International Financial Reporting Standards:

Revised Readiness Toolkit

October 2008

This is the revised word version of the published International Financial Reporting Standards:
readiness toolkit, which is available on our website, www.nao.org.uk. This revised toolkit takes
into account the finalised IFReM produced by HM Treasury in July 2008 and details the main
IFReM developments since the first toolkit was produced: accounting for Public Private
Partnership (PPP) and Private Finance Initiatives (PFI); intangible assets; infrastructure assets;
and IFRS 8 Operating Segments.

This version has expandable word tables that will enable clients to complete the document
electronically and share the results within their organisation and with their NAO audit teams.

The questions and issues raised in the document are directly comparable to the published
version.

If you have any queries about your use of this document, then please contact the NAO.

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HELPING THE NATION SPEND WISELY

The National Audit Office scrutinises public spending on behalf of Parliament.

The Comptroller and Auditor General is an Office of the House of Commons. Hs is the head of the
National Audit Office, which employs some 850 staff. He, and the National Audit Office, are totally
independent of Government. He certifies the accounts of all Government departments and a wide
range of other public sector bodies; and he has statutory authority to report to Parliament on the
economy, efficiency and effectiveness with which departments and other bodies have used their
resources.

For further information contact, Andrew Baigent,

Director Financial Audit Policy and Support.

National Audit Office

157-197 Buckingham Palace Road
Victoria, London, SW1W 9SP

0207 798 7563

Email: [email protected]
CONTENTS

Introduction

Section A – Overall summary of Management Actions

Section B – Accounting Changes

First time adoption

Format of the Accounts
Accounting policies
Consolidation and boundary issues
Investments
Non-current assets
Accounting for PPP arrangements, including PFI contracts
Inventories
Debtors
Cash
Leases
Other areas of impact

Section C – Lessons Learned from the Private Sector

Annex 1 – Financial Instruments

INTRODUCTION

The transition from UK Accounting standards to International Financial Reporting Standards (IFRS)
and the IFRS version of the Treasury’s Financial Reporting Manual (IFReM) is the largest change to
UK public sector financial reporting since the introduction of resource accounting. HM Treasury
set the revised timetable for the transition in FD Letter 08/12, including Trigger Point dates for
key actions in order to achieve IFRS-compliant financial statements for the year to 31 March
2010. Awareness of the key issues and a planned approach will ensure that the transition is
managed effectively and that the timetable is achieved.

The NAO have developed this ‘readiness toolkit’ to help our clients consider the work they need
to do in advance of the first set of audited IFRS accounts and establish the key financial reporting
issues for their organisation. We have also included an Annex outlining the key impacts of the
transition to Financial Instrument Standards for the 2008-09 financial year, which entities may
find useful.

The toolkit is designed to be used by client staff to assess the impact of the transition on their
business and financial statements. The toolkit:

 Outlines each applicable standard, and any relevant Treasury adaptations or interpretations
for the central government sector;
 Details the key areas of each of the applicable standards, where they differ from current UK
GAAP and the FREM; and
 Suggests a series of questions and actions which management should consider in defining
their approach to the transition

We have designed the document to be as comprehensive as possible and to address the majority of
the issues in implementing IFRS. However, it is not intended to replace the need for detailed
knowledge of the standards and the IFReM adaptations. It is important that the issues are considered
by the business as a whole, not just finance staff in isolation, as implementation in the private sector
suggests that in many cases, the detailed knowledge required to successfully introduce IFRS lies
outside the finance function.

The guide has three sections:

 Section A is designed to pull together the key issues and processes that management need to
take into account;
 Section B considers the individual International Financial Reporting Standards and the areas
of impact;
 Section C notes some of the key lessons from the private sector from implementation of
IFRS.
 Annex 1 details some of the considerations around the implementation of the financial
instrument standards for FRS, to be implemented in 2008-09.

NAO Audit teams will be available to discuss the process of transition and timetable with clients as
required and will audit the restatement of figures required by IFRS 1 – First Time Adoption of IFRS, in
line with the requirements of Treasury’s trigger points.

Note – Due to current legislative restrictions within the Charities Act, charitable NDPBs will continue
to prepare their accounts in accordance with the Charities SORP, which draws from current UK
GAAP. This checklist should therefore not be used for charities, unless IFRS-compliant consolidation
schedules are required for Resource Accounts or Whole of Government Accounts purposes.
SECTION A - OVERALL SUMMARY OF MANAGEMENT ACTIONS

Background
This section summarises the management actions that are required to implement IFRS successfully. In
completing this section you will want to draw on information gathered in Section B.
Management will need to ensure that sufficient steps are taken to successfully implement IFRS and
the IFReM. In particular, management will wish to review their activities and their organisation so
that they are aware of the impact of the transition to the new standards and that they have sufficient
resources and knowledge to ensure a successful transition.

PREPARATION – RESOURCES AND KNOWLEDGE Comment

1. What are the key impacts on the organisation

and its financial reporting arising from the
implementation of IFRS?

2. What are the key changes to accounting

policies?

3. What level of resource is required to

successfully manage the transition?

4. What IFRS staff training is required?

Note – Consideration should be given to training
finance and non-finance staff (such as
procurement staff and business managers) in the
impacts of IFRS.

5. What actions are required to ensure that

bodies that are consolidated into the financial
statements will successfully implement IFRS?

6. What role do internal audit have in aiding the

transition?

7. What is the potential impact on the accounts

preparation timetable as a result of the transition
to IFRS?

8. How is management planning to keep the Audit

Committee informed of the timetable and
progress being made towards adoption of the
revised standards?

9. What is the potential budgetary impact of the

move to IFRS?

10. How and when will engagement with the

external auditor take place?

11. Will the 2008-09 Accounts include a

statement on preparedness and the potential
impact of the transition to IFRS?

PREPARATIONS – SYSTEMS AND DATA

12. What implications to the configuration of

financial systems arise as a result of the
transition to IFRS?

13. For what balances and disclosures is there a

need to capture new and revised data with
regard to IFRS?
Note – Areas such as leases, financial
instruments and fixed assets may require
additional data capture.

14. How do management accounting processes

need to be re-engineered to ensure they are
compatible with IFRS?

15. Has the accounts format been altered to

ensure it is line with the new requirements of the
IFReM?
Note – The format should agree with IFRS
Department Yellow, IFRS Agency Pink, IFRS NDPB
Green and IFRS Magenta Pension Scheme
Accounts, as appropriate.
(http://www.financial-
reporting.gov.uk/proformas.htm)

16. Are parallel systems needed for 2008-09, for

IFRS and FRS based information, to ensure that
comparative information can be accurately
produced?
SECTION B – ACCOUNTING CHANGES

FIRST TIME ADOPTION

Background
In April 2008 the Treasury announced the Trigger Points for the implementation of IFRS in the lead up
to the first set of IFRS compliant accounts for the year ending 31 March 2010. IFRS shadow accounts
for 2008-09 will also be produced.

Key dates are now as follows:

 30 September 2008 – reporting entities should have completed the restatement of 31 March
2008 balances into an IFRS basis;
 31 December 2008 – completion of NAO audit of 31 March 2008 balance sheet restatement;
 10 September 2009 – reporting entities should have completed their 2008-09 shadow accounts
and passed to the NAO; and
 31 December 2009 – the NAO should have completed its dry-run audit of the 2008-09 shadow
accounts.

Management will need to ensure that they are able to produce financial reporting information on an
IFRS basis to feed into restated comparatives. Until 31 March 2009 management will also need to
produce information on the current UK GAAP basis for their 2008-09 published financial statements. In
overview there is a need for organisations to:

 Assess the areas of impact on their accounts;

 Capture the required data for the restatement figures required by the trigger points;
 Assess the impact of the revised standards on the format of their financial statements; and
 Review their accounting policies to identify any required revisions.

Entities will need to consider the following standards in their first time adoption review process:

 IFRS 1 - First Time Adoption of IFRS;

 IAS 1 – Format of the Accounts;
 IAS 8 – Accounting Policies

FIRST TIME ADOPTION OF IFRS - IFRS 1

Background
IFRS 1 sets out detailed rules that entities must follow when adopting IFRS for the first time.

The standard also sets out a number of exemptions that may be applied when adopting IFRS.
However, for UK Government implementation Treasury have clearly stated that adjustments should
only be made if they are material.

If an entity wishes to apply either of these exemptions a full audit trail must be produced to outline
the assessment and sufficient evidence must be provided to evidence that the application of the
exemption is appropriate.

The main issues that bodies need to be aware of when adopting IFRS 1 are:
 A full audit trail for all adjustments from UK GAAP to IFRS will be required;
 Additional reconciliations and disclosures will need to be produced, see detailed sections
below;
 A significant amount of analysis and documented evidence will be required even when
proving ‘nil’ adjustments;
 Key issues need to be flagged early and discussed with auditors to ensure there is timely
agreement on accounting treatment;
 The length of disclosures within the accounts as a result of IFRS will be increased;
 Early engagement with Audit Committees is essential to ensure they are aware of the process
and the impact of the change to IFRS; and
 Significant investments in terms of time and resources are likely to be required to ensure
that all issues with IFRS are resolved, especially for more complex accounts.
The Treasury has adapted the rules of IFRS 1 in the IFReM. This section reflects these adaptations and
interpretations.
IFRS 1 – Areas of impact Yes/No/Not applicable

Process
17. Has full consideration been given to the key
issues for applying full retrospective restatement
of IFRS required by the Treasury’s Trigger Points?

Restatement of Balances
18. Has a restatement of the Balance Sheet as at
31 March 2008 been carried out and submitted to
the NAO by 30/09/2008?

19. Are plans in place for the production of a full

set of shadow accounts for the 2008-09 financial
year leading to the 10 September 2009 Trigger
Point for the following:

 Balance Sheet as at 31 March 2009

 OCS/Income Statement for the year
ended 31 March 2009
 Cash Flow Statement for the year ended
31 March 2009
 Notes to the Accounts
 Statement of Operating Cost by
Departmental Aim and Objective
(resource accounts only)

Note – As stated in the new estimates manual,

the Statement of Parliamentary Supply for
Departments is not to be restated as a result of
the adoption of IFRS.

Disclosure of the Impact of IFRS

20. Have plans been developed for producing
additional disclosure notes outlining the effect of
the adoption of IFRS, including the following,
where the adjustments are material?

 A reconciliation of equity (net assets)

under FRS to equity under IFRS as at 1
April 2008.
 A reconciliation between net operating
costs for the year 2007-08 reported
under UK GAAP and as reported under
IFRS where this is not explained through
the reconciliation of taxpayer’s equity;
 A disclosure note of any required
impairment due to the adoption of IFRS.

Note - Clients cannot use the adoption of IFRS to

make corrections to inappropriate policies under
UK GAAP, or the inappropriate application of
legitimate policies. Where past errors are
identified as part of the IFRS implementation,
they should be disclosed separately; these
reconciliations should clearly identify the impact
of IFRS only.
FORMAT OF THE ACCOUNTS - IAS 1
Background
IAS 1 is less prescriptive than UK GAAP with regard to the structure and format of accounts. The
IFReM sets out a prescribed format for government entities that must be applied and removes some of
the options within IAS 1, for example the IFReM states that a Statement of Changes in Equity must be
prepared, removing the option to produce a Statement of Recognised Income and Expenses. Entities
should refer to the IFREM IFRS based Department Yellow, Agency Pink and NDPB Green for an
indication of appropriate format of statements and accounts.

IAS 1 - Areas of impact Yes/No/Not applicable

21. Has the format of the accounts, including

accounting policies, significant judgements and
disclosure notes, been considered to become IFRS
compliant?

Note – The format should agree with IFRS

Department Yellow, IFRS Agency Pink, IFRS NDPB
Green and IFRS Magenta Pension Scheme
Accounts, as appropriate.
(http://www.financial-
reporting.gov.uk/proformas.htm)

22. Has the format of accounts been discussed

with the auditors? (This should be considered in
the audit of the 31/03/08 restatement of
balances.)
ACCOUNTING POLICIES – IAS 8
Background
Accounting policies are defined in IAS 8 as the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements. Some revisions to
accounting policies will be required as a result of the adoption of IFRS and the private sector saw a
significant increase in the length of accounting policy disclosures in the financial statements as a
result of the transition to IFRS. This increase in length was largely due to the need to provide more
explanation on application of the standards, but also due to the requirement to explain areas of
judgement and an indication of uncertainties in accounting estimates.

The adoption of IFRS is an opportunity for clients to revisit their accounting policies and ensure that
they comply with the guidance in all areas.

IAS 8 – Areas of impact Comment

23. Is the entity reviewing its accounting policies

to confirm that they are compliant with the
requirements of IFRS and the IFReM?

Areas that entities will commonly need to revise

include:
 Consolidation and boundary issues (for
non-departments only).
 The use of fair value for land and
buildings fixed assets and the entity’s
approach to valuation of the assets.
 The use of fair value or depreciated
historic cost for non-property assets.
 The approach used to valuing financial
instruments.
 The approach to valuing and
depreciating intangible non-current
assets.
 The application of the revised
inventories guidance (where applicable).
 The calculation of employee benefits
accruals.
 The application of the revised related
parties guidance.
 The explanation of significant areas of
judgement and uncertainties in
accounting estimates.
 The approach to recognising and
accounting for PPP / PFI arrangements.

24. Are there any adjustments to existing policies

which, whilst not strictly required for IFRS
purposes, are proposed to aid the clarity and
understanding of the financial statements?
CONSOLIDATION AND BOUNDARY ISSUES
Background
In addition to the review of implementation procedures, policies and the format of the accounts,
entities need to assess the impact of IFRS on their accounting boundary.

The IFReM states that the departmental boundary is different from the concept of a group under
generally accepted accounting practice: it is based on in-year budgetary control and not on strategic
control. The IFReM also gives details of bodies both inside and outside the departmental resource
accounting boundary, with NDPBs specifically excluded.

However, there may be some impact on NDPBs and Trading Funds as they will be applying the
consolidation and boundary standards in full.

The standards that entities need to consider in this area are:

 IAS 27 – Subsidiaries;
 IAS 28 - Associates; and
 IAS 31 - Joint Ventures.

IAS 27, 28, 31 – Areas of impact Comment

25. What are the effects of IFRS on the

accounting boundary?

SUBSIDIARIES – IAS 27 Comment

For those entities that are not specifically

outlined in the IFReM as outside of the
accounting boundary (see IFReM chapter 4.2.12),
under IAS 27 all subsidiaries must be
consolidated. Subsidiaries are defined in terms of
control, defined as “the power to govern the
financial and operating policies of an enterprise
so as to obtain benefit from its activities”.

26. Are there relevant relationships which

demonstrate the following factors that indicate
control and may, as a result, impact on the
financial statements?

(Note – one or more of these factors will be

judged to indicate control and it is the
theoretical ability to control, not the exercise of
it which is relevant)
 Ownership of more than 50% of the
voting power.
 Power over more than 50% of the voting
rights.
 Power to govern financial and operating
policies.
 Power to appoint or remove the
majority of the members of the board of
directors.
 Power to cast the majority of votes at
meetings of the board of directors.

27. Are there changes to the entity’s

consolidation process as a result of IFRS?
ASSOCIATES – IAS 28 Comment

Under IAS 28, investors must use the equity

accounting method to account for all associates.
Associates are classified as such if the investor
has significant influence over the investee, being
“the power to participate in the financial and
operating policy decisions of the investee but not
control or joint control over those policies”.

28. Are there relevant relationships which

demonstrate the following that indicate
significant influence?

(Note – As for control, one or more or these

factors will indicate significant influence)

 Representation on the board (greater

than 20% of the voting power results in
significant influence).
 Participation in the policy making
process.
 Material transactions with the investee.
 Interchange of managerial personnel.
 Provision of essential technical
information.

29. Are there changes to the bodies which will be

equity accounted as a result of the transition to
IFRS?

JOINT VENTURES – IAS 31 Comment

Joint ventures are defined in terms of a

contractual arrangement, “whereby two or more
parties undertake an economic activity that is
subject to joint control”.

Note – IAS 31 only applies when decisions require

unanimous consent. Three types of joint
ventures are identified, jointly controlled
operations, jointly controlled assets and jointly
controlled entities.

30. What contractual arrangements whereby two

or more parties undertake an activity that is
subject to joint control, and unanimous consent
is required to take decisions, exist?
31. If such arrangements exist then is the body
accounting for them as follows, dependent on the
nature of the arrangement?

Jointly controlled operations:

 The assets it controls and the liabilities
it incurs.
 The expenses it incurs.
 Its share of the joint venture income.

Jointly
controlled assets:
 Its share of the jointly controlled assets.
 Any liabilities it has incurred directly.
 Its share of any liabilities incurred
jointly.
 Its share of the joint venture income and
expense.
 Any expenses it has incurred.

Jointly controlled entities – the venturer will

need to apply one of the following treatments:
 Proportional consolidation.
 The equity method of accounting for the
entity.
INVESTMENTS
Background
Generally the impact of IFRS on investments is restricted to the Financial Instruments standards, IAS
32 and 39 and IFRS 7, equivalent to FRS 25, 26 and 29 to be implemented in 2008-09 under UK GAAP
and the FReM. However, there are two specific areas where other standards may affect the
accounting for investments:

 Non-current assets held for sale – IFRS 5; and

 Investment property – IAS 40.

If an entity has any assets that it is planning to sell, or property that is held as an investment, then
these standards will apply.

IFRS 5 applies to a disposal group (group of assets and associated liabilities to be disposed of by sale
or otherwise together as a group in a single transaction) and non-current assets held for sale (that are
not under the scope of financial instruments or IAS 40 Investment Property).

IAS 40 defines investment property as “property held to earn rentals or for capital appreciation or
both, rather than for: use in the production or supply of goods and services; for administrative
purposes; or sale in the ordinary course of business”.

Note - There is no link between assets held for sale and discontinued operations. Discontinued
operations will not have a significant impact in the public sector as the IFReM states that machinery
of government transfers do not count as discontinued operations.

NON-CURRENT ASSETS HELD FOR SALE AND

DISCONTINUED OPERATIONS – IFRS 5

IFRS 5 – Areas of impact Yes/No/Not applicable

32. Are non-current assets held for sale classified

appropriately and shown separately on the
Balance Sheet?

33. Are all such assets valued at the lower of

carrying amount and fair value less costs to sell
and not being depreciated?

34. Has any impairment as a result of the change

in valuation to lower of carrying amount less
costs to sell been recognised?

Note – The recognition of subsequent gains is

allowed, but only to the extent that they
reverse any impairment loss.

INVESTMENT PROPERTY – IAS 40

IAS 40 – Areas of impact Yes/No/Not applicable

35. Is the entity holding investment properties at

fair value and not depreciating them?

Note – The option to value investment property

at depreciated historic cost has been removed by
the IFReM.

36. Is the entity passing all revaluation

gains/losses related to investment property
through the OCS?

37. Is the entity classifying investment properties

that they have developed for sale as stock?
38. Is investment property that is to be occupied
by the entity being, correctly, classified as
property, plant and equipment?
NON-CURRENT ASSETS
Background
The transition to IFRS with regard to non-current (fixed) assets will affect the majority of entities
within the public sector. The international standards require some significant changes in accounting
treatment that will result in adjustments for most entities.

The standards that impact on the accounting for non-current assets are:

 IAS 16 – Property, Plant and Equipment;

 IAS 38 – Intangible Assets;
 IAS 23 – Borrowing Costs;
 IAS 36 – Impairment.

Note – These standards do not apply to assets held for sale, biological agricultural assets,
exploration and evaluation assets, mineral rights and reserves, or investment properties.

PROPERTY, PLANT AND EQUIPMENT – IAS 16

Background
IAS 16 is similar to the equivalent UK standard, FRS 15, in many respects though there are some
changes in emphasis and new rules. These are highlighted below.

There is the opportunity for entities to revisit their accounting for non-current assets as a result of
the adoption IFRS and introduce a more component based approach. This will require material
components of non-current assets to be capitalised and depreciated separately, which will allow a
more accurate reflection of the consumption of economic benefits and the recapitalisation of
components when they are replaced. However, we advise entities to take a pragmatic approach to
the recognition of components under IAS 16 and only recognise components if there is a clear case for
doing so.

The applicability of IAS 16 to infrastructure and heritage assets is detailed in the IFReM in Chapter 6.

IAS 16 – Areas of impact Yes/No/Not applicable

39. Is the entity valuing property fixed assets:

 At valuation and not historic cost?

 Using the most appropriate method?

Note - Options include: quinquennial valuation

supplemented by indexation and no interim
valuations, annual valuation, or a rolling
programme of revaluation. The option given in
IAS 16 to measure at cost has been withdrawn by
the IFReM, as has the option to value only
certain classes of assets.

 At fair value using a method determined

by valuers?
 As assets under construction as
appropriate?
 Using the most appropriate reserve to
record the revaluation (revaluation
reserve, donated asset reserve or
government grant reserve)?

40. Is the entity recognising and valuing non-

property fixed assets at fair value, or
depreciated historic cost for assets with a short
life or low value?

41. Is the entity capitalising donated assets at

fair value with the credit entry made to the
donated asset reserve?

42. Is the entity capitalising subsequent

expenditure when it is probable economic
benefits will flow and the costs can be measured
reliably?

(Note - The requirement under FRS to extend

the economic life of the asset has been
removed)

43. Is the entity taking revaluation losses first to

reserves then to the OCS for any loss in excess of
previous revaluation gains?

(Note – The relevant reserve must be used,

donated assets to the donated asset reserve,
grant financed to government grant reserve)

44. Do any of the entity’s non-current assets have

a residual value?

Note - If so then this residual value, where

material, must be revisited at every Balance
Sheet date with depreciation adjusted
accordingly.

45. Is the entity valuing assets that have been

purchased for non-monetary assets at fair value?
INTANGIBLE FIXED ASSETS – IAS 38
Background
There are substantial differences between IAS 38 and the equivalent UK standard FRS 10, regarding
the identification of assets and the capitalised costs of such assets. There is the potential for
adjustments to be required on adoption of IAS 38 for some entities.

The Treasury have adapted the rules of IAS 38 in the IFReM and, as a result, we are not expecting
significant additions or removals from entities’ balance sheets. However, where there is a clear case
for capitalisation of intellectual property and database type assets, they should be recognised.

IAS 38 – Areas of impact Yes/No/Not applicable

46. Is the entity recognising intangible assets

when they are separately identifiable from the
business and meet the criteria of IAS 38 (as
opposed to the requirement for assets to have an
available market prior to recognition under FRS
10)?

Note - There is no presumption under IAS 38 that

intangibles have a finite Expected Useful Life,,
unlike under FRS 10. However, if the entity
chooses an infinite life for an intangible asset
then annual impairment reviews must be carried
out.

47. Is the entity holding intangible assets at the

appropriate valuation?
 On first time adoption, IAS 38 allows
entities to elect to used deemed cost for
initial recognition of the intangible asset
where that asset meets the recognition
criteria in IAS 38 and the revaluation
criteria. That deemed cost may be fair
value, or cost or depreciated
replacement cost (DRC). Under IFRS 1 an
entity can only elect to use these routes
if the intangible asset meets both
recognition criteria in IAS 38, including
reliable measurement of original cost.
Thus, an entity can only use
retrospective capitalisation where it
holds reliable original cost information
in relation to the internally generated
asset.
 For subsequent measurement IAS 38
allows the use of either the cost or
revaluation model for each class of
intangible asset. The IFReM has
withdrawn the option to value intangible
assets at cost. Where an active market
exists intangible assets should be
measured at fair value and where it does
not, intangible assets should be
measured using indices or some suitable
alternative to assess the DRC of
intangible assets which is a proxy for fair
value.

Note – Intangibles will have to be retrospectively

valued at the date of adoption of IFRS.

48. Is the entity capitalising development costs

(they must be capitalised under IAS 38, unlike
under FRS where this was optional)? To do so, has
the entity been able to demonstrate the
following:
 the technical feasibility of completing
the intangible asset so that it will be
available for use or sale;
 its intention to complete the intangible
asset and use or sell it;
 its ability to use or sell the intangible
asset;
 how the intangible asset will generate
probable future economic benefits.
Among other things, the entity can
demonstrate the existence of a market
for the output of the intangible asset or
the intangible asset itself or, if it is to
be used internally, the usefulness of the
intangible asset;
 the availability of adequate technical,
financial and other resources to
complete the development and to use or
sell the intangible asset; and
 its ability to measure reliably the
expenditure attributable to the
intangible asset during its development.

49. Is the entity capitalising internally generated

software as an intangible asset?

Note – Under the UK FReM internally generated

software was capitalised as a tangible asset
(chapter 7.4.40).

50. Is the entity expensing website costs rather

than capitalising them, unless the entity can
prove that the site is used to deliver future
service potential?

Note – If the website is simply for the purpose of

informing stakeholders of the services or
objectives of the reporting entity the costs
should not be capitalised.

BORROWING COSTS – IAS 23

Background
IAS 23 sets out the accounting treatment for borrowing costs. The standard requires borrowing costs
to be capitalised when they relate to fixed assets, removing the option to capitalise under FRS 15.

The IFReM states that cost of capital is outside the scope of IAS 23 and, therefore, should not be
capitalised.

IAS 23 – Area of impact Yes/No/Not applicable

51. Is the entity capitalising any finance costs

related to fixed assets while being prepared for
intended use or sale (except cost of capital)?

IMPAIRMENT – IAS 36 (APPLIES TO LAND, BUILDINGS, MACHINERY AND EQUIPMENT, INTANGIBLES,

AND ASSETS CARRIED AT REVALUED AMOUNTS UNDER IAS 16 AND IAS 36)
Background
IAS 36 is similar to the equivalent UK standard, FRS 11, though there are some areas of difference
with regard to the accounting and measurement of impairments.

IAS 36 – Areas of impact Yes/No/Not applicable

52. Are impairments allocated to a relevant

revaluation reserve first, at all times, when an
asset is found to be impaired?

Note - Unlike under FRS where impairment for a

permanent diminution is taken to the OCS.

53. Is the entity assessing impaired assets by

comparing the carrying value with the higher of
fair value less costs to sell and value in use?

54. Where an asset is not held for the purpose of

generating cash flows, is the entity calculating
the value in use with reference to the cost of
replacing the service potential provided by the
asset?

55. Where applicable, is the entity not

depreciating goodwill and carrying out annual
impairment reviews as required by IAS 36?

ACCOUNTING FOR PPP ARRANGEMENTS, INCLUDING PFI CONTRACTS, UNDER IFRS

Background

Under IFReM most PPP / PFI assets will come onto the public sector balance sheet.

The accounting treatment under IFRS is determined by whether the PPP arrangement, including PFI
contracts, meets the definition of a service concession arrangement under IFRIC 12 Service Concession
Arrangements. If the definition is met, the asset will be on the grantor’s balance sheet, valued in the
same way as other assets of that generic type, with the liability valued accordingly with reference to
the capital value of the contract.

The standards that apply to PPP arrangements, including PFI contracts, are:
 IFRIC 12 Service Concession Arrangements
 IAS 17 Leases

Comment

56. Does the arrangement meet the definition of

a service concession arrangement under IFRIC 12?

A service concession arrangement is one which

contractually obliges the private sector operator
to provide the services related to the particular
infrastructure to the public on behalf of the
grantor (the public sector).

In addition, the grantor must:

 Control or regulate what services the
operator must provide with the
infrastructure, to whom and at what
price; and
 Controls, through beneficial entitlement
or otherwise, any significant residual
 interest in the infrastructure at the end
of the term of the arrangement.

57. Has the PPP / PFI contract been accounted

for as on balance sheet when there has been a
clear case that control and residual value have
been transferred to the private sector operator?

58. Does the infrastructure asset meet the

criteria for capitalisation?
 Probability of future economic benefit?
 Reliable measurement of cost?
These should be recognised in accordance with
IAS 16 and valued in the same way as other non-
current assets of a similar type.

59. How is the arrangement to be accounted for?

 Can separate arrangements within the

contract relating solely to the
infrastructure asset be identified?

If so, then the asset will be measured as under

IAS 17 Leases, with the service element and the
interest charge recognised as incurred over the
term of the engagement.

 Is there a unitary payment stream that

includes infrastructure and service
elements that cannot be separated?

In this case, the service element of the payment

must be estimated. The fair value of the asset
determines the amount to be recorded as an
asset together with an offsetting contract
liability payable.

In both cases the liability is only for the capital

element of the contract obligation. The interest
charge and the service elements should be
expensed in the OCS.

60. Has the correct interest rate implicit in the

contract been used?
 For contracts signed before 1 April 2008
the grantor should use the risk free
market rate at the time the contract
was signed as published by the Treasury
on the FReM website (www.financial-
reporting.gov.uk)
 For contracts signed after 1 April 2008
the rate should be calculated using a
formula based on the long-term nominal
interest rate and the inflation rate, as
published in the Treasury’s Pocket Data
Bank. There is guidance on this formula
and a link to the Data bank on the FReM
website. (www.financial-
reporting.gov.uk)

61. Where the arrangement is on balance sheet

whereas previously it was off balance sheet
under UK GAAP:
 Has the non-current asset been
measured in the same way as other non-
 current assets of that generic type at
the opening balance sheet date?
 Has the liability been measured at its
fair value with reference to the capital
value of the contract?
62. Has the subsequent measurement of the non-
current asset been done using an appropriate
asset revaluation approach?

Have liabilities been measured using the

appropriate discount rate?

63. Has any revenue received under any revenue

sharing provision in the service concession
arrangement been recognised in line with IAS 18
Revenue?

64. Have any guarantees by the grantor to the

operator made as a part of the arrangement been
appropriately accounted for under IAS 32 and 39?

INVENTORIES
Background
The standards that apply to inventories are:

 IAS 2 – Inventories;
 IAS 11 – Construction Contracts
 IAS 41 - Agricultural Assets.

Inventories are defined as “assets held for sale in the ordinary course of business; or in the process of
production for such sale; or in the form of materials or supplies to be consumed in the production
process or in the rendering of services”.

Entities that are inventory rich may need to review their accounting for their inventories against IAS 2
in detail to ensure that they are adopting the correct approach.

INVENTORIES – IAS 2 – FOR LONG TERM CONTRACT INVENTORY ISSUES SEE CONSTRUCTION
CONTRACTS BELOW. EXCLUDES AGRICULTURAL AND FOREST PRODUCTS, MINERALS AND MINERAL
COMPOUNDS.

Background
IAS 2 and SSAP 9 are similar standards in most respects though there are some minor adjustments to
the accounting and the scope of the standards.

IAS 2 – Areas of impact Yes/No/Not applicable

65. Is the entity accounting for all inventories of

a similar nature and use consistently?

66. Is the entity holding all inventories at current

cost?

Note – as is required by the IFReM.

67. Is the entity valuing inventories using a

method other than Last In First Out (LIFO), as is
specifically stated in IAS 2?
68. Is the entity applying the following detailed
rules for inventories (as stated in the IFReM):

 Stockpile goods (strategic materials held

for use in national defence and
emergencies) – split between fixed
assets and other inventories and
accounted for separately?
 Confiscated, seized and forfeited
property – classified as surrenderable to
the consolidated fund?
 Goods held under price support and
stabilisation programmes (purchased by,
for example, the Rural Payments Agency
under order by the EU) – valued at cost
adjusted by depreciation or revaluation
as prescribed?

CONSTRUCTION CONTRACTS – IAS 11

Background
IAS 11 is similar to the equivalent standard, SSAP 9.

A construction contract is defined as “a contract specifically negotiated for the construction of an

asset or a combination of assets that are closely inter-related or inter-dependent in terms of their
design, technology and function or their ultimate purpose or use”. There is no reference to a
minimum duration for such a contract and the standard applies to all contracts that start in one
reporting period and end in the next. IAS 11 applies to assets such as bridges, buildings, dams,
machines built to customer order and specifications with a negotiated price and bespoke (though not
minimally customised) software contracts.

Note – This standard applies only to entities that develop long term construction contracts for sale,
IAS 2 or IAS 16 will apply to entities that are purchasing such assets.

IAS 11 – Area of impact

69. Is the entity using one of the following

methods to recognise assets: level of costs
incurred, surveys of work performed, completion
of a proportion of the contract and percentage
completion (but only when the outcome of the
contract can be estimated reliably)?

AGRICULTURAL ASSETS – IAS 41

Background
There is no equivalent UK standard to IAS 41. The rules for the treatment of agricultural assets only
apply up to the point of harvest, post harvest IAS 2 Inventories applies.

(Note – This is a specialist standard which will not apply to many entities. The IFReM clarifies that
this standard only applies in the government sector to activities that are undertaken for commercial
gain, which may, or may not, comprise the full entirety of a reporting entity’s operations. IAS 41
does not apply to goods held under price stabilisation programmes.)

IAS 41 – Area of impact Yes/No/Not applicable

70. Is the entity carrying all biological agriculture

assets at fair value less estimated point of sale
costs, with variations in the carrying amount
reported as part of operating costs?
DEBTORS
Background
IAS 39 has one specific rule relating to bad debt provisions that may impact on the government sector.

DEBTORS - IAS 39 Yes/No/Not applicable

71. Is the entity, in general, only providing for

specific bad debts (specifically stated in IAS 39)?

Note – Entities can make a bad debt provision

providing it is based on evidence, with reference
to the current economic environment.

CASH
Background
IAS 7 sets out the format and details of the Cash Flow Statement. The IFReM contains a prescribed
format for the cash flow statement that must be followed. There is, however, one additional rule
within IAS 7 which may impact on some government entities.

CASH FLOW STATEMENT - IAS 7 Yes/No/Not applicable

72. Has the entity followed the format of the

Cash Flow Statement as outlined in IAS 7?

Note – As is stated in the IFReM.

73. Have departments included the additional
note in Chapter 5 of the IFReM, reconciling cash
and cash equivalents due to the consolidated
fund, in the resource accounts format?

74. Is the entity including cash equivalents in the

Cash Flow Statement and the cash line of the
Balance Sheet?

Note – Cash equivalents are defined as short

term, highly liquid investments that are readily
convertible to cash and are subject to a low risk
of changes in value. This is a change in
classification from UK GAAP.
LEASES
Background
IAS 17 is similar in many respects to SSAP 21, but the focus on the assessment of the
finance/operating lease split is based solely on the whether substantially all of the risks and rewards
of ownership of the asset have been transferred to the lessee, removing the 90% test, of the present
value of minimum lease payments as a proportion of the value of the asset, available in SSAP 21.

In addition IAS 27 states that any land and building leases should be subject to separate assessments
for the land and building elements. This is likely to lead to more buildings being included on public
sector balance sheets.

IFRIC 4 extends the scope of the lease based accounting treatment beyond the legal form or leases to
“lease type arrangements”, which will increase the disclosure and recognition requirements for some
entities.

LEASES – IAS 17 Yes/No/Not applicable

75. Following a review of material contracts, are

extensive changes required to ensure that the
classification of operating/finance leases is
correct?

The organisation needs to pay special attention

to any operating leases that are classified as such
due to the strict application of the 90% test
within SSAP 21, as they will need to be revisited
to ensure that the classification is correct along
the following terms.

The lease classification test is based on the

balance of risk and rewards of ownership.
Indicators that a lease should be classified as a
finance lease include:
 The lease transfers ownership to the
lessee at the end of the term.
 The lease contains a bargain purchase
option.
 The present value of the minimum lease
payments covers at least substantially
all of the fair value of the asset.
 The asset is specialised.
 The lessee has an obligation to
compensate for the lessor’s losses.
 The lessee is exposed to the residual
value of the asset.
 The lease can be extended at a rent
substantially lower than the market
rent.

76. Is the entity assessing any arrangements

which do not take the legal form of a lease yet
convey the right to use an asset in return for
payment or a series of payments?

If so IFRIC 4 may require the recognition of a

lease (finance or operating) together with the
appropriate disclosure. (Two criteria must be
met: the arrangement must be based on the right
to use a specific asset; and the arrangement
must contain a right to control the use of an
asset, for example an outsourcing arrangement or
a telecoms contract that provides the right to
capacity/bandwidth). If the arrangement falls
under the scope of IFRIC 4 then the standard risk
and rewards tests will need to be applied to
assess the operating/finance lease split as
detailed above.

77. Is the entity reviewing all finance leases for

land and buildings?

Such leases will need to be revisited and

reassessed using the above classifications as,
under IAS 17, land elements must be separated
from buildings elements in combined leases and
classified as operating leases unless the land
transfers to the lessee at the end of the lease
term.

78. Do any of the entity’s leases include

incentives such as rent free periods or minimum
incremental increases?

If so are they included in the classification

assessment and accounted for appropriately
within the finance/operating lease?

79. Is the entity disclosing operating lease

payments on the basis of the year they are paid
rather than the year in which the commitment
expires?

Note – This is a change to the SSAP 21

requirement.

80. Does the organisation act as a lessor in any

lease transactions? If so the lease will need to be
accounted for as follows:

Finance lease:
 Initially recognise the asset as a
receivable at an amount equal to the
net investment in the lease (gross
investment discounted using the implicit
interest rate).
 Subsequently recognise income on a
pattern reflecting a constant periodic
rate of return on the lessor’s net
investment in the finance lease.

Operating lease:
 Present the asset as appropriate to its
nature.
 Recognise lease income in a straight line
basis over the lease term.
 Include the transaction expenses with
the asset and depreciate in line with the
entities policy.
OTHER AREAS OF IMPACT
Background
IAS 18, IAS 19, IAS 24 and IFRS 8 contain some areas of revised guidance that will impact on the
entities when adopting IFRS.

REVENUE – IAS 18 Comment

(Tax and other revenue streams)

81. Revenue is accounted for in line with the

criteria set out in IAS 18 Revenue. The IFReM
details the treatment of some specific types of
income. SIC 31 Barter Transactions Involving
Advertising Services also applies.

IFReM Chapter 13 details the treatment of

revenue from taxes and duties for HMRC and the
DVLA, this chapter is substantially the same as
the UK-based FReM chapter.

EMPLOYEE BENEFITS – IAS 19 Comment

82. How will an assessment of the levels of

unpaid leave or other accrued employment rights
be determined for inclusion in the account, if
material?

The accrual should be based on the level of

untaken leave at the end of the year, adjusted
subsequently in following accounting periods.
Entities need to ensure that they put in place
processes to capture the data required for the
accrual and develop a pragmatic but defensible
approach to determining the accrual.

83. Is the entity accruing for bonuses in year

where applicable?

RELATED PARTIES – IAS 24 Comment

84. Has the entity considered how related parties

transactions will be captured and disclosed as
required by the interpretations in the IFReM.

For departments, the ministerial titles and names

of all ministers who had responsibility for the
department during the year must be included in
the related parties disclosures.

THE EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES – IAS 21 Comment

Under IAS 21 the average exchange rate method

of retranslation can only be used if it is not
materially different from the spot rates over the
period.

In addition, IAS 21 does not allow organisations to

use the rate stated in a forward contract to
retranslate foreign exchange at the balance
sheet date. The spot rate must be used and a
derivative financial instrument recognised at fair
value for the forward contract.

85. How material are exchange rates to the

organisation and are plans in place to ensure the
spot rate is used, unless it is not materially
different from the average exchange rate?

IFRS 8 – OPERATING SEGMENTS

Background
The treatment under IFRS 8 is significantly different to SSAP 25 as it requires reporting of segments of
an entity’s internal reporting framework. The standard will apply to all non-department entities,
while departments will continue to produce a Statement of Net Operating Costs by Departmental Aim
and Objective, which will provide the necessary segmental information.

Comment

86. What segments would be disclosed, following

the “through the eyes of management” approach
to identifying segments required by IFRS 8?

86. Have disclosures been developed for:

 The basis of measurement of reportable
segments?
 Profit/loss, total assets and total
liabilities for each segment?

Note – The requirement to separate out assets

and liabilities relating to individual segments
may prove difficult for some entities.

 Types of products and services from

which each segment derives its
revenues?
 Interest revenues and interest expenses
for each reportable segment?
SECTION C – LESSONS FROM THE PRIVATE SECTOR

The introduction of IFRS in the private sector caused a number of difficulties. The standards that
created the most problems were IAS 32, 39 and IFRS 7 on Financial Instruments; IAS 27, 28 and 31 on
Subsidiaries, Associates and Joint Ventures; IFRS 2 on Share Based Payment; and IAS 12 on Income
Taxes. IFRS 2 and IAS 12 will not apply to the public sector in general, but the other standards will be
applied, as adapted by the IFReM, which will result in significant impacts for some organisations.

The key lessons from the private sector transition to IFRS are as follows:

 Early preparation is essential to ensure that there is no knock-on impact on the timetables
for the first year of IFRS compliant Accounts;
 The level of disclosure required under IFRS and therefore the length of accounts, increased
significantly as a result of the transition and the new standards;
 For most organisations the impact assessment and understanding of the new standards took
considerably longer than was expected;
 A significant investment in staff training was required;
 Flagging up and discussing key issues and potential areas of difficulty with key stakeholders
early aided smooth transition;
 Board and Audit Committee engagement is crucial, to ensure that they are involved in the
project and aware of the areas of impact and the potential risks involved in the transition.

The NAO believe that a number of these issues will apply equally to the central government
implementation of IFRS. Given the progress the central government entities have made in bringing
forward the laying and publication of accounts to the pre-recess period, it is important that the
process of implementation is well managed to ensure that timetables are not adversely affected.
ANNEX 1: FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS
Background
The financial instruments standards are long and complex and will need a significant effort in terms of
time and resources in some government entities to ensure that the categories and accounting of such
instruments is correct. Some entities may not be affected by the standards but a considerable amount
of work may still be required to ensure that this is the case. The Standards will come into effect on 1
April 2008 in the public sector.

 Financial instruments are defined as, “contracts that give rise to a financial asset of one
entity and a financial liability or equity instrument of another entity”.
 Financial assets are defined as “cash, or an equity instrument of another entity, or a
contractual right to receive cash or another financial asset from another entity”.
 Financial liabilities are defined as “a contractual obligation to deliver cash to another entity
or to exchange financial assets or liabilities on unfavourable terms”.

The major challenge for clients will be to provide a clear audit trail of their assessment of the impact
of the financial instruments standards, which will need to include a method of review of contracts
that may contain financial instruments.

The standards that apply to financial instruments are:

 FRS 25 – Financial Instruments: Presentation;

 FRS 26 – Financial Instruments: Recognition and Measurement;
 FRS 29 – Financial Instruments: Disclosure.

Examples of specific areas where these standards will impact on the central government sector are:

 Derivatives (forward contracts, options, forex contracts);

 Embedded derivatives (see section below for definition);
 Soft or subsidised loans (loans issued or received at less than the market rate); and
 Financial guarantees and letters of comfort.

Entities should note that the Treasury has stated that prior year comparatives will not be restated on
the adoption of these Standards.

Financial instruments – general Yes/No/Not applicable

1. Is the entity identifying all assets and

liabilities that should be recognised as financial
instruments, including assets and liabilities that
have been classified as ‘contingent’ under FRS
(e.g. financial guarantees), derivatives and
embedded derivatives?

Note – See FReM paragraph 9.1.8 (e) for the

treatment of Financial Guarantees.

Financial Instruments – Assets

Fair Value through profit and loss (FVTPL) Yes/No/Not applicable

Note – reclassification into or out of the fair

value through profit or loss category while an
asset is held is prohibited.

2. Is the entity working towards identifying all

assets to be categorised as at FVTPL?

Assets designated as at fair value through profit

and loss
3. If the entity is categorising assets (or
liabilities) at fair value through profit or loss is
this because:

 The categorisation eliminates or

significantly reduces a measurement or
recognition inconsistency that would
arise from measuring assets or liabilities
on different bases?

Note – This is called accounting mismatch – i.e. if

an entity has associated assets and liabilities,
then they should be accounted for using the
same basis to ensure there is no inconsistency,
for example if an organisation borrows and then
uses all of the funds to buy shares, then the
most accurate treatment is to value both the
debt and equity on the same basis – FVTPL.

 The entity manages performance on a

fair value basis – i.e. an organisation
that aims to make money by buying or
selling shares or debt?
 A contract contains one or more
embedded derivatives and therefore the
whole contract is classified as at fair
value to avoid any confusion or
requirement to split out the embedded
derivative?

Note – The Treasury must be informed of any

designated Financial Instrument at FVTPL so that
they are aware of the budgeting implications.

Assets categorised as held for trading – Note all

derivatives must be classified as held for
trading.

4. If the entity is categorising assets as held for

trading, and therefore at FVTPL, is this because
they meet the following criteria:

 The assets have been acquired

principally for the purpose of sale in the
near term?
 The assets are part of a portfolio of
instruments that are managed together
and for which there is evidence of short
term profit taking?
 The assets are derivatives and therefore
must be classified as at FVTPL (where
hedging does not apply)?

Held to maturity Yes/No/Not applicable

Held to maturity assets are defined as

“instruments with fixed or determinable
payments and fixed maturity that an entity has
the positive intention and ability to hold to
maturity, other than those that are initially
recognised at fair value through profit and loss or
as available for sale or that meet the definition
of loans and receivables”.

5. Is the entity working towards identifying all

financial instruments that are to be held to
maturity?

6. Is the entity demonstrating a positive intent

and ability to hold all assets categorised as held
to maturity to the end of the contract term?

7. Is the entity using the effective interest rate

method to value assets classified as held to
maturity?

Note – See www.financial-reporting.gov.uk for

an example of the effective interest rate
method.

8. Is the entity not categorising any assets as held

to maturity if the liability holder has the right to
settle at less than amortised cost?

9. Is the entity not categorising equity

instruments as held to maturity (as they are
judged to have an indefinite life)?

10. Is the entity categorising variable interest

rate instruments as held to maturity if the option
is taken to classify them as such?

11. Is there any evidence of tainting of held to

maturity assets?

Note – This occurs if an organisation sells some

held to maturity assets before the maturity
date. This calls into question the entity’s intent
to hold to maturity and therefore all such assets
are re-categorised as available for sale. No
comparative restatement is required. Once a
two year period has elapsed post-tainting assets
can be transferred back to held to maturity
providing intention can be shown. In this case
fair value at the time is the new amortised cost.

Loans and receivables Yes/No/Not applicable

Loans and receivables are defined as “non-

derivative financial assets with fixed or
determinable payments that are not quoted in an
active market, other than those that are to be
sold in the short term (held for trading) and
those that the entity on initial recognition
designates as at fair value through profit and loss
or available for sale”.

12. Is the entity working towards identifying all

loans and receivables and only categorising
financial instruments as loans and receivables if
they meet the definition?

13. Is the entity valuing all such assets at

amortised cost using the effective interest rate
method?

Note – See www.financial-reporting.gov.uk for

an example of the effective interest rate
method.
14. Is the entity only categorising assets as loans
and receivables if they have been created by
providing money, goods or service to a debtor?

Note - Examples include deposits held in banks,

trade receivables, loan assets, loans acquired in
syndication and other loans purchased in a
secondary market provided that they are not
quoted.

15. Is the entity holding assets in the loans and

receivables category consistently and not
transferring any assets out of the category?

Note – The transfer of assets out of the loans

and receivables category is specifically not
allowed by the standard.

Available for sale Yes/No/Not applicable

Examples of available for sale assets include:

equity investments that are not designated on
initial recognition as at fair value through profit
and loss; debt securities quoted on an active
market; and other financial assets held for
liquidity purposes.

Note – There is no definition of available for sale

assets, they are simply assets that are not
classified as at FVTPL, held to maturity or loans
and receivables.

16. Is the entity working towards identifying all

assets to be categorised as available for sale?

Note – This will mainly be through identifying all

other financial instrument assets first. The
available for sale categories comprises the
remainder of the Financial Instrument assets.

17. Is the entity measuring all assets categorised

as available for sale at fair value, with
gains/losses recognised in equity and recycled
through the income statement on sale?

Financial Instruments - Liabilities

Most liabilities in the public sector will generally

be held at amortised cost except for derivatives.
Liabilities must be classified as at FVTPL if they
are held for trading, or alternatively the entity
can designate liabilities as at FVTPL if
appropriate criteria are met.

Fair value through profit and loss Yes/No/Not applicable

Liabilities categorised as at FVTPL can be

designated as such by the entity or are
categorised as FVTPL because they are held for
trading.

18. Is the entity categorising liabilities as held for

trading because the liabilities are: incurred with
the intention of repurchasing them in the near
term; part of a portfolio of instruments that are
managed together and for which there is
evidence of short term profit taking; or
derivative liabilities (unless part of a hedge)?

19. Is the entity designating all liabilities as at

FVTPL if:
 The categorisation eliminates or
significantly reduces a measurement or
recognition inconsistency that would
arise from measuring assets or liabilities
on different bases?

Note – This is called accounting mismatch – i.e. if

an entity has associated assets and liabilities,
then they should be accounted for using the
same basis to ensure there is no inconsistency,
for example if an organisation borrows and then
uses all of the funds to buy shares, then the
most accurate treatment is to value both the
debt and equity on the same basis – FVTPL
.
 The entity manages performance on fair
value basis – i.e. a bank that aims to
make money by buying or selling shares
or debt?
 A contract contains one or more
embedded derivatives and therefore the
whole contract can be classified as at
fair value to avoid any confusion or
requirement to split out the embedded
derivative?

Note – The Treasury must be informed of any

designated Financial Instrument at FVTPL so that
they are aware of the budgeting implications.

Other financial liabilities – all those that are Yes/No/Not applicable

not held at FVTPL – all valued at amortised
cost.

20. Is the entity valuing all financial liabilities

not categorised as at FVTPL at amortised cost
using the effective interest rate method?

Financial instruments – Derivatives Yes/No/Not applicable

A derivative is defined as a financial instrument

with the following characteristics:

 Its value changes in response to the

change in a specified interest rate,
price, commodity price, forex rate,
index of prices or rates, credit rating or
index, or other variable.
 It requires no initial net investment or
initial investment that is smaller than
would be required for other types of
contracts that would be expected to
have a similar response to changes in
market factors.
 It is settled at a future date.

21. Is the entity working towards identifying all

derivatives that meet the above definition?
22. Is the entity valuing all such derivatives at
FVTPL, except when hedge accounting is applied?

Financial Instruments - Embedded Derivatives Yes/No/Not applicable

Embedded derivatives are defined as: “a

component of a hybrid instrument that also
includes a non-derivative host contract with the
effect that some of the cash flows vary in a way
similar to a stand-alone derivative, such that it
requires that some or all of the cash flows will be
modified according to a specified interest rate,
financial instrument price, commodity price,
foreign exchange rate, index of prices or other
variable”. If a derivative is identified then it can
either be separated from the host contract or
left with the contract, depending on the nature
of the relationship between the two elements.

Embedded derivatives will be an issue for entities

in the implementation process, as they will need
to carry out a detailed review of their contracts
to identify hybrid contracts that contain
separable elements.

23. Is the entity working towards identifying all

embedded derivatives that meet the definition
by reviewing contracts that may contain such
derivatives?

24. Is the entity separating all embedded

derivatives from host contracts when:
 The economic characteristics and risk of
the embedded derivative are not closely
related to the economic risks and
characteristics of the host contract?
 A separate instrument with the same
terms as the embedded derivative would
meet the definition of a derivative?
 The hybrid instrument is not measured
at fair value with changes in fair value
recognised in profit and loss?

25. Is the entity valuing all embedded derivatives

separated from the host contract at FVTPL, as for
other derivatives?

Financial Instruments – Measurement Yes/No/Not applicable

26. Is the entity initially valuing all financial

instruments entered into since 1 April 2008 at
Fair Value – e.g. the transaction price?

Note – See FRS 26 Appendix A, paragraphs AG 69-

82 for details on the assessment of fair value.
Indications of fair value include: transaction
price; market price; market price of a similar
instrument; discounted cash flow analysis; and a
range of other valuation techniques for
specialised instruments.
27. Is the entity adding transaction costs to the
fair value of all assets or deducting them from
the fair value of liabilities that are not classified
as at FVTPL?

Note – Therefore for all assets or liabilities that

are held at amortised cost, the transaction costs
are included in the calculation of the Effective
Interest Rate.
28. Is the entity recognising all transaction costs
in the OCS for assets or liabilities classified as at
FVTPL?

Subsequent measurement Yes/No/Not applicable

29. Is the entity valuing all financial instruments

classified as at FVTPL at fair value?

30. Is the entity valuing all financial instruments

classified as held to maturity at amortised cost
using the effective interest rate method (Internal
Rate of Return)?

31. Is the entity valuing all loans and receivables

at amortised cost using the effective interest
rate method (Internal Rate of Return)?

32. Is the entity is valuing all financial

instruments classified as available for sale as
follows: at fair value with movements going
through equity, except for the following which
are recognised in the OCS: interest calculated
using the effective interest rate method;
impairment losses; forex gains; and losses on
monetary assets?

In addition, when sold are all fair value

gains/losses recognised in reserves been recycled
through the OCS?

Financial Instruments - Hedging Yes/No/Not applicable

Hedging provides the ability to match the

volatility caused by carrying financial instruments
at fair value. Complex rules and documentation
apply if an organisation is going to implement
hedge accounting.

The rules for individual hedges are complex and

specific, there are three main types:
 Fair value hedge – A hedge of exposure
to changes on fair values of a recognised
asset or liability or an unrecognised firm
commitment.
 Cash flow hedge – A hedge of the
exposure to variability in cash flows that
(i) is attributable to a particular risk
associated with a recognised asset or
liability or a highly probable forecast
transaction and (ii) could affect profit or
loss.
 Hedge of a net investment in a foreign
operation.
33. Is the entity only using hedge accounting if:
 Formal hedge designation and
documentation is in place at its
inception?
 The hedge is expected to be highly
effective?
 The effectiveness of the hedge can be
measured reliably?
 The effectiveness is assessed regularly
and is within 80% and 120%?
 The transactions for cash flow and
forecast transactions are highly
probable?

Note – The Treasury must be informed of any

proposed hedged accounting treatments.