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IFRS 13 – Importance of Fair Value in a Business

According to IFRS 13, the fair value applies to the cost received for selling an asset or paid in order to transfer the liability in a transaction among market participants. In addition, International Financial Reporting Standards are implemented to govern the fair value of a business. Also, IFRS was introduced and regulated by the International Accounting Standards Board.

Marketers measure the fair value of assets or liabilities based on assumptions in the current market. Therefore, it also allows businesses to predict the risks. As a result, IFRS plays a significant role in business as it guides the fair value when the market is least active.

However, to know more about the IFRS 13 importance in a business, you must know the various fair value concepts.

What are the concepts of fair value?

IFRS 13 states fair value as the price received for selling an asset or liability on a measurement date. However, its concepts vary widely in the IFRS 13 standard fair value definition. So, let’s understand some of them.

Fair value can be specified as the exit price.

It is assumed to be an orderly transfer of sale.

Fair value is a market-based notion.

Also, the definition states that fair value is a recent price at the acquisition date.

As we now know what fair value is, let’s understand the importance of IFRS 13.

Importance of IFRS 13:

Effective in January 2013, IFRS 13 is implemented on other IFRS standards when they need fair value measurements. It can be permitted either in primary statements or footnotes.

So, IFRS 13 doesn’t depend on when to measure fair value. In contrast, it determines how to measure it in a business.

Here are some of the benefits of IFRS 13 for your business:

Businesses can analyze the profit margins.

It calculates risks.

Fair value predicts future growth.

IFRS 13 fair value is a little static.

It increases the accuracy of the valuations and helps in scenarios when the price in the market fluctuates.

The measured income of the business via fair value is on-point.

It is adaptive on several assets.

Businesses survive through financially challenging times.

Fair value ensures overestimated asset reduction.

Let’s look at some rules of IFRS 13.

Some IFRS 13 rules you should remember:

While making share-based transactions, IFRS doesn’t require disclosure documents or measurements. The exact requirement applies to leases and assets-based transactions.

It doesn’t exhibit disclosure requirements on the fair values of employee advantages and retirement.

IFRS 13 is inapplicable to IFRS 2 or IFRS 16.

IFRS 13 is applicable to measure the fair value items employed for disclosure purposes. Therefore, businesses can acquire financial information through IFRS 13 implementation. Many industrial sectors have suggested that these standards help them resolve various challenges.

Additionally, companies haven’t developed any unanticipated costs by applying IFRS 13. It mainly occurred because IASB removed all charges from implementing IFRS 13.

Conclusion:

IFRS 13 is affordable, reliable, and, most importantly, uplifts your business in tough times. So, the interested entity can apply for IFRS 13 in the annual reporting period and protect their businesses during market fluctuations.

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What disclosures are required as per IFRS 12?

All disclosure requirements regarding interests in other entities are covered by the comprehensive standard known as IFRS 12. The objective of IFRS 12 is to make it a requirement for an entity to provide information that will allow users from its financial statements to assess the nature of, risks connected to, and effects of its interests in other entities on financial statements.

OBJECTIVE

According to the IFRS 12 standard aims to make it necessary for an entity to provide information that allows users of its financial statements to assess:

The nature of its investments in other entities and the risks involved.

The impact of those interests on its cash flows, financial status, and financial performance.

To fulfil this aim, an entity must disclose the following:

i. The important judgements and presumptions it made in deciding:

the type of interest it has in a different entity or arrangement.

the kind of cooperative arrangement in which it is interested.

if applicable, that it satisfies the criteria for an investment entity.

ii. Information regarding its interests in:

Subsidiaries.

joint arrangements and partnerships.

structured entities that the entity does not control.

EXTENT

Organizations engaged in the following activities are required to implement IFRS 12: joint ventures, subsidiaries, joint operations, associates, or unconsolidated organised entities are examples of joint arrangements. Not covered by this Quality Standard are:

i. IAS 19 Employee Benefits accounts for long-term employee benefit plans like pensions and other post-employment plans.

ii. Financial statements that are separate from those of the entity for which IAS 27 applies. However, suppose an entity has interests in unconsolidated organised entities and produces discrete financial statements as its only source of financial information. In that case, it must adhere to the pertinent provisions of this Standard.

iii. an interest owned by an entity that takes part in a joint arrangement but does not share control over it unless the interest has a significant impact on the arrangement.

iv. an interest in a different organisation is treated as a financial instrument under IFRS 9. However, an organisation must follow this Standard:

Whether that interest is a share in a joint venture or an associate that is assessed at fair value based on profit or loss in line with IAS 28.

When the interest in question relates to a structured, unconsolidated entity.

Investment entities are exempt from certain disclosure obligations in IFRS 12, although they are subject to additional disclosure requirements.

Disclosure requirements imposed by IFRS 12

Users of an entity's consolidated financial statements must be provided with information that enables them to:

Understand:

The group's composition.

Non-controlling interests' involvement in the group's operations and cash flows.

Evaluate:

The type and scope of major limitations placed on its access to or use of the group's assets, as well as its capacity to settle liabilities.

The type of risk involved with its interests in consolidated structured companies and any changes to that risk.

The consequences of modifications to its ownership interest in a subsidiary without a loss of control.

The effects of a subsidiary losing control during the reporting period.

In Conclusion

The IASB implemented these modifications in response to the global financial crisis, intending to enhance the transparency of management's decisions regarding consolidation and the financial implications of a different result.

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What are Joint Arrangements as per IFRS 11?

A joint arrangement is a setting or an arrangement where two (or more) parties have control. In this case, they will have joint control.

Joint control arrangements exist due to several reasons. For example, it is a way for all the parties to share the risks and costs. They could also use this arrangement to provide access to new markets and technology.

You wish to know more about Joint Arrangements as per IFRS 11. This quick post will highlight the characteristics and objectives of joint arrangements as per IFRS 11.

The Objective of Joint Arrangements as per IFRS 11:

The objective of the IFRS 11 joint arrangement is to lay down the principles for financial reporting that have an interest in specific arrangements controlled jointly. IFRS 11 Standard clearly defines a joint arrangement in which two (or more) parties will have joint control. There are two main characteristics of the same. First, as you move forward, you will learn more about it.

The Two Characteristics of Joint Arrangements as per IFRS 11:

Firstly, the parties will enter into a contractual arrangement. Therefore, there will be a contract, and all the decisions will be documented.

It would help if you remembered that only one party could not decide on its own. Let’s take an example here: If one company has a share of 50 percent in a joint venture, then two other companies have about 25 percent each. Now, the contract says that there should be 75% agreement to make crucial decisions. It does not mean the 50% shareholder will get the upper hand. They would also need the acceptance of one of the other two companies.

The larger group needs the support of either of the two companies with a 25 percent share. It means there is collective control, which will also be mentioned in the contract. Secondly, there should be unanimous consent. No single entity can block a decision. The contract needs to specify the conditions/agreed terms.

Here’s another example to explain this arrangement. There are three shareholders: X, Y, and Z. A has a 45% share, B has a 45% share, and C has a 10% share. There is a contractual agreement that only 100% votes from all the shareholders will be viable. In this case, unanimous consent will be a necessity.

Shareholders X or Y, or Z cannot make a decision separately. Instead, all three shareholders must accept the decision unanimously. This is because the contract states that all of them have joint control.

Types of Joint Arrangements:

There are two types of joint arrangements.

Joint operations.

Joint Ventures.

How are they different? When a specific entity has rights to all the assets, the arrangement is called a joint operation. This is because there are not only rights to assets but also obligations of liabilities of Joint Arrangement. When a specific entity has the right to all the net assets, it is known as a joint venture. Now that you understand the basics of joint arrangements as per IFRS 11, it will be easy to grasp the in-depth concepts related to this subject.

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IFRS 10 - Consolidated Financial Statements

With the help of the accounting standard IFRS 10, businesses with numerous entities can consolidate their financials while still complying. While it resembles ASC 810, there are several significant differences. This article discusses four critical points that each company with several companies should consider under the IFRS standards.

When are consolidated financial statements necessary under IFRS 10?

When one company - the parent - controls one or more other companies, consolidated financial statements are necessary. A firm that holds more than 50% of the voting stock of another company is said to be the controlling company.

Associating businesses, subsidiaries, and joint ventures are included in this. Consolidated accounts are not necessary if that control is merely momentary, as would be the case if the company is going to enter administration.

The objective of the standard:

The objective of IFRS 10 is to define guidelines for preparing and presenting consolidated financial statements where a business controls one or more other entities, as stated in the standard. To achieve this goal, the following criteria must be met:

Requires a parent company that oversees one or more subsidiaries to present consolidated financial accounts.

Defines control as the cornerstone of consolidation by defining the concept of "control."

Sets out how to use the principle of control to determine whether an investor controls an investee and, as a result, must consolidate the investee.

Establishes the accounting standards necessary to prepare consolidated financial accounts.

Defines an investment entity and specifies the exemption for consolidating specific subsidiaries of an investment entity.

Scope:

A parent is exempt from presenting consolidated financial statements if and only if:

The parent is a wholly or substantially owned subsidiary of another business, and all of the parent's other owners, including those who are not otherwise allowed to vote, have been informed and do not object to the parent's decision not to present consolidated financial statements.

There is no public market for the debt or equity instruments of the parent (an over-the-counter market, which includes local and regional markets or domestic or international stock exchange).

To release any class of instruments in a public market, the parent neither filed its financial accounts with a securities commission nor is in the process of doing so.

The ultimate parent or any intermediate parent makes IFRS-compliant financial statements that the public can use. In these statements, subsidiaries are consolidated or measured at fair value through profit or loss.

Control:

According to IFRS 10, the parent company must be explicit about whether it "controls" the subsidiary, which is defined as:

Power over the investee: The investor already possesses rights that allow it to control the pertinent activities (the actions that have a substantial impact on the investee's returns).

Exposure to or rights to fluctuating returns as a result of its relationship with the investee.

The capacity to influence the investor's returns through its control over the investee.

The parent corporation is deemed to control the subsidiary if these three conditions are met. Therefore, unless otherwise exempt, it must prepare consolidated financial statements.

Effective dates and transitions:

IFRS10, which replaced IAS 27 at the start of the 2013 fiscal year, was developed in 2011 by the International Financial Reporting Standards board. If a company also accepted IFRS 11 and 12 as part of the consolidation package, it was permitted to adopt IFRS 10 earlier.

In Conclusion:

Consolidated accounts' goal is to represent a group of companies' financial standing as a single, cohesive entity. Therefore, the earnings that should be reported in a consolidated statement of financial position are those that the group has earned.

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Reporting as Per IFRS 8

An Introduction:

IFRS 8 Operating Segments mandates certain classes of organizations (primarily those with publicly traded shares) to publish information about their operating segments, products and services, geographical areas, and prominent clients. Information is derived from internal management reports for both the identification of operating segments and the measurement of reported segment data.

The IFRS 8 segment was published in November 2006 and applies to yearly periods beginning after January 1, 2009.

Scope:

This IFRS 8 standard applies to any company whose debt or equity securities are traded on a public market or that seeks to issue any instrument on a public market under IFRS 8. If they refer to their disclosures as 'segment information,' other companies must comply with IFRS 8 when disclosing segment information.

Identification of Segment Operations:

An operating segment is a part of an entity, according to IFRS 8:

That is actively involved in commercial activities that generate income.

Whose operational results are scrutinized regularly by the person in charge of making operational decisions? In IFRS 8, the term "chief operating decision maker" does not refer to a title as such but rather to a function. In some organizations, a board of directors may be able to perform the same duty as a single director.

It can be tracked down using specific financial data.

This means that not every part of a company is an operating segment by this definition. For example, according to IFRS 8, a company's headquarters, which may generate no or only incidental revenue, would not be considered an operating segment.

Critics say the "management approach" leaves segment designation up to the company's discretion, which makes it difficult to compare other companies' finances.

Identification of reportable segments:

Whenever an operating segment has been determined, the company must disclose segment information if it fulfills any of the quantitative standards listed below:

Its reported revenue (inter-segment and external) amounts to 10 percent or more of the total internal and external revenue generated by all operational segments combined.

Its assets account for 10% or more of the total assets of all operating segments.

According to IFRS 8, if several segments have equivalent economic characteristics, they may be combined into a single operating segment, and the size criterion can evaluate their combined size.

Entity-wide disclosures:

IFRS 8 requires firms to report revenue based on the "class of business" and the geographic location of the entity. Additionally, entities must give information on non-current assets on a regional basis instead of a "class of business basis."

If revenues from a single external customer account for 10% or more of the entity's total revenue, the entity must disclose that fact, as well as:

The total revenue generated by each customer (although the name is not needed).

the revenue-reporting segment or segments.

Conclusion: According to the report's findings, rapid implementation of IFRS 8 would reduce the ambiguity over the handling of financial reporting for the financial year ending on December 31, 2007. Additionally, it would aid the EU's larger objective of accepting IFRSs in all nations, including the United States, without the need for reconciliation, which would be a significant benefit.

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Financial Instruments as Per IFRS 7

Back in 2015, IFRS financial statements were required since a lot of loans were being taken by various entities from foreign banks. It is evident if you review the financial statement of even a mid-sized business that extends consumer loans. Foreign banks usually ask the bigger debtors to share their financial statements yearly.

It is possible that while checking the financial statement notes of a company, the numbers may add up, and everything may look balanced, nice, and clean. Still, there is a possibility that something might be out of place. For example, despite having everything in place, a company may not present sufficient notes regarding the financial instruments like loans given or taken apart from a break-up of the carrying amounts. Therefore, although it might be strange, IFRS 9 Financial Instruments may not require any disclosures. The reason is that IFRS 9 is too bulky and complex. Therefore, standard setters have voted in favor of a different standard regarding the disclosure requirements. Thus, IFRS 7 Financial Instruments came into existence.

At times, entities find it difficult to understand that things do not end up with IFRS 9 alone. Therefore, it is necessary to consider maturity analysis, sensitivity analysis, credit loss analysis, descriptions, and other things. It is better to understand the disclosures required by IFRS 7 so that you have a good idea of the additional work required apart from the accounting records. It is worth noting that one should be familiar with IFRS 7 as well since the standard applies to everyone dealing with financial instruments. There is no room for any exception.

Who Should Be Concerned About IFRS 7 Financial Instruments Disclosures?

According to the standards IFRS 7, the disclosure requirements apply to everyone with some financial instrument. It replaced the old IAS 30 Disclosures found in the financial statements of banks and financial institutions. IAS 30 applied only to banks and financial institutions. However, IFRS 7 applies to everybody. So, even if it is a trading company having a few loans but quite a few trade receivables, IFRS still applies it must be aware of what it is so that it is clear what things should be included in the notes of the financial statement.

There are a few instruments that are not part of the IFRS 7. Also, it is required to provide disclosure as per the other standards like:

Associates.

Joint Ventures.

Subsidiaries.

Insurance Contracts.

Employee Benefit Plans.

Share-based Payments.

Equity Instruments.

Disclosures Necessary for IFRS 7

There are two main areas of the disclosures:

Importance of the financial instrument.

Nature and extent of risks from financial instruments and the ways to manage these.

Importance of the financial instrument:

These are necessary to have an understanding of whether the financial instruments are significant for the performance and financial position of an entity or not. These have been divided into a few sub-groups that are as follows:

Disclosure of financial position statement.

Disclosure of comprehensive income statement.

Other disclosures.

Nature and extent of risks from financial instruments:

This part is quite demanding and requires additional work and analysis, especially for market risk disclosures. As per IFRS 7, there must be both qualitative and quantitative disclosures, namely:

Credit Risk.

Liquidity Risk.

Market Risk.

Hope it is clear now that IFRS 7 requires some mandatory information. Therefore, if you are looking to make the disclosure look useful, you have to follow the basics and include the mandatory details.

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IFRS 6- Exploration and Evaluation of Mineral Resources

IFRS 6 allows entities to adopt the standard for using accounting policies to explore and evaluate assets brought into effect before adopting IFRSs. It was issued in December 2004 and applies to annual periods on or after 1 January 2006. Most of the fundamental entities in the sector use the approach based on ‘successful efforts’, where the costs incurred in acquiring, funding, and developing reserves are capitalized on a ‘field by field’ basis.

IFRS 6 allows entities to continue using their existing accounting policies based on whether they comply with some policies like accounting policies and changes in accounting errors and estimates. The criteria for determining if a policy is reliable and relevant lie below:

If it is relevant to the economic decision-making requirements.

If it is reliable to the extent that the financial statements.

i. Offer faithful representations.

ii. Depict economic substances of events, conditions, and transactions and not only their legal form.

iii. Be free from bias or neutral.

iv. Are prudent.

v. Satisfy all material respects.

Alterations brought about in an entity’s accounting policy for exploring and extracting assets can be done if the financial statements are less relevant and not more reliable or more relevant and less reliable to the requirements of the economic decision-makers.

IFRS 6 has an extremely narrow scope, and its costs can be capitalized after the entity has obtained legal rights to discover a specific area but before the extraction demonstration as both technically feasible and commercially viable. So, costs incurred before exploring legal rights have been obtained are subject to profit or loss expenses. Once technical and commercial viability has been demonstrated, IAS 16 or 38 would affect costs.

The capitalized expenditure includes the following factors:

Trenching.

Sampling.

Exploratory drilling.

Acquisition of exploratory rights.

Geological, geophysical, geochemical, and topographical studies.

Activities linked to the examination of practicability and economic viability of exploiting a mineral reserve.

The method of impairment determines the exploration or evaluation of assets. The tests to indicate its impairment are as follows:

The time period within which the entity may investigate whether the specific region has recently expired or will soon expire, and there is no hope of renewal.

Expenditures for mineral exploration and evaluation are not planned or budgeted for in a specific area.

The finding of economically feasible amounts of mineral resources has not been fostered by exploration and appraisal of mineral resources in a specific area. This means that the company may stop doing certain things in a certain sector.

Because an organization may continue to apply its current accounting procedures before implementing IFRS 6, it is possible for it to comply with the standard even if it has not yet implemented IFRS 6. Despite the ongoing development in the particular field, the sum of the research and assessment asset is indeed not worth recovered fully from effective achievement or sale, according to sufficient information.

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IFRS 5- How Do You Report Non-Current Assets Held for Sale and Discontinued Operations?

A company might decide to sell a non-current asset or/and discontinue its business operations. This decision not only affects cash flows in the future but also changes the profitability and financial situation on the whole. In other words, Non-current assets held for sale and Abandoned Operations in accordance with IFRS 5 which was effective from January 1st, 2005. Let us look at the primary objectives of IFRS 5.

IFRS 5- Objectives

The two primary areas on which IFRS focuses are as follows:

Requirements related to reporting of discontinued operations have been established by this regulation.

It focuses on treatment of accounting of disposal groups, which are assets kept for the purpose of eventual liquidation.

IFRS 5- Measurements of Non-Current Assets Held for Sale

Often an entity acquires a non-current asset for disposing of it. Under such circumstances, it will be deemed as held-for-sale at its acquisition date if it is to be sold within one year. If the criteria occur after the date, the asset will not be categorized as held-for-sale. Also, if an entity abandons the assets, they will not be defined as held-for-sale ones. The value of a non-current asset or a group of non-current assets that are held for sale must not be depreciated.

Below are the guidelines related to exceptions for measuring assets held for sale:

Assets derived from the provision of benefits to employees (IAS 19).

Tax assets that have not yet been paid (IAS 12 Income Taxes).

IAS 40 Investment Property uses the fair value concept for financial assets that are classified as financial instruments (IFRS 9).

Contractual rights stemming from insurance contracts according to IFRS 4 Insurance Contracts.

In accordance with IAS 41, non-current assets are valued at their fair market value rather than their cost of acquisition.

IAS 40 Investment Property applies the fair value approach to non-current assets.

These assets fall under the broad category of held for sale because no change is brought about in their accounting treatment. The other assets should be measured at fair value with fewer costs to sell that are lower than their carrying amount. It is the significant measurement principle of IFRS 5.

IFRS 5- Presentation of Discontinued Operations

After identifying a discontinued operation, one must divide it from other ongoing operations in the statements of accounts. It will enable the reader to understand what is being maintained to generate cash flows and profits in the future.

Statement of cash flows: The net cash flows comprise the investing, operating, and financing activities of discontinued operations. One needs to present these disclosures in the financial statements only.

A complete income statement is the following: Discontinued operations' post-tax profit or loss is included in a single figure. Therefore, the concerned individual must report the analysis in the notes or statement of comprehensive income.

Financial position’s statement: In compliance with IFRS 5.38, disposal group non-current assets must be shown separately from other assets. Liabilities of a disposal group that are retained for sale are likewise covered by this rule.

Here, we have extensively covered what IFRS 5 entails and when a non-current asset is to be held for sale. We have also summarized guidelines related to the disclosure of discontinued operations.

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IFRS 4- Insurance Contract

An Introduction

IFRS 4 prescribes some revenue recognition features for insurance contracts issued by entities that have not adopted IFRS 17.

Unknown future events (the insured event) are covered by an insurance contract, which commits one party (the insurer) to pay the policyholder back if it hurts the policyholder. To learn more, continue reading!

Understanding IFRS 4- Insurance Contract

With few exclusions, IFRS 4 Insurance Contracts apply to all insurance contracts (including reinsurance contracts) issued by a business and all reinsurance contracts it possesses. In light of the IASB's extensive project on insurance contracts, this standard provides a temporary exemption from certain other IFRSs, including considering Changes in Accounting Estimates, Accounting Policies, and Errors when selecting accounting policies for insurance contracts.

IFRS 4 was published in March 2004 and applies to yearly periods beginning on or after January 1, 2005. IFRS 17 will supersede IFRS 4 beginning on January 1, 2023.

A company's insurance and reinsurance contracts, except those expressly covered by other Standards, must comply with IFRS 4. Non-financial assets and liabilities, such as those covered by IFRS 9, are not affected by this rule. In addition, policyholders' accounting is not addressed in this study.

Insurance Contract - Definition

It is a contract in which a party (the insurer) assumes a significant risk from another party (the policyholder) by pledging to reimburse the policyholder party if an undetermined future occurrence (the insured event) harms the policyholder party.

Accounting Approaches

A temporary exception from other obligations, such as the necessity to examine the Conceptual Framework while establishing accounting standards for insurance contracts is granted under IFRS 4. In spite of this, IFRS 4 states:

For contracts that were not in force at the conclusion of the reporting period, the provisions for claims under those contracts are invalid (such as catastrophe and equalization provisions)

Accuracy of insured liabilities and asset impairment are assessed throughout the process.

Until the liabilities are discharged, terminated, or expire, an insurer must report insurance obligations in its statement of financial position without recourse to contingent assets.

A 2016 update to IFRS 4 resolves the repercussions of implementing IFRS 9 before adopting IFRS 17.

Adjustments In Accounting Standards

IFRS 4 allows an insurer to amend its accounting rules for insurance contracts if its financial statements reflect information that is either more relevant and no less trustworthy or more reliable and no less relevant.

Specifically, an insurer cannot use any of the following techniques, but it may continue to use accounting rules including them:

Undiscounted insurance liabilities are measured.

Calculating contractual rights to future investment management fees at a rate that surpasses the market rate.

Based on comparing current market-based rates for comparable accounting services, their fair worth.

Using non-uniform accounting procedures for subsidiaries' insurance obligations.

Conclusion The purpose of IFRS 4 is to make insurance contracts and the companies that supply them more transparent from a financial reporting perspective (described in IFRS 4 as an insurer). If the insurer's financial statements contain both more trustworthy and relevant data, the IFRS 4 permits it to alter its accounting requirements for insurance contracts.

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IFRS 3- Basics of Business Combination

An Introduction

When a new owner takes over an established firm, the accounting standards in IFRS 3 Business Combinations serve as guidance (e.g. an acquisition or merger). Whenever assets and liabilities are acquired, they are valued at their fair market value on the date of acquisition, which is the case with purchase accounting.

IFRS 3 was issued in January 2008 and applies to business combinations in the first year of an entity's existence and begins on or after July 1, 2009.

Understanding IFRS 3 - Business Combination

As part of an acquisition, an acquirer must adhere to certain IFRS 3 principles and standards, including:

Accounts for the assets and liabilities it acquires from the acquire as well as any other parties' ownership interest in the acquire.

An acquisition of goodwill via a merger or a bargain purchase is recognized and measured.

Decide what information should be disclosed so that those who read the financial statements can evaluate the combined company's financial consequences and character.

What is the Scope of IFRS-3?

When accounting for business combinations, IFRS 3 must be used; however, it does not apply to the following situations:

A joint venture is formed. By [IFRS 3.2(a),] Although some guidelines are offered on how such transactions should be recorded, the purchase of an asset or group of assets that are not part of a company.

As per International Financial Reporting Standard (IFRS) 3.2. (b), Entities or enterprises controlled by a single entity or entity group (the IASB has a different and separate agenda project on basic control transactions).

As per International Financial Reporting Standard (IFRS) 3.2. (c), When an investment company purchases a subsidiary, the fair value of the acquired subsidiary is required to be shown on the consolidated financial statements by IFRS 10. International Financial Reporting Standards 3] 3.2(d).

How to figure out whether or not a deal is a merger or acquisition?

If a transaction is a business combination, it must be recorded according to IFRS 3. In addition, IFRS 3 gives further advice on this matter. This advice contains the following:

By transferring cash, incurring obligations, issuing stock instruments (or of any combination thereof), or without consideration, business combinations may occur (i.e. through contract alone). The International Financial Reporting Standard (IFRS) 3. [B5] To meet legal, tax, or other goals, a business combination may be organized in a variety of ways, including the creation of a new subsidiary or the transfer of net assets from one company to another or a new company.

Non-current assets, intellectual property, and other economic resources are examples of inputs. When applied to one or more processes, these resources generate outputs. When an input or a set of inputs is subjected to a process, an output is produced (e.g. strategic management, operational processes, resource management). To produce anything, you need inputs and procedures.

Conclusion By IFRS 3, the acquirer must provide data that enables the users of its financial statements to assess the nature and financial influence of the business combination during the current reporting period or later, after the reporting date but before the financial statements are authorized for release. To be released. Immediately after a business combination, the acquirer must record any changes in the current reporting period related to the prior reporting period's business combination.

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IFRS 2- What Is Shared Based Payments?

Understanding IFRS 2

IFRS 2: Accounting for equity-based compensation to receive payment, an organization must account for all transactions involving the payment of equity-based assets (such as granted shares, or share appreciation rights) in its financial statements. This includes payments made to employees or other parties in cash, other parties in assets, or equity instruments of the organization. Specific criteria are specified for equity-based and cash-settled share-based payment transactions and those where the entity or supplier has the option of cash or stock instruments.

IFRS 2 was initially announced in February 2004 and became effective for yearly periods starting on or after January 1, 2005.

What Do You Understand by Shared Based Payments?

In a share-based payment, an entity receives items or services in return for its equity instruments or incurs liabilities for amounts determined by the price of the firm's shares or other equity instruments. When a share-based payment is made, the accounting requirements are determined by whether the payment is made in stock, cash, or both.

Scope

All entities are required to comply with IFRS 2. Private and small enterprises are not exempt from the legislation. There are a few exceptions to the concept of universal scope.

Stock issuance in a business combination must be accounted for by IFRS 3. In addition, the share-based payments made with acquisitions must be separated from those made to workers in exchange for their ongoing employment.

IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement do not apply to share-based payments as defined in IFRS 2 paragraphs 8-10 or 5-7. IAS 32 and 39 should be implemented if the contract is settled in shares or rights to shares.

Apart from transactions involving the acquisition of goods and services, IFRS 2 does not apply to share-based payment transactions. As a result, it lacks authority over dividends, the purchase of treasury shares, and the issuance of new shares.

Quantification and detection

A company's equity must be increased before it may issue new shares or rights to purchase new shares. An offsetting debit entry must be expensed when payment for goods or services does not represent an asset. The cost should be recorded immediately upon consumption of the goods or service. For instance, if a business issues stock or rights to stock to buy products, the stock or rights are added to inventory and are expensed only when the stock or rights are sold or damaged.

The grant-date fair value of any shares or rights vested or entitled to vest must be quickly depreciated. During the vesting period, it is assumed that the shares distributed to employees are related to their services.

Conclusion

As of January 1, 2005, the standard will be applied to equity instruments given after November 7, 2002, but not yet fully vested. In addition, as of January 1, 2005, IFRS 2 applies to liabilities deriving from cash-settled transactions. You should have a working knowledge of accounting above concepts and an ability to articulate them in terms of financial data.

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All You Need to Know About IFRS-1

An Introduction

First-time Adoption of International Financial Reporting Standards (IFRS) outlines an organization's steps to prepare its first set of consolidated financial statements using IFRSs as a foundation. In addition, a limited number of IFRS exemptions are granted by the International Financial Reporting Standards (IFRS) after its first IFRS reporting period.

After 1 July 2009, an entity's first IFRS financial statements will be subject to a revised version of Item 1 of the International Financial Reporting Standards (IFRS). Just read this article to learn more about IFRS 1.

Understanding First Time Adoption

There are two types of companies: first-time adopters, and second-time adopters, both of which are companies that have adopted IFRSs for the first time. To be deemed a first-time adopter, an entity must have made its internal financial statements compliant with IFRS in the prior year but not made those financial statements available to shareholders or other parties such as investors or creditors. Financial statements prepared by international financial reporting standards (IFRS) will not be required to be submitted to the Financial Accounting Standards Board (FASB).

What Are the Requirements of IFRS 1?

An organization needs to meet the IFRS 1 standards while moving from national GAAP to the international standard. IFRS financial statements and any interim reports prepared under IAS 34, "Interim financial reporting," are covered by this standard. Additionally, entities that have applied for the first time more than once are covered by this provision (i.e., repeated first-time applications). An essential part of IFRS reporting is the application of all applicable IFRSs at the date of the report. There are, however, several optional and mandatory exceptions to the need for retroactive applicability.

IFR 1's fundamental principle is to apply all Standards in place as of a company's last balance sheet or first financial statement reporting date retroactively.

According to IFRS, businesses should:

Set up the first set of financial reports.

On the day of the changeover, prepare an initial balance sheet.

Account for all periods covered by the original financial statements using IFRS-compliant accounting procedures applied retroactively.

Check whether you need to take advantage of any possible exclusions from retroactive applicability.

Retrospective application of the IFRS should include the four required exclusions.

The move to IFRS necessitates extensive disclosures.

Exclusions from IFRS 1

While the International Accounting Standards Board (IASB) has allowed for certain voluntary exemptions for the retrospective implementation of IFRS 1, it has also acknowledged the costs and consequences of retroactively applying all relevant IFRS. Accordingly, in certain particular instances, the business may do a cost-benefit analysis to decide whether or not IFRS should be applied retroactively under IFRS 1.

Those standards that the IASB deems would be too difficult or expensive to implement retroactively would be excluded from the voluntary exemptions. Any, all, or no exemptions may be invoked as a last resort.

What Should Accounting Policies Be Considered As per IFRS?

Several Standards allow firms to choose from a variety of accounting practices. A company's initial balance sheet accounting practices must be carefully considered, and the influence on current and future periods must be adequately appreciated. Firms should take advantage of the opportunity to analyze accounting procedures from a new viewpoint.

The Bottom Line The "First-time Adoption of International Financial Reporting Standards" (IFRS 1) sets out the steps that must be taken by a company when using IFRSs for the first time to produce its general-purpose financial statements. As a result, transitioning to IFRS is made more accessible by this standard.

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Tax Changes in the US Law for 2022

Although we are in the first quarter of 2022, it isn't too early to learn major tax changes for the year. For instance, most tax changes enacted in 2021 due to COVID have expired.

It means that some reliefs enacted in 2021 will be different in 2022. But, regardless of the means, reasons, or time, the above changes can either help or harm you- be ready!

In this article, you will learn tax changes that will aid you in reducing your tax payable in 2023.

Let's dive in!

1.    Standard Deductions

Every US taxpayer has a right to a standard deduction if they are not itemizing their deductions. The following are the changes in standard deductions in 2022 for each filing status.

Head of Household: An increase of $400 from $12,550 to $12,950

Single: An increase of $600 from $18,800 to $ 19,400

Married but filing separately: Increased with $400 from $12,550 to $12,950

Married and filing jointly: An increase of $800 from $25,100 to $25,900

2.    Estate and Gift Taxes

Your tax exemption on estate tax will increase from $11.7 million to $12.06 million for singles. It will also increase to $24.12 million for couples. However, for couples it can only apply if the surviving spouse files IRS Form 706 on time after their spouse dies.

Again, the real estate special assessment tax of $1.23 million can get a discount valuation. There is an increase of $400,000 in 2022. The IRS has also allowed you to value real estate at its current value.

In addition, more of your tax liability qualifies for an installment payment plan in 2022. For instance, if your business holds more than 35% in real estate, you can defer up to $656,000 taxable at 2% interest. That's an increase from $636,000 in 2021.

Finally, the annual exclusion on gift tax of $15,000 will increase to $16,000. The annual exclusion for gifts is an amount you can gift a person without incurring gift tax.

3.    Increase in Tax Brackets

As a taxpayer, your filing status will determine your federal tax bracket. The following are the changes on tax brackets for all filing statuses:

Head of household and Single: Will increase from $523,601 in 2021 to $539,901

Married but filing separately: Will increase from $314,151 in 2021 to $332,926

Married and filing jointly: Will increase from $628,301 in 2021 to $647,851

4.    Self-Employed People

There are a few tax changes for self-employed taxpayers, S corporations, and owners of LLCs in 2022. To begin with, you can deduct up to 20% of your business income.

The above deduction does not apply to joint filers with more than $340,000 taxable income and $170,050 for others. It increases from $329,800 and $164,900 for joint filers and others, respectively, in 2021.

What's more, the tax credits for self-employed taxpayers will not be deductible in 2022.

5.    Restrictions to Deduct Contributions from Traditional IRA Income

If you are below 50 years, your IRA contribution limits will remain at $6,000 and $7,000 if you are above 50 years old. But, there are a few tax changes on IRA in 2022. If the employer-sponsored plan covers you, the increases will be as follows;

Single: The maximum deduction will increase from $66,000 to $68,000. The deduction, however, will be eliminated at $78,000 and above, an increase from $76,000 in 2021.

Married and filing jointly: Their maximum contributions will be reduced at $109,000 (an increase by $4,000). They should also eliminate their deductions at $129,000, unlike in 2021 when it was $125,000.

If the insurance covers only one spouse, the maximum deduction will increase to $204,001 from $ 198,000. In turn, the deduction is eliminated at $214,000, increasing from $208,000 in 2021.

6.    Parking and Transportation Benefits

Congress has increased the parking and transportation fringe benefits to $280 per month. This $10 increase includes exclusion for commuter vans and mass transit passes.

What Next For Taxpayers?

As a taxpayer, you should make tax plans for each year as early as the year's first quarter. This is important since it resolves major tax issues by the first quarter of the year. Again, you should always check on the tax legislation to enjoy major tax changes.

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Are IRA Losses Deductible?

We all make investments to get profitable returns. But what happens if you don't make a profit? In standard taxable investments, reporting capital gains and losses is straightforward.

However, IRA does not recognize losses or gains. In fact, the only way you can deduct losses in IRA is after withdrawing all the funds in the account and with a good reason. The reason, in this case, is non-deductible funds which are minimal, if any, in traditional IRAs.

Changes under Tax Cuts and Job Acts

As a result of this Act, any loss on IRA investments was suspended from 2018 to 2025. Previously, these deductions were made under Schedule A as follows;

The IRA losses were reported under itemized deductions subject to 2% of the adjusted gross income.

You were to distribute the balance in the other IRAs of the same type to claim the loss.

The loss was deductible if the balance available was less than the after-tax amount.

Deducting IRA losses was profitable for persons older than 591/2 to evade the 10% penalty on early distribution.

How to Withdraw Balances to Claim IRA Losses Before 2018?

To claim a loss on your IRA account, you were required to withdraw the money from all your similar IRAs. For instance, if the loss was in a traditional IRA account, you were required to withdraw the balances from all the other traditional IRA accounts. Simply put, if you had a loss in one account and the other accounts had gained, only the total of the same type of accounts mattered.

1. Traditional IRA Loses

Before 2018, losses were deductible only if what you withdrew was less than the basis or after-tax amount in the traditional IRAs. The after-tax amount consisted of roll-overs of after-tax from 457(b) and 403(b) plans and non-deductible contributions.

To determine the after-tax you withdrew from your traditional IRAs, they would check on Form 8606 filed to IRS. This form also showed the amount eligible as a loss and after-tax amount.

Example:

In January 2016, John had an aggregate balance of $40,000 in his traditional IRAs. In this amount, $30,000 is the after-tax amount. By the end of the year, his traditional IRA had lost $16,000, leaving him with a balance of $ 24,000. This balance is less than the after-tax of $30,000. Therefore, if John's AGI was $200,000, the allowable deduction should be $2,000.

Calculations:

To calculate the IRA closing balance;

Traditional IRA opening balance – IRA Losses =Traditional IRA closing balance

$40,000 - $16,000 = $24,000

To calculate the eligible loss;

Tax-deductible amount – Closing balance = eligible loss on IRA

$30,000 - $24,000 = $6,000

To get the allowable deduction;

Eligible loss on IRA – 2% of AGI = Allowable deduction

$6,000 - $4,000 (2% x $200,000) = $2,000

2. ROTH IRA Loses

The same rules in traditional IRA apply in ROTH IRA. Claiming your ROTH losses were allowed only if the amount withdrawn was less than the total amount in all your ROTH IRAs.

Example

At the start of 2015, John had ROTH IRA balances of $20,000. $12,000 was earnings, and the balance of $8,000 was contributions. In ROTH IRA, the contributions are the basis or after-tax amounts. In the year, John lost $4,000, leaving his ROTH IRA account with $16,000. This balance is more than the after-tax of $8,000.

If John withdraws his ROTH IRA balances now, he will not have any allowable deduction to claim.

Opening balance - Loss = Closing balance

$20,000 - $4,000 = $ 16,000

After-tax (basis) – Closing balance= Allowable deductions

$8,000 - $16,000 = -$8,000

No deduction allowable

Bottom Line

Before reporting any IRA loss, please consult a professional tax services provider and financial advisor, especially now that they are not deductible on your tax returns. The consultation will help you decide whether to withdraw all IRA amounts and how to maximize the itemized deductions.

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What is the purpose of accounting service?

It is tedious and a tiring task for many of the small businesses, start-ups as well as new entrepreneurs to employ or hire an accountant with the right and pinpointed skill set in preparing company's financial statements, managing operations of bank account, analyzing and evaluating financial data and preparing outgoing invoices.

However, the recent trend is as such that it has become even more difficult to find a skilful and qualified person at a rate which is affordable to company.

It has been a trend to outsource accounting services, and nowadays, more than 30% of small businesses outsource their services of accounting. Fascinatingly, many of the businesses or companies that are outsourcing their accounting services are less or not comfortable in handling their own company’s accounts.

Although it is a general perception that bookkeeping, as well as an accounting of a company, should be done within the organization itself. However, it becomes equally important to self-analyse that whether have the necessary skillset and that much level of experience to perform and, manage this job internally. Along with that, it becomes a necessary task to ponder and evaluate that whether employees have sufficient experience in handling the growing and increasing accounting operations. In addition to it, some of the reports suggest that more than 60% of small businesses consider the fact that they are paying high taxes.

This will allow to think about outsourcing the company's accounting services to someone or some of the organization that carries the right knowledge and skill set to perform this operation on behalf. Also. It becomes equally important to choose a company that can perform the same work qualitatively and profitably at a low cost.

Due to this reason, many of the companies have identified the numerous advantages of outsourcing accounting services. Moreover, outsourcing such services does not have a negative impact on businesses, employees and even customers.

Understanding the basic purpose of an accounting service

Accounting services companies provide a comprehensive range of services from payroll to bookkeeping and managing accounting processes altogether. The fact which attracts the small business owners is that there is an expected and considerable amount of savings in the cost of hiring a professional employee as well as there is an additional savings of time which the business owners can utilize in enhancing and growing their core business.

Account processing:

Other services that are available contain processing of the accounts of the company, issuing the payments as well as forming monthly reports on a regular basis. Accounting services usually process payments and produce and compile their reports faster than any other small staff can, and store information in a timely manner for those who control costs, purchases, and inventory.

Another account that can be managed by these services is accounts receivable. This includes payments checking, managing accounts, and resolving issues in past accounts. Other accounting services that attract the interest of businesses include full accounting services and tax assistance.

Accounting outsourcing and bookkeeping are probably best when:

• When an organization or a company of any size or turnover cannot identify or is not able to find a suitable person as a full-time employee with matching skills at a low cost.

• When the company is in need of any kind of temporary services, for instance, special assistance with final reports or when a full-time employee leaves or is on holiday, or when a female employee is on maternity leave, etc. However, the advantages of outsourcing accounting services are far-reaching when the analyze and evaluate the aspect of cost affordability and level of expertise that any outsourcing company can provide.

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The need of having Payroll and HR software for small businesses.

Small businesses have been flourishing very quickly in recent years, but competition is also greater than ever. The Payroll system and HR system play a vital role in the success story of any business organization, including small businesses. CII has conducted a survey and according to the report, 80% of small businesses and 20% of midsize businesses don't wish to spend on any kind of payroll or HR software because their budgets are limited. Due to this, many a time these businesses are not able to provide proper hikes to their employees and sometimes even lose or sometimes fail to retain the talented pool of people.

Investing in the correct payroll and HR management software not only helps in the smooth operation of the business but, it also contributes to the company's success as well. But in small businesses very little or in some cases zero attention is given to the employees of the organization and their negative impact will surely spill over into the growth of the organization.

Hence having the best payroll and HR management system is the finest choice for any small business organization. This software offers a plethora of benefits including greater efficiency, less scheduling, precision, accuracy, and improved productivity.

Some of the factors you should consider before choosing an HRMS software.

Your needs, as well as requirements- You, should always check for your needs before deciding on an HRMS. You should decide that whether you just need the basic payroll and HR featured software or do you want software with some advanced features like shift schedule automation, salary protection, end of duty, biometric integration, etc. If you have many offices, you need to be sure that the software can be easily accessed from anywhere with any device and it is also web-enabled.

Other factors -You can even think about including after-sales service, local availability, and implementation support, for each type of service and support.

For what reason do small businesses require Payroll and HR Management Software?

Upgrades Payroll Management and reduces Time: SME's put a ton of their time in payroll since they see the vast majority of the difficulties in this fragment. Payroll becomes a lot easier with the use of enhanced HR software, the execution of the process becomes simpler and saves time for HR, and furthermore, eliminates the errors which are frequently committed by the representatives. This software is useful in controlling and managing compliance issues, labor costs issues, as well as overtime issues and furthermore assist the organizations to make an enhanced decision without spending and dedicating a large of time.

Improves the process of recruitment: An enhanced HRMS is very useful for small businesses as it digitalizes everything and prioritizes the employee. Human resource management software helps small and medium-sized businesses attract the best people and talent for their business. It also simplifies the entire hiring process by making the process of screening, interviews, and on boarding very effective and time savvy.

Human error removal: Manual work creates a lot of errors such as errors while calculating taxes, sometimes ignoring the items which are taxable, filling improper information in forms, etc. Having an effective payroll and HR software eradicates all such problems

Automatic Payments and Updates:  The payments and system can be updated from time to time automatically with the use of payroll and HR management software. This is an added advantage of using such software for small businesses.

An effective payroll and HR management software can transform small businesses upside down if they are used effectively.

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Understanding the Cash Flow Statements

Cash flow statements are the annual financial statements that give the overall data about the inflows of cash in a company. This inflow of cash can be through outside investment sources or due to the current operations of the company. Along with that, it also includes the outflows of cash that a company pays for its business operations and investments of the company during a given period of time.

Financial statements present a clear picture in front of the investors and various business analysts which eventually leads to the success of the company. Since, cash flow statements deals with the inflow and outflow of cash, it is believed to be more reliable amongst all other financial statements, as it deals with cash flows of the business in three ways – 1) through the company’s operations, 2) Through the investments made by the company and 3) Through financing. The overall sum of all the three said parameters leads to the net cash flow of the company.

Here, we will understand all three factors in detail.

Cash flow from operations.

It is the first and foremost section in any of the cash flow statements; it incorporates all the transactions from the company’s operational business activities. It includes cash flow from operations which starts with the net income, and then it reconciles all the items which are non-cash and cash items that involve operational activities. Hence, in simple words, it is the representation of a company’s net income in cash form.

This part presents the inflows and outflows of cash that comes directly into the company’s core business activities. A few examples of such activities is the purchase and sale of supplies or inventories, or paying salaries to the employees. Outflows of any other forms like dividends, debts and investments are not included in the cash outflow here.

Companies generally generate an ample amount of positive cash flow from their operational growth. If a company is not able to do so, in order to expand it may require secure financing for external growth.

Cash flow from investing.

Cash flow from investing in the second section of the cash flow statement.  It is the result of gains and losses through investment. Cash spent on plant, equipment and property is also included in this section. Various analysts analyses the changes and variations in capital expenditure.

When there is an increase in capital expenditure of the company, it generally signifies a reduction in cash flows. This is not a negative this always, as it can also signify that the company has a vision of the future and are investing in future operations. Companies that are having a high capital expenditure are the companies that are growing.

Although positive cash flows are considered to be good – investors generally prefer to invest in a company that generates more cash flow from the core business operations rather than financial or investing activities. Companies may also generate the cash flow under this section by property or equipment selling.

Cash flow from financing

It is the last section of the cash flow statement. Overview regarding the cash that has been utilised in business financing is presented here. In simple terms, it means the cash flow between the owners of the company, its creditors and the company. The source of this is generally equity or debt.

Business analysts use this section to determine how much dividends the company has paid to its shareholders or how much money they have paid via share buybacks. It also helps to analyse the ways the company raises cash for their operational growth.

Cash generated or paid back through efforts of capital fundraising like debt or equity is listed here along with the loans that are taken or paid back to the lender. Positive cash flow from financial activities represents that more amount of money is coming into the business than coming out. A negative number signifies that the company is either making dividend payments/ or stock buybacks or are repaying their debt or loans.