting the expected costs of disposal.Fairvalueofanassetistheamountforwhichthatassetcouldbeexchangedb etweenknowledgeable,willing
parties in an arm’s length transaction.An active market is a market where all the following conditions exist:(a) the items traded within the market are homogeneous;(b) willing buyers and sellers can normally be found at any time; and(c) prices are available to the public.Animpairmentlossistheamountbywhichthecarryingamountofanassetexc eedsitsrecoverableamount.
Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any
accumulated amortisation and accumulated impairment losses thereon.
Intangible assets
8.Enterprisesfrequentlyexpendresources,orincurliabilities,ontheac quisition,development,maintenanceor
enhancement of intangible resources such as scientific or technical know ledge, design and implementation
of new processes or systems, licences, intellectual property, market kno wledge and trade marks (including
brand names and publishing titles). Common examples of items encompassed by these broad headings are
computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights,
fishinglicences,importquotas,franchises,customerorsupplierrelat ionships,customerloyalty,marketshare
and marketing rights.
9.Notalltheitemsdescribedinparagraph8willmeetthedefinitionofanint angibleasset,thatis,identifiability,
control over a resource and existence of future economic benefits. If an it em covered by this Standard does
notmeetthedefinitionofanintangibleasset,expendituretoacquireito rgenerateitinternallyisrecognised
as an expense when it is incurred. However, if the item is acquired in a busin ess combination that is an
acquisition, it forms part of the goodwill recognised at the date of acquis ition (see paragraph 56).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 345
Identifiability
10.Thedefinitionofanintangibleassetrequiresthatanintangibleassetbe identifiabletodistinguishitclearlyfrom
goodwill.Goodwillarisingonabusinesscombinationthatisanacquisiti onrepresentsapaymentmadebythe
acquirer in anticipation of future economic benefits. The future economi c benefits may result from synergy
between the identifiable assets acquired or from assets which, individua lly, do not qualify for recognition in
the financial statements but for which the acquirer is prepared to make a pa yment in the acquisition.
11.An intangible asset can be clearly distinguished from goodwill if the asse t is separable. An asset is separable
iftheenterprisecouldrent,sell,exchangeordistributethespecificfu tureeconomicbenefitsattributabletothe
assetwithoutalsodisposingoffutureeconomicbenefitsthatflowfromot herassetsusedinthesamerevenue
earning activity.
12.Separability is not a necessary condition for identifiability since an en terprise may be able to identify an asset
in some other way. For example, if an intangible asset is acquired with a gro up of assets, the transaction may
involve the transfer of legal rights that enable an enterprise to identify the intangible asset. Similarly, if an
internalprojectaimstocreatelegalrightsfortheenterprise,thenatur eoftheserightsmayassisttheenterprise
in identifying an underlying internally generated intangible asset. Als o, even if an asset generates future
economicbenefitsonlyincombinationwithotherassets,theassetisiden tifiableiftheenterprisecanidentify
the future economic benefits that will flow from the asset.
Control
13.Anenterprisecontrolsanassetiftheenterprisehasthepowertoobtainth efutureeconomicbenefitsflowing
from the underlying resource and also can restrict the access of others to t hose benefits. The capacity of an
enterprise to control the future economic benefits from an intangible ass et would normally stem from legal
rights that are enforceable in a court of law. In the absence of legal rights , it is more difficult to demonstrate
control.However,legalenforceabilityofarightisnotanecessarycondi tionforcontrolsinceanenterprisemay
be able to control the future economic benefits in some other way.
14.Market and technical knowledge may give rise to future economic benefits. An enterprise controls those
benefits if, for example, the knowledge is protected by legal rights such a s copyrights, a restraint of trade
agreement (where permitted) or by a legal duty on employees to maintain con fidentiality.
15.An enterprise may have a team of skilled staff and may be able to identify inc remental staff skills leading to
future economic benefits from training. The enterprise may also expect th at the staff will continue to make
theirskillsavailabletotheenterprise.However,usuallyanenterprise hasinsufficientcontrolovertheexpected
futureeconomicbenefitsarisingfromateamofskilledstaffandfromtrai ningtoconsiderthattheseitemsmeet
the definition of an intangible asset. For a similar reason, specific mana gement or technical talent is unlikely
to meet the definition of an intangible asset, unless it is protected by leg al rights to use it and to obtain the
future economic benefits expected from it, and it also meets the other part s of the definition.
16.Anenterprisemayhaveaportfolioofcustomersoramarketshareandexpect that,duetoitseffortsinbuilding
customer relationships and loyalty, the customers will continue to trade with the enterprise. However, in the
absence of legal rights to protect, or other ways to control, the relations hips with customers or the loyalty of
thecustomerstotheenterprise,theenterpriseusuallyhasinsufficient controlovertheeconomicbenefitsfrom
customerrelationshipsandloyaltytoconsiderthatsuchitems(portfoli oofcustomers,marketshares,customer
relationships, customer loyalty) meet the definition of intangible asse ts.346 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Future economic benefits
17.Thefutureeconomicbenefitsflowingfromanintangibleassetmayinclude revenuefromthesaleofproducts
or services, cost savings, or other benefits resulting from the use of the a sset by the enterprise. For example,
theuseofintellectualpropertyinaproductionprocessmayreducefuture productioncostsratherthanincrease
future revenues.
RECOGNITION AND INITIAL MEASUREMENT OF AN INTANGIBLE ASSET
18.Therecognitionofanitemasanintangibleassetrequiresanenterpriseto demonstratethattheitemmeetsthe:
(a) definition of an intangible asset (see paragraphs 7 to 17); and
(b) recognition criteria set out in this Standard (see paragraphs 19 to 55) .
19. An intangible asset should be recognised if, and only if:
(a) itisprobablethatthefutureeconomicbenefitsthatareattributable totheassetwillflowtotheenterprise;
and
(b) the cost of the asset can be measured reliably.
20. An enterprise should assess the probability of future economic benefi ts using reasonable and supportable
assumptionsthatrepresentmanagement’sbestestimateofthesetofecono micconditionsthatwillexistover
the useful life of the asset.
21.Anenterpriseusesjudgementtoassessthedegreeofcertaintyattachedto theflowoffutureeconomicbenefits
thatareattributabletotheuseoftheassetonthebasisoftheevidenceava ilableatthetimeofinitialrecognition,
giving greater weight to external evidence.
22. An intangible asset should be measured initially at cost.
Separate acquisition
23.If an intangible asset is acquired separately, the cost of the intangible a sset can usually be measured reliably.
This is particularly so when the purchase consideration is in the form of ca sh or other monetary assets.
24.The cost of an intangible asset comprises its purchase price, including an y import duties and non-refundable
purchase taxes, and any directly attributable expenditure on preparing t he asset for its intended use. Directly
attributable expenditure includes, for example, professional fees for l egal services. Any trade discounts and
rebates are deducted in arriving at the cost.
25.Ifpaymentforanintangibleassetisdeferredbeyondnormalcreditterms, itscostisthecashpriceequivalent;
the difference between this amount and the total payments is recognised as interest expense over the period
of credit unless it is capitalised under the allowed alternative treatmen t in IAS 23, borrowing costs.
26.Ifanintangibleassetisacquiredinexchangeforequityinstrumentsofth ereportingenterprise,thecostofthe
asset is the fair value of the equity instruments issued, which is equal to t he fair value of the asset.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 347
Acquisition as part of a business combination
27.Under IAS 22 (revised 1998), business combinations, if an intangible asse t is acquired in a business
combination that is an acquisition, the cost of that intangible asset is ba sed on its fair value at the date of
acquisition.
28.Judgementisrequiredtodeterminewhetherthecost(i.e.fairvalue)ofan intangibleassetacquiredinabusiness
combinationcanbemeasuredwithsufficientreliabilityforthepurposeo fseparaterecognition.Quotedmarket
prices in an active market provide the most reliable measurement of fair va lue (see also paragraph 67). The
appropriate market price is usually the current bid price. If current bid p rices are unavailable, the price of the
mostrecentsimilartransactionmayprovideabasisfromwhichtoestimate fairvalue,providedthattherehas
not been a significant change in economic circumstances between the trans action date and the date at which
the asset’s fair value is estimated.
29.If no active market exists for an asset, its cost reflects the amount that th e enterprise would have paid, at the
dateoftheacquisition,fortheassetinanarm’slengthtransactionbetwe enknowledgeableandwillingparties,
based on the best information available. In determining this amount, an en terprise considers the outcome of
recent transactions for similar assets.
30.Certain enterprises that are regularly involved in the purchase and sale o f unique intangible assets have
developed techniques for estimating their fair values indirectly. These techniques may be used for initial
measurementofanintangibleassetacquiredinabusinesscombinationtha tisanacquisitioniftheirobjective
istoestimatefairvalueasdefinedinthisStandardandiftheyreflectcur renttransactionsandpracticesinthe
industrytowhichtheassetbelongs.Thesetechniquesinclude,whereappr opriate,applyingmultiplesreflecting
currentmarkettransactionstocertainindicatorsdrivingtheprofitabi lityoftheasset(suchasrevenue,market
shares, operating profit, etc.) or discounting estimated future net cash flows from the asset.
31.In accordance with this Standard and the requirements in IAS 22 (revised 19 98) for the recognition of
identifiable assets and liabilities:
(a) anacquirerrecognisesanintangibleassetthatmeetstherecognition criteriainparagraphs19and20,even
if that intangible asset had not been recognised in the financial statemen ts of the acquiree; and
(b) if the cost (i.e. fair value) of an intangible asset acquired as part of a business combination that is an
acquisition cannot be measured reliably, that asset is not recognised as a separate intangible asset but is
included in goodwill (see paragraph 56).
32.Unlessthereisanactivemarketforanintangibleassetacquiredinabusin esscombinationthatisanacquisition,
IAS 22 (revised 1998) limits the cost initially recognised for the intangi ble asset to an amount that does not
create or increase any negative goodwill arising at the date of acquisitio n.
Acquisition by way of a government grant
33.In some cases, an intangible asset may be acquired free of charge, or for nom inal consideration, by way of a
governmentgrant.Thismayoccurwhenagovernmenttransfersorallocates toanenterpriseintangibleassets
suchasairportlandingrights,licencestooperateradioortelevisionst ations,importlicencesorquotasorrights
to access other restricted resources. Under IAS 20, accounting for govern ment grants and disclosure of
government assistance, an enterprise may choose to recognise both the int angible asset and the grant at fair
valueinitially.Ifanenterprisechoosesnottorecognisetheassetiniti allyatfairvalue,theenterpriserecognises
theassetinitiallyatanominalamount(undertheothertreatmentpermitt edbyIAS20)plusanyexpenditure
that is directly attributable to preparing the asset for its intended use.348 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Exchanges of assets
34.An intangible asset may be acquired in exchange or part exchange for a dissi milar intangible asset or other
asset. The cost of such an item is measured at the fair value of the asset rece ived, which is equivalent to the
fair value of the asset given up, adjusted by the amount of any cash or cash eq uivalents transferred.
35.Anintangibleassetmaybeacquiredinexchangeforasimilarassetthathas asimilaruseinthesamelineof
business and that has a similar fair value. An intangible asset may also be s old in exchange for an equity
interestinasimilarasset.Inbothcases,sincetheearningsprocessisin complete,nogainorlossisrecognised
on the transaction. Instead, the cost of the new asset is the carrying amoun t of the asset given up. However,
the fair value of the asset received may provide evidence of an impairment l oss in the asset given up. Under
these circumstances an impairment loss is recognised for the asset given u p and the carrying amount after
impairment is assigned to the new asset.
Internally generated goodwill
36. Internally generated goodwill should not be recognised as an asset.
37.In some cases, expenditure is incurred to generate future economic benefi ts, but it does not result in the
creation of an intangible asset that meets the recognition criteria in thi s Standard. Such expenditure is often
describedascontributingtointernallygeneratedgoodwill.Internally generatedgoodwillisnotrecognisedas
an asset because it is not an identifiable resource controlled by the enter prise that can be measured reliably
at cost.
38.Differences between the market value of an enterprise and the carrying amo unt of its identifiable net assets
at any point in time may capture a range of factors that affect the value of th e enterprise. However, such
differences cannot be considered to represent the cost of intangible asse ts controlled by the enterprise.
Internally generated intangible assets
39. It is sometimes difficult to assess whether an internally generated in tangible asset qualifies for recognition.
It is often difficult:
(a) toidentifywhether,andthepointoftimewhen,thereisanidentifiabl eassetthatwillgenerateprobable
future economic benefits; and
(b) to determine the cost of the asset reliably. In some cases, the cost of ge nerating an intangible asset
internally cannot be distinguished from the cost of maintaining or enhanc ing the enterprise’s internally
generated goodwill or of running day-to-day operations.
Therefore, in addition to complying with the general requirements for the recognition and initial
measurementofanintangibleasset,anenterpriseappliestherequiremen tsandguidanceinparagraphs40-55
below to all internally generated intangible assets.
40. To assess whether an internally generated intangible asset meets the c riteria for recognition, an enterprise
classifies the generation of the asset into:
(a) a research phase; and
(b) a development phase.
Althoughtheterms“research”and“development”aredefined,theterms“r esearchphase”and“development
phase” have a broader meaning for the purpose of this Standard.
41. If an enterprise cannot distinguish the research phase from the develo pment phase of an internal project to
create an intangible asset, the enterprise treats the expenditure on that project as if it were incurred in the
research phase only.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 349
Research phase
42. No intangible asset arising from research (or from the research phase o f an internal project) should be
recognised.Expenditureonresearch(orontheresearchphaseofanintern alproject)shouldberecognisedas
an expense when it is incurred.
43.This Standard takes the view that, in the research phase of a project, an ent erprise cannot demonstrate that
an intangible asset exists that will generate probable future economic be nefits. Therefore, this expenditure is
always recognised as an expense when it is incurred.
44.Examples of research activities are:
(a) activities aimed at obtaining new knowledge;
(b) the search for, evaluation and final selection of, applications of res earch findings or other knowledge;
(c) the search for alternatives for materials, devices, products, proces ses, systems or services; and
(d) the formulation, design, evaluation and final selection of possible a lternatives for new or improved
materials, devices, products, processes, systems or services.
Development phase
45. An intangible asset arising from development (or from the development phase of an internal project) should
be recognised if, and only if, an enterprise can demonstrate all of the foll owing:
(a) the technical feasibility of completing the intangible asset so that i t will be available for use or sale;
(b) its intention to complete the intangible asset and use or sell it;(c) its ability to use or sell the intangible asset;(d) how the intangible asset will generate probable future economic benef its. Among other things, the
enterprise should demonstrate the existence of a market for the output of t he intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness o f the intangible asset;
(e) the availability of adequate technical, financial and other resource s to complete the development and to
use or sell the intangible asset; and
(f) its ability to measure the expenditure attributable to the intangible asset during its development reliably.
46.
In the development phase of a project, an enterprise can, in some instances , identify an intangible asset and
demonstrate that the asset will generate probable future economic benefi ts. This is because the development
phase of a project is further advanced than the research phase.
47.Examples of development activities are:
(a) the design, construction and testing of pre-production or pre-use pro totypes and models;
(b) the design of tools, jigs, moulds and dies involving new technology;(c) the design, construction and operation of a pilot plant that is not of a s cale economically feasible for
commercial production; and
(d) the design, construction and testing of a chosen alternative for new or improved materials, devices,
products, processes, systems or services.350 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
48.To demonstrate how an intangible asset will generate probable future econ omic benefits, an enterprise
assessesthefutureeconomicbenefitstobereceivedfromtheassetusingt heprinciplesinIAS36,impairment
of assets. If the asset will generate economic benefits only in combinatio n with other assets, the enterprise
applies the concept of cash-generating units as set out in IAS 36.
49.Availability of resources to complete, use and obtain the benefits from an intangible asset can be
demonstrated by, for example, a business plan showing the technical, fina ncial and other resources needed
and the enterprise’s ability to secure those resources. In certain cases, an enterprise demonstrates the
availability of external finance by obtaining a lender’s indication of it s willingness to fund the plan.
50.Anenterprise’scostingsystemscanoftenmeasurereliablythecostofgen eratinganintangibleassetinternally,
such as salary and other expenditure incurred in securing copyrights or li cences or developing computer
software.
51. Internallygeneratedbrands,mastheads,publishingtitles,custome rlistsanditemssimilarinsubstanceshould
not be recognised as intangible assets.
52.This Standard takes the view that expenditure on internally generated bra nds, mastheads, publishing titles,
customerlistsanditemssimilarinsubstancecannotbedistinguishedfro mthecostofdevelopingthebusiness
as a whole. Therefore, such items are not recognised as intangible assets.
Cost of an internally generated intangible asset
53. Thecostofaninternallygeneratedintangibleassetforthepurposeof paragraph22isthesumofexpenditure
incurredfromthedatewhentheintangibleassetfirstmeetstherecogniti oncriteriainparagraphs19-20and
45. Paragraph 59 prohibits reinstatement of expenditure recognised as an expense in previous annual
financial statements or interim financial reports.
54. Thecostofaninternallygeneratedintangibleassetcomprisesallexp enditurethatcanbedirectlyattributed,
or allocated on a reasonable and consistent basis, to creating, producing and preparing the asset for its
intended use. The cost includes, if applicable:
(a) expenditure on materials and services used or consumed in generating t he intangible asset;
(b) the salaries, wages and other employment related costs of personnel di rectly engaged in generating the
asset;
(c) any expenditure that is directly attributable to generating the asset , such as fees to register a legal right
and the amortisation of patents and licences that are used to generate the a sset; and
(d) overheadsthatarenecessarytogeneratetheassetandthatcanbealloc atedonareasonableandconsistent
basis to the asset (for example, an allocation of the depreciation of prope rty, plant and equipment,
insurance premiums and rent). Allocations of overheads are made on bases s imilar to those used in
allocating overheads to inventories (see IAS 2, inventories). IAS 23, bor rowing costs, establishes criteria
for the recognition of interest as a component of the cost of an internally g enerated intangible asset.
55. The following are not components of the cost of an internally generated intangible asset:
(a) selling, administrative and other general overhead expenditure unle ss this expenditure can be directly
attributed to preparing the asset for use;
(b) clearly identified inefficiencies and initial operating losses incu rred before an asset achieves planned
performance; and
(c) expenditure on training staff to operate the asset.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 351
Example illustrating paragraph 53
An enterprise is developing a new production process. During 20X5, expend iture incurred was 1 000, of
which 900 was incurred before 1 December 20X5 and 100 was incurred between 1 December 20X5 and
31December20X5.Theenterpriseisabletodemonstratethat,at1December 20X5,theproductionprocess
met the criteria for recognition as an intangible asset. The recoverable a mount of the know-how embodied
intheprocess(includingfuturecashoutflowstocompletetheprocessbef oreitisavailableforuse)isestimated
to be 500.
Attheendof20X5,theproductionprocessisrecognisedasanintangibleas setatacostof100(expenditure
incurred since the date when the recognition criteria were met, that is, 1 D ecember 20X5). The
900 expenditure incurred before 1 December 20X5 is recognised as an expens e because the recognition
criteria were not met until 1 December 20X5. This expenditure will never fo rm part of the cost of the
production process recognised in the balance sheet.During20X6,expenditureincurredis2 000.Attheendof20X6,therecovera bleamountoftheknow-how
embodiedintheprocess(includingfuturecashoutflowstocompletethepr ocessbeforeitisavailableforuse)
is estimated to be 1 900.At the end of 20X6, the cost of the production process is 2 100 (100 expenditu re recognised at the end of
20X5 plus 2 000 expenditure recognised in 20X6). The enterprise recognise s an impairment loss of 200 to
adjustthecarryingamountoftheprocessbeforeimpairmentloss(2 100)to itsrecoverableamount(1 900).
This impairment loss will be reversed in a subsequent period if the require ments for the reversal of an
impairment loss in IAS 36, impairment of assets, are met.
RECOGNITION OF AN EXPENSE
56. Expenditure on an intangible item should be recognised as an expense wh en it is incurred unless:
(a) it forms part of the cost of an intangible asset that meets the recogniti on criteria (see paragraphs 18 to
55); or
(b) the item is acquired in a business combination that is an acquisition an d cannot be recognised as an
intangibleasset.Ifthisisthecase,thisexpenditure(includedintheco stofacquisition)shouldformpart
of the amount attributed to goodwill (negative goodwill) at the date of acq uisition (see IAS 22 (revised
1998), business combinations).
57.Insomecases,expenditureisincurredtoprovidefutureeconomicbenefit stoanenterprise,butnointangible
assetorotherassetisacquiredorcreatedthatcanberecognised.Inthese cases,theexpenditureisrecognised
as an expense when it is incurred. For example, expenditure on research is a lways recognised as an expense
whenitisincurred(seeparagraph42).Examplesofotherexpenditurethat isrecognisedasanexpensewhen
it is incurred include:
(a) expenditureonstart-upactivities(start-upcosts),unlessthisexp enditureisincludedinthecostofanitem
of property, plant and equipment under IAS 16. Start-up costs may consist o f establishment costs such
as legal and secretarial costs incurred in establishing a legal entity, ex penditure to open a new facility or
business(pre-openingcosts)orexpendituresforcommencingnewoperati onsorlaunchingnewproducts
or processes (pre-operating costs);
(b) expenditure on training activities;
(c) expenditure on advertising and promotional activities; and(d) expenditure on relocating or reorganising part or all of an enterprise .
58.
Paragraph56doesnotprecluderecognisingaprepaymentasanassetwhenpa ymentforthedeliveryofgoods
or services has been made in advance of the delivery of goods or the renderin g of services.352 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Past expenses not to be recognised as an asset
59. Expenditure on an intangible item that was initially recognised as an e xpense by a reporting enterprise in
previousannualfinancialstatementsorinterimfinancialreportsshoul dnotberecognisedaspartofthecost
of an intangible asset at a later date.
SUBSEQUENT EXPENDITURE
60.Subsequent expenditure on an intangible asset after its purchase or its co mpletion should be recognised as
an expense when it is incurred unless:
(a) it is probable that this expenditure will enable the asset to generate f uture economic benefits in excess
of its originally assessed standard of performance; and
(b) this expenditure can be measured and attributed to the asset reliably.
Iftheseconditionsaremet,thesubsequentexpenditureshouldbeaddedto thecostoftheintangibleasset (1).
61. Subsequent expenditure on a recognised intangible asset is recognise d as an expense if this expenditure is
required to maintain the asset at its originally assessed standard of perf ormance. The nature of intangible
assetsissuchthat,inmanycases,itisnotpossibletodeterminewhethers ubsequentexpenditureislikelyto
enhance or maintain the economic benefits that will flow to the enterprise from those assets. In addition, it
isoftendifficulttoattributesuchexpendituredirectlytoaparticular intangibleassetratherthanthebusiness
as a whole. Therefore, only rarely will expenditure incurred after the ini tial recognition of a purchased
intangible asset or after completion of an internally generated intangib le asset result in additions to the cost
of the intangible asset.
62. Consistentwithparagraph51,subsequentexpenditureonbrands,mast heads,publishingtitles,customerlists
anditemssimilarinsubstance(whetherexternallypurchasedorinternal lygenerated)isalwaysrecognisedas
an expense to avoid the recognition of internally generated goodwill.
MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
Benchmark treatment
63.After initial recognition, an intangible asset should be carried at its co st less any accumulated amortisation
and any accumulated impairment losses.
Allowed alternative treatment
64. Afterinitialrecognition,anintangibleassetshouldbecarriedatar evaluedamount,beingitsfairvalueatthe
date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated
impairment losses. For the purpose of revaluations under this Standard, f air value should be determined by
reference to an active market. Revaluations should be made with sufficien t regularity such that the carrying
amountdoesnotdiffermateriallyfromthatwhichwouldbedeterminedusin gfairvalueatthebalancesheet
date.
65.The allowed alternative treatment does not allow:
(a) the revaluation of intangible assets that have not previously been rec ognised as assets; or
(b) the initial recognition of intangible assets at amounts other than the ir cost.
(1) See also SIC-6: cost of modifying existing software.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 353
66.Theallowedalternativetreatmentisappliedafteranassethasbeeniniti allyrecognisedatcost.However,ifonly
part of the cost of an intangible asset is recognised as an asset because the asset did not meet the criteria for
recognitionuntilpartofthewaythroughtheprocess(seeparagraph53),t heallowedalternativemaybeapplied
to the whole of that asset. Also, the allowed alternative treatment may be a pplied to an intangible asset that
was received by way of a government grant and recognised at a nominal amount (see paragraph 33).
67.Itisuncommonforanactivemarketwiththecharacteristicsdescribedinp aragraph7toexistforanintangible
asset, although this may occur. For example, in certain jurisdictions, an active market may exist for
freely-transferabletaxilicences,fishinglicencesorproductionquot as.However,anactivemarketcannotexist
forbrands,newspapermastheads,musicandfilmpublishingrights,paten tsortrademarks,becauseeachsuch
asset is unique. Also, although intangible assets are bought and sold, con tracts are negotiated between
individual buyers and sellers, and transactions are relatively infreque nt. For these reasons, the price paid for
oneassetmaynotprovidesufficientevidenceofthefairvalueofanother. Finally,pricesareoftennotavailable
to the public.
68.Thefrequencyofrevaluationsdependsonthevolatilityofthefairvalues oftheintangibleassetsbeingrevalued.
Ifthefairvalueofarevaluedassetdiffersmateriallyfromitscarryinga mount,afurtherrevaluationisnecessary.
Some intangible assets may experience significant and volatile movement s in fair value thus necessitating
annual revaluation. Such frequent revaluations are unnecessary for inta ngible assets with only insignificant
movements in fair value.
69.If an intangible asset is revalued, any accumulated amortisation at the da te of the revaluation is either:
(a) restated proportionately with the change in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals its revalued amount; or
(b) eliminated against the gross carrying amount of the asset and the net am ount restated to the revalued
amount of the asset.
70. Ifanintangibleassetisrevalued,alltheotherassetsinitsclasssho uldalsoberevalued,unlessthereisnoactive
market for those assets.
71.Aclassofintangibleassetsisagroupingofassetsofasimilarnatureandu seinanenterprise’soperations.The
items within a class of intangible assets are revalued simultaneously in o rder to avoid selective revaluation of
assets and the reporting of amounts in the financial statements represent ing a mixture of costs and values as
at different dates.
72. Ifanintangibleassetinaclassofrevaluedintangibleassetscannotb erevaluedbecausethereisnoactivemarket
forthisasset,theassetshouldbecarriedatitscostlessanyaccumulated amortisationandimpairmentlosses.
73. If the fair value of a revalued intangible asset can no longer be determi ned by reference to an active market,
thecarryingamountoftheassetshouldbeitsrevaluedamountatthedateof thelastrevaluationbyreference
to the active market less any subsequent accumulated amortisation and any subsequent accumulated
impairment losses.
74.The fact that an active market no longer exists for a revalued intangible as set may indicate that the asset may
be impaired and that it needs to be tested under IAS 36, impairment of assets .
75.Ifthefairvalueoftheassetcanbedeterminedbyreferencetoanactivemar ketatasubsequentmeasurement
date, the allowed alternative treatment is applied from that date.354 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
76. Ifanintangibleasset’scarryingamountisincreasedasaresultofare valuation,theincreaseshouldbecredited
directly to equity under the heading of revaluation surplus. However, a re valuation increase should be
recognisedasincometotheextentthatitreversesarevaluationdecrease ofthesameassetandthatrevaluation
decrease was previously recognised as an expense.
77. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease should be recognised as an
expense. However, a revaluation decrease should be charged directly agai nst any related revaluation surplus
to the extent that the decrease does not exceed the amount held in the revalu ation surplus in respect of that
same asset.
78.The cumulative revaluation surplus included in equity may be transferred directly to retained earnings when
thesurplusisrealised.Thewholesurplusmayberealisedontheretiremen tordisposaloftheasset.However,
some of the surplus may be realised as the asset is used by the enterprise; in such a case, the amount of the
surplusrealisedisthedifferencebetweenamortisationbasedonthereva luedcarryingamountoftheassetand
amortisationthatwouldhavebeenrecognisedbasedontheasset’shistori calcost.Thetransferfromrevaluation
surplus to retained earnings is not made through the income statement.
AMORTISATION
Amortisation Period
79.Thedepreciableamountofanintangibleassetshouldbeallocatedonasyst ematicbasisoverthebestestimate
of its useful life. There is a rebuttable presumption that the useful life o f an intangible asset will not exceed
20 years from the date when the asset is available for use. Amortisation sho uld commence when the asset
is available for use.
80. Asthefutureeconomicbenefitsembodiedinanintangibleassetarecon sumedovertime,thecarryingamount
of the asset is reduced to reflect that consumption. This is achieved by sys tematic allocation of the cost or
revalued amount of the asset, less any residual value, as an expense over th e asset’s useful life. Amortisation
is recognised whether or not there has been an increase in, for example, the asset’s fair value or recoverable
amount. Many factors need to be considered in determining the useful life o f an intangible asset including:
(a) the expected usage of the asset by the enterprise and whether the asset c ould be efficiently managed by
another management team;
(b) typicalproductlifecyclesfortheassetandpublicinformationonest imatesofusefullivesofsimilartypes
of assets that are used in a similar way;
(c) technical, technological or other types of obsolescence;
(d) thestabilityoftheindustryinwhichtheassetoperatesandchangesin themarketdemandfortheproducts
or services output from the asset;
(e) expected actions by competitors or potential competitors;(f) thelevelofmaintenanceexpenditurerequiredtoobtaintheexpectedf utureeconomicbenefitsfromthe
asset and the company’s ability and intent to reach such a level;
(g) the period of control over the asset and legal or similar limits on the us e of the asset, such as the expiry
dates of related leases; and
(h) whether the useful life of the asset is dependent on the useful life of ot her assets of the enterprise.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 355
81. Given the history of rapid changes in technology, computer software an d many other intangible assets are
susceptible to technological obsolescence. Therefore, it is likely that their useful life will be short.
82. Estimatesoftheusefullifeofanintangibleassetgenerallybecomele ssreliableasthelengthoftheusefullife
increases. This Standard adopts a presumption that the useful life of inta ngible assets is unlikely to exceed
20 years.
83. Inrarecases,theremaybepersuasiveevidencethattheusefullifeofa nintangibleassetwillbeaspecificperiod
longer than 20 years. In these cases, the presumption that the useful life g enerally does not exceed 20 years
is rebutted and the enterprise:
(a) amortises the intangible asset over the best estimate of its useful lif e;
(b) estimates the recoverable amount of the intangible asset at least annu ally in order to identify any
impairment loss (see paragraph 99); and
(c) discloses the reasons why the presumption is rebutted and the factor(s ) that played a significant role in
determining the useful life of the asset (see paragraph 111(a)).
Examples
A. Anenterprisehaspurchasedanexclusiverighttogeneratehydro-elect ricpowerfor60years.Thecosts
of generating hydro-electric power are much lower than the costs of obtain ing power from alternative
sources.Itisexpectedthatthegeographicalareasurroundingthepowers tationwilldemandasignificant
amount of power from the power station for at least 60 years.
Theenterpriseamortisestherighttogeneratepowerover60years,unless thereisevidencethatitsuseful
life is shorter.
B. Anenterprisehaspurchasedanexclusiverighttooperateatollmotorwa yfor30years.Thereisnoplan
toconstructalternativeroutesintheareaservedbythemotorway.Itisex pectedthatthismotorwaywill
be in use for at least 30 years.The enterprise amortises the right to operate the motorway over 30 years, u nless there is evidence that
its useful life is shorter.
84. The useful life of an intangible asset may be very long but it is always fi nite. Uncertainty justifies estimating
the useful life of an intangible asset on a prudent basis, but it does not jus tify choosing a life that is
unrealistically short.
85.
Ifcontroloverthefutureeconomicbenefitsfromanintangibleassetisac hievedthroughlegalrightsthathave
beengrantedforafiniteperiod,theusefullifeoftheintangibleassetsh ouldnotexceedtheperiodofthelegal
rights unless:
(a) the legal rights are renewable; and
(b) renewal is virtually certain.
86. There may be both economic and legal factors influencing the useful lif e of an intangible asset: economic
factors determine the period over which future economic benefits will be r eceived; legal factors may restrict
the period over which the enterprise controls access to these benefits. Th e useful life is the shorter of the
periods determined by these factors.
87. The following factors, among others, indicate that renewal of a legal r ight is virtually certain:
(a) the fair value of the intangible asset does not reduce as the initial exp iry date approaches, or does not
reduce by more than the cost of renewing the underlying right;356 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) there is evidence (possibly based on past experience) that the legal ri ghts will be renewed; and
(c) thereisevidencethattheconditionsnecessarytoobtaintherenewalo fthelegalright(ifany)willbesatisfied.
Amortisation method
88. Theamortisationmethodusedshouldreflectthepatterninwhichtheas set’seconomicbenefitsareconsumed
by the enterprise. If that pattern cannot be determined reliably, the stra ight-line method should be used. The
amortisation charge for each period should be recognised as an expense unl ess another International
Accounting Standard permits or requires it to be included in the carrying a mount of another asset.
89.Avarietyofamortisationmethodscanbeusedtoallocatethedepreciablea mountofanassetonasystematic
basisoveritsusefullife.Thesemethodsincludethestraight-linemetho d,thediminishingbalancemethodand
the unit of production method. The method used for an asset is selected base d on the expected pattern of
consumptionofeconomicbenefitsandisconsistentlyappliedfromperiod toperiod,unlessthereisachange
in the expected pattern of consumption of economic benefits to be derived f rom that asset. There will rarely,
if ever, be persuasive evidence to support an amortisation method for inta ngible assets that results in a lower
amount of accumulated amortisation than under the straight-line method.
90.Amortisation is usually recognised as an expense. However, sometimes, th e economic benefits embodied in
anassetareabsorbedbytheenterpriseinproducingotherassetsratherth angivingrisetoanexpense.Inthese
cases,theamortisationchargeformspartofthecostoftheotherassetand isincludedinitscarryingamount.
For example, the amortisation of intangible assets used in a production pr ocess is included in the carrying
amount of inventories (see IAS 2, inventories).
Residual Value
91. The residual value of an intangible asset should be assumed to be zero un less:
(a) there is a commitment by a third party to purchase the asset at the end of i ts useful life; or
(b) there is an active market for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset’s use ful life.
92.Thedepreciableamountofanassetisdeterminedafterdeductingitsresid ualvalue.Aresidualvalueotherthan
zero implies that an enterprise expects to dispose of the intangible asset before the end of its economic life.
93.If the benchmark treatment is adopted, the residual value is estimated usi ng prices prevailing at the date of
acquisition of the asset, for the sale of a similar asset that has reached th e end of its estimated useful life and
that has operated under conditions similar to those in which the asset will be used. The residual value is not
subsequently increased for changes in prices or value. If the allowed alte rnative treatment is adopted, a new
estimate of residual value is made at the date of each revaluation of the ass et using prices prevailing at that
date.
Review of amortisation period and amortisation method
94. The amortisation period and the amortisation method should be reviewe d at least at each financial year end.
Iftheexpectedusefullifeoftheassetissignificantlydifferentfrompr eviousestimates,theamortisationperiod
should be changed accordingly. If there has been a significant change in th e expected pattern of economic
benefits from the asset, the amortisation method should be changed to refl ect the changed pattern. Such
changes should be accounted for as changes in accounting estimates under I AS 8, net profit or loss for the
period, fundamental errors and changes in accounting policies, by adjust ing the amortisation charge for the
current and future periods.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 357
95.During the life of an intangible asset, it may become apparent that the esti mate of its useful life is
inappropriate. For example, the useful life may be extended by subsequent expenditure that improves the
condition of the asset beyond its originally assessed standard of perform ance. Also, the recognition of an
impairment loss may indicate that the amortisation period needs to be chan ged.
96.Overtime,thepatternoffutureeconomicbenefitsexpectedtoflowtoanen terprisefromanintangibleasset
may change. For example, it may become apparent that a diminishing balance method of amortisation is
appropriateratherthanastraight-linemethod.Anotherexampleisifuse oftherightsrepresentedbyalicence
isdeferredpendingactiononothercomponentsofthebusinessplan.Inthi scase,economicbenefitsthatflow
from the asset may not be received until later periods.
RECOVERABILITY OF THE CARRYING AMOUNT — IMPAIRMENT LOSSES
97. Todeterminewhetheranintangibleassetisimpaired,anenterpriseap pliesIAS36,impairmentofassets.That
Standard explains how an enterprise reviews the carrying amount of its ass ets, how it determines the
recoverable amount of an asset and when it recognises or reverses an impair ment loss.
98. UnderIAS22(revised1998),businesscombinations,ifanimpairmentl ossoccursbeforetheendofthefirst
annual accounting period commencing after acquisition for an intangible asset acquired in a business
combinationthatwasanacquisition,theimpairmentlossisrecognisedas anadjustmenttoboththeamount
assigned to the intangible asset and the goodwill (negative goodwill) rec ognised at the date of acquisition.
However,iftheimpairmentlossrelatestospecificeventsorchangesinci rcumstancesoccurringafterthedate
of acquisition, the impairment loss is recognised under IAS 36 and not as an adjustment to the amount
assigned to the goodwill (negative goodwill) recognised at the date of acq uisition.
99.In addition to following the requirements included in IAS 36, impairment o f assets, an enterprise should
estimate the recoverable amount of the following intangible assets at lea st at each financial year end, even
if there is no indication that the asset is impaired:
(a) an intangible asset that is not yet available for use; and
(b) an intangible asset that is amortised over a period exceeding 20 years f rom the date when the asset is
available for use.
TherecoverableamountshouldbedeterminedunderIAS36andimpairmentlo ssesrecognisedaccordingly.
100. Theabilityofanintangibleassettogeneratesufficientfutureecon omicbenefitstorecoveritscostisusually
subjecttogreatuncertaintyuntiltheassetisavailableforuse.Therefo re,thisStandardrequiresanenterprise
to test for impairment, at least annually, the carrying amount of an intang ible asset that is not yet available
for use.
101. Itissometimesdifficulttoidentifywhetheranintangibleassetmay beimpairedbecause,amongotherthings,
thereisnotnecessarilyanyobviousevidenceofobsolescence.Thisdiffi cultyarisesparticularlyiftheassethas
a long useful life. As a consequence, this Standard requires, as a minimum, an annual calculation of the
recoverable amount of an intangible asset if its useful life exceeds 20 yea rs from the date when it becomes
available for use.
102. The requirement for an annual impairment test of an intangible asset a pplies whenever the current total
estimated useful life of the asset exceeds 20 years from when it became avai lable for use. Therefore, if the
useful life of an intangible asset was estimated to be less than 20 years at i nitial recognition, but the useful
lifeisextendedbysubsequentexpendituretoexceed20yearsfromwhenthe assetbecameavailableforuse,
an enterprise performs the impairment test required under paragraph 99(b ) and also makes the disclosure
required under paragraph 111(a).358 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
RETIREMENTS AND DISPOSALS
103. Anintangibleassetshouldbederecognised(eliminatedfromthebala ncesheet)ondisposalorwhennofuture
economic benefits are expected from its use and subsequent disposal.
104. Gains or losses arising from the retirement or disposal of an intangib le asset should be determined as the
differencebetweenthenetdisposalproceedsandthecarryingamountofth eassetandshouldberecognised
as income or expense in the income statement.
105.Ifanintangibleassetisexchangedforasimilarassetunderthecircumsta ncesdescribedinparagraph35,the
costoftheacquiredassetisequaltothecarryingamountoftheassetdispo sedofandnogainorlossresults.
106.An intangible asset that is retired from active use and held for disposal is carried at its carrying amount at
the date when the asset is retired from active use. At least at each financia l year end, an enterprise tests the
asset for impairment under IAS 36, impairment of assets, and recognises an y impairment loss accordingly.
DISCLOSURE
General
107.The financial statements should disclose the following for each class of i ntangible assets, distinguishing
between internally generated intangible assets and other intangible ass ets:
(a) the useful lives or the amortisation rates used;
(b) the amortisation methods used;
(c) thegrosscarryingamountandtheaccumulatedamortisation(aggregat edwithaccumulatedimpairment
losses) at the beginning and end of the period;
(d) the line item(s) of the income statement in which the amortisation of in tangible assets is included;
(e) a reconciliation of the carrying amount at the beginning and end of the p eriod showing:
(i) additions, indicating separately those from internal development an d through business
combinations;
(ii) retirements and disposals;(iii) increases or decreases during the period resulting from revaluatio ns under paragraphs 64, 76 and
77andfromimpairmentlossesrecognisedorreverseddirectlyinequityun derIAS36,impairment
of assets (if any);
(iv) impairment losses recognised in the income statement during the peri od under IAS 36 (if any);
(v) impairment losses reversed in the income statement during the period u nder IAS 36 (if any);
(vi) amortisation recognised during the period;(vii) netexchangedifferencesarisingonthetranslationofthefinancia lstatementsofaforeignentity;and
(viii) other changes in the carrying amount during the period.
Comparative information is not required.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 359
108. A class of intangible assets is a grouping of assets of a similar nature and use in an enterprise’s operations.
Examples of separate classes may include:
(a) brand names;
(b) mastheads and publishing titles;(c) computer software;(d) licences and franchises;(e) copyrights, patents and other industrial property rights, service an d operating rights;
(f) recipes, formulae, models, designs and prototypes; and(g) intangible assets under development.
Theclassesmentionedabovearedisaggregated(aggregated)intosmaller (larger)classesifthisresultsinmore
relevant information for the users of the financial statements.
109. Anenterprisedisclosesinformationonimpairedintangibleassetsu nderIAS36inadditiontotheinformation
required by paragraph 107(e)(iii) to (v).
110. Anenterprisedisclosesthenatureandeffectofachangeinanaccount ingestimatethathasamaterialeffect
inthecurrentperiodorthatisexpectedtohaveamaterialeffectinsubseq uentperiods,underIAS8,netprofit
orlossfortheperiod,fundamentalerrorsandchangesinaccountingpolic y.Suchdisclosuremayarisefrom
changes in:
(a) the amortisation period;
(b) the amortisation method; or(c) residual values.
111.
The financial statements should also disclose:
(a) if an intangible asset is amortised over more than 20 years, the reasons why the presumption that the
usefullifeofanintangibleassetwillnotexceed20yearsfromthedatewhe ntheassetisavailableforuse
is rebutted. In giving these reasons, the enterprise should describe the f actor(s) that played a significant
role in determining the useful life of the asset;
(b) a description, the carrying amount and remaining amortisation period of any individual intangible asset
that is material to the financial statements of the enterprise as a whole;
(c) for intangible assets acquired by way of a government grant and initial ly recognised at fair value (see
paragraph 33):
(i) the fair value initially recognised for these assets;(ii) their carrying amount; and(iii) whethertheyarecarriedunderthebenchmarkortheallowedalternat ivetreatmentforsubsequent
measurement;
(d) theexistenceandcarryingamountsofintangibleassetswhosetitleis restrictedandthecarryingamounts
of intangible assets pledged as security for liabilities; and
(e) the amount of commitments for the acquisition of intangible assets.
112. When an enterprise describes the factor(s) that played a significant role in determining the useful life of an
intangible asset that is amortised over more than 20 years, the enterprise considers the list of factors in
paragraph 80.360 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Intangible assets carried under the allowed alternative treatment
113. If intangible assets are carried at revalued amounts, the following s hould be disclosed:
(a) by class of intangible assets:
(i) the effective date of the revaluation;
(ii) the carrying amount of revalued intangible assets; and
(iii) the carrying amount that would have been included in the financial st atements had the revalued
intangible assets been carried under the benchmark treatment in paragrap h 63; and
(b) the amount of the revaluation surplus that relates to intangible asset s at the beginning and end of the
period, indicating the changes during the period and any restrictions on t he distribution of the balance
to shareholders.
114.It may be necessary to aggregate the classes of revalued assets into larger classes for disclosure purposes.
However,classesarenotaggregatedifthiswouldresultinthecombinatio nofaclassofintangibleassetsthat
includes amounts measured under both benchmark and allowed alternative t reatments for subsequent
measurement.
Research and development expenditure
115. The financial statements should disclose the aggregate amount of res earch and development expenditure
recognised as an expense during the period.
116.Research and development expenditure comprises all expenditure that is d irectly attributable to research or
development activities or that can be allocated on a reasonable and consis tent basis to such activities (see
paragraphs54to55forguidanceonthetypeofexpendituretobeincludedfo rthepurposeofthedisclosure
requirement in paragraph 115).
Other information
117.An enterprise is encouraged, but not required, to give the following infor mation:
(a) a description of any fully amortised intangible asset that is still in u se; and
(b) abriefdescriptionofsignificantintangibleassetscontrolledbyth eenterprisebutnotrecognisedasassets
because they did not meet the recognition criteria in this Standard or beca use they were acquired or
generated before this Standard was effective.
TRANSITIONAL PROVISIONS
118. At the date when this Standard becomes effective (or at the date of adop tion, if earlier), it should be applied
as set out in the following tables. In all cases other than those detailed in these tables, this Standard should
be applied retrospectively, unless it is impracticable to do so.
119.The tables below require retrospective application whenever this is nece ssary to eliminate an item that no
longer qualifies for recognition under this Standard or if the previous me asurement of an intangible asset
contradicted the principles set out in this Standard (for example, intang ible assets that have never been
amortised or that have been revalued but not by reference to an active marke t). In other cases, prospective
application of the recognition and amortisation requirements is require d or, in some cases, permitted.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 361
120. The effect of adopting this Standard on its effective date (or earlier ) should be recognised under IAS 8, net
profitorlossfortheperiod,fundamentalerrorsandchangesinaccountin gpolicies,thatis,asanadjustment
either to the opening balance of retained earnings of the earliest period p resented (IAS 8 benchmark
treatment) or to the net profit or loss for the current period (IAS 8 allowed alternative treatment).
121. In the first annual financial statements issued under this Standard, an enterprise should disclose the
transitional provisions adopted where transitional provisions under th is Standard permit a choice.
Transitional Provisions — Recognition
Circumstances Requirements
1.An intangible item was recognised as a separate asset — whether or not descr ibed as an intangible asset —
and, at the effective date of this Standard (or at the date of adoption of thi s Standard, if earlier), the item does
not meet the definition of, or recognition criteria for, an intangible ass et.
(a) The item was acquired in a business
combination that was an acquisition.(i) Reallocate the item to the goodwill (negative goodwill) resulting
from the same acquisition; and
(ii) adjust the goodwill (negative goodwill) recognised at the date of
acquisition retrospectively, as if the item had always been
included in the goodwill (negative goodwill) recognised at thedate of acquisition. For example, if the goodwill was recognisedasanassetandamortised,estimatetheaccumulatedamortisationthat would have been recognised, had the item been included inthegoodwillrecognisedatthedateofacquisition,andadjustthecarrying amount of the goodwill accordingly.
(b) The item was not acquired in a business
combination that was an acquisition (forexample, it was purchased separately orgenerated internally).Derecognise the item (eliminate it from the balance sheet).
2.An intangible item was recognised as a separate asset — whether or not descr ibed as an intangible asset —
and, at the effective date of this Standard (or at the date of adoption of thi s Standard, if earlier), the item meets
the definition of, and recognition criteria for, an intangible asset.
(a) The asset was recognised initially at cost. Classify the asset as an int angible asset. The cost initially recognised
for the asset is deemed to have been properly determined. Seetransitional provisions for subsequent measurement andamortisation under circumstances 4 and 5 below.
(b) The asset was recognised initially at an
amount other than cost.(i) Classify the asset as an intangible asset; and
(ii) re-estimate the carrying amount of the asset at cost (or revalued
amount, after initial recognition at cost) less accumulated
amortisation, determined under this Standard.
If the cost of the intangible asset cannot be determined, derecognisethe asset (eliminate it from the balance sheet).362 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
3.At the effective date of this Standard (or at the date of adoption of this Sta ndard, if earlier), an item meets the
definition of, and recognition criteria for, an intangible asset but it wa s not previously recognised as an asset.
(a) The intangible asset was acquired in a
business combination that was an
acquisition and formed part of thegoodwill recognised.Recognition of the intangible asset is encouraged, but not required.If the intangible asset is recognised:
(i) measure the carrying amount of the asset at cost (or revalued
amount) less accumulated amortisation determined under this
Standard; and
(ii) adjust the goodwill recognised at the date of acquisition
retrospectively,asiftheintangibleassethadneverbeenincludedinthegoodwillrecognisedatthedateofacquisition.Forexample,ifthegoodwillwasrecognisedasanassetandamortised,estimatethe effect on the accumulated amortisation of the goodwill ofdistinguishing the intangible asset separately and adjust thecarrying amount of the goodwill accordingly.
(b) The intangible asset was not acquired in
a business combination that was anacquisition (for example, it waspurchased separately or generatedinternally).The intangible asset should not be recognised.
Transitional Provisions — Amortisation of an intangible asset carried un der the benchmark treatment
Circumstances Requirements
4. Theassetwasnotpreviouslyamortisedor
theamortisationchargewasdeemedtobenil.Restate the carrying amount of the asset as if the accumulatedamortisation had always been determined under this Standard.
5. The asset was previously amortised.
Accumulated amortisation determinedunder this Standard is different to thatpreviously determined (because theamortisation period and/or theamortisation method is different).Do not restate the carrying amount of the intangible asset for anydifference between the accumulated amortisation in prior years andthat calculated under this Standard. Amortise any carrying amountof the asset over its remaining useful life determined under thisStandard(i.e.anychangeistreatedasachangeinaccountingestimate— see paragraph 94).
Transitional Provisions — Revalued intangible asset
Circumstances Requirements
6.An intangible asset was carried at a revalued amount not determined by refe rence to an active market:
(a) There is an active market for the asset. Theassetshouldberevaluedbyr eferencetothisactivemarketatthe
effective date of this Standard (or at the date of adoption of thisStandard, if earlier).
(b) There is no active market for the asset.
(i) Eliminate the effect of any revaluation; and
(ii) measurethecarryingamountoftheassetatcostlessaccumulated
amortisation, determined under this Standard.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 363
EFFECTIVE DATE
122. ThisInternationalAccountingStandardbecomesoperativeforannua lfinancialstatementscoveringperiods
beginningonorafter1July1999.Earlierapplicationisencouraged.Ifan enterpriseappliesthisStandardfor
annual financial statements covering periods beginning before 1 July 199 9, the enterprise should:
(a) disclose that fact; and
(b) adoptIAS22(revised1998),businesscombinations,andIAS36,impair mentofassets,atthesametime.
123.This Standard supersedes:
(a) IAS 4, depreciation accounting, with respect to the amortisation (dep reciation) of intangible assets; and
(b) IAS 9, research and development costs.
INTERNATIONAL ACCOUNTING STANDARD IAS 40
Investment property
This International Accounting Standard was approved by the IASC Board in M arch 2000 and became effective for
financial statements covering periods beginning on or after 1 January 200 1.
This Standard supersedes IAS 25, Accounting for Investments, with respec t to accounting for investment property.
IAS 25 was withdrawn when this Standard came into effect.
In January 2001, IAS 41, agriculture, amended paragraph 3. The amended tex t is operative for annual financial
statements covering periods beginning on or after 1 January 2003.
INTRODUCTION
1.IAS40prescribestheaccountingtreatmentforinvestmentpropertyandre lateddisclosurerequirements.The
Standard is effective for annual financial statements covering periods b eginning on or after 1 January 2001.
Earlier application is encouraged.
2.The Standard replaces previous requirements in IAS 25, accounting for inv estments. Under IAS 25, an
enterprisewaspermittedtochoosefromamongavarietyofaccountingtrea tmentsforinvestmentproperty
(depreciatedcostunderthebenchmarktreatmentinIAS16,property,plan tandequipment,revaluationwith
depreciation under the allowed alternative treatment in IAS 16, cost less impairment under IAS 25 or
revaluation under IAS 25). IAS 25 is withdrawn when this Standard comes int o effect.
3.Investment property is defined as property (land or a building — or part of a building — or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capit al appreciation or both, rather
than for:
(a) use in the production or supply of goods or services or for administrati ve purposes; or
(b) sale in the ordinary course of business.364 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4.The Standard does not deal with:
(a) owner-occupied property (that is, property held for use in the product ion or supply of goods or services
or for administrative purposes) — carried under IAS 16, property, plant an d equipment, at either
depreciated cost or revalued amount less subsequent depreciation;
(b) property held for sale in the ordinary course of business — carried at th e lower of cost and net realisable
value under IAS 2, inventories;
(c) property being constructed or developed for future use as investment p roperty — IAS 16 applies to such
property until the construction or development is complete, at which time the property becomes
investment property and this Standard applies. However, this Standard do es apply to existing investment
property that is being redeveloped for continued future use as investment property;
(d) an interest held by a lessee under an operating lease — covered by IAS 17, leases;
(e) biological assets attached to land related to agricultural activity — covered by IAS 41, agriculture; and
(f) mineral rights, the exploration for and development of minerals, oil, natural gas and similar
non-regenerative natural resources.
5.The Standard permits enterprises to choose either:
(a) afairvaluemodel:investmentpropertyshouldbemeasuredatfairvalu eandchangesinfairvalueshould
be recognised in the income statement; or
(b) a cost model. The cost model is the benchmark treatment in IAS 16, proper ty, plant and equipment:
investmentpropertyshouldbemeasuredatdepreciatedcost(lessanyaccu mulatedimpairmentlosses).An
enterprise that chooses the cost model should disclose the fair value of it s investment property.
6.ThefairvaluemodeldiffersfromtherevaluationmodelthattheBoardalre adypermitsforcertainnon-financial
assets.Undertherevaluationmodel,increasesincarryingamountabovea cost-basedmeasurearerecognised
as revaluation surplus. However, under the fair value model, all changes i n fair value are recognised in the
income statement.
7.ThisisthefirsttimethattheBoardhasintroducedafairvalueaccounting modelfornon-financialassets.The
commentlettersonExposureDraftE64showedthatalthoughmanysupportth isstep,manyothersstillhave
significant conceptual and practical reservations about extending a fai r value model to non-financial assets.
Also,somebelievethatcertainpropertymarketsarenotyetsufficiently matureforafairvaluemodeltowork
satisfactorily. Furthermore, some believe that it is impossible to creat e a rigorous definition of investment
property and that this makes it impracticable to require a fair value model at present.
8.For those reasons, the Board believes that it is impracticable, at this sta ge, to require a fair value model for
investmentproperty.Atthesametime,theBoardbelievesthatitisdesira bletopermitafairvaluemodel.This
evolutionary step forward will allow preparers and users to gain greater e xperience working with a fair value
model and will allow time for certain property markets to achieve greater m aturity.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 365
9.TheStandardrequiresthatanenterpriseshouldapplythemodelchosentoa llitsinvestmentproperty.Achange
from one model to the other model should be made only if the change will resul t in a more appropriate
presentation. The Standard states that this is highly unlikely to be the ca se for a change from the fair value
model to the cost model.
10.Inexceptionalcases,thereisclearevidencewhenanenterprisefirstacq uiresaninvestmentproperty(orwhen
an existing property first becomes investment property following the com pletion of construction or
development, or after a change in use) that the enterprise will not be able t o determine the fair value of the
investment property reliably on a continuing basis. In such cases, the Sta ndard requires an enterprise to
measure that investment property using the benchmark treatment in IAS 16 u ntil the disposal of the
investment property. The residual value of the investment property shoul d be assumed to be zero. An
enterprise that has chosen the fair value model measures all its other inve stment property at fair value.
11.Appendix A is a decision tree that summarises how an enterprise determines whether it applies IAS 40 (for
investment property), rather than IAS 16, property, plant and equipment ( for owner-occupied property or
property that is being constructed or developed for future use as investme nt property), or IAS 2, inventories
(for property held for sale in the ordinary course of business).
12.Appendix B, Basis for conclusions, summarises the Board’s reasons for ado pting the requirements set out in
IAS 40.
CONTENTS
Paragraphs
Objective 367
Scope 367
Definitions 367
Recognition 369
Initial measurement 370
Subsequent expenditure 370
Measurement subsequent to initial recognition 370
Fair value model 371
Inability to measure fair value reliably 373Cost model 373
Transfers 374
Disposals 375
Disclosure 376
Fair value model and cost model 376Fair value model 376
Cost model 377366 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Transitional provisions 378
Fair value model 378
Cost model 378
Effective date 379
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementation guidance in this Standard, and in the context of the Prefac e to International Accounting Standards.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
TheobjectiveofthisStandardistoprescribetheaccountingtreatmentfo rinvestmentpropertyandrelateddisclosure
requirements.
SCOPE
1. This Standard should be applied in the recognition, measurement and dis closure of investment property.
2.Amongotherthings,thisStandarddealswiththemeasurementinalessee’s financialstatementsofinvestment
propertyheldunderafinanceleaseandwiththemeasurementinalessor’sf inancialstatementsofinvestment
property leased out under an operating lease. This Standard does not deal w ith matters covered in IAS 17,
leases, including:
(a) classification of leases as finance leases or operating leases;
(b) recognition of lease income earned on investment property (see also IA S 18, revenue);
(c) measurement in a lessee’s financial statements of property held under an operating lease;
(d) measurement in a lessor’s financial statements of property leased out under a finance lease;
(e) accounting for sale and leaseback transactions; and(f) disclosure about finance leases and operating leases.
3.
This Standard does not apply to:
(a) biological assets attached to land related to agricultural activity ( see IAS 41, agriculture); and
(b) mineralrights,theexplorationforandextractionofminerals,oil,n aturalgasandsimilarnon-regenerative
resources.
DEFINITIONS
4. The following terms are used in this Standard with the meanings specifie d:
Investment property is property (land or a building — or part of a building — or both) held (by the owner
or by the lessee under a finance lease) to earn rentals or for capital apprec iation or both, rather than for:
(a) use in the production or supply of goods or services or for administrati ve purposes; or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 367
(b) sale in the ordinary course of business.
Owner-occupiedpropertyispropertyheld(bytheownerorbythelesseeund erafinancelease)foruseinthe
production or supply of goods or services or for administrative purposes.Fair value is the amount for which an asset could be exchanged between knowl edgeable, willing parties in an
arm’s length transaction.Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire
an asset at the time of its acquisition or construction.Carrying amount is the amount at which an asset is recognised in the balance sheet.
5.
Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment
propertygeneratescashflowslargelyindependentlyoftheotherassetsh eldbyanenterprise.Thisdistinguishes
investmentpropertyfromowner-occupiedproperty.Theproductionorsup plyofgoodsorservices(ortheuse
ofpropertyforadministrativepurposes)generatescashflowsthatareat tributablenotmerelytoproperty,but
alsotootherassetsusedintheproductionorsupplyprocess.IAS16,prope rty,plantandequipment,applies
to owner-occupied property.
6.The following are examples of investment property:
(a) land held for long-term capital appreciation rather than for short-te rm sale in the ordinary course of
business;
(b) land held for a currently undetermined future use. (If an enterprise ha s not determined that it will use the
landeitherasowner-occupiedpropertyorforshort-termsaleintheordin arycourseofbusiness,theland
is considered to be held for capital appreciation);
(c) abuildingownedbythereportingenterprise(orheldbythereportinge nterpriseunderafinancelease)and
leased out under one or more operating leases; and
(d) a building that is vacant but is held to be leased out under one or more ope rating leases.
7.The following are examples of items that are not investment property and th erefore fall outside the scope of
this Standard:
(a) propertyheldforsaleintheordinarycourseofbusinessorintheproce ssofconstructionordevelopment
forsuchsale(seeIAS2,inventories),forexamplepropertyacquiredexcl usivelywithaviewtosubsequent
disposal in the near future or for development and resale;
(b) property being constructed or developed on behalf of third parties (se e IAS 11, construction contracts);
(c) owner-occupied property (see IAS 16, property, plant and equipment), including (among other things)
property held for future use as owner-occupied property, property held fo r future development and
subsequent use as owner-occupied property, property occupied by employe es (whether or not the
employees pay rent at market rates) and owner-occupied property awaiting disposal; and
(d) property that is being constructed or developed for future use as inves tment property. IAS 16 applies to
such property until construction or development is complete, at which tim e the property becomes
investment property and this Standard applies. However, this Standard do es apply to existing investment
property that is being redeveloped for continued future use as investment property (see paragraph 52).368 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
8.Certainpropertiesincludeaportionthatisheldtoearnrentalsorforcap italappreciationandanotherportion
that is held for use in the production or supply of goods or services or for ad ministrative purposes. If these
portionscouldbesoldseparately(orleasedoutseparatelyunderafinanc elease),anenterpriseaccountsforthe
portionsseparately.Iftheportionscouldnotbesoldseparately,thepro pertyisinvestmentpropertyonlyifan
insignificant portion is held for use in the production or supply of goods o r services or for administrative
purposes.
9.In certain cases, an enterprise provides ancillary services to the occupa nts of a property held by the enterprise.
An enterprise treats such a property as investment property if the service s are a relatively insignificant
componentofthearrangementasawhole.Anexamplewouldbewheretheowner ofanofficebuildingprovides
security and maintenance services to the lessees who occupy the building.
10.Inothercases,theservicesprovidedareamoresignificantcomponent.Fo rexample,ifanenterpriseownsand
manages a hotel, services provided to guests are a significant component o f the arrangement as a whole.
Therefore, an owner-managed hotel is owner-occupied property, rather th an investment property.
11.It may be difficult to determine whether ancillary services are so signifi cant that a property does not qualify
asinvestmentproperty.Forexample,theownerofahotelsometimestransf erscertainresponsibilitiestothird
parties under a management contract. The terms of such management contrac ts vary widely. At one end of
the spectrum, the owner’s position may, in substance, be that of a passive i nvestor. At the other end of the
spectrum, the owner may simply have outsourced certain day-to-day functi ons while retaining significant
exposure to variation in the cash flows generated by the operations of the h otel.
12.Judgementisneededtodeterminewhetherapropertyqualifiesasinvestme ntproperty.Anenterprisedevelops
criteria so that it can exercise that judgement consistently in accordanc e with the definition of investment
propertyandwiththerelatedguidanceinparagraphs5to11.Paragraph66( a)requiresanenterprisetodisclose
these criteria when classification is difficult.
13.UnderIAS17,leases,alesseedoesnotcapitalisepropertyheldunderanop eratinglease.Therefore,thelessee
does not treat its interest in such property as investment property.
14.Insomecases,anenterpriseownspropertythatisleasedto,andoccupiedb y,itsparentoranothersubsidiary.
The property does not qualify as investment property in consolidated fina ncial statements that include both
enterprises, because the property is owner-occupied from the perspectiv e of the group as a whole. However,
from the perspective of the individual enterprise that owns it, the proper ty is investment property if it meets
thedefinitioninparagraph4.Therefore,thelessortreatsthepropertya sinvestmentpropertyinitsindividual
financial statements.
RECOGNITION
15. Investment property should be recognised as an asset when, and only whe n:
(a) itisprobablethatthefutureeconomicbenefitsthatareassociatedwi ththeinvestmentpropertywillflow
to the enterprise; and
(b) the cost of the investment property can be measured reliably.
16.In determining whether an item satisfies the first criterion for recognit ion, an enterprise needs to assess the
degree of certainty attaching to the flow of future economic benefits on th e basis of the available evidence at
the time of initial recognition. The second criterion for recognition is u sually readily satisfied because the
exchange transaction evidencing the purchase of the asset identifies its cost.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 369
INITIAL MEASUREMENT
17. An investment property should be measured initially at its cost. Trans action costs should be included in the
initial measurement.
18.The cost of a purchased investment property comprises its purchase price, and any directly attributable
expenditure. Directly attributable expenditure includes, for example, professional fees for legal services,
property transfer taxes and other transaction costs.
19.Thecostofaself-constructedinvestmentpropertyisitscostatthedatew hentheconstructionordevelopment
is complete. Until that date, an enterprise applies IAS 16, property, plan t and equipment. At that date, the
property becomes investment property and this Standard applies (see para graphs 51(e) and 59).
20.The cost of an investment property is not increased by start-up costs (unle ss they are necessary to bring the
property to its working condition), initial operating losses incurred be fore the investment property achieves
the planned level of occupancy or abnormal amounts of wasted material, lab our or other resources incurred
in constructing or developing the property.
21.Ifpaymentforaninvestmentpropertyisdeferred,itscostisthecashpric eequivalent.Thedifferencebetween
this amount and the total payments is recognised as interest expense over t he period of credit.
SUBSEQUENT EXPENDITURE
22. Subsequentexpenditurerelatingtoaninvestmentpropertythathasal readybeenrecognisedshouldbeadded
tothecarryingamountoftheinvestmentpropertywhenitisprobablethatf utureeconomicbenefits,inexcess
of the originally assessed standard of performance of the existing invest ment property, will flow to the
enterprise. All other subsequent expenditure should be recognised as an e xpense in the period in which it is
incurred.
23.The appropriate accounting treatment for expenditure incurred subseque ntly to the acquisition of an
investmentpropertydependsonthecircumstanceswhichweretakenintoac countontheinitialmeasurement
andrecognitionoftherelatedinvestment.Forinstance,whenthecarryin gamountofaninvestmentproperty
already takes into account a loss in future economic benefits, subsequent expenditure to restore the future
economic benefits expected from the asset is capitalised. This is also the case when the purchase price of an
asset reflects the enterprise’s obligation to incur expenditure that is n ecessary in the future to bring the asset
to its working condition. An example of this might be the acquisition of a bu ilding requiring renovation. In
such circumstances, the subsequent expenditure is added to the carrying a mount.
MEASUREMENT SUBSEQUENT TO INITIAL RECOGNITION
24. An enterprise should choose either the fair value model in paragraphs 2 7 to 49 or the cost model in
paragraph 50 as its accounting policy and should apply that policy to all of its investment property.
25.IAS 8, net profit or loss for the period, fundamental errors and changes in a ccounting policies, states that a
voluntary change in accounting policy should be made only if the change wil l result in a more appropriate
presentation of events or transactions in the financial statements of the enterprise. It is highly unlikely that a
change from the fair value model to the cost model will result in a more appro priate presentation.
26.This Standard requires all enterprises to determine the fair value of inve stment property for the purpose of
measurement (fair value model) or disclosure (cost model). An enterprise is encouraged, but not required, to
determinethefairvalueofinvestmentpropertyonthebasisofavaluation byanindependentvaluerwhoholds
arecognisedandrelevantprofessionalqualificationandwhohasrecente xperienceinthelocationandcategory
of the investment property being valued.370 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Fair value model
27. After initial recognition, an enterprise that chooses the fair value m odel should measure all of its investment
property at its fair value, except in the exceptional cases described in pa ragraph 47.
28. A gain or loss arising from a change in the fair value of investment prope rty should be included in net profit
or loss for the period in which it arises.
29.The fair value of investment property is usually its market value. Fair val ue is measured as the most probable
price reasonably obtainable in the market at the balance sheet date in keep ing with the fair value definition.
Itisthebestpricereasonablyobtainablebythesellerandthemostadvant ageouspricereasonablyobtainable
by the buyer. This estimate specifically excludes an estimated price infl ated or deflated by special terms or
circumstances such as atypical financing, sale and leaseback arrangemen ts, special considerations or
concessions granted by anyone associated with the sale.
30.Anenterprisedeterminesfairvaluewithoutanydeductionfortransactio ncoststhattheenterprisemayincur
on sale or other disposal.
31. Thefairvalueofinvestmentpropertyshouldreflecttheactualmarket stateandcircumstancesasofthebalance
sheet date, not as of either a past or future date.
32.Theestimatedfairvalueistimespecificasofagivendate.Becausemarket sandmarketconditionsmaychange,
theestimatedvaluemaybeincorrectorinappropriateatanothertime.The definitionoffairvaluealsoassumes
simultaneous exchange and completion of the contract for sale without any variation in price that might be
made in an arm’s length transaction between knowledgeable, willing parti es if exchange and completion are
not simultaneous.
33.The fair value of investment property reflects, among other things, renta l income from current leases and
reasonable and supportable assumptions that represent the market’s view of what knowledgeable, willing
parties would assume about rental income from future leases in the light of current market conditions.
34.The definition of fair value refers to “knowledgeable, willing parties”. In this context, “knowledgeable” means
thatboththewillingbuyerandthewillingsellerarereasonablyinformed aboutthenatureandcharacteristics
of the investment property, its actual and potential uses, and the state of the market as of the balance sheet
date.
35.A willing buyer is motivated, but not compelled to buy. This buyer is neithe r over-eager nor determined to
buyatanyprice.Thisbuyerisalsoonewhopurchasesinaccordancewiththe realitiesofthecurrentmarket,
and with the current market expectations, rather than an imaginary or hypo thetical market that cannot be
demonstratedoranticipatedtoexist.Theassumedbuyerwouldnotpayahig herpricethanthemarketrequires.
The present owner of an investment property is included among those who con stitute the market.
36.A willing seller is neither an over-eager nor a forced seller, prepared to s ell at any price, nor one prepared to
holdoutforapricenotconsideredreasonableinthecurrentmarket.Thewi llingsellerismotivatedtosellthe
investmentpropertyatmarkettermsforthebestpriceobtainableintheop enmarketafterpropermarketing,
whateverthatpricemaybe.Thefactualcircumstancesoftheactualinvest mentpropertyownerarenotapart
of this consideration because the willing seller is a hypothetical owner.
37.Theexpression“afterpropermarketing”meansthattheinvestmentproper tywouldbeexposedtothemarket
in the most appropriate manner to effect its disposal at the best price reas onably obtainable. The length of
exposure time may vary with market conditions, but must be sufficient to al low the investment property to
be brought to the attention of an adequate number of potential purchasers. The exposure period is assumed
to occur prior to the balance sheet date.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 371
38.The definition of fair value refers to an arm’s length transaction. An arm’ s length transaction is one between
partieswhodonothaveaparticularorspecialrelationshipthatmakespri cesoftransactionsuncharacteristic
of the market. The transaction is presumed to be between unrelated parties , each acting independently.
39.Thebestevidenceoffairvalueisnormallygivenbycurrentpricesonanact ivemarketforsimilarpropertyin
the same location and condition and subject to similar lease and other cont racts. An enterprise takes care to
identifyanydifferencesinthenature,locationorconditionoftheprope rty,orinthecontractualtermsofthe
leases and other contracts relating to the property.
40.In the absence of current prices on an active market of the kind described in paragraph 39, an enterprise
considers information from a variety of sources, including:
(a) current prices on an active market for properties of different nature, condition or location (or subject to
different lease or other contracts), adjusted to reflect those differenc es;
(b) recentpricesonlessactivemarkets,withadjustmentstoreflectanyc hangesineconomicconditionssince
the date of the transactions that occurred at those prices; and
(c) discountedcashflowprojectionsbasedonreliableestimatesoffutur ecashflows,supportedbytheterms
ofanyexistingleaseandothercontractsand(wherepossible)byexternal evidencesuchascurrentmarket
rentsforsimilarpropertiesinthesamelocationandcondition,andusing discountratesthatreflectcurrent
market assessments of the uncertainty in the amount and timing of the cash f lows.
41.Insomecases,thevarioussourceslistedinthepreviousparagraphmaysug gestdifferentconclusionsastothe
fairvalueofaninvestmentproperty.Anenterpriseconsidersthereasons forthosedifferences,inordertoarrive
at the most reliable estimate of fair value within a relatively narrow rang e of reasonable fair value estimates.
42.Inexceptionalcases,thereisclearevidencewhenanenterprisefirstacq uiresaninvestmentproperty(orwhen
an existing property first becomes investment property following the com pletion of construction or
development, or after a change in use) that the variability in the range of r easonable fair value estimates will
be so great and the probabilities of the various outcomes will be so difficu lt to assess, that the usefulness of
a single estimate of fair value is negated. This may indicate that the fair v alue of the property will not be
determinable reliably on a continuing basis (see paragraph 47).
43.Fair value differs from value in use, as defined in IAS 36, impairment of ass ets. Fair value reflects knowledge
andestimatesofparticipantsinthemarket,aswellasfactorsthatarerel evanttomarketparticipantsingeneral.
Incontrast,valueinusereflectstheenterprise’sknowledgeandestimat es,aswellasentity-specificfactorsthat
may be specific to the enterprise and that are not applicable to enterprise s in general. For example, fair value
does not reflect any:
(a) additional value derived from the creation of a portfolio of propertie s in different locations;
(b) synergies between investment property and other assets;
(c) legal rights or legal restrictions that are specific only to the curren t owner; and
(d) tax benefits or tax burdens that are specific to the current owner.372 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
44.Indeterminingthefairvalueofinvestmentproperty,anenterpriseavoid sdoublecountingofassetsorliabilities
that are recognised in the balance sheet as separate assets or liabilities . For example:
(a) equipment such as elevators or air-conditioning is often an integral p art of a building and is generally
included in the investment property, rather than being recognised separa tely as property, plant and
equipment;
(b) ifanofficeisleasedonafurnishedbasis,thefairvalueoftheofficeg enerallyincludesthefairvalueofthe
furniture, because the rental income relates to the furnished office. Whe n furniture is included in the fair
value of investment property, an enterprise does not recognise that furni ture as a separate asset; and
(c) thefairvalueofinvestmentpropertyexcludesprepaidoraccruedoper atingleaseincome,astheenterprise
recognises it as a separate liability or asset.
45.Thefairvalueofinvestmentpropertydoesnotreflectfuturecapitalexpe nditurethatwillimproveorenhance
the property and does not reflect the related future benefits from this fut ure expenditure.
46.Insomecases,anenterpriseexpectsthatthepresentvalueofitspayments relatingtoaninvestmentproperty
(otherthanpaymentsrelatingtorecognisedfinancialliabilities)will exceedthepresentvalueoftherelatedcash
receipts. An enterprise uses IAS 37, provisions, contingent liabilities and contingent assets, to determine
whether the enterprise recognises a liability and how the enterprise meas ures any such liability.
Inability to measure fair value reliably
47. There is a rebuttable presumption that an enterprise will be able to det ermine the fair value of an investment
property reliably on a continuing basis. However, in exceptional cases, t here is clear evidence when an
enterprise first acquires an investment property (or when an existing pro perty first becomes investment
propertyfollowingthecompletionofconstructionordevelopment,oraft erachangeinuse)thattheenterprise
willnotbeabletodeterminethefairvalueoftheinvestmentpropertyreli ablyonacontinuingbasis.Thisarises
when, and only when, comparable market transactions are infrequent and al ternative estimates of fair value
(forexample,basedondiscountedcashflowprojections)arenotavailabl e.Insuchcases,anenterpriseshould
measurethatinvestmentpropertyusingthebenchmarktreatmentinIAS16, property,plantandequipment.
The residual value of the investment property should be assumed to be zero. The enterprise should continue
to apply IAS 16 until the disposal of the investment property.
48.In the exceptional cases when an enterprise is compelled, for the reason gi ven in the previous paragraph, to
measureaninvestmentpropertyusingtheIAS16benchmarktreatment,thee nterprisemeasuresallitsother
investment property at fair value.
49. If an enterprise has previously measured an investment property at fai r value, the enterprise should continue
to measure the property at fair value until disposal (or until the property becomes owner-occupied property
or the enterprise begins to develop the property for subsequent sale in the ordinary course of business) even
if comparable market transactions become less frequent or market prices b ecome less readily available.
Cost model
50. After initial recognition, an enterprise that chooses the cost model s hould measure all of its investment
property using the benchmark treatment in IAS 16, property, plant and equi pment, that is, at cost less any
accumulated depreciation and any accumulated impairment losses.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 373
TRANSFERS
51. Transfers to, or from, investment property should be made when, and onl y when, there is a change in use,
evidenced by:
(a) commencement of owner-occupation, for a transfer from investment pro perty to owner-occupied
property;
(b) commencementofdevelopmentwithaviewtosale,foratransferfrominv estmentpropertytoinventories;
(c) end of owner-occupation, for a transfer from owner-occupied property to investment property;
(d) commencement of an operating lease to another party, for a transfer fro m inventories to investment
property; or
(e) end of construction or development, for a transfer from property in the course of construction or
development (covered by IAS 16, property, plant and equipment) to investm ent property.
52.Paragraph 51(b) above requires an enterprise to transfer a property from i nvestment property to inventories
when, and only when, there is a change in use, evidenced by commencement of d evelopment with a view to
sale. When an enterprise decides to dispose of an investment property with out development, the enterprise
continuestotreatthepropertyasaninvestmentpropertyuntilitisderec ognised(eliminatedfromthebalance
sheet)anddoesnottreatitasinventory.Similarly,ifanenterprisebegi nstoredevelopanexistinginvestment
property for continued future use as investment property, it remains an in vestment property and is not
reclassified as owner-occupied property during the redevelopment.
53.Paragraphs54to59dealwithrecognitionandmeasurementissuesthatappl ywhenanenterpriseusesthefair
value model for investment property. When an enterprise uses the cost mode l, transfers between investment
property, owner-occupied property and inventories do not change the carr ying amount of the property
transferred and they do not change the cost of that property for measuremen t or disclosure purposes.
54. For a transfer from investment property carried at fair value to owner- occupied property or inventories, the
property’scostforsubsequentaccountingunderIAS16orIAS2shouldbeit sfairvalueatthedateofchange
in use.
55. Ifanowner-occupiedpropertybecomesaninvestmentpropertythatwil lbecarriedatfairvalue,anenterprise
should apply IAS 16 up to the date of change in use. The enterprise should tre at any difference at that date
betweenthecarryingamountofthepropertyunderIAS16anditsfairvaluei nthesamewayasarevaluation
under IAS 16.
56.Up to the date when an owner-occupied property becomes an investment prope rty carried at fair value, an
enterprisecontinuestodepreciatethepropertyandtorecogniseanyimpa irmentlossesthathaveoccurred.The
enterprise treats any difference at that date between the carrying amount of the property under IAS 16 and
its fair value in the same way as a revaluation under IAS 16. In other words:
(a) any resulting decrease in the carrying amount of the property is recogn ised in net profit or loss for the
period. However, to the extent that an amount is included in revaluation su rplus for that property, the
decrease is charged against that revaluation surplus; and374 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) any resulting increase in the carrying amount is treated as follows:
(i) to the extent that the increase reverses a previous impairment loss for that property, the increase is
recognisedinnetprofitorlossfortheperiod.Theamountrecognisedinne tprofitorlossfortheperiod
doesnotexceedtheamountneededtorestorethecarryingamounttothecarr yingamountthatwould
have been determined (net of depreciation) had no impairment loss been rec ognised; and
(ii) anyremainingpartoftheincreaseiscrediteddirectlytoequityunde rtheheadingofrevaluationsurplus.
Onsubsequentdisposaloftheinvestmentproperty,therevaluationsurpl usincludedinequitymaybe
transferredtoretainedearnings.Thetransferfromrevaluationsurplus toretainedearningsisnotmade
through the income statement.
57. Foratransferfrominventoriestoinvestmentpropertythatwillbecar riedatfairvalue,anydifferencebetween
thefairvalueofthepropertyatthatdateanditspreviouscarryingamount shouldberecognisedinnetprofit
or loss for the period.
58.Thetreatmentoftransfersfrominventoriestoinvestmentpropertythatw illbecarriedatfairvalueisconsistent
with the treatment of sales of inventories.
59. Whenanenterprisecompletestheconstructionordevelopmentofaself -constructedinvestmentpropertythat
will be carried at fair value, any difference between the fair value of the p roperty at that date and its previous
carrying amount should be recognised in net profit or loss for the period.
DISPOSALS
60. An investment property should be derecognised (eliminated from the ba lance sheet) on disposal or when the
investment property is permanently withdrawn from use and no future econo mic benefits are expected from
its disposal.
61.The disposal of an investment property may occur by sale or by entering into a finance lease. In determining
the date of disposal for investment property, an enterprise applies the cr iteria in IAS 18, revenue, for
recognising revenue from the sale of goods and considers the related guida nce in the Appendix to IAS 18.
IAS 17, leases, applies on a disposal by entering into a finance lease or by a sale and leaseback.
62. Gains or losses arising from the retirement or disposal of investment p roperty should be determined as the
difference between the net disposal proceeds and the carrying amount of th e asset and should be recognised
as income or expense in the income statement (unless IAS 17, leases, requir es otherwise on a sale and
leaseback).
63.The consideration receivable on disposal of an investment property is rec ognised initially at fair value. In
particular,ifpaymentforaninvestmentpropertyisdeferred,theconsid erationreceivedisrecognisedinitially
atthecashpriceequivalent.Thedifferencebetweenthenominalamountof theconsiderationandthecashprice
equivalent is recognised as interest revenue under IAS 18 on a time proport ion basis that takes into account
the effective yield on the receivable.
64.An enterprise applies IAS 37, provisions, contingent liabilities and con tingent assets, or other International
Accounting Standards, as appropriate, to any liabilities that the enterp rise retains after disposal of an
investment property.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 375
DISCLOSURE
Fair value model and cost model
65.The disclosures set out below apply in addition to those in IAS 17, leases. U nder IAS 17, the owner of an
investmentpropertygivesalessor’sdisclosuresaboutoperatingleases .UnderIAS17,anenterprisethatholds
aninvestmentpropertyunderafinanceleasegivesalessee’sdisclosures aboutthatfinanceleaseandalessor’s
disclosure about any operating leases that the enterprise has granted.
66.An enterprise should disclose:
(a) when classification is difficult (see paragraph 12), the criteria dev eloped by the enterprise to distinguish
investmentpropertyfromowner-occupiedpropertyandfrompropertyheld forsaleintheordinarycourse
of business;
(b) the methods and significant assumptions applied in determining the fa ir value of investment property,
including a statement whether the determination of fair value was support ed by market evidence or was
more heavily based on other factors (which the enterprise should disclose ) because of the nature of the
property and lack of comparable market data;
(c) the extent to which the fair value of investment property (as measured o r disclosed in the financial
statements) is based on a valuation by an independent valuer who holds a rec ognised and relevant
professional qualification and who has recent experience in the location and category of the investment
property being valued. If there has been no such valuation, that fact shoul d be disclosed;
(d) the amounts included in the income statement for:
(i) rental income from investment property;
(ii) direct operating expenses (including repairs and maintenance) aris ing from investment property that
generated rental income during the period; and
(iii)direct operating expenses (including repairs and maintenance) ari sing from investment property that
did not generate rental income during the period;
(e) the existence and amounts of restrictions on the realisability of inve stment property or the remittance of
income and proceeds of disposal; and
(f) material contractual obligations to purchase, construct or develop i nvestment property or for repairs,
maintenance or enhancements.
Fair value model
67. In addition to the disclosure required by paragraph 66, an enterprise t hat applies the fair value model in
paragraphs 27 to 49 should also disclose a reconciliation of the carrying a mount of investment property at
the beginning and end of the period showing the following (comparative inf ormation is not required):
(a) additions, disclosing separately those additions resulting from acq uisitions and those resulting from
capitalised subsequent expenditure;
(b) additions resulting from acquisitions through business combination s;
(c) disposals;376 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(d) net gains or losses from fair value adjustments;
(e) the net exchange differences arising on the translation of the financi al statements of a foreign entity;
(f) transfers to and from inventories and owner-occupied property; and(g) other movements.
68. Intheexceptionalcaseswhenanenterprisemeasuresinvestmentprope rtyusingthebenchmarktreatmentin
IAS 16, property, plant and equipment (because of the lack of a reliable fai r value, see paragraph 47 above),
the reconciliation required by the previous paragraph should disclose am ounts relating to that investment
property separately from amounts relating to other investment property. In addition, an enterprise should
disclose:
(a) a description of the investment property;(b) an explanation of why fair value cannot be reliably measured;(c) if possible, the range of estimates within which fair value is highly li kely to lie; and
(d) on disposal of investment property not carried at fair value:
(i) the fact that the enterprise has disposed of investment property not ca rried at fair value;
(ii) the carrying amount of that investment property at the time of sale; an d
(iii)the amount of gain or loss recognised.
Cost model
69. In addition to the disclosure required by paragraph 66, an enterprise t hat applies the cost model in
paragraph 50 should also disclose:
(a) the depreciation methods used;(b) the useful lives or the depreciation rates used;(c) the gross carrying amount and the accumulated depreciation (aggregat ed with accumulated impairment
losses) at the beginning and end of the period;
(d) a reconciliation of the carrying amount of investment property at the b eginning and end of the period
showing the following (comparative information is not required):
(i) additions, disclosing separately those additions resulting from acq uisitions and those resulting from
capitalised subsequent expenditure;
(ii) additions resulting from acquisitions through business combinatio ns;
(iii)disposals;(iv) depreciation;(v) the amount of impairment losses recognised, and the amount of impairme nt losses reversed, during
the period under IAS 36, impairment of assets;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 377
(vi)thenetexchangedifferencesarisingonthetranslationofthefinancials tatementsofaforeignentity;
(vii)transfers to and from inventories and owner-occupied property; and
(viii)other movements; and
(e) the fair value of investment property. In the exceptional cases descri bed in paragraph 47, when an
enterprise cannot determine the fair value of the investment property rel iably, the enterprise should
disclose:
(i)a description of the investment property;
(ii)an explanation of why fair value cannot be determined reliably; and
(iii)if possible, the range of estimates within which fair value is highly likel y to lie.
TRANSITIONAL PROVISIONS
Fair value model
70. Underthefairvaluemodel,anenterpriseshouldreporttheeffectofad optingthisStandardonitseffectivedate
(orearlier)asanadjustmenttotheopeningbalanceofretainedearningsf ortheperiodinwhichtheStandard
is first adopted. In addition:
(a) iftheenterprisehaspreviouslydisclosedpublicly(infinancialsta tementsorotherwise)thefairvalueofits
investment property in earlier periods (determined on a basis that satisf ies the definition of fair value in
paragraph 4 and the guidance in paragraphs 29 to 46), the enterprise is enco uraged, but not required, to:
(i) adjust the opening balance of retained earnings for the earliest perio d presented for which such fair
value was disclosed publicly; and
(ii) restate comparative information for those periods; and
(b) iftheenterprisehasnotpreviouslydisclosedpubliclytheinformati ondescribedin(a),theenterpriseshould
not restate comparative information and should disclose that fact.
71.This Standard requires a different treatment from the benchmark and allow ed alternative treatments for
changesinaccountingpoliciesunderIAS8,netprofitorlossfortheperio d,fundamentalerrorsandchanges
in accounting policies. IAS 8 requires comparative information to be rest ated (benchmark treatment) or
additional pro forma comparative information on a restated basis to be dis closed (allowed alternative
treatment) unless it is impracticable to do so.
72.When an enterprise first adopts this Standard, the adjustment to the openi ng balance of retained earnings
includes the reclassification of any amount held in revaluation surplus f or investment property.
Cost model
73.IAS 8 applies to any change in accounting policies that occurs when an enter prise first adopts this Standard
andchoosestousethecostmodel.Theeffectofthechangeinaccountingpol iciesincludesthereclassification
of any amount held in revaluation surplus for investment property.378 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
EFFECTIVE DATE
74. This International Accounting Standard becomes operative for annual financial statements covering periods
beginningonorafter1January2001.Earlierapplicationisencouraged.I fanenterpriseappliesthisStandard
for periods beginning before 1 January 2001, it should disclose that fact.
75.This Standard supersedes IAS 25, accounting for investments, with respec t to investment property.
INTERNATIONAL ACCOUNTING STANDARD IAS 41
Agriculture
This International Accounting Standard was approved by the IASC Board in D ecember 2000 and becomes effective
for financial statements covering periods beginning on or after 1 January 2003.
INTRODUCTION
1.IAS 41 prescribes the accounting treatment, financial statement present ation, and disclosures related to
agriculturalactivity,amatternotcoveredinotherInternationalAccou ntingStandards.Agriculturalactivityis
themanagementbyanenterpriseofthebiologicaltransformationoflivin ganimalsorplants(biologicalassets)
for sale, into agricultural produce, or into additional biological asset s.
2.IAS 41 prescribes, among other things, the accounting treatment for biolo gical assets during the period of
growth,degeneration,production,andprocreation,andfortheinitialm easurementofagriculturalproduceat
the point of harvest. It requires measurement at fair value less estimated point-of-sale costs from initial
recognition of biological assets up to the point of harvest, other than whe n fair value cannot be measured
reliably on initial recognition. However, IAS 41 does not deal with proces sing of agricultural produce after
harvest; for example, processing grapes into wine and wool into yarn.
3.There is a presumption that fair value can be measured reliably for a biolog ical asset. However, that
presumption can be rebutted only on initial recognition for a biological a sset for which market-determined
pricesorvaluesarenotavailableandforwhichalternativeestimatesoff airvaluearedeterminedtobeclearly
unreliable. In such a case, IAS 41 requires an enterprise to measure that bi ological asset at its cost less any
accumulated depreciation and any accumulated impairment losses. Once th e fair value of such a biological
assetbecomesreliablymeasurable,anenterpriseshouldmeasureitatits fairvaluelessestimatedpoint-of-sale
costs.Inallcases,anenterpriseshouldmeasureagriculturalproduceat thepointofharvestatitsfairvalueless
estimated point-of-sale costs.
4.IAS 41 requires that a change in fair value less estimated point-of-sale co sts of a biological asset be included
in net profit or loss for the period in which it arises. In agricultural acti vity, a change in physical attributes of
a living animal or plant directly enhances or diminishes economic benefit s to the enterprise. Under a
transaction-based, historical cost accounting model, a plantation fore stry enterprise might report no income
until first harvest and sale, perhaps 30 years after planting. On the other hand, an accounting model that
recognises and measures biological growth using current fair values repo rts changes in fair value throughout
the period between planting and harvest.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 379
5.IAS 41 does not establish any new principles for land related to agricultur al activity. Instead, an enterprise
followsIAS16,property,plantandequipment,orIAS40,investmentprope rty,dependingonwhichstandard
isappropriateinthecircumstances.IAS16requireslandtobemeasuredei theratitscostlessanyaccumulated
impairment losses, or at a revalued amount. IAS 40 requires land that is inv estment property to be measured
at its fair value, or cost less any accumulated impairment losses. Biologi cal assets that are physically attached
toland(forexample,treesinaplantationforest)aremeasuredattheirfa irvaluelessestimatedpoint-of-salecosts
separately from the land.
6.IAS 41 requires that an unconditional government grant related to a biolog ical asset measured at its fair value
lessestimatedpoint-of-salecostsberecognisedasincomewhen,andonly when,thegovernmentgrantbecomes
receivable.Ifagovernmentgrantisconditional,includingwhereagover nmentgrantrequiresanenterprisenot
toengageinspecifiedagriculturalactivity,anenterpriseshouldrecog nisethegovernmentgrantasincomewhen,
and only when, the conditions attaching to the government grant are met. If a government grant relates to a
biologicalassetmeasuredatitscostlessanyaccumulateddepreciationa ndanyaccumulatedimpairmentlosses,
IAS 20, accounting for government grants and disclosure of government ass istance, is applied.
7.IAS41iseffectiveforannualfinancialstatementscoveringperiodsbegi nningonorafter1January2003.Earlier
application is encouraged.
8.IAS 41 does not establish any specific transitional provisions. The adopt ion of IAS 41 is accounted for in
accordancewithIAS8,netprofitorlossfortheperiod,fundamentalerror sandchangesinaccountingpolicies.
9.Appendix A provides illustrative examples of the application of IAS 41. Ap pendix B, Basis for conclusions,
summarises the Board’s reasons for adopting the requirements set out in IA S 41.
CONTENTS
Paragraphs
Objective 381
Scope 381
Definitions 382
Agriculture-related definitions 382
General definitions 382
Recognition and measurement 383Gains and losses 385
Inability to measure fair value reliably 385Government grants 385
Presentation and disclosure 386
Presentation 386
Disclosure 386
General 386
Additional disclosures for biological assets where fair value cannot be m easured reliably 388380 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Government grants 388
Effective date and transition 388
Thestandards,whichhavebeensetinbolditalictype,shouldbereadinthe contextofthebackgroundmaterialand
implementationguidanceinthisStandard,andinthecontextofthe“Prefa cetoInternationalAccountingStandards”.
International Accounting Standards are not intended to apply to immateri al items (see paragraph 12 of the Preface).
OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment, f inancial statement presentation, and
disclosures related to agricultural activity.
SCOPE
1. This Standard should be applied to account for the following when they re late to agricultural activity:
(a) biological assets;
(b) agricultural produce at the point of harvest; and(c) government grants covered by paragraphs 34 to 35.
2.
This Standard does not apply to:
(a) land related to agricultural activity (see IAS 16, property, plant and equipment, and IAS 40, investment
property); and
(b) intangible assets related to agricultural activity (see IAS 38, intan gible assets).
3.This Standard is applied to agricultural produce, which is the harvested p roduct of the enterprise’s biological
assets, only at the point of harvest. Thereafter, IAS 2, inventories, or an other applicable International
Accounting Standard is applied. Accordingly, this Standard does not deal with the processing of agricultural
produceafterharvest;forexample,theprocessingofgrapesintowinebya vintnerwhohasgrownthegrapes.
While such processing may be a logical and natural extension of agricultur al activity, and the events taking
place may bear some similarity to biological transformation, such proces sing is not included within the
definition of agricultural activity in this Standard.
4.The table below provides examples of biological assets, agricultural pro duce, and products that are the result
of processing after harvest:
Biological assets Agricultural produceProducts that are the result of
processing after harvest
Sheep Wool Yarn, carpet
Trees in a plantation forest Logs LumberPlants Cotton Thread, clothing
Harvested cane Sugar
Dairy cattle Milk CheesePigs Carcase Sausages, cured hamsBushes Leaf Tea, cured tobaccoVines Grapes WineFruit trees Picked fruit Processed fruit13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 381
DEFINITIONS
Agriculture-related definitions
5. The following terms are used in this Standard with the meanings specifie d:
Agricultural activity is the management by an enterprise of the biologica l transformation of biological assets
for sale, into agricultural produce, or into additional biological asset s.
Agricultural produce is the harvested product of the enterprise’s biolog ical assets.
A biological asset is a living animal or plant.
Biologicaltransformationcomprisestheprocessesofgrowth,degenerat ion,production,andprocreationthat
cause qualitative or quantitative changes in a biological asset.A group of biological assets is an aggregation of similar living animals or plants.
Harvest is the detachment of produce from a biological asset or the cessati on of a biological asset’s life
processes.
6.
Agricultural activity covers a diverse range of activities; for example, raising livestock, forestry, annual or
perennialcropping,cultivatingorchardsandplantations,floricultur e,andaquaculture(includingfishfarming).
Certain common features exist within this diversity:
(a) Capability to change: living animals and plants are capable of biologi cal transformation;
(b) Management of change: management facilitates biological transforma tion by enhancing, or at least
stabilising, conditions necessary for the process to take place (for exam ple, nutrient levels, moisture,
temperature,fertility,andlight).Suchmanagementdistinguishesagri culturalactivityfromotheractivities.
For example, harvesting from unmanaged sources (such as ocean fishing and deforestation) is not
agricultural activity; and
(c) Measurement of change: the change in quality (for example, genetic mer it, density, ripeness, fat cover,
protein content, and fibre strength) or quantity (for example, progeny, w eight, cubic metres, fibre length
ordiameter,andnumberofbuds)broughtaboutbybiologicaltransformati onismeasuredandmonitored
as a routine management function.
7.Biological transformation results in the following types of outcomes:
(a) assetchangesthrough(i)growth(anincreaseinquantityorimproveme ntinqualityofananimalorplant);
(ii) degeneration (a decrease in the quantity or deterioration in quality of an animal or plant); or (iii)
procreation (creation of additional living animals or plants); or
(b) production of agricultural produce such as latex, tea leaf, wool, and m ilk.
General definitions
8. The following terms are used in this Standard with the meanings specifie d:
An active market is a market where all the following conditions exist:
(a) the items traded within the market are homogeneous;(b) willing buyers and sellers can normally be found at any time; and(c) prices are available to the public.Carrying amount is the amount at which an asset is recognised in the balance sheet.382 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilit ysettled,betweenknowledgeable,
willing parties in an arm’s length transaction.
GovernmentgrantsareasdefinedinIAS20,accountingforgovernmentgran tsanddisclosureofgovernment
assistance.
9.Thefairvalueofanassetisbasedonitspresentlocationandcondition.As aresult,forexample,thefairvalue
ofcattleatafarmisthepriceforthecattleintherelevantmarketlessthe transportandothercostsofgetting
the cattle to that market.
RECOGNITION AND MEASUREMENT
10. An enterprise should recognise a biological asset or agricultural pro duce when, and only when:
(a) the enterprise controls the asset as a result of past events;(b) it is probable that future economic benefits associated with the asset will flow to the enterprise; and
(c) the fair value or cost of the asset can be measured reliably.
11.
In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding
orotherwisemarkingofthecattleonacquisition,birth,orweaning.Thef uturebenefitsarenormallyassessed
by measuring the significant physical attributes.
12. Abiologicalassetshouldbemeasuredoninitialrecognitionandateac hbalancesheetdateatitsfairvalueless
estimated point-of-sale costs, except for the case described in paragrap h 30 where the fair value cannot be
measured reliably.
13. Agricultural produce harvested from an enterprise’s biological asse ts should be measured at its fair value less
estimatedpoint-of-salecostsatthepointofharvest.Suchmeasurementi sthecostatthatdatewhenapplying
IAS 2, inventories, or another applicable International Accounting Stan dard.
14.Point-of-salecostsincludecommissionstobrokersanddealers,leviesb yregulatoryagenciesandcommodity
exchanges,andtransfertaxesandduties.Point-of-salecostsexcludetr ansportandothercostsnecessarytoget
assets to a market.
15.The determination of fair value for a biological asset or agricultural pro duce may be facilitated by grouping
biologicalassetsoragriculturalproduceaccordingtosignificantattr ibutes;forexample,byageorquality.An
enterprise selects the attributes corresponding to the attributes used i n the market as a basis for pricing.
16.Enterprises often enter into contracts to sell their biological assets or agricultural produce at a future date.
Contract prices are not necessarily relevant in determining fair value, b ecause fair value reflects the current
market in which a willing buyer and seller would enter into a transaction. A s a result, the fair value of a
biological asset or agricultural produce is not adjusted because of the ex istence of a contract. In some cases,
a contract for the sale of a biological asset or agricultural produce may be an onerous contract, as defined in
IAS 37, provisions, contingent liabilities and contingent assets. IAS 37 applies to onerous contracts.
17.If an active market exists for a biological asset or agricultural produce, the quoted price in that market is the
appropriate basis for determining the fair value of that asset. If an enter prise has access to different active
markets, the enterprise uses the most relevant one. For example, if an ente rprise has access to two active
markets, it would use the price existing in the market expected to be used.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 383
18.If an active market does not exist, an enterprise uses one or more of the foll owing, when available, in
determining fair value:
(a) themostrecentmarkettransactionprice,providedthattherehasnotb eenasignificantchangeineconomic
circumstances between the date of that transaction and the balance sheet d ate;
(b) market prices for similar assets with adjustment to reflect differenc es; and
(c) sector benchmarks such as the value of an orchard expressed per export t ray, bushel, or hectare, and the
value of cattle expressed per kilogram of meat.
19.Insomecases,theinformationsourceslistedinparagraph18maysuggestd ifferentconclusionsastothefair
value of a biological asset or agricultural produce. An enterprise consid ers the reasons for those differences,
in order to arrive at the most reliable estimate of fair value within a relat ively narrow range of reasonable
estimates.
20.In some circumstances, market-determined prices or values may not be avai lable for a biological asset in its
presentcondition.Inthesecircumstances,anenterpriseusesthepresen tvalueofexpectednetcashflowsfrom
the asset discounted at a current market-determined pre-tax rate in deter mining fair value.
21.The objective of a calculation of the present value of expected net cash flo ws is to determine the fair value of
a biological asset in its present location and condition. An enterprise co nsiders this in determining an
appropriate discount rate to be used and in estimating expected net cash fl ows. The present condition of a
biologicalassetexcludesanyincreasesinvaluefromadditionalbiologi caltransformationandfutureactivities
of the enterprise, such as those related to enhancing the future biologica l transformation, harvesting, and
selling.
22.An enterprise does not include any cash flows for financing the assets, tax ation, or re-establishing biological
assets after harvest (for example, the cost of replanting trees in a planta tion forest after harvest).
23.Inagreeinganarm’slengthtransactionprice,knowledgeable,willingbu yersandsellersconsiderthepossibility
ofvariationsincashflows.Itfollowsthatfairvaluereflectsthepossib ilityofsuchvariations.Accordingly,an
enterpriseincorporatesexpectationsaboutpossiblevariationsincash flowsintoeithertheexpectedcashflows,
or the discount rate, or some combination of the two. In determining a disco unt rate, an enterprise uses
assumptions consistent with those used in estimating the expected cash fl ows, to avoid the effect of some
assumptions being double-counted or ignored.
24.Cost may sometimes approximate fair value, particularly when:
(a) little biological transformation has taken place since initial cost i ncurrence (for example, for fruit tree
seedlings planted immediately prior to a balance sheet date); or
(b) the impact of the biological transformation on price is not expected to be material (for example, for the
initial growth in a 30-year pine plantation production cycle).
25.Biologicalassetsareoftenphysicallyattachedtoland(forexample,tre esinaplantationforest).Theremaybe
no separate market for biological assets that are attached to the land but a n active market may exist for the
combinedassets,thatis,forthebiologicalassets,rawland,andlandimp rovements,asapackage.Anenterprise
may use information regarding the combined assets to determine fair value for the biological assets. For
example, the fair value of raw land and land improvements may be deducted fr om the fair value of the
combined assets to arrive at the fair value of biological assets.384 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Gains and losses
26. A gain or loss arising on initial recognition of a biological asset at fa ir value less estimated point-of-sale costs
and from a change in fair value less estimated point-of-sale costs of a biol ogical asset should be included in
net profit or loss for the period in which it arises.
27.Alossmayariseoninitialrecognitionofabiologicalasset,becauseesti matedpoint-of-salecostsarededucted
in determining fair value less estimated point-of-sale costs of a biologi cal asset. A gain may arise on initial
recognition of a biological asset, such as when a calf is born.
28. Againorlossarisingoninitialrecognitionofagriculturalproducea tfairvaluelessestimatedpoint-of-salecosts
should be included in net profit or loss for the period in which it arises.
29.A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
Inability to measure fair value reliably
30. There is a presumption that fair value can be measured reliably for a bio logical asset. However, that
presumption can be rebutted only on initial recognition for a biological a sset for which market-determined
pricesorvaluesarenotavailableandforwhichalternativeestimatesoff airvaluearedeterminedtobeclearly
unreliable.Insuchacase,thatbiologicalassetshouldbemeasuredatits costlessanyaccumulateddepreciation
and any accumulated impairment losses. Once the fair value of such a biolog ical asset becomes reliably
measurable, an enterprise should measure it at its fair value less estimat ed point-of-sale costs.
31.Thepresumptioninparagraph30canberebuttedonlyoninitialrecognitio n.Anenterprisethathaspreviously
measuredabiologicalassetatitsfairvaluelessestimatedpoint-of-sal ecostscontinuestomeasurethebiological
asset at its fair value less estimated point-of-sale costs until disposal .
32.In all cases, an enterprise measures agricultural produce at the point of h arvest at its fair value less estimated
point-of-sale costs. This Standard reflects the view that the fair value o f agricultural produce at the point of
harvest can always be measured reliably.
33.In determining cost, accumulated depreciation and accumulated impairme nt losses, an enterprise considers
IAS 2, inventories, IAS 16, property, plant and equipment, and IAS 36, impa irment of assets.
GOVERNMENT GRANTS
34. An unconditional government grant related to a biological asset measu red at its fair value less estimated
point-of-sale costs should be recognised as income when, and only when, th e government grant becomes
receivable.
35. If a government grant related to a biological asset measured at its fair value less estimated point-of-sale costs
isconditional,includingwhereagovernmentgrantrequiresanenterpris enottoengageinspecifiedagricultural
activity,anenterpriseshouldrecognisethegovernmentgrantasincomew hen,andonlywhen,theconditions
attaching to the government grant are met.
36.Termsandconditionsofgovernmentgrantsvary.Forexample,agovernment grantmayrequireanenterprise
to farm in a particular location for five years and require the enterprise t o return all of the government grant
ifitfarmsforlessthanfiveyears.Inthiscase,thegovernmentgrantisno trecognisedasincomeuntilthefive
yearshavepassed.However,ifthegovernmentgrantallowspartofthegove rnmentgranttoberetainedbased
onthepassageoftime,theenterpriserecognisesthegovernmentgrantasi ncomeonatimeproportionbasis.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 385
37.If a government grant relates to a biological asset measured at its cost les s any accumulated depreciation and
any accumulated impairment losses (see paragraph 30), IAS 20, accounting for government grants and
disclosure of government assistance, is applied.
38.This Standard requires a different treatment from IAS 20, if a government g rant relates to a biological asset
measured at its fair value less estimated point-of-sale costs or a governm ent grant requires an enterprise not
toengageinspecifiedagriculturalactivity.IAS20isappliedonlytoago vernmentgrantrelatedtoabiological
asset measured at its cost less any accumulated depreciation and any accum ulated impairment losses.
PRESENTATION AND DISCLOSURE
Presentation
39. An enterprise should present the carrying amount of its biological ass ets separately on the face of its balance
sheet.
Disclosure
General
40. Anenterpriseshoulddisclosetheaggregategainorlossarisingdurin gthecurrentperiodoninitialrecognition
ofbiologicalassetsandagriculturalproduceandfromthechangeinfairv aluelessestimatedpoint-of-salecosts
of biological assets.
41. An enterprise should provide a description of each group of biological assets.
42.The disclosure required by paragraph 41 may take the form of a narrative or q uantified description.
43.An enterprise is encouraged to provide a quantified description of each gr oup of biological assets,
distinguishing between consumable and bearer biological assets or betwe en mature and immature biological
assets,asappropriate.Forexample,anenterprisemaydisclosethecarry ingamountsofconsumablebiological
assetsandbearerbiologicalassetsbygroup.Anenterprisemayfurtherdi videthosecarryingamountsbetween
matureandimmatureassets.Thesedistinctionsprovideinformationthat maybehelpfulinassessingthetiming
of future cash flows. An enterprise discloses the basis for making any such distinctions.
44.Consumable biological assets are those that are to be harvested as agricul tural produce or sold as biological
assets. Examples of consumable biological assets are livestock intended for the production of meat, livestock
heldforsale,fishinfarms,cropssuchasmaizeandwheat,andtreesbeingg rownforlumber.Bearerbiological
assetsarethoseotherthanconsumablebiologicalassets;forexample,li vestockfromwhichmilkisproduced,
grape vines, fruit trees, and trees from which firewood is harvested while the tree remains. Bearer biological
assets are not agricultural produce but, rather, are self-regenerating.
45.Biological assets may be classified either as mature biological assets or immature biological assets. Mature
biological assets are those that have attained harvestable specificatio ns (for consumable biological assets) or
are able to sustain regular harvests (for bearer biological assets).
46. Ifnotdisclosedelsewhereininformationpublishedwiththefinancia lstatements,anenterpriseshoulddescribe:
(a) the nature of its activities involving each group of biological assets ; and386 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(b) non-financial measures or estimates of the physical quantities of:
(i) each group of the enterprise’s biological assets at the end of the perio d; and
(ii) output of agricultural produce during the period.
47. An enterprise should disclose the methods and significant assumption s applied in determining the fair value
of each group of agricultural produce at the point of harvest and each group of biological assets.
48. Anenterpriseshoulddisclosethefairvaluelessestimatedpoint-of- salecostsofagriculturalproduceharvested
during the period, determined at the point of harvest.
49. An enterprise should disclose:
(a) theexistenceandcarryingamountsofbiologicalassetswhosetitleis restricted,andthecarryingamounts
of biological assets pledged as security for liabilities;
(b) the amount of commitments for the development or acquisition of biolog ical assets; and
(c) financial risk management strategies related to agricultural activi ty.
50. An enterprise should present a reconciliation of changes in the carryi ng amount of biological assets between
thebeginningandtheendofthecurrentperiod.Comparativeinformationi snotrequired.Thereconciliation
should include:
(a) the gain or loss arising from changes in fair value less estimated point -of-sale costs;
(b) increases due to purchases;
(c) decreases due to sales;(d) decreases due to harvest;
(e) increases resulting from business combinations;(f) net exchange differences arising on the translation of financial stat ements of a foreign entity; and
(g) other changes.
51.
The fair value less estimated point-of-sale costs of a biological asset ca n change due to both physical changes
and price changes in the market. Separate disclosure of physical and price changes is useful in appraising
current period performance and future prospects, particularly when ther e is a production cycle of more than
oneyear.Insuchcases,anenterpriseisencouragedtodisclose,bygroupo rotherwise,theamountofchange
in fair value less estimated point-of-sale costs included in net profit or loss due to physical changes and due
topricechanges.Thisinformationisgenerallylessusefulwhentheprodu ctioncycleislessthanoneyear(for
example, when raising chickens or growing cereal crops).
52.Biologicaltransformationresultsinanumberoftypesofphysicalchange —growth,degeneration,production,
and procreation, each of which is observable and measurable. Each of those physical changes has a direct
relationship to future economic benefits. A change in fair value of a biolo gical asset due to harvesting is also
a physical change.
53.Agriculturalactivityisoftenexposedtoclimatic,disease,andotherna turalrisks.Ifaneventoccursthatbecause
of its size, nature, or incidence is relevant to understanding the enterpr ise’s performance for the period, the
nature and amount of related items of income and expense are disclosed unde r IAS 8, net profit or loss for
theperiod,fundamentalerrorsandchangesinaccountingpolicies.Examp lesincludeanoutbreakofavirulent
disease, a flood, severe droughts or frosts, and a plague of insects.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 387
Additional disclosures for biological assets where fair value cannot be m easured reliably
54. Ifanenterprisemeasuresbiologicalassetsattheircostlessanyaccu mulateddepreciationandanyaccumulated
impairmentlosses(seeparagraph30)attheendoftheperiod,theenterpri seshoulddiscloseforsuchbiological
assets:
(a) a description of the biological assets;
(b) an explanation of why fair value cannot be measured reliably;
(c) if possible, the range of estimates within which fair value is highly li kely to lie;
(d) the depreciation method used;(e) the useful lives or the depreciation rates used; and(f) the gross carrying amount and the accumulated depreciation (aggregat ed with accumulated impairment
losses) at the beginning and end of the period.
55. If, during the current period, an enterprise measures biological asse ts at their cost less any accumulated
depreciationandanyaccumulatedimpairmentlosses(seeparagraph30),a nenterpriseshoulddiscloseanygain
orlossrecognisedondisposalofsuchbiologicalassetsandthereconcili ationrequiredbyparagraph50should
discloseamountsrelatedtosuchbiologicalassetsseparately.Inadditi on,thereconciliationshouldincludethe
following amounts included in net profit or loss related to those biologic al assets:
(a) impairment losses;(b) reversals of impairment losses; and(c) depreciation.
56. If the fair value of biological assets previously measured at their cos t less any accumulated depreciation and
any accumulated impairment losses becomes reliably measurable during th e current period, an enterprise
should disclose for those biological assets:
(a) a description of the biological assets;(b) an explanation of why fair value has become reliably measurable; and(c) the effect of the change.
Government grants
57. An enterprise should disclose the following related to agricultural a ctivity covered by this Standard:
(a) the nature and extent of government grants recognised in the financial statements;
(b) unfulfilled conditions and other contingencies attaching to governm ent grants; and
(c) significant decreases expected in the level of government grants.
EFFECTIVE DATE AND TRANSITION
58. This International Accounting Standard becomes operative for annual financial statements covering periods
beginningonorafter1January2003.Earlierapplicationisencouraged.I fanenterpriseappliesthisStandard
for periods beginning before 1 January 2003, it should disclose that fact.
59.This Standard does not establish any specific transitional provisions. T he adoption of this Standard is
accounted for in accordance with IAS 8, net profit or loss for the period, fu ndamental errors and changes in
accounting policies.388 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-1
Consistency — different cost formulas for inventories
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 2, inventories.
Issue
1. IAS 2.21 and 2.23 allow various cost formulas (FIFO, weighted average co st or LIFO) for inventories that are
ordinarily interchangeable or are not produced and segregated for specif ic projects.
2. The issue is whether an enterprise may use different cost formulas for di fferent types of inventories.
Consensus
3.Anenterpriseshouldusethesamecostformulaforallinventorieshavings imilarnatureandusetotheenterprise.
For inventories with a different nature or use (for example, certain commo dities used in one business segment
and the same type of commodities used in another business segment), differ ent cost formulas may be justified.
A difference in geographical location of inventories (and in the respecti ve tax rules), by itself, is not sufficient
to justify the use of different cost formulas.
Date of consensus: July 1997.
Effective date: Periods beginning on or after 1 January 1999; earlier appl ication is encouraged. Changes in
accounting policies should be accounted for according to the transition r equirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-2
Consistency — capitalisation of borrowing costs
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.Reference: IAS 23, borrowing costs.
Issue
1.
IAS 23.07 and 23.11 allow the choice of either:
(a) recognising all borrowing costs as an expense in the period in which the y are incurred (benchmark
treatment); or13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 389
(b) capitalising borrowing costs that are directly attributable to the ac quisition, construction or production
of qualifying assets as part of the cost of that asset (allowed alternative treatment).
2.Theissueiswhetheranenterprisethathaschosenapolicyofcapitalising borrowingcostsshouldapplythis
policy to all qualifying assets or whether an enterprise may choose to capi talise borrowing costs for certain
qualifying assets and not for others.
Consensus
3. Where an enterprise adopts the allowed alternative treatment, that tre atment should be applied consistently
to all borrowing costs that are directly attributable to the acquisition, construction or production of all
qualifyingassetsoftheenterprise.IfalltheconditionslaiddowninIAS 23.11aremet,anenterpriseshould
continue to capitalise such borrowing costs even if the carrying amount of the asset exceeds its recoverable
amount. However, IAS 23.19 explains that the carrying amount of the asset s hould be written down to
recognise impairment losses in such cases.
Date of consensus: July 1997.Effective date: Periods beginning on or after 1 January 1998; earlier appl ication is encouraged. Changes in
accounting policies should be accounted for using the transition require ments of IAS 23.30. Therefore, an
enterpriseusingtheallowedalternativetreatmentmaychoosenottocapi taliseallborrowingcostsincurred
before the effective date of this interpretation.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-3
Elimination of unrealised profits and losses on transactions with associ ates
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.Reference: IAS 28, accounting for investments in associates.
Issue
1.
Although IAS 28.16 refers to consolidation procedures set out in IAS 27, it does not give explicit guidance
on the elimination of unrealised profits and losses resulting from “upstr eam” or “downstream” transactions
betweenaninvestor(oritsconsolidatedsubsidiaries)andassociates.“ Upstream”transactionsare,forexample,
salesofassetsfromanassociatetotheinvestor(oritsconsolidatedsubs idiaries).“Downstream”transactions
are, for example, sales of assets from the investor (or its consolidated su bsidiaries) to an associate.
2.The issue is to what extent an investor should eliminate unrealised profit s and losses resulting from
transactions between an investor (or its consolidated subsidiaries) and associates accounted for using the
equity method.
Consensus
3. Where an associate is accounted for using the equity method, unrealised profits and losses resulting from
“upstream” and “downstream” transactions between an investor (or its con solidated subsidiaries) and
associates should be eliminated to the extent of the investor’s interest i n the associate.390 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4. Unrealised losses should not be eliminated to the extent that the transa ction provides evidence of an
impairment of the asset transferred.
Date of consensus: July 1997.Effective date: periods beginning on or after 1 January 1998; earlier appl ication is encouraged. Changes in
accounting policies should be accounted for according to the transition r equirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-6
Costs of modifying existing software
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IASC framework for the preparation and presentation of financ ial statements.
Issue1.
Enterprisesmayincurconsiderablecostsinmodifyingexistingsoftware systems.Forexample,suchcostsmay
beincurredtoenablethemtocontinuetooperateasintendedaftertheturn ofthemillennium(oftenreferred
to as “software 2000 costs”) or after the introduction of a new currency (e. g. the “euro”).
2.The issues are:
(a) whether such costs may be capitalised; and if not,
(b) when such costs should be recognised as an expense.
3.This interpretation does not address (a) the costs of modifying software p roduced for sale, (b) purchases of
replacement software, (c) enhancements of the system (“upgrading”) beyo nd those necessary to enable the
systemstocontinuetoperformasanticipated,and(d)therecognitionofi mpairmentlossesrelatedtoexisting
computer software.
Consensus
4.Costsincurredinordertorestoreormaintainthefutureeconomicbenefit sthatanenterprisecanexpectfrom
the originally assessed standard of performance of existing software sys tems should be recognised as an
expense when, and only when, the restoration or maintenance work is carrie d out (for example, to enable
themtooperateasoriginallyintendedaftertheturnofthemillenniumora ftertheintroductionoftheeuro).
Disclosure
5. A need for major software modifications may give rise to uncertainties. In accordance with IAS 1.08
(revised1997),enterprisesareencouragedtopresent,outsidethefinan cialstatements,informationaboutthe
principal uncertainties they face (for example, a description of the acti vities and expenditure both incurred
and planned to be incurred in future periods, in respect of significant sof tware modifications).
Date of consensus: October 1997.
Effective date: this interpretation becomes effective on 1 June 1998. Cha nges in accounting policies should
be accounted for according to the transition requirements of IAS 8.46.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 391
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-7
Introduction of the euro
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 21, the effects of changes in foreign exchange rates.
Issue
1.From 1 January 1999, the effective start of economic and monetary union (EM U), the euro will become a
currencyinitsownrightandtheconversionratesbetweentheeuroandthep articipatingnationalcurrencies
will be irrevocably fixed, i.e. the risk of subsequent exchange differenc es related to these currencies is
eliminated from this date on.
2.TheissueistheapplicationofIAS21tothechangeoverfromthenationalcu rrenciesofparticipatingMember
States of the European Union to the euro (“the changeover”).
Consensus
3. The requirements of IAS 21 regarding the translation of foreign currenc y transactions and financial
statements of foreign operations should be strictly applied to the change over. The same rationale applies to
the fixing of exchange rates when countries join EMU at later stages.
4. This means that, in particular:
(a) foreign currency monetary assets and liabilities resulting from tran sactions should continue to be
translated into the reporting currency at the closing rate. Any resultant exchange differences should be
recognised as income or expense immediately, except that an enterprise sh ould continue to apply its
existing accounting policy for exchange gains and losses related to forei gn exchange contracts that are
used to reduce the exchange risk on future transactions or commitments (an ticipatory hedges);
(b) cumulative exchange differences relating to the translation of finan cial statements of foreign entities
should continue to be classified as equity and should be recognised as inco me or expense only on the
disposal of the net investment in the foreign entity; and
(c) exchange differences resulting from the translation of liabilities d enominated in participating currencies
should not be included in the carrying amount of related assets.
Date of consensus: October 1997.
Effective date: this interpretation becomes effective on 1 June 1998. Cha nges in accounting policies should
be accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-8
First-time application of IASs as the primary basis of accounting
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 1, presentation of financial statements.392 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Issue
1.Anenterprisewishestodescribeitsfinancialstatementsforthefirstti meascomplyinginfullwithInternational
AccountingStandards(“IASs”).Itmay,forexample,previouslyhavepres enteditsfinancialstatementsusingonly
national accounting requirements (“national GAAP”) as the primary basis of accounting. It may also have
presented its financial statements based in part on national GAAP and in pa rt on IASs, in which case national
GAAP would be considered as the previous primary accounting basis. IAS 1 (r evised 1997) and IAS 8 do not
give explicit guidance on how to account for the transition from national G AAP to IASs as the primary
accounting basis.
2.The issues are:
(a) how the financial statements of an enterprise should be prepared and pr esented in the period when IASs
are first applied in full as the primary accounting basis; and
(b) whenIASsarefirstappliedinfullastheprimaryaccountingbasis,how specifictransitionalprovisionsset
outinindividualstandardsandinterpretationsshouldbeappliedtobala ncesofitemsthatexistedalready
at the effective date of those standards and interpretations.
Consensus3.
In the period when IASs are applied in full for the first time as the primary a ccounting basis, the financial
statements of an enterprise should be prepared and presented as if the fina ncial statements had always been
preparedinaccordancewiththestandardsandinterpretationseffective fortheperiodoffirst-timeapplication.
Therefore, the standards and interpretations effective for the period of first-time application should be applied
retrospectively, except when:
(a) individual standards or interpretations require or permit a differen t transitional treatment; or
(b) the amount of the adjustment relating to prior periods cannot be reason ably determined.
4.Comparative information should be prepared and presented in accordance w ith IASs.
5.AnyadjustmentresultingfromthetransitiontoIASsshouldbetreatedasa nadjustmenttotheopeningbalance
of retained earnings of the earliest period presented in accordance with I ASs.
6.WhenIASsareappliedinfullastheprimaryaccountingbasisforthefirstt ime,anenterpriseshouldapplythe
transitional provisions of the effective standards and interpretations only for periods ending on the date
prescribed in the respective standards and interpretations.
Disclosure7.
IntheperiodwhenIASsareappliedinfullforthefirsttimeastheprimarya ccountingbasis,anenterpriseshould
disclose:
(a) where the amount of the adjustment to the opening balance of retained ea rnings cannot be reasonably
determined, that fact;
(b) where it is impracticable to provide comparative information, that fa ct; and
(c) for each IAS that permits a choice of transitional accounting policies , the policy selected.
8.Enterprisesareencouragedtodisclose,inconnectionwiththedisclosur esrequiredbyIAS1.11(revised1997),
the fact that IASs are being applied in full for the first time.
Date of consensus: January 1998.Effective date: This interpretation becomes effective on 1 August 1998.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 393
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-9
Business combinations — classification either as acquisitions or unitin gs of interests
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 22 (revised 1998), business combinations (1).
ISSUE
1.Inordertoclassifyabusinesscombination,IAS22(revised1998)(“IAS22 ”)containsbothgeneraldefinitions
in paragraph 8 and additional guidance in paragraphs 10 to 12 for acquisiti ons and in paragraphs 13 to 16
forunitingsofinterests.IAS22isclearthatitwillbepossibletoidenti fyanacquirerinvirtuallyallcasesand
hence unitings of interests are expected to occur in exceptional circumst ances only. However, the standard
doesnotprovideexplicitguidanceontheinteractionbetweenthedefinit ionsandthetwosectionscontaining
guidance on acquisitions and unitings of interests.
2.The issues are:
(a) howthedefinitionsandtheadditionalguidanceinIAS22aretobeinter pretedandappliedinclassifying
a business combination; and
(b) whetherabusinesscombinationunderIAS22mightbeclassifiedasneit heranacquisitionnorauniting
of interests.
3.This interpretation does not deal with transactions among enterprises un der common control.
Consensus
4. A business combination should be accounted for as an acquisition, unles s an acquirer cannot be identified.
In virtually all business combinations an acquirer can be identified, i.e . the shareholders of one of the
combining enterprises obtain control over the combined enterprise.
5. Theclassificationofabusinesscombinationshouldbebasedonanovera llevaluationofallrelevantfactsand
circumstances of the particular transaction. The guidance given in IAS 22 provides examples of important
factorstobeconsidered,notacomprehensivesetofconditionstobemet.S inglecharacteristicsofacombined
enterprise such as voting power or relative fair values of the combining en terprises should not be evaluated
in isolation in order to determine how a business combination should be acc ounted for.
6. IAS 22.15(a), (b) and (c) describe the essential characteristics of a un iting of interests. An enterprise should
classify a business combination as an acquisition, unless all of these thr ee characteristics are present. Even if
all of the three characteristics are present, an enterprise should classi fy a business combination as a uniting
of interests only if the enterprise can demonstrate that an acquirer canno t be identified.
7. All business combinations under IAS 22 are either an “acquisition” or a “ uniting of interests”.
Date of consensus: January 1998.
Effective date: This interpretation becomes effective for business comb inations given initial accounting
recognition in periods beginning on or after 1 August 1998.
(1) IAS 22 (revised 1993) was superseded by IAS 22 (revised 1998), business co mbinations, effective 1 July 1999. The
cross-references in this interpretation have been updated to conform wit h IAS 22 (revised 1998).394 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-10
Government assistance — no specific relation to operating activities
Paragraph11ofIAS1(revised1997),presentationoffinancialsstatemen ts,requiresthatfinancialstatementsshould
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 20, accounting for government grants and disclosure of gov ernment assistance.
Issue1.
Insomecountriesgovernmentassistancetoenterprisesmaybeaimedatenc ouragementorlong-termsupport
of business activities either in certain regions or industry sectors. Con ditions to receive such assistance may
notbespecificallyrelatedtotheoperatingactivitiesoftheenterprise .Examplesofsuchassistancearetransfers
of resources by governments to enterprises which:
(a) operate in a particular industry;
(b) continue operating in recently privatised industries; or
(c) start or continue to run their business in underdeveloped areas.
2.The issue is whether such government assistance is a “government grant” wi thin the scope of IAS 20 and,
therefore, should be accounted for in accordance with this standard.
Consensus
3. Government assistance to enterprises meets the definition of governme nt grants in IAS 20, even if there are
no conditions specifically relating to the operating activities of the en terprise other than the requirement to
operateincertainregionsorindustrysectors.Suchgrantsshouldtheref orenotbecrediteddirectlytoequity.
Date of consensus: January 1998.
Effectivedate:Thisinterpretationbecomeseffectiveon1August1998.C hangesinaccountingpoliciesshould
be accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-11
Foreign exchange — capitalisation of losses resulting from severe curren cy devaluations
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.Reference: IAS 21, the effects of changes in foreign exchange rates.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 395
Issue
1.Anenterprisehasliabilitiesdenominatedinaforeigncurrencythatresu ltfromtheacquisitionofassets.After
the acquisition of the assets, the enterprise’s reporting currency under goes a severe devaluation or
depreciation. As a result, significant foreign exchange losses arise whe n the liabilities are measured at the
closing rate under IAS 21.11(a). The allowed alternative treatment in IAS 21.21 requires several conditions
toapplybeforeanenterprisemayincludesuchexchangelossesinthecarry ingamountoftherelatedassets.
2.The issues are:
(a) in which period the conditions that the liability “cannot be settled” a nd that there is “no practical means
of hedging” should be applied; and
(b) when the acquisition of an asset is “recent”.
Consensus
3. Foreignexchangelossesonliabilitiesshouldbeincludedinthecarryi ngamountofarelatedassetonlyifthose
liabilities could not have been settled and if it was impracticable to hedg e them prior to the occurrence of
the severe devaluation or depreciation of the reporting currency. The adj usted carrying amount of the asset
should not exceed its recoverable amount.
4. In order to include foreign exchange losses on liabilities in the carryi ng amount of a related asset, it should
be demonstrated that the foreign currency necessary for settlement of the liability was not available to the
reporting enterprise and that it was impracticable to hedge the exchange r isk (for example, with derivatives
such as forward contracts, options or other financial instruments). This is expected to occur only rarely, for
example, simultaneous shortage of foreign currency due to exchange contr ol restrictions imposed by a
government or a central bank and no availability of hedging instruments.
5. Once the conditions for capitalisation of exchange losses are met, an en terprise should capitalise further
exchange losses incurred after the first severe devaluation or depreciat ion of the reporting currency only to
the extent that all conditions for capitalisation continue to be met.
6. “Recent” acquisitions of assets are acquisitions within 12 months prio r to the severe devaluation or
depreciation of the reporting currency.
Date of consensus: January 1998.Effectivedate:Thisinterpretationbecomeseffectiveon1August1998.C hangesinaccountingpoliciesshould
be accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-12
Consolidation — special purpose entities
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 27, consolidated financial statements and accounting for investments in subsidiaries.396 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Issue
1.Anentitymaybecreatedtoaccomplishanarrowandwell-definedobjective (e.g.toeffectalease,researchand
developmentactivitiesorasecuritisationoffinancialassets).Suchas pecialpurposeentity(“SPE”)maytakethe
form of a corporation, trust, partnership or unincorporated entity. SPEs often are created with legal
arrangements that impose strict and sometimes permanent limits on the dec ision-making powers of their
governing board, trustee or management over the operations of the SPE. Fre quently, these provisions specify
that the policy guiding the ongoing activities of the SPE cannot be modifie d, other than perhaps by its creator
or sponsor (i.e. they operate on “autopilot”).
2.Thesponsor(orenterpriseonwhosebehalftheSPEwascreated)frequently transfersassetstotheSPE,obtains
therighttouseassetsheldbytheSPEorperformsservicesfortheSPE,whil eotherparties(“capitalproviders”)
may provide the funding to the SPE. An enterprise that engages in transacti ons with an SPE (frequently the
creator or sponsor) may in substance control the SPE.
3.A beneficial interest in an SPE may, for example, take the form of a debt inst rument, an equity instrument, a
participation right, a residual interest or a lease. Some beneficial inte rests may simply provide the holder with
a fixed or stated rate of return, while others give the holder rights or acce ss to other future economic benefits
of the SPE’s activities. In most cases, the creator or sponsor (or the enter prise on whose behalf the SPE was
created) retains a significant beneficial interest in the SPE’s activiti es, even though it may own little or none of
the SPE’s equity.
4.IAS 27 requires the consolidation of entities that are controlled by the re porting enterprise. However, the
standard does not provide explicit guidance on the consolidation of SPEs.
5.The issue is under what circumstances an enterprise should consolidate an SPE.
6.This interpretation does not apply to post-employment benefit plans or eq uity compensation plans.
7.A transfer of assets from an enterprise to an SPE may qualify as a sale by that enterprise. Even if the transfer
does qualify as a sale, the provisions of IAS 27 and this interpretation may mean that the enterprise should
consolidatetheSPE.Thisinterpretationdoesnotaddressthecircumstan cesinwhichsaletreatmentshouldapply
for the enterprise or the elimination of the consequences of such a sale upo n consolidation.
Consensus
8.An SPE should be consolidated when the substance of the relationship betwe en an enterprise and the SPE
indicates that the SPE is controlled by that enterprise.
9.InthecontextofanSPE,controlmayarisethroughthepredeterminationof theactivitiesoftheSPE(operating
on “autopilot”) or otherwise. IAS 27.12 indicates several circumstances which result in control even in cases
whereanenterpriseownsonehalforlessofthevotingpowerofanotherente rprise.Similarly,controlmayexist
evenincaseswhereanenterpriseownslittleornoneoftheSPE’sequity.Th eapplicationofthecontrolconcept
requires, in each case, judgement in the context of all relevant factors.
10.In addition to the situations described in IAS 27.12, the following circum stances, for example, may indicate a
relationship in which an enterprise controls an SPE and consequently shou ld consolidate the SPE (additional
guidance is provided in the appendix to this interpretation):
(a) insubstance,theactivitiesoftheSPEarebeingconductedonbehalfof theenterpriseaccordingtoitsspecific
business needs so that the enterprise obtains benefits from the SPE’s oper ation;
(b) in substance, the enterprise has the decision-making powers to obtain the majority of the benefits of the
activitiesoftheSPEor,bysettingupan“autopilot”mechanism,theenter prisehasdelegatedthesedecision
making powers;13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 397
(c) in substance, the enterprise has rights to obtain the majority of the be nefits of the SPE and therefore may
be exposed to risks incident to the activities of the SPE; or
(d) in substance, the enterprise retains the majority of the residual or ow nership risks related to the SPE or its
assets in order to obtain benefits from its activities.
11.PredeterminationoftheongoingactivitiesofanSPEbyanenterprise(the sponsororotherpartywithabeneficial
interest) would not represent the type of restrictions referred to in IAS 2 7.13(b).
Date of consensus: June 1998.
Effective date: This interpretation becomes effective for annual financ ial periods beginning on or after 1 July
1999; earlier application is encouraged. Changes in accounting policies should be accounted for according to
the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-13
Jointly controlled entities — non-monetary contributions by venturers
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.Reference: IAS 31 (revised 1998), financial reporting of interests in joi nt ventures.
Issue1.
IAS31.39(revised1998)referstobothcontributionsandsalesbetweenav enturerandajointventureasfollows:
“Whenaventurercontributesorsellsassetstoajointventure,recogniti onofanyportionofagainorlossfrom
thetransactionshouldreflectthesubstanceofthetransaction”.Inaddi tion,IAS31.19(revised1998)saysthat
“a jointly controlled entity is a joint venture which involves the establi shment of a corporation, partnership or
other entity in which each venturer has an interest”. There is no explicit g uidance on the recognition of gains
and losses resulting from contributions of non-monetary assets to jointl y controlled entities (“JCEs”).
2.Contributions to a JCE are transfers of assets by venturers in exchange for an equity interest in the JCE. Such
contributionsmaytakevariousforms.Contributionsmaybemadesimultan eouslybytheventurerseitherupon
establishing the JCE or subsequently. The consideration received by the v enturer(s) in exchange for assets
contributedtotheJCEmayalsoincludecashorotherconsiderationthatdo esnotdependonfuturecashflows
of the JCE (“additional consideration”).
3.The issues are:
(a) when the appropriate portion of gains or losses resulting from a contri bution of a non-monetary asset to
a JCE in exchange for an equity interest in the JCE should be recognised by th e venturer in the income
statement;
(b) how additional consideration should be accounted for by the venturer; and
(c) how any unrealised gain or loss should be presented in the consolidated financial statements of the
venturer.398 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4.This interpretation deals with the venturer’s accounting for non-moneta ry contributions to a JCE in exchange
for an equity interest in the JCE that is accounted for using either the equi ty method or proportionate
consolidation.
Consensus
5.In applying IAS 31.39 to non-monetary contributions to a JCE in exchange fo r an equity interest in the JCE, a
venturer should recognise in the income statement for the period the porti on of a gain or loss attributable to
the equity interests of the other venturers except when:
(a) the significant risks and rewards of ownership of the contributed non- monetary asset(s) have not been
transferred to the JCE;
(b) the gain or loss on the non-monetary contribution cannot be measured re liably; or
(c) thenon-monetaryassetscontributedaresimilartothosecontributed bytheotherventurers.Non-monetary
assets are similar to those contributed by other venturers when they have a similar nature, a similar use in
the same line of business and a similar fair value. A contribution meets the similarity test only if all of the
significant component assets thereof are similar to those contributed by the other venturers.
Whereanyoftheexceptions(a)through(c)applies,thegainorlosswouldb econsideredunrealisedandwould
therefore not be recognised in the income statement unless paragraph 6 als o applies.
6.If, in addition to receiving an equity interest in the JCE, a venturer recei ves monetary or non-monetary assets
dissimilartothoseitcontributed,anappropriateportionofgainorloss onthetransactionshouldberecognised
by the venturer in the income statement.
7.Unrealised gains or losses on non-monetary assets contributed to JCEs sho uld be eliminated against the
underlying assets under the proportionate consolidation method or again st the investment under the equity
method. Such unrealised gains or losses should not be presented as deferre d gains or losses in the venturer’s
consolidated balance sheet.
Date of consensus: June 1998.
Effectivedate:thisinterpretationbecomeseffectiveforannualfinanc ialperiodsbeginningonorafter1January
1999; earlier application is encouraged. Changes in accounting policies should be accounted for according to
the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-14
Property, plant and equipment — compensation for the impairment or loss of items
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.Reference: IAS 16, property, plant and equipment (revised 1998).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 399
Issue
1.Enterprises may receive monetary or non-monetary compensation from thir d parties for the impairment or
lossofitemsofproperty,plantandequipment.Oftenthemonetarycompens ationreceivedhastobeusedfor
compelling economic reasons to restore impaired assets or to purchase or c onstruct new assets in order to
replace the assets lost or given up. IAS 16 (revised 1998) does not give expl icit guidance on how to account
for such monetary or non-monetary compensation.
2.Examples of such cases may include:
(a) reimbursement by insurance companies after an impairment or loss of it ems of property, plant and
equipment, for example, due to natural disasters, theft or mishandling;
(b) indemnities by the government for items of property, plant and equipme nt that were expropriated, for
example, land that has to be used for public purposes;
(c) compensationrelatedtotheinvoluntaryconversionofitemsofproper ty,plantandequipment,forexample,
relocationoffacilitiesfromadesignatedurbanareatoanon-urbanareai naccordancewithanationalland
policy; or
(d) physical replacement in whole or in part of an impaired or lost asset.
3.The issue is how an enterprise should account for:
(a) impairments or losses of items of property, plant and equipment;
(b) related compensation from third parties, and(c) subsequent restoration, purchase or construction of assets.
Consensus
4.
Impairments or losses of items of property, plant and equipment, related c laims for or payments of
compensation from third parties and any subsequent purchase or construct ion of replacement assets are
separateeconomiceventsandshouldbeaccountedforassuch.Thethreeeco nomiceventsshouldbeaccounted
for separately as follows:
(a) impairments of items of property, plant and equipment should be recogn ised under IAS 36; the
retirement or disposal of items of property, plant and equipment should be recognised under IAS 16
(revised 1998);
(b) monetaryornon-monetarycompensationfromthirdpartiesforitemsof property,plantandequipment
that were impaired, lost or given up should be included in the income statem ent when recognised; and
(c) thecostofassetsrestored,purchased,constructedasareplacement, orreceivedascompensationshould
be determined and presented under IAS 16 (revised 1998).
Disclosure
5.Monetary or non-monetary compensation recognised for the impairment or l oss of items of property, plant
and equipment should be disclosed separately.
Date of consensus: June 1998.
Effective date: this interpretation becomes effective for annual financ ial periods beginning on or after 1 July
1999;earlierapplicationisencouraged.Changesinaccountingpolicies shouldbeaccountedforaccordingto
the transition requirements of IAS 8.46.400 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-15
Operating leases — incentives
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 17, leases (revised 1997).
Issue
1.In negotiating a new or renewed operating lease, the lessor may provide inc entives for the lessee to enter into
the agreement. Examples of such incentives are an up-front cash payment to the lessee or the reimbursement
or assumption by the lessor of costs of the lessee (such as relocation costs , leasehold improvements and costs
associatedwithapre-existingleasecommitmentofthelessee).Alternat ively,initialperiodsoftheleasetermmay
be agreed to be rent-free or at a reduced rent.
2.The issue is how incentives in an operating lease should be recognised in th e financial statements of both the
lessee and the lessor.
Consensus
3.All incentives for the agreement of a new or renewed operating lease should be recognised as an integral part
of the net consideration agreed for the use of the leased asset, irrespecti ve of the incentive’s nature or form or
the timing of payments.
4.Thelessorshouldrecognisetheaggregatecostofincentivesasareductio nofrentalincomeovertheleaseterm,
onastraight-linebasisunlessanothersystematicbasisisrepresentati veofthetimepatternoverwhichthebenefit
of the leased asset is diminished.
5.The lessee should recognise the aggregate benefit of incentives as a reduc tion of rental expense over the lease
term,onastraight-linebasisunlessanothersystematicbasisisreprese ntativeofthetimepatternofthelessee’s
benefit from the use of the leased asset.
6.Costs incurred by the lessee, including costs in connection with a pre-exi sting lease (for example costs for
termination, relocation or leasehold improvements), should be accounte d for by the lessee in accordance with
the International Accounting Standards applicable to those costs, inclu ding costs which are effectively
reimbursed through an incentive arrangement.
Date of consensus: June 1998.
Effective date: this interpretation becomes effective for lease terms be ginning on or after 1 January 1999.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-18
Consistency — alternative methods
Paragraph11ofIAS1(revised1997),presentationsoffinancialstatemen ts,requiresthatfinancialstatementsshould
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.
Reference: IAS 1 (revised 1997), presentation of financial statements.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 401
Issue
1.Certain IASC Standards provide an enterprise with an explicit choice betw een alternative accounting policies
applied in preparing its financial statements. Some standards which prov ide explicit choice of an accounting
policy indicate the manner in which that choice is to be exercised. For exam ple, IAS 39.104 indicates that an
enterpriseshouldchooseoneoftwopoliciesfortherecognitionofchange sinthefairvalueofavailable-for-sale
financialassets,andshouldapplythepolicyselectedtoallavailable-f or-salefinancialassets.Otherstandardsare
silent on the manner of exercising choice.
2.The issue is how the choice of accounting policy should be exercised in the c ontext of those IASC Standards
whichallowanexplicitchoiceofaccountingpolicybutaresilentonthema nnerofexercisingthatchoice.The
fundamental question is whether, once a choice of policy is made, that poli cy should be followed consistently
for all items accounted for under the specific requirements which provide the choice.
Consensus
3.If more than one accounting policy is available under an International Acc ounting Standard or Interpretation,
an enterprise should choose and apply consistently one of those policies, unless the standard or interpretation
specifically requires or permits categorisation of items (transactions , events, balances, amounts, etc.) for which
different policies may be appropriate. If a standard requires or permits c ategorisation of items, the most
appropriate accounting policy should be selected and applied consistent ly to each category. (Additional
guidance is provided in Appendix A and Appendix B to this interpretation.)
4.Once the appropriate initial policy has been selected under the requireme nts of paragraph 3, a change in
accounting policy should only be made in accordance with IAS 8.42 and appli ed to all items or categories of
items in the manner specified in paragraph 3.
Date of consensus: May 1999.
Effective date: This interpretation becomes effective for annual financ ial periods beginning on or after 1 July
2000. Earlier application is encouraged. Changes in accounting policies should be accounted for according to
the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-19
Reporting currency — measurement and presentation of financial statemen ts under IAS 21 and IAS 29
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.References: IAS 21, the effects of changes in foreign exchange rates (revi sed 1993) and IAS 29, financial reporting
in hyperinflationary economies (reformatted 1994) (
1).
Issue
1.Paragraph 4 of IAS 21 states that while that Standard does not specify the cu rrency in which an enterprise
presentsitsfinancialstatements,anenterprisenormallyusesthecurre ncyofthecountryinwhichitisdomiciled.
WhileIAS21definestheterm“reportingcurrency”asthecurrencyusedinp resentingthefinancialstatements,
the reporting currency used by an enterprise also has significant implica tions for accounting measurement in
the financial statements.
(1) See also SIC-30: reporting currency — translation from measurement curr ency to presentation currency.402 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
2.IAS21.7definesaforeigncurrencyasacurrencyotherthanthereportingc urrencyofanenterprise.Therefore,
the selection of a reporting currency establishes that all other currenci es are treated as foreign currencies.
Procedures for accounting for foreign currency transactions and transla ting financial statements of foreign
operations are specified in IAS 21. IAS 21.36 indicates additional conseq uences of selecting a reporting
currency for a foreign entity that reports in the currency of a hyperinflat ionary economy. The financial
statements of such a foreign entity are restated under IAS 29 before they ar e translated into the reporting
currencyofthereportingenterprise.IAS29.8alsorequiresrestatement byanenterprisethatpresentsitsown
financial statements using the currency of a hyperinflationary economy a s its reporting currency.
3.The issues are:
(a) howanenterprisedeterminesacurrencyformeasuringitemsinitsfina ncialstatements(the“measurement
currency”);
(b) whetheranenterprisemayuseacurrencyotherthanthemeasurementcur rencyforpresentingitsfinancial
statements (the “presentation currency”); and
(c) if the presentation currency may be different from the measurement cur rency, then how the financial
statements should be translated from the measurement currency to the pres entation currency.
4.IAS 21.5 states that the restatement of an enterprise’s financial stateme nts from the currency in which it
presents its financial statements in compliance with IAS into another cur rency for the convenience of users
accustomedtothatcurrencyorforsimilarpurposesisnotdealtwithbyIAS 21.Asaresult,suchrestatements
are not addressed in this Interpretation.
Consensus
5.The measurement currency should provide information about the enterpris e that is useful and reflects the
economic substance of the underlying events and circumstances relevant t o that enterprise. If a particular
currencyisusedtoasignificantextentin,orhasasignificantimpacton, theenterprise,thatcurrencymaybe
an appropriate currency to be used as the measurement currency (additiona l guidance is provided in
AppendixAtothisinterpretation).Alltransactionsincurrenciesother thanthemeasurementcurrencyshould
be treated as transactions in foreign currencies when applying IAS 21.
6.Once the measurement currency has been selected, it should not be changed u nless there is a change in the
underlyingeventsandcircumstancesrelevanttothatenterpriseasdeter minedinaccordancewithparagraph5
of this interpretation.
7.Ifthemeasurementcurrency,determinedinaccordancewithparagraph5of thisInterpretation,isthecurrency
of a hyperinflationary economy, then:
(a) the enterprise’s own financial statements should be restated under IA S 29; and
(b) when the enterprise is a foreign entity as defined in IAS 21 and is includ ed in the financial statements of
another reporting enterprise, its financial statements should be restat ed under IAS 29 before being
translated into the reporting currency of the other reporting enterprise .
8.Ifthecurrencyofacountrythatdoesnothaveahyperinflationaryeconomy isdeterminedtobeanappropriate
measurement currency under paragraph 5 of this interpretation, the enter prise is not required to restate its
financial statements under IAS 29.
9.Although an enterprise normally presents its financial statements in the same currency as the measurement
currencydeterminedunderparagraph5ofthisinterpretation,itmaychoo setopresentitsfinancialstatements
in a different currency. The method of translating the financial statemen ts of a reporting enterprise from the
measurementcurrencytoadifferentcurrencyforpresentationisnotspec ifiedunderInternationalAccounting
Standards.However,forfinancialstatementstopresentfairlythefinan cialposition,financialperformanceand
cash flows, the translation method applied by an enterprise should not lea d to reporting in a manner that is
inconsistent with the measurement of items in the financial statements us ing the currency determined in
accordance with paragraph 5 of this interpretation. In the case of an enter prise that has foreign entities and
presents consolidated financial statements, the currency used in presen ting the consolidated financial
statements is normally the same as the parent’s measurement currency but w ill often differ from the
measurementcurrenciesusedbyindividualforeignentities.(AppendixB providesanillustrationofapplication
of this interpretation to consolidated financial statements.)13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 403
Disclosure
10.The following should be disclosed:
(a) when the measurement currency is different from the currency of the cou ntry in which the enterprise is
domiciled, the reason for using a different currency;
(b) the reason for any change in the measurement currency or presentation c urrency; and
(c) when the financial statements are presented in a currency different fr om the enterprise’s measurement
currency, the measurement currency, the reason for using a different pres entation currency, and a
description of the method used in the translation process.
In consolidated financial statements, the references to measurement cur rency for the purpose of these
disclosure requirements are to the measurement currency of the parent.
Date of consensus: February 2000.
Effectivedate:Thisinterpretationbecomeseffectiveforannualfinanc ialperiodsbeginningonorafter1January
2001. Changes in accounting policies should be accounted for according to the transition requirements of
IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-20
Equity accounting method — recognition of losses
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 28, accounting for investments in associates (revised 199 8).
Issue1.
In some situations, an investor may hold a variety of financial interests i n an associate or joint venture that
is accounted for under the equity method. For example, the investor may hol d financial interests including
ordinary or preferred shares, loans, advances, debt securities, options to acquire ordinary shares, or trade
receivables.
2.IAS28.22indicatesthatinapplyingtheequitymethod,oncetheinvestor’ sshareoflossesofanassociateequals
or exceeds the carrying amount of an investment, the investor normally dis continues including its share of
furtherlossesinitsincomestatement.However,additionallossesarepr ovidedfortotheextentthattheinvestor
hasincurredobligationsormadepaymentsonbehalfoftheassociatetosat isfyobligationsoftheassociatethat
the investor has guaranteed or otherwise committed.
3.In applying the equity method, the issues are:
(a) whichfinancialinterestsareincludedinthe“carryingamountofanin vestment”referredtoinIAS28.22;
and
(b) whetherrecognitionoftheentity’sshareoflossesoftheassociateor jointlycontrolledentity(investee)in
excess of the carrying amount of the investment is continued when the enter prise holds other financial
interests in the investee which are not included in the carrying amount of t he investment.404 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
4.Thisinterpretationaddressestheapplicationoftheequitymethodunder IAS28.Undertheallowedalternative
treatmentpermittedbyIAS31.32,anenterpriseappliestheequitymethod inreportingitsinterestinajointly
controlled entity and therefore also applies this interpretation.
Consensus
5.Financialinterestsmaybedescribedinavarietyofways,forexample,som einterestsaredescribedasordinary
shares or as preferred shares. For the purpose of applying IAS 28.22, the ca rrying amount of an investment
should include only the carrying amount of instruments which provide unli mited rights of participation in
earnings or losses and a residual equity interest in the investee.
6.If the investor’s share of losses exceeds the carrying amount of the invest ment, the carrying amount of the
investment is reduced to nil and recognition of further losses should be di scontinued, unless the investor has
incurred obligations to the investee or to satisfy obligations of the inve stee that the investor has guaranteed
orotherwisecommitted,whetherfundedornot.Totheextentthattheinves torhasincurredsuchobligations,
the investor continues to recognise its share of losses of the investee.
7.Financial interests in an investee which are not included in the carrying a mount of the investment under
paragraph 5 of this interpretation are accounted for in accordance with ot her applicable International
Accounting Standards, for example, IAS 39, and prior to the implementatio n of IAS 39, IAS 25 (reformatted
1994).
8.Continuinglossesofaninvesteeshouldbeconsideredobjectiveevidence thatfinancialinterestsinthatinvestee,
bothfinancialinterestswhichareincludedinthecarryingamountofanin vestmentunderparagraph5ofthis
interpretationandotherfinancialinterests,maybeimpaired.Impairme ntofthecarryingamountofafinancial
interestwhichisincludedinthecarryingamountofanassetisdetermined basedonthecarryingamountafter
any adjustment for equity method losses.
9.If the investor has guaranteed or is otherwise committed to obligations to the investee or to satisfying
obligationsoftheinvestee,inadditiontocontinuingtorecogniseitssh areoflossesoftheinvestee,theinvestor
should determine whether a provision should be recognised in accordance w ith IAS 37. (Prior to the
applicationofIAS37,therecognitionofaprovisionisevaluatedunderth erequirementsofIAS10(reformatted
1994).)
Disclosure
10.If an investor discontinues recognition of its share of losses of an invest ee, the investor should disclose in the
notes to the financial statements the amount of its unrecognised share of l osses of the investee, both during
the period and cumulatively.
Date of consensus: August 1999.
Effective date: This interpretation becomes effective on 15 July 2000. Ch anges in accounting policies should
be accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-21
Income taxes — recovery of revalued non-depreciable assets
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 405
Draft interpretation SIC-D21, income taxes — omnibus was issued for comme nt in September 1999. The draft
interpretationincludedboththeissueaddressedinthisinterpretation andtheissueincludedininterpretationSIC-25,
income taxes — changes in the tax status of an enterprise or its shareholder s.
Reference: IAS 12, income taxes (revised 1996).
Issue
1.UnderIAS12.51,themeasurementofdeferredtaxliabilitiesandassetssh ouldreflectthetaxconsequencesthat
would follow from the manner in which the enterprise expects, at the balanc e sheet date, to recover or settle
the carrying amount of those assets and liabilities that give rise to tempo rary differences.
2.IAS 12.20 notes that the revaluation of an asset does not always affect taxa ble profit (tax loss) in the period
of the revaluation and that the tax base of the asset may not be adjusted as a r esult of the revaluation. If the
future recovery of the carrying amount will be taxable, any difference bet ween the carrying amount of the
revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.
3.Theissueishowtointerprettheterm“recovery”inrelationtoanassettha tisnotdepreciated(non-depreciable
asset) and is revalued under paragraph 29 of IAS 16 (revised 1998).
4.This interpretation also applies to investment properties which are carr ied at revalued amounts under
IAS 25.23(b) but would be considered non-depreciable if IAS 16 were to be ap plied.
Consensus
5.The deferred tax liability or asset that arises from the revaluation of a no n-depreciable asset under IAS 16.29
should be measured based on the tax consequences that would follow from rec overy of the carrying amount
ofthatassetthroughsale,regardlessofthebasisofmeasuringthecarryi ngamountofthatasset.Accordingly,
ifthetaxlawspecifiesataxrateapplicabletothetaxableamountderived fromthesaleofanassetthatdiffers
from the tax rate applicable to the taxable amount derived from using an ass et, the former rate is applied in
measuring the deferred tax liability or asset related to a non-depreciabl e asset.
Date of consensus: August 1999.
Effective date: This consensus becomes effective on 15 July 2000. Changes in accounting policies should be
accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-22
Business combinations — subsequent adjustment of fair values and goodwil l initially reported
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Reference: IAS 22 (revised 1998), business combinations.406 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Issue
1.In initially accounting for a business combination, an acquirer may not ha ve available all evidence to be able
toidentifyandtoestimatereliablythefairvaluesoftheassetsandliabi litiesacquiredortheidentifiableassets
andliabilitiesmaynotyetsatisfythecriteriaforrecognition.Thismay beduetothecomplexityofthebusiness
acquired, the need to produce and report financial information on a timely basis, or for other reasons.
2.IAS 22.71 (revised 1998) indicates that in accounting for a business acqui sition, identifiable assets and
liabilities,whichareacquiredbutdonotsatisfythecriteria……forsepa raterecognitionwhentheacquisition
isinitiallyaccountedfor,shouldberecognisedsubsequentlyasandwhen theysatisfythecriteria.Thecarrying
amounts of identifiable assets and liabilities acquired should be adjust ed when, subsequent to acquisition,
additional evidence becomes available to assist with the estimation of th e amounts assigned to those
identifiable assets and liabilities when the acquisition was initially a ccounted for. The amount assigned to
goodwill or negative goodwill should also be adjusted, when necessary, to the extent that:
(a) theadjustmentdoesnotincreasethecarryingamountofgoodwillabove itsrecoverableamount,asdefined
in IAS 36, impairment of assets; and
(b) such adjustment is made by the end of the first annual accounting period commencing after acquisition
(except for the recognition of an identifiable liability under paragraph 31, for which the timeframe in
paragraph 31(c) applies);
otherwisetheadjustmentstotheidentifiableassetsandliabilitiessho uldberecognisedasincomeorexpense.
3.The issues are, in making adjustments in the limited circumstances descri bed by IAS 22.71:
(a) whetheranadjustmenttotheinitialfairvaluesofidentifiableasset sandliabilitiesacquiredshouldinclude
theeffectsofdepreciationandotherchangeswhichwouldhaveresultedif theadjustedfairvalueshadbeen
applied from the date of acquisition;
(b) whether a related adjustment of goodwill or negative goodwill should i nclude the effect of amortisation
of the adjusted amount assigned to goodwill or negative goodwill from the d ate of acquisition; and
(c) how the adjustments to identifiable assets and liabilities acquired, and to goodwill or negative goodwill,
should be presented.
4.This interpretation does not apply to the following items as they are speci fically addressed elsewhere in
International Accounting Standards:
(a) deferredtaxassetsandliabilitiesrecognisedunderIAS12(revised1 996),paragraphs66through68;and
(b) the reversal of provisions initially made for terminating or reducing the activities of the acquiree, IAS 22
(revised 1998), paragraphs 75 and 76.
Consensus5.
An adjustment to the carrying amount of identifiable assets and liabiliti es acquired, made in the limited
circumstances described under IAS 22.71, should be calculated as if the ad justed fair values had been applied
from the date of acquisition. As a result, the adjustment should include bo th the effect of the change to the
fairvaluesinitiallyassignedandtheeffectofdepreciationandotherch angeswhichwouldhaveresultedifthe
adjusted fair values had been applied from the date of acquisition.
6.If the adjustment to identifiable assets and liabilities is made by the end of the first annual accounting period
commencingafteracquisition,thecarryingamountofgoodwillornegativ egoodwillshouldalsobeadjusted,
whennecessary,totheamountwhichwouldhavebeendeterminediftheadjus tedfairvalueshadbeenavailable
atthedateofacquisition.Asaresult,goodwillamortisationorrecognit ionofnegativegoodwillisalsoadjusted
fromthedateofacquisition.However,anadjustmenttothecarryingamoun tofgoodwillshouldbemadeonly
to the extent that it does not increase the carrying amount of goodwill abov e its recoverable amount.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 407
7.Adjustments to depreciation and amortisation, impairment charges, and o ther amounts, determined under
paragraphs5and6ofthisinterpretation,shouldbeincludedinnetprofit orlossintherespectiveclassification
ofincomeorexpensepresentedonthefaceoftheincomestatement.Onlyite mssubsequenttotheacquisition
date which are required or are permitted to be credited or charged directly to equity under other standards
would be recognised in equity; this interpretation does not alter the trea tment under those other standards.
Disclosure
8.Adjustmentstothecarryingamountsofidentifiableassetsorliabilitie sorgoodwillornegativegoodwillshould
be disclosed and explained in the financial statements of the period in whi ch the adjustment is made. The
amount of an adjustment which relates to prior and comparative periods sho uld also be disclosed.
Date of consensus: October 1999.
Effectivedate:Thisinterpretationbecomeseffectiveforadjustmentsm adeinannualperiodsendingonorafter
15 July 2000.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-23
Property, plant and equipment — major inspection or overhaul costs
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.
Reference: IAS 16, property, plant and equipment (revised 1998).
Issue
1.IAS 16.23 (revised 1998) requires the capitalisation of subsequent expen diture on an item of plant, property
orequipmentthatimprovestheconditionoftheassetbeyonditsoriginall yassessedstandardofperformance.
All other subsequent expenditure, such as repairs or maintenance expendi ture that restores or maintains the
future economic benefits that an enterprise can expect from the originall y assessed standard of performance
of the asset, should be recognised as an expense in the period in which it is i ncurred.
2.IAS 16.27 indicates that major components of some items of property, plant and equipment may require
replacementatregularintervals.Thecomponentsareaccountedforassep arateassetsbecausetheyhaveuseful
lives different from those of the items of property, plant and equipment to which they relate.
3.An enterprise purchases a property, plant and equipment asset and incurs a ll costs necessary to bring it into
conditionforitsintendeduse.Theenterprisewillinthefutureneedtope rformamajorinspectionoroverhaul
oftheassetatregularintervalsoveritsusefullifetoallowthecontinue duseoftheassetbytheenterprise.An
example of this is the purchase of an aircraft which requires an overhaul on ce every three years.
4.Theissueiswhentheenterpriseincursthecostofthemajorinspectionsor overhaulsoftheitemofproperty,
plant or equipment, occurring at regular intervals over the useful life of the asset and made to allow the
continued use of the asset by the enterprise, should those costs be capital ised as a component of the asset or
expensed.408 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Consensus
5.The cost of a major inspection or overhaul of an item of property, plant and e quipment occurring at regular
intervalsovertheusefullifeofanassetandmadetoallowthecontinuedus eoftheassetshouldberecognised
as an expense in the period in which it is incurred except when:
(a) consistent with IAS 16.12, the enterprise has identified as a separate component of the asset an amount
representing major inspection or overhaul and has already depreciated th at component to reflect the
consumption of benefits which are replaced or restored by the subsequent m ajor inspection or overhaul
(whether the asset is carried at historical cost or revalued);
(b) it is probable that future economic benefits associated with the asset will flow to the enterprise; and
(c) the cost of the major inspection or overhaul to the enterprise can be mea sured reliably.
If these criteria are met, the cost should be capitalised and accounted for as a component of the asset.
Date of consensus: October 1999.
Effective date: This interpretation becomes effective on 15 July 2000. Im plementation of the components
approachdescribedinthisinterpretationisachangeinthemethodofdepr eciationandistreatedasachange
in accounting estimate, consistent with IAS 16.52. As a result, the deprec iation charge for the current and
future periods is adjusted.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-24
Earnings per share — financial instruments and other contracts that may be settled in shares
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.
Reference: IAS 33, earnings per share.
Issue
1.Therearevariousformsoffinancialinstrumentsorothercontractsthatm aybesettledbyareportingenterprise
eitherbypaymentoffinancialassetsorbypaymentintheformofatransfer ofordinarysharesofthereporting
enterprise to the holder. In some cases, the manner of settlement is chosen by the issuer of the financial
instrument and in other cases the manner of settlement is chosen by the hold er of the financial instrument.
Anexampleofthistypeofinstrumentisacontractualobligationoftherep ortingenterprisethatmaybesettled
by payment of cash or issuance of ordinary shares of the reporting enterpri se.
2.Theissueiswhetherfinancialinstrumentsorothercontractsthatmaybes ettledbypaymentoffinancialassets
orissuanceofordinarysharesofthereportingenterprise,attheoptiono ftheissuerortheholder,arepotential
ordinary shares under IAS 33.
3.This interpretation addresses contracts that specify such alternative s ettlement methods in their terms.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 409
Consensus
4.Allfinancialinstrumentsorothercontractsthatmayresultintheissuan ceofordinarysharesofthereporting
enterprisetotheholderofthefinancialinstrumentorothercontract,at theoptionoftheissuerortheholder,
are potential ordinary shares of the enterprise.
Date of consensus: February 2000.
Effectivedate:thisinterpretationbecomeseffectiveon1December2000 .Comparativeinformationpresented
and disclosed in financial statements under IAS 33.47-52 should be restat ed for the effect of applying this
interpretation.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-25
Income taxes — changes in the tax status of an enterprise or its shareholder s
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not intended to apply to immaterial items.
Draft interpretation SIC-D21, income taxes — omnibus was issued for comme nt in September 1999. The draft
interpretationincludedboththeissueaddressedinthisinterpretation andtheissueincludedininterpretationSIC-21,
income taxes — recovery of revalued non-depreciable assets.
Reference: IAS 12, income taxes (revised 1996).
Issue
1.A change in the tax status of an enterprise or of its shareholders may have co nsequences for an enterprise by
increasing or decreasing its tax liabilities or assets. This may, for exam ple, occur upon the public listing of an
enterprise’s equity instruments or upon the restructuring of an enterpri se’s equity. It may also occur upon a
controlling shareholder’s move to a foreign country. As a result of such an event, an enterprise may be taxed
differently; it may for example gain or lose tax incentives or become subje ct to a different rate of tax in the
future.
2.Achangeinthetaxstatusofanenterpriseoritsshareholdersmayhaveanim mediateeffectontheenterprise’s
current tax liabilities or assets. The change may also increase or decreas e the deferred tax liabilities and assets
recognisedbytheenterprise,dependingontheeffectthechangeintaxsta tushasonthetaxconsequencesthat
will arise from recovering or settling the carrying amount of the enterpri se’s assets and liabilities.
3.The issue is how an enterprise should account for the tax consequences of a c hange in its tax status or that
of its shareholders.
Consensus
4.A change in the tax status of an enterprise or its shareholders does not give rise to increases or decreases in
amounts recognised directly in equity. The current and deferred tax conse quences of a change in tax status
should be included in net profit or loss for the period, unless those conseq uences relate to transactions and
events that result, in the same or a different period, in a direct credit or c harge to the recognised amount of
equity. Those tax consequences that relate to changes in the recognised am ount of equity, in the same or a
different period (not included in net profit or loss), should be charged or credited directly to equity.410 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Date of consensus: August 1999.
Effective date: this consensus becomes effective on 15 July 2000. Changes in accounting policies should be
accounted for according to the transition requirements of IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-27
Evaluating the substance of transactions involving the legal form of a lea se
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.
References:IAS1,presentationoffinancialstatements(revised1997), IAS17,leases(revised1997),IAS18,revenue
(revised 1993).
Issue
1.An enterprise may enter into a transaction or a series of structured transa ctions (an arrangement) with an
unrelatedpartyorparties(aninvestor)thatinvolvesthelegalformofal ease.Forexample,anenterprisemay
leaseassetstoaninvestorandleasethesameassetsback,oralternativel y,legallysellassetsandleasethesame
assetsback.Theformofeacharrangementanditstermsandconditionscanv arysignificantly.Intheleaseand
leasebackexample,itmaybethatthearrangementisdesignedtoachieveat axadvantagefortheinvestorthat
is shared with the enterprise in the form of a fee, and not to convey the right to use an asset.
2.When an arrangement with an investor involves the legal form of a lease, the issues are:
(a) howtodeterminewhetheraseriesoftransactionsislinkedandshouldb eaccountedforasonetransaction;
(b) whether the arrangement meets the definition of a lease under IAS 17; an d, if not,
(i) whetheraseparateinvestmentaccountandleasepaymentobligationst hatmightexistrepresentassets
andliabilitiesoftheenterprise(e.g.considertheexampledescribedin paragraph2(a)ofAppendixA);
(ii) how the enterprise should account for other obligations resulting fr om the arrangement; and
(iii)how the enterprise should account for a fee it might receive from an in vestor.
Consensus3.
A series of transactions that involve the legal form of a lease is linked and should be accounted for as one
transaction when the overall economic effect cannot be understood withou t reference to the series of
transactions as a whole. This is the case, for example, when the series of tr ansactions are closely interrelated,
negotiated as a single transaction, and takes place concurrently or in a co ntinuous sequence. (Appendix A
provides illustrations of application of this interpretation.)13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 411
4.The accounting should reflect the substance of the arrangement. All aspec ts and implications of an
arrangement should be evaluated to determine its substance, with weight g iven to those aspects and
implications that have an economic effect.
5.IAS17applieswhenthesubstanceofanarrangementincludestheconveyanc eoftherighttouseanassetfor
anagreedperiodoftime.Indicatorsthatindividuallydemonstratethata narrangementmaynot,insubstance,
involve a lease under IAS 17 include (Appendix B provides illustrations of application of this interpretation):
(a) an enterprise retains all the risks and rewards incident to ownership o f an underlying asset and enjoys
substantially the same rights to its use as before the arrangement;
(b) the primary reason for the arrangement is to achieve a particular tax re sult, and not to convey the right
to use an asset; and
(c) an option is included on terms that make its exercise almost certain (e. g. a put option that is exercisable
at a price sufficiently higher than the expected fair value when it becomes exercisable).
6.The definitions and guidance in paragraphs 49 to 64 of the framework should be applied in determining
whether, in substance, a separate investment account and lease payment ob ligations represent assets and
liabilities of the enterprise. Indicators that collectively demonstrat e that, in substance, a separate investment
account and lease payment obligations do not meet the definitions of an ass et and a liability and should not
be recognised by the enterprise include:
(a) the enterprise is not able to control the investment account in pursuit of its own objectives and is not
obligated to pay the lease payments. This occurs when, for example, a prepa id amount is placed in a
separateinvestmentaccounttoprotecttheinvestorandmayonlybeusedto paytheinvestor,theinvestor
agrees that the lease payment obligations are to be paid from funds in the in vestment account, and the
enterprise has no ability to withhold payments to the Investor from the inv estment account;
(b) theenterprisehasonlyaremoteriskofreimbursingtheentireamounto fanyfeereceivedfromaninvestor
and possibly paying some additional amount, or, when a fee has not been rece ived, only a remote risk of
paying an amount under other obligations (e.g. a guarantee). Only a remote risk of payment exists when,
forexample,thetermsofthearrangementrequirethataprepaidamountisi nvestedinrisk-freeassetsthat
are expected to generate sufficient cash flows to satisfy the lease paymen t obligations; and
(c) other than the initial cash flows at inception of the arrangement, the o nly cash flows expected under the
arrangement are the lease payments that are satisfied solely from funds wi thdrawn from the separate
investment account established with the initial cash flows.
7.Otherobligationsofanarrangement,includinganyguaranteesprovideda ndobligationsincurreduponearly
termination, should be accounted for under IAS 37 or IAS 39, depending on th e terms.
8.The criteria in paragraph 20 of IAS 18 should be applied to the facts and circ umstances of each arrangement
in determining when to recognise a fee as income that an enterprise might re ceive. Factors such as whether
there is continuing involvement in the form of significant future perform ance obligations necessary to earn
the fee, whether there are retained risks, the terms of any guarantee arran gements, and the risk of repayment
of the fee, should be considered. Indicators that individually demonstra te that recognition of the entire fee as
income when received, if received at the beginning of the arrangement, is i nappropriate include:
(a) obligations either to perform or to refrain from certain significant a ctivities are conditions of earning the
fee received, and therefore execution of a legally binding arrangement is not the most significant act
required by the arrangement;
(b) limitations are put on the use of the underlying asset that have the prac tical effect of restricting and
significantly changing the enterprise’s ability to use (e.g. deplete, se ll or pledge as collateral) the asset;412 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) the possibility of reimbursing any amount of the fee and possibly payin g some additional amount is not
remote. This occurs when, for example:
(i) theunderlyingassetisnotaspecialisedassetthatisrequiredbythee nterprisetoconductitsbusiness,
andthereforethereisapossibilitythattheenterprisemaypayanamountt oterminatethearrangement
early; or
(ii) the enterprise is required by the terms of the arrangement, or has some or total discretion, to invest
a prepaid amount in assets carrying more than an insignificant amount of ri sk (e.g. currency, interest
rate or credit risk). In this circumstance, the risk of the investment’s va lue being insufficient to satisfy
theleasepaymentobligationsisnotremote,andthereforethereisapossi bilitythattheenterprisemay
be required to pay some amount.
9.The fee should be presented in the income statement based on its economic su bstance and nature.
Disclosure
10.All aspects of an arrangement that does not, in substance, involve a lease u nder IAS 17 should be considered
in determining the appropriate disclosures that are necessary to underst and the arrangement and the
accountingtreatmentadopted.Anenterpriseshoulddisclosethefollowi ngineachperiodthatanarrangement
exists:
(a) a description of the arrangement including:
(i) the underlying asset and any restrictions on its use;
(ii) the life and other significant terms of the arrangement;(iii)the transactions that are linked together, including any options; a nd
(b) theaccountingtreatmentappliedtoanyfeereceived,theamountrecog nisedasincomeintheperiod,and
the line item of the income statement in which it is included.
11.
The disclosures required in accordance with paragraph 10 of this interpre tation should be provided
individually for each arrangement or in aggregate for each class of arrang ement. A class is a grouping of
arrangements with underlying assets of a similar nature (e.g. power plant s).
Date of consensus: February 2000.
Effective date: this interpretation becomes effective on 31 December 200 1. Changes in accounting policies
should be accounted for according to the transition requirements of IAS 8. 46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-28
Business combinations — “date of exchange” and fair value of equity instru ments
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.Reference: IAS 22, business combinations (revised 1998).13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 413
Issue
1.An enterprise may issue its own equity instruments as purchase considerat ion in a business combination
accounted for as an acquisition under IAS 22. IAS 22.21 requires that an acq uisition be accounted for at its
cost,andthatequityinstrumentsissuedbytheacquirerbemeasuredatthe irfairvalueatthedateofexchange.
2.Ifequityinstrumentsissuedaspurchaseconsiderationarequotedinamar ketandtheirmarketpriceatthedate
of exchange is not a reliable indicator of their fair value, IAS 22.24 indic ates that price movements for a
reasonable period before and after the announcement of the terms of the acq uisition need to be considered.
3.The issues are:
(a) what is the “date of exchange” when determining the fair value of equity instruments issued as purchase
consideration in an acquisition;
(b) when is it appropriate to consider other evidence and valuation method s in addition to a published price
at the date of exchange of a quoted equity instrument; and
(c) whatinformationshouldbedisclosedwhenapublishedpriceofaquoted equityinstrumenthasnotbeen
used as the instruments’ fair value, and what information should be disclo sed when an equity instrument
does not have a published price.
4.IAS 22.65 requires the amount of an adjustment to the purchase considerati on contingent on one or more
future events to be included in the cost of an acquisition as at the date of ac quisition if the adjustment is
probableandtheamountcanbemeasuredreliably.IAS22.68requirestheco stofanacquisitiontobeadjusted
when a contingency affecting the amount of the purchase consideration is r esolved subsequent to the date of
acquisition. Consequently, this interpretation does not apply to equity instruments issued as adjustments to
thepurchaseconsiderationcontingentononeormorefutureevents,unles stheadjustmentsareprobableand
the amounts can be measured reliably as at the date of acquisition.
Consensus
5.When an acquisition is achieved in one exchange transaction (i.e. not in st ages), the “date of exchange” is the
date of acquisition; that is, the date when the acquirer obtains control ov er the net assets and operations of
the acquiree. When an acquisition is achieved in stages (e.g. successive s hare purchases), the fair value of the
equity instruments issued as purchase consideration at each stage should be determined at the date that each
individual investment is recognised in the financial statements of the ac quirer.
6.The published price at the date of exchange of a quoted equity instrument pr ovides the best evidence of the
instrument’sfairvalueandshouldbeused,exceptinrarecircumstances. Otherevidenceandvaluationmethods
shouldalsobeconsideredonlyintherarecircumstancewhenitcanbedemon stratedthatthepublishedprice
atthatdateisanunreliableindicator,andthattheotherevidenceandval uationmethodsprovideamorereliable
measure of the equity instrument’s fair value. The published price at the d ate of exchange is an unreliable
indicator only when it has been affected by an undue price fluctuation or a n arrowness of the market.
Disclosure
7.Whenapublishedpriceofanequityinstrumentissuedaspurchaseconsider ationexistsatthedateofexchange,
but has not been used as the instruments’ fair value, an enterprise should d isclose:
(a) that fact;
(b) the reasons why the published price is not the fair value of the equity in struments;414 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
(c) the method and significant assumptions applied in determining the fai r value; and
(d) theaggregateamountofthedifferencebetweenthepublishedpriceand theamountdeterminedtobethe
fair value of the equity instruments.
8.When an equity instrument issued as purchase consideration does not have a published price at the date of
exchange, an enterprise should disclose that fact and the method and signi ficant assumptions applied in
determining the fair value.
Date of consensus: February 2001.
Effectivedate:Thisinterpretationbecomeseffectiveforacquisitions giveninitialaccountingrecognitiononor
after 31 December 2001.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-29
Disclosure — service concession arrangements
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.
Reference: IAS 1, presentation of financial statements (revised 1997).
Issue
1.Anenterprise(theconcessionoperator)mayenterintoanarrangementwit hanotherenterprise(theconcession
provider)toprovideservicesthatgivethepublicaccesstomajoreconomi candsocialfacilities.Theconcession
provider may be a public or private sector enterprise, including a governm ental body. Examples of service
concessionarrangementsinvolvewatertreatmentandsupplyfacilities, motorways,carparks,tunnels,bridges,
airports and telecommunication networks. Examples of arrangements that are not service concession
arrangements include an enterprise outsourcing the operation of its inte rnal services (e.g. employee cafeteria,
building maintenance, and accounting or information technology functio ns).
2.Aserviceconcessionarrangementgenerallyinvolvestheconcessionprov iderconveyingfortheperiodofthe
concession to the concession operator:
(a) the right to provide services that give the public access to major econo mic and social facilities, and
(b) in some cases, the right to use specified tangible assets, intangible a ssets, and/or financial assets,
in exchange for the concession operator:
(a) committingtoprovidetheservicesaccordingtocertaintermsandcond itionsduringtheconcessionperiod,
and
(b) when applicable, committing to return at the end of the concession peri od the rights received at the
beginning of the concession period and/or acquired during the concession period.
3.Thecommoncharacteristicofallserviceconcessionarrangementsisthat theconcessionoperatorbothreceives
a right and incurs an obligation to provide public services.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 415
4.The issue is what information should be disclosed in the notes to the financ ial statements of a concession
operator and a concession provider.
5.Certain aspects and disclosures relating to some service concession arra ngements are already addressed by
existingInternationalAccountingStandards(e.g.IAS16appliestoacqu isitionsofitemsofproperty,plantand
equipment,IAS17appliestoleasesofassets,andIAS38appliestoacquisi tionsofintangibleassets).However,
a service concession arrangement may involve executory contracts that ar e not addressed in International
Accounting Standards, unless the contracts are onerous, in which case IAS 37 applies. Therefore, this
interpretation addresses additional disclosures of service concession arrangements.
Consensus
6.All aspects of a service concession arrangement should be considered in de termining the appropriate
disclosures in the notes to the financial statements. A concession operat or and a concession provider should
disclose the following in each period:
(a) a description of the arrangement;
(b) significanttermsofthearrangementthatmayaffecttheamount,timin gandcertaintyoffuturecashflows
(e.g. the period of the concession, repricing dates and the basis upon whic h repricing or renegotiation is
determined);
(c) the nature and extent (e.g. quantity, time period or amount as appropri ate) of:
(i) rights to use specified assets;(ii) obligations to provide or rights to expect provision of services;(iii)obligations to acquire or build items of property, plant and equipme nt;
(iv) obligations to deliver or rights to receive specified assets at the en d of the concession period;
(v) renewal and termination options; and(vi) other rights and obligations (e.g. major overhauls); and
(d) changes in the arrangement occurring during the period.
7.
Thedisclosuresrequiredinaccordancewithparagraph6ofthisinterpret ationshouldbeprovidedindividually
for each service concession arrangement or in aggregate for each class of s ervice concession arrangements. A
classisagroupingofserviceconcessionarrangementsinvolvingservice sofasimilarnature(e.g.tollcollections,
telecommunications and water treatment services).
Date of consensus: May 2001.
Effective date: this interpretation becomes effective on 31 December 200 1.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-30
Reporting currency — translation from measurement currency to presentat ion currency
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.Reference: IAS 21, the effects of changes in foreign exchange rates (revis ed 1993), IAS 29, financial reporting in
hyperinflationary economies (reformatted 1994).416 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
Issue
1.SIC-19,reportingcurrency—measurementandpresentationoffinancials tatementsunderIAS21andIAS29,
addressestheissueofhowanenterprisetranslatesitsfinancialstateme ntsfromacurrencyusedformeasuring
items in its financial statements (measurement currency) to another curr ency for presentation purposes
(presentationcurrency).SIC-19doesnotspecifythemethodoftranslati ontobeapplied,butdoesrequirethat
the translation method used not lead to reporting in a manner that is incons istent with the measurement of
items in the financial statements.
2.SIC-19.15 elaborates on the requirement in the example of a Russian enterp rise using the Russian rouble as
an appropriate measurement currency and translating its financial state ments to another currency (e.g. euro)
for presentation. It states that the method applied to translate from Russ ian roubles to euro should not, for
example, have the effect of substituting the euros for the Russian rouble a s the measurement currency.
3.IAS21.5statesthatthestandarddoesnotdealwiththerestatementofanen terprise’sfinancialstatementsfrom
its reporting currency into another currency for the convenience of users accustomed to that currency or for
similar purposes.
4.The issues are:
(a) how items in financial statements should be translated from a measurem ent currency to a presentation
currencywhenthefinancialstatementsarepresentedinacurrencyothert hanthemeasurementcurrency
determined under SIC-19; and
(b) what information should be disclosed:
(i) when financial statements are presented in a currency other than the me asurement currency
determined under SIC-19; or
(ii) when additional information not required by International Accounti ng Standards is displayed in
financial statements and in a currency, other than the currency used in pre senting the financial
statements, as a convenience to certain users.
5.This interpretation is to be read and applied in conjunction with the requi rements of SIC-19. The term
“financial statements” encompasses consolidated financial statements as stated in IAS 27.4.
Consensus
6.Whenfinancialstatementsarepresentedinacurrencyotherthanthemeasu rementcurrencydeterminedunder
SIC-19,andthemeasurementcurrencyisnotthecurrencyofahyperinflati onaryeconomy,therequirements
of SIC-19.9 should be applied as follows:
(a) assetsandliabilitiesforallbalancesheetspresented(i.e.includi ngcomparatives)shouldbetranslatedatthe
closing rate existing at the date of each balance sheet presented;
(b) incomeandexpenseitemsforallperiodspresented(i.e.includingcom paratives)shouldbetranslatedatthe
exchangeratesexistingatthedatesofthetransactionsoraratethatappr oximatestheactualexchangerates;
(c) equityitemsotherthanthenetprofitorlossfortheperiodthatisincl udedinthebalanceofaccumulated
profit or loss should be translated at the closing rate existing at the date of each balance sheet presented;
and
(d) all exchange differences resulting from translation in accordance wi th paragraphs 6(a) to (c) of this
interpretation should be recognised directly in equity.
7.Whenfinancialstatementsarepresentedinacurrencyotherthanthemeasu rementcurrencydeterminedunder
SIC-19, and the measurement currency is the currency of a hyperinflationa ry economy, the requirements of
SIC-19.9 should be applied as follows:
(a) assets, liabilities and equity items for all balance sheets presented (i.e. including comparatives) should be
translated at the closing rate existing at the date of the most recent balan ce sheet presented; and
(b) incomeandexpenseitemsforallperiodspresented(i.e.includingcom paratives)shouldbetranslatedatthe
closing rate existing at the end of the most recent period presented.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 417
Disclosure
8.Whenfinancialstatementsarepresentedinacurrencyotherthanthemeasu rementcurrencydeterminedunder
SIC-19, an enterprise should state the fact that the measurement currency reflects the economic substance of
the underlying events and circumstances of the enterprise, in addition to disclosing the information required
by SIC-19.10.
9.Whenfinancialstatementsarepresentedinacurrencyotherthanthemeasu rementcurrencydeterminedunder
SIC-19, and the measurement currency is the currency of a hyperinflationa ry economy, an enterprise should
disclosetheclosingexchangeratesbetweenthemeasurementcurrencyand thepresentationcurrencyexisting
at the date of each balance sheet presented, in addition to the disclosures required by IAS 29.39.
10.When additional information not required by International Accounting St andards is displayed in financial
statements and in a currency, other than the currency used in presenting th e financial statements, as a
convenience to certain users, an enterprise should,
(a) clearly identify the information as supplementary information to dis tinguish it from the information
required by International Accounting Standards and translated in accord ance with paragraphs 6 or 7 of
this interpretation (whichever is applicable),
(b) disclosethemeasurementcurrencyusedtopreparethefinancialstate mentsandthemethodoftranslation
used to determine the supplementary information displayed,
(c) disclose the fact that the measurement currency reflects the economic substance of the underlying events
and circumstances of the enterprise and that the supplementary informati on is displayed in another
currency for convenience purposes only, and
(d) disclose the currency in which the supplementary information is displ ayed.
The statement required by paragraphs 8 and 10(c) is required in consolidat ed financial statements in all
circumstances other than when the measurement currencies of the enterpri ses in the group and the
presentationcurrency,andwhendisplayingadditionalinformation,the displaycurrency,arethesame.Forthe
purpose of the disclosure requirements in paragraphs 9 and 10(b) in consol idated financial statements, the
references to measurement currency are to the measurement currency of the parent.
Date of consensus: May 2001.
Effectivedate:thisinterpretationbecomeseffectiveforannualfinanc ialperiodsbeginningonorafter1January
2002. Changes in accounting policies should be accounted for according to the transition requirements of
IAS 8.46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-31
Revenue — barter transactions involving advertising services
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.Reference: IAS 18, revenue (revised 1993).
Issue
1.
An enterprise (seller) may enter into a barter transaction to provide adve rtising services in exchange for
receivingadvertisingservicesfromitscustomer(customer).Advertise mentsmaybedisplayedontheInternet
orpostersites,broadcastonthetelevisionorradio,publishedinmagazi nesorjournals,orpresentedinanother
medium.418 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
2.Insomecases,nocashorotherconsiderationisexchangedbetweentheente rprises.Insomeothercases,equal
or approximately equal amounts of cash or other consideration are also exc hanged.
3.A seller that provides advertising services in the course of its ordinary a ctivities recognises revenue under
IAS 18 from a barter transaction involving advertising when, amongst othe r criteria, the services exchanged
are dissimilar (IAS 18.12) and the amount of revenue can be measured reliab ly (IAS 18.20(a)). This
interpretationonlyappliestoanexchangeofdissimilaradvertisingser vices.Anexchangeofsimilaradvertising
services is not a transaction that generates revenue under IAS 18.
4.The issue is under what circumstances can a seller reliably measure revenu e at the fair value of advertising
services received or provided in a barter transaction.
Consensus
5.Revenue from a barter transaction involving advertising cannot be measur ed reliably at the fair value of
advertisingservicesreceived.However,asellercanreliablymeasurere venueatthefairvalueoftheadvertising
services it provides in a barter transaction, by reference only to non-bar ter transactions that:
(a) involve advertising similar to the advertising in the barter transact ion;
(b) occur frequently;
(c) representapredominantnumberoftransactionsandamountwhencompar edtoalltransactionstoprovide
advertising that is similar to the advertising in the barter transaction;
(d) involve cash and/or another form of consideration (e.g. marketable se curities, non-monetary assets, and
other services) that has a reliably measurable fair value; and
(e) do not involve the same counterparty as in the barter transaction.
Date of consensus: May 2001.Effective date: this interpretation becomes effective on 31 December 200 1. Changes in accounting policies
should be accounted for according to the transition requirements of IAS 8. 46.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-32
Intangible assets — web site costs
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.Reference: IAS 38, intangible assets.
Issue
1.
Anenterprisemayincurinternalexpenditureonthedevelopmentandopera tionofitsownwebsiteforinternal
orexternalaccess.Awebsitedesignedforexternalaccessmaybeusedforv ariouspurposessuchastopromote
and advertise an enterprise’s own products and services, provide electro nic services, and sell products and
services. A web site designed for internal access may be used to store compa ny policies and customer details,
and search relevant information.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 419
2.The stages of a web site’s development can be described as follows:
(a) planning — includes undertaking feasibility studies, defining objec tives and specifications, evaluating
alternatives and selecting preferences;
(b) application and infrastructure development — includes obtaining a do main name, purchasing and
developing hardware and operating software, installing developed appli cations and stress testing;
(c) graphical design development — includes designing the appearance of w eb pages;
(d) contentdevelopment—includescreating,purchasing,preparingandu ploadinginformation,eithertextual
or graphical in nature, on the web site before the completion of the web site ’s development. This
informationmayeitherbestoredinseparatedatabasesthatareintegrate dinto(oraccessedfrom)theweb
site or coded directly into the web pages.
3.Oncedevelopmentofawebsitehasbeencompleted,theoperatingstagebegi ns.Duringthisstage,anenterprise
maintains and enhances the applications, infrastructure, graphical des ign and content of the web site.
4.Whenaccountingforinternalexpenditureonthedevelopmentandoperatio nofanenterprise’sownwebsite
for internal or external access, the issues are:
(a) whetherthewebsiteisaninternallygeneratedintangibleassetthati ssubjecttotherequirementsofIAS38;
and
(b) the appropriate accounting treatment of such expenditure.
5.Thisinterpretationdoesnotapplytoexpenditureonpurchasing,develop ing,andoperatinghardware(e.g.web
servers, staging servers, production servers and Internet connections) of a web site. Such expenditure is
accounted for under IAS 16, property, plant and equipment (revised 1998). Additionally, when an enterprise
incurs expenditure on an Internet service provider hosting the enterpris e’s web site, the expenditure is
recognised as an expense under IAS 8.7 and the framework when the services a re received.
6.IAS38doesnotapplytointangibleassetsheldbyanenterpriseforsaleint heordinarycourseofbusiness(see
IAS 2, inventories, and IAS 11, construction contracts) or leases that fal l within the scope of IAS 17, leases
(revised1997).Accordingly,thisinterpretationdoesnotapplytoexpen ditureonthedevelopmentoroperation
ofawebsite(orwebsitesoftware)forsaletoanotherenterprise.Whenawe bsiteisleasedunderanoperating
lease, the lessor applies this interpretation. When a web site is leased un der a finance lease, the lessee applies
this interpretation after initial recognition of the leased asset.
Consensus
7.Anenterprise’sownwebsitethatarisesfromdevelopmentandisforintern alorexternalaccessisaninternally
generated intangible asset that is subject to the requirements of IAS 38.
8.Awebsitearisingfromdevelopmentshouldberecognisedasanintangiblea ssetif,andonlyif,inadditionto
complyingwiththegeneralrequirementsdescribedinIAS38.19forrecogn itionandinitialmeasurement,an
enterprise can satisfy the requirements in IAS 38.45. In particular, an en terprise may be able to satisfy the
requirement to demonstrate how its web site will generate probable future economic benefits under
IAS38.45(d)when,forexample,thewebsiteiscapableofgeneratingreven ues,includingdirectrevenuesfrom
enabling orders to be placed. An enterprise is not able to demonstrate how a web site developed solely or
primarilyforpromotingandadvertisingitsownproductsandserviceswil lgenerateprobablefutureeconomic
benefits, and consequently all expenditure on developing such a web site s hould be recognised as an expense
when incurred.420 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
9. Any internal expenditure on the development and operation of an enterpr ise’s own web site should be
accounted for in accordance with IAS 38. The nature of each activity for whi ch expenditure is incurred (eg
trainingemployeesandmaintainingthewebsite)andthewebsite’sstageo fdevelopmentorpost-development
shouldbeevaluatedtodeterminetheappropriateaccountingtreatment(a dditionalguidanceisprovidedinthe
appendix to this interpretation). For example:
(a) the planning stage is similar in nature to the research phase in IAS 38.4 2 to 44. Expenditure incurred in
this stage should be recognised as an expense when it is incurred;
(b) the application and infrastructure development stage, the graphic de sign stage and the content
development stage, to the extent that content is developed for purposes ot her than to advertise and
promote an enterprise’s own products and services, are similar in nature t o the development phase in
IAS38.45to52.Expenditureincurredinthesestagesshouldbeincludedin thecostofawebsiterecognised
as an intangible asset in accordance with paragraph 8 of this interpretati on when the expenditure can be
directly attributed, or allocated on a reasonable and consistent basis, t o preparing the web site for its
intended use. For example, expenditure on purchasing or creating content (other than content that
advertises and promotes an enterprise’s own products and services) speci fically for a web site, or
expenditure to enable use of the content (e.g. a fee for acquiring a licence to reproduce) on the web site,
should be included in the cost of development when this condition is met. Ho wever, in accordance with
IAS 38.59, expenditure on an intangible item that was initially recognise d as an expense in previous
financial statements should not be recognised as part of the cost of an inta ngible asset at a later date (e.g.
when the costs of a copyright have been fully amortised, and the content is s ubsequently provided on a
web site);
(c) expenditureincurredinthecontentdevelopmentstage,totheextentt hatcontentisdevelopedtoadvertise
and promote an enterprise’s own products and services (e.g. digital photo graphs of products), should be
recognisedasanexpensewhenincurredinaccordancewithIAS38.57(c).Fo rexample,whenaccounting
forexpenditureonprofessionalservicesfortakingdigitalphotographs ofanenterprise’sownproductsand
for enhancing their display, expenditure should be recognised as an expen se as the professional services
are received during the process, not when the digital photographs are disp layed on the web site;
(d) theoperatingstagebeginsoncedevelopmentofawebsiteiscomplete.E xpenditureincurredinthisstage
should be recognised as an expense when it is incurred unless it meets the cr iteria in IAS 38.60.
10.Awebsitethatisrecognisedasanintangibleassetunderparagraph8ofthi sinterpretationshouldbemeasured
afterinitialrecognitionbyapplyingtherequirementsofIAS38.63to78. Thebestestimateofawebsite’suseful
life should be short.
Date of consensus: May 2001.
Effective date: This interpretation becomes effective on 25 March 2002. T he effects of adopting this
interpretation should be accounted for using the transition requirement s of IAS 38.118 to 121. Therefore,
whenawebsitedoesnotmeetthecriteriaforrecognitionasanintangiblea sset,butwaspreviouslyrecognised
as an asset, the item should be derecognised at the date when this interpret ation becomes effective. When a
web site exists and the expenditure to develop it meets the criteria for rec ognition as an intangible asset, but
wasnotpreviouslyrecognisedasanasset,theintangibleassetshouldnot berecognisedatthedatewhenthis
interpretation becomes effective. When a web site exists and the expendit ure to develop it meets the criteria
forrecognitionasanintangibleasset,waspreviouslyrecognisedasanas setandinitiallymeasuredatcost,the
amount initially recognised is deemed to have been properly determined.
STANDING INTERPRETATIONS COMMITTEE INTERPRETATION SIC-33
Consolidation and equity method — potential voting rights and allocation of ownership interests
Paragraph 11 of IAS 1 (revised 1997), presentation of financial statement s, requires that financial statements should
notbedescribedascomplyingwithInternationalAccountingStandardsun lesstheycomplywithalltherequirements
ofeachapplicablestandardandeachapplicableinterpretationissuedby theStandingInterpretationsCommittee.SIC
interpretations are not expected to apply to immaterial items.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 421
Reference: IAS 27, consolidated financial statements and accounting for investments in subsidiaries (reformatted
1994),IAS28,accountingforinvestmentsinassociates(revised2000),I AS39,financialinstruments:recognitionand
measurement (revised 2000).
Issue
1.Anenterprisemayownsharewarrants,sharecalloptions,debtorequityin strumentsthatareconvertibleinto
ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the
enterprise voting power or reduce another party’s voting power over the fi nancial and operating policies of
another enterprise (potential voting rights).
2.The issues are:
(a) when assessing whether an enterprise controls or significantly influ ences another enterprise according to
IAS 27 and IAS 28 respectively,
(i) whether the existence and effect of potential voting rights should be c onsidered, in addition to the
factors described in IAS 27.12 and IAS 28.4 and 5; and
(ii) if so, whether any other facts and circumstances related to potential voting rights should be assessed;
(b) whether the proportion allocated to the parent and minority interests in preparing consolidated financial
statements under IAS 27, and the proportion allocated to an investor that a ccounts for its investment in
an associate using the equity method under IAS 28, should be determined bas ed on present ownership
interests or ownership interests that would be held if the potential votin g rights were exercised or
converted; and
(c) the appropriate accounting treatment for potential voting rights unt il they are exercised or expire.
Consensus
3.The existence and effect of potential voting rights that are presently (i. e. currently) exercisable or presently
convertibleshouldbeconsidered,inadditiontothefactorsdescribedin IAS27.12andIAS28.4and5,when
assessing whether an enterprise controls (as defined in IAS 27.6) or signi ficantly influences (as defined in
IAS28.3)anotherenterprise.Allpotentialvotingrightsshouldbeconsi dered,includingpotentialvotingrights
held by other enterprises. Potential voting rights are not presently exer cisable or presently convertible when,
forexample,theycannotbeexercisedorconverteduntilafuturedateorup ontheoccurrenceofafutureevent.
4.All facts and circumstances that affect potential voting rights consider ed in accordance with paragraph 3 of
this interpretation should be examined, except the intention of manageme nt and the financial capability to
exerciseorconvert.Otherfactsthatshouldbeconsideredincludetheter msofexerciseofthepotentialvoting
rightsandpossiblelinkedtransactions.(AppendixAprovidesillustrat ionsofapplicationofthisinterpretation.)
5.The proportion allocated to the parent and minority interests in preparin g consolidated financial statements
under IAS 27, and the proportion allocated to an investor that accounts for its investment using the equity
methodunderIAS28,shouldbedeterminedbasedsolelyonpresentownershi pinterests.Anenterprisemay,
in substance, have a present ownership interest when for example, it sells and simultaneously agrees to
repurchase, but does not lose control of, access to economic benefits asso ciated with an ownership interest.
Inthiscircumstance,theproportionallocatedshouldbedeterminedtaki ngintoaccounttheeventualexercise
ofpotentialvotingrightsandotherderivativesthat,insubstance,pres entlygiveaccesstotheeconomicbenefits
associatedwithanownershipinterest.(AppendixBprovidesillustratio nsofapplicationofthisinterpretation.)422 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 13/Vol. 32
6. When applying the consolidation and the equity method of accounting, in struments containing potential
voting rights should be accounted for as part of the investment in a subsidi ary and the investment in an
associaterespectivelyonlywhentheproportionofownershipinterestsi sallocatedbytakingintoaccountthe
eventual exercise of those potential voting rights in accordance with par agraph 5 of this interpretation. In all
other circumstances, instruments containing potential voting rights sh ould be accounted for in accordance
with IAS 39.
Date of consensus: August 2001.Effectivedate:Thisinterpretationbecomeseffectiveforannualfinanc ialperiodsbeginningonorafter1January
2002. Changes in accounting policies should be accounted for according to the transition requirements of
IAS 8.46.13/Vol. 32 MT Il-Ġurnal Uffiċjali ta’ l-Unjoni Ewropea 423