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IAS 1 Presentation of Financial Statements

XYZ plc
Statement of Comprehensive Income for the year ended 31 December 20X9

IAS 1 allows Comprehensive Income to be presented in two ways: [IAS 1: 81]
i. A single Statement of Comprehensive Income
ii. Two separate statements as shown above

IFRS do not specify whether revenue can be presented only as a single line item in the statement of
comprehensive income, or whether an entity also may include the individual components of
revenue (for example: various sub-totals for banks).

Expenses can be classified by: [IAS 1: 99]
Function: more common in practice (as the above statement)
Nature (e.g. purchase of materials, depreciation, wages and salaries, transport costs)

Finance income cannot be netted against finance costs; it is included in ‘Other income’ or show
separately in the income statement.
Where finance income is an incidental income, it is acceptable to present finance income
immediately before finance costs and include a sub-total of ‘Net finance costs’ in the income
Where earning interest income is one of the entity’s main line of business, it is presented as

Entities must prominently display: [IAS 1: 51]
name of the reporting entity
whether the statements are for a single entity or a group of entities
date of the end of the reporting period, or the period covered
presentation currency


the level of rounding used in the preparation of the statements

XYZ plc –Statement of Changes in Equity for the year ended 31 December 20X9

IAS 16 (PPE) permits and it is best practice to make a transfer between reserves of the excess
depreciation arising as a result of revaluation. [IAS 1: 41]

When an asset carrying using revaluation model is disposed, any remaining revaluation reserve
relating to that asset is transferred directly to retained earnings. [IAS 1: 41]

An entity can present components of changes in equity either in the ‘Statement of Changes in
Equity’ or in the notes to the financial statements. [IAS 1: 106]

XYZ plc – Statement of Financial Position as at 31 December 20X9

Reserves other than share capital and retained earnings may be grouped as ‘other components
of equity’.

Entities must present a set of previous year’s statements for comparison purposes.

An entity shall classify an asset as current when: [IAS 1: 66]
a) It expects to realise the asset, or intends to sell or consume it, in its normal operating
b) It holds the asset primarily for the purpose of trading;
c) It expects to realise the asset within twelve months after the reporting period; or
d) The asset is cash or cash equivalents unless the asset is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting period.

An entity shall classify a liability as current when: [IAS 1: 69]
a) It expects to settle the liability in its normal operating cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the reporting period; or

 Any abnormal costs incurred by the entity. plant and equipment are tangible assets that: are held for use in the production or supply of goods or services. the change should be accounted for over the useful economic life remaining.  The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset.  Elements of Cost: Cost can include: Purchase price less any trade discount (not prompt payment discount) or rebate Import duties and non-refundable purchase taxes Directly attributable costs of bringing the asset to working condition for its intended use. If either changes significantly. plant and equipment  An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected flow to the entity. Gains from the expected disposal of assets should not be taken into account in measuring a provision. - In case of a land. [IAS 16: 6] . even if not brought into use. for rental to others.  Estimated economic life and residual value of asset should be reviewed at the end of each reporting period. wastage or industrial disputes. if initial estimation of restoration cost is capitalised then this capitalised restoration cost shall be depreciated. or for administrative purposes. if the asset were already of the age and in the condition expected at the end of its useful life. - Borrowing costs incurred in the construction of qualifying assets if in accordance with IAS 23 Borrowing costs. should be expensed as they are incurred and do not form part of the capitalised cost of the PPE asset.  Property. for example those arising from design errors. the period for which the Initial delivery and handling costs costs can be included in the cost of PPE Installation and assembly costs ends when the asset is ready for use. architects fees Initial costs of testing that asset is functioning correctly (after deducting the net proceeds from selling any items produced) - The initial estimate of dismantling and removing the item and restoring the site where it is located if the entity is obliged to do so (to the extent it is recognised as a provision per IAS 37).d) It does not have unconditional right to defer settlement of the liability for at least twelve months after the reporting period.  Initial recognition: PPE should initially be recognised in an entity's statement of financial position at cost. Professional fees such as legal fees.  Cost is the amount of cash and cash equivalents paid to acquire the asset at the time of its acquisition or construction PLUS the fair value of any other consideration given. and are expected to be used during more than one period. after deducting the estimated costs of disposal. Examples: Where these costs are incurred over a Costs of site preparation period of time. IAS 16 Property.

Without the inspection the aircraft would not be permitted to continue flying. . If this model is applied to one asset. these should be separately identified and depreciated. revalue assets to their fair value (only if the fair value of the item can be measured reliably) For land and buildings this is normally determined based on their market values as determined by an appraisal undertaken by professionally qualified valuers.  Measurement after initial recognition: After initially recognising an item of property. Major inspections or overhauls should be recognised as part of (i. if it chooses. leading to large reductions in operating costs Where an asset is made up of many distinct (i. or improves quality or quantity of output. IAS 16 allows (and encourage) a reserve transfer in the statement of changes in equity (from ‘revaluation reserve’ to ‘retained earnings’) of the 'excess' depreciation because of an upward revaluation. The revalued amount is depreciated over the asset's remaining useful life. increase) carrying amount of the item of PPE. ship). or reduces the cost. it must also be applied to all other assets in the same class.e.e. the capitalised overhaul cost shall be depreciated over the period to next overhaul. For a revalued asset.   Subsequent expenditure only to be capitalised if enhances the life of the asset. Cost model: Carrying asset at cost less accumulated depreciation and impairment losses  Revaluation model: Carrying asset at revalued amount less subsequent accumulated depreciation and impairment losses Revaluation model: An entity can. an entity has two choices about how it accounts for that item going forwards. significant) parts (examples: aircraft. As a separate component of PPE. Note that when the revaluation model is used PPE must still be depreciated. Examples of subsequent expenditure to be capitalised can include: Modification of an item of plant to extend its useful life Upgrade of machine parts to improve the quality of output Adoption of a new production process. An example is where an aircraft is required to undergo a major inspection after so many flying hours. If not capitalised then recognise as expense in I/S. assuming that this meets the recognition criteria. plant and equipment in its statement of financial position at cost.

 Methods of depreciation: Straight line method Reducing balance method Machine hour method Sum-of-the-digits method Sum of the years of asset’s expected life = N X (N+1)/2 where N is the asset’s expected life Cost of a lorry was $15.000 $15. or When no future economic benefits are expected from its use or disposal.000 $15. this balance should be transferred to retained earnings. regardless of whether the asset is revalued or not.000 = $2.e.000 = $3.000 $15.  The gain or loss arising from de-recognition is included in profit or loss. removed from the statement of financial position) either: On disposal.000 and expected to last for five years. Any gain should not be classified as part of the entity's revenue.000 X X X X 5 4 3 2 /15 /15 /15 /15 = $5.  If on disposal of a revalued asset there remains a balance on the revaluation surplus relating to the asset. This gain or loss is calculated by comparing the sale proceeds to the asset's carrying amount.000  Derecognition: Property. The gain or loss is calculated in the same way. plant and equipment shall be derecognised (i. No scrap value.000 =$4. Sum of the years of asset’s expected life = N X (N+1)/2 = 5 X (5+1)/2 = 15 Depreciation in Year 1 2 3 4 $15. .

000) to be recognised in I/S 31. interest expense) of 3 months (i. [IAS 23: 8] A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. construction or production of a qualifying asset as part of the costs of that asset.e. [IAS 23: 21] .e. $100.12 Purchase order made to buy the Borrowing cost of 9 months (i.03. (Temporary delays or technical/administrative work will not cause suspension).12 Payment made to buy the asset Borrowing cost of 12 months (i.IAS 23 Borrowing costs Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds.$1m loan @10% for 2 years 28.e. as part of the asset) borrowing costs that are directly attributable to the acquisition.Asset is delivered & ready 31.13 . and Activities that are necessary to prepare the asset for its intended use are being undertaken. [IAS 23: 22]  The commencement date for capitalisation: [IAS 23: 17] When the following 3 conditions are first met: Expenditures for the asset are being incurred Borrowing costs are being incurred.12 .Loan is matured and repaid All three conditions are met at this point. Borrowing cost (i. [IAS 23: 5]  Borrowing costs eligible for capitalisation are those that would have been avoided otherwise. to be recognised in Income Statement under Finance Costs 01.  Capitalisation is suspended if active development is interrupted for extended periods.e. [IAS 23: 5]  An entity shall cease capitalisation borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. [IAS 23: 10] An entity shall capitalise (i. $25.000) to be capitalised as part of asset in Statement of Financial Position 31. $75. Interest income from deposit during this period is not deductible from capitalised borrowing cost since cost from this suspended period is not capitalised.12 .e.12.

calculate the borrowing costs which may be capitalised for each of the assets and consequently the cost of each asset as at 31 December 20X6. construction of which began on 1 July 20X6.500)  ($500. Acruni Co began construction of a qualifying asset.8% Borrowing costs = ($30m × 9. Expenditure drawn down for the construction was: $ £30m on 1 January 20X6.000 Less investment income: To 30 June 20X6 (8.000 90. The loan facility was drawn down and incurred on 1 January 20X6.8%) + ($20m × 9. 1 January 31 December 10% Bank loan repayable 20X8 9. using existing borrowings. On 1 January 20X6.000 × 7% × 6/12) For borrowings obtained generally.5% Bank loan repayable 20X9 8. Asset A Asset B $'000 $'000 1 January 20X6 250 500 1 July 20X6 250 500 The loan rate was 9% and Stremans Co can invest surplus funds at 7%. both of which were expected to take a year to build. [IAS 23: 14] Acruni Co had the following loans in place at the beginning and end of 20X6.000.5% × (80 / (120 + 80))) = 9.750) (17.5m to finance the production of two assets. a piece of machinery for a hydroelectric plant. Asset A Asset B $ $ Borrowing costs: To 31 December 20X6 45. Amount of borrowing costs available for capitalisation is actual borrowing costs incurred less any investment income from temporary investment of those borrowings.000/$1. $20m on 1 October 20X6.000/$500. apply the capitalisation rate to the expenditure on the asset (weighted average borrowing cost).9% debenture repayable 20X7 20X6 $m 120 80 – 20X6 $m 120 80 150 The 8. [IAS 23: 13] On 1 January 20X6 Stremans Co borrowed $1.8% × 3/12) = $3.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment).000 × 9%) ($250. with the remaining funds invested temporarily.43m . and was utilised as follows. Work started during 20X6. Capitalisation rate = weighted average rate = (10% × (120/ (80 + 120))) + (9. Required: Ignoring compound interest. Required: Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.

whether gains or losses. one portion under IAS 40 and another under IAS 16) if those portions could be sold separately or leased out separately under finance lease. Changes in fair value. or Sale in the ordinary course of business. the property does not qualify as investment property in the consolidated financial statements as it is owner-occupied from the group perspective. [IAS 40: 35]  When determining fair value. the accounting treatment of investment properties will be as follows: All investment properties should be measured at fair value at the end of each reporting period provided fair value can be measured reliably. However. and occupied by. an entity can choose between two models: [IAS 40: 30] The IAS 16 cost model The fair value model If the fair value model is adopted.g. [IAS 40: 15]  Initial recognition and measurement: An investment property should be initially measured at cost (IAS 16’s initial recognition rules applies). [IAS 40: 20]  Measurement after recognition: After initial measurement at cost. the property is treated as an investment property in the entity's own accounts. including property held for future use as owner-occupied: IAS 16 Property. then an entity accounts for the portions separately (e. rather than for: Use in the production or supply of goods or services or for administrative purposes. [IAS 40: 10] Where an entity owns property that is leased to. its parent or another subsidiary. [IAS 40: 5]  IAS 40 lists the following as examples of investment property: [IAS 40: 8] Land held for long-term capital appreciation rather than short-term sale in the ordinary course of business Land held for a currently undetermined future use A building owned by the entity (or held under a finance lease) and leased to a third party under operating lease A building which is vacant but is held to be leased out under an operating lease Property being constructed or developed for future use as an investment property (property constructed for sale is not investment property)  Followings are outside the scope of IAS 40: [IAS 40: 9] Property intended for sale in the ordinary course of business: IAS 2 Inventories Property being constructed or developed on behalf of third parties: IAS 11 Construction Contracts Owner-occupied property. [IAS 40: 37] .IAS 40 Investment property  Investment property is a property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. do not deduct ‘costs to sale’ from the fair value. should be recognised in profit or loss for the period in which they arise. Plant and Equipment Property occupied by employees whether or not the employees pay rent at market rates: IAS 16 PPE Property leased to another entity under a finance lease: IAS 17 Leases  Points to note: If a portion of an asset meets investment property criteria and other portion is not.

The treatment will be same whether the grant is received in cash or given as a reduction in a liability to government. appropriately qualified and experienced professionals but does not require it. [IAS 20: 10] Grants relating to assets: IAS 20 allows two alternatives: .  The policy chosen should be applied consistently to all of the entity's investment property IAS 40 encourages the assessment of fair value by independent. IAS 20 Government grants  An entity should not recognise government grants until it has reasonable assurance that: [IAS 20: 7] The entity will comply with any conditions attached to the grant The entity will actually receive the grant    Receiving the grant not necessarily prove that the conditions attached to it have been or will be fulfilled.

 Government grant recognised as ‘Deferred income’ (Option 1) needs to be amortised (i. [IAS 20: 32]   It is possible that the circumstances surrounding repayment may require a review of the asset value and an impairment of the new carrying amount of the asset.  A non-monetary asset (example: land. the benefit of the grant should be recognised in profit or loss over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. any excess should be recognised immediately as an expense. [IAS 20: 23]  Government grants that cannot reasonably have a value placed on them (for example the provision of free services by a government department) are excluded from the definition of government grants. [IAS 20: 32] Repayment of a grant related to an asset: increase the carrying amount of the asset or reduce the deferred income balance by the amount repayable. both may be valued at a nominal (i. etc.e. The fair value of such an asset is usually assessed and this is used to account for both the asset and the grant.e. [IAS 20: 29] As with grants related to assets. Alternatively. building.) may be transferred by government to an entity as a grant. recycled in I/S as Income) over the useful life of the asset. insignificant) amount. The cumulative additional depreciation that would have been recognised to date in the absence of the grant should be immediately recognised as an expense. IAS 20 does not cover: [IAS 20: 2] Accounting for government grants in financial statements reflecting the effects of changing prices Government assistance given in the form of ‘tax breaks’ Government acting as part-owner of the entity . [IAS 20: 34] Repayment of grant related to income: apply first against any unamortised deferred income set up in respect of the grant.  Repayment of government grant: If a grant must be repaid it should be accounted for as a revision of an accounting estimate (IAS 8).  Grants relating to income: Such grants should be recognised in profit or loss as other income or deducted from the related expense.

licensed. the following criteria met: [IAS 38: 21] it is probable that future economic benefits from the asset will flow to the entity the cost of the asset can be reliably measured. identifiable asset or liability. is capable of being separated or divided from the entity and sold.e. transferred. 69(b)] . [IAS 38: 8]   At recognition the intangible should be recognised at cost. regardless of whether the entity intends to do so. and only if. either individually or together with a related contract. i.IAS 38 Intangible assets  An intangible asset is an identifiable non-monetary asset without physical substance. [IAS 38: 24] Examples of expenditures that are not part of the cost of an intangible asset are: [IAS 38: 29] Costs of advertising and promotional activities) [IAS 38: 69(c)] Costs of staff training [IAS 38: 67(c). rented or exchanged. [IAS 38: 8] An asset is identifiable if it either: [IAS 38: 12] (a) is separable. or (b) arises from contractual or other legal rights. regardless of whether those rights are transferable or separable IAS are - 38 states that an intangible asset is to be recognised if. Purchased  An asset is a resource controlled by the entity as a result of past event(s) and from which future economic benefits are expected to flow to the entity.

[IAS 38: 48]  Internally generated brands. similar) (b) Willing buyers and sellers can normally be found at any IAS 36 Impairment of assets  An asset is impaired when its ‘carrying amount’ is higher than its ‘recoverable amount’. no probable future economic benefit can be expected An intangible asset arising from development must be capitalised if an entity can demonstrate all of the following criteria: [IAS 38: 57] the technical feasibility of completing the intangible asset (so that it will be available for use or sale) intention to complete and use or sell the asset ability to use or sell the asset  Internally generated goodwill should not be recognised as an asset. customer lists and items similar in substance shall not be recognised as intangible assets.e. [IAS 38: 8] The result of research is unknown and. [IAS 38: 109]  Residual values should be assumed to be nil. except if an active market exists or there is a commitment by a third party to purchase the asset at the end of its useful life [IAS 38: 100] An active market is a market in which all the following conditions exist: (a) The items traded in the market are homogeneous (i. undertaken with the prospect of gaining new scientific or technical knowledge and understanding.phaseDevelopment phaseResearch Internally generated    Research is original and planned investigation. but should be reviewed for impairment on an annual basis [IAS 38: 108] There must be an annual review of whether the indefinite life assessment is still appropriate. publishing titles. [IAS 38: 63]  An intangible asset with a finite useful life should be amortised over its expected useful life [IAS 38: 89]  An intangible asset with an indefinite life should not be amortised [IAS 38: 89]. so. mastheads. [IAS 36: 6]  Impairment loss = Carrying value – Recoverable amount [IAS 36: 59] Higher of .

any individual asset that is specifically impaired 2. pro rata with the carrying amounts of those assets [IAS 36: 122] . except for goodwill. [IAS 36: 31(a)] Future cash flows shall be estimated for the asset in its current condition. management’s best estimate of future price that could be achieved in arm’s length transactions are used in estimating the CGU’s value in use. [IAS 36: 70] If the cash inflows are affected by internal transfer pricing.    If no impairment loss then do nothing! After impairment review: the depreciation/amortisation should be adjusted for future periods.g. [IAS 36: 41] Recognition of impairment losses in financial statements: [IAS 36: 60. other assets pro rata to their carrying amount in the CGU (subject of the carrying amount of an asset not being reduced below its individual recoverable amount. [IAS 36: 70]  Impairment loss is allocated among the asset/CGU in the following order: [IAS 36: 104] 1. subject to IAS 16 requirements) [IAS 36: 119] SFP: A reversal for a CGU is allocated to the assets of the CGU.e. 61] Asset carried out at historical cost: in profit or loss. [IAS 36: 105]  Reversal of past impairment:  -  - I/S: An impairment loss reversal on property. the entity estimates the recoverable amount of the cash-generating unit to which it belongs.Fair value less costs to sell: Value in a binding sale agreement less incremental costs directly attributable to the asset’s disposal.e.  Where it is not possible to estimate the recoverable amount of an individual asset. goodwill allocated to the CGU 3. repair and replacement of parts). [IAS 36: 44] Cash outflows to maintain the level of economic benefits from the asset in its current condition should be included (e. [IAS 36: 68] If an active market exists for the output produced by an asset or a group of assets. plant and equipment first reverses the loss recorded in profit or loss (and any remainder is credited to the revaluation surplus. the asset’s market price (where there is an active market). this group of assets should be identified as a CGU even if some or all of the output is used internally. fair value). [IAS 36: 25] - Otherwise. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from improving or enhancing the asset’s performance. [IAS 36: 26]  Value in use: - - Based on cash-flow projections Cash flows should include expected disposal proceed. Revalued assets: first against any revaluation surplus relating to the asset and then (if amount left) in profit or loss. [IAS 36: 63] If goodwill is valued at fair value (in full) the non-controlling share of impairment will be allocated to non-controlling goodwill (i. or amount obtainable in an arm’s length transaction (i. will reduce NCI). less costs of disposal. [IAS 36: 66] A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

economic or legal environment Increased market interest rate. Intangible assets with an indefinite useful life or not yet available for use. [IAS 36: 10] IAS 8 Accounting policies. [IAS 36: 123] Impairment indicators: The entity should look for evidence at the end of each period and conduct an impairment review on any asset where there is evidence of impairment. [IAS 36: 9] External indicators: [IAS 36: 12] Internal indicators: [IAS 36: 12] - - - - - Significant decline in market value of asset Significant change in technological. and goodwill acquired in business combination are subject to annual impairment test irrespective of whether there are indications of impairment. the carrying amount of an asset must not increase above the lower of: Its recoverable amount. thus reducing value in use Carrying amount of net assets of the entity exceeds market - - Evidence of obsolescence or physical damage Significant changes with an adverse effect on the entity Evidence available that asset performance will be worse than expected. impairment losses on goodwill are not reversed [IAS 36: 124] In case of a reversal. and Its depreciated carrying amount had no impairment loss originally been recognised. changes in accounting estimates and errors .   Once recognised.

 Revaluation of non-current assets should not be treated as changes in accounting policy (i. Either restating the comparative amounts for the prior period(s) in which the error occurred.e.e. (ii) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material. or The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity. This involves restating opening balances of current year and comparative previous year. Changes in accounting estimate Errors:  Errors discovered during a current period which relate to a prior period may arise through: Mathematical mistakes Mistakes in the application of accounting policies Misinterpretation of facts Omissions Fraud  Prior period errors correct retrospectively. cash flows and financial position. In other words. From earliest date of same transaction (i. the policy is applied from that date. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. providing more reliable and relevant information. at the earliest date such transactions or events occurred. to allow users to analyse trends over time in profit. no retrospective effect for revaluation). Changes in accounting estimates  Management applies judgement based on information available at the time  Examples of accounting estimates: Useful life or residual value of a non-current asset (IAS 16) Provision made for future loss or expenses (IAS 37)  A change in accounting estimate must be applied prospectively.Changes in accounting policies The same accounting policies are usually adopted from period to period. Examples of accounting policies: Alternative presentation of government grant (IAS 20) FIFO or Weighted average method of inventory valuation Fair value model of cost model for investment properties (IAS 40: 31)  A change in accounting policy must be applied retrospectively.  Changes in accounting policy will be very rare and should be made only if: The change is required by an IFRS. retrospective effect)    On future transactions Policy change date Two types of event which do not constitute changes in accounting policy: (i) Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity. or .

Treat this as normal rental agreement.- when the error occurred before the earliest prior period presented. liabilities and equity for that period Error/ fraud discovered IAS 17 Leases  Operating lease: Any lease other than a finance lease. . restating the opening balances of assets. .

iii. v. Non-current asset is subsequently depreciated over shorter of: .e. The amount of non-current asset to be capitalized is lower of: [IAS 17: 20] - Present value of minimum lease payment. iv.  The leased asset is so specialised that it could only be used by the lessee without major modifications being made At commencement of a finance lease. and amortised over the lease term.  IAS 17 identifies five situations which would normally lead to a lease being classified as a finance lease: i. ii. Title may or may not eventually be transferred. that it is reasonably certain the option will be exercised The lease term is for a major part of the asset’s economic life even if title is not transferred at end of lease term Present value of minimum lease payment amounts to substantially all of the asset’s fair value at inception Present value of minimum lease payments is the payments over the lease term that the lessee is required to make discounted applying implicit interest rate. and . user of the asset) recognises a Non-current asset and a Liability in Statement of financial position.Asset’s useful life. leasee (i.  In F7 using cash price (fair value) given in the question should be sufficient.Lease term including any secondary period  use useful life if reasonable certainty exists that the lessee will obtain ownership (IAS 17: 27)  Example: Leasee accounting: Payment quarterly in advance . Finance lease: A lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee (who took the lease). Transfer of ownership of the asset to the lessee at the end of the lease term The lessee has the option to purchase the asset at a price sufficiently below fair value at the option exercise date. and Fair value of the leased asset Liability component comprises a current portion and a non-current portion.

Present value of the minimum lease payment: $ 1st instalment (in advance.570 61.000 Present value 2nd – 26th installment ($3. Evans has a policy to charge full year’s depreciation in the year of purchase of a non-current asset. Answer: Though the lease term is only 6.000 X 19.570 and the asset has a useful life of 10 years.On 1 October 20X3 Evans entered into a non-cancellable agreement whereby Evans would lease a new rocket booster. and that after this initial period Evans could continue.5 years ((26 quarter X 3)/ 12 months). at its option. The cash price of this asset would have been $61.000 quarterly in advance commencing on 1 October 20X3. to use the rocket booster for a nominal rental which is not material. Required: Identify whether this is a finance lease and show how these transactions would be reflected in the financial statements for the year ended 31 December 20X3. The terms of the agreement were that Evans would pay 26 rentals of $3.570 And.570 . The rate of interest implicit in the lease is 2% per quarter. so already at present value) 3. fair value of the lease asset at commencement of the lease (Cash price) Leaseee accounting: 58.5234) (25 years annuity at 2%) 61. the lease assumed to be a finance lease because the present value of the minimum lease payment is similar to the fair value of the leased asset.

150 (non-refundable) : $4.000 per annum for seven years payable in arrears : $20.000 (Fair value of the lease asset at commencement of the lease) The asset has useful life of four years and the interest rate implicit in the lease is 11%. Example: Leasee accounting: Payment annually in arrears Branch acquired an item of plant and equipment on a finance lease on 1 January 20X1. Answer: It is assumed that fair value of the leased asset and present value of minimum lease payments are same at the commencement of the lease. . Required: Prepare extracts from the income statement and statement of the financial position of Branch for the year ending 31 December 20X1. The terms of the agreement were as follows: Deposit Instalments Cash price : $1.

Cash price and fair value of the asset .000 to be made annually in advance. Commencement of the lease was 1 January 20X2 and term of the lease is 5 years. Example: Leasee accounting: Complex Bowtock has leased an item of plant. Required: Prepare extracts of the income statement and statement of financial position for Bowtock for the year to 30 September 20X3 for the above lease.000 at 1 January 20X2 – equivalent to the present value of the minimum lease payments. The company’s depreciation policy for this type of plant is 20% per annum on cost (apportioned on a time basis where relevant). Implicit interest rate within the lease 8% per annum.$52. Payments of $12. Answer: Leaseee accounting: .

25(a)] Revenue is income that arises in the course of ordinary activities of an entity. [Framework: 4. The seller must have transferred to the buyer all of the significant risks and rewards of From rendering of services should only be recognised when all of the four criteria are met: [IAS 18: 20] - - It is probable that future economic benefits will flow to the entity. The amount of revenue can be measured reliably.IAS 18 Revenue Income Revenue Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity. From sale of goods should only be recognised when all of the five criteria are met: [IAS 18: 14] - It is probable that future economic benefits will flow to the entity. The costs incurred in relation to the transaction can be reliably measured. . other than those relating to contributions from equity participants. The stage of completion can be measured reliably. The seller no longer has management involvement or effective control of the goods. The amount of revenue can be measured reliably. The costs incurred and the costs to complete in relation to the transaction can be reliably measured.

money) from sales is received but above revenue recognition criteria are not met: DR Asset: Cash CR Liability: Deferred income When revenue recognition criteria are met: DR Liability: Deferred income CR I/S: Revenue/Income  Amounts collected on behalf of third parties such as sales taxes. an entity may sell goods and. it is necessary to apply the revenue recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. when completed Estimated costs to completion and the estimated costs necessary to make the sale. revenue is only the amount of his commission.g. or in the form of materials or supplies to be consumed in the production process or in the rendering of services. for an agent. This sale and repurchase agreement may constitute a secured loan and recognised as loan liability instead of sales revenue. goods and services taxes and value added taxes are not part of revenue. in the process of production for such sale.Seller transfer significant risks and rewards: - In most cases the transfer of significant risks and rewards of ownership coincides with the transfer of legal title or the Where consideration (e. [IAS 18: 8]  In certain circumstances. enter into a separate agreement to repurchase the goods at a later date. at the same time.  Inventories needs to be valued lower of: Cost Cost of purchase Supplier’s gross price for raw materials + Import duties. [IAS 18: 13] IAS 2 Inventories  Inventories are assets: held for sale in the ordinary course of business. For example.g. [IAS 18: 8]  In an agency relationship. allocated on a systematic basis + Borrowing costs (if met IAS 23 criteria) Net Realisable Value (NRV) + Estimated selling price in the ordinary course of business. when the selling price of a product includes an identifiable amount for subsequent servicing. For example. etc + Costs of transporting materials to business premises Trade discounts Cost of + conversion Costs directly related to the units of production (e. [IAS 18: 13]  In some cases two or more transactions are considered together. . direct labours) + Fixed and variable production overheads incurred in converting materials to finished goods. that amount is deferred and recognised as revenue over the period during which the service is performed. direct materials.

which will have automatic effect on cost of sales (i. such as: Work in progress under construction contracts (IAS 11 Construction contracts) IAS 37 Provisions. [IAS 16: 16. a provision recognition (DR I/S: Expense. Costs should not include: Abnormal waste. CR Liability: Provision) initial estimation of future dismantling and restoration cost if above provision recognition criteria and IAS 16 capitalisation criteria are met. [IAS 37: 63]  An entity can be required to recognise a provision and capitalise (DR Non-current asset: Property. finished goods storage.e. more likely than not) that there will be an outflow of resources in the form of cash or other assets. unrelated administrative overheads  Write-down to NRV: If inventories are write-down to their NRV. 18] Gains from the expected disposal of assets shall not be taken into account in measuring a provision. established past An entity has a present obligation (legal or constructive) as a result of a past event.e. contingent liabilities and contingent assets  Provision: is a liability where there is uncertainty over its timing or the amount at which it will be settled. that amount is deferred (DR Asset: Cash/ Receivable.e. It is probable (i.  IAS 2 does not apply to inventories covered by other standards. A provision should be recognised where: - i. [IAS 37: 51]  If an entity sells goods with a warranty. [IAS 37: 36] - When the selling price includes an identifiable (i. distinguishable) amount for subsequent servicing. CR Liability: Deferred income) and recognised as revenue over the period during which the service is performed (DR Liability: Deferred income. cost of sales will be increased). this will result closing inventory with lower carrying value.e. CR Liability: Provision) can be required based on the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. A reliable estimate can be made of the amount [IAS 37: 10]  A provision should not be recognised in respect of future operating losses since there is no present obligation arising from a past event. plant & equipment. CR I/S: Revenue). [IAS 18: 13] .

-  A restructuring provision does not include costs of retraining or relocating continuing staff.000 is required to settle a liability after 2 years. and An announcement has been made to those who will e affected by the restructuring.e. [IAS 37: 45] Discount factor: (1+r)⁻ⁿ The discount rate shall be a pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability. At end of Year-1: $83 ($827X10%). marketing.000 X 0. DR I/S: Finance cost. identifying the areas of the business and number of employees affected with an estimate of likely costs an timescales. CR Liability: Provision (that makes closing provision liability = $910 ($827+$83))  At end of Year-2: $91 ($910X10%). or investment in new systems [IAS 37: 81]  Discounting to present value: When there is a significant period of time between the end of reporting period and settlement of the obligation. the amount of provision should be discounted to present value. Unwinding of discount (i. The provision and the amount recognised for reimbursement may be netted off in the I/S.   Example: If a provision of $1.e. and Should be treated as a separate asset in the statement of financial position (i. Unwinding of discount: When a provision is included in the statement of financial position at a discount value (i. at present value) the amount of the provision will increase over time. Such a reimbursement:   - Should only be recognised (DR Assets: Receivable.  Where the provision being measured involves a large population of items.827). the amount to be charged in finance cost and by the amount the provision needs to be increased) can be found by applying ‘discount rate’ on opening balance of the provision. requiring a provision. at 10% discount rate the provision will be recognised at Year-0 is $827 ($1. to reflect the passage of time. CR Liability: Provision (that makes closing Reimbursement: An entity may be entitled to reimbursement from a third party for all or part of the expenditure required to settle a provision. [IAS 37: 39] Restructuring costs: A constructive obligation.e. not netted off against the provision) at an amount no greater than that provision. CR I/S: Other income) where receipt is ‘virtually certain’. only arises in respect of restructuring costs where the following criteria are met: - A detailed formal plan has been made. [IAS 37: . - Unwinding of discount will be included in the finance cost. the obligation is estimated by ‘expected value’ calculation. DR I/S: Finance cost.

. or the amount cannot be measured with sufficient reliability. -  A contingent asset should not be recognised in the financial statements Contingent assets should only be disclosed in the notes of financial statements when the expected inflow of economic benefits is probable.e. -  Contingent liability is not recognised in the financial statements because either it is not probable. 13] Contingent asset: is a possible asset that arises from past events and whose existence will be confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. [IAS 37: 10. contingent liabilities and contingent assets if they would be expected to be seriously prejudicial (i. CR I/S: Other income) [IAS 37: 33] Disclosure let out: IAS 37 permits reporting entities to avoid disclosure requirements relating to provisions. will cause serious disadvantage) to the position of the entity in dispute with other parties. [IAS 37: 31. Contingent liability is only disclosed in the notes of financial statements. 34] When the realisation of income is virtually certain. Contingent liability: is a possible obligation that arises from past events and whose existence will be confirmed only by occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. then the related receivable is recognised in the financial statements (DR Asset: Receivable.

the following conditions must be met: The asset's current condition be adequate to be Available for immediate sale in present condition [IFRS 5:should 7]. the following must apply: - -  Management must be committed to a plan to sell the asset There must be an active programme to locate a buyer The asset must be marketed for sale at a price that is reasonable in relation to its current fair value The sale should be expected to take place within one year from the date of classification [IFRS 5: 8]. For a sale to be highly probable.IFRS 5 Non-current assets held for sale and discontinued operations A group of assets and liabilities that will be disposed of in a single transaction are referred to as disposal group. Sale is highly probable [IFRS 5: 8]. the following rules should be followed: Fair value less cost to sell is equivalent to net realisable value . [IFRS 5: 6]  To be classified as held for sale. Held for sale:  An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. Once an asset or group of assets and related liabilities is classified as held for sale. effectively ‘sold as seen’.

- Carry at lower of its carrying amount and fair value less cost to sell. . . [IFRS 5: 3]  Presentation of a non-current asset or a disposal group classified as held for sale: [IFRS 5: 38] Non-current assets and disposal groups classified as held for sale should be presented separately from other assets in the statements of financial position. [IFRS 5: 1] Non-current asset held for sale recognise under current asset.  A non-current asset or disposal group that is no longer classified as held for sale (for example. . or is classified as ‘held for sale’. adjusted for any depreciation that would have been charged had the asset not been held for sale. The liabilities of a disposal group should be presented separately from other liabilities in the statement of financial position.  On ultimate disposal of an asset classified as held for sale. An asset that is to be abandoned should not be classified as held for sale. and The post-tax gain or loss on the re-measurement to ‘fair value less costs to sell’ or on the disposal of the discontinued operation. which may give rise to an impairment loss [IFRS 5: 15]. - . This is an exception to the normal IAS 36 rule. an entity should disclose a single amount in the statement of comprehensive income comprising the total of: [IFRS 5: 33] -  The post-tax profit or loss from discontinued operations. because the sale has not taken place within one year) is measured at the lower of: [IFRS 5: 27]  Its carrying amount before it was classified as held for sale. [IFRS 5: 1] Present separately in the statement of financial position. [IFRS 5: 13] Discounted operation:  Discontinued operation is a component of an entity that has either been disposed of. and: represents a separate major line of business or geographical area of operations is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. any difference between its carrying amount and the disposal proceeds is treated as a loss or gain recognised in income statement. or is a subsidiary acquired exclusively with a view to resale. can include transport costs and costs to advertise that the asset is available for sale Do not depreciate even if still being used by the entity. The major classes of assets and liabilities held for sale should be separately disclosed either on the face of the statement of financial position or in the notes. Its recoverable amount at the date of the decision not to sell. IAS 36 impairment of assets requires an entity to recognise an impairment loss only when an asset’s recoverable amount is lower than its carrying amount. Assets and liabilities held for sale should not be offset. An entity should also disclose an analysis of the above single amount either on the face of the statement of comprehensive income or in the notes. [IFRS 5: 32]  For discontinued operations.

Gains and losses on the re-measurement of a non-current asset or disposal group that is not a discontinued operation but is held for sale should be included in profit or loss from continuing operations.Consolidated statement of comprehensive income for the year ended 31 December 20X9 $’000 Revenue X Cost of sales (X) Gross profit X Other income X Distribution costs (X) Administrative expenses (X) Other expenses (X) 11 Construction IAS contracts  Revenue and cost: should be recognised according to the stage of completion of the contract at the end of the reporting period. - - - Either. but only when the outcome of the activity can be estimated reliably.   An entity shall disclose the amount of income from continuing operations and from discontinuing operations attributable to owners of the parent. proportion of total contract costs incurred for work carried out to date Or. [IFRS 5: 37] XYZ plc . investing and financing activities of discontinued operations. An entity should also disclose the net cash flows attributable to the operating. the contract value < total contract cost) on a contract then it should be recognised immediately in I/S.  Costs incurred to date + costs will Costs that should be EXCLUDED from contract costs: beconstruction incurred General administration costs (unless reimbursement is specified to the contract) Selling costs Research and development (unless reimbursement is specified to the contract) Depreciation of idle plant and equipment not used on in the contract . physical proportion of the contract work completed  When outcome of the contract cannot be reliably estimated: Revenue: Only recognise revenue to the extent of contract costs incurred which are expected to be recoverable Cost: Recognise contract costs as an expense in the period they are incurred   Contract costs which cannot be recovered should be recognised as an expense straight away. - Probable that economic benefit of the contract will flow to the entity. Costs and revenue can be identified clearly and be reliably measured.e. These disclosures may be presented either on the face of the statement of cash flows or in the notes. If a loss is predicted (i.

rectification cost which is not reimbursed by client) (X)   Also known as current tax. in a later year. then the Profits/(losses) recognised to date (before deducting non-reimbursable cost) accounting treatment will be: X/(X) Net profit/(loss)    Also known as VAT (value added tax). The actual tax liability for the year is agreed with tax authorities. sales tax collected on behalf of government). will not increase the cost. then the tax charge for Year-2 will be increased by $20 (this is the ‘under-provision’ made in Year-1). if there is already a sales tax payable balance) 30 30 Income Under-provision or over-provision of tax: The tax Deferred tax actual tax liability for the year and the tax charge in the income statement are not necessarily the same amount. DR SFP: Current liability: Sales tax payable. I. (If tax is paid as incurred. then CR SFP: Cash) / (payables) (current If 15%Receivables sales tax applicable on sales made asset/liability) by X/(X) Company ‘T’.    Accounting treatments: Income Statement: Revenue X ((Total contract value X % completed) – Revenue recognised in previous periods ) Cost of sales (X) ((Total contract costs X % completed) – Costs and losses charged in previous periods) Foreseeable loss not previously recognised (ALWAYS test for foreseeable loss) (X) (((Total contract value – Total contract cost) X % yet to complete) – Any of this loss previously recognised) Profit/(loss) (before non-reimbursable abnormal cost) X/(X) Abnormal cost (e.  DR SFP: Current asset: Tax recoverable (or. but taxable profit is calculated based on tax rules.g. - If tax charge in Year-1 on Year-1 taxable profit is $100 and in Year-2 the actual tax charge for Year-1 determined $120. if there is already a tax payable balance) CR I/S: Income tax (will reduce expenses) If 15% sales tax applicable on purchases made by Company ‘T’ and if the sales taxes paid by Company ‘T’ is recoverable.e. DR I/S: Expense: Income tax X Seller collect ‘sales tax’ at the point of sale 30 Progress billing to date and the purchaser pays ‘sales tax’ at the point CR SFP: Current liability: Tax payable 30 (X) of purchase. Finance costs should be included in contract costs under IAS 23 Borrowing Costs. Statement of financial position:  If taxable profit for the year is $100 Contract costs incurred to date (accounting profit can be different) and X applicable tax rate isabnormal 30%.  An over-provision of tax from year 1 is . This is the tax on ‘taxable profit’ (NOT on X/(X) profit’). the accounting for $100 sales  If there is a tax loss for the year is $100. (Any rectification cost which will be reimbursed by‘accounting client will increase Companies prepare profit or loss account both ‘total contract value’ and ‘total contract costs’) based on accounting standards. if tax charge in Year-2 on Year-2 taxable profit is $150. may be.Penalty charged by client (may be for delay) will reduce the revenue. revenue cannot be recognised for the amount ($15) collected on behalf of others (i. DR SFP: Current liability: Tax payable. the accounting for $80 purchase will be: DR Purchase 80 DR SFP: Current asset: Sales tax recoverable 12 (or. the tax expense amount in Year-2 I/S will be $150+$20=$170.e. then will be: 12 Income taxes IAS the accounting treatment will be: DR SFP: Cash 115 CR I/S: Revenue 100 CR SFP: Current liability: Sales Sales tax tax payable TAX 15 (Because as per IAS 18.

Temporary differences may be either taxable or deductible.  Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.  Deferred tax liabilities: are the amounts of income taxes payable in future periods in respect of taxable temporary differences. it represents tax payable or recoverable in future accounting periods in relation to transactions which have already taken place. - Taxable temporary differences will result in taxable amounts in determining taxable profit (loss) of future periods when the carrying amount of the asset or liability is recovered or settled. DR Tax charge CR SFP: Non-current liabilities: Deferred tax liability . Deferred tax: This is an accounting measure rather than a tax levied by government.

The tax rate to be used in the calculation for determining a deferred tax asset or liability is the rate that is expected to apply when the asset is realised. i. Temporary difference will be either ‘taxable temporary difference’ or ‘deductible temporary difference’. The movement from year beginning deferred tax asset or liability to year end deferred tax asset or liability to be shown in I/S (in other comprehensive income if the portion related to revaluation). Check the decision tree below. or the liability is settled. In the question sometime the temporary differences are given.  Step 3: Apply tax rate on temporary differences to identify deferred tax asset or liability at year beginning and at year end. difference between carrying value and tax base value) at year beginning and at year end. In that case you don’t need to apply Step 1.  Step 2: Calculate the temporary difference (i. SFP value) and tax base value as at year beginning and year end. Expense: Asset Income: Asset .- Deductible temporary differences will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset is recovered or settled.e. DR SFP: Non-current assets: Deferred tax asset CR Tax charge   Recognise deferred tax (that is the difference between the opening and closing deferred tax balances in the SFP) normally in profit or loss. . book value.e. exceptions are: - Deferred tax relating to items dealt with as other comprehensive income (such as revaluation) should be recognised as tax relating to other comprehensive income within the statement of comprehensive income - Deferred tax relating to items dealt with directly in equity (such as the correction of an error or retrospective application of a change in accounting policy) should also be recognised directly in equity Steps to follow in determining deferred tax balances:  Step 1: Determine the item’s carrying amount (i.e. The deferred tax asset or liability identified from year end balances is the amount to be shown in Statement of Financial Position. But.  Deferred tax assets: are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences (and in respect of the carry forward of unused tax losses or tax credits).

Answer: . these differences even out over the life of an asset. will be fully depreciated at end of Year-4). These differences are misleading for investors who value companies on the basis of their post-tax profits (by using EPS for example). The tax rate is 40%.000 and depreciates it on a straight line basis over its expected useful life of five years (i. This means that the actual tax charge (current tax) is too low in comparison with accounting profits.000 for each of Year 1 to 5. In practice capital allowances tend to be higher than depreciation charges. Deferred tax adjusts the reported tax expense for these differences. As a result the reported tax expense (the current tax plus the deferred tax) will be comparable to the reported profits. and in the statement of financial position a provision is built up for the expected increase in the tax charge in the future. the equipment is depreciated at 25% per annum on a straight line basis (i. Show current and deferred tax impacts from Year 1 to 5. resulting in a relatively high current tax charge. [IAS 12: IN2] Question: Company 'T' buys equipment for $50. For tax purposes. and so at some point in the future the accounting profits will be lower than the taxable profits. There are different ways that deferred tax could be calculated. @20%). resulting in accounting profits being higher than taxable profits.e.The most important temporary difference is that between depreciation charged in the financial statements and capital allowances in the tax computation.e. However. IAS 12 states that the balance sheet liability method should be used. Accounting profit before tax is $5.

Determining tax base of assets:
 The tax base of an asset is the amount that will be deductible for tax purposes against any
taxable economic benefits that will flow to an entity when it recovers the carrying amount of
the asset. If those economic benefits are not taxable, the tax base of the asset is equal to its
carrying amount. [IAS 12: 7]
 Putting above into a formula:
Tax base = Carrying amount – Future taxable amounts + Future deductible amounts


Future taxable amount considered as equivalent to the Carrying amount since the economic
benefit (e.g. operations of the business which will generate income) from using the P&E yet to be
Future deductible amount is $3,500 since $6,500 already claimed as tax depreciation in taxable
profit calculation. $3,500 will be deductible in the future periods’ taxable profit calculation.


The amount will be taxable on cash basis; i.e. when the cash will be received in the future. So,
the whole $1,000 amount is Future taxable amount.
The amount will never be deductible in taxable profit calculation. So, ‘Nil’ Future deductible



The amount already been taxed; so will not be taxed further. That is why Future taxable amount
is ‘Nil’. - The amount will never be deductible in taxable profit calculation. So, ‘Nil’ Future
deductible amount.


The amount not taxable and not deductible in the future. So, Future taxable amount and Future
deductible amount both are Nil.


The amount will not be taxed or deductible in the future. So, both of the values are ‘Nil’.

Determining tax base of liabilities:
 The tax base of a liability is its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods. In the case of revenue which is received
in advance, the tax base of the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods. [IAS 12: 8]

Putting this into a formula: Tax base = Carrying amount + Future taxable amount* – Future
deductible amount

*Exception applies for unearned revenue (i.e. revenue received in advance) (see following Note-2)


The related expense will be deducted for tax purposes on a cash basis. Since the amount yet to
be paid, the $1,000 will be Future deductible amount.
The amount is an expense, so will not the taxable in the future.



The amount is charged for tax on cash basis. Since the cash is already received, the amount is
already taxed and will not be taxed again. That is why Future taxable amount is taken as a
negative figure, instead of positive (as given in the formula). This is exception to the general
formula, but in compliance with IAS 12 requirements.
Alternative way of calculating Tax base of Unearned revenue is: Carrying amount – Amount
that will not be taxable in the future. Thus the calculation will be: 10,000 - 10,000 = Nil


The amount will not be deductible, or chargeable for tax purposes.


The amount will not be deductible, or chargeable for tax purposes.

Financial instruments

Four standards on financial instruments:

simplified and incorporated disclosure requirements previously in IAS 32  IAS 39 Financial instruments: Recognition and measurement IAS 39 deals with recognition. Compound financial instruments: . and presentation of certain compound instruments  IFRS 7 Financial instruments: Disclosures IFRS 7 revised.  IAS 32 Financial instruments: Presentation IAS 32 deals with classification of financial instruments between liabilities and equity. derecognition and measurement of financial instruments and hedge accounting  IFRS 9 Financial instruments IFRS 9 is a work in progress and will replace IAS 39. It will come into force for accounting periods ending in 2013.

The present value should be discounted at the market rate for an instrument of comparable credit status and the same cash flows but without the conversion option. an issuer of a convertible bond has: - The obligation to pay annual interest and eventually repay the capital – the liability component The possibility of issuing equity. As an example. The amount received on the issue (net of any issue expense) should be allocated between the separate components as follows: - The fair value of the liability component should be measured at the present value of the periodic interest payments and the eventual capital repayment assuming the bond is redeemed. because of the value of the option to acquire equity. should bondholders choose the conversion option – the equity component.  Note that the rate of interest on the convertible will be lower than the rate of interest on the comparable instrument without the convertibility option.A compound or ‘hybrid’ financial instrument is one that contains both a liability component and an equity component. At the date of issue the components of such instruments should be classified separately according to their substance. This is often called ‘split’ accounting. . In substance the issue of such a bond is the same as issuing separately a non-convertible bond and an option to purchase shares. - The fair value of the equity component should be measured as the remainder of the net proceeds.



increase) of wealth Investments ‘held for sale’ (IFRS 5: Non-Current Asset Held for Sale and Discontinued Operations) Sale is highly probable + rule  REQUIRED TREATMENT IN GROUP ACCOUNTS Full consolidation.e. court administration or regulator.  Control may be lost even without changing the ownership levels. control can still exist with less than 50% voting power.Consolidated statement of financial position  Different types of investment and required accounting: INVESTMENT CRITERIA Subsidiary Control (> 50% rule) Associate Significant influence (50% > 20% rule) Joint venture (jointly controlled entity) Contractual agreement Investments which is none of the above Asset held for accretion (i. But.Power over more than 50% of the voting rights by virtue of agreement with other investors. Investments in Subsidiary: Control achieved by owning more than 50% voting power. When parent has: . single entity IAS 27 Consolidated and Separate Financial Statements IFRS 3 Business Combinations IFRS 10 Consolidated Financial Statements Equity accounting IAS 28 Investment in Associates and Joint Ventures Proportionate consolidation or equity accounting IAS 28 Investment in Associates and Joint Ventures IFRS 11 Joint Arrangements As for single company accounts (IFRS 9: Financial instruments) Present assets or group of assets separately in Statement of Financial Position and results of discontinued operations to be presented separately in the Statement of Comprehensive Income.The power to appoint or remove a majority of members of the board of directors.e.The power to govern the financial and operating policies of the entity by statue or under an agreement. when subsidiary becomes subject to control of a government. . Exemptions from preparing group accounts: A parent need not present consolidated financial statements if ALL of the following conditions are satisfied: It is a wholly-owned subsidiary or a partially-owned subsidiary of another entity and its other owners have not objected to the parent not presenting consolidated financial statements Its securities are not publicly traded It is not in the process of issuing securities in public securities markets . i. .

50% + (control) 20% + (significant influence) Subsidiary Associate NET ASSETS AT FAIR VALUE AT THE DATE OF: COST OF INVESTMENT: - Do not include costs like professional fees. goodwill . If it is due to additional information obtained that affects the position at acquisition date. these must be recognised in the Profit or Loss account as expense as incurred. if it is not possible. Adjustments should be made where accounting policies of subsidiary differ from parent. Also. 1. GROUP STRUCTURE: Parent 2. the subsidiary’s accounts may still be used provided that the gap is not more than three months and adjustments are made to reflect significant transactions or other events. 3. legal fees in the cost of investment.- The ultimate or intermediate parent publishes consolidated financial statements that comply with IFRS  Different reporting dates: If a subsidiary’s reporting date is different then parent and bulk of other subsidiaries in the group: the subsidiary may prepare another set of financial statements OR. in cost of investment do not include loan issued to subsidiary. - Any contingent consideration payable must be included even at the date of acquisition if it is not deemed probable that it will be paid - It is possible that the FV of the contingent consideration may change after the acquisition date.  Differing accounting policies: Uniform accounting policies should be used.

If the change is due to events after the acquisition date (such as earnings target met) then the goodwill will not be remeasured (gain/loss from remeasurement will be recognised in I/S) 4. New method: When examiner will require to use the new method. he will mention ‘full’. it will state that ‘it is group policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary’s identifiable net assets. 5. ‘gross’.’ NON-CONTROLLING INTEREST (NCI) IN SUBSIDIARY: . In this case FV of NCI (value of shares not acquired) at acquisition date will be given.NCI is not applicable for associates. or ‘calculate NCI at fair value’. . Old method: Where an exam question requires use of the old method. ii. ‘new’.should be remeasured (one year qualifying period applies). GOODWILL: i.


Consolidated statement of comprehensive income * If subsidiary is acquired part way through the year then all income and expenses of subsidiary shall be time apportioned X1: Transaction value of inter-company trading (i.e. the total selling price in inter-company trading) X2: Who is the seller? (only deduct the unrealised profit) .

X3: Interest on inter-company loan IAS 7 Statement of cash flows .




Ratio analysis . All information in the formats may not be required in every situation.****The formats are not comprehensive. It is very important to understand the underlying concept than mere memorising the format.

inventory.5:1 to 2:1 can mean sufficient current asset to cover its current liabilities. The higher the current ratio. taking long-term loan. the more capable the company is of paying its obligations. speeding up the receivables collection. A current ratio of 1. to repay debt which will save interest expenses. in current assets). Companies that have trouble getting paid by its receivables or have long inventory turnover can run into liquidity problems 2.e. slowing payables payment   A weak current ratio shows that the company is not in good financial health. receivables). Surplus assets can be used to to expand the business operation or to increase capacity which will earn additional profit. Quick or Quick asset or Acid test ratio = Current Asset . but it does not necessarily mean that it will go bankrupt as there are many ways to access financing.   - Current Asset Current Liabilities A current ratio below 1 suggests that the company would be unable to pay off all of its current liabilities if they came due at that point. Current ratio =     - = X:1 Current ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash. but it is definitely not a good sign. distribute to shareholders as dividend.Closing Inventory Current Liabilities =X:1 .Liquidity Ratios: Liquidity ratio measures a company's ability to pay short-term obligations 1. A current ratio of above 2:1 may mean over investment in working capital (i. Current ratio can be improved by selling of unused non-current assets.

 ROCE decrease from previous year or below industry average shows problem with controlling of costs. . This ratio indicates how efficiently a business (i. These may result a higher ROCE.  The value of capital employed is lower where company mainly uses rented assets (i. Inventory is excluded because some companies (specially manufacturing companies with high inventory holding period) have difficulty turning their inventory into cash. If quick ratio is too low than the current ratio. thorough operating lease) rather owning or finance lease. short inventory holding period) can have a less than 1 quick ratio without suggesting that the company could be cash flow trouble.  ROCE is the prime measure of operating performance.e. Return on capital employed (ROCE) = Profit Before Interest and Tax Capital Employed X 100% = X%  Capital employed = Total asset – Current liabilities = Share capital + Reserves + Long-term liabilities  Deferred Tax Liability or Asset normally excluded from Capital Employed. the better the position of the company. The higher the quick ratio. This is for comparability purpose.e.     The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets (as it excludes inventory). For companies with a high inventory turnover ratio (i. Capital employed = Total asset – Current liabilities – Deferred tax liability or asset = Share capital + Reserves + Long-term liabilities – Deferred tax liability or asset  Current Liability portion of Long-term liabilities.  There is a lot other contexts to define capital employed.e. High amount of inventory means high inventory holding costs. - If you are required to compare ratios between two different years and cannot calculate average for both of the years. this could mean that high amount of working capital is tied up in inventory. then take only the SFP value of the year (i. In that case. This is also possible where assets’ carrying value is lot less than the cost (remember in that case assets will need replacement). managers) is using the funds invested (equity and long-term debt).e. Level of dividend may also fall as a consequence. and a constant amount of Overdraft normally also considered as Non-current liability for Capital employed calculation  Better to use average Capital Employed (Opening + Closing / 2 ) where possible. Profitibality Ratios: 1.  ROCE increase from previous year or above industry average means a good sign and reflects the fact that the company (by managers) has managed to increase the sales without a proportionate increase in costs.  It is the ratio over which operations management has most control.  If market value of equity is taken then do not include ‘Reserves’. do not average). A quick ratio of 1:1 is normally most appropriate. This is basically the capital required for a business to function.

at discount) in order to generate high volume of sales.e. This may also indicate increased production cost (including material and labour cost) without a proportionate increase in selling price.e. This is for comparability purpose. when closing balance significantly differs from opening balance.2.If you are required to compare ratios between two different years and cannot calculate average for both of the years. this may result a declined ROE without indicating poor performance of the company because company really did not get time to utilise the new capital. a fall in ROE may mean increased finance cost because of new loans. . do not average). 4. otherwise any increase in borrowing will reduce shareholders' earnings.  If new share issued sometime at period end.e. so. which will give a lower ROCE without indicating company performance became poorer. specially.  A good figure results in a high share price and makes it easy to attract new funds.  With a similar level of ROCE.  ROCE should always be higher than the rate at which the company borrows. A high gross profit margin may also indicate concentration on low volume-high margin sales. Return on equity (ROE).  An improved ROE with a similar ROCE may mean some of the loans are repaid which resulted a lower finance cost and.  Asset revaluation (especially land) will result a higher amount of Capital employed. 3. then take only the SFP value of the year (i. lower cost of sales). improved profit attributable to ordinary shareholders. Operating profit margin = Profit before Interest and Tax Sales X 100% = X% . Gross profit margin = Gross Profit Sales X 100% = X%  High gross profit margin may indicate effective purchasing strategy which results a lower material &/ production cost (i.  Return on equity (ROE) indicates to ordinary shareholders how well their investments have performed measuring how much profit the company has generated for them with their money. or Return on Shareholders’ Capital (ROSC) = Profit After Tax and Preference Dividend Ordinary Share Capital and Reserve X 100% = X%  Profit after tax and preference dividend is the ‘Profit attributable to ordinary shareholders’  It is common to use book values rather market value of shares (if market value used then remember to exclude Reserves)  Better to use average of Shareholders’ Capital (Opening + Closing Ordinary Share Capital and Reserves / 2 ) where possible.  Low gross profit margin may be an indication of selling products cheaply (i.

 Typically operational management has full control over operating costs (the amount of loan capital and. This may also indicate products are sold at higher price. Check question for indication.  Company can sell at a discount to retain market share during economic downturn (and/or because of intense competition). If costs remain at similar level this will result a lower Net Profit Margin. Net profit margin = Profit After Tax Sales X 100% = X%  Net profit margin sometimes calculated based on ‘Profit before tax (after interest).  In large companies. Average receivables collection period = Average Trade Receivables Credit Sales X 365 = X days . operating profit margin effectively measures performance of operational management.e. 6.  If business is selling luxury products or products with higher profit margin that may result a lower Asset turnover ratio without a weaken ROCE or Net profit margin ratio. So. lower level of per unit cost) the net profit margin can be higher as a result. 5.  A weaken Net profit margin may indicate management is struggling in controlling the costs. so. interest expense normally depends on more higher level of management and the amount of tax payable depends on government policy). Efficiency Ratios: 1. If question says nothing.  A poor or declining Operating profit margin may indicate business is struggling in controlling the costs.  A higher percentage than last year or industry average indicates costs are being controlled better.  Multinational companies can gain or loss from favourable or adverse exchange rate movements.  This shows the sales that is generated from each $1 worth of Capital (or asset) employed.  A healthy operating profit margin is required for a company to be able to pay interest on loans. Operating profit margin gives analysts an idea of how much profit (before interest and tax) the company is making from each dollar of sales. then use ‘Capital employed’. Check question for indication. The higher the sales per $1 invested the more efficient use of the capital was. Asset turnover or Asset utilisation ratio = Sales Capital Employed = X:1  Use of ‘Non-current assets’ instead of ‘Capital employed’ is also correct. where higher level of economies of scale can be achieved (i. This may also happen because of decrease in selling price. Companies trading cheaper products can gain during economic downturn when customers generally stop buying luxury products and turn to cheaper ones.

receivables of government grant) shall not be included.  An alternative of using Average Receivables is using year-end receivables figure where amount of receivables did not change significantly from year-beginning to year-end. damage claim. Use only CREDIT SALES.  Increasing or long payment period may indicate liquidity problem. does not split between credit and cash sales) then use the given Sales figure.e. receivables derived from credit sales).  However.If you are required to compare ratios between two different years and cannot calculate average for both of the years. which may cause declining customer numbers (i. specially. However. use Cost of sales as it serves as an approximation. payables generated from credit purchase. whereas retailer may sell only or mainly on cash (may be collection period of not more than 10 days). Average payables payment period = Average Trade Payables Credit Purchase X 365 = X days  If Credit purchase or purchase amount cannot be identified from the question. do not average). then take only the SFP value of the year (i. If question gives us only a Sales figure (i.  Receivables collection days can be improved by offering discount to customers for early payment. advance. some businesses such as export oriented businesses normally needs to allow generous credit terms (may be 60 days) to win customers. This is for comparability purpose.e. 2. i.e. and increased risk of bad debts.  Receivables collection period is an approximate measure of the length of time customers take to pay what they owe. This also may mean over investment in receivables.  A high or increasing collection period may mean poorly managed credit control function. If question gives us only a Receivables figure. contradictorily.  Decreasing or low collection period may mean tighten credit control policy.  A longer payment period may also mean company has succeeded in obtaining very favourable credit terms from its suppliers.  A Receivables Collection Period similar to Payables Payment Period may be an indication of good credit control policy. and does not give any other indication about its components then assume that is the Trade receivables figure.e. when closing balance significantly differs from opening balance. Nontrade receivables (e. Significantly in excess of 30 days might be representative of poor management of funds of the business. reduction of sales).  Collection Period of less than 30 days may seem normal. and also may indicate loosing opportunity of prompt payment discounts.  We need only TRADE RECEIVABLES (i.  Use only Trade payables. increase in collection period might be a deliberate policy to increase sales by offering better credit terms than competitors.e. this may also mean unethical business practice. . .  Better to use average trade receivables (Opening + Closing /2 ) where possible.g.

. Working capital cycle.  Declining or short payment period may indicate business has sufficient cash to meet payables. sold) on average 12. some suppliers may charge interest if payment period exceeds a certain duration. Finished goods inventory turnover period = 2. Inventory turnover/ holding period = Average Inventory Cost of Sales X 365 days = X days or.e. But.16 times (= 365/30) in a year  A low turnover (i. in that case comparable figure has to derive from same approach. In F9: 1. or.3. Average production (WIP) period = Average FG Inventory Cost of Sales X 365 days = X days Average RM Inventory Annul Purchases X 365 days = X days Average WIP Cost of Sales X 365 days = X days 4. But. A short payment period may put company’s credit ratings in higher position.e. If average inventory holding period is 30 days. It may also put company at a great loss if prices start to decline (think about technological products). therefore. Cost of Sales Average Inventory = X Times  Better to use Average Inventory figure to take into account the variation between Opening inventory and Closing inventory. high holding period) implies slow sales and. this means that the inventory is ‘turned over’ (i. This measured how long a firm will be deprived of cash.  If receivables collection period is longer than the payables payment period then it can cause cash flow difficulties.  High inventory levels are unhealthy because they represent an investment with a zero rate of return.  This ratio is an estimate of the average time that inventory is held before it is used or sold. instead of Average Inventory the closing inventory figure can be used where opening inventory level cannot be determined. excess inventory and/ or high level of inventory holding costs.  Long credit term from suppliers is a source of interest free financing. Raw materials inventory turnover period = 3. Cash operating cycle (in days) = Inventory holding period (days) + Receivables collection period – Payables payment period In F9: Finished goods inventory turnover period Raw materials inventory turnover period Average production (WIP) period Average receivables collection period Average payables payment period Operating cycle  Days X X X X (X) X/(X) This cycle is the length of time between cash payment to suppliers and cash received form customers.

= $X  EPS is generally considered to be the single most important variable in determining a share’s price. companies may have a policy of achieving steady growth in dividend pay-out per share. Number of Ordinary Shares = X$  DPS is the actual portion of income received by the ordinary shareholders from EPS. care must be taken while interpreting.e. But. increase in share price). Profit) Attributable le to Ordinary Shareholders Weighted Avg.  EPS shows the amount of profit attributable to each ordinary share. This shows how well earnings support the dividend payments.  DPS is important for shareholders who are seeking income from shares rather capital gain. 3. but one could do so with less investment.  EPS often ignores the amount of capital employed to generate the earnings. Market Price per Share Price Earnings Ratio 2.  Increase in EPS generally indicates success. Dividend per share (DPS) = Ordinary Dividend Declared and Paid for The Year Weighted Avg. whereas a decrease is not welcomed by shareholders. increase) in share price. So. Investment Ratios: 1. Two companies could generate the same EPS.  Both right issue and bonus issue of shares result in a fall of EPS. So. A steady growth normally creates positive market reaction (i. This is a key measure of company performance from ordinary shareholders’ point of view. Ordinary Dividend Declared and Paid for The Year Earnings (i e Profit) Attributable to Ordinary Shareholders X 100% = X%  Dividend pay-out ratio is the percentage of earnings paid to shareholders as dividends. Dividend pay-out ratio = Dividend Per Share Earnings Per Share X 100% = X% or. This policy of strict collections and delay payments is not always sustainable or appreciable by customers (because they have to pay early) and suppliers (because they are being paid late). Number of Ordinary Shares = $X or. it does not represent actual income of the ordinary shareholders. Earnings per share (EPS) = Earnings (i.e. this could mean that this company was more efficient at using its capital. A company could even achieve a negative cycle by collecting from customers before paying suppliers.e.  Growth in dividend per share used in share price valuation. .  A constant growth in EPS may result in favourable movements (i.

The higher the cover. earnings) of the business.  Low dividend pay-out ratio may mean company is expecting difficulties in the future.  If the dividend cover is below 1 then the company is using its retained earnings from previous years to pay current year’s dividend  A low level of dividend cover might be acceptable in a company with very stable profits. and this does not necessarily serve company’s long-term interest.  Mature companies tend to have a higher pay-out ratio. Price/Earning (P/E) ratio = Market Price Per Share Earnings Per Share = X Times or. But. It gives an indication of the confidence that the investors have in the future success (i. this shows very little confidence on the company’s future prosperity.Profit) Attributable to Ordinary Shareholders = X Times  Market capitalisation is the total market value of all the issued ordinary shares of the company. Whereas.  Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out. Company’s Market Capitalisation Earnings (i. Dividend cover = Earnings Per Share Dividend Per Share = X Times or. but dividend cover below 1.e. it can also mean expansion (by reinvesting the retained earnings) of business in the future. so now interested in retaining earnings.  A P/E ratio of 1 means market is currently willing to pay $1 for each dollar of earnings currently made by the company.  Typically. a P/E ratio of 20 expresses a great deal of optimism about the future of the company . 5.  In a very basic term.  P/E ratio also knows as ‘Price Multiple’ or ‘Earnings Multiple’ ratio  P/E ratio is a measure of company performance from the market’s point of view.  High dividend pay-out ratio may mean company confidence on future earnings. Profit) Attributable to Ordinary Shareholders Ordinary Dividend for the Year = X Times  Dividend cover represents how many times dividend could have paid from the profit attributable to ordinary shareholders. a P/E ratio of 20 means investors are paying equivalent of 20 years’ earnings (at current EPS level) to own a share in the company.5 may seem risky.e. it may also mean that shareholders are taking out as much profit as they can.e. a ratio of 2 or higher is considered safe in the sense that the company can well afford the dividend. where majority of shares are held by a small number of shareholders.4. Earnings (i. But.  P/E ratio shows how much money investors are currently willing to pay for each dollar of earnings. but the same level of cover for a company with volatile profits would indicate that company may not able to maintain the current level of dividend pay-out. the better the ability to maintain dividend pay-out if profits drop.

a high Debt ratio may also mean company’s ability to raise debt finance which shows confidence of debt holders on the company. 6. X 100% = X% Redeemable Preference Share Capital + Long-term Ordinary Share Capital Irredeemable Preference Share Debt to Total capital ratio = Debt Capital Total Capital X 100% = Debt Capital Equity Capital + Debt Capital X 100% = X% . a. Dividend yield = Dividend Per Share Market Price Per Share X 100% = X%  Dividend Yield is a financial ratio that shows how much a company pays out in dividends relative to its share price. But. Many fast growing companies do not have a dividend yield at all because they do not pay-out any dividend. while young and growth oriented companies tend to have lower yield.  Mature and well-established companies tend to have higher dividend yields.  In the absence of any capital gains.  Investors can secure a minimum stream of cash flow from their investment portfolio by investing in shares which is paying relatively high and stable dividend yields.since investors are currently willing to pay $20 for each dollar of company’s earnings. Gearing ratios: Debt to Equity ratio = Debt Capital Liabilities Equity Capital X 100% = Capital + Reserves X 100% = X% b. and this will not take long to get the $20 earnings. Debt ratio = Total Debt Total Assets  Total assets consist of non-current and current assets. 2. Long-Term Solvency Ratios: 1. Investors paying 20 times of current earnings believe that company will do significantly better in coming years. the business can be considered as a risky company.  If Debt ratio is greater than 50%. the Dividend Yield is the return on investment for a share.  Market can over-value or under-value company shares depending of information available.  This ratio represents how much money company owes compared to its Total assets.  Debts consist of all current and non-current liabilities (Deferred tax liabilities can be ignored).

risky). Normally do not include Deferred tax liability within Debt capital.  A low or declining gearing may mean company is getting stronger financially and confident on future earnings. This means company will have to pay some of its interest from retained profit from previous years. do not add reserve amount with total market value of ordinary shares)  A gearing level of more than 50% (where Debt Capital to Total Capital used) or more than 100% (where Debt Capital to Equity Capital used) or Leverage ratio of less than 50% means company is highly geared (i. profit) to meet its interest charge. Leverage ratio : Equity Capital Equity Capital + Debt Capital X 100%     Take current liability portion as well of long-term liabilities in Debt capital calculation. a low level of interest cover ratio means that the business is potentially in danger of not being able to meet its interest obligations. .  Risk is high for investors in a high geared company because of obligation to pay the interest and repaying capital on time.  To lend money in a highly geared company. Interest cover = Profit before Interest and Tax Interest Charge = X Times  Interest cover is a measure of the adequacy of a company's profit relative to interest payment on its debt. This has to be justified with sales and profit growth. companies with very volatile earnings may require an even higher level of Interest cover.  Where gearing is high. Similarly.  A relatively higher gearing may mean company adopted an aggressive strategy to expand its operation.  The standard level of gearing depends on industry sector. shareholders’ required rate of return will increase because of high level of risk involve in the investment.  A high interest cover ratio means that the business is easily able to meet its interest obligations from profits. But. pledge on some assets) 4. This may also raise question about company’s going concern. lenders may impose some covenants on the company (example: a maximum limit of gearing. a minimum level of interest cover.  Interest cover of more than 2 is normally considered reasonably safe.e. Also in F9.e. If using market values remember market value of ordinary shares take account of reserves (i. A higher gearing may also mean company is having financial difficulties. values for Gearing ratio can be either book values or market values.3. In F9 Preference share considered as Debt capital not Equity capital. so may be a going concern issue.  Interest cover of less than 1 means the company did not earn sufficient earning (i.e.

So.IAS 33 Earnings per share  An entity is required to calculate and present a basic EPS and a diluted EPS amount based on the profit/ (loss) attributable to the ordinary shareholders (of the parent entity). Its profit for the year to 31 December 2010 and 2011 was $60. .000 respectively.000 and $65. company A has a share capital of 400. The corresponding previous year’s EPS also restated as that bonus issue was in existence throughout that previous year.  Basic EPS = Net profit or (loss) attributable to ordinary shareholders Shares are usually included in the weighted average number of ordinary shares weighted average number of shares from the date consideration is receivable. Simple example: Bonus issue At year beginning (01. As a result. this distorts the comparison of EPS in the current year with the EPS in the previous year.01. Calculate the EPS for the year ending 2011 and for corresponding previous year.2011). when it decides to make a bonus issue of 1 for 4 on 01 April 2011.000 ordinary shares. capitalisation issue) and share split: increases number of shares without any consideration. to ensure that the distortion does not occur: The EPS of the current year is calculated as if the bonus issue was in existence of the beginning took place at the start of the year. and.  Basic and diluted EPS figures should be presented on the face of the statement of comprehensive income with equal prominence. Weighted average number of shares can be calculated as:   Basic EPS with bonus issue (scrip issue.

Its profit for the year to 31 December 2010 and 2011 was $60.000 and $65.000 respectively. .000 shares and a bonus issue of 1 for 4 on 01 April 2011.2011). Calculate the EPS for the year ending 2011 and for corresponding previous year. It made a full market price issue on 01 March 2011 of 100.000 ordinary shares. company A has a share capital of 400.01.Complex example: Bonus issue after a full market price issue At year beginning (01.

we need to divide the total number of shares issued into ‘bonus shares’ and ‘fully paid shares’ and treat as such.286 . ii.000.000.142. Basic EPS with right issue: A rights issue offers existing shareholders the right to buy new shares in proportion of their existing holding at a price slightly below the market price.286 = $35. shares are sold at a reduced price.4 = 10. we can say.000.000 can be raised by issuing ($7.143) X $3. Number of rights share issued: 10.  dividing Deductby original number of shares from the result of the above formula to get the ‘bonus shares’ From above Theoretical ex-right price example: i.5 $35.857 shares at full market price iv. we still need to use formula in Step-2 to identify bonus fraction in a rights issue.000/ $3. Original shares plus bonus shares = Original number of shares price  X Cum right Theoretical ex right price The resulted ‘Original shares plus bonus shares’ will be a higher number of shares as we are multiplying by a bigger figure and a smaller figure.142.500.5) = 2.000 Amount received from rights issue: 2.000. as it is required by .000 X $3.000.500. there is a mismatch of ($35. so. So.000 iii.000/4 = 2.000 X $3 = $7.214.143 shares were bonus issue To verify the formula in Step 2: (Original shares + Bonus shares) X TERP = Original shares X Cum right price (10.857 shares were issued at full market price and (2.000) = $214.214. In theory the ex-right price should be the weighted average of the cum right price of the shares and issue price of corresponding number of share.857) = 357.500.000 So. This price is called the ‘theoretical ex-right price’.500.000 + 357. - In a right issue. 2.142. To calculate EPS when right issue is made we need to know:   The cum right price: This is the market price of a share just before the right issue The ex-right price: This is the price of a share after the right issue. $7.000 – 2. - Steps to follow in a right issue: Step 1: Calculate the theoretical ex-rights price Step 2: Split the number of shares in the rights issue into bonus shares and full price shares.500.286 (0.$35.6%) if we use above formula! But.500.

900. Profit for the year was $2.000. the company made a rights issue of 1 for 4 at $1. on 30 November 20X1. the company made a 1 for 10 bonus issue.PROBLEM!! when there will be multiple Step 3: Calculate current year’s EPS issues . The cum rights price was $2 per share. On 31 January 20X1. smarter but complex way) .check the example below Step 4: Calculate corresponding previous year’s EPS taking the bonus share effect. On 30 June 20X1.4c. Finally.000.000 shares. The reported EPS for year ended 31 December 20X0 was 46.000 ordinary shares in issue on 1 January 20X1. the company made an issue at full market price of 125. We can use following formula: Re-stated EPS of the previous year = Original EPS of the previous year X Holding ratio to have the bonus share(s) Share ratio with bonus shares - - Use this part of the formula only if there is a bonus issue in the current year. X Theoretical ex right price Cum right price The resulted ‘Re-stated EPS’ will be a smaller figure as we are multiplying by a smaller figure and dividing by a greater Basic EPS with right and bonus issue: Fenton had 5. Required: What was the earnings per share figure for year ended 31 December 20X1 and the restated EPS for year ended 31 December 20X0? Answer: (a quicker.75. Check the example below.

000 Diluted EPS = ($109. Diluted EPS: Diluted EPS warns existing shareholders that the EPS may fall in future years because of potential new ordinary shares that have been issued.000 and expenses of $50. It also had in issue $40.000/132. Calculate the diluted EPS.000 and 100.000X15%) 6.6c Dilution (i.000 ordinary $1 shares. the date of the convertible instrument issued. When calculating the revised weighted average number of shares.000) = $0.000 Tax expense (30%) (46.200 Number of shares issued 100.82.g. but not obligation.000 Expenses (50.000X4/$5) 32.000 Additional shares from conversation ($40.e. i.000 15% convertible bond which is convertible in two years’ time at the rate of 4 ordinary shares for every $5 of bond. In 2010 gross profit of $200. the convertible instrument (e. decrease) in earnings would be (105c – 82.4c per share  Dilutive or antidilutive: . including interest payable of $6.000) Add-back: Interest (40. Example: Diluted EPS with convertible bond In 2010 Farrah Co had a basic EPS of 105c based on earnings of $105. convertible bond) is deemed to have been converted into ordinary shares at the beginning of the period or. 82. to buy ordinary shares in a future date at a predetermined price) Contingently issuable shares (these are ordinary shares will be issued if certain conditions are met) - The diluted EPS is calculated by revising the original earnings (e. Solution: $ Gross profit 200. cancelling interest and its tax effect in case of convertible bond) and weighted average number of shares as though the potential ordinary shares had already been issued.000. if later. Tax is 30% of ‘profit before tax’.e.6c) = 22.000 132. Potential ordinary shares may be issued in the following forms: - - Convertible bonds (bonds and debentures that can be converted into ordinary shares) Convertible preference shares (Preference shares that can be converted into ordinary shares) Options and warrants (Option holders has right.000 Profit before tax 156.800) Earnings attributable to ordinary shareholders 109.6.g.000 were recorded.

Example: Brand Co had net profit of $1.35) = $91.000 X 0.000 = 35 cents (a) Earnings increased (i.000.000 of 10% convertible loan stock.Only diluted shares should be included in the diluted EPS calculation. Weighted average number of ordinary shares outstanding during the year was 500. The rate of income tax is 35%. interest expense saves): i X(1 – t) = $2. Decide which one of the following will dilute the EPS and will be included in diluted EPS calculation: (a) $1.10 (1 – 0.000/5.000 X 3)/ $5 = 1.000 = 45. Average of high and low prices when prices fluctuate Diluted EPS with option: widely. incremental EPS = $91.000.e. The free fraction is the dilutive.e.000 = 10.750.14 (1 – 0.000/200. The shares that would be issued if the options or warrants are exercised are divided into full priced shares and free shares. -  Adequate to use a simple average of weekly or monthly prices.000 shares So.e.000. . so diluted (i. interest expense saves): i X(1 – t) = $1. or.Potential new ordinary shares are not dilutive if EPS would have been higher if the potential shares had been actual shares in the period.35) = $130.000.000. The total earnings in 2010 were $1.000 X 2)/ $10 = 200.000 for the year ending 31 December 2010.5c Incremental EPS is higher than basic EPS.200. convertible in one year’s time at the rate of 3 shares per $5 of stock Solution: Basic EPS = $1.000.e.000. weakened) and need to include in the diluted EPS calculation. when they are ‘in the money’).000. so NOT diluted and do not include in the diluted EPS calculation.000/1.000.000 of 14% convertible loan stock.000 ordinary shares of 25 cents each in issue. Average of closing market prices. or..000 X 0.8c Incremental EPS is lower than basic EPS.200. incremental EPS = $130.000 Potential ordinary shares: ($1. Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the average market price of ordinary shares during the period (i. Average fair . (b) Earnings increased (i.000.000 Potential ordinary shares: ($2.750.200.000 shares So. Example: Ardent Co has 5. convertible in three years’ time at the rate of 2 shares per $10of stock (b) $2.

.  Post reporting date issues: Bonus issue.000 shares if issued full price.200.000 No effect $1.value of one ordinary share during the year was $20.000 – 75.000 shares will dilute the basic EPS. Brand Co issued share option of 100.000 / $20) = 75. To the extent that partly paid shares are not entitled to participate in dividends during the period they are treated as the equivalent of warrants or options in the calculation of diluted EPS. from the date of the contingent agreement.000 25. So.000 Basic EPS in 2010 = $1. the company is giving away (100.000 525.500. the company will raise cash of (100.000 = $2.40 Diluted EPS in 2010 = $1. Solution: If the options are exercised.000) = 25. Such shares need to be included in the diluted EPS calculation if and only if the conditions are met If multiple performance related criteria exists then diluted effect exists when all performance related criteria are met. the number of shares in the EPS calculation is adjusted for the period just ended and prior periods presented.000 shares X $15) = $1.000 shares with exercise price applicable of $15.e.200.200. Calculate both basic and diluted EPS.000 = $2. and the equivalent full number is included in the basic EPS calculation.29 Contingently issuable shares: These are ordinary shares issued for little or no cash when another party satisfies performance related conditions (e. share splits and share consolidations after the year end but before the financial statements are authorised for issue. These 25. or. That is ($1.500.  Diluted losses: when loss per share would be higher if potential shares were in issue. if later.000 Profit after tax $1.000 / 500.g. profit target is met) rather mere passing of time.000. This should be included from the beginning of the period. These shares can be a part of consideration for acquisitions or issued to senior staffs. less than share’s market value is paid): The equivalent number of fully paid shares must be established to the extent that partly paid shares are entitled to participate in dividends during the period. Employee share option Vesting conditions: Dilutive effect exists from: met Stay with the company Grant date Performance related When performance criteria are  If shares are partly paid (i.000 shares for free.000 / 525. Basic Dilutive effect  Number of shares 500.200.

Jedders’ trade receivables are to be split into three groups.2. Amount received by ‘factor’ from ‘Receivables’: DR SFP: Liability. and the company that purchases accounts receivable is often called a ‘factor’. In such situations.2. Group B receivables are to be factored and collected by Fab Factors on a ‘with recourse’ basis. the company may choose to sell accounts receivable to another company that specializes in collections. CR SFP: Liability ii. CR: SFP: Bank Factoring without recourse: - The seller transfers risk associated with collection of receivables to the ‘factor’. Any cash commission charged by the ‘factor’: DR I/S: Finance cost. .3-3. This process is called factoring. the seller does NOT reimburse that amount.Receivables factoring (Relevant accounting standard: IFRS 9 Financial instruments.  Factoring with recourse:   - The seller retains the risk of any under-collection of receivables by the ‘factor’. - Accounting: i. Group A receivables will not be factored or administered by Fab Factors under the agreement. Any remaining receivables amount reimbursed by the seller: DR SFP: Liability. - Accounting: i. DR I/S: Finance cost: amount under-received by seller.9)  Receivables factoring: Companies sometimes need cash before customers pay their account balances. the double entry is: DR SFP: Bank. CR SFP: Bank iii. If the ‘factor’ fails to collect any amount of receivables then the seller reimburses that uncollected amount to the factor. If the ‘factor’ fails to collect any amount of receivables. Jedders signed a receivables factoring agreement with a company Fab Factors. as follows. CR SFP: Receivables Exercise question: On 1 October 20X0. When the seller receives money from factor. If ‘factor’ charge commission by paying a lower amount of Receivables the seller: DR SFP: Bank. Interest charged by ‘factor’ to the seller: DR I/S: Finance cost. CR: Receivables ii. CR: SFP: Receivables iv. Amount received by the seller from ‘factor’: DR SFP: Bank. para 3. CR SFP: Bank iii. but instead will be collected as usual by Jedders.

000 $375.000 X 20%) X 20%) CR SFP: Receivables: Allowance for receivables (Receivables allowance of 20% recognised on remaining 20% receivables balance.250. Jedders will reimburse in full any individual balance outstanding after three months.000 $375. This is provision for doubtful debts and presented as decrease in receivables in SFP.000 @ 30 November 20X0: DR SFP: Bank ($1. decrease in receivables) $375.000 $50.250.Fab Factors will charge a 1% per month finance charge on the balance outstanding at the beginning of the month. Receivables allowance of 20% to be recognised on remaining 20% receivables balance.000 X 30%) CR SFP: Receivables (Further 30% of receivables collected by Jedders.000 X 30%) CR SFP: Receivables (30% of receivables collected by Jedders. So. So. decrease in receivables) DR I/S: Expense: Increase in receivables allowance (($1.000 $50.) $250. So. decrease in receivables) $375. 80% (30%+30%+20%) of the receivables collected by Jedders. Solution: Group A: No factoring By 31 December 20X0. @ 31 October 20X0: DR SFP: Bank ($1.000 X 20%) CR SFP: Receivables (Further 20% of receivables collected by Jedders.250. Fab Factors will pay Jedders 95% of the book value of the debtors. The receivables groups have been analysed as follows: Required: For the accounts of Jedders.250. calculate the finance costs and receivables allowance for each group of trade receivables for the period 1 October – 31 December 20X0 and show the financial position values for those trade receivables as at 31 December 20X0.000 $250.000 @ 31 December 20X0: DR SFP: Bank ($1. So. Group C receivables will be factored and collected by Fab Factors ‘without recourse’.000 . Jedders has a policy of making a receivables allowance of 20% of a trade receivables balance when it becomes three months old.

000) .000 ($1.000 (Interest charged by Fab Factors on outstanding balance at month beginning) DR SFP: Liability ($1.500.000 CR SFP: Bank $15.500.000 received from Fab Factors by Jedders.000-$600.000) = $200.500. So.500 CR SFP: Bank $4.000 CR SFP: Receivables $450.000 (Further 30% of receivables collected by Fab Factors.000) X 1%) $9.500 (Interest charged by Fab Factors on outstanding balance at month beginning) . So.000.000) X 1%) $4.000 X 40%) $600. Group A receivables balance to be presented in SFP as at 31 December 20X0: (($1.000 X 1%) $15.$250.250.000 .500.500.000-$600. @ 1 October 20X0: DR SFP: Bank $1.500.000 . Group B: Factoring with recourse Risk associated with any under-collection of receivables is retained with Jedders. decrease in receivables and liability) @ 31 December 20X0: DR I/S: Finance cost ($1.000-$450.000 CR SFP: Liability $1.000 (40% of receivables collected by Fab Factors.$375. So.So.000 X 30%) $450.000 CR SFP: Receivables $600.500.500.000 CR SFP: Bank $9.000 (Interest charged by Fab Factors on outstanding balance at month beginning) DR SFP: Liability ($1. increase in liability) @ 31 October 20X0: DR I/S: Finance cost ($1.000 $375. the amount received by Jedders from Fab Factors in advance shall be treated as a loan in Jedders account.$50. decrease in receivables and liability) @ 30 November 20X0: DR I/S: Finance cost ($1. so.

000 $100. Jedders transferred the risk of any undercollection to Fab Factors. And.000 .000 (Further 20% of receivables collected by Fab Factors.500. (Shortcut answer is in the book! Check Q-55-Jedders of BPP question bank. receivables balance shall be derecognised (i. So.500. Jedders is responsible in collecting the remaining receivables balance.000. So. Any commission charged by Fab Factors (may be by under-payment of receivables balance to Jedders or cash) shall be recognised as Finance cost. finance cost charged in I/S: (15.000) .000.000-$600.000 receivables balance.000 CR SFP: Receivables: Allowance for receivables $30.000 X 20%) $30.) .000 DR SFP: Bank $150.000 CR SFP: Receivables $300.000 $600.900.000. @ 1 October 20X0: DR SFP: Bank DR I/S: Finance cost: Factor’s commission CR SFP: Receivables (decrease in receivables) ($2. Group B receivables balance to be presented in SFP as at 31 December 20X0: (($1. Group B: Factoring without recourse Risk associated with any under-collection of receivables is transferred to Fab Factors. that is. Now.$30.000-$300.$300.000 X 20%) $300. This is provision for doubtful debts and presented as decrease in receivables in SFP. Jedders has no more right on receivables balance.000 ($1.$450.000 (Receivables allowance of 20% recognised on remaining $150.500.000 X 95%) ($2.000 There is no need for recognising any allowance for receivables on 31 December 20X0.) So.e.DR SFP: Liability ($1.) DR I/S: Expense: Increase in receivables allowance (($150.000-$450.000) = $120.500 = $28.000 $2. removed from SFP) at the point of cash received from Fab Factors.500. not Fab Factors.000 .000 + $9. decrease in receivables and liability) DR SFP: Liability $150.000 X 5%) $1. decrease in liability.000.000 + $4.000) (Receivables balance uncollected by Fab Factors reimbursed by Jedders to Fab Factors. since all the receivables balance derecognised on 1 October 20X0. So.

A major business combination after the reporting date (IFRS 3 or the disposing of a major subsidiary). bonus issue. Evidence that an asset was impaired at the reporting date (e. The discovery of fraud or errors that show that the financial statements are misstated . - Where a supervisory board is made up wholly of non-executive directors.g. Disclosure should be made in the financial statements where the outcome of a nonadjusting event would influence the economic decisions made by users of the financial statements. Examples include: - Non-adjusting events: are events that are indicative of conditions that arose after the reporting date.An adjustment to the disclosed EPS (as par IAS 33) for transactions where the number of shares altered without an increase in resources (e. share split or share consolidation). bankruptcy of a customer). Announcement of plan to discontinue an operation Major purchases and disposals of assets Classification of assets as held for sale Destruction of assets. Finalisations of prices for assets sold or purchased before year end.IAS 10 Events after reporting period  Events after the reporting period are split into: Adjusting events: are events that provide evidence of conditions that existed at the reporting date. Settlement of a court case that confirms that the entity had an obligation at the reporting date.  The cut-off date for the consideration of events after financial statements are authorised for issue. and the financial statements should be adjusted to reflect them. the financial statements will first be authorised by the executive directors for issue to that supervisory .g. for example by fire or flood Major ordinary share transactions (unless capitalisation or bonus issue) Decline in market value of investments the reporting period is the date on which the - Normally the financial statements are authorised by the directors before being issued to the shareholders for approval.

Where equity dividends are declared after the reporting date.  If a significant event occurs after the authorisation of the financial statements but before the annual report is published.4b]  Equity: The residual interest in the assets of the entity after deducting all its liabilities. other than those relating to distributions to equity participants.  Solvency: The availability of cash over the longer term to meet financial commitments as they fall due.25a]  Expenses: Decrease in economic benefits during the accounting period in the form of outflow or depletions of assets or incurrences of liabilities that result in decrease in equity. dividend to ordinary and irredeemable non-cumulative preference shares) should only be recognised as a liability where they have been declared before the reporting date.  Where the going-concern basis is clearly not appropriate. The ‘break-up’ measures the assets at their recoverable amount in a non trading environment. [Conceptual Framework: 4. as this is the date on which the entity has an obligation. and a provision is recognised for future costs that will be incurred to ‘break-up’ the business.  Underlying assumptions in preparing financial statements: Accruals basis: The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting . then the entity is not required to apply the requirements of IAS 10. - The date on which the financial statements were authorised for issue should be disclosed. this fact should be disclosed but no liability recognised at the reporting date. if the event was so material that it affects the entity’s business and operations in the future. [Conceptual Framework: 4. ‘break-up’ basis should be adopted.25b]  Liquidity: The availability of sufficient funds to meet deposit withdrawals and other short-term financial commitments as they fall due.e. [Conceptual Framework: 4. [Conceptual Framework: 4. The relevant cut-off date is the date on which the financial statements are authorised for issue to the supervisory board. However. [Conceptual Framework: 4.  Equity dividend (i.4c]  Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in increases in equity.board for its approval. other than those relating to contributions from equity participants. the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.4a]  Liability: A present obligation of the entity arising from past events. Important definitions  Asset: A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. the entity may wish to discuss the event in the narrative section at the front of the Annual Review but outside of the financial statements themselves.

[Conceptual Framework: 4.1]  Materiality: Information is material if its omissions or misstatements could influence the economic decisions of users taken on the basis of the financial statements. It is assumed that the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.Timeliness (Relevance) Verifiability (Reliability) Understandability . [Conceptual Framework: QC19] Comparability . [Conceptual Framework: QC11]  Substance over form: The principle that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.  Qualitative characteristics: The attributes which make the information provided in financial statements useful to the users. as continuing in operation for the foreseeable future. [Conceptual Framework: OB17] - Going concern: The entity is normally viewed as a going concern. that is.records and reported in the financial statements of the periods to which they relate.