The Bottomline: IFRS guide to fair value measurement

IFRS-13 (International Financial Reporting Standards), applicable for annual periods beginning January 1, 2013, sets principles for fair value measurement. During the development of IFRS-13, the International Accounting Standards Board received feedback about the challenges of applying fair value measurement principles to emerging and transition economies. The IASB noted that similar concerns may exist in other economies too, and entities will benefit from an educational material. The IFRS Foundation recently issued the first chapter of the material, covering the application of IFRS-13 principles to unquoted equity instruments. It presents a range of commonly used valuation techniques for measuring fair value within the market and income approaches, as well as the adjusted net asset method. It does not prescribe any specific valuation technique, but encourages the use of professional judgment and consideration of all facts and circumstances. The material is nonauthoritative. The IFRS Foundation will add chapters on other topics in due course. Stripping costs in a surface mine In surface mining, typically, mine waste material (overburden) should be removed to gain access to mineral ore deposits. This activity is known as stripping. During the development phase, stripping costs are usually capitalised as mine cost. The capitalised costs are depreciated on a systematic basis once production begins. A mining entity may continue to incur stripping costs during the production phase. The International Accounting Standards Board recently issued IFRIC-20 to deal with accounting for stripping costs incurred during the production phase. Here, to the extent that the benefit from the stripping activity is realised in the form of inventory, the entity will account for stripping cost as inventory cost. To the extent the benefit is improved access to ore, the entity will recognise the cost as a non-current asset, if the prescribed

criteria are met. IFRIC-20 is applicable for annual periods beginning on or after January 1, 2013. Putting leases on the balance sheet On May 16, 2013, the IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board) issued exposure drafts proposing a right-of-use model for leases. The ED requires lessees to recognise all leases, except short-term leases, on the balance sheet. At the commencement date of the lease, lessees would recognise a liability to make lease payments (the lease liability) and an asset representing the right to use the underlying asset during the lease period (the right-of-use asset). All entities would classify leases to determine how to recognise lease-related revenue and expense. Such classification would be based on the economic benefits of the underlying asset expected to be consumed by the lessee over the lease term. The classification will also affect what lessors record on their balance sheet. Comments on the ED are due by September 13, 2013 Clarification on audit qualification A circular from the Securities and Exchange Board of India, dated August 13, 2012, required listed companies to submit annual audited financial statements with the applicable form namely, Form A for an unqualified report or a report containing a matter of emphasis; and Form B for a qualified report. The audit reports in Form B will go through three levels of review. If, after reviews, it is concluded that the qualification is justified, the impact is material and the explanations are not satisfactory, SEBI may ask the company concerned to restate its financial statements. SEBI has received numerous queries, particularly on whether the restatement would be required in the same financial year, or in the subsequent year as a prior-period item. Also, there was concern that restatement in the same financial year may be contrary to the Companies Act requirements, which restrict restatement after the

financial statements are adopted during the annual general meeting and filing with the Registrar. SEBI recently clarified that restatement means a company will immediately disclose to shareholders the effect of revision through pro forma financial results. However, the financial effects of the revision may be carried out in the subsequent financial year as a prior-period item. Ernst & Young
(This article was published on June 16, 2013)