Advanced financial accounting under IFRS

-lecture notes-

Introduction to advanced issues in financial accounting

Course objective: to introduce advanced concepts and techniques in financial accounting

Major issues in financial accounting (course outline):

1. Conceptual issues developing a converged conceptual framework

2. Measurement issues fair value measurement versus historical cost, and the treatment of unrealized gains and losses:

2.1. Accounting for employee benefits;

2.2. Share based payments;

2.2. Accounting for financial instruments;

3. Advanced issues in business combinations

The context of improvements in IAS/IFRS/reshaping major accounting issues International accounting harmonizationUE -European directives

IASB IFRS

Both initially aimed at harmonizing accounting practices within the European Union (EU directives) or internationally (IAS/IFRS)International accounting convergence

IASB FASB Norwalk agreement - convergence project aimed at eliminating differences between accounting systemsMajor FASB-IASB convergence plans:

a) Financial statements;

b) Business combinations;

c) Conceptual framework;

d) Revenue recognition.

Other convergence issues leases, reporting earnings per share, income taxes etc.CHAPTER 1 Conceptual issues in financial accounting towards a new internationally converged conceptual frameworkIASB-FASB agreed to work together in order to revisit the conceptual bases of accounting standards an issue a new internationally converged conceptual framework operational in both the American and international accounting systems.In 2010, the Boards deferred further work on the joint project until after other more urgent convergence projects were finalized.

In September 2012, IASB decided to reactivate the Conceptual Framework project as an IASB-only comprehensive project.

Before being suspended, the joint IASB-FASB Conceptual Framework project was being conducted in a number of phases:

PhaseStatus

Phase A: Objectives and qualitative characteristicsCompleted, Conceptual Frameworkfor Financial Reporting 2010 issued on 28 September 2010

Phase B: Elements and recognitionTo be further considered as part of the IASB-only comprehensive project

Phase C: MeasurementTo be further considered as part of the IASB-only comprehensive project

Phase D: Reporting entityExposure Draft ED/2010/2 Conceptual Framework for Financial Reporting: The Reporting Entity published on 11 March 2010. To be further considered as part of the IASB-only comprehensive project

Phase E: Presentation and disclosureTo be further considered as part of the IASB-only comprehensive project. However, this will not be extended to other areas within the original scope of phase E, such as preliminary announcements and press releases

Phase F: Purpose and statusWork on this phase is to be discontinued as the project is being continued as an IASB-only project. One of the objectives of this phase was to reach a converged IASB-FASB view on the secondary purpose of the framework to assist preparers in preparing financial statements (which is not present in US GAAP)

Phase G: Application to not-for-profit entitiesWork on this phase will be discontinued as the current focus of the IASB is on business entities in the private sector

Phase H: Remaining issuesThis phase will not needed as the remaining topics to be considered as part of the IASB-only project are intended to be developed and issued together

Phase A Objectives and qualitative characteristics

Finalized with the issue of the Conceptual Framework for Financial Reporting in 2010The New Conceptual Framework addresses:

the objective of financial reporting (new version) the qualitative characteristics of useful financial information (new version) (the reporting entity) (under discussion old version) (the definition, recognition and measurement of the elements from which financial statements are constructed) (under discussion old version) (concepts of capital and capital maintenance) (under discussion old version)Chapter 1: The Objective of general purpose financial reporting as redefinedThe 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. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.Financial statements present information about a reporting entity's economic resources, claims, and changes in resources and claims.Economic resources and claimsInformation about the nature and amounts of a reporting entity's economic resources and claims assists users to assess that entity's financial strengths and weaknesses; to assess liquidity and solvency, and its need and ability to obtain financing. Information about the claims and payment requirements assists users to predict how future cash flows will be distributed among those with a claim on the reporting entity. [F OB13]

A reporting entity's economic resources and claims are reported in the statement of financial position (a new title for balance-sheet). [See IAS 1.54-80A]

Changes in economic resources and claimsChanges in a reporting entity's economic resources and claims result:

from that entity's performance; and from other events or transactions such as issuing debt or equity instruments.Users need to be able to distinguish between both of these changes. [F OB15]

Financial performance reflected by accrual accounting- the changes in an entity's economic resources and claims resulting from the entity performance - is presented in the statement of comprehensive income. [See IAS 1.81-105]

Comprehensive income: Accounting profit focuses on actual transactions, but the wealth of the company may as well be generated by unrealized changes in the value of the companys assets and liabilities. For instance, the value of the companys patens and brand names may increase or decrease, as well as the value of the companys buildings, equipments or securities, depending on the supply and demand operating on the market. These kind of unrealized changes are recognized in the companys reserves rather than taken into account when the profit is computed. Accordingly companies report a comprehensive income which takes into account all their gains and losses, that is: both the profit for the year and the unrealized changes in the value of their assets and liabilities, the latter items being called other comprehensive income.

Example 1. On January 2, 2008, a company purchased 2000 square feet of land amounting to 300,000 lei. At the end of the year, the value of the land increased to 400,000 lei. The unrealized change in the value of the land (100,000 lei = 400,000 lei 300,000 lei) is recorded as a revaluation reserve in owners equity, although no transaction occurred. The profit for the year was 2,000,000 lei. Accordingly, the comprehensive income for the year 2008 amounts to: 2,100,000 lei = 2,000,000 lei (profit for the year) + 100,000 lei (other comprehensive income).

In order to offer investors a better perspective on their performance, companies publish information about their comprehensive income either as:

a single financial statement: statement of comprehensive income, which disclose both revenues and expenses for the year and items of other comprehensive income; or

two financial statements: an income statement (disclosing the revenues and expense for the year) and a statement of comprehensive income (starting with the profit for the year and further disclosing the items of other comprehensive income).

SHAPE \* MERGEFORMAT

Financial performance reflected by past cash flows

Information about a reporting entity's cash flows during the reporting period also assists users to assess the entity's ability to generate future net cash inflows. This information indicates how the entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends to shareholders, etc. [F OB20]

The changes in the entity's cash flows are presented in the statement of cash flows. [See IAS 7]

Changes in economic resources and claims not resulting from financial performance

Information about changes in an entity's economic resources and claims resulting from events and transactions other than financial performance, such as the issue of equity instruments or distributions of cash or other assets to shareholders is necessary to complete the picture of the total change in the entity's economic resources and claims. [F OB21]

The changes in an entity's economic resources and claims not resulting from financial performance is presented in the statement of changes in equity. [See IAS 1.106-110]

Chapter 2: The Reporting entity

The chapter on the Reporting Entity will be inserted once the IASB has completed its re-deliberations following the Exposure Draft ED/2010/2 issued in March 2010.

Chapter 3: Qualitative characteristics of useful financial information (as redefined)The qualitative characteristics of useful financial reporting identify the types of information are likely to be most useful to users in making decisions about the reporting entity on the basis of information in its financial report. The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to financial information provided in other ways. [F QC1, QC3]

Financial information is useful when it is relevant and represents faithfully what it purports to represent. The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable. [F QC4]

Fundamental qualitative characteristics

Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information. [F QC5]

RelevanceRelevant financial information is capable of making a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both. The predictive value and confirmatory value of financial information are interrelated. [F QC6-QC10]

Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's financial report. [F QC11]

Faithful representationGeneral purpose financial reports represent economic phenomena in words and numbers, to be useful, financial information must not only be relevant, it must also represent faithfully the phenomena it purports to represent. This fundamental characteristic seeks to maximize the underlying characteristics of completeness, neutrality and freedom from error. [F QC12] Information must be both relevant and faithfully represented if it is to be useful. [F QC17]

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. [F QC19]

ComparabilityInformation about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date. Comparability enables users to identify and understand similarities in, and differences among, items. [F QC20-QC21]

VerifiabilityVerifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. [F QC26]

TimelinessTimeliness means that information is available to decision-makers in time to be capable of influencing their decisions. [F QC29]

UnderstandabilityClassifying, characterizing and presenting information clearly and concisely make it understandable. While some phenomena are inherently complex and cannot be made easy to understand, to exclude such information would make financial reports incomplete and potentially misleading. Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the information with diligence. [F QC30-QC32]

The cost constraint on useful financial reporting

Cost is a pervasive constraint on the information that can be provided by general purpose financial reporting. Reporting such information imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities. The IASB will consider whether different sizes of entities and other factors justify different reporting requirements in certain situations. [F QC35-QC39]

Chapter 4: The Framework: the remaining text

Chapter 4 contains the remaining text of the Framework approved in 1989. As the project to revise the Framework progresses, relevant paragraphs in Chapter 4 will be deleted and replaced by new Chapters in the IFRS Framework. Until it is replaced, a paragraph in Chapter 4 has the same level of authority within IFRSs as those in Chapters 1-3.

PHASE B: Objectives Elements and Recognition Phase (for information only not required for the exam)The objectives of the Elements and Recognition phase are to refine and converge the Boards frameworks as follows:

Revise and clarify the definitions of asset and liability.

Resolve differences regarding other elements and their definitions.

Revise the recognition criteria concepts to eliminate differences and provide a basis for resolving issues such as derecognition and unit of account.

Decisions Reached at the Last MeetingIASB Update October 2008FASB Action AlertOctober 20, 2008 joint meetingSummary of Decisions Reached to Date (As of October 2008)Asset DefinitionThe Boards agreed that the current frameworks existing asset definitions have the following shortcomings:

Some users misinterpret the terms expected (IASB definition) and probable (FASB definition) to mean that there must be a high likelihood of future economic benefits for the definition to be met; this excludes asset items with a low likelihood of future economic benefits.

The definitions place too much emphasis on identifying the future flow of economic benefits, instead of focusing on the item that presently exists, an economic resource.

Some users misinterpret the term control and use it in the same sense as that used for purposes of consolidation accounting. The term should focus on whether the entity has some rights or privileged access to the economic resource.

The definitions place undue emphasis on identifying the past transactions or events that gave rise to the asset, instead of focusing on whether the entity had access to the economic resource at the balance sheet date.

The Boards have tentatively adopted the following working definition of an asset:

An asset of an entity is a present economic resource to which the entity has a right or other access that others do not have. Accompanying text will amplify the asset definition by describing present, economic resource, and right or other access that others do not have: Present means that on the date of the financial statements both the economic resource exists and the entity has the right or other access that others do not have.

An economic resource is something that is scarce and capable of producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources. Economic resources that arise from contracts and other binding arrangements are unconditional promises and other abilities to require provision of economic resources, including through risk protection.

A right or other access that others do not have enables the entity to use the economic resource and its use by others can be precluded or limited. A right or other access that others do not have is enforceable by legal or equivalent means.

Liability DefinitionThe Boards agreed that the current frameworks existing liability definitions have the following shortcomings:

Some users misinterpret the terms expected (IASB definition) and probable (FASB definition) to mean that there must be a high likelihood of future outflow of economic benefits for the definition to be met; this excludes liability items with a low likelihood of a future outflow of economic benefits.

The definitions place too much emphasis on identifying the future outflow of economic benefits, instead of focusing on the item that presently exists, an economic obligation.

The definitions place undue emphasis on identifying the past transactions or events that gave rise to the liability, instead of focusing on whether the entity has an economic obligation at the balance sheet date.

It is unclear how the definition applies to contractual obligations.

The Boards have tentatively adopted the following working definition of a liability:

A liability of an entity is a present economic obligation for which the entity is the obligor.

Accompanying text will amplify the liability definition by describing present, economic obligation, and obligor:

Present means that on the date of the financial statements both the economic obligation exists and the entity is the obligor.

An economic obligation is an unconditional promise or other requirement to provide or forgo economic resources, including through risk protection.

An entity is the obligor if the entity is required to bear the economic obligation and its requirement to bear the economic obligation is enforceable by legal or equivalent means.CHAPTER 2. Measurement issues fair value measurement versus historical cost, and the treatment of unrealized gains and losses

2.1. Accounting for employee benefits IAS 19

Objective of IAS 19

The Standard prescribes the accounting and disclosure by employers for employee benefits

This standard does not apply to benefits which needs to cover under the IFRS2 share-based payment

This Standard does not deal with reporting by employee benefit plans (covered under IAS 26) e.g. accounting and reporting by trust plans

Scope

IAS 19 applies to (among other kinds of employee benefits):

wages and salaries

compensated absences (paid vacation and sick leave)

profit sharing plans

bonuses

medical and life insurance benefits during employment

housing benefits

free or subsidized goods or services given to employees

pension benefits

post-employment medical and life insurance benefits

long-service or sabbatical leave

'jubilee' benefits

deferred compensation programs

termination benefits.

Basic principle of IAS 19

The cost of providing employee benefits should be recognized in the period in which the benefit is earned by the employee, rather than when it is paid or payable.

Four categories of employee benefits to be covered

Short term employee benefits

Post-employment benefits

Other long term employee benefits

Termination benefits

Will cover formal plans, state plans, constructive obligation (informal practices)

1. Short-term employee benefits

For short-term employee benefits (those payable within 12 months after service is rendered, such as:

- wages,

- paid vacation and sick leave,

- bonuses, and

- non-monetary benefits such as medical care and housing

Accounting treatment: the undiscounted amount of the benefits expected to be paid in respect of service rendered by employees in a period should be recognised in that period as a liability or as an expense, except for capitalization provisions (such as in the cases of finished goods or tangible fixed assets produced accounted for in compliance with IAS 2 or IAS 16 in dualist accounting systems (e.g. Romanian, French etc) an expense is recorded first, which is afterwards matched with a revenue (e.g. 711 Variation in inventory)

No actuarial valuation is required and hence there would no possibility of any actuarial loss or (gain)

Obligation is measured on undiscounted basis

Example:

1) Wages and social security contributions:

Ex1. On December 3, N, advanced payments are made to employees in amount to 300 lei. On December 31, wages payable are computed amounting to 800 lei.

Employee benefits are expensed when incurred and not when paid.

a) Advance payments

Advance payments made to employees=Cash at bank300 lei

b) Recognizing benefits payable for the services received during the yearWages expenses=Wages payable800 lei

2) Short-term compensated absences

The expected cost of short-term compensated absences should be recognized as the employees render service that increases their entitlement or, in the case of non-accumulating absences, when the absences occur.

Accumulating absences (did not occur in the current period, but the rights can be used in the next accounting period);

Non- accumulating absences (cannot be benefited from in the next accounting period if not used in the current accounting period)

Non-accumulating absences:

Accounting treatment: expenses for the year in the current period (when the employees earn the rights to such benefits and take advantage of them)Ex.2. Employee X can benefit form 10 days sick leave per year compensated for 300 lei, that can only be used in the current accounting period. During the year N, the employee X took 5 days time off due to temporary illness.

1 day sick leave compensated for 300 lei/10 days = 30 lei/dayExpenses related to employee benefits=Employee benefits payable150 lei

Accumulating absencesAccounting treatment: the cost is recorded when incurred (when employees render services, increasing their rights to such leaves).

Ex. 3. A company has 100 employees with rights to 3 paid days leave of absence per year, which can be taken in the next accounting period compensated with 10 lei/day. At the end of the year N, only 100 days have been used (1 day per employee). Based on previous years experience, it is reasonably certain that 80% of the employees will benefit from the remaining days in the next accounting period.Total accumulating absences = 300 days, of which used = 100 days a) Accounting for accumulating absences used = 100 days

Expenses related to employee benefits=Employee benefits payable1.0 lei

b) Accounting for accumulating absences not used in the current year = 200 days

Expenses related to provisions for risks and charges =Provisions for employee benefits[10 x 200 x 80%] 1.600 lei

3). Profit-sharing and bonus paymentsThe entity should recognize the expected cost of profit-sharing and bonus payments when, and only when

1) it has a legal or constructive obligation to make such payments as a result of past events; and

2) a reliable estimate of the expected cost can be made.

Ex. 4 In the last 10 years, the company ABC Inc. distributes around 5% of the companies profits in a profit-sharing program for its employees. The entitys net profit before distribution is Euro 700,000. The cost of profit sharing is tax deductible and the income tax rate is 16%.

Regardless of the fact that the computations needed for the profit-sharing program are based on the companys net profit, the profit sharing should not be recorded as profit/dividends distributions to shareholders. Employees are not owners, and all benefits owed to them have to be recorded as expenses.Net profit before profit sharing = 700.000 euroProfit sharing = Net profit after profit sharing x 5%

Net profit after profit-sharing = 700.000 Net profit after sharing x 5% x 84% Net profit after profit-sharing = 700.000/(1+0,05x0,84) = 671.785 lei

Profit sharing = 671.785 x 5% = 33.590 leiAs the companys profit sharing program has a record of 10 years, it is reasonably to expected such benefits to be paid to employees, and the cost of these benefits can be reliably estimated.Expenses related to provisions for risks and charges =Provisions for employee benefits33.590 lei

2. Post-employment benefit plans

The accounting treatment for a post-employment benefit plans will be determined according to whether the plan is a defined contribution or a defined benefit plan:

Under a defined contribution plan, the entity pays fixed contributions into a fund but has no legal or constructive obligation to make further payments if the fund does not have sufficient assets to pay all of the employees' entitlements to post-employment benefits.

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. These would include both formal plans and those informal practices that create a constructive obligation to the entity's employees. It entails the companys obligation to pay a defined benefit at the employment termination.

Defined contribution plans

The legal obligation of the company is limited to the agreed contribution to the plan. The value of the post-employment benefits received by employees is determined by the value of the contributions paid by the company to a post-employment fund, or to an investment fund, together with the yield of these contributions.However, in the case of such plans, the employees bear the actuarial risk (that is, the benefits could be lower than expected), but also the investment risk (the assets invested in the plan are insufficient to cover for the expected benefits).

Accounting for defined contributions plansFor defined contribution plans, the cost to be recognized in the period is the contribution payable in exchange for service rendered by employees during the period.

If contributions to a defined contribution plan do not fall due within 12 months after the end of the period in which the employee renders the service, they should be discounted to their present value. [IAS 19.45]

The entity has no further obligation after paying the contribution to plan or insurance company.

Ex.5 An entity offers to its 100 employees a defined contributions plan for private pensions, promising to pay to an investment fund 2% p.a. for each employee out of his/her net salary for the year. For the year N, the total net salaries were 1.000.000 Euro.Expenses related to Companys contribution to pension funds =Companys contribution to pension funds payable20.000 Euro

Defined benefit plans

In the case of these plans, the companys obligation is not limited to the contribution paid to a fund, but it is the amount of benefits promised to employees, that are reasonably expected to be paid. Thus, it the case of such plans, it is the company that bears both the actuarial and the investment risk, as, at a future date, it will be required to pay a determined amount of benefits.

In order to be able to make such payments, entities usually invest in plan assets that can only be used for such a purpose. Plan assets cannot be used for making different kind of payments, except for cases in which a plan is terminated and the assets invested or generated by the plan (their yield) exceed the amount of post-employment benefits paid.For defined benefit plans, the amount recognized in the balance sheet should be:

the present value of the defined benefit obligation (that is, the present value of expected future payments required to settle the obligation resulting from employee service in the current and prior periods), as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and reduced by the fair value of plan assets at the balance sheet date.

The present value of the defined benefit obligation should be determined using the Projected Unit Credit Method, which is an actuarial method that sees each period of service as giving rise to an additional unit of benefit owed to employees, each unit (measured separately) being used to build up the total liability.

Accounting by an entity for defined benefit plans involves the following steps:

(a) Using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an entity to determine how much benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will influence the cost of the benefit;

(b) discounting that benefit using the Projected Unit Credit Method in order to determine the present value of the defined benefit obligation and the current service cost;

(c) determining the fair value of any plan assets;

(d) determining the total amount of actuarial gains and losses;

(e) where a plan has been introduced or changed, determining the resulting past service cost; and

(f) where a plan has been curtailed or settled, determining the resulting gain or loss.Accounting treatment of actuarial gains/losses

On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred) and the effects of changes in actuarial assumptions.

Recognition method: Comprehensive income methodIn December 2004, the IASB issued amendments to IAS 19 to allow the option of recognizing actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of comprehensive income. Over the life of the plan, changes in benefits under the plan will result in increases or decreases in the entity's obligation.

Valuations should be carried out with sufficient regularity such that the amounts recognized in the financial statements do not differ materially from those that would be determined at the balance sheet date. [IAS 19.56] The assumptions used for the purposes of such valuations should be unbiased and mutually compatible. [IAS 19.72] The rate used to discount estimated cash flows should be determined by reference to market yields at the balance sheet date on high quality corporate bonds. [IAS 19.78]

Ex6. A company has a defined benefit plan started in N-1, according to which employees receive when they retire 0.5% of their annual salary per each year of service. The annual salaries amounted to 20.000 lei in the year N-2, and they were expected to increase with 4% per year. The pension plan ends within 5 years. The discount rate used was 10%, based on market yields at the balance sheet date on high quality corporate bonds. In the year N-1, new information was available for the market yields of corporate bonds, which led to a decrease in the discount rate with 2%.

Companys liability related to the defined benefits plan is computed as follows:

Last year salary= 20.000 lei x (1,04)4 = 23.397 lei

Amount owed for each year of service= 23.397 lei x 0,5% =117 lei

Years (n)1

(N-2)2

(N-1)3

(N)4

(N+1)5

(N+2)

Present value of Plan Obligation at the beginning of the year (PV(PO01.01))080176291426

Cost of finance/Interest expense (i = 10%)08182943

Cost of service/Expenses related to post-employment benefits808897106117

Present value of Plan Obligation at the end of the year (PV(PO31.12))80176291426586

Where,

Cost of finance = i x PV(PO01.01)

Cost of servicen = 117/(1+i)1-n

PV(PO31.12)= PV(PO01.01)+ Cost of finance+Cost of service

Journal entry for plan obligations in N-2, according to the initial hypothesis:

N-2

%=Plan obligations 80 lei

Interest expense0 lei

Expenses related to post-employment benefits/defined benefits plan80 lei

In the year N-1, new information were available for the market yield of corporate bonds, which led to a decrease in the discount rate to 8%. This new information led to a variation in the present value of the plan obligation at the end of the year, which generated an actuarial loss of 3 lei:

Years (n)1

(N-2)2

(N-1)3

(N)4

(N+1)5

(N+2)

Present value of Plan Obligation at the beginning of the year (PV(PO01.01))080176291426

Cost of finance/Interest expense (i = 10%)08182943

Cost of service/Expenses related to post-employment benefits (i=10%)808897106117

Present value of Plan Obligation at the end of the year (PV(PO31.12)) Expected value80176291426586

Present value of Plan Obligation at the beginning of the year (PV(PO01.01))179

Valuations based on i=8%:

Cost of finance/Interest expense (i = 8%)6

Cost of service/Expenses related to post-employment benefits93

Present value of Plan Obligation at the end of the year (PV(PO31.12) (dr: 8%) Actual value80179

Actuarial Gains/Losses for the year03

The company recognizes all actuarial gains/losses as other comprehensive income in the year in which they occur, accordingly a reserve amounting to 3 lei should be recorded in N-1.

N-1

%=Plan obligations 99 lei

Interest expense8 lei

Expenses related to post-employment benefits/defined benefits plan88 lei

Reserves related to actuarial gains/losses3 lei

Past service cost is the term used to describe the change in the obligation for employee service in prior periods, arising as a result of changes to plan arrangements in the current period. Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced). Past service cost should be recognised immediately to the extent that it relates to former employees or to active employees already vested. Otherwise, it should be amortised on a straight-line basis over the average period until the amended benefits become vested. [IAS 19.96]

Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of a plan are recognised when the curtailment or settlement occurs. Curtailments are reductions in scope of employees covered or in benefits.

If the calculation of the balance sheet amount as set out above results in an asset, the amount recognised should be limited to the net total of unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. [IAS 19.58]

The IASB issued the final 'asset ceiling' amendment to IAS 19 in May 2002. The amendment prevents the recognition of gains solely as a result of deferral of actuarial losses or past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial gains. [IAS 19.58A]

The charge to income recognised in a period in respect of a defined benefit plan will be made up of the following components: [IAS 19.61]

current service cost (the actuarial estimate of benefits earned by employee service in the period)

interest cost (the increase in the present value of the obligation as a result of moving one period closer to settlement)

expected return on plan assets*

actuarial gains and losses, to the extent recognised

past service cost, to the extent recognised

the effect of any plan curtailments or settlements

*The return on plan assets is interest, dividends and other revenue derived from the plan assets, together with realised and unrealised gains or losses on the plan assets, less any costs of administering the plan (other than those included in the actuarial assumptions used to measure the defined benefit obligation) and less any tax payable by the plan itself. [IAS 19.7]

IAS 19 contains detailed disclosure requirements for defined benefit plans. [IAS 19.120-125]

IAS 19 also provides guidance on allocating the cost in:

a multi-employer plan to the individual entities-employers [IAS 19.29-33]

a group defined benefit plan to the entities in the group [IAS 19.34-34B]

a state plan to participating entities [IAS 19.36-38].

Other long-term benefits

IAS 19 requires a simplified application of the model described above for other long-term employee benefits. This method differs from the accounting required for post-employment benefits in that: [IAS 19.128-129]

actuarial gains and losses are recognised immediately and no 'corridor' (as discussed above for post-employment benefits) is applied; and

all past service costs are recognised immediately.

Termination benefits

For termination benefits, IAS 19 specifies that amounts payable should be recognised when, and only when, the entity is demonstrably committed to either: [IAS 19.133]

terminate the employment of an employee or group of employees before the normal retirement date; or

provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

The entity will be demonstrably committed to a termination when, and only when, it has a detailed formal plan for the termination and is without realistic possibility of withdrawal. [IAS 19.134] Where termination benefits fall due after more than 12 months after the balance sheet date, they should be discounted. [IAS 19.139]

2.2. Accounting for share-based payments IFRS 2

IFRS 2 Share-based Payment requires an entity to recognize share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled

- in cash;

- other assets; or,

- equity instruments of the entity.

Specific requirements are included for:

- equity-settled share-based payment transactions;

- cash-settled share-based payment transactions, as well as

- those where the entity or supplier has a choice of cash or equity instruments.

Common share-based payment arrangements between employers and employees

Call options that give employees the right to purchase an entitys shares in exchange for their services;

Share appreciation rights that entitle employees to cash payments calculated by reference to increases in the market price of an entitys shares;

Share ownership plans where employees receive an entitys shares in exchange for their services.

Common share-based payment arrangements that are not between employers and employees

An external consultant (not an employee) may provide services in return for shares in the entity;

A supplier may provide goods in return for shares in the entity;

A shareholder (rather than an employer) may grant shares to an employee.

Example

An individual with a 40% shareholding in entity A has awarded 2% of his shareholding to a director of entity A. The shareholder of entity A has transferred equity instruments of entity A to a party that has supplied services to the entity (the director). Unless it is clear that the transaction is a result of some other relationship between the shareholder and the director that is unrelated to his employment, the award will be reflected as a share-based payment in entity As financial statements.

An award is within the scope of IFRS 2 where either the entity or its shareholder issues equity instruments in any group entity in return for goods or services provided to the entity.

A transaction with an employee is not within the scope of IFRS 2 if:

It is not related to the receipt of goods or services; or The amount paid to the employee is not based on the market price of that entitys equity instruments.

Examples

Share-based payments that are not related to employee servicesAn entity makes a rights issue of shares to all shareholders, including employees who are shareholders. The transaction is an arrangement with employees in their capacity as owners of equity instruments, not in their capacity as employees. Therefore, the transaction is not within the scope of IFRS 2.

Note: If the entity issued shares to the shareholders who are employees at a discounted price, the arrangement would be within the scope of IFRS 2. The favourable terms indicate that the entity is dealing with these shareholders as employees, rather than in their capacity as equity holders.

Cash payments that are not based on the market price of equity instrumentsAn entity makes a cash payment to an employee that is based on a fixed multiple of the entitys earnings, such as earnings before interest, tax, depreciation and amortisation (EBITDA).

The cash payment is not based on the entitys share price, so it is not within the scope of IFRS 2. The cash payment is an employee benefit, which is accounted for under IAS 19, Employee benefits.

Definition of share-based payment

A share-based payment is a transaction in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity. The accounting requirements for the share-based payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or (c) equity or cash.

There are two exemptions to the general scope principle.

First, the issuance of shares in a business combination should be accounted for under IFRS 3 Business Combinations. However, care should be taken to distinguish share-based payments related to the acquisition from those related to employee services.

Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Disclosure and Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32 and 39 should be applied for commodity-based derivative contracts that may be settled in shares or rights to shares.

IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are therefore outside its scope.

There are three types of share-based payment arrangements:1) Equity-settled share-based payments transactions in which the entity (a) receives goods or services as consideration for its own equity instruments (including shares or share options); or (b) receives goods or services but has no obligation to settle the transaction with the supplier.

2) Cash-settled share-based payments transactions in which the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity.

3) Choice of settlement transactions in which the entity receives or acquires goods or services, and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.

ExamplesEquity-settled share-based paymentThe issue to employees of options that give them the right to purchase the entitys shares at a discounted price in exchange for their services.

A cash-settled share-based paymentShare appreciation rights that entitle employees to cash payments based on the increase in the employer entitys share price.

Recognition and measurement

Management must determine the fair value of a share-based payment at the grant date, the period over which this fair value should be recognised (the vesting period), and the charge that should be recognised in each reporting period.

Management needs to understand the conditions of the share-based payments with employees and other parties to properly apply this guidance. This may prove challenging in practice because almost no two share-based payment arrangements are the same.

The goods or services received or acquired in a share-based payment are recognised when the goods are obtained or as the services are received. A corresponding increase in equity is recognised if the goods or services are received in an equity-settled transaction. A liability is recognised if the goods or services are acquired in a cash-settled transaction.

Example: Recognition of employee share option grantCompany grants a total of 100 share options to 10 members of its executive management team (10 options each) on July 1, N. These options vest at the end of a three-year period. The company has determined that each option has a fair value at the date of grant equal to 15. The company expects that all 100 options will vest and therefore records the following entry at 31 of December N+1:Employee benefits expenses/Share based payments=Other equity items/Share options250

[(100 15) 3 periods] 2 = 250

Equity-settled share-based payments

Measurement guidance

Depending on the type of share-based payment, fair value may be determined by the value of the shares or rights to shares given up, or by the value of the goods or services received:

General fair value measurement principle. In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received. Only if the fair value of the goods or services cannot be measured reliably would the fair value of the equity instruments granted be used.

Measuring employee share options. For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received.

When to measure fair value - options. For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date.

When to measure fair value - goods and services. For transactions measured at the fair value of the goods or services received, fair value should be estimated at the date of receipt of those goods or services.

Measurement guidance. For goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest.

More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties. The standard does not specify which particular model should be used.

If fair value cannot be reliably measured. IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those "rare cases" in which the fair value of the equity instruments cannot be reliably measured. However this is not simply measured at the date of grant. An entity would have to remeasure intrinsic value at each reporting date until final settlement.

Performance conditions. IFRS 2 makes a distinction between the handling of market based performance features from non-market features. Market conditions are those related to the market price of an entity's equity, such as achieving a specified share price or a specified target based on a comparison of the entity's share price with an index of share prices of other entities. Market based performance features should be included in the grant-date fair value measurement. However, the fair value of the equity instruments should not be reduced to take into consideration non-market based performance features or other vesting features.The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires the offsetting debit entry to be expensed when the payment for goods or services does not represent an asset. The expense should be recognised as the goods or services are consumed. For example, the issuance of shares or rights to shares to purchase inventory would be presented as an increase in inventory and would be expensed only once the inventory is sold or impaired.

The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to employees with, say, a three-year vesting period is considered to relate to services over the vesting period. Therefore, the fair value of the share-based payment, determined at the grant date, should be expensed over the vesting period.

As a general principle, the total expense related to equity-settled share-based payments will equal the multiple of the total instruments that vest and the grant-date fair value of those instruments. In short, there is truing up to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market related performance feature, the expense would still be recognised if all other vesting features are met.

Measurement based on the fair value of the goods and services received

Ex. Raw materials were purchased from suppliers in amount of 13.000 lei. The liability is settled with 1.000 treasury stock (own shares), previously redeemed for 12 lei/share.The difference between the fair value of the goods received and the carrying amount of treasury stock is recognized in Owner Equity, as transactions with owners (who act in this capacity) do not generate profit or loss. And once the supplier receives companys shares, it acts like an owner; it is a transaction with owners similar to any owners investments in the company, as the supplier delivers goods for shares instead of being compensated in cash.

The increase in owner equity is equal to the fair value of the goods received:Fair value of goods received13.000lei

Carrying amount of treasury stock= 1.000 shares x 12 lei/share =12.000 lei

= Gain on share-based payments1.000lei

Suppliers=%13.000 lei

Own shares/Treasury stock12.000 lei

Reserves related to own shares1.000 lei

Measurement based on the fair value of the equity instruments granted, as it is not possible to estimate reliably the fair value of goods/services received

Ex. According to the long term motivation plan, Company A distributed 200 treasury shares to executive officers. The market price of the companys shares on that date is 13 lei/share, and the shares were previously acquired for 11 lei/share.

According to IFRS 2, the increase in owners equity has to be valued at the fair value of goods/services received. However, if the entity cannot reliably estimate the fair value of goods/services received, the fair value of the equity instruments granted should be used.

In this case, treasury stock are granted in addition to the managers compensation for their current services, as the program aims at motivating managers to generate additional future economic benefits for the company. Such services are very difficult to measure, and IFRS 2 allows the use of fair value of the equity instruments granted. Accordingly, the services received from managers (the total increase in owners equity) are valued at the fair value of the shares, that is 13 lei/share.

As granting the shares is not contingent on future conditions, the employee benefits are immediately recorded in profit or loss together with the increase in owners equity.

The difference between the fair value of the services received (measured by means of the fair value of shares granted) and the carrying amount of treasury stock is recognized in Owner Equity, as transactions with owners (who act in this capacity) do not generate profit or loss.

(On the one hand, the manager acts like an employee of the company providing administrative services recognizing expensing allowed; on the other, the manager acts like an owner, being compensated in shares for his/her services).

Fair value of own shares= 200 shares x 13 lei/share =2.600lei

Carrying amount of treasury stock= 200 shares x 11 lei/share =2.200 lei

= Gain on share-based payment400lei

Employee benefits expenses/Share based payments=%2.600 lei (200 Shares x 13 lei/share)

Own shares/Treasury stock2.200 lei (200 shares x 11 lei/share)

Reserves related to own shares400 lei (200 share x (13-11) lei/share )

Rights dependent on conditions

1). Rights dependent on employees expected turnoverAs the shares will not be obtained until the end of a certain period, the numbers of shares/options will be adjusted each year based on employees expected turnover:

Ex. At the beginning of the year N, an entity signs a contract with 200 of its employees, promising to grant each of them 10 shares at the end of the year N+2, if they are still employees of the company at that date. When the contract was signed, the market value of the companies shares was 250 lei/share. At the beginning of the year N, 90% of the employees are expected to work in the company at the end of the year N+2. At the end of the year N, the percentage decreases to 80%, And at the end of the year N+2, there are 156 employees still working within the company. At that date, the market value of the companies shares is 260 lei/share. The shares were purchased in N+1 for 255lei/share.

N:

Employee benefits expenses/Share based payments

1/3(200x10x250x80%)=Other equity items/Shares to be issued133.333 lei

N+1:Employee benefits expenses/Share based payments2/3(200x10x250x75%)-133.333=Other equity items/Shares to be issued

116.667 lei

N+2:Employee benefits expenses/Share based payments(156x10x250)-133.333-116.667=Other equity items/Shares to be issued116.667 lei

%=Own shares(1.560x255)397.800 lei

Other equity items/Shares to be issued(133.333+116.667+140.000)390.000 lei

Reserves related to own shares7.800

2) Rights non-dependent on market conditions

-uncertainty related to the conditions realization

Ex. At the beginning of the year N, an entity agrees to grant 1000 shares (par value: 100 lei) to its CEO, if the operating profit is increased with 30% compared to its N-1 level. The market value of the companies shares at the beginning of the year N is 250 lei/share. At that date, the level of performance is expected to be achieved within three years. During the year N, the operating profit increased with only 5%, and the company revised its expectations, that is, the level of performance is expected to be achieved within four years. At the end of the year N+1, the operating profit increased with 25%, and the entity expects the level of performance to be achieved in the next year. At the end of the year N+2, the operating profit is with 37% higher than its level from N-1. The entity purchases 1000 shares for 320.000 lei and grants the shares to its CEO.

N:

Employee benefits expenses/Share based payments1/4(1.000x250)=Other equity items/Shares to be issued62.500 lei

N+1

Employee benefits expenses/Share based payments2/3(1.000x250))-62.599=Other equity items/Shares to be issued104.167 lei

N+2:

Employee benefits expenses/Share based payments(1.000x250) 62.500-104.167)=Other equity items/Shares to be issued83.333 lei

Own shares

=Cash at bank320.000 lei

%=Own shares

(1.560x255)320.000 lei

Other equity items/Shares to be issued250.000 lei

Reserves related to own shares70.000 lei

-uncertainty related to the number of shares to be issued

Ex. At the beginning of the year N, the remuneration committee accepts to grant stock options to the CEO. Each option gives the right to purchase 1 share for 150 lei. The options can be exercise within two years, starting January 1, N+3. The number of the stock options granted depends on the average value of the return on equity during the years N - (N+2). The CEO receives:

5.000 stock-options, if ROE=12%;

At the beginning of the year N, the entity expects ROE to be 10% for the next 3 years. At that date the stock options are valued at 20 lei each. For the year N, ROE was 11%, and the entity expects this level of performance for the next two years. At the end of the year N, the fair value of the stock options is 25 lei/option. For the years N and N+1, the average value of ROE was 15%, and the entity expects this value to decrease to 13% for the years N (N+2). At the end of the year N+1, the fair value of the stock options is 25 lei/option. At the end of the year N+2, the actual average value of ROE for the years N- N+2 was 13%, and the options value is 30 lei/per unit.

N:

Employee benefits expenses/Share based payments1/3(8.000x20)=Other equity items/Share options53.333 lei

N+1:Employee benefits expenses/Share based payments2/3(10.000x20))-53.333=Other equity items/Share options80.000 lei

N+2:

Employee benefits expenses/Share based payments(10.000x20) 53.333-80.000)=Other equity items/Share options83.333 lei

3) Rights dependent on market conditionsEx. At the beginning of the year N, an entity grants 10.000 stock options to ten executive directors. Each option gives the right to purchase 1 share for 180 lei. The options can only be exercised provided that two conditions are met:

The market value of the companies shares exceeds 200 lei;

The managers are with the company at that date.

On January 1, N, the market value of the shares is 130 lei, and the fair value of the stock options is 3 lei. At the end of the year N+1, the market value of the shares is 130 lei, and the fair value of the stock options is 2 lei. At that date the company expects that: the market value of the shares will not reach 200 lei before the end of N+4, and that 2 executive managers will terminate their employment by then. At the end of the year N+1, market value of the shares is 170 lei, and the fair value of the stock options is 9 lei. At that date the company expects that: the market value of the shares will reach 200 lei at the end of N+3, and that 1 executive manager will terminate its employment by then. At the end of the year N+2, the market value of the shares is 210 lei, and all executive managers are still employees of the company.

Assume that one of the executive directors do not exercise his/hers options during the respective 5 years (starting January 1, N+3).

N:

Employee benefits expenses/Share based payments1/5(80.000x2)=Other equity items/Share options32.000 lei

N+1:Employee benefits expenses/Share based payments

2/5(90.000x2)-32.000=Other equity items/Share options40.000 lei

N+2:

Employee benefits expenses/Share based payments

(10.000x20) 32.000 40.000)=Other equity items/Share options128.000 lei

N+7:Other equity items/Share options[10.000x2]= Reserves20.000 lei

Cash-settled share-based payment transactions

Measurement guidanceForcash-settled share-based payment transactions, the entity shall measure the goods or services acquired and the liability incurred at thefair valueof the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.

For example, an entity might grant share appreciation rights toemployeesas part of their remuneration package, whereby the employees will become entitled to a future cash payment (rather than an equity instrument), based on the increase in the entitys share price from a specified level over a specified period of time. Or an entity might grant to its employees a right to receive a future cash payment by granting to them a right to shares (including shares to be issued upon the exercise ofshare options) that are redeemable, either mandatorily (egupon cessation of employment) or at the employees option.

The entity shall recognise the services received, and a liability to pay for those services, as theemployeesrender service. For example, some share appreciation rightsvestimmediately, and the employees are therefore not required to complete a specified period of service to become entitled to the cash payment. In the absence of evidence to the contrary, the entity shall presume that the services rendered by the employees in exchange for the share appreciation rights have been received. Thus, the entity shall recognise immediately the services received and a liability to pay for them. If the share appreciation rights do not vest until the employees have completed a specified period of service, the entity shall recognise the services received, and a liability to pay for them, as the employees render service during that period.

The liability shall be measured, initially and at the end of each reporting period until settled, at thefair valueof the share appreciation rights, by applying an option pricing model, taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which theemployeeshave rendered service to date.

Example: Company A acquired 1,000 units of raw materials from Supplier B with a market value of 10 lei/unit. The settlement of the acquisition shall consist in paying the value of 1,000 shares of Company A at their market value of those shares at the settlement date. Market value of the shares at the acquisition date 12 lei/share.Raw materials = Suppliers/Share-based payments1,000 x12 = 12,000 lei31.12.N

Market value is 13 lei/share

Expenses related to fair value measurements = Suppliers/Share-based payments1,000 x(13-12) =1,000

02.01.N+1Market value is 11 lei/share

Suppliers/Share-based payments = %

Cash at bank 1,000 x 11 = 11,000

Other financial revenues

1,000x(13-11)

= 2,000

Ex. At the beginning of the year N, an entity enters a long term motivation plan, promising to grant to 1000 of its employees, during the years N+2 and N+3, the right to receive an amount equal to 10 times the increase in the market value of the companies shares starting with January 1, N+2. The plan targets employees remaining within the company until the end of the year N+1. At the beginning of the year N, the market value of the shares is 100 lei, and 5% of the employees are expected to leave the company by the end of N+1. The fair value of the option right is estimated at 230 lei. At the end of the year N, the market value of the shares is 120 lei and fair value of the option right is estimated at 260 lei. 20 employees have terminated their employment and 950 are expected to still work in the company at the end of the year N+1. At the end of the year N+1, 960 employees are working within the company, the shares market value is 130 and the value of the rights is 350. In N+2, 500 employees exercise their rights, the average market value of the companies shares is 140. In N+3, 460 employees exercise their rights, the average market value of the companies shares is 125 lei.

N:

Expenses related to= Employee benefits payable/ Shares based payments123.500 lei

employee benefits/Shares based payments

1/2(950x260)

N+1:Expenses related to= Employee benefits payable212.500 lei

employee benefits/Shares based payments

(960x350) -123.500

N+2:

% = Cash at bank200.000 lei

(500x10x(140-100))

Employee benefits payable

(500x350)175.000 lei

Expenses related to shares25.000 lei

based payments

N+3:Employee benefits payable = %

161.000 leiCash at bank

115.000 lei

Revenues related to share based payments 46.000 lei(460x10x(125-100))

Share-based payment transactions with cash alternatives

Forshare-based payment transactionsin which the terms of the arrangement provide either the entity or the counterparty with the choice of whether the entity settles the transaction in cash (or other assets) or by issuingequity instruments, the entity shall account for that transaction, or the components of that transaction, as acash-settled share-based payment transactionif, and to the extent that, the entity has incurred a liability to settle in cash or other assets, or as anequity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.

Share-based payment transactions in which the terms of the arrangement provide the counterparty with a choice of settlement

If an entity has granted the counterparty the right to choose whether ashare-based payment transactionis settled in cash4or by issuingequity instruments, the entity has granted a compound financial instrument, which includes a debt component (ie the counterpartys right to demand payment in cash) and an equity component (ie the counterpartys right to demand settlement in equity instruments rather than in cash). For transactions with parties other thanemployees, in which thefair valueof the goods or services received is measured directly, the entity shall measure the equity component of the compound financial instrument as the difference between the fair value of the goods or services received and the fair value of the debt component, at the date when the goods or services are received.

For other transactions, including transactions withemployees, the entity shall measure thefair valueof the compound financial instrument at themeasurement date, taking into account the terms and conditions on which the rights to cash orequity instrumentswere granted.

To applyparagraph 36, the entity shall first measure thefair valueof the debt component, and then measure the fair value of the equity componenttaking into account that the counterparty must forfeit the right to receive cash in order to receive the equity instrument. The fair value of the compound financial instrument is the sum of the fair values of the two components. However,share-based payment transactionsin which the counterparty has the choice of settlement are often structured so that the fair value of one settlement alternative is the same as the other. For example, the counterparty might have the choice of receivingshare optionsor cash-settled share appreciation rights. In such cases, the fair value of the equity component is zero, and hence the fair value of the compound financial instrument is the same as the fair value of the debt component. Conversely, if the fair values of the settlement alternatives differ, the fair value of the equity component usually will be greater than zero, in which case the fair value of the compound financial instrument will be greater than the fair value of the debt component.

Share-based payment transactions in which the terms of the arrangement provide the entity with a choice of settlement

41For a share-based payment transaction in which the terms of the arrangement provide an entity with the choice of whether to settle in cash or by issuingequity instruments, the entity shall determine whether it has a present obligation to settle in cash and account for the share-based payment transaction accordingly. The entity has a present obligation to settle in cash if the choice of settlement in equity instruments has no commercial substance (eg because the entity is legally prohibited from issuing shares), or the entity has a past practice or a stated policy of settling in cash, or generally settles in cash whenever the counterparty asks for cash settlement.

42If the entity has a present obligation to settle in cash, it shall account for the transaction in accordance with the requirements applying tocash-settled share-based payment transactions, inparagraphs 3033.

43If no such obligation exists, the entity shall account for the transaction in accordance with the requirements applying toequity-settled share-based payment transactions, inparagraphs 1029. Upon settlement:

(a)

if the entity elects to settle in cash, the cash payment shall be accounted for as the repurchase of an equity interest, ie as a deduction from equity, except as noted in (c)below.

(b)

if the entity elects to settle by issuingequity instruments, no further accounting is required (other than a transfer from one component of equity to another, if necessary), except as noted in (c)below.

(c)

if the entity elects the settlement alternative with the higherfair value, as at the date of settlement, the entity shall recognise an additional expense for the excess value given, ie the difference between the cash paid and the fair value of the equity instruments that would otherwise have been issued, or the difference between the fair value of theequity instrumentsissued and the amount of cash that would otherwise have been paid, whichever is applicable.

Payments dependent on the market value of the companys sharesEx. At the beginning of the year N, an entity enters a long term motivation plan, promising to grant to 1000 of its employees, during the years N+2 and N+3, the right to receive an amount equal to 10 times the increase in the market value of the companies shares starting with January 1, N. The plan targets employees remaining within the company until the end of the year N+1. At the beginning of the year N, the market value of the shares is 100 lei, and 5% of the employees are expected to leave the company by the end of N+1. The fair value of the option right is estimated at 230 lei. At the end of the year N, the market value of the shares is 120 lei and fair value of the option right is estimated at 260 lei. 20 employees have terminated their employment and 960 are expected to still work in the company at the end of the year N+1. At the end of the year N+1, 960 employees are working within the company, the shares market value is 130 and the value of the rights is 350. In N+2, 500 employees exercise their rights, the average market value of the companies shares is 140. . In N+3, 460 employees exercise their rights, the average market value of the companies shares is 125 lei.

N:

Employee benefits expenses/Shares based payments

1/2(950x260)=Employee benefits payable123.500 lei

N+1

Employee benefits expenses/Shares based payments(960x350) -123.500=Employee benefits payable212.500 lei

N+2:

% =Cash at bank

(500x10x(140-100))200.000 lei

Employee benefits payable

(500x350)175.000 lei

Expenses related to shares based payments25.000 lei

N+3:

% =Cash at bank

(460x10x(125-100))161.000 lei

Employee benefits payable

(460x350)115.000 lei

Expenses related to shares based payments46.000 lei

Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions has an effect on the amount recognised depends on whether the fair value of the new instruments is greater than the fair value of the original instruments (both determined at the modification date).

Modification of the terms on which equity instruments were granted may have an effect on the expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments modified after their vesting date. If the fair value of the new instruments is more than the fair value of the old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the incremental amount is recognised over the remaining vesting period in a manner similar to the original amount. If the modification occurs after the vesting period, the incremental amount is recognised immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred.

The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting period and therefore any amount unrecognized that would otherwise have been charged should be recognized immediately. Any payments made with the cancellation or settlement (up to the fair value of the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognized as an expense

New equity instruments granted may be identified as a replacement of cancelled equity instruments. In those cases, the replacement equity instruments should be accounted for as a modification. The fair value of the replacement equity instruments is determined at grant date, while the fair value of the cancelled instruments is determined at the date of cancellation, less any cash payments on cancellation that is accounted for as a deduction from equity.

Disclosure

Required disclosures include:

the nature and extent of share-based payment arrangements that existed during the period;

how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

the effect of share-based payment transactions on the entity's profit or loss for the period and on its financial position. 2.3. Accounting for financial instruments IAS 32, IAS 39, IFRS 7, IFRS 9Definitions

A financial instrument is "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity".

A financial asset is "any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right to receive cash or another financial asset from another entity".

A financial liability is "any liability that is a contractual obligation to deliver cash or another financial asset to another entity".

An equity instrument is "any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities". Ordinary shares are the most common instance of an equity instrument.Examples:

(a) a company makes an issue of loan stock

(b) a company sells goods to a customer on credit

(c) a company buys goods from a supplier on credit

(d) a company deposits money into its bank account

(e) a company overdraws its bank account

(f) a company makes an issue of ordinary shares

(g) a company invests in newly-issued ordinary shares of another company.

(a) The issue of loan stock creates a contractual obligation on the part of the company to repay the loan at some time in the future. The contract between the company and the lenders is a financial instrument because:

- the lenders now have the right to be repaid (a financial asset)

- the company is now under an obligation to repay the loan (a financial liability)(b) A sale on credit creates a contractual obligation on the part of the customer to pay for the goods. The contract with the customer is a financial instrument because:

- the company now has a trade receivable (a financial asset)

- the customer now has a trade payable (a financial liability).

(c) A purchase on credit creates a contractual obligation on the part of the company to pay for the goods. The contract with the supplier is a financial instrument because:

- the supplier now has a trade receivable (a financial asset)

- the company now has a trade payable (a financial liability).

(d) In effect, a bank deposit is a loan to the bank and the bank is contractually obliged to repay this money. The contract with the bank is a financial instrument because:

- the company now has the right to withdraw its cash (a financial asset)

- the bank is now under an obligation to repay the cash (a financial liability).

(e) A bank overdraft is a form of bank loan and the company is contractually obliged to repay this loan. The contract with the bank is a financial instrument because:

- the bank now has the right to be repaid (a financial asset)

- the company is now under an obligation to repay the overdraft (a financial liability).

(f) Ordinary shares are an equity instrument. The issue of ordinary shares creates a contract between the company and its shareholders. This contract is a financial instrument because:

- the shareholders now own the shares (a financial asset)

- the company now has extra share capital (an equity instrument).

(g) This purchase of ordinary shares creates a contract between the investing company and the issuing company. This contract is a financial instrument because:

- the investing company now owns the shares (a financial asset)

- the issuing company now has extra share capital (an equity instrument).

Accounting for financial assets

There are four chategories of financial assets with associated measurement:

(a) Financial assets at fair value through profit or loss. These are usually financial assets that are held for trading. This means that the assets have been acquired with the intention of re-selling them at a profit in the fairly near future. However, on initial recognition, an entity may designate any financial asset as being "at fair value through profit or loss" if doing so would result in more relevant information. After initial recognition, financial assets which fall into this category should be measured at their fair value. Gains or losses arising from fluctuations in fair value are recognised in the income statement.

(b) Held-to-maturity investments. These are financial assets with fixed or determinable payments and fixed maturity dates that the entity intends to hold until maturity and has the ability to do so.

After initial recognition, held-to-maturity investments should be measured at their amortised cost using the effective interest method (see below).

(c) Loans and receivables. These are financial assets with fixed or determinable payments that are not quoted in an active market.

After initial recognition, loans and receivables should usually be measured at their amortised cost using the effective interest method. This method involves discounting the amounts expected to be received when the loan or the receivable is settled. But short-term receivables (e.g. most trade receivables) may be measured at the original invoice amount if the effect of discounting is not material.

(d) Available-for-sale financial assets. These are financial assets which do not fall into any of the other three categories. An example of an available-for-sale financial asset is a long-term investment in ordinary shares.

After initial recognition, available-for-sale financial assets should generally be measured at their fair value. Gains or losses arising from fluctuations in fair value are recognised in other comprehensive income.

Note that it may sometimes be impossible to measure the fair value of unquoted ordinary shares reliably. In this case, such shares (which usually fall into category (d) above) should be measured at cost.Valuation rules

SHAPE \* MERGEFORMAT

According to IFRS 9 2014 amendments (applicable starting in 2018) an entity shall classify financial assets as:

subsequently measured at amortised cost;

fair value through other comprehensive income, or

fair value through profit or loss

on the basis of both:

(a) the entitys business model for managing the financial assets and

(b) the contractual cash flow characteristics of the financial asset.

A financial asset shall be measured at amortised cost if both of the following conditions are met:

(a) the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and

(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset shall be measured at fair value through other comprehensive income if both of the following conditions are met:

(a) the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and

(b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Principal is the fair value of the financial asset at initial recognition and interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin.

A financial asset shall be measured at fair value through profit or loss unless it is measured at amortised cost, or at fair value through other comprehensive income.Ex. Financial assets at fair value through profit/loss or other comprehensive incomeOn 04.06. N-1, 100 shares of MAC Inc were purchased for 20 USD/share. The fee paid to the broker was 1% of the value of the transaction. At the end of the year N, a MAC inc share was valued at 24 USD/share. Spot exchange rate on 04.06.N-1 was 2 lei/USD and on 31.12.N-1 was 2,5 lei/USD. On 04.03.N, the company sold all shares aquired on 04.06.N-1 for 25 USD/aciune. The spot exchange rate on that date was 2,6 lei. The fee paid to the broker was 1% of the transaction value. Unrealized gains are taxed when they are realized (income tax 16%). Required: Journalize all transactions assuming that:a) The shares are classified as available for sale (at fair value through other comprehensive income);

b) The shares are classified as measured at fair value through profit or lossCase a)

On 04.06.N-1 the company classifies purchased securities as financial assets available for sale. The initial recognition of a financial asset available for sale is at fair value (in this case, the market value or purchase price) plus transaction costs that are directly attributable to asset acquisition. Since this is a transaction in foreign currency (USD), it will be recorded in the functional currency of the company (lei) at the exchange spot rate at the transaction date (IAS 21)04.06.N-1

Fair value= 100 shares x 20 USD/share =2.000USD

Transaction cost= 2.000 USD x 1% =20USD

Shares value in USD2.020USD

Shares value in lei= 2.020 USD x 2 lei/USD =4.040Lei

Shares available for sale=Cash at bank4.040 lei

At the end of the year, any gain or loss generated by re-measuring financial assets available for sale are recognized directly in comprehensive equity, as described above. Since the original transaction was carried out in foreign currencies, gains or losses may appear on foreign exchange differences between the transaction date and the end of the year. But according to IAS 21 such gains or losses are recognized as other comprehensive income.

31.12.N-1

Fair value= 100 shares x 24 USD/share =2.400USD

Shares value in USD2.400USD

Shares value in lei= 2.400 USD x 2,5 lei/USD =6.000Lei

Gain on remeasuring available for sale financial assets=Amount in lei as of 31.12.N-1Amount in lei as of 04.04.N-1=6.000 4.040=1.960 lei

Shares available for sale=Fair value reserves1.960 lei

As the gain will be taxed when realized, a deferred income tax will be recognized (in other comprehensive income, as it is related to an item recorded in other comprehensive income):

Fair value reserves=Deferred income tax liability314 lei

On 04.03.N the company recognizes the gain from selling the shares acquired on the 04.06.N-1 in profit or loss :

04.03. N

Fair value= 100 shares x 25 USD/share x 2,6 lei/USD =6.500 lei

Transaction cost= 6.500 lei x 1% =(65) lei

Shares value in lei= 4.040 lei + 1.960 lei =(6.000)lei

Gain on sale= 6.500 lei 65 lei 6.000 lei =435 lei

Cash at bank=%6.435 lei

Shares available for sale6.000 lei

Gain on the sale of available for sale financial assets435 lei

As financial assets are derecognized, the unrealized gains recorded as other comprehensive income (1.960 lei) shall be recognized in profit or loss:

Fair value reserves=Revenues from fair value measurements of available for sale financial assets1.960 lei

At the same time, the deferred income tax needs to be derecognized:

Deferred income tax liability=Fair value reserves314 lei

Case b)

On 04.06.N-1 the company classifies purchased securities as financial assets at fair value through profit or loss. The initial recognition for such financial assets is made at fair value (in this case, the market value or purchase price) Since this is a transaction in foreign currency (USD), it will be recorded in the functional currency of the company (lei) at the exchange spot rate at the transaction date (IAS 21)04.06.N-1

Fair value= 100 shares x 20 USD/share =2.000USD

Shares value in USD2.000USD

Shares value in lei= 2.000 USD x 2 lei/USD =4.000Lei

Marketable securities=Cash at bank4.000 lei

Transaction costs (e.g. the broker fee) are expensed instead of being capitalized:

Commissions expenses=Cash at bank40 lei

At the end of the year, any gain or loss generated by re-measuring these financial assets are recognized in profit or loss, as described above.

31.12.N-1

Fair value= 100 shares x 24 USD/share =2.400USD

Shares value in USD2.400USD

Shares value in lei= 2.400 USD x 2,5 lei/USD =6.000Lei

Gain on remeasuring available for sale financial assets=Amount in lei as of 31.12.N-1Amount in lei as of 04.04.N-1=6.000 4.000=2.000 lei

Marketable securities=Gain on re-measuring financial assets at fair value through profit or loss2.000 lei

As the gain will be taxed when realized, a deferred income tax will be recognized (in profit or loss, as it is related to an item recorded in profit or loss):

Deferred income tax expense=Deferred income tax liability320 lei

On 04.03.N the company recognizes the gain from selling the shares acquired on the 04.06.N-1 in profit or loss :

04.03. N

Fair value= 100 shares x 25 USD/share x 2,6 lei/USD =6.500 lei

Broker fee= 6.500 lei x 1% =65 lei

Shares value in lei= 4.000 lei + 2.000 lei =6.000 lei

Gain on sale= 6.500 lei 65 lei 6.000 lei =435 lei

Cash at bank=%6.435 lei

Marketable securities6.000 lei

Gain on the sale of financial assets at fair value through profit or loss435 lei

At the same time, the deferred income tax needs to be derecognized:

Deferred income tax liability= Deferred income tax revenues320 lei

Ex. Financial assets at amortized cost

On January 1, N an entity acquires 100 bonds for 110 lei/bond. The par value of the bonds is 100 lei/bond, and they bear a 10% cupoun p.a. payable at the end of each year. The bonds shall be redeemed after 4 years for 105 lei/bond. The bonds are classified as held to maturity investments.

On 01.01.N bonds are recorded at fair value (there are no transaction costs):

Bonds/Held to maturity investments=Cash at bank 11.000

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