IFRS: training, methodology and implementation practice for companies and specialists

A joint project of IPB Russia and the magazine “Corporate Financial Reporting. International standards".

Discounting in calculations for IFRS purposes

K. e. n. Deputy Director of the International Audit and Consulting Department of BUSINESS PROFILE JSC.

Effective interest rate for discounting

The discounted value is determined by the formula:

FV n = PV (1 + r) n ,

where FVn - future value in n years (Future Value);
   PV - modern, reduced or current value (Present Value);
  r- annual rate percent (effective rate);
n is the discount period.

From here current value:

PV = FV / (1 + r) n .

The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to calculating effective rate percent for discounting. Experts use various methods to calculate it.

Cumulative method

This method is an adjustment (increase) of the risk-free rate for risks inherent in the country, market, company, etc. For this method, the company needs to establish the influence of individual factors on the value of the risk premium, that is, develop a scale of risk premiums.

d = R + I + r + m + n,

where d is the effective interest rate;
  R - risk-free rate of return (%);
I - country risk;
r - industry risk;
   m is the risk of unreliability of project participants;
n is the risk of not receiving the income provided for by the project.

The risk-free rate is the rate of return that can be earned by financial instrument, whose credit risk is zero. The most reliable investment instrument 30 year olds are considered in the world government bonds USA. If you compare a similar instrument in the same currency, for the same period, on the same terms in Russia, the rates will differ by country risk. If we take bonds with similar conditions, denominated in rubles, and compare them with previous securities, we will get the impact currency risk.

Organizational weighted average cost of capital (WACC) model

The weighted average cost of capital is calculated as the sum of the return equity and debt capital, weighted by their specific share in the capital structure.

Calculated using the following formula:

WACC = Ks × Ws + Kd × Wd × (1 – T),

where Ks is the cost of equity;
   Ws - share of equity capital (%) (balance sheet);
Kd - cost of borrowed capital;
Wd - share of borrowed capital (%) (balance sheet);
T - income tax rate (%).

Capital Asset Pricing Model (CAPM)

At efficient market capital, it is assumed that only market (systemic) risks will affect the future return of the stock. In other words, the future performance of a stock will be determined by the overall market sentiment.

Rs = R + b × (Rm – R) + x + y + f,

where Rs is the real discount rate;
R - risk-free rate of return (%);
Rm - average market return (%);
b - beta coefficient, measuring the level of risks, making adjustments and adjustments;
x - premium for risks associated with insufficient solvency (%);
y - risk premium closed company related to the unavailability of information about financial condition and management decisions (%);
f - country risk premium (%).

You can also contact us for information on rates. open sources of information. In particular, you can use the Banking Statistics Bulletin of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal and individuals, by currencies and by terms of loan obligations.

Discounting in IFRS

The use of discounting requires a number of international standards financial statements.

• According to IAS 18 Revenue, discounting must be applied if payment for goods occurs significantly after their delivery, that is, in essence, commodity credit. Finance costs will need to be excluded from revenue at recognition and recognized over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
• IAS 17 Leases states that leased assets are accounted for at the lower of the present value of the minimum lease payments or fair value received property.
• IAS 36 Impairment of Assets requires an impairment test to be performed when there is an indication of impairment. The recoverable amount of the asset is determined, which is calculated as the greater of the asset's fair value and value in use. The value in use of an asset is calculated as the discounted value of future cash flows associated with the asset, most often discounted at the weighted average cost of capital.
• IAS 37 Provisions contingent liabilities and contingent assets" states that in the case of creating long-term provisions, the amount of liabilities must be discounted.

Example 1

A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the law, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). Assessed value of these works will amount to 3000 thousand rubles. The effective rate is 9%.

According to IAS 16, the cost of liquidation work must be included in the cost of the fixed asset. In this case, the estimated liability must be reduced to its current value:

3,000,000 / (1 + 0.09)20 = 535,293 rub.

Thus, the initial cost of the fixed asset will be formed 20,535,293 rubles. and reserve. Amount 535,293 rub. is a discount. Every reporting period the provision will increase by the amount of finance costs recognized using the effective rate.

• According to IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible assets"If payment for an asset is made on a deferred basis, finance costs are required to be excluded from the cost of the asset upon recognition and the costs are recognized over the installment period.

Example 2

Inventories were purchased under a contract in the amount of RUB 15,000. with deferred payment for 12 months. The market interest rate is 8%. When reflected in accounting, inventories and liabilities are recognized in the amount of discounted future flow: 15,000 / (1 + 0.08)1 = 13,888 rubles.

Amount 1112 rub. - a fee for deferment, which will be recognized as part of finance expenses during the year and will reduce the value of inventories.

• IAS 39 Financial Instruments: Recognition and Measurement also requires the use of discounting. Accounting and valuation of financial instruments in accordance with this standard is carried out until December 31, 2017. Effective from January 1, 2018 new standard IFRS 9 Financial Instruments, early adoption is permitted.

New IFRS 9 Financial Instruments

The introduction of the new standard IFRS 9 Financial Instruments has made some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.

Financial instruments are initially recognized at fair value at the transaction date less/plus transaction costs, regardless of the model used to subsequently account for the financial instrument.

A financial asset is recognized at an amount that corresponds to the actual amount of cash or other consideration paid, payable or receivables accrued plus directly attributable costs to the transaction.

Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received less costs directly attributable to the transaction.

The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferral of payments. In such a case, it is necessary to discount future flows using a market rate to eliminate the delay fee.

A significant difference between IFRS 9 and IAS 39 is that at the time of recognition the company must not only reflect fair value, but also estimate expected possible risks and create a provision on initial recognition financial assets in accounting:

• assets at amortized cost;
• assets carried at fair value through other comprehensive income;
• rent receivables;
• a number of other financial instruments.

The company must initially estimate and recognize expected credit losses for a period of 12 months based on the likelihood of adverse events occurring.

For trade receivables and lease receivables, expected credit risks are assessed and recognized over the entire holding period of the instrument.

For each reporting date it is necessary to assess how expected credit risks change, and if they increase significantly, it is necessary to create a reserve for the entire amount of expected losses during the holding period. A significant increase in risk occurs, for example, in the event of a late payment or unfavorable events with the borrower.

The borrower's condition may improve and he will begin making payments in accordance with the agreement. Then, having assessed the risk reduction, you can return to assessing future risks for 12 months.

Since there is no actual impairment in the above cases, financial income should continue to be accrued based on the carrying amount of the asset and the effective interest rate.

In the event that at the reporting date there are characteristic features impairment (such as, for example, a delay of more than 90 days), it is necessary to estimate the amount that can realistically be collected under the contract and discount it taking into account the original effective interest rate. The difference between the carrying amount and the new discounted flow amount is credit losses, you need to create a reserve for them. If there are clear signs of impairment, interest income is accrued only on the amount that can be collected from the client, so the effective rate should be multiplied by the difference between the carrying amount and the provision.

Let's look at the difference in discounting with an example.

Example 3

The company issued a loan in the amount of 200,000 rubles on December 15, 2016. for a period of three years.

Return deadline is December 15, 2019. The rate under the agreement is 11% per annum. Interest is paid annually on December 31st. Interest is calculated monthly. The effective market rate is 14.12%.

According to the developed rules for this type of loans (without obvious signs of risk of non-payment), the probability of default is estimated at 1%.

It is known that as of December 31, 2017, the borrower was 45 days late in payment; for such loans, the probability of default was estimated at 4.0%.

On December 30, 2018, it became known that the borrower was having financial difficulties and payments would not be made in full. According to calculations, the company will be able to receive only 191,036 rubles.

Comparative information on the recognition of financial assets according to IAS 39 and IFRS 9 (in rubles):

	Postings	According to IFRS 39	According to IFRS 9
Moment of recognition 12/15/2016	DT “Financial asset” (FA) (statement of financial position, FPP) CT "Cash" (OFP) Dt "Profits and losses" (profit and loss statement, OFR) CT "Financial asset" (FAP)	200 000 200 000   14 357 14 357	200 000 200 000   14 357 14 357
	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	- -	1856 1856
Reporting period 12/31/2016	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)		2 2
	Dt "FA" (OPP)	1149 1149	1149 1149
Reporting period 12/31/2017	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)		5745 5745
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 239 26 239	26 239 26 239
Reporting period 12/31/2018	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	30 000 30 000	14 093 14 093
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 837 26 837	23 774 23 774
Reporting period 12/31/2019	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	- -	8304 8304
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 131 26 131	29 195 29 195

The movement of debt can also be presented in the form of a table.
According to IAS 39:

Period			Interest accrued for the year	Debt with interest	Payments		Carrying value of FA as at 31 December
2016	185 643		1149	186 792	−964		185 828
2017	185 828		26 239	212 06	−22 000		190 067
2018	190 067		26 837	216 904	−22 000	30 000	194 904
2019	194 904		26 131	221 036	−191 036	30 000	0

According to IFRS 9:

Period	Debt at the beginning or date of recognition	Debt after discounting expected flows taking into account credit losses	Reserve upon receipt of FI	Interest accrued for the year	Debt with interest	Payments	Provision for impairment at closing	The book value of the FA as of December 31 excluding provisions
2016	185 643		1856	1149	186 792	−964	1858	185 828
2017	185 828			26 239	212 067	−22 000	7603	190 067
2018	190 067	168 371		23 774	192 145	−22 000	21 696	191 841
2019	191 841	191 036		29 195	221 03	−191 036	30 000	0

Solution
1. Calculations at the time of recognition of a financial asset 12/15/2016
1.1. We determine the fair value of FA as of December 15, 2016, since interest is paid unevenly and the nominal rate differs from the effective one:

Payment date	Amount of payments under the agreement	Discount formula	Present value of cash flows
31.12.2016	964	= 964 / (1 + 0,1412) ^ (16 / 365)	959
31.12.2017	22 000	= 22 000 / (1 + 0,1412) ^ (381 / 365)	19 167
31.12.2018	22 000	= 22 000 / (1 + 0,1412) ^ (746 / 365)	16 795
31.12.2019	221 036	= 221 036 / (1 + 0,1412) ^ (1095 / 365)	148 723
Total	266 000		185 643

1.2. Let's adjust the book value to fair value:

200,000 − 185,643 = 14,357 rubles.

Let's recognize the difference in costs.

1.3. We accrue reserves for assessed financial risks for 12 months:

185,643 × 1% = 1,856 rubles.

2. Calculations at the end of the reporting period December 31, 2016
2.1. We estimate future credit risk as of December 31, 2016. Significant increase credit risk Did not happen. We create a reserve for 12 months based on new amount debt. Debt amount:

185,643 + (185,643 × 14.12% × 16 / 365) – 964 = 185,828 rub.

Reserve as of December 31, 2016: RUB 185,828. × 1% = 1858 rub.
Change in reserve in OFR: RUB 1,858. − 1856 rub. = 2 rub.

2.2. We charge and recognize financial income at an effective rate from book value:

185,643 × 14.12% × 16 / 365 = 1149 rubles.

3. Calculations at the end of the reporting period December 31, 2017
3.1. We estimate future credit risk as of December 31, 2017. There has been a significant increase in credit risk. We create a reserve based on the entire period of ownership of the asset based on the new amount of debt:

185,828 + (185,828 × 14.12% × 1) − 22,000 = 190,067 rub.
RUB 190,067 × 4.0% = 7603 rub.

Change in reserve in OFR:

7603 rub. − 1858 rub. = 5745 rub.

3.2. Finance income is accrued and recognized at an effective rate based on the carrying amount:

185,828 × 14.12% × 1 = 26,239 rubles.

4. Calculations at the end of the reporting period 12/31/2018
4.1. There are signs of impairment of the financial asset as of December 31, 2018.

As of December 31, 2018, we estimate the value of future cash flows, discounted at the original effective rate, taking into account the new cash flow:

4.2. Expected credit losses are:

190,067 − 168,371 = 21,696 rubles.

Taking into account the already accrued amount of the reserve in the financial reserve, we recognize impairment in accordance with IFRS 9:

21,696 − 7603 = 14,093 rubles.

Reserve according to IAS 39: RUB 30,000. in the OFR.

4.3. Financial income is accrued and recognized at the effective rate for 2018:

• from book value to IAS 39: 190,067 × 14.12% × 1 = 26,837 rub.
• from the book value less credit losses on IFRS 9:(190,067 − 21,696) × 14.12% × 1 = 23,774 rubles.

5. Calculations at the time of disposal of a financial asset 12/16/2019
5.1. At the time of loan repayment on December 15, 2018, the amount of the recognized reserve will be RUB 30,000.

The OFR reflects additional accrual of credit losses up to RUB 30,000:

30,000 − 21,696 = 8,304 rubles.

5.2. The amount of interest income is calculated as the balance required to close the contract, taking into account the actual payment and the reserve. In our case, it is 29,195 rubles.

Thus, in addition to the issue of the method for calculating the effective discount rate, the introduction of IFRS 9 Financial Instruments introduced additional cases, in which discounting is used, and determined new order calculation of credit losses.

Discounting is the most important mechanism for representing financial position organizations reliably. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements under IFRS. In Russian accounting, similar requirements are not imposed, while in Western systems, discounting is an integral part of accounting.

In RAS, a mention of discounting is contained in PBU 19/02 in relation to debt valuable papers and granted loans, while discounting is the right of the organization, and is carried out only for disclosure in explanatory note, and making entries in accounting is prohibited (clause 23 of PBU 19/02). Similar to discounting is the procedure for accounting for the difference between the initial cost and the par value of debt securities for which the current price is not determined. market price: PBU 19/02 allows such a difference to be attributed evenly to financial results.

In IFRS, discounting can affect the carrying amount of any accounting element and thereby change a company's financial performance.

The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has different prices for the following two reasons:

1) risk of non-receipt;

2) the possibility of alternative investments.

For example, if a company acquired assets under regular price, but was able to negotiate a significant deferment of their payment, then she actually acquired the assets cheaper than usual. And if the company sold an asset with a significant deferred payment, then receivables in IFRS will be reflected not at their nominal value, but at the current, discounted value, and the difference will affect financial results. By taking into account the impact of the time value of money on financial performance, the comparability of financial statements is enhanced and provides greater opportunities for investment and management analysis.

Any, even the most complex, discounting operations come down to the discounting formula:

PV = FV/ (1+i) n

FV – current value,

PV – future value,

i – discount rate,

n – term (number of periods).

Basic rules of discounting according to IFRS

Determining the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. Discount rates tend to vary from company to company, for different transactions, at different points in time, and for different purposes.

Determining the rate is the most important thing in discounting, since it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million payable in 3 years:

• at a rate of 20% it will be $578,704,
• at a rate of 3% it will be $915,141,
• at a rate of 30% – $455,166.

Depending on the specific accounting objects, IFRS provides various options for choosing a discount rate (see Table 1). At the same time, the following basic discounting rules in IFRS can be identified, which are applicable to all situations:

1. Discounting is usually not carried out if the effect of the time value of money is not significant;
2. The interest portion generated by discounting is usually accrued not evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the method compound interest. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts the expected amount of future cash payments or proceeds up to the maturity date of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
3. Financial instruments are purchased throughout financial year, and the period for which the discount rate is determined (in the formula - “n”) should be used not a year, but the shortest possible period (usually a month is enough). Otherwise, it will be much more difficult to calculate interest at each reporting date.
4. To determine the discount rate (except in special cases) usually apply market rates, including adjusted for similar conditions, for example, for conditions for attracting borrowed funds, similar in terms of currency, term, type of interest rate and other factors, attracted by an organization with a similar credit rating;
5. The discount rate used for accounting generally depends on the creditworthiness of the debtor. If receivables are discounted, the discount rate usually corresponds to the interest rate at which the counterparty could receive borrowed funds on similar terms. If discounted accounts payable, then the discount rate usually corresponds to the interest rate at which this organization could obtain borrowed funds on similar terms.
6. Discount rates are applied before income tax, that is, cash flows before taxes are taken into account when estimating the rate.
7. Estimates of discount rates do not take into account risks for which estimates of future cash flows have been adjusted. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of rising prices.

In countries with developed stock market To calculate the discount rate, the weighted average cost of capital indicator, WACC (weighted average cost of capital), can be used, which is calculated based on the cost of the company's equity capital and borrowed funds. In Russia, it can be reasonably used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.

For financial instruments of other companies, a discount rate is usually calculated based on an estimate of the cumulative risk premium. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent to the financial instrument for the main risk factors.

Among evaluators and investment analysis There is no consensus on what constitutes a risk-free interest rate in Russia, or whether there is one. As already indicated, the discount rate will be different for solving different problems; moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA (ISA) 540 “Audit accounting estimates» IFRS financial statements auditors will need to ensure that the company has chosen the discount rate correctly. At the same time, audit evidence obtained from sources independent of the audited entity is considered, according to ISA 500, to be more reliable. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).

Cases where discounting is assumed in IFRS are presented in Table 1.

Table 1 – Cases in which discounting is provided for under IFRS

IAS 2 Inventories paragraph 18,
IAS 16 “Property, Plant and Equipment” paragraph 23,
IAS 38 Intangible Assets paragraph 32

If the acquisition of an asset allows for deferred payment beyond normal terms, the asset is accounted for at the present value of future payments.

The most reliable estimate of the asset when using:
1. The rate at which the buyer can raise borrowed funds on similar terms;
2. Rates, the use of which allows you to obtain the current value of the asset upon payment in cash according to the discount formula specified in paragraph 3 of the table

A portion of interest costs directly attributable to the acquisition of a qualifying asset may be included in the cost of that asset if the entity chooses Alternative option accounting for borrowing costs in accordance with IAS 23 Borrowing Costs

IAS 39 Financial Instruments: Recognition and Measurement paragraph 43

Financial assets and liabilities are generally measured at fair value upon initial recognition. When calculating fair value in this case, discounting is often used

Current market interest rate for similar financial instruments

Discounting the future cash flows of a financial instrument is only one type of measurement of its fair value (for more information, see IAS 39, Application Guidance, AG64-82).
Accounting for the impact of the time value of money on additional costs associated with the acquisition of an asset or liability is determined in a manner similar to that set out in paragraph 1 above

IAS 39

After initial recognition, a portion of financial assets and liabilities continue to be measured at fair value and a portion is measured at amortized cost using the effective interest method.

For those measured at fair value – upon initial recognition.
For those valued at amortized cost, the discount formula (PV = FV/(1+i) n) is applied to estimate the interest rate (i) at which the value of the asset or liability increases as the maturity date approaches. In this case, the formula is modified as follows:
i = (FV/PV) 1/n – 1, where
FV – future payments on a financial instrument;
n – number of periods until the corresponding future payment;
PV is the current book value of the financial instrument.

For the purpose of identifying impairment losses on financial assets measured at amortized cost, discounting future payments at a market interest rate is also used.

IAS 16 paragraph 31,
IAS 36 Impairment of Assets paragraph 18,
IAS 38 paragraph 75,
IAS 40 Investment Property paragraph 33
IAS 41 " Agriculture(Agriculture) paragraphs 21, 22,
IFRS 3 Business Combinations paragraph 26,
IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations paragraph 15
and etc.

In addition to the valuation of financial instruments, IFRS provides for a number of cases when the fair value of assets and liabilities must be determined

Current market interest rates, adjusted for the risks inherent in such assets and liabilities.

In situations where there is no active market, discounting future cash flows can be used to estimate fair value, along with other methods that can provide a more reliable estimate: applying multiples to indicators such as revenue, profit, market share, etc.

IAS 18 Revenue paragraph 11

When a counterparty is allowed to defer payment for a significant period of time, revenue is recognized at the discounted amount of future receipts

The most reliable estimate of income is calculated from:
1. The rate at which the counterparty (buyer) can raise borrowed funds on similar terms;
2. Rates, the application of which allows you to obtain the current value of the assets (services) being sold when they are paid for in cash (the rate is determined by the formula specified in clause 3 of the table).

Revenue is always measured at the fair value of the consideration received or expected.
As in all other cases, the difference between the current fair value of the future payment and its nominal amount is recognized as interest income using the effective interest method (that is, by multiplying the growing receivables by the same rate each reporting period, to the date of its repayment, the debt in accounting was equal to the nominal debt).

IAS 37 paragraph 45

Recognized reserves are generally accounted for at present value.

Current market interest rate adjusted for the risks inherent in such obligations

Provisions include liabilities of uncertain timing or amount. Discounting is applied both to reserves that increase the expenses of the reporting period, and to reserves that increase the value of assets. An example of the latter are obligations to decommission a facility, restore natural resources on the occupied site

IAS 36

An impairment loss is recognized when the carrying amount
the value of the asset (or cash-generating unit),
exceeds its recoverable amount

The current market interest rate, adjusted for the risks specific to such assets (cash-generating units).

An asset's recoverable amount is the higher of its fair value less costs to sell or its value in use, which is calculated based on the present value of future cash flows. IAS 36 provides clarifications on the discounting procedure, see paragraph 56 and Appendix A to the standard.

IAS 17

At the time of concluding the lease agreement, the cost of the minimum lease payments is discounted

The rate at which the tenant can raise borrowed funds on similar terms

If, at the time of concluding the lease agreement, the discounted value of the minimum lease payments, that is, the amounts that will be required to be paid by the tenant, plus additional amounts specified in IAS 17.4 represent a significant portion of the total fair value of the leased asset, this is an indication that the lease is likely to be a finance lease.

IAS 17 paragraph 20

At the beginning of the lease, the lessee estimates the discounted value of the minimum lease payments

The interest rate included in the lease agreement. If this cannot be determined, the rate of interest on the lessee's borrowings shall apply, i.e. the rate of interest that the lessee would have to pay on a similar lease or, if this cannot be determined, the rate at the commencement of the lease that the lessee would have to pay on borrowings, received for the same period and with the same security, in the amount necessary to purchase the asset)

At the inception of the lease, the lessee is required to recognize finance leases as assets and liabilities on the balance sheet in amounts equal to the fair value of the leased property or, if those amounts are lower, the present value of the minimum lease payments (plus initial costs).
The interest rate implicit in the lease is the discount rate that, when applied at the beginning of the lease term, ensures that the total present value of the minimum lease payments and non-guaranteed residual value equals the sum of the fair value of the leased asset and the lessor's initial direct costs.

IAS 17 paragraph 36

At the beginning of the lease term, the lessor estimates the discounted value of the gross investment in the lease

Interest rate implied in the lease agreement (see paragraph above)

Gross Investment lease is the combination of the minimum lease payments received by the lessor under a finance lease and any non-guaranteed residual value due to the lessor, that is, that part of the residual value of the leased asset the receipt of which is not guaranteed by the lessor or is guaranteed only by a party related to the lessor

IFRS	Application of discounting	Discount rate	Exceptions and clarifications
1. Determination of the initial cost of acquired assets
2. Determination of the historical cost of financial assets and liabilities
3. Subsequent measurement of financial assets and liabilities
4. Other cases of determining fair value
5. Income accounting
6. Accounting for reserves
7. Impairment loss
8. Rental accounting
Lease type qualification
Initial valuation of the finance lease and the liability on the lessee's balance sheet
Initial measurement of finance lease receivables on the lessor's balance sheet

There are other rarer cases where IFRS requires discounting. For example, valuation and accounting of composite (combined) financial instruments (IFRS (IAS) 32), accounting for costs of selling those intended for sale non-current assets(IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, accounting for pension plans (IAS 19 Employee Benefits).

There are also situations where the use of discounting is not permitted by the standards, for example in relation to deferred taxes. In the opinion of the IASB, drawing up a detailed timing schedule for the reversal of each temporary difference is in many cases impractical or extremely difficult, so deferred tax assets and liabilities are not discounted. This rule is contained in IAS 12 Income taxes, paragraph 53.

Example of calculating discounted cash flows of a company

The company acquired on January 1, 2005 a fixed asset with a maturity beneficial use– 10 years for $1 million with deferred payment for 3 years, with a discount rate of 20%. The fixed asset is depreciated in a linear way.

In order to understand the impact of discounting on a company's accounting and reporting, the example shows the accounting entries for a fixed asset during the period of installment payment for it and shows the reflection of these assets and liabilities in the company's balance sheet.

Transactions according to RAS and IFRS for 2005-2007 are presented in table. 2 (for simplicity – without VAT):

Table 2 – Transactions according to RAS and IFRS for 2005 – 2006

Dt Primary means

Kt Accounts payable

PV =1,000,000 / (1+0.20) 3 = 578,704

Dr Cost

Kt Depreciation

578,704 /10 years = 57,870

Kt Accounts payable

578 704 * 0,2 = 115 741

Dr Cost

Kt Depreciation

Dr Interest expense (impact of discounting)

Kt Accounts payable

(578 704 + 115 741) * 0,2 = 138 889

Dr Cost

Kt Depreciation

Dr Interest expense (impact of discounting)

Kt Accounts payable

(578 704 + 115 741 + 138 889) * 0,2 = 166 666

Dt Accounts payable

Kt Cash

	accounting entry	Amount according to RAS, dollars	Amount according to IFRS, dollars	Calculation (for IFRS), dollars	Balance sheet indicators according to IFRS (cumulatively, except for DS)
					The main thing	retained earnings	Accounts payable
Acquisition of fixed assets:
Depreciation calculation:
Impact of discounting:
Depreciation calculation:
Impact of discounting:
Depreciation calculation:
Impact of discounting:
Payment to OS supplier:

Thus, initially the fixed asset and accounts payable on it are reflected not at their nominal value ($1,000,000), but taking into account the time value of money: in fact, the item was cheaper for the company ($578,704). Subsequently, each item is depreciated based on its maturity: fixed assets over 10 years (until the end of their useful life) using the straight-line method, and accounts payable over 3 years (until the maturity date) using the effective interest rate method.

Essentially, the company uses supplier credit, and the effect of discounting accounts payable is reflected in interest payable on the income statement each period. Accrued interest ($115,741 + $138,889 + $166,666) is added to the accounts payable each period, and at the end of the deferment it will be equal to the face value ($1,000,000).

After 10 years, the amount of depreciation according to RAS will be $1 million. The amount of expenses according to IFRS will consist of:

• depreciation – $578,704;
• interest expenses– 115,741 + 138,889 + 166,666 = $421,296
• total $1,000,000

Thus, the example shows that discounting does not change the final financial result, but always changes its distribution over periods, and also changes the qualification of expenses. Given that the company is a going concern, discounting in many companies changes the financial position and financial results of operations for each reporting period.

Head of department international reporting ACG "Interekspertiza" Kalanov Anton.

Discounting is the most important mechanism for reliably representing the financial position of an organization. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements under IFRS. In Russian accounting, similar requirements are not imposed, while in Western systems, discounting is an integral part of accounting.

In RAS, a mention of discounting is contained in PBU 19/02 in relation to debt securities and loans provided, while discounting is the right of the organization and is carried out only for disclosure in the explanatory note, and making entries in accounting is prohibited (clause 23 of PBU 19/02) . Similar to discounting is the procedure for accounting for the difference between the initial cost and the nominal value of debt securities for which the current market value is not determined: PBU 19/02 allows such a difference to be evenly attributed to financial results.

In IFRS, discounting can affect the carrying amount of any accounting element and thereby change a company's financial performance.

The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has different values ​​for the following two reasons:

1) risk of non-receipt;

2) the possibility of alternative investments.

For example, if a company purchased assets at the normal price, but was able to negotiate a significant deferment in payment, then it actually acquired the assets at a lower price than usual. And if the company sold an asset with a significant deferred payment, then receivables under IFRS will be reflected not at their nominal value, but at the current, discounted value, and the difference will affect financial results. By taking into account the impact of the time value of money on financial performance, the comparability of financial statements is enhanced and provides greater opportunities for investment and management analysis.

Any, even the most complex, discounting operations come down to the discounting formula:

PV = FV/ (1+i)^n

FV? current value,

PV? future value,

I? discount rate,

N? term (number of periods).

Basic rules of discounting according to IFRS

Determining the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. Discount rates tend to vary from company to company, for different transactions, at different points in time, and for different purposes.

Determining the rate? This is the most important thing in discounting, since it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million payable in 3 years would be:

at a rate of 20%? $578,704

at a rate of 3%? $915,141

at a rate of 30%? $455,166

Depending on the specific accounting objects, IFRS provides various options for choosing a discount rate (see Table 1). At the same time, we can highlight the following basic discounting rules in IFRS, which are applicable to all situations:

1. Discounting is usually not carried out if the effect of the time value of money is insignificant.

2. The interest portion generated by discounting is usually accrued not evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the compound interest method. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts expected future cash payments or receipts until maturity of the financial instrument, or when this is appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability.

3. Financial instruments are purchased throughout the entire financial year, and the period for which the discount rate is determined (in the “n” formula) should not be a year, but the shortest possible period (usually a month is enough). Otherwise, it will be much more difficult to calculate interest at each reporting date.

4. To determine the discount rate (except in special cases), market rates are usually used, including those adjusted for similar conditions, for example, for conditions for raising borrowed funds, similar in terms of currency, term, type of interest rate and other factors attracted by an organization with similar credit rating.

5. The discount rate used for accounting generally depends on the creditworthiness of the debtor. If receivables are discounted, the discount rate usually corresponds to the interest rate at which the counterparty could obtain borrowed funds on similar terms. If accounts payable are discounted, the discount rate usually corresponds to the interest rate at which the organization could obtain borrowed funds on similar terms.

6. Discount rates are applied before deduction of income tax, that is, cash flows before tax are taken into account when assessing the rate.

7. When estimating discount rates, risks for which estimates of future cash flows have been adjusted are not taken into account. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of rising prices.

In countries with a developed stock market, the weighted average cost of capital, WACC (weighted average cost of capital), which is calculated based on the cost of the company's equity capital and borrowed funds, can be used to calculate the discount rate. In Russia, it can be reasonably used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.

For financial instruments of other companies, a discount rate is usually calculated based on an estimate of the cumulative risk premium. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent to the financial instrument for the main risk factors.

There is no consensus among valuation and investment analysis experts on what constitutes a risk-free interest rate in Russia, or whether there is one. As already indicated, the discount rate will be different for solving different problems; moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA 540, Audit of Accounting Estimates, IFRS auditors will be required to ensure that the company has chosen the correct discount rate. At the same time, audit evidence obtained from sources independent of the audited entity is considered, according to ISA 500, to be more reliable. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).

Cases when discounting is assumed in IFRS are presented in table. 1.

Head of the International Reporting Department of AKG Interexpertiza Anton Kalanov

date: May 2006

AKG "Interekspertiza" asks you to keep in mind when using publications that:

the article represents the opinion of the author, agreed in all material respects with the opinion of the Expert Council of the AKG Interexpertiza at the time of its preparation;

the author’s opinion does not always coincide with the opinion of official bodies;

Please remember that legislation or law enforcement practice may have changed since the publication of this article;

all issues discussed in the article are of a general nature and are not intended for direct use in practical activities without coordination of all specific circumstances of the case with professional consultants.

k.e. n. Deputy Director of the International Audit and Consulting Department of BUSINESS PROFILE JSC.

Effective interest rate for discounting

The discounted value is determined by the formula:

FV n = PV (1 + r) n ,

where FV n — future value in n years (Future Value);
   PV - modern, reduced or current value (Present Value);
  r is the annual interest rate (effective rate);
n is the discount period.

From here current value:

PV = FV / (1 + r) n .

The most interesting and controversial point in this formula is the effective rate. It should be noted that there is no single approach to calculating the effective interest rate for discounting. Experts use various methods to calculate it.

Cumulative method

This method is an adjustment (increase) of the risk-free rate for risks inherent in the country, market, company, etc. For this method, the company needs to establish the influence of individual factors on the value of the risk premium, that is, develop a scale of risk premiums.

d = R + I + r + m + n,

where d is the effective interest rate;
  R—risk-free rate of return (%);
I - country risk;
r—industry risk;
   m is the risk of unreliability of project participants;
n is the risk of not receiving the income provided for by the project.

The risk-free rate is the rate of return that can be earned on a financial instrument that has zero credit risk. 30-year US government bonds are considered the most reliable investment instrument in the world. If you compare a similar instrument in the same currency, for the same period, on the same terms in Russia, the rates will differ by country risk. If we take bonds with similar conditions, denominated in rubles, and compare them with previous securities, we will get the impact currency risk.

Organizational weighted average cost of capital (WACC) model

The weighted average cost of capital is calculated as the sum of the return on equity and debt capital, weighted by their specific share in the capital structure.

Calculated using the following formula:

WACC = Ks × Ws + Kd × Wd × (1 - T),

where Ks is the cost of equity;
   Ws - share of equity capital (%) (balance sheet);
Kd is the cost of borrowed capital;
Wd — share of borrowed capital (%) (balance sheet);
T — income tax rate (%).

Capital Asset Pricing Model (CAPM)

In an efficient capital market, future stock returns are assumed to be affected only by market (systemic) risks. In other words, the future performance of a stock will be determined by the overall market sentiment.

Rs = R + b × (Rm - R) + x + y + f,

where Rs is the real discount rate;
R—risk-free rate of return (%);
Rm—average market return (%);
b is the beta coefficient, which measures the level of risks, making adjustments and amendments;
x — premium for risks associated with insufficient solvency (%);
y is the premium for the risks of a closed company associated with the unavailability of information about the financial condition and management decisions (%);
f — premium for country risk (%).

You can also contact us for information on rates. open sources of information. In particular, you can use the Bulletin of Banking Statistics of the Central Bank of the Russian Federation, which provides monthly information on the level of interest rates broken down by legal entities and individuals, by currencies and by terms of loan obligations.

Discounting in IFRS

The use of discounting is required by a number of international financial reporting standards.

• According to IAS 18 “Revenue”, discounting must be applied if payment for goods occurs significantly later than their delivery, that is, in essence, this is a trade credit. Finance costs will need to be excluded from revenue at recognition and recognized over the installment period (similar to IFRS 15 Revenue from Contracts with Customers).
• IAS 17 Leases states that leased assets are accounted for at the lower of the present value of the minimum lease payments or the fair value of the property received.
• IAS 36 Impairment of Assets requires an impairment test to be performed when there is an indication of impairment. The recoverable amount of the asset is determined, which is calculated as the greater of the asset's fair value and value in use. An asset's value in use is calculated as the present value of the future cash flows associated with that asset, most often discounted at the weighted average cost of capital rate.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that where long-term provisions are made, the amount of the liability must be discounted.

Example 1
A well was purchased for 20,000 thousand rubles. The service life of a similar well is 20 years. According to the law, when decommissioning a well, it is necessary to carry out restoration work (land reclamation). The estimated cost of these works will be 3,000 thousand rubles. The effective rate is 9%.

According to IAS 16, the cost of liquidation work must be included in the cost of the fixed asset. In this case, the estimated liability must be reduced to its current value:

3,000,000 / (1 + 0.09)20 = 535,293 rub.

Thus, the initial cost of the fixed asset will be formed 20,535,293 rubles. and reserve. Amount 535,293 rub. is a discount. Each reporting period, the provision will increase by the amount of finance costs recognized using the effective rate.

• According to IAS 2 Inventories, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, if payment for an asset is made on a deferred basis, finance costs are required to be excluded from the cost of the asset upon recognition and recognized expenses during the installment period.

Example 2
Inventories were purchased under a contract in the amount of RUB 15,000. with deferred payment for 12 months. The market interest rate is 8%. When reflected in accounting, inventories and liabilities are recognized in the amount of discounted future flow: 15,000 / (1 + 0.08) 1 = 13,888 rubles.

Amount 1112 rub. — a fee for deferment, which will be recognized as part of finance expenses during the year and will reduce the value of inventories.

• IAS 39 Financial Instruments: Recognition and Measurement also requires the use of discounting. Accounting and valuation of financial instruments in accordance with this standard is carried out until December 31, 2017. From January 1, 2018, the new standard IFRS 9 “Financial Instruments” will be in force, the early application of which is permitted.

New IFRS 9 Financial Instruments

The introduction of the new standard IFRS 9 Financial Instruments has made some changes to the calculation and recognition of impairment compared to IAS 39 Financial Instruments: Recognition and Measurement.

Financial instruments are initially recognized at fair value at the transaction date less/plus transaction costs, regardless of the model used to subsequently account for the financial instrument.

A financial asset is recognized at an amount that corresponds to the actual amount of cash or other consideration paid, payable or receivables accrued plus directly attributable costs to the transaction.

Financial liabilities are initially recognized at an amount corresponding to the amount of cash or other consideration received less costs directly attributable to the transaction.

The fair value of assets and liabilities at the time of recognition may differ from the amount of funds received and consideration received, for example, if there is a temporary deferral of payments. In such a case, it is necessary to discount future flows using a market rate to eliminate the delay fee.

A significant difference between the IFRS 9 standard and the IAS 39 standard is that at the time of recognition the company must not only reflect the fair value, but also assess the expected possible risks and create a provision for the initial recognition of financial assets in accounting:

• assets at amortized cost;
• assets carried at fair value through other comprehensive income;
• rent receivables;
• a number of other financial instruments.

The company must initially estimate and recognize expected credit losses for a period of 12 months based on the likelihood of adverse events occurring.

For trade receivables and lease receivables, expected credit risks are assessed and recognized over the entire holding period of the instrument.

At each reporting date, it is necessary to assess how expected credit risks are changing, and if they increase significantly, it is necessary to create a reserve for the entire amount of expected losses during the holding period. A significant increase in risk occurs, for example, in the event of a late payment or unfavorable events with the borrower.

The borrower's condition may improve and he will begin making payments in accordance with the agreement. Then, having assessed the risk reduction, you can return to assessing future risks for 12 months.

Since there is no actual impairment in the above cases, financial income should continue to be accrued based on the carrying amount of the asset and the effective interest rate.

If there are indicators of impairment at the reporting date (such as being more than 90 days past due), it is necessary to estimate the amount that is realistically collectible under the contract and discount it at the original effective interest rate. The difference between the carrying amount and the new discounted flow amount is credit losses, you need to create a reserve for them. If there are clear signs of impairment, interest income is accrued only on the amount that can be collected from the client, so the effective rate should be multiplied by the difference between the carrying amount and the provision.

Let's look at the difference in discounting with an example.

Example 3
The company issued a loan in the amount of 200,000 rubles on December 15, 2016. for a period of three years.

Return deadline is December 15, 2019. The rate under the agreement is 11% per annum. Interest is paid annually on December 31st. Interest is calculated monthly. The effective market rate is 14.12%.

According to the developed rules for this type of loans (without obvious signs of risk of non-payment), the probability of default is estimated at 1%.

It is known that as of December 31, 2017, the borrower was 45 days late in payment; for such loans, the probability of default was estimated at 4.0%.

On December 30, 2018, it became known that the borrower was having financial difficulties and payments would not be made in full. According to calculations, the company will be able to receive only 191,036 rubles.

Comparative information on the recognition of financial assets according to IAS 39 and IFRS 9 (in rubles):

	Postings	According to IFRS 39	According to IFRS 9
Moment of recognition 12/15/2016	DT “Financial asset” (FA) (statement of financial position, FPP) CT "Cash" (OFP) Dt "Profits and losses" (profit and loss statement, OFR) CT "Financial asset" (FAP)	200 000 200 000   14 357 14 357	200 000 200 000   14 357 14 357
	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	— —	1856 1856
Reporting period 12/31/2016	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)		2 2
	Dt "FA" (OPP)	1149 1149	1149 1149
Reporting period 12/31/2017	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)		5745 5745
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 239 26 239	26 239 26 239
Reporting period 12/31/2018	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	30 000 30 000	14 093 14 093
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 837 26 837	23 774 23 774
Reporting period 12/31/2019	Dr. Profit and Loss (PLO) CT "Impairment of physical activity" (OPP)	— —	8304 8304
	Dt "FA" (OPP) CT “Financial income” (FIR)	26 131 26 131	29 195 29 195

The movement of debt can also be presented in the form of a table.
According to IAS 39:

Period	Debt at the beginning or date of recognition		Interest accrued for the year	Debt with interest	Payments		Carrying amount of FA as of December 31
2016	185 643		1149	186 792	−964		185 828
2017	185 828		26 239	212 06	−22 000		190 067
2018	190 067		26 837	216 904	−22 000	30 000	194 904
2019	194 904		26 131	221 036	−191 036	30 000	0

Period	Debt at the beginning or date of recognition	Debt after discounting expected flows taking into account credit losses	Reserve upon receipt of FI	Interest accrued for the year	Debt with interest	Payments	Provision for impairment at the end	Book value of FA as of December 31 excluding provision
2016	185 643		1856	1149	186 792	−964	1858	185 828
2017	185 828			26 239	212 067	−22 000	7603	190 067
2018	190 067	168 371		23 774	192 145	−22 000	21 696	191 841
2019	191 841	191 036		29 195	221 03	−191 036	30 000	0

Solution
1. Calculations at the time of recognition of a financial asset 12/15/2016
1.1. We determine the fair value of FA as of December 15, 2016, since interest is paid unevenly and the nominal rate differs from the effective one:

Payment date	Amount of payments under the agreement	Discount formula
31.12.2016	964	= 964 / (1 + 0,1412) ^ (16 / 365)	959
31.12.2017	22 000	= 22 000 / (1 + 0,1412) ^ (381 / 365)	19 167
31.12.2018	22 000	= 22 000 / (1 + 0,1412) ^ (746 / 365)	16 795
31.12.2019	221 036	= 221 036 / (1 + 0,1412) ^ (1095 / 365)	148 723
Total	266 000		185 643

1.2. Let's adjust the book value to fair value:

200,000 − 185,643 = 14,357 rubles.

Let's recognize the difference in costs.

1.3. We accrue a reserve for assessed financial risks for 12 months:

185,643 × 1% = 1,856 rubles.

2. Calculations at the end of the reporting period December 31, 2016
2.1. We estimate future credit risk as of December 31, 2016. There was no significant increase in credit risk. We create a reserve for 12 months based on the new amount of debt. Debt amount:

185,643 + (185,643 × 14.12% × 16 / 365) - 964 = 185,828 rub.

Reserve as of December 31, 2016: RUB 185,828. × 1% = 1858 rub.
Change in reserve in OFR: RUB 1,858. − 1856 rub. = 2 rub.

2.2. We accrue and recognize financial income at an effective rate based on the carrying amount:

185,643 × 14.12% × 16 / 365 = 1149 rubles.

3. Calculations at the end of the reporting period December 31, 2017
3.1. We estimate future credit risk as of December 31, 2017. There has been a significant increase in credit risk. We create a reserve based on the entire period of ownership of the asset based on the new amount of debt:

185,828 + (185,828 × 14.12% × 1) − 22,000 = 190,067 rub.
RUB 190,067 × 4.0% = 7603 rub.

Change in reserve in OFR:

7603 rub. − 1858 rub. = 5745 rub.

3.2. Finance income is accrued and recognized at an effective rate based on the carrying amount:

185,828 × 14.12% × 1 = 26,239 rubles.

4. Calculations at the end of the reporting period 12/31/2018
4.1. There are signs of impairment of the financial asset as of December 31, 2018.

As of December 31, 2018, we estimate the value of future cash flows, discounted at the original effective rate, taking into account the new cash flow:

Payment date	Amount of payments under the agreement	Discount formula	Present value of cash flows
15.12.2019	191 036	= 191 036 / (1 + 0,1412) ^ ((349) / 365)	168 371
Total	191 036		168 371

4.2. Expected credit losses are:

190,067 − 168,371 = 21,696 rubles.

Taking into account the already accrued amount of the reserve in the financial reserve, we recognize the impairment in accordance with IFRS 9:

21,696 − 7603 = 14,093 rubles.

Reserve according to IAS 39: RUB 30,000. in the OFR.

4.3. Financial income is accrued and recognized at the effective rate for 2018:

• from book value to IAS 39: 190,067 × 14.12% × 1 = 26,837 rub.
• from the book value less credit losses on IFRS 9:(190,067 − 21,696) × 14.12% × 1 = 23,774 rubles.

5. Calculations at the time of disposal of a financial asset 12/16/2019
5.1. At the time of loan repayment on December 15, 2018, the amount of the recognized reserve will be RUB 30,000.

The OFR reflects additional accrual of credit losses up to RUB 30,000:

30,000 − 21,696 = 8,304 rubles.

5.2. The amount of interest income is calculated as the balance required to close the contract, taking into account the actual payment and the reserve. In our case, it is 29,195 rubles.
Thus, in addition to the issue of the method for calculating the effective discount rate, the introduction of IFRS 9 Financial Instruments introduced additional cases in which discounting is used and defined a new procedure for calculating credit losses.

Discounting is the most important mechanism for reliably representing the financial position of an organization. This is one of the most difficult technical problems that a Russian accountant faces when preparing financial statements under IFRS. In Russian accounting, similar requirements are not imposed, while in Western systems, discounting is an integral part of accounting.

In RAS, a mention of discounting is contained in PBU 19/02 in relation to debt securities and loans provided, while discounting is the right of the organization, and is carried out only for disclosure in the explanatory note, and making entries in accounting is prohibited (clause 23 of PBU 19/02 ). Similar to discounting is the procedure for accounting for the difference between the initial cost and the nominal value of debt securities for which the current market value is not determined: PBU 19/02 allows such a difference to be evenly attributed to financial results.

In IFRS, discounting can affect the carrying amount of any accounting element and thereby change a company's financial performance.

The meaning of discounting is that the present value of future financial flows may differ significantly from their nominal value. The theory of the value of money says that the same amount paid at different points in time has different values ​​for the following two reasons:

1) risk of non-receipt;

2) the possibility of alternative investments.

For example, if a company purchased assets at the normal price, but was able to negotiate a significant deferment in payment, then it actually acquired the assets at a lower price than usual. And if a company sells an asset with a significant deferred payment, then IFRS will reflect it not at its nominal value, but at its current, discounted value, and the difference will affect financial results. By taking into account the impact of the time value of money on financial performance, the comparability of financial statements is enhanced and provides greater opportunities for investment and management analysis.

Any, even the most complex, discounting operations come down to the discounting formula:

PV = FV/ (1+i)^n

FV – current value,

PV – future value,

i – discount rate,

n – term (number of periods).

Basic rules of discounting according to IFRS

Determining the rate is not only the most important, but also the most difficult in discounting. There is no right or wrong discount rate. Discount rates tend to vary from company to company, for different transactions, at different points in time, and for different purposes.

Determining the rate is the most important thing in discounting, since it significantly affects the results of all calculations. For example, the present value of an asset with a nominal value of $1 million payable in 3 years:

• at a rate of 20% it will be $578,704,
• at a rate of 3% it will be $915,141,
• at a rate of 30% - $455,166.

Depending on the specific accounting objects, IFRS provides various options for choosing a discount rate (see Table 1). At the same time, the following basic discounting rules in IFRS can be identified, which are applicable to all situations:

1. Discounting is usually not carried out if the effect of the time value of money is insignificant;

2. The interest portion generated by discounting is usually accrued not evenly, but at the effective interest rate. Accordingly, the discount rate is calculated using the compound interest method. According to IAS 39 Financial Instruments: Recognition and Measurement, the effective interest rate is the rate that exactly discounts expected future cash payments or receipts until maturity of the financial instrument, or when this is appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability.

3. Financial instruments are purchased throughout the entire financial year, and the period for which the discount rate is determined (in the formula – “n”) should be used not a year, but the shortest possible period (usually a month is enough). Otherwise, it will be much more difficult to calculate interest at each reporting date.

4. To determine the discount rate (except in special cases), market rates are usually used, including those adjusted for similar conditions, for example, for conditions for raising borrowed funds, similar in terms of currency, term, type of interest rate and other factors attracted by an organization with similar credit rating;

5. The discount rate used for accounting generally depends on the creditworthiness of the debtor. If receivables are discounted, the discount rate usually corresponds to the interest rate at which the counterparty could obtain borrowed funds on similar terms. If discounted, then the discount rate usually corresponds to the interest rate at which the organization could obtain borrowed funds on similar terms.

6. Discount rates are applied before deduction of income tax, that is, cash flows before tax are taken into account when assessing the rate.

7. When estimating discount rates, risks for which estimates of future cash flows have been adjusted are not taken into account. For example, if future cash flows are calculated in nominal terms, then the discount rate must include the effect of rising prices.

In countries with a developed stock market, the weighted average cost of capital, WACC (weighted average cost of capital), which is calculated based on the cost of the company's equity capital and borrowed funds, can be used to calculate the discount rate. In Russia, it can be reasonably used only in relation to the debts of a small number of companies - public issuers of securities, as well as (with certain assumptions) companies comparable to them in size and nature of activity.

For financial instruments of other companies, a discount rate is usually calculated based on an estimate of the cumulative risk premium. In this case, the risk-free interest rate is used as the base rate, which is adjusted based on the risk premiums inherent to the financial instrument for the main risk factors.

There is no consensus among valuation and investment analysis experts on what constitutes a risk-free interest rate in Russia, or whether there is one. As already indicated, the discount rate will be different for solving different problems; moreover, within the framework of solving one problem, it will be different for different specialists. In accordance with ISA 540, Audit of Accounting Estimates, IFRS auditors will be required to ensure that the company has chosen the correct discount rate. At the same time, audit evidence obtained from sources independent of the audited entity is considered, according to ISA 500, to be more reliable. Therefore, if discounting significantly affects the financial position or financial performance of the company, then it is advisable to entrust the determination of the discount rate to an independent party (for example, appraisers or an audit company).

Cases where discounting is assumed in IFRS are presented in Table 1.

Table 1

Cases in which IFRS provides for discounting

IAS 2 Inventories paragraph 18, IAS 16 “Property, Plant and Equipment” paragraph 23, IAS 38 Intangible Assets paragraph 32

If the acquisition of an asset allows for deferred payment beyond normal terms, the asset is accounted for at the present value of future payments.

The most reliable estimate of the asset when using: 1. The rate at which the buyer can raise borrowed funds on similar terms; 2. Rates, the use of which allows you to obtain the current value of the asset when it is paid for in cash using the discount formula specified in clause 3 of the table

A portion of interest costs directly attributable to the acquisition of a qualifying asset may be included in the cost of that asset if the entity chooses the alternative option of accounting for borrowing costs under IAS 23 Borrowing Costs.

IAS 39 Financial Instruments: Recognition and Measurement paragraph 43

Financial assets and liabilities are generally measured at fair value upon initial recognition. When calculating fair value in this case, discounting is often used

Current market interest rate for similar financial instruments

Discounting the future cash flows of a financial instrument is only one type of measurement of its fair value (for more information, see IAS 39, Application Guidance, AG64-82). Accounting for the impact of the time value of money on additional costs associated with the acquisition of an asset or liability is determined in a manner similar to that set out in paragraph 1 above

IAS 39

After initial recognition, a portion of financial assets and liabilities continue to be measured at fair value and a portion is measured at amortized cost using the effective interest method.

For those measured at fair value - upon initial recognition. For those valued at amortized cost, the discount formula (PV = FV/(1+i)^n) is applied to estimate the interest rate (i) at which the value of the asset or liability increases as the maturity date approaches. In this case, the formula is modified as follows: i = ((FV/PV)^(1/n)) – 1, where FV – future payments on a financial instrument; n – number of periods until the corresponding future payment;