IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

TOPICS INCLUDED

 IFRS 13: Fair Value Measurement

 IFRS 14: Regulatory Deferral Accounts
 IFRS 15: Revenue from contracts with customers
 IFRS 16: Leases
 IFRS 17: Insurance Contracts.
…........................................................................................................................................................

IFRS 13: Fair Value Measurement

Meaning
IFRS 13 Fair Value Measurement applies to IFRSs that require or permit fair value measurements or
disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about
fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a
'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement.

Objective

 defines fair value

 sets out in a single IFRS a framework for measuring fair value
 requires disclosures about fair value measurements.

Key Definition:
Fair Value
The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date

Active Market
A market in which transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis

Exit Price
The price that would be received to sell an asset or paid to transfer a liability
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

Highest and best price

The use of a non-financial asset by market participants that would maximise the value of the asset
or the group of assets and liabilities (e.g. a business) within which the asset would be used

Most advantageous market

The market that maximises the amount that would be received to sell the asset or minimises the
amount that would be paid to transfer the liability, after taking into account transaction costs and
transport costs

Principle market
The market with the greatest volume and level of activity for the asset or liability.

Valuation Technique:

 Market approach – uses prices and other relevant information generated by market transactions
involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities
(e.g. a business)
 Cost approach – reflects the amount that would be required currently to replace the service
capacity of an asset (current replacement cost)
 Income approach – converts future amounts (cash flows or income and expenses) to a single
current (discounted) amount, reflecting current market expectations about those future amounts.

Disclosures:
IFRS 13 requires extensive disclosures to help users of financial statements understand the nature and
risks associated with fair value measurements. Disclosures include information about the valuation
techniques used, the inputs into those techniques, and the sensitivity of the measurements to changes in
assumptions.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

IFRS 14: Regulatory Deferral Accounts

Meaning
IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International
Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral
account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in
subsequent financial statements. Regulatory deferral account balances, and movements in them, are
presented separately in the statement of financial position and statement of profit or loss and other
comprehensive income, and specific disclosures are required.

Objective
The objective of IFRS 14 is to specify the financial reporting requirements for 'regulatory deferral account
balances' that arise when an entity provides good or services to customers at a price or rate that is subject
to rate regulation.

Scope
IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and
has recognised amounts in its previous GAAP financial statements that meet the definition of 'regulatory
deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory liabilities').

Key Definitions
Rate Regulations
A framework for establishing the prices that can be charged to customers for goods and services
and that framework is subject to oversight and/or approval by a rate-regulator

Rate Regulator
An authorised body that is empowered by statute or regulation to establish the rate or range of
rates that bind an entity. The rate regulator may be a third-party body or a related party of the
entity, including the entity's own governing board, if that body is required by statute or regulation
to set rates both in the interest of customers and to ensure the overall financial viability of the
entity

Regulatory Deferral
The balance of any expense (or income) account that would not be recognised as an asset or a
liability in accordance with other Standards, but that qualifies for deferral because it is included,
or is expected to be included, by the rate regulator in establishing the rate(s) that can be charged
to customers
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

Important disclosures:
1. Recognition and Measurement: How regulatory deferral accounts should be recognized and
measured in the financial statements.

2. Presentation: How information about regulatory deferral accounts should be presented in the
financial statements.

3. Disclosure: What disclosures are required to provide users of financial statements with
information about the nature and extent of regulatory deferral accounts, including the accounting
policies applied.

4. Transition: Guidance on how to transition to the new standard, including any retrospective
application or restatement of comparative periods.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

IFRS 15: Revenue from contracts with customers

Meaning
IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such
entities to provide users of financial statements with more informative, relevant disclosures. The standard
provides a single, principles based five-step model to be applied to all contracts with customers.

Objective:
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful
information to users of financial statements about the nature, amount, timing, and uncertainty of revenue
and cash flows arising from a contract with a customer. [IFRS 15:1] Application of the standard is
mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier application is
permitted.

Key Definitions:
Contract
An agreement between two or more parties that creates enforceable rights and obligations.

Customer
A party that has contracted with an entity to obtain goods or services that are an output of the
entity’s ordinary activities in exchange for consideration.

Income
Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than
those relating to contributions from equity participants.

Performance Obligation
A promise in a contract with a customer to transfer to the customer either:

 a good or service (or a bundle of goods or services) that is distinct; or

 a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
Revenue
Income arising in the course of an entity’s ordinary activities.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

Steps to Recognize Revenue:

Step 1: Identify the Contract with the Customer
Step 2: Identify the Performance Obligations in the Contract
Step 3: Determine the Transaction Price
Step 4: Allocate the Transaction Price to the Performance Obligations
Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation

Disclosure Requirements:
IFRS 15 introduces enhanced disclosure requirements to help financial statement users
understand the nature, amount, timing, and uncertainty of revenue and cash flows from contracts
with customers.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

IFRS 16: Leases

Meaning of Lease
IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The
standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for
all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors
continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting
substantially unchanged from its predecessor, IAS 17.

Objective:
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases,
with the objective of ensuring that lessees and lessors provide relevant information that faithfully
represents those transactions. [IFRS 16:1]

Meaning of Lessor and Lessee

Lessor:
1. **Definition:** A lessor is the entity or party that owns an asset and leases it to another party
in exchange for periodic payments.

2. **Role:** The lessor is the owner of the leased asset, and they grant the lessee the right to use
the asset for a specified period, usually in return for lease payments.

3. **Types of Leases:** There are two primary types of leases for lessors:
- **Operating Lease:** The lessor retains ownership of the asset, and the lessee uses it
for a defined period. At the end of the lease term, the asset is typically returned to the
lessor.
- **Finance Lease:** The lessor effectively transfers the risks and rewards of
ownership to the lessee. At the end of the lease term, the lessee may have the option to
purchase the asset.

4. **Accounting for Lessors:** Lessors account for leases differently based on whether the lease
is classified as an operating lease or a finance lease. In an operating lease, the lessor continues to
recognize the leased asset on its balance sheet and recognizes lease income over the lease term. In
a finance lease, the lessor recognizes a lease receivable and removes the underlying asset from its
balance sheet.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

5. **Risk and Ownership:** In an operating lease, the lessor retains ownership and bears the
risks associated with ownership. In a finance lease, ownership is often transferred to the lessee.

Lessee:
1. **Definition:** A lessee is the entity or party that acquires the right to use an asset through a
leasing arrangement with the lessor.

2. **Role:** The lessee is the user of the leased asset, and they make periodic lease payments to
the lessor for the right to use the asset.

3. **Types of Leases:** Lessees can enter into operating leases or finance leases:
- **Operating Lease:** The lessee has the right to use the asset for a limited period,
and at the end of the lease term, the asset is typically returned to the lessor.
- **Finance Lease:** The lessee effectively assumes the risks and rewards of
ownership, and at the end of the lease term, they may have the option to purchase the
asset.

4. **Accounting for Lessees:** IFRS 16 and other accounting standards require lessees to
recognize most leases on their balance sheets. The lessee recognizes a right-of-use asset
representing the right to use the leased asset and a lease liability for future lease payments.

5. **Risk and Ownership:** In an operating lease, the lessee does not assume the risks and
rewards of ownership. In a finance lease, the lessee often takes on a greater degree of risk, and
ownership may be transferred at the end of the lease term.

Disclosure
The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with
information provided in the statement of financial position, statement of profit or loss and statement of
cash flows, gives a basis for users to assess the effect that leases have. Paragraphs 52 to 60 of IFRS 16 set
out detailed requirements for lessees to meet this objective and paragraphs 90 to 97 set out the detailed
requirements for lessors.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

IFRS 17: Insurance Contracts.

Meaning of Insurance
IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure
of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that
an entity provides relevant information that faithfully represents those contracts. This
information gives a basis for users of financial statements to assess the effect that insurance
contracts have on the entity's financial position, financial performance and cash flows.

Objective
IFRS 17 Insurance Contracts establishes the principles for the recognition, measurement,
presentation and disclosure of Insurance contracts within the scope of the Standard. The
objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully
represents those contracts. This information gives a basis for users of financial statements to
assess the effect that insurance contracts have on the entity's financial position, financial
performance and cash flows. [IFRS 17:1]

Types of insurance contracts:

### 1. **Life Insurance:**

- **Purpose:** Provides a payout to beneficiaries upon the death of the insured
person.
- **Types:**
- **Term Life Insurance:** Offers coverage for a specified term. No cash value,
and benefits are paid only if the insured dies during the term.
- **Whole Life Insurance:** Provides coverage for the entire life of the insured.
Accumulates a cash value over time.
- **Universal Life Insurance:** Combines a death benefit with a savings or
investment component. Allows flexibility in premium payments and death benefits.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

### 2. **General Insurance:**

- **Purpose:** Covers various risks and liabilities that are not life-related.
- **Types:**
- **Property Insurance:** Protects against damage or loss of physical property,
including homes, buildings, and belongings.
- **Liability Insurance:** Covers legal obligations arising from injuries or
damages to others.
- **Commercial Insurance:** Includes various policies for businesses, such as
property, liability, and business interruption insurance.

### 3. **Vehicle Insurance:**

- **Purpose:** Provides coverage for damages or injuries resulting from accidents
involving vehicles.
- **Types:**
- **Auto Insurance:** Covers damages or injuries resulting from car accidents.
- **Motorcycle Insurance:** Similar to auto insurance but tailored for
motorcycles.
- **Commercial Vehicle Insurance:** Covers vehicles used for business purposes.

### 4. **Term Insurance:**

- **Purpose:** Offers coverage for a specified term with no savings component.
- **Features:**
- **Pure Protection:** Primarily provides a death benefit.
- **No Cash Value:** Unlike whole life insurance, term insurance does not
accumulate cash value.
- **Renewable or Convertible:** Policies may be renewable or convertible to
permanent insurance at the end of the term.
IFRS AND US GAAP UNIT 4 – IFRS 13 TO IFRS 17

### 5. **Travel Insurance:**

- **Purpose:** Provides coverage for unexpected events during travel.
- **Types:**
- **Trip Cancellation/Interruption Insurance:** Reimburses non-refundable
expenses due to trip cancellation or interruption.
- **Travel Health Insurance:** Covers medical expenses incurred while traveling.
- **Baggage Insurance:** Reimburses for lost, stolen, or damaged luggage.

### 6. **Special Insurance:**

- **Purpose:** Addresses unique risks or needs not covered by standard insurance
policies.
- **Types:**
- **Pet Insurance:** Covers veterinary expenses for pets.
- **Event Cancellation Insurance:** Protects against financial loss due to the
cancellation of planned events.
- **Cyber Insurance:** Covers losses related to data breaches and cyberattacks.

### 7. **Casualty Insurance:**

- **Purpose:** Covers financial losses resulting from unforeseen events.
- **Types:**
- **Liability Insurance:** Covers legal obligations arising from injuries or
damages to others.
- **Property and Casualty Insurance (P&C):** A broad category that includes
coverage for property, liability, and other risks.