IFRS Insights Topics Including General Issues

2.
6 Business combinations (Insights into IFRS)
Insights into IFRS

jurisdictional
NOW, MORE THAN EVER
ABOUT THIS PUBLICATION
REFERENCES
ACKNOWLEDGEMENTS
1. BACKGROUND
2. GENERAL ISSUES
3. SPECIFIC STATEMENT OF FINANCIAL POSITION ITEMS
4. SPECIFIC STATEMENT OF COMPREHENSIVE INCOME ITEMS
5. SPECIAL TOPICS
6. FIRST-TIME ADOPTION OF IFRS
7. FINANCIAL INSTRUMENTS
8. INSURANCE
Appendix I
Appendix II
© 2013 KPMG IFRG Limited, a U.K. company, limited by guarantee. All rights reserved.
Page 1 / 375
2.6 Business combinations (Insights into IFRS)
NOW, MORE THAN EVER

This last year has seen a shift in focus within the world of IFRS. In its first decade, the IASB prioritised the adoption of
IFRS, including convergence projects with national standard setters. Now, with new leadership looking beyond the
completion of its major projects, and with the finalisation of the IFRS Foundation's strategy review, there is a growing focus
on maintaining IFRS for existing preparers and users.
This shift coincides with a general expectation of greater consistency as IFRS has matured. Now, more than ever,
practitioners need clear and insightful guidance to help them steer the right course.
Insights into IFRS offers just this kind of guidance. It forms part of a suite of KPMG publications aimed at helping you cut
through the increasing complexity of international standards. Building on previous editions, we continue to combine
experience from around the KPMG network with our most up-to-date thinking, and bring clarity to the interpretation and
application of IFRS.
KPMG International Standards Group
Page 2 / 375
ABOUT THIS PUBLICATION
ORGANISATION OF THE TEXT
STANDARDS AND INTERPRETATIONS
Insights into IFRS, now in its ninth edition, emphasises the application of IFRS in practice and explains the conclusions that
we have reached on many interpretative issues. Based on actual questions that have arisen in practice around the world,
Insights into IFRS includes many illustrative examples to elaborate or clarify the practical application of IFRS.
Although it includes an overview of the requirements of IFRS, Insights into IFRS is an interpretative guide to IFRS that builds
on those standards and should be read alongside them.
Page 3 / 375
ORGANISATION OF THE TEXT

This publication is organised into topics and is presented in two volumes.
Volume 1 includes separate sections dealing with:
• general issues such as business combinations;
• specific items in the statement of financial position and statement of comprehensive income;
• special topics such as leases; and
• issues relevant to those making the transition to IFRS.
Volume 2 includes separate sections dealing with:
• financial instruments; and
• insurance contracts.
Paragraphs dealing with separate financial statements are indicated by an in the outer margin.
Appendix II includes a table of concordance primarily showing where guidance that was included in the eighth edition has
moved. The table of concordance does not include changes to paragraph numbers made as a result of forthcoming
requirements, changes in the format of examples or editorial amendments.
Page 4 / 375
STANDARDS AND INTERPRETATIONS

This ninth edition of Insights into IFRS reflects IFRS in issue at 1 August 2012. The guidance differentiates between
currently effective requirements, forthcoming requirements and possible future developments.
Page 5 / 375
Currently effective requirements

The main text is based on those IFRSs that are required to be applied by an entity with an annual reporting period
beginning on 1 January 2012 - i.e. an entity with an annual reporting period ending on 31 December 2012. These
requirements are referred to as the currently effective requirements.
A list of the standards and interpretations that comprise the currently effective requirements, including the latest
amendments to those standards and interpretations, is included in Appendix I.
This publication does not consider the requirements of IAS 26 Accounting and Reporting by Retirement Benefit Plans. In
addition, this publication does not address the requirements included in the IFRS for Small and Medium-sized Entities (IFRS
for SMEs), which was published in July 2009, other than in a brief overview of the IFRS for SMEs in chapter 1.1.
Page 6 / 375
Forthcoming requirements
When a currently effective requirement will be changed by a new requirement that has been issued at 1 August 2012, but is
not yet effective for an annual reporting period ending on 31?December 2012, it is marked with a # and the impact of this
forthcoming requirement is explained in accompanying boxed text.
In addition, the following chapters relate entirely to forthcoming requirements.
2.4A IFRS 13 Fair Value Measurement
2.5A IFRS 10 Consolidated Financial Statements
3.6A IFRS 11 Joint Arrangements
7A IFRS 9 Financial Instruments
A list of standards and interpretations that comprise forthcoming requirements is included in Appendix I.
Page 7 / 375
Future developments
For some topics, we anticipate changes to IFRS in issue at 1 August 2012 - e.g. as a result of an IASB project. When a
significant change to the currently effective or forthcoming requirements is expected, it is marked with an * as an area that
may be subject to future developments; a brief overview of the relevant project(s) is then provided at the end of that
chapter.
Page 8 / 375
KEEPING YOU INFORMED

This publication has been produced by the KPMG International Standards Group. Visit www.kpmg.com/ifrs to keep up to
date with the latest developments in IFRS and browse our suite of publications. Whether you are new to IFRS or a current
user of IFRS, you can find digestible summaries of recent developments, detailed guidance on complex requirements, and
practical tools such as illustrative financial statements and checklists. For a local perspective, follow the links to the IFRS
resources available from KPMG member firms around the world.
All of these publications are relevant for those involved in external IFRS reporting. The In the Headlines series provides a
high level briefing for audit committees and boards.
Your need Publication series Purpose
Briefing In the Headlines Provides a high-level summary of significant accounting, auditing

and governance changes together with their impact on entities.
IFRS Newsletters Highlights recent IASB and the FASB discussions on the financial
instruments, insurance, leases and revenue projects. Includes an
overview, an analysis of the potential impact of decisions, current
status and anticipated timeline for completion.
The Balancing Items Focuses on narrow-scope amendments to IFRS.
New on the Horizon Considers the requirements of due process documents such as
exposure drafts and provides KPMG's insight. Also available for
specific sectors.
First Impressions Considers the requirements of new pronouncements and highlights

the areas that may result in a change in practice. Also available for
specific sectors.
Application IFRS Practice Issues Addresses practical application issues that an entity may encounter
issues when applying IFRS. Also available for specific sectors.
IFRS Handbooks Includes extensive interpretative guidance and illustrative examples

to elaborate or clarify the practical application of a standard.
Interim and Illustrative financial Illustrates one possible format for financial statements prepared
annual statements under IFRS, based on a fictitious multinational corporation.
reporting Available for annual and interim periods, and for specific sectors.
Disclosure checklist Identifies the disclosures required for currently effective

requirements for both annual and interim periods.
GAAP IFRS compared to US Highlights significant differences between IFRS and US GAAP. The
comparison GAAP focus is on recognition, measurement and presentation; therefore,
disclosure differences are generally not discussed.
Sector- IFRS Sector Newsletters Provides a regular update on accounting and regulatory
specific issues developments that directly impact specific sectors.
Page 9 / 375
Application of IFRS Illustrates how entities account for and disclose sector-specific
issues in their financial statements.
Accounting under IFRS Focuses on the practical application issues faced by entities in
specific sectors and explores how they are addressed in practice.
Impact of IFRS Provides a high-level introduction to the key IFRS accounting issues
for specific sectors and discusses how the transition to IFRS will
affect an entity operating in that sector.
For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KPMG's
Accounting Research Online. This web-based subscription service can be a valuable tool for anyone who wants to stay
informed in today's dynamic environment. For a free 15-day trial, go to aro.kpmg.com and register today.
Page 10 / 375
REFERENCES
KEEPING YOU INFORMED
Currently effective The overviews of the current requirements of IFRS and our interpretations of them are
requirements referenced to 2012 IFRS Consolidated volume without early application (‘Blue Book’).
References in square brackets after the text identify the relevant paragraphs of the
standards or other literature - e.g. IFRS 1.7 is paragraph 7 of IFRS 1; and IAS 18.IE3 is
paragraph 3 of the IAS 18 illustrative examples.
Forthcoming The forthcoming requirements of IFRS are referenced to 2012 IFRS Consolidated volumes
requirements with full early application ('Red Book').
When an 'R' follows the number of the standard, it indicates a reference to forthcoming
requirements of existing standards - e.g. IAS 19R.34 is paragraph 34 of IAS 19 (2011).
IFRS Interpretations References to the IFRS Interpretations Committee decisions and IASB tentative decisions,
Committee decisions addressed in their publications IFRIC Update and IASB Update, respectively, are also
and IASB tentative indicated - e.g. IU 03-11 is IFRIC Update March 2011; and BU 05-09 is IASB Update May
decisions 2009.
Page 11 / 375
ACKNOWLEDGEMENTS
KPMG MEMBER FIRMS' CONTRIBUTORS
PANEL OF REVIEWERS
This publication was made possible by the invaluable input of many people working in KPMG member firms worldwide. The
overview of the requirements of IFRS and the interpretative positions described reflect the work of both current and former
members of the KPMG International Standards Group, for which the authors and editors are grateful.
Current members of the International Standards Group and a panel of reviewers from KPMG member firms around the
world generously contributed their time for exhaustive and challenging reviews of this edition. A list of contributors to this
edition is included below.
Page 12 / 375
KPMG MEMBER FIRMS' CONTRIBUTORS
Page 13 / 375
Principal editors
Suzanne Arnold United Kingdom
Deborah Chandler United Kingdom
Neil Fanning United Kingdom
Irina Ipatova United Kingdom
Alistair South United Kingdom
Page 14 / 375
Authors and principal contributors

Sheri Anderson United States
Ewa Bialkowska United Kingdom
Darryl Briley United States
Kim Bromfield South Africa
Jim Calvert Ireland
Ross Collins United States
Ben Doctor Australia
Phil Dowad Canada
Egbert Eeftink The Netherlands
Brandon Gardner United States
Ashish Gupta India
Danielle Handlan United States
Yoshiaki Hasegawa Japan
Seung Im (Celine) Hyun Korea (Republic of)
Anil Jobanputra India
Fabian Junqueira Sousa Brazil
Joachim Kölschbach Germany
Silvie Koppes The Netherlands
Katja van der Kuij-Groenberg The Netherlands
Wolfgang Laubach Germany
David Littleford United Kingdom
Annie Mersereau France
Mike Metcalf United Kingdom
Astrid Montagnier France
Catherine Morley Hong Kong
Paul Munter United States
Brian O'Donovan United Kingdom
Daniel O'Donovan Ireland
Toshihiro Ozawa Japan
Nirav Patel India
Kris Peach Australia
Page 15 / 375
Lynn Pearcy United Kingdom

Margarita Perez Rodriguez Argentina
Nicolle Pietsch Germany
David Rizik United States
Julie Santoro United Kingdom
Thomas Schmid Switzerland
Andrea Schriber Switzerland
Robert Sledge United States
Richard Smith Canada
Chris Spall United Kingdom
Sze Yen Tan Singapore
Jim Tang Hong Kong
Pamela Taylor United Kingdom
Enrique Tejerina United States
Mary Tokar United States
Andrew Vials United Kingdom
Anthony Voigt Australia
David Ward United Kingdom
Page 16 / 375
PANEL OF REVIEWERS
Page 17 / 375
IFRS Panel
Reinhard Dotzlaw Canada
Ryoji Fujii Japan
Ramon Jubels Brazil
Simon Lambert Singapore
Michael Sten Larsen Denmark
Reyaz Mihular MESA
Carmel O'Rourke Czech Republic
Emmanuel Paret France
Kris Peach Australia
Mary Tokar (Global leader - Standard setters & regulatory liaison) United States
Mark Vaessen (Global IFRS network leader) United Kingdom
Andrew Vials United Kingdom
Page 18 / 375
Business Combinations and Consolidation Topic Team

Mahesh Balasubramanian Bahrain
Peter Carlson Australia
Steven Douglas Canada
Ramon Jubels Brazil
Wincey Lam Hong Kong
Steve McGregor South Africa
Mike Metcalf (Deputy leader) United Kingdom
Paul Munter (Leader) United States
Claus Nielsen Russia
Emmanuel Paret France
Julie Santoro United Kingdom
Jim Tang Hong Kong
Page 19 / 375
Employee Benefits Topic Team

Kees Bergwerff The Netherlands
Yusuf Hassan MESA
Jeffrey Jones United States
Gale Kelly Canada
Michael Sten Larsen Denmark
Ralph Menschel Mexico
Annie Mersereau (Deputy leader) France
Takanobu Miwa Japan
Lynn Pearcy (Leader) United Kingdom
Mary Tokar United States
Sanel Tomlinson New Zealand
Page 20 / 375
Financial Instruments Topic Team

Marco Andre Almeida Brazil
Ewa Bialkowska United Kingdom
Jean-Francois Dande France
Terry Harding United Kingdom
Caron Hughes Hong Kong
Gale Kelly Canada
Marina Malyutina Russia
Chris Spall (Deputy leader) United Kingdom
Patricia Stebbens Australia
Enrique Tejerina (Deputy leader) United States
Andrew Vials (Leader) United Kingdom
Venkataramanan Vishwanath India
Danny Vitan Israel
Vanessa Yuill South Africa
Page 21 / 375
Income Taxes Topic Team

Syed Anjum Pakistan
Karel Charvat Czech Republic
Jon Fehleison United States
Ryoji Fujii Japan
Benoit Lebrun France
Rebecca Mak China
Winfried Melcher Germany
Cheryl Robinson Canada
Thomas Schmid (Leader) Switzerland
Tara Smith South Africa
Jim Tang (Deputy leader) Hong Kong
Page 22 / 375
Insurance Contracts Topic Team

Darryl Briley (Deputy leader) United States
Gerdus Dixon South Africa
Bhavesh Gandhi Kuwait
Jeremy Hoon Singapore
Joachim Kölschbach (Leader) Germany
Viviane Leflaive France
Csilla Leposa Hungary
Luciene Magalhaes Brazil
Neil Parkinson Canada
Paul Ruiz Australia
Phil Smart United Kingdom
Chris Spall United Kingdom
Page 23 / 375
Leases Topic Team

Kimber Bascom United States
Archana Bhutani India
Judit Boros Hungary
Úna Curtis Ireland
Heather De Jongh South Africa
Karine Dupre France
Colin Graham United Kingdom
Wolfgang Laubach (Leader) Germany
Sylvie Leger Canada
Mun Wai Lo Singapore
Brian O'Donovan United Kingdom
Kris Peach (Deputy leader) Australia
Beth Zhang China
Page 24 / 375
Presentation Topic Team

Kim Bromfield (Deputy leader) South Africa
Matthew Cook Russia
Holger Erchinger United States
Se Bong Hur Korea (Republic of)
Gabriela Kegalj Canada
Wietse Koster The Netherlands
David Littleford (Leader) United Kingdom
Søren Kok Olsen Denmark
Lukas Marty Switzerland
Ruchi Rastogi India
Danilo Simoes Brazil
Kensuke Sodekawa Japan
Jim Tang Hong Kong
Sanel Tomlinson New Zealand
Page 25 / 375
Revenue Recognition and Provisions Topic Team

Riaan Davel South Africa
Phil Dowad (Leader) Canada
Kim Heng Australia
Graciela Laso Argentina
Vijay Mathur India
Catherine Morley (Deputy leader) Hong Kong
Brian O'Donovan (Deputy leader) United Kingdom
Carmel O'Rourke Czech Republic
Thomas Schmid Switzerland
Sachiko Tsujino Japan
Riccardo Zeni Italy
Page 26 / 375
Valuations and Impairment Topic Team

Cyrus Balsara MESA
Jim Calvert Ireland
Marc Castedello Germany
Robert de Virion Poland
Egbert Eeftink (Leader) The Netherlands
Raphael Jacquemard France
Reinhard Klemmer Singapore
Sylvie Leger Canada
Peter Lyster United States
Marcus McArdle Australia
Julie Santoro (Deputy leader) United Kingdom
Elizabeth Sherratt South Africa
Kuldip Singh Panama
Sharon Todd United States
Orazio Vagnozzi Italy
Thanks to Yizhen (Carol) Hu and Derek White from Babson College (USA) for their assistance.
Page 27 / 375
1. BACKGROUND
1.1 Introduction
1.2 The Conceptual Framework
Page 28 / 375
1.1 Introduction
(IFRS Foundation Constitution, IASB Due Process Handbook, IFRIC Due Process Handbook, Preface to IFRSs, IAS 1)
OVERVIEW OF CURRENTLY EFFECTIVE REQUIREMENTS
International • 'IFRS' is the term used to indicate the whole body of IASB
FinancialReporting authoritative literature. [1.1.80.10]
Standards
• IFRS is designed for use by profit-oriented entities. [1.1.80.30]
• Both the bold and plain-type paragraphs of IFRS have equal
authority. [1.1.80.50]
Compliance with • Any entity claiming compliance with IFRS complies with all
IFRS standards and interpretations, including disclosure requirements,
and makes an explicit and unreserved statement of compliance with
IFRS. [1.1.120.10]
• The overriding requirement of IFRS is for the financial statements to
give a fair presentation (or a true and fair view). [1.1.130.10]
CURRENTLY EFFECTIVE REQUIREMENTS

This publication reflects IFRS in issue at 1 August 2012. The currently effective requirements cover annual periods
beginning on 1 January 2012. The requirements related to this topic are derived from the IFRS Foundation Constitution,
IASB Due Process Handbook, IFRIC Due Process Handbook, Preface to IFRSs and IAS 1 Presentation of Financial
Statements.
FORTHCOMING REQUIREMENTS AND FUTURE DEVELOPMENTS

When a currently effective requirement will be changed by a new requirement that is issued but is not yet effective, it is
marked with a # as a forthcoming requirement and the impact of the change is explained in the accompanying boxed
text. The forthcoming requirements related to this chapter are derived from the Monitoring Board's review of the IFRS
Foundation's governance structure. A brief outline of the impact of that review is given in 1.1.45.
When a significant change to the currently effective or forthcoming requirements is expected, it is marked with an * as an
area that may be subject to future developments and a brief outline of the relevant projects is given in 1.1.170.
Page 29 / 375
1.1.05 INTERNATIONAL FINANCIAL REPORTING STANDARDS

FOUNDATION
1.1.05.10 The objectives of the International Financial Reporting Standards Foundation (IFRS Foundation), as stated in its
constitution, are to:
• develop, in the public interest, a single set of high quality, understandable, enforceable and
globally accepted financial reporting standards based on clearly articulated principles that require
high quality, transparent and comparable information in financial statements and other financial
reporting to help investors, other participants in the world's capital markets and other users of
financial information to make economic decisions;
• promote the use and rigorous application of those standards;
• consider the needs of a range of sizes and types of entities operating in diverse economic
settings; and
• promote and facilitate the adoption of IFRS by convergence of national accounting standards with
IFRS. [Constitution 2]
1.1.05.20 The Trustees of the IFRS Foundation (Trustees) are responsible for the governance of the IFRS Foundation. The
Trustees are required to act in the public interest in all matters. The 22 Trustees comprise:
• six Trustees appointed from the Asia/Oceania region;
• six Trustees appointed from Europe;
• six Trustees appointed from North America;
• one Trustee appointed from Africa;
• one Trustee appointed from South America; and
Page 30 / 375
• two Trustees appointed from any area, subject to maintaining the overall geographical balance.
[Constitution 3-4, 6]
1.1.05.30 The responsibilities of the Trustees include:
• appointing the members of the IASB (see 1.1.30), the IFRS Interpretations Committee (see
1.1.60) and the IFRS Advisory Council (see 1.1.50);
• funding the IFRS Foundation and the IASB;
• approving the budget of the IFRS Foundation;
• reviewing compliance with the operating procedures, consultative arrangements and due
process;
• approving amendments to the IFRS Foundation Constitution after a due process, including
consultation with the IFRS Advisory Council and publication of an exposure draft for public
comment; and
• fostering and reviewing the development of educational programmes and materials that are
consistent with the IFRS Foundation's objectives. [Constitution 15]
1.1.05.40 The Trustees' Due Process Oversight Committee (DPOC) is responsible for the due process requirements for the
IASB and the IFRS Interpretations Committee. The DPOC meets regularly with the IASB, the IFRS Interpretations Committee
and the IFRS Advisory Council to review outreach, consultations and due process. [IASB Due Process Handbook 2]
Page 31 / 375
1.1.10 INTERNATIONAL ACCOUNTING STANDARDS BOARD

1.1.20 Formation
1.1.20.10 The IASB started operations in April 2001 as the successor to the International Accounting Standards Committee
(IASC). The IASB is the standard-setting body of the IFRS Foundation.
1.1.30 Composition
1.1.30.10 The IASB currently comprises 16 full-time members, from a range of functional backgrounds. Members who
were appointed before 2 July 2009 were appointed for a term of five years, which is renewable once for an additional five
years. Members who were appointed after 2 July 2009 were appointed for a term of five years, which is renewable once for
an additional three years, with the exception of the Chair and one Vice-Chair whose second term may be five years.
[Constitution 24-38]
1.1.30.20 The IASB can have up to 16 members, up to three of whom can be part-time. The geographical composition
guidelines for IASB membership are: four members from each of Europe, North America and the Asia/Oceania region; one
member from each of Africa and South America; and two other members from any area, subject to maintaining the overall
geographical balance. [Constitution 24, 26]
Page 32 / 375
1.1.35 MONITORING BOARD #

1.1.35.10 The Monitoring Board, comprised of public authorities with responsibility for setting reporting requirements for
listed entities, was created in 2009 to establish a formal link between the Trustees and public authorities. The objective of
the Monitoring Board is to enhance the public accountability of the IFRS Foundation, while at the same time maintain the
operational independence of the IFRS Foundation and the IASB. [Constitution 18]
1.1.35.20 The Monitoring Board is responsible for overseeing the Trustees' fulfilment of their constitutional duties. Specific
responsibilities of the Monitoring Board include:
• participating in the nomination process for Trustees of the IFRS Foundation and approving the
appointment of Trustees; and
• meeting with the Trustees, or a subgroup of the Trustees, at least once annually. [Constitution
19]
1.1.35.30 The membership of the Monitoring Board is institutional and comprises the leadership of the:
• European Commission;
• Emerging Markets Committee of the International Organization of Securities Commissions
(IOSCO);
• Technical Committee of IOSCO;
• Japanese Financial Services Agency;
• US Securities and Exchange Commission; and
• as an observer, the Basel Committee on Banking Supervision. [Constitution 21]
1.1.40 [Not used]
1.1.45 Forthcoming requirements
1.1.45.10 In February 2012, the Monitoring Board issued a report following a review of the IFRS Foundation's
governance structure.
1.1.45.20 The Monitoring Board's report included the following decisions.
• The membership of the Monitoring Board will be expanded by appointment of four additional
members chosen from major emerging markets.
• Two rotating seats for members from all other markets will be created and filled following a
selection process and criteria to be developed by the Monitoring Board in consultation with
IOSCO.
• Membership of the Monitoring Board will require domestic use of IFRS in the relevant
jurisdiction and financial contribution by the jurisdiction to the setting of IFRS. The criteria for
evaluating the domestic use of IFRS in a jurisdiction will be developed by the Monitoring Board.
• The Basel Committee on Banking Supervision will retain its observer status (see 1.1.35.30).
1.1.45.30 The Monitoring Board will begin implementing these changes in 2012.
Page 33 / 375
1.1.50 IFRS ADVISORY COUNCIL

1.1.50.10 The IFRS Advisory Council (Advisory Council) advises the IASB on agenda priorities and current projects. The
Advisory Council comprises organisations and individuals; currently it has approximately 45 members. The Advisory Council
meets three times a year. [Constitution 44-46]
Page 34 / 375
1.1.60 IFRS INTERPRETATIONS COMMITTEE *

1.1.60.10 The IFRS Interpretations Committee (Interpretations Committee) (formerly the International Financial Reporting
Interpretations Committee or IFRIC), was reconstituted in December 2001 as the successor to the Standing Interpretations
Committee (SIC). Its 14 voting members are appointed for terms of three years, renewable once. The Interpretations
Committee provides guidance on the interpretation and application of IFRS for issues that are likely to give rise to divergent
or unacceptable treatments in the absence of authoritative guidance. The Interpretations Committee may recommend that
an issue be considered by the IASB. It meets six times a year. [Constitution 39-43]
1.1.60.12 The Interpretation Committee considers proposed agenda items against the following criteria; an issue does not
have to satisfy all to qualify.
• The issue is widespread and has practical relevance.
• The issue indicates that there are significantly divergent interpretations.
• Financial reporting would be improved through elimination of the diverse reporting methods.
• The issue can be resolved efficiently within the confines of existing IFRS and the Conceptual
Framework for Financial Reporting, and the demands of the interpretation process.
• It is probable that the Interpretations Committee will be able to reach a consensus on the issue
on a timely basis.
• If the issue relates to a current or planned IASB project, there is a pressing need to provide
guidance sooner than would be expected from the IASB's activities. [IFRIC Due Process
Handbook 24]
1.1.60.15 Draft interpretations are exposed by the Interpretation Committee for public comments for not less than 60 days.
The matter is then redeliberated by the Interpretation Committee. A draft Interpretation is issued if no more than three
Interpretation Committee members and no more than four IASB members object. A final Interpretation is issued if no more
than three Interpretation Committee members object and the IASB approves it, subject to the normal IASB voting
requirements for an IFRS. The Interpretation Committee addresses effective dates, early application and transitional
requirements of interpretations on an interpretation-by-interpretation basis.
1.1.60.18 If the Interpretations Committee decides not to add an item to its agenda, then it publishes a tentative agenda
decision with a comment period of normally 30 days to allow for feedback before the next Interpretations Committee's
meeting. Agenda decisions sometimes include commentary about relevant IFRSs. Agenda decisions are non-authoritative
but many regulators expect any commentary to be applied.
1.1.60.20 The Interpretation Committee also develops recommendations to the IASB for annual improvements (see
1.1.85.10).
Page 35 / 375
1.1.65 OTHER ADVISORY GROUPS

1.1.65.10 The IASB has a number of other advisory groups that it works with either across a number of projects or in
connection with specific agenda projects.
1.1.65.20 These advisory groups are:
• the Capital Markets Advisory Council (users of financial statements);
• the Financial Crisis Advisory Group (dormant);
• the Global Preparers Forum;
• the Expert Advisory Panel (focused on financial instrument impairment issues);
• the SME Implementation Group; and
• working groups for major agenda projects, including:
- employee benefits
- financial instruments
- financial statement presentation (two groups, one with a financial institutions focus)
- insurance
- lease accounting.
Page 36 / 375
1.1.70 INTERNATIONAL FINANCIAL REPORTING STANDARDS

1.1.80 Definition
1.1.80.10 International Financial Reporting Standards (IFRS) is the term used to indicate the whole body of IASB
authoritative literature, and includes:
• IFRS issued by the IASB;
• International Accounting Standards (IAS) issued by the IASC, or revisions thereof issued by the
IASB;
• Interpretations of IFRS and IAS developed by the Interpretations Committee and approved for
issue by the IASB; and
• Interpretations of IAS developed by the SIC and approved for issue by the IASB or IASC. [Preface
5]
1.1.80.20 [Not used]
1.1.80.30 IFRS is designed for use by profit-oriented entities. IFRS is adapted for entities in the public sector in the
International Public Sector Accounting Standards issued by the International Public Sector Accounting Standards Board.
Notwithstanding this, entities engaged in not-for-profit activities may find IFRS useful, and may follow them if considered
appropriate. [Preface 9]
1.1.80.40 IFRS is not limited to a particular legal framework. Therefore, financial statements prepared under IFRS often
contain supplementary information required by local statute or listing requirements.
1.1.80.50 IFRS comprise a series of bold-type and plain-type paragraphs. Generally the bold-type paragraphs outline the
main principle, and the plain-type paragraphs provide further explanation. Bold and plain-type paragraphs have equal
authority. [Preface 14]
1.1.80.60 Some IFRSs contain appendices (e.g. IAS 7). A statement at the top of each appendix clarifies its status. When
an appendix is illustrative only and not an integral part of the standard, it does not have the same status as the standard
itself. However, in our view the guidance in an appendix should generally be followed unless it conflicts with the
requirements of an IFRS, or when such guidance merely represents an illustrative example and it is clear that a standard or
requirement can be complied with in different ways. For example, Appendix A of IAS 7 presents interest paid as part of
operating activities, whereas the standard itself states clearly that interest paid may be classified as part of either operating
or financing activities (see 2.3.50.20).
1.1.82 IASB due process *

1.1.82.10 A discussion paper is normally the first publication on a major new project. A discussion paper includes an
overview of the issue, possible approaches in addressing the issue, and the IASB's preliminary views. Normally, there is a
120-day comment period for a discussion paper. [IASB Due Process Handbook 30-31, 35]
1.1.82.20 An exposure draft is a mandatory step in the due process. It sets out a specific proposal in the form of a
proposed IFRS (or amendment to an IFRS). The draft includes a basis for conclusions on the proposals, and the alternative
views of dissenting IASB members (if any). Other than in exceptionally urgent cases, the IASB normally allows a period of
120 days for comment on an exposure draft. [IASB Due Process Handbook 38, 41, 42]
1.1.82.30 The IASB analyses responses, including input from outreach and/or roundtables, and redeliberates its proposals.
Final standards (or amendments) are accompanied by a feedback statement and effects analyses. Issuing a draft or final
standard (or amendment) requires a positive vote by nine IASB members. [IASB Due Process Handbook 45, 49-51, 76]
Page 37 / 375
1.1.82.40 The IASB consults with the Trustees and the Advisory Council in developing and pursuing its technical agenda. In
addition, the IASB carries out a public consultation every three years; the first formal public agenda consultation was
launched in July 2011. A feedback statement on the agenda consultation is expected in the second quarter of 2012. [IFRS
Foundation Constitution 37(d)]
1.1.85 Annual improvements process *

1.1.85.10 The annual improvements process is the IASB's process for dealing with non-urgent but necessary amendments
to IFRS, whereby such amendments are accumulated throughout a year and then processed collectively on an annual basis.
Issues dealt with in this process arise from matters raised by the Interpretations Committee and suggestions from staff or
stakeholders.
1.1.85.20 The Interpretations Committee assists the IASB by reviewing proposed improvements to IFRS and making
recommendations to the IASB. It also redeliberates comments received on exposure drafts. The Interpretations Committee
develops a recommendation on an issue included in the annual improvements process. The Interpretations Committee then
presents that recommendation, including finalisation of the proposed amendment or removal from the project, to the IASB
for ratification. The finalised Annual Improvements to IFRSs and related exposure drafts are issued by the IASB.
1.1.85.30 Amendments made within the annual improvements process typically clarify IFRS or correct a relatively minor
unintended consequence - e.g. a conflict in existing standards. Annual improvements should not introduce new principles or
make changes to existing ones. [IASB Due Process Handbook 65A]
1.1.85.40 The IASB has established criteria for assessing whether an issue should be addressed by the annual
improvements process. [IASB Due Process Handbook 27A, 65A]
1.1.85.50 An exposure draft of proposed improvements is usually published for comment in the second half of each year,
with a comment period of 90 days. The final Annual Improvements to IFRSs then is usually published by the second quarter
of the following year. The Board addresses effective dates, early application and transitional requirements on an
amendment-by-amendment basis. The amendments will generally be effective from 1 July of the year the amendment is
issued or 1 January the following year.
1.1.90-100 [Not used]
Page 38 / 375
1.1.110 COMPLIANCE WITH IFRS

1.1.120 General
1.1.120.10 Any entity claiming that a set of financial statements is in compliance with IFRS complies with all such
standards and related interpretations. An entity should not claim that its financial statements are, for example, 'materially'
in compliance with IFRS, or that it has complied with 'substantially all' requirements of IFRS. Compliance with IFRS
encompasses disclosure as well as recognition and measurement requirements. [IAS 1.16]
1.1.120.20 The IASB does not carry out any inquiry or enforcement role regarding the application of its standards. Often
this is undertaken by local regulators and/or stock exchanges.
1.1.130 Fair presentation

1.1.130.10 The overriding requirement of IFRS is for the financial statements to give a fair presentation (or a true and fair
view). [IAS 1.15]
1.1.130.20 'Fair presentation' is the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses as set out in the
Conceptual Framework for Financial Reporting (Conceptual Framework) (see 1.2). Compliance with IFRS, including
additional disclosure when necessary, is presumed to result in a fair presentation. [IAS 1.15]
1.1.130.30 When compliance with a requirement of an IFRS would be so misleading that it would conflict with the
objective of financial reporting set out in the Conceptual Framework, an entity departs from the required treatment to give a
fair presentation, unless the relevant regulator prohibits such an override. If an override cannot be used because it is
prohibited by the regulator, then additional disclosure is required in the notes to the financial statements to reduce the
perceived misleading impact of compliance to the maximum extent possible. [IAS 1.19-24]
1.1.130.40 Compliance with a requirement of an IFRS is misleading when it conflicts with the objective of financial
statements as set out in the Conceptual Framework (see 1.2.15.10).
1.1.130.50 The use of a true and fair override is very rare under IFRS. In the very rare case of an override, extensive
disclosures are required, including the particulars of the departure, the reasons for the departure and its effect. [IAS 1.19-
21]
1.1.140 [Not used]
Page 39 / 375
1.1.150 PRIVATE ENTITIES

1.1.150.10 An entity that claims compliance with IFRS applies all IFRSs (see 1.1.70 and 110). However, as an alternative,
a private entity without public accountability (see 1.1.160.30) may consider applying the IFRS for Small and Medium-sized
Entities (the IFRS for SMEs).
Page 40 / 375
1.1.160 IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES *

1.1.160.10 In July 2009 the IASB published the IFRS for SMEs. The standard is intended to facilitate financial reporting by
private entities that want to use international standards.
1.1.160.20 The IFRS for SMEs is a stand-alone document organised by topic. It does not follow the numbering of full IFRS;
it also does not contain cross-references to full IFRS, except for IAS 39. The IFRS for SMEs contains reduced guidance as
compared to full IFRS; therefore even when the general principles in the IFRS for SMEs appear to be the same as full IFRS,
differences in application may result. Financial statements prepared under the IFRS for SMEs cannot claim compliance with
IFRS.
1.1.160.30 The IFRS for SMEs is applicable for entities that publish general purpose financial statements for external users
and that do not have public accountability. An entity would have public accountability if it files (or is in the process of filing)
financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of
instruments in a public market, or if it holds assets in a fiduciary capacity for a broad group of outsiders - e.g. a bank or
insurance company. There are no quantitative thresholds to qualify as an SME.
Page 41 / 375
1.1.170 FUTURE DEVELOPMENTS

1.1.170.10 In May 2012, the Trustees issued proposals to amend both the IASB Due Process Handbook and the IFRIC Due
Process Handbook through the issue of a new IFRS Foundation Due Process Handbook. This included proposed changes to
the existing handbooks that have arisen from the Trustees' review of the efficiency and effectiveness of the Interpretations
Committee, the recently completed Trustees' strategy review and the IASB's 2011 three-yearly consultation on its technical
work programme (see 1.1.82.40).
1.1.170.20 The proposals included the following:
• revisions to both the annual improvements criteria and the Interpretation Committee's proposed
agenda items criteria;
• increase from 30 to 60 days for the comment period on a tentative agenda decision that the
Interpretations Committee publishes when it decides not to add an item to its agenda (see
1.1.60.18); and
• decrease from 120 to 60 days for the minimum comment period on a re-exposure of an
exposure draft where it is necessary for there to be the re-exposure (see 1.1.82.20).
1.1.170.30 In June 2012, the IASB issued a Request for Information: Comprehensive Review of the IFRS for SMEs (RFI)
seeking views as to whether and how the IFRS for SMEs should be amended. The RFI was issued as part of the IASB's
initial comprehensive review of the IFRS for SMEs.
Page 42 / 375
1.2 The Conceptual Framework

(IASB Conceptual Framework)
Purpose • The IASB and the Interpretations Committee use the Conceptual
Framework when developing new or revised IFRSs and
interpretations or amending existing IFRSs. [1.2.10.20]
• The Conceptual Framework is a point of reference for preparers of
financial statements in the absence of specific guidance in IFRS.
[1.2.10.20]
Objective of • The objective of general purpose financial reporting is to provide

general purpose financial information about the reporting entity that is useful to
financial reporting existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity.
[1.2.15.10]
Qualitative • The Conceptual Framework outlines the qualitative characteristics of

characteristics of financial information to identify the types of information that is likely
useful financial to be most useful to users of financial statements. [1.2.17.10]
information
Assets and • The Conceptual Framework sets out the definitions of 'assets' and
liabilities 'liabilities'. The definitions of 'equity', 'income' and 'expenses' are
derived from the definition of assets and liabilities. [1.2.30.10-20]
Going concern • Financial statements are prepared on a going concern basis, unless
management intends or has no alternative other than to liquidate
the entity or to stop trading. [1.2.85.10]
Transactions with • Transactions with shareholders in their capacity as shareholders are

shareholders recognised directly in equity. [1.2.110.10]

beginning on 1 January 2012. The requirements related to this topic are derived mainly from the Conceptual Framework for
Financial Reporting (Conceptual Framework) and several other standards that help to explain the basic principles of the
Conceptual Framework.
text. The forthcoming requirements related to this topic are derived from IFRS 13 Fair Value Measurement, which is
effective for annual periods beginning on or after 1 January 2013. A brief outline of the impact of IFRS 13 on this topic is
given in 1.2.58. The requirements of IFRS 13 are discussed in chapter 2.4A.
The currently effective or forthcoming requirements may be subject to future developments and a brief outline of the
relevant project is given in 1.2.120.
Page 43 / 375
1.2.10 INTRODUCTION
1.2.10.10 The Conceptual Framework provides a broad discussion of the concepts that underlie the preparation and
presentation of financial statements. It discusses the objective of general purpose financial reporting; the qualitative
characteristics of useful financial information, such as relevance and faithful representation; the underlying assumption of
financial statements; and perhaps more importantly, it discusses the elements of financial statements, including assets,
liabilities, equity, income and expenses, providing definitions and recognition criteria. The Conceptual Framework also
discusses in broad terms the measurement of assets and liabilities and the concepts of capital and capital maintenance.
1.2.10.20 The IASB and the Interpretations Committee use the Conceptual Framework when developing new or revised
IFRSs and interpretations or amending existing IFRSs. The Conceptual Framework also provides a point of reference for
preparers of financial statements in the absence of specific guidance in IFRS on a particular subject (see 2.8.06). The
purpose of this section is to highlight some of the Conceptual Framework's key principles. [CF. Purpose and status, IAS
8.11]
Page 44 / 375
1.2.15 THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL

REPORTING
1.2.15.10 The objective of general purpose financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources
to the entity. [CF.OB2]
Page 45 / 375
1.2.17 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFORMATION
1.2.17.10 The purpose of the qualitative characteristics of financial information outlined in the Conceptual Framework is to
identify the types of information that are likely to be most useful to existing and potential investors, lenders and other
creditors for making decisions about the reporting entity on the basis of information in its financial report. [CF.QC1]
1.2.17.20 The qualitative characteristics are categorised as follows.

1.2.17.30 Relevance and faithful representation underpin the usefulness of financial information. The usefulness of
financial information is enhanced if it is comparable, verifiable, timely and understandable. [CF.QC4]
1.2.17.40 Cost is a pervasive constraint on the information that can be provided. Therefore, it is important that costs
incurred in providing information are justified by the benefits of reporting that information. [CF.QC35]
1.2.18 Materiality
1.2.18.10 IFRS does not apply to items that are 'immaterial'. The Conceptual Framework refers to materiality as an entity-
specific aspect of relevance. Information is material if omitting it or misstating it could influence decisions that users make
on the basis of financial information about a specific reporting entity. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. Either the size or the nature of the item, or a
combination of both, could be the determining factor. Consideration of materiality is relevant to judgements regarding both
the selection and application of accounting policies, and to the omission or disclosure of information in the financial
statements. [CF.QC11, BC3.18, IAS 1.7, 8.5]
1.2.18.20 Materiality is also a factor when making judgements about disclosure. For example, materiality affects when
items may be aggregated, and the use of additional line items, headings and subtotals. When an IFRS does not explicitly
specify the positioning of a disclosure, materiality is relevant: an item may be sufficiently material to warrant disclosure on
the face of the financial statements, or may only require disclosure in the notes to the financial statements. Materiality may
mean that a specific disclosure requirement in a standard or an interpretation is not provided if the information is not
material. In our view, the materiality of a disclosure item should not be determined solely by the materiality of the related
financial statement line item. When making judgements about the materiality of disclosure, an entity considers the
objectives of the disclosure and its relevance to the users together with the surrounding circumstances, including the
consideration of qualitative factors. [IAS 1.30-31, 86]
Page 46 / 375
1.2.18.30 Accounting policies in accordance with IFRS do not need to be applied when their effect is immaterial. [IAS 8.8]
1.2.18.40 Financial statements do not comply with IFRS if they contain either material errors, or immaterial errors that are
made intentionally to achieve a particular presentation of an entity's financial position, financial performance or cash flows.
[IAS 8.8, 41]
Page 47 / 375
1.2.20 ASSETS AND LIABILITIES

1.2.30 Definitions
1.2.30.10 In developing new standards and interpretations, the IASB and the Interpretations Committee rely on the
following definitions of assets and liabilities, which are key elements of the financial statements.
• An 'asset' is a resource controlled by the entity as a result of past events, from which future
economic benefits are expected to flow to the entity.
• A 'liability' is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
[CF4.4]
1.2.30.20 The definitions of equity, income and expenses are derived from the definitions of assets and liabilities.
• 'Equity' is the residual interest in the assets of the entity after deducting all of its liabilities.
• 'Income' is an increase in economic benefits during the period in the form of inflows or
enhancements of assets or decreases in liabilities that result in increases in equity, other than
those related to contributions from equity participants.
• 'Expenses' are decreases in economic benefits during the period in the form of outflows or
depletions of assets or increases in liabilities that result in decreases in equity, other than those
related to distributions to equity participants. [CF4.4, 4.25]
1.2.30.30 The Conceptual Framework's emphasis on assets and liabilities, and the resulting influence that this has had on
standard setting in general, means that in our view any entity analysing how a transaction should be accounted for should
consider this focus on the statement of financial position.
1.2.40 Recognition criteria

1.2.40.10 An item that meets the definition of an asset or liability is recognised when:
• it is probable that any future economic benefits associated with the item will flow to the entity (in
the case of an asset) or from the entity (in the case of a liability); and
• the asset or liability has a cost or value that can be measured reliably. [CF4.38]
1.2.40.20 The term 'probable' is not defined in the Conceptual Framework, nor is it generally defined in the standards
when it is used. However, IAS 37 specifies that, for the purpose of that standard, probable means 'more likely than
not' (see 3.12.30.10). While this interpretation of probable may be used in other areas in which there is no specific
guidance, higher thresholds cannot be ruled out - e.g. in the recognition of deferred tax assets (see 3.13.170.40). [IAS
37.23]
1.2.40.30 Contingent assets are not recognised in the statement of financial position because this may result in the
recognition of income that may never be realised (see 3.12.107). Contingent liabilities are not recognised in the statement
of financial position, except for certain items assumed in a business combination (see 2.6.650.30). However, their
disclosure may be required (see 3.12.875 and 876). [IAS 37.27-35]
1.2.50 Matching
1.2.50.10 A typical objective in preparing financial statements is to match revenues and expenses. Matching historically has
had a significant influence on the preparation of financial statements; however, it has been de-emphasised in recent
standard setting because the predominance of the balance sheet approach has grown. Accordingly, expenses (or revenues)
Page 48 / 375
may be deferred in the statement of financial position only if they meet the definition of an asset (or liability). [CF.4.50]
EXAMPLE 1 - ASSET VERSUS EXPENSE RECOGNITION
1.2.50.20 A football club may spend five months of the year incurring maintenance expenditure to
prepare the grounds for the oncoming season. If the expense could be deferred and recognised at
the same time as the revenue from ticket sales, then the club might avoid showing a loss during
those five months and significant profits later. However, notwithstanding the uneven impact on
profit or loss, the maintenance expenditure is expensed as incurred since the maintenance
expenditure does not meet the definition of an asset.
1.2.55 Measurement basis

1.2.55.10 The Conceptual Framework requires the selection of a basis of measurement for the elements of the financial
statements. IFRS requires financial statements to be prepared on a modified historical cost basis (historical cost combined
with other measurement bases), with a growing emphasis on fair value (see 2.4.10). [CF4.54-56]
1.2.57 Fair value measurement #

1.2.57.10 '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. [Glossary]
1.2.57.20 Although this definition of fair value is used across IFRS, the terminology used throughout the standards is
inconsistent and any guidance on this topic is piecemeal.
1.2.58.10 IFRS 13 replaces most of the fair value measurement guidance contained in individual IFRSs with a single
definition of fair value. It also provides fair value application guidance and establishes a comprehensive disclosure
framework for fair value measurements. Chapter 2.4A discusses the requirements of IFRS 13.
1.2.60 Executory contracts

1.2.60.10 Although the Conceptual Framework does not refer explicitly to executory contracts, they are an integral part of
accounting under IFRS. IAS 37 describes an 'executory contract' as one in which neither party has performed any of its
obligations or both parties have partially performed their obligations to an equal extent. For example, a company enters into
a contract to buy equipment in six months and agrees to pay 100 at that time. Initially this is an executory contract because
the seller has the obligation to deliver the equipment and the buyer has the right to receive the equipment, but also has an
obligation to pay 100, and neither party has performed its obligations. [IAS 37.3]
1.2.60.20 Even though the rights and obligations under executory contracts are outside the scope of IAS 39 and they
generally meet the definition and recognition criteria of assets and liabilities, current practice generally is not to recognise
them in the financial statements to the extent that the rights and obligations have equal value, or the rights have a value
greater than that of the obligations. When the unavoidable costs of meeting the obligations exceed the expected economic
benefits, a provision for an onerous contract is recognised in accordance with IAS 37 (see 3.12.630). See 7.1.150 for a
discussion of executory contracts within the scope of IAS 39. [IAS 37.66, 68]
1.2.70-80 [Not used]
Page 49 / 375
1.2.85 GOING CONCERN

1.2.85.10 Financial statements are prepared on a going concern basis, unless management intends or has no alternative
other than to liquidate the entity or to stop trading. If the going concern assumption is not appropriate, then IFRS is applied
in a manner appropriate to the circumstances (see 2.4.15). [CF4.1, IAS 1.25]
1.2.90-100 [Not used]
Page 50 / 375
1.2.110 TRANSACTIONS WITH SHAREHOLDERS

1.2.110.10 The definitions of income and expense exclude capital transactions with equity participants. Accordingly, such
transactions, as for example capital contributions from shareholders, are recognised directly in equity, in the same way as
the distributions made to shareholders. However, the position is less clear when the transaction with the shareholder
equally could have been with a third party. [CF4.25]
EXAMPLE 2 - TRANSACTIONS WITH SHAREHOLDERS
1.2.110.20 A company sells inventory at fair value to a shareholder. In this case, the transaction
is recognised in profit or loss because the transaction price (fair value) indicates that the
shareholder is not acting in its capacity as a shareholder; rather, it is transacting with the company
in the same way as any other third party.
1.2.110.30 Alternatively, if the inventory is given without consideration to a shareholder, then it
can be argued that the shareholder has received a benefit from the company in its capacity as a
shareholder because an independent third party would not have been given the inventory for free.
We believe that, in the absence of any other pertinent facts, this transaction should be recognised
directly in equity as a distribution to shareholders (see 7.3.630).
1.2.110.40 Changing the facts further, suppose that the shareholder pays considerably more than
fair value for the inventory. In such cases, it may be appropriate to split the transaction into a
capital transaction and a revenue transaction. Proceeds equal to the fair value of the inventory
would be recognised in profit or loss, with the remaining proceeds being recognised directly in
equity as a contribution from shareholders.
1.2.110.50 Generally, IFRS does not discuss the circumstances in which it would be appropriate for a transaction entered
into by a shareholder on behalf of the entity to be recognised in the financial statements of the entity (i.e. attribution).
However, IFRS 2 does require the attribution of expense for certain share-based payment transactions (see 4.5.10.100). In
other instances judgement should be used in determining whether attribution is appropriate. IAS 24 requires attribution for
disclosure purposes in certain circumstances (see 5.5.110.30).
1.2.110.60 The key point is that transactions with shareholders, or any transactions that are made on behalf of the entity,
are considered carefully, having regard to all of the facts and circumstances, in determining the appropriate accounting.
Page 51 / 375

1.2.120.10 In 2004, the IASB and the FASB added to their agendas a joint project for the development of a common
conceptual framework.
1.2.120.20 The Boards have identified the following phases of this project:
A. Objectives and qualitative characteristics
B . Elements and recognition
C. Measurement
D. Reporting entity
E. Presentation and disclosure
F. Purpose and status
G. Application to not-for-profit entities
H. Remaining issues, if any.
1.2.120.30 Phase A was completed in September 2010 with the publication of Chapter 1 The Objective of General Purpose
Financial Reporting and Chapter 3 Qualitative Characteristics of Useful Financial Information of the Conceptual Framework
for Financial Reporting.
1.2.120.40 In November 2010, the IASB amended its work plan and deferred work on a number of projects that were
active at that time. The future of this project is subject to the IASB's agenda consultation, which was launched in July 2011
(see 1.1.82.40).
Page 52 / 375
2. GENERAL ISSUES
2.1 Form and components of financial statements
2.2 Changes in equity
2.3 Statement of cash flows
2.4 Basis of accounting
2.4A Fair value measurement
2.5 Consolidation
2.5A Consolidation
2.6 Business combinations
2.7 Foreign currency translation
2.8 Accounting policies, errors and estimates
2.9 Events after the reporting period
Page 53 / 375
2.1 Form and components of financial statements

(IAS 1, IAS 27)
Components of a • The following are presented as a complete set of financial

complete set of statements: a statement of financial position; a statement of
financial comprehensive income; a statement of changes in equity; a
statements statement of cash flows; and notes including accounting policies.
[2.1.10.10]
• In addition, a statement of financial position as at the beginning of
the earliest comparative period is presented when an entity restates
comparative information following a change in accounting policy;
correction of an error; or reclassification of items in the financial
statements. [2.1.10.10]
Reporting period • The end of the annual reporting period may change only in
exceptional circumstances. [2.1.20.10]
Comparative • Comparative information is required for the preceding period only,

information but additional periods and information may be presented.
[2.1.30.10]
Types of financial • IFRS sets out the requirements that apply to consolidated, individual
statements and separate financial statements. [2.1.40.10]
Consolidated • An entity with one or more subsidiaries presents consolidated

financial financial statements unless specific criteria are met. [2.1.50.10, 20]
statements
Individual financial • An entity with no subsidiaries but with an associate or jointly

statements controlled entity prepares individual financial statements unless
specific criteria are met. [2.1.60.02]
• In its individual financial statements, an entity generally accounts for
investments under the equity method, unless specific criteria are
met. [2.1.60.10]
Separate financial • An entity is permitted, but not required, to present separate

statements financial statements in addition to consolidated or individual financial
Presentation of • In our view, the presentation of pro forma information is acceptable

pro forma if it is allowed by local regulations and stock exchange rules and if
information certain criteria are met. [2.1.80.20]

beginning on 1 January 2012. The requirements related to this topic are derived from IAS 1 Presentation of Financial
Page 54 / 375
Statements and IAS 27 Consolidated and Separate Financial Statements.

text. The forthcoming requirements related to this topic are derived from the following.
• Presentation of Other Comprehensive Income - Amendments to IAS 1, which are effective for
annual periods beginning on or after 1 July 2012. A brief outline of the impact of these
amendments is given in 2.1.15.
• IFRS 10 Consolidated Financial Statements, which is effective for annual periods beginning on or
after 1 January 2013. A brief outline of the impact of IFRS 10 on this topic is given in 2.1.55.10.
The requirements of IFRS 10 are discussed in chapter 2.5A.
• IAS 27 (2011) Separate Financial Statements, which is effective for annual periods beginning on
or after 1 January 2013. A brief outline of the impact of IAS 27 (2011) on this topic is given in
2.1.55.20.
• IFRS 11 Joint Arrangements, which is effective for annual periods beginning on or after 1 January
2013. A brief outline of the impact of IFRS 11 on this topic is given in 2.1.55.30. The
requirements of IFRS 11 are discussed in chapter 3.6A.
• Annual Improvements to IFRSs 2009-2011 Cycle, which are effective for annual periods
beginning on or after 1 January 2013. A brief outline of the impact of these amendments on this
topic is given in 2.1.36.
area that may be subject to future developments and a brief outline of the relevant project is given in 2.1.90.
Page 55 / 375
2.1.10 COMPONENTS OF THE FINANCIAL STATEMENTS #*

2.1.10.10 The following comprise a complete set of financial statements:
• a statement of financial position (see 3.1);
• a statement of comprehensive income, presented either in a single statement of comprehensive
income (which includes all components of profit or loss and other comprehensive income) or in
the form of two statements, being an income statement (which displays components of profit or
loss) followed immediately by a separate statement of comprehensive income (which begins with
profit or loss as reported in the income statement and displays components of other
comprehensive income) (see 4.1);
• a statement of changes in equity (see 2.2);
• a statement of cash flows (see 2.3);
• notes, comprising a summary of significant accounting policies and other explanatory
information; and
• a statement of financial position as at the beginning of the earliest comparative period when an
entity restates comparative information following:
- a change in accounting policy;
- a correction of an error; or
- a reclassification of items in the financial statements (see 2.1.35). [IAS 1.10]
2.1.10.20 The statements presented outside the notes to the financial statements are generally referred to as 'financial
statements' in IAS 1 (previously 'primary statements'). In this chapter, those financial statements are described when
necessary as 'primary financial statements' to distinguish them from the financial statements as a whole. Although IAS 1
provides the titles for the primary financial statements as outlined in 2.1.10.10, those titles are not mandatory. Throughout
this publication, we use the titles provided in IAS 1 for each primary statement.
2.1.10.25 All financial statements within a complete set of financial statements are presented with equal prominence. [IAS
1.11]
2.1.10.30 IFRS specifies minimum disclosures to be made in the financial statements. However, it does not prescribe
specific formats to be followed. In our experience, entities consider the presentation adopted by other entities in the same
industry or country.
2.1.10.40 Although a number of disclosures are made in the primary financial statements, IFRS generally allows significant
flexibility in presenting additional line items and subtotals when necessary to ensure a fair presentation (see 4.1). In
addition to the information required to be disclosed in the financial statements, many entities provide additional information
outside the financial statements, either voluntarily or because of local regulations or stock exchange requirements (see 5.8).
[IAS 1.13, 54-55, 82-85]
2.1.10.50 Notes to the financial statements are presented in a systematic order and are cross-referenced from items in the
primary financial statements. Notes are generally presented in the following order:
• a statement of compliance with IFRS;
• the basis of preparation and the significant accounting policies applied;
• supporting information for items presented in the primary financial statements, in the order in
which each statement and each line item is presented or in an order that give greater
prominence to those disclosures that have greater significance; and
Page 56 / 375
• other disclosures, including contingencies, commitments and non-financial disclosures. [IAS

1.113, 114(a)-(d), 117]
2.1.10.60 However, in some circumstances it may be appropriate to vary the order of specific items within the notes. For
example, tax items in the statement of comprehensive income and the statement of financial position might be presented
together, or an entity might combine information on changes in fair value recognised in profit or loss (disclosure related to
the statement of comprehensive income) with information on the maturities of financial instruments (disclosure related to
the statement of financial position). Nevertheless, an entity should have a systematic structure for the notes.
2.1.15.10 Presentation of Other Comprehensive Income - Amendments to IAS 1:
• require an entity to present the items of other comprehensive income that may be reclassified
to profit or loss in the future if certain conditions are met, separately from those that would
never be reclassified to profit or loss. Consequently, an entity that presents items of other
comprehensive income before related tax effects would also have to allocate the aggregated tax
amount between these sections; and
• change the title of the statement of comprehensive income to the 'statement of profit or loss
and other comprehensive income'. However, an entity is still allowed to use other titles.
Page 57 / 375
2.1.20 REPORTING PERIOD

2.1.20.10 The end of the annual reporting period may change only in exceptional circumstances - e.g. following a change
of major shareholder or due to regulatory or taxation requirements. If the end of the annual reporting period does change,
then the financial statements for that period will cover either more or less than 12 months. In this case, the entity discloses
the reasons for using a longer or shorter period and the fact that information in the financial statements is not fully
comparable. However, pro forma information for the comparable preceding reporting period might be presented (see
2.1.80). [IAS 1.36]
2.1.20.15 IFRS is silent on the approach to take when a subsidiary changes the end of its annual reporting period to align it
with that of the parent. In our view, the consolidated financial statements should include the results of the subsidiary from
the end of its last reporting period to the end of its new reporting period. Therefore, the subsidiary's results included in the
consolidated financial statements might cover a period of either more or less than 12 months (see 2.5.290.30).
Page 58 / 375
2.1.30 COMPARATIVE INFORMATION #

2.1.30.10 Comparative information is required for the immediately preceding period. Unless there is a specific exemption
provided in an IFRS, an entity discloses comparative information in respect of the previous period for all amounts reported
in the current period's financial statements. The previous period's related narrative and descriptive information is generally
required only if it is relevant for an understanding of the current period's financial statements. For example, comparative
segment information would be disclosed. [IAS 1.38]
2.1.30.20 No particular format is required for the presentation of comparatives. In our experience, most entities reporting
under IFRS provide comparative information about the immediately preceding period alongside that for the current period.
2.1.30.30 More extensive comparatives may be presented voluntarily or to meet regulatory or stock exchange
requirements.
2.1.30.40 When an entity is adopting IFRS for the first time, the comparatives required by IFRS are prepared in
accordance with IFRS. Any additional comparatives included in the financial statements need not comply with IFRS provided
that those comparatives are labelled clearly and explanatory disclosures are included. (see 6.1.20.40). [IFRS 1.7, 21-22]
2.1.35 Presentation of a third statement of financial position and related notes

#
2.1.35.10 An additional statement of financial position is presented as at the beginning of the earliest comparative period
when an entity restates comparative information following a change in accounting policy, the correction of an error or the
reclassification of items in the financial statements. However, it is not required in condensed interim financial statements
(see 5.9.30.22). [IAS 1.10, 39, BC33]
2.1.35.20 It is unclear from IAS 1 how the requirement addressed in 2.1.35.10 should be interpreted in certain
circumstances. For example, the adoption of IFRS 8 is a change in accounting policy that does not affect the statement of
financial position; it is unclear whether the adoption of IFRS 8 means that a third statement of financial position should be
presented in the year in which it is adopted.
2.1.35.30 In our view, an entity should consider materiality based on its particular facts and circumstances when
interpreting the requirement to present a third statement of financial position. In other words, a third statement of financial
position would be required when there is a material impact on the statement of financial position at the beginning of the
earliest comparative period. Therefore, we believe, for example, that the reclassification of expenses in the statement of
comprehensive income might not require a third statement of financial position to be presented. However, if an entity
decided to split its obligation for post-employment benefits into separate current and non-current components in the
statement of financial position, having previously presented the entire amount as non-current as allowed by IAS 19, then we
believe that a third statement of financial position would generally be required. [IAS 1.39, 60, 19.118]
2.1.35.35 If there has been a change in accounting policy, the correction of an error or the reclassification of items in the
financial statements, but a third statement of financial position is not presented on the basis that the effect of the change is
judged not to be material, then an entity should consider whether this fact should be disclosed. See 6.1.1650 for the
requirement to present a third statement of financial position and related notes for first-time adopters of IFRS.
2.1.35.40 IAS 1 requires the presentation of related notes when a third statement of financial position is presented. In our
view, this requirement should be interpreted as requiring disclosure of those notes that are relevant to the reason the third
statement of financial position is presented - i.e. not all notes related to the third statement of financial position are
required in every circumstance. For example, in 2012 an entity with a calendar end of reporting period makes a voluntary
change in its accounting policy to expense certain exploration and evaluation expenditure as allowed by IFRS 6; previously
that expenditure had been capitalised. In this circumstance, we believe that the entity should present a third statement of
financial position as of 1 January 2011 together with all notes affected by the expensing of the exploration and evaluation
expenditure. [IFRS 6.13, IAS 1.39]
Page 59 / 375
2.1.36.10 Annual Improvements to IFRSs 2009-2011 Cycle amend IAS 1 to clarify the guidance on providing additional
comparative information beyond the minimum requirements, and the guidance on the presentation of the third statement
of financial position. Specifically, they clarify that:
• presenting comparative information in addition to the minimum comparative financial
statements required by IFRS - for example, an additional statement of cash flows, is acceptable.
Such comparative information is accompanied by the related notes presented in accordance
with IFRS. However, additional comparative information need not be presented in the form of a
complete set of financial statements;
• in cases when additional comparative information is presented, the third statement of financial
position relates to the beginning of the preceding period; and
• the third statement of financial position at the beginning of the preceding period is presented
only if a change in accounting policy, retrospective restatement or reclassification has a material
effect on the information in the statement of financial position.
Page 60 / 375
2.1.40 TYPES OF FINANCIAL STATEMENTS

2.1.40.10 IFRS sets out the requirements that apply to three distinct types of financial statements: consolidated financial
statements, individual financial statements and separate financial statements. Most, but not all, recognition, measurement,
presentation and disclosure requirements apply to all three types of financial statements.
2.1.40.20 It is the reporting entity's interests in subsidiaries, associates and jointly controlled entities that determine which
type of financial statements the entity is required to prepare. Certain exemptions may provide relief from those
requirements.
Page 61 / 375
2.1.50 CONSOLIDATED FINANCIAL STATEMENTS #

2.1.50.10 Consolidated financial statements are financial statements of a parent and its subsidiaries presented as a single
economic entity. [IAS 27.4]
2.1.50.20 In consolidated financial statements, subsidiaries are consolidated (see 2.5). Unless they are held for sale (see
5.4.20), investments in associates are equity accounted and jointly controlled entities are either proportionately consolidated
or equity accounted (see 3.5.90 and 3.6.110). [IAS 27.9, 28.13, 31.28, 30]
2.1.50.30 An entity with an investment in a subsidiary is exempt from preparing consolidated financial statements only if all
of the following criteria are met:
• the parent is itself a wholly owned subsidiary or is a partially owned subsidiary and its other
owners (including those not otherwise entitled to vote) have been informed about, and do not
object to, the parent not presenting consolidated financial statements;
• the parent's debt or equity instruments are not traded in a public market, including stock
exchanges and over-the-counter markets (see 5.2.10.12 for further discussion of what is
considered to be 'traded in a public market');
• the parent did not file, and is not in the process of filing, its financial statements with a regulatory
organisation for the purpose of issuing any class of instruments in a public market; and
• the ultimate or any intermediate parent of the parent produces consolidated financial statements
that comply with IFRS and are available for public use. [IAS 27.10]
2.1.50.40 An entity that prepares consolidated financial statements (i.e. it does not meet and use the criteria in 2.1.50.30
for exemption) may elect to prepare separate financial statements in addition to its consolidated financial statements (see
2.1.70).
2.1.50.50 In our view, if an entity meets and uses the criteria for exemption from preparing consolidated financial
statements, then there is no requirement under IFRS to prepare financial statements. However, it may elect to prepare
separate financial statements as its only set of IFRS financial statements (see 2.1.70). [IAS 27.8]
2.1.50.55 If an entity is exempt from preparing consolidated financial statements, but chooses to do so in any event, then
in our view the entity is required to apply all of the requirements of IFRS that relate to consolidated financial statements.
For example, the entity would be required to apply equity accounting to investments in associates (see 3.5.170).
2.1.50.60 If an entity does not qualify for the above exemption, but nonetheless decides to present only separate financial
statements, then in our view these separate financial statements cannot be regarded as complying with IFRS (see 1.1.110).
Our view is based on the fact that the preparation of consolidated financial statements is fundamental to compliance with
IFRS and pervades every aspect of the financial statements.
EXAMPLE 1 - EXEMPTION CRITERIA
2.1.50.70 Company B is an intermediate parent of Company C, and B is owned by Company P, the

ultimate parent. C has subsidiaries.
Page 62 / 375
2.1.50.80 C is not required to prepare consolidated financial statements when the following
conditions are met:
• either P or B prepares consolidated financial statements in accordance with
IFRS and those consolidated financial statements are available to the users
of the financial statements of C;
• C's debt or equity instruments are not traded in a public market, including
stock exchanges and over-the-counter markets; and
• C did not file, and is not in the process of filing, its financial statements with
a regulatory organisation for the purpose of issuing any class of instruments
in a public market.
2.1.50.90 In our view, if an entity disposes of its last subsidiary during the current reporting period, then consolidated
financial statements are not required to be prepared because the entity is no longer a parent at the end of the reporting
period. In such cases, we believe that the financial statements, including comparatives, should be presented as
unconsolidated financial statements (i.e. individual or separate financial statements as appropriate (see 2.1.60 and 70,
respectively)) unless the consolidated financial statements are required by a regulator. However, the entity may wish to
present supplementary information on a consolidated basis (see 5.8).
2.1.55.10 Under IFRS 10, although the definition of a group remains unchanged - a parent and its subsidiaries - the
standard changes the definition of control. Therefore, under IFRS 10 the population of subsidiaries in a group may be
different from that under IAS 27. Chapter 2.5A discusses the requirements of IFRS 10.
2.1.55.20 The exemption from the requirement to prepare consolidated financial statements is now contained in IAS 27
(2011). However, the requirements remain unchanged and therefore the guidance in 2.1.50.30-60 will continue to apply.
2.1.55.30 Under IFRS 11, joint ventures (currently jointly controlled entities) are accounted for using the equity method
and the option of using proportionate consolidation is eliminated. Chapter 3.6A discusses the requirements of IFRS 11.
Page 63 / 375
2.1.60 INDIVIDUAL FINANCIAL STATEMENTS

2.1.60.02 Individual financial statements are those of an entity that has no subsidiaries and has investments in associates
and/or jointly controlled entities that are accounted for under the equity method. [IAS 28.2, 13, 31.2-3]
2.1.60.10 Unless either of the following criteria is met, investments in associates are accounted for under the equity
method and investments in jointly-controlled entities are accounted for under the equity method or proportionally
consolidated.
• All such interests are classified as held-for-sale in accordance with IFRS 5 (see 5.4.20).
• All of the following criteria are satisfied:
- the investor is a wholly owned subsidiary, or is a partially owned subsidiary and its other
owners (including those not otherwise entitled to vote) have been informed and do not object
to the investor not applying the equity method;
- the investor's debt or equity instruments are not traded in a public market, including a stock
exchange or an over-the-counter market;
- the investor did not file, nor is it in the process of filing, its financial statements with a
regulatory organisation for the purpose of issuing any class of instruments in a public market;
and
- the ultimate or any intermediate parent of the investor produces consolidated financial
statements that comply with IFRS and are available for public use. [IAS 28.13, 31.2]
2.1.60.20 An entity that has a subsidiary cannot prepare individual financial statements.
2.1.60.30 In our view, an entity may label its individual financial statements as such, or use alternative titles that may be
more understandable to readers - e.g. 'financial statements of the entity and investees'. Whatever label is used to identify
individual financial statements, we believe that the notes to the financial statements should explain clearly the basis used in
preparing those financial statements.
2.1.60.40 An entity that prepares individual financial statements may elect to prepare separate financial statements in
addition to the individual financial statements.
2.1.60.50 In our view, if an entity meets and uses the exemption from preparing individual financial statements, then IFRS
does not require it to prepare financial statements. However, such an entity may elect to prepare separate financial
statements as its only set of IFRS financial statements (see 2.1.70).
Page 64 / 375
2.1.70 SEPARATE FINANCIAL STATEMENTS

2.1.70.05 Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a
jointly controlled entity, in which the investments are accounted for on the basis of direct equity interest rather than on the
basis of the reported results and net assets of the investees. [IAS 27.4, 28.2, 31.3]
2.1.70.10 A parent, an investor in an associate or a venturer in a jointly controlled entity that is not required to prepare
consolidated financial statements (see 2.1.50.30) or individual financial statements (see 2.1.60.10) may prepare separate
financial statements (see 3.5.710). Alternatively, separate financial statements may be prepared in addition to consolidated
or individual financial statements (see 2.1.50.40 and 60.40). In separate financial statements, interests in subsidiaries,
associates and jointly controlled entities are accounted for at cost or as financial assets, unless they are classified as held-
for-sale (see 5.4.20). [IAS 27.6, 8, 37, 28.4-5, 31.5-6]
2.1.70.20 IAS 27 states that the financial statements of an entity that does not have an investment in a subsidiary,
associate or jointly controlled entity are not separate financial statements. However, in all material respects, the
requirements that will apply to those financial statements will be identical to individual financial statements. [IAS 27.7, 28.3,
31.4]
2.1.70.30 IFRS does not contain a requirement to prepare separate financial statements; however, an entity may elect, or
be required by local regulations, to prepare such statements.
2.1.70.35 IFRS does not preclude an entity from including both consolidated and separate financial statements within the
same report. If an entity chooses to do so, then there is no required format or order in which the financial statements
should be presented. However, the information presented should be identified clearly as related to either the separate or
the consolidated financial statements.
2.1.70.40 If an entity prepares separate financial statements in accordance with IFRS, then all relevant IFRSs apply equally
to those separate financial statements (see 1.1.110).
2.1.70.50 All separate financial statements disclose:
• the fact that the financial statements are separate financial statements;
• a list of significant investments in subsidiaries, jointly controlled entities and associates, including
the name, country of incorporation or residence, proportion of ownership interest and, if it is
different, the proportion of voting power held; and
• a description of the method used to account for these investments. [IAS 27.43]
2.1.70.60 Separate financial statements of a parent that meets and uses the criteria for exemption from preparing
consolidated financial statements disclose in addition to the requirements in 2.1.70.50:
• the fact that the exemption from consolidation has been used;
• the name and country of incorporation or residence of the entity whose consolidated financial
statements that comply with IFRS have been produced for public use; and
• the address at which those consolidated financial statements are obtainable. [IAS 27.42]
2.1.70.70 Separate financial statements of an entity that is not exempt from preparing consolidated or individual financial
statements (see 2.1.50.30 and 60.10) disclose the reason for preparing them if it is not required by law and identify the
related consolidated or individual financial statements. [IAS 27.43]
Page 65 / 375
2.1.80 PRESENTATION OF PRO FORMA INFORMATION

2.1.80.10 IFRS is generally silent on the presentation of pro forma information within the financial statements, with the
exception of the requirement in IFRS 3 to present, following a business combination, revenue and profit or loss of the
combined entity determined as if the acquisition had been effected at the beginning of the period. [IFRS 3.B64(q)]
2.1.80.20 In some cases, an entity may wish to present pro forma information that is not required by IFRS - e.g. pro forma
comparative financial statements following a change in the end of its reporting period (see 2.1.20.10) or a pro forma
statement of comprehensive income following significant changes in the composition of the entity. In our view, such
additional information is generally acceptable to the extent that it is allowed by local regulations and relevant stock
exchange rules and provided that:
• the information is labelled clearly to distinguish it from the financial statements prepared in
accordance with IFRS and is marked clearly as unaudited if that is the case;
• the entity discloses the transaction or event that is reflected in the pro forma financial
information, the source of the financial information on which it is based, the significant
assumptions used in developing the pro forma adjustments and any significant uncertainties
about those adjustments; and
• the presentation indicates that the pro forma financial information should be read in conjunction
with the financial statements and that the pro forma financial information is not necessarily
indicative of the results that would have been attained if, for example, the transaction or event
had taken place on a different date.
Page 66 / 375

2.1.90.10 The IASB had been working on a comprehensive financial statement presentation project aiming to improve
guidance on the organisation and presentation of information in the financial statements. The project was conducted in
three phases. The first phase was completed in September 2007 with the release of a revised IAS 1. In November 2010,
the IASB amended its work plan and deferred work on a number of projects that were active at that time. The future of the
remaining phases of this project is subject to the IASB's agenda consultation, which was launched in July 2011 (see
1.1.82.40).
Page 67 / 375
2.2 Changes in equity

(IAS 1)
General • A statement of changes in equity (and related notes) reconciles

opening to closing amounts for each component of equity.
[2.2.40.10]
• All owner-related changes in equity are presented in the statement
of changes in equity, separately from non-owner changes in equity.
[2.2.40.40]
Entities with no • Entities that have no equity as defined in IFRS may need to adopt
equity the financial statement presentation of members' or unit holders'
interests. [2.2.50.10]
Changes in • The total adjustment to each component of equity resulting from

accounting changes in accounting policies is presented separately from that
policies and resulting from the correction of errors in the statement of changes
errors in equity. [2.2.70.15]

Statements.
text. The forthcoming requirements related to this topic are derived from Annual Improvements to IFRSs 2009-2011 Cycle,
which are effective for annual periods beginning on or after 1 January 2013. A brief outline of the impact of the
amendments on this topic is given in 2.2.75.
There are no future developments for this topic.
2.2.10-30 [Not used]
Page 68 / 375
2.2.40 STATEMENT OF CHANGES IN EQUITY

2.2.40.10 A statement of changes in equity includes:
• total comprehensive income for the period, separately showing the total amounts attributable to
owners of the parent and to non-controlling interests;
• for each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with IAS 8; and
• for each component of equity, a reconciliation between the carrying amount at the beginning and
at the end of the period, separately disclosing changes resulting from:
- profit or loss;
- other comprehensive income; and
- transactions with owners in their capacity as owners showing separately contributions by and
distributions to owners and changes in ownership interests in subsidiaries that do not result
in a loss of control. [IAS 1.106]
2.2.40.20 An analysis of other comprehensive income by item - for each component of equity - is presented either in the
statement of changes in equity or in the notes. [IAS 1.106A]
2.2.40.30 [Not used]
2.2.40.40 All owner-related changes in equity are presented in the statement of changes in equity, separately from non-
owner changes in equity. As such, dividends and the related per-share amounts are disclosed either in the statement of
changes in equity or in the notes to the financial statements. Such disclosures are not included in the statement of
comprehensive income (see 4.1.190). [IAS 1.107]
2.2.50 Entities with no equity

2.2.50.10 Entities that have share capital that is not equity (e.g. some co-operative entities) and entities that do not have
equity as defined in IAS 32 (e.g. some mutual funds) may need to adapt the financial statement presentation of members'
or unit holders' interests. As a statement of changes in equity is not relevant for such entities, a statement of changes in net
assets attributable to members or unit holders may be presented. Although IFRS does not require presentation of this
statement, it may provide useful information with respect to the components underlying the movements in the net assets of
the entity attributable to the members or unit holders during the year. [IAS 1.6]
2.2.60 [Not used]
2.2.70 Changes in accounting policies and errors #

2.2.70.10 A change in accounting policy or the correction of a prior period material error is generally presented by
adjusting the opening balance of each component of equity of the earliest period presented, and revising comparatives (see
2.8). The adjustments for each prior period and the beginning of the period are disclosed in the statement of changes in
equity. [IAS 1.106(b), 110]
2.2.70.15 The total adjustment to each component of equity resulting from changes in accounting policies is presented
separately from the total adjustment resulting from the correction of errors. [IAS 1.110]
2.2.70.20 In addition, a statement of financial position as at the beginning of the earliest comparative period is presented
following a change in accounting policy, the correction of an error or the reclassification of items in the financial statements
(see 2.1.35). [IAS 1.10(f)]
Page 69 / 375
2.2.75.10 Annual Improvements to IFRSs 2009-2011 Cycle amend IAS 1 to clarify the requirements regarding the
presentation of a third statement of financial position. Specifically, they clarify that the third statement of financial position
is presented only if a change in accounting policy, retrospective restatement or reclassification has a material effect on the
information in that statement of financial position. The amendments also clarify that, in cases when additional comparative
information is presented, the third statement of financial position relates to the beginning of the preceding period.
Page 70 / 375
2.3 Statement of cash flows

(IAS 7)
Cash and cash • Cash and cash equivalents' includes certain short-term investments
equivalents and, in some cases, bank overdrafts. [2.3.10.30]
Operating, • The statement of cash flows presents cash flows during the period
investing and classified by operating, investing and financing activities. [2.3.20.10]
financing
activities • An entity chooses its own policy for classifying each of interest and
dividends. The chosen presentation method should present the cash
flows in the most appropriate manner for the business or industry,
and should be applied consistently. [2.3.50.20]
• Taxes paid are classified as operating activities unless it is
practicable to identify them with, and therefore classify them as,
financing or investing activities. [2.3.50.20]
Direct vs indirect • Cash flows from operating activities may be presented under either
method the direct method or the indirect method. [2.3.30.10]
Foreign currency • Foreign currency cash flows are translated at the exchange rates at
cash flows the dates of the cash flows (or using averages when it is
appropriate to do so). [2.3.80.10]
Offsetting • Generally, all financing and investing cash flows are reported gross.
Cash flows are offset only in limited circumstances. [2.3.110.10]

beginning on 1 January 2012. The requirements related to this topic are derived from IAS 7 Statement of Cash Flows.
There are no forthcoming requirements for this topic.
Page 71 / 375
2.3.10 CASH AND CASH EQUIVALENTS

2.3.10.10 Cash comprises cash on hand and demand deposits. Cash equivalents are short-term highly liquid investments
that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. [IAS
7.6]
2.3.10.20 Demand deposits are not defined in IFRS, but in our view they should have the same level of liquidity as cash
and therefore should be able to be withdrawn at any time without penalty. In addition, in our view demand deposits need
not be held with a financial institution - for example, monies held by solicitors for clients in separate and designated
accounts could be considered demand deposits as long as they are not restricted. Even if a deposit fails to be classified as
cash it may still meet the definition of cash equivalents.
2.3.10.30 Since the investments comprising cash equivalents are required to be readily convertible to known amounts of
cash, only debt securities and deposits can generally qualify for inclusion, subject to the other criteria being met. Equity
investments may also qualify if they are, in substance, cash equivalents - e.g. preference shares acquired within a short
period of their maturity and with a specified redemption date. 'Short-term' is not defined, but the standard encourages a
cut-off of three months' maturity from the acquisition date. In our view, three months should be used as an absolute cut-off
and debt securities with a longer maturity should be regarded as part of investing activities. [IAS 7.7]
2.3.10.35 In our view, an investment that is redeemable at any time could be considered a cash equivalent but only if the
amount of cash that would be received is known at the time of the initial investment and is subject to an insignificant risk of
changes in value, and the other IAS 7 criteria for cash equivalents are met. The fact that an investment can be converted at
the market price at any time does not mean that the 'readily convertible to known amounts of cash' criterion has been met.
[IU 05-09]
2.3.10.40 Investments with a longer maturity at acquisition do not become cash equivalents once their remaining maturity
period falls to three months. [IAS 7.7]
2.3.10.50 An overriding test is that cash equivalents are held to meet short-term cash commitments rather than for
investment or other purposes. For example, an entity gives a three-month loan to a customer to help the customer in
managing its short-term liquidity position. In our view, this loan is not a cash equivalent because it was given for a purpose
other than for the entity to manage its own short-term cash commitments. [IAS 7.7]
2.3.10.55 An entity discloses the policy that it adopts in determining the composition of cash and cash equivalents. The
effect of any change in the policy for determining components of cash and cash equivalents is then reported in accordance
with IAS 8. [IAS 7.46-47]
2.3.10.60 Bank overdrafts repayable on demand are included as cash and cash equivalents to the extent that they form an
integral part of the entity's cash management. However, even though a bank overdraft might be netted against cash and
cash equivalents in the statement of cash flows, this is not permitted in the statement of financial position unless the
offsetting criteria are met (see 3.1.50, 7.8.90). [IAS 7.8, 32.42]
2.3.10.70 A reconciliation of cash and cash equivalents in the statement of cash flows to the equivalent amount presented
in the statement of financial position is disclosed and may be included in the notes to the financial statements. For example,
if an entity has cash balances in a disposal group that is classified as held-for-sale in the statement of financial position,
then this would be a reconciling item between cash and cash equivalents in the statement of cash flows and the equivalent
amount presented in the statement of financial position. [IAS 7.45]
Page 72 / 375
2.3.20 OPERATING, INVESTING AND FINANCING ACTIVITIES

2.3.20.10 The statement of cash flows presents cash flows during the period classified by operating, investing and
financing activities.
• Operating activities are the principal revenue-producing activities of the entity and other activities
that are not investing or financing activities.
• Investing activities relate to the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
• Financing activities relate to shareholders' equity and borrowings of the entity. [IAS 7.6, 10]
2.3.20.11 The wording of the definitions means that operating activities is the default classification when a cash flow does
not meet the definition of either investing or financing cash flows.
2.3.20.13 An entity presents its cash flows in the manner most appropriate to its business. For example, IFRS 6 allows
entities in the extractive industries to choose an accounting policy, to be applied consistently, in respect of qualifying
exploration and evaluation (E&E) expenditure; such expenditure may be either capitalised as an asset or expensed as it is
incurred (see 5.11.30). However, if such expenditure is capitalised, then the related cash flows are classified as investing
activities, because only expenditure that results in the recognition of an asset can be classified as investing activities. If such
expenditure is expensed, then the related cash flows are classified as operating activities in the statement of cash flows.
[IFRS 6.24, IAS 7.11, 16, 8.10]
2.3.20.14 Although aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses are
presented separately and classified as investing activities, only expenditure that results in the recognition of an asset can be
classified as investing activities. In some cases, significant judgement may be needed to classify certain cash flows that
relate to business combinations. In particular, consideration may be needed of whether the cash flow relates to obtaining
control and whether the expenditure results in a recognised asset in the statement of financial position. [IAS 7.16, 39]
2.3.20.15 In our view, in the consolidated financial statements transaction costs associated with a business combination,
although they are ancillary to the assets acquired, are classified as operating activities because the transaction costs are not
capitalised.
2.3.20.16 When deferred consideration arising from a business combination is settled in cash, the payment will reflect both
the initial fair value and amounts recognised in profit or loss as a finance expense. The cash flow classification of the cash
paid may require judgement. To the extent that the amount paid reflects the finance expense, classification consistent with
interest paid may be appropriate. Depending on the accounting policy adopted, this may be classified as either financing or
operating activities (see 2.3.50).
2.3.20.17 To the extent that the amount paid reflects the settlement of the fair value of the consideration recognised on
initial recognition (see 2.6.270), classification of the cash flow as a financing activity would be consistent with the settlement
of other financial liabilities - e.g. a loan or a finance lease obligation. However, classification as an investing activity may
also be appropriate. IAS 7 is not clear whether the settlement of a financial liability is always classified as a financing
activity. For example, the settlement of trade payables is often classified in line with the nature of the underlying
expenditure, including as an investing activity if the payment is for an item of property, plant or equipment. Accordingly,
judgement will be needed to determine whether the cash settlement arises from obtaining control or the settlement of
financing provided by the seller. Factors that may be relevant to this judgement include the length of the period between
initial recognition of the liability and settlement, whether the period reflects a normal credit period and whether the liability
is discounted to reflect its deferred settlement; the latter would suggest that there is a financing element to the
arrangement.
2.3.20.18 Similar judgements to those described in 2.3.20.16-17 would apply in respect of the classification of cash
outflows for contingent consideration in a business combination (see 2.6.280). Further judgement is needed when the cash
payment is greater than the amount recognised on initial recognition as a result of the resolution of uncertainties - e.g. the
better-than-expected operating performance of the acquired business. In this case, classification as an operating activity, or
Page 73 / 375
classification as a financing or operating activity consistent with interest paid, may be appropriate.
2.3.20.20 The separate components of a single transaction should each be classified as operating, investing or financing;
IFRS does not allow a transaction to be classified based on its predominant characteristic. For example, a loan repayment
comprises interest (which may be classified as operating or financing (see 2.3.50.20)) and principal repayment (which is
classified as financing). [IAS 7.12]
2.3.20.30 However, the aggregate net cash flows from obtaining and losing control of subsidiaries and other businesses
are presented separately as a single line item as part of investing activities. For example, when a subsidiary is acquired, a
single line item equal to the consideration paid by cash and cash equivalents, less any cash and cash equivalents held by the
subsidiary at the time of acquisition, is shown as an investing cash outflow, rather than as separate cash outflows and
inflows for the various net assets and liabilities acquired. [IAS 7.39-42]
2.3.20.35 A subsequent purchase of an additional interest or a sale by a parent of a subsidiary's equity instruments that
does not result in a loss of control is classified as cash flows from financing activities because such changes in ownership
interests are accounted for as transactions with equity holders (see 2.3.20.10 and 2.5.385.20). [IAS 7.42A]
2.3.20.40 Non-cash investing or financing transactions (e.g. shares issued as consideration in a business combination, or
acquisition of assets via a finance lease) are not included in the statement of cash flows, but are disclosed to provide
relevant information about investing and financing activities. [IAS 7.43-44]
Page 74 / 375
2.3.30 DIRECT VS INDIRECT METHOD

2.3.30.10 Cash flows from operating activities may be presented either under the direct method (receipts from customers,
payments to suppliers etc.) or under the indirect method (profit or loss for the period reconciled to the total net cash flow
from operating activities). Although the standard encourages use of the direct method, in our experience the indirect
method is usually used. [IAS 7.18-20]
2.3.30.20 For an entity that elects to present operating cash flows under the indirect method, there is often confusion
about the correct starting point: should it be profit or loss (i.e. the final figure in the statement of comprehensive income) or
can a different figure, such as profit before income tax, be used? The standard itself refers to profit or loss, but the
example provided in the appendix to the standard starts with a different figure (i.e. profit before taxation). Because the
appendix is illustrative only and therefore does not have the same status as the standard, it would be more appropriate to
follow the standard (see 1.1.80.60). [IAS 7.18, 20, A]
2.3.30.30 Alternatively, an entity using the indirect method may choose to present its operating cash flows by showing
revenues and expenses before working capital changes as the starting point, followed by changes during the period in
inventories, and operating receivables and payables. However, in our experience this approach is less common. [IAS 7.20,
A]
Page 75 / 375
2.3.40 CLASSIFICATION ISSUES

2.3.50 Interest, dividends and taxes *
2.3.50.10 IFRS requires cash flows from interest and dividends received and paid, and income taxes paid, to be disclosed
separately. In our view, this means that disclosure is required in the statement of cash flows rather than in the notes. [IAS
7.31-36]
2.3.50.20 The standard does not, however, specify the classification of such cash flows, and an entity is required to choose
its own policy for classifying each of interest and dividends paid as operating or financing activities and each of interest and
dividends received as operating or investing activities. An entity chooses a presentation method that will present these cash
flows in the most appropriate manner for the business or industry (e.g. banking), if applicable, and the method selected is
applied consistently. Taxes paid are classified as operating activities unless it is practicable to identify them with, and
therefore classify them as, financing or investing activities. [IAS 7.31-36]
2.3.50.30 If it is practicable for an entity to classify certain taxes as investing or financing activities, then the standard is
not clear on whether:
• to allocate all taxes paid among the three categories of cash flows; or
• to allocate only certain taxes paid because they relate to transactions classified as investing or
financing, leaving the balance in operating activities.
2.3.50.35 In our view, it is acceptable to allocate only certain material tax cash flows, while leaving the balance in
operating activities, as long as the approach taken is applied consistently and disclosed appropriately. We believe that
allocating, for example, 60 percent of the tax cash flows as it represents the material tax cash flows known to be from
investing or financing activities, with appropriate disclosure, provides better information than not allocating any.
2.3.50.40 In our view, to the extent that borrowing costs are capitalised in respect of qualifying assets (see 4.6.10), the
cost of acquiring those assets should be split in the statement of cash flows. For example, an entity builds an asset and
pays construction expenses of 1,000, which includes 50 of capitalised interest. In such circumstances, the interest paid of 50
will be included in operating or financing activities (depending on the entity's accounting policy for presenting interest paid in
the statement of cash flows) and the remaining 950 will be included in investing activities. This is consistent with the
requirement to classify separately the different components of a single transaction (see 2.3.20.20).
2.3.55 Assets held for rental and subsequently held for sale
2.3.55.10 Cash flows related to the acquisition of an asset recognised in accordance with IAS 16 are generally cash flows
from investing activities (see 2.3.20.10). However, cash payments to manufacture or acquire assets held for rental that
subsequently become held-for-sale (i.e. are transferred to inventory) are cash flows from operating activities (see
3.2.440.37). Cash flows from rental payments and subsequent sales of these assets are also classified as operating. [IAS
7.14, 16.68A]
2.3.60 Hedging
2.3.60.10 When a hedging instrument is accounted for as a hedge of an identifiable position (see 7.7), the cash flows of
the hedging instrument are classified in the same manner as the cash flows of the position being hedged. See 7.8.270 for a
discussion of the presentation of hedging instruments. [IAS 7.16]
2.3.70 Securitisation of receivables

2.3.70.10 There is no specific guidance in IFRS on presenting cash flows from securitisations, but in our view the
classification of the proceeds from a securitisation of receivables should follow the underlying accounting (see 7.5.320).
Page 76 / 375
• If the receivables are not derecognised and the proceeds are recognised as a liability, then the
proceeds should be classified as part of financing activities.
• If the receivables are derecognised, then it would generally be more appropriate for the
proceeds to be classified as part of operating activities even if the entity does not enter into such
transactions regularly. This is because we believe that generally such proceeds do not fit clearly
into the definitions of either investing or financing activities (see 2.3.20); also, a securitisation
resulting in derecognition is analogous to the early collection of amounts due from customers.
Page 77 / 375
2.3.80 FOREIGN CURRENCY DIFFERENCES

2.3.80.10 Cash flows arising from an entity's foreign currency transactions are translated into the entity's functional
currency (see 2.7.30) at the exchange rates at the dates of the cash flows; when exchange rates have been relatively
stable, an appropriate average can be used. When the presentation currency is different from the functional currency, the
functional currency cash flows are translated into the presentation currency at the rates at the dates of the cash flows (or
appropriate averages). For example, the functional currency cash flows of a foreign operation will need to be translated into
the group presentation currency when preparing consolidated financial statements. The effect of exchange rate changes on
the balances of cash and cash equivalents is presented as part of the reconciliation of movements therein. [IAS 7.25-28]
2.3.90 Cash held in a foreign currency

EXAMPLE 1 - CALCULATING AND PRESENTING THE EFFECT OF EXCHANGE RATE CHANGES
2.3.90.10 This example illustrates the calculation of the effect of exchange rate changes on the
balances of cash and cash equivalents and its presentation in the statement of cash flows.
Page 78 / 375
2.3.100 Other foreign currency differences

2.3.100.10 Assets and liabilities denominated in a foreign currency generally include an element of unrealised exchange
differences at the end of the reporting period. When applying the indirect method, it is generally more transparent for the
unrealised exchange difference to be presented as a single non-cash item within operating activities, rather than left
embedded in the asset or liability.
EXAMPLE 2 - PRESENTATION OF UNREALISED EXCHANGE DIFFERENCES
Page 79 / 375
Notes
(1) AC = Alternative currency
(2) Cash or balance at the end of 2011 is held in entity’s functional currency
(FC)
(3) Calculated as (200 - 125)
2.3.100.20 Because there are no receipts from customers or payments to suppliers, net cash from operating activities
would also be zero under the direct method.
Page 80 / 375
2.3.110 OFFSETTING
2.3.110.10 Financing and investing cash flows are generally reported gross. [IAS 7.21]
EXAMPLE 3 - GROSS PRESENTATION
2.3.110.20 An entity obtains a loan of 2,000 during the reporting period and uses the proceeds to
repay another loan of 2,000. The following should be presented as financing activities:
• proceeds from borrowings: 2,000; and
• separately, repayment of borrowings: 2,000.
2.3.110.25 Receipts and payments may be netted only when the items concerned - e.g. sale and purchase of investments
- turn over quickly, the amounts are large and the maturities are short; or when they are on behalf of customers and the
cash flows reflect the activities of the customers. [IAS 7.22-23]
2.3.110.30 In addition, a financial institution may report on a net basis certain advances, deposits and repayments thereof
that form part of its operating activities. However, not all borrowings of a financial institution are part of operating activities;
therefore, Example 3 in relation to financing activities applies equally to a financial institution. [IAS 7.24]
2.3.110.40 In our view, if a group comprises a combination of financial institution and non-financial institution subsidiaries,
then the offsetting requirements would apply separately to each subsidiary's cash flows as presented in the consolidated
statement of cash flows.
Page 81 / 375
2.3.120 TAXES COLLECTED ON BEHALF OF THIRD PARTIES

2.3.120.10 IAS 7 is silent on the classification of cash flows from taxes that are collected on behalf of third parties when
the direct method is used to present cash flows from operating activities; examples include value added tax (VAT) and
goods and services tax (GST).
2.3.120.20 In our view, taxes collected on behalf of third parties, when the direct method is used, may be either:
• included as separate line items to show the impact on cash flows of such taxes separately; or
• included in receipts from customers and payments to suppliers.
2.3.120.30 In our experience, these indirect taxes are generally included in receipts from customers and payments to
suppliers.
2.3.120.40 The example below illustrates alternative approaches to presentation of taxes collected on behalf of third
parties in the statement of cash flows.
EXAMPLE 4 - ILLUSTRATION OF THE ALTERNATIVE APPROACHES
Page 82 / 375
Page 83 / 375
2.3.125 CASH FLOW DISCLOSURE REQUIREMENTS OF OTHER

STANDARDS
2.3.125.10 Other standards have certain cash flow disclosure requirements - e.g. cash flows of discontinued operations
(see 5.4.220.40-70) and cash flows arising from the exploration of mineral resources (see 5.11.165).
Page 84 / 375

2.3.130.10 In May 2012, the IASB published Exposure Draft ED/2012/1 Annual Improvements to IFRSs 2010-2012 Cycle.
The ED proposed that the classification of interest that is capitalised in accordance with IAS 23 would follow the
classification of the underlying asset to which those payments were capitalised. For example, interest paid that is capitalised
into the cost of property, plant and equipment would be classified as an investing activity; interest paid that is capitalised
into the cost of inventory would be classified as an operating activity. If this proposal is accepted, then our view expressed
in 2.3.50.40 would be aligned with these requirements.
2.3.130.20 In November 2011, the IFRS Interpretations Committee recommended that the IASB consider making
amendments to IAS 7 to clarify that an operator that provides construction or upgrade services in a service concession
arrangement within the scope of IFRIC 12 should present all of the cash inflows and outflows relating to these activities as
operating cash flows. This issue is being considered by the IASB as part of the Annual Improvements to IFRSs 2011-2013
Cycle.
Page 85 / 375
2.4 Basis of accounting

(IAS 1, IAS 21, IAS 29, IFRIC 7)
Modified historical • Financial statements are prepared on a modified historical cost

cost basis with a growing emphasis on fair value. [2.4.10.10]
Going concern • Even when the going concern assumption is not appropriate, IFRS is
still applied accordingly. [2.4.15.10]
Hyperinflation • When an entity's functional currency is hyperinflationary, its financial

statements are adjusted to state all items in the measuring unit
current at the end of the reporting period. [2.4.20.10]
Key judgements • Disclosure is required for judgements that have a significant impact
and estimations on the financial statements and for key sources of estimation
uncertainty. [2.4.170, 180]

Statements, IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 29 Financial Reporting in Hyperinflationary
Economies and IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary
Economies.
text. The forthcoming requirements related to this topic are derived from IFRS 13 Fair Value Measurement, which is
effective for annual periods beginning on or after 1 January 2013. A brief outline of the impact of IFRS 13 on this topic is
given in 2.4.12. The requirements of IFRS 13 are discussed in chapter 2.4A.
Page 86 / 375
2.4.10 THE MODIFIED HISTORICAL COST CONVENTION #

2.4.10.10 IFRS requires financial statements to be prepared on a modified historical cost basis with a growing emphasis
on fair value. 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. Issues associated with the determination of fair value are discussed
throughout this publication in connection with the relevant asset or liability. [Glossary]
2.4.10.20 The following are examples of assets and liabilities whose carrying amounts are determined with reference to
cost-based measurements subsequent to initial recognition (ignoring adjustments for impairment):
• property, plant and equipment and intangible assets that are not revalued (see 3.2 and 3.3);
• investment property that is not measured at fair value (see 3.4); and
• loans and receivables, held-to-maturity investments and financial liabilities other than those
measured at fair value (see 7.4).
2.4.10.30 The carrying amounts of the following assets and liabilities are based on fair value measurements subsequent to
initial recognition.
• All derivatives, all financial assets and financial liabilities held for trading or designated as at fair
value through profit or loss, and all financial assets that are classified as available-for-sale are
measured at fair value (see 7.6.120).
• Biological assets are measured at fair value less costs to sell (see 3.9.30).
• Whole classes of property, plant and equipment may be revalued to fair value subject to certain
conditions (see 3.2.300).
• Certain intangible assets may be revalued to fair value (see 3.3.280).
• Investment property may be measured at fair value (see 3.4.140.40, 160).
2.4.10.40 In addition, the following value-based measurements are an integral part of financial reporting under IFRS.
• Recoverable amount, which is used in impairment testing for many assets (see 3.10.180), is the
higher of an asset's value in use (estimated net future cash flows) and its fair value less costs to
sell.
• Net realisable value, which is used as a ceiling test to avoid over-valuing inventory, is the
estimated selling price less costs of completion and disposal (see 3.8.110).
• Discounting is inherent in many IFRSs although the discount rate used varies. For example,
defined benefit plans for employees are discounted using a corporate or government bond rate
(see 4.4.300), whereas deferred payment related to the sale of goods may be discounted using
either a market interest rate or a rate of interest that discounts the nominal amount payable to
the current cash sales price (see 4.2.20).
2.4.12.10 IFRS 13 replaces most of the fair value measurement guidance contained in individual IFRSs with a single
definition of fair value. It also provides fair value application guidance and establishes a comprehensive disclosure
framework for fair value measurements. Chapter 2.4A discusses the requirements of IFRS 13.
Page 87 / 375

2.4.15.10 Financial statements are prepared on a going concern basis, unless management intends or has no alternative
other than to liquidate the entity or stop trading. In assessing whether the going concern assumption is appropriate,
management assesses all available information about the future for at least, but not limited to, 12 months from the end of
the reporting period. In our view, there is no general dispensation from the measurement, recognition and disclosure
requirements of IFRS even if an entity is not expected to continue as a going concern. We believe that even if the going
concern assumption is not appropriate, IFRS is applied accordingly, with particular attention paid to the requirements of
IFRS 5 (to the extent that assets are being held for sale and not abandoned), IAS 32 (with respect to the classification of
the entity's debt and equity instruments), IAS 36 and IAS 37. If an entity ceases to be a going concern after the end of the
reporting period but before its financial statements are authorised for issue, then it should not prepare its financial
statements on a going concern basis. [IAS 1.25-26, 10.14]
2.4.15.15 In the case of an entity in liquidation, all liabilities should continue to be recognised and measured in accordance
with the applicable IFRS until the obligations are discharged, cancelled or expire. For example, Company C is in liquidation.
If C has a financial liability in accordance with IAS 39, then this financial liability cannot be derecognised until the
requirement of paragraph 39 of IAS 39 is met - i.e. the obligation specified in the related contract is discharged, cancelled
or expires.
2.4.15.20 If a subsidiary is expected to be liquidated and its financial statements are prepared on a non-going concern
basis, but the parent is expected to continue as a going concern, then in our view the consolidated financial statements
should be prepared on a going concern basis. The subsidiary should continue to be consolidated until it is liquidated or
otherwise disposed of, unless the exemption criteria in IAS 27 are met (see 2.1.50).
Page 88 / 375
2.4.20 HYPERINFLATION
2.4.20.10 When an entity's functional currency (see 2.7.30) is hyperinflationary, its financial statements are 'restated' so
that all items are presented in the measuring unit current at the end of the reporting period (i.e. it should adopt the current
purchasing power concept). Moreover, when an entity has foreign operations (e.g. a subsidiary, associate or jointly
controlled entity) whose functional currency is hyperinflationary, the investee's financial statements should be restated
before being translated and included in the investor's financial statements. Comparative amounts are excluded from the
restatement requirement when the presentation currency of the ultimate financial statements into which they will be
included is non-hyperinflationary (see 2.7.270). [IAS 21.43, 29.8]
2.4.30 Indicators of hyperinflation

2.4.30.10 Under IFRS, it is a matter of judgement as to when restatement for hyperinflation becomes necessary.
Hyperinflation is indicated by the characteristics of an economy, which include but are not limited to the following.
• The general population prefers to keep its wealth in non-monetary assets or in a relatively stable
foreign currency - amounts of local currency held are invested immediately to maintain
purchasing power.
• The general population regards monetary amounts not in terms of the local currency but in terms
of a relatively stable foreign currency - prices may be quoted in the stable currency.
• Sales and purchases on credit take place at prices that compensate for the expected loss of
purchasing power during the credit period, even if the period is short.
• Interest rates, wages and prices are linked to a price index.
• The cumulative inflation rate over three years is approaching, or exceeds, 100 percent. [IAS
29.3]
2.4.30.20 While the 100 percent numerical indicator is a key factor in identifying hyperinflation, it is not the only factor and
should not be considered in isolation. Applying all of these factors could result in a country being considered
hyperinflationary when its three-year cumulative inflation rate is, for example, only 80 percent.
2.4.30.30 While judgement is involved in determining the onset of hyperinflation in a particular case, a preference is stated
in the standard for all affected entities to apply the standard from the same date. [IAS 29.4]
2.4.30.40 Restatement for hyperinflation is not elective. For example, the standard cannot be adopted when an entity
believes that the cumulative effects of inflation are significant and therefore that restatement would be helpful. In such
cases the entity may consider presenting supplementary current cost information (see 5.8).
2.4.40 Measuring the inflation rate
2.4.50 The appropriate price index

2.4.50.10 For most countries there are two main indices that generally are used in measuring the general inflation rate: a
consumer price index (CPI) and a producer or wholesale price index (PPI or WPI). The CPI measures the change in the cost
of a fixed basket of products and services consumed by a 'typical household', generally including housing, electricity, food
and transportation. The PPI or WPI measures wholesale price levels.
2.4.50.20 IFRS requires the use of a general price index that reflects changes in general purchasing power. In addition,
two of the indicators of hyperinflation refer to the general population rather than a specific sector. For these reasons, in our
view the CPI is the most appropriate index to use in measuring the inflation rate, since it is a broad-based measurement
across all consumers in an economy. [IAS 29.37]
Page 89 / 375
2.4.60 The cumulative inflation rate

2.4.60.10 IAS 29 refers to a cumulative inflation rate, but is silent as to whether the calculation should be done on a simple
or compounded basis. In our view, a compounded inflation rate should be calculated because the simple rate aggregates
three discrete results without viewing the three-year period itself on a cumulative basis. [IAS 29.3]
EXAMPLE 1 - DETERMINATION OF CUMULATIVE INFLATION RATE
2.4.60.20 The inflation rate in three consecutive years is 20%, 30% and 40%, respectively. The
cumulative rate calculated on a simple basis is 90% (20 + 30 + 40). However, on a compounded
basis the rate is 118%, which is calculated as follows.
• At the start of year 1, assume the index to be 100.
• At the end of year 1, the index is 120 (100 x 1.2).
• At the end of year 2, the index is 156 (120 x 1.3).
• At the end of year 3, the index is 218 (156 x 1.4), which gives a cumulative
inflation rate of 118%.
2.4.70 No index available

2.4.70.10 When there is no index available, the standard requires an index to be estimated. The example it provides is
using an estimate based on exchange rate movements between the functional currency and a relatively stable foreign
currency. Although the standard uses this example in the context of the restatement of property, plant and equipment, in
our view this method could be used for the restatement of the entire financial statements in cases when no index is
available. The same issue will arise when the official indices are considered unreliable, but this problem should be rare.
[IAS 29.17]
2.4.80 Mechanics
2.4.80.10 To prepare a statement of financial position and a statement of comprehensive income in a hyperinflationary
economy, an entity needs to restate its comparatives and determine the impact of changes in purchasing power. To
prepare these statements, there are three separate steps to be considered:
• restate the statement of financial position at the beginning of the reporting period;
• restate the statement of financial position at the end of the reporting period; and
• restate the statement of comprehensive income for the reporting period. [IAS 29.8, 26]
2.4.80.11 There will also be impacts on the statement of changes in equity and statement of cash flows from this process.
[IAS 29.33]
2.4.80.12 In the statement of financial position at the beginning of the reporting period both monetary and non-monetary
items are 'indexed up' such that they are stated in the measuring unit current at the end of the reporting period, and
therefore reflect the purchasing power on that later date. Non-monetary items, such as property, plant and equipment and
inventory, may have been acquired many periods ago when the purchasing power of the currency was greater. The
historical currency amounts will need to be indexed up from the date acquired to reflect the purchasing power at the end of
the reporting period. Monetary items are, on any given date, always stated at their current purchasing power at that date.
Therefore, the monetary items in the opening statement of financial position also need to be indexed up - i.e. their opening
balance is increased to reflect the fact that the asset had higher purchasing power - to reflect their purchasing power at the
end of the reporting period. [IAS 29.8]
2.4.80.13 Deferred income tax balances are calculated after the restatement of non-monetary assets (see 2.4.90.20).
[IFRIC 7.4]
Page 90 / 375
2.4.80.14 The statement of financial position at the end of the reporting period is also indexed up to current purchasing
power terms. Because monetary items are, on any given date, always stated at their current purchasing power at that date,
this means that monetary amounts held at the end of the reporting period do not require restatement. Non-monetary items
at the beginning of the reporting period are already restated to reflect the purchasing power at the end of the reporting
period (see 2.4.80.12). Therefore, assuming no changes to the non-monetary items in the reporting period, non-monetary
items are carried at the same amount as is in the adjusted statement of financial position at the beginning of the reporting
period (i.e. the same for both years presented in the statement of financial position). For example, an item of inventory on
hand and measured at cost at the beginning and at the end of the reporting period will be stated at the same amount in
both statements of financial positions (absent impairment). Otherwise, a non-monetary asset purchased during the
reporting period is indexed up from date-of-purchase purchasing power to purchasing power at the end of the reporting
period. However, if an asset or liability has been revalued, then it is adjusted only from the date of the valuation. [IAS
29.12-16]
2.4.80.16 A hyperinflationary statement of comprehensive income includes the gain or loss from holding monetary assets
or liabilities and the gain or loss from transactions during the period. The gain or loss from holding monetary assets or
liabilities is included in profit or loss. Any income earned or expense incurred during the period will need to be indexed up
from the date initially recorded to reflect the purchasing power at the end of the reporting period. For practical reasons, an
average indexation rate may be acceptable when the overall result is not materially different from the result that would be
obtained by indexing individual items of income and expense based on the date at which the transaction took place. [IAS
29.26]
2.4.80.17 The gain or loss from holding monetary assets or liabilities is an economical concept. Suppose that an entity held
1,000 of cash (and 1,000 of share capital), and had no other assets, liabilities or transactions, throughout a year when the
CPI index has moved from 100 to 150. The entity has made an economic loss, and current purchasing power accounting
forces this to appear in the financial statements. The economic loss exists as follows: the entity would need 1,500 of cash
at the end of the reporting period to be in the same purchasing power position as having 1,000 of cash at the beginning of
the reporting period, and a loss of 500 has actually occurred.
EXAMPLE 2 - RESTATEMENTS TO REFLECT THE PURCHASING POWER AT THE END OF THE REPORTING PERIOD
2.4.80.20 The following example illustrates the process. Company H was incorporated in
December 2010 with a cash capital contribution of 100, and started its operations in 2011. In
December 2011, it bought a piece of land for 600, and entered into a five-year loan. In October
2012, H bought inventories, which remained unsold at 31 December 2012. H's functional currency
has been considered hyper-inflationary since 2009.
Page 91 / 375
2.4.80.30 In preparing the 2012 financial statements, H first restates its statement of financial
position at the beginning of the reporting period. Accordingly, the statement of financial position at
31 December 2011 (1 January 2012) is restated so that it is expressed in the measuring unit current
at 31 December 2012, either from:
• the historical statement of financial position at the beginning of the reporting
period: .
- non-monetary items in the statement of financial position at 31
December 2011 are divided by the index at the date the non-monetary
items were acquired or contributed and multiplied by the index at the
December 2012 (200); and .
- monetary items at 31 December 2011 are divided by the index at 31
December 2011 (150) and multiplied by the index at 31 December 2012
(200); or
• as illustrated below, the statement of financial position at the beginning of
the reporting period as expressed in the purchasing power at that date:
- all assets and liabilities in the statement of financial position at 31
December 2011 are divided by the index at 31 December 2011 (150) and
multiplied by the index at 31 December 2012 (200). [IAS 29.34]
Page 92 / 375
2.4.80.40 H then restates its statement of financial position at the end of the reporting period (31
December 2012) in terms of the measuring unit current at that time. In general, non-monetary
items are restated from the acquisition or contribution date. However, if an asset or liability has
been revalued, then it is restated only from the date of the valuation. If the item is stated at fair
value at the end of the reporting period, then no restatement is necessary. Monetary items at 31
December 2012 are not restated because they are already expressed in purchasing power at that
date. [IAS 29.12, 14-15, 18]
Page 93 / 375
2.4.80.50-60 Not Used

2.4.80.70 Income and expenses recorded in the statement of comprehensive income are restated
to reflect changes in the price index from the date that they are recorded initially in the financial
statements. In this example an average index is applied. In our experience a single annual average
often may not be appropriate due to the speed and exponential way in which the index rises in a
hyperinflationary economy. [IAS 29.26]
Page 94 / 375
2.4.80.100 The loss on net monetary position can be determined as follows.

• Calculate the gain/loss on holding monetary items in the statement of
financial position at the beginning of the reporting period, for the whole
period (column 1 below).
• Adjust the above amount for net monetary transactions that occurred during
2012 by comparing the restated carrying amount to the historical transaction
amount (columns 2 and 3).
2.4.80.110 Alternatively, the loss on net monetary position may be derived as the difference
resulting from the restatement of non-monetary assets, owners' equity and items in the statement
of comprehensive income and the adjustment of any index linked assets and liabilities. [IAS
29.27]
Page 95 / 375
2.4.83 Impairment of non-monetary assets

2.4.83.10 The restated amount of a non-monetary asset is reduced in accordance with appropriate IFRSs when it exceeds
the item's recoverable amount. For example, IAS 36 requires that if the recoverable amount of property, plant and
equipment or goodwill is less than the asset's cost or amortised cost (as appropriate), then the carrying amount of the
asset is reduced to its recoverable amount and the reduction is an impairment loss that is recognised immediately in profit
or loss. Similarly, IAS 2 requires inventories to be measured at the lower of cost and net realisable value with any write
down to net realisable value recognised as an expense in the period the write-down occurs. [IAS 2.9, 34, 29.19, 36.59-60]
2.4.83.20 Consistent with the requirements of those other standards, and with the objective of IAS 29 to reflect amounts in
the financial statements based on their current purchasing power, in our view, such reductions to recoverable amount
should be included in profit or loss and determined based on amounts measured in purchasing power terms at the end of
the reporting period. [IAS 29.8]
EXAMPLE 3 - IMPAIRMENT OF INVENTORY
2.4.83.30 Company M purchased inventory some months ago for 100. The net realisable value at
the end of the reporting period is 175 while the increase in the inflation index from the date of
purchase to the end of the reporting period is 100%. In current purchasing power terms, the
inventory has a cost of 200 and the write down of 25 to 175 is an expense in current purchasing
power terms that is included in profit or loss for the period.
2.4.85 Comparatives
2.4.85.10 Comparatives are restated by taking the corresponding figures for the end of the previous period and applying a
general price index so that they are presented in terms of the measuring unit current at the end of the reporting period.
The same process that is used to calculate the statement of financial position at the beginning of the reporting period is
used to calculate the comparatives (see 2.4.80.30). [IAS 29.8, 24]
2.4.85.20 In other words, first, the comparative statement of financial position is restated to reflect the purchasing power
at the end of the reporting period. Second, the comparative statement of comprehensive income is restated to the current
Page 96 / 375
purchasing power at the end of the reporting period. If the comparative period's financial statements were themselves
presented under IAS 29, then the previously published figures were in prior-period-end purchasing power. In that case, the
restatement to purchasing power at the end of the reporting period becomes a mathematical computation of multiplying up
all those figures by the increase in the price index over the current annual reporting period. This multiplication is also
applied to the monetary loss shown in the prior period's current purchasing power statement of comprehensive income.
2.4.90 First application of hyperinflationary accounting

2.4.90.10 At the end of the reporting period in which an entity identifies its functional currency as hyperinflationary, it
applies IAS 29 retrospectively, as if the currency had always been hyperinflationary. Non-monetary assets and liabilities at
the beginning of both the current and the comparative period are all restated for changes in prices from their dates of
acquisition or incurrence (or revaluation, if applicable) into the purchasing power at the end of the reporting period.
Monetary items at the beginning of current and comparative periods are restated from those dates through to purchasing
power at the end of the reporting period. [IFRIC 7.3]
2.4.90.20 IFRIC 7 provides guidance on the calculation of deferred tax in the period when an entity's functional currency is
considered hyperinflationary, but has not been hyperinflationary in the previous ones. At the end of the reporting period,
deferred taxes are calculated recognised and measured in accordance with IAS 12 (see 3.13). However, because deferred
tax items are a function of carrying amounts of assets or liabilities and their tax bases, an entity cannot restate its
comparative deferred tax items by simply applying a general price index. Instead, the balance of deferred tax at the
beginning of the reporting period is calculated in accordance with IAS 12 after the nominal carrying amounts of non-
monetary items at that date has been restated by applying the effects of inflation at that date. This remeasured deferred
tax at the beginning of the reporting period is then restated by applying the effects of inflation to the end of the reporting
period. [IFRIC 7.4]
EXAMPLE 4 - RESTATEMENT OF DEFERRED TAX WHEN RESTATING THE EFFECTS OF INFLATION UNDER IAS 29
2.4.90.25 Continuing with the facts as set out in Example 2, except that H identified the existence
of hyperinflation during 2012. In addition, H's income tax rate is 40%. The tax base of the land was
31 December 2011 and remained unchanged at 31 December 2012.
Page 97 / 375
2.4.90.30 IAS 29 requires comparatives to be restated in the measuring unit current at the end of the reporting period.
However, IAS 21 prohibits restatement of comparatives for the effects of inflation at the end of the reporting period if the
entity's presentation currency is not hyperinflationary (see 2.4.120.10 and 2.7.270.20). It is unclear whether on first
application of hyperinflationary accounting the entity should restate its comparatives for price changes in prior periods if its
presentation currency is not hyperinflationary. In our view, an entity should choose an accounting policy, to be applied
consistently, as to whether it restates its comparatives in these circumstances. If an entity chooses not to restate its
comparatives in these circumstances, then in our view the entity should recognise directly in equity the gain or loss on the
net monetary position related to price changes in prior periods. This will ensure that the gain or loss on the net monetary
position recognised in profit or loss in the current period is consistent with the amount that would have been recognised had
the entity always applied restatement under IAS 29. [IAS 21.42, 29.8]
2.4.100 [Not used]
2.4.110 Cessation of hyperinflationary accounting

2.4.110.10 When an entity's functional currency ceases to be hyperinflationary, it discontinues preparing and presenting its
financial statements in accordance with IAS 29 for annual periods ending on or after the date that the economy is identified
as being non-hyperinflationary. Judgement is required in determining when the economy ceases to be hyperinflationary.
[IAS 29.38]
2.4.120 Translation of comparative amounts in a presentation currency

different from the functional currency
2.4.120.10 When the financial information of an entity whose functional currency is hyperinflationary is translated into a
different presentation currency, this is done in accordance with IAS 21 (see 2.7.310). If the presentation currency is not
hyperinflationary, comparative amounts are not restated for either changes in the price level (i.e. as otherwise required by
IAS 29), or changes in exchange rates. As such, the comparative amounts remain those amounts reported as current for
the previous annual reporting period. Conversely, when the presentation currency is hyperinflationary, the comparative
amounts will be restated in accordance with both IAS 21 and IAS 29. [IAS 21.42, 29.8]
2.4.130 Supplementary historical cost information

2.4.130.10 When restated financial statements are presented, in our view it is not appropriate to present additional
supplementary financial information prepared on a historical cost basis.
2.4.130.20 Since money rapidly loses its purchasing power in a hyperinflationary economy, reporting an entity's financial
position and operating results in the currency of a hyperinflationary economy without restatement would be meaningless to
users; comparative figures would also have little or no value. Therefore, the presentation of historical cost information in
Page 98 / 375
these cases may be misleading to users of the financial statements.
Page 99 / 375
2.4.140 CHANGING PRICES

2.4.140.10 Entities whose functional currency is not hyperinflationary may choose to disclose certain information about the
effects of changing prices on a current cost basis as supplementary information to its financial statements (see 5.8).
2.4.150-160 [Not used]
Page 100 / 375

2.4.170 JUDGEMENT
2.4.170.10 An entity should disclose judgements (other than estimates (see 2.4.180)) made by management in applying
the entity's accounting policies. Disclosure is required of the judgements that have the most significant effect on the
measurement of items recognised in the financial statements (e.g. whether risks and rewards have been transferred in a
revenue-generating transaction). [IAS 1.122]
Page 101 / 375

2.4.180 ESTIMATION
2.4.180.10 An entity discloses the key assumptions about the future, and other major sources of estimation uncertainty at
the end of the reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts of
assets and liabilities within the next reporting period. The assumptions and other major sources of estimation uncertainty to
be disclosed relate to the estimates that require management's most difficult, subjective or complex judgements. These
disclosures are intended to help users understand these judgements. [IAS 1.125]
Page 102 / 375

2.4A Fair value measurement

(IFRS 13)
OVERVIEW OF FORTHCOMING REQUIREMENTS
Scope • IFRS 13 applies to most fair value measurements or disclosures

(including measurements based on fair value) that are required or
permitted by other IFRSs. [2.4A.10.10]
Fair value • Fair value is the price that would be received to sell an asset or
principles paid to transfer a liability in an orderly transaction between market
participants at the measurement date - i.e. an exit price.
[2.4A.30.10]
• Fair value measurement assumes that a transaction takes place in
the principal market for the asset or liability or, in the absence of a
principal market, in the most advantageous market for the asset or
liability. [2.4A.70.10]
Application issues • For liabilities or an entity's own equity instrument, if a quoted price
for a transfer of an identical or similar liability or own equity
instrument is not available and the identical item is held by another
entity as an asset, then the liability or own equity instrument is
valued from the perspective of a market participant that holds the
asset. Failing that, other valuation techniques are used to value the
liability or own equity instrument from the perspective of a market
participant that owes the liability. [2.4A.100.10]
• The fair value of a liability reflects non-performance risk. Non-
performance risk is assumed to be the same before and after the
transfer of the liability. [2.4A.140.10]
• When another IFRS requires or permits an asset or a liability to be
measured initially at fair value, gains or losses arising on
differences between fair value at initial recognition and the
transaction price are recognised in profit or loss, unless the other
IFRS requires otherwise. [2.4A.160.10]
• Certain groups of financial assets and financial liabilities with
offsetting market or credit risks may be measured based on the
net risk exposure. [2.4A.200.10]
• The fair value of a non-financial asset is based on its highest and
best use to market participants, which may be on a stand-alone
basis or in combination with complementary assets or liabilities.
[2.4A.270.10]
Valuation • While IFRS 13 discusses three general approaches to valuation

technique (the market, income, and cost approaches), it does not establish
specific valuation standards. Several valuation techniques may be
available under each approach. [2.4A.300.10]
Page 103 / 375

• Appropriate valuation technique(s) should be used, maximising the

use of relevant observable inputs and minimising the use of
unobservable inputs. [2.4A.300.10]
• A fair value hierarchy is established based on the inputs to
valuation techniques used to measure fair value. [2.4A.390.10]
• The inputs are categorised into three levels (Levels 1, 2 and 3),
with the highest priority given to unadjusted quoted prices in active
markets for identical assets or liabilities and the lowest priority
given to unobservable inputs. [2.4A.390.20]
• A premium or discount may be an appropriate input to a valuation
technique. A premium or discount should not be applied if it is
inconsistent with the relevant unit of account. [2.4A.450.10]
• For fair value measurements of assets or liabilities having bid and
ask prices, an entity uses the price within the bid-ask spread that is
most representative of fair value in the circumstances. The use of
bid prices for assets and ask prices for liabilities is permitted.
[2.4A.460.10]
• Guidance is provided on measuring fair value when there has been
a decline in the volume or level of activity in a market, and when
transactions are not orderly. [2.4A.470.10]
Disclosures • A comprehensive disclosure framework is set out in IFRS 13 to

help users of financial statements assess the valuation techniques
and inputs used in fair value measurements, and the effect on
profit or loss or other comprehensive income of recurring fair value
measurements that are based on significant unobservable inputs.
[2.4A.480.10]
FORTHCOMING REQUIREMENTS
In May 2011, the IASB published IFRS 13 Fair Value Measurement. IFRS 13 provides a single source of guidance on how
fair value is measured, and replaces fair value measurement guidance that was previously dispersed throughout IFRS.
Subject to limited exceptions, IFRS 13 is applied when fair value measurements or disclosures are required or permitted
by other IFRSs. IFRS 13 does not establish requirements on when fair value measurements or disclosures are required or
permitted.
IFRS 13 provides a framework for measuring fair value. While it includes descriptions of certain valuation approaches and
techniques, it does not establish valuation standards.
IFRS 13 applies for annual periods beginning on or after 1 January 2013. Early adoption is permitted, in which case that
fact is disclosed. [IFRS 13.C1]
When a significant change to the forthcoming requirements is expected, it is marked with an * as an area that may be
subject to future developments and a brief outline of the relevant project is given in 2.4A.530.
Page 104 / 375

2.4A.10 SCOPE
2.4A.10.10 Unless explicitly scoped out, as specified in 2.4A.10.30-40, IFRS 13 applies to:
• fair value measurements (both initial and subsequent) that are required or permitted by other
IFRSs. [IFRS 13.5, 8]
• measurements based on fair value or disclosures about those measurements, such as fair
value less costs to sell of:
- a cash generating unit (CGU) under IAS 36 (see 3.10.190); or
- assets classified as held-for-sale under IFRS 5 (see 5.4.40); [IFRS 13.5] and
• assets or liabilities that are not measured at fair value in the statement of financial position but
for which fair value is disclosed, such as:
- financial instruments subsequently measured at amortised cost under IAS 39 or IFRS 9
(see 7.6.270); or
- investment property subsequently measured using the cost model under IAS 40 (see
3.4.180). [IFRS 13.BC25]
2.4A.10.20 The requirements of IFRS 13 apply to an entity's use of the 'fair value as deemed cost' exemption under
IFRS 1 (see 6.1.330, 530 and 590).
2.4A.10.30 IFRS 13 does not apply to the following:
• share-based payment transactions within the scope of IFRS 2;
• leasing transactions within the scope of IAS 17; and
• measurements that are similar to fair value but that are not fair value - e.g. net realisable
value in IAS 2, or value in use in IAS 36. [IFRS 13.6]
2.4A.10.35 Provisions measured at the best estimate of the expenditure required to settle the present obligation in
accordance with IAS 37 are outside the scope of IFRS 13 (see 3.12.110).
2.4A.10.40 Additionally, the disclosure requirements of IFRS 13 do not apply to:
• plan assets measured at fair value in accordance with IAS 19;
• retirement benefit plan investments measured at fair value in accordance with IAS 26; and
• assets for which the recoverable amount is fair value less costs of disposal in accordance with
IAS 36. [IFRS 13.7]
Page 105 / 375

2.4A.20 DEFINITIONS
2.4A.20.10 IFRS 13 introduces or amends certain definitions and concepts, some of which are outlined in this section.
2.4A.20.20 'Fair value' is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. [IFRS 13.9, A]
2.4A.20.30 An 'active market' is a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis. [IFRS 13.A]
2.4A.20.40 A 'principal market' is the market with the greatest volume and level of activity for the asset or liability.
[IFRS 13.A]
2.4A.20.50 The 'most advantageous market' is the market that maximises the amount that would be received to sell the
asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction and
transport costs. [IFRS 13.A]
2.4A.20.60 'Market participants' are buyers and sellers in the principal (or most advantageous) market for the asset or
liability that have all the following characteristics.
• They are independent of each other - i.e. they are not related parties as defined in IAS 24,
although the price in a related party transaction may be used as an input to a fair value
measurement if the entity has evidence that the transaction was entered into at market terms.
• They are knowledgeable, having a reasonable understanding about the asset or liability and the
transaction using all available information, including information that might be obtained through
due diligence efforts that are usual and customary.
• They are able to enter into a transaction for the asset or liability.
• They are willing to enter into a transaction for the asset or liability - i.e. they are motivated but
not forced or otherwise compelled to do so. [IFRS 13.A]
2.4A.20.70 'Highest and best use' is the use of a non-financial asset by market participants that would maximise the
value of the asset or the group of asset and liabilities (e.g. a business) within which the asset would be used. [IFRS 13.A]
Page 106 / 375

2.4A.30 FAIR VALUE PRINCIPLES

2.4A.30.10 Fair value is an exit price. An 'exit price' is the price that would be received to sell an asset or paid to
transfer a liability at the measurement date. An exit price of an asset or liability embodies expectations about the future
cash inflows and outflows associated with the asset or liability from the perspective of a market participant that holds the
asset or owes the liability at the measurement date. [ [IFRS 13.A], BC36, BC39]
2.4A.30.20 Fair value is a market-based measurement, rather than an entity-specific measurement. Fair value is
measured using the assumptions that market participants would use when pricing the asset or liability, including
assumptions about risk. As a result, an entity's intention to hold an asset or to settle or otherwise fulfil a liability is not
relevant when measuring fair value. For example, the fact that an entity asserts that prices in orderly transactions are too
low relative to its own value expectations, and accordingly that the entity would be unwilling to sell at such prices, is not
relevant. [IFRS 13.2, IN9]
2.4A.40 The asset or liability being measured

2.4A.40.10 An entity should take into account characteristics of the asset or liability that market participants would take
into account in a transaction for the asset or liability at the measurement date. In the case of an asset, these
characteristics include, for example:
• the condition and location of the asset (see 2.4A.80.20); and
• restrictions, if any, on the sale or use of the asset. [IFRS 13.11]
2.4A.40.20 It is important to distinguish a characteristic of an asset or liability from a characteristic arising from an
entity's holding of the asset or liability, which is an entity-specific characteristic (see 2.4A.450.40). Factors used to
evaluate whether a restriction on an asset is a characteristic of the asset or entity-specific may include whether the
restriction is:
• transferred to a (potential) buyer;
• imposed on a holder by regulations;
• part of the contractual terms of the asset; or
• attached to the asset through a purchase contract or another commitment. See also 2.4A.150
for discussion on restriction on the transfer of a liability or an entity's own equity instrument.
EXAMPLE 1 - RESTRICTIONS ON THE USE OF AN ASSET
2.4A.40.30 Company B acquired a plot of land currently used as storage space for its factory as
part of a business combination. As a condition of the acquisition, B is not allowed to change the
use of the land for a period of 5 years. However, the area in which the property is located has
recently been re-zoned, and other land nearby has been redeveloped as residential properties. B
has received legal advice that although it is restricted under the terms of the acquisition from
changing the current use of the land, the land could be sold to a third party who would not be
bound by the restriction. Because the restriction would not be transferred to a market participant,
the restriction is a characteristic of the current holder rather than of the asset itself, and would
not be considered in measuring the fair value of the land.
EXAMPLE 2A - SECURITIES SUBJECT TO A LOCK-UP PROVISION
2.4A.40.40 Company D offers securities in a public offering and enters into an underwriting
Page 107 / 375

agreement with Company E. The underwriting agreement between D and E contains a lock-up
provision that prohibits D and its founders, directors and executive officers, from selling their
securities for a period of 180 days. The lock-up provision may be based on a contract separate
from the security (i.e. resulting from the underwriting agreement) and apply only to those parties
that signed the contract (e.g. the issuing entity, D) and their affiliates. In that case, these
restrictions may represent entity-specific restrictions that would not be considered in the fair
value measurement of the securities. However, there may be situations in which a lock-up
provision is determined to be a characteristic of the security and not entity-specific based on the
specific terms and nature of the restriction. In that case, the restriction would be considered in
the fair value measurement of the securities. See also 2.4A.450.40.
EXAMPLE 2B - SECURITIES PLEDGED AS COLLATERAL
2.4A.40.50 Company F enters into a borrowing arrangement. In accordance with the borrowing
arrangement, certain securities that F holds as investments are pledged as collateral supporting
F's borrowing. F is restricted from selling the securities pledged during the period the borrowing
is outstanding. The restrictions on the securities that F holds, resulting from the securities being
pledged as collateral, represent entity-specific restrictions that are not considered in the
securities' fair value measurement. See also 2.4A.450.40.
2.4A.50 Unit of account and unit of valuation

2.4A.50.10 When other IFRSs require or permit fair value measurement of an asset or liability, a question arises on the
level at which the measurement is performed - for example, when an entity holds multiple securities, whether the
valuation is performed for the aggregate holding or for each individual security. This is relevant because the value of an
aggregate holding may be different to the sum of the values of the components measured on an individual basis. For
example, a control premium may be appropriate in a valuation of an aggregate holding of securities that represents a
controlling interest but a control premium would generally not be appropriate when valuing an individual security (in the
absence of specific control rights for the individual security such as a golden share). See also 2.4A.450 for a discussion on
premiums, discounts and blockage factors.
2.4A.50.20 What is being measured - e.g. a stand-alone asset or a group of assets and/or liabilities - generally
depends on the unit of account. 'Unit of account' is defined as the level at which an asset or a liability is aggregated or
disaggregated in an IFRS for recognition purposes. [IFRS 13.14, A]
2.4A.50.30 IFRS 13 generally does not specify whether an individual asset or liability or a group of assets or liabilities is
considered for fair valuation. The unit of account is usually determined under the IFRS that requires or permits the fair
value measurement. For example, the unit of account in IAS 39 or IFRS 9 is generally an individual financial instrument,
whereas the unit of account in IAS 36 is often a group of assets or a group of assets and liabilities comprising a CGU. See
also 2.4A.450.35. [IFRS 13.14, BC47]
2.4A.50.40 Although not defined in IFRS, the term 'unit of valuation' is used in this chapter for convenience, to indicate
the level at which an asset or a liability is aggregated or disaggregated for the purpose of measuring fair value.
2.4A.50.50 Generally, the unit of account and unit of valuation are the same. However, there could be situations in
which the unit of valuation is different. For example, IFRS 13 permits an entity to measure the fair value of a group of
financial assets and liabilities on the basis of the net risk position in certain circumstances (see 2.4A.200). In such cases,
the unit of valuation for a particular risk exposure would be the net risk position (group of financial assets and financial
liabilities), whereas the unit of account determined under IAS 39 or IFRS 9 would be an individual financial instrument.
See also 2.4A.120.20 and 450.
2.4A.60 Market participants

2.4A.60.10 IFRS 13 requires an entity to consider the perspective of market participants and measure the fair value of
the asset or liability, based on the assumptions that would be made by market participants acting in their economic best
Page 108 / 375

interest (see 2.4A.20.60). An entity need not identify specific market participants; rather the entity should identify
characteristics that distinguish market participants considering the following:
• the asset or liability;
• the principal (or most advantageous) market for the asset or liability; and
• market participants with whom the entity would enter into a transaction in that market (see
2.4A.270.50). [IFRS 13.22-23]
2.4A.60.20 Market participants are assumed to be knowledgeable about the asset or liability, using all available
information, including information that would be expected to become available in customary and usual due diligence. To
the extent to which uncertainty exists thereafter, it would be factored into the measurement. [IFRS 13.BC58-BC59]
2.4A.70 Principal and most advantageous markets

2.4A.70.10 Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in
the principal market for the asset or liability - i.e. the market with the greatest volume and level of activity. In the absence
of a principal market, the transaction is assumed to take place in the most advantageous market for the asset or liability.
This is the market that either maximises the amount that would be received to sell the asset or minimises the amount
that would be paid to transfer the liability, after considering transaction costs and transport costs (see 2.4A.80). [IFRS
13.16, A]
2.4A.70.20 If an entity identifies a principal market, then it cannot consider prices from other, more advantageous
markets. Only if the entity were unable to identify a principal market would it measure fair value assuming a transaction
in the most advantageous market. In order for a market to be eligible to be considered as the principal or most
advantageous market, the entity should be able to access that market at the measurement date. However, the
identification of a principal market is not limited to those markets in which the entity would actually sell the asset or
transfer the liability. Furthermore, although the entity has to be able to access the market, the entity does not need to be
able to buy or sell the particular asset (or transfer the particular liability) on the measurement date in that market - e.g.
see 2.4A.40.30. [IFRS 13.19-20, BC48]
2.4A.70.30 Because the entity has to have access to the principal (or most advantageous) market in order to use a
price from that market, the identification of the relevant market is considered from the perspective of the entity. This may
give rise to different principal or most advantageous markets for entities with different activities and for different
businesses within an entity. For example, when a swap transaction takes place between an investment bank and a
commercial entity, the former may have access to the dealer and retail markets while the latter may have access only to
the retail market. [IFRS 13.19]
2.4A.70.40 In some cases, different entities within a consolidated group (and businesses within those entities) may
have different principal markets for the same asset or liability. For example, a parent company identifies a particular
market as its principal market for a particular asset. Due to regulatory restrictions, its overseas subsidiary is prohibited
from transacting in that market. As a result, the overseas subsidiary has a different principal market for the same asset.
2.4A.70.50 The IASB expects that in many instances the principal market and the most advantageous market would be
the same. An entity is not required to undertake an exhaustive search of all possible markets to identify the principal
market, or in the absence of a principal market, the most advantageous market; however, it should take account of all
information that is reasonably available. For example, if reliable information about volumes transacted is available in
trade magazines, then it may be appropriate to consider this information in determining the principal market. In the
absence of evidence to the contrary, the principal (or most advantageous) market is presumed to be the market in which
an entity normally enters into transactions to sell the asset or transfer the liability. IFRS 13 contains this practical
expedient because the IASB concluded that entities normally enter into transactions in the principal market for the asset
or liability (i.e. the most liquid market that the entity can access). [IFRS 13.17, BC53]
2.4A.70.60 IFRS 13 does not provide detailed guidance on:
• how an entity should identify the principal market;
• over what period it should analyse transactions in the asset or liability to make the
Page 109 / 375

determination; or
• how often it should update its analysis.
2.4A.70.70 It appears that an entity should update its analysis to the extent that events have occurred or activities have
changed in a manner that could change the entity's determination of the principal (or most advantageous) market for the
asset or the liability.
2.4A.80 Transaction and transport costs

2.4A.80.10 The price used to measure fair value should not be adjusted for the directly attributable sale or transfer
costs that an entity would incur when selling the asset or transferring the liability (i.e. transaction costs). Instead,
transaction costs should be accounted for in accordance with other applicable standards. This is because transaction
costs are not a characteristic of the asset or liability and are, instead, characteristics of a transaction. However,
transaction costs are taken into account in identifying the most advantageous market (see Example 3). [IFRS 13.25, A]
2.4A.80.20 Transaction costs do not include transport costs - i.e. costs incurred to transport an asset from its current
location to its principal (or most advantageous) market. If location is a characteristic of an asset - e.g. crude oil held in
the Arctic circle - then the price in the principal (or most advantageous) market is adjusted for the costs that would be
incurred to transport the asset to that market - e.g. costs to transport the crude oil from the Arctic circle to the
appropriate market. [IFRS 13.26]
EXAMPLE 3 - PRINCIPAL MARKET
2.4A.80.30 Company P holds an asset that is traded in three different markets as follows.
2.4A.80.40 The principal market for the asset in this example is Market A, because it has the
highest volume and level of activity. The most advantageous market is Market C, because it has
the highest net proceeds.
2.4A.80.50 P bases its fair value on prices in Market A when information about the volume and
Page 110 / 375

level of activity of each market is reasonably available, and P is able to access Market A. Pricing is
taken from Market A, even though P does not normally transact in that market and it is not the
most advantageous market. In this case, considering transport costs but not transaction costs, fair
value would be 47. This is despite the fact that P normally transacts in Market C and could
maximise net proceeds in that market.
2.4A.80.60 If P is unable to access Market A and B, or if information allowing a conclusion on
what market has the greatest volume and level of activity is not reasonably available, then P
would use Market C where net proceeds would be 47. In this case, fair value would be 49.
2.4A.80.70 The above example highlights that it is not always appropriate to assume that the
principal market is the market in which the entity usually transacts. In this example, P has
information about Market A that it cannot ignore, and Market A is the principal market and not
Market C.
Page 111 / 375

2.4A.90 APPLICATION ISSUES

2.4A.100 Application to liabilities and an entity's own equity instruments
2.4A.100.10 IFRS 13 contains specific requirements for applying the fair value measurement framework to liabilities
(including financial liabilities) and an entity's own equity instruments. The following diagram illustrates the process that an
entity uses when measuring the fair value of a liability or its own equity instruments. [IFRS 13.37-40, 79(c)]
2.4A.110 Quoted price for transfer of a liability or an entity's own equity instrument
2.4A.110.10 When measuring the fair value of a liability or an entity's own equity instrument, it is assumed that the
liability or equity instrument is transferred to a market participant at the measurement date - e.g. the liability remains
outstanding and the market participant transferee would be required to fulfil it. It is also assumed that the non-
performance risk related to a liability is the same before and after the transfer. See also 2.4A.140. [IFRS 13.34, BC80,
BC94]
2.4A.110.20 The transfer notion is conceptually consistent with the exit price concept (see 2.4A.30.10). However, in our
experience there are many cases where there is no observable market to provide pricing information about the transfer
of a liability or an entity's own equity instrument. Also, in many cases an entity may not be willing or able to transfer its
Page 112 / 375

liability to a third party. There may be an observable market for such items if they are held by other parties as assets.
Therefore, the fair values of most financial liabilities and own equity instruments are measured from the perspective of a
market participant that holds the identical instrument as an asset (see 2.4A.120). [IFRS 13.35, 37, BC81]
2.4A.110.30 Furthermore, the transfer notion reflects the fact that fair value is a market-based and not an entity-
specific measurement. For example, the expected costs to an entity to fulfil an obligation may be lower than the price to
transfer it to a market participant because the entity has advantages relative to the market. However, even in such cases
an entity is required to measure fair value based on the price that would be paid to transfer the liability. Consequently,
the resulting fair value measurement is a market-based measurement and not an entity-specific measurement that
reflects the entity's relative advantages in fulfilling the obligation. Hence, these advantages appear in profit or loss over
time as the entity settles its obligation through performance using its own internal resources. See also 2.4A.30.20. [IFRS
13.BC31, BC81]
2.4A.120 Measurement from the perspective of a market participant that holds an

identical asset
2.4A.120.10 If there is no quoted price for the transfer of an identical or a similar liability or an entity's own equity
instrument, and another market participant holds the identical item as an asset, then the entity measures the item's fair
value from the perspective of such a market participant. [IFRS 13.37]
2.4A.120.20 In these circumstances, an entity adjusts quoted prices for features that are present in the asset but not in
the liability or the entity's own equity instrument, or vice versa. If the unit of account for an asset is not the same as for
the liability or the entity's own equity instrument, then this indicates that the quoted price of the asset should be adjusted.
Consider, for example, a debt security that is issued with a third-party credit enhancement such as a guarantee. From the
perspective of the holder, the individual financial instrument may be the combined security containing both the amount
due from the issuer and the guarantee (see 7.1.80). From the issuer's point of view, the fair value measurement of a
liability follows the unit of account of the liability for financial reporting purposes. If that unit excludes the guarantee, then
the fair value of the obligation takes into account only the credit standing of the issuer and not the credit standing of the
guarantor (see 2.4A.50). Consequently, the fair value of a liability reflects the effect of non-performance risk on the basis
of its unit of account (see 2.4A.140). Neither IAS 39 nor IFRS 9 states explicitly whether such a guarantee is part of the
liability's unit of account. [IFRS 13.39, 42-44, 79(c), BC98]
2.4A.130 Valuation technique from the perspective of a market participant that owes
a liability or an issued equity instrument
2.4A.130.10 There may be liabilities or an entity's own equity instruments that are not held by another party as an
asset and for which there is no quoted price for the transfer of an identical or similar liability or own equity instrument
(e.g. for some decommissioning liabilities assumed in a business combination). In this case, an entity uses a valuation
technique to measure the fair value of the item from the perspective of a market participant that owes the liability or that
issued the equity instrument. When using a present value technique, an entity estimates the future cash outflows that
market participants would expect to incur in fulfilling the obligation. This would include any compensation for risk and the
profit margin that a market participant would require to undertake the activity. [IFRS 13.40, B31-B33, BC90]
2.4A.130.20 The risk adjustment is often the most difficult factor to quantify in a fair value measurement of a non-
financial liability. Estimating the risk adjustment, as well as other inputs, may be especially difficult if an entity has an
obligation with a unique or unusual risk - as opposed to situations in which there are several obligations with similar risks.
In the latter case, the entity may have experience from previous outcomes that enables it to estimate the range of
possible results. Also, the price that a market participant might require to assume an obligation may reflect possible
portfolio diversification effects. For example, when outcomes are not perfectly correlated, negative outcomes may be
(partially) offset by positive outcomes. In that case, a market participant may demand a lower risk premium. A greater
risk adjustment would be likely if the inputs to a fair value measurement were more uncertain.
2.4A.130.30 An entity may estimate future cash outflows that market participants would expect to incur in fulfilling the
obligation by taking the following steps:
• estimate the cash flows that the entity would incur in fulfilling the obligation;
• exclude the cash flows that other market participants would not incur;
Page 113 / 375

• include the cash flows that other market participants would incur but that the entity would not
incur; and
• estimate the profit margin that a market participant would require to assume the obligation.
[IFRS 13.41, B31]
2.4A.140 Non-performance risk including credit risk

2.4A.140.10 The fair value of a liability reflects the effect of 'non-performance risk', which is the risk that an entity will
not fulfil an obligation. Non-performance risk is assumed to be the same before and after the transfer of the liability. Non-
performance risk includes, but may not be limited to, an entity's own credit risk. 'Credit risk' is defined as the risk that one
party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. See also
7.8.360, 2.4A.230 and 170.10. [IFRS 13.42, A, BC92, IFRS 7.A]
2.4A.140.20 The effect of non-performance risk may differ depending on:
• the nature of the liability - e.g. whether the liability is an obligation to deliver cash (a financial
liability) or an obligation to deliver goods or services (a non-financial liability); and
• the terms of credit enhancements related to the liability, if any - e.g. a pledge of assets against
default. [IFRS 13.43]
2.4A.140.30 The fair value of a liability would reflect the effect of non-performance risk on the basis of its unit of
account. Therefore, the issuer of a liability that is issued with an inseparable third-party credit enhancement does not
include the effect of that credit enhancement in the liability's fair value measurement if it accounts separately for the
liability and the credit enhancement. Consequently, if the liability is a separate unit of account from the perspective of the
issuing entity, then the fair value of that liability reflects the issuer's own non-performance risk and not that of the
guarantor. See also 2.4A.50 and 120. [IFRS 13.43, 44]
EXAMPLE 4 - DECOMMISSIONING LIABILITY
2.4A.140.40 On 1 January 2011, Company B assumes a decommissioning liability in a business

combination and is therefore required to measure the liability at fair value - as opposed to a best
estimate measurement required by IAS 37 (see 2.4A.10.35). B is legally required to remediate a
mine pit at the end of its useful life, which is estimated to be in 10 years. B uses a present value
technique to measure the fair value of the decommissioning liability. If B were contractually
allowed to transfer its decommissioning liability to a market participant, then B concludes that a
market participant would use all of the following inputs when estimating the price:
• labour costs of 100;
• allocated overhead and equipment costs of 60% of labour costs (60);
• a third-party contractor margin of 20% (160 x 20% = 32), based on
margins that contractors in the industry generally receive for similar
activities;
• annual inflation rate of 4%, based on market data for the applicable
jurisdiction (192 x 4% compounded for 10 years = 92);
a 5% risk adjustment that reflects the compensation that an external party would require in order
to accept the risk that the cash flows might differ from those expected given the uncertainty in
locking in today's price for a project that will not occur for 10 years (284 x 5% = 14);
a risk-free rate of 5% based on 10-year government bonds in the applicable jurisdiction; and
a 3% adjustment to the discount rate to reflect B's non-performance risk, including its credit risk.
2.4A.140.50 The following diagram shows the make-up of these costs to give a fair value of the
Page 114 / 375

decommissioning liability of 138 (present value at 8% of 298 in 10 years).
2.4A.140.60 The adjustment for the time value of money is shown separately from the credit
risk adjustment, to illustrate the direction of the adjustment. However, in our experience only one
discount rate calculation would be undertaken. [IFRS 13.IE35-IE39]
2.4A.140.70 As Example 4 shows, the adjustment for the entity's own non-performance risk has reduced the fair value
of the liability - just as higher credit risk reduces the fair value of a financial asset.
2.4A.150 Restrictions on liabilities or an entity's own equity instruments

2.4A.150.10 Separate inputs to reflect restrictions on the transfer of a liability or an entity's own equity instrument are
not included in the fair value of a liability or an entity's own equity instrument. Such a restriction is assumed to be
reflected implicitly or explicitly in the other inputs used by market participants to price such instruments. Therefore, if the
effect of a restriction is already included in the other inputs, then an additional input or adjustment to reflect a restriction
on transferability results in double counting. [IFRS 13.45-46, BC99]
2.4A.150.20 Consequently, when measuring a liability or an entity's own equity instrument from the perspective of a
market participant that holds the item as an asset, an entity ensures that the price of the asset does not reflect the effect
of a restriction preventing the sale of that asset. It is assumed that restrictions on the sale of an asset relate to the
marketability of that asset, while restrictions on the corresponding liability relate to performance of the obligation (see
2.4A.40.10 and 450). [IFRS 13.39, BC99-BC100]
2.4A.160 Fair value at initial recognition

2.4A.160.10 When an asset is acquired (or a liability assumed), the transaction price paid for the asset (or received to
assume a liability) normally reflects an entry price. IFRS 13 requires fair value measurements to be based on an exit price
(see 2.4A.30.10). Although conceptually different, in many cases the exit and entry price are equal and therefore fair
value at initial recognition generally equals the transaction price. [IFRS 13.57-58, BC42]
2.4A.160.20 However, entities are required to take into account factors specific to the transaction and the asset or
liability that would indicate that the transaction price and initial fair value measurement may differ. These may include:
• the transaction being between related parties;
• the transaction taking place under duress - for example, if the seller is experiencing financial
difficulty;
• the unit of account represented by the transaction price differing from the unit of account of the
Page 115 / 375

asset or liability measured at fair value - for example, if the transaction price represents the
purchase of multiple items; and
• the market in which the transaction takes place being different from the principal (or most
advantageous) market. [IFRS 13.B4, BC133]
2.4A.160.30 An example of a transaction price that would not be equal to fair value at initial recognition may be in the
case of an investment bank that enters into a trade in a retail market when its principal market is the dealer market, as
described in 2.4A.70.40. In this case, the fair value is determined by transactions in the dealer market, because that is
the principal market for the investment bank. However, the transaction price is based on the price in the retail market.
[IFRS 13.IE26]
2.4A.160.40 The presence of one or more of these factors does not automatically result in a fair value measurement
that differs from the transaction price. For example, the price in a related party transaction may be used as an input into
a fair value measurement if the entity has evidence that the transaction was entered into at market terms. [IFRS 13.B4,
BC57]
2.4A.160.50 A day one gain or loss arises when the transaction price for an asset and/or liability differs from the fair
value used to measure it at initial recognition. IFRS 13 requires day one gains or losses to be recognised in profit or loss,
unless the IFRS that requires or permits fair value measurement specifies otherwise. See also 2.4A.250. [IFRS 13.60,
BC135]
2.4A.160.60 Because transaction costs are not a component of a fair value measurement, they do not represent a
difference between an exit price and an entry price (see 2.4A.80). [IFRS 13.BC33]
EXAMPLE 5 - EFFECT OF TRANSACTION COSTS
2.4A.160.70 A seller sells an asset in an orderly transaction at a price of 100. The seller pays
broker commission of 5% out of the proceeds of the sale. However, the fair value or exit price
would be 100 and not 95 (100 exit price less 5 transaction costs). From the buyer's perspective,
the fair value is the same - i.e. 100. The buyer's transaction costs of 2 are also not part of the fair
value measurement.
2.4A.160.80 Bid-ask spreads may represent a difference between entry and exit price in markets for financial
instruments, or when an intermediary is needed to bring together a buyer and a seller (see 2.4A.460). [IFRS 13.BC164-
BC165]
2.4A.170 Application to financial instruments
Page 116 / 375

2.4A.170.10 IFRS 13 applies to all financial instruments for which IAS 32, IAS 39, IFRS 7 or IFRS 9 require or permit
fair value measurements or disclosures about fair value measurements. Furthermore, financial liabilities and an entity's
own equity instruments are subject to the specific requirements for these instruments in IFRS 13 (see 2.4A.100). IFRS 13
also contains specific requirements that apply to certain groups of financial assets and financial liabilities with offsetting
positions in market risk(s) or counterparty credit risk (see 2.4A.200).
2.4A.180 Financial liabilities with a demand feature

2.4A.180.10 IFRS 13 carries forward without change from IAS 39 and IFRS 9 the guidance that the fair value of a
financial liability with a demand feature cannot be less than the amount payable on demand, discounted from the first
date that the amount could be required to be paid. [IFRS 13.47, D33, D101, BC26(a)]
2.4A.190 Investments in equity instruments

2.4A.190.10 Under IFRS 9, all investments in equity instruments and contracts on those instruments are measured at
fair value. IFRS 13 does not amend the guidance in IFRS 9 in the limited circumstances in which cost may be an
appropriate estimate of fair value. This may be the case if:
• insufficient more recent information is available to determine fair value; or
• there is a wide range of possible fair value measurements, and cost represents the best
estimate of fair value within that range. [IFRS 9.B5.4.14]
2.4A.190.20 However, in the basis for conclusions to IFRS 9, the IASB notes that such circumstances are not applicable
to equity investments held by particular entities such as financial institutions and investment funds (see 7A.240). [IFRS
9.BC5.18]
2.4A.200 Financial assets and financial liabilities with offsetting positions in market
risk(s) or credit risk
2.4A.200.10 An entity that holds a group of financial assets and financial liabilities is exposed to market risks (i.e.
interest rate risk, currency risk, other price risk) and to the credit risk of each of the counterparties. If certain conditions
are met, then IFRS 13 permits an entity to measure by exception the fair value of a group of financial assets and financial
liabilities with offsetting risk positions on the basis of its net exposure. Under the exception, the fair value of the group is
measured on the basis of the price that would be received to sell a net long position (or paid to transfer a net short
position) for a particular risk exposure in an orderly transaction between market participants at the measurement date.
Therefore, application of the portfolio measurement exception is considered to be consistent with the way that market
participants would price the net risk position at the measurement date. [IFRS 13.48, BC119]
2.4A.200.20 It appears that application of the portfolio measurement exception changes the unit of valuation from the
individual financial asset or financial liability to the net position for a particular risk exposure (see 2.4A.50.50). We believe
that the size of the net risk exposure is a characteristic to be considered when measuring the fair value of the net risk
exposure. [IFRS 13.14, 48, 53, 56, 69]
2.4A.200.30 An entity is permitted to apply the portfolio measurement exception to a group of financial assets and
financial liabilities that are within the scope of IAS 39 or IFRS 9 if the answer to all of the questions in the following
flowchart is 'yes'. [IFRS 13.48-49, 52, BC47(b)]
Page 117 / 375

2.4A.200.40 Judgement may be required to evaluate whether, based on the specific facts and circumstances, it is
appropriate to apply the portfolio measurement exception.
2.4A.200.50 If the entity is permitted to use the exception, then it should choose an accounting policy, to be applied
consistently, for a particular portfolio. However, an entity is not required to maintain a static portfolio. [IFRS 13.51,
BC121]
2.4A.200.60 The exception does not pertain to financial statement presentation. Therefore, if an entity applies the
exception, then the basis of measurement of a group of financial instruments might differ from the basis of presentation.
For example, a portfolio of derivative financial instruments might be measured based on the price of the entity's net
exposure to a particular market risk (or the credit risk of a particular counterparty). If the entity presents those derivative
assets and derivative liabilities separately in its statement of financial position (see 7.8.90), then the portfolio-level
adjustments - e.g. bid-ask adjustment or credit risk adjustments - are allocated to the individual assets and liabilities on a
reasonable and consistent basis. [IFRS 13.50, BC128-BC131]
2.4A.200.70 If an entity applies the portfolio measurement exception, then the portfolio-level adjustments are
considered when categorising, in the fair value hierarchy, the fair value measurements of the individual financial assets
and financial liabilities that are part of that portfolio. It appears that an allocated portfolio-level adjustment forms an input
to the fair value measurement of the individual asset or liability. Therefore, if an allocated portfolio-level adjustment is an
unobservable input and has a significant effect on the financial asset's or financial liability's fair value measurement, then
we believe that this fair value measurement should be categorised within Level 3. [IFRS 13.50, 73, BC127, BC130]
2.4A.200.80 The group of financial assets and financial liabilities for which an entity manages its net exposure to a
particular market risk (or risks) could differ from the group for which an entity manages its net exposure to the credit risk
of a particular counterparty. [IFRS 13.BC127]
EXAMPLE 6 - APPLICATION OF THE PORTFOLIO MEASUREMENT EXCEPTION TO DIFFERENT PORTFOLIOS
2.4A.200.85 Company T manages certain financial assets and financial liabilities based on its net
exposure to interest rate risk. These financial assets and financial liabilities are entered into with
counterparties X, Y and Z. T also manages its financial assets and financial liabilities with
counterparty X, regardless of market risk exposure, based on the net exposure to X's credit risk.
Therefore, assuming that all other criteria are met, a financial asset or a financial liability of T
that is subject to interest rate risk and that is entered into with counterparty X, is both part of one
group that may be measured based on the price for the net exposure to interest rate risk and of
another group that may be measured based on the price for the net exposure to X's credit risk.
2.4A.200.90 The portfolio measurement exception is available only for financial assets and financial liabilities within the
scope of IAS 39 and IFRS 9 that meet the specified criteria. It appears that this may include contracts to buy or sell a
non-financial item within the scope of IAS 39 and IFRS 9 that are accounted for as if they were financial assets or
financial liabilities in accordance with those standards (see 2.4A.200.30). [IFRS 13.51]
2.4A.210 Exposure to market risk
Page 118 / 375

2.4A.210.10 An entity that measures fair value on the basis of its net exposure to a particular market risk (or risks):
• applies the price within the bid-ask spread that is most representative of fair value (see
2.4A.460); and
• ensures that the nature and duration of the risk(s) to which the exception is applied are
substantially the same. [IFRS 13.54-55, BC122, BC125]
2.4A.210.20 Any basis risk resulting from market risk parameters that are not identical is reflected in the fair value of
the net position. For example, if an entity manages its interest rate risk on a net portfolio basis, then it may include
financial instruments with different interest rate bases in one portfolio. However, any difference in the interest rate bases
(e.g. GBP LIBOR vs UK treasury yields) is reflected in the fair value measurement. [IFRS 13.54]
EXAMPLE 7 - NATURE AND DURATION OF MARKET RISKS
2.4A.210.30 Company B cannot combine interest rate risk associated with a financial asset with
the commodity price risk associated with a financial liability. The natures of these risks are not
considered substantially the same; therefore, based on these risks, these financial instruments do
not qualify for the portfolio measurement exception. Also, if Company C has a 12-month futures
contract to offset 12 months' worth of interest rate risk exposure on a five-year financial
instrument, then C may be allowed to measure the exposure to 12-month interest rate risk on a
net basis. However, it measures the interest rate risk exposure from year 2 to 5 on a gross basis.
[IFRS 13.53-55, BC122-BC123]
2.4A.220 Exposure to credit risk of a particular counterparty
2.4A.220.10 A fair value measurement on the basis of the entity's net exposure to a particular counterparty:
• includes the effect of the entity's net exposure to the credit risk of that counterparty or the
counterparty's net exposure to the credit risk of the entity, if market participants would take
into account any existing arrangements that mitigate credit risk exposure in the event of default
(e.g. master netting agreements or collateral (see 2.4A.240)); and
• reflects market participants' expectations about the likelihood that such an arrangement would
be legally enforceable in the event of default. [IFRS 13.56, BC125-BC126]
2.4A.230 Derivatives - own and counterparty credit risk

2.4A.230.10 A fair value measurement for a liability is based on the (exit) price at which a liability would be transferred
to a market participant - assuming that the non-performance risk, including the effect of the entity's own credit risk,
remains the same before and after the transfer (see 2.4A.110.20 and 140). In addition, in the absence of a quoted
market price for the transfer of a liability, the liability's fair value should be measured from the perspective of a market
participant that holds the liability as an asset (see 2.4A.120). This would imply consistency between the calculation of own
credit risk adjustments and counterparty credit risk adjustments in measuring derivative assets and liabilities. In principle,
and assuming no differences in the unit of account, the credit risk adjustments made in the fair value measurement by
both counterparties to the financial instrument should be the same. [IFRS 13.9, 34, 37, BC94]
2.4A.230.20 The credit risk of both the entity itself and the counterparty may be relevant to measuring the fair value of
an instrument that might change from being an asset to a liability or vice versa - e.g. an interest rate swap or a forward
contract. For such derivatives, an entity considers both its own and the counterparty's credit risk if market participants
would do so when measuring the fair value of these instruments. Therefore, an entity should design and implement a
method for appropriately considering credit risk adjustments in valuing these derivatives. If market participants would
consider both counterparty and the entity's own credit risk, then although an entity calculates the credit risk adjustment
based on a method that considers only the current classification of the derivative (as either an asset or liability), it
determines whether additional credit risk adjustments are necessary based on the potential for the other classification.
[IFRS 13.11, 42]
Page 119 / 375

2.4A.230.30 The inclusion of counterparty credit risk and the entity's own credit risk in the fair value measurements of
derivative instruments may affect hedging relationships. A change in the fair value of the hedging derivative instrument
due to counterparty or the entity's own credit risk may affect the hedge effectiveness assessment and hedge
ineffectiveness measurement (see 7.7.580).
2.4A.240 Collateral, master netting and credit support agreements

2.4A.240.10 The effect of a requirement to provide collateral that is part of the contractual terms of an individual
financial instrument is a characteristic of the financial instrument. Therefore, this effect is included in the fair value
measurement of that financial instrument (e.g. a typical residential mortgage). In this case, the requirement to provide
collateral may affect the discount rate or any other credit risk adjustments that are used when measuring fair value.
[IFRS 13.11, 69, B19]
2.4A.240.20 If the unit of valuation is the individual financial instrument, then a separate arrangement that mitigates
credit risk exposure in the event of default - e.g. a master netting agreement or a credit support agreement that requires
the exchange of collateral on the basis of each party's net exposure to the credit risk of a group of financial instruments -
is not reflected in the fair value of the individual financial instrument. However, if an entity applies the portfolio
measurement exception to a group of financial assets and financial liabilities entered into with a particular counterparty,
then the effect of such an agreement would be included in measuring the fair value of the group of financial assets and
financial liabilities if market participants would do so (see 2.4A.220). [IFRS 13.14, 56, 69]
2.4A.250 Gains or losses on initial recognition

2.4A.250.10 IFRS 13 introduces consequential amendments to IAS 39 and IFRS 9 that align the guidance on
measurement with the definitions in IFRS 13 but without substantively changing the threshold for the recognition of day
one gains and losses. The transaction price is normally the best evidence of the fair value of a financial instrument on
initial recognition. See also 2.4A.160. However, there may be cases where it is appropriate for an entity to determine that
the fair value at initial recognition is different from the transaction price. If the entity's fair value measurement is
evidenced by a quoted price in an active market for an identical asset or liability or is based on a valuation technique that
uses only data from observable markets, then the entity immediately recognises a gain or loss. This gain or loss is equal
to the difference between the fair value on initial recognition and the transaction price. If the entity determines that the
fair value on initial recognition differs from the transaction price but this fair value measurement is not evidenced by a
valuation technique that uses only data from observable markets, then the carrying amount of the financial instrument on
initial recognition is adjusted to defer the difference between the fair value measurement and the transaction price. This
deferred difference is subsequently recognised as a gain or loss only to the extent that it arises from a change in a factor
(including time) that market participants would take into account when pricing the asset or liability. [IFRS 9.B5.1.2A, 2.2A,
IAS 39.AG76-AG76A]
2.4A.250.20 The table below illustrates the application of the day one gain and loss guidance on initial recognition if:
• a difference arises between the transaction price (100) and management's alternative estimate
of fair value (99); and
• the observability condition is not satisfied. [IFRS 9.B5.1.2A, 2.2A, IAS 39.AG76-AG76A]
Application of day one gain and loss guidance if observability condition is not met
Fair value Management's estimate of exit price 99
Initial measurement (ignoring transaction costs) Fair value 99

• plus difference between transaction
price and fair value 1 (100 - 99) =
100
Page 120 / 375

2.4A.260 Application to non-financial assets
2.4A.270 Highest and best use

2.4A.270.10 A fair value measurement of a non-financial asset considers a market participant's ability to generate
economic benefits by using the asset at its highest and best use or by selling it to another market participant who will use
the asset in its highest and best use (see 2.4A.20.70). 'Highest and best use' is a valuation concept used to value non-
financial assets - e.g. land. The following diagram illustrates the factors to be considered in identifying the highest and
best use. [IFRS 13.27-28, BC68]
2.4A.270.20 To be considered 'legally permissible', a potential use of a non-financial asset should not be legally
prohibited. An entity cannot assume a use that could not be permitted under current law in the jurisdiction. For example,
if legislation prohibits building on land in a protected area, then the highest and best use of land in that area could not be
to develop it for industrial use. However, a fair value measurement of land and buildings assumes different zoning under
current law if market participants would assume such a change in zoning. In such circumstances the fair value
measurement would incorporate the cost to convert the asset and obtain a different zoning permission, including the risk
and uncertainty that such permission would not be granted. [IFRS 13.BC69]
EXAMPLE 8 - CHANGE IN HIGHEST AND BEST USE OF LAND
2.4A.270.25 Company X acquired a brewery that is located in an area that has recently been
re-zoned to allow both residential and industrial use. The entity determines that market
participants would take into account the potential to develop the brewery site for residential use
when pricing the land on which the brewery is currently located. The highest and best use of the
land is determined by comparing both of the following:
(a) the value of the land as currently developed as a brewery; and
(b) the value of the land as a vacant site for residential use, taking into
account the costs of demolishing the brewery and other costs necessary to
convert the land to a vacant site.
2.4A.270.27 The highest and best use of the land would be determined on the basis of the
higher of those values. [IFRS 13.IE7-IE8]
Page 121 / 375

2.4A.270.30 In the absence of evidence to the contrary, the entity's current use of an asset is assumed to be its highest
and best use - i.e. an entity is not required to engage in exhaustive efforts to identify other potential highest and best
uses. However, if readily available market information or other factors suggest that a different use by a market participant
would maximise the value of the asset, then such information should not be ignored. The IASB concluded that, after
considering the cost to convert an asset to an alternative use, the entity's current use would generally be its highest and
best use. [IFRS 13.29, BC71]
2.4A.270.40 An entity may not intend to actively use a non-financial asset acquired in a business combination for
reasons such as:
• the existence of an overlap with existing assets; or
• an intention to protect its competitive position etc.
2.4A.270.50 Notwithstanding its actual use by an entity, the fair value of a non-financial asset is measured assuming it
is used by market participants in its highest and best use. This use will depend on the characteristics of market
participants (see 2.4A.60.10). For example, some potential market participants, such as certain strategic buyers, may
have overlapping assets and might be expected to use the non-financial asset defensively to increase the value of other
assets. Other potential market participants, such as financial buyers, may not have overlapping assets and might use the
asset actively. Accordingly, an entity identifies the characteristics of market participants to determine how a market
participant would use the asset. [IFRS 13.30, BC70]
EXAMPLE 9 - PURCHASE OF A BRAND
2.4A.270.60 Company B acquires a brand in a business combination. B decides not to use the
brand on the assumption that its removal from the market will generate greater incremental value
to B as a result of increased revenues from its existing brands. However, a market participant
would choose to continue to use the brand, since it would not hold the other brands that B does.
Because a market participant would choose to continue actively using the brand, the fair value of
the brand would be based on that as the highest and best use to a market participant. This is
despite the fact that B's decision not to use the brand results in higher benefits to B.
2.4A.280 Valuation premise

2.4A.280.10 A fair value measurement of a non-financial asset is based on its use either:
• in combination with other assets as a group or in combination with other assets and liabilities;
or
• on a stand-alone basis. [IFRS 13.31]
2.4A.280.20 The valuation premise depends on the use that is consistent with the perspective of market participants of
the non-financial asset's highest and best use. [IFRS 13.31]
2.4A.280.30 When the highest and best use would be to use a non-financial asset in combination with other assets, it is
assumed that the other assets would be available to market participants, and that this would be considered in pricing the
asset. However, the fair value measurement assumes that the asset is sold consistent with the unit of account specified in
other IFRSs (see 2.4A.50). [IFRS 13.31(a)(i), 32]
2.4A.280.40 When the highest and best use is to use the asset in combination with other assets, the same valuation
premise is used for the other non-financial assets with which it would be used. [IFRS 13.31(a)(iii)]
EXAMPLE 10 - CUSTOMER RELATIONSHIP
2.4A.280.50 Company B acquired contractual customer relationships and technology assets as

part of a business combination. B needed to determine whether the highest and best use of the
customer relationships would be on a stand-alone basis or in combination with complementary
Page 122 / 375

assets. In doing so, B noted that the relationships with customers arose in the context of the sale
of a product incorporating the technology. A market participant without complementary
technology would be likely to realise lower value from the customer relationships, because of the
probability of lower expected sales; it would consider this in pricing the customer relationships on
a stand-alone basis. However, a market participant with access to the complementary technology
would be likely to realise higher sales and profits than on a stand-alone basis and would consider
this in valuing the customer relationships based on their highest and best use in combination with
other assets. A similar analysis would apply to the technology - i.e. the technology would be more
valuable as a result of its use with customer relationships. Therefore, B measures the fair value
of the customer relationships and the technology on an in-combination premise.
Page 123 / 375

2.4A.290 VALUATION TECHNIQUES

2.4A.300 General principles
2.4A.300.10 When measuring the fair value of an asset or a liability, an entity selects those valuation techniques that
are appropriate in the circumstances and for which sufficient data is available to measure fair value. The technique
chosen should maximise the use of relevant observable inputs and minimise the use of unobservable inputs. [IFRS 13.61]
2.4A.300.20 IFRS 13 does not establish requirements for specific valuation technique(s) to be used unless there is a
quoted price in an active market for an identical asset or liability. In some cases, only a single valuation technique will be
appropriate to assess fair value; in other cases, however, using more than one valuation technique will be more
appropriate. An example of a situation in which multiple valuation techniques might be used is when measuring the fair
value less costs to sell of a CGU for the purpose of impairment testing. In such cases, an entity may evaluate the
indications of fair value resulting from multiple valuation techniques and weigh them considering the reasonableness of
the range of values indicated by those results. In some cases, a secondary method is used only to corroborate the
reasonableness of the most appropriate technique. The fair value measurement when using multiple valuation techniques
is the point within the range that is most representative of fair value in the circumstances. [IFRS 13.63]
2.4A.300.30 IFRS 13 refers to a valuation approach as a broad category of techniques, whereas a valuation technique
refers to a specific technique such as a particular option pricing model. Valuation techniques used to measure fair value
fall into three approaches:
• market approach (see 2.4A.310);
• income approach (see 2.4A.320); and
• cost approach (see 2.4A.380). [IFRS 13.62]
2.4A.300.40 Any, or a combination, of the three approaches discussed in IFRS 13 could be used to measure fair value if
the techniques are appropriate in the circumstances. When multiple valuation techniques are used to measure fair value,
the standard does not prescribe a mathematical weighting scheme; rather it requires the application of judgement.
Entities should consider, among other things, the reliability of the valuation techniques and the inputs that are used in the
techniques. If a particular valuation technique falling under the market approach relies on higher level inputs - e.g.
observable market prices, compared to a valuation technique falling under the income approach that relies heavily on
projections of income - then the entity may conclude that it is appropriate to apply greater weight to the measurement of
fair value generated by the valuation technique falling under the market approach because it relies on higher-level inputs.
Higher level measurements - e.g. Level 1 or Level 2 measurements - if available and relevant should not be ignored.
[IFRS 13.BC142]
2.4A.310 Market approach

2.4A.310.10 Valuation techniques that fall under the market approach often derive market multiples from a set of
comparable assets. A market multiple expresses the value of a business or other asset in terms of its ratio to a financial,
operating or physical metric. For example, a price to earnings ratio expresses an entity's per-share value in terms of its
earnings per share. The multiple can then be applied to the metric of an entity with similar characteristics but different
scale, subject to adjustment for differences between the entity and the selected comparable. When multiples are derived
from a number of comparable entities, there will typically be a range of multiples calculated. Selection within the range
should be based on market participants' expectations. For example, in estimating the fair value of a CGU, the point in the
range of multiples that is selected for the CGU would consider differences between the CGU and comparable companies in
terms of size, growth, profitability, risk, investment requirements etc. [IFRS 13.B5-B6]
2.4A.310.20 When using quoted prices for similar assets or liabilities, adjustments are often necessary for differences
between the subject asset and the comparable assets. When there is a high degree of subjectivity in estimating the
Page 124 / 375

adjustment - e.g. because the asset differs in important respects from the closest comparable assets - the resulting value
indication may be less reliable than when the range of possible adjustments is narrower, because the subject asset is
very similar to the comparable assets.
2.4A.310.30 Matrix pricing is a valuation technique that is specifically referred to in the standard as an example of a
valuation technique falling under the market approach. Matrix pricing is a mathematical technique used mainly to value
debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the
securities' relationship to other benchmark quoted securities. Therefore, matrix prices are based on quoted prices for
securities with similar coupons, ratings and maturities, rather than on actual prices for the asset being measured. The
use of matrix pricing when an entity holds a large number of similar assets or liabilities that are measured at fair value,
for which quoted prices in active markets are available but not readily accessible is discussed in 2.4A.410.30, 50. [IFRS
13.B7]
2.4A.320 Income approach

2.4A.320.10 The valuation techniques that fall under the income approach convert future amounts such as cash flows
or income streams to a current amount on the measurement date. The fair value measurement reflects current market
expectations about those future amounts, discounted to their present value. The concept behind the income approach is
that an asset is worth what it is expected to earn, discounted for the time value of money and associated risks. [IFRS
13.B10]
2.4A.320.20 Common valuation techniques falling under the income approach include:
• present value techniques (see 2.4A.330);
• option pricing models (see 2.4A.360); and
• multi-period excess earnings method (see 2.4A.370). [IFRS 13.B11]
2.4A.330 Present value techniques*

2.4A.330.10 The application guidance in IFRS 13 describes two approaches to applying a present value technique:
• the discount rate adjustment technique; and
• the expected present value technique.
2.4A.330.20 IFRS 13 does not prescribe a specific method; instead, the present value technique used to measure fair
value depends on facts and circumstances specific to the asset or liability being measured and the availability of sufficient
data such as cash flow estimates, risk premiums, discount rates and other factors that would be considered by market
participants. [IFRS 13.B12]
2.4A.330.30 Present value techniques differ in how they capture these elements; however, there are some
commonalities when determining the inputs into the valuation techniques. [IFRS 13.B14]
2.4A.330.40 The assumptions used for the cash flows and discount rates should reflect market participants' views. The
assumptions should consider only the factors attributable to the asset or the liability being measured. [IFRS 13.B14]
2.4A.340 Risk and uncertainty
2.4A.340.10 A valuation using present value techniques is based on assumptions that are inherently uncertain because
they reflect estimates of the future rather than known amounts. Even contractual cash flows that may appear certain at
first glance contain risk because of uncertainty about the ability of the counterparty to meet its contractual obligations. For
example, contractual cash flows on a loan are subject to a risk of default. A risk premium is therefore included for the fair
value measurement to reflect the amount that risk-averse market participants would demand to be compensated for the
uncertainty of the cash flows. [IFRS 13.B15-B16]
2.4A.340.20 Different options are available for making adjustments for risk in present value techniques. The discount
rate adjustment technique uses a single estimate of cash flows and adjusts for risk in the discount rate. IFRS 13 notes
Page 125 / 375

two possible methods to incorporate risk in an expected present value technique, which is based on probability-weighted
cash flows.
• Method 1 adjusts for risk in the expected cash flows, which are then discounted at the risk-free
rate.
• Method 2 uses a risk-adjusted discount rate with expected cash flows. [IFRS 13.B17]
2.4A.340.30 There is no preferred method for making adjustments for risk in a present value technique; it depends on
facts and circumstances specific to the asset or liability being measured. The risk adjustment may need to be considered
in both cash flows and the discount rate. However, rates used to discount cash flows should not reflect risks for which the
estimated cash flows have been adjusted as otherwise the effect will be double counted. [IFRS 13.B17, B30]
2.4A.340.40 To use a risk-free rate when valuing an asset, the expected cash flows need to be adjusted to represent
certainty-equivalent cash flows. This means that a market participant would be indifferent between investing in the risky
asset and investing in a risk-free investment that generated those cash flows. In our experience, although it is
theoretically possible that expected cash flows from an asset could be adjusted to incorporate all relevant risks so that the
investor was indifferent, the practical application of this approach would be very difficult outside of option pricing and
certain derivative modelling. The discussion on present value techniques in IFRS 13 is a useful clarification that expected
cash flows are not necessarily risk adjusted, which in our experience is sometimes how they are incorrectly understood.
Expected cash flows include both positive as well as negative possible outcomes and, before risk adjustment, they
represent only the probability-weighted-average outcome. [IFRS 13.B17, B24]
2.4A.350 Discount rates
2.4A.350.10 Discount rates should reflect assumptions that are consistent with those inherent in the cash flows to avoid
double counting or omitting the effects of certain risk factors.
2.4A.350.20 Assumptions about cash flows and discount rates should be internally consistent. For example, if the cash
flows include the effect of expected inflation, then the discount rate should also incorporate the effects of inflation.
2.4A.350.30 In our experience, for some assets and liabilities it is rare that a discount rate can be observed directly
from the market. For example, the cost of equity of a business, which is often used as an input into a weighted-average
cost of capital calculation when valuing a CGU under the discounted cash flow method, cannot be observed. In such
circumstances, it will generally be necessary to build up a market participant discount rate that appropriately reflects the
risks associated with the cash flows of the asset or liability being measured at fair value. Other IFRSs that deal with
discount rates, such as IAS 36, refer to an entity's weighted-average cost of capital as the starting point in determining a
possible appropriate discount rate (see 3.10.300).
2.4A.360 Option pricing models

2.4A.360.10 Option pricing models such as the Black-Scholes-Merton formula or a binomial model can be used to
calculate the fair value of options. Option valuation models implicitly or explicitly use mathematical techniques such as
closed form solutions or numerical methods to identify a range of future scenarios. From these possible scenarios, the
payoff of an option can be calculated. These intrinsic values at future exercise then are probability-weighted and
discounted to their present value to estimate the fair value of the option at the measurement date. [IFRS 13.B11(b)]
2.4A.370 Multi-period excess earnings method

2.4A.370.10 The multi-period excess earnings method is commonly used in the valuation of intangible assets such as
customer relationships or technology. The method is based on a discounted cash flow analysis that measures the fair
value of an asset by taking into account not only operating costs but also charges for contributory assets; this isolates the
value related to the asset to be measured and excludes any value related to contributory assets. [IFRS 13.B11(c)]
2.4A.380 Cost approach

2.4A.380.10 The cost approach comprises valuation techniques that reflect the amount that would be required to
Page 126 / 375

replace the service capacity of an asset. The concept behind the cost approach is that an investor will pay no more for an
asset than the cost to purchase or construct a substitute asset of comparable utility. [IFRS 13.B8]
2.4A.380.20 The primary method used to calculate fair value under the cost approach is the depreciated replacement
cost method. A depreciated replacement cost valuation considers how much it would cost to reproduce an asset of
equivalent utility taking into account physical, functional and economic obsolescence. It estimates the replacement cost of
the required capacity rather than the actual asset (see 3.2.330). Because the cost approach is based on service capacity,
it is not relevant for financial assets.
2.4A.390 Fair value hierarchy

2.4A.390.10 To increase consistency and comparability, IFRS 13 establishes a fair value hierarchy based on the inputs
to valuation techniques used to measure fair value. The inputs are categorised into three levels - the highest priority is
given to unadjusted quoted prices in active markets for identical assets or liabilities, and the lowest priority is given to
unobservable inputs. [IFRS 13.72]
2.4A.390.20 The fair value hierarchy is made up of three levels.
• Level 1 inputs. Unadjusted quoted prices in active markets for identical assets or liabilities that
the entity can access at the measurement date.
• Level 2 inputs. Inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3 inputs. Unobservable inputs for the asset or liability. [IFRS 13.76, 81, 86, A]
2.4A.400 Categorisation of fair value measurements

2.4A.400.10 Fair value measurements are classified in their entirety based on the lowest level input that is significant to
the measurement; this is outlined in the flow chart below. [IFRS 13.73]
2.4A.400.20 The level into which a fair value measurement is classified in its entirety is determined with reference to
the observability and significance of the inputs used in the valuation technique. Categorisation into Level 1 can only be
achieved through the market approach using a quoted price in an active market for an identical asset or liability, without
adjustment (see 2.4A.310). [IFRS 13.73, 74, 76, 81, 86, A]
2.4A.400.30 Valuation techniques often incorporate both observable and unobservable inputs. When fair value is
measured using inputs from multiple levels of the fair value hierarchy, the inclusion of a lower-level input (Level 3 is
considered lower than Level 2) in an entity's measurement may indicate that the input is significant. This is because the
entity's decision to include the lower-level input provides evidence that the entity considers the input to be significant to
the overall fair value measurement. However, the final determination of whether inputs are significant is a matter of
judgement that will require an entity to consider:
Page 127 / 375

• factors specific to the asset or liability; and

• the effect of the input on the overall fair value measurement, including alternative possible
assumptions for the input. [IFRS 13.73-74]
2.4A.400.40 When multiple unobservable inputs are used, it appears that the unobservable inputs should be considered
individually and in total for the purpose of determining their significance. For example, it would not be appropriate to
categorise in Level 2 a fair value measurement that has multiple Level 3 inputs that are individually significant to that
measurement but whose effects happen to offset.
2.4A.410 Level 1 inputs
2.4A.410.10 The definition of Level 1 (see 2.4A.390.20) refers to the term 'active market'. An 'active market' is a
market in which transactions for the asset or liability take place with sufficient frequency and volume for pricing
information to be provided on an ongoing basis. Whether transactions take place with sufficient frequency and volume is a
matter of judgement, and depends on the specific facts and circumstances of the market for the asset or liability. Even if
a market is considered inactive - i.e. the price for the asset or liability is not a Level 1 input - it may still provide relevant
pricing information (see 2.4A.470). [IFRS 13.76, A, BC169]
2.4A.410.20 Even if the volume or level of activity for an asset or a liability has significantly decreased, the market for
that asset or liability may still be active. In such circumstances, the quoted price for the asset or liability in that market
would still be categorised within Level 1. See also 2.4A.470.
2.4A.410.30 Generally, an entity is not allowed to adjust Level 1 prices. However, in the following limited circumstances
an adjustment may be appropriate.
• As a practical expedient, an entity may measure the fair value of certain assets and liabilities
under an alternative method that does not rely exclusively on quoted prices. Such a practical
expedient is appropriate only when:
- the entity holds a large number of similar assets or liabilities that are measured at fair
value; and
- a quoted price in an active market is available but not readily accessible for each of these
assets or liabilities individually.
It appears that the use of such an alternative method as a practical expedient is also subject to
the condition that it results in a price that is representative of fair value. We believe that
application of a practical expedient is not appropriate if it would lead to a measurement that is
not representative of an exit price at the measurement date.
• It may be that a quoted price in an active market does not represent fair value at the
measurement date. This may be the case when a significant event takes place after the close
of a market but before the measurement date, such as the announcement of a business
combination. An entity should choose an accounting policy, to be applied consistently, for
identifying those events that may affect fair value measurements.
• An entity may measure the fair value of a liability or its own equity instruments using the
quoted price of an identical instrument traded as an asset. However, there may be specific
differences between the item being measured and the asset. This may happen, for example, if
the identical instrument traded as an asset includes a credit enhancement that is excluded from
the liability's unit of account (see 2.4A.120.20 and 140.30). [IFRS 13.39(b), 79]
2.4A.410.40 Any adjustment to a quoted price in an active market (including those in 2.4A.410.30) will result in the fair
value measurement being classified into a lower level of the fair value hierarchy. It appears that although a price that is
adjusted based on one of the limited circumstances in 2.4A.410.30 is no longer a Level 1 measurement, an entity should
not make other adjustments to that measurement (e.g. for market or other risks), except when the criteria to make one
of the other adjustments to Level 1 prices in 2.4A.410.30 are met. We believe that the circumstances that allow an entity
to exceptionally adjust Level 1 inputs only allow for adjustments related to those circumstances. [IFRS 13.79]
Page 128 / 375

2.4A.410.50 An example of an alternative pricing method as described in the first bullet of 2.4A.410.30 is matrix
pricing. This pricing method involves using a selection of data points (usually quoted prices) or yield curves to calculate
prices for separate financial instruments that share characteristics similar to the data points. Matrix pricing using
observable market-based data points will usually result in Level 2 fair value measurements. [IFRS 13.79(a)]
EXAMPLE 11 - ADJUSTMENT TO LEVEL 1 INPUTS
2.4A.410.60 Company P invests in shares of Company T that are listed on the London Stock
Exchange (LSE). On the last day of the reporting period, P obtains the closing price of the shares
from the LSE. After the closing time of the LSE but still on the last day of the reporting period, T
makes a public announcement that affects the fair value of its shares; this is evidenced by prices
for a small number of aftermarket transactions in depository receipts on the shares of T that are
traded on the New York Stock Exchange. P therefore uses the aftermarket prices to make
appropriate adjustments to the closing price from the LSE, in order to measure the fair value of
the shares at the measurement date. Because the adjustment is derived from observed market
prices, the resulting fair value measurement is a Level 2 measurement.
2.4A.410.70 Positions in a single asset or liability (including a group of identical assets or liabilities) that are traded in
an active market are measured at fair value within Level 1 as the product of the quoted price for the individual asset or
liability and the quantity held. This is also applicable if:
• the market's normal daily trading volume is insufficient to absorb the quantity held; or
• placing orders to sell the position in a single transaction might affect the quoted price (see
2.4A.450.20). [IFRS 13.80]
2.4A.420 Level 2 and Level 3 inputs
2.4A.420.10 The determination of whether a fair value measurement is categorised into Level 2 or Level 3 depends on:
• the observability of the inputs that are used in the valuation technique(s); and
• the significance of the inputs to the fair value measurement. [IFRS 13.73, 81, 84, 86, A]
2.4A.420.20 'Observable inputs' are inputs that are developed using market data, such as publicly available information
about actual events or transactions and that reflect the assumptions that market participants would use when pricing the
asset or liability. [IFRS 13.A]
2.4A.420.30 Level 2 inputs include:
• quoted prices for similar assets or liabilities in active markets;
• quoted prices for identical or similar assets and liabilities in markets that are not active; and
• other inputs that are observable for the asset or liability. Examples of Level 2 inputs other than
quoted prices are interest rates, credit spreads or yield curves that are observed in the market.
[IFRS 13.82]
2.4A.420.40 'Market-corroborated inputs' that are derived principally from or corroborated by observable market data
(by correlation or other means) are also Level 2 inputs. For example, consider a fair value measurement of an interest
rate swap, whose variable leg is based on a specific bank's prime rate. If the bank's prime rate is derived through
extrapolation and the extrapolated values are corroborated by observable market data through correlation with an
interest rate that is observable over substantially the full term of the swap, then the bank's prime rate is a market-
corroborated input that is categorised as a Level 2 input. [IFRS 13.82, A, B35(c), BC171]
2.4A.420.50 An input to a fair value measurement of an asset or a liability with a specified term is a Level 2 input only if
it is observable for substantially the full term of the asset or liability. Therefore, if an input is not observable for
substantially the full term of an asset or a liability, then the input is a Level 3 input. Whether the resulting fair value
measurement would be categorised in Level 2 or Level 3 depends on the significance of that input to the measurement in
Page 129 / 375

its entirety. [IFRS 13.73, 82, A]

EXAMPLE 12 - LEVEL 2 INPUT THAT IS NOT AVAILABLE FOR SUBSTANTIALLY THE FULL TERM
2.4A.420.60 Company E has an over-the-counter contract to purchase natural gas every month
for the next 30 months. E accounts for the contract as a derivative instrument, and measures it at
fair value in the statement of financial position. Natural gas prices that are quoted in an active
market are available for the next 24 months after the end of the current reporting period. For the
remaining six months of the term, E uses internally developed estimates of future natural gas
prices. Market prices are not available for substantially the entire term of the contract, and the
impact of the unobservable inputs is significant. Therefore, E classifies the fair value
measurement of this contract as a Level 3 measurement. In the following year, if quoted natural
gas prices continue to be available for the following 24 months, then the fair value measurement
might be classified as a Level 2 measurement.
2.4A.420.70 When measuring fair value, an entity minimises the use of unobservable inputs (see 2.4A.390.10 and
300.10). However, situations may occur in which relevant inputs are not observable. In such situations, unobservable
inputs are used based on the best information available about the assumptions that market participants would make when
pricing the asset or liability, including assumptions about risk. Adjustments to Level 2 inputs based on unobservable inputs
may be necessary depending on the characteristics of the asset or liability being measured. In this case, an entity
assesses whether the effects of these adjustments are significant to the entire measurement (see 2.4A.400.40). If so,
then the fair value measurement is classified into Level 3. [IFRS 13.61, 75, 83-84, 86-87, 89]
2.4A.420.80 When developing unobservable inputs due to the unavailability of relevant observable inputs, an entity is
not precluded from using its own data. However, an entity adjusts its own data if reasonably available information
indicates that other market participants would use different information. An example of a possible adjustment would be
buyer-specific synergies - i.e. synergies available to a specific acquirer in a business combination that would not be
available to market participants. [IFRS 13.89]
2.4A.430 Pricing services and broker quotes

2.4A.430.10 Using a pricing service does not change the way that inputs are categorised in the fair value hierarchy.
Prices obtained from a pricing service are not considered observable simply because they were obtained from a third
party. Rather, an entity using a pricing service should understand the source of the inputs used by the pricing service in
order to properly categorise any fair value measurements based on those inputs. For example, if a pricing service
provides an unadjusted quoted price from an active market for an identical instrument, then a fair value measurement
based only on that price would be a Level 1 measurement. Alternatively, if the pricing service provides prices based on in-
house models, then any resulting fair value measurement would be a Level 2 or Level 3 measurement, depending on the
observability and significance of the inputs used. [IFRS 13.73, A]
2.4A.430.20 In some cases, pricing services may provide Level 2 inputs determined using a matrix pricing methodology,
even though Level 1 inputs are available to both the entity and the pricing service. Using Level 2 inputs in these situations
is not appropriate unless the entity meets the criteria in 2.4A.410.30. If these criteria are not met, then the entity should
obtain quoted prices in active markets (Level 1 inputs) either from the pricing service or from other sources. [IFRS 13.79]
2.4A.430.30 Consensus pricing services obtain information from multiple subscribers who each submit prices to the
pricing service. The pricing service returns consensus prices to each subscriber based on the data received. When
assessing consensus data, it is important to understand what the prices submitted represent. If the estimates provided to
the service do not represent executable quotes or are not based on observable prices, then a fair value measurement
derived from the consensus price would be a Level 3 measurement. However, if the inputs to the price received from the
pricing service are Level 1 or Level 2 inputs, then the use of those prices generally results in a Level 2 measurement.
[IFRS 13.73]
2.4A.430.40 Similar considerations apply to prices obtained from brokers. A broker quote is not generally a binding
offer. Even if it is, it may not represent the price at which an orderly transaction would take place between market
participants. If a broker quote reflects actual current market transactions in an identical instrument, then it may be a Level
Page 130 / 375

1 or Level 2 input. However, if a broker quote is an indicative price based on the broker's valuation models, then it is a
Level 2 or Level 3 input. See also 2.4A.470.80. [IFRS 13.73, A, BC159]
2.4A.440 Inputs to valuation technique

2.4A.440.10 Inputs to valuation techniques are the assumptions that market participants would use when pricing the
asset or liability. These inputs include assumptions about risk such as the risk inherent in a particular valuation technique
used to measure fair value - i.e. the pricing model - and the risk inherent in the inputs to the valuation technique. [IFRS
13.A]
2.4A.440.20 Entities select the valuation techniques that are appropriate in the circumstances, for which sufficient data
is available, and that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. [IFRS
13.61, 67, BC142]
2.4A.440.30 Markets (such as exchange markets, dealer markets, brokered markets, principal-to-principal markets
etc.) might provide inputs that could be observable for some assets and liabilities. [IFRS 13.68]
2.4A.440.40 In some cases, an entity may be required to adjust the available observable inputs significantly given the
characteristics of the asset or liability being measured or market conditions at the measurement date. Unobservable
inputs are a part of a fair value measurement if they are required inputs in order to arrive at a fair value measurement
and if they relate to factors that market participants would consider.
2.4A.440.50 For example, the fair value of an unquoted security held as an asset may be based primarily on observable
market multiples. However, to the extent that market participants would be expected to apply a discount because the
shares valued are not publicly traded, a discount for lack of marketability should be considered, even though this is not
directly observable.
2.4A.450 Premiums, discounts and blockage factors

2.4A.450.10 An entity selects inputs that are consistent with the characteristics of the asset or liability that market
participants would take into account when pricing the asset or liability. In some cases, an initial valuation indication may
not reflect a characteristic of an asset or liability that market participants would take into account (see 2.4A.440.50). More
generally, it may be appropriate to make an adjustment, such as a control premium, a marketability or liquidity discount
or a non-controlling interest discount, to a preliminary value indication in measuring the fair value of an asset or liability.
[IFRS 13.69]
2.4A.450.20 An entity does not apply a premium or discount if:
• it is inconsistent with the item's unit of account (see 2.4A.50);
• it reflects size as a characteristic of the entity's holding (e.g. a blockage factor) (see
2.4A.450.30);
• the characteristic is already reflected in the preliminary value indication (see 2.4A.450.50); or
• there is a quoted price in an active market for an identical asset or liability - i.e. a Level 1 input.
[IFRS 13.69]
2.4A.450.30 For example, an entity may hold a large number of identical financial instruments, but the market for the
instrument does not have sufficient trading volume to absorb the quantity held by the entity without affecting the price. A
'blockage factor' is a discount that adjusts the quoted price of an asset or a liability because the market's normal trading
volume is not sufficient to absorb the quantity held by the entity. IFRS 13 clarifies that a blockage factor is not a
characteristic of an asset or a liability but a characteristic of the size of the entity's holding, and it expressly prohibits
application of a blockage factor. [IFRS 13.69, 80, BC 156]
2.4A.450.35 There is currently some uncertainty on the application of valuation adjustments under IFRS 13. This arises
in part because the IFRS that requires a fair value measurement may not be explicit in identifying the appropriate unit of
account, and IFRS 13 is not explicit in identifying all circumstances where the unit of account guidance in the IFRS giving
rise to the fair value measurement is overridden by unit of valuation guidance in IFRS 13. In particular, the interaction of
Page 131 / 375

IFRS 13's guidance on following the unit of account in other IFRSs may be inconsistent in certain cases with its
requirement to use Level 1 prices without adjustment, when available. For example, consider the case of a listed
subsidiary that constitutes a CGU. On the one hand, the unit of account in accordance with IAS 36 is the CGU as a whole,
which implies that a control premium may be appropriate. But on the other hand, IFRS 13 states that when a Level 1
input is available for an asset or liability, it is used without adjustment except in specific circumstances that do not apply
in this case (see 2.4A.410.30). A similar issue would arise when measuring the acquisition-date fair value of an already
held equity interest (accounted for under the equity method) in an acquiree in a step acquisition, if the entity has paid a
control premium and the shares of the investee are publicly traded. See also 3.10.190.60.
2.4A.450.40 When an entity measures the fair value of an asset such as a security for which it is subject to a restriction
on its sale or transfer, it determines whether it is appropriate to apply an adjustment to the price of a similar unrestricted
security to reflect the restriction. To make that determination, the entity analyses first whether the restriction is security-
specific or entity-specific (i.e. whether the restriction is an attribute of the asset or an attribute of the holder). For
security-specific restrictions, the price used in the fair value measurement reflects the effect of the restriction if this would
be considered by a market participant in pricing the security; this may require an adjustment to the quoted price of
otherwise identical but unrestricted securities. For entity-specific restrictions, the price used in the fair value
measurement is not adjusted to reflect the restriction. Although an entity may not be able to sell a particular security on
the measurement date due to an entity-specific restriction, it is still considered to have access to the market. See also
2.4A.40. [IFRS 13.IE28]
2.4A.450.50 If a characteristic of an asset or a liability is not reflected in a preliminary value indication, then a separate
adjustment may be required to measure the fair value of the asset or liability. Continuing the example in 2.4A.440.50, if
the assets being measured are non-controlling shares in a private entity and the preliminary value indication was arrived
at using market multiples derived from the share prices of comparable public entities, then the resulting preliminary value
indication is on a marketable, minority interest basis, because the publicly traded shares are marketable and represent
the price of non-controlling holdings. In order to use such multiples to measure the fair values of non-marketable, non-
controlling shares in a private entity, an adjustment would not generally be required to reflect the fact that the shares are
non-controlling, because this is already reflected in the comparable entity share prices used to calculate the market
multiples. However, an adjustment would generally be required to reflect the non-marketable nature of the assets relative
to the publicly traded shares.
2.4A.460 Inputs based on bid and ask prices

2.4A.460.10 If assets or liabilities have a bid and an ask price, then an entity uses the price within the bid-ask spread
that is most representative of fair value in the circumstances. The bid-ask spread includes transaction costs, and may
include other components. The price in the principal or most advantageous market is not adjusted for transaction costs
(see 2.4A.80). Therefore, an entity makes an assessment of what the bid-ask spread represents when determining the
price that is most representative of fair value within the bid-ask spread. However, the use of bid prices for long positions
and ask prices for short positions is permitted but not required. [IFRS 13.70, BC164]
2.4A.460.20 The standard does not prohibit using mid-market prices or other pricing conventions generally used by
market participants as a practical expedient for fair value measurements within a bid-ask spread. However, it appears
that the use of mid-market prices is subject to the condition that a mid-market price provides a reasonable approximation
of an exit price. We believe that use of the practical expedient does not override the general fair value measurement
guidance, and should not be used if it leads to a measurement that is not representative of fair value. Therefore, an entity
should not ignore available evidence that a mid-market price does not result in a price that is representative of fair value.
For example, if the bid-ask spread is particularly wide, or if the applicable bid-ask spread has widened significantly for a
specific asset or liability, then a mid-market price may not be representative of fair value. [IFRS 13.71]
2.4A.470 Measuring fair value when the volume or level of activity has
significantly decreased
2.4A.470.10 A fair value measurement may be affected when there has been a significant decrease in the volume or
level of activity for that item compared with the normal market activity for that item. Judgement may be required in
determining whether, based on the evidence available, there has been such a significant decrease. An entity assesses the
significance and relevance of all facts and circumstances. Factors that might be taken into account may include the
Page 132 / 375

following.
• There are few recent transactions.
• Price quotations are not based on current information.
• Price quotations vary substantially over time or between market makers.
• Indices that were previously highly correlated with the fair values of the item are demonstrably
uncorrelated with recent indications of fair value for that item.
• There is a significant increase in implied liquidity risk premiums, yields or performance
indicators for transactions observed in the market or quoted prices compared with the entity's
estimate of expected cash flows.
• There is a wide or significantly increased bid-ask spread.
• There is a significant decline in primary market activity for similar assets or liabilities.
• Little information is publicly available. [IFRS 13.B37, B42]
2.4A.470.20 If an entity concludes that the volume or level of activity for an asset or liability has significantly decreased,
then further analysis of the transactions or quoted prices is required. A decrease in the volume or level of activity on its
own might not indicate that a transaction or a quoted price is not representative of fair value, or that a transaction in that
market is not orderly. It is not appropriate to conclude that all transactions in a market in which there has been a
decrease in the volume or level of activity are not orderly. However, determining whether a transaction is orderly is more
difficult if there has been a significant decrease in the volume or level of activity in relation to normal market activity for
the asset or liability (or similar assets or liabilities). To evaluate the circumstances, and to determine whether a
transaction is orderly, judgement may be required. If an entity determines that a transaction or quoted price does not
represent fair value, then an adjustment to that price is necessary if it is used as a basis for determining fair value. [IFRS
13.B38, B43]
2.4A.470.30 If the volume or level of activity has significantly decreased and the entity concludes that the market for
that asset or liability is not active, then it may be appropriate for an entity to change the valuation technique used or to
use multiple valuation techniques to measure the fair value of an item. If multiple valuation techniques are used, then the
entity considers the reasonableness of the range of the different fair value indications. The objective of the weighting
process is to determine the point within the range that is most representative of fair value under current market
conditions. A wide range of fair value estimates may be an indication that further analysis is needed. [IFRS 13.B40]
2.4A.470.40 A fair value measurement reflects an orderly transaction between market participants. Therefore,
regardless of the valuation techniques used, a fair value measurement includes appropriate risk adjustments that are
reflective of an orderly transaction between market participants under current market conditions; this includes a risk
premium reflecting the amount that market participants would demand as compensation for the uncertainty inherent in
the future cash flows of an asset or liability. [IFRS 13.A, B39]
2.4A.470.50 An 'orderly transaction' is defined as a transaction that assumes exposure to the market for a period
before the measurement date to allow for marketing activities that are usual and customary for transactions involving
such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale). It is generally reasonable
to assume that a transaction in which an asset or liability was exchanged between market participants is an orderly
transaction. However, there are circumstances in which an entity needs to assess whether a transaction is orderly.
Circumstances that may indicate that a transaction is not orderly include the following.
• There was inadequate exposure to the market to allow usual and customary marketing
activities.
• The seller marketed the asset or liability to a single market participant.
• The seller is in distress.
• The seller was forced to sell to meet regulatory or legal requirements.
• The transaction price is an outlier compared with other recent transactions for identical or
Page 133 / 375

similar items. [IFRS 13.22, A, B43]

2.4A.470.60 If the evidence indicates that a transaction was not orderly, then the entity places little (if any) weight on
the transaction price when measuring fair value. However, if the evidence indicates that the transaction was orderly, then
the entity considers the transaction price in estimating the fair value of the asset or liability. The weight placed on that
transaction price depends on the circumstances - such as the volume and timing of the transaction and the comparability
of the transaction to the asset or liability being measured. If an entity does not have sufficient information to conclude
whether a transaction was orderly, then it should take the transaction price into account, but place less weight on it
compared with transactions that are known to be orderly. [IFRS 13.B44]
2.4A.470.70 Although an entity need not undertake exhaustive efforts to determine whether a transaction is orderly, it
should not ignore information that is reasonably available. If an entity is party to a transaction, then it is presumed to
have sufficient information to conclude whether the transaction is orderly. [IFRS 13.B44]
2.4A.470.80 An entity is allowed to use quoted prices that are provided by third parties (such as brokers or pricing
services) if these quoted prices are determined in accordance with the fair value measurement requirements. If there has
been a significant decrease in the volume or level of activity for an item, then an entity evaluates whether third-party
prices are developed using current market information that reflects orderly transactions and market participant
assumptions. If an entity obtains prices from a third-party pricing service or broker as inputs to a fair value measurement,
then it places less weight on quotes that do not reflect the result of transactions. Furthermore, the entity takes into
account the nature of the quotes and gives a higher weight to quotes representing binding offers than to those
representing indicative bids. Whether third-party prices represent observable or unobservable inputs depends on their
nature and source (see 2.4A.430). [IFRS 13.B45-B47]
Page 134 / 375

2.4A.480 DISCLOSURES
2.4A.480.10 IFRS 13 contains a comprehensive disclosure framework that combines the fair value measurement
disclosures previously required by other IFRSs and requires additional disclosures that users of financial statements have
suggested would be useful. The objective of the disclosures for assets and liabilities that are measured at fair value is:
• to provide information that enables users of financial statements to assess the methods and
inputs used to develop those measurements; and
• to assess the effect of the measurements on profit or loss or other comprehensive income of
recurring fair value measurements that are based on significant unobservable inputs (i.e.
recurring Level 3 measurements). [IFRS 13.91, BC184-BC185]
2.4A.480.20 The fair value disclosures for assets and liabilities that are measured at fair value applies to classes of
assets and liabilities that are measured at fair value in the statement of financial position after initial recognition. These
disclosure requirements do not apply to classes of assets and liabilities that are measured at fair value only at initial
recognition. For example, the disclosure requirements of IFRS 13 do not apply to revenue (which is measured at fair
value of the consideration received or receivable), because revenue is neither an asset nor liability recognised in the
statement of financial position and is not measured at fair value after its initial recognition. Similarly, the disclosure
requirements of IFRS 13 do not apply to the fair value of assets acquired in a business combination and subsequently
measured at cost, because the assets are only measured at fair value on initial recognition. [IFRS 13.93, BC184]
2.4A.490 Recurring and non-recurring fair value measurements

2.4A.490.10 Recurring fair value measurements arise from assets and liabilities that are measured on a fair value basis
at the end of each reporting period - e.g. biological assets in IAS 41. However, this does not necessarily mean that a
valuation is performed every reporting period. For example, an entity may carry land and buildings using the revaluation
model under IAS 16. IAS 16 requires revaluations to be performed when the fair value of a revalued asset differs
materially from its carrying amount (see 3.2.300). Non-recurring fair value measurements are fair value measurements
that are triggered by particular circumstances - e.g. an asset being classified as held-for-sale. Disclosure requirements
are different depending on whether a fair value measurement is recurring or non-recurring. [IFRS 13.93(a)]
2.4A.490.20 A non-recurring fair value measurement may have occurred before the end of the reporting period.
Although not explicit, it appears that the fair value measurement disclosures (for both recurring (see example in
2.4A.490.10) and non-recurring measurements) should be based on the fair value at which the item is measured at the
end of the reporting period, even if that fair value was determined as of an earlier date.
2.4A.500 Classes of assets and liabilities

2.4A.500.10 To meet the disclosure objective, an entity makes the required disclosures for each class of assets and
liabilities. Class is determined based on:
• the nature, characteristics, and risks of the asset or liability; and
• the level into which it is categorised in the fair value hierarchy.
2.4A.500.20 The number of classes for assets and liabilities categorised in Level 3 of the fair value hierarchy may need
to be greater than those categorised within other levels, given the greater degree of uncertainty and subjectivity of fair
value measurements within Level 3. [IFRS 13.94, BC193]
2.4A.500.30 Determining the appropriate classes of assets and liabilities requires judgement. A class of assets and
liabilities could be more disaggregated than a single line item in the statement of financial position, and an entity should
provide information sufficient to allow reconciliation to the statement of financial position. However, if another IFRS
specifies the class for an asset or a liability, then an entity may use that class in providing the disclosures if that class
Page 135 / 375

meets the above criteria (see 2.4A.500.10). [IFRS 13.93-94]
2.4A.510 Disclosure requirements

2.4A.510.10 The disclosure requirements are summarised in the table below. They are most extensive for recurring
Level 3 measurements.
2.4A.510.20 IFRS 13 requires disclosure of accounting policy choices in relation to:
Page 136 / 375

• determining when transfers between levels in the hierarchy have occurred - e.g. the beginning
of the reporting period; and
• a decision to apply the exception for measuring a group of financial assets and financial
liabilities with offsetting risk positions (see 2.4A.200). [IFRS 13.95-96]
2.4A.510.30 For a liability measured at fair value and issued with an inseparable third-party credit enhancement (see
2.4A.120.20), an entity discloses:
• the existence of the credit enhancement; and
• whether that credit enhancement is reflected in the fair value measurement of the liability.
[IFRS 13.98]
2.4A.510.40 An entity discloses a quantitative sensitivity analysis for financial assets and financial liabilities that are
measured at fair value on a recurring basis and are categorised within Level 3. The entity quantifies the effect, if
significant, of changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions as
required by IFRS 7 - including how the effect was calculated. [IFRS 7.27B(e), 13.93(h)(ii)]
2.4A.510.50 It appears that 'reasonably possible alternative' assumptions are assumptions that could reasonably have
been included in the valuation model at the end of the reporting period based on the circumstances at that date. A
quantitative sensitivity analysis for financial instruments provides information about the sensitivity of the fair value
measurement to changes in reasonably possible alternative unobservable inputs at the measurement date. Therefore, we
do not believe that this disclosure is intended to be a forward looking sensitivity analysis about an entity's exposure to
future changes in market variables. [IFRS 7.27B(e), 13.93(h)(ii), BC209]
2.4A.510.60 For financial instruments measured at fair value, the fair value disclosures required in annual financial
statements also apply for interim financial reports in accordance with IAS 34. [IAS 34.16A(j)]
Page 137 / 375

2.4A.520 TRANSITIONAL REQUIREMENTS

2.4A.520.10 The requirements of the standard will be applied prospectively as of the beginning of the annual period in
which they are initially applied. [IFRS 13.C2]
2.4A.520.20 Prospective application will mean that any changes from adjustments to valuation techniques at the date of
adoption will be recognised in the period of adoption either in:
• profit or loss; or
• other comprehensive income, when a gain or loss is recognised in other comprehensive income
in accordance with the IFRS that requires or permits fair value measurement. [IFRS 13.BC229,
IAS 8.36]
2.4A.520.30 The disclosure requirements of IFRS 13 are not required to be applied for comparative periods, before
initial application of the standard. [IFRS 13.C3]
Page 138 / 375

2.4A.530 FUTURE DEVELOPMENTS

2.4A.530.10 In May 2012, the IASB published Exposure Draft ED/2012/1 Annual Improvements to IFRSs 2010-2012
Cycle. The ED proposed amending the basis for conclusions of IFRS 13 to clarify that, in issuing IFRS 13 and making
consequential amendments to IFRS 9 and IAS 39, the IASB did not intend to remove an entity's ability to measure short-
term receivables and payables with no stated interest rate at invoice amounts without discounting, if the effect of not
discounting is immaterial.
Page 139 / 375

2.5 Consolidation
(IAS 27, SIC-12)
Scope • All subsidiaries are consolidated, including subsidiaries of venture

capital organisations and unit trusts, and those acquired exclusively
with a view to subsequent disposal. [2.5.10.10]
Assessing control • Consolidation is based on control, which is the power to govern,

either directly or indirectly, the financial and operating policies of an
entity so as to obtain benefits from its activities. [2.5.10.20]
• The ability to control is considered separately from the exercise of
that control. [2.5.30.50]
• The assessment of control may be based on either a power-to-
govern or a de facto control model. [2.5.30.10]
• Potential voting rights that are currently exercisable are considered
in assessing control. [2.5.130.10]
Special purpose • A special purpose entity (SPE) is an entity created to accomplish a

entities narrow and well-defined objective. SPEs are consolidated based on
control. The determination of control includes an analysis of the
risks and benefits associated with an SPE. [2.5.150.10]
Subsidiaries' • A parent and its subsidiaries generally have the same reporting
accounting periods when consolidated financial statements are prepared. If this
periods and is impracticable, then the difference between the reporting period of
policies a parent and its subsidiary cannot be more than three months.
Adjustments are made for the effects of significant transactions and
events between the two period ends. [2.5.290.10]
• Uniform accounting policies are used throughout the group.
[2.5.290.40]
Non-controlling • The acquirer in a business combination can elect, on a transaction-

interests by-transaction basis, to measure 'ordinary' non-controlling interests
(NCI) at fair value or at their proportionate interest in the
recognised amount of the identifiable net assets of the acquiree at
the acquisition date. 'Ordinary NCI' are present ownership interests
that entitle their holders to a proportionate share of the entity's net
assets in the event of liquidation. Other NCI are generally measured
at fair value. [2.5.305.10]
• An entity recognises a liability for the present value of the
(estimated) exercise price of put options held by NCI, but there is no
detailed guidance on the accounting for such put options.
[2.5.460.10]
• Losses in a subsidiary may create a deficit balance in NCI.
[2.5.325.20]
Page 140 / 375

• NCI in the statement of financial position are classified as equity but

are presented separately from the parent shareholders' equity.
[2.5.335.10]
• Profit or loss and comprehensive income for the period are allocated
to NCI and owners of the parent. [2.5.325.10]
Intra-group • Intra-group transactions are eliminated in full. [2.5.370.10]

transactions
Loss of control • On the loss of control of a subsidiary, the assets and liabilities of the
subsidiary and the carrying amount of the NCI are derecognised.
The consideration received and any retained interest (measured at
fair value) are recognised. Amounts recognised in other
comprehensive income (OCI) are reclassified as required by other
IFRSs. Any resulting gain or loss is recognised in profit or loss.
[2.5.490.10]
Changes in • Changes in the parent's ownership interest in a subsidiary without a

ownership loss of control are accounted for as equity transactions and no gain
interest while or loss is recognised in profit or loss. [2.5.385.10]
retaining control

beginning on 1 January 2012. The requirements related to this topic are derived from IAS 27 (2008) Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities.
referred to as a forthcoming requirement. The forthcoming requirements related to this topic are derived from the
following.
after 1 January 2013. The standard replaces the currently effective requirements in IAS 27 and
SIC-12 with respect to the definition of control and related consolidation guidance. The
• IFRS 12 Disclosure of Interests in Other Entities, which is effective for annual periods beginning
on or after 1 January 2013. When a currently effective requirement will be changed by IFRS 12,
it is marked with a # and the impact of the change is explained in the accompanying boxed text.
A brief outline of the impact of IFRS 12 on this topic is given in 2.5.207. The requirements of
IFRS 12 are discussed in chapter 2.5A.
Early adoption of IFRS 10 and IFRS 12 is permitted as long as the entity also adopts the other standards that form part of
the 'consolidation' suite of standards, as well as IAS 27 (2011) Separate Financial Statements if applicable.
Consolidation suite of standards
Standard Title
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
Page 141 / 375

IFRS 12 Disclosure of Interests in Other Entities
IAS 28 (2011) Investments in Associates and Joint Ventures
Page 142 / 375

2.5.10 ENTITIES INCLUDED IN THE CONSOLIDATED FINANCIAL

STATEMENTS *
2.5.10.10 Consolidated financial statements include all subsidiaries of the parent, without exception. See 2.1.50 for the
requirement to prepare consolidated financial statements. The guidance provided by IAS 27 may also be used for identifying
an acquirer in a business combination (see 2.6.60). [IFRS 5.BC53-BC55, IAS 27.12]
2.5.10.20 The definition of a subsidiary focuses on the concept of control and has two parts, both of which need to be met
to conclude that one entity controls another:
• the power to govern the financial and operating policies of an entity ...
• ... so as to obtain benefits from its activities. [IAS 27.4]
2.5.10.30 There is no requirement for the parent to have a shareholding in a subsidiary, and this is not a necessary pre-
condition for control. [IAS 27.4, SIC-12.9]
2.5.10.40 Control is presumed to exist if the parent owns, directly or indirectly through subsidiaries, more than half of the
voting power of an entity. This presumption of control may be rebutted in exceptional circumstances if it can be
demonstrated clearly that such ownership does not constitute control (see 2.5.140). [IAS 27.13]
2.5.10.50 Even if the parent owns half or less of the voting power of an entity, control exists in any of the following
circumstances:
• the investor has power over more than half of the investee's voting power through an agreement
with other investors;
• the investor has the power to govern the investee's financial and operating policies by virtue of a
statute or agreement;
• the investor has the power to appoint or remove the majority of the investee's board of directors
or governing body members, and control of the entity is exercised through that board or body; or
• the investor has the power to cast the majority of votes at meetings of the investee's board of
directors or governing board, and control of the entity is exercised through that board or body.
[IAS 27.13]
2.5.10.60 An entity included in the consolidated financial statements could be a part of a legal entity - e.g. a division of a
company. However, in our view an approach in which only part of a legal entity is assessed for consolidation is appropriate
only when the activities, assets and liabilities (i.e. the risks and rewards) of that part of the legal entity are 'ring-fenced'
from the risks and rewards of the other parts of the legal entity. Alternatively, if the activities and net assets are not ring-
fenced, then the assessment of consolidation should be made in the context of the legal entity as a whole. See 2.5.200 for
further discussion of this issue in the context of SPEs. [IAS 27.4, 12]
Page 143 / 375

2.5.20 THE POWER TO GOVERN THE FINANCIAL AND

OPERATING POLICIES OF AN ENTITY
2.5.30 Power to govern vs de facto control
2.5.30.10 The assessment of whether one entity controls another entity depends on the application of the control concept
in IAS 27.
2.5.30.20 Under one view, consolidation is based on the power to govern. Under this view, in assessing control it is
considered whether the ability to control has a legal or contractual basis rather than whether that control is actually
exercised. For example, significant minority shareholder B has a 40 percent interest in an investee; the other holdings are
dispersed such that no other individual shareholder has an interest of more than five percent. B does not have the power to
govern the investee because the other shareholders could unite to oppose it. Therefore, B does not consolidate the
investee. Rather, it would be accounted for under the equity method in accordance with IAS 28 (see 3.5). [IAS 27.4, 13]
2.5.30.30 Another view is that, in addition to the power-to-govern analysis, the evaluation of consolidation requirements
should take into account de facto circumstances. De facto control arises when an entity holding a significant minority
interest can control another entity without legal arrangements that would give it majority voting power. In the example in
2.5.30.20, de facto control could exist because the balance of holdings with other shareholders is dispersed and the other
shareholders have not organised their interests in such a way that they commonly exercise more votes than the significant
minority shareholder. Under a de facto control model, the power to govern an entity through a majority of the voting rights
or other legal means is not essential for consolidation. Instead, the ability in practice to control - e.g. by casting a majority
of the votes actually cast - in the absence of legal control may be enough if no other party has the power to govern. Under
this view, in de facto control circumstances, which is evaluated based on all evidence available, the significant minority
shareholder is required to consolidate.
2.5.30.40 In our view, both interpretations are acceptable. Therefore, an entity should choose an accounting policy, to be
applied consistently, with respect to the application of the control principle in IAS 27, especially whether the entity includes
or excludes de facto control aspects in its analysis of control. Arguably, consolidation based on the power to govern is more
consistent with the wording of paragraph 13 of IAS 27, which explicitly refers to power. If a policy of de facto control is
selected and no other party has the power to govern an investee, then the entity that has de facto control should
consolidate.
2.5.30.50 Determining whether control exists requires a careful analysis of all facts and circumstances. The definition of
control permits only one entity to have control of another entity. Furthermore, control should be assessed without regard to
whether that power is actually exercised in practice. Instead, an entity considers whether the ability to control has a legal or
contractual basis, under the power-to-govern model, or is present as a result of practical circumstances, under the de facto
control model. [IAS 27.4, 13, IG3]
EXAMPLE 1 - PASSIVE MAJORITY SHAREHOLDER
2.5.30.60 Company R applies the power-to-govern model in consolidating subsidiaries. R owns

60% of the voting power in Company B, but never attends or votes at shareholder meetings and
takes no other interest in running B's operations.
2.5.30.70 In this example, we believe that R has the power to govern B because it can step in and
exercise its rights at any time - e.g. if it is not satisfied with how B's operations are being run.
Accordingly, R should consolidate B. Consolidation is based on the ability of one entity to control
another, regardless of whether that power is exercised in practice.
2.5.40 Governance structures

Page 144 / 375

2.5.40.10 An entity controls its investment if it has the power to appoint or remove the majority of the investee's board of
directors or other governing body members, and control of the entity is exercised through that board or body. Similarly, an
entity will control its investment if it has the power to cast the majority of votes at a meeting of the governing body (board
of directors or other governing body) through which control of the entity is exercised. [IAS 27.13(c)-(d)]
2.5.40.20 Therefore, when determining whether one entity controls another, a clear understanding of the investee's
governance structure is necessary. In many countries, the governing body is the board of directors; however, in other
countries there are layers of governance. Although the law may provide for different bodies to have certain rights and
obligations, in assessing control an entity should consider any shareholders' agreements that amend these 'typical' rights
and obligations.
2.5.40.30 For example, there might be a supervisory board and an executive board. In certain jurisdictions, the executive
board determines the detailed financial and operating policies, whereas the supervisory board has a more detached role in
overseeing the actions of management on behalf of shareholders and employees. Under these circumstances, the executive
board is generally the governing body for the purpose of identifying control under IFRS.
2.5.40.40 However, before reaching any conclusion it would be necessary to consider the respective roles of the
supervisory and executive boards in a particular case. In some cases, the role of the supervisory board is altered to give it
much more authority over the entity's financial and operating policies; this is becoming increasingly common as the focus on
corporate governance increases. For example, the supervisory board might approve the annual budgets and operational
planning or it might have the power to appoint or dismiss members of the executive board. Depending on the
circumstances, it might be appropriate to conclude that the supervisory board is the key governing body for the purpose of
determining control under IFRS.
2.5.40.50 The role of any nominations committee is also relevant in considering who has the power to appoint or remove
the majority of the governing body members. For example, a single shareholder might have the power to nominate
governing body members, but the operation of a nominating committee might require those nominees to be approved
unanimously by a number of parties, including certain shareholders and employee representatives. Whether the role of a
nominating committee is relevant in a particular case will depend on the circumstances. In this example, if the nominating
shareholder also has the power to alter the operations of the nominating committee so that it can appoint or remove
governing body members unopposed, then notwithstanding the participation of the committee, that shareholder still has the
power to appoint or remove the majority of the governing body members.
2.5.40.60 In certain jurisdictions, some or all members of the governing board are independent and/or are required by law
to 'act in the best interest of the entity'. Nevertheless, in our view a shareholder with the power to appoint or remove the
majority of the investee's board members generally has the power to govern the financial and operating policies of the
other entity in that situation, even though the shareholder may by law be precluded from directing the decisions of the
management of the other entity.
2.5.50 Shareholders' agreements

2.5.50.10 Shareholders' agreements may be an important part of assessing control. [IAS 27.13]
EXAMPLE 2A - SHAREHOLDER AGREEMENT
2.5.50.15 Company E owns 60% of the voting power in Company G, and Company F owns the
other 40%. E therefore appears to have the power to govern G.
2.5.50.17 However, E has entered into an agreement with F such that E defers to the wishes of F
with respect to voting; E has done this because it has no expertise in the area of G's operations.
Therefore, under this agreement, F has the power to govern G.
2.5.50.20 However, before concluding that a shareholders' agreement confers power on a particular party, an entity
should consider the break-up terms in the agreement and its duration.
EXAMPLE 2B - SHAREHOLDER AGREEMENT - BREAK-UP TERMS
Page 145 / 375

2.5.50.25 Continuing Example 2A, suppose that E can discontinue the agreement at any time
without penalty. In that case, we believe that E has the power to govern G because it can step in
and exercise its rights at any time.
2.5.50.30 If a shareholders' agreement has a fixed duration, then depending on the facts and circumstances, it might be
appropriate to conclude that the agreement covers too short a period to have any real impact on the power to govern.
2.5.50.40 Although a shareholders' agreement will generally be in writing, this is not a requirement of IFRS. In our view,
an oral shareholders' agreement may be as important as a written agreement in assessing control.
2.5.60 Management vs governance

2.5.60.10 In assessing the power to govern, it is necessary to distinguish between the management of the operations and
their control. A manager does not have control of an entity simply by virtue of running the daily operations if it does so only
within the financial and operating policy framework established by another entity. Although IAS 27 is silent on this issue, this
view is clarified by IAS 31 in respect of the accounting for joint ventures. [IAS 31.12]
EXAMPLE 3 - OPERATIONS MANAGEMENT VS CONTROL
2.5.60.20 Company H owns 70% of the voting power in Company K, and Company J owns the
other 30%. In addition, J runs the daily operations of K because it has expertise in that area.
However, H actually has the power to govern the operations of K because it has the majority of
voting power and therefore has the power to remove J as manager
2.5.70 Economic power

2.5.70.10 A party may be able to restrict the freedom of another entity by virtue of their trading or economic relationship.
Examples of parties that may have such power include financiers, trade unions, public utilities, government departments or
agencies, and major customers and suppliers. Such relationships do not give rise to the power to govern in the sense of
IAS 27 because the relationship is not one of investor-investee. This is clarified in SIC-12, which notes that economic
dependence, such as the relationship between a supplier and a significant customer, does not by itself lead to control. [IAS
24.11, SIC-12.App]
2.5.80 The rights of minorities

2.5.80.10 In many cases, minorities have certain rights even if another party owns the majority of the voting power in an
entity; sometimes these rights are derived from law and other times from the entity's constitution.
2.5.80.20 IFRS does not address the issue of minority rights. In our view, it is necessary to consider the nature and extent
of the rights of minorities in determining control, including the distinction between participating rights that allow minorities
to block significant decisions that would be expected to be made in the ordinary course of business, and rights that are
protective in nature. For example, the minority's approval may be necessary for:
• amendments to the entity's constitution;
• the pricing of related party transactions;
• the liquidation of the entity or launching bankruptcy proceedings; and
• share issues or repurchases.
2.5.80.30 In our view, these minority rights are protective and would not in isolation overcome a presumption of control by
the majority holder of voting power.
Page 146 / 375

2.5.80.40 However, the minority's approval may be necessary for:

• appointing and removing governing body members, including setting their remuneration; or
• making operating and capital decisions, including approving budgets, in the ordinary course of
operations.
2.5.80.50 In our view, such rights are participative in nature and therefore granting such rights to minorities may
overcome the presumption of control by the majority owner under IFRS when they are considered together with all other
facts and circumstances. However, overcoming the presumption of control by the majority owner does not mean that the
minority shareholder has control. All facts and circumstances should be taken into consideration in determining the degree
of influence of each party involved. The majority investor may have joint control (see 3.6.30 and 40) or significant influence
(see 3.5.20 and 30) over the entity.
2.5.80.60 In considering the significance of rights given to minorities, it is also important to consider what happens in the
event of deadlock. For example, if the minority shareholders have the power to veto the investee's annual operating budget,
then this may indicate that the majority shareholder does not have the power to govern the operations of the investee.
However, if the constitution provides that the minority shareholders have the right to object to the annual budget, and the
majority shareholder is obliged to listen and respond to those concerns, but is not obliged to change the budget or to enter
into independent discussions to decide the outcome, then in our view the minority rights are likely to be more protective
than participative and would not, in isolation, overcome the presumption of control by the majority holder of voting power.
2.5.80.70 Other rights that should be considered include, for example, minority shareholder approval of major asset
acquisitions and disposals, distributions, financing, the ability of the minority shareholders to liquidate the entity and any
'kick-out rights' that could force the majority shareholder to sell its interest in the investee. Although kick-out rights most
commonly occur in limited partnerships (see 2.5.90), they also can occur outside a partnership. In analysing kick-out rights,
care should be taken to ensure that they are currently exercisable.
EXAMPLE 4 - KICK-OUT RIGHTS EXERCISABLE IN THE FUTURE
2.5.80.80 Company P acquired 65% of the voting shares of Company S on 1 January 2011 and
nominates three of the five directors. There are two minority shareholders who can each nominate
one director.
2.5.80.82 A separate shareholders' agreement gives the minority shareholders the right from 1
January 2013 to kick out P after two formal disagreements between the majority and minority
shareholders; this is regardless of whether those disagreements happen before or after 1 January
2013.
2.5.80.85 Until 1 January 2013, the minority shareholders' kick-out rights should not be considered
when determining which entity has control because the rights are not currently exercisable (see
2.5.130). However, from 1 January 2013, when the minority shareholders' kick-out rights become
exercisable, this may lead to a re-assessment of which entity controls Y. This would depend on a
further analysis of the specific facts and circumstances at that time.
Page 147 / 375

2.5.80.90 An entity's constitution or a shareholders' agreement may give the minority shareholders the right to object to
certain decisions related to the entity's financial and operating policies, to delay the decision-making process and/or to
require protracted discussions with the majority shareholder.
2.5.80.100 If, after following the process set up in the constitution or shareholder agreement, including procedures in the
event of deadlock, the majority shareholder is provided with an explicit power to make a decision unilaterally - i.e. without
the agreement of the minority shareholders - then in our view the majority shareholder has control. In our view, this
conclusion would not change if the minority shareholders have the right to put their shares to the majority shareholder (put
option) if the majority shareholder takes such a decision against their will.
2.5.90 Limited partnerships and certain rights of limited partners

2.5.90.10 In some cases, an entity that is not an SPE is managed by an owner who is fully liable for the obligations of the
entity and who also holds the majority of voting rights. Other owners have a residual interest in the entity, but have limited
liability and hold no voting rights. This structure is commonly referred to as a 'limited partnership' and the party that has
unlimited liability for the obligations of such a partnership is referred to as a 'general partner'. There is a presumption that
the general partner has the power to govern the partnership, regardless of the general partner's voting interest in the
limited partnership. These structures are often seen in the private equity and hedge fund industry (see 2.5.210).
2.5.90.20 In the case of a limited partnership, consideration should be given to the ability of the limited partners to remove
the general partner (kick-out rights) and to rights to dissolve or liquidate the partnership. In our view, if kick-out rights are
substantive, then this will overcome the presumption that the general partner has the power to govern the partnership even
if the general partner holds the majority of the voting rights. In analysing kick-out rights, care should be taken to ensure
that they are currently exercisable (see 2.5.80.80). However, in our view a limited partner's ability to withdraw funding from
the partnership would not, on its own, overcome the presumption of the general partner's power to govern.
2.5.90.25 In some cases, the voting required to exercise kick-out rights may mean that they vest in a single limited partner
- e.g. if a single limited partner holds 67 percent of the voting rights of all limited partners and a simple majority is required
to remove the general partner. In our view, the fact that in substance only one limited partner has the ability to exercise the
kick-out rights does not prevent the rights from being substantive.
2.5.90.30 [Not used]
2.5.90.40 As a general principle, in our view the rights of the limited partners are regarded as substantive if there are no
significant barriers to exercising those rights. The rights should be exercisable without cause - i.e. not only in the case of
misconduct, such as negligence by the general partner - and there should be no other significant barriers to the
exercisability of the rights.
2.5.90.45 For example, such barriers would include the following.
• The voting thresholds make it unlikely that the rights will be exercisable.
• The exercise of the rights is subject to other conditions - e.g. related to the partnership's
performance - that make exercisability unlikely.
• Financial penalties or operational barriers form significant disincentives for the limited partners to
exercise their rights.
• There are not enough qualified replacement general partners or there is a lack of opportunities
to attract a qualified replacement.
• There is no mechanism for exercising the rights.
• The limited partners do not have the ability to obtain the information necessary to exercise the
rights.
2.5.90.50 If the analysis set out in 2.5.90.40-45 leads to the conclusion that the liquidation and/or kick-out rights of the
limited partners are substantive, then we believe that the presumption that the general partner has control over the limited
partnership is overcome.
Page 148 / 375

2.5.90.60 If it is concluded that the general partner does not control the partnership because the limited partners have
substantive kick-out rights, then it follows that the general partner will not have the ability to exercise significant influence
even if it holds more than 20 percent of the voting rights in the partnership (see 3.5.50).
2.5.100 Indirect holdings

2.5.100.10 Indirect holdings may or may not result in one entity having control over another. Although the total ownership
interest may exceed 50 percent, this may not mean that the entity has control.
EXAMPLE 5 - INDIRECT HOLDING THROUGH ASSOCIATE
2.5.100.20 Company L owns 40% of the voting power in Company M, and 35% of the voting
power in Company N. M owns 60% of the voting power in N.
2.5.100.25 Therefore, L has, directly and indirectly, a 59% (35% + (60% x 40%)) ownership
interest in N. However, L does not control 59% of the vote because it does not have control over the
votes exercised by M; instead, it is limited to significant influence (see 3.5.20). Therefore, in the
absence of any contrary indicators, L does not control N.
2.5.100.30 This issue addressed in Example 5 is captured in IAS 27 when it refers to voting power held indirectly through
subsidiaries - i.e. not through associates or lesser investments. [IAS 27.13]
2.5.110 Control vs fellow subsidiaries

2.5.110.10 In some cases, it is not clear whether one entity is controlled by another entity or whether they are both under
the control of a third entity. This issue sometimes arises in a closely held group of entities.
EXAMPLE 6 - CONTROL VS FELLOW SUBSIDIARIES
2.5.110.20 Individual P owns 100% of the voting power in Company Q, which owns 10% of the
voting power in Company R. P owns 55% of the voting power in R indirectly through a number of
other subsidiaries. The remaining 35% of R's voting power is widely held. The governing bodies of
Q and R are identical and include P.
Page 149 / 375

2.5.110.30 It may initially appear that Q controls the operations of R because the governing body
members are identical. However, in the absence of any contrary indicators, it is P who controls both
Q and R in this case. Therefore, it would not be appropriate for Q to consolidate R; rather, they are
fellow subsidiaries under the common control of P.
Page 150 / 375

2.5.120 SO AS TO OBTAIN BENEFITS FROM ITS ACTIVITIES

2.5.120.05 The second part of the definition of control requires that the investor obtain benefits from the activities of the
investee (see 2.5.10.20).
2.5.120.10 Although IFRS is silent on the matter, in our view the benefits referred to in the definition of control are the
benefits derived from having the power to govern the financial and operating policies of an entity - i.e. ownership benefits.
2.5.120.12 We believe that the two dominant typical features of such ownership benefits are participation in future
dividends and participation in future changes in the value of the entity, both positive and negative; these features together
typically determine the total shareholder return. The right to participate in these economic benefits generally arises at the
point of becoming an actual owner in the entity.
2.5.120.15 In our view, synergistic benefits such as revenue enhancements, cost savings or benefits from economies of
scale are not in the nature of ownership benefits in the context of IAS 27. This is supported by the consensus reached in
SIC-12 for SPEs (see 2.5.150). Benefits received from ordinary business transactions are not benefits that lead to control as
long as the terms of the transactions are established on an arm's length basis. For example, if a shareholder sells inventory
to the investee, then the sales price of the goods is a normal trading benefit as long as the investee does not pay more or
less than any of the shareholder's other customers under similar conditions. Similarly, a performance fee paid to an
investment manager that is on market terms is not in the nature of ownership benefits (see 2.5.210.60). Conversely,
ownership-type benefits may be present if the benefits received from 'ordinary' business transactions are in excess of the
benefits that would have been received had the transactions been on market terms - i.e. there are 'hidden dividends'. [SIC-
12.9-10]
2.5.120.20 Control does not require the parent to receive a majority of the benefits from the subsidiary. [IAS 27.4]
EXAMPLE 7 - VOTING POWER VS BENEFITS DISPROPORTIONATE
2.5.120.25 Company S issues A and B shares. They carry equal voting rights, but class A shares
have far greater rights to dividends in the event of a distribution. As a result of holding a mixture of
A and B shares, P owns 60% of the voting power in the entity, but receives only 40% of the
dividends.
2.5.120.27 In the absence of any contrary indicators, P controls S despite its share of benefits
being disproportionately low compared with its power.
2.5.120.30 Although the benefits of ownership are normally realised in the form of dividends, this is not necessary to
establish control over an entity. This is consistent with the absence of a requirement for the parent to hold shares in a
subsidiary (see 2.5.10.30).
EXAMPLE 8 - OWNERSHIP BENEFITS OTHER THAN DIVIDENDS
Page 151 / 375

2.5.120.35 Company T appoints the majority of Company W's governing body members through a
long-term or non-cancellable agreement entered into with W's shareholders. T receives no
dividends from W, but it receives a management fee based on W's profits that far exceeds the fee
that might be expected in the market.
2.5.120.37 In this example, we believe that such a benefit should be considered a benefit of
control under IFRS.
2.5.120.40 In summary, the key issue is assessing whether benefits may be obtained. No single aspect of benefits - i.e.
magnitude, form, mechanism for receipt - is decisive on its own.
Page 152 / 375

2.5.130 POTENTIAL VOTING RIGHTS

2.5.130.10 In assessing control, an entity should consider the impact of potential voting rights that are currently
exercisable. All potential voting rights are taken into account, whether they are held by the entity or by other parties. Such
potential voting rights may take many forms, including call options, warrants, convertible shares and contractual
arrangements to acquire shares. Only those rights that either would give the entity voting power or would reduce another
party's voting rights are considered. [IAS 27.14]
2.5.130.15 Written put options are not considered potential voting rights because the writer of a put option does not have
control over the exercise of that option and therefore cannot control the acquisition of the associated voting rights.
Accordingly, the holder of a put option takes into account the voting rights associated with the underlying shares when
considering whether it controls the entity.
EXAMPLE 9A - CALL OPTION EXERCISABLE NOW
2.5.130.20 Company X owns 40% of the voting power in Company B, Company Y owns 25% and
Company Z owns the remaining 35%. Also, X holds a call option to acquire from Y an additional
20% of the voting power in B; the call option can be exercised at any time.
2.5.130.25 Accordingly, it is X that has the power to govern B. Therefore, X consolidates B, with
60% allocated to NCI.
EXAMPLE 9B - CALL OPTION EXERCISABLE IN THE FUTURE
2.5.130.30 Company P grants Company O a call option to acquire the share capital of company Q
between June 2013 and December 2015 at a fixed price. The option cannot be exercised before
June 2013. Therefore, O does not currently have the power to control Q.
2.5.130.35 However, once the option becomes exercisable consideration should be given to
whether O controls Q. This would depend on a further analysis of the specific facts and
circumstances at that time.
EXAMPLE 9C - CALL OPTION CONTINGENT ON FUTURE EVENT
2.5.130.40 Company D acquires 51% of the shares and voting rights in Company E, which was a
wholly owned subsidiary of Company F. E is a legal entity that contains F's IT function and, as part
of the acquisition, E and F enter into an outsourcing contract for future IT services.
2.5.130.41 D and F also enter into a shareholder agreement that provides that if, over the term of
the outsourcing contract, one of the parties to that contract (E or F) fails to comply with its key
Page 153 / 375

obligations as defined in the contract, then:

• F has the right to re-acquire D's 51% interest if E is the failing party; and
• D has the right to acquire F's 49% interest if F is the failing party.

2.5.130.42 Because F's call option to re-acquire D's shares is contingent on a future event - i.e.
that one of the parties fails to comply with its obligations under the contract - we believe that the
option is not currently exercisable. Therefore, the issue of the call option to F does not prevent D
from controlling E.
2.5.130.43 However, if the breach of a condition that triggers the exercisability of an option is at
the discretion of the holder of the option, then we believe that the option is currently exercisable.
EXAMPLE 9D - CALL OPTION WITH FIXED EXERCISE PRICE
2.5.130.45 Company X has no shareholding in Company Z, but has a call option to acquire the
share capital of Z at any time for a nominal amount. In our experience, the parties to such an
arrangement are likely to be related (see 5.5).
2.5.130.47 X has the power to govern Z by virtue of the call option that is currently exercisable.
However, in this example X also has ownership benefits in Z by virtue of the pricing of the call
option: the fixed price means that X has both the upside and downside risk of changes in the fair
value of Z, which we believe are a form of ownership benefits (see 2.5.120.10).
2.5.130.50 Management's intentions in respect of the exercise of potential voting rights are ignored in assessing control
because these intentions do not affect the existence of the ability to exercise power. Continuing Example 9A, even if X had
no intention of exercising the call option, it would still be deemed to have the power to govern B. [IAS 27.15]
2.5.130.60 The exercise price of potential voting rights, and the holder's financial ability to exercise them, are also
ignored. However, the ability to exercise power does not exist if potential voting rights lack economic substance - e.g. if the
price is deliberately set so high that the chance of the potential voting rights being exercised is remote. [IAS 27.15]
2.5.130.70 In some cases, the exercise of potential voting rights may be subject to regulatory approval. Only when
regulatory approval is deemed a mere formality should the rights be considered currently exercisable. The nature of
regulatory approval, together with all relevant facts and circumstances, is considered when making this assessment. [IAS
27.15]
Page 154 / 375

2.5.140 REBUTTING THE PRESUMPTION OF CONTROL

2.5.140.10 It is possible for an entity that has less than a 50 percent interest in another entity to be considered its parent
as long as it controls that other entity. Similarly, ownership of more than a 50 percent interest may not give rise to control.
The determination of where control lies is a question of fact based on all relevant facts and circumstances, examples of
which are discussed in 2.5.20-130.70. [IAS 27.13-14]
2.5.140.20 A related issue is whether an entity could have two parents. [IAS 27.13, IG3]
EXAMPLE 10 - POTENTIAL FOR TWO PARENTS
2.5.140.30 Company D holds 60% of the voting power in Company F, but Company E has the right
to appoint and remove a majority of F's board of directors.
2.5.140.40 The indicators in IAS 27 might lead to a conclusion that both D and E should
consolidate F.
2.5.140.50 However, control is a question of fact and therefore there can be only one parent
because no more than one entity can have the current power to govern. In this example, it would
be necessary to consider:
• how F's financial and operating policies are set; and
• the rights of the shareholders in general meetings compared with the rights
of the board of directors. [IAS 27.13, IG3]
Page 155 / 375

2.5.150 SPECIAL PURPOSE ENTITIES

2.5.150.10 An SPE is an entity created to accomplish a narrow and well-defined objective - e.g. a vehicle into which trade
receivables are securitised. The principles discussed above for identifying control apply equally to an SPE. However, SIC-12
sets out additional guidance because many of the traditional indicators of control - e.g. power over more than half of the
voting rights as a result of ownership or contractual agreement - are not present in an SPE. For example, the activities of
the SPE may be predetermined so that there is no need for a governing body. [SIC-12.3, 9]
2.5.150.20 SIC-12 does not apply to employee benefit plans, either post-employment benefit plans or other long-term
employee benefit plans within the scope of IAS 19; however, it does apply to equity compensation plans (see 4.5.1040).
See 4.4.1090 for a discussion of the treatment of entities that provide employee benefits and that are excluded from the
scope of SIC-12 - e.g. employee benefit trusts. [SIC-12.6, BC15A-15E]
2.5.150.30 SIC-12 describes an SPE as an entity that:
• is often created with legal arrangements that impose strict limits on the decision-making powers
of its governing body; in some cases these restrictions are permanent; or
• frequently operates in a predetermined way such that virtually all rights, obligations and aspects
of activities are controlled through the legal/contractual provisions determined at inception
(commonly referred to as 'auto-pilot'). [SIC-12.1, 3, 14]
2.5.150.35 Typically an SPE has only one creator or sponsor.
2.5.150.40 In our view, an entity would be an SPE if the powers to direct its activities do not amount to powers of
governance because they are limited or constrained and therefore an analysis of the power to govern is inappropriate. For
example, retail investment funds are typically subject to regulations that can place significant restrictions on the activities
and decision-making powers of the investment manager. Another example may be a tracker fund that is an investment fund
that tracks a predetermined public index. In our view, a tracker fund is an example of an entity that would be considered to
be an SPE, because the investment decisions are predetermined and the investment manager simply executes these
decisions - i.e. it operates on auto-pilot. See 2.5.210 for further discussion of investment funds.
2.5.150.50 The control concept in SIC-12 is based on the substance of the relationship between an entity and an SPE, and
considers a number of indicators that are discussed in 2.5.160-180. Each factor is analysed independently. There is no
requirement to meet all of the factors for control to exist and none of the factors is a conclusive indicator of control on its
own. The party having control over an SPE is determined through the exercise of judgement in each case, taking into
account all relevant facts and circumstances. It is also important to bear in mind, when analysing an SPE, the requirement
to account for the substance and economic reality of a transaction rather than only its legal form. [SIC-12.10, 12, IU 11-06]
2.5.150.60 If, as a result of performing an analysis as outlined in 2.5.160-180, it is concluded that an entity does not have
control over an SPE, then in our view the entity would generally account for its interest in the SPE as a financial asset in
accordance with IAS 39. We believe that an analysis in accordance with SIC-12 will generally lead to a conclusion that the
entity does not have significant influence (see 3.5.80.50) over an SPE's financial and operating policies if they are largely
predetermined.
2.5.160 Business needs

2.5.160.10 Determining whose business needs the SPE benefits requires an evaluation of the SPE's purpose, its activities
and which entity benefits most from them. An example is when the SPE is engaged in an activity that supports one entity's
ongoing major or central operations. [SIC-12.10(a)]
EXAMPLE 11A - SPE - LEASE VEHICLE
2.5.160.20 Company G sells its main operating asset to an SPE and then leases it back (see
Page 156 / 375

5.1.470). A bank provides the SPE's capital.

2.5.160.30 In the absence of any contrary indicators, it appears that the SPE has been set up
primarily to support the business needs of G.
2.5.170 Decision-making powers

2.5.170.10 Many SPEs run on auto-pilot because all key decisions have been made as part of the formation of the SPE and
delegated to other parties (managers). In such cases, it is necessary to identify the entity that made all the key decisions
and delegated their execution as part of the process of identifying the party that obtains the majority of benefits from the
SPE's activities. [SIC-12.10(b)]
EXAMPLE 11B - SPE - SECURITISATION VEHICLE (1)
2.5.170.20 Major decisions that relate to the operations of an SPE that holds securitised
receivables include the profile of receivables eligible for securitisation, servicing arrangements,
liquidity facility arrangements, the ranking of claims against the SPE's cash flows and the wind-up of
the SPE.
2.5.170.30 If it is determined that the transferor made these key decisions, then it is likely to be
deemed to have control over the SPE. Even if the conclusion is that the transferor did not make
these key decisions, then the other indicators of control in respect of SPEs may still lead to a
conclusion that the transferor should consolidate the SPE.
2.5.180 The majority of risks and benefits, and ownership of residual interests
2.5.180.10 An evaluation of the majority of risks and benefits, and the ownership of the residual interests in an SPE, is
often the most crucial element of determining whether consolidation of an SPE is necessary. The benefits that should be
analysed can take various forms - for example, the holder of a beneficial interest in an SPE may receive a fixed or stated
rate of return in some cases and in other cases may have rights or access to other future economic benefits of the SPE's
activities. In our view, the analysis of benefits and risks is focused on the residual-type benefits and risks rather than the
gross cash flows of all of the assets and liabilities in the SPE. For example, if there are reserves or equity that would be
distributed when the SPE is wound up, then the entity entitled to the majority of this potential upside may be required to
consolidate the SPE. [SIC-12.10]
2.5.180.20 Although risk is not part of the definition of control in IFRS (see 2.5.10.20), in analysing an SPE the risks are
often easier to identify than the benefits. Therefore, the focus is often on analysing the risks on the basis that an entity
would not assume risks without obtaining equivalent benefits, which in turn may lead to a presumption of control. In
evaluating the majority of risks, if for example there are senior and subordinated cash flows in an SPE, then the evaluation
should focus on the exposure to subordinated cash flows and any residual equity. In this respect, both the proportion and
the likelihood of the eventual existence of any residual interest should be considered. An entity with the majority of this
exposure may be required to consolidate the SPE.
EXAMPLE 11C - SPE - SECURITISATION VEHICLE (2)
2.5.180.30 An entity (transferor) transfers 110 of receivables into an SPE for proceeds of 100,
with 10 being over-collateralisation for the transaction.
• If credit losses are greater than 10, then these excess losses are absorbed
by the transferee, or in substance the beneficial interest holders in the SPE.
• If the losses are less than 10, then the transferor receives the difference as
additional proceeds.
• Historically, credit losses have amounted to 4 and this trend is expected to
Page 157 / 375

continue.
2.5.180.35 The transferor's position could be analysed in one of two ways.
• The transferor does not bear the majority of the risk associated with the
SPE because the 10 represents only 9% (10 / 110) of the maximum
potential losses. Therefore, the transferor should not consolidate the SPE. In
our view, this is not the appropriate interpretation of SIC-12.
• The transferor bears the majority of the risk associated with the SPE
because the 10 is expected to cover all expected losses. Therefore, the
transferor may be required to consolidate the SPE. In our view, this is the
appropriate interpretation of SIC-12.
2.5.180.40 An entity may provide servicing to an SPE. As noted in 2.5.120.15, in our view an arm's length and market-
based servicing fee for services performed would not be viewed as receiving benefits from the SPE. However, a servicing
fee that varies based on the performance, or non-performance, of the SPE's assets, or that entitles the servicer to residual
benefits, might be akin to the servicer having the ability to obtain benefits from, or being exposed to, the risks of the SPE, in
which case the variability in those fees would be included in the analysis of risks and benefits under SIC-12.
2.5.180.50 Conversely, an entity might bear substantially all the risks and benefits of an SPE if the entity assumes all of the
risks and benefits from an SPE in an arm's length transaction.
EXAMPLE 11D - SPE - SECURITISATION VEHICLE (3)
2.5.180.60 Company J transfers some receivables to an SPE for 90% of their face value because
the expected losses are 10%. At the same time, the SPE enters into an agreement with Company K,
a credit insurance company, to assume the residual credit risk associated with these receivables.
2.5.180.70 Under this arrangement, any amounts collected in excess of the expected loss would
flow to K. The SPE and K are not related and the consideration paid is based on a market price for
similar types of arrangements.
2.5.180.80 If the credit risk is assumed to be the sole risk of the SPE, then K bears all the risks
and benefits and would be required to consolidate the SPE.
2.5.190 Purchases of residual interests of a special purpose entity in the

secondary market
2.5.190.10 Some time after the formation of an SPE an entity, typically an investment company with no prior connection to
the SPE, might purchase the residual interest in the SPE in the secondary market. The SPE may be a securitisation vehicle
whose assets consist of mortgage loans, trade receivables etc., which refinances itself by issuing senior and junior notes,
sometimes called an equity and/or mezzanine tranche. The SPE is usually operated on auto-pilot and the sponsor of the
SPE benefits from its activities by receiving funds from the SPE and transferring risks to it.
2.5.190.20 Assume that the residual interest acquired by the investment company contains substantially all of the risk in
the underlying assets of the SPE. In this scenario, the application of the indicators in SIC-12 for consolidating an SPE points
to different parties being the controlling party of the SPE. Whereas it is clear that the original purpose of the SPE was to
benefit the sponsor and therefore the sponsor of the SPE was required to consolidate the SPE from the date of formation,
after the sale substantially all of the risk in the assets of the SPE and the corresponding benefits have been transferred to
the acquiring entity. [SIC-12.10(a), (c)-(d)]
2.5.190.30 In our view, when an entity acquires substantially all of the risks and benefits of an SPE operated on auto-pilot,
and when the benefits received by the sponsor from the activities of the SPE are insignificant, the acquiring entity should be
identified as the controlling party and consequently should consolidate the SPE. We believe that when considering whether
consolidation of an SPE is required, the primary test should be to analyse which party is exposed to a majority of the risks
and a majority of the benefits in respect of the SPE. Furthermore, for the 'business needs' indicator (see 2.5.160), we
Page 158 / 375

believe that the acquisition of the residual interests in an SPE should be analysed similarly to the origination of an SPE. In
other words, because the acquiring entity bought the residual interests, the activities of the SPE are conducted on behalf of
the acquiring entity from the purchase date onwards. Therefore, in substance, this entity becomes the (new) sponsor of the
SPE. [SIC-12.10]
2.5.200 Multi-seller special purpose entities

2.5.200.10 Sometimes an SPE obtains assets from multiple, and often unrelated, entities. These SPEs are sometimes
referred to as 'multi-seller' SPEs, or 'commercial paper conduits' if they issue notes backed by short-term financial assets
obtained from other entities. These SPEs are often sponsored by a financial institution that does not transfer any of its own
assets into the SPE.
2.5.200.20 For multi-seller SPEs in which the transferor retains some risk with respect to the transferred assets, and those
assets are not cross-collateralised with other assets in the SPE, in our view each transferor of assets should evaluate the
risks and benefits only of those assets that it has transferred to the SPE. This is sometimes referred to as a 'ring-fenced'
approach because each transfer is evaluated as an individual 'silo' within the SPE.
2.5.200.30 However, if all transfers of assets to a multi-seller SPE cross-collateralise all liabilities of the SPE, then the
transferor should evaluate its risks and benefits in relation to all assets held by the entire SPE. In this case, it becomes less
likely that any one transferor will be viewed as having a majority of the residual risks or benefits of the multi-seller SPE.
2.5.200.40 If the structure is sponsored by a financial institution, then that financial institution should consider whether it
should consolidate the SPE.
EXAMPLE 11E - SPE - SECURITISATION VEHICLE (4)
2.5.200.45 Companies X and Y each create an SPE (SPE X and SPE Y) and transfer trade
receivables, including a credit enhancement, to their respective vehicles. Another SPE is created
(SPE R), which issues commercial paper, thereby acting as the refinancing vehicle for SPE X and
SPE Y. A bank facilitates the creation of this securitisation programme by providing an overall
programme-wide credit enhancement to SPE R as a second loss guarantee.
2.5.200.47 In our view, the bank may be required to consolidate SPE R if it bears the residual
risk, without consideration of the likelihood of the credit enhancement being called on; this is
because SIC-12 requires an analysis of which party bears the majority of the residual risk even if
Page 159 / 375

the total residual risk is itself immaterial. If the bank were required to consolidate SPE R, then it
would consolidate the entire commercial paper liability of SPE R and the loans provided to SPE X
and SPE Y.
2.5.200.50 In our view, a multi-seller SPE with no cross-collateralisation of the transferred assets
would lead to a similar result. In this case, each originator - Company X and Company Y in this
example - would consolidate its specific silo, which would include the receivables transferred as
financial assets and its share of the loan from the refinancing part of the SPE as a financial liability,
even though there is no corresponding loan agreement. The bank would consolidate the refinancing
part of the SPE by presenting a collateralised loan to X and Y, for which no corresponding
agreement exists, as a financial asset and the entire commercial paper as a financial liability.
2.5.205 Re-assessment arising from unfavourable market conditions #

2.5.205.10 It is common for structured investment vehicles and other SPEs to have liquidity facilities in place with financial
institutions, often the originating/sponsoring financial institution. The risks arising from such facilities form part of the
analysis under SIC-12 of whether the vehicle should be consolidated (see 2.5.150).
2.5.205.20 Under normal market conditions, such facilities may rarely have been drawn down for prolonged periods, and
this usually will not have been a significant factor in determining control under SIC-12. However, if liquidity conditions
change, then facilities may be drawn down more frequently and for periods longer than was expected when the initial
assessment of consolidation was performed. An entity lending under such a liquidity facility may be exposed to credit losses
through wind-down mechanisms that may require the entire structure to be liquidated if replacement financing is not
obtained within a stipulated period.
2.5.205.30 If market conditions change, then originators/sponsors may also make additional voluntary investments, lending
amounts in excess of existing liquidity facilities or extending terms beyond those originally established, in part to avoid
reputational risk from the forced liquidation of a sponsored vehicle.
2.5.205.40 The assessment of whether an entity has control over an SPE is carried out at inception and no further re-
assessment of control is normally carried out unless there are changes in the structure or terms of the SPE, or additional
transactions between the entity and the SPE. Day-to-day changes in market conditions do not normally lead to a re-
assessment of control.
2.5.205.50 An issue therefore arises as to whether an entity should re-assess control of an SPE given changed market
conditions because of draw-downs of liquidity facilities, or sponsors having entered into new arrangements with SPEs
because of reputational risk.
Page 160 / 375

2.5.205.60 Determining which party has control over an SPE requires judgement, taking into account all relevant facts and
circumstances (see 2.5.150). Whether an entity is required to consolidate an SPE will depend on whether it has obtained
control. Such an evaluation requires the exercise of judgement, having reconsidered all of the factors in 2.5.160-180.50.
[SIC-12.10]
2.5.205.70 In our view, modifications of the original terms of a structure or voluntary actions - e.g. lending amounts in
excess of existing liquidity facilities or extending terms beyond those originally established - change the relationship
between an entity and the SPE that it sponsors. Therefore, such modifications or actions result in a re-assessment of
control under SIC-12. In our view, entering into a transaction with an SPE that was not contemplated in the original
assessment of control is similar to a transaction in which an entity buys the residual interest in an SPE in the secondary
market (see 2.5.190) and therefore should lead to a re-assessment of control.
2.5.205.80 If other sponsors in the marketplace have stepped in to provide support to enable investment vehicles to
continue conducting business, then in our view this should cause an entity to consider whether any SPE that it sponsors
might require such support. The entity should then consider whether, if it were required, it would provide such support for
reputational or other reasons. When an entity concludes that support might be required and that it would provide such
support, in our view the entity should re-assess the need to consolidate the vehicle under SIC-12. This is because new
market conditions may have altered the substance of the relationship between the entity and the SPE. In our view, it is not
the transaction with the SPE that causes re-assessment, but the change in the substance of the relationship between the
sponsor and the SPE.
2.5.205.90 A re-assessment of control under SIC-12 may or may not lead to consolidation. In particular, an entity will need
to re-evaluate, taking into consideration its overall relationship with the SPE and the market's long-term assessment of
credit and liquidity risk, whether it is exposed to the majority of risks and benefits in the SPE. In making such a re-
assessment an entity may, following changing market events, need to change its assumptions with respect to loss
probabilities, the likelihood of liquidity facilities being drawn down in the future and the likelihood of future actions being
taken for reputational reasons.
2.5.205.100 An entity may conclude that there is no event that would cause it to re-assess consolidation, or it may re-
assess and conclude that consolidation is not required. There are no specific disclosure requirements in IFRS that apply if
an entity sponsors or is otherwise associated with investment vehicles that are not consolidated. However, IAS 1 requires
an entity to disclose information about the assumptions concerning the future, and other major sources of estimation
uncertainty at the end of the reporting period (see 2.4.180.10). The assessment of control under SIC-12 relies on significant
estimates and assumptions about the probabilities assigned to various potential cash flow outcomes, and therefore the
sharing of risks and benefits between those parties that hold an interest in the SPE and its assets. In addition, IAS 1
requires the disclosure of judgements that management has made in the process of applying the entity's accounting policies
and that have the most significant effect on the amounts recognised in the financial statements; one of the examples
provided in IAS 1 is the judgement applied in determining whether the substance of the relationship between an entity and
an SPE indicates that the SPE is controlled by the entity. [IAS 1.122-123, 125]
2.5.205.110 In our view, entities should consider providing disclosures about SPEs that they sponsor or are associated
with, the reasons for non-consolidation and the factors that might cause consolidation to be re-assessed in future periods.
Under changing market conditions, in our view entities should consider such disclosure in both interim and annual financial
statements.
2.5.207.10 IFRS 12 requires disclosures about an entity's interests in unconsolidated structured entities (see 2.5A.540).
The disclosures include qualitative and quantitative information about the entity's involvement with - e.g. sponsorship of -
structured entities.
Page 161 / 375

2.5.210 INVESTMENT FUNDS

2.5.210.10 Investment funds generally have many characteristics that are similar to SPEs. Because there is specific
guidance for determining whether to consolidate an SPE (see 2.5.150), the first question that should be addressed is
whether the fund is an SPE (see 2.5.150.10).
2.5.210.20 In many cases, retail investment funds are highly regulated and are created by legal arrangements that impose
strict and sometimes permanent limits on the investment manager's ability to make decisions. In our experience, in most
jurisdictions hedge funds are less regulated than other investment funds. In our view, the following are examples of factors
that may suggest that an investment fund is an SPE:
• the investment manager has no power to change the investment policy without
approval/authorisation from a third party - e.g. investors' vote and/or custodian and/or
regulators;
• the investment manager cannot enter into a transaction on the fund's behalf that conflicts with
the investment policy or statute of the fund;
• the trustee holds custody over all assets; or
• an independent party monitors compliance with the regulation.
2.5.210.30 In our view, a broad investment mandate - e.g. a mandate to invest in global equities - does not in itself
preclude an entity from being an SPE. Therefore, another factor to consider in evaluating whether an investment fund is an
SPE is the degree of influence that the fund has on its investments. If the investment vehicle can be involved actively in the
investment - i.e. it is not precluded from obtaining significant influence or (joint) control over the investment - then we
would generally assume that the vehicle does not have a 'narrow and well-defined objective', which is one of the
characteristics of an SPE (see 2.5.150.10). In this case, we would normally conclude that the vehicle is an operating entity
and not an SPE. If, however, the investment vehicle is restricted to acting as a passive investor - i.e. it is not allowed to
have significant influence over its investments - then in our view this may be an indicator that the vehicle's activities are
designed to follow a narrow and well-defined objective. In such cases, it might be concluded that the vehicle is an SPE.
[SIC-12.1]
2.5.210.40 Investment funds should be evaluated for consolidation by both the investment manager and the investors; it is
generally the role of the investment manager that requires the more careful analysis. If the fund is an SPE, then this
evaluation should be carried out using SIC-12 (see 2.5.150). One of the triggers for consolidation under SIC-12 is when an
entity has the right to obtain the majority of benefits and retains the majority of risks (see 2.5.180). In our view, a retail
investment fund that is considered to be an SPE should be consolidated by the party holding an investment of over 50
percent, or holding an investment of less than 50 percent and obtaining a variable performance fee that together total the
majority of benefits.
2.5.210.50 If the fund is not considered to be an SPE, then the general consolidation principles in IAS 27 apply (see
2.5.10). The fund manager should consider whether it has control over the fund - i.e. the power to govern the financial and
operating policies of the fund so as to obtain benefits from its activities. At the same time, the fund manager should
consider the power of other investors, including their substantive ability to remove the fund manager without cause (see
2.5.90 for kick-out rights). If the manager concludes that it possesses the power to govern, then in our view a meaningful
level of ownership benefits, including performance-related fees to the extent that they are not on market terms, will trigger
consolidation.
2.5.210.60 In assessing the level of ownership benefits, in our view amounts to be received by the fund manager that are
in substance compensation for the manager's performance should not be considered as ownership benefits if they are on
market terms. For example, a manager may be provided with a separate class of shares, sometimes called 'carried
interest', that entitles it to receive a certain percentage of the fund's profits in excess of a defined hurdle. The arrangement
is expected to result in payments to the fund manager that are equivalent to performance fees otherwise paid in the
marketplace. We believe that the benefits flowing from these shares are received by the fund manager in its capacity as an
Page 162 / 375

investment manager rather than as an owner; therefore, we would not consider these benefits to be ownership benefits.
2.5.210.65 In our view, compensation for the manager's performance includes both fixed and variable fees, as well as any
fees that the fund manager earns directly - i.e. not from managing the fund - to the extent that such fees are on market
terms.
EXAMPLE 12 - FUND MANAGER COMPENSATION
2.5.210.67 An investment property fund, which invests in real estate entities, is managed by a
fund manager. The fund manager has an interest in the property fund and a direct interest in the
entities owned by the fund.
2.5.210.68 The fund manager receives an annual fixed fee of 100 and a variable performance fee
of 15% of any fund returns in excess of 10%. The fund manager also receives a separate fee from
the entities owned by the fund for managing their underlying assets.
2.5.210.69 In our view, the compensation-type benefits that the manager obtains through its
involvement in the arrangement include the 100 annual fixed fee, the 15% variable performance fee
and the fees received directly for managing the underlying assets.
2.5.210.70 In determining whether the level of ownership benefits is meaningful, a manager, or general partner in a
limited partnership structure, should consider the arrangement as a whole, including the relative importance of the
ownership benefits and compensation-type benefits that the manager obtains through its involvement in the arrangement.
In our view, if the manager can demonstrate that receiving at-market compensation, including performance fees, for its
services, irrespective of their legal form, is clearly the dominant purpose of its involvement and that obtaining ownership
benefits (see 2.5.120) is clearly secondary to that purpose, then this could lead to the conclusion that the fund manager
does not control the fund. This is because the manager fails to meet the 'so as to obtain benefits' criterion.
2.5.210.80 Determining whether receiving compensation for services is clearly the dominant purpose of the manager's
involvement in the entity requires judgement, taking into account the specific arrangements. In our view, the higher the
level of ownership benefits that the manager holds in relation to its compensation for services, the more difficult it will be to
conclude that receiving compensation for services is the dominant purpose of the manager's involvement in the investment
entity. Conversely, the higher the level of compensation for services in relation to the manager's ownership benefits, the
easier it will be to conclude that receiving compensation for services is the dominant purpose of the manager's involvement
in the investment entity. If it is clearly demonstrated that the manager's dominant purpose in relation to the investment
entity is to maximise the compensation for its services, then in our view the manager does not have the power to govern so
as to obtain benefits and therefore does not have control of the investment fund.
2.5.210.90 In our view, the size of the ownership interest of the fund manager, including any indirect interests held, should
also be taken into account in determining whether the fund manager should consolidate the fund.
2.5.210.100 The following flowchart summarises the decisions to be made to determine whether a fund manager
consolidates the fund.
Page 163 / 375

2.5.220 Presentation
2.5.220.10 Investment managers are typically required to consolidate investment funds if most of the investment is funded
by seed money provided by the investment manager - i.e. the investment manager owns more than 50 percent of the
ownership interests in the fund. In such cases, the presentation requirements for disposal groups held for sale may apply if
the manager plans to sell the fund to third-party investors within 12 months and the criteria are met for a disposal group to
be classified as held-for-sale (see 5.4.20).
Page 164 / 375

2.5.230 STRUCTURED TRANSACTIONS

2.5.230.10 There is no formal definition of a structured transaction. However, a structured transaction typically arises
when parties undertake a series of actions to achieve a desired outcome. For example:
• assets are transferred into an SPE, which may or may not be controlled by the transferor (a
securitisation of receivables often takes this form); and
• an entity obtains control of an investee with a view to increasing its shareholding at a later date.
2.5.230.20 The analysis of a vehicle that arises from a structured transaction takes into account all of the factors described
above. However, such transactions often have characteristics that require careful consideration. If the complete transaction
comprises a series of smaller transactions that would be accounted for differently if each one were viewed in isolation, then
it is important to bear in mind the substance of the transaction as a whole.
2.5.230.30 In our experience, the use of derivatives, including potential voting rights, is much more common in structured
transactions. The terms and conditions of the derivatives need to be considered to determine the impact that they may have
on the rights of the parties involved. In derecognition transactions, an analysis of the derivatives involved may result in the
conclusion that the underlying asset should not be derecognised (see 7.5.60).
2.5.230.40 In the context of losing control of a subsidiary, IAS 27 contains specific requirements for determining whether
two or more transactions should be accounted for as a single transaction - i.e. linked (see 2.5.500). [IAS 27.33]
Page 165 / 375

2.5.240 EXCLUSIONS FROM CONSOLIDATION

2.5.240.10 There are no exclusions from the requirement for an entity to consolidate all subsidiaries.
2.5.240.20 Subsidiaries cannot be excluded from consolidation on the basis that their activities are dissimilar to those of
the parent; relevant information is provided by the consolidation of such subsidiaries and the resulting disclosure of
additional information about the impact of those activities. For example, the disclosures required by IFRS 8 help to explain
the significance of different business activities within the group (see 5.2). [IAS 27.17]
2.5.250 Severe long-term restrictions

2.5.250.10 An entity considers severe long-term restrictions that significantly impair its ability to transfer funds to the
parent when assessing its ability to control an entity; however, such restrictions do not in themselves preclude control. In
our view, the transfer of funds should be interpreted as funds related to the benefits of ownership (see 2.5.120). [IAS
27.BC20]
2.5.260 Disposal in the near future

2.5.260.10 An entity is required to consolidate a subsidiary even if it is acquired exclusively with a view to its subsequent
disposal. However, the disposal group - comprising the assets that are to be disposed of and directly related liabilities - is
classified in the consolidated financial statements as held-for-sale-or-distribution on acquisition if certain criteria are met
(see 5.4.20 and 35). [IFRS 5.6, 11]
2.5.270 Immaterial subsidiaries

2.5.270.10 Although IFRS does not explicitly address the treatment of immaterial subsidiaries, in our view subsidiaries do
not need to be consolidated if, both alone and in aggregate, they are immaterial (see 1.2.17) to the financial position,
performance and cash flows of the group, whether they are consolidated or accounted for at fair value.
2.5.270.20 Materiality depends on both the size and the nature of the omission or misstatement, or a combination of the
two, judged in the surrounding circumstances. In considering materiality, the nature of a subsidiary may be important - e.g.
if it is an SPE. In our view, the non-consolidation of a subsidiary should be reconsidered in preparing financial statements at
the end of each reporting period. [IAS 1.7, 29-31]
2.5.280 Venture capital organisations and investment entities *

2.5.280.10 Venture capital organisations, investment funds, mutual funds, unit trusts and similar entities are not exempt
from the requirements for consolidation and therefore their subsidiaries should be consolidated. See 3.5.100 for guidance
on identifying a venture capital organisation. This is notwithstanding the view that the aggregation of modified historical cost
statements of financial position and statements of comprehensive income may present less relevant information to investors
who are concerned primarily with the fair value of each individual investment in a portfolio and the net asset value per
share. If it is appropriate, information about the fair value of investments may be disclosed in the notes to the consolidated
financial statements; alternatively, separate financial statements (see 2.1.70) in which investments are recognised at cost
or fair value may be prepared. [IAS 27.16, 38]
Page 166 / 375

2.5.290 SUBSIDIARIES' ACCOUNTING PERIODS AND POLICIES

2.5.290.10 The financial statements of the parent and its subsidiary are prepared for the same reporting period. To
achieve this, if the entities have different reporting periods, then additional financial statements of the subsidiary are
prepared as at the end of parent's reporting period unless it is impracticable to do so. In any case, the difference between
the year end of the parent and subsidiary should not be greater than three months and adjustments should be made for the
effects of significant transactions and events in that period. [IAS 27.22-23]
2.5.290.20 If there is a difference between the reporting period of the parent and a subsidiary, the length of the reporting
periods and the gap between them should be consistent from period to period. However, IFRS is silent on the approach to
take when a subsidiary changes the end of its annual reporting period to align it with that of the parent.
2.5.290.30 Suppose that the parent has a year end of 31 December and its subsidiary has a year end of 31 October. Each
year, the consolidated financial statements are prepared using financial information for the subsidiary at 31 October,
adjusted for any significant transactions in November and December. In 2012, the subsidiary changes its year end to 31
December.
2.5.290.35 In our view, the 2012 consolidated financial statements should include the results of the parent for the 12
months to 31 December 2012, and the results of the subsidiary for the 14 months to 31 December 2012, unless the parent
has already included the subsidiary's transactions in that time as adjustments made for significant transactions.
2.5.290.37 We believe that this is more appropriate than adjusting the group's opening retained earnings at 1 January
2012 for the results of the subsidiary for the two months to 31 December 2011, an approach that would be necessary to
limit the consolidated financial statements in the current period to 12 months of the subsidiary's results.
2.5.290.40 For the purposes of consolidation, the financial information of all subsidiaries is prepared on the basis of IFRS.
Uniform accounting policies for like transactions and events are used throughout the group. Therefore, if a subsidiary uses
different accounting policies from those applied in the consolidated financial statements, then appropriate consolidation
adjustments to align accounting policies are made when preparing those consolidated financial statements. However, see
8.10.60 for an exception for insurance contracts. [IAS 27.24-25]
Page 167 / 375

2.5.300 NON-CONTROLLING INTERESTS

2.5.300.10 NCI represent the equity in a subsidiary that is not attributable directly or indirectly to the parent. For example,
if a parent owns 80 percent of a subsidiary directly and the remaining 20 percent is owned by a third party, then in the
parent's consolidated financial statements the 20 percent interest held by the third party is the NCI in that subsidiary. [IFRS
3.A, IAS 27.4]
2.5.305 Initial measurement of non-controlling interests

2.5.305.10 NCI can be categorised as:
• present ownership interests that entitle their holders to a proportionate share of the entity's net
assets in liquidation (ordinary NCI; see 2.6.844); and
• all other NCI (other NCI; see 2.6.847). [IFRS 3.19]
2.5.305.20 When less than 100 percent of a subsidiary is acquired, the acquirer can elect on a transaction-by-transaction
basis to measure ordinary NCI on initial recognition either at:
• fair value at the acquisition date, which means that goodwill, or the gain on a bargain purchase,
includes a portion attributable to ordinary NCI; or
• the holders' proportionate interest in the recognised amount of the identifiable net assets of the
acquiree, which means that goodwill, or the gain on a bargain purchase, relates only to the
controlling interest acquired. [IFRS 3.19]
2.5.305.30 This accounting policy choice relates only to the initial measurement of ordinary NCI. After initial recognition,
the option of measuring ordinary NCI at fair value is not available (see 2.6.844.20).
2.5.305.40 The accounting policy choice in 2.5.305.20 does not apply to other NCI, such as equity components of
convertible bonds or options under share-based payment arrangements. Such instruments are initially measured at fair
value or in accordance with other relevant IFRSs - e.g. share-based payments that give rise to NCI are measured using the
market-based measure in accordance with IFRS 2 (see 2.6.847). [IFRS 3.19]
2.5.310 Percentage attributable to non-controlling interests

2.5.310.10 NCI are the equity in a subsidiary that is not attributable directly or indirectly to the parent (see 2.5.300.10).
Therefore, the NCI include any equity interests in a subsidiary that are not held by the parent directly or indirectly through
subsidiaries, associates or joint ventures. [IAS 27.4]
EXAMPLE 13 - NCI AND INDIRECT HOLDINGS IN A SUBSIDIARY
2.5.310.20 Company P prepares consolidated financial statements that include its two
subsidiaries, Company S1 and Company S2, and the group's interest in an associate, Company Q.
Company P's interests in the respective companies are shown in the following diagram.
Page 168 / 375

2.5.310.30 P owns 90% of S1 directly and has no indirect interest in S1. Therefore, the NCI in S1
are 10%. P recognises in its consolidated financial statements 100% of the results of S1, with 10%
allocated to NCI.
2.5.310.40 P owns 63% of S2 indirectly through S1 (70% x 90%), and 12% of S2 indirectly
through Q (30% x 40%). Therefore, P's total interest in S2 is 75% and the NCI are 25%. P
recognises in its consolidated financial statements 100% of the results of S2, with 25% allocated to
NCI. However, when accounting for Q under the equity method, P would also recognise 12% of the
results of S2, resulting in double counting, which should be eliminated. See 2.5.315 for a discussion
of the elimination of the double counting in these cases.
2.5.310.50 In some cases, the economic interests of investors will not equal their shareholding. For example, an entity
may control 60 percent of the voting power in a subsidiary, but own only a 55 percent economic interest in the profits and
net assets. In this case, the NCI are measured based on economic interest - i.e. 45 percent. [IAS 27.IG5-IG6]
2.5.310.60 An entity may transfer interests in a subsidiary to a defined benefit pension plan and the interests may then
qualify as plan assets under IAS 19 (see 4.4.350). If the contributing entity retains control over the subsidiary but a plan
asset nevertheless arises under IAS 19 (see 4.4.410.20), then in our view the entity recognises NCI for the interests held by
the pension plan. If no plan asset arises - e.g. the interest is not transferable (see 4.4.400.10) - then no accounting entries
result; the pension plan has no asset and therefore the entity continues to account for the interest in the subsidiary.
2.5.310.70 We believe that after a contribution that qualifies as a plan asset, the ownership benefits associated with the
shareholdings (see 2.5.120) accrue to the pension plan rather than to the contributing entity. It might be argued that the
contributing entity continues to have these ownership benefits indirectly because, given that it is the sponsor of the plan, the
benefits help reduce its obligation in respect of any deficit in the plan. However, we believe that it is only the initial
contribution of the equity interests that reduces the net obligation and that, once the contribution has been made, any
benefits arising from those interests thereafter (either through a change in value of the asset or a distribution) accrue
directly to the plan as a return on its plan asset and are accounted for by the sponsor in accordance with the requirements
of IAS 19 (including the accounting for actuarial gains or losses); they do not represent further benefits accruing to the
parent entity, which then contributes them to the plan on an annual basis. Furthermore, the pension plan is a separate
entity that is excluded from the requirements of IAS 27 (see 2.5.150.20), which is the basis on which the NCI are
recognised on the contribution of the shares to the plan.
2.5.310.80 Changes in a parent's ownership interest in a subsidiary that do not result in the loss of control are accounted
for as equity transactions and no gain or loss is recognised (see 2.5.380). We believe that the transfer of interests in a
subsidiary to become plan assets constitutes such a change in ownership interest. Therefore, net assets have to be re-
allocated to NCI to reflect such a change. As is set out in 4.4.410.30, plan assets are measured at fair value on contribution,
which is the consideration received in accounting for the reduction in ownership of the subsidiary. Any resulting difference
between the measurement of NCI and the fair value of the interest transferred is recognised directly in equity. [IAS 27.30-
31, 32.33]
EXAMPLE 14 - PARTIAL DISPOSAL OF SHARES IN SUBSIDIARY TO PENSION PLAN
2.5.310.90 Company P holds 100% of the shares in Subsidiary S and no goodwill arose on the
acquisition. The carrying amount of the net assets of S is 1,000. P transfers 20% of its interest in S
to its pension plan, which qualifies as a plan asset under IAS 19. At the time of the transfer, the fair
value of that interest transferred is 300. P records the following entry.
Page 169 / 375

2.5.315 Indirect interests and the elimination of double counting

2.5.315.10 Example 13 highlights the double counting that arises when an interest in a subsidiary is held indirectly through
associates or joint ventures.
2.5.315.20 In our view, the double counting highlighted in that example in respect of P's interest in S2 should be
eliminated against the equity-accounted earnings of Q. Effectively, this means that the equity-accounted earnings of S2 will
be reduced to zero because the consolidated financial statements of the parent already include P's 12 percent interest in S2
- i.e. 100 percent of the assets, liabilities, income and expenses of the subsidiary S2 have already been included.
2.5.320 Potential voting rights

2.5.320.10 Even though the determination of control of an entity takes into account potential voting rights (see 2.5.130),
the calculation of NCI is generally based on current ownership interests because this corresponds to the economic interests
of the parties. [IAS 27.14-15, IG5]
2.5.325 Attribution of profits and losses

2.5.325.10 Profit or loss and each component of OCI are generally attributed to the owners of the parent and to ordinary
NCI in proportion to their ownership interests in the subsidiary. For example, if Company P owns 80 percent of Company S,
then 80 percent of the earnings is allocated to the owners of the parent and 20 percent to the NCI in S. [IAS 27.28]
2.5.325.20 Losses applicable to the NCI in a subsidiary (including components of OCI) are allocated to the NCI even if
doing so causes the NCI to have a deficit balance. [IAS 27.28]
2.5.330 Profit-sharing arrangement or parent has obligation to cover losses

attributable to non-controlling interests
2.5.330.10 A parent and the NCI in a subsidiary may enter into an arrangement to share profits (losses) in a manner other
than in proportion to their ownership interests (i.e. a profit-sharing arrangement) or to place the parent under an obligation
to absorb losses attributable to NCI. In our view, in its consolidated financial statements the parent should choose an
accounting policy, to be applied consistently, for accounting for such a profit-sharing arrangement or guarantee. It can:
• take the profit-sharing arrangement/guarantee into account when doing the original attribution in
the statement of comprehensive income; or
• use the following two-step approach:
(1) attribute to the NCI its portion of the profits/losses in the statement of comprehensive income
in proportion to its present ownership interests in the subsidiary - i.e. unaffected by the
existence of the profit-sharing arrangement/guarantee; and
(2) account for the profit-sharing arrangement/guarantee separately in the statement of changes
in equity by attributing any additional profits/losses to the controlling interest or NCI based on
the terms of the agreement. [IAS 27.BC35]
2.5.330.20 A guarantee issued by the parent to absorb losses does not result in a liability from the point of view of the
consolidated financial statements - i.e. the transaction is between the parent and the subsidiary, and no entries are
recorded in the consolidated financial statements.
Page 170 / 375

2.5.333 Non-reciprocal capital contributions

2.5.333.10 In our view, non-reciprocal capital contributions (see 7.3.370) made by a parent to a non-wholly owned
subsidiary should be allocated proportionately to NCI - i.e. they should be accounted for as transactions between
shareholders, which have a direct impact on equity. [IAS 27.31]
EXAMPLE 15 - NON-RECIPROCAL CAPITAL CONTRIBUTION BY PARENT
2.5.333.20 Company X makes a capital contribution of 100 to its subsidiary, Y, in which it holds a
75% interest. The NCI in Y make no capital contribution.
2.5.333.30 In this example, an amount of 25 is allocated to NCI and 75 is allocated to parent
equity directly in equity in the consolidated financial statements of X.
2.5.335 Presentation of non-controlling interests

2.5.335.10 In the parent's consolidated statement of financial position, NCI are presented within equity, separately from
the equity of the owners of the parent. If there are NCI in more than one subsidiary, then those interests are presented in
aggregate in the consolidated financial statements. In the parent's consolidated statement of comprehensive income, the
amount of profit or loss and total comprehensive income attributable to owners of the parent and NCI are shown
separately; they are not presented as an item of income or expense. [IAS 1.54(q), 83, 27.27]
2.5.335.20 Income, expenses, assets and liabilities are reported in the parent's consolidated financial statements at the
consolidated amounts, which include the amounts attributable to the owners of the parent and NCI. In addition, the amounts
of intra-group income, expenses and balances to be eliminated in the parent's consolidated financial statements are not
affected by the existence of NCI (see 2.5.370). [IAS 27.20]
2.5.335.30 In our view, the presentation of NCI does not change if part of NCI is associated with a disposal group classified
as held-for-sale or held-for-distribution and/or a discontinued operation (see 5.4.20 and 120).
EXAMPLE 16 - SUBSIDIARY IS A DISCONTINUED OPERATION
2.5.335.32 Group P has an 80% interest in Subsidiary S, which is classified as held-for-sale and is
a discontinued operation.
2.5.335.34 The net profit of the discontinued operation for the year is 200, the related disposal
group comprises assets of 1,200 and liabilities of 500 and the NCI are measured at 140.
2.5.335.36 In the statement of comprehensive income, the result of the discontinued operation is
200. The result is not presented net of NCI of 40 (200 x 20%) because NCI are not an item of
income or expense, but instead are presented as an allocation of the entity's profit or loss.
2.5.335.38 In the statement of financial position, the assets of the disposal group of 1,200 are
presented as a separate line item. Likewise, the liabilities of the disposal group of 500 are
presented as a separate line item. The NCI of 140 continue to be presented as a component of
equity.
2.5.335.40 Entities should consider whether the NCI related to a disposal group and/or a
discontinued operation should be disclosed separately from the NCI related to the continuing
operations of the entity.
2.5.340-350 [Not used]
2.5.360 Non-controlling shareholders holding put options
Page 171 / 375

2.5.360.10 Sometimes non-controlling shareholders of an entity's subsidiary are granted put options that convey to those
shareholders the right to sell their shares in that subsidiary for an exercise price (fixed or variable) specified in the option
agreement. From the perspective of the entity, such written put options meet the definition of a financial liability in IAS 32 if
the entity has an obligation to settle in cash or in another financial asset, and should be recognised as such. See 2.5.460 for
the accounting for put options written to non-controlling shareholders.
Page 172 / 375

2.5.370 INTRA-GROUP TRANSACTIONS

2.5.370.10 Intra-group balances and transactions, and resulting profits, are eliminated in full regardless of whether the
unearned profit is in the parent or the subsidiary. Intra-group losses are eliminated in full except to the extent that the
underlying asset is impaired. [IAS 27.20-21]
EXAMPLE 17A - DOWNSTREAM SALE TO PARTIALLY OWNED SUBSIDIARY
2.5.370.20 This example illustrates the elimination in a 'downstream' sale of inventory from the
parent to an 80% subsidiary.
2.5.370.30 Example 17A shows that the NCI are calculated without regard to the elimination entry because the unearned
profit is in the parent's result. This is notwithstanding the fact that the unearned profit is included in the carrying amount of
the inventory in the subsidiary's separate financial statements.
EXAMPLE 17B - UPSTREAM SALE BY PARTIALLY OWNED SUBSIDIARY
2.5.370.40 This example is the same as Example 17A except that the 80% subsidiary makes an
'upstream' sale of inventory to the parent.
Page 173 / 375

2.5.370.50 Example 17B shows that NCI are calculated after eliminating the unearned profit that is included in its results.
In addition, the NCI share of net assets is also calculated after the elimination even though the inventory that was
overstated from the group's perspective is in the parent's separate statement of financial position.
Page 174 / 375

2.5.380 CHANGES IN OWNERSHIP INTERESTS WHILE

RETAINING CONTROL
2.5.385 General principle
2.5.385.10 After a parent has obtained control of a subsidiary it may change its ownership interest in that subsidiary
without losing control. This can happen, for example, through the parent buying shares from, or selling shares to, the NCI
or through the subsidiary issuing new shares or reacquiring its shares. It can also occur when 'other' NCI are converted to
'ordinary' NCI (see 2.6.840.10).
2.5.385.20 Transactions that result in changes in ownership interests while retaining control are accounted for as
transactions with equity holders in their capacity as equity holders. As a result, no gain or loss on such changes is
recognised in profit or loss; instead, it is recognised in equity. Also, no change in the carrying amounts of assets (including
goodwill) or liabilities is recognised as a result of such transactions. This approach is consistent with NCI being a component
of equity. [IAS 27.30]
2.5.385.30 The interests of the parent and NCI in the subsidiary are adjusted to reflect the relative change in their
interests in the subsidiary's equity. Any difference between the amount by which NCI are adjusted and the fair value of the
consideration paid or received is recognised directly in equity and attributed to the owners of the parent. [IAS 27.31]
2.5.385.35 The principles set out in 2.5.385.30 also apply when a subsidiary issues new shares and the ownership
interests change due to that issuance.
EXAMPLE 18 - SUBSIDIARY ISSUES ADDITIONAL SHARES
2.5.385.37 Company S has 100 ordinary shares outstanding and the carrying amount of its equity
(net assets) is 300. Company P owns 90% of S - i.e. 90 shares. S has no OCI.
2.5.385.38 S issues 20 new ordinary shares to a third party for 120 in cash, as a result of
which:
• S's net assets increase to 420;
• P's ownership interest in S reduces from 90% to 75% (P now owns 90
shares out of 120 issued); and
• NCI in S increase from 30 (300 x 10%) to 105 (420 x 25%).
2.5.385.39 P records the following entry in its consolidated financial statements to recognise the
increase in NCI in S arising from the issue of shares.
Page 175 / 375

2.5.385.40 IFRS does not provide guidance on the presentation of the resulting gain or loss within equity. Alternative
approaches include establishing a separate category of equity (other equity) in which such amounts are recognised or
recognising those amounts in retained earnings. In our view, either treatment is acceptable.
2.5.385.50 If there is a change in the ownership interest in a subsidiary without the loss of control, then the parent
discloses in its consolidated financial statements a schedule showing the effects of such changes on the equity attributable
to the parent. [IAS 27.41(e)]
2.5.390 Determining the adjustment to non-controlling interests

2.5.390.10 IFRS does not provide guidance on the treatment of goodwill when the interests of the parent and NCI are
adjusted to reflect the change in interests. Depending on the initial measurement of NCI, there are different approaches
possible, as discussed below.
2.5.392 Non-controlling interests initially measured at proportionate interest in the

identifiable net assets of the acquiree
2.5.392.10 If NCI were initially measured at their proportionate interest in the identifiable net assets of a subsidiary,
because no goodwill was initially attributed to NCI, then several approaches to determining the adjustment to NCI are
acceptable for purchases and sales of NCI when retaining control.
2.5.392.15 In our view, each of the following approaches is acceptable (see Examples 19A and 19B).
• Approach 1. Attribute a proportionate amount of all the net assets of the subsidiary, including
recognised goodwill. This view interprets 'interests in the subsidiary' in paragraph 31 of IAS 27
as related to all net assets, including goodwill, recognised in the parent's consolidated financial
statements. Under this approach, recognised goodwill is treated as any other asset.
• Approach 2. Attribute a proportionate amount of the net assets of the subsidiary; however, in
doing so there are two separate asset pools: one asset pool is in respect of the parent's interest
(net assets including goodwill) and the other asset pool is in respect of the NCI (identifiable net
assets but no goodwill). Under this approach, a purchase of equity interests from the non-
controlling shareholders results in adjusting NCI for the proportionate amount of the NCI asset
pool because the parent is buying a portion of that pool of assets. Conversely, a sale of equity
interests to the non-controlling shareholders results in adjusting NCI for a proportionate amount
of the parent's assets-plus-goodwill pool because the parent is selling a portion of that asset pool
to the NCI. In Example 19A, we illustrate the first transaction with NCI after obtaining control of a
subsidiary; the calculations would be more complicated if there were several transactions with
NCI - e.g. a purchase of NCI and a subsequent sale of NCI.
• Approach 3. Attribute a proportionate amount of only the identifiable net assets of the subsidiary.
This view interprets 'interests in the subsidiary' in paragraph 31 of IAS 27 as related to
identifiable assets only because NCI have been initially recognised only in respect of identifiable
assets.
2.5.392.20 Other approaches may also be acceptable depending on the circumstances. An entity should choose an
accounting policy, to be applied consistently to both sales and purchases of equity interests in subsidiaries when control
exists before and after the transaction and NCI are initially measured at their proportionate interest in the identifiable net
assets of the acquiree.
2.5.395 Non-controlling interests initially measured at fair value

2.5.395.10 In our view, if NCI were initially measured at fair value, then the adjustment of NCI on purchases or sales of
equity interests in the subsidiary when control of the subsidiary by the parent exists before and after the transaction
includes a portion of goodwill (see Examples 19A and 19B). This view interprets 'interests in the subsidiary' in paragraph 31
of IAS 27 as relating to all net assets, including goodwill, because goodwill is attributed to NCI when NCI were initially
measured at fair value.
Page 176 / 375

2.5.395.20 Likewise, if an entity initially acquires 100 percent of a subsidiary, then the same approach would be taken for
subsequent sales or purchases of NCI because full goodwill was recognised in the acquisition accounting, just as is the case
when NCI are initially measured at fair value.
2.5.400 Impact of a control premium

2.5.400.10 If NCI are initially measured at fair value and there is a control premium in the consideration paid to obtain
control of the acquiree, then a question arises about the determination of the adjustment to NCI when the parent sells
equity interests to the non-controlling shareholders. In this case, we believe that a rational method should be used, based
for example on a proportionate amount of the goodwill recognised in the financial statements (similar to Approach 1 in
2.5.392.15) or on a proportionate amount of the goodwill attributable to NCI (similar to Approach 2 in 2.5.392.15).
2.5.405 Purchase of equity interests from non-controlling shareholders

2.5.405.05 The following example illustrates the adjustment to NCI in the context of the purchase of equity interests from
NCI.
EXAMPLE 19A - PURCHASE OF EQUITY INTERESTS FROM NCI
2.5.405.10 Company P acquired 80% of Company S in a business combination several years

ago. P subsequently purchases an additional 10% interest in S.
2.5.405.20 The contribution of S to P's consolidated financial statements before the purchase
of NCI is as follows.
Note
(1) Assuming no control premium
2.5.405.30 The contribution of S to P’s consolidated financial statements after the purchase
of the additional 10% interest (exclusive of the consideration paid) is as follows.
Page 177 / 375

2.5.410 Sale of equity interests to non-controlling shareholders

2.5.410.05 The following example illustrates the adjustment to NCI in the context of the sale of equity interests to NCI.
EXAMPLE 19B - SALE OF EQUITY INTERESTS TO NCI
2.5.410.10 Company P acquired 80% of Company S in a business combination several years ago.
P subsequently sells a 20% interest in S but retains control of S.
2.5.410.20 The contribution of S to P's consolidated financial statements before the sale of NCI is
as follows.
Page 178 / 375

2.5.410.30 The contribution of S to P’s consolidated financial statements after the sale of equity
interests to NCI (exclusive of the consideration received) is as follows.
2.5.415 Changes in ownership interests in a subsidiary that has other

comprehensive income
2.5.415.10 When the relative interests of the parent and NCI change, in our view the balance of components of OCI should
be re-allocated between the parent and the NCI to reflect the new interests. For any foreign currency translation reserve,
such re-allocation is explicitly required following a partial disposal (see 2.7.320). [IAS 21.48C]
EXAMPLE 20 - RE-ALLOCATION OF OCI
2.5.415.20 Company P owns 80% of the shares in Company S. On 1 January 2012, P acquires an
additional 10% of S for cash of 30.
2.5.415.30 The carrying amount of the cumulative NCI in S before the acquisition is 48, which
includes 4 for the NCI's portion of gains recognised in OCI for foreign exchange movements on
translation of that subsidiary.
2.5.415.40 P records the following entries in its consolidated financial statements to recognise the
decrease in NCI in S.
Page 179 / 375

2.5.420 Transaction costs

2.5.420.10 In our view, an entity recognises transaction costs for transactions with NCI while retaining control directly in
equity. This approach is consistent with treating transactions with NCI as equity transactions and the requirement in IAS 32
that transaction costs of an equity transaction are accounted for as a deduction from equity (see 7.3.520). [IAS 1.106(d)
(iii), 109, 32.35, IU 07-09]
2.5.425 Contingent consideration

2.5.425.10 In our view, contingent consideration payable for an acquisition of NCI is accounted for similarly to contingent
consideration payable in a business combination (see 2.6.280 and 1010). An obligation to pay contingent consideration is
classified either as equity or as a financial liability based on the definitions in IAS 32 (see 7.3.200). Such an obligation is
initially recognised at fair value as part of the transaction, with NCI recognised in equity. If the obligation is classified as a
financial liability, then subsequent changes in the value of the liability are recognised in profit or loss in accordance with IAS
39. [IAS 32.AG8]
2.5.430 Impairment considerations

2.5.430.10 When the parent's ownership interest in a subsidiary changes but control is retained, the change in ownership
does not result in any adjustment to the carrying amount of the subsidiary's assets or liabilities, including goodwill.
However, in our view if the price paid to acquire non-controlling interests is less than the carrying amount of those interests
in the consolidated financial statements, then this might be an indication that certain assets of the subsidiary are impaired.
In such cases, we believe that the entity should consider whether any of the underlying assets are impaired before
accounting for the change in ownership interests.
2.5.440-450 [Not used]
2.5.460 Written put option or forward

2.5.460.10 An entity may write a put option or enter into a forward purchase agreement with the non-controlling
shareholders in an existing subsidiary on their equity interests in that subsidiary. If the put option or forward granted to the
non-controlling shareholders provides for settlement in cash or in another financial asset by the entity (see 7.3.50), then
IAS 32 requires the entity to recognise a liability for the present value of the exercise price of the option or of the forward
price. [IAS 32.23]
2.5.460.20 See 2.5.470 for a discussion of put options or forwards granted to the non-controlling shareholders that do not
provide for settlement in cash or in another financial asset by the entity.
2.5.460.30 In our view, the likelihood of a written put option being exercised is relevant only in assessing whether the
Page 180 / 375

terms of the put are genuine. If the terms affecting the exercisability of the option are genuine, then we believe that a
liability for the put option should be recognised. This is the case even if the put option is exercisable only on the occurrence
of uncertain future events that are outside the control of both parties to the contract (see 7.3.40.70-80).
EXAMPLE 21 - NCI PUT OPTION CONTINGENT ON A FUTURE EVENT
2.5.460.40 Parent P sells 25% of its wholly owned Subsidiary S to Company Y. A put option is
written by P that entitles Y to sell the 25% interest back to P. The put option is exercisable only if a
key patent held by S is revoked by the relevant regulatory authorities.
2.5.460.50 We believe that if the condition related to the revoking of the patent is genuine - even
though the event might not be probable - then a financial liability should be recognised in
accordance with IAS 32.
2.5.460.60 See 2.5.478 for a discussion of a put option written or a forward entered into as part of the acquisition of a
subsidiary, and 2.5.480 in connection with IFRS 3 (2004) and IAS 27 (2003).
2.5.462 Accounting treatment driven by present access to economic benefits

2.5.462.10 For a written put or forward with the non-controlling shareholders in an existing subsidiary on their equity
interests in that subsidiary, 2.5.460 discusses the credit side of the transaction. However, the accounting for the debit side
of the transaction, as well as the subsequent accounting, is unclear under IFRS.
2.5.462.20 If the NCI still have present access to the economic benefits associated with the underlying ownership interests,
then in our view the entity could choose an accounting policy, to be applied consistently, to use one of the following
methods.
• The anticipated-acquisition method. The contract is accounted for as an anticipated acquisition
of the underlying NCI - i.e. as if the put option had been exercised already or the forward had
been satisfied by the non-controlling shareholders. This is independent of how the exercise price
is determined (e.g. fixed or variable) and how likely it is that the option will be exercised.
• The present-access method. Under this method, NCI continue to be recognised because the
non-controlling shareholders still have present access to the economic benefits associated with
the underlying ownership interests; therefore, the debit entry is to 'other' equity.
2.5.462.30 If the non-controlling shareholders do not have present access to the economic benefits associated with the
underlying ownership interests, then in our view the entity should apply the anticipated-acquisition method.
2.5.462.40 We believe that the two dominant typical features of such ownership benefits are participation in future
dividends and participation in future changes in the value of the entity, both positive and negative; these features together
typically determine the total shareholder return. The right to participate in these economic benefits generally arises at the
point of becoming an actual owner in the entity.
Page 181 / 375

2.5.464 Anticipated-acquisition method *
2.5.464.10 Under the anticipated-acquisition method, the interests of the non-controlling shareholders that hold the written
put options or forwards are derecognised when the financial liability is recognised. This is because the recognition of the
financial liability implies that the interests subject to the put options or forwards are deemed to have been acquired already.
Therefore, the underlying interests are presented as already owned by the entity, both in the statement of financial position
and in the statement of comprehensive income, even though legally they are still NCI. In other words, profits and losses
attributable to the holder of the NCI subject to the put or forward are presented as attributable to the owners of the parent
and not as attributable to those non-controlling shareholders. [IAS 1.83, 32.DO1]
EXAMPLE 22A - WRITTEN PUT OPTION - ANTICIPATED-ACQUISITION METHOD
2.5.464.20 Company P holds a 70% interest in Company S. The carrying amount of NCI is 30,
which represents their 30% interest in S. P writes a put option that allows the non-controlling
shareholders to sell their shares in S to P for cash; the present value of the exercise price is 35.
2.5.464.30 Under the anticipated-acquisition method, P records the following entry at the date
that the put option is written.
2.5.464.40 In our view, if an entity writes a put option over NCI, then subsequent to initial recognition it should choose an
accounting policy, to be applied consistently, to recognise changes in the carrying amount of the put liability in profit or loss
or within equity. See 2.5.468 for a full discussion of this issue, including exceptions.
2.5.464.50 If the put option expires unexercised, then the put liability is derecognised and NCI are recognised. In our view,
this should be treated as a disposal of the 'anticipated interests' and should be treated consistently with a decrease in
ownership interests in a subsidiary while retaining control (see 2.5.380).
2.5.466 Present-access method *

2.5.466.10 Under the present-access method, the interests of non-controlling shareholders that hold the written put
options or forwards are not derecognised when the financial liability is recognised. This is because the NCI have present
access to the ownership benefits that are the subject of the put options or forwards. However, if the NCI do not have
Page 182 / 375

present access to those ownership benefits, then in our view this method is not appropriate; instead, the entity should
follow the anticipated-acquisition method (see 2.5.464). [IAS 27.30, IG5]
2.5.466.20 Under this method, the transaction is not treated as an anticipated acquisition; instead, on initial recognition of
the liability, the debit entry is to 'other' equity. The application of this method has no impact on the 'normal' accounting for
NCI (see 2.5.300).
EXAMPLE 22B - WRITTEN PUT OPTION - PRESENT-ACCESS METHOD
2.5.466.30 Using the same facts as in Example 22A, under the present-access method P records
the following entry at the date that the put option is written.
2.5.466.40 In our view, if an entity writes a put option over NCI, then subsequent to initial recognition it should choose an
accounting policy, to be applied consistently, to recognise changes in the carrying amount of the put liability in profit or loss
or within equity. See 2.5.468 for a full discussion of this issue, including exceptions.
2.5.468 Recognising changes in the put liability in equity *

2.5.468.10 As noted in 2.5.464.40 and 2.5.466.40, in our view if an entity writes a put option over NCI, then subsequent to
initial recognition it should choose an accounting policy, to be applied consistently, to recognise changes in the carrying
amount of the put liability in profit or loss or within equity.
2.5.468.20 Recognising changes in the carrying amount of the put liability in profit or loss is consistent with the
requirement in IAS 39 to remeasure financial liabilities through profit or loss (see 7.6.120). However, given that the IFRS
Interpretations Committee (Interpretations Committee) acknowledged diversity in practice, citing a perceived conflict
between IAS 27 and IAS 39, we believe that recognition of the changes in equity is also acceptable. [IAS 27.30, 39.55, AG8,
IU 01-11]
2.5.468.30 In our view, the accounting policy choice described in 2.5.468.10 is not available for:
• forwards over NCI, because the Interpretations Committee's discussion was limited to puts. In
accordance with IAS 39, changes in the carrying amount of the liability for a forward contract are
recognised in profit or loss (see 7.6.120); or
• puttable instruments that are classified as equity by a subsidiary only by virtue of the specific
presentation requirements of paragraphs 16A-D of IAS 32 (see 7.3.60). [IAS 32.AG29A]
2.5.468.40 If an entity chooses an accounting policy to recognise changes in the carrying amount of an NCI put liability in
equity, then in our view this generally includes all changes in the carrying amount of the liability, including the accretion of
interest.
2.5.468.50 A potential conflict similar to that between the guidance in IAS 27 and IAS 39 discussed by the Interpretations
Committee may be identified between the guidance in IAS 21 and IAS 27 on changes in the carrying amount of the put
liability due to foreign currency translation. Under IAS 21, gains or losses on the foreign currency translation of monetary
items are recognised in profit or loss. In our view, an entity can choose to recognise changes due to foreign currency
translation in equity if the equity option is applied for changes in the carrying amount of NCI put liabilities. [IAS 21.28]
2.5.470 Exceptions from recognising a financial liability
Page 183 / 375

2.5.474 Written put option to be settled in shares of the parent
2.5.474.10 If a put option granted to the non-controlling shareholders provides for gross physical settlement in equity
instruments - e.g. a fixed number of shares of the parent or a variable number of shares of the parent based on the fair
value of the subsidiary - then there is no requirement to recognise a financial liability for the present value of the
redemption amount.
2.5.474.20 This is because the relevant provision of IAS 32 to recognise a financial liability for the present value of the
redemption amount applies only to obligations that will be settled in cash or in another financial asset of the entity (see
7.3.190.10), but not to obligations to settle in a fixed or variable number of the entity's own equity instruments.
2.5.474.30 Accordingly, no financial liability is recognised in respect of the estimated redemption amount under the put
option and the NCI subject to the put option are not derecognised. Instead, the option is accounted for either as a derivative
in accordance with IAS 39 (see 7.2.10) or as an equity instrument if it meets the fixed-for-fixed criterion in IAS 32 (see
7.3.180.60-110).
2.5.474.40 If the parent, in addition to settling the put option in a fixed or variable number of own equity instruments, has
an option to settle in cash, then in our view it should choose an accounting policy, to be applied consistently, either to
recognise a liability for the present value of the redemption amount or to apply the accounting set out in 2.5.474.30 (see
also 7.3.210.40).
2.5.476 Written put option to be settled in shares of another subsidiary
2.5.476.10 The put option granted to the non-controlling shareholders might provide for gross physical settlement in
shares of another subsidiary of the parent. Assuming that settlement of the option does not lead to deconsolidation of the
subsidiary, there is no requirement to recognise a financial liability for the present value of the redemption amount because,
from the perspective of the consolidated financial statements, no financial asset of the entity will be delivered on settlement
of the option. Instead, the put option is accounted for either as a derivative in accordance with IAS 39 (see 7.2.10) or as an
equity instrument if it meets the fixed-for-fixed criterion in IAS 32 (see 7.3.180.60-110).
2.5.476.20 However, it could be questioned whether the replacement of the underlying NCI in the first subsidiary by that of
the second could be anticipated (see 2.5.462). If the acquisition were to be anticipated in this case, then the calculation of
NCI would not be based on their current interest in the subsidiary whose shares will be delivered in settlement, but based
on their interest as if they had already exercised the put option. In our view, in current IFRS there is no basis for such
anticipation. Therefore, we believe that the interests of the non-controlling shareholders that hold such put options should
be computed based on their current shareholdings.
EXAMPLE 23 - WRITTEN PUT OPTION SETTLED IN SHARES OF A DIFFERENT SUBSIDIARY
2.5.476.30 Company P acquires control over Company S by purchasing a 70% interest in S. The
NCI are recognised with an initial carrying amount of 1,200, which represents their 30% interest in
S.
2.5.476.40 The non-controlling shareholders are granted the option of exchanging their shares in
S for a fixed number of shares in Company T, another subsidiary of P, at any time in the future if S
fails to meet certain performance criteria.
Page 184 / 375

2.5.476.50 We believe that it should not be anticipated that the non-controlling shareholders of S
might become shareholders of T in the future. Therefore, the NCI in P's consolidated financial
statements in respect of S continue to be stated at 1,200; the put option will be classified as equity
because it meets the fixed-for-fixed criterion in IAS 32 (see 7.3.180.60-110).
2.5.478 Written put option or forward in a business combination

2.5.478.10 An entity may write a put option or enter into a forward with the non-controlling shareholders in an acquiree as
part of the acquisition of a subsidiary. In that case, in our view there is a rebuttable presumption that the transactions are
linked and that the guidance in 2.5.460-2.5.476 applies.
2.5.478.20 If the NCI still have present access to the economic benefits associated with the underlying ownership interests
(see 2.5.462.30), then depending on the policy chosen from those identified in 2.5.462.20, goodwill will vary if NCI is
calculated based on their proportionate interest in the net assets of the acquiree.
2.5.478.30 This is because the deemed acquired interest and the consideration transferred are different under each
method.
• Under the anticipated-acquisition method, the interest subject to the put option or forward is
deemed to have been acquired at the acquisition date. Accordingly, the financial liability arising
from the put option or forward is included in the consideration transferred.
• Under the present-access method, the interest subject to the put option or forward is not
deemed to have been acquired at the acquisition date. Accordingly, the financial liability arising
from the put option or forward is not included in the consideration transferred; instead, it is
accounted for separately.
EXAMPLE 24 - WRITTEN PUT OPTION IN A BUSINESS COMBINATION
2.5.478.40 Company P acquires control over Company S by purchasing an 80% interest in

exchange for cash of 120. The fair value of S's identifiable net assets is 100 and P elects to
measure the NCI at their proportionate interest in the identifiable net assets of S.
2.5.478.50 At the same time, P writes a put option that allows the non-controlling shareholders to
sell their shares in S to P for cash; the present value of the exercise price is 25.
2.5.478.60 Under the anticipated-acquisition method, P records the following entry in its
consolidated financial statements at the acquisition date.
Page 185 / 375

2.5.478.70 Under the present-access method, P records the following entry in its consolidated
financial statements at the acquisition date.
2.5.480 Put written under IFRS 3 (2004) and IAS 27 (2003)

2.5.480.10 In some cases, a put with non-controlling shareholders may have been written while IFRS 3 (2004) and IAS 27
(2003) were in effect, and remain outstanding on the adoption of IFRS 3 (2008) and IAS 27 (2008). It is unclear whether an
entity may continue its existing accounting, or whether it needs to change its accounting policy in accordance with the new
standards. In our view, an entity continues its existing accounting policy under IFRS 3 (2004) and IAS 27 (2003) in respect
of that put.
2.5.480.20 In our view, an entity should have chosen an accounting policy, to be applied consistently, to subsequently
account for the carrying amount of the non-controlling shareholder put liability in the context of IAS 27 (2003) under either
of the following approaches.
• The IAS 39 approach. Under this approach, changes in the carrying amount of the liability are
Page 186 / 375

recognised in profit or loss.

• The adjustment-to-initial-accounting approach. Under this approach, changes in the carrying
amount of the liability are recognised by adjusting the carrying amount of the balancing item
affected by the initial recognition of the transaction - e.g. goodwill; this excludes the effect of
unwinding the discount, which is recognised in profit or loss.
2.5.480.30 The adjustment-to-initial-accounting approach is supported by the fact that variability in the consideration
payable is contingent consideration, even when it relates to the acquisition of non-controlling interests. In our view,
contingent consideration arising under IFRS 3 (2004) is scoped out of IAS 39 even though the IAS 39 exemption for
contingent consideration was removed for annual periods beginning on or after 1 January 2009.
2.5.485 Presentation of call options over subsidiary shares

2.5.485.10 A parent may purchase a call option written by a third party over shares in a subsidiary. In our view, the
premium paid for the call option is debited to parent equity in the consolidated financial statements of the parent and not to
NCI if the following conditions are met.
• The call does not in substance give the parent present access to the ownership benefits of the
shareholding that is the subject of the option (see 2.5.120.10).
• The call meets the fixed-for-fixed criterion and is therefore classified as an equity instrument in
the parent's consolidated financial statements (see 7.3.10).
2.5.485.20 We believe that the purchased call option is an equity instrument in its own right (i.e. it is part of the group's
equity) that is held by the parent when these conditions are met. Therefore, the call option is directly attributable to the
parent and so does not meet the definition of NCI (see 2.5.300).
Page 187 / 375

2.5.490 LOSS OF CONTROL

2.5.490.10 A parent can lose control of a subsidiary in a variety of ways. The loss of control can happen without a change
in absolute or relative ownership levels or in the absence of a transaction. There may be a loss of control if, for example:
• a parent sells all or part of its ownership interest in its subsidiary such that it loses control;
• a contractual agreement that gave control of the subsidiary to the parent expires;
• the subsidiary issues shares to third parties, thereby reducing the parent's ownership interest in
the subsidiary so that it no longer has control of the subsidiary;
• substantive participating rights are granted to other parties;
• the parent distributes its ownership interest in the subsidiary; or
• the subsidiary becomes subject to the control of a government, court, administrator or regulator.
[IAS 27.32]
2.5.490.20 When a parent loses control of a subsidiary, it:
• stops consolidating the subsidiary by derecognising the assets (including goodwill) and liabilities
of the subsidiary and NCI in the subsidiary, including any components of OCI attributable to them;
• recognises the fair value of the consideration received, if any;
• recognises the distribution of shares to the new owners of the subsidiary - i.e. the owners of the
former parent - if the loss of control involves such a distribution (see also 2.5.510);
• recognises any non-controlling investment retained at fair value; and
• reclassifies to profit or loss, or transfers directly to retained earnings, amounts recognised in OCI
in relation to the subsidiary on the same basis as would be required if the parent had directly
disposed of the related assets or liabilities. [IAS 27.34]
2.5.490.30 As a consequence, the amount recognised in profit or loss on the loss of control of a subsidiary is measured as
the difference between (a) and (b), together with any profit or loss reclassifications.
(a) The sum of:
- the fair value of the consideration received, if any;
- the recognised amount of the distribution of shares, if applicable;
- the fair value of any retained non-controlling investment; and
- the carrying amount of the NCI in the former subsidiary, including the accumulated balance of
each class of OCI attributable to the NCI (see 2.5.490.50).
(b) The carrying amount of the former subsidiary's net assets. [IAS 27.34(f)]
2.5.490.40 From the group's perspective, the loss of control of a subsidiary results in derecognition of the individual assets
and liabilities of the subsidiary. On disposal, components of OCI related to the subsidiary's assets and liabilities are
accounted for on the same basis as would be required if the individual assets and liabilities had been disposed of directly.
As a result, the following amounts are reclassified to profit or loss:
• exchange differences that were recognised in OCI in accordance with IAS 21;
• changes in the fair value of available-for-sale financial assets previously recognised in OCI in
accordance with IAS 39; and
Page 188 / 375

• the effective portion of gains and losses on hedging instruments in a cash flow hedge previously
recognised in OCI in accordance with IAS 39. [IAS 27.35]
2.5.490.50 In our view, on loss of control of a non-wholly owned subsidiary, the reserve to be reclassified to profit or loss
or transferred to retained earnings, as the case may be, is the net amount - i.e. excluding the amount of reserve allocated
to NCI. In the case of amounts reclassified to profit or loss, no amount of the reclassification is allocated to NCI because the
reclassification of the reserve happens as a consequence of the loss of control of the subsidiary, which results in the
derecognition of the NCI through profit or loss at the same time (see 2.5.490.30). [IAS 27.35]
2.5.490.60 There is some ambiguity in IFRS over how the gain or loss on the loss of control should be calculated when a
parent loses control of a subsidiary by contributing it to an associate or a jointly controlled entity (see 2.5.525). If the entity
applies the IAS 27 approach and recognises the gain or loss in full in profit or loss, then the components of OCI of the
former subsidiary are also reclassified in full as described in 2.5.490.40. If the entity applies the IAS 28/IAS 31 approach
and eliminates a part of the gain or loss in respect of the continuing interest in the assets and liabilities contributed, then in
our view the components of OCI of the former subsidiary are not reclassified in full, but instead are reclassified on a
proportionate basis. See also 3.5.470 and 3.6.190 for further discussion. [IAS 27.35, 21.48C]
2.5.490.70 The NCI's share of the carrying amount of the net assets of the former subsidiary immediately before control is
lost, which includes the share of all profit or loss and OCI that was attributed to the NCI, is derecognised. [IAS 27.34(b)]
2.5.490.80 Any retained non-controlling equity investment in the former subsidiary is generally remeasured to its fair value
at the date on which control is lost; see 2.5.525 for a potential exception. The gain or loss on such remeasurement is
included in determining the gain or loss on the loss of control. From the date on which control is lost, any remaining
investment is accounted for in accordance with IAS 39, IAS 28 or IAS 31, as appropriate. [IAS 27.34(d), 36]
EXAMPLE 25 - PARTIAL DISPOSAL RESULTING IN LOSS OF CONTROL
2.5.490.90 Company P owns 60% of the shares in Company S. On 1 January 2012, P disposes of
a 20% interest in S for cash of 400 and loses control over S.
2.5.490.95 At that date, the fair value of the remaining 40% investment is determined to be 800,
and the carrying amount of the net assets of S is 1,750. OCI includes the following related to the
subsidiary, which are net of amounts that were allocated to NCI:
• foreign currency translation reserve of 60; and
• available-for-sale revaluation reserve of 120.
2.5.490.100 The amount of NCI in the consolidated financial statements of P on 1 January 2012 is
700. The carrying amount of NCI includes the following amounts that were recognised in OCI before
being allocated to NCI:
• foreign currency translation reserve of 40 (60 / 60% x 40%); and
• available-for-sale revaluation reserve of 80 (120 / 60% x 40%).
2.5.490.110 P records the following entry to reflect its loss of control over S at 1 January 2012.
Page 189 / 375

2.5.490.120 The 330 recognised in profit or loss represents the increase in the fair value of the
retained 40% investment of 100 (800 - (1,750 x 40%)), plus the gain on the disposal of the 20%
interest of 50 (400 - (1,750 x 20%)), plus the reclassification adjustments of 180 (60 + 120).
Assuming that the remaining interest of 40% represents an associate, the fair value of 800
represents the cost on initial recognition and IAS 28 applies going forward (see 3.5.170).
2.5.500 Linkage of transactions

2.5.500.10 Because different accounting treatments apply depending on whether control is lost, the structure of
transactions could affect the accounting result. As a consequence, IAS 27 contains provisions for determining whether two
or more transactions or arrangements that result in the loss of control of a subsidiary should be treated as a single
transaction. [IAS 27.33]
2.5.500.20 In some instances, it will be clear that a series of transactions are linked and should be accounted for as a
single transaction. However, in other instances a careful analysis of the facts and circumstances and the exercise of
judgement will be required in making the determination. If one or more of the following indicators is present, then this may
indicate that the transactions or arrangements that result in a loss of control should be accounted for as a single transaction
or arrangement:
• they are entered into at the same time or in contemplation of one another;
• they form a single arrangement that achieves, or is designed to achieve, an overall commercial
effect;
• the occurrence of one transaction or arrangement is dependent on the other transaction(s) or
arrangement(s) happening; or
• one or more of the transactions or arrangements considered on their own is not economically
justified, but they are economically justified when considered together - e.g. when one disposal
is priced below market, compensated by a subsequent disposal priced above market. [IAS 27.33]
EXAMPLE 26A - LOSS OF CONTROL - LINKAGE (1)
2.5.500.30 Company P owns 70% of the shares in Subsidiary S. P intends to sell all of its 70%
interest in S and is considering the following structures to effect the sale:
• sell all of its 70% interest in one transaction; or
• initially sell 19% of its interest in S without the loss of control and then
afterwards sell the remaining 51% and lose control.
2.5.500.40 In the first case, the full amount of the gain or loss on the sale of the 70% interest
would be recognised in profit or loss.
2.5.500.45 In the second case, if the transactions are determined not to be linked, then the gain
or loss on the sale of the 19% interest would be recognised in equity, whereas the gain or loss
from the sale of the remaining 51% interest would be recognised in profit or loss. If they are
determined to be linked, then the treatment would be the same as in the first case.
EXAMPLE 26B - LOSS OF CONTROL - LINKAGE (2)
2.5.500.50 Company P sells a subsidiary to Company Q. The purchase-and-sale agreement
Page 190 / 375

includes a manufacturing and supply agreement. According to the manufacturing-and-supply

agreement, P agrees to supply specific products to Q. The selling price of the products covers all of
P's manufacturing costs (direct and indirect), transportation costs, duties and other taxes, and
insurance costs, but includes no profit margin to P. The manufacturing-and-supply agreement starts
on completion of the purchase-and-sale agreement and ends five years later.
2.5.500.55 Other relevant facts include the following.
• P has no similar manufacturing-and-supply agreement with other customers.
• It is believed that P would not have received the same price for the sale of
the subsidiary if the purchase-and-sale agreement had not been entered
into simultaneously with the manufacturing-and-supply agreement.
• Each year, Q provides P with a two-year non-binding forecast of the
expected order quantities, and a 12-month rolling forecast is provided on a
monthly basis.
2.5.500.60 The agreement appears to include two transactions: the disposal of a subsidiary, and
a manufacturing-and-supply agreement for goods. However, in this example we believe that the
transactions are linked and should be accounted for together. Therefore, a portion of the proceeds
on the sale of the subsidiary should be deferred and recognised as revenue as the goods are
delivered. Any subsequent changes in the estimate of goods to be delivered are changes in
estimates and should be accounted for as such in accordance with IAS 8 (see 2.8.60).
2.5.510 Demergers/spin-offs
2.5.510.10 If a parent distributes its ownership interest in a subsidiary and loses control as a result (a demerger or spin-
off), then it should consider whether the distribution is within the scope of IFRIC 17.
2.5.510.20 IFRIC 17 applies to non-reciprocal distributions of non-cash assets to owners acting in their capacity as owners,
in which all owners of the same class of equity instruments are treated equally. It also applies to distributions in which each
owner may elect to receive either their share of the non-cash asset or a cash alternative. IFRIC 17 excludes from its scope:
• common control transactions; and

• distributions of part of the ownership interests in a subsidiary when control is retained. [IFRIC
17.3-4, 6-7]
2.5.510.30 A common control transaction in this context is a distribution in which the asset being distributed is ultimately
controlled by the same party (or parties) both before and after the distribution (see 5.13.10). [IFRIC 17.6]
2.5.510.40 For a demerger within the scope of IFRIC 17, the distribution is measured at the fair value of the assets to be
distributed and any gain or loss on the distribution is recognised in profit or loss (see 7.3.640). [IFRIC 17.11-13]
2.5.510.50 The accounting for demergers that are not within the scope of IFRIC 17 is not addressed specifically in IFRS.
Therefore, an entity should develop an accounting policy for such demergers using the hierarchy for the selection of
accounting policies in IAS 8. In our view, for a demerger that is not within the scope of IFRIC 17, the distribution can be
measured using either book values or fair value. See 5.13.90 for a discussion in the context of common control
transactions.
2.5.515 Non-current assets held for sale

2.5.515.10 When an entity is committed to a sale plan involving the loss of control of a subsidiary, it classifies all of the
assets and liabilities of that subsidiary as held-for-sale when the IFRS 5 criteria for such classification are met (see 5.4.20).
This is regardless of whether the entity will retain a non-controlling interest in its former subsidiary. [IFRS 5.6-8A]
2.5.515.20 If the subsidiary being sold meets the definition of a discontinued operation, then it is presented accordingly.
Page 191 / 375

[IFRS 5.30-36A]
2.5.520 Amount owed to or from a former subsidiary that remains outstanding

after control is lost
2.5.520.10 Sometimes, an amount owed to or from a former subsidiary before losing control will remain payable after
control of that subsidiary is lost, and the question arises about how that amount should be accounted for on the loss of
control. Because the receivable or payable is recognised for the first time, at the point of loss of control, it is required under
IAS 39 to be recognised at fair value (and IAS 39 applies thereafter). [IAS 27.34, 36, 39.4]
EXAMPLE 26C - LOSS OF CONTROL - RECEIVABLE FROM SUBSIDIARY
2.5.520.20 Company P sells to Company Q 100% of Subsidiary S on 31 March 2012 for cash of
1,000. P has a receivable of 100 due from S immediately before losing control over S. This amount
remains payable to P from S after the loss of control. The fair value of the receivable at 31 March
2012 is also 100.
2.5.520.30 The receivable is part of the consideration received by P for S. Therefore, the total
consideration is 1,100 (1,000 + 100). The receivable is subsequently accounted for in accordance
with IAS 39.
2.5.525 Contribution of a subsidiary to an associate or a jointly controlled entity

2.5.525.10 Sometimes, a parent may contribute a subsidiary to an associate or a jointly controlled entity. A question arises
about how the gain or loss should be calculated because there appears to be some ambiguity in IFRS in this regard. IAS 27
requires any resulting gain or loss to be recognised in full in profit or loss when control of a subsidiary is lost (see 2.5.490) -
i.e. no elimination is made for a continuing interest in the assets and liabilities contributed. However, IAS 28, IAS 31 and
SIC-13 require an elimination to be made for a continuing interest in the assets and liabilities contributed. [IAS 28.22,
31.48, SIC-13.5]
2.5.525.20 In our view, this conflict means that the entity should choose an accounting policy, to be applied consistently, to
apply either the IAS 27 approach or the IAS 28/IAS 31 (SIC-13) approach.
• The IAS 27 approach. Under this approach, no elimination of the gain or loss is performed and
the fair value of the retained investment is its deemed cost for the purposes of subsequent
accounting.
• The IAS 28/IAS 31 (SIC-13) approach. Under this approach, the gain or loss is eliminated to the
extent of the retained interest in the former subsidiary.
2.5.525.30 See 3.5.470 and 3.6.190 for further discussion, and 2.5.490.60 for a discussion of the allocation of reserves.
2.5.530 Written call option to sell shares in a subsidiary

2.5.530.10 In some cases, an entity will sell a portion of its shares in a subsidiary and at the same time write a call option
for the potential sale of additional shares. In our view, the proceeds should be split between the call option and the shares
by determining the fair value of the call option at inception, required to be recognised by IAS 39, and attributing the
remaining proceeds to the sale of shares.
2.5.535 Agreement to sell ownership interests in a subsidiary at a later date

2.5.535.10 In some cases, an entity may enter into an agreement to sell some of its ownership interests in a subsidiary at
a later date. The entity considers the derecognition criteria in IAS 39 to determine the percentage attributable to the NCI. If
the derecognition criteria have not been met in respect of the remaining shares to be sold, then the NCI would be measured
without taking the agreement to sell into account. [IAS 27.IG5-IG8]
Page 192 / 375

EXAMPLE 27 - AGREEMENT TO SELL OWNERSHIP INTERESTS IN THE FUTURE
2.5.535.20 Company P owns 100% of Company S. P enters into an agreement with Company Q to
sell 40% of its shares in S at the end of the reporting period and an additional 20% at the end of
each year for the next three years. The price of the shares to be sold will be based on a fixed price
determined at the agreement date.
2.5.535.30 If P retains control of S, then P considers the derecognition criteria in IAS 39 to
determine the percentage attributable to the NCI. If the derecognition criteria have not been met in
respect of the remaining shares to be sold, then the NCI would be measured based on a 40%
interest at the end of the reporting period.
2.5.536 Contingent consideration in the financial statements of the seller

2.5.536.10 A receivable relating to contingent consideration in the seller's financial statements is accounted for under IAS
39 if the receivable meets the definition of a financial instrument. [IAS 32.AG8, 39.IGC4]
2.5.536.20 Contingent consideration receivable is accounted for as a contingent asset in accordance with IAS 37 if it is a
non-financial asset (e.g. property) (see 3.12.876). [IAS 37.31-35]
Page 193 / 375

2.5.537 ACQUISITION OF A NON-WHOLLY OWNED SUBSIDIARY

THAT IS NOT A BUSINESS
2.5.537.10 If an entity acquires an interest in a non-wholly owned subsidiary that is not a business, then the requirements
of IAS 27 apply because the scope of the standard is not limited to subsidiaries that are businesses. In our view, IAS 27
applies even if the subsidiary holds only a single asset. On that basis, we believe that NCI are generally recognised in the
consolidated financial statements of the parent in such cases.
2.5.540-560 [Not used]
Page 194 / 375


2.5.570.10 In August 2011, the IASB published Exposure Draft ED/2011/4 Investment Entities. The ED proposed that
investment entities (as defined) measure their investments in controlled entities at fair value through profit or loss in
accordance with IFRS 9 or IAS 39, rather than consolidate those investments. The ED set out criteria to qualify as an
investment entity, based on the nature of the entity's activities, the nature of its investors and their interests in the entity,
and the entity's management of its investments. The consolidation exception would not be carried through to the level of an
investment entity's parent that is not an investment entity itself.
2.5.570.20 In June 2012, the IASB published Draft Interpretation DI/2012/2 Put Options Written on Non-controlling
Interests. The DI proposed that if an entity writes a put option over NCI, then subsequent to initial recognition it should
recognise changes in the carrying amount of the liability in profit or loss.
Page 195 / 375

2.5A Consolidation
(IFRS 10, IFRS 12)
OVERVIEW OF FORTHCOMING REQUIREMENTS
The single control • Control involves power, exposure to variability in returns and a
model linkage between the two. It is assessed on a continuous basis.
[2.5A.30.10, 40.10]
• The investor considers the purpose and design of the investee so
as to identify its relevant activities, how decisions about such
activities are made, who has the current ability to direct those
activities and who receives returns therefrom. [2.5A.80.10]
• Control is usually assessed over a legal entity, but can also be
assessed over only specified assets and liabilities of an entity
(referred to as a 'silo') when certain conditions are met.
[2.5A.15.10]
Step 1: Power • There is a 'gating' question in the model, which is to determine

over relevant whether voting rights or rights other than voting rights are relevant
activities when assessing whether the investor has power over the relevant
activities of the investee. [2.5A.190.10, 280.10]
• Only substantive rights held by the investor and others are
considered. [2.5A.170.10]
• If voting rights are relevant when assessing power, then
substantive potential voting rights are taken into account. The
investor assesses whether it holds voting rights sufficient to
unilaterally direct the relevant activities of the investee, which can
include de facto power. [2.5A.190]
• If voting rights are not relevant when assessing power, then the
investor considers:
- the purpose and design of the investee;
- evidence that the investor has the practical ability to direct the
relevant activities unilaterally;
- indications that the investor has a special relationship with the
investee; and
- whether the investor has a large exposure to variability in
returns. [2.5A.280.10]
Step 2: Exposure • Returns are broadly defined and include:

to variability in
returns - distributions of economic benefits;
- changes in the value of the investment; and
- fees, remunerations, tax benefits, economies of scale, cost
Page 196 / 375

savings and other synergies. [2.5A.330.10]
Step 3: Linkage • An investor that has decision-making power over an investee and
exposure to variability in returns determines whether it acts as a
principal or as an agent to determine whether there is a linkage
between power and returns. When the decision maker is an agent,
the link between power and returns is absent and the decision
maker's delegated power is treated as if it were held by its
principal(s). [2.5A.340.10]
• To determine whether it is an agent, the decision maker considers:
- substantive removal and other rights held by a single or
multiple parties;
- whether its remuneration is on arm's length terms;
- its other economic interests; and
- the overall relationship between itself and other parties.
[2.5A.340.40]
• An entity takes into account the rights of parties acting on its behalf
when assessing whether it controls an investee. [2.5A.390.10]
FORTHCOMING REQUIREMENTS
In May 2011, the IASB published IFRS 10 Consolidated Financial Statements, followed by amendments to the transitional
requirements in June 2012. This standard supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12
Consolidation - Special Purpose Entities. The IASB published IFRS 12 Disclosure of Interests in Other Entities at the same
time.
The following are the main changes from IAS 27 and SIC-12.
• A single control model is applied to determine whether an investee should be consolidated.
• De facto control is explicitly included in the model.
• Control involves power over the relevant activities of the investee, exposure to variability of
returns, and a link between power and returns.
• Guidance is provided for assessing whether the investor is a principal or an agent in respect of
its relationship with the investee. A principal could consolidate an investee whereas an agent
would not because the linkage between power and returns is not present.
• The control assessment includes consideration of substantive potential voting rights as opposed
to currently exercisable potential voting rights.
• Exposure or rights to variability in returns replaces and is broader than the concept of
ownership benefits.
• Protective rights are defined and explicit guidance on 'kick-out' rights is introduced.
• Enhanced disclosures about involvement with consolidated and unconsolidated entities are
required.
IFRS 10 is effective for annual periods beginning on or after 1 January 2013. Early adoption is permitted as long as the
entity also adopts the other standards that form part of the 'consolidation' suite of standards, as well as IAS 27 (2011)
Separate Financial Statements if applicable. However, an entity is permitted to provide the additional information required
by IFRS 12 without having to early adopt the remaining standards. [IFRS 10.C1]
Page 197 / 375

Consolidation suite of standards
Standard Title
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IAS 28 (2011) Investments in Associates and Joint Ventures
When a significant change to the forthcoming requirements is expected, it is marked with an * as an area that may be
subject to future developments and a brief outline of the relevant project is given in 2.5A.610.
Page 198 / 375

2.5A.10 ENTITIES INCLUDED IN THE CONSOLIDATED

FINANCIAL STATEMENTS *
2.5A.10.10 Consolidated financial statements include all subsidiaries of the parent. A 'subsidiary' is an entity that is
controlled by another entity. [IFRS 10.A]
2.5A.10.20 The term 'investee' is not defined in IFRS 10. However, it is used in the context of IFRS 10 as an entity or a
deemed entity (see 2.5A.15) that is or may be a subsidiary of the investor. Therefore, the meaning of 'investee' in the
context of IFRS 10 is or could be different from its meaning in other standards (e.g. IAS 28). [IFRS 10.BCZ182]
2.5A.10.30 The investor consolidates an investee from the date on which it obtains control over the investee until the
date on which it loses control over the investee. [IFRS 10.20, B88]
2.5A.10.40 It appears that the IASB intended to carry forward the exemption from the consolidation of post-
employment benefit plans or other long-term employee benefit plans in the scope of IAS 19 from SIC-12. [IFRS 10.4(b)]
2.5A.10.50 See 2.1.50 for a discussion of the requirement to prepare consolidated financial statements. [IFRS 10.4(a)]
2.5A.10.60 The guidance provided by IFRS 10 may also be used for identifying the acquirer in a business combination
(see 2.6.60). [IFRS 3.7]
2.5A.15 Silos
2.5A.15.10 Control by an investor is generally assessed at the level of the legal entity. However, if certain criteria are
met, then it is assessed at the 'silo' level. [IFRS 10.B76]
2.5A.15.20 An investor has power over only specified assets and liabilities of an entity and treats that portion of the
entity as a deemed separate entity (a silo) only if:
• in substance, the assets, liabilities and equity of the silo are separate from the overall entity
such that:
- none of those assets can be used to pay other obligations of the entity; and
- those assets are the only source of payment for specified liabilities of the silo; and
parties other than those with the specified liability have no rights or obligations related to the specified assets or to
residual cash flows from those assets. [IFRS 10.B76-B78]
EXAMPLE 1 - UMBRELLA FUND
2.5A.15.30 Umbrella Fund F is an open-ended investment company with two sub-funds that are
cells within the legal entity.
Page 199 / 375

2.5A.15.40 The following facts are relevant to the set-up of the sub-funds.
• The structure is a protected-cell regime such that the assets of sub-fund 1
are not available to meet the liabilities of sub-fund 2, including in the event
of insolvency.
• Any contract entered into by sub-fund 1 contains an implied term that the
counterparty does not have access to the assets of sub-fund 2, and vice
versa for contracts entered into by sub-fund 2.
2.5A.15.50 In this example, each of the sub-funds is a silo for which control is assessed
separately.
Example 1 is simplistic because it ignores the fact that typically the governing body of the umbrella
fund would have the discretion to allocate costs that are not directly attributable to a particular sub-
fund - e.g. asset manager's fees, custodian's fees, administrator's fees and audit fees. An issue
arises as to whether such allocations cause the structure to fail the silo test outlined in 2.5A.15.20;
this is because the standard refers to 'none' of the silo's assets being used to pay other obligations
of the entity. [IFRS 10.B77]
However, it appears that such an arrangement to allocate insignificant operating costs does not
cause the silo test to fail for the following reasons.
• The 'specified' liabilities of a silo are not restricted to those that are directly attributable to the
silo - i.e. they could include liabilities that are attributed to the silo by management; in the
context of Example 1, the attribution of management costs would be made by the board of
Umbrella Fund F.
• If the phrase 'specified' were interpreted literally, then it is likely that silos would be very
uncommon, and there is no indication that this was the IASB's intention; this is because we
expect that most potential silos will have management expenses of some sort.
2.5A.15.80 It appears that there can be non-controlling interests (NCI) in a silo. This is because there is nothing in the
standard to suggest that only the controlling party (parent) can have an interest in the net assets of the silo after specified
obligations. See 2.5.380-485 for a discussion of NCI, the accounting for which has not been changed by IFRS 10.
Page 200 / 375

2.5A.20 THE SINGLE CONTROL MODEL

2.5A.30 Based on power, exposure to variability and linkage
2.5A.30.10 An investor controls an investee when the investor is exposed to, or has rights to, variable returns from its
involvement with the investee, and has the ability to affect those returns through its power over the investee. Control
involves power, exposure to variability in returns and a linkage between the two. [IFRS 10.6, 7, A, B2]
2.5A.30.20 To have power, the investor needs to have existing rights that give it the current ability to direct the
activities that significantly affect the investee's returns - i.e. the relevant activities. An investor can have power over an
investee even if other parties have existing rights to participate in the direction of the relevant activities - e.g. significant
influence over the investee. [IFRS 10.10, 14, B9, B14]
2.5A.30.30 The above definition of power is based on ability. Therefore, power does not need to be exercised.
Conversely, evidence that the investor has been directing the relevant activities is not in itself conclusive in determining
that the investor has power over the investee. Also, in the absence of other rights, economic dependence of an investee
on the investor does not result in the investor concluding that it has control over the investee. [IFRS 10.11-12, B40]
2.5A.40 Assessed on a continuous basis

2.5A.40.10 The assessment of control is performed on a continuous basis and the investor re-assesses whether it
controls an investee if facts and circumstances indicate that there are changes to power, exposure to returns, or the link
between power and returns. Determining how decisions about the relevant activities are made is also assessed on a
continuous basis (see 2.5A.150.50). [IFRS 10.8, B80-B84]
2.5A.40.20 An investor may have de facto power over an investee. De facto power relies, at least in part, on the actions
or inactions of other investors. Therefore, the requirement to assess control on a continuous basis may mean that the
investor who is assessing whether it has de facto power may need to have processes in place that allow it to consider:
• who the other investors are;
• what their interests are; and
• what actions they may or may not take with respect to the investee on an ongoing basis (see
2.5A.240).
2.5A.40.30 A change in market conditions does not trigger a re-assessment of the control conclusion unless it changes
one or more of the three elements of control, or the overall relationship between a principal and an agent. This is further
discussed at 2.5A.230.20-30 in the context of potential voting rights. [IFRS 10.B85]
2.5A.50 Control vs collective control

2.5A.50.10 If two or more investors need to act together to direct the relevant activities of an investee, then they can
collectively control the investee. In this case, if no single investor can direct the activities of the investee without the co-
operation of another investor, then no single investor controls the investee. The investors assess whether the investee is
a joint arrangement, an associate or an investment to which financial instrument accounting applies. See chapter 3.6A for
further discussion of collective control and joint arrangements. [IFRS 10.9]
2.5A.50.20 A situation in which several investors have collective control over the same relevant activities of an investee
is different from a situation in which several investors each direct different relevant activities of an investee. See 2.5A.130
for further discussion on this issue.
2.5A.60 The control model at a glance

Page 201 / 375

2.5A.60.10 The diagram below summarises the analysis that may be required to determine whether the rights held by
the investor give it control over the investee. [IFRS 10.B2-B3]
2.5A.70 No hierarchy in the model

2.5A.70.10 The investor considers all relevant facts and circumstances when assessing whether it controls an investee.
The standard identifies a number of indicators of control, but no hierarchy is provided: it requires an entity to analyse all
facts and circumstances, and to apply judgement in making the control conclusion. [IFRS 10.8]
2.5A.70.20 In straightforward cases, the investor that has the majority of the voting rights in an investee controls that
investee. In other cases, the assessment is more complicated and the investor needs to analyse a series of factors, which
are illustrated above as being some of the steps in the diagram. We expect this diagram to present one way to apply the
IFRS 10 control model. However, IFRS 10 does not prescribe any order to be followed for the analysis and does not
require an investor to go through all of the steps presented in the diagram.
Page 202 / 375

2.5A.80 Consideration of purpose and design

2.5A.80.10 The purpose and design of the investee in this context may be an item of high-level consideration in the
analysis for certain investees. Purpose and design are also considered:
• in identifying and understanding the significance of relevant activities (see 2.5A.115);
• in the context of an investor holding potential voting rights (see 2.5A.230);
• when rights other than voting rights are relevant in assessing whether an investor has power
over an investee (see 2.5A.280);
• when assessing whether a decision maker is a principal or an agent (see 2.5A.350); and
• when assessing whether disclosures are required (see 2.5A.500.40). [IFRS 10.B8, B48, B63,
12.B7]
2.5A.90-100 [Not used]
Page 203 / 375

2.5A.105 STEP 1: POWER OVER RELEVANT ACTIVITIES

2.5A.110 Identify the relevant activities of the investee
2.5A.110.10 'Relevant activities' of the investee are the activities of the investee that significantly affect the investee's
returns. [IFRS 10.13, A]
2.5A.115 Purpose and design

2.5A.115.10 While IFRS 10 indicates that understanding the purpose and design of the investee helps determine what
the relevant activities are, it appears that purpose and design cannot itself be a relevant activity. This is reinforced by
commentary in one of the illustrative examples, which indicates that substantive decision-making is required in order for
an activity to be a 'relevant activity', and the fact that design is not listed in the standard as an example of a relevant
activity. [IFRS 10.B5, B11-B12, B.Ex11]
2.5A.120 Investees with a range of operating and financing activities

2.5A.120.10 In many investees, a range of operating and financing activities significantly affect returns. For example:
• sales of goods;
• management of financial assets;
• acquisitions and disposals of operating assets;
• management of research and development activities; and
• determination of the funding structure. [IFRS 10.B11]
2.5A.120.20 In such cases, the decisions affecting the returns may be linked to decisions such as establishing operating
and capital decisions - e.g. budgets - and appointing, remunerating and terminating key management personnel or other
service providers. This could be the case, for example, for diversified industrial entities. [IFRS 10.B12, B16]
2.5A.130 Investees in which several investors each direct different relevant activities
2.5A.130.10 There can be investees in which several investors each have the ability to direct different relevant
activities. In such cases, the investor that has the current ability to direct the activities that most significantly affect the
returns of the investee has power. [IFRS 10.13, B13]
2.5A.130.20 Investees with multiple parties having decision-making rights can arise:
• when the assets are managed by one party and the funding is managed by another party; or
• in the case of multi-seller conduits or multi-seller securitisations. [IFRS 10.BC85-BC91]
2.5A.130.25 In some cases, it may be predetermined that different relevant activities will occur at different times. It
appears that a predetermined change in relevant activities can lead to a change in the control assessment as the relevant
activities of the investee progress, because IFRS 10:
• is based on the 'current' ability to direct the relevant activities, which implies that the investor
should consider an investee's present and future activities at any point in time - i.e. past
activities are ignored; and
• refers to rights being exercisable when decisions need to be made, which again implies a focus
on present and future activities. [IFRS 10.12, B24]
Page 204 / 375

EXAMPLE 2 - DIFFERENT ACTIVITIES RELEVANT AT DIFFERENT TIMES
2.5A.130.30 Two investors, B and C, form an investee that is engaged in the development of a
medical product, and its subsequent manufacture and marketing. B has the unilateral ability to
make decisions related to development, and C has the unilateral ability to make decisions about
manufacturing and marketing. All of the activities are relevant activities.
2.5A.130.35 B and C each need to determine the activity that most significantly affects the
investee's returns, considering the following factors:
• the purpose and design of the investee;
• the factors that determine the profit margin, revenue and value of the
investee as well as the value of the medical product;
• the effect of each investor's decision-making authority on the investee's
returns;
• the investors' exposure to variability of returns;
• the uncertainty of, and effort required to obtain, regulatory approval; and
• which investor controls the medical product if the development phase is

successful. [IFRS 10.B13]
2.5A.130.40 In this example, each party concludes that B has power over the relevant activity of
development; and that C has power over the relevant activities of manufacturing and marketing.
Subject to completing a full analysis of control, we believe this means that control of the investee
will change once the development phase is complete; this is because there will no longer be any
ongoing decision-making over which B will have power.
2.5A.140 Relevant activities occur only when particular circumstances or events occur
2.5A.140.10 There can be investees for which relevant activities occur only when particular circumstances arise or
events occur, because the direction of activities is predetermined until this date. In this case, only the decisions when
those events occur can significantly affect the returns, and therefore be relevant activities. [IFRS 10.B53]
2.5A.140.20 For example, the only assets of an investee are receivables, and the only relevant activity is managing the
receivables on default. The probability of default is not considered in the analysis, because this is the only decision that
can significantly affect the returns. Therefore, the investor with the power over this activity has control even prior to
default. [IFRS 10.B.Ex12]
2.5A.150 Identify how decisions about the relevant activities are made
2.5A.150.10 Determining how decisions about the relevant activities are made is key, and represents a 'gating' question
in the control analysis. This gating question seeks to determine whether:
• voting rights are relevant in assessing whether the investor has power over the investee (i.e.
the investee is controlled by means of voting instruments); or
Page 205 / 375

• voting rights are not relevant in assessing whether the investor has power over the investee
(i.e. the investee is controlled by means of other rights). [IFRS 10.B6]
2.5A.150.20 When the investee is controlled by means of equity instruments, with associated and proportionate voting
rights, the assessment of power focuses on which investor, if any, has sufficient voting rights to direct the investee's
relevant activities; this is in the absence of any additional arrangements that alter the decision making. In the most
straightforward cases, the investor holding the majority of the voting rights has power over (and controls) the investee
(see 2.5A.190). [IFRS 10.11, B6]
2.5A.150.30 For more complex cases, a number of factors are relevant for assessing what is determinative in
assessing control - i.e. voting or other rights - and then identifying the controlling party. This involves an analysis of:
• what the purpose and design of the investee is;
• what the relevant activities are;
• whether the investor is exposed or has rights to variable returns from its involvement with the
investee; and
• whether the investor has the ability to use its power over the investee to affect the amount of
the investor's returns. [IFRS 10.B3, B7]
2.5A.150.40 Some investees are designed so that voting rights are not relevant to the determination of power, but
instead other rights are relevant (see 2.5A.280). These entities generally correspond to structured entities as defined in
IFRS 12 (see 2.5A.520). [IFRS 10.B8]
2.5A.150.50 How decisions about the relevant activities are made is assessed on a continuous basis (see 2.5A.40).
Changes in the decision-making rights can, for example, imply that the relevant activities are no longer controlled by
means of equity instruments but by means of contractual rights.
2.5A.160 Assess whether investor has power over the relevant activities
2.5A.170 Only substantive rights considered

2.5A.170.10 An investor is required to consider both substantive rights that it holds and substantive rights held by
others. [IFRS 10.B22]
2.5A.170.20 To be substantive, rights need to be exercisable when decisions about the relevant activities are required
to be made, and the holder needs to have a practical ability to exercise those rights. [IFRS 10.B24]
EXAMPLE 3 - TIME TO EXERCISE CALL OPTION VS TIMING OF DECISIONS
2.5A.170.22 Company X holds an option to acquire the majority of voting shares in Company Z
that is exercisable in 25 days and is in the money. Z has annual shareholder meetings at which
decisions to direct the relevant activities are made.
2.5A.170.24 Although the next shareholder meeting is scheduled for 8 months' time,
shareholders can call a special meeting to change the existing policies over relevant activities.
However, a requirement to give notice to the other shareholders means that such a meeting
cannot be held for at least 30 days.
2.5A.170.26 Unless other factors exist, it is likely that X controls Z. X has rights that are
essentially equivalent to those of the ordinary shareholders in Z. This is because it can exercise
the potential voting rights before a special shareholder meeting can be held. The potential voting
rights held by X are therefore substantive, and are considered when assessing whether X controls
Z. This, coupled with the fact that the option is in the money, is the reason why these rights are
currently considered substantive. [IFRS 10.B24]
Page 206 / 375

2.5A.170.30 Substantive rights exercisable by other parties can prevent an investor from controlling the investee, even
if they only give their holders the ability to approve or block decisions that relate to the investee's relevant activities. This
can also apply when other parties hold potential voting rights, kick-out rights or similar rights. [IFRS 10.B25, BC106]
2.5A.170.40 Determining whether rights are substantive requires judgement, taking into account all available facts and
circumstances. Factors to consider include:
• whether there are barriers that prevent the holder from exercising the rights;
• how many parties need to agree for the rights to become exercisable or operational; and
• whether the party holding the rights would benefit from their exercise - e.g. the rights are in
the money. [IFRS 10.B23]
EXAMPLE 4 - NO BENEFIT FROM EXERCISING CALL OPTION
2.5A.170.42 Company X holds an option to acquire Company Y's shares in Company Z. The
option is in the money and can be exercised at any time.
2.5A.170.44 However, if X exercises the option, then the business would be seriously damaged:
Y is the only source of vital know-how, and could leave the arrangement lawfully taking the know-
how with it.
2.5A.170.46 As a result, X would not benefit from exercising the option and the potential voting
rights may not be considered substantive.
2.5A.170.50 It may be that a number of parties need to agree for the rights to become exercisable or operational. In
this case, the more parties needed to agree to exercise the rights, the less likely it is that the rights are substantive.
However, there might be a mechanism (such as the board of directors) providing those parties with the ability to exercise
their rights collectively. The absence of such a mechanism is an indicator that the rights may not be substantive. [IFRS
10.B23]
2.5A.170.60 An investor may have the ability to make a decision unilaterally through a call option over the shares of the
investee that becomes exercisable in the event of deadlock. Although the call option cannot be exercised until a deadlock
actually arises, this contingency does not limit the power associated with the option; this is because the contingency
relates to decision-making and the call option is exercisable when it is actually needed. However, whether the call option
is substantive still requires judgement, taking into account all available facts and circumstances, including the purpose and
design of the call option (see 2.5A.230.70-80). [IFRS 10.B24]
EXAMPLE 5 - CALL OPTION EXERCISABLE IN DEADLOCK
2.5A.170.62 Company B is owned by Companies X, Y and Z in the ratio of 55:40:5.
Page 207 / 375

• The management and operations of B are governed by a shareholders'

agreement that requires the consent of both X and Y.
• X holds a call option over the shares of Y, which is exercisable at market
value in the event of deadlock between the parties.
2.5A.170.64 If X and Y fail to agree, then the shareholders' agreement includes various non-
binding mechanisms designed to help the parties to reach agreement. However, if X and Y
ultimately do not reach an agreement, then X is able to exercise its call option to acquire the
shares in B held by Y. There are no barriers that would prevent X from exercising the option.
2.5A.170.66 In this example, it is concluded that X has power over B, because:
• the call option is exercisable when it is needed in order to make a relevant
decision - i.e. in the event of deadlock; and
• there are no barriers that would prevent X from exercising the option.
2.5A.170.70 Protective rights are related to fundamental changes in the activities of an investee, or are rights that apply
only in exceptional circumstances. As such, they cannot give the holder power or prevent other parties from having power
and therefore control over the investee. Not all rights contingent on future events are protective (see 2.5A.140). [IFRS
10.14, B26-B28]
2.5A.170.80 Rights related to amendments to the following are likely to meet the definition of protective rights because
they relate to fundamental changes of the investee:
• the entity's constitution;
• the liquidation of the entity or commencement of bankruptcy proceedings;
• share issues or repurchases; or
• sales of a significant portion of the entity's operating assets. [IFRS 10.B28]
2.5A.180 Franchise agreements
2.5A.180.10 Franchisor rights do not necessarily prevent parties other than the franchisor from having power over the
franchisee. In many cases, the franchisor's rights are likely to be protective rights because they are designed to protect
the franchise brand. In that case, the relevant activities of the franchisee may be directed by the franchisee owner rather
than the franchisor. [IFRS 10.B29-B32]
2.5A.180.20 The less the direct financial support provided by the franchisor and the lower the franchisor's exposure to
variability of returns from the franchisee, the more likely it is that the franchisor only has protective rights. [IFRS 10.B33]
2.5A.190 When voting rights are relevant

2.5A.190.10 An investor can have power over an investee when the investee's relevant activities are directed through
voting rights if:
• the investor holds the majority of the voting rights (see 2.5A.200); or
• it holds less than a majority of the voting rights but:
Page 208 / 375

- has an agreement with other vote holders (see 2.5A.210);

- holds rights arising from other contractual arrangements (see 2.5A.220);
- holds substantive potential voting rights (see 2.5A.230);
- holds voting rights sufficient to unilaterally direct the relevant activities of the investee (see
2.5A.240) - i.e. de facto power; or
- holds a combination of the above. [IFRS 10.B34-B50]
2.5A.200 Investor holds the majority of the voting rights
2.5A.200.10 The investor who holds the majority of the voting rights has power, unless:
• the voting rights are not substantive;
• the voting rights do not provide the investor with the current ability to direct the relevant
activities; or
• another party has existing rights to direct the relevant activities of the investee and that party is
not an agent of the investor. [IFRS 10.B35-B37]
2.5A.200.20 For example, an investor does not control an investee whose relevant activities are directed by a liquidator
or regulator. Additionally, the investor holding a majority of the voting rights may not have control if another investor
holds substantive voting rights sufficient to give it control over the investee.
2.5A.210 Investor holds fewer than half of the voting rights but has an agreement
with other vote holders
2.5A.210.10 An agreement with other vote holders can give the investor the right to exercise voting rights or to direct
enough other vote holders on how to vote, sufficient to give it power. This issue is further discussed in 2.5.50. [IFRS
10.B39]
2.5A.220 Investor holds fewer than half of the voting rights but holds rights arising
from other contractual arrangements
2.5A.220.10 The rights within the arrangement, in combination with the investor's voting rights, can give it the current
ability to direct some of the processes of an investee that significantly affect the investee's returns. The processes
directed can be, for example, the manufacturing processes or other operating or financing activities of an investee. [IFRS
10.B40]
2.5A.230 Investor holds fewer than half of the voting rights but holds substantive
potential voting rights
2.5A.230.10 Potential voting rights are considered only if they are substantive (see 2.5A.170). Determining whether
rights are substantive will often require judgement. [IFRS 10.B47-B50]
2.5A.230.20 A change in market conditions alone should not typically cause potential voting rights to become
substantive or cease to be substantive. This is because determining whether potential voting rights are substantive is a
holistic analysis that takes into account a variety of factors, including market conditions (see 2.5A.170.40). However, there
could be circumstances in which changes in market conditions, coupled with other factors, result in a different conclusion
about whether potential voting rights are substantive; these could trigger a re-assessment of the control conclusion.
[IFRS 10.BC124]
2.5A.230.30 Moreover, determining whether potential voting rights are in or out of the money may not always be
straightforward. For example, potential voting rights could be out of the money when the exercise price is compared to
the current market price. However, because the exercise price includes an embedded control premium, the potential
voting rights are at or in the money when evaluated on a controlling-interest basis. [IFRS 10.BC124]
Page 209 / 375

EXAMPLE 6 - CALL OPTION DEEPLY OUT OF THE MONEY
2.5A.230.40 Company P holds 70% of the voting rights of Company C. Company B holds the
remaining 30% of C's voting rights, as well as an option to acquire half of P's voting rights.
2.5A.230.50 The option is exercisable at any time during the next two years at a fixed price that
is deeply out of the money (inclusive of a control premium), and is expected to remain so for that
two-year period. P has been exercising its votes, and is actively directing the activities of C.
2.5A.230.60 In this example, P is likely to meet the power criterion, because:
• it appears to have the current ability to direct the relevant activities; and
• B's potential voting rights are deemed to be non-substantive. [IFRS
10.B.Ex9]
2.5A.230.70 The purpose and design of potential voting rights are also considered in the analysis, as well as the
purpose and design of any other involvement that the investor has with the investee. This includes assessing the terms
and conditions of such rights as well as the apparent expectations, motives and reasons for agreeing to them. [IFRS
10.B23]
2.5A.230.80 This requirement seems to imply that the intent of the party who writes or purchases the potential voting
rights would be taken into account when assessing whether the rights are substantive. However, it appears that intent
does not mean an assertion by management of its intention to exercise; instead, the consideration of intent is part of the
assessment of the design of the potential voting rights. Rights without any barrier to exercise whereby the holder could
benefit from exercise would unlikely be agreed to without any intentions and expectations of the rights being exercised.
2.5A.240 Investor has de facto power over investee

2.5A.240.05 An investor's current voting rights may be sufficient to give it power even though it has less than half of the
voting rights. To assess whether this is the case, IFRS 10 requires a two-step approach.
Page 210 / 375

2.5A.240.10 Even without potential voting rights or other contractual rights, when the investor holds significantly more
voting rights than any other vote holder or organised group of vote holders, this may be sufficient evidence of power. In
other situations, these factors may provide sufficient evidence that the investor does not have power - e.g. when there is
a concentration of other voting interests among a small group of vote holders. In some cases, these factors may not be
conclusive and the investor needs to proceed to the second step. [IFRS 10.B43-B45]
2.5A.240.20 Determining whether an investor has de facto control over an investee is usually highly judgemental: it
includes determining the point at which an investor's shareholding in an investee is sufficient and the point at which other
shareholdings' interests are sufficiently dispersed. It would also be difficult for a dominant shareholder to know whether a
voting agreement amongst other shareholders exists.
2.5A.240.30 In our experience, there may be situations in which the dominant shareholder does not know whether
arrangements exist among other shareholders, or whether it is easy for other shareholders to consult with each other.
The investor should have processes in place to allow it to capture publicly available information about other shareholder
concentrations and agreements.
2.5A.240.40 The smaller the size of the investor's holding of voting rights and the less the dispersion of the holding of
other vote holders, the more reliance is placed on the additional factors in Step 2 of the analysis; within these, a greater
weighting is placed on the evidence of power. [IFRS 10.B45]
2.5A.240.50 The 'voting patterns at previous shareholders' meetings' requires consideration of the number of
shareholders that typically come to the meetings to vote (i.e. the usual quorum in shareholders' meetings) and not how
the other shareholders vote (i.e. whether they usually vote the same way as the investor). [IFRS 10.B45, Ex8]
2.5A.240.60 Determining the date on which an investor has de facto power over an investee may in practice be a
challenging issue. In some situations, it may lead to a conclusion that control is obtained at some point after the initial
acquisition of voting interests. At the date that an investor initially acquires less than a majority of voting rights in an
investee, the investor may assess that it does not have de facto control over the investee if it does not know how other
shareholders are likely to behave. As time passes, the investor obtains more information about other shareholders, gains
experience from shareholders' meetings and may ultimately assess that it does have de facto control over the investee.
Page 211 / 375

Determining the point at which this happens may require significant judgement. See 2.6.1020 for further discussion of the
acquisition accounting in such cases.
2.5A.250-270 [Not used]
2.5A.280 When rights other than voting rights are relevant

2.5A.280.10 When voting rights are not relevant to the analysis, the investor considers the purpose and design of the
investee (see 2.5A.290) and the following factors:
• evidence of the practical ability to direct the relevant activities (see 2.5A.300);
• indications of special relationships with the investee (see 2.5A.310); and
• whether the investor has a large exposure to variability in returns (see 2.5A.320). [IFRS
10.B17]
2.5A.280.20 When these three factors are considered, greater weight is given to evidence of the practical ability to
direct the relevant activities. [IFRS 10.B21]
2.5A.290 Purpose and design of investee when entity not controlled through voting rights
2.5A.290.10 Assessing the purpose and design of the investee includes considering the risks that the investee was
designed to create and to pass on to the parties involved in the transaction, and whether the investor is exposed to some
or all of those risks.
2.5A.290.15 Considering the risks includes both downside risk and the potential for upside return. Other items to
consider may include:
• involvement and decisions made at the investee's inception;
• contractual arrangements such as call rights, put rights or liquidation rights established at the
investee's inception;
• circumstances in which the relevant activities occur - e.g. only when particular circumstances
arise or events occur (see 2.5A.140); and
• the investor's commitment to ensuring that the investee continues to operate as designed.
[IFRS 10.B51-B54]
EXAMPLE 7 - RELEVANT ACTIVITY IS MANAGING RECEIVABLES IN DEFAULT
2.5A.290.20 An investee is designed so that its only activity is to purchase receivables and
service them on a day-to-day basis. The only activity that can significantly affect the returns is
managing those receivables when default occurs. An investor may have the current ability to
direct this activity, because it is agreed in a separate agreement that it will purchase the
receivables if and when they default.
2.5A.290.30 In this situation, the terms of the agreement are integral to the overall
arrangement and the establishment of the investee. Therefore, the agreement would be
considered together with the founding documents of the investee when assessing power. In this
case, the investor would have power over the investee. [IFRS 10.B.Ex11]
2.5A.300 Evidence of practical ability to direct the relevant activities
2.5A.300.10 In some circumstances, it may be difficult to determine whether an investor's rights are sufficient to give it
power over an investee. In those circumstances, an investor considers any evidence that it has the practical ability to
direct the relevant activities. Examples of such circumstances are when:
Page 212 / 375

• the investor can appoint or approve the investee's key management personnel who have the
ability to direct the relevant activities; or
• the investor can direct the investee to enter into a significant transaction for the benefit of the
investor. [IFRS 10.B18]
2.5A.310 Special relationships
2.5A.310.10 In some situations, the nature of the relationship that the investor has with the investee may suggest that
the investor has more than a passive interest in the investee. This could indicate that the investor has other related rights
or provide evidence of existing power over the investee. [IFRS 10.B19]
2.5A.310.15 The following suggest that the investor has more than a passive interest in the investee and, in
combination with other rights, may indicate power:
• the investee's key management personnel who direct the relevant activities are current or
previous employees of the investor;
• the investee's operations are dependent on the investor - e.g. for funding, critical technology or
intellectual property; see 2.5A.180 for additional considerations for franchisors;
• a significant portion of the investee's activities either involve or are conducted on behalf of the
investor; and/or
• the investor's exposure to, or rights to, the returns from its involvement with the investee are
disproportionately greater than its voting rights. [IFRS 10.B19]
2.5A.310.20 Reputational risk is not an indicator of power in its own right. However, it may be a factor to consider
together with other facts and circumstances. It may create an incentive for the investor to secure its rights in the
investee, which may give it power over the investee. [IFRS 10.BC37-BC39]
2.5A.310.30 Employees and key management personnel (see 2.5A.310.15) are not defined in IFRS 10. As such, we
expect the definitions provided in IFRS 2 (see 4.5.750) and IAS 24 (see 5.5.40) to apply. [IFRS 2.A, IAS 24.9]
2.5A.320 Large exposure to variability in returns
2.5A.320.10 When assessing whether an investor controls an investee, the investor determines whether it is exposed
to, or has rights to, variable returns from its involvement with the investee (see 2.5A.330). A large exposure to variability
of returns is likely to mean that the investor has power over the investee; however, a large exposure to variability of
returns is not, on its own, determinative. [IFRS 10.B20]
Page 213 / 375

2.5A.330 STEP 2: EXPOSURE TO VARIABILITY IN RETURNS

2.5A.330.10 Returns vary as a result of the performance of an investee and can be only positive, only negative, or
either positive or negative. Sources of returns include:
• dividends or other economic benefits, such as interest from debt securities and changes in the
value of the investor's investment in the investee;
• remuneration for servicing an investee's assets or liabilities, fees and exposure to loss from
providing credit or liquidity support;
• tax benefits;
• residual interests in the investee's assets and liabilities on liquidation; and/or
• returns that are not available to other interest holders, such as the investor's ability to use the
investee's assets in combination with its own to achieve economies of scale, cost savings or
other synergies. [IFRS 10.15, B55-B57]
2.5A.330.20 For example, holding a bond with fixed interest payments could be a source of variable returns, because
the interest payments are subject to default risk and expose the investor to the credit risk of the bond's issuer. The
variability of the returns depends on the credit risk. [IFRS 10.B56]
2.5A.330.30 Although only one investor can control an investee, more than one investor can share in the returns of an
investee. [IFRS 10.16]
2.5A.330.40 In some cases, it may be challenging to distinguish between:
• returns from the investment in an investee that would be taken into account in the assessment
of control; and
• returns from ordinary business transactions with the investee that would not be taken into
account, when the terms of the transaction are established on an arm's length basis.
Page 214 / 375

2.5A.335 STEP 3: LINKAGE

2.5A.340 The link between power and returns
2.5A.340.10 To have control, in addition to power and exposure or rights to variable returns from its involvement with
the investee, an investor needs the ability to use its power over the investee to affect its returns. When the investor is an
agent, the linkage element is missing. It is not clear whether in practice linkage might be missing in any other
circumstances. [IFRS 10.17]
2.5A.340.20 The decision maker needs to assess whether it is acting as a principal or as an agent on behalf of other
investors when directing the activities of an investee.
• If it has the power to direct the activities of an entity that it manages to generate returns for
itself, then it is a principal.
• If it is engaged to act on behalf and for the benefit of another party or parties, then it is an
agent and does not control the investee when exercising its decision-making authority.
However, a decision maker is not an agent simply because other parties can benefit from the
decisions it makes. [IFRS 10.18, B58]
2.5A.340.30 We expect the principal-vs-agent guidance to be particularly relevant in the context of the funds sector
(see 2.5A.400). It may, however, apply to other cases. For example, it is relevant when, due to local laws, equity
interests in some investees in a country must be held by entity domiciled in the same country. In this case, a foreign
investor willing to invest in this country may enter into an agreement with the holding entity, whereby the local holding
entity would agree to act solely for the benefit and interest of, and on behalf of, the foreign investor. This holding entity
may be an agent of the foreign investor.
2.5A.340.40 The following diagram illustrates the steps that a decision maker follows when analysing whether it is
acting as a principal or an agent.
Page 215 / 375

2.5A.340.50 If a single party holds substantive rights to remove the decision maker without cause, then that party is the
principal and the decision maker is an agent. In all other circumstances, the decision maker considers the overall
relationship between itself and other parties, and all of the following factors to determine whether it is an agent:
• the scope of its decision-making authority over the investee;
• the rights held by other parties, including substantive removal rights not held by a single party;
• its remuneration and the level of linkage of remuneration with the investee's performance; and
• its exposure to variability of returns because of other interests that it holds in the investee.
[IFRS 10.B60-B61]
2.5A.340.60 Different weightings are applied to each of the factors depending on particular facts and circumstances.
[IFRS 10.B60-B61]
2.5A.340.70 The last two factors - i.e. remuneration and other interests held - may be considered in aggregate and
referred to as the decision maker's 'aggregate economic interest'. This is because if the level of remuneration/other
interests alone resulted in a principal conclusion, then the same conclusion would be reached when assessed in
aggregate; conversely, if the assessment did not result in a principal assessment on a stand-alone basis, then the
remuneration/other would still be required to be tested as part of a larger aggregate.
2.5A.340.80 The greater the magnitude of and variability of its economic interests, the more likely it is that the decision
maker is a principal. [IFRS 10.B68, B72(a)]
2.5A.350 Scope of decision-making authority

2.5A.350.10 When assessing the scope of its decision-making authority, the investor considers the following:
• the activities that are permitted according to the decision-making agreement(s) and specified
by law; and
• its level of discretion. [IFRS 10.B62]
2.5A.350.20 The investor considers the purpose and design of the investee as explained in 2.5A.80. If the investor was
involved in the design of the investee, then this may indicate that it had the opportunity and incentive to obtain power over
the investee. [IFRS 10.B63]
2.5A.350.30 We would expect the activities mentioned in 2.5A.350.10 to be relevant activities of the investee.
2.5A.360 Rights held by other parties

2.5A.360.10 When a single party holds substantive rights to remove the decision maker without cause, this is sufficient
to conclude that the decision maker is an agent. However, if more than one party needs to act together to remove the
decision maker, then this fact alone is not sufficient to conclude that the decision maker is an agent or that the removal
rights are not substantive. Such rights are considered in the overall evaluation of whether the decision maker is acting as
a principal. The more parties that need to agree to remove the decision maker, the less likely that the removal rights are
substantive. [IFRS 10.B64-B65]
Page 216 / 375

2.5A.360.15 For example, the decision maker may be removed without cause by a simple majority vote of other
investors. If there are three other investors (e.g. only two votes are needed to remove the decision maker), then the
removal rights are much more likely to be substantive than if there are 30,000 other investors (e.g. 15,001 votes are
needed to remove the decision maker). [IFRS 10.B64-B65]
2.5A.360.20 Rights that restrict the decision maker's discretion are considered in a similar manner to removal rights.
Consequently, if the decision maker needs to obtain approval from a small number of parties to make its decisions, then
generally it is an agent. [IFRS 10.B66]
2.5A.360.30 The greater the number of parties required to act together to exercise removal or similar rights, and the
greater the magnitude and variability associated with the decision maker's economic interests, the less weighting is
placed on this factor. [IFRS 10.B65]
2.5A.360.40 However, consideration of the rights held by other parties includes rights exercisable by the investee's
board of directors or other governing body and their effect on the decision-making authority (see 2.5A.170.50). For
example, when the board of directors is independent of the decision maker, it may in effect act as a central mechanism
through which investors act collectively. Such a mechanism is likely to be substantive and, if so, would overcome any
presumption that the rights of a large number of parties required to act together is not substantive. [IFRS 10.B23(b), B67]
2.5A.360.50 When assessing whether removal rights are substantive, the guidance in 2.5A.170 is considered.
Questions may arise in respect of removal rights that are exercisable for only a limited period of time. In assessing
whether the removal rights are substantive, an entity would need to consider the time period for which the rights are
exercisable - especially in respect of when relevant decisions are to be made. [IFRS 10.B66]
2.5A.370 Remuneration
2.5A.370.10 For the decision maker to be an agent, its remuneration needs to:
• be commensurate with the services provided; and
• include only terms, conditions or amounts customarily present in arrangements for similar
services and level of skill negotiated on an arm's length basis. [IFRS 10.B69]
2.5A.370.20 If the remuneration does not meet both of these two criteria, then the decision maker is not an agent. If
the remuneration meets these two criteria, then the decision maker can be, but is not necessarily, an agent. This is
because the other factors also would need to be considered. [IFRS 10.B70]
2.5A.370.30 There is a hierarchy between the requirements in the principal-vs-agent guidance: if a single party holds
substantive removal rights and can remove the decision maker without cause, then the decision maker is an agent. This is
the case even if its remuneration is not commensurate with that of other service providers, which would otherwise result
in a conclusion that the decision maker is not an agent. [IFRS 10.B65]
2.5A.380 Exposure to variability through other interests

2.5A.380.10 If the decision maker holds other interests in an investee, then this may indicate that it is a principal. Other
interests can be investments in the investee or guarantees provided in respect of the performance of the investee. [IFRS
10.B71]
2.5A.380.20 The decision maker considers whether its exposure to variability of returns is different from that of the
other investors, and if so, whether this might influence its actions. [IFRS 10.B72(b)]
2.5A.390 Relationship with other parties

2.5A.390.10 When assessing control over an investee, the investor considers the nature of its relationships with other
parties and whether those other parties act on the investor's behalf. This determination requires judgement in assessing
the consequence of how those parties interact with each other and with the investor. [IFRS 10.B4, B73]
2.5A.390.20 The investor treats the decision-making rights delegated to its agent as held by the investor directly. [IFRS
Page 217 / 375

10.B59]
2.5A.390.30 A contractual arrangement is not required in a principal-agent relationship. A party is a de facto agent if
the investor or those who control the investor have the ability to direct that party to act on the investor's behalf. [IFRS
10.B74]
2.5A.390.40 The following are examples of parties that, by the nature of their relationship, might act as de facto agents
for the investor:
• related parties of the investor;
• a party that received its interest in the investee as a contribution or loan from the investor;
• a party that has agreed not to sell, transfer or encumber its interest in the investee without the
investor's prior approval;
• a party that cannot finance its operations without subordinated support from the investor;
• a party for which a majority of the members of the governing body or key management
personnel is the same as that of the investor; and/or
• a party that has a close business relationship with the investor. [IFRS 10.B75]
EXAMPLE 8 - DE FACTO AGENT
2.5A.390.50 The voting interests in Company L, which is a listed entity, are as follows.
2.5A.390.60 The following additional points are relevant.

• No shareholder other than P, T and S has more than a 1% voting interest
in L.
• There is no contractual arrangement between P, T and S on how to vote
when decisions relating to L are taken. However, T and S have always
voted in the same way as P in the past.
• T and S both have significant business relationships with P.
• Voting rights are relevant when assessing which investor has power over
L.
2.5A.390.65 In this example, P should first consider whether T and S are acting as de facto
agents on behalf of P as far as the investment in L is concerned.
• If this is the case, then it would be as if P held a 45% voting interest in L,
and P should consider whether it has de facto control over L (see
2.5A.240).
• If P concludes that T and S are not de facto agents on behalf of P, then P
would still need to assess whether it has de facto control over L; however,
that assessment would be based on P's 35% voting rights rather than on
Page 218 / 375

45% voting rights.
2.5A.390.70 We understand that the guidance on de facto agents is not intended to have an impact on the assessment
of control for sub-holding entities in their stand-alone financial statements.
EXAMPLE 9 - SUB-CONSOLIDATION
2.5A.390.80 Company UP controls Company P, which controls Company S.
2.5A.390.90 There could be a question as to whether P could be viewed as acting de facto as

UP's agent when holding S's shares. This would lead to P not consolidating S in its own financial
statements.
2.5A.390.100 We understand, however, that the intent of the IASB is that, in the absence of
specific agreements, P would not be considered a de facto agent for UP for its investment in S.
This is because it is expected to primarily benefit from its investment in S and not to primarily act
for UP's benefit when holding S's shares.
2.5A.400 Application to investment funds

2.5A.400.10 KPMG's publication IFRS Practice Issues: Applying the consolidation model to fund managers provides a
more in-depth discussion of the application of IFRS 10 to fund managers than this chapter. This chapter summarises the
key points included in that publication, and expands the discussion in 2.5A.340-390 in the context of investment funds.
2.5A.400.20 Fund managers generally have power over the relevant activities of the funds that they manage through
their exercise of delegated power (see 2.5A.105), and exposure to variability in returns through incentive fees and/or co-
investment (see 2.5A.330). Therefore, the link between power and returns is usually key for fund managers in assessing
whether a fund manager has control over the fund. On the assumption that the fund manager has power and exposure to
variability, consolidation is then required only when the fund manager has the ability to use its power to affect its returns.
2.5A.400.30 Of the steps set out in 2.5A.340.40, it appears that the linkage analysis for fund managers will come down
to a combined assessment of just two indicators: aggregate economic interests and kick-out rights.
2.5A.400.40 This is because:
• single party kick-out rights are rarely present in the funds sector;
• a fund manager's remuneration is generally at market if there is sufficient investment from
independent investors;
• the scope of decision-making authority is not a distinguishing factor because the fund manager
has all of the discretion within the designed activities of the fund; and
Page 219 / 375

• as noted in 2.5A.340.70, remuneration and other interests do not need to be tested separately.
2.5A.400.50 The two indicators are required to be considered together. Therefore, the stronger the kick-out rights, the
more aggregate economic interest can be accepted while still being an agent. Conversely, the weaker the kick-out rights,
the less aggregate economic interest can be accepted while still being an agent.
2.5A.400.60 The chart below provides a way of visualising a general scheme for the result of combining different
strengths of each indicator.
• In the grey zone, the combination of strong kick-out rights and low aggregate economic interest
suggests that the fund manager is an agent.
• In the black zone, the combination of weak kick-out rights and high aggregate economic
interest suggests that the fund manager is a principal.
• In the marginal zone, the combination does not give a clear outcome.
2.5A.400.70 For those cases that fall into the marginal zone, the fund manager will need to consider certain other
aspects of these indicators to determine if it is an agent or a principal. The question of where the central, marginal zone
starts and finishes is not clear; there are no bright lines.
2.5A.400.80 The rest of this section summarises the key steps in the linkage analysis for a fund manager.
2.5A.410 Aggregate economic interest

2.5A.410.10 The first key indicator is the aggregate economic interest, comprising remuneration and other interest in
Page 220 / 375

aggregate. It appears that this amount is simply the sum of remuneration and other interests. [IFRS 10.B72(a)]
2.5A.410.20 IFRS 10 requires an evaluation of the magnitude of, and variability associated with, its economic interests
relative to the total variability of returns of the investee. This evaluation is made primarily on the basis of returns
expected from the activities of the investee but should not ignore the decision maker's maximum exposure to variability of
returns. [IFRS 10.B72]
2.5A.410.30 On this basis, it appears that the key measure is the 'variability of expected returns', for the following
reasons.
• It is a key element of the definition of returns in IFRS 10; the standard focuses on returns as
being those that have the potential to vary as a result of the investee's performance.
• It is identified as a headline factor to assess when performing the agent-vs-principal
assessment - e.g. the decision maker's exposure to variability of returns.
• All of the IFRS 10 examples, except one, refer exclusively to variability; magnitude, however, is
mentioned in only one example. Furthermore, from the facts given in the examples, variability
is the only measure that could be calculated. [IFRS 10.7(b), 15, B60, B71-B72, B.Ex13-16]
2.5A.410.40 It appears that variability is the marginal increase or decrease in the fund manager's returns relative to a
marginal increase or decrease in the fund's returns. This is because IFRS 10 requires an assessment of the investor's
variability associated with its economic interests relative to the total variability of returns of the investee. This is asking:
how much, relatively, does the fund manager's total income vary as fund performance varies? [IFRS 10.B72]
EXAMPLE 10 - VARIABILITY OF A FUND MANAGER'S INTEREST
2.5A.410.50 Investment manager M has the following interests in a fund:

• 1% management fee calculated on net asset value (NAV); plus
• a performance fee paying 20% of additional profits after management
fees, once an 8% (profits after management fee) hurdle is reached; plus
• a 10% investment.
2.5A.410.60 The variability at any level of return at which a performance fee is due can be
calculated as follows.
2.5A.410.70 The table illustrates that for every 1 more or less of fund performance, the fund
Page 221 / 375

manager receives 0.287 more or less. Variability is therefore 28.7%. The calculation can be done
in a short-cut way as follows: 1% + 20% x 99% + 10% x (80% x 99%) = 28.7%.
2.5A.410.80 There may be different rates of remuneration at different levels of performance; usually there is a hurdle
return above which a performance fee is paid. It appears that variability should be measured at the expected level of fund
returns and the level should be at a level that includes a performance fee for the following reasons.
• Performance fees are set with the intention of being achievable.
• The fees incentivise the fund manager to behave so as to obtain this return.
• IFRS 10 examples ignore the hurdle.
2.5A.410.90 Focusing on the level at which performance fees arise is also a practical approach. The calculation is
simple and is not sensitive to the precise level of performance above the hurdle, assuming that the fee has only one
rate/hurdle. Once the fee has become payable, the fund manager's share of further changes in the fund performance is
always the same. If there is more than one performance fee level, then the decision, as to which performance fee band
to build into the quantitative measure, will need to be more precise - i.e. determine which hurdle level is expected and
build that into the initial calculation. The existence of higher bands may still need to be taken into account later as a
qualitative feature of the aggregate economic interest (see 2.5A.440).
2.5A.420 Strength of kick-out rights

2.5A.420.10 The second key indicator is kick-out rights, which are assessed on a sliding scale of strength.
2.5A.420.20 It appears that the key attribute of the strength of kick-out rights is the number of investors who need to
act together to exercise such a right. The smaller the number of investors who must act together, the greater the
weighting placed on their kick-out rights and the lower the likelihood that the fund manager is a principal.
2.5A.420.30 It also appears that rights exercisable by an independent governing body (such as the board of directors)
are considered at the board level, and are therefore implied to be very strong. This is because a board would generally
comprise only a few members; once the investors' rights have been transferred to the board members, it is the number
of board members that matters. For example, there may be hundreds of investors in a fund but only a very few directors;
if those directors have the ability to remove the fund manager without cause, then the kick-out right strength would be
assessed at the board level. Naturally, the board needs to be independent, and there should be no other barriers to
exercise that would weaken the force of that right. [IFRS 10.B23(b), B65, BC139]
2.5A.420.40 Some kick-out rights may be exercisable with cause. In that case, kick-out rights are given zero weight in
the principal-agent analysis. [IFRS 10.B65, B72, B.Ex14A-Ex14B]
2.5A.420.50 There may be barriers to exercising kick-out rights, which affect their strength, such as:
• financial penalties;
• conditions narrowly limiting the timing of exercise;
• the absence of a mechanism allowing exercise; or
• the inability to obtain the information necessary for exercise. [IFRS 10.B23-B24]
2.5A.420.60 However, if there are no barriers, then there is clearly no effect at all on the strength.
2.5A.420.70 It appears that the lack of an annual general meeting (AGM) may be seen as weakening the investors'
practical ability to exercise kick-out rights, unless there is another mechanism in place.
2.5A.420.80 Private equity investment funds might have no AGM, but usually have alternative mechanisms that give
investors the practical ability to exercise kick-out rights. For example:
• there may be quarterly calls and annual meetings at which the investors are provided with
information;
• an investor will usually necessarily know who the other investors are - e.g. they will be named
Page 222 / 375

in the partnership documents available to all investors; or

• there could be a right to call an extraordinary meeting - often requiring just five percent
investment - to vote on removal. The ability to call such a meeting and exercise a right may
even be stronger than awaiting an AGM in order to exercise a right.
2.5A.420.90 As a result, the lack of an annual voting opportunity does not necessarily require zero weight to be
accorded to kick-out rights.
2.5A.420.100 Notice periods can also represent barriers to exercising kick-out rights. It appears that a notice period
covering the whole of the life of a limited life fund (or penalties equivalent to total fees for the life of the fund) would
result in zero weighting of the kick-out rights; however, other cases may not be so clear-cut.
2.5A.420.110 For example, a typical arrangement in the private equity sector is to give six months' notice plus payment
of a further six months' fees - in effect a combined one-year notice/fees period. However, at the outset the fund life will
be five or seven years. It appears that the effect on the strength of the kick-out right is material, but not so great that the
kick-out right has no weight.
2.5A.420.120 Questions may arise as to whether rights to terminate a fund are evaluated in the same way as removal
rights. Although this may be the case in certain situations, the decision maker would need to consider:
• the specific facts and circumstances under which such rights are exercisable; and
• the purpose and design of those rights. [IFRS 10.B66]
2.5A.430 Combining the two indicators

2.5A.430.10 When combining the two indicators - aggregate economic interest and kick-out rights - it may be
appropriate to use a matrix, grouping together categories of kick-out right strength. For each category, the fund manager
could identify a level of aggregate economic interest for which the entity is clearly an agent and another for which it is
clearly a principal. A marginal zone would then appear between these points (see the diagram in 2.5A.400.60).
2.5A.430.20 The standard as well as the IASB's related Effect Analysis (republished in January 2012) provides
examples of combinations of kick-out rights and aggregate economic interest.
Example Variability Kick-out rights Agent/Principal
13 11% Zero Agent
14A 22% Zero Agent
14B 37% Zero Principal
14C 37% Without-cause Agent
15 42% Widely dispersed Principal
Effect Analysis 45% Zero Principal
2.5A.430.30 When no kick-out rights exist, and deriving returns from the IFRS 10 examples, the changeover from agent
to principal occurs between approximately 22 and 37 percent (the marginal zone between Examples 14A and 14B).
2.5A.430.40 When stronger kick-out rights exist, a higher variability might still support an agent outcome. For instance,
Example 14C has without-cause, board-level, kick-out rights (a very strong case) and can withstand 37 percent aggregate
economic interest, while still being deemed an agent. In Example 14B, which has the same variability but no kick-out
rights, the manager is deemed a principal.
2.5A.440 Analysing marginal cases
Page 223 / 375

2.5A.440.10 If a combined assessment of the key indicators falls into the marginal zone (see the diagram in
2.5A.400.60), then other features of aggregate economic interest and kick-out rights need to be taken into account.
2.5A.440.20 The other features to consider include expected magnitude, a second tier of performance fee, the
proportion of investors required to vote together and the nature of variability compared with that of other investors.
2.5A.440.30 Magnitude appears to be the fund manager's total return as a percentage of the fund's total return
measured at the expected performance level is a feature of the aggregate economic interest that can help decide a
marginal case. This is because it has to be different from variability, yet still be a measure of fund manager returns
relative to fund returns - i.e. while variability is the marginal share of return, magnitude is the absolute share of return. If
magnitude is low, then it may tip the scales for a marginal case to be an agent, and vice versa.
2.5A.440.40 It appears that the possibility of an annual, non-cumulative fee not being due would be taken into account
in deciding marginal cases if an investment manager's performance fee is determined and paid based on annual
performance with no clawback in subsequent years. If a fee has been designed to be due only occasionally, then this
may, in marginal cases, weight the scales towards being an agent.
Page 224 / 375

2.5A.450 SUBSIDIARIES' ACCOUNTING PERIODS AND

POLICIES
2.5A.450.10 See 2.5.290 for a discussion of a subsidiary's accounting periods and policies, the guidance for which has
not been changed by IFRS 10. [IFRS 10.19, B87, B92-B93]
Page 225 / 375

2.5A.460 NON-CONTROLLING INTERESTS

2.5A.460.10 See 2.5.300-360 for a discussion of NCI, the accounting for which has not been changed by IFRS 10. [IFRS
10.22, B89-B91, B94-B95]
Page 226 / 375

2.5A.470 INTRA-GROUP TRANSACTIONS

2.5A.470.10 See 2.5.370 for a discussion of intra-group transactions, the accounting for which has not been changed
by IFRS 10. [IFRS 10.B86]
2.5A.470.20 In addition, IFRS 10 emphasises that the cash flows from the parent are combined with those of its
subsidiaries and intra-group cash flows are eliminated. [IFRS 10.B86]
Page 227 / 375

2.5A.480 CHANGES IN OWNERSHIP INTERESTS WHILE

RETAINING CONTROL
2.5A.480.10 See 2.5.380-485 for a discussion of changes in ownership interests while retaining control, the accounting
for which has not been changed by IFRS 10. [IFRS 10.23, B96]
Page 228 / 375

2.5A.490 LOSS OF CONTROL

2.5A.490.10 See 2.5.490-520 and 530-535 for a discussion of the loss of control, the accounting for which has not been
changed by IFRS 10. [IFRS 10.25, B97-B99]
2.5A.490.20 Sometimes a parent may contribute a subsidiary to an associate or a joint venture. The question arises as
to how the gain or loss should be calculated, because there appears to be some ambiguity in IFRS in this regard. IFRS 10
requires that when control of a subsidiary is lost, any resulting gain or loss is recognised in full in profit or loss (see
2.5.490) - i.e. a continuing interest in the assets and liabilities contributed is not eliminated. However, IAS 28 requires an
elimination to be made in respect of a continuing interest in the assets and liabilities contributed. [IFRS 10.25, IAS 28.28,
30]
2.5A.490.30 In our view, this conflict means that the entity should choose an accounting policy, to be applied
consistently, to apply either of the following approaches.
• The IFRS 10 approach. Under this approach, no elimination of the gain or loss is performed
and the fair value of the retained investment is its deemed cost for the purpose of subsequent
accounting.
• The IAS 28 approach. Under this approach, the gain or loss is eliminated to the extent of the
retained interest in the former subsidiary.
2.5A.490.40 See 3.5.470 and 600 for further discussion, and 2.5.490.60 for a discussion of the allocation of reserves.
2.5A.490.50 The standard contemplates cases in which control of a subsidiary is lost and the subsidiary becomes a
joint venture or an associate. However, it does not contemplate the parent losing control of an entity and obtaining joint
control of this entity, when the joint arrangement is a joint operation rather than a joint venture (see 3.6A.70). In this
case, it is not clear whether there should be full gain recognition, or whether the gain should be based on the share of
net assets derecognised. [IFRS 10.25(b)]
Page 229 / 375

2.5A.500 DISCLOSURES
2.5A.500.10 IFRS 12 requires disclosure of the significant judgements and assumptions that an entity has made in
determining the nature of its interest in another entity or arrangement. It also contains extensive disclosure requirements
for subsidiaries and unconsolidated structured entities. This commentary only focuses on areas of uncertainty in practice.
[IFRS 12.7]
2.5A.500.20 The objective of IFRS 12 is to require disclosure that helps users of financial statements evaluate:
• the nature of, and risks associated with, an entity's interests in other entities; and
• the effects of those interests on the entity's financial position, financial performance and cash
flows. [IFRS 12.1]
2.5A.500.30 In this context, interests in other entities are contractual and non-contractual involvement that exposes an
entity to variability of returns from the performance of the other entity. These interests may, for example, take the form
of equity or debt instruments; however, they can also comprise other forms of involvement, such as the provision of
funding, liquidity support, credit enhancement and/or guarantees. However, an interest in another entity does not exist
solely as a result of a typical customer-supplier relationship. [IFRS 12.A]
2.5A.500.40 Interests in another entity are the basis for many of the disclosures. Understanding the purpose and design
of the other entity (see 2.5A.80) may assist in identifying such interests. The entity considers the risks that the other
entity was designed to create, and the risks that the other entity was designed to pass on to the reporting entity and other
parties. [IFRS 12.B7]
2.5A.500.50 The application guidance on interests in other entities is not comprehensive, and applying the standard
may require significant judgement to evaluate whether the disclosure objective has been achieved. This includes
assessing the level of disclosure that is meaningful to users of the financial statements. Significant judgement in
assessing whether an entity has an interest in a structured entity may also be required. We expect that the main
questions in the analysis are what creates and what absorbs variability, and whether that variability is driven by the other
entity's performance. These are concepts that exist in US GAAP, but it is unclear to what extent the IASB expects entities
to consider the relevant US GAAP guidance.
2.5A.510 Aggregation
2.5A.510.10 The disclosures may be aggregated for interests in similar entities, with the method of aggregation being
disclosed. A quantitative and qualitative analysis, taking into account the different risk and return characteristics of each
entity, is made in order to determine the aggregation level. As a minimum, information is given for subsidiaries, joint
ventures, joint operations, associates and unconsolidated structured entities. Further sub-aggregation can be performed if
doing so is consistent with the objectives of the standard. [IFRS 12.4, B2-B6]
2.5A.520 Structured entities

2.5A.520.10 A structured entity is one that has been designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity. An example of a structured entity may be when voting rights relate to
administrative tasks only, and the relevant activities are directed by means of contractual arrangements. [IFRS 12.A]
2.5A.520.20 Structured entities often have some or all of the following characteristics:
• restricted activities;
• a narrow and well-defined objective;
• insufficient equity to permit it to finance its activities without subordinated financial support; or
Page 230 / 375

• financing in the form of multiple contractually linked instruments to investors that create
concentrations of credit or other risks (tranches). [IFRS 12.B22]
2.5A.520.30 Entities generally need to:
• understand what a structured entity is in the context of their operations;
• apply judgement in assessing whether they are 'involved' with a structured entity; and
• assess the level of disclosure that they believe is meaningful to users of the financial
statements.
2.5A.520.40 IFRS 12 states that structured entities are not likely to differ significantly from special purpose entities
(SPEs) within the scope of SIC-12. However, the description of structured entities includes consideration of the sufficiency
of an entity's equity to support its operations, this concept is similar to a variable interest entity in US GAAP, and is
significantly different from an SPE. Therefore, there may be structured entities that are not described as SPEs under SIC-
12. [IFRS 12.B22, BC82]
2.5A.520.50 Even though IFRS 10 does not refer to structured entities, it includes the definition in a description of why
it is important to consider the purpose and design of an investee in assessing control (see 2.5A.150.40). This appears to
be an acknowledgement that interests in structured entities are a key focus of the consolidation model, even if IFRS 10
deliberately avoids making a clear distinction between different types of investees. As a result, differences between the
application of IFRS 10 and IFRS 12 could arise in practice. [IFRS 10.B8]
2.5A.530 Consolidated structured entities

2.5A.530.10 Consolidated structured entities disclose, if material, the terms of any contractual arrangements that could
require the parent or its subsidiaries to provide financial support. This explicitly includes events or circumstances that
could expose the reporting entity to loss. [IFRS 12.14]
2.5A.530.20 If a group entity has provided financial or other support - e.g. purchasing assets of or instruments issued
by the structured entity without a contractual obligation to do so - then the type of, and the reasons for, the support are
disclosed. An entity also discloses any current intentions to provide financial or other support to a consolidated structured
entity, including assistance in obtaining financial support. [IFRS 12.15, 17]
2.5A.530.30 The term 'support' is used broadly in IFRS 12; therefore, entities need to analyse the kinds of support that
they provide and may need to establish a monitoring system to obtain the information needed to comply with the
disclosure requirements.
2.5A.540 Interests in unconsolidated structured entities

2.5A.540.10 If an entity holds no interest in a structured entity but has sponsored the entity, then it discloses:
• its method for determining which structured entities it has sponsored;
• income from those structured entities in the reporting period, including a description of the
types of income; and
• the carrying amount at the time of transfer of all assets transferred to those structured entities
during the reporting period. [IFRS 12.27-28]
2.5A.540.20 IFRS 12 does not define what 'financial support' and 'sponsorship' mean. As a consequence, IFRS 12 could
broaden the transactions and relationships to which the disclosures may apply. This is particularly the case for those who
sponsor, or perhaps even transact with, but do not consolidate structured entities.
Page 231 / 375

2.5A.550 TRANSITIONAL ISSUES

2.5A.550.10 IFRS 10 contains a general principle of retrospective application on adoption (annual periods beginning on
or after 1 January 2013). [IFRS 10.C1-C2]
2.5A.550.20 Depending on the extent of comparative information provided in the financial statements, IFRS 10 includes
a simplified transition and provides additional relief from disclosures.
One year of comparatives provided (required Additional comparatives provided

by IFRS)
Some relief from the restatement of comparatives More extensive relief from the restatement of
(see 2.5A.550.30 and 560). comparatives (see 2.5A.550.30, 560 and 570.10).
Some relief from the disclosures in respect of a More extensive relief from the disclosures in respect
change in accounting policy (see 2.5A.570.20). of a change in accounting policy (see 2.5A.570.20-30).
Relief from the IFRS 12 disclosures in respect of Some relief from all IFRS 12 disclosures (see
unconsolidated structured entities (see 2.5A.600). 2.5A.600).
2.5A.550.30 The investor tests whether the consolidation conclusion has changed in respect of its investees at 'the date
of initial application' of IFRS 10, which is the beginning of the annual period in which the standard is applied for the first
time - i.e. 1 January 2013 for an entity with a calendar year end that does not early adopt the standard. This relief avoids
the need to consolidate and then deconsolidate a controlling interest that was disposed of in the comparative period, for
example. [IFRS 10.C2B]
2.5A.560 Consolidation conclusion unchanged

2.5A.560.10 When there is no change in the consolidation conclusion between IAS 27/SIC-12 and IFRS 10 for an
investee, the investor is not required to adjust the accounting for its involvement with the investee. [IFRS 10.C3]
2.5A.560.20 The transitional requirements appear to permit, but not require, retrospective application when the
consolidation conclusion is unchanged on the initial application of IFRS 10. This is relevant when the date on which control
is obtained differs between IAS 27/SIC-12 and IFRS 10.
2.5A.570 Comparative information

2.5A.570.10 When the consolidation conclusion changes, the restatement of comparatives is limited to the immediately
preceding period. Entities that provide comparatives for more than one period have the option of leaving additional
comparative periods unchanged. [IFRS 10.C4-C5]
2.5A.570.20 IAS 8 requires specific disclosures when an entity changes an accounting policy as a result of the initial
application of a new IFRS, most notably the effect of the change - these disclosures relate to both the comparative period
(s) and the current period (to the extent practicable). The disclosures in respect of the current period can be onerous
because an entity is required to apply the old and the new policy in the current period in order to collect the data
necessary for the disclosure. [IAS 8.28(f)]
2.5A.570.30 However, the IFRS 10 transition amends the general disclosure requirements by requiring the quantitative
disclosures of IAS 8 only for the immediately preceding period. Even if an entity restates comparatives for an additional
period, the IAS 8 disclosures in respect of that additional period are voluntary. [IFRS 10.C2A]
2.5A.570.40 The following diagram illustrates the approach for an entity with a 31 December 2013 year end that
Page 232 / 375

presents comparative information for 2012 (as required by IFRS) and, in addition, voluntarily presents comparative
information for 2011.
2.5A.570.50 Assuming that the entity applies IFRS 10 retrospectively as of 1 January 2012, and that the impact of the
change in accounting policy is material, it will present a third statement of financial position as at that date (see 2.1.35).
[IFRS 10.BC199C]
2.5A.570.60 The above diagram assumes that the restatement of comparatives is practical. If restatement is
impracticable, then additional relief is provided (see 2.5A.580.20 and 590.20).
2.5A.580 Consolidation on transition

2.5A.580.10 An entity applies IFRS 3 when an investee is consolidated for the first time on transition, even if the
investee is not a business. Depending on the date that control was obtained, an entity can choose which version of the
standards to apply. [IFRS 10.C4B-C4C]
Control obtained…
…Before effective date of IFRS 3 (2008)/IAS 27 …After effective date of IFRS 3 (2008)/IAS 27
(2008) … (2008)
• Apply IFRS 3 (2008) or IFRS 3 (2004). • ..After effective date of IFRS 3 (2008)
• If relevant, apply IFRS 10 or IAS 27 • If relevant, apply IFRS 10.
(2003) up to the effective date of IAS
27 (2008) and then apply IFRS 10
from that date.
Notes
IFRS 3 (2008) was effective for business combinations in annual periods beginning on or after 1 July 2009.
IAS 27 (2008) was effective for annual periods beginning on or after 1 July 2009.
2.5A.580.20 The following table highlights the steps that are followed when an investee is consolidated for the first
time. [IFRS 10.C4-C4A]
Page 233 / 375

EXAMPLE 11 - CONSOLIDATION ON TRANSITION
2.5A.580.30 Parent P has an involvement in Investee S (a business), which was not

consolidated under IAS 27. P has a 31 December 2013 year end and presents comparative
information for 2012 (as required by IFRS) and, in addition, voluntarily presents comparative
information for 2011. As at 1 January 2013, the date of initial application of IFRS 10, P concludes
that S should be consolidated.
2.5A.580.40 P follows these steps.
1) It determines that if IFRS 10 had been effective, then it would have
obtained control of S on 16 May 2007.
2) P chooses to apply IFRS 3 (2008) (see 2.5A.580.10). P measures S's
assets, liabilities and NCI according to IFRS 3 (2008) and determines
goodwill as of 16 May 2007.
3) P rolls these values forward to determine the carrying amounts of S's
assets, liabilities and NCI as of 1 January 2012, as if S had been
consolidated since 16 May 2007.
4) The difference between the newly determined carrying amounts at 1
January 2012 and the existing carrying amount of the investment in S at 1
January 2012 is recognised in equity at the beginning of 2012. [IFRS 10.C4
(a), C4B]
2.5A.580.50 P chooses not to make changes to the 2011 comparatives, and instead discloses
the lack of comparability with 2012 and 2013. [IFRS 10.C4(a), C6B]
2.5A.590 Deconsolidation on transition

2.5A.590.10 An entity applies IFRS 10 when an investee is deconsolidated on transition, regardless of the date that
control was lost. [IFRS 10.C5]
2.5A.590.20 The following diagram highlights the steps that are followed when an investee is consolidated for the first
time. [IFRS 10.C5-C5A]
Page 234 / 375

EXAMPLE 12 - DECONSOLIDATION ON TRANSITION
2.5A.590.30 Parent P has an involvement in Investee D, which was consolidated under IAS
27/SIC-12. P has a 31 December 2013 year end and presents comparative information for 2012
(as required by IFRS) and, in addition, voluntarily presents comparative information for 2011. As
at 1 January 2013, the date of initial application of IFRS 10, P concludes that S should be
deconsolidated.
2.5A.590.40 P follows these steps.
1) It determines that if IFRS 10 had been effective, then it would have lost
control of D on 1 July 2009.
2) P measures its interest in D as of 1 July 2009 in accordance with IFRS 10.
3) Next, P rolls that value forward to 1 January 2012 in accordance with the
relevant IFRS - e.g. IFRS 9.
4) The difference between the newly determined carrying amount of the
investment in S at 1 January 2012 and the existing consolidated carrying
amounts at 1 January 2012 is recognised in equity at that date. [IFRS
10.C5]
2.5A.590.50 P chooses not to make changes to the 2011 comparatives, and instead discloses
the lack of comparability with 2012 and 2013. [IFRS 10.C6B]
2.5A.600 Adoption of IFRS 12

2.5A.600.10 Subject to the exception in 2.5A.600.20, the restatement of comparatives in respect of the disclosures
required by IFRS 12 is limited to the immediately preceding period - i.e. from 1 January 2012 for an entity with a calendar
year-end that does not early adopt the standards. Entities that provide comparatives for more than one period have the
option of leaving additional comparative periods unchanged. [IFRS 12.C2A]
2.5A.600.20 In addition, the disclosures in respect of interests in unconsolidated structured entities (see 2.5A.540) can
be made from the date of initial application of IFRS 10 and IFRS 12 - i.e. from 1 January 2013 for an entity with a
calendar year-end that does not early adopt the standards. [IFRS 12.C2B]
Page 235 / 375

Page 236 / 375

2.5A.610 FUTURE DEVELOPMENTS

2.5A.610.10 In August 2011, the IASB published Exposure Draft ED/2011/4 Investment Entities. The ED proposed that
investment entities (as defined) measure their investments in controlled entities at fair value through profit or loss in
accordance with IFRS 9 or IAS 39, rather than consolidate those investments. The ED set out criteria to qualify as an
investment entity, based on the nature of the entity's activities, the nature of its investors and their interests in the entity,
and the entity's management of its investments. The consolidation exception would not be carried through to the level of
an investment entity's parent that is not an investment entity itself.
Page 237 / 375

2.6 Business combinations

(IFRS 3)
Scope • Business combinations are accounted for under the acquisition

method, with limited exceptions. [2.6.10]
Identifying a • A business combination is a transaction or other event in which an

business acquirer obtains control of one or more businesses. [2.6.20.10]
combination
Identifying the • The acquirer in a business combination is the combining entity that
acquirer obtains control of the other combining business or businesses.
[2.6.60.10]
Determining the • The acquisition date is the date on which the acquirer obtains
acquisition date control of the acquiree. [2.6.180.10]
Consideration • Consideration transferred by the acquirer, which is generally

transferred measured at fair value at the acquisition date, may include assets
transferred, liabilities incurred by the acquirer to the previous
owners of the acquiree and equity interests issued by the acquirer.
[2.6.290.10]
Determining what • Any items that are not part of the business combination transaction
is part of the are accounted for outside of the acquisition accounting. [2.6.340.15]
business
combination
Identifiable • The identifiable assets acquired and the liabilities assumed are
assets acquired recognised separately from goodwill at the acquisition date if they
and liabilities meet the definition of assets and liabilities and are exchanged as
assumed part of the business combination. They are measured at the
acquisition date at their fair values, with limited exceptions.
[2.6.570.10]
Measurement of • 'Ordinary' non-controlling interests (NCI) are measured at fair value,

NCI or at their proportionate interest in the net assets of the acquiree.
[2.6.844.10]
• 'Other' NCI are generally measured at fair value. [2.6.847.10]
Goodwill or a gain • Goodwill is measured as a residual and is recognised as an asset.

on bargain When the residual is a deficit (gain on a bargain purchase), it is
purchase recognised in profit or loss after re-assessing the values used in the
acquisition accounting. [2.6.900.10]
Subsequent • Adjustments to the acquisition accounting during the 'measurement

measurement and period' reflect additional information about facts and circumstances
Page 238 / 375

accounting that existed at the acquisition date. [2.6.920.20]

• In general, items recognised in the acquisition accounting are
measured and accounted for in accordance with the relevant IFRS
subsequent to the business combination. [2.6.970]

beginning on 1 January 2012. The requirements related to this topic are derived from IFRS 3 Business Combinations.
text. The forthcoming requirements related to this topic are derived from the following.
after 1 January 2013. A brief outline of the impact of IFRS 10 on this topic is given in 2.6.65. The
• IFRS 13 Fair Value Measurement, which is effective for annual periods beginning on or after 1
January 2013. A brief outline of the impact of IFRS 13 on this topic is given in 2.6.335, 605, 1023
and 1135. The requirements of IFRS 13 are discussed in chapter 2.4A.
Page 239 / 375

2.6.10 SCOPE
2.6.10.10 IFRS 3 does not apply to the formation of a joint venture; the acquisition of an asset (group of assets) that does
not meet the definition of a business; or a combination of entities or businesses under common control. [IFRS 3.2]
2.6.10.20 Transactions that give rise to the formation of a joint venture are outside the scope of IFRS 3 because they do
not meet the definition of a business combination - i.e. none of the participants obtains control over the joint venture.
However, IFRS 3 is applied to a business combination entered into by a joint venture after its formation.
2.6.10.30 If an entity acquires an asset or a group of assets (including any liabilities assumed) that does not constitute a
business, then the transaction is outside the scope of IFRS 3 because it cannot meet the definition of a business
combination. Such transactions are accounted for as asset acquisitions in which the cost of acquisition is allocated between
the individual identifiable assets and liabilities in the group based on their relative fair values at the acquisition date. See
3.13.667 for a discussion of the acquisition of tax losses other than in a business combination. [IFRS 3.2(b)]
2.6.10.40 A business combination in which all of the combining entities or businesses are ultimately controlled by the same
party or parties both before and after the combination, and that control is not transitory, is outside the scope of IFRS 3. See
chapter 5.13 for a detailed discussion of common control transactions.
Page 240 / 375

2.6.20 IDENTIFYING A BUSINESS COMBINATION

2.6.20.10 A 'business combination' is a transaction or other event in which an acquirer obtains control of one or more
businesses. An acquirer may obtain control in a number of ways including, for example, by transferring cash or other
assets, incurring liabilities, issuing equity instruments or without transferring consideration. The structure of a transaction or
event does not affect the determination of whether it is a business combination; whether an acquirer obtains control of one
or more businesses is the determining factor. [IFRS 3.B5]
2.6.20.20 A 'business' is an integrated set of activities and assets that is capable of being conducted and managed to
provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other
economic benefits. A business generally consists of inputs, processes applied to those inputs and the ability to create
outputs. [IFRS 3.A, B7]
2.6.20.30 For a transaction or event to be a business combination, the activities and assets over which the acquirer has
obtained control must constitute a business.
2.6.30 Inputs, processes and outputs

2.6.30.10 For an integrated set of activities and assets to be considered a business, the set needs to contain both inputs
and processes. Outputs are not required to qualify as a business as long as there is the ability to create outputs. If the
acquired set includes only inputs, then it is accounted for as an asset acquisition rather than as a business combination (see
2.6.10.30). The key terms are defined as follows.
DESCRIPTION EXAMPLES
Inputs Economic resources that create (or have Non-current assets (including intangible
the ability to create) outputs when one or assets or rights to use non-current assets),
more processes are applied to them. intellectual property, the ability to obtain
access to necessary materials or rights,
and employees.
Processes Systems, standards, protocols, conventions Strategic management processes,

or rules that create (or have the ability to operational processes and resource
create) outputs when they are applied to management processes. These processes
inputs. typically are documented, but an organised
workforce with the necessary skills and
experience following rules and conventions
may provide the necessary processes that
are capable of being applied to inputs to
create outputs. Accounting, billing, payroll
and other administrative systems typically
are not processes used to create outputs.
Outputs The result of inputs and processes applied Goods and services.
to those inputs that provide, or have the
ability to provide, a return in the form of
economic benefits.
2.6.30.20 The acquisition of all of the inputs and processes used by the seller in operating a business is not necessary for
the activities and assets acquired to meet the definition of a business. What is important is that a market participant (see
2.6.1040.60-80 in the context of fair value) would be capable of producing outputs by integrating what was acquired with
Page 241 / 375

either its own inputs and processes or with inputs and processes that it could obtain. Therefore, it is not relevant whether
the seller operated the set as a business or whether the acquirer intends to operate it as a business. [IFRS 3.B8, B11]
2.6.30.30 In our view, a significant characteristic of a business is that the underlying activities and assets are integrated. A
group of assets without connecting activities is unlikely to represent a business.
2.6.30.40 If the acquiree has employees and the related employment contracts are transferred to the acquirer, then this
may indicate that a business has been acquired. However, in our view a group of assets acquired could still be a business
even if some (or all) of the staff employed formerly by the acquiree are replaced by the acquirer's own staff; and those
staff will carry out the acquiree's existing activities necessary to generate economic benefits. Not taking over all of the
employees might be a major part of the synergies that the acquirer is seeking to achieve by the acquisition. The acquirer's
decision not to retain all employees does not mean that the acquired activities and assets do not comprise a business.
2.6.30.50 If some of the acquiree's processes and activities were outsourced before the acquisition and the related
contracts are taken over by the acquirer, then this could indicate that the processes and activities necessary to create
outputs are in place, and therefore that the group of assets acquired is a business. Conversely, if none of the processes or
activities are in place at the acquisition date, but instead would be designed and established by a market participant (or a
market participant would already have similar processes), then this could indicate that what was acquired is not a business.
2.6.30.60 The exclusion of some components of a business does not preclude classification of an acquisition as a business
combination if a market participant could operate the remaining activities and assets as a business. However, judgement is
required in making this determination. [IFRS 3.B8]
EXAMPLE 1A - IDENTIFYING A BUSINESS - ADMINISTRATIVE PROCESSES EXCLUDED
2.6.30.70 Company P owns and operates restaurant groups in various metropolitan areas.
• P acquires from Company S a group of 10 restaurants located in a major
city.
• The acquired group of assets includes land, buildings, leased assets and
leasehold improvements, equipment, and the rights to the trade name used
by the restaurant group.
• P also offers employment to the restaurants’ employees, including
managementlevel employees, service staff and chefs.
• P acquires S's procurement system used to purchase the food, drinks and
other supplies necessary to operate the restaurants.
• P plans to integrate the 10 restaurants into its existing accounting and
human resource systems.
2.6.30.80 The elements in the acquired set include the following.
Page 242 / 375

2.6.30.90 The acquired set of restaurants is a business since it contains all of the inputs and
processes necessary for it to be capable of creating outputs to provide a return to P. While the
administrative systems (accounting and human resources) of S are not acquired by P, the acquired
restaurants will be integrated into P's existing accounting and human resources systems. Because
the acquired group of assets is a business, the acquisition is accounted for as a business
combination.
EXAMPLE 1B - IDENTIFYING A BUSINESS - PROCUREMENT SYSTEM EXCLUDED
2.6.30.100 Assume the same facts as in Example 1A except that P does not acquire S's
procurement system. The elements in the acquired set include the following.
2.6.30.110 We believe that the acquired set of restaurants is a business. This is notwithstanding
the fact that it does not contain all of the inputs and processes necessary for it to be capable of
creating outputs to provide a return to P because S's procurement system was not acquired.
2.6.30.112 The acquired activities and assets do not need to be self-sustaining in order to be a
business. The fact that some elements of a business are not taken over does not mean that what is
acquired is not a business. A market participant could integrate the procurement needs of the
acquired restaurants into its own procurement process. In fact, not taking over the procurement
system of the acquiree may be a part of the synergies that a market participant would intend to
obtain by entering into the business combination.
2.6.30.113 As the acquired group of assets is a business, the acquisition is accounted for as a
business combination.
EXAMPLE 1C - IDENTIFYING A BUSINESS - NO PROCESS ACQUIRED
2.6.30.120 Assume the same facts as in Example 1A except that P acquires only the land,
buildings, leased assets and leasehold improvements, and equipment. S had closed the restaurants
comprising the acquired set for a significant period of time before the acquisition by P. P does not
acquire employees, the rights to the trade name or the processes from S. The elements in the
acquired set include the following.
Page 243 / 375

2.6.30.130 We believe that the acquired set of restaurants is not a business. A business consists
of inputs and processes applied to those inputs that have the ability to create outputs. In this case,
no processes are acquired and some key inputs are missing. Therefore, we believe that there is no
business and consequently no business combination; instead, the acquisition is accounted for as an
asset acquisition (see 2.6.10.30). Even if a market participant would be capable of acquiring the
land, buildings and equipment and integrating these into its own business to create outputs, the
acquired set is not a business.
2.6.30.140 The seller may retain an option to repurchase key components of the business sold. In such cases, it is
necessary to consider the nature of those components to determine whether the assets and activities acquired would meet
the definition of a business in their absence. The terms and substance of the option are also considered.
EXAMPLE 1D - IDENTIFYING A BUSINESS - CALL OPTION OVER KEY PERSONNEL
2.6.30.150 Company P acquires Company S's research and development (R&D) business.
However, at the same time the parties agree on an option for S to re-acquire the service contracts
of the key research personnel in the business, exercisable at any time over the next two years. The
R&D activities acquired are extremely specialised and the research personnel have unique
knowledge that is not readily available in the marketplace.
2.6.30.155 Without the research personnel, one of the key elements necessary for the group of
assets to comprise a business is missing. Therefore, in this example we believe that there is no
business and consequently no business combination; instead, the acquisition is accounted for as an
asset acquisition (see 2.6.10.30).
2.6.30.160 IFRS 3 contains a rebuttable presumption that a group of assets in which goodwill is present is a business.
However, a business does not need to have goodwill. Therefore, the presence of goodwill implies that the acquired set is a
business. However, the acquirer should consider whether all of the tangible and intangible assets acquired have been
correctly identified, recognised and valued before concluding that goodwill is present. [IFRS 3.B12]
2.6.30.170 IFRS 3 provides some example factors to consider when determining whether an integrated set of activities
and assets in the development stage is a business, including:
• planned principal activities have commenced;
• there are employees, intellectual property and other inputs and there are processes that could be
applied to those inputs;
• a plan to produce outputs is being pursued; and
• there will be an ability to obtain access to customers who will purchase the outputs. [IFRS 3.B10]
2.6.30.180 Not all of the factors in 2.6.30.170 need to be present for the acquired set to be considered a business. [IFRS
3.B10]
2.6.40 Investment property

2.6.40.10 If investment property is acquired, then a careful analysis of what is acquired is often needed to determine
whether it constitutes a business. In our experience it can be difficult to decide whether the acquired set meets the
definition of a business, and judgement is required. Factors that may be relevant in making the determination include
whether property management services are acquired and the nature of those services, and the level and nature of ancillary
services - e.g. security, cleaning and maintenance.
EXAMPLE 1E - IDENTIFYING A BUSINESS - INVESTMENT PROPERTY
2.6.40.20 Company P purchases four investment properties (shopping malls) that are fully rented
to tenants. P also takes over the contract with the property management company, which has
Page 244 / 375

unique knowledge related to investment properties in the area and makes all decisions, both of a
strategic nature and related to the daily operations of the malls. Ancillary activities necessary to
fulfil the obligations arising from these lease contracts are also in place, specifically activities
related to maintaining the building and administering the tenants.
2.6.40.40 We believe that the acquired set is a business since it contains all of the inputs and
processes necessary for it to be capable of creating outputs to provide a return to P.
2.6.40.50 In contrast, if the property management is not taken over, then the group of assets
might not be a business. The acquired set might not represent an integrated set of activities and
assets as the key element of the infrastructure of the business, property management, is not taken
over. If so, P would account for the transaction as the purchase of individual investment properties,
and not as the purchase of a business. It is necessary to consider all the relevant facts and
circumstances and significant judgement may be required.
Page 245 / 375

2.6.50 OVERVIEW OF THE ACQUISITION METHOD

2.6.50.10 IFRS 3 requires that acquisition accounting be applied to all business combinations within its scope. Below are
the steps to follow when applying acquisition accounting for a business combination, which are discussed in more detail
throughout this chapter. [IFRS 3.4-5]
Requirement Reference
Identify the acquirer 2.6.60
Determine the acquisition date 2.6.180
Identify the consideration transferred in the business combination, and elements of the 2.6.260, 340
transaction that should be accounted for separately from the business combination
Measure the consideration transferred 2.6.260
Identify the identifiable assets acquired and liabilities assumed in the business 2.6.560
combination
Measure the identifiable assets acquired and liabilities assumed in the business 2.6.600, 1050
combination
Measure NCI 2.6.840
Determine the amount of goodwill or the gain on a bargain purchase 2.6.900
Recognise any measurement period adjustments 2.6.910
Page 246 / 375

2.6.60 IDENTIFYING THE ACQUIRER #

2.6.60.10 An acquirer is identified for each business combination. The acquirer is the combining entity that obtains control
of the other combining business or businesses, whereby control is the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities (see 2.5.20 and 120). [IFRS 3.6, A, IAS 27.4]
2.6.60.20 In most business combinations, identifying the acquirer is straightforward because it will be clear which one of
the combining entities has obtained control. The acquirer is identified in the following steps.
(1) Apply the guidance in IAS 27 to determine who has control.
(2) If an acquirer cannot be identified clearly from the guidance in IAS 27, then the additional factors
identified in IFRS 3 are considered. These consist mainly of examining the form of the
consideration transferred, the relative size of the combining entities, relative voting rights, and
the composition of the board of directors and senior management. [IFRS 3.7, B13-B18, IAS
27.13-15]
2.6.60.30 In our view, the IAS 27 guidance discussed in 2.5 should not be the sole focus of identifying an acquirer even if it
appears that an acquirer can be identified; the additional guidance in IFRS 3 should also be taken into account. Otherwise
there is a risk that the analysis of which party is the acquirer may lead to an answer that conflicts with what we believe is
the intention of IFRS 3. For example, only applying the IAS 27 guidance on control would mean that a reverse acquisition
(see 2.6.170) could not arise as the entity that owns all of the share capital of another entity will always have the power to
govern its financial and operating policies so as to gain benefits from that other entity's activities.
2.6.65.10 IFRS 10 replaces IAS 27 in determining whether one entity controls another, and introduces a number of
changes from the control model in IAS 27. Chapter 2.5A discusses the requirements of IFRS 10.
2.6.70 Combinations effected primarily by transferring cash or other assets or

by incurring liabilities
2.6.70.10 In business combinations effected primarily by the transfer of cash or other assets or by incurring liabilities, the
acquirer is usually the entity that transfers the cash or other assets or incurs the liabilities. For example, if Company P
acquires Company S by transferring cash to the owners of S, then P would usually be identified as the acquirer in the
business combination, assuming that S meets the definition of a business (see 2.6.20). [IFRS 3.B14]
2.6.80 Combinations effected primarily by exchanging equity interests

2.6.80.10 In most business combinations effected primarily through the exchange of equity interests, the acquirer is the
entity that issues the new equity interests. One exception to this general principle is a reverse acquisition, in which case the
issuing entity is the acquiree (see 2.6.170). Another exception arises when a new entity is created to issue equity
instruments to effect a business combination (see 2.6.150). [IFRS 3.B15, B18]
2.6.80.20 While not exhaustive, other factors to consider in identifying the acquirer are discussed in 2.6.90-140. The
factors have no hierarchy, and some factors may be more relevant to identifying the acquirer in one combination and less
relevant in others. Judgement is required when the various factors individually point to different entities being the acquirer.
2.6.90 Relative voting rights

2.6.90.10 The acquirer is usually the combining entity whose owners, as a group, hold the largest portion of the voting
rights in the combined entity. Typically the weight attached to this factor increases as the portion of the voting rights held by
Page 247 / 375

the majority increases - for example, a split of 80 percent to 20 percent is likely to be determinative in the absence of other
factors. In making this determination, consideration is given to the existence of any unusual or special voting arrangements,
and potential voting rights such as options, warrants or convertible securities. [IFRS 3.B15(a), IAS 27.14-15]
2.6.90.20 The exercise price of potential voting rights and the financial capability of the holder to exercise them are
ignored. However, the capability to exercise power does not exist when potential voting rights lack economic substance -
e.g. when the price is deliberately set so high that the chance of the potential voting rights being exercised is remote. [IAS
27.15]
2.6.90.30 In some cases, the exercise of potential voting rights may be subject to regulatory approval. In our view, the
rights are considered currently exercisable only when regulatory approval is deemed a mere formality. The nature of
regulatory approval, together with all relevant facts and circumstances, should be considered when making this
assessment.
2.6.90.40 In some transactions, the voting rights of one or more classes of shares automatically change at a future date or
on the occurrence of specified events. For example, a class of shares may be designated as non-voting for a limited time
period following the business combination. All of the facts and circumstances of the transaction are evaluated to determine
how this affects the identification of the acquirer. The factors described in 2.6.110 may also be helpful in evaluating
whether the period of time that the shares are non-voting is substantive.
2.6.100 Large minority voting interest

2.6.100.10 When there is a large minority voting interest and no other owner or organised group of owners has a
significant voting interest, the acquirer is usually the combining entity whose single owner or organised group of owners
holds the largest minority voting interest in the combined entity. For example, if one investor owns 40 percent of the newly
combined entity and the remaining 60 percent is shared equally by six other investors who are not organised as a group,
then the entity previously owned by the investor holding 40 percent of the combined entity is likely to be the acquirer. See
2.6.160.30-40 for an illustration of this principle. [IFRS 3.B15(b)]
2.6.110 Composition of governing body

2.6.110.10 The acquirer is usually the combining entity whose shareholders (owners) have the ability to appoint or remove
a majority of the members of the governing body - e.g. board of directors - of the combined entity. [IFRS 3.B15(c)]
2.6.110.20 IFRS 3 is silent as to whether these rights need to exist only at the acquisition date, or for a period of time
thereafter. However, if control of the governing body by a shareholder group is temporary, then consideration is given to
whether that control is substantive. In making this determination, the period of time that each governing body member is
entitled to hold their position is also considered, taking into account scheduled retirements and elections after the
acquisition date.
2.6.110.30 While there is no minimum duration required for a shareholder group to be in control of the governing body for
it to be deemed substantive, in our view control generally should extend for a sufficient duration to allow the governing body
to consider and act on substantive matters following the acquisition. These may include matters related to corporate
governance, the appointment and compensation of senior management, the issue of debt or equity securities, and
substantive business integration, exit and disposal activities. When the period of control of the governing body is temporary,
judgement is required in determining whether that control is substantive.
2.6.120 Composition of senior management

2.6.120.10 The acquirer is usually the combining entity whose former management dominates the management of the
combined entity. [IFRS 3.B15(d)]
2.6.120.20 IFRS 3 is silent on what is meant by 'management'. In our view, it is consistent with 'key management
personnel' defined in IAS 24 as being those persons having authority and responsibility for planning, directing and
controlling the activities of the entity. The definition of key management personnel includes directors (both executive and
non-executive) of an entity or any of the entity's parents (see 5.5.40). [IAS 24.9]
Page 248 / 375

2.6.130 Terms of exchange

2.6.130.10 The acquirer is usually the combining entity that pays a premium over the pre-combination fair value of the
equity interests of the other combining entity or entities. This factor applies equally when the equity instruments exchanged
are not publicly traded. [IFRS 3.B15(e)]
EXAMPLE 2A - IDENTIFYING THE ACQUIRER - LEVEL OF INFLUENCE
2.6.130.20 Company P acquires 15% of the outstanding shares of Company S, a public company,
for cash, paying a premium of 10% above the market price; and acquires the remaining
outstanding shares of S in exchange for shares of P. After the acquisition, the former shareholders
of S own 58% of the outstanding shares of the combined company. If exercised, warrants held by
former shareholders of S would increase their interest to 71%; however, the warrants cannot be
exercised for three years from the closing date.
2.6.130.30 The board of directors of the combined entity consists of five nominees of P and four
nominees of S for a two-year term. The removal of board members requires a vote of at least two-
thirds of the shareholders. The chairman and the CEO of P retain their positions in the combined
company. No other relevant circumstances exist with respect to voting, ownership of significant
blocks of shares, or management.
2.6.130.40 We believe that P is the acquirer, notwithstanding the voting majority of the former
shareholders of S. Although S's former shareholders will own the majority of the shares in the
combined company, they will not own two-thirds of the shares for at least three years following the
business combination; accordingly, they will not be able to vote out the board of directors in place
immediately after the business combination. P paid partly in cash, including a premium above
market price, and dominates the board of directors and senior management of the combined entity.
Therefore, we would identify P as the acquirer as it has the most influence over the combined
entity.
2.6.140 Relative sizes

2.6.140.10 The acquirer is usually the combining entity that is significantly larger than the other combining entity or
entities. Size can be measured with reference to, for example, assets, revenue or profit. Other examples of relative size
include operating cash flows and market capitalisation. If assets are being used to compare relative size, then in our view it
is the fair value of the assets that should be used. [IFRS 3.B16]
2.6.140.20 Judgement is required when comparing the combining entities based on their relative size. When each
combining entity is involved in similar businesses, a comparison of relative size may be straightforward, although not
Page 249 / 375

necessarily so. However, when the combining entities are involved in different businesses, a comparison of relative size
may not be straightforward and certain adjustments to amounts reported in the financial statements may be required.
Information other than the amounts reported in the financial statements is also considered.
EXAMPLE 2B - IDENTIFYING THE ACQUIRER - USING FAIR VALUES
2.6.140.30 Two companies' principal revenue-generating assets are intangible. In one case, the
assets were internally developed and therefore are not recognised in the statement of financial
position; in the other case, the assets were acquired in a series of business combinations and
therefore are recognised in the statement of financial position. Accordingly, comparing the reported
assets of the two entities may not be appropriate. As noted in 2.6.140.10, we believe that the fair
value of the assets should be used.
2.6.140.40 Similarly, comparing the amount of reported revenues without considering the nature and source of those
revenues may not be appropriate. For example, comparing revenues generated by an entity with high volumes and low
gross margins (e.g. a grocery store chain) with revenues generated by an entity with low volumes and high gross margins
(e.g. a designer and manufacturer of specialised equipment) might not be meaningful.
2.6.150 New entity formed to effect a business combination

2.6.150.10 A new entity (Newco) formed to effect a business combination is not necessarily the acquirer. In such cases,
one of the combining entities that existed before the combination is identified as the acquirer by considering the additional
factors provided in IFRS 3 (see 2.6.70-140). [IFRS 3.B18]
2.6.150.20 A newly formed entity that pays cash rather than issuing shares in a business combination might be identified
as the acquirer; however, it will not always be the acquirer. All facts and circumstances are considered in identifying the
acquirer in a business combination and judgement is required. [IFRS 3.B18]
2.6.150.30 A business combination in which two or more entities transfer net assets that constitute businesses to a newly
formed entity, or the owners of those entities transfer their equity interests to a newly formed entity, is a business
combination within the scope of IFRS 3; in some countries, such a business combination is referred to as a 'roll-up' or 'put-
together' transaction. (See Example 2C). [IFRS 3.B18]
2.6.160 Combinations involving more than two entities

2.6.160.10 There is only one acquirer in a business combination. In business combinations involving more than two
entities, determining the acquirer includes consideration of, among other things, which of the combining entities initiated the
combination and the relative size of the combining entities. [IFRS 3.B17]
2.6.160.20 The guidance in respect of combinations involving the exchange of equity interests, which indicates that the
acquirer is usually the combining entity whose single owner or organised group of owners holds the largest minority voting
interest in the combined entity (see 2.6.100), may be particularly helpful in identifying the acquirer in some combinations
involving more than two entities.
EXAMPLE 2C - IDENTIFYING THE ACQUIRER - DOMINANT SHAREHOLDER
2.6.160.30 Companies B, C, D and E each operate independent florist shops in the suburbs of the
same city. Company F operates four florist shops in this city. To capitalise on economies of scale
and other synergies, the owners agree to form a single entity (Newco) by contributing their
businesses in return for shares in Newco. The ownership of Newco will be as follows.
Page 250 / 375

2.6.160.40 F's shareholders receive a greater interest in Newco (35%) than the shareholders of
any of the other combining companies. Because no other factors indicate to the contrary, F is
identified as the acquirer. Newco's financial statements will include the assets and liabilities of F at
their pre-combination carrying amounts, and the assets and liabilities of B, C, D and E will be
subject to acquisition accounting.
2.6.170 Reverse acquisitions

2.6.170.10 In business combinations effected through an exchange of equity interests, the entity that issues the equity
interests is usually the acquirer. However, in some business combinations, referred to as 'reverse acquisitions', application
of the guidance in IFRS 3 results in the identification of the legal acquirer (i.e. the entity that issues the securities) as the
accounting acquiree and the legal acquiree as the accounting acquirer. [IFRS 3.B19]
2.6.170.15 The acquirer in a reverse acquisition is not required to be a legal entity as long as it is a reporting entity. [IU
09-11]
2.6.170.20 The accounting for reverse acquisitions is illustrated in the illustrative examples that accompany IFRS 3. [IFRS
3.IE1-IE15]
Page 251 / 375

2.6.180 DETERMINING THE ACQUISITION DATE

2.6.180.10 The acquisition date is the date on which the acquirer obtains control of the acquiree - i.e. the date from which
the acquirer has the power to govern the financial and operating policies of the acquiree so as to obtain benefits from its
activities (see 2.5.20 and 120). [IFRS 3.8]
2.6.180.20 Determining the acquisition date will usually be straightforward. However, in certain business combinations it
will require a careful analysis of the facts and circumstances, and judgement will be required. The acquisition date will
usually be the closing date - i.e. the date on which the consideration is legally transferred and when the assets are acquired
and liabilities are assumed - but this will depend on the facts and circumstances of each case. [IFRS 3.9]
2.6.180.30 Determining the acquisition date is important because it is the date on which the fair value of the consideration
transferred and of the assets acquired and liabilities assumed is determined, and the date on which NCI and goodwill are
measured and recognised. It is also only from this date that the results of the acquiree are included in the consolidated
financial statements of the acquirer.
2.6.190 Designating an effective acquisition date

2.6.190.10 It is not possible to designate an effective acquisition date other than the actual date on which control is
obtained. However, in some cases it may be acceptable for an acquirer to consolidate a subsidiary from the start/end of a
reporting period close to the acquisition date for convenience, as long as the effect thereof is immaterial. For example, a
subsidiary acquired on 13 October might be consolidated with effect from 1 October, provided that the effect of the 13 days
is immaterial to the consolidated financial statements. For disclosure purposes the acquisition date would still be 13
October.
2.6.200 Agreements with retroactive effect

2.6.200.10 In some cases, an agreement will provide that the acquisition is effective on a specified date. Irrespective of
any date specified in an agreement, the acquisition date is the date on which the acquirer obtains the power to govern the
financial and operating policies of the acquiree so as to obtain benefits from its activities - i.e. the date that control is
obtained. This may or may not correspond to a specified date in an agreement.
EXAMPLE 3A - ACQUISITION DATE - STATED EFFECTIVE DATE
2.6.200.20 Company P and Company S commence negotiations on 1 January 2012 for P to

acquire all of the shares in S. On 1 March 2012, the agreement is finalised and P obtains the power
to control S's operations on that date. However, the agreement states that the acquisition is
effective as of 1 January 2012 and that P is entitled to all profits after that date. In addition, the
purchase price is determined with reference to S's net asset position at 1 January 2012.
2.6.200.30 Notwithstanding that the price is based on the net assets at 1 January 2012 and S's
shareholders do not receive any dividends after that date, we believe that the acquisition date for
accounting purposes is 1 March 2012. This is because it is only on 1 March 2012 that P has the
power to govern the financial and operating policies of S and to obtain benefits from its activities.
2.6.210 Shareholder approval

2.6.210.10 In some cases, management may agree on an acquisition subject to receiving shareholder approval,
sometimes referred to as a 'revocable' agreement. In our view, the acquisition date cannot be before shareholder approval
if the passing of control is conditional on their approval - e.g. the voting rights do not transfer or the board of directors
remains unchanged until the acquisition is approved by the shareholders. However, it is necessary to consider the substance
Page 252 / 375

of the requirement of the shareholder approval to assess the impact that it has on obtaining the power to govern.
EXAMPLE 3B - ACQUISITION DATE - SHAREHOLDER APPROVAL
2.6.210.20 Company P enters into an agreement with the shareholders of Company S on 1 March
2012 to acquire a controlling interest in S. The agreement provides that the effective date of
transfer is 1 April 2012 and is subject to approval by the shareholders of P at a meeting scheduled
for 1 May 2012. The voting rights are not transferred and the board of directors remains unchanged
until the approval of P's shareholders. The board of directors of P does not control the majority of
the voting interests in S.
2.6.210.30 We believe that the acquisition date cannot be prior to P's shareholders approving the
transaction as the passing of control is conditional on their approval - i.e. the voting rights are not
transferred and the board of directors remains unchanged until the approval of P's shareholders.
However, if the board of directors of P also controlled the majority of the voting interests in S, then
the acquisition date might be before the date that shareholder approval is obtained.
2.6.220 Regulatory approval

2.6.220.10 In some cases, a business combination cannot be finalised before regulatory approval is obtained. Although at
the acquisition date the acquirer is required to have the ability to govern the financial and operating policies of the acquiree,
it is not necessary for the transaction to be finalised legally. It is necessary to consider the nature of the regulatory approval
in each case and the impact that it has on the passing of control.
EXAMPLE 3C - ACQUISITION DATE - REGULATORY APPROVAL SUBSTANTIVE
2.6.220.20 Company P and Company S are manufacturers of electronic components for a

particular type of equipment. P makes a bid for S's business and the competition authority
announces that the proposed transaction is to be scrutinised to ensure that competition laws will
not be breached. P and S agree the terms of the acquisition and the purchase price before
competition authority clearance is obtained, but the contracts are made subject to competition
authority clearance.
2.6.220.25 In this case, the acquisition date cannot be earlier than the date that approval is
obtained from the competition authority since this is a substantive hurdle to be overcome before P
is able to control S's operations.
EXAMPLE 3D - ACQUISITION DATE - REGULATORY APPROVAL NOT SUBSTANTIVE
2.6.220.30 Company P acquires the shares in Company S on 1 April 2012. However, before the
sale of shares becomes legally binding, the transaction needs to be registered, a process that takes
up to six weeks. The registration of the shares is a formality and there is no risk that the sale could
be rejected. In this case, the acquisition date is 1 April 2012 since the registration of the sale does
not prevent the passing of control.
2.6.220.40 However, if the facts of this case were different and the registration was not a
formality because the authorities were required to consider and accept or reject each transaction,
then it is likely that the acquisition date could not be earlier than the date of registration.
2.6.230 Public offers

2.6.230.10 When a public offer is made for the acquisition of shares, it is necessary to consider the impact of the nature
and terms of the offer and any other relevant laws or regulations when determining the acquisition date.
Page 253 / 375

2.6.230.20 In some jurisdictions an offer, at a certain minimum price, to buy the shares of all other shareholders is made
once a shareholder owns a certain percentage of the voting rights in an entity (a 'mandatory offer'). Typically the acquirer
obtains the voting rights associated with each share as each individual shareholder accepts the offer.
EXAMPLE 3E - ACQUISITION DATE - SHARES TRANSFER WHEN PUBLIC OFFER CLOSES
2.6.230.30 Company P makes an offer to acquire all of the shares in Company S and each
shareholder can decide individually whether to accept or reject the offer; the offer is conditional on
at least 75% acceptance. The offer is made on 15 September 2012 and closes on 15 November
2012, at which time ownership of the shares, and the rights associated with ownership, will be
transferred. At 20 October 2012 enough offers have been accepted to give P its minimum 75% of
the shares of S.
2.6.230.35 Whether P has the power to control S at 20 October 2012 will depend on the local
laws and regulations in respect of public offers. If P does not have the power to control S's
operations until the public offer has closed and P is not able to make decisions and impose its will
on S's operations, then the acquisition date could not be earlier than 15 November 2012.
EXAMPLE 3F - ACQUISITION DATE - SHARES IN PUBLIC OFFER TRANSFER PROGRESSIVELY
2.6.230.40 Company P increases its shareholding in Company S to above 30% and in accordance
with local law makes a mandatory offer on 15 March 2012 to acquire all of the shares in S. Each
shareholder can decide individually whether to accept or reject the offer, and P obtains the voting
rights and all other rights associated with each share as each individual shareholder accepts. The
offer is not conditional on a minimum level of acceptance. The offer closes on 15 June 2012 but on
1 May 2012 enough shareholders have accepted the offer for P's interest in S to exceed 50%.
2.6.230.50 In this case, the acquisition date is 1 May 2012 because P obtains control of S on this
date. After 1 May 2012 any additional acquisition of shares would be treated as an acquisition of
NCI (see 2.5.380).
2.6.240 Acquirer consulted on major decisions

2.6.240.10 In some cases, the seller in a business combination agrees to consult the acquirer on major business decisions
before completion of the transaction. The requirement to consult with the acquirer does not necessarily mean that the
power to govern the operations has passed to the acquirer from this time. It is necessary to consider all relevant facts and
circumstances to determine the substance of the agreement between the parties. In any case, the acquirer would need
both power and benefits to have control.
EXAMPLE 3G - ACQUISITION DATE - CONSULTATION ON MAJOR DECISIONS
2.6.240.20 Company P makes an offer to buy all of the shares in Company S, which is wholly
owned by Company Q. The offer is subject to the satisfactory completion of due diligence. In the
meantime, the parties agree that P should be consulted on any major business decisions.
2.6.240.30 In this case, we believe that P does not have the power to govern S simply because it
will be consulted on major decisions; P does not have the ability to impose its will on S's business
and the due diligence is yet to be completed. Therefore, the offer date is not the acquisition date in
this example.
2.6.250 Acquisition date in a business combination achieved in stages

2.6.250.10 Sometimes control is obtained in successive share purchases - i.e. the acquirer obtains control of an acquiree
Page 254 / 375

in which it held an equity interest immediately before the acquisition date. Such a business combination is commonly
referred to as a 'business combination achieved in stages' or a 'step acquisition'. Consistent with all other business
combinations within the scope of IFRS 3, for a step acquisition the acquisition date is the date on which the acquirer obtains
control of the acquiree. [IFRS 3.8, 41]
2.6.250.20 See 2.6.1020 for a discussion of the accounting for a business combination achieved in stages.
Page 255 / 375

2.6.260 CONSIDERATION TRANSFERRED #

2.6.260.10 Consideration transferred includes contingent consideration (see 2.6.280) and certain elements of share-based
payment awards exchanged for awards held by the acquiree's employees (see 2.6.420). However, a number of items are
excluded from consideration transferred (see 2.6.340). Consideration is often transferred directly to the former owners of
the acquired business; however, consideration given in exchange for an acquired business may be transferred indirectly -
for example, when the acquirer contributes a business to an acquired subsidiary (see 2.6.530).
2.6.260.20 In some cases, the consideration transferred in a business combination will relate not just to the acquirer
obtaining control over the acquiree, but also to other elements of the overall transaction. Amounts that are not part of the
exchange for control over the acquiree are excluded from the accounting for the business combination; instead, they are
accounted for as separate transactions in accordance with other relevant IFRSs. [IFRS 3.51]
2.6.260.30 The consideration transferred in a business combination is measured at fair value except for any portion of the
acquirer's share-based payment awards issued to replace awards held by the acquiree's employees, which are measured in
accordance with IFRS 2 (see 2.6.430). [IFRS 3.37]
2.6.270 Deferred consideration

2.6.270.10 Deferred consideration comprises obligations to pay specified amounts at future dates - i.e. there is no
uncertainty about the amount to be paid. Deferred consideration is recognised and measured at fair value at the acquisition
date and is included in the consideration transferred. In our view, fair value is determined by discounting the amount
payable using a market rate of interest for a similar instrument of an issuer with a similar credit rating. The unwinding of
any interest element of deferred consideration is recognised in profit or loss.
2.6.270.20 See 2.3.20.16-17 for a discussion of the classification of cash flows arising from the settlement of deferred
consideration.
2.6.280 Contingent consideration *

2.6.280.10 Contingent consideration is an obligation by the acquirer to transfer additional assets or equity interests to the
former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or
conditions are met. Contingent consideration may also include an acquirer's right to the return of previously transferred
consideration if certain conditions are met - for example, a repayment to the acquirer of consideration transferred to the
former owners of an acquired business is required if that business does not meet financial or operating targets that were
specified in the acquisition agreements.
2.6.280.20 Contingent consideration may include the transfer of additional cash, the issue of additional debt or equity
securities, or the distribution of other consideration on resolution of contingencies based on post-combination earnings,
post-combination security prices or other factors. All contingent consideration is measured at fair value on the acquisition
date and included in the consideration transferred in the acquisition.
2.6.280.30 Obligations of an acquirer under contingent consideration arrangements are classified as equity or a liability in
accordance with IAS 32 (see 7.3.10), or other applicable IFRSs in the case of non-financial contingent consideration. See
2.6.1010 for a discussion of the subsequent measurement of contingent consideration, which depends on its classification
on initial recognition. [IFRS 3.40]
2.6.280.40 See 2.3.20.18 for a discussion of the classification of cash flows arising from the settlement of contingent
consideration.
2.6.290 Assets transferred or liabilities assumed by the acquirer

2.6.290.10 Assets transferred or liabilities assumed by the acquirer as part of the consideration transferred in a business
Page 256 / 375

combination are generally measured at their acquisition-date fair values; any gain or loss is recognised in profit or loss in
accordance with the relevant IFRS. However, this guidance applies only if the acquirer does not retain control of the assets
or liabilities transferred after the acquisition (see 2.6.530). [IFRS 3.38]
2.6.300 Business combinations in which no consideration is transferred

2.6.300.10 A business combination can occur without the acquirer transferring consideration. Examples include:
• an acquiree repurchases a sufficient number of its own shares so that an existing shareholder
obtains control of the acquiree;
• substantive participating rights held by another equity holder expire; and
• business combinations achieved by contract alone - e.g. 'stapled' arrangements - or the
formation of a dual-listed entity. In these business combinations, the acquirer transfers no
consideration in exchange for control of an acquiree and obtains no equity interests in the
acquiree on obtaining control. [IFRS 3.43]
2.6.300.20 In business combinations in which no consideration is transferred, an acquirer uses the acquisition-date fair
value of its interest in the acquiree, determined using a valuation technique, instead of the acquisition-date fair value of the
consideration transferred to determine the amount of goodwill. [IFRS 3.33]
EXAMPLE 4 - NO CONSIDERATION TRANSFERRED
2.6.300.30 Company P owns 45% of Company S. On 31 October 2012, S repurchases a number

of its shares such that P's ownership interest increases to 65%. The repurchase transaction results
in P obtaining control of S. Therefore, the transaction is a business combination accounted for by
applying the acquisition method and P is the acquirer.
2.6.300.40 The carrying amount of P's 45% interest in S in P's financial statements immediately
prior to the share repurchase is 40. At 31 October 2012, after the repurchase, the fair value of S is
100 and the fair value of the identifiable net assets of S is 80. The fair value of 65% of S is 65. P
elects to measure NCI at fair value at the acquisition date (see 2.6.840), which is assumed to be 35
in this example.
2.6.300.50 P records the following entry in respect of the acquisition.
Page 257 / 375

2.6.300.60 In a business combination achieved by contract alone, the acquirer receives no additional equity interests in the
acquiree. Therefore, if the acquirer held no equity interest in the acquiree before the business combination, then 100
percent of the acquiree's equity would be attributed to NCI. If in such circumstances the acquirer elects to measure NCI at
fair value at the acquisition date, then in our view this does not include any control premium because it is a non-controlling
interest.
2.6.310 Business combinations involving mutual entities

2.6.310.10 When a business combination takes place between mutual entities, the acquisition method is applied. In a
combination involving mutual entities, the acquirer and acquiree exchange only equity interests. If the fair value of the
equity or member interests in the acquiree is more reliably measurable than the fair value of the member interests
transferred by the acquirer, then the acquirer determines the amount of goodwill by using the acquisition-date fair value of
the acquiree's equity interests instead of the acquirer's equity interests transferred as consideration. [IFRS 3.33]
2.6.320 Business combination effected through derivatives

2.6.320.10 IAS 39 does not apply to contracts between the acquirer and the seller in a business combination to buy an
acquiree at a future date. Therefore, when an entity effects a business combination by entering into a forward contract, an
issue arises as to whether the contract to acquire the target should be accounted for as a derivative in accordance with IAS
39 or as an unrecognised executory contract before the acquisition date, or if it leads to consolidation when the derivative
grants present access to ownership benefits. These issues are discussed in 7.1.110-120 and 150. [IAS 27.IG5, 39.2(g)]
2.6.320.20-30 [Not used]
2.6.320.40 An option to acquire a business is a derivative that falls within the scope of IAS 39 (see 7.1.110.30); the scope
exemption discussed in 2.6.320.10 does not extend to options because in that case an acquisition is conditional on the
option being exercised. Therefore, the option will be measured at fair value through profit or loss, and the consideration
transferred includes the fair value of the derivative at the acquisition date. [IAS 39.BC24C]
EXAMPLE 5 - CONTROL OBTAINED THROUGH CALL OPTION
2.6.320.50 On 1 January 2011, Company P purchased a European-style call option for 60% of the
shares in Company S, which was exercisable on 1 January 2012. P paid a premium of 50 for the
option, which had a strike price for the entire underlying of 1,000. The fair value of the call option
at 31 December 2011 was 80, and therefore 30 (80 - 50) was recognised in profit or loss.
Page 258 / 375

2.6.320.60 On 1 January 2012, the option became exercisable and P became the parent of S
because of these potential voting rights (see 2.5.130); P also exercised the call option at that date.
In this case, the consideration transferred at 1 January 2012 is 1,080 (cash of 1,000 plus the fair
value of the derivative of 80).
2.6.330 Hedging a future business combination

2.6.330.10 A firm commitment to acquire a business in a business combination can be a hedged item only for foreign
exchange risk because other risks cannot be specifically identified and measured. In our view, an entity may also hedge the
foreign exchange risk of a highly probable forecast business combination. In our view, in the consolidated financial
statements, a cash flow hedge of the foreign exchange risk of a firm commitment to acquire a business or a forecast
business combination relates to the foreign currency equivalent of the consideration paid. In a cash flow hedge designation,
the effective portion of the gain or loss arising from the hedging instrument is recognised in other comprehensive income
(OCI). [IAS 39.AG98]
2.6.330.20 See 7.7.730 for a discussion of when and how the amount recognised in OCI is reclassified to profit or loss.
2.6.335.10 The guidance in IFRS 3 on determining fair value is replaced by IFRS 13, which contains guidance on fair
value measurement that applies across all IFRSs. Chapter 2.4A discusses the requirements of IFRS 13 .2.6.335.20
Previously, there was no specific guidance in respect of determining the fair value of consideration transferred. The
guidance in IFRS 13 is consistent with the view expressed in 2.6.270.10, assuming that market participants (see 2.4A.60)
would value the consideration in this manner (see 2.4A.300).
Page 259 / 375

2.6.340 DETERMINING WHAT IS PART OF THE BUSINESS

COMBINATION
2.6.340.10 Determining what is part of the business combination transaction involves an analysis of the elements of an
overall arrangement. Generally, a transaction entered into by or on behalf of the acquirer or primarily for its benefit or that
of the combined entity, rather than being entered into before the combination primarily for the benefit of the acquiree or its
former owners, is likely to be a separate transaction.
2.6.340.15 IFRS 3 provides three examples, which are not intended to be exhaustive, of transactions that are not part of a
business combination and which therefore are accounted for separately in accordance with other relevant IFRSs. The three
examples are transactions that:
• in effect settle a pre-existing relationship between the acquirer and the acquiree (see 2.6.350);
• remunerate employees or former owners of the acquiree for future services (see 2.6.400); and
• reimburse the acquiree or its former owners for paying the acquirer's acquisition-related costs
(see 2.6.520). [IFRS 3.B50]
2.6.340.20 The implementation guidance in IFRS 3 provides the following factors that entities should consider in assessing
whether a transaction is part of a business combination or is a separate transaction that should be accounted for
separately:
• the reasons for the transaction;
• who initiated the transaction; and
• the timing of the transaction. [IFRS 3.B50]
2.6.340.30 These factors are not mutually exclusive or individually conclusive. An acquirer determines whether any portion
of the amounts transferred by the acquirer relate to transactions other than the acquisition of a business that should be
accounted for separately from the consideration exchanged for the acquiree and the assets acquired and liabilities assumed
in the business combination. [IFRS 3.B50]
2.6.340.40 For example, the acquirer in a business combination may have outstanding debt with terms that could result in
an increase in the interest rate in the event of an acquisition. If the interest rate on debt of the acquirer is increased as a
result of a business combination, then in our view the additional interest costs are not part of the business combination
transaction and therefore are not included in the consideration transferred. This is because changes in the acquirer's
interest rate are not part of the exchange for control of the acquiree. The acquirer should account for the variable interest
feature and any related additional interest expense in accordance with IAS 39 - i.e. in profit or loss.
2.6.350 Pre-existing relationships

2.6.350.10 A 'pre-existing relationship' is any relationship that existed between the acquirer and the acquiree before the
business combination was contemplated. Such relationships may be contractual or non-contractual, and include defendant
and plaintiff, customer and vendor, licensor and licensee, lender and borrower, and lessee and lessor relationships. In our
view, the guidance in respect of pre-existing relationships is also applied to relationships entered into while the business
combination is being contemplated but before the acquisition date. [IFRS 3.B51]
2.6.350.20 Because the acquirer consolidates the acquiree following a business combination, pre-existing relationships are
effectively settled as a result of the combination - i.e. following the business combination such transactions are generally
eliminated in the consolidated financial statements. Therefore, such pre-existing relationships are accounted for separately
from the business combination. [IFRS 3.BC122]
2.6.350.30 The settlement of a pre-existing relationship gives rise to a gain or loss that is recognised by the acquirer in
Page 260 / 375

profit or loss at the acquisition date. How the resulting gain or loss is calculated depends on whether the pre-existing
relationship was contractual or non-contractual in nature. In general:
• settlement of a relationship that is favourable to the acquirer results in a gain being recognised
by the acquirer, subject to adjustment in respect of any existing carrying amount in the financial
statements of the acquirer; and
• settlement of a relationship that is unfavourable to the acquirer results in a loss being recognised
by the acquirer, subject to adjustment in respect of any existing carrying amount in the financial
statements of the acquirer. [IFRS 3.B52]
2.6.350.40 See 3.13.780 for a discussion of the income tax effects of the effective settlement of a pre-existing relationship.
2.6.360 Non-contractual relationships

2.6.360.10 An example of a pre-existing non-contractual relationship between the acquirer and acquiree is a lawsuit
related to a non-contractual matter in which the two parties had a relationship as plaintiff and defendant.
2.6.360.20 The gain or loss on effective settlement of a non-contractual relationship is measured at fair value. The
difference between the fair value of the lawsuit and any amounts recognised previously by the acquirer in accordance with
applicable IFRSs is recognised as a gain or loss at the acquisition date. [IFRS 3.B52(a)]
EXAMPLE 6A - PRE-EXISTING RELATIONSHIP - NON-CONTRACTUAL
2.6.360.30 Company P is the defendant in a lawsuit in which Company S is the plaintiff. P has
recognised a liability in the amount of 8,000 related to this lawsuit in accordance with IAS 37. On 1
January 2012, P acquires S in a business combination, and pays cash consideration of 100,000 to
S's shareholders. The acquisition effectively settles the lawsuit.
2.6.360.40 The fair value of the lawsuit at 1 January 2012 is determined to be 5,000. P
recognises a 3,000 gain on the effective settlement of the lawsuit at the acquisition date in profit or
loss, being the difference between the 8,000 liability recognised previously under IAS 37 less the
5,000 fair value of the lawsuit at the acquisition date.
2.6.360.50 In accounting for the acquisition, the consideration transferred to acquire S is 95,000,
being the total amount paid to the shareholders of 100,000 less the 5,000 recognised in connection
with the effective settlement of the lawsuit.
2.6.370 Contractual relationships

2.6.370.10 Examples of pre-existing contractual relationships between the acquirer and acquiree include a customer-
vendor relationship, a licensor-licensee relationship, and a lender-borrower relationship.
2.6.370.20 The gain or loss on effective settlement of a contractual relationship is measured at the lower of:
• the amount by which the contract is favourable or unfavourable compared to market (off-market)
Page 261 / 375

from the perspective of the acquirer; and

• the amount of any stated settlement provisions in the contract available to the counterparty to
whom the contract is unfavourable. [IFRS 3.B52(b)]
2.6.370.30 This valuation of the off-market component of a contract is the same as would be done for the valuation of a
contract with a third party. However, instead of being included in the valuation of the contract recognised in the statement
of financial position, the resulting value is included in the accounting for the settlement of the pre-existing relationship.
2.6.370.40 The difference between the amount calculated in 2.6.370.20 and any amounts recognised previously by the
acquirer is recognised as a gain or loss at the acquisition date. [IFRS 3.B52]
EXAMPLE 6B - PRE-EXISTING RELATIONSHIP - SUPPLY CONTRACT
2.6.370.50 Company P sells goods to Company S under a long-term, fixed price supply
agreement. The supply agreement commenced on 1 June 2010 and expires on 1 June 2015. A
clause in the agreement states that either party has the right to cancel the agreement on payment
of a penalty of 5,000. P acquires S on 1 June 2012, when the supply agreement has three years left
to run.
2.6.370.60 At the time of the acquisition, P determines that, while the contract currently remains
profitable, the pricing under the contract is less than the current market price for the goods - i.e.
the agreement is unfavourable to P. P values the off-market component of the contract at 3,000.
2.6.370.70 Because the cancellation penalty is higher than the off-market value of the contract,
the loss on settlement of the pre-existing relationship is measured based on the value of the off-
market component of the contract from P's perspective - i.e. at the lower amount.
2.6.370.80 In respect of a lender-borrower relationship, frequently there will not be a stated settlement provision in the
contract available to the counterparty to whom the contract is unfavourable. In that case, the amount by which the contract
is favourable or unfavourable compared to market - i.e. fair value as compared to the carrying amount - results in the
recognition of a gain or loss on settlement.
EXAMPLE 6C - PRE-EXISTING RELATIONSHIP - FINANCIAL INSTRUMENTS
2.6.370.90 Company P issued five-year bonds on 31 December 2010, which are held entirely by
Company S. P acquires S on 1 June 2012. At the time of the acquisition, the carrying amount of the
bonds in P's financial statements is 1,000 while the fair value of the bonds is determined to be 850.
P recognises the settlement of the pre-existing relationship as follows.
Page 262 / 375

2.6.380 Prepaid contracts

2.6.380.10 When the pre-existing relationship between the acquirer and acquiree is a prepaid contract - e.g. a prepaid
licence or prepaid lease agreement - an issue arises as to how to determine the favourable or unfavourable aspect of the
pre-existing relationship from the acquirer's perspective. Any amount paid or received by the acquiree or the acquirer
before the business combination is not itself recognised in the acquisition accounting (see also 2.6.838). Instead, the
favourable/unfavourable element at the acquisition date is determined by comparing the actual future payment stream
under the contract with the market rate that would need to be paid to the counterparty based on the future periods in the
contract if the contract were entered into anew for those remaining periods.
2.6.380.20 In the case of downstream prepaid transactions, applying the mechanical calculation (see 2.6.370.20) will
indicate that the pre-existing relationship is unfavourable compared to market from the perspective of the acquirer because
the acquirer will not receive any future rental payments from the acquiree. However, in such transactions the acquirer may
also have recognised deferred revenue in its financial statements before the business combination; the carrying amount of
such deferred revenue is derecognised at the acquisition date. [IFRS 3.B52]
EXAMPLE 6D - PRE-EXISTING RELATIONSHIP - DOWNSTREAM PREPAID LEASE
2.6.380.30 Company P (lessor) entered into a five-year operating lease with Company S (lessee).
The contractual rental payments of 10,000 were fully prepaid by S on entering into the contract,
and P recognised deferred revenue of 10,000 in its statement of financial position. The contract was
concluded at market terms and there are no stated settlement provisions. P acquires S in a
business combination two years later. At the acquisition date, P's balance of deferred revenue is
6,000 ((10,000 / 5) x 3 remaining years).
2.6.380.40 At the acquisition date, a market participant granting a lease for a similar asset over a
three-year period would expect to receive a present value of lease payments of 6,600 (whether as
an up-front payment or over three years with interest). As a result of the business combination, P
will receive rental payments of zero. Therefore, the pre-existing relationship is unfavourable by
6,600 compared to market from P's perspective. This amount is recognised separately as a
settlement loss after the derecognition of P's deferred revenue of 6,000.
2.6.380.50 In the case of upstream prepaid transactions, applying the mechanical calculation (see 2.6.370.20) will indicate
that the pre-existing relationship is favourable compared to market from the perspective of the acquirer because the
acquirer will not make any future rental payments to the acquiree. However, in such transactions the acquirer may also
have recognised an intangible asset (see 3.3.100) or prepaid rent (see 5.1.310.20) in its financial statements before the
business combination; the carrying amount of any such asset will be derecognised at the acquisition date. [IFRS 3.B52]
EXAMPLE 6E - PRE-EXISTING RELATIONSHIP - UPSTREAM PREPAID LEASE
2.6.380.60 Company P (lessee) enters into a five-year operating lease with Company S (lessor).
Page 263 / 375

The contractual rental payments of 10,000 were fully prepaid by P on entering into the contract,
and P recognised prepaid rent of 10,000 in its statement of financial position. The contract was
concluded at market terms and there are no stated settlement provisions. P acquires S in a
business combination two years later. At the acquisition date, P's balance of prepaid rent is 6,000
((10,000 / 5) x 3 remaining years).
2.6.380.70 At the acquisition date, a market participant entering into a lease contract for a similar
asset over a three-year period would expect to pay a present value of lease payments of 6,600
(whether as an up-front payment or over three years with interest). As a result of the business
combination, P will pay zero for the right to use the asset. Therefore, the pre-existing relationship is
favourable by 6,600 compared to market from P's perspective. This amount is recognised
separately as a settlement gain after the derecognition of P's asset for prepaid rent of 6,000.
2.6.380.80 Further complexity is likely to arise in our experience as contracts between the acquirer and the acquiree may
include prepayments as well as ongoing payments. Additionally, in downstream transactions the contractual relationship can
also give rise to a re-acquired right (see 2.6.390).
2.6.390 Re-acquired rights

2.6.390.10 The pre-existing relationship may take the form of a right granted by the acquirer to the acquiree before the
business combination. For example, an acquirer may have previously granted the acquiree the right to use the acquirer's
trade name under a franchise agreement. As a result of the business combination, effectively the acquirer re-acquires that
previously granted right. Rights of this kind re-acquired by an acquirer in a business combination are identifiable intangible
assets that the acquirer recognises separately from goodwill (see 2.6.690). [IFRS 3.29, B35-B36]
2.6.390.20 The following table summarises the accounting for the settlement of pre-existing 'upstream' relationships and
'downstream' relationships under which a licence is granted by one party to another involved in a business combination.
Favourable for Upstream relationship(1) Downstream relationship(2)
Licensee Licensee is the acquirer Licensee is the acquiree

Settlement gain arises Settlement loss arises (see Example 7)
Licensor Licensor is the acquiree Licensor is the acquirer

Settlement loss arises Settlement gain arises
1 The acquiree previously granted a licence to the acquirer

2 The acquirer previously granted a licence to the acquiree
EXAMPLE 7 - FRANCHISE RIGHTS RE-ACQUIRED
2.6.390.30 Franchiser P acquires the business of operating Franchisee S for 30,000. In connection
Page 264 / 375

with the acquisition, P re-acquires previously granted franchise rights. The re-acquired franchise
right is valued at 3,000 in accordance with the measurement guidance in IFRS 3 (see 2.6.690).
2.6.390.40 The terms of the contract covering the rights are unfavourable for P, by 4,000 relative
to the terms of current market transactions for similar items. The contract includes a cancellation
penalty of 5,000. The fair value of the identifiable net assets of S, excluding the franchise right,
which is measured in accordance with IFRS 3, is 17,000.
2.6.390.50 The cancellation penalty is higher than the off-market value of the contract; therefore,
the loss on settlement of the pre-existing relationship is measured based on the value of the off-
market component of the contract from P's perspective - i.e. at the lower amount (see 2.6.370.20).
P records the settlement of the pre-existing relationship and the reacquisition of the franchise right
as follows.
2.6.400 Payments to employees who are former owners of the acquiree

2.6.400.10 An acquirer may enter into an arrangement for payments to employees or selling shareholders of the acquiree
that are contingent on a post-acquisition event. The accounting for such arrangements depends on whether the payments
represent contingent consideration issued in the business combination (which are included in the acquisition accounting), or
are separate transactions (which are accounted for in accordance with other relevant IFRSs). [IFRS 3.B54]
2.6.400.20 Contingent consideration issued in a business combination is an obligation of the acquirer to transfer additional
consideration to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future
events occur or conditions are met. Such additional consideration may be in the form of cash, other assets or equity
interests. Contingent consideration may also give the acquirer the right to the return of previously transferred consideration
if specified conditions are met or fail to be met. [IFRS 3.A]
2.6.400.30 Arrangements for contingent payments to employees or selling shareholders that do not meet the definition of
contingent consideration - i.e. payments that are not part of the exchange for control of the acquiree and are not part of the
accounting for the business combination - are accounted for separately in accordance with other relevant IFRSs. [IFRS
3.51]
2.6.400.40 The application guidance of IFRS 3 provides indicators to be evaluated when determining whether contingent
payments to employees or selling shareholders comprise contingent consideration or are a transaction to be accounted for
separately from the business combination. Judgement will frequently be required in this respect. [IFRS 3.B55]
2.6.400.50 An arrangement under which contingent payments are automatically forfeited if employment terminates is
Page 265 / 375

compensation for post-combination services. Although this requirement is included within a group of indicators to assist in
identifying amounts that are part of consideration transferred, the language in the standard is plain and rules out an
alternative interpretation. Therefore, this is the case even if an evaluation of some, or even all, of the other indicators
suggests that the payments would otherwise be considered to be additional consideration transferred in exchange for the
acquiree; and even if the relevant employee is entitled to remuneration at rates comparable with those earned by people in
similar roles. [IFRS 3.B55(a)]
2.6.400.60 In our view, contingent payments that are forfeited at the discretion of the acquirer if employment terminates
are also compensation for post-combination services. In such arrangements, generally it is the fact that continuing
employment is required to be provided by the recipient of the contingent payment that is relevant. However, in our view
careful consideration is given to arrangements in which a related party of the beneficiary of such an award is required to
provide continuing services. For example, a contingent payment arrangement may be structured so that the spouse of an
employee will benefit from payments that are contingent on the employee's continued employment. Such arrangements
may, in substance, be compensation for post-combination services.
2.6.400.70 If all or part of a contingent consideration arrangement is not affected by employment termination, then other
indicators are considered in determining whether the arrangement is part of the business combination or a separate
transaction. [IFRS 3.B55(b)-(h)]
2.6.410 Forgiveness of full-recourse loans

2.6.410.10 Full-recourse loans granted to employees of an acquiree may be forgiven in connection with a business
combination. This could include loans granted to employees in connection with the exercise of share options, as well as
loans granted for other purposes. If it is not clear whether the forgiveness of the loans is part of the exchange for the
acquiree or is a transaction separate from the business combination, then all relevant facts and circumstances are
considered in making the determination, paying particular attention to the factors in 2.6.480.
2.6.410.15 For example, if the loans were entered into before the commencement of negotiations for the business
combination, and the original terms of the loans require forgiveness in the event of a change in control, then in our view
such forgiveness would generally be accounted for as part of the acquisition accounting. However, if such forgiveness
includes any post-combination service requirements, or is tied to another agreement that includes post-combination service
requirements, then in our view the forgiveness would be accounted for separately.
2.6.410.16 In another example, if the acquisition agreement includes a clause requiring forgiveness of the loans, then a
determination as to why the clause was included, as well as a review of other arrangements entered into with the
participating employees, will be helpful in making a determination. For example, if the clause was included at the request of
the acquirer, and a termination agreement was also entered into with the employee before the combination, then the
forgiveness might in substance constitute a severance payment to the employee that should be accounted for as a
transaction separate from the business combination. In our view, an acquirer cannot avoid the recognition of a severance
cost that it would otherwise expect to incur immediately following a business combination by arranging for the acquiree to
make the payment before the business combination, or by putting clauses in an acquisition agreement that effectively
provide for the payments.
2.6.410.20 In reviewing arrangements such as those discussed in 2.6.410.10-16, all arrangements with the participating
employees are considered. For example, if two arrangements are entered into at about the same time, such as an
arrangement providing for the forgiveness of a loan with no service requirement and a second arrangement that includes a
service requirement, then in our view it should be considered whether the service requirement included in the second
arrangement should impact the determination of whether the first arrangement is part of the exchange for the acquiree or
is a transaction separate from the business combination.
2.6.420 Acquirer share-based payment awards exchanged for acquiree awards

2.6.420.10 The consideration transferred might include certain elements of share-based payment awards exchanged for
awards held by the acquiree's employees. Typically, the grant of a share-based payment replacement award is an example
of a transaction with an element that is part of the consideration transferred and an element that is accounted for outside of
the acquisition accounting. IFRS 3 contains detailed attribution requirements that determine the amount of a share-based
payment included in consideration transferred and the amount recognised outside the acquisition accounting as post-
Page 266 / 375

combination remuneration cost of the acquirer in accordance with IFRS 2.
2.6.424 Voluntary replacement of expired acquiree awards

2.6.424.10 If an award that expires (i.e. the employee no longer is entitled to the share-based payment and the award
lapses) as a result of a business combination is replaced voluntarily, then all of the market-based measure of the
replacement award is recognised as post-combination remuneration cost. None of the market-based measure of the
replacement awards is attributed to pre-combination service in the business combination. [IFRS 3.B56]
2.6.424.20 A replacement as described in 2.6.424.10 is considered voluntary unless the acquirer is obliged to issue
replacement awards. An acquirer is 'obliged' to issue replacement awards if the acquiree or its employees are able to
enforce replacement. Such obligations may arise from various sources, including:
• the terms of the acquisition agreement;
• the terms of the acquiree's awards; or
• applicable laws or regulations. [IFRS 3.B56]
2.6.427 Replacement of unexpired acquiree awards

2.6.427.10 When the acquirer issues replacement awards to employees of an acquiree in exchange for unexpired share-
based payment awards issued previously by the acquiree, such exchanges are accounted for as modifications of share-
based payment awards under IFRS 2, and all or a portion of the amount of the acquirer's replacement awards is included in
measuring the consideration transferred in the business combination (see 2.6.440). [IFRS 3.B56]
2.6.427.20 This applies equally to unexpired acquiree awards that are replaced mandatorily, and unexpired acquiree
awards that are replaced voluntarily. [IFRS 3.B56]
2.6.427.30 See 3.13.630 for a discussion of the accounting for income taxes related to replacement awards.
2.6.430 Measurement
2.6.430.10 Share-based payment transactions are an exception to the fair value measurement principle of IFRS 3 (see
2.6.600). This exception requires that such transactions be measured at the acquisition date in accordance with IFRS 2 and
refers to the amounts so determined as the 'market-based measure' of the share-based payment transactions. This applies
regardless of whether the market-based measurement of the share-based payment transactions is included in measuring
the consideration transferred in a business combination, or is recognised as remuneration cost in the post-combination
financial statements. [IFRS 3.30]
2.6.440 Attribution principles for replacement awards
2.6.440.10 In some instances, a portion of the value of the replacement awards is allocated to post-combination service
and accounted for separately from the business combination. This is the case, for example, when post-combination service
is required to be rendered by the employees of the acquiree in connection with the acquirer issuing replacement awards or
when the market-based measure of the replacement awards exceeds the market-based measure of the acquiree awards.
[IFRS 3.B56]
2.6.440.20 The amount of the market-based measure of the replacement awards treated as consideration transferred is
determined in the following manner.
(1) Determine at the acquisition date, in accordance with the market-based measurement
method in IFRS 2:
• the market-based measure of the acquiree's awards (FVa); and
• the market-based measure of the replacement awards (FVr). [IFRS 3.B57]
Page 267 / 375

(2) Determine:
• the period for which services have been provided by the employees before the
acquisition date - i.e. the pre-combination vesting period (see A in the following
diagram);
• the original vesting period of the acquiree's awards (see B in the following
diagram);
• the post-combination vesting period, if any, for the replacement awards (see C in
the following diagram); and
• the greater of the total vesting period (the sum of A plus C) and the original vesting
period of the acquiree's awards (B).
The diagram illustrates a situation in which the total period of A plus C is longer than B.
In our experience, the total vesting period of the original awards may be longer than the
sum of the pre-combination vesting period plus the post-combination vesting period of
the replacement awards.
(3) Calculate the portion of the replacement awards attributable to pre-combination service
as the product of:
• the market-based measure of the acquiree's awards at the acquisition date; and
• the ratio of the pre-combination vesting period to the greater of the total vesting
period and the original vesting period of the acquiree's awards. [IFRS 3.B58]
Amount included in consideration transferred = FVa x

Any remaining amount of the market-based measure of the replacement awards after deducting the amount
attributed to consideration transferred is treated as post-combination remuneration cost. [IFRS 3.B59]
2.6.440.30 These requirements for determining the portions of a replacement award attributable to pre-combination and
post-combination service apply equally regardless of whether the replacement award is classified as cash-settled or as
equity-settled in accordance with IFRS 2. [IFRS 3.B61]
2.6.440.40 The process in 2.6.440.20 demonstrates several points.
• The acquirer measures both the replacement awards given to employees by the acquirer and the
acquiree awards at the acquisition date. The measurement and attribution of replacement
awards issued in a business combination are independent of the original grant-date value of the
acquiree awards.
• IFRS 3 sets two limits on the amount of the replacement awards' value that is included in the
consideration transferred:
Page 268 / 375

- the amount cannot exceed the market-based measure at the acquisition date of the acquiree
awards; and
- the amount includes only the value attributed to pre-combination service.
• Any incremental value of the replacement awards over the value of the acquiree awards at the
acquisition date is attributed to post-combination service and is not part of the consideration
transferred, even if all service has been rendered as of the acquisition date. In this case, the
excess value is recognised immediately as remuneration cost in the post-combination financial
statements of the combined entity. If additional service is required, then the remuneration cost is
recognised in the post-combination financial statements by applying the requirements of IFRS 2
(see 2.6.1017).
• Even if acquiree awards are fully vested at the time of a business combination, a portion of the
replacement award is allocated to post-combination service if the acquiree's employee is
required to render service in the post-combination period in order for the replacement award to
vest.
EXAMPLE 8 - SHARE-BASED PAYMENT AWARDS
2.6.440.50 Company F acquires Company G on 31 December 2012. At the acquisition date, G's
employees hold share options with a total acquisition-date value, measured under IFRS 2, of 300.
All of the acquiree awards were granted on 1 January 2009 - i.e. three years prior to the acquisition
date. G's share option plan does not contain a change-in-control clause that accelerates vesting
(see 2.6.480-490). The vesting period of the acquiree awards was four years. Accordingly, prior to
the acquisition date, the acquiree awards have a remaining vesting period of one year.
2.6.440.60 Pursuant to a requirement in the acquisition agreement, F replaces the unvested
acquiree awards with unvested awards with a value, measured under IFRS 2, of 300. Those
awards require two years of service subsequent to the acquisition date - i.e. they will vest a year
later than the acquiree awards would have vested under their original terms. In its consolidated
financial statements, F records the following entries.
Page 269 / 375

2.6.450 Replacement awards with expected failure to meet vesting conditions other than
market conditions
2.6.450.10 Recognition of remuneration cost in respect of share-based payment awards is based on the best available
estimate at the acquisition date of the total number of replacement awards expected to vest. Accordingly, the determination
of the amount of replacement awards to be attributed to pre- and post-combination service takes into account the expected
rate of forfeitures of the replacement awards due to expected failure to meet vesting conditions other than market
conditions (see 2.6.460). [IFRS 2.19-21, 30, 3.B60]
2.6.450.20 There are two types of vesting conditions that are not market conditions (see 4.5.640).
• Service conditions that require the counterparty to complete a specified period of service.
• Non-market performance conditions that require the counterparty, in addition to completing a
specified period of service, to meet specified performance targets unrelated to the market price
of the entity's equity instruments - e.g. a specified increase in profit or an earnings per share
target.
2.6.450.30 Consistent with the guidance in IFRS 2, changes in estimated forfeitures are reflected as an adjustment to
post-combination remuneration cost in the period in which the change in estimate occurs. Therefore, the acquirer does not
adjust consideration transferred in periods subsequent to the acquisition date if actual forfeitures differ from the forfeitures
estimated at the acquisition date. [IFRS 3.B60]
2.6.460 Replacement awards with market conditions
2.6.460.10 A share-based payment may contain a market condition - i.e. a performance condition that determines whether
a share-based payment vests that is related to the market price of the entity's equity instruments. Examples of market
conditions include a specific share price target or total shareholder return, measured based on the share price of an entity's
shares adjusted for the reinvestment of dividends, or based on the share price of an entity's shares relative to a stock-
exchange index. [IFRS 2.A]
2.6.460.20 Market conditions are reflected as an adjustment (discount) to the market-based measure of both the
replacement and the acquiree's awards at the acquisition date. This applies regardless of the classification of the share-
based payment as equity settled or cash settled. [IFRS 2.21, 33, 3.30]
2.6.460.30 The attribution of the acquisition-date market-based measure of the replacement awards to pre-combination
service and post-combination service follows the general requirements set out in 2.6.440. This applies regardless of the
classification of the share-based payment as equity settled or cash settled. However, the accounting for the replacement
awards in post-combination periods differs depending on the classification of the share-based payment.
• When the market condition of an equity-settled share-based payment is not met, the accounting
for post-combination remuneration cost is not affected.
• When the market condition of a cash-settled share-based payment is not met, the liability is
reversed through profit or loss, even though the amount of the liability recognised for services
attributed to pre-combination service remains in goodwill. [IFRS 3.B61]
2.6.470 Replacement awards with non-vesting conditions
Page 270 / 375

2.6.470.10 The attribution of the acquisition-date market-based measure of the replacement awards to pre-combination
service and post-combination service follows the general requirements set out in 2.6.440. This applies regardless of the
classification of the share-based payment. [IFRS 3.B61]
2.6.470.20 For equity-settled share-based payments, non-vesting conditions, similar to market conditions, are reflected in
the market-based measurement of the share-based payments at the acquisition date. [IFRS 2.21A, IG24]
2.6.470.30 For cash-settled share-based payments, in our view non-vesting conditions should also be taken into account
when measuring the market-based measure of a cash-settled liability at the acquisition date, similar to market conditions.
2.6.480 Share-based payment award includes change-in-control clauses
2.6.480.10 Share options or other share-based payment plans often include a clause that provides for the acceleration of
vesting in the event of a change in control of the issuer (a change-in-control clause). In other instances, existing awards
sometimes are modified to add a change-in-control clause in contemplation of a change in control of an acquiree (see
2.6.490). The effect of the change-in-control clause that accelerates vesting on the attribution of an acquirer's replacement
awards between pre-combination and post-combination service depends on how the change-in-control clause arose.
2.6.480.20 In some circumstances, a change-in-control clause is included in the original terms of an acquiree award and
the clause is triggered by an acquisition of the acquiree such that unvested awards immediately vest at the acquisition date.
In such cases, the shortened vesting period resulting from the change in control was provided for by the terms of the
acquiree award and is in our view regarded as the original vesting period for the purposes of determining the amount of a
replacement award to be attributed to pre-combination service and to post-combination service.
2.6.480.30 For example, an acquiree award that includes a change-in-control clause providing for the acceleration of
vesting is exchanged for a replacement award that does not require post-combination service to vest. In this case, we
believe that the original vesting period and the sum of the pre-combination vesting period plus the post-combination vesting
period would be the same for purposes of attributing the replacement award to pre-combination and post-combination
services. Accordingly, if in such situations the market-based measure of the replacement award is not in excess of that of
the acquiree award, then we believe that the total market-based measure of the replacement award would be attributed to
the consideration transferred in the business combination; no amount would be attributed to post-combination
remuneration cost. Any market-based measure of the replacement award in excess of that of the acquiree award would be
recognised as post-combination cost.
2.6.490 Acquirer requests modification of acquiree award in contemplation of change in control
2.6.490.10 If a change-in-control clause that provides for the acceleration of vesting is added to an acquiree's share-based
payment award at the request of an acquirer, and is replaced by a fully vested acquirer award, then in our view the
accounting would be the same as if the acquirer issued a fully vested replacement award in exchange for an unvested
acquiree award. This is consistent with the guidance in IFRS 3 that a transaction entered into by the acquirer and the
acquiree during the negotiations of the terms of a business combination for the benefit of the combined entity is likely to be
separate from the business combination. [IFRS 3.B50]
2.6.500 Awards with graded vesting
2.6.500.10 In some cases, share-based payment awards vest in instalments over the vesting period (graded-vesting
awards). IFRS 2 requires each such instalment to be treated as a separate grant of share-based payment awards.
Accordingly, an entity determines the portion of replacement awards to be attributed to pre- and post-combination service
separately for each tranche of a graded-vesting award. [IFRS 2.IG11]
2.6.505 Unreplaced awards

2.6.505.10 If acquiree awards are not replaced at the acquisition date (unreplaced awards), then the accounting for such
awards distinguishes between:
• acquiree awards that were vested at the acquisition date (see 2.6.510); and
Page 271 / 375

• acquiree awards that were not vested at the acquisition date (see 2.6.515). [IFRS 3.B62A-B62B]
2.6.510 Vested acquiree awards are not replaced

2.6.510.10 If equity-settled unreplaced acquiree options are vested at the acquisition date, then those acquiree awards
form part of the NCI in the acquiree and are measured at their market-based measure at the acquisition date in accordance
with IFRS 2. This is because the awards do not represent present access to ownership interests and do not entitle their
holders to a proportionate share of the acquiree's net assets in the event of liquidation. [IFRS 3.19, B62A]
2.6.515 Unvested acquiree awards are not replaced

2.6.515.10 If an equity-settled unreplaced acquiree award is not vested at the acquisition date, then it is measured at its
market-based measure as if the acquisition date were the grant date under IFRS 2. In determining the portion of the
market-based measure that is allocated to pre-combination services, all relevant data regarding the probability of meeting
vesting conditions, other than market conditions, are taken into account. If the acquiree's awards have non-market
performance conditions that are not probable of being met as of the acquisition date, then no amount is allocated to pre-
combination services and therefore no amount is allocated to NCI. [IFRS 3.B62A]
2.6.515.20 When the non-market performance condition is probable of being met such that a portion of the market-based
measure is allocated to pre-combination services, the market-based measure of the unvested share-based payment
transactions is allocated to pre-combination services, and therefore to NCI, based on the ratio of the portion of the vesting
period completed to the greater of the total vesting period or the original vesting period of the unreplaced awards. The
balance is allocated to post-combination service. The attribution formula for unreplaced awards is the same as the formula
for replaced awards (see 2.6.440). The attribution requirements for replaced awards also apply to unreplaced awards in
which the vesting period is modified. [IFRS 3.B62B]
2.6.518 Acquirer share-based payment awards exchanged for acquiree awards: separate
financial statements
2.6.518.10 The requirements in IFRS 3 for the attribution of the market-based measure of replacement awards were
developed as part of the requirements for acquisition accounting in consolidated financial statements of the acquirer. It is
not clear how replacement awards should be accounted for in the separate financial statements of the acquirer.
2.6.518.20 In our view, one acceptable approach is to follow the attribution guidance in IFRS 3 by analogy. This is on the
basis that, from the point of view of the separate financial statements, the issue of a replacement award may be considered
to have been exchanged for two different items:
• as part of the cost of obtaining a controlling interest in the acquiree; and
• for post-acquisition services to be rendered by the acquiree's employees.
2.6.518.30 The amounts recognised under this view would be added to the cost of the investment in the subsidiary (see
4.5.1850):
• in respect of the cost of obtaining control of the acquiree, at the acquisition date (see 2.6.260);
and
• in respect of post-acquisition services, as those services are received (see 2.6.340).
2.6.520 Acquisition-related costs

2.6.520.10 Acquisition-related costs incurred by an acquirer to effect a business combination are not part of the
consideration transferred. They are accounted for as an expense in the period incurred, unless such costs are incurred to
issue debt or equity securities, in which case they are recognised in accordance with IAS 32 (for equity, see 7.3.520) and
IAS 39 (for debt, see 7.6.30). [IFRS 3.53]
2.6.520.15 In some cases, judgement is required in determining whether a cost incurred is an acquisition-related cost or a
Page 272 / 375

cost that qualifies for capitalisation in accordance with, for example, IAS 38.
EXAMPLE 9 - THIRD-PARTY PAYMENT FOR RIGHTS TO BE TRANSFERRED
2.6.520.16 Company P acquires Company S on 30 June 2012. Included in the assets acquired
from S is an intangible asset that comprises rights to operate in a certain area of activity. However,
P is required to make an additional payment to the regulator in S's jurisdiction in order for the
rights to be transferred for use by P group.
2.6.520.17 We believe that the payment to the regulator is an acquisition-related cost. If the right
was acquired separately - i.e. not as part of a business combination - then it would be capitalised
as an intangible asset (see 3.3.30) and the payment would be a transaction cost, like a transfer tax.
Although the right is acquired as part of a business combination, the nature of the payment has not
changed; accordingly, it is an acquisition-related cost incurred to effect the business combination,
and is expensed as incurred. We believe that the transfer of rights could not be construed as
separate from the business combination because the transfer of the rights to P group is an integral
part of the business combination itself.
2.6.520.20 If acquisition-related costs incurred by, or in substance on behalf of, an acquirer are paid by the acquiree or
selling shareholders, then those costs are also accounted for as a separate transaction and are not part of the accounting
for the business combination. [IFRS 3.52(c)]
2.6.520.30 An acquirer may incur costs related to equity securities issued to effect a business combination. Such costs
may include, for example, fees charged by underwriters, attorneys, accountants and printers. These costs effectively reduce
the proceeds from the issue, and therefore the amount is recognised in equity. An entity recognises as an expense in profit
or loss all costs that are not incremental to the issue of the securities, because such costs would have been incurred even
without the issue of the equity securities. [IFRS 3.53, IAS 32.37]
2.6.520.40 An acquirer may incur costs in connection with the issue of debt associated with a business combination. For
example, such costs may include fees paid to creditors, attorneys and rating agencies. Debt issue costs reduce the proceeds
from the debt issued and are an element of the effective interest cost of the debt; neither the source of the debt financing
nor the use of the proceeds changes the nature of such costs. Only costs incurred in connection with a debt issue that are
directly attributable to that debt issue are capitalised and amortised over the term of the debt as a component of interest
cost. In our view, directly attributable costs comprise only those that are incremental. Costs that are not directly attributable
to the issue of debt are recognised as an expense in profit or loss because such costs would have occurred even without
the issue of debt. [IFRS 3.53, IAS 39.43]
2.6.520.50 An entity may incur fees in connection with the issue of debt and also pay fees to the same service
provider/creditor in a related business combination. The fees allocated to the debt issue and the cost of the acquisition
(which are expensed), in our view should be representative of the actual services provided. For example, if an entity pays
fees to an investment bank in connection with a business combination plus additional financing, then we believe that those
fees should be allocated between the costs of the acquisition and debt issue costs considering factors such as the fees
charged by investment banks in connection with other similar recent transactions - e.g. fees charged by an investment bank
solely for advisory services for an acquisition or fees charged by an investment bank solely for arranging financing.
2.6.520.60 In our view, costs incurred by the acquirer in respect of due diligence procedures, which may be internal or
external costs, are generally acquisition-related costs rather than being related to financing. However, a final determination
will depend on the facts and circumstances of each case.
2.6.520.70 In some circumstances, a vendor may commission due diligence procedures. Some vendor due diligence
engagements are commissioned by selling shareholders, before potential buyers for a business are identified, to facilitate a
rapid sale or to obtain a better transaction price. In other circumstances, an acquirer may be involved at some stage in
setting the scope or procedures to be performed in such due diligence procedures. Factors to be taken into account in
assessing whether the costs of such transactions borne by the vendor are in substance reimbursed by the acquirer include,
but are not limited to:
• the extent to which the acquirer uses the vendor due diligence report;
Page 273 / 375

• the extent to which the acquirer avoids paying for a due diligence process itself;
• the extent of the acquirer's involvement in the vendor due diligence process;
• the extent to which the vendor due diligence assists the former owners of the acquiree - e.g. by
facilitating a quicker sale and/or a higher price; and
• who bears the cost of the due diligence if the business combination does not take place.
2.6.525 Written put option or forward

2.6.525.10 An entity may write a put option or enter into a forward with the non-controlling shareholders in an acquiree as
part of acquisition of the subsidiary. In that case, in our view there is a rebuttable presumption that the transactions are
linked and should be accounted for as a single transaction in the acquisition accounting. See 2.5.480 for a more in-depth
discussion.
Page 274 / 375

2.6.530 CONTROL MAINTAINED OVER ASSETS TRANSFERRED

2.6.530.10 An acquirer may transfer a business or a subsidiary to the acquiree as consideration in a business combination.
Other forms of consideration transferred may include assets and liabilities of a subsidiary or other assets of the acquirer.
Regardless of the structure of the transaction, if the acquirer retains control of the transferred assets or liabilities after the
acquisition, then it recognises no gain or loss in profit or loss and measures those assets and liabilities at their carrying
amounts immediately before the acquisition. [IFRS 3.38]
2.6.530.20 Additionally, if an acquirer transfers an equity interest in a subsidiary, but continues to hold a controlling
interest in the subsidiary after the transfer, then the change in the parent's ownership interest in the subsidiary is accounted
for as an equity transaction, and no gain or loss is recognised in profit or loss (see 2.5.380).
EXAMPLE 10A - EXISTING SUBSIDIARY TRANSFERRED TO ACQUIREE - NCI AT FAIR VALUE
2.6.530.30 Company P transfers its wholly owned Subsidiary S1 to Company S2 in exchange for a
60% interest in S2. The fair value of the consideration transferred (the proportionate fair value of
S1) is equal to the fair value of the consideration received (the proportionate investment in S2) -
i.e. there is no bargain purchase. It also is determined that there is no minority discount or control
premium in this transaction.
2.6.530.40 P controls the transferred business (S1) directly before the transaction, and indirectly
after the transaction through its control of S2. Therefore, P continues to measure the assets and
liabilities of S1 following the acquisition at their carrying amounts immediately before the
acquisition. However, as a result of the acquisition P has given up a 40% interest in S1. This
decrease in interest is accounted for as an equity transaction.
Page 275 / 375

2.6.530.60 The above amounts are calculated as follows.

• The fair value of the identifiable net assets of S2 was given in the fact
pattern. S1 is already consolidated and therefore its net assets are excluded
from the above entry.
• Goodwill of 50 is the consideration transferred (240) plus the amount
attributed to NCI in respect of S2 (160), less the fair value of its identifiable
net assets (350).
The NCI in S2 comprises:
- the NCI interest in S2 measured using the fair value of 160 (400 x 40%),
based on the assumption that there was no minority discount or control
premium in the transaction; and
- the NCI interest in S1 measured using book values of 100 (250 x 40%).
The entry to 'other' equity comprises the difference between:
- consideration transferred, P's interest in S1, measured at fair value of
240 (600 x 40%); and
- P's interest in S1 given up measured using book value of 100 (250 x
40%).
2.6.530.70 There is no specific guidance in IFRS about where this credit should be recognised
within equity; alternatives might include additional paid-in capital (share premium) and retained
earnings.
2.6.540 [Not used]
2.6.550 Non-controlling interests measured at proportionate interest in

identifiable net assets
EXAMPLE 10B - EXISTING SUBSIDIARY TRANSFERRED TO ACQUIREE - NCI AT PROPORTIONATE INTEREST IN
IDENTIFIABLE NET ASSETS
2.6.550.05 Assume the same facts as in Example 10A except that P elects to measure NCI at their
Page 276 / 375

proportionate interest in the identifiable net assets of S2 at the acquisition date.

2.6.550.20 The above entry differs from Example 10A as follows.

• Goodwill of 30 is the consideration transferred (240) plus the amount
attributed to NCI in respect of S2 (140), less the fair value of its identifiable
net assets (350).
The NCI in S2 comprises:
- the NCI interest in S2 measured using the fair value of the identifiable
net assets of 140 (350 x 40%); and
- the NCI interest in S1 measured using book values of 100 (250 x 40%).
2.6.550.30 An economically similar result would occur if S1 had issued new shares representing a
40% interest to the shareholders of S2 in exchange for all the ordinary shares of S2. The same
accounting treatments as those described above would apply in such a transaction.
Page 277 / 375

2.6.560 IDENTIFIABLE ASSETS ACQUIRED AND LIABILITIES

ASSUMED
2.6.560.10 IFRS 3 contains general principles on the recognition and measurement of the identifiable assets acquired and
the liabilities assumed as part of a business combination. There are limited exceptions to these recognition and
measurement principles. For example, certain contingent liabilities assumed in a business combination are recognised
separately as part of the acquisition accounting, and non-current assets (or disposal groups) classified as held-for-sale are
measured at fair value less costs to sell. [IFRS 3.23, 31]
2.6.560.20 Subsequent to the business combination, assets and liabilities are generally measured in accordance with
applicable IFRSs; this subsequent measurement is outside the scope of this chapter other than for certain items in respect
of which IFRS 3 contains guidance (see 2.6.970).
2.6.570 Recognition principle

2.6.570.10 The recognition principle in IFRS 3 is that the identifiable assets acquired and the liabilities assumed as part of
a business combination are recognised separately from goodwill at the acquisition date, if they:
• meet the definition of assets and liabilities in the Conceptual Framework (see 1.2.30); and
• are exchanged as part of the business combination, instead of as a separate transaction (see
2.6.340). [IFRS 3.11-12]
2.6.570.20 As a result of the recognition principle, the usual recognition criteria for assets and liabilities acquired in a
business combination are always considered satisfied - i.e. probable inflow or outflow of economic benefits and that their
values can be measured reliably. [IFRS 3.BC126]
2.6.570.30 Costs incurred due to the acquisition because of planned or future actions of the acquirer are not recognised as
liabilities by the acquirer because they are not liabilities of the acquiree at the acquisition date. For example, the cost of
restructuring the acquiree is recognised as a liability as part of the acquisition accounting only if it is a liability of the
acquiree at the acquisition date. [IFRS 3.11-12, 51-53]
2.6.570.40 There are limited exceptions to the recognition principle (see 2.6.640).
2.6.580 Classifying and designating assets acquired and liabilities assumed

2.6.580.10 IFRS 3 provides a general principle that at the acquisition date the acquirer classifies and designates
identifiable assets acquired and liabilities assumed as necessary to apply other IFRSs subsequently. Those classifications
are made based on the contractual terms, economic conditions, the acquirer's operating or accounting policies and other
pertinent conditions at the acquisition date. [IFRS 3.15]
2.6.580.20 There are two exceptions to this general classification and designation principle: the classification by the
acquiree of a lease as operating or finance in accordance with IAS 17 and the classification of a contract as an insurance
contract in accordance with IFRS 4 are retained, unless the acquiree's classification was made in error. The classification
and designation of these contracts are based on the contractual terms at inception of the contract, or at the date of the
latest modification that resulted in a change of classification. [IFRS 3.17]
2.6.590 Financial instruments

2.6.590.10 The acquirer goes through the process of designating financial instruments as hedging instruments and
designating any hedge relationships of the acquiree, and re-assessing whether separation of an embedded derivative from
its host is required at the acquisition date based on conditions as they exist at the acquisition date. [IFRS 3.16]
2.6.590.20 This means that in its consolidated financial statements the acquirer cannot automatically continue to apply the
Page 278 / 375

hedge accounting model to the hedge relationship designated previously by the acquiree. Rather, if it wishes to apply hedge
accounting, then the acquirer has to designate a new hedge relationship. This might involve the same financial instruments
and hedged items, but the inception of the hedge relationship can be no earlier than the acquisition date.
2.6.590.30 Designation can be made only if the hedging relationship meets all hedging requirements in IAS 39 at the
acquisition date and can be made prospectively only from that date. This requires the acquirer to assess whether the hedge
will be effective over the designated period. See 7.7.670 for a discussion of assessing hedge effectiveness when hedging
with an off-market derivative.
2.6.600 Measurement principle #

2.6.600.10 The measurement principle in IFRS 3 is that the identifiable assets acquired and the liabilities assumed as part
of a business combination are measured at the acquisition date at their fair values. '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. Fair
value is based on the concept of a hypothetical market participant, rather than being specific to either the acquirer or the
acquiree (see 2.6.1040.60-80). [IFRS 3.18, A]
2.6.600.20 There are limited exceptions to the measurement principle (see 2.6.640).
2.6.600.30 IFRS 3 provides specific guidance on applying the fair value measurement principle to the following assets:
• assets with uncertain cash flows (valuation allowances);
• assets subject to operating leases in which the acquiree is the lessor; and
• assets that the acquirer intends not to use or to use differently from the way in which other
market participants would use them.

value measurement that applies across all IFRSs. Chapter 2.4A discusses the requirements of IFRS 13.
2.6.605.20 Previously, there was no general guidance on how to determine the fair value of the identifiable assets
acquired and the liabilities assumed as part of a business combination. IFRS 13 does not amend the specific guidance in
respect of determining fair value outlined in 2.6.600.30, as explained further in 2.6.610-630.
2.6.610 Assets with uncertain cash flows (valuation allowances)

2.6.610.10 IFRS 3 prohibits recognition at the acquisition date of a separate valuation allowance on assets acquired that
are measured at fair value. The rationale is that fair value incorporates uncertainties about cash flows. For example,
because accounts receivable acquired in a business combination are recognised at fair value at the acquisition date, they
cannot be recognised in the statement of financial position at their gross amounts (contractual amount of the receivable
without taking into account credit risk) less a separate valuation allowance based on estimated uncollectible cash flows. The
acquirer is required to disclose separately the fair value of the receivables acquired, as well as their gross contractual
amounts and the best estimate of the amounts of the contractual cash flows that the acquirer does not expect to collect.
[IFRS 3.B41, B64(h)]
EXAMPLE 11 - FAIR VALUE OF TRADE RECEIVABLES LESS THAN FACE VALUE
2.6.610.20 Company P acquires Company S in a business combination on 31 October 2012. At the

acquisition date, the gross contractual amount of S's trade receivables is 100. The fair value of the
trade receivables at 31 October 2012 is 75 and the best estimate of the amount expected to be
collected is also 75.
2.6.610.30 P recognises trade receivables at their acquisition-date fair value of 75 in applying the
acquisition accounting. In addition, P discloses the fair value of the receivables acquired of 75, as
Page 279 / 375

well as their gross contractual amounts of 100 and the best estimate of the amounts of the
contractual cash flows that the acquirer does not expect to collect of 25.
2.6.620 Assets subject to operating leases in which acquiree is the lessor

2.6.620.10 If the acquiree is the lessor in an operating lease, then the asset subject to the operating lease (e.g. a building)
is recognised at fair value taking into account the terms of the related lease - i.e. the acquirer does not recognise a
separate intangible asset or liability related to the favourable or unfavourable aspect of an operating lease relative to
market terms or prices. See 2.6.830-838 for further guidance on leases acquired in a business combination. [IFRS 3.B42]
2.6.630 Usage different from other market participants

2.6.630.10 Many assets have different uses and often the value of an asset to an entity may be highly dependent on its
specific use. Sometimes the acquirer intends to use an asset in a manner different from the way in which market
participants would use it. In an extreme scenario, the acquirer in a business combination may intend not to use one of the
assets acquired, whereas market participants would use and generate economic benefits from the asset. There can be a
variety of reasons for this. An example is defensive intangible assets that the acquirer does not intend to use, but intends to
hold and prevent others from gaining access to them, thereby increasing the value of the acquirer's existing (competing)
assets. The question arises as to how such assets should be valued in the acquisition accounting.
2.6.630.20 The standards do not exempt an entity from recognising an asset acquired at fair value based on market
participants' use of the asset because the entity does not intend to use that asset, or intends to use it in a way that is not
similar to how market participants would be expected to use it. Therefore, such assets are recognised at fair value rather
than based on the way in which the acquirer intends to use them (see 2.6.1030). However, see 2.6.1060 for guidance on
assets held for sale.
EXAMPLE 12 - ACQUIRED BRAND TO BE UNUSED
2.6.630.30 Company P, a confectionary company, acquires one of its main competitors, Company
S, in a business combination on 31 October 2012. While P intends to use S's production plant,
distribution network and research facilities, it does not intend to use S's brand name for its
confectionary. However, it is envisaged that other market participants would use that brand
name.
2.6.630.35 Even though P does not intend to use S's brand name, it is still required to recognise
and measure S's brand name at its fair value at the acquisition date based on its use by other
market participants. Therefore, P estimates the likely plans of market participants for the brand.
2.6.630.40 See 3.3.235 for a discussion of the amortisation of an intangible asset that the acquirer intends not to use or to
use in a way that is different from how market participants would use them.
2.6.640 Exceptions to the recognition and measurement principles

2.6.640.10 IFRS 3 provides the following exceptions to the recognition and/or measurement principles. [IFRS 3.24-31]
Exception to the recognition Exceptions to both the Exceptions to the measurement

principle recognition and measurement principle
principles
• Contingent • Deferred tax assets and • Re-acquired rights (see

liabilities (see liabilities and tax 2.6.690)
2.6.650) uncertainties (see
2.6.660) • Share-based payment
awards (see 2.6.700)
Page 280 / 375

• Indemnification assets
(see 2.6.670) • Assets held for sale
(see 2.6.710)
• Employee benefits (see
2.6.680)
2.6.650 Contingent liabilities

2.6.650.10 A 'contingent liability' is:
• a possible obligation that arises from past events whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the entity; or
• a present obligation that arises from past events but is not recognised because it is not probable
that economic outflow will be required to settle the obligation or it cannot be measured with
sufficient reliability. [IFRS 3.22, IAS 37.10]
2.6.650.20 The following flowchart outlines the application of IFRS 3 in respect of contingent liabilities.
2.6.650.30 A contingent liability acquired in a business combination is recognised in the acquisition accounting if it is a
present obligation and its fair value can be measured reliably; this is because it meets the definition of a liability in that
case. A contingent liability that is a possible obligation is not recognised because it does not meet the definition of a liability.
[IFRS 3.23, BC274-BC275]
2.6.650.40 In some cases, it will not be clear whether a present obligation exists - for example, when the parties dispute
facts and circumstances giving rise to the contingent liability. In that case, IAS 37 clarifies that a past event is deemed to
give rise to a present obligation if it is 'more likely than not' that a present obligation exists. Although this is not stated
explicitly in IFRS 3, in our view it is appropriate to extend this requirement of IAS 37 in applying the acquisition method
since IFRS 3 does not deal with the issue itself. [IAS 37.15]
Page 281 / 375

2.6.650.50 The probability of payment being required is not relevant in determining whether a contingent liability that is a
present obligation should be recognised in a business combination, but this probability will impact its fair value. [IFRS 3.23]
2.6.650.60 Contingent liabilities may arise due to actual or intended post-acquisition actions of the acquirer. Such
contingent liabilities are not recognised as part of the acquisition accounting since the intentions of the acquirer are not
reflected in the acquisition accounting and the definition of a liability is not met at the acquisition date. For example, risks
arising from transactions after the acquisition date to achieve tax optimisation for the acquirer would not be reflected as of
the acquisition date.
2.6.650.70 See 2.6.990 for a discussion of the subsequent measurement of contingent liabilities recognised in the
acquisition accounting.
2.6.650.80 Contingent assets are not recognised because a contingent asset is a 'possible' asset that does not meet the
definition of an asset. [IFRS 3.BC276, IAS 37.10]
EXAMPLE 13 - CONTINGENT ASSET ACQUIRED
2.6.650.90 Company P acquires Company S in a business combination on 31 October 2012. S

leases a property to Company Q under an operating lease. The terms of the lease state that if Q
cancels the contract, then Q would be required to pay 100 to S. P would not recognise this
contingent asset in accounting for the business combination.
2.6.660 Deferred tax assets and liabilities

2.6.660.10 Deferred tax assets and liabilities that arise from the assets acquired and liabilities assumed in a business
combination are recognised and measured in accordance with IAS 12 rather than at fair value. Deductible temporary
differences and unused tax losses of the acquiree are also accounted for in accordance with IAS 12. [IFRS 3.24]
2.6.660.20 See 3.13.670 for a discussion of the accounting for the income tax effects of business combinations.
2.6.670 Indemnification assets

2.6.670.10 Purchase agreements sometimes provide that the seller indemnifies the acquirer against a particular contingent
liability outstanding at the acquisition date. For example, a contingent liability could relate to a legal case of the acquiree for
environmental pollution or to specific tax uncertainties. The seller may agree to reimburse the acquirer if the outcome of
the legal case or resolution of the tax uncertainty requires payment by the acquiree. As a result, the acquirer obtains an
indemnification asset.
2.6.670.20 When the seller is contractually obliged to indemnify the acquirer for a specific liability, an asset is recognised
at the same time and measured using the same measurement basis as the liability. This ensures that both the asset and
the liability are measured on a consistent basis using similar assumptions, subject to management's assessment of
collectibility of the asset. [IFRS 3.27-28]
2.6.670.30 This accounting applies to indemnities related to a specific liability or contingent liability of the acquiree. It does
not apply in accounting for general representations and warranties provided by the seller to the acquirer that do not create
a specific right of reimbursement.
2.6.670.40 After initial recognition, an indemnification asset continues to be measured based on the assumptions used to
measure the related liability, subject to management's assessment of collectibility of the asset, limited to the amount of the
liability to which it relates (see 2.6.1000). [IFRS 3.57]
EXAMPLE 14 - INDEMNIFICATION PROVIDED BY SELLER
2.6.670.50 Company P acquires Company S in a business combination on 31 October 2012. S is

being sued by one of its customers for breach of contract. The sellers of S provide an
Page 282 / 375

indemnification to P for the reimbursement of any losses greater than 500. There are no
collectibility issues around this indemnification.
2.6.670.60 At the acquisition date, it is determined that there is a present obligation and therefore
the fair value of the contingent liability of 530 is recognised by P in the acquisition accounting. In the
acquisition accounting, P also recognises an indemnification asset of 30 (530 - 500).
2.6.680 Employee benefits

2.6.680.10 Employee benefit liabilities (and assets, if any) are recognised and measured in accordance with IAS 19 (see
4.4) except those to which IFRS 2 applies (see 2.6.700). Defined benefit plan surpluses (to the extent recoverable) and
deficits are recognised at the full present value of the obligation less the fair value of any plan assets - i.e. all actuarial
gains and losses and past service costs of the acquiree are recognised. [IFRS 3.26]
2.6.680.20 The measurement of the liability does not take into account plan amendments, terminations or curtailments
that the acquirer has no obligation to make at the acquisition date; therefore, it does not take into account the acquirer's
intentions or future actions, such as an intention to change the terms of the plan to conform to the acquirer's existing plan.

2.6.690.10 The acquisition of a right that had been previously granted to the acquiree to use one of the acquirer's assets
(recognised or unrecognised) is a re-acquired right, which is recognised as part of the acquisition accounting. The re-
acquired right represents an identifiable intangible asset that is recognised separately from goodwill. [IFRS 3.B35]
2.6.690.20 Re-acquired rights are measured by taking into account only the remaining contractual terms of the related
contract. Any potential renewals are ignored even if a market participant would take these into account in its determination
of fair value. This is consistent with the requirement that the amortisation period of re-acquired rights cannot take into
account expected renewals (see 2.6.980).
2.6.700 Share-based payment awards

2.6.700.10 In certain instances, an acquirer's share-based payment awards (replacement awards) may be exchanged for
awards held by the acquiree's employees (acquiree awards). Such payments are accounted for as modifications in
accordance with IFRS 2. Any liability or equity instrument related to a share-based payment award is measured in
accordance with IFRS 2, which is a market-based measurement principle rather than a fair value measurement principle.
See 2.6.420 for a discussion of the accounting for share-based payment awards.
2.6.710 Assets held for sale

2.6.710.10 Assets (or disposal groups) acquired solely with the intention of disposal in the short term are consolidated.
However, they are classified separately as non-current assets (or disposal groups) held-for-sale if they meet the criteria for
classification as held-for-sale in IFRS 5 within a short period of time after the acquisition date, generally three months or
less. Such assets (or disposal groups) classified as held-for-sale are measured at fair value less costs to sell in accordance
with IFRS 5. [IFRS 3.31]
2.6.720 Intangible assets

2.6.720.10 All identifiable intangible assets acquired in a business combination are recognised separately from goodwill
and are initially measured at their acquisition-date fair values. This often involves identifying and recognising intangible
assets not previously recognised by the acquiree in its financial statements. Therefore, the identification, recognition and
measurement of intangible assets is an important part of the acquisition accounting that often requires considerable time
and attention.
2.6.720.20 In general, an intangible asset is recognised only if it meets the asset recognition criteria - i.e. it is probable
that the expected future economic benefits attributable to the asset will flow to the entity, and its cost can be measured
Page 283 / 375

reliably. For identifiable intangible assets acquired in a business combination, these recognition criteria are always
considered to be satisfied. Therefore, all identifiable intangible assets acquired in a business combination are recognised
separately from goodwill. [IAS 38.21, 33]
2.6.720.30 IAS 38 provides guidance on the subsequent accounting for intangible assets acquired in a business
combination (see 3.3.190-320).
2.6.720.40 An asset is identifiable if either it is separable or it arises from contractual or other legal rights, regardless of
whether those rights are transferable or separable from the entity or from other rights and obligations (see 3.3.40). [IAS
38.12]
2.6.720.50 The implementation guidance to IFRS 3 provides examples of intangible assets that meet the identifiability
criteria for recognition as intangible assets separately from goodwill - i.e. either arise from contractual-legal rights or are
separable. The intangible assets are grouped into the following categories:
• marketing-related;
• customer-related;
• artistic-related;
• contract-based; and
• technology-based. [IFRS 3.IE16-IE40]
2.6.720.60 Sometimes an intangible asset acquired is separable only together with a related contract, identifiable asset or
liability. In this case it is recognised separately from goodwill together with the related item. [IFRS 3.B34, IAS 38.36]
2.6.720.70 Examples of intangible assets that may be separable only together with a related item include:
• a trademark for a product because this may be separable only together with the recipe or
documented but unpatented technical expertise used to manufacture that product;
• a trademark for natural spring water because this may relate to a particular spring and be
separable only together with that spring;
• a group of depositor relationships because this may be separable only together with the related
deposit liabilities; and
• a licence to operate an item because this may be separable only together with the related item -
for example, a licence to operate a nuclear power plant or an airport. [IFRS 3.B32(b)]
2.6.720.80 Sometimes a group of complementary identifiable intangible assets may be acquired - e.g. a trademark for a
drug and its related trade name, formula, recipe and technological expertise. In this case, the group of complementary
assets may be recognised together as a single asset separate from goodwill provided that the individual assets have similar
useful lives. [IAS 38.37]
2.6.720.90 Many intangible assets arise from rights conveyed legally by contract, statute or similar means. An intangible
asset that meets the contractual-legal criterion is identifiable, regardless of whether it meets the separability criterion.
Examples of intangible assets that may meet the contractual-legal criterion include:
• franchises granted - for example, in respect of fast-food outlets, restaurant chains or car
dealers;
• trademarks;
• patents;
• contracts negotiated with customers or suppliers and related relationships;
• licence agreements;
• the favourable terms of an acquired operating lease compared with current market terms,
regardless of whether the lease terms prohibit the acquirer from selling or otherwise transferring
Page 284 / 375

the lease; and

• licences to operate, regardless of whether the licence can be sold or otherwise transferred
separately from the related item - for example, licences to operate a nuclear power plant or an
airport. [IFRS 3.B32(a)-(b)]
2.6.720.100 Contractual or other legal rights are not defined in IFRS 3, but it is clear from the examples in the standard
that the definition is intended to be broad. For example, customer relationships may meet the contractual-legal criterion at
the acquisition date even if there is no contract in place with the customer at the acquisition date, if the acquiree has a
practice of establishing contracts with customers. [IFRS 3.IE30(c)]
2.6.720.110 Sometimes a contract may be cancellable by the customer, but this does not affect it meeting the contractual-
legal criterion. [IFRS 3.IE30]
2.6.720.120 Sometimes the terms of a contract may prohibit its sale or transfer separately from the acquiree. This does
not affect it meeting the contractual-legal criterion, but it may in some cases affect its fair value (see 2.6.1040). [IFRS
3.IE26]
2.6.720.130 'Goodwill' is an asset representing the future economic benefits arising from other assets acquired in a
business combination that are not individually identified and separately recognised. An intangible asset acquired in a
business combination that meets neither the separability criterion nor the contractual-legal criterion at the acquisition date
is subsumed into goodwill. Similarly, any value attributable to items that do not qualify as assets at the acquisition date are
subsumed into goodwill. See 2.6.900 for a discussion of the recognition and measurement of goodwill. [IFRS 3.A]
2.6.720.140 Examples of items that are not identifiable include:
• the assembled workforce of the acquiree - i.e. an existing collection of employees that permits
the acquirer to continue to operate an acquired business from the acquisition date;
• potential future contracts at the acquisition date, although there may be a related customer
relationship intangible asset (see 2.6.760);
• synergies from combining the acquiree's net assets with those of the acquirer; and
• market share. [IFRS 3.B37-B38, BC179]
2.6.720.150 While individual employees may have employment contracts that are intangible assets, the assembled
workforce as a whole does not have such a contract and it is not separable. [IFRS 3.BC178]
2.6.720.160 A collective bargaining agreement typically dictates the terms of the employment - e.g. wage rates - but
normally does not oblige the covered employees to remain with the employer for a specified period. The assembled
workforce of the acquiree is not recognised as an intangible asset because it is not identifiable. In our view, the existence of
a collective bargaining agreement does not change this for the employees covered by that agreement. However, in our view
the underlying collective bargaining contract could meet the criteria for recognition as a separate intangible asset
(favourable contract terms) or a liability (unfavourable contract terms). We would expect the separate recognition of a
collective bargaining agreement intangible asset to arise rarely in our experience.
2.6.720.170 In our view, a group of individual employment contracts entered into by an acquiree with a broad group of
employees should not be viewed, collectively, as an assembled workforce. However, the facts and circumstances in each
situation should be evaluated. For example, non-compete clauses included in such contracts are evaluated separately for
possible recognition as identifiable intangible assets.
2.6.720.180 If an item acquired in a business combination is included in goodwill - for example, because it is not
identifiable at the acquisition date, then the acquirer does not subsequently reclassify that value from goodwill for events
that occur after the acquisition date. See 2.6.910 for a discussion of subsequent adjustments to the acquisition accounting.
[IFRS 3.45-50, B38]
2.6.730 Customer-related intangible assets

2.6.730.10 Customer-related intangible assets may meet the contractual-legal and/or the separability criterion (see
2.6.720.40 and 3.3.40). Identifying, recognising and measuring customer-related intangible assets is an area that often
Page 285 / 375

requires careful analysis and attention. The relationship that an acquiree has with its customers may encompass a number
of distinct intangible assets that need to be recognised separately from each other - e.g. a specific contract with a customer
may need to be recognised separately from the relationship with that customer. This can pose challenges in the acquisition
accounting. Examples of customer-related intangible assets include:
• customer lists (non-contractual);
• order or production backlog (contractual);
• customer contracts and related customer relationships (contractual); and
• non-contractual customer relationships. [IFRS 3.IE23]
2.6.740 Customer lists
2.6.740.10 A customer list consists of information about customers, such as names and contact information. It also may be
a database that includes other information about customers, such as order histories and demographic information.
Customer lists do not generally arise from contractual or other legal rights, but frequently are sold, leased or exchanged. A
customer list that is separable might meet the definition of an intangible asset even if the acquiree does not control the
customer relationship. However, not all customer lists are separable. In some countries, regulations exist that prevent an
entity from selling, leasing or exchanging the information in such a list. Sometimes there are terms of confidentiality or
other agreements that prohibit an entity from selling, leasing or otherwise exchanging information about its customers. The
existence of such regulation or similar agreements prevents recognition because the list would not be separable in such
cases. [IFRS 3.IE24]
2.6.740.20 It is important to distinguish between a customer list and a customer base. A customer list includes specific
information about the customer, such as name, contact information, order history and demographic information. A
customer base represents a group of customers that are neither known nor identifiable to the entity - e.g. the customers
that visit a particular fast-food restaurant. A customer base does not meet the criteria for recognition separately from
goodwill because a customer base meets neither the contractual-legal nor the separability criterion.
EXAMPLE 15A - INTANGIBLE ASSETS ACQUIRED - CUSTOMER LIST
2.6.740.30 Company P acquires Company S, a medical testing company, in a business

combination on 31 October 2012. S provides testing services to patients, such as blood screening,
based on referrals from their general practitioners (medical practitioners who provide primary care
to patients). S maintains a database with each patient's information, such as name, address,
telephone number, doctor's name, insurer's name and policy number. However, this patient
information is protected by privacy laws and S cannot sell, licence, transfer or otherwise exchange
it.
2.6.740.40 The customer list does not meet the separability criterion because privacy laws and
regulations over patient information prevent selling, transferring, licensing or exchanging patient
information separately from the acquiree. Whether P could recognise a separate intangible asset
for the relationship with the patients and the general practitioner would depend on the specific facts
and circumstances of each case.
2.6.750 Order or production backlog
2.6.750.10 Order or production backlog arises from contracts such as purchase or sales orders. An order or production
backlog acquired in a business combination meets the contractual-legal criterion even if the purchase or sales orders are
cancellable by the customer (see 2.6.720.110). [IFRS 3.IE25]
2.6.760 Customer contracts and related customer relationships
2.6.760.10 Customer relationships are identifiable intangible assets if they arise from contractual or legal rights, or are
separable. The following criteria need to be met to conclude that a customer relationship exists:
Page 286 / 375

• the acquiree should have information about the customer and regular contact with the customer;
and
• the customer should have the ability to make direct contact with the acquiree. [IFRS 3.IE28]
2.6.760.20 Care is taken to distinguish between a customer contract and the related customer relationship because they
may represent two distinct intangible assets, which may need to be recognised separately from each other since they may
have different useful lives. [IFRS 3.IE27]
2.6.760.30 If an entity establishes relationships with its customers through contracts, then those customer relationships
arise from contractual rights and therefore meet the contractual-legal criterion. This is unaffected by confidentiality or other
contractual terms that prohibit the sale or transfer of a contract separately from the acquiree. The interpretation of what is
a contractual customer relationship is broad. [IFRS 3.IE26, IE30]
EXAMPLE 15B - INTANGIBLE ASSETS ACQUIRED - CUSTOMER CONTRACTS AND RELATIONSHIPS
2.6.760.40 Company P acquires Company S in a business combination on 31 October 2012. S has

a practice of using purchase orders when entering into transactions with its customers. At the
acquisition date S:
• has a backlog of open purchase orders with 75% of its recurring customers;
and
• does not have open purchase orders, or other contracts, with the other 25%
of its recurring customers. [IFRS 3.IE29, IE30(c)]
2.6.760.50 Regardless of whether they are cancellable, the purchase orders from the 75% of S's
recurring customers meet the contractual-legal criterion. The related relationships with those
customers also meet the contractual-legal criterion. Therefore, both the contracts and the
relationships are recognised as intangible assets separately from goodwill, and separately from
each other as they represent two distinct intangible assets. Since S has a practice of establishing
customer relationships with customers through purchase orders, the customer relationships with
the 25% of recurring customers with whom S does not have open purchase orders also meet the
contractual-legal criterion. Therefore, these customer relationship assets are recognised at fair
value, separately from goodwill.
EXAMPLE 15C - INTANGIBLE ASSETS ACQUIRED - LOYALTY PROGRAMME
2.6.760.60 Company P acquires Company S, a department store, in a business combination on 31

October 2012. S runs a loyalty programme and has access to relevant customer information and
the ability to contact customers participating in the loyalty programme. In addition, the customers
have the ability to make direct contact with S. On the basis of the information presented in this
example, we believe that the customer relationship is recognised as an intangible asset separately
from goodwill at its acquisition-date fair value.
2.6.770 Overlapping customer relationships
2.6.770.10 Sometimes both the acquirer and the acquiree can have relationships with the same customer. In our view, the
acquirer still recognises the acquiree's relationship with that customer at its fair value at the acquisition date if that
relationship is identifiable.
EXAMPLE 15D - INTANGIBLE ASSETS ACQUIRED - OVERLAPPING CUSTOMER RELATIONSHIPS
2.6.770.20 Company P acquires Company S in a business combination on 31 October 2012. P and

S operate in the same industry and both sell their products to Customer C. Assuming that the
Page 287 / 375

relationship meets the separability or contractual-legal criterion, an issue arises as to whether P

should recognise an intangible asset for S's relationship with C separately from goodwill since P
already has a relationship with C.
2.6.770.30 We believe that P should recognise a customer relationship intangible asset for S's
relationship with C. We believe that it meets the definition of an identifiable intangible asset. The
relationship is measured at its fair value at the acquisition date from a market participant's
perspective.
2.6.780 Acquiree has a pre-existing customer relationship with acquirer

2.6.780.10 Sometimes the acquiree may have a pre-existing customer relationship with the acquirer, and the question
arises as to whether the acquirer recognises this relationship in the acquisition accounting. In our view, the acquirer should
not recognise an intangible asset separately from goodwill for a customer relationship that the acquiree has with the
acquirer because, from the perspective of the consolidated group, the definition of an asset is not met because no future
economic benefits will be derived from outside the group; the asset cannot be disposed of and the contract is between
members of the consolidated group.
2.6.780.20 In contrast to this, a re-acquired right granted previously by the acquirer to the acquiree to use an asset of the
acquirer is recognised in the acquisition accounting (see 2.6.390). The reason for the difference is that in the case of a re-
acquired right, the acquirer regains the right to use one of its assets; however, in the case of a customer relationship that
the acquiree has with the acquirer, the acquirer is not obtaining an identifiable asset because from the group's perspective
the acquirer and acquiree are part of the same entity. [IFRS 3.B35]
EXAMPLE 15E - INTANGIBLE ASSETS ACQUIRED - CUSTOMER RELATIONSHIP BETWEEN ACQUIRER AND ACQUIREE
2.6.780.30 Company P acquires Company S, one of its suppliers, in a business combination on 31

October 2012. The question arises as to whether P can recognise an intangible asset separately
from goodwill for S's customer relationship with P.
2.6.780.40 We believe that P should not include S's relationship with P in the measurement of the
customer relationship intangible asset arising from the acquisition of S because, from the
perspective of the consolidated group, the definition of an asset is not met. However, P should
consider whether there are other related identifiable intangible assets acquired - e.g. re-acquired
rights.
2.6.790 Purchased legal relationships with customers

2.6.790.10 Sometimes an acquiree may have a purchased legal relationship with customers, but does not have direct
contact with those customers. In our view, purchased legal relationships with customers may meet the criteria to be
recognised as contract-based intangible assets even if the entity does not have a direct contract with its customers and only
limited or no information about their identity, as long as the relationship nonetheless is established through contractual or
other legal rights.
EXAMPLE 15F - INTANGIBLE ASSETS ACQUIRED - RIGHT TO RECEIVE MANAGEMENT FEES
2.6.790.20 Company P acquires Company S, a fund management company, in a business

combination on 31 October 2012. S has a portfolio of customers (investors) who invest their money
in the funds run by S and pay a management fee to S as the fund manager. There is no contact
between S and its investors, and S does not have any information about its investors. Rather,
several banks act as intermediaries by advertising S's funds to their customers and enabling them
to invest in the funds. By doing so, the investors agree to the terms and conditions included in a
prospectus that is issued by the fund, which includes all relevant provisions, including those applying
to the management fee.
Page 288 / 375

2.6.790.30 In this case, we believe that P should recognise a contract-based intangible asset as
part of the acquisition accounting, based on the terms and conditions contained in the prospectus.
The intangible asset is effectively the right of S to receive management fees.
2.6.800 Non-contractual customer relationships

2.6.800.10 A customer relationship that does not meet the contractual-legal criterion can be identifiable if it meets the
separability criterion. Separability is demonstrated if the entity has the ability to dispose of the asset, or for the asset to be
disposed of as a package with a related asset, liability or related contract, but not as part of a business combination.
Therefore, in our view if an asset is capable of being divided from the entity, then separability is demonstrated by the
following:
• there is a market for the same or similar assets to be exchanged in transactions that are not
business combinations; and
• the entity has access to this market - i.e. the entity would be able to sell its customer relationship
in that market. [IFRS 3.B33-B34, IE31]
2.6.810 In-process research and development assets

2.6.810.10 In-process research and development (IPR&D) may be acquired in a business combination.
• 'Research' is original and planned investigation undertaken with the prospect of gaining new
knowledge and understanding. Outside of a business combination, research costs are expensed
as incurred.
• 'Development' is the application of research findings or other knowledge to a plan or design for
the production of new or substantially improved materials, products, processes etc. before the
start of commercial production or use. It does not include the maintenance or enhancement of
ongoing operations. [IAS 38.8]
2.6.810.20 IFRS 3 does not contain an exception to the recognition or measurement principles for IPR&D. Therefore,
IPR&D is recognised separately from goodwill and measured at its fair value at the acquisition date, if it is identifiable (see
2.6.720.40) and otherwise meets the definition of an intangible asset (see 3.3.30). This is irrespective of whether the
acquiree had recognised the asset in its financial statements before the business combination. Similar to other intangible
assets acquired in a business combination, the asset recognition criteria of probable future economic benefits and being
able to measure its cost reliably are considered to be satisfied in all cases (see 2.6.720.20). If there is uncertainty about the
outcome of a project, then this is reflected in the measurement of its fair value.
2.6.810.30 At the acquisition date, IPR&D is capitalised as an intangible asset not yet ready for use. The subsequent
measurement of an acquired IPR&D project and the treatment of subsequent expenditure on it are in accordance with IAS
38.
EXAMPLE 15G - INTANGIBLE ASSETS ACQUIRED - IPR&D
2.6.810.40 Company P acquires Company S, a pharmaceutical company, in a business

combination on 31 October 2012. The identifiable net assets acquired by P include an IPR&D project
for a new drug. S has capitalised 1,000 in accordance with IAS 38 in respect of this project. The
fair value of the project at the acquisition date is 3,000.
2.6.810.50 As part of its acquisition accounting, P recognises separately from goodwill an
intangible asset of 3,000 for the IPR&D project.
2.6.820 Usage different from other market participants

2.6.820.10 Sometimes the acquirer may intend not to use an acquired intangible asset, or it may intend to use it in a way
Page 289 / 375

that is not its highest and best use. There are a variety of reasons why an acquirer may intend not to use an acquired asset
- e.g. for competitive reasons or because the asset was incidental to the acquisition. Nevertheless, it is measured at its fair
value at the acquisition date based on its use by other market participants (see 2.6.1040.60-80). [IFRS 3.B43]
2.6.830 Leases
2.6.830.10 When the acquiree in a business combination is a party to lease agreements at the acquisition date, the
acquirer needs to account for these leases assumed as part of the acquisition accounting. This may result in the recognition
of assets and liabilities. The type of lease - i.e. operating or finance - and whether the acquiree is the lessee or the lessor
will impact how the assets and liabilities are recognised. The terms of the lease compared to market terms at the
acquisition date will impact the determination of the fair value of the asset or liability.
2.6.830.20 The following is a summary of the treatment of leases in the acquisition accounting, which is explained in more
detail in 2.6.831-838.
Page 290 / 375

2.6.831 Operating leases
2.6.832 Acquiree is the lessee in an operating lease
2.6.832.10 When the acquiree is the lessee in an operating lease, the underlying asset that is the subject of the lease is
not recognised by the acquiree or the acquirer. However, the acquirer recognises a separate intangible asset or liability in
respect of operating leases of the acquiree that are acquired in a business combination; in respect of an asset, these lease
agreements meet the contractual-legal criterion (see 2.6.720.40). The lease contract asset or liability is recognised at its
fair value at the acquisition date. Factors that affect the fair value include, for example, the lease not being priced at market
rates at the acquisition date, the existence of renewal options and the difficulty in securing such a lease. Leasehold
improvements of the acquiree are recognised as tangible assets at their fair values at the acquisition date. [IFRS 3.B28-
B29]
EXAMPLE 16A - OPERATING LEASE ACQUIRED - ACQUIREE IS LESSEE
2.6.832.20 Company P acquires Company S in a business combination on 31 December 2012. S

entered into an operating lease for a building as the lessee during 2012. The rent under the
agreement is fixed for five years and is substantially lower than market rates at the acquisition
date. The contract has a fair value estimated at 500, which includes consideration of renewal
options.
2.6.832.30 P recognises an intangible asset of 500 separately from goodwill and does not
recognise the underlying building.
2.6.833 Acquiree is the lessor in an operating lease
2.6.833.10 If the acquiree is the lessor in an operating lease, then the asset subject to the operating lease (e.g. a building)
is recognised at fair value taking into account the terms of the related lease - i.e. the acquirer does not recognise a
separate intangible asset or liability related to the favourable or unfavourable aspect of an operating lease relative to
market terms or prices. [IFRS 3.B42]
2.6.833.20 If the asset that is the subject of the operating lease is measured subsequent to the acquisition using the cost
model in accordance with IAS 16, then the off-market value of the lease, favourable or unfavourable, becomes a separate
component of the asset for the purpose of calculating depreciation. [IAS 16.44]
2.6.833.30 In addition to recognising the lease contract, an intangible asset may be recognised for the relationship that the
lessor has with the lessee at its fair value at the acquisition date, since the contractual-legal criterion is satisfied (see
2.6.720.40).
EXAMPLE 16B - OPERATING LEASE ACQUIRED - ACQUIREE IS LESSOR
2.6.833.40 Company P acquires Company S in a business combination on 31 December 2012.

One of the assets acquired by P is a building with an operating lease to a third party, which qualifies
as investment property in accordance with IAS 40. The lease contract with the third party has 12
Page 291 / 375

years remaining, and the estimated remaining useful life of the building is 30 years. The estimated
fair value of the building, excluding any favourable or unfavourable aspect of the operating lease
relative to its market terms, is 30,000. Because the lease is at a fixed rate that is above current
market rates, the lease has an estimated fair value of 600, which represents the favourable aspect
of the operating lease relative to market terms.
2.6.833.45 As part of its acquisition accounting, P recognises the building initially at a fair value of
30,600 (30,000 + 600).
2.6.833.50 If P subsequently measures investment property using the cost model under IAS 16,
then the building will be depreciated over its remaining useful life of 30 years, and the lease
component will be amortised over its remaining useful life of 12 years. Assuming that P uses the
straight-line depreciation method and there is no residual value, depreciation expense in the first
year after the acquisition will be 1,050 ((30,000 / 30) + (600 / 12)).
2.6.833.60 If P subsequently measures investment property using the revaluation model under
IAS 40, then the building is not depreciated. Each time the fair value of the building is determined,
the fair value of the lease contract asset or liability is incorporated into the fair value of the
building.
2.6.834 Finance leases
2.6.835 Acquiree is the lessee in a finance lease
2.6.835.10 When the acquiree is the lessee in a finance lease, the acquirer recognises the fair value of both the asset held
under the finance lease and the related liability. Depending on the terms of the lease, the fair value of the leased asset may
be less than the fair value of the asset itself. This is because the acquirer acquires as part of the business combination the
right to use an asset over the remaining term of the lease, which could be shorter than the economic life of the asset. In
other words, although the asset is accounted for according to its type - e.g. property, plant and equipment - the acquirer
measures the fair value of the asset based on the fair value of the leasehold interest acquired rather than on the underlying
asset itself.
2.6.836 Acquiree is the lessor in a finance lease
2.6.836.10 When the acquiree is the lessor in a finance lease, the acquirer recognises a receivable for the net investment
in the finance lease. This is measured at its acquisition-date fair value, determined based on the assumptions about
discount rates and other factors that market participants would use. In our view, an acquirer would not recognise
separately an additional asset or liability related to favourable or unfavourable contracts, because measurement of the fair
value of the lease receivables and the unguaranteed residual values at fair value would consider all of the terms of the
lease contracts.
2.6.836.20 In addition, an intangible asset may be recognised for the relationship the lessor has with the lessee (see
2.6.760).
2.6.837 Contingent rent

2.6.837.10 Outside of a business combination, contingent rent is not generally recognised until it becomes payable.
However, in our view the existence of contingent rent in a lease contract, acquired in a business combination, will be
incorporated into the fair value measurement of the asset or liability arising from the lease that is recognised as part of the
acquisition accounting. [IAS 17.25]
EXAMPLE 16C - OPERATING LEASE ACQUIRED - CONTINGENT RENT
2.6.837.20 Company P acquires Company S in a business combination on 31 October 2012. S is a

retailer and leases its retail outlets under operating lease contracts. One of S's operating lease
Page 292 / 375

agreements, with a remaining lease period of eight years, requires a fixed annual lease payment of
500 plus an additional contingent rental payment equal to 2.5% of annual sales in excess of
10,000.
2.6.837.30 At the acquisition date, the market rate of an eight-year lease for a similar property is
a fixed annual lease payment of 500 plus an additional contingent rental payment equal to 2% of
annual sales in excess of 10,000. P has determined that all other terms of the lease contracts are
consistent with market terms.
2.6.837.40 In applying the acquisition method, P recognises a liability for an unfavourable lease
contract, due to the unfavourable contingent rental payments relative to market terms for the
remaining eight years of the lease term - i.e. the contingent rental payments of 2.5% on annual
sales in excess of 10,000 is unfavourable to the market rate of 2% on a comparable lease.
2.6.838 Prepaid or accrued rent recognised by acquiree on operating leases

2.6.838.10 In accordance with IAS 17, lease payments under an operating lease are usually recognised on a straight-line
basis over the lease term; when the timing of lease payments does not represent the time pattern of the lessee's benefits
under the lease agreement, prepaid rent or accrued liabilities for rental payments is recognised (see 5.1.310.20). Such
prepaid rent or accrued liability does not meet the definition of an asset acquired or a liability assumed (see 2.6.570).
Therefore, prepaid or accrued rent recognised previously by an acquiree to recognise lease payments under an operating
lease on a straight-line basis in accordance with the requirements of IAS 17 should not be recognised by the acquirer under
the acquisition method; this is regardless of whether an acquiree is the lessee or lessor. Instead, the
favourable/unfavourable element of the lease contract, which is recognised in the acquisition accounting, is determined by
comparing the actual future payment stream under the operating lease with the market rate that would need to be paid
based on the future periods in the contract as if a new contract were granted in respect of those periods. This either forms
the basis of an acquiree asset or liability, or is included in the accounting for the settlement of a pre-existing relationship
(see 2.6.370). [IAS 17.33]
EXAMPLE 16D - OPERATING LEASE ACQUIRED - ACCRUED RENT PAYABLE
2.6.838.20 Company P acquires Company S in a business combination on 31 December 2012. S

leases its headquarters under an operating lease. The lease terms included an incentive of the first
year of the lease being rent-free. At the acquisition date, S had recognised a liability of 1,000 for
accrued rent as a result of recognising the lease expense on a straight-line basis in accordance with
IAS 17.
2.6.838.30 As a part of its acquisition accounting, P does not recognise the accrued rent
recognised by S as it does not meet the definition of a liability. However, P recognises an intangible
asset or liability for the fair value of the operating lease, including whether the required future
rental payments are favourable or unfavourable. An intangible asset or a liability would be
amortised to lease expense during the post-combination period on a straight-line basis over the
remaining term of the operating lease.
2.6.839 Deferred income/revenue

2.6.839.10 The acquirer in a business combination recognises a liability in respect of deferred income/revenue of the
acquiree only if the acquiree has an obligation to perform subsequent to the acquisition. The obligation to perform is
measured at fair value at the acquisition date in accordance with the general measurement principle.
EXAMPLE 17A - DEFERRED REVENUE - NO OBLIGATION TO PERFORM
2.6.839.20 Company S sells a five-year non-exclusive licence to Company Z to use certain

technology. Z makes an up-front payment for the licence. Although S is obliged to inform Z of new
Page 293 / 375

developments to the technology, S is not required to continue developing the technology, and Z has
no right to request repayment of all or a portion of the up-front payment if S ceases developing the
technology.
2.6.839.30 After two years, Company P acquires S in a business combination. Because further
development of the technology is solely at the discretion of S, it has no obligation to perform, and
no liability exists.
2.6.839.40 In this case, we believe that P (the acquirer) should not recognise a liability in respect
of the up-front payment for the licence in the acquisition accounting, irrespective of whether
deferred revenue was recognised by S under its previous accounting policies. Therefore, P will not
recognise any post-acquisition revenue, or income, in respect of the acquired contract with Z.
EXAMPLE 17B - DEFERRED REVENUE - OBLIGATION TO PERFORM
2.6.839.50 Company X has built a fibre optic network. A five-year right to specified amounts of
capacity and routes is sold to large corporations for an up-front payment. X accounts for the up-
front payments as deferred revenue and recognises the revenue over the five-year term of the
contracts.
2.6.839.60 In contrast to Example 17A, X has a legal obligation under the contracts, which relates
to the provision of services - i.e. X should provide the capacity and routes to customers.
2.6.839.70 Company Y acquires X in a business combination. As part of the acquisition
accounting, we believe that Y should recognise a liability (at fair value) for the obligation of X to
perform under the contracts.
Page 294 / 375

2.6.840 MEASUREMENT OF NON-CONTROLLING INTERESTS

2.6.840.10 NCI can be categorised by:
• present ownership interests that entitle their holders to a proportionate share of the entity's net
assets in liquidation (ordinary NCI; see 2.6.844); and
• all other NCI (other NCI; see 2.6.847). [IFRS 3.19]
2.6.844 Measuring ordinary non-controlling interests

2.6.844.10 When less than 100 percent of a subsidiary is acquired, the acquirer can elect on a transaction-by-transaction
basis to measure ordinary NCI either at:
• fair value at the acquisition date, which means that goodwill, or the gain on a bargain purchase,
includes a portion attributable to ordinary NCI; or
• the holders' proportionate interest in the recognised amount of the identifiable net assets of the
acquiree, which means that goodwill recognised, or the gain on a bargain purchase, relates only
to the controlling interest acquired. [IFRS 3.19]
2.6.844.20 This accounting policy choice relates only to the initial measurement of ordinary NCI. After initial recognition,
the option of measuring ordinary NCI at fair value is not available.
2.6.844.30 The implication of recognising ordinary NCI at their proportionate interest in the recognised amount of the
identifiable assets and liabilities of the acquiree is that both the NCI and goodwill are lower because no goodwill is ascribed
to the NCI. However, an issue arises when recognising ordinary NCI at their proportionate interest when both ordinary and
other NCI are present (see 2.6.850).
EXAMPLE 18A - ORDINARY NCI MEASURED AT FAIR VALUE
2.6.844.40 On 31 October 2012, Company P acquires 60% of Company S for cash of 1,000. The
fair value of the identifiable net assets of S is 1,500 and their carrying amount is 1,200. The fair
value of ordinary NCI is 650 based on the market price of the shares that the acquirer does not
obtain.
2.6.844.50 If P elects to measure ordinary NCI in S at fair value, then in its consolidated financial
statements P recognises the identifiable net assets of S at 1,500 (full fair value), NCI at 650 (full fair
value), and the resulting goodwill at 150 (1,000 + 650 - 1,500); see 2.6.900 for the calculation of
goodwill. In its consolidated financial statements, P records the following entry.
Page 295 / 375

EXAMPLE 18B - ORDINARY NCI MEASURED AT PROPORTIONATE INTEREST IN IDENTIFIABLE NET ASSETS
2.6.844.60 Assuming the same facts as in Example 18A, if P elects to recognise ordinary NCI in S
at their proportionate interest in the fair value of the identifiable assets and liabilities, then in its
consolidated financial statements P recognises the identifiable net assets of S at 1,500 (full fair
value), NCI at 600 (1,500 x 40%), and the resulting goodwill at 100 (1,000 + 600 - 1,500); see
2.6.900 for the calculation of goodwill. In its consolidated financial statements, P records the
following entry.
2.6.847 Measuring other non-controlling interests

2.6.847.10 The accounting policy choice in 2.6.844.10 does not apply to other NCI, such as equity components of
convertible bonds or options under share-based payment arrangements. Such instruments are measured at fair value or in
accordance with other relevant IFRSs - e.g. share-based payments that give rise to NCI are measured using the market-
based measure in accordance with IFRS 2. [IFRS 3.19]
2.6.850 Measurement when both components of non-controlling interests are

present
2.6.850.10 When both components of NCI are present in an acquisition and the acquirer intends to measure ordinary NCI
at their proportionate interest in the identifiable net assets of the acquiree, an issue arises as to how that proportionate
interest should be calculated.
2.6.850.20 The following fact pattern is used in the discussion in 2.6.860-890 to illustrate the different accounting
approaches.
• Company P acquires 80 percent of the ordinary shares of Company S for 1,600.
• P elects to measure ordinary NCI at their proportionate interest in the identifiable net assets of S.
The identifiable net assets are determined under IFRS 3 as 1,800.
• S also has outstanding 200 equity-classified preference shares that have a preference in
liquidation and participate with a fixed amount of 1 per share in liquidation; none of these shares
were acquired by P. Because the preference shares do not entitle the holders to a proportionate
share of net assets in the event of liquidation, they are not eligible for the measurement choice
and are measured in the acquisition accounting at fair value, which is determined to be 240.
2.6.850.30 In our view, there are two possible approaches for determining the proportionate interest in identifiable net
assets in measuring ordinary NCI (see 2.6.860 and 2.6.870); a third approach has been identified that we do not believe is
appropriate (see 2.6.880). In our view, an entity should choose an accounting policy, to be applied consistently, between
Approach 1 and Approach 2 for all business combinations in which ordinary NCI are measured at their proportionate
interest in the identifiable net assets.
Page 296 / 375

2.6.860 Approach 1: Fair value of other non-controlling interests

2.6.860.10 Under Approach 1, the proportionate interest in the identifiable net assets of ordinary NCI is determined using
the following steps.
(1) Start with the recognised amount of the identifiable net assets of the acquiree, measured in
accordance with IFRS 3.
(2) Deduct the values assigned to other NCI - e.g. the market-based measure of a share-based
payment - from the identifiable net assets of the acquiree. This step is the key difference
between the approaches.
(3) Multiply the determined subtotal by the percentage interest attributable to ordinary NCI.
2.6.860.20 Applying Approach 1 to the fact pattern in 2.6.850.20, ordinary NCI is measured as follows at the acquisition
date.
2.6.860.30 Under Approach 1 it is argued that other NCI also have a share in the identifiable net assets of the acquiree.
Accordingly, ordinary NCI are measured after taking account of the value of the interests in the identifiable net assets
attributable to other NCI. The value taken into account (deducted) for such other NCI is represented by the amount
recognised under IFRS 3 (fair value in this example).
2.6.860.40 By way of contrast with Approach 2 in 2.6.870, Approach 1 assumes that a proportionate share in liquidation is
the trigger for allowing the measurement option in IFRS 3. However, this trigger does not direct how ordinary NCI should be
measured.
2.6.870 Approach 2: Participation in liquidation

2.6.870.10 Approach 2 is based on the idea that a proportionate share in liquidation should not only be the trigger for
allowing the measurement option in IFRS 3, but also directs the measurement of ordinary NCI. Under Approach 2, Step 2 in
2.6.860.10 comprises the amount that other NCI would receive in liquidation; this deduction is determined based on an
assumed liquidation on the acquisition date.
2.6.870.20 Applying this approach to the fact pattern in 2.6.850.20, ordinary NCI is measured as follows at the acquisition
date.
2.6.880 Approach 3: No adjustment
Page 297 / 375

2.6.880.10 Another possible approach is to determine the proportionate share of identifiable net assets of ordinary NCI
without any adjustment for other NCI - i.e. without Step 2 illustrated in 2.6.860.20 and 870.20. We do not believe that
Approach 3 is acceptable because it fails to take into account any value attributable to other stakeholders' interests in the
acquiree and therefore overvalues ordinary NCI.
2.6.880.20 If this approach were applied to the fact pattern in 2.6.850.20, then ordinary NCI would be measured as
follows at the acquisition date.
2.6.890 Goodwill calculation

2.6.890.10 Depending on the approach taken, there is a consequential effect on the calculation of goodwill. Applying the
acceptable approaches in 2.6.860 and 870 to the fact pattern in 2.6.850.20, goodwill is determined as follows.
2.6.890.20 In the calculations in 2.6.890.10, the amount attributed to preference shareholder NCI is 240 in both cases -
i.e. fair value. This is because the different approaches to measuring other NCI are solely for the purpose of measuring
ordinary NCI. These calculations have no effect on the amount at which other NCI is stated in the statement of financial
position at the acquisition date. Instead, it is the calculation of goodwill that is affected.
Page 298 / 375

2.6.900 GOODWILL OR A GAIN ON BARGAIN PURCHASE

2.6.900.10 Goodwill is recognised at the acquisition date, measured as a residual. Goodwill recorded previously by an
acquiree is not recorded as a separate asset by the acquirer. [IFRS 3.18-19, 32, 37, 42]
Goodwill is measured as the excess of A over B
A. The aggregate of: B. The net of the acquisition-date amounts of the

identifiable assets acquired and the liabilities assumed,
• consideration transferred, which is measured in accordance with IFRS 3 (see 2.6.560).
generally measured at fair value (see
2.6.260);
• the amount of any non-controlling
interests in the acquiree, which may
be measured either at fair value or at
their proportionate share in the fair
value of the identifiable assets and
liabilities of the acquiree (see
2.6.840); and
• in a business combination achieved in
stages, the acquisition-date fair value
of the acquirer's previously held equity
interest in the acquiree (see
2.6.1020.30).
A gain on a bargain purchase arises when B is greater than A. [IFRS 3.34] 2.6.900.20-30
2.6.900.20-30 [Not used]

2.6.900.40 A bargain purchase may arise for a number of reasons; these include a forced liquidation or distressed sale or
due to applying the measurement requirements of IFRS 3, which require in certain instances measurement of the
identifiable assets acquired and liabilities assumed at amounts other than fair value (see 2.6.640). A business combination
does not, however, need to exhibit any particular characteristics such as evidence of a forced or distressed sale in order for
a bargain purchase to be recognised. Such a gain is the result of applying the formula described in 2.6.900.10, regardless
of other factors, such as the economic rationale for the transaction. [IFRS 3.35]
2.6.900.50 Before recognising a gain on a bargain purchase, the acquirer re-assesses whether it has correctly identified all
of the assets acquired and the liabilities assumed. In our view, the acquirer should also re-assess whether it has correctly
identified any NCI in the acquiree, any previously held equity interest in the acquiree, and the consideration transferred.
Following that re-assessment, the acquirer reviews the procedures used to measure the following amounts required to be
recognised at the acquisition date to ensure that the measurements reflect consideration of all available information as of
the acquisition date:
• the identifiable assets acquired and liabilities assumed;
• any NCI in the acquiree;
• for a business combination achieved in stages, the acquirer's previously held equity interest in
the acquiree; and
• the consideration transferred. [IFRS 3.36]
2.6.900.60 In our view, an acquirer should also review the procedures used to identify amounts that are not part of what
Page 299 / 375

the acquirer and acquiree exchanged in the business combination. For example, a business combination may:
• result in the effective settlement of a pre-existing relationship between the acquirer and the
acquiree - e.g. a supply agreement or an operating lease arrangement (see 2.6.350);
• include transactions that compensate employees or former owners of an acquiree for future
services (see 2.6.400); or
• include transactions that reimburse the acquiree or its former owners for paying the acquirer's
acquisition-related costs (see 2.6.520).
2.6.900.70 Such transactions are not part of the business combination transaction and are therefore accounted for as
separate transactions. Accounting for such arrangements as separate transactions, rather than as part of the acquisition,
affects the determination of goodwill or the gain from a bargain purchase that arises from the business combination.
2.6.900.80 Any remaining gain from a bargain purchase after completing the re-assessment is recognised in profit or loss
at the acquisition date. Disclosure is required of the amount of any recognised gain from a bargain purchase, the line items
in profit or loss in which the gain is recognised, and a description of the reasons why the transaction resulted in a gain.
[IFRS 3.B64(n), IAS 1.87]
Page 300 / 375

2.6.910 MEASUREMENT AFTER THE ACQUISITION ACCOUNTING
2.6.920 The measurement period

2.6.920.10 The initial accounting for a business combination comprises a number of steps, including identifying and/or
measuring:
• the identifiable assets acquired and liabilities assumed (see 2.6.560);
• any NCI (see 2.6.840);
• consideration transferred (see 2.6.260);
• any pre-existing equity interest in the acquiree (see 2.6.1020); and
• goodwill or the gain on a bargain purchase (see 2.6.900).
2.6.920.20 The measurement period cannot be longer than one year from the acquisition date. However, the standard
does not allow an 'open' one-year period following the acquisition date. Instead, the measurement period ends when the
acquirer receives the information that it was seeking about facts and circumstances existing at the acquisition date, or
learns that more information is not available. While the final outcome of some items may not be known within a year - e.g.
a liability for which the outcome was uncertain at the acquisition date - the purpose of the measurement period is to
provide time to obtain the information necessary to measure items at the acquisition date; determining the ultimate
outcome of, for example, provisions, is not part of the acquisition accounting. [IFRS 3.45, BC392]
2.6.920.30 An entity reflects measurement period adjustments by revising its comparative financial statements as if the
new information had been known when the business combination was accounted for initially. [IFRS 3.45]
2.6.930 Reporting when the acquisition accounting is incomplete

2.6.930.10 If the acquisition accounting is not complete in any financial statements issued during the measurement period,
then the acquirer reports provisional amounts for the assets, liabilities, equity interests, or items of consideration for which
the accounting is incomplete. [IFRS 3.45]
2.6.930.20 IFRS 3 does not provide specific guidance on determining provisional amounts. Those amounts are determined
based on the available information at the acquisition date, consistent with the recognition and measurement requirements
of the standard. In our view, entities should make a reasonable effort to determine provisional amounts. Accordingly, we
believe that it would not be appropriate to assign only nominal amounts, or no amounts, solely because the acquirer
anticipates receiving additional information about facts and circumstances that existed at the acquisition date.
2.6.930.30 Until the accounting for a business combination is complete, the acquirer is required to disclose the following in
its annual financial statements and in any interim financial statements:
• the reasons why the initial accounting for the business combination is incomplete;
• the assets, liabilities, equity interests, or items of consideration for which the initial accounting is
incomplete; and
• the nature and amount of any measurement period adjustments recognised during the period.
[IFRS 3.B67(a), IAS 34.16A(i)]
2.6.940 Adjustments to provisional amounts during the measurement period

2.6.940.10 Measurement period adjustments are analogous to adjusting events after the end of the reporting period under
IAS 10 (see 2.9). Adjusting events are events that occur after the end of the reporting period but before the financial
Page 301 / 375

statements are issued and that provide evidence of a condition that existed at the end of the reporting period; such events
are reflected in the financial statements. Similarly, the effects of information that first becomes available during the
measurement period and that provides evidence of conditions or circumstances that existed at the acquisition date are
reflected in the accounting at the acquisition date. All other changes to amounts included in the acquisition accounting that
occur after the acquisition date, including those occurring within the measurement period, do not generally affect the
acquisition accounting (see 2.6.960). [IFRS 3.BC399]
EXAMPLE 19A - PROVISIONAL ACCOUNTING - ACQUISITION ACCOUNTING VS PROFIT OR LOSS
2.6.940.20 Company P acquires Company S in a business combination on 30 April 2012.

Provisional amounts are recognised for certain of the assets acquired and liabilities assumed,
including a liability related to a contractual dispute between S and one of its customers. Shortly
before the acquisition date S's customer claimed that certain amounts were due by S under penalty
clauses for completion delays included in the contract.
2.6.940.30 P evaluates the dispute based on the information available at the acquisition date and
concludes that S was responsible for at least some of the delays in completing the contract. P
recognises a provisional amount for this liability of 1,000 in its acquisition accounting, which is its
best estimate of the fair value of the liability to the customer based on the information available at
2.6.940.40 The interim consolidated financial statements of P for the six months ending 30 June
2012 include appropriate disclosure in respect of the provisional accounting.
2.6.940.50 P obtains no new information about the possible outcome of the dispute until
September 2012, when the customer presents additional information in support of its claim. Based
on this information, P concludes that the fair value of the liability for the customer's claim at the
acquisition date was 2,000. Accordingly, in its consolidated financial statements P records the
following entry.
2.6.940.60 P continues to receive and evaluate information related to the claim after September
2012. Its evaluation does not change until May 2013, when it concludes, based on additional
information and responses received from the customer to enquiries made by P, that the liability for
the claim at the acquisition date was 1,900. P determines that the amount that would be recognised
with respect to the claim under IAS 37 at May 2013 would be 2,200. Accordingly, in its consolidated
financial statements P records the following entry.
Page 302 / 375

2.6.940.70 The decrease in the estimated fair value of the liability for the claim in May 2013
occurred after the measurement period, and therefore is not recognised as an adjustment to the
acquisition accounting. When the amount determined in accordance with IAS 37 subsequently
exceeds the previous estimate of the fair value of the liability, P recognises an increase in the
liability. Because the information resulting in this change was obtained after the end of the
measurement period, the increase in the liability is recognised in profit or loss.
2.6.940.80 It is important to distinguish new information about conditions that existed at the acquisition date from
information about changes in the value of acquired assets or liabilities that result from events that occur subsequent to the
acquisition date. Only the former results in adjustments to the acquisition accounting.
2.6.940.90 A degree of tension exists between the general requirement in IFRS 3 to measure amounts recognised in the
acquisition accounting at fair value and the requirement to amend acquisition accounting retrospectively for measurement
period adjustments. In our view, additional information that becomes available during the measurement period that, if
known, might have affected observable market data on which the measurement of an item included in the acquisition
accounting is based should not give rise to a measurement period adjustment. This is because such information does not
affect the basis of estimation of the fair value of an asset or liability at the acquisition date - i.e. the amount at which an
asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction at
that date. In contrast, when fair values are estimated based on other than observable market data, the measurement of
such values in the acquisition accounting is adjusted when new information obtained during the measurement period
represents a basis for a better estimate of fair value at the acquisition date. See 2.9.70 for a discussion of the discovery of
a fraud after the end of the reporting period.
2.6.950 Changes in the recognition of assets and liabilities during the

measurement period
2.6.950.10 Measurement period adjustments may affect not only the measurement of assets and liabilities but also their
recognition. Therefore, during the measurement period the acquirer recognises additional assets or liabilities if new
information is obtained about facts and circumstances that existed at the acquisition date that, if known, would have
resulted in the recognition of those assets and liabilities at that date. [IFRS 3.45]
2.6.950.20 Generally it is expected that the possibility of subsequent adjustments to the acquisition accounting during the
measurement period would have been identified in the disclosures in any financial statements of the acquirer issued
subsequent to the business combination but before the adjustments are identified. Accordingly, unless an acquirer has a
high level of confidence that it has identified all contingent liabilities assumed, it is advisable for the acquirer to disclose the
status of its identification of such liabilities in financial statements that include the measurement period.
2.6.950.30 Adjustments made during the measurement period are recognised retrospectively and comparative information
is revised - i.e. as if the accounting for the business combination had been completed at the acquisition date. These
adjustments include adjustments to the assets acquired, liabilities assumed and goodwill or gain on a bargain purchase
recognised at the acquisition date, and any change in depreciation, amortisation, or other effects on comprehensive income
that arise as a result of the adjustments. [IFRS 3.45]
EXAMPLE 19B - PROVISIONAL ACCOUNTING - ADJUSTMENT OF COMPARATIVES
2.6.950.40 Company P acquired Company S on 30 November 2011. As part of the acquisition
Page 303 / 375

accounting P recognised a provisional amount of 10,000 in respect of a patent developed by S,

based on the historical earnings attributable to products developed using that patent. However, the
technology covered by the patent was new and P expected the cash flows to be generated by the
patent to increase beyond those being generated at the time. Accordingly, P commissioned an
independent valuation report from a third-party consultant, which was not expected to be finalised
for several months. P assessed the useful life of the patent to be 10 years. Goodwill of 20,000 was
recognised in the provisional accounting.
2.6.950.50 The consolidated financial statements of P at 31 December 2011 included appropriate
disclosure in respect of the provisional accounting (see 2.6.930).
2.6.950.60 The valuation report is finalised subsequent to the issue of the 2011 financial
statements but before the end of the measurement period. Based on the valuation, P concludes that
the fair value of the patent was 15,000 at 30 November 2011. Management does not revise the
estimated useful life of the patent, which remains at 10 years. As a result of this measurement
period adjustment, the comparative information presented in the 2012 financial statements is
revised as follows.
2.6.960 Adjustments after the measurement period

2.6.960.10 After the measurement period ends, the acquisition accounting is adjusted only to correct an error or, in our
view, to reflect a change in accounting policy in certain circumstances. Other adjustments are accounted for in accordance
with the relevant standards. [IFRS 3.50]
2.6.960.20 If an error in the acquisition accounting is discovered after the measurement period, then the acquisition
accounting is adjusted in accordance with IAS 8 (see 2.8.40) and comparative amounts are restated. In addition, it also is
likely that the entity will be required to present a statement of financial position as at the beginning of the earliest
comparative period (see 2.8.80.10). [IFRS 3.50, IAS 1.10, 39, 8.41]
2.6.960.30 The measurement of certain identifiable assets acquired and liabilities assumed is an exception to the general
fair value measurement principle (see 2.6.640). For example, deferred taxes and employee benefits are not measured at
fair value in the acquisition accounting; instead, they are measured in accordance with IAS 12 and IAS 19 respectively (see
2.6.660 and 680). An issue therefore arises as to whether the acquisition accounting is adjusted when accounting for those
items changes.
2.6.960.35 This issue arises in the amendments to IAS 12 dealing with the recovery of underlying assets, which are
effective for annual periods beginning on or after 1 January 2012. This amendment provides an exception to the general
Page 304 / 375

measurement principle included in IAS 12 in respect of investment property measured using the fair value model in
accordance with IAS 40 (see Example 22 in 3.13). Under the exception, the measurement of deferred tax assets and
liabilities is based on a rebuttable presumption that the carrying amount of the investment property will be recovered
entirely through sale. The amendments are being applied retrospectively.
2.6.960.40 In our view, when changes in accounting policy affect items that were initially measured in accordance with a
specific standard at other than fair value and those changes are effective retrospectively, the acquisition accounting is
adjusted to reflect the change in accounting policy.
2.6.960.50 In some instances, particularly when a new standard is applicable fully retrospectively, retrospective
adjustment of the acquisition accounting may present practical difficulties. In such cases, entities consider the requirements
of IAS 8 to determine whether full retrospective adoption is impracticable (see 2.8.50).
Page 305 / 375

2.6.970 SUBSEQUENT MEASUREMENT AND ACCOUNTING

2.6.970.10 IFRS 3 provides specific guidance on the subsequent measurement of the following items, which are discussed
in this chapter:
• re-acquired rights;
• contingent liabilities;
• indemnification assets; and
• contingent consideration.
2.6.970.20 Additionally, some issues arise in respect of the subsequent accounting of share-based payment awards issued
in a business combination (see 2.6.1015).

2.6.980.10 See 2.6.690 for a discussion of the concept of re-acquired rights and their measurement at the acquisition
date.
2.6.980.20 The acquirer amortises a re-acquired right over the remaining contractual period of the related contract in
which the right was granted, regardless of the likelihood of renewals. This is consistent with the exception to the fair value
measurement principle for the initial measurement of a re-acquired right, which does not take into account potential
contract renewals. [IFRS 3.29, 55]
2.6.990 Contingent liabilities that are present obligations

2.6.990.10 A contingent liability assumed in a business combination is recognised and measured at fair value at the
acquisition date if the contingent liability represents a present obligation that arises from past events and can be measured
reliably (see 2.6.650). Subsequently, such contingent liabilities are recognised at the higher of:
• the amount recognised initially less, if appropriate, cumulative amortisation recognised in

accordance with IAS 18; and
• the amount that would be recognised in accordance with IAS 37. [IFRS 3.56]
2.6.990.20 These requirements do not apply to contracts accounted for under IAS 39. [IFRS 3.56]
2.6.990.30 Subsequent adjustments to the carrying amount of a contingent liability recognised in the acquisition accounting
might be recognised as a change to the acquisition accounting or be recognised in profit or loss subsequent to the
acquisition. In determining the appropriate accounting, an entity considers whether the events or conditions that result in
such an adjustment existed at the acquisition date. If new information is discovered within the measurement period that
relates to conditions that existed at the time of the business combination, then the acquisition accounting is adjusted (see
2.6.940-950). If such new information relates to events subsequent to the business combination or is discovered
subsequent to the expiry of the measurement period, then the remeasurement of the contingent liability is recognised in
profit or loss.
2.6.990.40 A contingent liability initially recognised in a business combination is not derecognised until it is settled,
cancelled or it expires. In our view, if a contingency for which a liability is recognised in the acquisition accounting is re-
assessed subsequently as 'probable to occur', then the guidance in 2.6.990.10 in respect of subsequent measurement still
applies even if the amount recognised exceeds the amount that the entity expects to pay notwithstanding that a similar
liability recognised initially, other than in a business combination, would be measured under IAS 37. This effectively
establishes a 'floor' on the amount recognised in respect of a contingent liability initially recognised in a business
combination. [IFRS 3.56]
Page 306 / 375

EXAMPLE 20A - SUBSEQUENT ACCOUNTING - CONTINGENT LIABILITY
2.6.990.50 Company P acquires Company S in November 2012. Prior to the acquisition date,
Company X filed a lawsuit against S. Based on the legal foundations of the lawsuit, P's management
determines that a present obligation exists; however, based on previous experience, the likelihood
of the case being decided against P is less than probable. Taking these factors into account, P
recognises a liability of 5,000 in respect of the contingent liability as part of the acquisition
accounting.
2.6.990.60 In December 2013, P re-assesses the likelihood of the lawsuit being settled or
determined in court and determines that settlement is now probable, although the amount at which
the liability is now estimated to be settled is less than management previously considered possible.
Management's best estimate of the amount of settlement is 4,000. We believe that the liability
continues to be measured at 5,000 until it is settled - i.e. the fair value of the contingent liability at
2.6.1000 Indemnification assets

2.6.1000.10 Indemnification assets are an exception to the recognition and measurement principles of IFRS 3. An acquirer
recognises indemnification assets at the same time and measures them on the same basis as the indemnified item, subject
to contractual limitations and adjustments for collectibility, if applicable (see 2.6.670). [IFRS 3.27]
2.6.1000.20 Subsequent to initial recognition, the acquirer continues to measure an indemnification asset on the same
basis as the related indemnified asset or liability. For example, an indemnification asset related to an asset or liability
measured at fair value, such as an indemnification related to a forward contract accounted for at fair value under IAS 39, is
itself measured at fair value. [IFRS 3.57]
2.6.1000.30 The initial and subsequent accounting for indemnification assets recognised at the acquisition date applies
equally to indemnified assets and liabilities that are recognised and measured under the principles of IFRS 3 and those that
are subject to exceptions to the recognition or measurement principles of IFRS 3 (see 2.6.640). For example, an acquirer
would initially recognise and measure an indemnification asset related to a defined benefit pension obligation using
assumptions consistent with those used to measure the indemnified item - i.e. assumptions consistent with IAS 19; this
basis of measurement would continue subsequent to the business combination. [IFRS 3.57]
2.6.1000.40 An acquirer may hold an indemnification related to an item that is not recognised at the acquisition date. For
example, an indemnification may relate to a contingent liability that is not recognised because it cannot be measured with
sufficient reliability (see 2.6.650.30). In our view, notwithstanding that no amount was recognised in the acquisition
accounting, in these circumstances the indemnification asset is recognised and measured at the same time and on the
same basis as the indemnified item subsequent to the business combination, subject to any contractual limitations on the
amount of the indemnification and adjustments for collectibility.
EXAMPLE 20B - SUBSEQUENT ACCOUNTING - INDEMNIFICATION ASSET
2.6.1000.50 Company P is fully indemnified for any obligation arising from a contingent liability
assumed in the acquisition of Company S. The fair value of the contingent liability recognised at the
acquisition date was 10,000. P also recognised an indemnification asset of 10,000 at the acquisition
date - i.e. there were no concerns about the collectibility of the indemnification asset.
Page 307 / 375

2.6.1000.60 Following the acquisition, P obtains new information about events subsequent to the
acquisition date and, based on this new information, concludes that the contingent liability would be
measured at an amount of 5,000 under IAS 37; this does not impact the measurement of the
contingent liability at the acquisition date (see 2.6.650). P still has no concerns about the
collectibility of the indemnification asset.
2.6.1000.70 Because the acquisition-date fair value of the contingent liability of 10,000 is higher
than the IAS 37 amount of 5,000, the carrying amount of the liability remains at 10,000,
notwithstanding that payment is now probable (see 2.6.990.10). Under IFRS 3, the measurement of
the indemnification asset follows the measurement of the liability, subject to management's
assessment of collectibility and contractual limitations. Because there are no concerns over the
collectibility of the indemnification asset or contractual limitations on the amount of the
indemnification, P continues to recognise the indemnification asset at 10,000.
2.6.1000.80 Collectibility of the indemnification asset may affect its measurement. For indemnification assets measured at
fair value, management's assessment of collectibility is considered in determining fair value. For items measured at other
than fair value, the carrying amount of the indemnification asset is reduced to reflect management's assessment of any
uncollectible amounts under the indemnity. [IFRS 3.27]
2.6.1000.90 The measurement of an indemnification asset is subject to any contractual limitations on its amount. [IFRS
3.28]
2.6.1000.100 The acquirer derecognises an indemnification asset only when it collects the asset, sells it, or otherwise
loses the right to it. [IFRS 3.57]
2.6.1000.110 If the amounts recognised by an acquirer for an indemnified liability and a related indemnification asset
recognised at the acquisition date do not change subsequent to the acquisition and ultimately are settled at the amounts
recognised in the acquisition accounting, then there will be no net effect on profit or loss providing that those amounts are
the same.
2.6.1010 Contingent consideration

2.6.1010.10 The fair value of contingent consideration is initially recognised by an acquirer at the acquisition date as part
of the consideration transferred, measured at its acquisition-date fair value (see 2.6.280). [IFRS 3.39]
2.6.1010.20 Subsequent changes in the fair value of contingent consideration that result from additional information about
facts and circumstances that existed at the acquisition date that the acquirer obtains during the measurement period are
measurement-period adjustments; therefore, the acquisition accounting is adjusted (see 2.6.940-950).
2.6.1010.30 The accounting for changes in the fair value of contingent consideration after the acquisition date, other than
measurement-period adjustments, depends on whether the contingent consideration is classified as equity, an asset or a
liability. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for
within equity. See 2.6.280.30 and 7.3.200 for a discussion of the classification of contingent consideration.
2.6.1010.40 Contingent consideration that is liability-classified (or in some instances asset-classified) that falls within the
scope of IAS 39 is remeasured to fair value at the end of each reporting period until the contingency is resolved. Changes in
the fair value of such contingent consideration subsequent to the acquisition date are generally recognised in profit or loss.
Contingent consideration that is not within the scope of IAS 39 is accounted for under IAS 37 or other IFRSs as appropriate.
[IFRS 3.58(b)(i), BC355]
2.6.1010.50 An acquirer recognises changes in the fair value of liability-classified contingent consideration within the scope
of IAS 39 in profit or loss as they occur, unless the changes result from measurement-period adjustments.
EXAMPLE 20C - SUBSEQUENT ACCOUNTING - CONTINGENT CONSIDERATION
Page 308 / 375

2.6.1010.60 Company P acquires Company S in June 2012 for cash. Additionally, P agrees to pay
5% of profits in excess of 5,000 generated over the next two years in cash in a lump sum at the
end of the two years. P determines the fair value of the contingent consideration liability to be 45 at
the acquisition date. In its consolidated financial statements, P records the following entry.
2.6.1010.70 A year after the acquisition, S has performed better than projected initially by P and
a significant payment is now expected to be made at the end of year two. The fair value of this
financial liability is 185 at the end of the first year. Accordingly, P recognises the remeasurement of
the liability in profit or loss. In its consolidated financial statements, P records the following entry.
2.6.1010.80 The adjustment to the financial liability to reflect the final settlement amount (final
fair value) will also be recognised in profit or loss if the amount differs from the fair value estimate
at the end of the first year.
2.6.1015 Acquirer share-based payment awards exchanged for acquiree

awards
2.6.1017 Recognition of pre- and post-combination service

2.6.1017.10 Neither IFRS 2 nor IFRS 3 provides clear guidance on how to account for the amount allocated to post-
combination service. In our view, an entity should choose an accounting policy, to be applied consistently, to account for the
recognition of the remuneration cost in post-combination periods under the new grant approach or the modification
approach (see 2.6.1017.20).
2.6.1017.20 The two approaches can be summarised as follows.
New grant approach Modification approach
The replacement award is treated as a new grant, The modification approach is complex because some of
since the shares underlying the replacement award are the requirements for modification accounting in IFRS 2
the acquirer's shares and not the acquiree's appear to conflict with the requirements regarding
shares.The modification accounting principles of IFRS 2 replacement awards in IFRS 3.
(modification approach) are applied.
IFRS 2 requires the incremental fair value, estimated at
Page 309 / 375

Under the new grant approach, in line with the basic the date of modification, to be recognised in addition to
attribution principle in IFRS 2, the amount attributed to the grant-date fair value of the original equity
post-combination service would be recognised over the instruments. [IFRS 2.B43(a)]
vesting period of the replacement award.
However, this requirement is effectively over-ridden by
Although this may appear to be a practical and logical IFRS 3, which prescribes how to determine the amount
approach, it could be considered not entirely consistent of the replacement award allocated to post-
with the reference in IFRS 3 to account for such combination services. Under IFRS 3, the amount
replacements as modifications of share-based payment attributed to post-combination services includes any
awards in accordance with IFRS 2. [IFRS 3.B56] incremental fair value and the unrecognised amount of
the acquisition-date market-based measure of the
original award. [IFRS 3.B59]
2.6.1017.30 [Not used]

2.6.1017.40 As a result of the requirement of paragraph B59 of IFRS 3, the cumulative amount recognised should be the
same under the two approaches outlined in 2.6.1017.20. However, application of IFRS 2's requirements for modifications
may lead to a different pattern of attribution in the post-combination periods. For example, to apply modification accounting
the acquirer would have to determine whether the terms of the replacement award, as compared to the terms of the
acquiree award, are beneficial to the employee. If the replacement is considered to be non-beneficial - e.g. replacement
with no incremental value and an extension of the vesting period - then the amount allocated to the post-combination
services would be recognised over a shorter period under the modification approach than under the new grant approach.
2.6.1017.50 See 2.6.480 for guidance on how a change-in-control clause may affect the attribution of the market-based
measure of a replacement award to pre-combination and post-combination services.
Page 310 / 375

2.6.1020 BUSINESS COMBINATIONS ACHIEVED IN STAGES #

2.6.1020.10 Sometimes control is obtained in successive share purchases - i.e. the acquirer obtains control of an acquiree
in which it held a non-controlling equity interest immediately before the acquisition date. Such a business combination is
commonly referred to as a 'business combination achieved in stages' or a 'step acquisition'. For example, Company P
acquires a 10 percent interest in Company S, and an additional 60 percent interest some years later to gain control. [IFRS
3.41]
2.6.1020.20 The acquisition method is applied in the normal manner to a business combination achieved in stages:
(1) determine the acquisition date (see 2.6.180);
(2) recognise and measure the consideration transferred (see 2.6.260 and 340); and
(3) recognise and measure the assets acquired and liabilities assumed (see 2.6.560, 600 and 1050).
2.6.1020.30 In a step acquisition, the fair value of any non-controlling equity interest in the acquiree that is held
immediately before obtaining control is used in the determination of goodwill - i.e. it is remeasured to fair value at the
acquisition date with any resulting gain or loss recognised in profit or loss. Care is taken to adjust for any control premium if
the fair value of the previously held non-controlling interest is being calculated with reference to the controlling interest.
[IFRS 3.32(a)(iii), 42]
2.6.1020.40 This treatment effectively considers that any investment in the acquiree that was held before obtaining control
is sold and subsequently repurchased at the acquisition date. Accordingly, in our view the disclosure of that gain or loss
should be on the same basis as if the investment had been disposed of to a third party (see 3.5.590.20-30, and 3.5.600.10).
[IFRS 3.BC384]
2.6.1020.50 On obtaining control, any amounts recognised in OCI related to the previously held equity interest are
recognised on the same basis as would be required if the acquirer had disposed of the previously held equity interest
directly. [IFRS 3.42, BC384]
EXAMPLE 21A - STEP ACQUISITION - AVAILABLE-FOR-SALE RESERVE
2.6.1020.60 Prior to obtaining control over Company S, Company P classified its investment in S
as available-for-sale and recognised changes in its fair value in OCI. On obtaining control over S,
the amount that was recognised in OCI is reclassified and included in the calculation of any gain or
loss recognised in profit or loss (see 3.5.590.30-40).
2.6.1020.70 Also, for investments not classified as available-for-sale before obtaining control, unrealised gains or losses
may have been recognised in OCI - e.g. foreign exchange gains or losses, and revaluation surpluses on property, plant and
equipment. The treatment of these amounts on obtaining control is consistent with how they would be treated if the
previously held equity interest was disposed of to a third party. For example, foreign exchange gains or losses previously
recognised in OCI are reclassified from equity to profit or loss on the date that control is obtained, while revaluation
surpluses on property, plant and equipment may be reclassified within equity to retained earnings (see 3.5.590.40). [IFRS
3.42, IAS 16.41, 21.48A]
EXAMPLE 21B - STEP ACQUISITION - FOREIGN CURRENCY TRANSLATION RESERVE
2.6.1020.80 On 1 January 2011, Company P acquired 30% of the voting ordinary shares of
Company S for 80,000. P equity accounts its investment in S under IAS 28. At 31 December 2011, P
recognised equity accounted earnings of 7,000 in profit or loss and unrealised gains in OCI of 1,000
related to exchange differences and 500 related to the revaluation of property, plant and
equipment. The carrying amount of the investment in the associate on 31 December 2011 was
Page 311 / 375

therefore 88,500 (80,000 + 7,000 + 1,000 + 500).

2.6.1020.90 On 1 January 2012, P acquires the remaining 70% of S for cash of 250,000. At this
date, the fair value of the 30% interest already owned is 90,000 and the fair value of S's identifiable
assets and liabilities is 300,000. In its consolidated financial statements, P records the following
entry.
2.6.1020.100 Notwithstanding that on obtaining control amounts recognised in OCI are recognised on the same basis as
would be required if the acquirer had disposed of the previously held equity interest directly, in our view, classification of
the previously held equity interest as held-for-sale or as a discontinued operation is not appropriate because there is no
Page 312 / 375

actual sale of the investment. [IFRS 3.BC384, 5.6-8, BU 05-09]
value measurement that applies across all IFRSs. Chapter 2.4A discusses the requirements of IFRS 13.
2.6.1023.20 Previously, there was no specific guidance on how to determine the fair value of a previously held equity
interest in a step acquisition. IFRS 13 allows a premium to be added to fair value measurements in certain circumstances,
which may be relevant when the previously held interest is an equity-accounted investee. However, it is unclear whether a
premium may be added when the shares of an equity-accounted investee are publicly traded. See 2.4A.450.35 for further
discussion of this issue.
Page 313 / 375

2.6.1025 PUSH-DOWN ACCOUNTING

2.6.1025.10 'Push-down accounting', whereby fair value adjustments recognised in the consolidated financial statements
are 'pushed down' into the financial statements of the subsidiary is not addressed by, and is not applicable under, IFRS.
However, some fair value adjustments could be reflected in the acquiree as revaluations if permitted by the relevant
standards, as long as the revaluations are kept up to date subsequently.
EXAMPLE 22 - PUSH-DOWN ACCOUNTING PROHIBITED
2.6.1025.20 On 31 March 2012, Company E acquired all of the shares of Company F and as part
of the acquisition accounting recognised land and buildings at 500 (the previous cost-based carrying
amount was 300) and a trademark at 150 (which was not recognised previously).
2.6.1025.30 F could recognise the fair value adjustment of 200 in respect of land and buildings in
its own financial statements for the period ended 31 December 2012 if it changed its accounting
policy to one of revaluation and complied with all of the revaluation requirements, including the
need to keep revaluations up to date (see 3.2.300).
Page 314 / 375

2.6.1030 FAIR VALUE MEASUREMENT IN A BUSINESS

COMBINATION #
2.6.1040 General principles
2.6.1040.10 There is almost no guidance in IFRS 3 on the determination of fair value. Instead, guidance on the
determination of fair value has been included in IFRS 13 (see 2.6.1135).
2.6.1040.20 Consistent with other IFRSs, '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. Fair value measurements are based on a
hypothetical transaction at the acquisition date, considered from the perspective of market participants. [IFRS 3.A]
2.6.1040.30 Generally, the measurement of fair value includes determining:
• the particular asset or liability that is the subject of the measurement, including its unit of
account;
• the market participants who would engage in a transaction for the asset or liability, including the
assumptions that such market participants would make regarding the asset or liability; and
• the valuation technique(s) appropriate for the measurement, considering the availability of data
with which to develop inputs that represent the assumptions that market participants would
make.
2.6.1040.40 A fair value measurement is for a particular asset or liability, considering various factors such as its condition
and location at the measurement date. The asset or liability may be a stand-alone asset and/or liability (e.g. an individual
security within the scope of IAS 39 that is traded in an active market) or a group of assets and/or liabilities (e.g. a group of
complementary intangible assets). When measuring the fair value of an asset or liability, an entity first determines the item
being measured based on its unit of account.
2.6.1040.50 The unit of account is particularly relevant for identifiable intangible assets because intangible assets are
grouped with other assets or liabilities in certain circumstances (see 2.6.720).
2.6.1040.60 The definition of fair value does not refer to the actual buyer; rather, it refers to a hypothetical transaction
with hypothetical, typical buyers - i.e. market participants. Therefore, the acquirer's intention with respect to an asset or
liability is not relevant in determining fair value. Instead, fair value is determined with reference to market participants and
their expectations. Many assets have different uses and often the value of an asset may be highly dependent on its use.
2.6.1040.70 Therefore, for example, the fact that a particular acquirer plans to shelve a brand acquired in a business
combination is ignored if market participants would continue to use the asset (see 2.6.630). In addition, future restructuring
and enhancements are taken into account to the extent that they are actions that a typical market participant would take,
even if the actual owner or buyer is not planning such action. Conversely, if the actual owner or buyer would restructure but
the typical market participant would not, then the future restructuring and/or enhancements are excluded from the
valuation.
2.6.1040.80 Fair value is based on assumptions that are consistent with those of market participants; such data includes
market prices, capital market data, information obtained from market studies and analysts' reports. When such market data
is not observable, an approach that is sometimes followed in our experience is to start with the information and
assumptions that the actual buyer has used, and then to look for indicators that would lead to the conclusion that other
potential buyers would have based their valuation on different information and assumptions. If such indicators are not
found, then the information and assumptions that the actual buyer has used are considered in determining fair value after
removing any entity-specific synergies or expertise that would not be available to other market participants.
2.6.1050 Identifiable assets acquired and liabilities assumed

Page 315 / 375

2.6.1060 Assets (disposal groups) held for sale

2.6.1060.10 In an exception to the fair value measurement principle in IFRS 3, assets (or disposal groups) classified as
held-for-sale in accordance with IFRS 5 (see 2.6.710) are measured at fair value less costs to sell. Therefore, while the
general guidance in this chapter in respect of fair value applies, the estimated disposal costs are deducted as an additional
step in determining the amount to be included in the acquisition accounting. [IFRS 3.31]
2.6.1060.20 See 5.4.60 for guidance on the valuation of assets (or disposal groups) held for sale or distribution.
2.6.1070 Property, plant and equipment

2.6.1070.10 In our view, the guidance in IAS 16 should be used as a basis for determining the fair value of property, plant
and equipment in the acquisition accounting. In accordance with IAS 16, the fair value of land and buildings is usually
determined with reference to market-based evidence, while the fair value of plant and equipment is usually determined by
appraisal. However, when there is no market-based evidence of fair value for a specialised item of property, plant and
equipment that is rarely sold other than as part of a continuing business, fair value may be estimated under an income or
cost approach. See 3.2.300 for more detailed guidance. [IAS 16.32-33]
2.6.1080 Investment property

2.6.1080.10 In our view, the guidance in IAS 40 should be used as a basis for determining the fair value of investment
property in the acquisition accounting. Determining the fair value of investment property generally involves consideration of:
• the actual current market for that type of property in that type of location at the end of the
reporting period and current market expectations;
• rental income from leases and market expectations regarding possible future lease terms;
• hypothetical sellers and buyers, who are reasonably informed about the current market and who
are motivated, but not compelled, to transact in that market on an arm's length basis; and
• investor expectations - for example, investors' expectations of the potential for future
enhancement of the rental income or market conditions etc. [IAS 40.33-52]
2.6.1080.20 See 3.4.150 for guidance on the valuation of investment property.
2.6.1090 Intangible assets

2.6.1090.10 A number of specific valuation methods that fall under the income approach have been developed in practice
to deal with the valuation of intangible assets for which there is no market evidence of fair value. IAS 38 itself refers to the
following methods: discounted cash flows; the relief-from-royalty approach; and the cost approach. In our experience, the
cost approach is rarely appropriate in practice for determining the fair value of intangible assets other than internal-use
software. [IAS 38.41]
2.6.1100 Inventories
2.6.1100.10 The technique used to arrive at fair value depends on the inventory's stage of development in the production
cycle. Under the previous version of IFRS 3, the fair value of manufactured finished goods and work in progress was
measured based on the estimated selling price, less certain costs (and a margin thereon), that would be realised by a
market participant. While this guidance was not carried forward into the revised standard, in our view this technique
continues to be acceptable in the absence of other guidance.
2.6.1100.20 The fair value of finished goods inventory is most frequently estimated under the market approach or income
approach - i.e. at the estimated selling price less the sum of the costs of disposal and a reasonable profit allowance for the
selling effort of the acquirer (selling profit), both of which are estimated from the perspective of a market participant.
2.6.1100.30 Judgement is required in determining a reasonable amount of profit attributable to the effort incurred by the
Page 316 / 375

acquiree pre-acquisition, and the profit attributable to the effort that is likely to be incurred by the acquirer post-acquisition.
In our view, the analysis should take into account the current profitability of the product at the acquisition date, even if
conditions were different when the inventory was manufactured.
EXAMPLE 23 - FAIR VALUE OF FINISHED GOODS
2.6.1100.40 The acquiree has finished goods measured at a cost of 100; the expected selling
price is 150. The inventory is specialised and there are very few potential customers; this inventory
has already been earmarked for one of those customers. Distribution costs are estimated at 20.
2.6.1100.45 In the absence of any additional factors indicating that market participants would
arrive at a different estimate of the fair value of the inventory, we believe that the fair value of the
inventory would be close to 130 (150 - 20) because the selling effort to be incurred by the seller is
minimal.
2.6.1100.50 Work in progress of the acquiree is typically valued in a similar manner as finished goods inventory, most
frequently under the market approach or income approach - i.e. at the estimated selling price of the work in progress, as if
finished, less the sum of costs to complete, costs of disposal and a reasonable profit allowance for the completion and
selling effort of the acquirer, all of which are estimated from the perspective of a market participant.
2.6.1100.60 The valuation approach used for recognising the acquisition-date fair value of raw materials is a market
approach using observable market prices, if available, or a cost approach when market information is not available, both of
which are estimated from the perspective of a market participant.
2.6.1110 Financial instruments

2.6.1110.10 In our view, the fair value of financial instruments in the scope of IAS 39 should be determined following the
valuation guidance in IAS 39 (see 7.6.190).
2.6.1110.20 In many cases, financial instruments will be measured on a fair value basis by an acquiree already applying
IFRS; in these cases, fair value may just need updating as of the acquisition date - e.g. derivatives, investments held for
trading or available-for-sale financial instruments. However, other financial instruments will be measured on the basis of
cost or amortised cost, and the acquirer will need to determine fair value.
2.6.1120 Equity-accounted investees

2.6.1120.10 In certain circumstances, a premium might be paid to obtain significant influence rather than control over an
entity's operations. In such cases, the unit of account is the holding rather than the individual security, as outlined in
3.10.190.60. An analysis of whether such a shareholding might be valued in excess of its pro rata share of an entity's
market capitalisation would consider similar factors to those outlined in 3.10.190.70-80 - i.e. based on an evaluation of the
potential of such a shareholder to increase cash flows or reduce risk. However, a non-controlling, influential shareholder
generally receives the same pro rata cash flows as other non-controlling shareholders. Therefore, in our experience it may
be difficult to support a fair value significantly in excess of the listed share price.
2.6.1130 Contingent liabilities

2.6.1130.10 A contingent liability is recognised in a business combination if it is a present obligation that arises from past
events and its fair value can be measured reliably (see 2.6.650). In our view, the fair value of a contingent liability should
be estimated using expected cash flows - i.e. the valuation method should apply probabilities to different possible future
outcomes to estimate an expected outcome. This is then discounted at an appropriate discount rate.

value measurement that applies across all IFRSs. Chapter 2.4A discusses the requirements of IFRS 13, including the
techniques to be used in determining fair value. In particular, the general valuation approaches are discussed in 2.4A.300.
Page 317 / 375

2.6.1135.20 The guidance in IFRS 13 also replaces the specific guidance that was previously included in:
• IAS 16 (see 2.6.1070.10 and the forthcoming requirements in 3.2.425);
• IAS 40 (see 2.6.1080.10 and the forthcoming requirements in 3.4.163); and
• IAS 39 (see 2.6.1110.10 and chapter 2.4A).
2.6.1135.30 The guidance in IFRS 13 is consistent with the views expressed in 2.6.1100 in relation to the valuation of
inventories, assuming that market participants (see 2.4A.60) would value inventories in this manner (see 2.4A.300).
2.6.1135.40 In determining the fair value of equity-accounted investees (see 2.6.1120), IFRS 13 allows a premium to be
added to fair value measurements in certain circumstances. However, it is unclear whether a premium may be added
when the shares of an equity-accounted investee are publicly traded. See 2.4A.450.35 for further discussion of this issue.
2.6.1135.50 Contingent liabilities (see 2.6.1130) are seldom traded in active markets or held by another entity as an
asset. Therefore, IFRS 13 requires that they be valued using a valuation technique from the perspective of a market
participant that owes the liability (see 2.4A.130).
Page 318 / 375

2.6.1140 DISCLOSURES
2.6.1140.10 The overall objective of the disclosure requirements of IFRS 3 is for the acquirer to provide information that
enables the users of its financial statements to evaluate:
• the nature and financial effects of a business combination that occurs either during the current
reporting period, or after the end of the reporting period but before the financial statements are
authorised for issue; and
• the financial effects of adjustments recognised in the current reporting period that relate to
business combinations that occurred in the current or previous reporting periods. [IFRS 3.59-62]
2.6.1140.20 If the specific disclosures do not meet the overall disclosure objective, then the acquirer discloses whatever
additional information is required to meet that objective. [IFRS 3.63]
2.6.1140.30 The disclosure requirements cover:
• general information on the business combination;
• consideration transferred;
• assets acquired and liabilities assumed;
• goodwill (or a gain on a bargain purchase);
• transactions that are not part of the business combination;
• business combinations in which the acquirer holds less than 100 percent of the acquiree;
• business combinations achieved in stages - i.e. step acquisitions;
• pro forma information about revenue and profit or loss; and
• adjustments, including measurement period adjustments and contingent consideration
adjustments. [IFRS 3.B64-B67]
2.6.1140.40 The disclosures are required for each material business combination, or in aggregate for individually
immaterial business combinations that are collectively material. The exception to this is the requirement to disclose revenue
and profit or loss of the combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the period had been at the beginning of the annual reporting period. [IFRS 3.B64(q)(ii),
B65, B67]
2.6.1140.50 The disclosures are as of the acquisition date even if the acquirer consolidates the subsidiary from a different
date for convenience (see 2.6.190.10).
2.6.1140.60 Disclosures are generally required in respect of a business combination that occurs after the end of the
reporting period but before the financial statements are authorised for issue. The only exception is if the initial accounting is
incomplete when the financial statements are authorised, in which case the entity discloses why the disclosures cannot be
given. [IFRS 3.B66]
2.6.1140.70 An entity also discloses information that enables users to evaluate the financial effects of any adjustments
that are recognised in the current reporting period that relate to business combinations that have occurred either in the
current or previous reporting periods. [IFRS 3.61]
2.6.1140.80 The disclosure requirements are also applicable for interim financial statements prepared in accordance with
IAS 34. [IAS 34.16A(i)]
2.6.1140.90 The disclosure requirements of IFRS 3 are illustrated in KPMG's illustrative financial statements for annual and
interim financial reporting periods.
Page 319 / 375


The ED proposed amending IFRS 3 to clarify the accounting for contingent consideration in a business combination as
follows.
• When an obligation to pay contingent consideration is a financial instrument, classification as a
liability or as equity would be determined by reference only to IAS 32 rather than to any other
IFRSs.
• Contingent consideration classified as equity would not be remeasured. Other contingent
consideration would be subsequently measured at fair value; the corresponding gain or loss
would be recognised in profit or loss except to the extent that IFRS 9 requires recognition in OCI.
2.6.1150.20 The ED also proposed consequential amendments to IFRS 9, to prohibit contingent consideration from
subsequently being measured at amortised cost.
2.6.1150.30 The amendments would be applied prospectively to business combinations with an acquisition date on or after
1 January 2015.
Page 320 / 375

2.7 Foreign currency translation

(IAS 21, IAS 29)
Determining the • An entity measures its assets, liabilities, income and expenses in its
functional functional currency, which is the currency of the primary economic
currency environment in which it operates. [2.7.40.10]
Translation of • Transactions that are not denominated in an entity's functional

foreign currency currency are foreign currency transactions; exchange differences
transactions arising on translation are generally recognised in profit or loss.
[2.7.90.10]
Translation of • The financial statements of foreign operations are translated as

foreign currency follows:
financial
statements - assets and liabilities are translated at the closing rate;
- income and expenses are translated at actual rates or
appropriate averages; and
- equity components (excluding current-year movements, which
are translated at actual rates) are translated at historical rates.
[2.7.230.10]
• Exchange differences arising on the translation of the financial
statements of a foreign operation are recognised in other
comprehensive income (OCI) and accumulated in a separate
component of equity. The amount attributable to any non-controlling
interests (NCI) is allocated to and recognised as part of NCI.
[2.7.230.10]
Hyperinflation • If the functional currency of a foreign operation is the currency of a

hyperinflationary economy, then current purchasing power
adjustments are made to its financial statements before translation
into a different presentation currency based on the closing rate at
the end of the current period. However, if the presentation currency
is not the currency of a hyperinflationary economy, then
comparative amounts are not restated. [2.7.270.10]
Translation from • An entity may present its financial statements in a currency other
functional to than its functional currency (presentation currency); an entity that
presentation translates financial statements into a presentation currency other
currency than its functional currency uses the same method as for translating
financial statements of a foreign operation. [2.7.300.10]
Sale or liquidation • If an entity disposes of an interest in a foreign operation, which

of a foreign includes losing control over a foreign subsidiary, then the cumulative
operation exchange differences recognised in OCI are reclassified to profit or
loss. A partial disposal of a foreign subsidiary (without the loss of
control) leads to a proportionate reclassification to NCI, while other
Page 321 / 375

partial disposals result in a proportionate reclassification to profit or

loss. [2.7.320.10]
Convenience • An entity may present supplementary financial information in a

translations currency other than its presentation currency if certain disclosures
are made. [2.7.330.10]
beginning on 1 January 2012. The requirements related to this topic are derived from IAS 21 The Effects of Changes in
Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies.
Page 322 / 375

2.7.10 DEFINITIONS
2.7.20 Reporting entity
2.7.20.10 A 'reporting entity', as used in this chapter, refers to the parent entity of a consolidated group, which may
include legal entities and foreign operations within each legal entity. [IAS 21.11]
2.7.25 Foreign operation

2.7.25.10 A 'foreign operation' is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the
activities of which are based or conducted in a country or currency other than those of the reporting entity. [IAS 21.8]
2.7.30 Functional currency

2.7.30.10 An entity's 'functional currency' is the currency of the primary economic environment in which it operates (see
2.7.40). [IAS 21.8]
2.7.32 Presentation currency

2.7.32.10 An entity's 'presentation currency' is the currency in which the financial statements are presented. [IAS 21.8]
2.7.32.20 Although an entity measures items in its financial statements in its functional currency, it may decide to present
its financial statements in a currency or currencies other than its functional currency. For example, an entity with a euro
functional currency may choose to present its financial statements in US dollars because its primary listing is in the US. [IAS
21.8, 38]
2.7.32.30 If an entity presents its financial statements in a presentation currency that is not its functional currency, then
there is no requirement for it to present additional financial information in its functional currency.
2.7.34 Monetary items

2.7.34.10 'Monetary items' are units of currency held, and assets and liabilities to be received or paid, in a fixed or
determinable number of units of currency (see 2.7.120). [IAS 21.8]
Page 323 / 375

2.7.35 SUMMARY OF APPROACH TO FOREIGN CURRENCY

TRANSLATION
2.7.35.10 The following is a summary of the approach under IFRS to foreign currency translation, which is explained in
more detail in 2.7.80-310.20.
• An entity determines its functional currency. All transactions that are not denominated in its
functional currency are foreign currency transactions. First these transactions are translated into
the entity's functional currency at the transaction date.
• At the end of the reporting period, assets and liabilities denominated in a currency other than the
entity's functional currency are translated as follows:
- monetary items are translated at the exchange rate at the end of the reporting period;
- non-monetary items measured at historical cost are not retranslated - they remain at the
exchange rate at the date of the transaction; and
- non-monetary items measured at fair value are translated at the exchange rate when the fair
value was determined.
• Next an entity determines the functional currency of each of its branches, subsidiaries, associates
and joint ventures, including consideration of whether or not this is the same as the entity's own
functional currency.
• The financial statements of the parent, branches, subsidiaries, associates and joint ventures are
translated into the group presentation currency if their functional currencies are different from
the group presentation currency. Two methods for such translation exist.
- The step-by-step method. The financial statements of a foreign operation are translated into
the functional currency of any intermediate parent, and the financial statements of the
intermediate parent that include the foreign operation are then translated into the functional
currency of the ultimate parent (or the presentation currency, if different).
- The direct method. The financial statements of the foreign operation are translated directly
into the functional currency of the ultimate parent (or the presentation currency, if different).
• The result of all of the above is that the entity will present its financial statements or consolidated
financial statements in either the functional currency of the parent entity or another chosen
presentation currency. [IAS 21.BC18, IFRIC 16.17]
Page 324 / 375

2.7.40 DETERMINING THE FUNCTIONAL CURRENCY

2.7.40.10 An entity measures its assets, liabilities, equity, income and expenses in its functional currency. All transactions
in currencies other than the functional currency are foreign currency transactions (see 2.7.80). [IAS 21.1N7, 20]
2.7.40.20 Each entity in a group has its own functional currency. There is no concept of a group-wide functional currency
under IFRS. See 2.7.180 for further discussion of this issue.
2.7.40.30 In determining its functional currency, an entity emphasises the currency that determines the pricing of the
transactions that it undertakes, rather than focusing on the currency in which those transactions are denominated. The
following factors are considered in determining an appropriate functional currency:
• the currency that mainly influences sales prices for goods and services - often this will be the
currency in which sales prices are denominated;
• the currency of the country whose competitive forces and regulations mainly determine the sales
prices of its goods and services; and
• the currency that mainly influences labour, material and other costs of providing goods and
services - often this will be the currency in which these costs are denominated and settled. [IAS
21.9]
2.7.40.40 The factors in 2.7.40.30 are the primary indicators of an entity's functional currency. These factors are provided
as an inclusive list; however, this should not be interpreted as meaning that all of these factors should indicate a certain
currency in order for that currency to be the entity's functional currency. Additional, or 'secondary', factors may exist that
provide supporting evidence to determine an entity's functional currency, namely:
• the currency in which funds from financing activities are generated; this would be the currency
used for issuing debt and equity instruments; and
• the currency in which receipts from operating activities are usually retained. [IAS 21.10]
2.7.40.50 Furthermore, when determining the functional currency of a foreign operation, it is necessary to consider
whether this should be the same as the functional currency of its parent (see 2.7.190). [IAS 21.11]
2.7.40.60 In our experience, entities often operate in a mixture of currencies and consideration of the factors in 2.7.40.30
and 40 does not result in an obvious conclusion on the entity's functional currency. This will require management to
exercise its judgement to determine the functional currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions based on the specific facts and circumstances. In doing so, priority should be
given to the primary indicators before considering the secondary indicators (see 2.7.40.30). [IAS 21.12]
2.7.40.70 In many cases, an entity's functional currency is its local currency.
EXAMPLE 1A - FUNCTIONAL CURRENCY IS LOCAL CURRENCY (1)
2.7.40.75 An entity in Russia produces goods that are exported throughout Europe. Sales prices
are denominated in euro for the convenience of trade and consistency in pricing, and some of the
entity's cash reserves are held in euro. However, all of the other factors, including the currency that
mainly influences the costs of providing goods, indicate that the rouble is the entity's functional
currency. In our view, the functional currency is the rouble because there is not enough evidence to
indicate that the euro overcomes the presumption that the rouble best reflects the economic
substance of the underlying events and circumstances relevant to the entity.
EXAMPLE 1B - FUNCTIONAL CURRENCY IS LOCAL CURRENCY (2)
Page 325 / 375

2.7.40.80 A manufacturer of steel products in Chile has analysed its operations as follows.
• The majority of products are sold into the local Chilean market. The local
sales price is set based on:
- international steel prices that are quoted in US dollars in the
international market; and
- competitive forces in Chile.
• The majority of raw material purchases are from local suppliers and are
denominated in Chilean pesos, based on the price of steel, quoted in US
dollars, on the London Metal Exchange.
• These sales and raw material purchases are invoiced and settled in Chilean
pesos like most other expenses.
• A significant amount of financing is in US dollars to match the currency in
which the sales are priced.
• Cash reserves are held in Chilean pesos.
2.7.40.90 In our view, despite the entity using the US dollar-denominated international spot price
for steel as the starting point for pricing its domestic sales, and despite the fact that the US dollar-
denominated steel price largely drives the cost of its raw materials, this does not result in the US
dollar being the key influencer of the sales price of the entity's products or its raw material
purchases. While the market price of steel is driven by international forces of supply and demand,
the market price is quoted in US dollars because it is a stable and widely traded currency. The US
economy does not determine the entity's sale price and raw material purchase prices. The local
sales prices and most costs of the entity are determined by the competitive forces in the Chilean
economy. As a result, the cash collection may be significantly different from the US dollar-
equivalent sales value. In our view, the primary economic environment in which the entity operates
is Chile, and therefore the functional currency of the entity is the Chilean peso.
2.7.40.100 However, it should not be assumed that the local currency is always the functional currency.
EXAMPLE 2 - FUNCTIONAL CURRENCY IS NOT THE LOCAL CURRENCY
2.7.40.110 An entity in the Philippines manufactures sports clothing that is exported to the US.
Sales prices are established having regard to prices in the US, and are denominated in US dollars.
Sales are settled in US dollars and the receipts are converted to Philippine pesos only when
necessary to settle local expenses. The majority of the entity's borrowings are denominated in US
dollars and the cost of the manufacturing equipment, which is the entity's major item of property,
plant and equipment, is denominated in US dollars. Management's salaries - which represent the
significant portion of labour costs - are denominated and paid in US dollars. Other labour costs, as
well as all material costs, are denominated and settled in Philippine pesos. In our view, the entity's
functional currency is the US dollar.
2.7.40.113 In some cases, an analysis of the underlying events and circumstances relevant to an entity may indicate that
two (or more) currencies are equally relevant.
EXAMPLE 3 - FUNCTIONAL CURRENCY IS NOT OBVIOUS
2.7.40.115 A Turkish entity has analysed its operations as follows.

• The majority of short- and long-term debt is financed in US dollars and the
balance is financed in Turkish lira.
• The activities of the entity are financed mainly by its own capital that is
Page 326 / 375

denominated in Turkish lira and currencies other than the US dollar.

• The majority of cash reserves are held in US dollars.
• Export sales that are priced and denominated largely in US dollars make up
approximately 95% of total sales.
• The majority of operating expenses are priced and denominated in Turkish
lira and the balance is denominated in US dollars.
2.7.40.120 In our view, both the Turkish lira and the US dollar are key to the entity's operations.
However, because an entity can have only one functional currency, management applies judgement
to determine whether the Turkish lira or the US dollar is the entity's functional currency. In doing
so, greater weighting will be given to the primary indicators. In this example, further consideration
would need to be given to the specific facts and circumstances and the environment in which the
entity operates. For example, it would have to be considered whether the US dollar is used to
achieve stability in the financial results and position of the entity rather than because the US
economy is a determining factor for those results and position. However, in the absence of further
evidence, it seems that in this example the US dollar might be considered the functional currency of
the entity.
2.7.40.130 An entity may not choose to adopt a functional currency other than that determined under IAS 21. An entity
whose functional currency is that of a hyperinflationary economy may not avoid applying hyperinflationary accounting by
choosing a different stable currency as its functional currency. [IAS 21.14]
2.7.40.140 Once an entity has determined its functional currency, it is not changed unless there is a change in the relevant
underlying transactions, events and circumstances (see 2.7.312).
2.7.50-70 [Not used]
Page 327 / 375

2.7.80 TRANSLATION OF FOREIGN CURRENCY TRANSACTIONS

2.7.90 At the transaction date
2.7.90.10 Each foreign currency transaction is recorded in the entity's functional currency at the rate of exchange at the
date of the transaction, or at rates that approximate the actual exchange rates. An average exchange rate for a specific
period may be a suitable approximate rate for transactions during that period, particularly if exchange rates do not fluctuate
significantly. [IAS 21.21-22]
2.7.90.20 Inventory purchased in a foreign currency is measured on initial recognition at the spot exchange rate. An entity
may hedge its future inventory purchases to minimise its exposure to movements in exchange rates.
EXAMPLE 4 - INITIAL MEASUREMENT OF INVENTORY PURCHASED IN A FOREIGN CURRENCY WHEN HEDGE
ACCOUNTING IS APPLIED
2.7.90.25 An entity plans to purchase inventory at a price of foreign currency AC 100. In

anticipation of the transaction, the entity enters into a forward exchange contract to purchase AC
100 for an amount of functional currency FC 180. The spot exchange rate at the date of purchase is
AC 1:FC 2. The inventory is measured on initial recognition at the spot exchange rate. If the
forward contract was designated and determined effective as a cash flow hedge of the foreign
currency exposure on the anticipated inventory purchase, then the effective portion of the gain or
loss on the hedging instrument may, as a matter of accounting policy choice, be added to or
deducted as a basis adjustment from the inventory amount initially recognised. Alternatively, this
portion is retained in equity and reclassified to profit or loss usually when the inventory affects profit
or loss. See 7.7.60 for a discussion of the accounting for cash flow hedges. [IAS 39.98]
2.7.90.30 In some countries, there are dual exchange rates: the official exchange rate and an unofficial parallel exchange
rate. In our view, individual transactions should be translated using the exchange rate that will be used to determine the
rate at which the transaction is settled. Normally, this will be the official rate. However, use of an unofficial exchange rate
may be more appropriate in very limited circumstances - for example, if it is a legal rate (i.e. domestic and foreign entities
can and do purchase and sell foreign currency on a local market at this rate legally), and the only rate at which the
transaction can be settled because long-term lack of liquidity in the exchange market means that sufficient amounts of cash
are not available at the official rate. [IAS 21.26]
2.7.100 At the end of the reporting period
2.7.110 General requirements

2.7.110.10 At the end of the reporting period, assets and liabilities denominated in a currency other than the entity's
functional currency are translated as follows:
• monetary items are translated at the exchange rate at the end of the reporting period;
• non-monetary items measured at historical cost are not retranslated; they remain at the
exchange rate at the date of the transaction; and
• non-monetary items measured at fair value are translated at the exchange rate when the fair
value was determined. [IAS 21.23]
2.7.120 Monetary vs non-monetary

2.7.120.10 'Monetary items' are units of currency held, and assets and liabilities to be received or paid, in a fixed or
Page 328 / 375

determinable number of units of currency. Conversely, non-monetary items lack such a feature. Examples of non-monetary
items include:
• prepaid expenses and income received in advance, on the basis that no money will be paid or
received in the future; and
• equity securities held and share capital, on the basis that any future payments are not fixed or
determinable. [IAS 21.8, 16]
2.7.120.20 Most debt securities are considered monetary items because their contractual cash flows are fixed or
determinable. There is no exemption from this classification when the security is classified as available-for-sale if the future
cash flows are fixed or determinable. [IAS 39 IG.E.3.4]
2.7.120.30 The appropriate treatment of deferred taxes is not clear in IFRS. Deferred taxes comprise both monetary and
non-monetary components. Treatment as a monetary item is based on the view that deferred tax represents future
amounts of cash that will be paid to/received from the tax authorities. In our experience, normally deferred tax is treated as
a monetary item. An entity that normally considers deferred tax as a monetary item may nonetheless consider individual
deferred tax items as non-monetary if an event that would result in realisation of the asset or liability is not expected to
occur and not result in a cash flow - e.g. temporary differences arising on revaluation of a non-depreciable asset that an
entity does not plan to sell. If this approach is taken, then a review to determine the appropriate treatment should be
performed for all deferred tax items, and consistent criteria should be applied. If a portion of a deferred tax item is likely to
result in realisation of the asset or liability, then in our view the item should be treated as a monetary item in its entirety.
[IFRIC 7.BC21-BC22]
2.7.120.40 When a non-monetary asset is stated at fair value (see 2.7.110.10), an issue arises as to how to distinguish
the change in fair value from the related foreign exchange gain or loss.
EXAMPLE 5 - CALCULATION OF FOREIGN EXCHANGE GAIN OR LOSS ON NON-MONETARY ASSET MEASURED AT FAIR
VALUE
2.7.120.50 Company Y, whose functional currency is FC, owns an investment property. The fair
value of the investment property at 31 December 2011 was AC 1,000 with the exchange rate being
AC 1 : FC 1.5. Therefore, in Y's 31 December 2011 financial statements, the property is recorded at
FC 1,500. Y measures all investment property at fair value (see 3.4.150). At 31 December 2012 the
fair value of the property has increased to AC 1,200 and the exchange rate at the same date is AC
1 : FC 1.7.
2.7.120.60 In our view, the foreign exchange gain or loss may be calculated as the difference
between the fair value recorded at the spot rate at 31 December 2011 and the same fair value
measured at the exchange rate at 31 December 2012 - i.e. 200 (1,000 x (1.7 - 1.5)). Under this
approach, the fair value gain excluding the impact of changes in foreign currency rates is FC 340
((1,200 - 1,000) x 1.7). This reflects recognition of the foreign currency amount of the fair value
gain at the spot rate at the end of the reporting period. However, Y is not precluded from
performing revaluations on a more frequent basis than at the end of each reporting period. In this
case, Y could calculate the foreign exchange gain or loss on the revaluation date as the difference
between:
• the fair value recorded at the previous revaluation date using the exchange
rate at that date; and
• the same fair value using the exchange rate at the current revaluation date.
2.7.120.70 Although both the exchange gain or loss and the change in the fair value of the
investment property measured at fair value are recognised in profit or loss, they are disclosed
separately if they are material. [IAS 1.35]
2.7.130 Intra-group transactions
Page 329 / 375

2.7.130.10 Although intra-group balances are eliminated on consolidation (see 2.5.370), any related foreign exchange
gains or losses will not be eliminated. This is because the group has a real exposure to a foreign currency because one of
the entities will need to obtain or sell foreign currency to settle the obligation or realise the proceeds received. [IAS 21.45]
EXAMPLE 6 - FOREIGN EXCHANGE LOSS ON INTRA-GROUP LOAN
2.7.130.20 Parent P has a functional currency of AC, and Subsidiary S has a functional currency of
FC. P, whose reporting date is 31 December, lends AC 100 to S on 1 June 2012. S converted the
cash received into FC on receipt.
2.7.130.30 In S's second entry in 2.7.130.20, the liability is remeasured at 31 December 2012 and
a translation loss is recorded. The following entry is recorded by P.
2.7.130.40 On consolidation at 31 December 2012, the FC 200 converts to AC 100 (see 2.7.220)
and the receivable and payable are eliminated. However, the exchange loss equivalent to FC 50 for
the year ending 31 December 2012 remains on consolidation. This is appropriate because S will
need to obtain AC in order to repay the liability; therefore, the group as a whole has a foreign
currency exposure. It is not appropriate to transfer the exchange loss to equity on consolidation
unless the loan forms part of P's net investment in S (see 2.7.150).
Page 330 / 375

2.7.140 Recognition of foreign exchange gains and losses

2.7.140.10 Foreign exchange gains and losses are generally recognised in profit or loss. Exceptions relate to monetary
items that in substance form part of the reporting entity's net investment in a foreign operation and hedging instruments in
a qualifying cash flow hedge or hedge of a net investment in a foreign operation (see 7.7). Also, when a gain or loss on a
non-monetary item is recognised in OCI, the foreign exchange component is recognised in OCI. For example, because IAS
16 requires gains and losses arising on a revaluation of property, plant and equipment to be recognised in OCI (see
3.2.300), the related exchange difference is also recognised in OCI. [IAS 21.28, 30, 32]
2.7.150 Net investment in a foreign operation

2.7.150.10 A monetary item receivable from or payable to a foreign operation may form part of the net investment in a
foreign operation. In order to qualify, settlement of the monetary item should be neither planned nor likely to occur in the
foreseeable future. To form part of the net investment in a foreign operation, the entity that has the monetary item
receivable or payable may be the reporting entity or any subsidiary in the group. However, an investment in a foreign
operation made by an associate of the reporting entity is not part of the reporting entity's net investment in that operation
because an associate is not a group entity. [IAS 21.15-15A, 32-33, BC25F]
2.7.150.15 In the financial statements that include the reporting entity and its foreign operation (e.g. the consolidated
financial statements), foreign exchange gains and losses arising from monetary items that in substance form part of the net
investment in the foreign operation are recognised in OCI and are presented within equity in the foreign currency translation
reserve (see 2.7.260).
2.7.150.20 The exception in 2.7.150.15 applies only in the financial statements that include both the reporting entity and
the foreign operation. In the separate financial statements of the reporting entity or subsidiary, and those of the foreign
operation, the foreign exchange gains and losses are recognised in profit or loss. [IAS 21.32-33]
EXAMPLE 7A - RECOGNITION OF GAINS AND LOSSES ARISING FROM MONETARY ITEMS THAT ARE PART OF THE
NET INVESTMENT IN A FOREIGN OPERATION (1)
2.7.150.30 Parent P has a functional currency of AC, and Subsidiary S has a functional currency of
FC. P sells inventory to S for FC 300. At the reporting date, S has not yet paid the amount it owes
to P, but payment is expected to be made in the foreseeable future. Accordingly, the exchange gain
or loss incurred by P is recognised in profit or loss in both its consolidated and separate financial
statements. Even if repayment was not due for three years (for example) or even longer, in our
view if repayment is still planned, then the gain or loss should be recognised in profit or loss.
2.7.150.40 In addition to the trading balances between P and S, P lends an amount of FC 500 to S
that is not expected to be repaid in the foreseeable future. P regards the amount as part of its
permanent funding to S. In this case, the exchange gain or loss incurred by P on the FC 500 loan is
recognised in profit or loss in P's separate financial statements, but recognised in OCI and
presented within equity in its consolidated financial statements.
2.7.150.50 If the loan was denominated in AC rather than in FC (i.e. in P's functional currency
rather than S's functional currency), then S would incur an exchange gain or loss. In its separate
financial statements, S would recognise the gain or loss in profit or loss. On consolidation, the gain
or loss would be recognised in OCI.
2.7.150.60 When the exchange gain or loss incurred by either P or S is recognised in OCI on
consolidation, any related deferred or current tax is also recognised in OCI (see 3.13.370 and
530).
2.7.150.70 P and/or S could avoid recognising an exchange gain or loss only if the funding did not
meet the definition of a financial liability (see 7.1.25.50), which is unlikely to be the case in our
experience. If that were the case, then P's 'contribution' of FC 500 that is not required to be repaid
would be classified as a capital contribution in S's financial statements and would not be
retranslated subsequent to initial recognition (see 2.7.100). Similarly, in P's separate financial
Page 331 / 375

statements, the funding would be classified as part of P's investment in the equity instruments of S,
which also would not be retranslated if P has a policy of measuring investments in subsidiaries at
cost in its separate financial statements.
EXAMPLE 7B - RECOGNITION OF GAINS AND LOSSES ARISING FROM MONETARY ITEMS THAT ARE PART OF THE NET
INVESTMENT IN A FOREIGN OPERATION (2)
2.7.150.80 Modifying the fact pattern in 2.7.150.30-40 of Example 7A, suppose that the
'permanent' funding extended to Subsidiary S is made via another entity in the group, Subsidiary T,
rather than from Parent P directly; this is done for tax reasons.
2.7.150.90 Any exchange difference in respect of the loan is recognised in OCI in the consolidated
financial statements because from the group's point of view the funding relates to an investment in
a foreign operation. This is the case irrespective of the currency in which the loan is denominated.
So if the loan is denominated in T's functional currency, and this is different from that of S, then
exchange differences should still be recognised in OCI in the consolidated financial statements. [IAS
21.15A, 32-33]
2.7.160 Presentation of items in profit or loss

2.7.160.10 Disclosure is required of the amount of exchange differences recognised in profit or loss for the period, except
for those arising on financial instruments measured at fair value through profit or loss. However, the standard does not
specify the line item in which such differences should be presented. [IAS 21.52]
2.7.160.20 In our experience, the most common practice is for all such exchange differences related to monetary items to
be included as part of finance costs. However, it is also acceptable to allocate the exchange differences to the various line
items affected. For example, an entity might classify exchange differences on trade payables arising from the purchase of
inventory as part of cost of sales, and exchange differences arising from loans as part of finance costs. If exchange
differences are allocated in this way, then this should be done consistently from period to period having regard to the
guidance in IAS 1 on offsetting (see 4.1.170), and in our view it would be necessary to disclose the entity's allocation policy
if significant in the financial statements. See also 4.1.90.10-30, 7.8.80.20, 60 and 220.60-65.
Page 332 / 375

2.7.170 FOREIGN OPERATIONS

2.7.170.10 A 'foreign operation' of an entity is a subsidiary, associate, joint venture or branch whose activities are
conducted in a country or currency other than those of the reporting entity. IFRS defines the terms subsidiary (see 2.5),
associate (see 3.5) and joint venture (see 3.6). However, a branch is not defined in IFRS and issues arise regarding the
level and nature of activities that can comprise a foreign operation (see 2.7.190). [IAS 21.8]
2.7.180 Functional currency of a foreign operation

2.7.180.10 The guidance provided on determining an entity's functional currency also applies to determining the functional
currency of a (potential) foreign operation of the entity (see 2.7.40). This guidance places greater emphasis on the currency
that determines the pricing of transactions than on the currency in which transactions are denominated. Especially relevant
in the case of a foreign operation is whether or not it has the same functional currency as the reporting entity. To
determine this, the relationship between the foreign operation and the reporting entity should be considered. In considering
the relationship between the foreign operation and the reporting entity, in addition to the primary and secondary indicators
discussed in 2.7.40, the following factors are relevant:
• whether the activities of the foreign operation are conducted as an extension of the reporting
entity rather than with a significant degree of autonomy;
• whether a high or low proportion of the foreign operation's activities comprise transactions with
the reporting entity;
• whether cash flows from the foreign operation's activities directly affect the cash flows of the
reporting entity and are readily available for remittance to it; and
• whether the foreign operation generates sufficient cash flows from its own activities to service
existing and normally expected debt obligations without additional funds from the reporting
entity. [IAS 21.11]
2.7.180.20 The factors in 2.7.180.10 should be relied on only to provide additional supporting evidence to determine a
foreign operation's functional currency. When the indicators are mixed and the functional currency is not obvious, priority is
still given to the primary indicators (see 2.7.40.30). [IAS 21.9, 12]
2.7.180.30 In our view, the conclusion as to a foreign operation's functional currency should be the same irrespective of
whether the analysis is performed on a stand-alone basis or with reference to the entity's relationship with the reporting
entity. In other words, if an entity determines that its functional currency is the same as that of the reporting entity with
reference to the factors noted in 2.7.180.10 in the consolidated financial statements of the reporting entity, then it should
use the same functional currency to measure items in its separate financial statements.
2.7.190 Issues in determining whether a foreign operation has the same functional
currency as the reporting entity
2.7.190.10 A significantly different accounting result may be achieved depending on whether the foreign operation is
considered to have the same functional currency as the reporting entity. When the foreign operation has the same
functional currency as the reporting entity, but undertakes a large number of transactions in a foreign currency, the effect of
these transactions will be reflected in profit or loss. To reduce or eliminate volatility, the reporting entity may choose to
hedge its exposure and therefore may be able to apply hedge accounting. Conversely, if it is concluded that the foreign
operation has a functional currency different from that of the reporting entity, then foreign exchange gains or losses on
translation of the foreign operation into the group presentation currency will be recognised in OCI as it is part of a net
investment in a foreign operation. This avoids profit or loss volatility. These issues are particularly significant when the
activities are conducted through a special purpose entity (SPE) (see 2.7.210.10).
Page 333 / 375

2.7.190.20 In 2.7.200-210, we discuss some of the issues that require particular attention when determining the functional
currency of a foreign operation.
2.7.200 Separate legal entity
2.7.200.10 In our view, the analysis of whether a foreign subsidiary consists of more than one operation should be based
on the substance of the activities of the foreign operation, rather than its legal structure. Accordingly, we believe that a
single legal entity may comprise multiple foreign operations with different functional currencies in certain circumstances.
EXAMPLE 8 - MULTIPLE FOREIGN OPERATIONS IN A SINGLE LEGAL ENTITY
2.7.200.20 Parent P is based in the US and its functional currency is US dollars. Subsidiary S is
based in the UK. S has three distinct operations (X, Y and Z), which are conducted from the UK but
under different economic environments as a result of differences in the nature of their products and
markets. Separate accounting records are kept for each of the operations. In our view, the
functional currency of each of X, Y and Z should be determined separately. [IAS 21.BC6]
2.7.200.30 Care should be taken in assessing whether X, Y and Z indeed could have different
functional currencies. The fact that they are part of the same legal entity will normally make it more
difficult to demonstrate that any of them is independent and not an integral part of the reporting
entity. In particular, if separate accounting records for each operation are not kept or if their
operations and cash flows are managed on a unified basis, then in our view it would not be
appropriate to conclude that each is a foreign operation. [IAS 21.BC6]
2.7.210 An operation
2.7.210.10 In our view, a foreign operation should carry out its own activities. We do not believe that an ad hoc collection
of assets comprises an operation. Furthermore, when the foreign operation under consideration is an SPE, in our view in
order for the foreign operation to have a functional currency that differs from the reporting entity, it is necessary that:
• there is a substantive business reason for establishing a separate entity to conduct these
activities;
• there is a substantive business reason for choosing the currency in which that entity transacts;
and
• both substantial cash inflows and substantial third-party funding are denominated in that
currency. [IAS 21.9, 11]
2.7.210.20 In our view, an example of a substantive business reason would be providing security for an external
borrowing. However, we believe that obtaining a natural hedge or avoiding the need for hedge accounting would not, on its
own, be a sufficient business reason for the purpose of determining whether an SPE has its own functional currency.
EXAMPLE 9A - DETERMINING THE FUNCTIONAL CURRENCY OF AN SPE (1)
2.7.210.30 A reporting entity in New Zealand sets up an SPE to finance the acquisition of a cargo
ship. The SPE obtains a loan from an external financier, buys the ship and then leases the ship to
the reporting entity on normal commercial terms for a period of seven years (compared to the 25-
to 30-year life of the ship). The ship serves as security for the loan. The interest and capital
repayments on the loan will be financed partly through the lease payments, with the outstanding
balance to be settled with the proceeds from the sale of the ship after seven years. All of these
transactions are denominated in US dollars. The reporting entity's functional currency is New
Zealand dollars.
2.7.210.40 In our view, the SPE can have a functional currency that differs from the functional
currency of the reporting entity. By acquiring the ship as illustrated in 2.7.210.30, the reporting
Page 334 / 375

entity is able to isolate the ship as security in favour of the external financier and therefore it has a
substantive business reason. Given that most ship purchase and sale transactions are denominated
in US dollars, it follows that the SPE's transacting currency would be the US dollar. Also, the loan
from an external party is provided and settled in US dollars. While the lease payments are mostly
internal, these would not be sufficient to settle the entire loan and the settlement is effected by
using the proceeds from the sale of the ship to an external party. In such circumstances, in our
view the functional currency of the SPE would be US dollars, in part because of the substantial
residual US dollar value risk.
EXAMPLE 9B - DETERMINING THE FUNCTIONAL CURRENCY OF AN SPE (2)
2.7.210.50 An SPE is established as a vehicle through which the reporting entity leases a
production plant to a third party. The SPE obtains a loan from the reporting entity, buys the plant
and then leases the plant to a third party. The lease payments are sufficient to finance the interest
and capital repayments on the loan. All of these transactions are denominated in US dollars. The
reporting entity's functional currency is euro.
2.7.210.60 In our view, in this case the SPE cannot have a functional currency that differs from
that of the reporting entity because there is no substantive business purpose for establishing a
separate entity through which to purchase the production plant and effect the lease agreement. The
reporting entity could have acquired the production plant and entered into the lease agreement
itself. The SPE does not operate with a significant degree of autonomy from the reporting entity.
The reporting entity determines the asset profile and future cash flows of the SPE because the
reporting entity has written the lease agreement and also provided the funding for the purchase of
the production plant. Also, there is no clear reason for choosing US dollars as the transacting
currency. Any currency could have been chosen as the transacting currency, which means that it is
not relevant that substantially all of the SPE's assets, liabilities, income and expenses are
denominated in a currency different from that of the reporting entity. The US dollar cash flows of
the SPE directly affect the cash flows of the reporting entity since these are remitted immediately to
the reporting entity in the form of interest and principal payments.
2.7.210.70 We believe that the reporting entity and the SPE will have the same functional
currency, which in this case will be determined by analysing the combined operations.
Page 335 / 375

2.7.220 TRANSLATION OF FOREIGN CURRENCY FINANCIAL

STATEMENTS
2.7.230 Foreign operations
2.7.230.10 The financial statements of foreign operations are translated into the group presentation currency as follows:
• assets and liabilities are translated at the exchange rate at the end of the reporting period;
• items of income and expense are translated at exchange rates at the dates of the relevant
transactions, although appropriate average rates may be used;
• the resulting exchange differences are recognised in OCI and are presented within equity
(generally referred to as the foreign currency translation reserve or currency translation
adjustment); and
• cash flows are translated at exchange rates at the dates of the relevant transactions, although
appropriate average rates may be used (see 2.3.80). [IAS 7.26-27, 21.39, 52]
2.7.230.20 In addition, although IFRS is not explicit on these points, in our view:
• capital transactions (e.g. dividends) are translated at exchange rates at the dates of the relevant
transactions; and
• components of equity are not retranslated - i.e. each component of equity is translated once, at
the exchange rates at the dates of the relevant transactions.
2.7.230.30 As stated above, translating capital transactions should be done using exchange rates at the dates of the
relevant transactions. For practical reasons, in our view this may be approximated by use of an average rate, as used for
translation of income and expenses, if appropriate - e.g. for the translation of gains and losses on available-for-sale
financial assets (see 2.7.240).
2.7.230.40 Goodwill and fair value acquisition accounting adjustments related to a foreign operation are treated as assets
and liabilities of the foreign operation. In other words, they are considered to be expressed in the functional currency of the
foreign operation and are translated at the exchange rate at the end of the reporting period like other assets and liabilities.
[IAS 21.47]
2.7.230.50 The end of the reporting period of a foreign operation that is a subsidiary, associate or joint venture may be
before that of the parent (see 2.5.290 and 3.5.200). In that case, adjustments are made for significant movements in
exchange rates - up to the end of the reporting period of the parent - for group reporting purposes. [IAS 21.46, 27.23]
2.7.240 Using average exchange rates

2.7.240.10 In determining whether average rates may be used to translate income and expenses (and cash flows), in our
view fluctuations in the exchange rate and the volume and size of transactions should be considered. For example, if the
flow of transactions (by size and volume) is fairly stable over the period and exchange rates have not altered significantly,
then it may be acceptable to update exchange rates only quarterly. In this case, the translated amounts for each quarter
would be combined to obtain the annual total. However, at the other extreme, daily exchange rates might be used for an
entity with complex operations in which there is an uneven flow of transactions, or if exchange rates are not stable. [IAS
21.22]
2.7.250 Dual exchange rates

2.7.250.10 As noted in 2.7.90.30, in some countries there are dual exchange rates: the official exchange rate and an
Page 336 / 375

unofficial parallel exchange rate. In our view, when a foreign operation operates in a dual exchange rate environment,
subject to the considerations highlighted above, its financial statements should be translated using the rate applicable to
dividends and capital repatriation since this is how the investment in the foreign operation will be recovered.
2.7.250.15 In our view, the determination of which rate to use in these circumstances may be a matter of judgement and
the conclusion may change over time. For example, although a company may legally apply to a government agency for
foreign currency at the official rate for the purpose of paying dividends, it may also be able to effect dividends or capital
repayments through parallel market transactions. In this case, an entity should consider all relevant facts and circumstances
in determining what is the more appropriate rate to use for the purposes of translation, including:
• practical difficulties, uncertainties or delays associated with applying for foreign currency at the
official rate;
• whether an entity would plan to remit a dividend or repayment of the net investment through an
application for funds at the official rate or through parallel market transactions;
• past and current practice in relation to the remittance of dividends or capital; and
• the ability to source funds for dividend or capital repayments through parallel market
transactions.
2.7.250.20 In our view, the financial statements should disclose the reasons for not applying an official exchange rate as
well as information about the rate used, if a rate other than the official rate has been used.
2.7.260 Foreign currency translation reserve

2.7.260.10 The net exchange difference that is recognised in the foreign currency translation reserve in each period
represents the following.
• In respect of income, expenses and capital transactions, the difference between translating these
items at actual or average exchange rates, and using the exchange rate at the end of the
reporting period.
• In respect of the opening balance of equity (excluding the foreign currency translation reserve),
the difference between translating the balance at the rate used at the end of the previous
reporting period, and using the rate at the end of the current reporting period. [IAS 21.41]
2.7.260.20 The proof of the foreign currency translation reserve is illustrated in Example 11.
2.7.260.30 In addition, the foreign currency translation reserve may include exchange differences arising from loans that
form part of an entity's net investment in a foreign operation (see 2.7.150) and gains and losses related to hedges of a net
investment in a foreign operation (see 7.7.90).
2.7.260.40 In some cases, the foreign currency translation reserve may have a debit balance. A debit balance on the
reserve is not reclassified to profit or loss simply because it represents a 'loss'. It is reclassified to profit or loss only on
disposal of the foreign operation (see 2.7.320).
2.7.260.50 When there is a non-controlling interest in a foreign operation subsidiary, the amount of accumulated exchange
differences attributable to the NCI is allocated to and recognised as part of the NCI. [IAS 21.41, 27.28]
2.7.270 Hyperinflation
2.7.270.10 The functional currency of a foreign operation may be the currency of a hyperinflationary economy. In that
case, the foreign operation's financial statements are first restated into the measuring unit current at the end of the
reporting period. This does not apply for the comparative amounts if the group's presentation currency is not the currency
of a hyperinflationary economy. All amounts in the financial statements (excluding the comparatives noted above) are then
translated using the exchange rate at the current reporting date. [IAS 21.42-43]
2.7.270.20 If the financial statements of a hyperinflationary foreign operation are translated into the currency of a non-
hyperinflationary economy, the comparative amounts are not adjusted for changes in the price level or exchange rate since
Page 337 / 375

the end of the relevant comparative reporting period. In other words, the comparatives are those previously presented.
[IAS 21.42]
EXAMPLE 10 - TRANSLATION OF FINANCIAL STATEMENTS OF A HYPERINFLATIONARY FOREIGN OPERATION
2.7.270.30 An entity has prepared financial statements as at and for the year ended 31 December
2012 with comparative information as at and for the year ended 31 December 2011. If the
functional currency and presentation currency are the currencies of hyperinflationary economies,
then the 2011 and 2012 financial statements are restated to be presented in the measuring unit
current at 31 December 2012. Accordingly, the relevant exchange rate at 31 December 2012 is
applied in translating the financial information for both years. However, if the presentation currency
is not the currency of a hyperinflationary economy but the functional currency is the currency of a
hyperinflationary economy, then the 2012 financial statements are restated, and translated using
the exchange rate at 31 December 2012. The 2011 comparative amounts, however, remain
unchanged and are presented as they were in 2011.
2.7.270.40 See 2.4.20 for a discussion of the accounting treatment of hyperinflation.
2.7.280 Worked example

EXAMPLE 11 - TRANSLATION OF FINANCIAL STATEMENTS OF A FOREIGN OPERATION
2.7.280.10 This example illustrates the translation of the financial statements of a foreign
operation. As a result of the translation process, the exchange difference recognised in the foreign
currency translation reserve is a balancing figure; however, the amount can be proved, and this is
illustrated in this example (see 2.7.280.30). In addition, an exchange difference will arise in
reconciling the opening and closing balances of the various assets and liabilities. The proof of these
exchange differences is illustrated in 2.7.280.60 using property, plant and equipment as an
example.
2.7.280.20 A subsidiary was acquired on 1 January 2011. To simplify the example, assume that
there were no goodwill or fair value adjustments that arose in the business combination. Income
and expenses since acquisition have been translated using annual average exchange rates (see
2.7.240). No dividends have been paid since acquisition. The subsidiary's functional currency is FC;
the group presentation currency is PC.
Page 338 / 375

2.7.280.30 The proof of the foreign currency translation reserve is demonstrated by taking the
difference between the actual exchange rate used to translate each component of equity (i.e. the
amount in FC recognised in the statement of financial position) and the closing exchange rate, and
multiplying this by the balance of the item in FC. The proof of the translation reserve is a theoretical
proof because each equity component is not actually retranslated to the closing exchange rate when
presented in the consolidated financial statements.
Page 339 / 375

2.7.280.40 While the proof in the example above is on a cumulative basis, in our experience the
proof would be done on an annual basis.
2.7.280.45 The following proof of the change in the foreign currency translation reserve during
2012 is provided. This change is calculated based on the opening and closing exchange rates for
balances that are brought forward from previous reporting periods and on the actual and the
closing exchange rates for transactions that took place during 2012.
2.7.280.50 The reconciliation of property, plant and equipment for 2012 will be disclosed as
follows in the consolidated financial statements (assuming no additions or disposals). [IAS 16.73]
Page 340 / 375

2.7.280.60 The proof of the exchange difference in the reconciliation of property, plant and
equipment is demonstrated by taking the difference between the actual exchange rates used to
translate each item and the closing exchange rate, and multiplying this by the amount of each item
in FC.
Page 341 / 375

2.7.290 TRANSLATION FROM FUNCTIONAL TO PRESENTATION

CURRENCY
2.7.300 General requirements
2.7.300.10 If an entity presents its financial statements in a presentation currency that is different from its functional
currency, then the translation procedures are the same as those for translating foreign operations (see 2.7.230). [IAS
21.39]
2.7.300.20 The standard does not provide specific guidance on the translation of components of equity, other than in
respect of the current year's income and expense and the foreign currency translation reserve.
2.7.300.30 In our view, the method of translation to any presentation currency should be consistent with translation of a
foreign operation for consolidation purposes. Therefore, after the initial translation into the presentation currency,
components of equity at the end of the reporting period should not be retranslated.
EXAMPLE 12 - TRANSLATION FROM FUNCTIONAL CURRENCY TO PRESENTATION CURRENCY
2.7.300.40 This example is similar to Example 11, which illustrates the translation of foreign
operations. The entity's functional currency is FC; however, the financial statements will be
presented in presentation currency (PC). Income and expenses have been translated using an
annual average exchange rate (see 2.7.240).
Page 342 / 375

2.7.300.50 The proof of the foreign currency translation reserve is demonstrated by taking the
difference between the actual exchange rate used to translate an item and the closing exchange
rate, and multiplying this by the balance of the item in FC.
2.7.300.60 The following proof of exchange differences recognised in OCI and of the change in
the foreign currency translation reserve during 2012 is provided. This change is calculated based on
the opening and closing exchange rates for balances that are brought forward from previous
reporting periods and on the actual and the closing exchange rates for transactions that took place
during 2012.
Page 343 / 375

2.7.310 Hyperinflation
2.7.310.10 If both the entity's functional and presentation currencies are currencies of hyperinflationary economies, then
all items in the financial statements (current period and comparatives) are translated into the presentation currency at the
closing rate at the end of the most recent period presented after being restated for the effects of inflation. [IAS 21.42-43]
2.7.310.20 However, when the entity's functional currency is the currency of a hyperinflationary economy and its financial
statements are to be translated into a presentation currency that is not the currency of a hyperinflationary economy, only
the current period's amounts are remeasured for the effects of inflation in the current period, and then translated at the
exchange rate at the end of the reporting period. In this case, comparative amounts are not adjusted for changes in the
price level or exchange rate during the current period - i.e. the comparatives reported as current in prior year financial
statements are presented as they were previously. [IAS 21.42]
Page 344 / 375

2.7.312 CHANGES IN THE FUNCTIONAL CURRENCY

2.7.312.10 Once an entity has determined its functional currency, it is not changed unless there is a change in the relevant
underlying transactions, events and circumstances. If circumstances change and a change in functional currency is
appropriate, then the change is accounted for prospectively from the date of the change. However, a prospective change
triggers an issue with respect to the comparative financial information. [IAS 21.13, 35-37]
EXAMPLE 13 - CHANGE IN FUNCTIONAL CURRENCY
2.7.312.20 An entity incorporated in the UK with a 31 December year end had the euro as its
functional and presentation currency until the end of 2011. From the beginning of 2012, the focus of
the entity's operations changed and the appropriate functional currency is determined to be sterling
going forward. Additionally, the entity changes its presentation currency to sterling. At 1 January
2012, the financial position should be translated from euro into sterling using the exchange rate at
that date. From 2012, the financial statements will be prepared with any non-sterling transactions
translated following the requirements for foreign currency transactions (see 2.7.80). In our view,
the entity should choose an accounting policy, to be applied consistently, to present the 2011
comparative information under either of the following approaches.
• The 2011 comparatives should be translated from euro - which is the
functional currency for that period - into sterling using the amounts
determined under the new functional currency as at 1 January 2012.
Therefore, all comparative information will be translated at the exchange
rate as at 1 January 2012.
• The 2011 comparatives should be translated from the euro into sterling
using the methodology specified in 2.7.290 in respect of the translation of
financial statements from an entity's functional currency to its presentation
currency - i.e. using of appropriate 2011 exchange rates.
2.7.312.25 If, in this example, there is no change to the presentation currency (e.g. the entity's
presentation currency is euro for both 2011 and 2012), then translation of comparative amounts
into the new functional currency using the procedures that apply for translation into a different
presentation currency (see 2.7.290) would allow the entity to avoid restatement of its comparatives
- i.e. there would be no change in the 2011 comparatives presented in euro.
2.7.312.30 In our view, these procedures would apply equally when the legal currency of a country is changed. For
example, on 1 January 2011 the legal currency in Estonia changed from the Estonian kroon to the euro.
Page 345 / 375

2.7.315 CHANGES IN THE PRESENTATION CURRENCY

2.7.315.10 The same presentation currency is used for all periods presented. Generally, if an entity changes its
presentation currency, then it presents its financial statements, including comparative amounts, as if the new presentation
currency had always been the entity's presentation currency. The presentation of comparative information when there is a
change in presentation currency connected with a change in functional currency is discussed in 2.7.312. In our view, the
translation of comparative information into a new presentation currency is a change that would require, in accordance with
IAS 1, presentation of a third statement of financial position as at the beginning of the earliest period presented when such
information is considered material (see 2.1.35). [IAS 1.39, 41-42, 46]
2.7.315.20 The new presentation currency may differ from the reporting entity's functional currency or a foreign
operation's functional currency. In such cases, adjusting comparative amounts retrospectively is achieved by translating
comparatives in the functional currency to the presentation currency, based on the method described in 2.7.230 and
2.7.300.30 (unless the functional currency is hyperinflationary). Following this method, translating assets and liabilities,
items of income and expense, and cash flows is relatively straightforward.
• Assets and liabilities are translated based on the exchange rate at the end of the comparative
reporting period.
• Items of income and expense, capital transactions and cash flows relating to transactions in a
previous period are translated using the exchange rate prevailing at the transaction date or at an
appropriate average rate (see 2.7.230.10-30). [ IAS 21.39]
2.7.315.30 However, complexities may arise when translating components of equity because, in our view, such
components are only translated once at the exchange rates at the dates of the relevant transactions (see 2.7.230.20).
Therefore, retrospective application may require identification of the transactions that gave rise to the equity component
and the historic rates applicable to these transactions. This may be especially relevant for equity components that have
been accumulated over time, such as retained earnings.
Page 346 / 375

2.7.320 SALE OR LIQUIDATION OF A FOREIGN OPERATION

2.7.320.05 The following decision tree outlines the principles that apply to reclassification of the foreign currency
translation reserve on disposal or partial disposal of a foreign operation.
2.7.320.10 The cumulative exchange differences related to a foreign operation that have been included in the foreign
currency translation reserve are reclassified to profit or loss when the foreign operation is disposed of. A disposal may
arise, for example, through sale, liquidation or repayment of share capital. The standard does not specify in which line item
this amount is included. In our experience, typically it is included as part of the gain or loss on the disposal. [IAS 21.48, 49]
2.7.320.20 The cumulative exchange differences recorded and therefore subject to reclassification in respect of an
individual foreign operation are affected by whether the entity uses the direct or step-by-step method of consolidation (see
2.7.35.10). However, if an entity uses the step-by-step method of consolidation, then it may adopt an accounting policy of
determining the amount to be reclassified as if it had applied the direct method of consolidation to translate the financial
statements of the foreign operation into the functional currency of the ultimate parent. [IFRIC 16.17]
EXAMPLE 14 - EFFECT OF METHOD OF CONSOLIDATION
2.7.320.30 A group consists of Parent P with a euro functional currency, Intermediate Subsidiary
B with a sterling functional currency, and Subsidiary C with a US dollar functional currency. B has a
net investment in C of USD 300. Assume that the amount of the net investment remains the same in
US dollar terms throughout its life. P has borrowed USD 300 which is designated as a hedge of the
group's US dollar net investment in C against euros. The hedge is based on spot rates and has
been fully effective throughout.
2.7.320.40 C was purchased by B, and the US dollar borrowing was incurred by P, on 1 January
2012 when the three currencies were at par. C was sold on 31 December 2012, at which time the
US dollar had strengthened and the sterling had weakened against the euro. Exchange rates at 31
December 2012 and the average rates for the year then ended were as follows.
Page 347 / 375

USD 1 = EUR 1.25 = GBP 1.5 or GBP 1 = USD 0.67 = EUR 0.83
2.7.320.50 In its separate financial statements, P recognises a foreign exchange loss of EUR 75
((300 x 1.25) - 300) on its US dollar liability. In P's consolidated financial statements, this is
reclassified from profit or loss to the foreign currency translation reserve.
2.7.320.60 If P had used the direct consolidation method, then a corresponding foreign exchange
gain of EUR 75 would have been recognised in the foreign currency translation reserve as a result
of retranslating the USD 300 net investment into euro.
2.7.320.70 However, P has used the step-by-step consolidation method. B has first consolidated
C, and recognises a foreign exchange gain in its foreign currency translation reserve of GBP 150
((300 x 1.5) - 300). This is translated at the rate (see 2.7.230.40) of 0.83 into euro, so that P
Group's foreign currency translation reserve with respect to its net investment in C consists of:
• EUR 75 loss on the hedging instrument; and
• EUR 125 (150 x 0.83) gain recognised by B on B's net investment in C.
2.7.320.80 When P consolidates B, B's net assets, including B's net investment in C, are translated
at the closing exchange rate from sterling into euro. This gives rise to a foreign exchange loss of
EUR 50 ((300 x 0.83) - 300), which because of the consolidation method, is treated as part of the
foreign currency translation reserve related to B Group.
2.7.320.90 On disposal of C, P may simply reclassify the net EUR 50 gain to profit or loss that is
presented in its foreign currency translation reserve related to C. Alternatively, it may additionally
reclassify the loss of EUR 50 that relates indirectly to the net assets of C but was treated as part of
the foreign currency translation reserve related to P's investment in B, as if it had applied the direct
consolidation method. The second method better reflects the economic effect of the hedge
transaction, which was designed to eliminate the effect of the exchange differences on the group's
US dollar net investment in C.
2.7.320.100 In addition to the disposal of an entity's entire interest in a foreign operation, the following are accounted for
as disposals even if the entity retains an interest in the former subsidiary, associate or jointly controlled entity:
• the loss of control of a subsidiary that includes a foreign operation;
• the loss of significant influence over an associate that includes a foreign operation; and
• the loss of joint control over a jointly controlled entity that includes a foreign operation.[IAS
21.48A-48B]
2.7.320.110 For example, Parent P owns 100 percent of Subsidiary S, a foreign operation. P sells 60 percent of its
investment and loses control of S. Therefore, the entire balance in the foreign currency translation reserve in respect of S is
reclassified to profit or loss.
2.7.320.120 On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange
differences related to that foreign operation that have been attributed to the NCI forms part of the NCI that is derecognised
and is included in the calculation of the gain or loss on disposal, but it is not reclassified to profit or loss.
EXAMPLE 15 - LOSS OF CONTROL OVER A SUBSIDIARY
2.7.320.125 Parent P acquired 90% of Subsidiary S that includes a foreign operation some years
ago. P now sells its entire investment in S for 1,500. The net assets of S are 1,000 and the NCI in S
is 100. The cumulative exchange differences that have arisen during P's ownership are gains of
200, resulting in P's foreign currency translation reserve in respect of S having a credit balance of
180 while the cumulative amount of exchange differences that have been attributed to the NCI is
20. P's gain on disposal would be calculated in the following manner.
Page 348 / 375

2.7.320.130 When a parent loses control of a subsidiary by contributing it to an associate or a jointly controlled entity,
there is some ambiguity in IFRS on how the gain or loss on the loss of control should be calculated (see 2.5.525). If the
entity applies the IAS 27 approach and recognises the gain or loss in full in profit or loss, then the components of OCI of the
former subsidiary are also reclassified in full as described in 2.7.320.120. If the entity applies the IAS 28/IAS 31 approach
and eliminates a part of the gain or loss in respect of the continuing interest in the assets and liabilities contributed, then in
our view the components of OCI of the former subsidiary are not reclassified in full, but instead are reclassified on a
proportionate basis.
2.7.320.140 Reductions in an entity's ownership interest in a foreign operation, except for those reductions described in
2.7.320.100, are regarded as partial disposals. In the case of the partial disposal of a subsidiary that includes a foreign
operation, the entity re-attributes the proportionate share of the cumulative amount of the exchange differences recognised
in OCI to the NCI in that foreign operation. For example, Parent P owns 100 percent of Subsidiary S that includes a foreign
operation. P sells 20 percent of its investment and retains control over S. Therefore, 20 percent of the balance in the
foreign currency translation reserve is reclassified to NCI. [IAS 21.48C-48D]
2.7.320.150 In any other partial disposal of a foreign operation, the entity reclassifies to profit or loss only the
proportionate share of the cumulative amount of the exchange differences recognised in OCI. For example, Parent P owns
30 percent of Associate B that includes a foreign operation. P sells a five percent stake and retains significant influence over
B. Therefore one-sixth of the balance in the foreign currency translation reserve is reclassified to profit or loss. [IAS
21.48C]
2.7.320.160 A reporting entity may make a loan to a foreign operation that is classified as part of its net investment such
that exchange differences on the loan are recognised in the foreign currency translation reserve (see 2.7.260). IFRS is
silent on whether repayment of an intercompany loan forming part of the net investment is a partial disposal. In our view,
an entity should choose an accounting policy, to be applied consistently, on whether repayment of an intercompany loan
forming part of the net investment in a foreign operation is considered a partial disposal. We prefer that such a repayment
not be considered a partial disposal because it does not change the percentage share interest held by the reporting entity.
However, given historical practice, the definition of 'net investment' and its similarity to 'ownership interest', and the IASB's
view that such loans are treated similarly to equity investments, an accounting policy that treats such repayments as partial
disposals is also acceptable. [IAS 21.8, 48D, BC25D]
2.7.320.170 If an entity elects to treat repayment of a long-term intercompany loan forming part of the net investment as
a partial disposal, then in our view the principles noted in 2.7.320.140 and 150 should be applied.
• Loan to a subsidiary. There would be no reclassification to profit or loss, only a reattribution
between the foreign currency translation reserve of the entity and NCI. If the subsidiary is wholly
owned and there is no NCI, then no amount is reattributed.
• Loan to an associate or jointly controlled entity. The proportionate share of the foreign currency
translation reserve of the entity is reclassified to profit or loss. [IAS 21.48C, 49]
2.7.320.180 In our view, an entity should also consider whether the repayment of a loan results in substance in a
liquidation of a subsidiary and a full disposal. [IAS 21.49]
EXAMPLE 16 - REPAYMENT OF A LOAN FORMING PART OF THE NET INVESTMENT
2.7.320.190 Company P subscribed 100 in return for a 25% interest in Associate B, and extended
'permanent' funding of a further 50 at the same time. If B repays the loan of 50 and P's accounting
Page 349 / 375

policy is to treat repayment of a loan forming part of the net investment as a partial disposal, then
we believe that one-third of the balance in the foreign currency translation reserve should be
reclassified to profit or loss.
2.7.320.200 If P had extended the permanent funding some time after the original investment,
then we believe that the amount to be reclassified to profit or loss should be one-third of the
change in the balance of the foreign currency translation reserve that arose while the funding was
outstanding. Alternatively, if P had tracked the actual foreign exchange differences arising on the
permanent funding, then we believe that it would be acceptable for P to reclassify to profit or loss
these actual foreign exchange differences that had been previously recognised in OCI.
2.7.320.210 In the event of an impairment loss, the standard is clear that this does not constitute a partial disposal.
Consequently, no amount of the foreign currency translation reserve is reclassified to profit or loss. [IAS 21.49]
2.7.320.220 In our view, a major restructuring that results in reducing the scale of operations of a foreign operation does
not in itself trigger reclassification to profit or loss of any amount of the foreign currency translation reserve because the
parent has not realised its investment in the foreign operation.
Page 350 / 375

2.7.325 DISPOSAL OF NON-FOREIGN OPERATIONS

2.7.325.10 IFRS is silent on the accounting for exchange differences on a disposal of a non-foreign operation if the group
presentation currency is not the same as the parent's functional currency. For example, a German parent that presents its
consolidated financial statements in US dollars but whose functional currency is the euro disposes of its entire interest in a
directly owned German subsidiary whose functional currency is also the euro.
2.7.325.20 If the method used to prepare consolidated financial statements in US dollars was first to consolidate the
financial statements of the subsidiary in euros and then second to translate these consolidated euro amounts into US
dollars, no exchange differences in respect of the subsidiary would be separately accumulated in the parent's consolidated
financial statements. However, if the financial statements of the subsidiary had been directly translated into the presentation
currency, then exchange differences would have been separately accumulated in respect of the subsidiary. In our view, no
reclassification of these differences in respect of the subsidiary is required or permitted in the parent's consolidated
financial statements because the subsidiary was not a foreign operation. [IAS 21.8, BC18-BC20]
Page 351 / 375

2.7.330 CONVENIENCE TRANSLATIONS

2.7.330.10 A convenience translation occurs when an entity decides to present financial statements in addition to the
financial statements required to be presented in accordance with IFRS. For example, an entity has a functional currency of
Danish krone and a presentation currency of euro; in addition, it wishes to show US dollar figures for the most recent year's
primary financial statements, but it will not publish a full set of US dollar financial statements. [IAS 21.BC14]
2.7.330.20 There is a difference between a convenience translation and a translation to the presentation currency. An
entity that presents its financial statements in a currency or currencies that are different from its functional currency
describes the financial statements as complying with IFRS only if they comply with the translation method as set out in IAS
21. If an entity displays its financial statements or other financial information in a currency that is different from either its
functional currency or its presentation currency and does not comply with the translation method set out under IAS 21, then
it needs to provide disclosures - e.g. that the information in the convenience translation is supplementary, what the
convenience currency is, and the functional currency and the method of translation used. A convenience translation may be
used only for selected information and is provided only as supplemental information (see 5.8). [IAS 21.39, 42, 55, 57]
Page 352 / 375

2.8 Accounting policies, errors and estimates

(IAS 1, IAS 8)
Selection of • Accounting policies are the specific principles, bases, conventions,

accounting polices rules and practices that an entity applies in preparing and
presenting financial statements. [2.8.05.10]
• When IFRS does not cover a particular issue, management uses its
judgement based on a hierarchy of accounting literature.
[2.8.06.20]
• Unless otherwise specifically permitted by an IFRS, the accounting
policies adopted by an entity are applied consistently to all similar
items. [2.8.07.10]
Changes in • An accounting policy is changed in response to a new or revised

accounting policy IFRS, or on a voluntary basis if the new policy is more appropriate.
and correction of [2.8.10.10]
prior-period
errors • Generally, accounting policy changes and corrections of prior-period
errors are made by adjusting opening equity and restating
comparatives unless this is impracticable. [2.8.30.20, 40.40]
Changes in • Changes in accounting estimates are accounted for prospectively.

accounting [2.8.60.10]
estimates
• When it is difficult to determine whether a change is a change in
accounting policy or a change in estimate, it is treated as a change
in estimate. [2.8.60.20]
Change in • If the classification or presentation of items in the financial

classification or statements is changed, then comparatives are restated unless this is
presentation impracticable. [2.8.70.10]
Presentation of a • A statement of financial position as at the beginning of the earliest

third statement comparative period is presented when an entity restates
of financial comparative information following a change in accounting policy,
position correction of an error, or reclassification of items in the financial

Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
text. The forthcoming requirements related to this topic are derived from Annual Improvements to IFRSs 2009-2011 Cycle,
Page 353 / 375

which are effective for annual periods beginning on or after 1 January 2013. A brief outline of the impact of the
amendments on this topic is given in 2.8.90.
Page 354 / 375

2.8.05 SELECTION OF ACCOUNTING POLICIES

2.8.05.10 Accounting policies are the specific principles, bases, conventions, rules and practices that an entity applies in
preparing and presenting financial statements. [IAS 8.5]
2.8.05.20 See 6.1.170 for a discussion of the selection of accounting policies by an entity applying IFRS for the first time.
2.8.06 Hierarchy of accounting policy sources

2.8.06.10 If an issue is specifically addressed by an IFRS, then an entity applies the accounting policy or policies required
by that IFRS to that issue. [IAS 8.7]
2.8.06.20 If IFRS does not cover a particular issue, then management uses its judgement in developing and applying an
accounting policy that results in information that is relevant to the economic decisions of users and is reliable. There is a
hierarchy of accounting literature to be used in arriving at the policy selected, which provides entities with a basic structure
for resolving issues in the absence of specific guidance. [IAS 8.10-12]
2.8.06.30 If IFRS does not cover a particular issue, then the entity considers:
• the guidance and requirements in standards and interpretations dealing with similar and related
issues; and
• the Conceptual Framework (see 1.2). [IAS 8.11]
2.8.06.40 The entity may also consider the pronouncements of other standard-setting bodies (e.g. the FASB) and accepted
industry practice, to the extent that they do not conflict with the standards, interpretations and the Conceptual Framework
(see 1.2). [IAS 8.12]
2.8.06.50 In developing an accounting policy through analogy to an IFRS dealing with similar and related issues, an entity
uses its judgement in applying all aspects of the IFRS that apply to the particular issue. [IU 03-11]
2.8.07 Consistency
2.8.07.10 Unless an IFRS specifically permits otherwise, the accounting policies adopted by an entity are applied
consistently to all similar items. For example, if an entity chooses to account for common control transactions in the
consolidated financial statements of the acquirer at book value (see 5.13.50.20), then it uses that method consistently for all
similar common control transactions in its consolidated financial statements; it cannot use IFRS 3 accounting for some
common control transactions and book value accounting for other similar transactions. [IAS 8.13]
2.8.07.20 Certain IFRSs permit the application of different methods of accounting to different categories of items. For
example, IAS 2 requires the same cost formula to be used for all inventories having a similar nature and use to the entity,
but also recognises that different cost formulae may be justified for inventories with a different nature or use. However, IAS
2 recognises that a difference in the geographical location of inventories, by itself, is not sufficient to justify the use of
different cost formulae. For example, an oil refiner could not use a weighted-average costing formula for crude oil supplies
in the US and use a first-in, first-out (FIFO) costing formula at non-US locations. However, a manufacturer may have
computer chips that are used in industrial machinery, and computer chips that are used in domestic appliances; in our view,
the cost of the computer chips for each end product could be measured differently. However, in our view a difference in
customer demographic (e.g. end user vs retailer) does not meet the IAS 2 criterion of inventories with a different nature or
use to justify a difference in costing formula. [IAS 2.25-26]
2.8.07.30 Accounting policies within a group are applied consistently, including those that are established for the purposes
of consolidation (see 2.5.290.40). An exception is that insurance contracts accounted for under IFRS 4 need not be
accounted for consistently on a group-wide basis (see 8.1.60). [IAS 27.24]
2.8.07.40 See 5.9.230 for a discussion of the accounting policies followed in an interim reporting period.
Page 355 / 375

2.8.10 CHANGES IN ACCOUNTING POLICY

2.8.10.10 A change in accounting policy is made when it is required by a new or revised IFRS. A voluntary change may be
made if it will result in a reliable and more relevant presentation (see 2.8.30). In applying an IFRS that contains more than
one acceptable accounting policy, in our view an entity may generally change its accounting policy from one acceptable
accounting policy to another, because both methods are considered acceptable in providing a fair presentation. [IAS 8.14-
15]
2.8.10.20 Notwithstanding our general view in 2.8.10.10, we do not believe that it is appropriate for an entity to change an
accounting policy multiple times without carefully considering the criteria to qualify for a voluntary change in accounting
policy. For example, in 2010 Company B changed its accounting policy for property, plant and equipment from the cost
model to the revaluation model. During 2012, B re-assesses its accounting policy and decides to change its accounting policy
back to the cost model. In our view, because B previously demonstrated that the revaluation model was more appropriate,
B would need to demonstrate that the need for a reversal of its previous change in accounting policy is due to a change in
circumstances. Such a circumstance could occur as a result of the acquisition of B by a new parent if the new parent
instructs B to change its accounting policy for property, plant and equipment to the cost model in order to align B's policy
with the rest of the group. [IAS 8.14]
2.8.10.30 In addition, IFRS specifically provides that in respect of investment property (see 3.4.140.30) it is 'highly unlikely'
that a change in accounting policy from a fair value to a cost basis will result in a more appropriate presentation in the
financial statements. [IAS 8.14(b), 40.31]
2.8.10.40 The following changes in accounting policy are subject to special requirements.
• First-time adoption of IFRS. Changes in accounting policy that arise on the first-time adoption of
IFRS are the subject of a separate standard, IFRS 1. This includes changes in policies between
interim and annual financial statements in the year of first-time adoption of IFRS (see 6.1.170).
• Property, plant and equipment and intangible assets. A change in accounting policy to revalue
items of property, plant and equipment (see 3.2.300) or intangible assets (see 3.3.280) is
accounted for as a revaluation in accordance with the relevant IFRS.
• Insurance contracts. An entity is permitted to change its existing IFRS accounting policy for
insurance contracts only if the change improves either the relevance or the reliability of its
financial statements without reducing either (see 8.1.90).
• Exploration and evaluation activities. An entity is permitted to change its existing IFRS accounting
policy for exploration and evaluation activities only if the change makes the financial statements
more relevant and no less reliable, or more reliable and no less relevant, to the needs of users
(see 5.11.350). [IFRS 1.27-27A, BC97, 4.22, 6.13, IAS 8.17]
2.8.10.50 In addition, individual IFRSs may contain specific requirements for accounting policy changes that result from
their adoption (see 2.8.20).
2.8.10.60 Neither the adoption of an accounting policy for new transactions or events, nor the application of an accounting
policy to previously immaterial items, is a change in accounting policy. When a functional currency becomes
hyperinflationary and the restatement requirements of IFRS are applied (see 2.4.90), in our view this is not a change in
accounting policy because restatement could not have been applied before the functional currency was judged
hyperinflationary, which is similar to accounting for a new transaction or event. This is notwithstanding the fact that
purchasing-power adjustments are computed from the date on which non-monetary assets (liabilities) are acquired
(incurred). [IAS 8.16]
2.8.10.70 See 2.8.07 for a discussion of the consistency of accounting policies within an entity and in the consolidated
financial statements.
2.8.10.80 Disclosures required in respect of changes in accounting policy include the reasons for the change and the
Page 356 / 375

amount of the adjustment for the current period and for each period presented. In our view, such disclosures should be
made separately for each such change. [IAS 8.28-29]
2.8.10.90 In addition, any accompanying financial information presented in respect of prior periods (e.g. historical
summaries) is also restated as far back as is practicable to reflect the change in accounting policy (see 2.8.50.60). [IAS
8.26]
2.8.10.100 Although it is not specifically mentioned in IAS 8, the standard's implementation guidance shows the restated
comparative financial statements with the heading 'restated'. In our view, this is necessary to highlight the fact that the
comparative financial statements are not the same as the financial statements previously published (see 2.8.40.110).
2.8.10.110 See 3.13.380 for a discussion of the accounting for income taxes as a result of a change in accounting policy.
2.8.20 Accounting policy change on adoption of a new IFRS

2.8.20.10 When a change in accounting policy arises from the adoption of a new, revised or amended IFRS, an entity
follows the specific transitional requirements in that IFRS, which take precedence over the general requirements for
changes in accounting policies. [IAS 8.19]
EXAMPLE 1 - SPECIFIC TRANSITIONAL REQUIREMENTS
2.8.20.20 The transitional requirements in IFRS 10, as amended in June 2012, contain specific
requirements in terms of when an entity tests its previous consolidation conclusion for investees (at
the date of initial application of the standard), and the restatement of comparatives (only one year
required to be restated). These specific transitional requirements take precedence over the general
requirements in IAS 8. See 2.5A.550 for a discussion of the transitional requirements of IFRS 10.
[IFRS 10.C3-C4]
2.8.20.30 When an entity follows the specific transitional requirements of an IFRS, in our view it should nonetheless
comply with the disclosure requirements of IAS 8 in respect of a change in accounting policy to the extent that the
transitional requirements do not include disclosure requirements. Even though it could be argued that the disclosures are
not required because they are set out in the requirements for voluntary changes in accounting policy, we believe that they
are necessary in order to give a fair presentation. [IAS 8.28-29]
2.8.30 Voluntary change

2.8.30.10 An entity may change an accounting policy voluntarily if the new policy provides reliable and more relevant
information. The early adoption of a new IFRS is not a voluntary change in accounting policy. [IAS 8.14, 20]
2.8.30.15 If, in the absence of an IFRS specifically addressing an accounting issue, an entity adopted an accounting policy
based on the pronouncements of other standard-setting bodies (see 2.8.06.40) and chooses to change that accounting
policy as a result of an amendment to the underlying pronouncement, the change is accounted for and disclosed as a
voluntary change in accounting policy. [IAS 8.21]
2.8.30.20 Generally, an entity applies a change in accounting policy retrospectively (i.e. as if the new accounting policy had
always been applied), including any income tax effect. This is done by adjusting the opening balance of each affected
component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior
period presented. [IAS 8.22]
2.8.30.30 If it is impracticable to determine the period-specific effects for one or more prior periods presented (see
2.8.50), then the entity restates the opening balances of assets, liabilities and equity for the earliest period for which
retrospective application is practicable. [IAS 8.24]
2.8.30.40 If it is impracticable to determine the cumulative effect at the beginning of the current period of a change in
accounting policy (see 2.8.50), then the entity restates the comparative information prospectively from the earliest date
practicable. Nevertheless, a change in accounting policy is permitted even if it is impracticable to apply the policy
prospectively for any prior period. [IAS 8.25, 27]
Page 357 / 375

2.8.30.50 The financial statements include disclosure regarding the change in accounting policy, including the reasons why
applying a voluntary change in accounting policy provides reliable and more relevant information. [IAS 8.29]
Page 358 / 375

2.8.40 ERRORS
2.8.40.10 Errors result from the misapplication of policies or the misinterpretation of facts and circumstances that exist at
the end of the reporting period. Examples include mathematical mistakes, fraud (see 2.9.70) and oversight. [IAS 8.5]
2.8.40.20 Financial statements containing material errors, or immaterial errors made intentionally to achieve a particular
result in the financial statements, do not comply with IFRS. Potential current-period errors are corrected before the financial
statements are authorised for issue. Material prior-period errors are corrected by restating the comparative information
presented in the financial statements for that subsequent period. [IAS 8.41]
2.8.40.30 The correction of a material prior-period error is made by either:
• restating the comparative amounts for the prior period(s) presented in which the error occurred;
or
• if the error occurred before the earliest prior period presented, by restating the opening balances
of assets, liabilities and equity for the earliest prior period presented. [IAS 8.42]
2.8.40.40 IAS 8 requires material prior-period errors to be corrected by restating the opening balance of equity and
comparatives unless this is impracticable. [IAS 8.43]
2.8.40.50 If it is impracticable to determine the period-specific effects for one or more prior periods presented (see
2.8.50), then the entity restates the opening balances of assets, liabilities and equity for the earliest period for which
retrospective restatement is practicable. [IAS 8.44]
2.8.40.60 If it is impracticable to determine the cumulative effect at the beginning of the current period of an error on all
prior periods (see 2.8.50), then the entity restates the comparative information to correct the error prospectively from the
earliest date practicable. [IAS 8.45]
2.8.40.70 [Not used]
EXAMPLE 2 - CORRECTING AN ERROR
2.8.40.80 During 2012, Company X discovered that prepayments of 400 made during 2010 had
not been recognised in profit or loss as the related expenses were incurred. The prepayments
should have been recognised as an expense of 100 in 2010; 250 in 2011; and 50 in 2012. The
misstatement is material.
Page 359 / 375

2.8.40.90 The opening balance of retained earnings is adjusted and comparatives are restated
when practicable to reflect the correction of the error. The restatement should reflect any tax
effects, which are ignored for the purposes of this example.
2.8.40.100 In restating the comparatives, the adjustment will be included in the appropriate line item of the statement of
comprehensive income in the usual way (see 4.1). For example, if the expense in Example 2 were insurance of X's head
office and X classified its expenses by function, then the expense would normally be included in administrative expenses. In
addition, the financial statements will include full disclosure regarding the error and the adjustments made to correct it.
[IAS 8.49]
2.8.40.110 Although it is not mentioned specifically in IAS 8, the standard's implementation guidance shows the restated
comparative financial statements with the heading 'restated'. In our view, this is necessary in order to highlight for users
the fact that the comparative financial statements are not the same as the financial statements previously published. [IAS
8.IG]
2.8.40.120 In Example 2, the component of equity affected by the error was retained earnings. If the error affects more
components of equity, then the effect on each component of equity is disclosed separately. [IAS 1.106(b)]
Page 360 / 375

2.8.50 IMPRACTICABILITY OF RETROSPECTIVE APPLICATION

2.8.50.10 The retrospective application of changes in accounting policies (see 2.8.10) and the restatement of material
errors (see 2.8.40) are required, unless they are impracticable. Guidance is given on when retrospective application or
restatement will be impracticable. [IAS 8.5, 50]
2.8.50.20 Retrospective application or restatement is done using only information that:
• would have been available in preparing the financial statements for that earlier period; and
• provides evidence of circumstances that existed on the date(s) when the transaction or event
occurred. [IAS 8.52]
2.8.50.30 Other information - e.g. information that uses the benefit of hindsight - may not be used. [IAS 8.53]
2.8.50.40 Retrospective application or restatement is impracticable when it requires:
• significant estimates to be made that cannot, after making every reasonable effort, distinguish
information that may be used from information that may not; or
• information regarding transactions or events that is not available to the entity after making every
reasonable effort to retrieve the necessary information. [IAS 8.50, 52]
2.8.50.50 In such cases, the financial statements are adjusted as at the beginning of the earliest period from which
retrospective adjustment is practicable.
2.8.50.60 If an entity presents any accompanying financial information in respect of prior periods (e.g. historical
summaries), then in our view an inability to restate all of the periods presented in the historical summaries or other prior-
period information is not a reason to conclude that none of the comparative information required by IFRS would be
restated.
EXAMPLE 3 - INABILITY TO RESTATE ALL PERIODS IN HISTORICAL SUMMARIES
2.8.50.70 Company X prepares a 10-year historical summary as accompanying financial

information to its annual report. As a result of a change in accounting policy, X attempts to adjust
the historical summary for the entire 10-year period, but concludes that it is impracticable to restate
beyond the last 4 years. Therefore, X restates the affected financial information as far back as
practicable, being the last 4 years of the financial summary. [IAS 8.23]
Page 361 / 375

2.8.60 CHANGES IN ACCOUNTING ESTIMATES

2.8.60.10 Estimates are an essential part of financial reporting and changes therein are accounted for in the period in
which the change occurs. For example, a change in the estimate of recoverable receivables is accounted for in the period in
which the change in estimate is made. Disclosure of the nature and amount of such changes is required (see 4.1.150). [IAS
8.32-33, 39-40]
2.8.60.20 In some cases, it can be difficult to determine whether a change represents a change in accounting policy or a
change in estimate. In such cases, the change is treated as a change in estimate and appropriate disclosure is given. In our
view, when an entity changes its method of measuring the cost of inventory (see 3.8.280) - e.g. from FIFO to weighted-
average - this is a change in accounting policy notwithstanding the fact that both methods measure cost. [IAS 8.35]
2.8.60.30 A change in the estimate of the useful life or method of recognising the depreciation or amortisation of property,
plant and equipment (see 3.2.140) or an intangible asset (see 3.3.210) is accounted for prospectively as a change in
estimate by adjusting depreciation or amortisation in the current and future periods. [IAS 8.32, 36, 16.51, 61, 38.104]
EXAMPLE 4 - ACCOUNTING FOR CHANGES IN ESTIMATES
2.8.60.40 Company C acquired a printing machine at the beginning of 2008 and its useful life was
estimated to be 10 years. At the end of 2011, the carrying amount of the machine was 240. At the
beginning of 2012, C revised the estimated useful life downwards to a further 2 years from that
date. Therefore, the carrying amount of 240 is depreciated over the next 2 years. In addition, the
decrease in useful life may indicate that the carrying amount of the machine is impaired (see
3.10.110).
2.8.60.50 A change in estimate is different from the correction of an error because an error results from the
misapplication of policy or misinterpretation of existing facts and circumstances. Changes in accounting estimates result
from new information or new developments. An estimate takes into account all existing facts and circumstances, but
changes over time as those facts and circumstances change or as the entity obtains more experience and/or knowledge. If
an objective determination cannot be made of whether a change is a change in estimate or the correction of an error, then
in our view it should be accounted for as a change in estimate; this is consistent with the approach taken to distinguishing
between changes in estimates and changes in accounting policy. [IAS 8.5, 34, 48]
2.8.60.60 Any significant change in estimate made during the last interim period in a financial year is disclosed in a note to
the annual financial statements, unless separate interim financial statements are published for this period. [IAS 34.26]
Page 362 / 375

2.8.70 CHANGE IN CLASSIFICATION OR PRESENTATION

2.8.70.10 In some cases, it may be appropriate to change the classification or presentation of items in the financial
statements even though there has been no change in accounting policy, to achieve a more appropriate presentation. In such
cases, the comparatives are restated unless this is impracticable and appropriate explanatory disclosures are included in
the financial statements. [IAS 1.41, 45-46]
EXAMPLE 5 - RESTATING COMPARATIVES FOR CHANGES IN PRESENTATION
2.8.70.20 In 2011, Company D presented its entire net obligation for post-employment benefits as
non-current as allowed by IFRS (see 4.4.1100). In 2012, D decides to split the net obligation into
current and non-current components in the statement of financial position. We believe that the 2011
comparatives should be restated if D has the information necessary to do so and a third statement
of financial position as at the beginning of the earliest comparative period should be presented (see
2.1.35.30). [IAS 1.39, 19.118]
Page 363 / 375

2.8.80 PRESENTATION OF A THIRD STATEMENT OF FINANCIAL

POSITION #
2.8.80.10 IAS 1 requires an additional statement of financial position to be presented as at the beginning of the earliest
comparative period following a retrospective change in accounting policy, the correction of an error or the reclassification of
items in the financial statements. [IAS 1.10(f)]
2.8.80.20 In our view, this requirement should be interpreted having regard to materiality based on the particular facts and
circumstances (see 2.1.35).
2.8.90.10 Annual Improvements to IFRSs 2009-2011 Cycle amend IAS 1 to clarify the requirements regarding the
presentation of the third statement of financial position. Specifically, they clarify that the third statement of financial
position is presented only if a change in accounting policy, retrospective restatement or reclassification has a material
effect on the information in the statement of financial position. The amendments also clarify that, in cases when additional
comparative information is presented, the third statement of financial position relates to the beginning of the preceding
period.
Page 364 / 375

2.9 Events after the reporting period

(IAS 1, IAS 10)
Overall approach • The date on which the financial statements are authorised for issue
is generally the date on which they are authorised for issue by
management, either to the supervisory board or to the
shareholders. [2.9.15.20]
Adjusting events • The financial statements are adjusted to reflect events that occur
after the end of the reporting period, but before the financial
statements are authorised for issue, if those events provide
evidence of conditions that existed at the end of the reporting
period. [2.9.20.10]
Non-adjusting • Financial statements are not adjusted for events that are a result of
events conditions that arose after the end of the reporting period, except
when the going concern assumption is no longer appropriate.
[2.9.30.10]
Current vs non- • The classification of liabilities as current or non-current is based on

current circumstances at the end of the reporting period. [2.9.40.10]
classification
Earnings per • Earnings per share is restated to include the effect on the number of
share shares of certain share transactions that happen after the end of the
reporting period. [2.9.50.10]
Going concern • If management determines that the entity is not a going concern
after the end of the reporting period but before the financial
statements are authorised for issue, then the financial statements
should not be prepared on a going concern basis. [2.9.55.10]
Identifying the • It is necessary to determine the underlying causes of an event and

key even its timing to determine the appropriate accounting. [2.9.60.10]
Discovery of a • In our view, if information about a fraud could not reasonably be

fraud after the expected to have been obtained and taken into account by an entity
end of the preparing financial statements when they were authorised for issue,
reporting period then the subsequent discovery is not evidence of a prior-period
error. [2.9.70.10]

Statements and IAS 10 Events after the Reporting Period.
Page 365 / 375


Page 366 / 375

2.9.10 OVERALL APPROACH

2.9.10.10 The following diagram illustrates the scope of IAS 10, which deals with events that occur after the end of the
reporting period but before the financial statements are authorised for issue. [IAS 10.3]
2.9.15 Date on which the financial statements were authorised for issue
2.9.15.10 Disclosure is required in the financial statements of the date on which the financial statements were authorised
for issue and who gave such authorisation, to inform users of the date to which events have been considered. If the
shareholders have the power to amend the financial statements after issue, then the entity discloses that fact. [IAS 10.17]
2.9.15.20 The date on which the financial statements are authorised for issue is generally the date on which the financial
statements are authorised for issue by management, either to the supervisory board or to the shareholders. Even if the
shareholders are required to approve the financial statements, the date on which the financial statements are authorised
for issue is the date of issue, not the date when shareholders approve the financial statements. [IAS 10.5-6]
2.9.15.22 Identification of the date on which the financial statements are authorised for issue is a key area in the
application of IAS 10. This is because any event that occurs after this date is not disclosed or reflected in the financial
statements of the current period. However, the date on which the financial statements are authorised for issue is not
always easily identifiable. In our view, the determination of this date should be based on all facts and circumstances,
including the rights and responsibilities of the governing body and local governance rules on authorisation protocols. [IAS
10.4-7]
2.9.15.25 In our view, two different dates of authorisation for issue of the financial statements (dual dating of financial
statements) should not be disclosed, because we believe that only a single date of authorisation for issue of the financial
statements complies with IAS 10.
2.9.15.30 The financial statements of each entity have their own date of authorisation. For example, if financial statements
of a subsidiary are authorised for issue after the publication of the consolidated financial statements of the group that
includes this subsidiary, then the financial statements of the subsidiary have a later date of authorisation.
2.9.15.40 In our view, the authorisation for issue of the financial statements of the current period does not itself require
the reconsideration of adjusting and non-adjusting events in respect of comparative information that is derived from
financial statements (annual or interim) of a previous period that were themselves previously authorised for issue. [IAS
1.38, 10.8-11]
Page 367 / 375

2.9.20 ADJUSTING EVENTS

2.9.20.10 The financial statements are adjusted to reflect events that occur after the end of the reporting period, but
before the financial statements are authorised for issue, if either they provide evidence of conditions that existed at the end
of the reporting period (adjusting events) or they indicate that the going concern basis of preparation is inappropriate (see
2.9.55). [IAS 10.3, 8, 14]
EXAMPLE 1A - LEGAL CLAIM - DEFENDANT
2.9.20.20 Company T is being sued for breach of contract. At the end of the reporting period, T
asserted that it had not breached the contract and had legal opinions supporting this as the most
likely outcome. Therefore, T had not recognised any provision in its draft financial statements (see
3.12). Before the financial statements are authorised by the directors, the judge in the case delivers
a preliminary ruling that T is guilty and liable for damages of 1,000. A final judgment is made after
the financial statements have been authorised for issue. In our view, the financial statements
should be adjusted and a provision of 1,000 recognised because the preliminary ruling provides
enough evidence that an obligation existed at the end of the reporting period, in the absence of any
evidence to the contrary, notwithstanding the fact that a final judgment had not yet been reached.
2.9.20.30 See paragraph 9 of IAS 10 for other examples of adjusting events.
Page 368 / 375

2.9.30 NON-ADJUSTING EVENTS

2.9.30.10 Financial statement amounts are not adjusted for non-adjusting events. Non-adjusting events are events that are
a result of conditions that arose after the end of the reporting period. An exception is when events after the end of the
reporting period indicate that the financial statements should not be prepared on a going concern basis (see 2.9.55). [IAS
10.3, 10, 14]
EXAMPLE 1B - LEGAL CLAIM - CLAIMANT
2.9.30.15 Continuing Example 1A from the point of view of Company V, which is suing Company T
for breach of the contract, V is uncertain about the outcome of the legal proceeding at the end of
the reporting period. V's financial statements are authorised for issue after the final court
judgment. V considers whether the favourable court ruling is an adjusting or non-adjusting event in
respect of its claim, which has been treated as a contingent asset (see 3.12.107) because its
realisation was probable but not virtually certain. In our view, the change in probability of
realisation of income and the recovery of the related asset due to the court ruling is an event that
should be reflected in the financial statements of the period in which the change occurs and should
not be treated as an adjusting event in the prior-period financial statements. This is because the
recognition of an asset for an item that is a contingent asset is specified as 'recognised in the
period in which the change occurs'. We believe that the phrase 'in which the change occurs' refers
to the change in probability of the related inflows of economic benefits, which provides enough
evidence that from that point in time the item meets the definition of and the recognition
requirements for an asset. We believe that this specific guidance should be applied rather than
considering the change in probability to be an event that provides additional information about
circumstances at the end of the reporting period, even though this is not symmetrical with the
accounting by the counterparty (T). [IAS 37.33, 35]
2.9.30.20 Dividends declared (i.e. the dividends are authorised and no longer at the discretion of the entity) after the end
of the reporting period are non-adjusting events that are not recognised as a liability in the financial statements, but are
disclosed in the notes to the financial statements. This is because no obligation exists at the end of the reporting period.
See 7.3.360 for further discussion of the timing of the recognition of dividends. [IAS 10.12-13, BC4]
2.9.30.25 A change in income tax rate or income tax law enacted or substantively enacted after the end of the reporting
period is a non-adjusting event that would generally result in disclosure (see 3.13.310.30). [IAS 10.22(h), 12.51]
2.9.30.28 Changes in market conditions after the end of the reporting period should be considered to determine whether
they indicate an adjusting or non-adjusting event. If the assumptions made in determining recoverable amount at the end of
the reporting period are consistent with market data at that date, then no further adjustment is necessary. However, the
entity should consider whether disclosure would be appropriate (see 2.9.30.30). Although the inability to forecast significant
unforeseen changes in market conditions does not call into question the reasonableness of prior forecasts, such conditions
should be considered in the forecasts in future impairment testing (see 3.10.180.70).
2.9.30.30 For significant non-adjusting events, an entity discloses the nature of the event and an estimate of its financial
effect or a statement that an estimate cannot be made. A non-adjusting event is considered to be significant if it is of such
importance that non-disclosure would affect the ability of users of the financial statements to make proper evaluations and
decisions. In all cases, when a business combination happens after the end of the annual reporting period but before the
financial statements are authorised for issue, an entity discloses information as prescribed by IFRS 3 (see 2.6.1140). [IFRS
3.59-63, IAS 10.21]
2.9.30.40 See paragraph 22 of IAS 10 for other examples of non-adjusting events.
Page 369 / 375

2.9.40 CURRENT VS NON-CURRENT CLASSIFICATION *

2.9.40.10 Generally, the classification of long-term debt as current or non-current reflects circumstances at the end of the
reporting period. Refinancings, amendments, waivers etc. signed after the end of the reporting period are not considered in
determining the classification of debt. However, if an entity expects, and has the discretion, at the end of the reporting
period to refinance or to reschedule payments on a long-term basis, then the debt is classified as non-current (see 3.1.40).
[IAS 1.72-76]
Page 370 / 375

2.9.50 EARNINGS PER SHARE

2.9.50.10 Earnings per share is restated to include the effect on the number of shares of certain share transactions that
happen after the end of the reporting period even though the transactions themselves are non-adjusting events (see
5.3.360). [IAS 33.64]
Page 371 / 375


2.9.55.10 An entity does not prepare its financial statements on a going concern basis if management determines, after
the end of the reporting period but before the financial statements are authorised for issue, that it intends or has no
alternative other than to liquidate the entity or to stop trading (see 2.4.15). [IAS 10.14]
Page 372 / 375

2.9.60 IDENTIFYING THE KEY EVENT

2.9.60.10 In some cases, an event after the end of the reporting period actually may have been triggered by an event that
occurred before the end of the reporting period. In such cases, it is necessary to determine the underlying causes of the
event and its timing to determine the appropriate accounting. [IAS 10.3]
EXAMPLE 2A - THE KEY EVENT - CUSTOMER BANKRUPTCY
2.9.60.20 Company B receives notice after the end of the reporting period that one of its major
customers has gone into liquidation. In this case, the standard states that the bankruptcy of a
customer after the end of the reporting period usually confirms that a loss existed at the end of the
reporting period. Therefore, B should assume that the bankruptcy is an adjusting event unless
evidence to the contrary exists - e.g. the customer became bankrupt because its main operating
plant was destroyed in a fire that happened after the end of the reporting period. [IAS 10.9]
2.9.60.30 An entity considers whether adjusting events impact not only recognised items but also previously unrecognised
items.
EXAMPLE 2B - THE KEY EVENT - PREVIOUSLY RECOGNISED AND UNRECOGNISED ITEMS
2.9.60.35 A financier extends a loan to Company C before the end of its reporting period.
Company D provides a financial guarantee to the financier so that D has the credit risk of non-
repayment of the loan by C to the financier. After the end of its reporting period, D receives notice
that C has gone into administration (bankruptcy). D should assume that the administration is an
adjusting event (subject to evidence to the contrary (see Example 2A)) and should recognise a
provision for its estimate of the amount that it will pay under the guarantee (see 3.12), despite not
having recognised the loan as an asset in its own accounting records. [IAS 10.9, 37.16]
2.9.60.40 In other cases, multiple events may happen, some before and some after the end of the reporting period, and it
is necessary to determine which of the events should trigger the recognition of the event in the financial statements.
Page 373 / 375

2.9.70 DISCOVERY OF A FRAUD AFTER THE END OF THE

REPORTING PERIOD
2.9.70.10 A fraud may be discovered after the financial statements have been authorised for issue. In our view, if
information about the fraud could not reasonably be expected to have been obtained and taken into account by an entity
preparing financial statements when those financial statements were authorised for issue, then subsequent discovery of
such information is not evidence of a prior-period error in those financial statements. This is because the definition of a
prior-period error focuses on whether information was available or reasonably could have been obtained and taken into
account (see 2.8.40). [IAS 8.5]
2.9.70.20 In other circumstances, a fraud may be discovered after the end of the reporting period but before the financial
statements are authorised for issue. In our view, in concluding whether the discovery of the fraud should be treated as an
adjusting or non-adjusting event related to reporting the fair value of financial assets under IAS 39 in financial statements
that have not yet been authorised for issue, management first identifies whether there is a question of existence, valuation
or both.
2.9.70.30 In our view, if the discovery of a fraud raises issues related to the existence of the financial assets involved, then
it should be treated as an adjusting event for financial statements that have not yet been authorised for issue. This is
because the discovery of the fraud provides additional information about the existence of financial assets at the end of the
reporting period. If, however, the fraud raises issues related only to the valuation of financial assets that do exist, then in
our view it should be treated as a non-adjusting event for reporting the fair values of financial assets within the scope of
IAS 39. This is because of the following fair value measurement requirements of IAS 39.
• Quoted instruments. Fair value is determined based on the price at which a transaction would
occur at the end of the reporting period in the most advantageous active market to which the
entity has immediate access. In our view, although the market may have been mispricing the
underlying value of traded securities due to inaccurate or incomplete information, a quoted price
for a financial instrument in an active market should not be overridden.
• Unquoted instruments. If there is no quoted price for a financial instrument in an active market,
then its fair value is determined using a valuation technique that incorporates all factors that
knowledgeable market participants would consider in setting a price at the end of the reporting
period. The measurement objective for an unquoted instrument measured at fair value is the
same as that for a quoted instrument measured at fair value: what the price was or would have
been at the end of the reporting period. Therefore, in our view a valuation that has as its
objective fair value at the end of the reporting period should not reflect information that neither
was nor would have been reasonably available to market participants at that date. [IAS 39.48A,
AG71-AG73]
2.9.70.40 In some cases, it may be difficult to separate the existence and the valuation issues. In our view, if it is
impracticable to separate the existence and the valuation issues, then the entire effect should be treated as an issue related
to the existence of assets. For example, Fund Q reports an investment in government bonds and had its investment adviser,
K, act as a custodian; Q discovers in March 2012 that K has been charged with fraud. In this case, K is alleged to have
reported these government bonds as assets of multiple investors and their owner of record is an affiliate of K. Although
these government bonds were in existence, the existence of Q's claim to those assets is uncertain.
2.9.70.50 If an entity concludes that the subsequent discovery of a fraud is a valuation issue, and therefore it is treated as
a non-adjusting event, then the non-adjusting event should be disclosed if it is material. [IAS 10.21]
Page 374 / 375


The ED proposed amending IAS 1 to clarify that for an otherwise current liability to be classified as non-current based on an
ability to refinance or roll over the obligation, the refinancing would need to be with the same lender, and on the same or
similar terms.
Page 375 / 375

IFRS Insights Topics Including General Issues

Uploaded by

Copyright:

Available Formats

IFRS Insights Topics Including General Issues

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IFRS Insights Topics Including General Issues

Uploaded by

Copyright:

Available Formats

What is the purpose and organization of the publication?

What is the purpose and organization of the publication?

What are some of the topics covered in Volume 1?

What are some of the topics covered in Volume 1?

2.

6 Business combinations (Insights into IFRS)

Insights into IFRS

ABOUT THIS PUBLICATION

3. SPECIFIC STATEMENT OF FINANCIAL POSITION ITEMS

4. SPECIFIC STATEMENT OF COMPREHENSIVE INCOME ITEMS

6. FIRST-TIME ADOPTION OF IFRS

NOW, MORE THAN EVER

ABOUT THIS PUBLICATION

ORGANISATION OF THE TEXT

STANDARDS AND INTERPRETATIONS

ORGANISATION OF THE TEXT

STANDARDS AND INTERPRETATIONS

Currently effective requirements

2.4A IFRS 13 Fair Value Measurement

2.5A IFRS 10 Consolidated Financial Statements

3.6A IFRS 11 Joint Arrangements

7A IFRS 9 Financial Instruments

KEEPING YOU INFORMED

Your need Publication series Purpose

Briefing In the Headlines Provides a high-level summary of significant accounting, auditing

The Balancing Items Focuses on narrow-scope amendments to IFRS.

First Impressions Considers the requirements of new pronouncements and highlights

IFRS Handbooks Includes extensive interpretative guidance and illustrative examples

Disclosure checklist Identifies the disclosures required for currently effective

KEEPING YOU INFORMED

KPMG MEMBER FIRMS' CONTRIBUTORS

KPMG MEMBER FIRMS' CONTRIBUTORS

Authors and principal contributors

Lynn Pearcy United Kingdom

Business Combinations and Consolidation Topic Team

Employee Benefits Topic Team

Financial Instruments Topic Team

Income Taxes Topic Team

Insurance Contracts Topic Team

Leases Topic Team

Presentation Topic Team

Revenue Recognition and Provisions Topic Team

Valuations and Impairment Topic Team

1.2 The Conceptual Framework

CURRENTLY EFFECTIVE REQUIREMENTS

FORTHCOMING REQUIREMENTS AND FUTURE DEVELOPMENTS

1.1.05 INTERNATIONAL FINANCIAL REPORTING STANDARDS

1.1.10 INTERNATIONAL ACCOUNTING STANDARDS BOARD

1.1.35 MONITORING BOARD #

1.1.50 IFRS ADVISORY COUNCIL

1.1.60 IFRS INTERPRETATIONS COMMITTEE *

1.1.65 OTHER ADVISORY GROUPS

1.1.70 INTERNATIONAL FINANCIAL REPORTING STANDARDS

1.1.82 IASB due process *

1.1.85 Annual improvements process *

1.1.110 COMPLIANCE WITH IFRS

1.1.130 Fair presentation

1.1.150 PRIVATE ENTITIES

1.1.160 IFRS FOR SMALL AND MEDIUM-SIZED ENTITIES *