Oct 29 2011

Measurement of off-balance sheet commitments

Category: GuidanceFinancial Translator @ 10:08 am

When specific disclosures are required under a particular International Financial Reporting Standard, the measurement methods applicable to these disclosures are generally set out in that standard, such as for example:
–  finance leases IAS17:

  • schedule of minimum future payments (i.e. excluding contingent rent, cost of services and taxes payable) and of their present value;
  • contractual terms and conditions of the main leases and in particular the method for calculating contingent rent and implementation of renewal options;

–        operating leases IAS 17: schedule of minimum future payments.

–        contingent liabilities IAS 37: the potential financial impact must be determined using the same principles as those applied to calculate provisions (see paragraphs 36 to 52 of the standard); in particular the amounts presented should thus theoretically be discounted;

–        carrying amount of inventories pledged as security for liabilities (IAS2.36 (h));

–        contractual commitments arising from the purchase of property, plant and equipment (a priori corresponding to the historical cost of the asset excluding direct purchase costs);

–       fair value of collateral held as security for loans granted to third parties that are impaired or past due (see IFRS7.37 (c));

–        fair value of financial and non-financial assets held as collateral that the issuer can sell or re-use as collateral (IFRS7.15 or IAS 32.94);

–        carrying amount of financial assets pledged as collateral or of contingent liabilities (IFRS7.14 or IAS 32.94).

Where the measurement of a commitment is complex and depends on changes in future parameters, the AMF recommends specifying the minimum or maximum amount, so long as they are specified or reference is made to the full description of the commitment in question.

 

Tags: IFRS, Off-balance sheet commitments


Oct 28 2011

Disclosure of off-balance sheet commitments

Category: GuidanceFinancial Translator @ 9:04 am

Disclosure of off-balance sheet commitments in the notes to the consolidated financial statements has been made mandatory under International Financial Reporting Standards and various AMF recommendations.

The AMF also recommends including in the Registration Document a summary of off-balance sheet commitments not required under International Financial Reporting Standards.

Definitions

As per International Financial Reporting Standards

Pursuant to IAS 1, the notes to the consolidated financial statements must include disclosures required under the various International Financial Reporting Standards that are not included in the statement of financial position (formerly the “balance sheet”), statement of income, statement of changes in equity and statement of cash flows (for example certain disclosures required under IAS17,  IAS19, IAS37,  IAS32/IFRS7… ), namely:

  • contingent liabilities as defined in IAS 37 and in particular financial guarantees, representations and warranties (“garanties de passif”)…;
  • restrictions on title, and property, plant and equipment pledged as security for liabilities;
  • commitments to purchase property, plant and equipment;
  • disclosures on operating and finance leases;
  • the fair value of financial assets and liabilities;
  • restrictions on the ability of subsidiaries to transfer funds to the parent;
  • firm contractual commitments (i.e. not options)

 

As per AMF recommendations

In the AMF’s view, the International Financial Reporting Standards do not cover all off-balance sheet commitments, and so some must be covered directly in the Registration Document. To improve transparency of these off-balance sheet commitments, the AMF recommends that issuers aggregate the disclosures and present a two year summary broken down as follows:

  • Off-balance sheet commitments relating to the scope of consolidation;
  • Off-balance sheet commitments relating to an issuer’s financing;
  • Off-balance sheet commitments relating to an issuer’s operations.

In the case of certain more complex commitments, more detailed disclosures are required in order to explain the mechanism and the resulting potential liabilities. What is required is a description of the type of commitment and when it will expire along with the known and likely financial impact.

This is notably the case of disclosures required with respect to business combinations.

 

A. Off-balance sheet commitments relating to the scope of consolidation

These primarily represent:

  • commitments to acquire equity interests that are not recognised because they are deemed not likely to be realised or can’t be reliably estimated;
  •  disclosures on any unconsolidated special purpose entities;
  • commitments given or received as part of particular transactions,  commitments related to competition or the market, or indeed commitments to purchase assets;
  • commitments to retain securities for tax reasons.

 

B. Off-balance sheet commitments relating to an issuer’s financing

This mainly involves disclosures required under IFRS 7 for example: undrawn credit facilities, financial  guarantees….

 

C. Off-balance sheet commitments relating to an issuer’s operations

These primarily represent commitments arising from operations and business development (site, operational maintenance, contractual commitments, investment commitments…) and commitments arising from the performance of operating contracts (performance bonds, pledges, mortgages…).

 

Tags: AMF, IFRS, Off-balance sheet commitments