P7_accounting summaries_Kashif Kamran-FCCA

IFRS – SET 1

IAS/ Summary Exam question

IFRS
IFRS-2 How to record for cash settled and equity settled share based plan?  Dec 2015-Q1
Cash settled  Dec 14-Q5
IFRS-2 Share-based Payment which states that the liability in respect of the plan should be measured at fair value at the  Dec11- Q1
year end with the expense recognized in the statement of profit or loss. This accounting treatment has not been followed
leading to understated liabilities and overstated profit.

Equity settled
IFRS2 Share-based Payment requires that an expense should be recognized over the vesting period , calculated based on the
fair value of the share options at the grant date
IFRS-5 How to treat asset held for sale? And what are conditions associated with classifying asset as held for sale?  June 11- Q1
Held for sale  Dec 12-Q2
The asset is deemed to be held for sale where: (Note 7)
 Decided to sell an asset  Jun 13- Q3a
 Made asset ready for sale by year end  Dec 16-
 Is actively trying to sell the asset at the year end Q2(a)
Asset held for sale should:
 No longer be depreciated
 Be shown separately on the face of SOFP
 Be valued at the lower of the CV or FV less the cost to sell
Discontinued operations
The asset held for sale can include an entire division, then that bring us to discontinued operations.
The discontinued operation has been permanently closed during the year or has been held for sale
 If it qualifies as discontinued, the result of the business should be disclosed separately from the rest of the business
in the profit or loss
 If segment remain as held of sale , then treated as above ( held for sale)
IFRS-8 How to disclose operating segments in notes to financial statements? What constitutes major operating segments?  Dec 2014-
Applicable to listed companies only Q1
Companies must present an analysis of revenue, profit and assets between major operating segments.

Major operating segments

Segmental information must be disclosed for all segments that represents at least 10% of the assets, or revenue or profit of
the company. If all such segments total less than 75% of the company additional segments must be reported even if less than
10% until 75% threshold is reached.
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IFRS-9 How to record financial assets and liabilities?  June 2015- Q1

 June 2016 –
Financial assets are generally held at FVTPL, whereas the financial liabilities are held at amortized cost basis. Q5(iii/iv)
Investment is shares are treated as FVTPL, whereas investments not held for trading, the changes can be taken in OCI rather
profit or loss.

IFRS- 15 How to recognize revenue?  Dec 15- Q1

 Jun 17- Q5
AccordingtoIFRS15Revenuefrom Contracts with Customers, revenue should only be recognized as control is passed, either  Dec 17-Q1
over time or at a point in time. The timing of revenue recognition will depend on the contractual terms with the customer,
with factors which may indicate the point in time at which control passes including the transference of the physical asset,
transference of legal title, and the customer accepting the significant risks and rewards related to the ownership of the asset.

IFRS-16 How to recognize lease in the books of lessee?  June 2013-

Q3b
 From September 2017 onwards, operating lease no longer exist for lessee accounting.  June 2015-
 All leases are finance lease. Q2a(i)
 With all leases, an asset and corresponding liability will be recorded, the cost of the asset is the PVMLP and the other
side is treated as liability.
 Lease payment will be split between two parts, reduction in liability and finance charge ( just like loan repayment)
 The liability will be split into current and non-current liability
 If lease is less than one year, than the company can elect to treat payments as expense rather recording an asset or
liability

Sale and lease back

 Where an asset is sold and then leased back to the company the accounting treatment depends upon whether a
sale has occurred in substance.
 If the leaseback means the right and obligations of ownership have been transferred to the new legal owner,
then in substance the asset has been sold- so gain or loss on disposal will occur in normal way. The new lease is
then accounted for as with any new lease ( as above)
 If the lease back means the previous legal owner has kept the rights and obligations (i.e. continue to use the
asset) then in substance no asset disposal has occurred and the asset should remain on SOFP and the entire sales
proceed are simply dealt as loan.

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IAS- SET 2
IAS/ Summary Exam question
IFRS
IAS-10 What are two types of events and how are they dealt with in financial statements?  Dec 2014-
Q2(b)
Student should be capable of picking the event after the balance sheet date in terms of whether it is an adjusting event or  Dec 2016- Q5
non-adjusting event and accordingly deal it in the financial statements (b)
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of
the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of
the enterprise is not appropriate.
Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the
reporting period. [IAS 10.3]
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of
the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of
the enterprise is not appropriate.
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at the end of
the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of
the enterprise is not appropriate.
Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end of the
reporting period.

Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence of
conditions that existed at the end of the reporting period, including events that indicate that the going concern assumption
in relation to the whole or part of the enterprise is not appropriate

Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of
users to make proper evaluations and decisions. The required disclosure is (a) the nature of the event and (b) an estimate
of its financial effect or a statement that a reasonable estimate of the effect cannot be made.

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IAS-12 Recognizing deferred tax assets and liabilities – situations  Jun-16-Q1

note 2
IAS 12 Income Taxes requires deferred tax liability to be recognized in respect of taxable temporary differences which arise  Dec-15- Q1
between the carrying amount and tax base of assets , including the differences which arise on the revaluation of non-
current assets, regardless of whether the assets are likely to be disposed of in the foreseeable future.

According to IAS 12 Income Taxes, a deferred tax asset is recognized for an unused tax loss carry-forward or unused tax
credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or
credit carry-forward can be utilized.

IAS-16 Revaluation of assets and Distinguish between capital and revenue expenditure?  Jun-16-Q1
Note: In P7, revaluation is one of a very repetitive accounting treatment. Student should have good knowledge about basic note 1
accounting rules around revaluation.  Dec-15- Q1
Assets should be revalued, if so all assets in a class should be revalued together. Any surplus should be taken to spate  June-13- Q1
revaluation reserve. (Note 2)

Also, student should know sense of classifying revenue and capital expenditure.

IAS-20 How to recognize the government grant?  Dec 2015 –Q1

 Jun-12- Q1
Grant is recognized as income over the period necessary to match the grant received with the related costs for which they
are intended to compensate. IAS 20 allows classification as deferred income, or alternatively the amount can be netted
against the assets to which the grant relates

IAS-21 How to initially recognize and translate the foreign currency transactions?  Dec 2015- Q1
Note: This is a very common repetitive accounting treatment in P7  Dec 2012-Q1
Foreign currency transactions should be initially recorded using the spot rate, and monetary items such as trade payables
should be retranslated at the yearend using the closing rate. Exchange gains and losses should be recognized within profit
for the year

IAS-23 When to capitalize the borrowing cost? And what is a qualifying asset?  Jun-16-Q5(ii)
 Dec-12- Q1
A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. The costs of
borrowing (typically interest) that relate to the construction of specific assets should be capitalized as part of the cost of
the asset.

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IAS-24 How to disclose a related party transaction?  Dec 2016- Q3

(b)
IAS 24 requires disclosure of the nature of the related party relationship along with information about the transaction  Jun-14 –Q3 a
itself, such as the amount of the transaction, any relevant terms and conditions, and any balances outstanding (ii)

IAS-33 How to calculate EPS?  Jun 15- Q1

Listed companies must on face of income statement present

 Basic EPS ( Profit attributable to shareholders)
 Diluted EPS
 Diluted EPS is the EPS taking account of anything that could convert into ordinary shares e.g. convertible debts,
convertible preference shares and share options
 In doing the calculation weighted average number of shares should be used
 It will sometime be necessary e.g. with a bonus issues to recalculate the prior year EPS based on new number to be
comparable

IAS-36 Conditions to recognize impairment?  Jun-17 –

Note: This is a very common repetitive accounting treatment in P7 Q4(b)
 Jun-16-Q5(i)
When performing an impairment test, in accordance with IAS 36 Impairment of Assets, the carrying value of the asset (or  Dec-13- Q3
cash generating unit) in question is compared to the recoverable amount of the asset. If the recoverable amount is lower
than the carrying value impairment loss should be recognized, reducing the asset down from its carrying value to the
recoverable amount. The recoverable amount is calculated as the higher of the fair value less costs to sell and value in use.

According to IAS 36 Impairment of Assets, this is an indicator of potential impairment of the assets. IAS 36 gives examples of
indicators that an asset may be impaired in value, one of which is significant adverse changes which have taken place or are
expected to take place in the technological, market, economic or legal environment in which the entity operates.

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IAS-37 Condition to recognize provision, contingent assets and liabilities?  Jun-17 –Q4(c)
[Warranty
Note: This is a very common repetitive accounting treatment in P7 provision]
 Jun-16 Q1
Provision = present obligation + probable outflow+ reliable estimate can be made (Note 4)-
Contingent liab = present /possible obligation + possible outflow [Onerous
contract]
Restructuring provision  Jun -15 –Q5
In the case of restructuring, an obligation to restructure arises only if: (b) [
contingent
 There is a detailed formal plan for restructuring with relevant information in it (about business, location, liab]
employees, time schedule and expenditures)  Dec 14- Q5
 A valid expectation related to restructuring has been raised in the affected parties. (2)
[Restructurin
Contingent asset g provision]
 Dec 2014- Q1
A contingent asset is a possible asset arising from past events that will be confirmed by some future events not fully [ Provision]
under the entity’s control.

Similarly as with contingent liabilities, you should not book anything in relation to contingent assets, but you make
appropriate disclosures.

Onerous contract

Onerous contract is a contract in which unavoidable costs of fulfilling exceed the benefits from the contract.

In other words, it is a loss contract that cannot be avoided.

You should make a provision in the amount lower of:

 Unavoidable costs of fulfilling the contract and

 Penalty for not meeting your obligations from the contract

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IAS-38 Recording intangible assets and their amortization?  Dec 2016-

Q1(License)
Intangibles – is a key examinable area of P7 exams. Goodwill, patents, license, research and development cost, purchased  Jun 15- Q1
or acquired brand name had all been a regular feature of exam papers. Student should know- how intangibles are initially (license +
recognized and then their amortization. Further should also have sound knowledge over infinite and finite life intangibles. R&D)
 Dec 2O14- Q1
IA- future economic benefit + cost can be reliably measured [ Patents,
R&D, Brand ]
The license acquired should be recognized as an intangible asset and amortized on a systematic basis over its useful life.  Jun-13- Q3
According to IAS 38 Intangible Assets, the amortisation method should reflect the pattern of benefits, or if the pattern (c)[License]
cannot be determined reliably, the straight-line method of amortisation should be used. Amortisation should begin when  Jun-13 –Q1
the asset is available for use, meaning when it is in the location and condition necessary for it to be capable of operating in (Note 2 –
the manner which management intends R&D]

The purchased brand should be recognized in the statement of financial position as an intangible asset at cost and
amortized over its useful life. IAS 38 Intangible Assets states that an intangible asset with a finite useful life is amortized,
and an intangible asset with an indefinite useful life is not.

IAS 38 Intangible Assets requires that goodwill is tested annually for impairment regardless of whether indicators of
potential impairment exist.

IAS-40 How to recognize an investment property?  Jun-14 –Q1

According to IAS 40 Investment Property, an entity can use either the fair value model or the cost model to measure
investment property. When the fair value model is used the gain is recognized in profit or loss.

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