PAS2 - INVENTORIES

Objective: In inventories, the amount of cost to be recognized as an asset and carried forward until the
related revenues are recognized. This standard provides guidance on the determination of cost and its
subsequent recognition as an expense, including any write-down to net realizable value. It also provides
guidance on the cost formulas that are used to assign cost to inventories.

This Standard applies to all inventories, except:

(a) [deleted]
(b) Financial instruments (see PAS 32 Financial Instruments; Presentation and PFRS 9 Financial
Instruments); and
(c) Biological assets related to agricultural activity and agricultural produce at the point of harvest
(see PAS 41 Agriculture).

This Standard does not apply to the measurement of inventories held by:

(a) Producers of agricultural and forest products, agricultural produce after harvest, and minerals
and minerals products, to the extent that they are measured at net realizable value 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.
(b) Commodity broker-traders 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.

Key definitions

Inventories are assets:

(a) Held for sale in the ordinary course of business;

(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be consumed in the production process or I the rendering
of services.

Net realizable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.

Fair value is 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 PFRS 13 Fair Value
Measurement.)

Net realizable value for inventories may not equal fair value less costs to sell.

Inventories encompass goods purchased and held for resale including, for example, merchandise
purchased by a retailer and held for resale, or land and other property held for resale. Inventories also
encompass finished goods produced, or work in progress being produced, by the entity and include
materials and supplies awaiting use in the production process. Costs incurred to fulfill a contract with a
customer that do not give rise to inventories (or assets within the scope of another Standard) are
accounted for in accordance with PFRS 15 Revenue from Contracts with Customers.
Measurement of Inventories

Inventories shall be measured at the lower of cost and net realizable value.

- Cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred
in bringing the inventories to their present location and condition.
- Costs of purchase comprise the purchase of inventories comprise the purchase price, import duties,
and other taxes (other than those subsequently recoverable by the entity from the taxing
authorities), and transport, handling and other costs directly attributable to the acquisition of
finished goods, materials and services. Trade discounts, rebates and other similar items are
deducted in determining the costs of purchase.
- Cost of conversion include costs directly related to the units of production, such as direct labor,
fixed production overheads and variable production overheads.

Normal capacity is the production expected to be achieved on average over a number of periods or
seasons under normal circumstances, taking into account the loss of capacity resulting from planned
maintenance. Unallocated overheads are recognized as an expense in the period in which they are
incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit
of production is decreased so that inventories are not measured above cost. Most by-products, by their
nature, are immaterial. When this is the case, they are often measured at net realizable value and this
value is deducted from the cost of the main product.

Inventory cost should not include:

(a) abnormal amounts of wasted materials, labor or other production costs;

(b) storage costs, unless those costs are necessary in the production process before further
production stage;
(c) administrative overheads that do not contribute to bringing inventories to their present location
and condition; and
(d) selling costs.

Cost formulas

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced
and segregated for specific projects shall be assigned by using specific identification of their individual
costs. On the other hand, cost of inventories, other than those dealt above, shall be assigned by using
the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula
for all inventories having similar nature and use to the entity. For inventories with a different nature or
use, different cost formulas may be justified.

Net realizable value

The cost of inventories may not be recoverable if

- those inventories are damaged, if they have become wholly or partially obsolete, or if their selling
declined.
- the estimated cost of completion or the estimated costs to be incurred to make the sale have
increased.
The practice of writing inventories down below cost to net realizable value is consistent with the view
that assets should not be carried in excess of amounts expected to be realized from their sale or use.

Inventories are usually written down to net realizable value item by item.

Materials and other supplies held for use in the production of inventories are not written down below
cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the finished products
exceeds net realizable value, the materials are written down to net realizable value. In such
circumstances, the replacement cost of the materials may be the best available measure of their net
realizable value. : )

Limit to the gain on reversal

Inventories to be written down below cost no longer exist or when there is clear evidence of an increase
in net realizable value because of changed in economic circumstances, the amount of the write-down is
reversed (i.e. the reversal is limited to the amount of the original write-down) so that the new carrying
amount is the lower of the cost and the revised net realizable value.

Recognition as an expense

- When inventories are sold, the carrying amount of those inventories in the period in which the
related revenue is recognized.
- The amount of any write-down of inventories to net realizable value and all losses of inventories in
the period the write-down or loss occurs.
The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value in the period in which the reversal occurs.

Required disclosures:

- 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
- 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).

The amount of inventories recognized as an expense during the period, which is often referred to as cost
of sales, consists of those costs previously included in the measurement of inventory that has now been
sold and unallocated production overheads and abnormal amounts of production costs of inventories.

PAS 10 — Events 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.
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.

- Invoices for goods/services received before the year end

- The resolution after the reporting of a court case
- Evidence of impairment of assets
- Discovery of fraud or errors
- Determination of employee bonuses/profit shares
- Announcement of the tax rates applicable
- The sale of a non-current asset at a loss
- The bankruptcy of a customer

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose
after the end of the reporting period.

- Business combinations
- Discontinuance of an operation
- Major sale/purchase of assets
- Destruction of major assets in natural disaster
- Major restructuring
- Major share transactions
- Unusual changes in asset prices/foreign exchange rates

Accounting Treatment

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.

Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting
period. 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.

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.

Disclosure

(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.

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.

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.

PAS 16 – Property, Plant and Equipment

Property plant and equipment are tangible items that are:

- Held for use in the production or supply of goods or services, for rentals to others, or for
administrative purposes, and
- Expected to be used during more than one period.

Objective: The principal issues are the recognition of assets, the determination of their carrying
amounts, and the depreciation charges and impairment losses to be recognized in relation to them.

Scope

This Standard does not apply to:

(a) property, plant and equipment classified as held for sale in accordance with PFRS 5 Non-current
Assets Held for Sale and Discontinued Operations;
(b) biological assets related to agricultural activity (see PAS 41 Agriculture);
(c) the recognition and measurement of exploration and evaluation assets (see PFRS 6 Exploration
for and Evaluation of Mineral Resources); or
(d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.

However, this Standard applies to property, plant and equipment used to develop or maintain the assets
described in (b)–(d).

An entity using the cost model for investment property in accordance with PAS 40 Investment Property
shall use the cost model in this Standard.

Key definitions

Carrying amount is the amount at which an asset is recognized after deducting any accumulated
depreciation and accumulated impairment losses.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized in accordance with the specific requirements of other
PFRSs, eg PFRS 2 Share-based Payment.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing
use of an asset and from its disposal at the end of its useful life or expects to incur when settling a
liability.

Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties
in an arm’s length transaction.

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.

Useful life is:

(a)the period over which an asset is expected to be available for use by an entity; or

(b)the number of production or similar units expected to be obtained from the asset by an entity.

Recognition

The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

These costs include costs incurred initially to acquire or construct an item of property, plant and
equipment and costs incurred subsequently to add to, replace part of, or service it.

The carrying amount of an item of property, plant, and equipment will include the cost of replacing the
part of such an item when that cost is incurred if the recognition criteria (future benefits and
measurement reliability) are met. The carrying amount of those parts that are replaced is derecognized
in accordance with the derecognition provisions of PAS 16.

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognized in the carrying amount of the item of
property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary,
the estimated cost of a future similar inspection may be used as an indication of what the cost of the
existing inspection component was when the item was acquired or constructed.

Initial measurement
An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs
necessary to bring the asset to working condition for its intended use. This would include not only its
original purchase price but also costs of site preparation, delivery and handling, installation, related
professional fees for architects and engineers, and the estimated cost of dismantling and removing the
asset and restoring the site (see PAS 37 Provisions, Contingent Liabilities and Contingent Assets).

Proceeds from selling items produced while bringing an item of property, plant and equipment to the
location and condition necessary for it to be capable of operating in the manner intended by
management are not deducted from the cost of the item of property, plant and equipment but
recognized in profit or loss.

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognized or imputed.

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost
will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b)
the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired
item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Measurement subsequent to initial recognition

PAS 16 permits two accounting models:

- Cost model is carried at cost less accumulated depreciation and impairment.

- Revaluation model is carried at a revalued amount, being its fair value at the date of revaluation
less subsequent depreciation and impairment, provided that fair value can be measured reliably.

The revaluation model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount
of an asset does not differ materially from its fair value at the balance sheet date.

If an item is revalued, the entire class of assets to which that asset belongs should be revalued.

Revalued assets are depreciated in the same way as under the cost model. If a revaluation results in an
increase in value, it should be credited to other comprehensive income and accumulated in equity
under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of
the same asset previously recognized as an expense, in which case it should be recognized in profit or
loss.

A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset.

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss.

Depreciation (cost and revaluation models)

For all depreciable assets:

The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a
change in estimate under PAS 8.

The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the entity; a depreciation method that is based on revenue that is generated by an activity
that includes the use of an asset is not appropriate. It should be reviewed at least annually and, if the
pattern of consumption of benefits has changed, the depreciation method should be changed
prospectively as a change in estimate under PAS 8. Expected future reductions in selling prices could be
indicative of a higher rate of consumption of the future economic benefits embodied in an asset.

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another
asset. It begins when the asset is available for use and continues until the asset is derecognized, even if
it is idle.

Recoverability of the carrying amount

Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property,
plant, and equipment. An item of property, plant, or equipment shall not be carried at more than
recoverable amount. Any claim for compensation from third parties for impairment is included in profit
or loss when the claim becomes receivable.

Derecognition (retirements and disposals)

An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on
disposal is the difference between the proceeds and the carrying amount and should be recognized in
profit and loss.

If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of business.

Disclosure

Information about each class of property, plant and equipment

For each class of property, plant, and equipment, disclose:

- Basis for measuring carrying amount depreciation method(s) used useful lives or depreciation rates
gross carrying amount and accumulated depreciation and impairment losses reconciliation of the
carrying amount at the beginning and the end of the period, showing:
additions disposals acquisition through business combinations revaluation increases or decreases
impairment losses reversals of impairment losses depreciation net foreign exchange differences on
translation other movements

Additional disclosures
The following disclosures are also required:

- restrictions on title and items pledged as security for liabilities expenditures to construct property,
plant, and equipment during the period contractual commitments to acquire property, plant, and
equipment compensation from third parties for items of property, plant, and equipment that were
impaired, lost or given up that is included in profit or loss.

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are
required:

- the effective date of the revaluation whether an independent valuer was involved for each revalued
class of property, the carrying amount that would have been recognized had the assets been carried
under the cost model the revaluation surplus, including changes during the period and any
restrictions on the distribution of the balance to shareholders.

PAS 24 - Related Party Disclosures

Objective: 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, including commitments, with
such parties.

Scope

This Standard shall be applied in:

(a) identifying related party relationships and transactions;

(b) identifying outstanding balances, including commitments, between an entity and its related parties;

(c) identifying the circumstances in which disclosure of the items in (a) and (b) is required; and

(d) determining the disclosures to be made about those items.

Key definitions

A related party is a person or entity that is related to the entity that is preparing its financial statements
(in this Standard referred to as the ‘reporting entity’).

(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:
(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 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).

A related party transaction is a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.

Close members of the family of a person are those family members who may be expected to
influence, or be influenced by, that person in their dealings with the entity and include:

(a) that person’s children and spouse or domestic partner;

(b) children of that person’s spouse or domestic partner; and

(c) dependants of that person or that person’s spouse or domestic partner.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.

Joint control is the contractually agreed sharing of control over an economic activity.

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 director (whether
executive or otherwise) of that entity.

Significant influence is the power to participate in the financial and operating policy decisions of an
entity, but is not control over those policies. Significant influence may be gained by share ownership,
statute or agreement.

Government refers to government, government agencies and similar bodies whether local, national or
international.

A government-related entity is an entity that is controlled, jointly controlled or significantly influenced

by a government.

In the context of this Standard, the following are not related parties:
 (a) two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity has
significant influence over the other entity.
(b) two venturers simply because they share joint control over a joint venture.
(c) (i) providers of finance,
(ii)trade unions,
(iii)public utilities, and
(iv)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).
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a
significant volume of business, simply by virtue of the resulting economic dependence.

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.

Management compensation - Disclose key management personnel compensation in total and for each
of the following categories:

- short-term employee benefits

- post-employment benefits
- other long-term benefits
- termination benefits
- share-based payment benefits

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 the entity for the
provision of key management personnel services that are provided by the separate management
entity*.
These disclosures would be made separately for each category of related parties transactions and
would include:

- the amount of the transactions

- the amount of outstanding balances, including terms and conditions and guarantees
- provisions for doubtful debts related to the amount of outstanding balances
- expense recognized during the period in respect of bad or doubtful debts due from related parties

The following are examples of transactions that are disclosed if they are with a related party:
(a)purchases or sales of goods (finished or unfinished);
(b)purchases or sales of property and other assets;
(c)rendering or receiving of services;
(d)leases;
(e)transfers of research and development;
(f)transfers under license agreements;
(g)transfers under finance arrangements (including loans and equity contributions in cash or in kind);
(h)provision of guarantees or collateral;
(i)commitments to do something if a particular event occurs or does not occur in the future, including
executory contracts* (recognized and unrecognized); and
(j)settlement of liabilities on behalf of the entity or by the entity on behalf of that related party.

PAS 32 - Financial Instruments: Presentation

Objective: To establish principles for presenting financial instruments as liabilities or equity and for
offsetting financial assets and liabilities.

Scope

PAS 32 applies in presenting and disclosing information about all types of financial instruments with the
following exceptions:

- interests in subsidiaries, associates and joint ventures that are accounted for, PAS 28 Investments in
Associates or Interests in Joint Ventures, Consolidated Financial Statements, Separate Financial
Statements and Investments in Associates and Joint Ventures). However, PAS 32 applies to all
derivatives on interests in subsidiaries, associates, or joint ventures.
- employers' rights and obligations under employee benefit plans (see PAS 19 Employee Benefits)
- insurance contracts (see PFRS 4 Insurance Contracts). However, PAS 32 applies to derivatives that
are embedded in insurance contracts if they are required to be accounted separately by PAS 39
- financial instruments that are within the scope of PFRS 4 because they contain a discretionary
participation feature are only exempt and (analyzing debt and equity components) but are subject
to all other PAS 32 requirements
- contracts and obligations under share-based payment transactions (see PFRS 2 Share-based
Payment) with the following exceptions:
apply when accounting for treasury shares purchased, sold, issued or cancelled by employee share
option plans or similar arrangements

PAS 32 applies to those contracts to buy or sell a non-financial item that can be settled net in cash or
another financial instrument, except for contracts that were entered into and continue to be held for
the purpose of the receipt or delivery of a non-financial item in accordance with the entity's expected
purchase, sale or usage requirements.

Key definitions

An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.

A puttable instrument is a financial instrument that gives the holder the right to put the instrument
back to the issuer for cash or another financial asset or is automatically put back to the issuer on the
occurrence of an uncertain future event or the death or retirement of the instrument holder.

Classification as liability or equity

Financial instrument should be classified as either a financial liability or an equity instrument according
to the substance of the contract, not its legal form, and the definitions of financial liability and equity
instrument. Two exceptions from this principle are certain puttable instruments meeting specific criteria
and certain obligations arising on liquidation. The entity must make the decision at the time the
instrument is initially recognized. The classification is not subsequently changed based on changed
circumstances.

A financial instrument is an equity instrument only if (a) the instrument includes no contractual
obligation to deliver cash or another financial asset to another entity and (b) if the instrument will or
may be settled in the issuer's own equity instruments, it is either:

- a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of
its own equity instruments; or a derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed number of its own equity instruments.

Illustration – preference shares

If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a
mandatory redemption feature at a future date, the substance is that they are a contractual obligation
to deliver cash and, therefore, should be recognized as a liability. In contrast, preference shares that do
not have a fixed maturity, and where the issuer does not have a contractual obligation to make any
payment are equity. In this example even though both instruments are legally termed preference shares
they have different contractual terms and one is a financial liability while the other is equity.

Illustration – issuance of fixed monetary amount of equity instruments

A contractual right or obligation to receive or deliver a number of its own shares or other equity
instruments that varies so that the fair value of the entity's own equity instruments to be received or
delivered equals the fixed monetary amount of the contractual right or obligation is a financial liability.

Illustration – one party has a choice over how an instrument is settled

When a derivative financial instrument gives one party a choice over how it is settled (for instance, the
issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is a financial
asset or a financial liability unless all of the settlement alternatives would result in it being an equity
instrument.

Contingent settlement provisions

If, as a result of contingent settlement provisions, the issuer does not have an unconditional right to
avoid settlement by delivery of cash or other financial instrument (or otherwise to settle in a way that it
would be a financial liability) the instrument is a financial liability of the issuer, unless:

the contingent settlement provision is not genuine or the issuer can only be required to settle the
obligation in the event of the issuer's liquidation or the instrument has all the features and meets the
conditions of PAS 32.

Puttable instruments and obligations arising on liquidation

Some financial instruments that currently meet the definition of a financial liability will be classified as
equity because they represent the residual interest in the net assets of the entity.

Classifications of rights issues

If such rights are issued pro rata to an entity's all existing shareholders in the same class for a fixed
amount of currency, they should be classified as equity regardless of the currency in which the exercise
price is denominated.

Compound financial instruments

Some financial instruments – sometimes called compound instruments – have both a liability and an
equity component from the issuer's perspective. In that case, PAS 32 requires that the component parts
be accounted for and presented separately according to their substance based on the definitions of
liability and equity. The split is made at issuance and not revised for subsequent changes in market
interest rates, share prices, or other event that changes the likelihood that the conversion option will be
exercised.

Interest, dividends, gains, and losses relating to an instrument classified as a liability should be reported
in profit or loss. This means that dividend payments on preferred shares classified as liabilities are
treated as expenses. On the other hand, distributions (such as dividends) to holders of a financial
instrument classified as equity should be charged directly against equity, not against earnings.

Transaction costs of an equity transaction are deducted from equity. Transaction costs related to an
issue of a compound financial instrument are allocated to the liability and equity components in
proportion to the allocation of proceeds.

Treasury shares

The cost of an entity's own equity instruments that it has reacquired ('treasury shares') is deducted from
equity. Gain or loss is not recognized on the purchase, sale, issue, or cancellation of treasury shares.
Treasury shares may be acquired and held by the entity or by other members of the consolidated group.
Consideration paid or received is recognized directly in equity.

Offsetting

PAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that a
financial asset and a financial liability should be offset and the net amount reported when, and only
when, an entity:

- has a legally enforceable right to set off the amounts; and

- intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Costs of issuing or reacquiring equity instruments

Costs of issuing or reacquiring equity instruments are accounted for as a deduction from equity, net of
any related income tax benefit.

Disclosures

Financial instruments disclosures are in IFRS 7 Financial Instruments: Disclosures, and no longer in IAS
32.

PAS 33 — Earnings Per Share

Objective: 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.

Scope

It applies to entities whose securities are publicly traded or that are in the process of issuing securities to
the public. Other entities that choose to present EPS information must also comply with PAS 33.

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

Key definitions

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

 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.

Antidilution: 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:

- 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.

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

Basic and diluted EPS must be presented with equal prominence for all periods presented and even if
the amounts are negative (that is, a loss per share).

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.

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.

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

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

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

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

Disclosure

If EPS is presented, the following disclosures are required:

 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.

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.

PAS 37 - Provisions, Contingent Liabilities & Contingent Assets

Objective: To ensure that appropriate recognition criteria and measurement bases are applied to
provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the
notes to enable users to understand their nature, timing and amount.

Scope

IAS 37 excludes obligations and contingencies arising from:

 financial instruments that are in the scope of PAS 39 Financial Instruments: Recognition and
Measurement (or PFRS 9 Financial Instruments)

 non-onerous executory contracts

 insurance contracts (see PFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions,
contingent liabilities and contingent assets of an insurer

 items covered by another IFRS. For example, PAS 11 Construction Contracts applies to

obligations arising under such contracts; PAS 12 Income Taxes applies to obligations for current
or deferred income taxes; PAS 17 Leases applies to lease obligations; and PAS 19 Employee
Benefits applies to pension and other employee benefit obligations.

Key definitions
Provision: a liability of uncertain timing or amount.

Liability:

 present obligation as a result of past events

 settlement is expected to result in an outflow of resources (payment)

Contingent liability:

 a possible obligation depending on whether some uncertain future event occurs, or

 a present obligation but payment is not probable or the amount cannot be measured reliably

Contingent asset:

 a possible asset that arises from past events, and

 whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.

Recognition of a provision

An entity must recognize a provision if, and only if:

 a present obligation (legal or constructive) has arisen as a result of a past event (the obligating
event),

 payment is probable ('more likely than not'), and

 the amount can be estimated reliably.

An obligating event is an event that creates a legal or constructive obligation and, therefore, results in
an entity having no realistic alternative but to settle the obligation.

A constructive obligation arises if past practice creates a valid expectation on the part of a third party,
for example, a retail store that has a long-standing policy of allowing customers to return merchandise
within, say, a 30-day period.

A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not
required if payment is remote.

Measurement of provisions

 Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit)

are measured at the most likely amount.

 Provisions for large populations of events (warranties, customer refunds) are measured at a
probability-weighted expected value.

 Both measurements are at discounted present value using a pre-tax discount rate that reflects
the current market assessments of the time value of money and the risks specific to the liability.
In reaching its best estimate, the entity should take into account the risks and uncertainties that
surround the underlying events.

If some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party, the reimbursement should be recognized as a separate asset, and not as a reduction of the
required provision, when, and only when, it is virtually certain that reimbursement will be received if the
entity settles the obligation. The amount recognized should not exceed the amount of the provision.

In measuring a provision consider future events as follows:

 forecast reasonable changes in applying existing technology

 ignore possible gains on sale of assets

 consider changes in legislation only if virtually certain to be enacted

Remeasurement of provisions

 Review and adjust provisions at each balance sheet date

 If an outflow no longer probable, provision is reversed.

Restructurings

A restructuring is:

 sale or termination of a line of business

 closure of business locations

 changes in management structure

 fundamental reorganizations.

Restructuring provisions should be recognized as follows:

 Sale of operation: recognize a provision only after a binding sale agreement

 Closure or reorganization: recognize a provision only after a detailed formal plan is adopted and
has started being implemented, or announced to those affected. A board decision of itself is
insufficient.

 Future operating losses: provisions are not recognized for future operating losses, even in a
restructuring

 Restructuring provision on acquisition: recognize a provision only if there is an obligation at

acquisition date

Restructuring provisions should include only direct expenditures necessarily entailed by the
restructuring, not costs that associated with the ongoing activities of the entity.

What is the debit entry?

When a provision (liability) is recognized, the debit entry for a provision is not always an expense.
Sometimes the provision may form part of the cost of the asset.

Use of provisions

Provisions should only be used for the purpose for which they were originally recognized. They should
be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no
longer probable that an outflow of resources will be required to settle the obligation, the provision
should be reversed.

Contingent liabilities

Since there is common ground as regards liabilities that are uncertain, PAS 37 also deals with
contingencies. It requires that entities should not recognize contingent liabilities – but should disclose
them, unless the possibility of an outflow of economic resources is remote.

Contingent assets

Contingent assets should not be recognized – but should be disclosed where an inflow of economic
benefits is probable. When the realization of income is virtually certain, then the related asset is not a
contingent asset and its recognition is appropriate.

Disclosures

Reconciliation for each class of provision:

 opening balance

 additions

 used (amounts charged against the provision)

 unused amounts reversed

 unwinding of the discount, or changes in discount rate

 closing balance

A prior year reconciliation is not required.

For each class of provision, a brief description of:

 nature

 timing

 uncertainties

 assumptions

 reimbursement, if any.