(a)    (i) The Conceptual Framework sets out the following definitions of assets and liabilities:

(a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

(b) A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

The definitions use the word ‘expected’ which indicates that the inflows and outflows do not need to be completely certain before an asset or liability exists. There is no quantification of the level of inflows and outflows which are ‘expected’. There are also additional criteria in the Conceptual Framework which must be met before assets and liabilities can be recognised. An item which meets the definition of an element should be recognised if:

(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and

(b) the item has a cost or value which can be measured with reliability.

Probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. This principle is consistent with the uncertainty which relates to the environment in which any entity operates. However, the level of certainty required before elements are recognised in the financial statements is not defined but left to individual International Financial Reporting Standards (IFRS).

(ii)    IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that one of the conditions for recognising a provision is that payment must be probable which itself is defined as ‘more likely than not’. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations states that one of the conditions which must be met for an asset (or ‘disposal group’) to be classified as held for sale is that the sale is ‘highly probable’, within 12 months of classification as held for sale. IAS 37 states that its interpretation of probable does not necessarily apply to other standards. IFRS 5 does not include this caveat. In practice, the term probable in IFRS has been interpreted as meaning something other than ‘more likely than not’.

IFRSs use a variety of terms to indicate different levels of uncertainty, for the purposes of definition, recognition, classification and disclosure. For example, IAS 37 states that entities should not recognise contingent liabilities but should disclose them, unless the possibility of an outflow of economic resources is remote. Additionally, IAS 37 states that contingent assets should not be recognised but should be disclosed where an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.

It can be argued that given the range of possible probability-thresholds, and their lack of precise definition, a more consistent and clearer guidance on the threshold level is needed.

(b)    The Conceptual Framework states that information is material if omitting it or misstating it could influence decisions which users make on the basis of financial information about a specific reporting entity. Materiality is an entity-specific judgement based upon the relevance, nature and magnitude of the financial statement items involved. IAS 1 Presentation of Financial Statements states that the assessment of materiality should take into account how users could reasonably be expected to be influenced in making economic decisions on the basis of financial statements. The use of the principles behind the concept of materiality should ensure that the financial statements are an effective and understandable summary of the entity’s internal accounting records. Information in the financial statements should be summarised and aggregated in a clear and helpful manner without an excessive amount of immaterial information being disclosed or material information being omitted.

For instance, a common issue is whether an entity needs to disaggregate certain line items, for example, revenue, into categories on the face of the primary financial statements or if provision of this information in the notes is sufficient. It is important to determine the appropriate level of aggregation on the face of the primary financial statements. In certain industries, the materiality assessment may rely on different quantitative materiality thresholds depending upon the primary financial statement. Similarly, certain elements of the primary financial statements or the notes may attract more attention from the users of financial statements for certain industries. For instance, due to regulatory requirements, liquidity and liquidity ratios are considered more important in the financial statements of a bank than in the financial statements of an insurance company. An entity would need to consider such industry-specific aspects when assessing materiality. The Internation Accounting Standards Board (IASB) feels that the poor application of materiality contributes to too much irrelevant information in financial statements and not enough relevant information. In the light of this feedback, the IASB decided to undertake a project on materiality by issuing an Exposure Draft of an IFRS Practice Statement Application of Materiality to Financial Statements. Examples which are commonly cited as poor application of materiality, that is where judgement may not have been used appropriately, include:

(i) use of the disclosure requirements as a checklist; and

(ii) describing accounting policies in financial statements using words directly from IFRS, or copying note disclosures from illustrative financial statements without making the information entity-specific.

A practising accountant may use similar principles as preparers do when making judgements in applying the concept of materiality. However, practising accountants may also apply the concept of materiality for different purposes, for example, audit purposes. It would not be appropriate for preparers to rely on materiality thresholds used by practising accountants when making decisions about the application of materiality to the financial statements. However, irrespective of how materiality is used by preparers and accountants, both are focused on the same fundamental issues, that is what financial information will impact the decisions of users of the financial statements and whether or not the financial statements are free of material misstatement and in the end provide a fair presentation.

(c)    Lamyard will need to assess the full effect of the jurisdiction exiting the agreement. They will need to provide disclosures on the entity’s exposure to risks (for example, financial, operational and strategic risks), their expected impact and the uncertainties which might affect the entity’s activities and how they are going to manage and mitigate those risks. In this respect, Lamyard should provide high quality narrative information which supplements the financial statements.

Particular attention should be given to disclosures related to liquidity risks or debt repayments due to breaches of covenants. Lamyard should consider the need to provide the disclosures related to potential impairment of assets, as well as the disclosures required by IFRS 7 Financial Instruments: Disclosures. Under IAS 1 Presentation of Financial Statements, an entity should disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, which have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

There is a potential reduction of estimated cash flows, changes in the supply chain costs or the volatility of the financial markets and exchange currency rates because of the exiting from the agreement. The local currency has already suffered a devaluation. Thus, Lamyard should assess the assumptions used in the valuation of assets and liabilities and, where applicable, to recognise impairment losses. Lamyard should assess if relevant triggers for the recognition of impairment losses in financial assets are met and if the recoverable amounts determined in accordance with IAS 36 Impairment of Assets decrease significantly. Assets measured at fair value under IFRS 13 Fair Value Measurement or fair value of plan assets and defined benefit obligations under IAS 19 Employee Benefits will need review.

IAS 21 The Effects of Changes in Foreign Exchange Rates specifies only that the amount of exchange differences should be disclosed. When making judgements about materiality, the entity should assess whether the loss should be reported separately from the other exchange differences. The fact that a large loss was incurred relative to the other transactions, and that the loss was from speculative activity, suggests that aggregating these exchange differences would result in a loss of material information. Information which could influence users’ opinions of management’s stewardship would be lost through aggregation. In some jurisdictions, local corporate governance requirements prohibit speculative activities unless closely monitored and therefore disclosure of the information would be critical. However, in those jurisdictions where speculation is not prohibited, it could be argued that the reason for a large loss does not impact on the assessment of whether it is material or not as the absolute amount is material in itself when compared to the total of which it forms part.