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IAS 01 Presentation of Financial Statements

Overview
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial
statements, including how they should be structured, the minimum requirements for their content
and overriding concepts such as going concern, the accrual basis of accounting and the
current/non-current distinction. The standard requires a complete set of financial statements to
comprise a statement of financial position, a statement of profit or loss and other comprehensive
income, a statement of changes in equity and a statement of cash flows.

IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after 1
January 2009.
Objective of IAS 1
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose
financial statements, to ensure comparability both with the entity's financial statements of
previous periods and with the financial statements of other entities. IAS 1 sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content. [IAS 1.1] Standards for recognizing, measuring, and
disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3]

Scope
IAS 1 applies to all general purpose financial statements that are prepared and presented in
accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position
to require financial reports tailored to their particular information needs. [IAS 1.7]

Objective of financial statements

The objective of general purpose financial statements is to provide information about the
financial position, financial performance, and cash flows of an entity that is useful to a wide
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range of users in making economic decisions. To meet that objective, financial statements
provide information about an entity's: [IAS 1.9]

Assets liabilities equity income and expenses, including gains and losses contributions by and
distributions to owners (in their capacity as owners) cash flows.
That information, along with other information in the notes, assists users of financial statements
in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of financial statements

A complete set of financial statements includes: [IAS 1.10]

a statement of financial position (balance sheet) at the end of the period a statement of profit or
loss and other comprehensive income for the period (presented as a single statement, or by
presenting the profit or loss section in a separate statement of profit or loss, immediately
followed by a statement presenting comprehensive income beginning with profit or loss) a
statement of changes in equity for the period a statement of cash flows for the period notes,
comprising a summary of significant accounting policies and other explanatory notes
comparative information prescribed by the standard.
An entity may use titles for the statements other than those stated above. All financial statements
are required to be presented with equal prominence. [IAS 1.10]

When an entity applies an accounting policy retrospectively or makes a retrospective restatement

of items in its financial statements, or when it reclassifies items in its financial statements, it
must also present a statement of financial position (balance sheet) as at the beginning of the
earliest comparative period.

Reports that are presented outside of the financial statements – including financial reviews by
management, environmental reports, and value added statements – are outside the scope of
IFRSs. [IAS 1.14]
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Fair presentation and compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and
cash flows of an entity. Fair presentation requires the faithful representation of the effects of
transactions, other events, and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the Framework. The application of
IFRSs, with additional disclosure when necessary, is presumed to result in financial statements
that achieve a fair presentation. [IAS 1.15]

IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit and
unreserved statement of such compliance in the notes. Financial statements cannot be described
as complying with IFRSs unless they comply with all the requirements of IFRSs (which includes
International Financial Reporting Standards, International Accounting Standards, and IFRIC
Interpretations and SIC Interpretations). [IAS 1.16]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies
used or by notes or explanatory material. [IAS 1.18]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is required
to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact
of the departure. [IAS 1.19-21]

Going concern
The Conceptual Framework notes that financial statements are normally prepared assuming the
entity is a going concern and will continue in operation for the foreseeable future. [Conceptual
Framework, paragraph 4.1]

IAS 1 requires management to make an assessment of an entity's ability to continue as a going

concern. If management has significant concerns about the entity's ability to continue as a going
concern, the uncertainties must be disclosed. If management concludes that the entity is not a
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going concern, the financial statements should not be prepared on a going concern basis, in
which case IAS 1 requires a series of disclosures. [IAS 1.25]

Accrual basis of accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information,
using the accrual basis of accounting. [IAS 1.27]

Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from one
period to the next unless a change is justified either by a change in circumstances or a
requirement of a new IFRS. [IAS 1.45]

Materiality and aggregation

Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information about a specific
reporting entity. [IAS 1.7]*

Each material class of similar items must be presented separately in the financial statements.
Dissimilar items may be aggregated only if they are individually immaterial. [IAS 1.29]

However, information should not be obscured by aggregating or by providing immaterial

information, materiality considerations apply to the all parts of the financial statements, and even
when a standard requires a specific disclosure, materiality considerations do apply. [IAS 1.30A-
31]

* Clarified by Definition of Material (Amendments to IAS 1 and IAS 8), effective 1 January
2020.
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Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted
by an IFRS. [IAS 1.32]
Comparative information
IAS 1 requires that comparative information to be disclosed in respect of the previous period for
all amounts reported in the financial statements, both on the face of the financial statements and
in the notes, unless another Standard requires otherwise. Comparative information is provided
for narrative and descriptive where it is relevant to understanding the financial statements of the
current period. [IAS 1.38]
An entity is required to present at least two of each of the following primary financial statements:
[IAS 1.38A]
 Statement of financial position*
 statement of profit or loss and other comprehensive income
 separate statements of profit or loss (where presented)
 statement of cash flows
 statement of changes in equity
 Related notes for each of the above items.
* A third statement of financial position is required to be presented if the entity retrospectively
applies an accounting policy, restates items, or reclassifies items, and those adjustments had a
material effect on the information in the statement of financial position at the beginning of the
comparative period. [IAS 1.40A]
Where comparative amounts are changed or reclassified, various disclosures are required. [IAS
1.41]
Structure and content of financial statements in general
IAS 1 requires an entity to clearly identify: [IAS 1.49-51]

 The financial statements, which must be distinguished from other information in a

published document
 each financial statement and the notes to the financial statements.
In addition, the following information must be displayed prominently, and repeated as necessary:
[IAS 1.51]
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 the name of the reporting entity and any change in the name
 whether the financial statements are a group of entities or an individual entity
 information about the reporting period
 the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign
Exchange Rates)
 the level of rounding used (e.g. thousands, millions).
Reporting period
There is a presumption that financial statements will be prepared at least annually. If the annual
reporting period changes and financial statements are prepared for a different period, the entity
must disclose the reason for the change and state that amounts are not entirely comparable. [IAS
1.36]

Statement of financial position (balance sheet)

Current and non-current classification

An entity must normally present a classified statement of financial position, separating current
and non-current assets and liabilities, unless presentation based on liquidity provides information
that is reliable. [IAS 1.60] In either case, if an asset (liability) category combines amounts that
will be received (settled) after 12 months with assets (liabilities) that will be received (settled)
within 12 months, note disclosure is required that separates the longer-term amounts from the
12-month amounts. [IAS 1.61]

Current assets are assets that are: [IAS 1.66]

 expected to be realized in the entity's normal operating cycle
 held primarily for the purpose of trading
 expected to be realized within 12 months after the reporting period
 cash and cash equivalents (unless restricted).
All other assets are non-current. [IAS 1.66]
Current liabilities are those: [IAS 1.69]
 expected to be settled within the entity's normal operating cycle
 held for purpose of trading
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 due to be settled within 12 months

 For which the entity does not have the right at the end of the reporting period to defer
settlement beyond 12 months.
Other liabilities are non-current.
When a long-term debt is expected to be refinanced under an existing loan facility, and the entity
has the discretion to do so, the debt is classified as non-current, even if the liability would
otherwise be due within 12 months. [IAS 1.73]

If a liability has become payable on demand because an entity has breached an undertaking
under a long-term loan agreement on or before the reporting date, the liability is current, even if
the lender has agreed, after the reporting date and before the authorization of the financial
statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74]
However, the liability is classified as non-current if the lender agreed by the reporting date to
provide a period of grace ending at least 12 months after the end of the reporting period, within
which the entity can rectify the breach and during which the lender cannot demand immediate
repayment. [IAS 1.75]

Settlement by the issue of equity instruments does not impact classification. [IAS 1.76B]

Line items

The line items to be included on the face of the statement of financial position are: [IAS 1.54]

(a) Property, plant and equipment

(b) Investment property
(c) Intangible assets
(d) Financial assets (excluding amounts shown under (e), (h), and (i))
(e) Investments accounted for using the equity method
(f) Biological assets
(g) Inventories
(h) Trade and other receivables
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(i) Cash and cash equivalents

(j) Assets held for sale
(k) Trade and other payables
(l) Provisions
(m) Financial liabilities (excluding amounts shown under (k) and (l))
(n) Current tax liabilities and current tax assets, as defined in IAS 12
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) Liabilities included in disposal groups
(q) Non-controlling interests, presented within equity
(r) Issued capital and reserves attributable to owners of the parent.
Additional line items, headings and subtotals may be needed to fairly present the entity's
financial position. [IAS 1.55]
When an entity presents subtotals, those subtotals shall be comprised of line items made up of
amounts recognized and measured in accordance with IFRS; be presented and labeled in a clear
and understandable manner; be consistent from period to period; and not be displayed with more
prominence than the required subtotals and totals. [IAS 1.55A]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Further sub-classifications of line items presented are made in the statement or in the notes, for
example: [IAS 1.77-78]:
 Classes of property, plant and equipment
 disaggregation of receivables
 disaggregation of inventories in accordance with IAS 2 Inventories
 disaggregation of provisions into employee benefits and other items
 classes of equity and reserves.
Format of statement

IAS 1 does not prescribe the format of the statement of financial position. Assets can be
presented current then non-current, or vice versa, and liabilities and equity can be presented
current then non-current then equity, or vice versa. A net asset presentation (assets minus
liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets
+ current assets - short term payables = long-term debt plus equity – is also acceptable.
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Share capital and reserves

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.79]

 numbers of shares authorized, issued and fully paid, and issued but not fully paid
 par value (or that shares do not have a par value)
 a reconciliation of the number of shares outstanding at the beginning and the end of the
period
 description of rights, preferences, and restrictions
 treasury shares, including shares held by subsidiaries and associates
 shares reserved for issuance under options and contracts
 a description of the nature and purpose of each reserve within equity.
Additional disclosures are required in respect of entities without share capital and where an
entity has reclassified put table financial instruments. [IAS 1.80-80A]
Statement of profit or loss and other comprehensive income
Concepts of profit or loss and comprehensive income
Profit or loss is defined as "the total of income less expenses, excluding the components of other
comprehensive income". Other comprehensive income is defined as comprising "items of
income and expense (including reclassification adjustments) that are not recognized in profit or
loss as required or permitted by other IFRSs". Total comprehensive income is defined as "the
change in equity during a period resulting from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as owners". [IAS 1.7]
Comprehensive income for the period = Profit or loss + other comprehensive income
All items of income and expense recognized in a period must be included in profit or loss unless
a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that
some components to be excluded from profit or loss and instead to be included in other
comprehensive income.
In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the
correction of errors and the effect of changes in accounting policies to be recognized outside
profit or loss for the current period. [IAS 1.89]
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Choice in presentation and basic requirements

An entity has a choice of presenting:
 a single statement of profit or loss and other comprehensive income, with profit or loss
and other comprehensive income presented in two sections,
 or two statements:
 a separate statement of profit or loss
 a statement of comprehensive income, immediately following the statement of profit or
loss and beginning with profit or loss [IAS 1.10A]
The statement(s) must present: [IAS 1.81A]
 profit or loss
 total other comprehensive income
 comprehensive income for the period
 an allocation of profit or loss and comprehensive income for the period between non-
controlling interests and owners of the parent.
Profit or loss section or statement
The following minimum line items must be presented in the profit or loss section (or separate
statement of profit or loss, if presented): [IAS 1.82-82A]
 revenue
 gains and losses from the DE recognition of financial assets measured at amortized cost
 finance costs
 share of the profit or loss of associates and joint ventures accounted for using the equity
method
 certain gains or losses associated with the reclassification of financial assets
 tax expense
 a single amount for the total of discontinued items
Expenses recognized in profit or loss should be analyzed either by nature (raw materials, staffing
costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc.). [IAS 1.99] If
an entity categories by function, then additional information on the nature of expenses – at a
minimum depreciation, amortization and employee benefits expense – must be disclosed. [IAS
1.104]
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Other comprehensive income section

The other comprehensive income section is required to present line items which are classified by
their nature, and grouped between those items that will or will not be reclassified to profit and
loss in subsequent periods. [IAS 1.82A]
An entity's share of OCI of equity-accounted associates and joint ventures is presented in
aggregate as single line items based on whether or not it will subsequently be reclassified to
profit or loss. [IAS 1.82A]*
* Clarified by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
When an entity presents subtotals, those subtotals shall be comprised of line items made up of
amounts recognized and measured in accordance with IFRS; be presented and labeled in a clear
and understandable manner; be consistent from period to period; not be displayed with more
prominence than the required subtotals and totals; and reconciled with the subtotals or totals
required in IFRS. [IAS 1.85A-85B]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.

Other requirements
Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the notes.
[IAS 1.87]
Certain items must be disclosed separately either in the statement of comprehensive income or in
the notes, if material, including: [IAS 1.98]
 write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs
 restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
 disposals of items of property, plant and equipment
 disposals of investments
 discontinuing operations
 litigation settlements
 other reversals of provisions
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Statement of cash flows

Rather than setting out separate requirements for presentation of the statement of cash flows, IAS
1.111 refers to IAS 7 Statement of Cash Flows.

Statement of changes in equity

IAS 1 requires an entity to present a separate statement of changes in equity. The statement must
show: [IAS 1.106]
 total comprehensive income for the period, showing separately amounts attributable to
owners of the parent and to non-controlling interests
 the effects of any retrospective application of accounting policies or restatements made in
accordance with IAS 8, separately for each component of other comprehensive income
 reconciliations between the carrying amounts at the beginning and the end of the period
for each component of equity, separately disclosing:
 profit or loss
 other comprehensive income*
 transactions with owners, showing separately contributions by and distributions to
owners and changes in ownership interests in subsidiaries that do not result in a loss of control
* An analysis of other comprehensive income by item is required to be presented either in the
statement or in the notes. [IAS 1.106A]
The following amounts may also be presented on the face of the statement of changes in equity,
or they may be presented in the notes: [IAS 1.107]
 amount of dividends recognized as distributions
 the related amount per share.
Notes to the financial statements
The notes must: [IAS 1.112]
 present information about the basis of preparation of the financial statements and the
specific accounting policies used
 disclose any information required by IFRSs that is not presented elsewhere in the
financial statements and
 provide additional information that is not presented elsewhere in the financial statements
but is relevant to an understanding of any of them
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Notes are presented in a systematic manner and cross-referenced from the face of the financial
statements to the relevant note. [IAS 1.113]
IAS 1.114 suggests that the notes should normally be presented in the following order:*
 a statement of compliance with IFRSs
 a summary of significant accounting policies applied, including: [IAS 1.117]
 the measurement basis (or bases) used in preparing the financial statements
 the other accounting policies used that are relevant to an understanding of the financial
statements
 supporting information for items presented on the face of the statement of financial
position (balance sheet), statement(s) of profit or loss and other comprehensive income,
statement of changes in equity and statement of cash flows, in the order in which each statement
and each line item is presented
 other disclosures, including:
 contingent liabilities (see IAS 37) and unrecognized contractual commitments
 non-financial disclosures, such as the entity's financial risk management objectives and
policies (see IFRS 7 Financial Instruments: Disclosures)
* Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016, clarifies this order just to be an example of
how notes can be ordered and adds additional examples of possible ways of ordering the notes to clarify that
understandability and comparability should be considered when determining the order of the notes.
Other disclosures
Judgments’ and key assumptions
An entity must disclose, in the summary of significant accounting policies or other notes, the
judgments, apart from those involving estimations, that management has made in the process of
applying the entity's accounting policies that have the most significant effect on the amounts
recognized in the financial statements. [IAS 1.122]

Examples cited in IAS 1.123 include management's judgments in determining:

 when substantially all the significant risks and rewards of ownership of financial assets
and lease assets are transferred to other entities
 Whether, in substance, particular sales of goods are financing arrangements and therefore
do not give rise to revenue.
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An entity must also disclose, in the notes, information about the key assumptions concerning the
future, and other key sources of estimation uncertainty at the end of the reporting period, that
have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year. [IAS 1.125] These disclosures do not involve disclosing
budgets or forecasts. [IAS 1.130]
Dividends
In addition to the distributions information in the statement of changes in equity (see above), the
following must be disclosed in the notes: [IAS 1.137]
 the amount of dividends proposed or declared before the financial statements were
authorized for issue but which were not recognized as a distribution to owners during the period,
and the related amount per share
 The amount of any cumulative preference dividends not recognized.
Capital disclosures
An entity discloses information about its objectives, policies and processes for managing capital.
[IAS 1.134] To comply with this, the disclosures include: [IAS 1.135]
 Qualitative information about the entity's objectives, policies and processes for managing
capital, including>
 description of capital it manages
 nature of external capital requirements, if any
 how it is meeting its objectives
 Quantitative data about what the entity regards as capital
 Changes from one period to another
 whether the entity has complied with any external capital requirements and
 if it has not complied, the consequences of such non-compliance.
Put table financial instruments
IAS 1.136A requires the following additional disclosures if an entity has a put table instrument
that is classified as an equity instrument:
 summary quantitative data about the amount classified as equity
 the entity's objectives, policies and processes for managing its obligation to repurchase or
redeem the instruments when required to do so by the instrument holders, including any changes
from the previous period
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 the expected cash outflow on redemption or repurchase of that class of financial

instruments and
 Information about how the expected cash outflow on redemption or repurchase was
determined.
Other information
The following other note disclosures are required by IAS 1 if not disclosed elsewhere in
information published with the financial statements: [IAS 1.138]
 domicile and legal form of the entity
 country of incorporation
 address of registered office or principal place of business description of the entity's
operations and principal activities
 if it is part of a group, the name of its parent and the ultimate parent of the group
 if it is a limited life entity, information regarding the length of the life
Terminology
The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential
amendments were made at that time to all of the other existing IFRSs, and the new terminology
has been used in subsequent IFRSs including amendments. IAS 1.8 states: "Although this
Standard uses the terms 'other comprehensive income', 'profit or loss' and 'total comprehensive
income', an entity may use other terms to describe the totals as long as the meaning is clear. For
example, an entity may use the term 'net income' to describe profit or loss." Also, IAS 1.57(b)
states: "The descriptions used and the ordering of items or aggregation of similar items may be
amended according to the nature of the entity and its transactions, to provide information that is
relevant to an understanding of the entity's financial position."
Term before 2007 revision of IAS 1 Term as amended by IAS 1 (2007)
balance sheet statement of financial position
cash flow statement statement of cash flows
income statement statement of comprehensive income (income statement
is retained in case of a two-statement approach)
recognized in the income Statement recognized in profit or loss
recognized [directly] in equity (only for recognized in other comprehensive income
OCI components)
recognized [directly] in equity (for recognized outside profit or loss (either in OCI or
recognition both in OCI and equity) equity)
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removed from equity and recognized in reclassified from equity to profit or loss as a
profit or loss ('recycling') reclassification adjustment
Standard or/and Interpretation IFRSs
on the face of in
equity holders owners (exception for 'ordinary equity holders')
balance sheet date end of the reporting period
reporting date end of the reporting period
after the balance sheet date after the reporting period

IAS 02 Inventory
Overview

IAS 2 Inventories contains the requirements on how to account for most types of inventory. The
standard requires inventories to be measured at the lower of cost and net realizable value (NRV)
and outlines acceptable methods of determining cost, including specific identification (in some
cases), first-in first-out (FIFO) and weighted average cost.

A revised version of IAS 2 was issued in December 2003 and applies to annual periods
beginning on or after 1 January 2005.

Summary of IAS 2
Objective of IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides
guidance for determining the cost of inventories and for subsequently recognizing an expense,
including any write-down to net realizable value. It also provides guidance on the cost formulas
that are used to assign costs to inventories.
Scope
Inventories include assets held for sale in the ordinary course of business (finished goods), assets
in the production process for sale in the ordinary course of business (work in process), and
materials and supplies that are consumed in production (raw materials). [IAS 2.6]
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However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
Work in process arising under construction contracts (see IAS 11 Construction Contracts)
Financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)
Biological assets related to agricultural activity and agricultural produce at the point of harvest
(see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to the
measurement of inventories held by: [IAS 2.3]
producers of agricultural and forest products, agricultural produce after harvest, and minerals and
mineral products, to the extent that they are measured at net realizable value (above or below
cost) in accordance with well-established practices in those industries. When such inventories are
measured at net realizable value, changes in that value are recognized in profit or loss in the
period of the change commodity brokers and dealers who measure their inventories at fair value
less costs to sell. When such inventories are measured at fair value less costs to sell, changes in
fair value less costs to sell are recognized in profit or loss in the period of the change.
Fundamental principle of IAS 2
Inventories are required to be stated at the lower of cost and net realizable value (NRV). [IAS
2.9]
Measurement of inventories
Cost should include all: [IAS 2.10]
 costs of purchase (including taxes, transport, and handling) net of trade discounts
received
 costs of conversion (including fixed and variable manufacturing overheads) and
 other costs incurred in bringing the inventories to their present location and condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest)
can be included in cost of inventories that meet the definition of a qualifying asset. [IAS 2.17 and
IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
 abnormal waste
 storage costs
 administrative overheads unrelated to production
 selling costs
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 foreign exchange differences arising directly on the recent acquisition of inventories

invoiced in a foreign currency
 interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost, provided that the
results approximate actual cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the specific
individual items of inventory. [IAS 2.23]
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas.
[IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no
longer allowed.
The same cost formula should be used for all inventories with similar characteristics as to their
nature and use to the entity. For groups of inventories that have different characteristics, different
cost formulas may be justified. [IAS 2.25]
Write-down to net realizable value
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of
completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to
NRV should be recognized as an expense in the period in which the write-down occurs. Any
reversal should be recognized in the income statement in the period in which the reversal occurs.
[IAS 2.34]
Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold
and revenue is recognized, the carrying amount of those inventories is recognized as an expense
(often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also
recognized as an expense when they occur. [IAS 2.34]
Disclosure
Required disclosures: [IAS 2.36]
 accounting policy for inventories
 carrying amount, generally classified as merchandise, supplies, materials, work in
progress, and finished goods. The classifications depend on what is appropriate for the entity
 carrying amount of any inventories carried at fair value less costs to sell
 amount of any write-down of inventories recognized as an expense in the period
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 amount of any reversal of a write-down to NRV and the circumstances that led to such
reversal
 carrying amount of inventories pledged as security for liabilities
 cost of inventories recognized as expense (cost of goods sold).
IAS 2 acknowledges that some enterprises classify income statement expenses by nature
(materials, labor, and so on) rather than by function (cost of goods sold, selling expense, and so
on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an
entity to disclose operating costs recognized during the period by nature of the cost (raw
materials and consumables, labor costs, other operating costs) and the amount of the net change
in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial
Statements, which allows presentation of expenses by function or nature.

IAS 07 Statement of Cash Flows

Overview
IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an
integral part of its primary financial statements. Cash flows are classified and presented into
operating activities (either using the 'direct' or 'indirect' method), investing activities or financing
activities, with the latter two categories generally presented on a gross basis.
IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial
statements covering periods beginning on or after 1 January 1994.
Summary of IAS 7
Objective of IAS 7
Page 20 of 101

The objective of IAS 7 is to require the presentation of information about the historical changes
in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies
cash flows during the period according to operating, investing, and financing activities.
Fundamental principle in IAS 7
All entities that prepare financial statements in conformity with IFRSs are required to present a
statement of cash flows. [IAS 7.1]

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash
and cash equivalents comprise cash on hand and demand deposits, together with short-term,
highly liquid investments that are readily convertible to a known amount of cash, and that are
subject to an insignificant risk of changes in value. Guidance notes indicate that an investment
normally meets the definition of a cash equivalent when it has a maturity of three months or less
from the date of acquisition. Equity investments are normally excluded, unless they are in
substance a cash equivalent (e.g. preferred shares acquired within three months of their specified
redemption date). Bank overdrafts which are repayable on demand and which form an integral
part of an entity's cash management are also included as a component of cash and cash
equivalents. [IAS 7.7-8]
Presentation of the Statement of Cash Flows
Cash flows must be analyzed between operating, investing and financing activities. [IAS 7.10]
Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:
 operating activities are the main revenue-producing activities of the entity that are not
investing or financing activities, so operating cash flows include cash received from customers
and cash paid to suppliers and employees [IAS 7.14]
 investing activities are the acquisition and disposal of long-term assets and other
investments that are not considered to be cash equivalents [IAS 7.6]
 financing activities are activities that alter the equity capital and borrowing structure of
the entity [IAS 7.6]
 interest and dividends received and paid may be classified as operating, investing, or
financing cash flows, provided that they are classified consistently from period to period [IAS
7.31]
Page 21 of 101

 cash flows arising from taxes on income are normally classified as operating, unless they
can be specifically identified with financing or investing activities [IAS 7.35]
 for operating cash flows, the direct method of presentation is encouraged, but the indirect
method is acceptable [IAS 7.18]
The direct method shows each major class of gross cash receipts and gross cash payments. The
operating cash flows section of the statement of cash flows under the direct method would
appear something like this:

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx

Cash paid to employees xx,xxx

Cash paid for other operating xx,xxx

expenses

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash
transactions. The operating cash flows section of the statement of cash flows under the indirect
method would appear something like this:

Profit before interest and income taxes xx,xxx

Add back depreciation xx,xxx

Add back impairment of assets xx,xxx

Increase in receivables xx,xxx

Decrease in inventories xx,xxx

Increase in trade payables xx,xxx

Interest expense xx,xxx

Page 22 of 101

Less Interest accrued but not yet paid xx,xxx

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

 The exchange rate used for translation of transactions denominated in a foreign currency
should be the rate in effect at the date of the cash flows [IAS 7.25] 
 Cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when
the cash flows took place [IAS 7.26] 
 As regards the cash flows of associates, joint ventures, and subsidiaries, where the equity or
cost method is used, the statement of cash flows should report only cash flows between the
investor and the investee; where proportionate consolidation is used, the cash flow statement
should include the venture’s share of the cash flows of the investee [IAS 7.37] 
 Aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business
units should be presented separately and classified as investing activities, with specified
additional disclosures. [IAS 7.39] The aggregate cash paid or received as consideration should be
reported net of cash and cash equivalents acquired or disposed of [IAS 7.42] 
 cash flows from investing and financing activities should be reported gross by major class of
cash receipts and major class of cash payments except for the following cases, which may be
reported on a net basis: [IAS 7.22-24]
 cash receipts and payments on behalf of customers (for example, receipt and repayment
of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a
property)
 cash receipts and payments for items in which the turnover is quick, the amounts are
large, and the maturities are short, generally less than three months (for example, charges and
collections from credit card customers, and purchase and sale of investments)
 cash receipts and payments relating to deposits by financial institutions
 cash advances and loans made to customers and repayments thereof
 Investing and financing transactions which do not require the use of cash should be excluded
from the statement of cash flows, but they should be separately disclosed elsewhere in the
financial statements [IAS 7.43] 
Page 23 of 101

 Entities shall provide disclosures that enable users of financial statements to evaluate changes
in liabilities arising from financing activities [IAS 7.44A-44E]* 
 The components of cash and cash equivalents should be disclosed, and a reconciliation
presented to amounts reported in the statement of financial position [IAS 7.45] 
 The amount of cash and cash equivalents held by the entity that is not available for use by the
group should be disclosed, together with a commentary by management [IAS 7.48]

IAS 8 — Accounting Policies, Changes in Accounting Estimates and

Errors

Overview
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting
and applying accounting policies, accounting for changes in estimates and reflecting corrections
of prior period errors.
The standard requires compliance with any specific IFRS applying to a transaction, event or
condition, and provides guidance on developing accounting policies for other items that result in
relevant and reliable information. Changes in accounting policies and corrections of errors are
generally retrospectively accounted for, whereas changes in accounting estimates are generally
accounted for on a prospective basis.
IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1
January 2005.
Summary of IAS 8
Key definitions [IAS 8.5]
 Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
 A change in accounting estimate is an adjustment of the carrying amount of an asset or
liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability.
Page 24 of 101

 International Financial Reporting Standards are standards and interpretations adopted

by the International Accounting Standards Board (IASB). They comprise:
o International Financial Reporting Standards (IFRSs)
o International Accounting Standards (IASs)
o Interpretations developed by the International Financial Reporting Interpretations
Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the
IASB.
 Materiality. Information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of general purpose financial
statements make on the basis of those financial statements, which provide financial information
about a specific reporting entity.*
 Prior period errors are omissions from, and misstatements in, an entity's financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that was available and could reasonably be expected to have been obtained and taken
into account in preparing those statements. Such errors result from mathematical mistakes,
mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.
* Clarified by Definition of Material (Amendments to IAS 1 and IAS 8), effective 1 January 2020.
Selection and application of accounting policies
When a Standard or an Interpretation specifically applies to a transaction, other event or
condition, the accounting policy or policies applied to that item must be determined by applying
the Standard or Interpretation and considering any relevant Implementation Guidance issued by
the IASB for the Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, other
event or condition, management must use its judgment in developing and applying an accounting
policy that results in information that is relevant and reliable. [IAS 8.10]. In making that
judgment, management must refer to, and consider the applicability of, the following sources in
descending order:
 the requirements and guidance in IASB standards and interpretations dealing with similar
and related issues; and
 the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Framework. [IAS 8.11]
Page 25 of 101

Management may also consider the most recent pronouncements of other standard-setting bodies
that use a similar conceptual framework to develop accounting standards, other accounting
literature and accepted industry practices, to the extent that these do not conflict with the sources
in paragraph 11. [IAS 8.12]
Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar transactions, other
events and conditions, unless a Standard or an Interpretation specifically requires or permits
categorization of items for which different policies may be appropriate. If a Standard or an
Interpretation requires or permits such categorization, an appropriate accounting policy shall be
selected and applied consistently to each category. [IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
 is required by a standard or interpretation; or
 results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events or conditions on the entity's financial position, financial
performance, or cash flows. [IAS 8.14]
Note that changes in accounting policies do not include applying an accounting policy to a kind
of transaction or event that did not occur previously or were immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or interpretation, the change
is accounted for as required by that new pronouncement or, if the new pronouncement does not
include specific transition provisions, then the change in accounting policy is applied
retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected component of
equity for the earliest prior period presented and the other comparative amounts disclosed for
each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]
 However, if it is impracticable to determine either the period-specific effects or the
cumulative effect of the change for one or more prior periods presented, the entity shall apply the
new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the
earliest period for which retrospective application is practicable, which may be the current
period, and shall make a corresponding adjustment to the opening balance of each affected
component of equity for that period. [IAS 8.24]
Page 26 of 101

 Also, if it is impracticable to determine the cumulative effect, at the beginning of the

current period, of applying a new accounting policy to all prior periods, the entity shall adjust the
comparative information to apply the new accounting policy prospectively from the earliest date
practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new standard or interpretation
include: [IAS 8.28]
 the title of the standard or interpretation causing the change
 the nature of the change in accounting policy
 a description of the transitional provisions, including those that might have an effect on
future periods
 for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
 the amount of the adjustment relating to periods before those presented, to the extent
practicable
 if retrospective application is impracticable, an explanation and description of how the
change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
 the nature of the change in accounting policy
 
 the reasons why applying the new accounting policy provides reliable and more relevant
information
 for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
Page 27 of 101

 the amount of the adjustment relating to periods before those presented, to the extent
practicable
 if retrospective application is impracticable, an explanation and description of how the
change in accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
If an entity has not applied a new standard or interpretation that has been issued but is not yet
effective, the entity must disclose that fact and any and known or reasonably estimable
information relevant to assessing the possible impact that the new pronouncement will have in
the year it is applied. [IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognized prospectively by including
it in profit or loss in: [IAS 8.36]
 the period of the change, if the change affects that period only, or
 the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it is recognized by adjusting the carrying amount of the
related asset, liability, or equity item in the period of the change. [IAS 8.37]
Disclosures relating to changes in accounting estimates
Disclose:
 the nature and amount of a change in an accounting estimate that has an effect in the
current period or is expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it is
impracticable, an entity shall disclose that fact. [IAS 8.39-40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior period errors
retrospectively in the first set of financial statements authorized for issue after their discovery by:
[IAS 8.42]
 restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
 if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.
Page 28 of 101

However, if it is impracticable to determine the period-specific effects of an error on

comparative information for one or more prior periods presented, the entity must restate the
opening balances of assets, liabilities, and equity for the earliest period for which retrospective
restatement is practicable (which may be the current period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the beginning of the current
period, of an error on all prior periods, the entity must restate the comparative information to
correct the error prospectively from the earliest date practicable. [IAS 8.45]
Disclosures relating to prior period errors
Disclosures relating to prior period errors include: [IAS 8.49]
 the nature of the prior period error
 for each prior period presented, to the extent practicable, the amount of the correction:
o for each financial statement line item affected, and
 
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
 the amount of the correction at the beginning of the earliest prior period presented
 if retrospective restatement is impracticable, an explanation and description of how the
error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.

IAS 10 Events after the Reporting Period

Overview
IAS 10 Events after the Reporting Period contains requirements for when events after the end of
the reporting period should be adjusted in the financial statements. Adjusting events are those
providing evidence of conditions existing at the end of the reporting period, whereas non-
Page 29 of 101

adjusting events are indicative of conditions arising after the reporting period (the latter being
disclosed where material).
IAS 10 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.
Summary of IAS 10
Key definitions
Event after the reporting period: An event, which could be favorable or unfavorable, that
occurs between the end of the reporting period and the date that the financial statements are
authorized for issue. [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. [IAS
10.3]
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]
Accounting
 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. [IAS 10.8]
 Do not adjust for non-adjusting events - events or conditions that arose after the end of
the reporting period. [IAS 10.10]
 If an entity declares dividends after the reporting period, the entity shall not recognize
those dividends as a liability at the end of the reporting period. That is a non-adjusting event.
[IAS 10.12]
Going concern issues arising after end of the reporting period
An entity shall not prepare its financial statements on a going concern basis if management
determines after the end of the reporting period either that it intends to liquidate the entity or to
cease trading, or that it has no realistic alternative but to do so. [IAS 10.14]
Disclosure
Page 30 of 101

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. [IAS 10.21]
A company should update disclosures that relate to conditions that existed at the end of the
reporting period to reflect any new information that it receives after the reporting period about
those conditions. [IAS 10.19]
Companies must disclose the date when the financial statements were authorized for issue and
who gave that authorization. If the enterprise's owners or others have the power to amend the
financial statements after issuance, the enterprise must disclose that fact. [IAS 10.17]

IAS 12 Income Taxes, Deferred Tax

Overview

IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of

accounting for income taxes which recognizes both the current tax consequences of transactions
and events and the future tax consequences of the future recovery or settlement of the carrying
amount of an entity's assets and liabilities. Differences between the carrying amount and tax base
of assets and liabilities, and carried forward tax losses and credits, are recognized, with limited
exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a
'probable profits' test.
IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1
January 1998.
Summary of IAS 12
Objective of IAS 12
The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.
In meeting this objective, IAS 12 notes the following:
Page 31 of 101

 It is inherent in the recognition of an asset or liability that that asset or liability will be
recovered or settled, and this recovery or settlement may give rise to future tax consequences
which should be recognized at the same time as the asset or liability
 An entity should account for the tax consequences of transactions and other events in the
same way it accounts for the transactions or other events themselves.
Key definitions
[IAS 12.5]

Tax base The tax base of an asset or liability is the amount attributed to that asset
or liability for tax purposes

Temporary Differences between the carrying amount of an asset or liability in the

differences statement of financial position and its tax bases

Taxable Temporary differences that will result in taxable amounts in determining

temporary taxable profit (tax loss) of future periods when the carrying amount of
differences the asset or liability is recovered or settled

Deductible Temporary differences that will result in amounts that are deductible in
temporary determining taxable profit (tax loss) of future periods when the carrying
differences amount of the asset or liability is recovered or settled

Deferred tax The amounts of income taxes payable in future periods in respect of
liabilities taxable temporary differences

Deferred tax The amounts of income taxes recoverable in future periods in respect of:
assets
1. deductible temporary differences
 
2. the carry forward of unused tax losses, and
 
3. the carry forward of unused tax credits
Current tax
Current tax for the current and prior periods is recognized as a liability to the extent that it has
not yet been settled, and as an asset to the extent that the amounts already paid exceed the
Page 32 of 101

amount due. [IAS 12.12] The benefit of a tax loss which can be carried back to recover current
tax of a prior period is recognized as an asset. [IAS 12.13]
Current tax assets and liabilities are measured at the amount expected to be paid to (recovered
from) taxation authorities, using the rates/laws that have been enacted or substantively enacted
by the balance sheet date. [IAS 12.46]
Calculation of deferred taxes
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:

Temporary difference  =  Carrying amount  -  Tax base

Deferred tax asset or liability  =  Temporary difference  x  Tax rate
The following formula can be used in the calculation of deferred taxes arising from unused tax
losses or unused tax credits:

Deferred tax asset  =  Unused tax loss or unused tax credits  x  Tax rate

Tax bases
The tax base of an item is crucial in determining the amount of any temporary difference, and
effectively represents the amount at which the asset or liability would be recorded in a tax-based
balance sheet. IAS 12 provides the following guidance on determining tax bases:
 Assets. The tax base of an asset is the amount that will be deductible against taxable
economic benefits from recovering the carrying amount of the asset. Where recovery of an asset
will have no tax consequences, the tax base is equal to the carrying amount. [IAS 12.7]
 Revenue received in advance. The tax base of the recognized liability is its carrying
amount, less revenue that will not be taxable in future periods [IAS 12.8]
 Other 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 [IAS 12.8]
 Unrecognized items. If items have a tax base but are not recognized in the statement of
financial position, the carrying amount is nil [IAS 12.9]
 Tax bases not immediately apparent. If the tax base of an item is not immediately
apparent, the tax base should effectively be determined in such as manner to ensure the future tax
Page 33 of 101

consequences of recovery or settlement of the item is recognized as a deferred tax amount [IAS
12.10]
 Consolidated financial statements. In consolidated financial statements, the carrying
amounts in the consolidated financial statements are used, and the tax bases determined by
reference to any consolidated tax return (or otherwise from the tax returns of each entity in the
group). [IAS 12.11]
Recognition and measurement of deferred taxes
Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognized for all taxable
temporary differences. There are three exceptions to the requirement to recognize a deferred tax
liability, as follows:\
 Liabilities arising from initial recognition of goodwill [IAS 12.15(a)] 
 Liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting or the
taxable profit [IAS 12.15(b)] 
 Liabilities arising from temporary differences associated with investments in subsidiaries,
branches, and associates, and interests in joint arrangements, but only to the extent that the entity
is able to control the timing of the reversal of the differences and it is probable that the reversal
will not occur in the foreseeable future. [IAS 12.39]
Recognition of deferred tax assets
A deferred tax asset is recognized for deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilized, unless the deferred tax asset arises
from: [IAS 12.24]
 the initial recognition of an asset or liability other than in a business combination which,
at the time of the transaction, does not affect accounting profit or taxable profit.
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint arrangements, are only recognized to the extent
that it is probable that the temporary difference will reverse in the foreseeable future and that
Page 34 of 101

taxable profit will be available against which the temporary difference will be utilized.
[IAS 12.44]
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is
subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be
available. [IAS 12.37]
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 12.34]
Measurement of deferred tax
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates/laws that have been
enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The
measurement reflects the entity's expectations, at the end of the reporting period, as to the
manner in which the carrying amount of its assets and liabilities will be recovered or settled.
[IAS 12.51]
IAS 12 provides the following guidance on measuring deferred taxes:
 Where the tax rate or tax base is impacted by the manner in which the entity recovers its
assets or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred
taxes is consistent with the way in which an asset is recovered or liability settled [IAS 12.51A]
 
 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land),
deferred taxes reflect the tax consequences of selling the asset [IAS 12.51B]
 
 Deferred taxes arising from investment property measured at fair value
under IAS 40 Investment Property reflect the rebuttable presumption that the investment
property will be recovered through sale [IAS 12.51C-51D]
 
Page 35 of 101

 If dividends are paid to shareholders, and this causes income taxes to be payable at a
higher or lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are
measured using the tax rate applicable to undistributed profits [IAS 12.52A]
Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]
Recognition of tax amounts for the period
Amount of income tax to recognize
The following formula summaries the amount of tax to be recognized in an accounting period:

Tax to recognize for the  =  Current tax for the  +  Movement in deferred tax balances
period period for the period

Where to recognize income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other
events are recognized in the same way as the items giving rise to those tax consequences.
Accordingly, current and deferred tax is recognized as income or expense and included in profit
or loss for the period, except to the extent that the tax arises from: [IAS 12.58]
 transactions or events that are recognized outside of profit or loss (other comprehensive
income or equity) - in which case the related tax amount is also recognized outside of profit or
loss [IAS 12.61A]
 a business combination - in which case the tax amounts are recognized as identifiable
assets or liabilities at the acquisition date, and accordingly effectively taken into account in the
determination of goodwill when applying IFRS 3 Business Combinations. [IAS 12.66]
IAS 12 provides the following additional guidance on the recognition of income tax for the
period:

 Where it is difficult to determine the amount of current and deferred tax relating to items
recognized outside of profit or loss (e.g. where there are graduated rates or tax), the amount of
income tax recognized outside of profit or loss is determined on a reasonable pro-rata allocation,
or using another more appropriate method [IAS 12.63] 
 In the circumstances where the payment of dividends impacts the tax rate or results in taxable
amounts or refunds, the income tax consequences of dividends are considered to be more directly
Page 36 of 101

linked to past transactions or events and so are recognized in profit or loss unless the past
transactions or events were recognized outside of profit or loss [IAS 12.52B] 
 the impact of business combinations on the recognition of pre-combination deferred tax assets
are not included in the determination of goodwill as part of the business combination, but are
separately recognized [IAS 12.68] 
 the recognition of acquired deferred tax benefits subsequent to a business combination are
treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify
for that treatment, or otherwise are recognized in profit or loss [IAS 12.68] 
 Tax benefits of equity settled share based payment transactions that exceed the tax affected
cumulative remuneration expense are considered to relate to an equity item and are recognized
directly in equity. [IAS 12.68C]
Presentation
Current tax assets and current tax liabilities can only be offset in the statement of financial
position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71]
Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial
position if the entity has the legal right to settle current tax amounts on a net basis and the
deferred tax amounts are levied by the same taxing authority on the same entity or different
entities that intend to realize the asset and settle the liability at the same time. [IAS 12.74]
The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income. [IAS 12.77]
The tax effects of items included in other comprehensive income can either be shown net for
each item, or the items can be shown before tax effects with an aggregate amount of income tax
for groups of items (allocated between items that will and will not be reclassified to profit or loss
in subsequent periods). [IAS 1.91]
Disclosure
IAS 12.80 requires the following disclosures:
 major components of tax expense (tax income) [IAS 12.79] Examples include:
o current tax expense (income)
o any adjustments of taxes of prior periods
o amount of deferred tax expense (income) relating to the origination and reversal
of temporary differences
Page 37 of 101

o amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes
o amount of the benefit arising from a previously unrecognized tax loss, tax credit
or temporary difference of a prior period
o write down, or reversal of a previous write down, of a deferred tax asset
o Amount of tax expense (income) relating to changes in accounting policies and
corrections of errors.
IAS 12.81 requires the following disclosures:
 aggregate current and deferred tax relating to items recognized directly in equity
 tax relating to each component of other comprehensive income
 explanation of the relationship between tax expense (income) and the tax that would be
expected by applying the current tax rate to accounting profit or loss (this can be presented as a
reconciliation of amounts of tax or a reconciliation of the rate of tax)
 changes in tax rates
 amounts and other details of deductible temporary differences, unused tax losses, and
unused tax credits
 temporary differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements
 for each type of temporary difference and unused tax loss and credit, the amount of
deferred tax assets or liabilities recognized in the statement of financial position and the amount
of deferred tax income or expense recognized in profit or loss
 tax relating to discontinued operations
 tax consequences of dividends declared after the end of the reporting period
 information about the impacts of business combinations on an acquirer's deferred tax
assets
 Recognition of deferred tax assets of an acquire after the acquisition date.
Other required disclosures:
 details of deferred tax assets [IAS 12.82]
 tax consequences of future dividend payments. [IAS 12.82A]
Page 38 of 101

In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are
required by IAS 1 
Presentation of Financial Statements, as follows:
 Disclosure on the face of the statement of financial position about current tax assets,
current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and (o)]
 Disclosure of tax expense (tax income) in the profit or loss section of the statement of
profit or loss and other comprehensive income (or separate statement if presented). [IAS 1.82(d)

IAS 19 Employee Benefits

Overview
IAS 19 Employee Benefits (1998) outlines the accounting requirements for employee benefits,
including short-term benefits (e.g. wages and salaries, annual leave), post-employment benefits
such as retirement benefits, other long-term benefits (e.g. long service leave) and termination
benefits. The standard establishes the principle that the cost of providing employee benefits
should be recognized in the period in which the benefit is earned by the employee, rather than
when it is paid or payable, and outlines how each category of employee benefits are measured,
providing detailed guidance in particular about post-employment benefits.
IAS 19 (1998) is superseded by an amended version, IAS 19 Employee Benefits (2011),
effective for annual periods beginning on or after 1 January 2013.
Summary of IAS 19 (1998)
IAS 19 Employee Benefits (1998) is superseded by an amended version, IAS 19 Employee
Benefits (2011), effective for annual periods beginning on or after 1 January 2013. The summary
that follows refers to IAS 19 (1998). Readers interested in the requirements of IAS 1 Objective
of IAS 19

The objective of IAS 19 (1998) is to prescribe the accounting and disclosure for employee
benefits (that is, all forms of consideration given by an entity in exchange for service rendered by
Page 39 of 101

employees). The principle underlying all of the detailed requirements of the Standard is that the
cost of providing employee benefits should be recognized in the period in which the benefit is
earned by the employee, rather than when it is paid or payable.
Scope
IAS 19 (1998) applies to (among other kinds of employee benefits):
 wages and salaries
 compensated absences (paid vacation and sick leave)
 profit sharing plans
 bonuses
 medical and life insurance benefits during employment
 housing benefits
 free or subsidized goods or services given to employees
 pension benefits
 post-employment medical and life insurance benefits
 long-service or sabbatical leave
 'jubilee' benefits
 deferred compensation programmers
 termination benefits.
IAS 19 (1998) does not apply to employee benefits within the scope of IFRS 2 Share-based
Payment or the reporting by employee benefit plans (see IAS 26 Accounting and Reporting by
Retirement Benefit Plans).
Basic principle of IAS 19 (1998)
The cost of providing employee benefits should be recognized in the period in which the benefit
is earned by the employee, rather than when it is paid or payable.
Short-term employee benefits
For short-term employee benefits (those payable within 12 months after service is rendered, such
as wages, paid vacation and sick leave, bonuses, and non-monetary benefits such as medical care
and housing), the undiscounted amount of the benefits expected to be paid in respect of service
rendered by employees in a period should be recognized in that period. [IAS 19(1998).10] The
expected cost of short-term compensated absences should be recognized as the employees render
Page 40 of 101

service that increases their entitlement or, in the case of non-accumulating absences, when the
absences occur. [IAS 19(1998).11]
Profit-sharing and bonus payments
The entity should recognize the expected cost of profit-sharing and bonus payments when, and
only when, it has a legal or constructive obligation to make such payments as a result of past
events and a reliable estimate of the expected cost can be made. [IAS 19(1998).17]
Types of post-employment benefit plans
The accounting treatment for a post-employment benefit plan depends on whether the plan is a
defined contribution plan or a defined benefit plan:
 Under a defined contribution plan, the entity pays fixed contributions into a fund but has
no legal or constructive obligation to make further payments if the fund does not have sufficient
assets to pay all of the employees' entitlements to post-employment benefits
 A defined benefit plan is a post-employment benefit plan other than a defined
contribution plan. These would include both formal plans and those informal practices that create
a constructive obligation to the entity's employees.
Defined contribution plans
For defined contribution plans, the cost to be recognized in the period is the contribution payable
in exchange for service rendered by employees during the period. [IAS 19(1998).44]
If contributions to a defined contribution plan do not fall due within 12 months after the end of
the period in which the employee renders the service, they are discounted to their present value.
[IAS 19(1998).45]
Defined benefit plans
For defined benefit plans, the amount recognized in the statement of financial position is the
present value of the defined benefit obligation (that is, the present value of expected future
payments required to settle the obligation resulting from employee service in the current and
prior periods), as adjusted for unrecognized actuarial gains and losses and unrecognized past
service cost, and reduced by the fair value of plan assets at the end of the reporting period.
[IAS 19(1998).54]
The present value of the defined benefit obligation should be determined using the Projected
Unit Credit Method. [IAS 19(1998).64] Valuations should be carried out with sufficient
regularity such that the amounts recognized in the financial statements do not differ materially
Page 41 of 101

from those that would be determined at the end of the reporting period. [IAS 19(1998).56] The
assumptions used for the purposes of such valuations must be unbiased and mutually compatible.
[IAS 19(1998).72] The rate used to discount estimated cash flows is determined by reference to
market yields at the end of the reporting period on high quality corporate bonds, or where there is
no deep market in such bonds, by reference to market yields on government bonds.
[IAS 19(1998).78]
On an ongoing basis, actuarial gains and losses arise that comprise experience adjustments (the
effects of differences between the previous actuarial assumptions and what has actually
occurred) and the effects of changes in actuarial assumptions. In the long-term, actuarial gains
and losses may offset one another and, as a result, the entity is not required to recognise all such
gains and losses in profit or loss immediately. IAS 19 (1998) specifies that if the accumulated
unrecognized actuarial gains and losses exceed 10% of the greater of the defined benefit
obligation or the fair value of plan assets, a portion of that net gain or loss is required to be
recognized immediately as income or expense. The portion recognized is the excess divided by
the expected average remaining working lives of the participating employees. Actuarial gains
and losses that do not breach the 10% limits described above (the 'corridor') need not be
recognized - although the entity may choose to do so. [IAS 19(1998).92-93]
In December 2004, the IASB issued amendments to IAS 19 (1998) to allow the option of
recognizing actuarial gains and losses in full in the period in which they occur, outside profit or
loss, in other comprehensive income. This option is similar to the requirements of the UK
standard, FRS 17 Retirement Benefits. The Board concluded that, pending further work on post-
employment benefits and on reporting comprehensive income, the approach in FRS 17 should be
available as an option to preparers of financial statements using IFRSs. [IAS 19(1998).93A]
Over the life of the plan, changes in benefits under the plan will result in increases or decreases
in the entity's obligation.
Past service cost is the term used to describe the change in the obligation for employee service
in prior periods, arising as a result of changes to plan arrangements in the current period. Past
service cost may be either positive (where benefits are introduced or improved) or negative
(where existing benefits are reduced). Past service cost is recognized immediately to the extent
that it relates to former employees or to active employees already vested. Otherwise, it is
Page 42 of 101

amortised on a straight-line basis over the average period until the amended benefits become
vested. [IAS 19(1998).96]
Plan curtailments or settlements: Gains or losses resulting from curtailments or settlements of
a plan are recognized when the curtailment or settlement occurs. [IAS 19(1998).109-110]
Curtailments are reductions in scope of employees covered or in benefits.
If the calculation of the statement of financial position amount set out above results in an asset,
the amount recognized is limited to the net total of unrecognized actuarial losses and past service
cost, plus the present value of available refunds and reductions in future contributions to the
plan. [IAS 19(1998).58]
The IASB issued the final 'asset ceiling' amendment to IAS 19 (1998) in May 2002. The
amendment prevents the recognition of gains solely as a result of deferral of actuarial losses or
past service cost, and prohibits the recognition of losses solely as a result of deferral of actuarial
gains. [IAS 19(1998).58A]
The amount recognized in the profit or loss (unless included in the cost of an asset under another
Standard) in a period in respect of a defined benefit plan is made up of the following
components: [IAS 19(1998).61]
 current service cost (the actuarial estimate of benefits earned by employee service in the
period)
 interest cost (the increase in the present value of the obligation as a result of moving one
period closer to settlement)
 expected return on plan assets* and on any reimbursement rights
 actuarial gains and losses, to the extent recognized 
 past service cost, to the extent recognized 
 the effect of any plan curtailments or settlements
 the effect of 'asset ceiling'
*The return on plan assets is interest, dividends and other revenue derived from the plan assets,
together with realised and unrealised gains or losses on the plan assets, less any costs of
administering the plan (other than those included in the actuarial assumptions used to measure
the defined benefit obligation) and less any tax payable by the plan itself. [IAS 19(1998).7]
IAS 19 (1998) contains detailed disclosure requirements for defined benefit plans.
[IAS 19(1998).120-125]
Page 43 of 101

IAS 19 (1998) also provides guidance on allocating the cost in:

 a multi-employer plan to the individual entities-employers [IAS 19(1998).29-33]
 a group defined benefit plan to the entities in the group [IAS 19(1998).34-34B]
 a state plan to participating entities [IAS 19(1998).36-38].
Other long-term benefits
IAS 19 (1998) requires a simplified application of the model described above for other long-term
employee benefits. This method differs from the accounting required for post-employment
benefits in that: [IAS 19(1998).128-129]
 actuarial gains and losses are recognized immediately without the application of a
'corridor' (as discussed above for post-employment benefits)
 all past service costs are recognized immediately.
Termination benefits
For termination benefits, IAS 19 (1998) specifies that amounts payable should be recognized
when, and only when, the entity is demonstrably committed to either: [IAS 19(1998).133]
 terminate the employment of an employee or group of employees before the normal
retirement date, or
 provide termination benefits as a result of an offer made in order to encourage voluntary
redundancy.
The entity will be demonstrably committed to a termination when, and only when, it has a
detailed formal plan (meeting minimum outlined requirements) for the termination and is without
realistic possibility of withdrawal. [IAS 19(1998).134] Where termination benefits fall due after
more than 12 months after the balance sheet date, they are discounted. [IAS 19(1998).139]
9 Employee Benefits (2011) should refer to our summary of IAS 19 (2011).
Page 44 of 101

IAS 23 Borrowing Costs

Overview
IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition,
construction or production of a 'qualifying asset' (one that necessarily takes a substantial period
of time to get ready for its intended use or sale) are included in the cost of the asset. Other
borrowing costs are recognized as an expense.
IAS 23 was reissued in March 2007 and applies to annual periods beginning on or after 1
January 2009.
Summary of IAS 23
Objective of IAS 23
The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing
costs include interest on bank overdrafts and borrowings, finance charges on finance leases and
exchange differences on foreign currency borrowings where they are regarded as an adjustment
to interest costs.
Key definitions
Borrowing cost may include: [IAS 23.6]
 interest expense calculated by the effective interest method under IAS 39,
 finance charges in respect of finance leases recognized in accordance with IAS 17
Leases, and
 exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
This standard does not deal with the actual or imputed cost of equity, including any preferred
capital not classified as a liability pursuant to IAS 32. [IAS 23.3]
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended
use or sale. [IAS 23.5] That could be property, plant, and equipment and investment property
during the construction period, intangible assets during the development period, or "made-to-
order" inventories. [IAS 23.6]
Scope of IAS 23
Two types of assets that would otherwise be qualifying assets are excluded from the scope of
IAS 23:
Page 45 of 101

 qualifying assets measured at fair value, such as biological assets accounted for under
IAS 41 Agriculture
 inventories that are manufactured, or otherwise produced, in large quantities on a
repetitive basis and that take a substantial period to get ready for sale (for example, maturing
whisky)
Accounting treatment
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalized. Other
borrowing costs are recognized as an expense. [IAS 23.8]
Measurement
Where funds are borrowed specifically, costs eligible for capitalization are the actual costs
incurred less any income earned on the temporary investment of such borrowings. [IAS 23.12]
Where funds are part of a general pool, the eligible amount is determined by applying a
capitalization rate to the expenditure on that asset. The capitalization rate will be the weighted
average of the borrowing costs applicable to the general pool. [IAS 23.14]
Capitalization should commence when expenditures are being incurred, borrowing costs are
being incurred and activities that are necessary to prepare the asset for its intended use or sale are
in progress (may include some activities prior to commencement of physical production). [IAS
23.17-18] Capitalization should be suspended during periods in which active development is
interrupted. [IAS 23.20] Capitalization should cease when substantially all of the activities
necessary to prepare the asset for its intended use or sale are complete. [IAS 23.22] If only minor
modifications are outstanding, this indicates that substantially all of the activities are complete.
[IAS 23.23]
Where construction is completed in stages, which can be used while construction of the other
parts continues, capitalization of attributable borrowing costs should cease when substantially all
of the activities necessary to prepare that part for its intended use or sale are complete. [IAS
23.24]
Disclosure [IAS 23.26]
 amount of borrowing cost capitalized during the period
 capitalization rate used
Page 46 of 101

IAS 24 Related Party Disclosures

Overview

IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding

balances with an entity's related parties. The standard defines various classes of entities and
people as related parties and sets out the disclosures required in respect of those parties,
including the compensation of key management personnel.

IAS 24 was reissued in November 2009 and applies to annual periods beginning on or after 1
January 2011.

Summary of IAS 24

Objective of IAS 24

The objective of IAS 24 is to ensure that an entity's financial statements contain the disclosures
necessary to draw attention to the possibility that its financial position and profit or loss may
have been affected by the existence of related parties and by transactions and outstanding
balances with such parties.

Who are related parties?

A related party is a person or entity that is related to the entity that is preparing its financial
statements (referred to as the 'reporting entity') [IAS 24.9].

(a) A person or a close member of that person's family is related to a reporting entity if that
person:

(i) has control or joint control over the reporting entity;

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.

(b) An entity is related to a reporting entity if any of the following conditions applies:
Page 47 of 101

(i) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).

(iii) Both entities are joint ventures of the same third party.

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.

(v) The entity is a post-employment defined benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such
a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the
key management personnel of the entity (or of a parent of the entity).

(viii) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity*.

* Requirement added by Annual Improvements to IFRSs 2010–2012 Cycle, effective for annual
periods beginning on or after 1 July 2014.

The following are deemed not to be related: [IAS 24.11]

o two entities simply because they have a director or key manager in common

o two ventures who share joint control over a joint venture

o providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significantly influence the reporting entity,
simply by virtue of their normal dealings with an entity (even though they may affect the
freedom of action of an entity or participate in its decision-making process)
Page 48 of 101

o a single customer, supplier, franchiser, distributor, or general agent with whom an entity
transacts a significant volume of business merely by virtue of the resulting economic dependence

What are related party transactions?

A related party transaction is a transfer of resources, services, or obligations between related

parties, regardless of whether a price is charged. [IAS 24.9]

Disclosure

Relationships between parents and subsidiaries. Regardless of whether there have been

transactions between a parent and a subsidiary, an entity must disclose the name of its parent
and, if different, the ultimate controlling party. If neither the entity's parent nor the ultimate
controlling party produces financial statements available for public use, the name of the next
most senior parent that does so must also be disclosed. [IAS 24.16]

Management compensation. Disclose key management personnel compensation in total and for

each of the following categories: [IAS 24.17]

o short-term employee benefits

o post-employment benefits

o other long-term benefits

o termination benefits

o share-based payment benefits

Key management personnel are those persons having authority and responsibility for planning,
directing, and controlling the activities of the entity, directly or indirectly, including any directors
(whether executive or otherwise) of the entity. [IAS 24.9]

If an entity obtains key management personnel services from a management entity, the entity is
not required to disclose the compensation paid or payable by the management entity to the
management entity’s employees or directors. Instead the entity discloses the amounts incurred by
Page 49 of 101

the entity for the provision of key management personnel services that are provided by the
separate management entity*. [IAS 24.17A, 18A]

* These requirements were introduced by Annual Improvements to IFRSs 2010–2012 Cycle,

effective for annual periods beginning on or after 1 July 2014.

Related party transactions. If there have been transactions between related parties, disclose the
nature of the related party relationship as well as information about the transactions and
outstanding balances necessary for an understanding of the potential effect of the relationship on
the financial statements. These disclosure would be made separately for each category of related
parties and would include: [IAS 24.18-19]

o the amount of the transactions

o the amount of outstanding balances, including terms and conditions and guarantees

o provisions for doubtful debts related to the amount of outstanding balances

o expense recognized during the period in respect of bad or doubtful debts due from related
parties

A statement that related party transactions were made on terms equivalent to those that prevail in
arm's length transactions should be made only if such terms can be substantiated. [IAS 24.21]
Page 50 of 101

IAS 33 Earning Per Share

Overview

IAS 33 Earnings Per Share sets out how to calculate both basic earnings per share (EPS) and
diluted EPS. The calculation of Basic EPS is based on the weighted average number of ordinary
shares outstanding during the period, whereas diluted EPS also includes dilutive potential
ordinary shares (such as options and convertible instruments) if they meet certain criteria.

IAS 33 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005.

Summary of IAS 33

Objective of IAS 33

The objective of IAS 33 is to prescribe principles for determining and presenting earnings per
share (EPS) amounts to improve performance comparisons between different entities in the same
reporting period and between different reporting periods for the same entity. [IAS 33.1]

Scope

IAS 33 applies to entities whose securities are publicly traded or that are in the process of issuing
securities to the public. [IAS 33.2] Other entities that choose to present EPS information must
also comply with IAS 33. [IAS 33.3]

If both parent and consolidated statements are presented in a single report, EPS is required only
for the consolidated statements. [IAS 33.4]

Key definitions [IAS 33.5]

Ordinary share: also known as a common share or common stock. An equity instrument that is
subordinate to all other classes of equity instruments.

Potential ordinary share: a financial instrument or other contract that may entitle its holder to
ordinary shares.

Common examples of potential ordinary shares

Page 51 of 101

 convertible debt

 convertible preferred shares

 share warrants

 share options

 share rights

 employee stock purchase plans

 contractual rights to purchase shares

 contingent issuance contracts or agreements (such as those arising in business

combination)

Dilution: a reduction in earnings per share or an increase in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction of specified conditions.

ant dilution: an increase in earnings per share or a reduction in loss per share resulting from the
assumption that convertible instruments are converted, that options or warrants are exercised, or
that ordinary shares are issued upon the satisfaction of specified conditions.

Requirement to present EPS

An entity whose securities are publicly traded (or that is in process of public issuance) must
present, on the face of the statement of comprehensive income, basic and diluted EPS for: [IAS
33.66]

 profit or loss from continuing operations attributable to the ordinary equity holders of the
parent entity; and

 Profit or loss attributable to the ordinary equity holders of the parent entity for the period
for each class of ordinary shares that has a different right to share in profit for the period.
Page 52 of 101

If an entity presents the components of profit or loss in a separate income statement, it presents
EPS only in that separate statement. [IAS 33.4A]

Basic and diluted EPS must be presented with equal prominence for all periods presented. [IAS
33.66]

Basic and diluted EPS must be presented even if the amounts are negative (that is, a loss per
share). [IAS 33.69]

If an entity reports a discontinued operation, basic and diluted amounts per share must be
disclosed for the discontinued operation either on the face of the of comprehensive income (or
separate income statement if presented) or in the notes to the financial statements. [IAS 33.68
and 68A]

Basic EPS

Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the
parent entity (the numerator) by the weighted average number of ordinary shares outstanding
(the denominator) during the period. [IAS 33.10]

The earnings numerators (profit or loss from continuing operations and net profit or loss) used
for the calculation should be after deducting all expenses including taxes, minority interests, and
preference dividends. [IAS 33.12]

The denominator (number of shares) is calculated by adjusting the shares in issue at the
beginning of the period by the number of shares bought back or issued during the period,
multiplied by a time-weighting factor. IAS 33 includes guidance on appropriate recognition dates
for shares issued in various circumstances. [IAS 33.20-21]

Contingently issuable shares are included in the basic EPS denominator when the contingency
has been met. [IAS 33.24]

Diluted EPS
Page 53 of 101

Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of
dilutive options and other dilutive potential ordinary shares. [IAS 33.31] The effects of anti-
dilutive potential ordinary shares are ignored in calculating diluted EPS. [IAS 33.41]

Guidance on calculating dilution

Convertible securities. The numerator should be adjusted for the after-tax effects of dividends
and interest charged in relation to dilutive potential ordinary shares and for any other changes in
income that would result from the conversion of the potential ordinary shares. [IAS 33.33] The
denominator should include shares that would be issued on the conversion. [IAS 33.36]

Options and warrants. In calculating diluted EPS, assume the exercise of outstanding dilutive
options and warrants. The assumed proceeds from exercise should be regarded as having been
used to repurchase ordinary shares at the average market price during the period. The difference
between the number of ordinary shares assumed issued on exercise and the number of ordinary
shares assumed repurchased shall be treated as an issue of ordinary shares for no consideration.
[IAS 33.45]

Contingently issuable shares. Contingently issuable ordinary shares are treated as outstanding

and included in the calculation of both basic and diluted EPS if the conditions have been met. If
the conditions have not been met, the number of contingently issuable shares included in the
diluted EPS calculation is based on the number of shares that would be issuable if the end of the
period were the end of the contingency period. Restatement is not permitted if the conditions are
not met when the contingency period expires. [IAS 33.52]

Contracts that may be settled in ordinary shares or cash. Presume that the contract will be
settled in ordinary shares, and include the resulting potential ordinary shares in diluted EPS if the
effect is dilutive. [IAS 33.58]

Retrospective adjustments

The calculation of basic and diluted EPS for all periods presented is adjusted retrospectively
when the number of ordinary or potential ordinary shares outstanding increases as a result of a
capitalization, bonus issue, or share split, or decreases as a result of a reverse share split. If such
changes occur after the balance sheet date but before the financial statements are authorized for
Page 54 of 101

issue, the EPS calculations for those and any prior period financial statements presented are
based on the new number of shares. Disclosure is required. [IAS 33.64]

Basic and diluted EPS are also adjusted for the effects of errors and adjustments resulting from
changes in accounting policies, accounted for retrospectively. [IAS 33.64]

Diluted EPS for prior periods should not be adjusted for changes in the assumptions used or for
the conversion of potential ordinary shares into ordinary shares outstanding. [IAS 33.65]

Disclosure

If EPS is presented, the following disclosures are required: [IAS 33.70]

 the amounts used as the numerators in calculating basic and diluted EPS, and a
reconciliation of those amounts to profit or loss attributable to the parent entity for the period

 the weighted average number of ordinary shares used as the denominator in calculating
basic and diluted EPS, and a reconciliation of these denominators to each other

 instruments (including contingently issuable shares) that could potentially dilute basic
EPS in the future, but were not included in the calculation of diluted EPS because they are
antidilutive for the period(s) presented

 a description of those ordinary share transactions or potential ordinary share transactions

that occur after the balance sheet date and that would have changed significantly the number of
ordinary shares or potential ordinary shares outstanding at the end of the period if those
transactions had occurred before the end of the reporting period. Examples include issues and
redemptions of ordinary shares issued for cash, warrants and options, conversions, and exercises
[IAS 34.71]

An entity is permitted to disclose amounts per share other than profit or loss from continuing
operations, discontinued operations, and net profit or loss earnings per share. Guidance for
calculating and presenting such amounts is included in IAS 33.73 and 73A.
Page 55 of 101

IAS 36 Impairments

Overview

IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than
their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use).
With the exception of goodwill and certain intangible assets for which an annual impairment test
is required, entities are required to conduct impairment tests where there is an indication of
impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset
does not generate cash inflows that are largely independent of those from other assets.

IAS 36 was reissued in March 2004 and applies to goodwill and intangible assets acquired in
business combinations for which the agreement date is on or after 31 March 2004, and for all
other assets prospectively from the beginning of the first annual period beginning on or after 31
March 2004.

Summary of IAS 36

Objective of IAS 36

To ensure that assets are carried at no more than their recoverable amount, and to define how
recoverable amount is determined.

Scope

IAS 36 applies to all assets except: [IAS 36.2]

o inventories (see IAS 2)

o assets arising from construction contracts (see IAS 11)

o deferred tax assets (see IAS 12)

o assets arising from employee benefits (see IAS 19)

o financial assets (see IAS 39)

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o investment property carried at fair value (see IAS 40)

o agricultural assets carried at fair value (see IAS 41)

o insurance contract assets (see IFRS 4)

o non-current assets held for sale (see IFRS 5)

Therefore, IAS 36 applies to (among other assets):

o land

o buildings

o machinery and equipment

o investment property carried at cost

o intangible assets

o goodwill

o investments in subsidiaries, associates, and joint ventures carried at cost

o assets carried at revalued amounts under IAS 16 and IAS 38

Key definitions [IAS 36.6]

Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognized in the balance sheet after
deducting accumulated depreciation and accumulated impairment losses

Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes
called net selling price) and its value in use

* Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was

referred to as 'fair value less costs to sell'.
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Fair value: the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (see IFRS 13 Fair
Value Measurement)

Value in use: the present value of the future cash flows expected to be derived from an asset or
cash-generating unit

Identifying an asset that may be impaired

At the end of each reporting period, an entity is required to assess whether there is any indication
that an asset may be impaired (i.e. its carrying amount may be higher than its recoverable
amount). IAS 36 has a list of external and internal indicators of impairment. If there is an
indication that an asset may be impaired, then the asset's recoverable amount must be calculated.
[IAS 36.9]

The recoverable amounts of the following types of intangible assets are measured annually
whether or not there is any indication that it may be impaired. In some cases, the most recent
detailed calculation of recoverable amount made in a preceding period may be used in the
impairment test for that asset in the current period: [IAS 36.10]

o an intangible asset with an indefinite useful life

o an intangible asset not yet available for use

o goodwill acquired in a business combination

Indications of impairment [IAS 36.12]

External sources:

o market value declines

o negative changes in technology, markets, economy, or laws

o increases in market interest rates

o net assets of the company higher than market capitalization

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Internal sources:

o obsolescence or physical damage

o asset is idle, part of a restructuring or held for disposal

o worse economic performance than expected

o for investments in subsidiaries, joint ventures or associates, the carrying amount is higher
than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive
income of the investee

These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may
be impaired may indicate that the asset's useful life, depreciation method, or residual value may
need to be reviewed and adjusted. [IAS 36.17]

Determining recoverable amount

o If fair value less costs of disposal or value in use is more than carrying amount, it is not
necessary to calculate the other amount. The asset is not impaired. [IAS 36.19]

o If fair value less costs of disposal cannot be determined, then recoverable amount is value
in use. [IAS 36.20]

o For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS
36.21]

Fair value less costs of disposal

o Fair value is determined in accordance with IFRS 13 Fair Value Measurement

o Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS
36.28]

Value in use

The calculation of value in use should reflect the following elements: [IAS 36.30]
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o an estimate of the future cash flows the entity expects to derive from the asset

o expectations about possible variations in the amount or timing of those future cash flows

o the time value of money, represented by the current market risk-free rate of interest

o the price for bearing the uncertainty inherent in the asset

o other factors, such as illiquidity, that market participants would reflect in pricing the
future cash flows the entity expects to derive from the asset

Cash flow projections should be based on reasonable and supportable assumptions, the most
recent budgets and forecasts, and extrapolation for periods beyond budgeted projections. [IAS
36.33] IAS 36 presumes that budgets and forecasts should not go beyond five years; for periods
after five years, extrapolate from the earlier budgets. [IAS 36.35] Management should assess the
reasonableness of its assumptions by examining the causes of differences between past cash flow
projections and actual cash flows. [IAS 36.34]

Cash flow projections should relate to the asset in its current condition – future restructurings to
which the entity is not committed and expenditures to improve or enhance the asset's
performance should not be anticipated. [IAS 36.44]

Estimates of future cash flows should not include cash inflows or outflows from financing
activities, or income tax receipts or payments. [IAS 36.50]

Discount rate

In measuring value in use, the discount rate used should be the pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the asset. [IAS 36.55]

The discount rate should not reflect risks for which future cash flows have been adjusted and
should equal the rate of return that investors would require if they were to choose an investment
that would generate cash flows equivalent to those expected from the asset. [IAS 36.56]

For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity
would pay in a current market transaction to borrow money to buy that specific asset or portfolio.
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If a market-determined asset-specific rate is not available, a surrogate must be used that reflects
the time value of money over the asset's life as well as country risk, currency risk, price risk, and
cash flow risk. The following would normally be considered: [IAS 36.57]

o the entity's own weighted average cost of capital

o the entity's incremental borrowing rate

o Other market borrowing rates.

Recognition of an impairment loss

o An impairment loss is recognized whenever recoverable amount is below carrying

amount. [IAS 36.59]

o The impairment loss is recognized as an expense (unless it relates to a revalued asset

where the impairment loss is treated as a revaluation decrease). [IAS 36.60]

o Adjust depreciation for future periods. [IAS 36.63]

Cash-generating units

Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]

If it is not possible to determine the recoverable amount (i.e. the higher of fair value less costs of
disposal and value in use) for the individual asset, then determine recoverable amount for the
asset's cash-generating unit (CGU). [IAS 36.66] The CGU 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. [IAS 36.6]

Impairment of goodwill

Goodwill should be tested for impairment annually. [IAS 36.96]

To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating
units, or groups of cash-generating units, that are expected to benefit from the synergies of the
combination, irrespective of whether other assets or liabilities of the acquire are assigned to those
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units or groups of units. Each unit or group of units to which the goodwill is so allocated shall:
[IAS 36.80]

o represent the lowest level within the entity at which the goodwill is monitored for internal
management purposes; and

o Not be larger than an operating segment determined in accordance with IFRS

8 Operating Segments.

A cash-generating unit to which goodwill has been allocated shall be tested for impairment at
least annually by comparing the carrying amount of the unit, including the goodwill, with the
recoverable amount of the unit: [IAS 36.90]

o If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and
the goodwill allocated to that unit is not impaired

o If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity
must recognize an impairment loss.

The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of
units) in the following order: [IAS 36.104]

o first, reduce the carrying amount of any goodwill allocated to the cash-generating unit
(group of units); and

o Then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata
on the basis.

The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]

o its fair value less costs of disposal (if measurable)

o its value in use (if measurable)

o Zero.
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If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the
other assets of the unit (group of units).

Reversal of an impairment loss

o Same approach as for the identification of impaired assets: assess at each balance sheet
date whether there is an indication that an impairment loss may have decreased. If so, calculate
recoverable amount. [IAS 36.110]

o No reversal for unwinding of discount. [IAS 36.116]

o The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been recognized. [IAS
36.117]

o Reversal of an impairment loss is recognized in the profit or loss unless it relates to a

revalued asset [IAS 36.119]

o Adjust depreciation for future periods. [IAS 36.121]

o Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]

Disclosure

Disclosure by class of assets: [IAS 36.126]

o impairment losses recognized in profit or loss

o impairment losses reversed in profit or loss

o which line item(s) of the statement of comprehensive income

o impairment losses on revalued assets recognised in other comprehensive income

o impairment losses on revalued assets reversed in other comprehensive income

Disclosure by reportable segment: [IAS 36.129]

o impairment losses recognized

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o impairment losses reversed

Other disclosures:

If an individual impairment loss (reversal) is material disclose: [IAS 36.130]

o events and circumstances resulting in the impairment loss

o amount of the loss or reversal

o individual asset: nature and segment to which it relates

o cash generating unit: description, amount of impairment loss (reversal) by class of assets
and segment

o if recoverable amount is fair value less costs of disposal, the level of the fair value
hierarchy (from IFRS 13 Fair Value Measurement) within which the fair value measurement is
categorized, the valuation techniques used to measure fair value less costs of disposal and the
key assumptions used in the measurement of fair value measurements categorized within 'Level
2' and 'Level 3' of the fair value hierarchy*

o if recoverable amount has been determined on the basis of value in use, or on the basis of
fair value less costs of disposal using a present value technique*, disclose the discount rate

* Amendments introduced by Recoverable Amount Disclosures for Non-Financial Assets,

effective for annual periods beginning on or after 1 January 2014.

If impairment losses recognized (reversed) are material in aggregate to the financial statements
as a whole, disclose: [IAS 36.131]

o main classes of assets affected

o main events and circumstances

Disclose detailed information about the estimates used to measure recoverable amounts of cash
generating units containing goodwill or intangible assets with indefinite useful lives. [IAS
36.134-35]
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IFRS 07 Financial Instruments: Disclosure

Overview

IFRS 7 Financial Instruments: Disclosures requires disclosure of information about the

significance of financial instruments to an entity, and the nature and extent of risks arising from
those financial instruments, both in qualitative and quantitative terms. Specific disclosures are
required in relation to transferred financial assets and a number of other matters.

IFRS 7 was originally issued in August 2005 and applies to annual periods beginning on or after
1 January 2007.

Summary of IFRS 7

Overview of IFRS 7

 adds certain new disclosures about financial instruments to those previously required
by IAS 32 Financial Instruments: Disclosure and Presentation (as it was then cited) 

 replaces the disclosures previously required by IAS 30 Disclosures in the Financial

Statements of Banks and Similar Financial Institutions

 puts all of those financial instruments disclosures together in a new standard

on Financial Instruments: Disclosures. The remaining parts of IAS 32 deal only with
financial instruments presentation matters.

Disclosure requirements of IFRS 7

IFRS requires certain disclosures to be presented by category of instrument based on the IAS 39
measurement categories. Certain other disclosures are required by class of financial instrument.
For those disclosures an entity must group its financial instruments into classes of similar
instruments as appropriate to the nature of the information presented. [IFRS 7.6]

The two main categories of disclosures required by IFRS 7 are:

1. information about the significance of financial instruments.

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2. information about the nature and extent of risks arising from financial instruments

Information about the significance of financial instruments

Statement of financial position

 Disclose the significance of financial instruments for an entity's financial position and
performance. [IFRS 7.7] This includes disclosures for each of the following categories:
[IFRS 7.8]

o financial assets measured at fair value through profit and loss, showing separately
those held for trading and those designated at initial recognition

o held-to-maturity investments

o loans and receivables

o available-for-sale assets

o financial liabilities at fair value through profit and loss, showing separately those
held for trading and those designated at initial recognition

o financial liabilities measured at amortized cost

 Other balance sheet-related disclosures:

o special disclosures about financial assets and financial liabilities designated to be

measured at fair value through profit and loss, including disclosures about credit
risk and market risk, changes in fair values attributable to these risks and the
methods of measurement.[IFRS 7.9-11]

o reclassifications of financial instruments from one category to another (e.g. from

fair value to amortized cost or vice versa) [IFRS 7.12-12A]

o information about financial assets pledged as collateral and about financial or

non-financial assets held as collateral [IFRS 7.14-15]
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o reconciliation of the allowance account for credit losses (bad debts) by class of
financial assets[IFRS 7.16]

o information about compound financial instruments with multiple embedded

derivatives [IFRS 7.17]

o breaches of terms of loan agreements [IFRS 7.18-19]

Statement of comprehensive income

 Items of income, expense, gains, and losses, with separate disclosure of gains and losses
from: [IFRS 7.20(a)]

o financial assets measured at fair value through profit and loss, showing separately
those held for trading and those designated at initial recognition.

o held-to-maturity investments.

o loans and receivables.

o available-for-sale assets.

o financial liabilities measured at fair value through profit and loss, showing
separately those held for trading and those designated at initial recognition.

o financial liabilities measured at amortized cost.

 Other income statement-related disclosures: 

o total interest income and total interest expense for those financial instruments that
are not measured at fair value through profit and loss [IFRS 7.20(b)]

o fee income and expense [IFRS 7.20(c)]

o amount of impairment losses by class of financial assets [IFRS 7.20(e)]

o interest income on impaired financial assets [IFRS 7.20(d)]

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Other disclosures

 Accounting policies for financial instruments [IFRS 7.21]

 Information about hedge accounting, including: [IFRS 7.22]

o description of each hedge, hedging instrument, and fair values of those

instruments, and nature of risks being hedged

o for cash flow hedges, the periods in which the cash flows are expected to occur,
when they are expected to enter into the determination of profit or loss, and a
description of any forecast transaction for which hedge accounting had previously
been used but which is no longer expected to occur

o if a gain or loss on a hedging instrument in a cash flow hedge has been recognized
in other comprehensive income, an entity should disclose the following: [IAS
7.23]

o the amount that was so recognized in other comprehensive income during the
period

o the amount that was removed from equity and included in profit or loss for the
period

o the amount that was removed from equity during the period and included in the
initial measurement of the acquisition cost or other carrying amount of a non-
financial asset or non- financial liability in a hedged highly probable forecast
transaction
Note: Where IFRS 9 Financial Instruments (2013) is applied, revised disclosure
requirements apply. The required hedge accounting disclosures apply where the
entity elects to adopt hedge accounting and require information to be provided in
three broad categories: (1) the entity’s risk management strategy and how it is
applied to manage risk (2) how the entity’s hedging activities may affect the
amount, timing and uncertainty of its future cash flows, and (3) the effect that
hedge accounting has had on the entity’s statement of financial position, statement
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of comprehensive income and statement of changes in equity. The disclosures are

required to be presented in a single note or separate section in its financial
statements, although some information can be incorporated by reference.

 For fair value hedges, information about the fair value changes of the hedging instrument
and the hedged item [IFRS 7.24(a)]

 Hedge ineffectiveness recognized in profit and loss (separately for cash flow hedges and
hedges of a net investment in a foreign operation) [IFRS 7.24(b-c)]

 Uncertainty arising from the interest rate benchmark reform [IFRS 7.24H]

 Information about the fair values of each class of financial asset and financial liability,
along with: [IFRS 7.25-30]

o comparable carrying amounts

o description of how fair value was determined

o the level of inputs used in determining fair value

o reconciliations of movements between levels of fair value measurement hierarchy

additional disclosures for financial instruments whose fair value is determined
using level 3 inputs including impacts on profit and loss, other comprehensive
income and sensitivity analysis

o information if fair value cannot be reliably measured

The fair value hierarchy introduces 3 levels of inputs based on the lowest level of input
significant to the overall fair value (IFRS 7.27A-27B):

 Level 1 – quoted prices for similar instruments

 Level 2 – directly observable market inputs other than Level 1 inputs

 Level 3 – inputs not based on observable market data

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Note that disclosure of fair values is not required when the carrying amount is a reasonable
approximation of fair value, such as short-term trade receivables and payables, or for instruments
whose fair value cannot be measured reliably. [IFRS 7.29(a)]

Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures [IFRS 7.33]

 The qualitative disclosures describe:

o risk exposures for each type of financial instrument

o management's objectives, policies, and processes for managing those risks

o changes from the prior period

Quantitative disclosures

 The quantitative disclosures provide information about the extent to which the entity is
exposed to risk, based on information provided internally to the entity's key management
personnel. These disclosures include: [IFRS 7.34]

o summary quantitative data about exposure to each risk at the reporting date

o disclosures about credit risk, liquidity risk, and market risk and how these risks
are managed as further described below

o concentrations of risk

Credit risk

 Credit risk is the risk that one party to a financial instrument will cause a loss for the
other party by failing to pay for its obligation. [IFRS 7. Appendix A]

 Disclosures about credit risk include: [IFRS 7.36-38]

o maximum amount of exposure (before deducting the value of collateral),

description of collateral, information about credit quality of financial assets that
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are neither past due nor impaired, and information about credit quality of financial
assets whose terms have been renegotiated [IFRS 7.36]

o for financial assets that are past due or impaired, analytical disclosures are
required [IFRS 7.37]

o information about collateral or other credit enhancements obtained or called

[IFRS 7.38]

Liquidity risk

 Liquidity risk is the risk that an entity will have difficulties in paying its financial
liabilities. [IFRS 7. Appendix A]

 Disclosures about liquidity risk include: [IFRS 7.39]

o a maturity analysis of financial liabilities

o description of approach to risk management

Market risk [IFRS 7.40-42]

 Market risk is the risk that the fair value or cash flows of a financial instrument will
fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency
risk and other price risks. [IFRS 7. Appendix A]

 Disclosures about market risk include:

o a sensitivity analysis of each type of market risk to which the entity is exposed

o additional information if the sensitivity analysis is not representative of the

entity's risk exposure (for example because exposures during the year were
different to exposures at year-end).

o IFRS 7 provides that if an entity prepares a sensitivity analysis such as value-at-

risk for management purposes that reflects interdependencies of more than one
component of market risk (for instance, interest risk and foreign currency risk
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combined), it may disclose that analysis instead of a separate sensitivity analysis

for each type of market risk

Transfers of financial assets [IFRS 7.42A-H]

An entity shall disclose information that enables users of its financial statements:

1. to understand the relationship between transferred financial assets that are not
derecognized in their entirety and the associated liabilities; and

2. to evaluate the nature of, and risks associated with, the entity's continuing involvement in
derecognized financial assets. [IFRS 7 42B]

Transferred financial assets that are not derecognized in their entirety

 Required disclosures include description of the nature of the transferred assets, nature of
risk and rewards as well as description of the nature and quantitative disclosure depicting
relationship between transferred financial assets and the associated liabilities. [IFRS
7.42D]

Transferred financial assets that are derecognized in their entirety

 Required disclosures include the carrying amount of the assets and liabilities recognized,
fair value of the assets and liabilities that represent continuing involvement, maximum
exposure to loss from the continuing involvement as well as maturity analysis of the
undiscounted cash flows to repurchase the derecognized financial assets. [IFRS 7.42E]

 Additional disclosures are required for any gain or loss recognized at the date of transfer
of the assets, income or expenses recognize from the entity's continuing involvement in
the derecognized financial assets as well as details of uneven distribution of proceed from
transfer activity throughout the reporting period. [IFRS 7.42G]

Application guidance

An appendix of mandatory application guidance (Appendix B) is part of the standard.

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There is also an appendix of non-mandatory implementation guidance (Appendix C) that

describes how an entity might provide the disclosures required by IFRS 7.
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IFRS 09 Financial Instruments

Overview

IFRS 9 Financial Instruments issued on 24 July 2014 is the IASB's replacement of IAS

39 Financial Instruments: Recognition and Measurement. The Standard includes requirements
for recognition and measurement, impairment, DE recognition and general hedge accounting.
The IASB completed its project to replace IAS 39 in phases, adding to the standard as it
completed each phase.

The version of IFRS 9 issued in 2014 supersedes all previous versions and is mandatorily
effective for periods beginning on or after 1 January 2018 with early adoption permitted (subject
to local endorsement requirements). For a limited period, previous versions of IFRS 9 may be
adopted early if not already done so provided the relevant date of initial application is before 1
February 2015.

IFRS 9 does not replace the requirements for portfolio fair value hedge accounting for interest
rate risk (often referred to as the ‘macro hedge accounting’ requirements) since this phase of the
project was separated from the IFRS 9 project due to the longer term nature of the macro
hedging project which is currently at the discussion paper phase of the due process. In April
2014, the IASB published a Discussion Paper Accounting for Dynamic Risk management: a
Portfolio Revaluation Approach to Macro Hedging. Consequently, the exception in IAS 39 for a
fair value hedge of an interest rate exposure of a portfolio of financial assets or financial
liabilities continues to apply.

The phased completion of IFRS 9

On 12 November 2009, the IASB issued IFRS 9 Financial Instruments as the first step in its
project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9
introduced new requirements for classifying and measuring financial assets that had to be applied
starting 1 January 2013, with early adoption permitted. Click for IASB Press Release (PDF
101k).

On 28 October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting
for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of
financial assets and financial liabilities. Click for IASB Press Release (PDF 33k).

On 16 December 2011, the IASB issued Mandatory Effective Date and Transition Disclosures
(Amendments to IFRS 9 and IFRS 7), which amended the effective date of IFRS 9 to annual
periods beginning on or after 1 January 2015, and modified the relief from restating comparative
periods and the associated disclosures in IFRS 7.

On 19 November 2013, the IASB issued IFRS 9 Financial Instruments (Hedge Accounting and
amendments to IFRS 9, IFRS 7 and IAS 39) amending IFRS 9 to include the new general hedge
accounting model, allow early adoption of the treatment of fair value changes due to own credit
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on liabilities designated at fair value through profit or loss and remove the 1 January 2015
effective date.

On 24 July 2014, the IASB issued the final version of IFRS 9 incorporating a new expected loss
impairment model and introducing limited amendments to the classification and measurement
requirements for financial assets.   This version supersedes all previous versions and is
mandatorily effective for periods beginning on or after 1 January 2018 with early adoption
permitted (subject to local endorsement requirements). For a limited period, previous versions of
IFRS 9 may be adopted early if not already done so provided the relevant date of initial
application is before 1 February 2015.

Summary of IFRS 9

Initial measurement of financial instruments

All financial instruments are initially measured at fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit or loss, transaction costs.
[IFRS 9, paragraph 5.1.1]

Subsequent measurement of financial assets

IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two
classifications - those measured at amortised cost and those measured at fair value.

Where assets are measured at fair value, gains and losses are either recognised entirely in profit
or loss (fair value through profit or loss, FVTPL), or recognised in other comprehensive income
(fair value through other comprehensive income, FVTOCI).

For debt instruments the FVTOCI classification is mandatory for certain assets unless the fair
value option is elected. Whilst for equity investments, the FVTOCI classification is an election.
Furthermore, the requirements for reclassifying gains or losses recognised in other
comprehensive income are different for debt instruments and equity investments.

The classification of a financial asset is made at the time it is initially recognised, namely when
the entity becomes a party to the contractual provisions of the instrument. [IFRS 9, paragraph
4.1.1] If certain conditions are met, the classification of an asset may subsequently need to be
reclassified.

Debt instruments

A debt instrument that meets the following two conditions must be measured at amortised cost
(net of any write down for impairment) unless the asset is designated at FVTPL under the fair
value option (see below):

[IFRS 9, paragraph 4.1.2]

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 Business model test: The objective of the entity's business model is to hold the financial
asset to collect the contractual cash flows (rather than to sell the instrument prior to its
contractual maturity to realise its fair value changes).

 Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.

Assessing the cash flow characteristics also includes an analysis of changes in the timing or in
the amount of payments. It is necessary to assess whether the cash flows before and after the
change represent only repayments of the nominal amount and an interest rate based on them.

The right of termination may for example be in accordance with the cash flow condition if, in the
case of termination, the only outstanding payments consist of principal and interest on the
principal amount and an appropriate compensation payment where applicable. In October 2017,
the IASB clarified that the compensation payments can also have a negative sign.*

*Prepayment Features with Negative Compensation (Amendments to IFRS 9); to be applied

retrospectively for fiscal years beginning on or after 1 January 2019; early application permitted

A debt instrument that meets the following two conditions must be measured at FVTOCI unless
the asset is designated at FVTPL under the fair value option (see below):

[IFRS 9, paragraph 4.1.2A]

 Business model test: The financial asset is held within a business model whose objective
is achieved by both collecting contractual cash flows and selling financial assets.

 Cash flow characteristics test: The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.

All other debt instruments must be measured at fair value through profit or loss (FVTPL). [IFRS
9, paragraph 4.1.4]

Fair value option

Even if an instrument meets the two requirements to be measured at amortised cost or FVTOCI,
IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at
FVTPL if doing so eliminates or significantly reduces a measurement or recognition
inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise
from measuring assets or liabilities or recognising the gains and losses on them on different
bases. [IFRS 9, paragraph 4.1.5]

Equity instruments
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All equity investments in scope of IFRS 9 are to be measured at fair value in the statement of
financial position, with value changes recognised in profit or loss, except for those equity
investments for which the entity has elected to present value changes in 'other comprehensive
income'. There is no 'cost exception' for unquoted equities.

'Other comprehensive income' option

If an equity investment is not held for trading, an entity can make an irrevocable election at
initial recognition to measure it at FVTOCI with only dividend income recognised in profit or
loss. [IFRS 9, paragraph 5.7.5]

Measurement guidance

Despite the fair value requirement for all equity investments, IFRS 9 contains guidance on when
cost may be the best estimate of fair value and also when it might not be representative of fair
value.

Subsequent measurement of financial liabilities

IFRS 9 doesn't change the basic accounting model for financial liabilities under IAS 39. Two
measurement categories continue to exist: FVTPL and amortised cost. Financial liabilities held
for trading are measured at FVTPL, and all other financial liabilities are measured at amortised
cost unless the fair value option is applied. [IFRS 9, paragraph 4.2.1]

Fair value option

IFRS 9 contains an option to designate a financial liability as measured at FVTPL if [IFRS 9,

paragraph 4.2.2]:

 doing so eliminates or significantly reduces a measurement or recognition inconsistency

(sometimes referred to as an 'accounting mismatch') that would otherwise arise from
measuring assets or liabilities or recognising the gains and losses on them on different
bases, or

 the liability is part or a group of financial liabilities or financial assets and financial
liabilities that is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy, and information
about the group is provided internally on that basis to the entity's key management
personnel.

A financial liability which does not meet any of these criteria may still be designated as
measured at FVTPL when it contains one or more embedded derivatives that sufficiently modify
the cash flows of the liability and are not clearly closely related. [IFRS 9, paragraph 4.3.5]

IFRS 9 requires gains and losses on financial liabilities designated as at FVTPL to be split into
the amount of change in fair value attributable to changes in credit risk of the liability, presented
Page 78 of 101

in other comprehensive income, and the remaining amount presented in profit or loss. The new
guidance allows the recognition of the full amount of change in the fair value in profit or loss
only if the presentation of changes in the liability's credit risk in other comprehensive income
would create or enlarge an accounting mismatch in profit or loss. That determination is made at
initial recognition and is not reassessed. [IFRS 9, paragraphs 5.7.7-5.7.8]

Amounts presented in other comprehensive income shall not be subsequently transferred to profit
or loss, the entity may only transfer the cumulative gain or loss within equity.

Derecognition of financial assets

The basic premise for the derecognition model in IFRS 9 (carried over from IAS 39) is to
determine whether the asset under consideration for derecognition is: [IFRS 9, paragraph 3.2.2]

 an asset in its entirety or

 specifically identified cash flows from an asset (or a group of similar financial assets) or

 a fully proportionate (pro rata) share of the cash flows from an asset (or a group of
similar financial assets). or

 a fully proportionate (pro rata) share of specifically identified cash flows from a financial
asset (or a group of similar financial assets)

Once the asset under consideration for derecognition has been determined, an assessment is
made as to whether the asset has been transferred, and if so, whether the transfer of that asset is
subsequently eligible for derecognition.

An asset is transferred if either the entity has transferred the contractual rights to receive the cash
flows, or the entity has retained the contractual rights to receive the cash flows from the asset,
but has assumed a contractual obligation to pass those cash flows on under an arrangement that
meets the following three conditions: [IFRS 9, paragraphs 3.2.4-3.2.5]

 the entity has no obligation to pay amounts to the eventual recipient unless it collects
equivalent amounts on the original asset

 the entity is prohibited from selling or pledging the original asset (other than as security
to the eventual recipient),

 the entity has an obligation to remit those cash flows without material delay

Once an entity has determined that the asset has been transferred, it then determines whether or
not it has transferred substantially all of the risks and rewards of ownership of the asset. If
substantially all the risks and rewards have been transferred, the asset is derecognised. If
substantially all the risks and rewards have been retained, derecognition of the asset is precluded.
[IFRS 9, paragraphs 3.2.6(a)-(b)]
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If the entity has neither retained nor transferred substantially all of the risks and rewards of the
asset, then the entity must assess whether it has relinquished control of the asset or not. If the
entity does not control the asset then derecognition is appropriate; however if the entity has
retained control of the asset, then the entity continues to recognise the asset to the extent to
which it has a continuing involvement in the asset. [IFRS 9, paragraph 3.2.6(c)]

These various derecognition steps are summarised in the decision tree in paragraph B3.2.1.

Derecognition of financial liabilities

A financial liability should be removed from the balance sheet when, and only when, it is
extinguished, that is, when the obligation specified in the contract is either discharged or
cancelled or expires. [IFRS 9, paragraph 3.3.1] Where there has been an exchange between an
existing borrower and lender of debt instruments with substantially different terms, or there has
been a substantial modification of the terms of an existing financial liability, this transaction is
accounted for as an extinguishment of the original financial liability and the recognition of a new
financial liability. A gain or loss from extinguishment of the original financial liability is
recognised in profit or loss. [IFRS 9, paragraphs 3.3.2-3.3.3]

Derivatives

All derivatives in scope of IFRS 9, including those linked to unquoted equity investments, are
measured at fair value. Value changes are recognised in profit or loss unless the entity has
elected to apply hedge accounting by designating the derivative as a hedging instrument in an
eligible hedging relationship.

Embedded derivatives

An embedded derivative is a component of a hybrid contract that also includes a non-derivative

host, with the effect that some of the cash flows of the combined instrument vary in a way
similar to a stand-alone derivative. A derivative that is attached to a financial instrument but is
contractually transferable independently of that instrument, or has a different counterparty, is not
an embedded derivative, but a separate financial instrument. [IFRS 9, paragraph 4.3.1]

The embedded derivative concept that existed in IAS 39 has been included in IFRS 9 to apply
only to hosts that are not financial assets within the scope of the Standard. Consequently,
embedded derivatives that under IAS 39 would have been separately accounted for at FVTPL
because they were not closely related to the host financial asset will no longer be separated.
Instead, the contractual cash flows of the financial asset are assessed in their entirety, and the
asset as a whole is measured at FVTPL if the contractual cash flow characteristics test is not
passed (see above).

The embedded derivative guidance that existed in IAS 39 is included in IFRS 9 to help preparers
identify when an embedded derivative is closely related to a financial liability host contract or a
host contract not within the scope of the Standard (e.g. leasing contracts, insurance contracts,
contracts for the purchase or sale of a non-financial items).
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Reclassification

For financial assets, reclassification is required between FVTPL, FVTOCI and amortised cost, if
and only if the entity's business model objective for its financial assets changes so its previous
model assessment would no longer apply. [IFRS 9, paragraph 4.4.1]

If reclassification is appropriate, it must be done prospectively from the reclassification date

which is defined as the first day of the first reporting period following the change in business
model. An entity does not restate any previously recognised gains, losses, or interest.

IFRS 9 does not allow reclassification:

 for equity investments measured at FVTOCI, or

 where the fair value option has been exercised in any circumstance for a financial assets
or financial liability.

Hedge accounting

The hedge accounting requirements in IFRS 9 are optional. If certain eligibility and qualification
criteria are met, hedge accounting allows an entity to reflect risk management activities in the
financial statements by matching gains or losses on financial hedging instruments with losses or
gains on the risk exposures they hedge.

The hedge accounting model in IFRS 9 is not designed to accommodate hedging of open,
dynamic portfolios. As a result, for a fair value hedge of interest rate risk of a portfolio of
financial assets or liabilities an entity can apply the hedge accounting requirements in IAS 39
instead of those in IFRS 9. [IFRS 9 paragraph 6.1.3]

In addition when an entity first applies IFRS 9, it may choose as its accounting policy choice to
continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of
Chapter 6 of IFRS 9 [IFRS 9 paragraph 7.2.21]

Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:

1. the hedging relationship consists only of eligible hedging instruments and eligible hedged
items.

2. at the inception of the hedging relationship there is formal designation and documentation
of the hedging relationship and the entity’s risk management objective and strategy for
undertaking the hedge.

3. the hedging relationship meets all of the hedge effectiveness requirements (see below)
[IFRS 9 paragraph 6.4.1]
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Hedging instruments

Only contracts with a party external to the reporting entity may be designated as hedging
instruments. [IFRS 9 paragraph 6.2.3]

A hedging instrument may be a derivative (except for some written options) or non-derivative
financial instrument measured at FVTPL unless it is a financial liability designated as at FVTPL
for which changes due to credit risk are presented in OCI. For a hedge of foreign currency risk,
the foreign currency risk component of a non-derivative financial instrument, except equity
investments designated as FVTOCI, may be designated as the hedging instrument. [IFRS 9
paragraphs 6.2.1-6.2.2]

IFRS 9 allows a proportion (e.g. 60%) but not a time portion (eg the first 6 years of cash flows of
a 10 year instrument) of a hedging instrument to be designated as the hedging instrument. IFRS 9
also allows only the intrinsic value of an option, or the spot element of a forward to be
designated as the hedging instrument.  An entity may also exclude the foreign currency basis
spread from a designated hedging instrument. [IFRS 9 paragraph 6.2.4]

IFRS 9 allows combinations of derivatives and non-derivatives to be designated as the hedging

instrument. [IFRS 9 paragraph 6.2.5]

Combinations of purchased and written options do not qualify if they amount to a net written
option at the date of designation. [IFRS 9 paragraph 6.2.6]

Hedged items

A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a highly
probable forecast transaction or a net investment in a foreign operation and must be reliably
measurable. [IFRS 9 paragraphs 6.3.1-6.3.3]

An aggregated exposure that is a combination of an eligible hedged item as described above and
a derivative may be designated as a hedged item. [IFRS 9 paragraph 6.3.4]

The hedged item must generally be with a party external to the reporting entity, however, as an
exception the foreign currency risk of an intragroup monetary item may qualify as a hedged item
in the consolidated financial statements if it results in an exposure to foreign exchange rate gains
or losses that are not fully eliminated on consolidation. In addition, the foreign currency risk of a
highly probable forecast intragroup transaction may qualify as a hedged item in consolidated
financial statements provided that the transaction is denominated in a currency other than the
functional currency of the entity entering into that transaction and the foreign currency risk will
affect consolidated profit or loss. [IFRS 9 paragraphs 6.3.5 -6.3.6]

An entity may designate an item in its entirety or a component of an item as the hedged item.
The component may be a risk component that is separately identifiable and reliably measurable;
one or more selected contractual cash flows; or components of a nominal amount. [IFRS 9
paragraph 6.3.7]
Page 82 of 101

A group of items (including net positions is an eligible hedged item only if:

1. it consists of items individually, eligible hedged items;

2. the items in the group are managed together on a group basis for risk management
purposes; and

3. in the case of a cash flow hedge of a group of items whose variabilities in cash flows are
not expected to be approximately proportional to the overall variability in cash flows of
the group:

1. it is a hedge of foreign currency risk; and

2. the designation of that net position specifies the reporting period in which the
forecast transactions are expected to affect profit or loss, as well as their nature
and volume [IFRS 9 paragraph 6.6.1]

For a hedge of a net position whose hedged risk affects different line items in the statement of
profit or loss and other comprehensive income, any hedging gains or losses in that statement are
presented in a separate line from those affected by the hedged items. [IFRS 9 paragraph 6.6.4]

Accounting for qualifying hedging relationships

There are three types of hedging relationships:

Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or
liability or an unrecognised firm commitment, or a component of any such item, that is
attributable to a particular risk and could affect profit or loss (or OCI in the case of an equity
instrument designated as at FVTOCI). [IFRS 9 paragraphs 6.5.2(a) and 6.5.3]

For a fair value hedge, the gain or loss on the hedging instrument is recognised in profit or loss
(or OCI, if hedging an equity instrument at FVTOCI and the hedging gain or loss on the hedged
item adjusts the carrying amount of the hedged item and is recognised in profit or loss. However,
if the hedged item is an equity instrument at FVTOCI, those amounts remain in OCI. When a
hedged item is an unrecognised firm commitment the cumulative hedging gain or loss is
recognised as an asset or a liability with a corresponding gain or loss recognised in profit or loss.
[IFRS 9 paragraph 6.5.8]

If the hedged item is a debt instrument measured at amortised cost or FVTOCI any hedge
adjustment is amortised to profit or loss based on a recalculated effective interest rate.
Amortisation may begin as soon as an adjustment exists and shall begin no later than when the
hedged item ceases to be adjusted for hedging gains and losses. [IFRS 9 paragraph 6.5.10]

Cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a
particular risk associated with all, or a component of, a recognised asset or liability (such as all
Page 83 of 101

or some future interest payments on variable-rate debt) or a highly probable forecast transaction,
and could affect profit or loss. [IFRS 9 paragraph 6.5.2(b)]

For a cash flow hedge the cash flow hedge reserve in equity is adjusted to the lower of the
following (in absolute amounts):

 the cumulative gain or loss on the hedging instrument from inception of the hedge; and

 the cumulative change in fair value of the hedged item from inception of the hedge.

The portion of the gain or loss on the hedging instrument that is determined to be an effective
hedge is recognised in OCI and any remaining gain or loss is hedge ineffectiveness that is
recognised in profit or loss.

If a hedged forecast transaction subsequently results in the recognition of a non-financial item or

becomes a firm commitment for which fair value hedge accounting is applied, the amount that
has been accumulated in the cash flow hedge reserve is removed and included directly in the
initial cost or other carrying amount of the asset or the liability. In other cases the amount that
has been accumulated in the cash flow hedge reserve is reclassified to profit or loss in the same
period(s) as the hedged cash flows affect profit or loss. [IFRS 9 paragraph 6.5.11]

When an entity discontinues hedge accounting for a cash flow hedge, if the hedged future cash
flows are still expected to occur, the amount that has been accumulated in the cash flow hedge
reserve remains there until the future cash flows occur; if the hedged future cash flows are no
longer expected to occur, that amount is immediately reclassified to profit or loss [IFRS 9
paragraph 6.5.12]

A hedge of the foreign currency risk of a firm commitment may be accounted for as a fair value
hedge or a cash flow hedge. [IFRS 9 paragraph 6.5.4]

Hedge of a net investment in a foreign operation (as defined in IAS 21), including a hedge of
a monetary item that is accounted for as part of the net investment, is accounted for similarly to
cash flow hedges:

 the portion of the gain or loss on the hedging instrument that is determined to be an
effective hedge is recognised in OCI; and

 the ineffective portion is recognised in profit or loss. [IFRS 9 paragraph 6.5.13]

The cumulative gain or loss on the hedging instrument relating to the effective portion of the
hedge is reclassified to profit or loss on the disposal or partial disposal of the foreign operation.
[IFRS 9 paragraph 6.5.14]

Hedge effectiveness requirements

Page 84 of 101

In order to qualify for hedge accounting, the hedge relationship must meet the following
effectiveness criteria at the beginning of each hedged period:

 there is an economic relationship between the hedged item and the hedging instrument;

 the effect of credit risk does not dominate the value changes that result from that
economic relationship; and

 the hedge ratio of the hedging relationship is the same as that actually used in the
economic hedge [IFRS 9 paragraph 6.4.1(c)]

Rebalancing and discontinuation

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge
ratio but the risk management objective for that designated hedging relationship remains the
same, an entity adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so
that it meets the qualifying criteria again. [IFRS 9 paragraph 6.5.5]

An entity discontinues hedge accounting prospectively only when the hedging relationship (or a
part of a hedging relationship) ceases to meet the qualifying criteria (after any rebalancing). This
includes instances when the hedging instrument expires or is sold, terminated or exercised.
Discontinuing hedge accounting can either affect a hedging relationship in its entirety or only a
part of it (in which case hedge accounting continues for the remainder of the hedging
relationship). [IFRS 9 paragraph 6.5.6]

Time value of options

When an entity separates the intrinsic value and time value of an option contract and designates
as the hedging instrument only the change in intrinsic value of the option, it recognises some or
all of the change in the time value in OCI which is later removed or reclassified from equity as a
single amount or on an amortised basis (depending on the nature of the hedged item) and
ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.15] This reduces profit or loss
volatility compared to recognising the change in value of time value directly in profit or loss.

Forward points and foreign currency basis spreads

When an entity separates the forward points and the spot element of a forward contract and
designates as the hedging instrument only the change in the value of the spot element, or when
an entity excludes the foreign currency basis spread from a hedge the entity may recognise the
change in value of the excluded portion in OCI to be later removed or reclassified from equity as
a single amount or on an amortised basis  (depending on the nature of the hedged item) and
ultimately recognised in profit or loss. [IFRS 9 paragraph 6.5.16] This reduces profit or loss
volatility compared to recognising the change in value of forward points or currency basis
spreads directly in profit or loss.

Credit exposures designated at FVTPL

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If an entity uses a credit derivative measured at FVTPL to manage the credit risk of a financial
instrument (credit exposure) it may designate all or a proportion of that financial instrument as
measured at FVTPL if:

 the name of the credit exposure matches the reference entity of the credit derivative
(‘name matching’); and

 the seniority of the financial instrument matches that of the instruments that can be
delivered in accordance with the credit derivative.

An entity may make this designation irrespective of whether the financial instrument that is
managed for credit risk is within the scope of IFRS 9 (for example, it can apply to loan
commitments that are outside the scope of IFRS 9). The entity may designate that financial
instrument at, or subsequent to, initial recognition, or while it is unrecognised and shall
document the designation concurrently. [IFRS 9 paragraph 6.7.1]

If designated after initial recognition, any difference in the previous carrying amount and fair
value is recognised immediately in profit or loss [IFRS 9 paragraph 6.7.2]

An entity discontinues measuring the financial instrument that gave rise to the credit risk at
FVTPL if the qualifying criteria are no longer met and the instrument is not otherwise required to
be measured at FVTPL. The fair value at discontinuation becomes its new carrying amount.
[IFRS 9 paragraphs 6.7.3 and 6.7.4]

Impairment

The impairment model in IFRS 9 is based on the premise of providing for expected losses.

Scope

IFRS 9 requires that the same impairment model apply to all of the following:

[IFRS 9 paragraph 5.5.1]

 Financial assets measured at amortised cost;

 Financial assets mandatorily measured at FVTOCI;

 Loan commitments when there is a present obligation to extend credit (except where
these are measured at FVTPL);

o Financial guarantee contracts to which IFRS 9 is applied (except those measured

at FVTPL);

o Lease receivables within the scope of IAS 17 Leases; and

Page 86 of 101

o Contract assets within the scope of IFRS 15 Revenue from Contracts with
Customers (i.e. rights to consideration following transfer of goods or services).

General approach

With the exception of purchased or originated credit impaired financial assets (see below),
expected credit losses are required to be measured through a loss allowance at an amount equal
to:

[IFRS 9 paragraphs 5.5.3 and 5.5.5]

 the 12-month expected credit losses (expected credit losses that result from those default
events on the financial instrument that are possible within 12 months after the reporting
date); or

 full lifetime expected credit losses (expected credit losses that result from all possible
default events over the life of the financial instrument).

A loss allowance for full lifetime expected credit losses is required for a financial instrument if
the credit risk of that financial instrument has increased significantly since initial recognition, as
well as to contract assets or trade receivables that do not constitute a financing transaction in
accordance with IFRS 15. [IFRS 9 paragraphs 5.5.3 and 5.5.15]

Additionally, entities can elect an accounting policy to recognise full lifetime expected losses for
all contract assets and/or all trade receivables that do constitute a financing transaction in
accordance with IFRS 15. The same election is also separately permitted for lease receivables.
[IFRS 9 paragraph 5.5.16]

For all other financial instruments, expected credit losses are measured at an amount equal to the
12-month expected credit losses. [IFRS 9 paragraph 5.5.5]

Significant increase in credit risk

With the exception of purchased or originated credit-impaired financial assets (see below), the
loss allowance for financial instruments is measured at an amount equal to lifetime expected
losses if the credit risk of a financial instrument has increased significantly since initial
recognition, unless the credit risk of the financial instrument is low at the reporting date in which
case it can be assumed that credit risk on the financial instrument has not increased significantly
since initial recognition. [IFRS 9 paragraphs 5.5.3 and 5.5.10]

The Standard considers credit risk low if there is a low risk of default, the borrower has a strong
capacity to meet its contractual cash flow obligations in the near term and adverse changes in
economic and business conditions in the longer term may, but will not necessarily, reduce the
ability of the borrower to fulfil its contractual cash flow obligations. The Standard suggests that
‘investment grade’ rating might be an indicator for a low credit risk. [IFRS 9 paragraphs B5.5.22
– B5.5.24]
Page 87 of 101

The assessment of whether there has been a significant increase in credit risk is based on an
increase in the probability of a default occurring since initial recognition. Under the Standard, an
entity may use various approaches to assess whether credit risk has increased significantly
(provided that the approach is consistent with the requirements). An approach can be consistent
with the requirements even if it does not include an explicit probability of default occurring as an
input. The application guidance provides a list of factors that may assist an entity in making the
assessment. Also, whilst in principle the assessment of whether a loss allowance should be based
on lifetime expected credit losses is to be made on an individual basis, some factors or indicators
might not be available at an instrument level. In this case, the entity should perform the
assessment on appropriate groups or portions of a portfolio of financial instruments.

The requirements also contain a rebuttable presumption that the credit risk has increased
significantly when contractual payments are more than 30 days past due. IFRS 9 also requires
that (other than for purchased or originated credit impaired financial instruments) if a significant
increase in credit risk that had taken place since initial recognition and has reversed by a
subsequent reporting period (i.e., cumulatively credit risk is not significantly higher than at initial
recognition) then the expected credit losses on the financial instrument revert to being measured
based on an amount equal to the 12-month expected credit losses. [IFRS 9 paragraph 5.5.11]

Purchased or originated credit-impaired financial assets

Purchased or originated credit-impaired financial assets are treated differently because the asset
is credit-impaired at initial recognition. For these assets, an entity would recognise changes in
lifetime expected losses since initial recognition as a loss allowance with any changes recognised
in profit or loss. Under the requirements, any favourable changes for such assets are an
impairment gain even if the resulting expected cash flows of a financial asset exceed the
estimated cash flows on initial recognition. [IFRS 9 paragraphs 5.5.13 – 5.5.14]

Credit-impaired financial asset

Under IFRS 9 a financial asset is credit-impaired when one or more events that have occurred
and have a significant impact on the expected future cash flows of the financial asset. It includes
observable data that has come to the attention of the holder of a financial asset about the
following events:

[IFRS 9 Appendix A]

 significant financial difficulty of the issuer or borrower;

 a breach of contract, such as a default or past-due event;

 the lenders for economic or contractual reasons relating to the borrower’s financial
difficulty granted the borrower a concession that would not otherwise be considered;

 it becoming probable that the borrower will enter bankruptcy or other financial
reorganisation;
Page 88 of 101

 the disappearance of an active market for the financial asset because of financial
difficulties; or

 the purchase or origination of a financial asset at a deep discount that reflects incurred
credit losses.

Basis for estimating expected credit losses

Any measurement of expected credit losses under IFRS 9 shall reflect an unbiased and
probability-weighted amount that is determined by evaluating the range of possible outcomes as
well as incorporating the time value of money. Also, the entity should consider reasonable and
supportable information about past events, current conditions and reasonable and supportable
forecasts of future economic conditions when measuring expected credit losses. [IFRS 9
paragraph 5.5.17]

The Standard defines expected credit losses as the weighted average of credit losses with the
respective risks of a default occurring as the weightings. [IFRS 9 Appendix A] Whilst an entity
does not need to consider every possible scenario, it must consider the risk or probability that a
credit loss occurs by considering the possibility that a credit loss occurs and the possibility that
no credit loss occurs, even if the probability of a credit loss occurring is low. [IFRS 9 paragraph
5.5.18]

In particular, for lifetime expected losses, an entity is required to estimate the risk of a default
occurring on the financial instrument during its expected life. 12-month expected credit losses
represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the
reporting date, weighted by the probability of that default occurring.

An entity is required to incorporate reasonable and supportable information (i.e., that which is
reasonably available at the reporting date). Information is reasonably available if obtaining it
does not involve undue cost or effort (with information available for financial reporting purposes
qualifying as such).

For applying the model to a loan commitment an entity will consider the risk of a default
occurring under the loan to be advanced, whilst application of the model for financial guarantee
contracts an entity considers the risk of a default occurring of the specified debtor.  [IFRS 9
paragraphs B5.5.31 and B5.5.32]

An entity may use practical expedients when estimating expected credit losses if they are
consistent with the principles in the Standard (for example, expected credit losses on trade
receivables may be calculated using a provision matrix where a fixed provision rate applies
depending on the number of days that a trade receivable is outstanding). [IFRS 9 paragraph
B5.5.35]

To reflect time value, expected losses should be discounted to the reporting date using the
effective interest rate of the asset (or an approximation thereof) that was determined at initial
recognition. A “credit-adjusted effective interest” rate should be used for expected credit losses
Page 89 of 101

of purchased or originated credit-impaired financial assets.  In contrast to the “effective interest

rate” (calculated using expected cash flows that ignore expected credit losses), the credit-
adjusted effective interest rate reflects expected credit losses of the financial asset. [IFRS 9
paragraphs B5.5.44-45]

Expected credit losses of undrawn loan commitments should be discounted by using the effective
interest rate (or an approximation thereof) that will be applied when recognising the financial
asset resulting from the commitment. If the effective interest rate of a loan commitment cannot
be determined, the discount rate should reflect the current market assessment of time value of
money and the risks that are specific to the cash flows but only if, and to the extent that, such
risks are not taken into account by adjusting the discount rate. This approach shall also be used to
discount expected credit losses of financial guarantee contracts. [IFRS 9 paragraphs B5.5.47]

Presentation

Whilst interest revenue is always required to be presented as a separate line item, it is calculated
differently according to the status of the asset with regard to credit impairment. In the case of a
financial asset that is not a purchased or originated credit-impaired financial asset and for which
there is no objective evidence of impairment at the reporting date, interest revenue is calculated
by applying the effective interest rate method to the gross carrying amount. [IFRS 9 paragraph
5.4.1]

In the case of a financial asset that is not a purchased or originated credit-impaired financial asset
but subsequently has become credit-impaired, interest revenue is calculated by applying the
effective interest rate to the amortised cost balance, which comprises the gross carrying amount
adjusted for any loss allowance. [IFRS 9 paragraph 5.4.1]

In the case of purchased or originated credit-impaired financial assets, interest revenue is always
recognised by applying the credit-adjusted effective interest rate to the amortised cost carrying
amount. [IFRS 9 paragraph 5.4.1] The credit-adjusted effective interest rate is the rate that
discounts the cash flows expected on initial recognition (explicitly taking account of expected
credit losses as well as contractual terms of the instrument) back to the amortised cost at initial
recognition. [IFRS 9 Appendix A]

Consequential amendments of IFRS 9 to IAS 1 require that impairment losses, including

reversals of impairment losses and impairment gains (in the case of purchased or originated
credit-impaired financial assets), are presented in a separate line item in the statement of profit or
loss and other comprehensive income.

Disclosures

IFRS 9 amends some of the requirements of IFRS 7 Financial Instruments:

Disclosures including adding disclosures about investments in equity instruments designated as
at FVTOCI, disclosures on risk management activities and hedge accounting and disclosures on
credit risk management and impairment.
Page 90 of 101

Interaction with IFRS 4

On 12 September 2016, the IASB issued amendments to IFRS 4 providing two options for
entities that issue insurance contracts within the scope of IFRS 4:

 an option that permits entities to reclassify, from profit or loss to other comprehensive
income, some of the income or expenses arising from designated financial assets; this is
the so-called overlay approach;

 an optional temporary exemption from applying IFRS 9 for entities whose predominant
activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral
approach.

An entity choosing to apply the overlay approach retrospectively to qualifying financial assets
does so when it first applies IFRS 9. An entity choosing to apply the deferral approach does so
for annual periods beginning on or after 1 January 2018. The application of both approaches is
optional and an entity is permitted to stop applying them before the new insurance contracts
standard is applied.

IFRS 15 Revenue from Contract with Customer

Overview

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring
such entities to provide users of financial statements with more informative, relevant disclosures.
The standard provides a single, principles based five-step model to be applied to all contracts
with customers.

IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after
1 January 2018. On 12 April 2016, clarifying amendments were issued that have the same
effective date as the standard itself.

Summary of IFRS 15

Objective

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful
information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Application of the
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standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier
application is permitted.

Scope

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except
for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights
or obligations within the scope of IFRS 9 Financial Instruments,  IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial
Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within
the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. [IFRS 15:5]

A contract with a customer may be partially within the scope of IFRS 15 and partially within the
scope of another standard.  In that scenario: [IFRS 15:7]

 if other standards specify how to separate and/or initially measure one or more parts of
the contract, then those separation and measurement requirements are applied first. The
transaction price is then reduced by the amounts that are initially measured under other
standards;

 if no other standard provides guidance on how to separate and/or initially measure one or
more parts of the contract, then IFRS 15 will be applied. 

Accounting requirements for revenue

The five-step model framework

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.  This core principle is
delivered in a five-step model framework: [IFRS 15:IN7]

 Identify the contract(s) with a customer

 Identify the performance obligations in the contract

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 Determine the transaction price

 Allocate the transaction price to the performance obligations in the contract

 Recognise revenue when (or as) the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract
with a customer and will require the exercise of judgment.

Step 1: Identify the contract with the customer

A contract with a customer will be within the scope of IFRS 15 if all the following conditions are
met: [IFRS 15:9]

 the contract has been approved by the parties to the contract;

 each party’s rights in relation to the goods or services to be transferred can be identified;

 the payment terms for the goods or services to be transferred can be identified;

 the contract has commercial substance; and

 it is probable that the consideration to which the entity is entitled to in exchange for the
goods or services will be collected.

If a contract with a customer does not yet meet all of the above criteria, the entity will continue
to re-assess the contract going forward to determine whether it subsequently meets the above
criteria. From that point, the entity will apply IFRS 15 to the contract. [IFRS 15:14]

The standard provides detailed guidance on how to account for approved contract modifications.
If certain conditions are met, a contract modification will be accounted for as a separate contract
with the customer. If not, it will be accounted for by modifying the accounting for the current
contract with the customer. Whether the latter type of modification is accounted for
prospectively or retrospectively depends on whether the remaining goods or services to be
delivered after the modification are distinct from those delivered prior to the modification.
Further details on accounting for contract modifications can be found in the Standard. [IFRS
15:18-21].
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Step 2: Identify the performance obligations in the contract

At the inception of the contract, the entity should assess the goods or services that have been
promised to the customer, and identify as a performance obligation: [IFRS 15.22]

 a good or service (or bundle of goods or services) that is distinct; or

 a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.

A series of distinct goods or services is transferred to the customer in the same pattern if both of
the following criteria are met: [IFRS 15:23]  

 each distinct good or service in the series that the entity promises to transfer
consecutively to the customer would be a performance obligation that is satisfied over
time (see below); and

 a single method of measuring progress would be used to measure the entity’s progress
towards complete satisfaction of the performance obligation to transfer each distinct good
or service in the series to the customer.

A good or service is distinct if both of the following criteria are met: [IFRS 15:27]

 the customer can benefit from the good or services on its own or in conjunction with
other readily available resources; and

 the entity’s promise to transfer the good or service to the customer is separately
idenitifable from other promises in the contract.

Factors for consideration as to whether a promise to transfer goods or services to the customer is
not separately identifiable include, but are not limited to: [IFRS 15:29]

 the entity does provide a significant service of integrating the goods or services with
other goods or services promised in the contract;

 the goods or services significantly modify or customise other goods or services promised
in the contract;
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 the goods or services are highly interrelated or highly interdependent.

Step 3: Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled in exchange for the
transfer of goods and services. When making this determination, an entity will consider past
customary business practices. [IFRS 15:47]

Where a contract contains elements of variable consideration, the entity will estimate the amount
of variable consideration to which it will be entitled under the contract. [IFRS 15:50] Variable
consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties or other similar items. Variable
consideration is also present if an entity’s right to consideration is contingent on the occurrence
of a future event.  [IFRS 15:51]

The standard deals with the uncertainty relating to variable consideration by limiting the amount
of variable consideration that can be recognised. Specifically, variable consideration is only
included in the transaction price if, and to the extent that, it is highly probable that its inclusion
will not result in a significant revenue reversal in the future when the uncertainty has been
subsequently resolved. [IFRS 15:56]

However, a different, more restrictive approach is applied in respect of sales or usage-based

royalty revenue arising from licences of intellectual property. Such revenue is recognised only
when the underlying sales or usage occur. [IFRS 15:B63]

Step 4: Allocate the transaction price to the performance obligations in the contracts

Where a contract has multiple performance obligations, an entity will allocate the transaction
price to the performance obligations in the contract by reference to their relative standalone
selling prices. [IFRS 15:74] If a standalone selling price is not directly observable, the entity will
need to estimate it. IFRS 15 suggests various methods that might be used, including: [IFRS
15:79]

 Adjusted market assessment approach

 Expected cost plus a margin approach

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 Residual approach (only permissible in limited circumstances).

Any overall discount compared to the aggregate of standalone selling prices is allocated between
performance obligations on a relative standalone selling price basis. In certain circumstances, it
may be appropriate to allocate such a discount to some but not all of the performance
obligations. [IFRS 15:81]

Where consideration is paid in advance or in arrears, the entity will need to consider whether the
contract includes a significant financing arrangement and, if so, adjust for the time value of
money. [IFRS 15:60] A practical expedient is available where the interval between transfer of
the promised goods or services and payment by the customer is expected to be less than 12
months. [IFRS 15:63]

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

Revenue is recognised as control is passed, either over time or at a point in time. [IFRS 15:32]

Control of an asset is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. This includes the ability to prevent others from directing the
use of and obtaining the benefits from the asset. The benefits related to the asset are the potential
cash flows that may be obtained directly or indirectly. These include, but are not limited to:
[IFRS 15:31-33]

 using the asset to produce goods or provide services;

 using the asset to enhance the value of other assets;

 using the asset to settle liabilities or to reduce expenses;

 selling or exchanging the asset;

 pledging the asset to secure a loan; and

 holding the asset.

An entity recognises revenue over time if one of the following criteria is met: [IFRS 15:35]
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 the customer simultaneously receives and consumes all of the benefits provided by the
entity as the entity performs;

 the entity’s performance creates or enhances an asset that the customer controls as the
asset is created; or

 the entity’s performance does not create an asset with an alternative use to the entity and
the entity has an enforceable right to payment for performance completed to date.

If an entity does not satisfy its performance obligation over time, it satisfies it at a point in time.
Revenue will therefore be recognised when control is passed at a certain point in time. Factors
that may indicate the point in time at which control passes include, but are not limited to: [IFRS
15:38]

 the entity has a present right to payment for the asset;

 the customer has legal title to the asset;

 the entity has transferred physical possession of the asset;

 the customer has the significant risks and rewards related to the ownership of the asset;
and

 the customer has accepted the asset.

Contract costs

The incremental costs of obtaining a contract must be recognised as an asset if the entity expects
to recover those costs. However, those incremental costs are limited to the costs that the entity
would not have incurred if the contract had not been successfully obtained (e.g. ‘success fees’
paid to agents). A practical expedient is available, allowing the incremental costs of obtaining a
contract to be expensed if the associated amortisation period would be 12 months or less. [IFRS
15:91-94]

Costs incurred to fulfil a contract are recognised as an asset if and only if all of the following
criteria are met: [IFRS 15:95]
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 the costs relate directly to a contract (or a specific anticipated contract);

 the costs generate  or enhance resources of the entity that will be used in satisfying
performance obligations in the future; and

 the costs are expected to be recovered.

These include costs such as direct labour, direct materials, and the allocation of overheads that
relate directly to the contract. [IFRS 15:97]

The asset recognised in respect of the costs to obtain or fulfil a contract is amortised on a
systematic basis that is consistent with the pattern of transfer of the goods or services to which
the asset relates. [IFRS 15:99]

Further useful implementation guidance in relation to applying IFRS 15

These topics include:

 Performance obligations satisfied over time

 Methods for measuring progress towards complete satisfaction of a performance

obligation

 Sale with a right of return

 Warranties

 Principal versus agent considerations

 Customer options for additional goods or services

 Customers’ unexercised rights

 Non-refundable upfront fees

 Licensing

 Repurchase arrangements
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 Consignment arrangements

 Bill-and-hold arrangements

 Customer acceptance

 Disclosures of disaggregation of revenue

These topics should be considered carefully when applying IFRS 15.

Presentation in financial statements

Contracts with customers will be presented in an entity’s statement of financial position as a

contract liability, a contract asset, or a receivable, depending on the relationship between the
entity’s performance and the customer’s payment. [IFRS 15:105]

A contract liability is presented in the statement of financial position where a customer has paid
an amount of consideration prior to the entity performing by transferring the related good or
service to the customer. [IFRS 15:106]

Where the entity has performed by transferring a good or service to the customer and the
customer has not yet paid the related consideration, a contract asset or a receivable is presented
in the statement of financial position, depending on the nature of the entity’s right to
consideration. A contract asset is recognised when the entity’s right to consideration is
conditional on something other than the passage of time, for example future performance of the
entity. A receivable is recognised when the entity’s right to consideration is unconditional except
for the passage of time.

Contract assets and receivables shall be accounted for in accordance with IFRS 9. Any
impairment relating to contracts with customers should be measured, presented and disclosed in
accordance with IFRS 9. Any difference between the initial recognition of a receivable and the
corresponding amount of revenue recognised should also be presented as an expense, for
example, an impairment loss. [IFRS 15:107-108]

Disclosures
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The disclosure objective stated in IFRS 15 is for an entity to disclose sufficient information to
enable users of financial statements to understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. Therefore, an entity should
disclose qualitative and quantitative information about all of the following: [IFRS 15:110]

 its contracts with customers;

 the significant judgments, and changes in the judgments, made in applying the guidance
to those contracts; and

 any assets recognised from the costs to obtain or fulfil a contract with a customer.

Entities will need to consider the level of detail necessary to satisfy the disclosure objective and
how much emphasis to place on each of the requirements. An entity should aggregate or
disaggregate disclosures to ensure that useful information is not obscured. [IFRS 15:111]

In order to achieve the disclosure objective stated above, the Standard introduces a number of
new disclosure requirements. Further detail about these specific requirements can be found at
IFRS 15:113-129.

Effective date and transition

The standard should be applied in an entity’s IFRS financial statements for annual reporting
periods beginning on or after 1 January 2018. Earlier application is permitted.  An entity that
chooses to apply IFRS 15 earlier than 1 January 2018 should disclose this fact in its relevant
financial statements. [IFRS 15:C1]

When first applying IFRS 15, entities should apply the standard in full for the current period,
including retrospective application to all contracts that were not yet complete at the beginning of
that period. In respect of prior periods, the transition guidance allows entities an option to either:
[IFRS 15:C3]

 apply IFRS 15 in full to prior periods (with certain limited practical expedients being
available); or
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 retain prior period figures as reported under the previous standards, recognising the
cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity
as at the date of initial application (beginning of current reporting period).
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