CHAPTER 7

Specific Situations

About This Chapter

In previous chapters we have considered both the accounting ­requirements connected to individual financial statements and the business relationships that require particular accounting treatment and disclosures. In this chapter, we consider a mixture of situations, all of them important and to be disclosed in the financial statements. As with the earlier chapters, we have placed the standards in numerical order, and there is little to connect one standard with the others. All of the situations are stand-alone.

The first standard, IAS 8 Accounting policies, changes in accounting estimates and errors, can be traced in some form back to 1978. The current version was issued in 2003 with effect from 2005. It is an important standard as all companies that issue financial statements compliant with International Financial Reporting Standards (IFRS) will state their accounting policies in their annual report and accounts. This is critical information for the users of annual reports and accounts.

This is followed by a more technical standard, IAS 19 Employee benefits. This was first issued in 1998, but the present version was issued in 2011, effective from 2013. The guiding principle in the standard is that the cost of all employee benefits, including present salaries and postemployment benefits, must be recognized when the benefit is earned by the employee. We explain how the standard is applied to different categories of employee benefits.

The title of IAS 29 Financial reporting in hyperinflationary economies is self-explanatory. It was issued in 1989, and the latest amendment was in 2008. The standard does not define “hyperinflation” but explains the accounting treatments a company should follow where it is in such a situation.

A more complex standard is IAS 37 Provisions, contingent liabilities, and contingent assets. This was originally issued in 1978 and, although there have been no subsequent amendments, it is on the International Accounting Standards Board’s (IASB’s) list for potential amendments. The main purpose of the standard is to prevent abuses in the financial statements by companies establishing “provisions.” It also includes the treatment of both contingent assets and liabilities.

The final two standards are about specific situations and provide the accounting treatment. IFRS 5 Noncurrent assets held for sale is straightforward. The standard was issued in 2004, and there have been a series of minor amendments since that date. IFRS 16 Leases is far more debatable. It was issued in 2016 and becomes effective in 2019. Some would argue that it was the failure to agree on this standard that led to the end of the convergence agreement between the United States and the IASB.

The purpose of IFRS 16 is to prevent perceived abuses of an earlier standard, IAS 17. It has been a contentious standard and illustrates the complexity and time involved in setting standards. We have therefore discussed this particular standard at some length.

To provide a framework for a chapter that covers several disconnected standards, we give a brief overview in Table 7.1.

Table 7.1 Standards discussed in this chapter

IAS 8 Accounting policies	Issued in 2005, it applies to accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors.
IAS 19 Employee benefits	Issued in 2011 and supersedes an earlier standard. It applies to various types of employee benefits.
IAS 29 Financial reporting in hyperinflationary economies	Issued in 1989. It applies to an entity’s functional currency if it is that of a hyperinflationary economy.
IAS 37 Provisions, contingent liabilities, and contingent assets	Issued in 1998. It applies to provisions (liabilities of uncertain timing or amount), with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable).
IFRS 5 Noncurrent assets held for sale	Issued in 2004. It applies to noncurrent assets held for sale (or for distribution to owners).
IFRS 16 Leases	Issued in 2016 and replaces IAS 17. It applies to the leasing of assets from the viewpoint of both the lessor and the lessee.

IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors

It is important to have an understanding of the policies a company uses when preparing its financial statements. A change in policy could lead to a change in the accounting statements and the profit a company is making or the value of the assets it holds. IAS 1 Presentation of Financial Statements requires the disclosure of accounting policies, the judgments used in applying them, the assumptions and other sources of estimation or uncertainty.

IAS 8 was issued in 2005 and sets out the criteria for selecting and applying accounting policies and accounting for changes in accounting estimates and accounting errors on the financial statements that were issued in a prior financial period.

It may be that a company has a specific issue that is not covered by IAS 8. In such circumstances, the company should use its own judgment in setting its policy. Its decision may be helped by referring to similar standards. For example, the guidance in IAS 1, which we discussed in Chapter 3, and the conceptual framework, which we discussed in Chapter 2. It is also valuable to review any recent pronouncements by the IASB or the Financial Reporting Council. We discussed the work of the latter in Chapter 2.

Accounting Policies

Accounting policy disclosures often fill many pages in the financial statements, as companies disclose more than just the significant accounting policies. This abundance of information may confuse the user, and considerable thought has been given by the standard setters to the kind of policies that should be disclosed. It is reasonable to assume that users apply their knowledge and experience to determine those accounting policies that are important in shaping a company’s financial statements.

If a company changes its accounting policies or corrects a prior period error, it usually has to do this retrospectively. The task can be time-consuming and complex. Changes in accounting estimates are generally accounted for on a prospective basis. In other words, the company is assessing what may occur in the future and how this may impact its financial statements.

The policies a company adopts determine the information on the financial statements and hence the substance of its financial performance and position over a period. Users of financial statements have a better understanding if they appreciate a company’s reasons for choosing a particular treatment for transactions, other events and conditions shown in the financial statements. Some standards permit different accounting treatments and without knowledge of this, and of the treatment chosen, users may encounter difficulties in understanding.

A company should be consistent in determining the accounting policies it applies, but it can make changes in two specific circumstances. The IASB may issue a standard or an interpretation that requires companies to make a change. We have seen this recently with leasing and revenue recognition that we discussed in earlier chapters. In addition to changes required by the IASB, an entity may itself decide that a change would improve the financial information. If so, it must ensure that its new policy does not conflict with any of the IASB’s regulations, and it must apply the change retrospectively to all periods presented in the financial statements as if the new accounting policy has always been applied.

We would emphasize that the company determines which policy is appropriate for its needs. Although the policy should conform to international standards, there is evidence that international comparison of policies may not be possible. A study (Ardogan and Ozturk 2015) of companies in Europe, Australia, and Turkey of 2008/9 annual reports concluded that there is an influence of local accounting policies over IFRS practice in Turkey and that this influence still exists in Europe and Australia. This may result in the comparability of financial statements within one country being more appropriate than comparisons between countries claiming to use IFRS.

Accounting Estimates

Changes in accounting estimates are not corrections of previous errors. Such changes arise from new information or fresh developments. An example of an estimate may be a change in the predicted useful life of a current asset or the amount it could be sold for at the end of its life.

The changes may be made, but this is not a correction of an error, but because of new information. No retrospective changes need to be made to the financial statements of previous years, but it would have to make the changes in its current financial statements as the future benefits anticipated may be changed.

Prior Period Errors

The accounting treatment is different for prior period errors. These occur where there was a mistake in past financial statements but the entity has only now identified the occurrence. Prior period errors may be due to mistakes, misinterpretations, or even due to fraud occurring in the company. Examples are the amount of closing inventory, the value of machinery, and the sales in a foreign country.

Whatever the reason is, there may be a mistake in the financial statements. In such cases, the error may be so small that it can be corrected through the profit or loss for the current period. If the error could influence the decisions of users, it is considered material. The entity must correct the error retrospectively. The entity can either restate the comparative amounts for the prior periods in which the error occurred or, if the error occurred before the earliest prior period presented, restate the opening balances of assets, liabilities, and equity for that period.

An entity must adjust the financial statements for when the error occurred. It does not make changes to the present financial statements. For example, an entity preparing its financial statements for 2017 may find a previous error in the 2016 financial statements, which have already been issued. The correction is made to the incorrect statements, that is, those for 2016, and this information would appear in the notes to the accounts.

The standard permits companies not to make the changes if it is impracticable, but various disclosures are required.

The importance of policies and estimates are demonstrated in this note from the financial statements of GlaxoSmithKline plc 2016, where the directors give an overview of their responsibilities:

Select suitable accounting policies and then apply them consistently;

––make judgments and accounting estimates that are reasonable and prudent;

––state that the group financial statements comply with IFRS as adopted by the European Union and IFRS as issued by the IASB, subject to any material departures disclosed and explained in the group financial statements; and

––prepare the financial statements on a going concern basis unless it is inappropriate to presume that the group will continue in business.

Source: GLK Annual Report (2016, p. 148).

IAS 19 Employee Benefits

One might casually think that employee benefits are rarely a problem. That is not the case. First, there is the issue of size. For example, Tesco has ~500,000 employees. Such a large number requires clear policies and practices at the corporate level. Second, with a workforce of this size, there will be several types of remuneration schemes, depending on such factors as the employee’s work responsibilities. There are also such issues as sickness pay and retirements. All of these issues are covered by one standard that has been successful.

IAS 19 was first issued in 1998 and replaced by a new standard in 2011. It contains the requirements for accounting for employee benefits. This includes wages and salaries, annual leave, postemployment benefits (e.g., retirement benefits), other long-term benefits, and termination benefits. The purpose of the standard is to ensure that the cost of providing employee benefits is recognized in the period in which the benefit is earned, not when it is paid or payable—in other words, when the liability arises and not when it is satisfied.

The standard describes a very comprehensive list of benefits an employee may receive. These include not only wages and salaries, but current and postemployment medical benefits, subsidized goods, long service or sabbatical leave, and termination benefits. It does not apply to employee benefits within the scope of IFRS 2 Share-based Payment.

In this section, we discuss short-term benefits and postemployment benefits. The benefit that raises the most difficult accounting issues is postemployment benefits and therefore requires greater explanation.

The general principle with all types of benefits is that the cost of providing employee benefits should be recognized as an expense in the period where the employee earns the benefit. Pensions demonstrate an unusual transaction. The employer benefits from the employee’s service currently but does not pay the pension until the employee retires. As the employer is required to pay the future pension, it will classify it as a liability.

Short-Term Benefits

The accounting treatment for short-term employee benefits usually causes few problems. These are benefits that are payable within 12 months after the service is provided. This includes vacations, paid sick leave, and other acceptable absences where the benefits are still payable. For these benefits, the company should disclose the charge on the Income Statement. If the benefit remains unpaid at the end of the financial period, it will be shown on the balance sheet as a liability.

Postemployment Benefits

There are two main types of retirement plans: the defined contribution plan and the defined benefit plan. Accounting for these benefits causes some accounting problems. We discuss the requirements of these two separately.

Defined Contribution Plan

The employer recognizes contributions to the pension plan as an expense in the period that the employee provides the service. In many schemes, the employee and the employer both agree to jointly contribute specific amounts to the plan.

The amount paid into the defined contribution plan is fixed and the payments invested to build up a “fund” for the particular employee. The amount of the contributions and the income that the investment has generated should be a substantial amount by the date the employee retires. This fund provides regular payments to the pensioner.

Unfortunately, the amount of the final fund relies on the success of the investments. If the economy is poor, the fund and the pension paid out will be much smaller than what the employee anticipated. The risk on the amount of pension payout is the concern of the employee, and there is no risk to the employer.

Defined Benefit Plan

Defined benefit plans are calculated on the amount of pension an employee is guaranteed by the employer to receive on retirement. The pension is usually calculated using a formula that takes into account the employee’s length of service and salary. In this scenario, the employer now needs to know the amount of contribution that must be made each year to pay for the final pension. This raises such questions as whether the employee will leave or die before they are due to retire and how long they will live after retirement.

There are many other variations and possibilities that the entity has to resolve in order to calculate the contribution payments required. Unfortunately for them, companies have an obligation to make up any shortfall if there are insufficient funds to pay out the promised benefits. The risk lies with the employer and not the employee.

Hybrid Schemes

Companies may have several types of pension schemes for different groups of employees. There are also hybrid plans that are part-defined benefit and part-defined contribution. In 2011, the IASB issued important amendments to IAS 19, Employee Benefits. Employers with a defined benefit scheme must ensure that the contributions they make to the fund are sufficient to ensure that there is enough money to pay the pensions to employees when they retire. Their calculations are based on the market value of the assets into which the contributions are invested until they are needed to pay retirement pensions.

Actuaries work with the long-term forecasts and, understandably, their assessment of the market value of the assets is likely to change. This can lead to a surplus in the scheme or, more worryingly, a deficit. This deficit must appear on the balance sheet as a liability. As there are likely to be movements in the balance sheet figure, these must be recorded. Under IAS 19, actuarial gains or losses are referred to as remeasurements. These remeasurement movements must be shown in the statement of other comprehensive income.

At the time the IASB made amendments to IAS 19 in 2011, it also announced that it would closely examine schemes known as contribution-based promises (CBPs). This is a hybrid scheme that involves both contribution and benefit aspects. The employee receives a pension based on the performance of the assets in the pension plan (the contribution basis), and the employer provides a guarantee of the minimum performance of those assets (the benefit basis). The employee, accordingly, receives a benefit that is the higher of the contributions plus the actual return on the assets in the plan and the guaranteed amount. Alternatively, the employee may receive a guaranteed benefit based on a specified return on “notional” plan contributions by the employer.

This discussion on pension plans has explained the two main schemes and the accounting issues, based on UK practices. The actual operation and regulation of pension plans for employees must comply with the laws of the countries in which they operate. This may add another complication to the application of IAS 19.

IAS 29 Financial Reporting in Hyperinflationary Economies

The financial statements of a large company will, most likely, incorporate the results of its business activities in other countries. Some of those countries may be suffering from hyperinflation. The problem arises as to how the companies in hyperinflationary economies are going to produce financial statements that comply with international standards. The solution is provided by IAS 29.

The standard does not give an absolute measure of what is considered to be hyperinflation but provides examples of situations where hyperinflation may be present. These are as follows:

• •the general population prefers to keep its wealth in nonmonetary assets or in a relatively stable foreign currency.
• •amounts of local currency held are immediately invested 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, and prices may be quoted in that 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 approaches, or exceeds, 100 percent.

The standard requires that the financial statements of an entity reporting in the currency of a hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date. Comparative figures for any prior periods should be restated into the same current measuring unit.

Where hyperinflation ends, the company should show any carrying amounts in its financial statements by using the amounts in the measuring unit current at the end of the previous reporting period. The company should also disclose the following information.

• •Gain or loss on monetary items
• •The fact that financial statements and other prior period data have been restated for changes in the general purchasing power of the reporting currency
• •Whether the financial statements are based on an historical cost or current cost approach
• •Identity and level of the price index at the balance sheet date and moves during the current and previous reporting period

There are some particular actions a company should take. Monetary items shown in the balance sheet are not restated, but nonmonetary items are restated. In the statement of comprehensive income, all incomes and expenditure should be restated on the basis of the change in the general price index between the dates the items were first recognized and the reporting date.

The standard is not attempting to resolve the problems of hyperinflationary economies, but it is pertinent to question the usefulness of such financial statements where they may be required for decision making. A recent study conducted in Venezuela (Kapepa and Van Vuuren 2019) has suggested firms that tolerate failure are more likely to be entrepreneurially innovative and better performing than those that are risk averse.

These issues of the value of financial statements in hyperinflationary countries are underresearched, but there are no indications of any changes being considered for the present requirements of IAS 29.

IAS 37 Provisions and Contingent Liabilities and Contingent Assets

IAS 37 was issued in 1998 and establishes the accounting treatment for provisions, contingent liabilities, and contingent assets. The standard aims to set guidelines to control uncertainty and ambiguity in the financial statements. Entities may make provisions in their financial statements for future liabilities that are of uncertain timing or amount. Although such practices may reflect caution, there is concern that users of financial statements may be misled. A contingent liability is an obligation with significant uncertainty. Contingent assets are possible assets. The standard attempts to regulate the way that entities account for future uncertainties. We consider each of the three classes separately:

Provisions

Prior to IAS 37, some companies were adopting accounting practices that were highly dubious and that could mislead the users of financial statements. One such method was profit smoothing. Where an entity enjoyed a very profitable year, it could decrease the profit figure it would announce by creating a provision that was treated as an expense in the Income Statement.

The provision was regarded as a type of fund that would be available to meet future uncertainties. If future profits were to decline for some reason, the entity would use the provisions to smooth the profit trend. The understandable assumption made by such entities was that investors liked to see a profit that increased annually and did not like sudden losses. The users would draw the conclusion that the successful entity was reporting a steady profit every year.

Unfortunately, the opposite may have been true. Some provisions had foundation and were made sensibly. Unfortunately, some provisions, known as “big bath provisions” or “cookie jar provisions,” were made in the good years but with no specific reasons. However, the entities would use them to sweeten their profits in future years.

This practice was recognized, and IAS 37 was introduced to prevent the occurrence. The standard defines a provision as a future liability of uncertain timing or amount. Examples of provisions include warranty obligations, a retailer’s policy on refunds to customers, obligation to clean up contaminated land, restructuring and onerous contracts. The standard sets out the following criteria for ensuring that provisions are made correctly and do not mislead users:

Present Obligation

There must be a present obligation, in other words a liability. There are two types of obligations. One is a legal obligation, while the other is a constructive obligation. An example of a legal obligation would be where an entity has a court case but the legal decision has not been made.

It is uncertain whether the entity will lose or win the case. It seeks legal advice that it is probable it will lose the case. Given this legal advice, the entity can make a provision for the estimated amount of damages. Of course, if the legal advice states that it is probable that the entity will win the case, no provision will be made. Although one could criticize this approach as relying too heavily on legal opinion as well as the meaning of “probable,” the standard has prevented abuses.

A constructive obligation is the consequence of an entity’s own practices or policies. These may allow third parties to assume that the entity will settle certain perceived obligations. One example would be a retailer that has the policy of accepting goods returned by customers. Such a policy is a constructive obligation. It is known as an obligating event because the entity has taken or not taken some action in the past, such as having a policy on returns. This policy results in a present obligation when a customer returns goods.

Reliable Estimate of Amount

The amount an entity establishes for a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. In calculating the estimate, an entity must assess all the risks and uncertainties involved. Where the obligation is substantial and is likely to occur at some considerable date in the future, the entity should discount the amount to present values.

The standard refers specifically to some events that do not meet the regulations but where an entity can make a provision. The first we discuss is where some form of entity restructuring is taking place. The second is where there are onerous contracts.

Corporate Restructuring

An entity may decide to carry out significant and costly organizational restructuring. It may be the closure of parts of the business, amalgamations, or reorganization. The decision on the action has been made, but the restructuring will not take place until the following financial year.

This is classified as a future and not a past event, so it does not come under the normal requirements we have discussed so far. However, an entity may make a provision if the restructuring meets the requirements in the standard applicable to restructuring. The corporate restructuring actions allowed under the standard are:

• •Sale or termination of a line of business.
• •The closure of a business location in a country or region or the relocation of business activities from one country.
• •Changes in management structure.
• •Fundamental reorganizations that have a material effect on the nature and focus of the business operations.

The standard regards these events as a constructive obligation as the entity, by its practices or policies, leads others to believe that it will act in a particular way. To demonstrate there is a constructive obligation, the entity must fulfill the following two criteria:

1. 1.A detailed formal plan must be drawn up.
2. 2.Those affected by the restructuring, for example employees, must be informed.

Onerous Contracts

An entity, in carrying out its normal business, will enter into many contracts. Some contracts contain clauses that allow either party to cancel the contract without incurring any financial penalty. Some may contain clauses that compel the entity to pay some form of damages on cancellation of the contract. Such contracts are known as onerous contracts, and the entity is able to make a provision.

Entities are required by the standard to review the provisions they have made annually. Owing to a subsequent change in circumstances, it may decide that it no longer needs the provision. If the provision is not required, it can be reversed. This would be through the Income Statement. An entity cannot use the provision for another eventuality that it had not foreseen.

Contingent Liabilities

A contingent liability is defined in the standard as a significant uncertainty with a number of aspects regarding the liability. The critical wording is the term “significant uncertainty.” This can be of two types: It may be a possible obligation, arising from past events, although more information is required to establish whether it is a present obligation as defined in the standard. The second type is one where there is a present obligation but either it cannot be measured reliably or it is uncertain whether it will be settled.

A contingent liability cannot be placed in the Income Statement. It goes in the notes in the annual report and accounts. However, it is possible that as time passes there are changes in the event. In these circumstances, an entity may be able to redefine the event as a provision and charge it to the Income Statement.

Contingent Assets

A contingent asset occurs from past events but can be confirmed only by some future event that is not completely in a company’s control. An example could be a court case where the entity relies on legal advice. If the advice is that it is only unsure that the entity will win, nothing appears in the annual report and accounts. If the advice is that it is probable that the entity will win the case, it should disclose a contingent asset in the notes to the accounts. If the advice is that it is virtually certain that the entity will win the case, the contingent asset should appear on the balance sheet.

IAS 37 is a necessary standard in preventing misleading financial statements, but its definitions are obscure. The concepts of probable, possible, and remote are matters of judgment, and opinions may differ. The ability to predict future events and measure them in monetary terms is not foolproof.

However, the standard has prevented the manipulation of provisions that was taking place and provides a framework to assist companies in deciding the appropriate treatment for events that may be probable, possible, or remote.

It is useful to complete this section by considering oil and gas installations. These are extremely expensive, last for many years, and the decommissioning costs must be recognized at the point of an asset installation as part of that asset’s historical cost and as a provision in the balance sheet. Accounting standards IAS 16 and IAS 37 both apply.

Understandably, as we are talking about the decommissioning taking place many years after installation, the cost, and thus the provision, is subject to judgment but will be significant. A study of this problem with UK companies (Abdol and Mangena 2018) concluded that there is a lack of compliance with the disclosure requirements of IASs. The minimum amount of information about provisions for decommissioning costs is given, and stakeholders consider the information inadequate. Similar conclusions were also arrived at from a study of the mining industry in Romania (Manuela, Mardiros, and Cuza 2005).

Having been responsible for creating such provisions in previous careers, we would like to defend the companies. The problem is that you are being asked to calculate the cost of the removal of all equipment and “making good” the site in possibly 10 years’ time or more. The exact year of the future decommissioning is usually not known but “assessed,” the rate of inflation over that period is unknown, and the development of new technologies or customer demands that could extend or reduce the life of the installation is unknown.

IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations

In carrying on its normal business, an entity may find that, from time to time, it has some noncurrent assets no longer required by the company, so it wishes to dispose of them. IFRS 5 requires disclosure of discontinued operations and the proposed selling of assets as this is useful information for the users of financial statements.

The “component” is easily identifiable. It is part of an entity where the operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. They are a cash-generating unit or a group of cash-generating units while being held for use.

The discontinued operation may be a single noncurrent asset or a group of noncurrent assets. The standard defines a group of noncurrent assets as

• •a group of assets to be disposed of, by sale or otherwise.
• •together as a group in a single transaction.
• •with liabilities directly associated and transferred with those assets.

At the end of the financial year, the entity has either disposed of the component or intends to. The reasons for the disposal could be many. It may be strategic, if the entity is shifting the focus of its operations, political if the component is in a region that the entity does not regard as favorable, or simply that the entity believes it can obtain more by disposal than continuing to operate the component.

Noncurrent Assets Held for Sale

An asset is held for sale when an entity does not intend to use it for its ongoing business. IFRS 5 sets out the criteria for identifying assets for sale. The company must be committed to the sale and take all the actions necessary to complete it such as marketing it at a reasonable price.

Once the decision is made, the company will no longer depreciate the asset but must assess realistically whether it will make a gain from the sale. It calculates the difference between the carrying value and the fair value less costs to sell off the asset. If the carrying value is higher, the company must show this in the Income Statement as an impairment loss. This action means that the entity recognizes immediately any anticipated losses from the sale of the assets as soon as the decision to sell the assets has taken place.

It may be that the entity later decides not to sell the asset. If so, the entity cannot show the asset in its balance sheet at a value higher than its original carrying value prior to the decision to sell the asset or disposal group.

IFRS 16 Leases

The original standard on accounting for leases, IAS 17, was reissued in 2003. It was realized that it had some weaknesses, and the convergence project with the Financial Accounting Standards Board (FASB) in the United States, which we discussed in Chapter 2, was the opportunity to produce a converged new standard. The new standard would ensure the recognition of all assets and liabilities arising under lease contracts in the statement of financial position.

Despite numerous meetings and various draft papers, the two parties were unable to agree on a converged standard. The FASB issued its own standard, and the IASB released IFRS 16 in January 2016 to apply to annual reporting periods beginning on or after January 1, 2019. The new standard is based on a single lessee accounting model. The procedure is that all lessees recognize the assets and liabilities for all leases.

There are exemptions to this requirement, and if the lease terms are 12 months or less or the assets have a low value, they do not come under IFRS 16. The regulations for lessors are substantially the same as under the
old IAS 17. There are certain leased assets that do not come under IAS 16. Examples are leases of biological assets and licenses of intellectual property. A critical part of the standard is guidance in determining the asset as this is the substance of the lease agreement. Frequently, it is specified in the contract, although it may be implicitly specified when the customer gains control.

There may be a contract for an identifiable asset, but there is also a nonlease component. For example, an entity may have leased the use of a floor in the building, and the contract also includes maintenance and servicing. There are two approaches: The lease payments can be based on the stand-alone prices, or the lessee can elect not to separate the nonlease components and treat them as part of the lease.

Conclusions

This chapter has concentrated on specific situations. This has required a review of several separate standards. To a large extent, the standards we have discussed have met the needs of the users of financial statements, although there are still certain aspects that require a second appraisal.

Most would agree that IAS 8, IAS 29, and IFRS 5 have clarified the reporting practices required of companies. The IASB made some minor amendments to IAS 8 in 2018, and these become effective from January 1, 2020. Some questionable reporting practices have been developed by companies in respect of pensions, and some minor amendments were made in 2018 to become effective after January 1, 2019.

IAS 37 has caused some companies difficulties when reporting provisions, contingent liabilities, and contingent assets. These have been fairly minor issues, and we do not anticipate any significant amendments to the standards. In December 2018, amendments were made in regard to onerous contracts.

With IFRS 16 Leases, it can be claimed that it has not yet been fully tested by experience. The new standard requires companies to classify leases as operating or finance, and this is not a significant change from its predecessor, IAS 17. IFRS 16 was issued in January 2016 and applies to annual reporting periods beginning on or after January 1, 2019. It will require some years of experience before any conclusions can be drawn, but the IASB spent several years developing the regulations, and there appears to be wide agreement that it will work.