DipIFR+Study+Text+D17 J18+ (1) +

DipIFR
Stud
y Tex
t
Diploma i
n Internat
ional
Financial
Reporting
For December 2017
and June 2018 Exa
minations
DI
P
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All of Becker’s materials are authored by experienced ACCA lecturers and are used in the delivery of classroom
courses.
Study Text: Gives complete coverage of the syllabus with a focus on learning outcomes. It is designed to be
used both as a reference text and as part of integrated study. It also includes the ACCA Syllabus and Study
Guide, exam advice and commentaries and a Study Question Bank containing practice questions relating to
each topic covered.
Revision Question Bank: Exam style and standard questions together with comprehensive answers to
support and prepare students for their exams. The Revision Question Bank also includes past examination
questions (updated where relevant), model answers and alternative solutions and tutorial notes.
ACCA Professional Diploma in
International Financial Reporting
For Examinations in December 2017 and June 2018
®
©2017 Becker Educational Development Corp. All rights reserved. (i)
Typesetting by Jana Korcakova
©2017 Becker Educational Development Corp. (ii)
All rights reserved.
ACCA Professional Diploma in
Technical Editor
Phil Bradbury
©2017 Becker Educational Development Corp. All rights reserved. (iii)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been published and prepared by Becker Professional Development

ISBN: 9781785664120
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©2017 Becker Educational Development Corp. All rights reserved. (iv)
CONTENTS
S P
I
(
S
(
(
(
Introduction
1 Intr 0
odu
ctio
n t
o I
nte
rna
tio
nal
Fin
anc
ial
Re
por
tin
g S
tan
dar
ds
2
C 0
3
I 0
4
IAS 8 Acc0401
ounting
licies, Cha
nges in
counting
stimates
nd Errors
Income
1
5 I
0
Assets
2
6 I
0
7
I 0
8
IAS
20 A 0
ccou 8
nting 0
for 1
Gov
ernm
ent
Gra
nts a
nd D
isclo
sure
of
9
I 0
10
I 1
11
I 1
12
I 1
13
I 1
14
I 1
15
IFRS 1
6 Ex 5
plor 0
ation 1
for a
nd E
valu
ation
of M
iner
al R
esou
rces
©2017 Becker Educational De
velopment Corp. All rights res
erved. (v)

CONTENTS
S P
Liabilities
16 IAS 37 1
Provis 6
ions, 0
Contin 1
gent L
iabiliti
es and
Contin
gent A
ssets
17
I 1
18
I 1
19
I 1
20
F 2
Group account
s
p
21 C
2
22
C 2
23
F 2
24
C 2
25
A 2
26
IA 2
S 2
1 T
he
Eff
ect
s o
f C
han
ges
in
For
eig
n E
xch
ang
e R
ate
s
Disclosure and
analysis
3
27 I
2
28
I 2
29
I 2
30
I 3
31
I 3
32
IFRS 1 First
3201
-time Adopti
on of Intern
ational
ncial Reporti
ng Standard
s
erved. (vi)

SYLLABUS
Introduction
Reporting (DipIF
R). This Diploma
is designed to dev
elop knowledge of
IFRSs – providing
an
understanding of t
he concepts and pr
inciples which und
erpin them, and th
eir application in t
he
international mark
etplace. Together
with the Question
Bank, this volume
provides
comprehensive co
verage of the sylla
bus and is designe
d to be used both a
s a reference text a
nd as
an integral part of
your studies to pro
vide you with the
knowledge, skill a
nd confidence to
succeed in your Di
ploma examinatio
n.
About the author:
Phil Bradbury is B
ecker Professional
Education’s lead t
utor in
international finan
cial reporting and
has more than 15
years’ experience i
n delivering
ACCA exam-
based training.
How to use
this Study T
ext
You should first re
ad through the syll
abus, study guide
and approach to e
xamining the
syllabus provided
in this session to f
amiliarise you wit
h the content of thi
s
examination. The
sessions which fol
low include:
An overview dia
gram at the begi
nning of each ses
sion.
This provides a v
isual summary o
f the topics cover
ed in each Sessio
n and
how they are rela
ted
The body of kno
wledge which un
derpins the sylla
bus. Features of
the text
include:
Defi Terms are
nitio defined as
ns they are in
troduced.
These are t
Illus o be read a
trati s part of th
ons e text. An
y
solutions t
o numerica
l illustratio
ns follow
on
immediate
ly.
Worked
Solutions are
exampl
provided with
es additional ex
planations.
These sho
Act
uld be att
ivit empted us
ies ing the pr
oforma
solution p
rovided (
where ap
plicable).
Comm These prov
entarie ide additio
s nal informa
tion.
Key
poi Attention i
nts s drawn to
fundament
sum al rules an
mar d
y underlying
concepts a
nd principl
es in a su
mmary at
the end of
each sessi
on.
F These a
re the le
o
arning
c outcom
u es relev
s ant to t
he
session,
as publi
shed in
ACCA’
s Study
Guide.
Example solutio
ns are presented
at the end of eac
h session.
A bank of practice
questions is contai
ned in the Study Q
uestion Bank prov
ided. These
are linked to the to
pics of each sessio
n and should be att
empted after study
ing each
session.
©2017 Becker Educ
(vii)
ational Developmen
t Corp. All rights
erved.
SYLLABUS
Syllabus
Aim
To provide qualifi
ed accountants or
graduates, possess
ing relevant countr
y specific
qualifications or w
ork experience wit
h an up to date an
d relevant convers
ion course,
providing a practic
al and detailed kn
owledge of the ke
y international fin
ancial reporting
standards (IFRS) a
nd how they are in
terpreted and appli
ed.
Objectives
On completion of
this syllabus candi
dates should be ab
le to:
 Understand a
nd explain the
structure of th
e internationa
l professional
and conceptu
al
framework of
financial repo
rting;
 Apply relevan
t international
financial repo
rting standard
s to key elem
ents of financi
al
statements;

disclosure req
uirements for
entities relatin
g to the prese
ntation of
financial state
ments and not
es;

al statements
Pre (excluding gr
par oup cash flow
e statements) in
rou cluding
p subsidiaries, a
na ssociates and
nci joint arrange
ments.
Position wit
hin the over
all portfolio
of ACCA's q
ualification f
ramework
The Diploma in In
ternational Financi
al Reporting Stand
ards (DipIFR) buil
ds on the technical
and/or
practical knowled
ge acquired from r
ecognised country
specific accountan
cy qualifications o
r relevant
work experience.
The syllabus intro
duces the candidat
e to the wider inter
national framewor
k of
accounting and the
system of standard
setting. The DipI
FR concentrates o
n the application o
f
conceptual and tec
hnical financial re
porting knowledge
that candidates ha
ve already obtaine
d to the
specific requireme
nts of financial rep
orting under IFRS
s.
The DipIFR also p
rovides essential i
nternational financ
ial reporting know
ledge and principl
es that will
prepare candidates
for the increasingl
y global market pl
ace and keep them
abreast of internati
onal
developments and
how they might ap
ply to companies a
nd businesses.
The prerequisite k
nowledge for DipI
FR can either com
e:
 from a countr
y specific pro
fessional qual
ification;
 from possessi
ng a relevant
degree (givin
g exemptions
from F1, F2,
F3 and F4 of
the ACCA qu
alification) an
d two years’ a
ccounting exp
erience; or

by having thr
ee years’ full-
time relevant
accounting ex
perience, sup
ported by
an employer’s
covering lette
r.
©2017 Becker Educ
ational Developmen
t Corp. All rights (viii)
erved.
SYLLABUS
Syllabus co
ntent
A
Internation
al sources
of authorit
y
1) The Internatio
nal Accountin
g Standards B
oard (IASB) a
nd the regulat
ory framewor
k
B
Elements
of financial
statements
1) Revenue reco
2) gnition
3) Property, plan
4) t and equipme
5) nt
6) Impairment of
7) assets
8) Leases
9) Intangible ass
10) ets and goodw
11) ill
12) Inventories
Financial instr
13) uments
14) Provisions, co
15) ntingent assets
and liabilities
Accounting fo
r employment
and post-
employment b
enefits
Tax in financi
al statements
The effect of c
hanges in fore
ign currency e
xchange rates
Agriculture
Share-based p
ayment
Exploration a
nd evaluation
expenditures
Fair value me
asurement.
C
Presentati
on and ad
ditional dis
closures
1) Presentation o
f the statemen
t of financial
2) position, state
3) ment of profit
4) or loss and
5) other compreh
6) ensive income
7) Earnings per s
hare
Events after t
he reporting d
ate
Accounting p
olicies, chang
es in accounti
ng estimates a
nd errors
Related party
disclosures
Operating seg
ments.
Reporting req
uirements of s
mall and medi
um-sized entit
ies (SMEs)
D Preparation
of external
financial re
ports for co
mbined ent
ities, assoc
iates
and joint ar
rangement
s
1) Preparation of
2) group consoli
3) dated external
reports
4) Business com
binations – in
tra-group adju
stments
Business com
binations – fa
ir value adjust
ments
Business com
binations – as
sociates and j
oint arrangem
ents
©2017 Becker Educational D
evelopment Corp. All rights
reserved. (ix)

SYLLABUS
Excluded to
pics
The following topi
cs are specifically
excluded from the
syllabus:
 Partnership a
nd branch fin
ancial statem
ents
 Complex gro
up structures,
including sub
-subsidiaries
or mixed grou
ps and foreign
subsidiaries
 Step acquisiti
ons, partial di
sposal of subs
idiaries and g
roup re-
constructions
 Financial stat
ements of ban
ks and similar
financial insti
tutions
 Preparation
and cons
of stateme
olidated)
nts of
flows
le compan
y
 Schemes of r
eorganisation
/reconstructi
on
 Company/sh
are valuation

Acc ting for insur
oun ance entities
 International
financial repo
rting exposur
e drafts and d
iscussion pap
ers
 The internati
onal public s
ector perspec
tive
 Multi-
employer be
nefit scheme
s
 Information r
eflecting the e
ffects of chan
ging prices an
d financial re
porting
in hyperinflati
onary econom
ies
 Share-based
payment tran
sactions with
cash alternati
ves.
Key areas o
f the syllabu
s
The key topic area
headings are as fol
lows:
 International
sources of au
thority
 Elements of
financial stat
ements

Pre of accounts a
sen nd additional
tati disclosures
on
 Preparation of
external repor
ts for combin
ed entities, as
sociates and j
oint
arrangements.
reserved. (x)

SYLLABUS
Approach to
examining t
he syllabus
The examination i
s three hours and 1
5 minutes. Most q
uestions will conta
in a mix of compu
tational
and discursive ele
ments. Some ques
tions will adopt a s
cenario/case study
approach. All que
stions
are compulsory.
The first question
will attract 40 mar
ks. It will involve
preparation of one
or more of the
consolidated finan
cial statements tha
t are examinable
within the syllabus
. This question wi
ll include
several issues that
will need to be ad
dressed prior to pe
rforming the cons
olidation procedur
es.
Generally these iss
ues relate to the fi
nancial statements
of the parent prior
to consolidation.
The other three qu
estions will attract
20 marks each. T
hese will often be
related to a scenari
o in which
questions arise reg
arding the appropr
iate accounting tre
atment and/or disc
losure of a range o
f issues.
In such questions
candidates may be
expected to comm
ent on managemen
t’s chosen account
ing
treatment and dete
rmine a more appr
opriate one, based
on circumstances
described in the q
uestion.
Often one of the q
uestions will focus
more specifically
on the requirement
s of one specific I
FRS.
Some IFRSs are v
ery detailed and c
omplex. In the Di
pIFR exam candid
ates need to be aw
are of the
principles and key
elements of these
Standards. Candi
dates will also be
expected to have a
n
appreciation of the
background and n
eed for internation
al financial reporti
ng standards and i
ssues
related to harmoni
sation of accounti
ng in a global cont
ext.
The overall pass
mark for the DipI
FR is 50%.
E
O
M
i
n
e
c
o
n
s
ol
id
at
io
n
q
u
e
st
io
n
T
h
re
e
s
c
e
n
ar
io
q
u
e
st
4 6
0
100
ACCA encourages
candidates to take
time at the beginni
ng of the exam to
read questions
carefully and to pl
an answers, howe
ver once the exam
time has started, th
ere is no restrictio
n as
to when candidate
s may start writing
in their answer bo
oklets.
Guidance on the u
se of reading and
planning time can
be found on ACC
A’s website
Examinable
documents
Knowledge of ne
w examinable reg
ulations issued by
31 August will be
required in
examination sessi
ons held in the foll
owing calendar ye
ar. Documents ma
y be
examinable even i
f the effective date
is in the future.
The documents lis
ted as examinable
(see later) are the l
atest that were iss
ued prior to
31 August 2016 a
nd will be examin
able in December
2017 and June 201
8
examination sessi
ons.
The ACCA Study
Guide which follo
ws offers more det
ailed guidance on
the depth and
level at which the
examinable docu
ments will be exa
mined. It is refere
nced to the
Sessions in this St
udy Text and shou
ld be read in conju
nction with the ex
aminable
documents list.
reserved. (xi)

STUDY GUIDE
Account for
the different
S types of
consideratio
n including v
ariable
consideratio
n and where
a significant
A financing
Ref:
Internaticomponen
t exists in t
onal he
1)rces contract
Prepare finan
authoritycial statemen
The Interts extracts
national for contracts
with multiple
Accountiperformance
ng obligations, s
Standardome of whic
s Board h are satisfie
d
IASB) over time an
d the d some at a p
regulator
oint in time.
y framew
ork
 Discuss
e need 2) P
internation
al ro
financial  p
 eporting er
andards ty
d
possible
,
 rriers pl
 a
eir develop nt
 ment a

Explain n
he struct
 ure and d
e
onstitutio
n q
of the ui
SB and p
he standa
rd setting m
process
e
nt
Understan
d and Defin
rpret the e the i
nitial
inancial cost o
Reporting f a no
Framewor n-
k curre
nt
E asset
x (inclu
p ding
a self
l -
a constr
i ucted
n asset)
and a
pply t
t his to
h vario
e us
exam capitalised
ples
Ide
f
ntif
nditur
e, y pr
inguis 7
e-
hing
con
betwe
diti
enons
italfor
d the
capi 9
nue
talis
emsatio
9
State an 7
Ele d apprai
se the
men fects of
ts of he
fina IASB’s 7
rules for
ncia the reval
l uation
f
stat property
eme , plant
nts nd equip
1) ment
Rev
enu Account
e re for gain
cog s and
nitio ses on
n e
 Exp disposal
lain of re-
valued 7
and ssets
app
C
ly t
he a
prin l
cipl c
e of u
l
rev
enu a
e re t
cog e
niti
on: d
e
p
r
e
c
i
a
t
i
o
n

o
n
:

(i)I
revalued ass
d ets, and
e assets that h
n ave two or
t more
i
f
i
c
a
t
i
o
n

o
f

c
o
n
t
r
a
c
t
s

(ii) major items
or significa
Iden nt parts
tific
atio
n of
perf
orm
ance
obli
gati
ons
(iii) Det  Apply
erminati the pr
on of tra ovisio

nsaction ns of
price accou
nting
( standa
rds rel
i ating t
o gov
v ernme
nt gra
) nts
and g
overn
A ment
l
assist
l
o ance
c De
scr
a ibe
t the
i crit
o eri
a t
n hat
ne
ed to s held 8
be r sale,
prese
nt bef ther
ore n individu31
on- ally or
curre n a disp
nt ass osal gro
ets ar
up
D ransactions

es :
cr
ib 
e
an
 d
ap
pl 
 y
th
e
ac
ce
pt
ab
le
m
et
ho
ds
fo
r
m
ea
su
ri
ng
pr
og
re
ss
to
w
ar
ds
co
m
pl
et
e
sa
tis
fa
cti
on
of
pe
rf
or
m
an
ce
ob
li
ga
ti
on
Expl
ain a
nd a
pply
the c
riteri
Acal uirements
31
cogro of internati
onal
untup financial
fors t porting 12
nohat ndards
n- are investment
curhel properties.
rend f 12
t or
setsal
s e
ndDiscu
disss the
pos
Principal versus age
nt;
(ii) Repurchase arrange
ments;
(iii) Bill and hold arrange
ments; and
(iv) Consignment agreem
ents
©2017 Becker Education
al Development Corp. (xii)
l rights reserved.
STUDY GUIDE
3) Describ
15
e the me
Imp
thod of
air accounti
me ng
nt specifie
of d by the
ass IASB
ets r the
 Define ex
and cal
culate t plo
he reco rati
verable
on
amoun for
t of an an
asset a
nd any d e
associa val
ted
uat
impair
ion
ment l
of
osses mi
ner
al r
eso
urc
es.
6
)

I
n
v
e
n
t
o
r
i
e
s

 Identi
fy circ Meas 6
umsta
nces ure a
which nd va
indica
te lue in
that a vento
n imp
airme ries.
nt of a
n asse
t has
occurr
ed
7) Fina 20
ncial instr
uments
 Desc 
ribe
Explai
defi ial
n nitio instrument
 State th Determine th
e basis e appropriate
on whi classification
ch imp
airment of a financial
instrument, i
losses s ncluding
hould b
e alloca those instrum
ted, an ents that are
d alloca subject to
te “split classifi
a given cation” (e.g.
impair convertible
ment lo
ss to th
e assets
of
a cash-
generat
ing unit
.
4
10
l
o
 Discuss and
Acco account for t
unt f he initial and
or rig
ht- subsequent
 of- measurement
use a (including th
ssets e
and impairment)
lease of financial a
liabil ssets and
ities i financial liab
n the ilities in acco
recor rdance with
ds of applicable fi
the nancial repor
lesse ting standard
s
e and the finan
Expl ce costs asso
ain t ciated with
he ex them
empt
ion f
rom t
he
reco
gniti
on cr
iteria
for le
ases
in th
e
recor
ds of
the l
essee

Accou 
nt for s
 ale and
leaseba

ck
transac
tions in
the rec
ords of
the less
ee
Ex
pla
in
the
dis
tin
cti
on
bet
we
en
op
era
tin
g l
eas
es
an
d f
ina
nc
e l
eas
Discu
inancia n the conditi
ss l asset ons that are r
condit
or liabi
ions
lity to equired
hatbe de- for hedge ac
e recogni counting to
ired be used
forsed
 Prepare finan
Account
cial informati
for opera on for hedge
5)ting and accounting p
finance l urposes, inclu
eases ding the
in the fin impact of trea
ancial st ting hedging
atements arrangements
of lessor
s. as fair value
hedges or cas
h flow hedges
Int
an
gibl
e a
sse
ts
an
d g
oo
dwi
ll
 Discuss Describe the
nature financial inst
possible rument
accountingdisclosures r
reatments equired in th
f both e notes to the
nally financial stat
generated ements.
nd purchase
d goodwill

Distinguish8) 16
between rovisio
odwill ns, co
other ntinge
intangible nt ass
assets ets
and
abilitie
s
 Define on
the crit provisions is
eria for necessary – g
the init ive examples
ial of previous a
recogn
ition a buses in this
nd mea area
sureme
nt of
intangi
ble ass
ets
 uent accou
nting
 treatment, i
ncluding th
e s in which
ncipl
a
e gain on constructive
argain
impa obligations,
chase (neg past events
irme
ative
nt and the trans
goodwill)
sts fer of econo
arises,
relati mic benefits
its subsequ
on
ent
accounting how t
purc
treatment hey shou
hase
d ld be
odwi accounte
ll d for
Explain h
Identif ow provis
y ions shou
ircum
stance ld be
measured
 Describe Define conti
d apply ngent assets
requiremenand liabilitie
ts of s
IFRSs – give exam
ternally ples and desc
erated ribe their
s
other than accounting tr
goodwill eatment
.g. research
and
developme
nt)
(xiii)
al Development Corp.
rights reserved.
STUDY GUIDE
c
I
1

Recognise t
O he scope of
ne
ro internation
us al
co accounting
ntr standards f
ac or agricultu
ts re
En
vir Discuss the r
on
m ecognition an
en d
tal
an
d s
im
ila
r
pr
ov
isi
on
s
D m
ea
r su
re
m
en
t c
rit
eri
a i
nc
lu
di
ng
th
e
tre
at
m
en
t o
f g
ai
ns
an
d l
os
se
s,
an
d t
he
in
ab
ilit
y t
o
m
ea
su
re
fai
r v
al
ue
rel
ia
bl
y
9)
 Identify and
Accountiexplain the tr
ng for eatment of
mploym government
grants, and th
ent and e presentatio
post- n
employ and disclosur
ment e of informat
nefit ion relating
to agriculture
ts
Desc Report
ribe t on the t
he na ransfor
ture mation
of de of
fined biologi
cal asse
contr ts and a
ibuti gricultu
on an ral
d def produc
ined e at the
benef point of
its harvest
sche and
mes account
for agri
Explain culture
e recogniti related
on and
measurem govern
ent of defi ment gr
ned benefi ants.
t
schemes
n the finan
cial statem
ents of
contrib
uting e 1 1
mploye 8
rs

 Accoun
t for def Understand t
ined be he term “sha
nefit sc
hemes i re-based
n payment”
the fina
ncial sta
tements
of contr
ibuting
employ
ers.
10) Discuss the k
Tax ey issue that
in fi measurement
nan
cial of the transac
tion should b
stat
e based on
eme
nts
 Account sales taxes (
e.g. VAT or
or current
tax liabilit GST)
 ies and
assets
ccordance
with IFRS
s
19

5
 Explain Identify the
effect of principles ap
xable tempplied to
orary measuring b
differencesoth cash and
on accountiequity settled
ng and share-based
ble payment tran
profits
sactions

Outline Compute the
amounts that
principles need to be
 f accountinrecorded in t
g for he financial s
deferred tatements
x when an entit
y carries out
Identify a transaction
and acco where the pa
unt for yment is shar
e based.
he IASB
require
ments
lating to
deferred
tax
14) 15
Expl
 Calculat
orati
e and
on a
ord defer
nd e
red tax valu
ation
expe
nditu
res
amo Outline the
unts need for an
in th accounting
e fin standard in t
anci his area and
al st clarify its
ate scope
men
ts.
11) The
ects of
nges in
eign
currency
xchange
tes
 Discuss cordance wit
h
the reco
rding of IFRSs
transact
ions Disting
and tran uish bet
slation
ween re
 of mon
etary/n porting
on- and
moneta functio
 ry items
nal curr
at the re
porting encies
date for
Deter
individ mine
a ents of cost t
n  hat
might be inc
luded in the i
nitial
measuremen
 t of explorati
on and
evaluation as
 sets
Describe h
ow explora
tion and
evaluation
assets shou
ld be classi
fied
and reclass
ified
Explain whe
n and how ex
ploration and
evaluation as
sets should b
e tested for
impairment.
al Development Corp. (xiv)
rights reserved.
STUDY GUIDE
1 Compute th
e diluted EP
S in the
following ci
rcumstances
:
 Exp
lain
where
the conve
 prin rtible
cipl debt o
e un r
der
whi prefer
ence s
ch f hares
air are in
valu issue
e is 
mea
sure where
d ac share
cord
ing option
to I s and
FRS
s warra
Ident nts
ify a
n ap exist
prop
riate
fair v
alue
meas
urem
ent f
or an
asset
or lia
bility
in
a giv
en ci
rcum
stanc
es.
Identify anti
C Pre -dilutive cir
sent cumstances.
atio
n an Events aft
d ad er the rep
ditio orting dat
nal e
disc
losu
res
1) other presen
Presentcompre tation
ation hensive of fina
the stat income ncial s
ement tatem
of State theents
financialjectives
De
positionFRSs goverscr
ning ibe
and stat
the , chang
stru
ctur es in 30
e accounti
nd ng esti
con
tent mates
4
nd error
of3
stat s
em
ent3 Identify
s tems req
fina uiring
nci parate
al disclosur
osit e, includi
ion ng their
and ccountin
stat g
em treatment
ent
s and requi
pro red discl
fit
or osures
oss
and Recognise
oth the circum
er stances
co ere a
mp
reh change
ens accounting
ive policy
inc stified
om
e
clu
din
g
con
tinu
ing
ope
rati
ons

Define prior
 Discuss period adjust
e importanments and
ce of ident “errors” and
ifying account for t
and report he correction
ing the of errors and
ults of changes in a
discontinu ccounting
ed operati policies.
ons
 Define
nd accou 5) R
nt for

e
n-current l
 a
assets
t
d for sale
and disco e
ntinued d
operation
s p
a
Discuss
r
“fair pr
esentati
t
on” and y
the
account d
ing con i
scsure ies in
los cordanc 31
e with
Define IFRSs
nd apply
2) Describe the
Ea potential to

rni mislead user
ng s
s p when relate
d party trans
er
actions are
sh accounted f
ar or
e (
Explain the d
E isclosure req
P uirements for
S)
related party
Recognise transactions.
he importan
ce of
comparabili
ty in relatio
n to the
calculation
of earnings
per share
d its
importance
as a stock
arket indica
tor
6) Ope 2
rating se 8
gments

Explain Discuss the
why the usefulness a
nd problems
 trend of associated w
EPS ma ith the provis
y be a ion of
more ac segment info
curate i
ndicator rmation
of perfo
rmance
than a c Defi
ompany ne a
’s profit n op
trend erati
D ng s
e egm
f ent
i
n
e

e
a
r
n
i
n
g
s

 Ca basic
lc EPS where
there
urin
has Identify
eng th portable
onus
e ye gments
cluding
ar applying
issue
of he aggrega
res/sto 1
tion criteri
ck a and
t quantitativ
g
e threshold
the s).
ar,
d Reportin
 g requir
where
ements
of SMEs
there
Outline
has he princi
en pal consi
derations
ghts in
developin
issu g a set
accountin
es g
shar standards
es for SMEs
 Explain Discuss so
e relevance
to existing lutions to t
shareholdehe proble
rs of the m of
luted EPS, differentia
and l financial
describe reporting
e circumst
ances that Discuss the r
will easons why t
give rise he IFRS for
a future SMEs does n
ution of ot address ce
e EPS rtain topics
(xv)
rights reserved.
STUDY GUIDE
PreparaBusi 23
Dtion of
ness
externacom
l reportbinat
s for ions
1)combin– fai
ed entitr
ies and
valu
joint
arrangee adj
ments ustm
ents
P Explain
y it is
r sary for
e h the
p considerati
on paid
a a subsidiary
r and
a the subsidia
t ry’s identifi
able assets
i and
o liabilities
n be accounte
d for at
r
o fair values
f when prepa
g ring consoli
r dated
o
u
p

c
o
n
s
o
l
i
d
a
t
e
d

e
x
t
e
r
n
a
l
r
e
p
o
r
t
s


Explai
Explai financial stat
n n and a ements
oncept
of pply th
oupe defin Comp
ndition of ute th
e fair
purpo value
subsidi of the
se
ary co
repari
ngmpanie consi
nsolid derati
s on gi
ated
ven in
financ cludi
ial ng the
ement follo
s wing
eleme
nts:
 Prepare
2
nsolidated
tatement 2
financial exchanges
sition for Deferred c
imple group onsideratio
n
(one or
e subsidiari Contingent
es) dealing considerati
with
pre and on
-acquisition
profits,
controlling
nterests
goodwill
Explain Prepare cons
 need for olidated fina
ncial
ng coterminstatements d
ous ealing with f
year-ends air value
nd uniform
accountingadjustments
polices (including th
 n preparingeir effect on
consolidateconsolidated
d
financial goodwill) in
tements respect of:
describe
w it
is achievedDepreciatin
in practice g and non-
depreciatin
Prepare g non-
onsolidate current asse
d statements
t of  Inven
profit or
ss and tory
er compre
hensive
incom including an
example
e and where an ac
statem quisition occ
urs during th
ent of e
chang year where t
es in here is a non
equity -controlling
for a s
imple interest
group
(one o
r more
 Liabilities
 Assets and li
abilities (inc
 luding
contingencie
s), not inclu
ded in the
subsidiary’s
own stateme
nt of
financial pos
ition.
Explain
d illustrateBusi
the effect 2
f the nes 5
disposal s co
a parent’s mbi
nvestment
in a nati
subsidiaryons
in the pare–
nt’s indivi
dual ass
financial ocia
atements tes
nd/or those
of the and
group joint
ricted to arra
sposals
he nge
parent’s men
tire invest ts
ment in D
e
ef
subsidiary)in
.
e
as
so
ci
at
es
a
n
d
jo
in
t
ar
ra
n
g
e
m
e
nt
s
Distinguish
2) B
between join
usines t operations
s com and joint ven
binatio ture
ns – i
ntra-
group
adjust
ments
 Explainnsact
ions
hy intra-
inclu
group
ding:
 sactions
should
eliminated
on consoli
dation
Report
ffects of
a-group
ing
and other
olidatedsubsi
Prepar d company
e ncial diary
or a joint arr
statements
o include angement.
and
ingle
unrealised profit
s in inventory and 22
non-current
ts
24
 intra-group
s and interest and
other intra-
group charges, and 22
 intra-group
vidends.
(xvi)
rights reserved.
EXAMINABLE DOCUMENTS
E
x
a
m
i
n
a
b
l
e
d
o
c
u
m
e
n
t
s
S s
es
The 2
Conc
eptua
l Fra
mew
ork f
or Fi
nanci
al Re
porti
ng
International Financial Report
ing Standards
IASP 3
IAS
I 6
IAS
Accounting Poli 4
cies, Changes in
Accounting Esti
mates and Error
s
IAS
E 3
IAS
I 1
IAS
P 7
IAS
E 1
IAS
Accounting for Govern 8
ment Grants and Disclo
sure of Government Ass
istance
IAS
The Eff 2
ects of
Change
s in Fo
reign E
xchang
e Rates
IAS
B 9
IAS
R 3
IAS
S 2
IAS r
Investmen
A
ts ins
s
o
c
i
a
t
e
s

a
n
d

J
o
i
n
t

V
e
n
t
u
25
IAS
F 2
IAS
E 2
IAS
I 1
IAS
Provisions, 1
Contingent
Liabilities
and Contin
gent Assets
IAS
I 1
IAS p
I
12
IAS 41
©2017 Becker Educational Development (xvii)
rp. All rights reserved.
EXAMINABLE DOCUMENTS
International S
Financial Re e
porting Stand s
ards (continu s
ed) i
o
n

r
e
f
e
r
e
n
c
e

IFRS 1
IFRS
S 1
IFRS
B 2
IFRS 5
IFRS
Explorat 1
ion for a
nd Evalu
ation of
Mineral
Resource
s
IFRS 7
IFRS 8
IFRS 9
IFRS 2
12 D
isclos
ure of
Intere
sts in
Other
Entiti
es

10
A link to the examinable documents
may be found at:
©2017 Becker Educational Development (xviii)
orp. All rights reserved.
Overview
Objective

To introduce source
s of authority in inte
rnational financial r
eporting.
INTRODUCTION
 What is GAAP?
 Sources of GAAP
IASB
 Objectives
 Governance structure
 Standard setting
 Projects update
INTERNATIONAL
FINANCIAL REPORTI
NG
STANDARDS (IFRSs)
 GAAP hierarchy
 Scope
 Authority
 Role in international
harmonisation
 Possible barriers to d
evelopment
BIG GAAP vs
LITTLE GAAP
 The debate
 Consensus
 Differential reporting
©2017 B
ecker Edu
cational Development Corp.
0101
SESSION 1 – INTERNATIONAL FINANCIAL REPORTING STANDARDS
1 Introduction
1.1 What is GAAP?
GAAP (Generally Accepted Accounting Principles) is a general term for a set of
financial accounting standards and reporting guidelines used to prepare accounts
in a
given environment.
Commentary
US GAAP is a more specific statement.
 The term may or may not have legal authority in a given country.
 It is a dynamic concept. It changes with time in accordance with chang
es in
the business environment.
1.2 Sources of GAAP
1.2.1
Regulatory framework
The regulatory framework includes:
 The body of rules and regulations, from whatever source, which an entit
y must
follow when preparing accounts in a particular country for a particular p
urpose.
This is usually laid down in statute (e.g. Companies Acts in the UK).
 Statements issued by professional accounting bodies which lay down ru
les on
accounting for different issues, for example:
 International Financial Reporting Standards (IFRSs);
 Financial Reporting Standards (UK FRSs);
 Financial Accounting Standards (US FASs).
1.2.2 Other sources
 Best practice, that is, methods of accounting developed by companies in
the
absence of rules in a specific area.
 Industry groups, such as:
 The Oil Industry Accounting Group (OIAC);
 British Bankers’ Association (BBA).
©2017 Becker Educatio
nal Development Corp.
0102
1.3 Role of statute and standards

Some countries have a very legalistic approach to drafting financial
statements. The legal rules are detailed and specific and the system is o
ften
geared to the production of a profit figure for taxation purposes (e.g. in
Russia and Ukraine).
 Some countries adopt an approach where statute provides a framework
of
regulation and standards then fill in the blanks. For example in the UK:
 Statute Companies Act 2006;
 Standards Financial Reporting Standards (FRSs).

Some countries have relatively little in the way of statute and rely largel
y on
standards (e.g. in the US).
Commentary
In the US, a body of the federal government called the Securities and Exchan
ge
Commission (SEC) oversees the accounting regulations issued by the professi
on. The
SEC can veto accounting treatments and demand that regulation be enacted i
n new
areas.
2 IASB
body. It is the sole body having responsibility and authority to issue pronounce
ments on
international accounting standards. All new standards are called “International F
inancial
Reporting Standards” (IFRSs).
2.1 Objectives

These are set out in the IASB’s Mission Statement:
 To develop, in the public interest, a single set of high quality, understan
dable
and enforceable global accounting standards (known as IFRSs) that req
uire
high quality, transparent and comparable information in financial state
ments;
Commentary
That is, to assist participants in the world’s capital markets and
other users of financial statements in making economic decisions.
 To promote the use and rigorous application of those standards;

To take of the needs of a range of sizes and types of entities
account in diverse economic settings (e.g. emerging economies);

To promote and facilitate adoption of International Financial Reporting
Standards (IFRSs), through the convergence of national accounting stan
dards
and IFRSs.
©2017 Becker Educational Development Corp. All rights reserved. 0103
2.2 Governance structure

The IASB operates under the IFRS Foundation:
Monitoring Board
Approve and oversee
trustees
IFRS Foundation
(22 trustees)
International Financial
IFRS Advisory IASB Reporting Standards
Council (16 members) Interpretations
Committee (IFRS IC)
Working groups
for major agenda
projects
2.2.1 Monitoring Board
 This board oversees the IFRS Foundation trustees, participates in the tr
ustee
nomination process, and approves appointments to the trustees.
2.2.2
IFRS Foundation
 Formerly called the International Accounting Standards Committee (IA
SC)
Foundation, this independent, not-for-profit corporation was established
under the laws of United States of America (Delaware State) in 2001.
 This body oversees the International Accounting Standards Board (IAS
B).

The IFRS Foundation’s trustees are 22 individuals from diverse geograp
hical and
functional backgrounds who appoint:

 the IFRS Advisory Council ;
the Board Members (IASB); and

the IFRS Interpretations Committee (IFRS IC).
 The trustees also:
 monitor the IASB’s effectiveness;
 secure funding;

approve the IASB’s budgets;

have responsibility for constitutional change.
2.2.3 IASB
 16 members (maximum three part-time) are appointed by the trustees fo
r an initial
term three to five years. The main qualifications are professional competence
and
practical experience.
 The IASB has complete responsibilities for all technical matters includi
ng:

preparation and issue of IFRSs;
 preparation and issue of exposure drafts;
 setting up procedures to review comments received on documents
published for comment;

issuing a basis for conclusions.
Commentary
Each IASB member has one vote on technical and other matters. The
approval of 10 members is required for documents to be issued for
discussion, exposure or as the final standard.
2.2.4 IFRS Council
 About 40 members:


appointed by the trustees for a renewable term of three years;
having diverse geographic and functional backgrounds.
 The Council provides a forum for participation by organisations and
individuals with an interest in international accounting.
Commentary
Participating organisations include the Organisation for Economic Change an
d
Development (OECD), the United States Financial Accounting Standards Boa
rd
(FASB) and European Commission. The Council meets, in public, at least thr
ee times
a year with the IASB.
 Objectives:
 to advise the IASB on agenda decisions and priorities of work;

to pass on views of the Council members on the major standard
setting projects and the implications of proposed standards for users
and preparers of financial statements;
 to give other advice to the trustees and the IASB.
2.3
IFRS IC
2.3.1 IFRS IC Interpretations
 The Committee’s predecessor (the Standing Interpretations Committee
(SIC)), was founded in 1997 with the objective of developing conceptua
lly
sound and practicable interpretations of IFRSs to be applied on a global
basis.
 Responsibilities include:

interpreting the application of IFRSs; and

providing timely guidance on financial reporting issues not
specifically addressed in IFRSs.
 The Committee is made up of a team of accounting experts appointed by
the trustees.
Non-voting observers who have the right to attend and speak at IFRS IC
meetings are
also appointed by the trustees. Currently the official observers include t
he International
Organization of Securities Commissions (IOSCO) and the European Co
mmission.
2.3.2 Approach
 IFRS IC uses the approach described in IAS 1 “Presentation of Financia
l Statements”:
 making analogies with the requirements and guidance in IFRSs dealing
with similar and related issues;

applying the definitions, recognition and measurement criteria for assets
, liabilities,
income and expenses set out in “The Framework” (see next session); an
d
 taking into consideration the pronouncements of other standard setting
bodies
and accepted industry practices (only to the extent that these are consist
ent
with IFRSs).
 IFRS IC works closely with comparable groups from the International F
orum of Accounting
Standard Setters (IFASS) to reach similar conclusions on issues where u
nderlying standards
are substantially the same.
Commentary
IFASS (formerly known as National Standard-Setters, NSS) is a grouping of
national accounting standard-setters from around the world, plus other
organisations that have a close involvement in financial reporting issues.
 After approval by the Board the interpretations become part of the IASB
’s authoritative
literature. The pronouncements have the same status as an IFRS (see lat
er).
2.3.3
IFRS ICs in issue
Twenty two IFRS ICs have so far been issued (as at March 2017). These cover a
wide
range of issues, for example:
 IFRIC 1 “Changes in Existing Decommissioning, Restoration and Simil
 ar Liabilities”;
 IFRIC 17 “Distributions of Non-cash Assets”;
IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments”.
Commentary
Specific IFRICs are not examinable.
2.4
Standard setting

IFRSs are developed through an international due process that involve
s:
 accountants, financial analysts and other users of financial statements;
 the business community;
 stock exchanges;
 regulatory and legal authorities;
 academics; and
 other interested individuals and organisations throughout the world.
 Due process normally involves the following steps (those in bold are re
quired under
the terms of the IFRS Foundation’s Constitution):
Identification and review of associated issues and consideration of the
Study of national accounting requirements and practice and an
Consultation with IFRS Advisory Council about adding the
Formation of an advisory (“working”) group to advise IASB.
Publishing a discussion document (“paper” i.e. DP) for public comment.
Publishing an exposure draft (ED) for public comment.
Consideration of all comments received within the comment period.
If considered desirable, holding a public hearing and conducting field-tests.
Approval of a standard by at least 10 votes of the IASB
Commentary
A basis for conclusions is usually included within an ED and the published st
andard.
Any dissenting opinions (“alternative views”) of IASB board members must b
e included
within an ED and the published standard.
2.4.1 Discussion papers
 IASB may develop and publish discussion documents (usually called dis
cussion papers)
for public comment.
 A discussion paper:
 sets out the problem, the scope of the project and the financial reporting
 issues;
 discusses research findings and relevant literature; and
presents alternative solutions to the issues under consideration and
the arguments and implications relative to each.
 Following the receipt and review of comments, IASB develops and pub
lishes
an Exposure Draft, which is also for public comment.
©2017 Becker Educational Development Corp. All rights reserved.
0107
2.4.2 Exposure Draft (ED)
 An ED invites comment on any aspect of specific questions and the pro
posed IFRS.
 It sets out the proposed standards and transitional provisions.
Commentary
The basis of the IASB’s conclusions, which summarises the Board’s
considerations, is also published for comment.
2.4.3 Voting
 The publication of a Standard, ED, or final IFRS IC Interpretation requir
es approval by
10 of the IASB’s 16 members.
Commentary
Or just nine if 15 or fewer members are voting. An abstention is equivalent t
o voting
against a proposal.
 All other decisions, including the issue of a Discussion Paper require a s
imple
majority of the IASB members present at a meeting (which must be atte
nded by
at least 60% of the members).
2.4.4 Comment period
 According to the IASB’s Constitution this is for a “reasonable period”.
 Typically this is for 90 or 120 days. The minimum comment period for
an
exposure draft is 60 days.
Commentary
A “reasonable period” must allow, for example, for the translation of docume
nts.
2.5 Projects update
2.5.1
Most recent IFRSs
 Since 2011 the following IFRSs have been issued:


 IFRS 14 “Regulatory Deferral Accounts”;
 IFRS 15 “Revenue from Contracts with Customers”;
IFRS 16 “Leases”.
Commentary
IFRS 14 is not an examinable document.
0108
2.5.2 Work plan
 The IASB’s work plan (as at 16 March 2017) includes the following:

 “Conceptual Framework for Financial Reporting”;
Disclosure Initiative – Materiality Practice Statement; and

Disclosure initiative – Principles of Disclosure.

Commentary
Although these developments are not examinable they illustrate the dynamic n
ature
2.5.3 Annual Improvements Project
Since 2007, the IASB has issued, as a separate document, annual improvements t
o
IFRSs. These improvements are initially issued as an exposure draft and then, if
approved, issued as a separate standard which will eventually be incorporated int
o the
amended standards. These amendments are deemed to be non-urgent but necess
ary to
Commentary
Each cycle of amendments is referenced “2013–2015”, “2014 –2016”, etc.
For example, minor amendments to standards arising from the 2015–2017
improvements project (issued in January 2017) are summarised as follows:
 IAS 12 “Income Taxes” – the income tax consequences of dividends m
ust be
accounted for in the same way, irrespective of how the tax arose.
 IAS 23 “Borrowing Costs” – Clarification of which borrowing costs are
eligible for capitalisation.
 IAS 28 “Investments in Associates and Joint Ventures” – Clarifies that
IFRS
9 “Financial Instruments” should be applied to long-term interests in an
associate or joint venture to which the equity method is not applied.
Commentary
These amendments are not examinable as they issued after the cut-off date fo
r
0109
2.5.4 Public information
The aim of the IASB is to make its deliberations, activities and intentions as tran
sparent
and open as possible.
 Extensive information on the IASB and its activities is available on the I
ASB’s website

Commentary
This includes all discussion documents, exposure drafts, public comments,
current activities and timetables of IASB and IFRS IC meetings.
 IASB and IFRS IC meetings are open to the public and may be received
as a
webcast through the IASB website.

“IASB Update” and “IFRIC Update” are summaries issued after every I
ASB and
IFRS IC meeting detailing the issues discussed and conclusions reached
.

Issue from time to time, various publications to assist in the understandi
ng of the
work of the IASB and in IFRS.
Commentary
For example, “2015 IFRS – A Briefing for Chief Executives” provides
summaries of all current IFRSs in “non-technical language”.
3 International Financial Reporting Sta
ndards
Commentary
IFRSs are a major international GAAP. They are widely used and accepted
as a
basis for the preparation of financial statements across many jurisdictions.
3.1 GAAP hierarchy
In descending order, the authority of IASB pronouncements is as follows:
 IFRS, including any appendices that form part of the Standard;
 Interpretations;
 Appendices to an IFRS that do not form part of the Standard;
 Implementation guidance issued by IASB.
Commentary
All Standards (IASs) continue to be applicable unless and until they are amen
ded or withdrawn.
The term “IFRSs” includes all standards (IFRSs) and interpretations
(IFRS ICs) approved by the IASB and IASs (and SICs) issued by the IASC.
3.2 Scope

IFRSs apply to the published financial statements of all profit-oriented
entities (i.e. those engaged in commercial, industrial and financial activi
ties).
Commentary
Entities may be corporate or organised in other forms (e.g. mutual co-
operatives or partnerships). IFRSs may also be appropriate to not-for profit
activities, government business enterprises and other public sector entities.
 IFRSs apply to all “general purpose financial statements” (i.e. those aim
ed at the
common information needs of a wide range of users).
Commentary
Both individual entity and consolidated financial statements.
 Any limitation on the applicability of a specific IFRS is made clear in th
e “scope”
section to the standard.
Commentary
For example, IFRS 8 “Operating Segments” only applies to the separate or i
ndividual
statements of an entity whose debt or equity instruments are traded in a publi
c market.
 Standards are not intended to apply
Commentary
The term “material” will be covered in the next session but for now you can
take this to mean significant – therefore “immaterial” means insignificant.
3.3
Authority

Within a jurisdiction, regulations may govern the publication of general
purpose financial
statements (e.g. statutory reporting requirements and/or national account
ing standards).

IFRSs do not override local regulations governing the issue of financial
statements
in a particular country.

Neither IASB nor the accountancy profession has the power to require c
ompliance.
3.4
Role in international harmonisation

The IFRS Foundation has had considerable influence on the harmonisat
ion of
financi al reporting :

 through adoption by multinationals and local regulators;
through working with IOSCO (see below).
3.4.1 Adoption
 IFRSs are used:

 as national requirements or as the basis for national requirements;

as an international benchmark for countries developing their own requir
ements;
 by regulatory authorities and companies;
by large multinationals for the purpose of raising finance on
international capital markets.
3.4.2 IOSCO
 The members of International Organisation of Securities Commissions (
IOSCO)
are securities commissions and other stock exchange regulators. Harmo
nisation of
financial reporting standards has been high on IOSCO’s agenda for man
y years.

IASC) for use in
the preparation of financial statements for cross-border offerings and list
ings.
Commentary
This endorsement meant that IOSCO recommended that its members allow
entities quoted on the stock exchanges of the world to adopt IFRS for filing
purposes. (It was not binding.)
3.4.3 Use around the world
 More than 120 countries are reported to be either permitting or requirin
g the
use of IFRS, for example:
 Bahrain, Chile, Georgia and Guatemala – all listed companies, includin
g
domestic, must follow IFRS;
 The EU, European Economic Area member states – all domestic listed c
ompanies
were required to adopt IFRS on or before 1 January 2005.
 IFRS financial statements are not currently permitted in, for example, C
hina,
Iran, Egypt and Vietnam. However, China has substantially converged
national accounting standards to IFRS.
Commentary
The above examples are illustrative of the range and extent of us use of IFRS
around the
world. Clearly this is constantly changing.
0112
3.5 Possible barriers to development
3.5.1
Common goals
 An understanding of the need for international accounting standards and
the overriding
objective of financial reporting must be shared between participants.

The tax-driven nature of many national accounting regimes complicates
alignment of
financial reporting with tax reporting.

Substantial sums are invested in unregulated information communicatio
n systems which
supplement the regulated system (e.g. in maintaining investor relations).
Different
stakeholders and different countries do not share a common understandi
ng of the “public
interest” which underpins the need for a single set of high quality, under
standable and
enforceable global accounting standards.
3.5.2 Key stakeholders
 Investors, accountants, standard setters and management do not have the
same incentives
for engaging in dialogue to change financial reporting as they know it.

also be a lack of trust between these key stakeholder groups
which
prevents them from contributing to a meaningful process of change.
Commentary
Consider for example that national standard setters need to endorse IFRS to
give them legal backing.
 The competence of key stakeholders (their level of technical knowledge
and
understanding of financial and non-financial information) may also pres
ent a barrier
(e.g. due to limited experience with certain types of transactions).
3.5.3 Ability to deal with complexity and change
 Certain transactions and the regulations surrounding them are creating a
dditional
complexities which demand too much change for existing systems to de
al with.
Commentary
Standards on financial instruments, impairment of assets, deferred tax and
employee benefits are most frequently cited as too complicated.
 Not only complexity, but the scale and pace of change are transforming t
he environment in
which business is operating. This environment has significantly increas
ed the demands on
disclos nts. Although many welcome the additional information there is a
ure req suggestion that the increased quantity has led to a reduction in quality of
uireme information.
 Although the IASB has a clear work program (see above) and its prioriti
es are reviewed and
changed, the growth in new IFRSs and the amendments to existing stand
ards is potentially
hazardous.
Commentary
Consider for example that although IFRS 9 replaces IAS 39, IAS 39 is not yet
withdrawn and can still be used until IFRS 9 becomes effective in 2018.
3.5.4 Cost
 As well as the costs incurred by IASB in the development of IFRS, costs
are incurred by
national standard-setters, preparers of financial statements, users of finan
cial statements (e.g.
financial analysts). National standard setters may be funded by a profess
ional body and/or
government and like most organisations have limited resources and budg
ets.
3.6 Progress towards international harmonisation

There is no doubt that high-quality, comprehensive and rigorously appli
ed global
standards bring benefits over competing and sometimes contradictory na
tional standards:

 improved investor confidence;
 better comparisons of investment options;
lower costs for issuers (which ultimately benefits shareholders).
 Progress towards international harmonisation and convergence of thinki
ng between
regulatory bodies (e.g. between IASB and FASB) has significantly redu
ced the diversity
of accounting practices in many areas. Considering, for example, good
will arising on
consolidation, subsequent accounting treatments varied widely between:
 No amortisation;
 Amortisation over a maximum of 20 years;
 Amortisation over exactly 20 years;
 Any of the above with or without impairment testing.
Commentary
Now, in compliance with IFRS, such goodwill cannot be amortised but must b
e
tested annually for impairment.
 However, there are still many areas in which diversity exists, particular i
n relation to
matters of disclosure. The principles-based approach to IFRSs, rather th
an a rules-based
approach, requires professional judgement which can lead to a lack of co
mparability:
 disclosures may not extend beyond the minimum requirements;
 voluntary disclosure may be no more than “boiler plate”.
Commentary
The term “boilerplate” is used to mean standardised text that is little change
d, if at
all, even though the context in which it is used is different from the original c
ontext.
Users of financial statements may suffer from an information overload, partic
ularly
on matters of disclosure, when far more useful, user-friendly and understanda
ble
information could be conveyed with just the relevant details.
 IASB does not have the formal authority of a national regulat
system so:
ory

 compliance is “promoted” (see IASB objectives) rather than enforced; a
nd
“harmonisation” is encouraged.
 “Harmonisation” can be described as the process by which differences b
etween financial
reporting practices can be minimised, if not eliminated, over time. This
is not the same
as convergence, which implies the bringing together of accounting pract
ices in different
jurisdictions.
4 Big GAAP vs little GAAP
4.1 The debate

The relevance of IFRS to all forms of business has been a matter of deb
ate for
many years. Is financial reporting the same for:
 Large and small companies?
 Profit focused and not-for-profit organisations?
 Public sector and private sector organisation?
 Not all businesses have profit as their prime focus. The information that
listed companies are
required to present is likely to be of little use to the users of a charity’s fi
nancial statements.
 The majority of companies in the world are not listed on a recognised st
ock exchange and
their shares are not traded. Many of these are “insider” or owner-
managed companies
and therefore financial information is available immediately for the own
ers. In contrast,
shareholders (owners) of a listed company only really get to see financia
l information that
is published in the annual financial statements.
 There is also a cost issue. It is very costly to produce and present a set o
f financial
statements in compliance with IFRS. If most businesses gain no benefit
from these
statements is it really cost effective for every business type to fully com
ply with IFRS?
 The debate is therefore about “differential reporting” – whether “one-
sized fits all” or
whether different types of business should report under different regulati
ons. The
possible options available for reporting for different businesses include:
 All businesses to use one “IFRS GAAP”;
 Use one GAAP but limit disclosures for certain types of business;
 Exempt some types of business from the reporting requirements; or

Have a separate set of standards for certain businesses.
 The IASB has taken the latter route by issuing IFRS for Small and Med
ium-sized Entities.
4.2
Consensus

There has been a consensus for a long time that reporting requirements
are
biased towards larger companies and ignore the needs of small compani
es.
 Compliance places a burden on small companies. This burden includes
:

 the cost of considering whether a particular standard applies to the entit
 y;
 the cost of assembling the information;
the cost of auditing the information; and
the loss of commercial advantage arising from increased disclosure.
 The appropriateness of applying accounting standards to small compani
es has been the
subject of numerous studies in the UK and around the world which conc
lude that:
 to all financial
statements that purport to present a “true and fair” view;
 Therefore, small companies should be exempted from the need to
comply with certain standards.
4.3 Difficulties

Difficulties include:

choosing a method of determining which companies should be
allowed any exemption from “big” GAAP; and

selecting the accounting rules from which such companies should
be exempt.
 Factors to be considered in distinguishing between categories of compa
nies include:

 the extent to which there is public interest in an entity;

its complexity, the separation of ownership and control; and
its size.
Commentary
Although size is not the most important factor, it is the easiest to apply.
4.4 Differential reporting
4.4.1 Meaning
 How the financial reporting needs and requirements of different types o
f
entities (e.g. listed, private, not-for-profit, public sector) should be dealt
with.
 Differential reporting considers whether there should be different accou
nting
and reporting requirements and the criteria on which those requirements

should be based (e.g. type of entity or size).
 The debate has considered the following:

Should there be two totally independent set of standards?

Should there be a single set of standards, with exclusions for some
types of companies?

Should all companies follow exactly the same set of standards?

Should the recognition and measurement issues remain the same
and only disclosure requirements be relaxed for some companies?
4.4.2 Arguments for
 The purpose of a set of accounts is to communicate information to users
of
financial statements. However, for a simple entity, some of the comple
x rules
relevant to larger entities may hinder communication rather than aid it.

osure and the technical terminology
required by accounting standards may render the accounts of small com
of discl panies
incomprehensible to their principal users.
 The owners of public companies are not generally involved in managing
the
business. For this reason, a relationship of stewardship (i.e. accountabil
ity) exists
between owners and managers. This is not the case for owner-managed
entities.
Commentary
In short, current standards fail to take adequate account of the needs of users
.
 The users of public companies’ financial statements include:

 existing and potential shareholders;
loan creditors;

financial analysts and advisers;
 the financial press;
 employees.
 The users of small companies’ financial statements include:

 owner-managers;
bankers; and

tax authorities.
 Many of the developments in international standard setting have been dr
iven by the desire
to create a single set of “global standards for the world economy”. The r
equirements of
the newer standards, in particular, are not necessarily appropriate to sma
ller entities.
4.4.3 Arguments against
 Empirical research has not found that small companies find complying
with
accounting standards a matter for concern.
 Small entities normally have very few major accounting issues that nee
d to be
addressed, simply because of their size. In practice, this means that ma
ny of
the IFRSs have negligible impact on the small company.
 For companies already in existence, accounts formats with full disclosu
re will
already be in place.
4.5 IFRS for SMEs

In 2009 the IASB issued IFRS for Small and Medium-sized Entities w
hich gives
possible relief for many companies from compliance with full IFRS. Th
is is not an
examinable document.
 The standard provides an alternative framework that can be applied by
eligible companies instead of “full IFRS”.
4.5.1 IASB definition
 The standard does not specifically define an SME, it leaves that up to na
tional
regulatory authorities and it is these bodies that will set the eligibility cr
iteria,
possible based upon turnover, value of assets or number of employees.
4.5.2 Stand-alone document
 The standard is intended to be a stand-alone document without the need
to
refer to the full set of IFRSs.
 Therefore, where an item is not covered by the standard there is no
mandatory “fall back” to full IFRSs.
 The standard takes the fundamental concepts from the framework docu
ment,
principles and mandatory guidance from appropriate standards and mod
ifies
these to take account of users’ needs and cost-benefit considerations.
4.5.3 Topics omitted
 Those standards that are not relevant to a typical SME are omitted altog
ether from
the standard. If a particular standard affects the SME it will refer to the
full IFRS.
 Standards omitted include:



IFRS 5 Non-current Assets Held for Sale and Discontinued Operatio

ns;
Key points summary
IFRS is a principles-based set of accounting standards. It is widely used for the
preparation of financial statements across many jurisdictions.
IFRSs apply to the published financial statements of all profit-oriented entities.
IFRSs apply to all “general purpose financial statements” (i.e. those aimed at the
common information needs of a wide range of users).
Many countries have adopted IFRS as their accounting framework with local G
AAP
either disappearing or only used for private entities.
Publication of a Standard, Exposure Draft or final IFRIC requires approval by 10
of the
IASB’s 16 members (nine if 15 or fewer members are voting).
Not all organisations primary objectives are to make profit. Not-for-profit and p
ublic
sector entities have other functions to perform in the economy.
IFRS for SMEs relaxes the reporting and disclosure requirements for those entiti
es
meeting the small or medium sized entity criteria.
Focus
You should now be able to:
 discuss the need for international financial reporting standards and poss
ible
barriers to their development;
 explain the structure and constitution of the IASB and the standard setti
ng process;

explain the progress towards international harmonisation;
 outline the principal considerations in developing a set of accounting sta
ndards for SMEs;
 discuss solutions to the problem of differential financial reporting; and
 discuss the reasons why the IFRS for SMEs does not address certain to
pics.
Overview
Objective

To set out the conce
pts that underlie the
preparation and pres
entation of financial
statements for exter
nal users.
PURPOSE AND
STATUS
 Purpose
 Scope
 Financial statement
s
GE
UND NE
ERL R QUALI
YIN AL TATIV
PU E
G RP CHAR
OS ACTE
ASS E
UMP RISTIC
TIO FI S
N N
A
N
CI
AL
RE
PO
RT
IN
G
  Econo
mic phen
omena
 Funda
mental qu
alitative
c
h
ar
ac
te
ri
sti
cs

R
e
characteristics
 Cost constraint
ELEMENTS OF
FINANCIAL
STATEMENTS
 Definitions
 Recognition
 Measurement bases
CAPIT
AL AN FAIR
D
VALU
E
CAPIT
AL
MAINT
ENANC
E
 C  Bac
apita kgrou
nd
l
 Te
 Pr
rminol
ofit
ogy
 Non-financial assets
 Hierarchy of inputs
©2017 Becker Educational
0201
eserved.
SESSION 2 – CONCEPTUAL FRAMEWORK
1 Purpose and status
1.1 Purpose

Primarily, to assist the IASB in:

developing future IFRSs and reviewing existin
 g IFRSs;
promoting harmonisation in the presentation of
financial statements by
providing a basis for reducing the number of alt
ernative accounting
treatments permitted by IFRSs.
Commentary
For example, IFRS 11 “Joint Arrangements” does n
ot allow the proportionate
consolidation method of accounting for joint venture
s which was previously permitted.
 To assist national standard-setting bodies in d
eveloping national standards.

To assist preparers of financial statements in a
pplying IFRSs and in dealing
with topics that are not yet the subject of an IF
RS.

To assist auditors in forming an opinion on wh
ether financial statements
conform with IFRSs.

To assist users of financial statements in interpr
eting information contained
in financial statements prepared in conformity
with IFRSs.

To provide interested parties with information a
bout how IFRSs are formulated (published
as a “basis for conclusions” with each new and r
evised Standard).
Commentary
The “Conceptual Framework” is a foundation for th
e preparation and appraisal of financial
reporting standards. It is not an IFRS and therefore
nothing in the framework overrides any
specific IFRS. In a limited number of cases where a
conflict between the framework and an
IFRS arises, the IFRS prevails.
1.2 Scope

To explain:



 Definition, recognition and measurement of el
ements;
Commentary
The “Framework” provides answers to a series of fu
ndamental questions:

 What are financial statements?
 What are they for?
 Who are they for?
What makes them useful?
1.3 Financial statements
Included
Not included
 Statement of financial position  Reports by direct
“balance sheet”); ors;
 Statement of profit an
 Statements by c
d loss and other
hairman;
 Statement of cha  Discussion an
nges in equity; d analysis by
 Statement of cash flows; and
 Notes, including a summary of significant
1.4 Users and their information ne
eds
Users Information
needs
 Providers of ca  Risk and return of investment.
pital Need information:
 for decision-making (e.g. to buy, hold or sell shares
); and
 Employees and their  Stabilityand profitability
 Ability to provide remuneration, retirement benefits
and employment
 Lenders (e.g.  Whether loan repayments and inter
banks) est will be paid when due and to
 Suppliers and  Whether amounts owing will be
her paid when due.
 Custom  Continuance – important for lon
ers g-term involvement with, or
 Governments Allocation and utilisation of resourc
nd their es (e.g. scarce natural resources)
 Information to regulate activities, determine taxatio
n policies and as
 Public
 Contribution to local economy i
ncluding number of employees an
d
 Trends and recent developments in prosperity and r
ange of activities.
2 General purpose financi
al reporting
2.1 Objective and usefulness

To provide information about the financial posi
tion, performance and
changes in financial position of a reporting enti
ty that is useful to a wide
range of users in making economic decisions.
 To show the results of management’s stewards
hip (i.e. accountability for
resources entrusted to it).
Commentary
“Management” in the Conceptual Framework also e
ncompasses any governing board.
 Existing and potential investors, lenders and cr
editors (“primary users”)
mostly need to rely on published financial infor
mation as they cannot obtain
it directly.
2.2 Limitations

Financial reports cannot meet all the informatio
n needs of primary users. Those users
must therefore consider other sources of inform
ation (e.g. economic conditions, political
events and industry outlooks).
 IFRSs are developed to meet the information re
quirements of primary users. Although
other users may find them useful they do not sp
ecifically aim to meet their needs.
 They do not purport to show the value of the re
porting entity.
 They are based to a large extent on estimates, j
udgements and models.
0204
2.3 Financial position, performance
and changes in
financial position
2.3.1 Economic resources, claims and ch
anges
 Financial reports provide information that enab
les users to evaluate:

the entity’s ability to generate cash and cash e
 quivalents;
the timing and certainty of their generation.
POSITIO PERFORM FINANCIA

N ANCE L
 Affected by: In particular profitability:
 economic reso financing and oper
urces ating
generate cash flows
controlled; from activities.

existing resourceTo assess abilit
 financial stru se; 
cture; y to
generate cash f
 liquidit lows.
y and about effectiveness
solvenc with  To indicate how c
which additionalash is
y; resources might obtained and spent
capacity to ad employed. and
apt to the cost of financi
changes. ng it.
 STATEMENT  STATEMENT OF  STATEMENT O

F ROFIT F
OR LOSS AND
FINANCIAL POSITIHER CASH FLOWS
ON
COMPREHENSIVE
COME
Commentary
Statements of cash flows are not examinable in the
Diploma exam.
2.3.2 Accrual accounting
 Financial reporting is reflected by accrual accou
nting as this provides a better basis for
assessing performance than cash receipts and pa
yments.

Under al accounting effects of transactions and other e
accru vents are:

recognised when they occur not as cash is recei
 ved or paid;
recorded in the accounting records and reporte
d in the financial
statements of the periods to which they relate.
 Financial statements prepared on the accrual ba
sis inform users of obligations to pay
cash in the future and of resources that represen
t cash to be received in the future.
Commentary
The accrual basis gives rise to the “matching” conc
ept – that expenses are recognised
on the basis of a direct association between costs in
curred and earning of income.
3 Underlying assumption
3.1 Going concern

This is the assumption that the entity will contin
ue in operation for the foreseeable future.

Therefore, there is neither intention nor need to
liquidate or curtail materially
the scale of operations.
Commentary
This assumption, which concerns the basis of prepar
ation, applies unless users of
financial statements are told otherwise.
4 Qualitative characteristi
cs
4.1 “Economic phenomena”

Qualitative characteristics of financial statement
s are the attributes that make information
provided therein useful to primary users.

This information primarily concerns economic
resources and claims and how
these are affected by transactions, conditions an
d other events.
Commentary
Collectively the Conceptual Framework refers to the
se as “economic phenomena”.
4.2 Fundamental qualitative charac
teristics

These are relevance and faithful representat
ion.

Other enhancing characteristics are:

 comparability;

verifiability;

timeliness; and
understandability.
4.3 Relevance

This y
concerns the decision-making needs of us
qualit
ers. It helps users:

to evaluate past, present or future events (i.e. ha
 s a predictive value);
to confirm or correct their past evaluations (i.e.
has a confirmatory value).
Commentary
Predictive and confirmatory values are inter-related
(e.g. the same information may
confirm a previous prediction and be used for a futu
re prediction).
 Relevance of information is affected by:
Its nature
Materiality
sufficient to deter could influence the economic decis
mine ions of users taken
relevance. on the basis of the financial statem
ents.
circumstances of its omission or misstatement.
a primary qualitative characteristic.
Commentary
Azure AG sold a property for $4 million is one piece
of information. That it sold it
to another company which is owned by Azure’s chief
executive officer is another
piece of information. (Such “related party” transact
ions are the subject of IAS 24.)
 Both nature and materiality may be important (
e.g. amounts of inventories
held in each main category).
4.4 Faithful representation

Useful information must represent faithfully th
at which it either purports to
represent (or could reasonably be expected to r
epresent).
 Faithful representation encompasses:
 neutrality (i.e. free from bias);
 completeness (within bounds of materiality and
cost) – an omission can
cause information to be false or misleading and
thus unreliable; and
 accuracy (i.e. free from error).
4.5
Enhancing characteristics
4.5.1 Comparability
 Users need to be able to compare financial stat
ements of:

 different entities – to evaluate relative financia
l position,
performance and changes in financial position.

Comparability requires consistent measurement
and display of the financial
effect of like transactions and other events.
 An implication of this is that users must be info
rmed of the accounting policies
employed, any changes in those policies and th
e effects of such changes.
 Financial statements must show corresponding i
nformation for preceding periods.
Commentary
Consistent measurement, for example, means adoptin
g the same initial measurement
and subsequent measurement rules for intangible ass
ets as for tangible assets.
4.5.2 Verifiability

This means that knowledgeable, independent o
bservers could reach a
consensus that a particular representation has th
e fundamental quality of
faithfulness.
 Verification may be:
 direct (e.g. through physical inspection); or

indirect (e.g. using a model, formula or techni
que).
Commentary
This characteristic does not relate only to single poi
nt estimates but also to
ranges of outcomes and related probabilities.
4.5.3 Timeliness
 Information needs to be available in time for us
ers to make decision.
Commentary
Older information is generally less useful (but may s
till be useful in
identifying and assessing trends).
4.5.4 Understandability
 Users are assumed to have a reasonable knowle
dge of business and economic activities and
accounting and a willingness to study informati
on with reasonable diligence (i.e. they are
expected to have a level of financial expertise).
 Information about complex matters should not
be excluded on the grounds
that it may be too difficult for certain users to u
nderstand.
4.6 Cost constraint

The cost of providing information should not ex
ceed the benefit obtained from it.

e reporting entity, is ultimately borne by
borne the users (e.g. through lower returns on their in
by th vestment).
 Users also incur costs (e.g. in analysing and int
erpreting information).
 Benefits are most difficult to quantify and ass
ess:
 the better the quality of information, the better
 decision making should be;
confidence in the efficiency of capital markets l
owers the cost of capital.
5 Elements of financial st
atements
“Elements” are the broad classes of the financial effect
s of transactions grouped
5.1 Definitions

An asset:

 a resource controlled by the entity;

Commentary
Control means being able to restrict use (e.g. with p
hysical “keys” or rights enforceable in a
court of law). Although a skilled workforce is a res
ource, an entity will not have sufficient
control over the future economic benefits of it to rec
ognise it as an asset. An asset does not
 A liability:
 a present obligation of the entity;
 arising from past events;
 settlement of which is expected to result in an
outflow of resources
embodying economic benefits.
Commentary
So not, for example, a proposed dividend (since ther
e is no legal obligation), nor future
repairs and maintenance costs.
 Equity:

 the residual interest;

Commentary
This is defined in terms of other items in the stateme
nt of financial position; it amounts
to the “balancing figure”.
 Income:


 in the form of inflows (or enhancements) of ass
 ets or decreases of liabilities;
Commentary
Again, this is defined in terms of items in the statem
ent of financial position. Income
includes revenue and gains, even though they may b
e included in other comprehensive
income or directly in equity rather than profit or los
s (e.g. a revaluation gain).
 Expenses:


 in the form of outflows (or depletions) of assets
 or incurrences of liabilities;
Commentary
Note now the Conceptual Framework’s very “balanc
e sheet” view of financial reporting –
this is fundamental to understanding IFRSs. Expens
es include losses – most of which will be
recognised in profit or loss though some may be incl
uded in other comprehensive income
(e.g. a revaluation deficit on an asset with a previou
sly reported gain) or directly in equity.
5.2 Recognition
5.2.1 Meaning
 The process of incorporating in the statement of
financial position or statement of
profit or loss and other comprehensive income
an item that:


satisfies the criteria for recognition (below).
Commentary
One factor to consider in assessing whether an item
meets a definition is “substance over
form” (i.e. the underlying substance, not merely lega
l form). It is for this reason that assets
held under right-of-use contracts are treated as asse
ts acquired (see Session 10).
 Recognition involves:

the depiction of the item in words and by a mo
 netary amount; and
the inclusion of that amount in totals of the stat
ement of financial
position or statement of profit or loss and other
comprehensive income.
 Items that satisfy the recognition criteria must
be recognised.

The failure to recognise such items is not rectif
ied by disclosure of the
accounting policies used nor by notes or explan
atory material.
5.2.2 Criteria

It is probable that any future economic benefit
associated with the item will
flow to or from the entity; AND
 The item has a cost or value that can be measu
red with reliability.
Commentary
This criterion features throughout the Standards. In
IAS 37 “Provisions, Contingent
Liabilities and Contingent Assets” probably means “
more likely than not” (i.e. greater
than 50%). However, for asset recognition a higher
threshold may be considered
“probable”. Items which do not meet the recognitio
n criteria (e.g. because they cannot
be measured) may nevertheless require to be disclos
ed (e.g. contingent liabilities).
5.3 Measurement bases
Assets
Liabilities
Historical co paid (or
st the fair for the obligati
value of the considera
on.
tion given)
to acquire them at the
time of
taxes) at the amounts of c
IAS 16 Property, Pla ash
nt and expected to be paid to sati
sfy the
liability in the normal co
urse of
business.
Current cost
be paid if the same or an
equivalent asset was acq would be required to settl
uired e the
currently. obligation currently.
Realisabl
e
(settleme be obtained by undiscounted amoun
nt) elling the asset ts expected to
value in an orderly dis be paid to satisfy the
posal. (Used in liabilities in
IAS the normal course of
business).
2 In
ven
tori
es.)
Present value
future net cash inflows future net cash outflows th
hat the at are
item is expected to gene expected to be required to s
rate in ettle the
the normal course of bu liabilities in the normal cou
siness. rse of
business. (Used, for exam
ple, in
Liabilities and Contingent Assets.)
Commentary
Each of these bases may be used under IFRS accord
ing to circumstance. Initial
recognition is invariably at historical cost – being re
latively easy, reliable and
objective. Subsequent measurement at revaluation is
permitted (e.g. in IAS 16) because
it provides more useful information, albeit more subj
ective.
As the framework was first published in 1989 before
“fair value” was recognised as a
measurement basis, this term was defined in all rele
vant standards. Now it is only
defined where its meaning is different to that in IFR
S 13 “Fair Value Measurement”.
Refers to the amount of cash or cash equivalents
6 Concepts of capital and
capital maintenance
6.1 Capital
6.1.1 Financial concept
 Capital (i.e. money invested) is synonymous wi
th net assets or equity.
6.1.2 Physical concept – operating capab
ility
 Capital is regarded as productive capacity base
d on operating capability (e.g.
units of output per day).
Commentary
These two concepts give rise to the concepts of capit
al maintenance.
6.2 Capital maintenance and the de
termination of profit
6.2.1
Financial capital maintenance

Profit is earned only if the financial (or money)
amount of the net assets at the end of the
period exceeds the financial (or money) amount
of net assets at the beginning of the
period (after excluding any distributions to/cont
ributions from owners during the period).
Commentary
Historical cost accounting uses financial capital mai
ntenance in money terms.
6.2.2 Physical capital maintenance

Profit is earned only if the physical productive c
apacity (or operating capability) at the end
of the period exceeds the physical productive ca
pacity at the beginning of the period (after
excluding any distributions to/contributions fro
m, owners during the period).
Commentary
Both concepts can be measured in either nominal m
onetary units or units of constant
purchasing power. Physical capital maintenance re
quires that current cost be
adopted as the basis of measurement, whereas finan
cial capital maintenance does
not call for any particular measurement basis.
7 Fair value
7.1 Background

When the framework document was first issued
the concept of fair value was not
widely used in accounting and so was not inclu
ded as a measurement basis.
 Since then, the use of fair value in accounting h
as become widespread.
 When new standards required or allowed the us
e of fair value there was no
consistency between each standard as to how fa
ir value should be measured.
 In 2011, IFRS 13 Fair Value Measurement wa
s issued to prescribe how fair value is
measured when it is required or permitted to be
used by another standard.
Commentary
So, for example, an investment property may be mea
sured at fair value under IAS 40
but it is IFRS 13 that specifies how that fair value s
hould be determined.
7.2 Terminology
Definition
Fair value – the price that would be received to sell an
asset or paid to transfer a
liability in an orderly transaction between market parti
cipants at the measurement date.
 This definition of fair value is based on an exit
price (i.e. “sell-side”
perspective) rather than an entry price (i.e. “bu
y-side” perspective).

that a
market participant would take into account sho
uld be reflected in the
valuation. This could include the condition or l
ocation of the asset and any
restrictions on the use of the asset.

The definition is market-based and is not entity
-specific. It reflects the use
market participants would use the asset or liabil
ity for not what a specific
entity would use the asset or liability for.
Definitions
Active market – a market in which transactions take pl
ace with sufficient frequency and
volume to provide pricing information on an on-going
basis.
Highest and best use – the use of a non-financial asset
by market participants that
would maximise the value of the asset.
selling the asset) or minimise the amount payable (to s
ettle the liability), after taking
account of both transaction and transport costs.
Principal market – the market with the greatest volum
e and level of activity.
Commentary
The actual markets in which the entity trades are irr

elevant (see Illustration 1).
7.3 Price

Price is the amount that would be received for a
n asset or paid for a liability
in the principal market. Fair value can be a pri
ce that is directly observable
or a price that is estimated using a valuation tec
hnique.
 Fair value includes transport costs, but does not
include transaction costs.

Fair value is not adjusted for transaction costs a
s these costs are not
characteristics of the specific asset or liability.
Any transaction costs are
generally expensed as incurred.
Commentary
Transaction costs are ignored because they are a cost

of entering into the
transaction rather than a cost specific to the item bei
ng measured.
 Transport costs are reflected in fair value beca
use they change the
characteristics of the item (i.e. its location).
Illustration 1 Principal market
Jammee has business in two markets, Europe and Asia
. The fair value of an asset
needs to be ascertained for accounting purposes. Detai
ls relating to the asset in the two
markets are as foll
ows: Europe
Asia
$ $
Market price 120 125
Transaction costs (5) (11)
(5) (2)
Transport costs –––– ––––
110 112
–––– ––––
If Europe is the principal market for the asset, the fair
value would be $115 (price –
transport cost).
If neither Europe nor Asia is the principal market, Jam
mee would take the most
advantageous price to be fair value. This would reflect
the best price available to sell
the asset after deducting transaction and transport cost
s.
In this situation Asia is the most advantageous market
giving net proceeds of $112
compared with $110 in Europe. However, $112 is not
the fair value of the asset. The
fair value is $123; the price less transport costs.
If the item was a liability, the most advantageous mark
et would be Europe and the fair
value of the liability would be $115. This reflects the
amount Jammee would have to
pay to settle the liability, which is obviously better tha
n having to settle at $123.
7.4 Non-financial assets

For non-financial assets (e.g. investment proper
ty), fair value is based on the
highest and best use.
 The highest and best use must be physically po
ssible, legally allowed and
financially feasible.
Commentary
Uses that are not reasonably probably (e.g. due to l
egal, economic or physical
limitations) cannot qualify as the highest and best us
e.
 The highest and best use may assume that the a
sset will be used on its own or
in combination with other assets (and/or liabilit
ies).
Commentary
If the entity uses the asset on its own, but the best u
se by market participants would
be combined with other assets, the valuation would
be based on using the asset in
combination with others.
7.5 Valuation techniques

The standard assumes that the transaction will
occur in the principal market
for the asset or liability, if one exists. If there i
s no principal market, the
valuation is based on the most advantageous m
arket.
 Unless proven otherwise the principal market p
lace will be presumed to be
the one that the entity transacts in on a regular
basis.
 Three common techniques for estimating an ex
it price in an orderly
transaction are considered below.
7.5.1 Market approach
 This approach uses prices and other informatio
n generated in a market place
that involve identical or comparable assets or li
abilities.
7.5.2 Cost approach
 This approach reflects the amount that would b
e required to replace the
service capacity of the asset (current replaceme
nt cost).
7.5.3 Income approach
 This approach considers future cash flows and
discounts those cash flows to a
current value. Models that follow an income ap
proach include:
 present value; and
 option pricing models (e.g. Black-Scholes-
Merton).
Commentary
Option pricing is not examinable.
7.6 Hierarchy of inputs

inputs wherever possible. The hierarchy (order
) of inputs aims to increase
consistency of usage and comparability in the
measurement of fair values and
their related disclosures.
7.6.1 Level 1 inputs
 These are quoted prices in active markets for id
entical assets or liabilities at
the measurement date.
 These are inputs other than quoted prices that a
re observable for the asset or
liability, either directly or indirectly.

These would include prices for similar, but not
identical, assets or liabilities
that were then adjusted to reflect the factors spe
cific to the measured asset or
liability.
 These are unobservable inputs for the asset or
liability.
Commentary
Level 1 inputs should be used wherever possible; the
use of level 3 inputs
should be kept to a minimum.
Worked example 1
Exeter has an investment property with a floor area of
420 square metres. Exeter has
adopted a fair value policy for its investment property.
Similar properties in the same locality have been sold
at prices which amount to
$1,250, $1,255, $1,260, $1,270 and $1,290 per square
metre during the past month.
Required:
(a)
Calculate a fair value for the property usin
g:
(i)
(ii) a mid-value; and
an average.
(b)
rnative fair values to those calculated in (a).
Sugge Calculations
st alte are not required.
Worked solution 1
(a) Fair value
(i) The mid-value is $1,270 (1,250 + ½ (1,290 – 1,
250). This would
value the property at $533,400 (420 × $1,270).
(ii) The simple average is $1,265 ((1,250 + 1,255 +
1,260 + 1,270 +
1,290) ÷ 5). This would value the property at $
531,300 (420 ×
$1,265).
(b) Alternative fair values
 The highest value ($1,290) marginally distorts
the simple average
of the other values that are closer. Excluding $
1,290 from the
calculation in (ii) would give a slightly lower v
alue.
 If there is a trend in the reported sales prices a
value which reflects
that trend would be appropriate. For example,
if prices are
increasing, selecting the highest value.
 Similar properties would not all have the same
floor area. A
weighted average price per square metre could
be calculated by
dividing the sum of the total prices of recent pr
operty sales by the
sum of their floor areas.
7.7 Disclosure

The disclosure requirements of IFRS 13 are ver
y extensive and depend on
whether level 1, 2 or 3 inputs are being used in
the measurement techniques.
The disclosures required are of a quantitative a
nd qualitative nature.
 The standard also distinguishes between those
measurements that are of a
recurring nature against those of a non-
recurring nature.
 Disclosures include the following:
 reason for using fair value;
 the level of hierarchy used;
 description of techniques used for level 2 or 3
inputs;

for no ial assets, the highest and best use if different t
n- o the
financ entity’s use; and
 for level 3 inputs a reconciliation of the openin
g and closing
balances and any amounts included in profit or
loss for the period.
Commentary
The above is only a small selection of the requireme
nts; it is unlikely that the
exam will require extensive knowledge of these discl
osures.
Key points summary
Objectives of general purpose financial statements:
 to provide information about the financial position,
performance and changes
 to show the results of stewardship/accountability of
management.
There is only one underlying assumption of financial s
tatements – going concern.
There are two fundamental qualitative characteristics
– relevance and faithful
There are four enhancing characteristics – comparabil
ity, verifiability timeliness
and understandability.
Elements of financial statements are assets, liabilities,
equity, income and
expenses.
Recognition means incorporating in the financial state
ments an item that meets the
definition of an element and satisfies the recognition cr
iteria:
 reliable measurement.
Measurement involves assigning monetary amounts.
The definition of fair value is based on an exit price, ta
king the asset or liability
out of the entity, rather than an entry price.
Techniques used to estimate fair values should maximi
se observable inputs
wherever possible. IFRS 13 prescribes a hierarchy to i
ncrease consistency and
comparability in measurement.
Focus
 understand and interpret the Financial Reporti
ng Framework;
 explain the principle under which fair value is
measured according to IFRS;
 identify an appropriate fair value measurement
for an asset or liability in a
given circumstance.
Overview
Objective

To prescribe the bas
is for presentation o
f general purpose fin
ancial statements.
INTRODUCTI Objective
ON
 Scope
Objectiv
es
FI GE
N NE
 Com
A RA
ponents
N L
CI FE
A AT
L UR
S ES
T
A
T
E
M
E
N
T
S
Fair presentation and
compliance with IF
RS
 Going concern
STRUCTUR
Identification
E AND
financial
statements
CONTENT
SITI
FI
N ON
A
N
CI
A
ST L
AT
EM P
EN
T O O
F
C
O
M
P
R
E STA
ST TEM
AT H ENT
EM E OF
EN
T O N CHA
F P SI NGE
RO V S IN
FIT
E
EQUI
IN
OR TY
LO C
SS O
AN M
D O
TH E
ER
 Sep
ara
te
stat
em
ent

Str
uct
ure
NOTES TO
HE Definition
FINANCIAL Structure
STATEMENT
S
©2017 B
ecker Edu
cational
Develop
ment Cor
p. All rig
hts reser
ved.
0301
SESSION 3 – IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
1 Introduction
1.1 Objective

To prescribe the basis for presentation of general purpose financial
 the entity’s own financial statements of previous periods; and
 financial statements of other entities.
 To achieve this IAS 1 sets out:
 overall requirements for presentation of financial statements;


1.2 Scope
1.2.1
Definition
 “General purpose financial statements” means financial statements in
tended
1.2.2 Application of IAS 1
 To all financial statements of entities with a profit objective.
Commentary
General purpose financial statements may be presented separately or withi
n a
published document (e.g. annual report or prospectus). IAS 1 does not ap
ply to
 To consolidated accounts of groups and individual entities.
Commentary
Consolidated financial statements prepared in accordance with IFRSs may
be presented
with the financial statements of the parent company prepared under nation
al
requirements providing that the basis of preparation of each is clearly disc
losed in the
statements of accounting policies.
 To all types of commercial, industrial and business reporting entities,
whether
public or private including:
 banks and other financial institutions;
 insurance entities.
Commentary
IAS 1 prescribes only minimum content requirements.
 To public sector business entities with a profit objective.
Commentary
Not-for-profit and governmental organisations may apply IAS 1 by analogy.
2
Financial statements
2.1 Objectives

To provide information, useful to a wide range of users in making ec
onomic
decisions about:


financial performance (income/expenses including gains/losses);

Commentary
Because each of the primary financial statements presents a different aspec
t
of the same transactions or events, they are necessarily interrelated. For
example, sales of goods on credit terms may be reflected as:
–
– revenue in profit or loss;
– trade receivables in the statement of financial position; and
cash receipts from customers in the statement of cash flows.
 To show the results of management’s stewardship of the entity’s reso
urces.
2.2
Components

A complete set of financial statements includes:

 a statement of financial position;
 a statement of profit or loss and other comprehensive income;
 a separate statement of changes in equity;
 a statement of cash flows;
 significant accounting policies and other explanatory notes;
a statement of financial position as at the beginning of the earliest
comparative period when IAS 8 Accounting Policies, Changes in
Commentary
A complete set may be for annual or interim periods. Other titles may be
used for
financial statements (e.g. a “balance sheet” is a statement of financial pos
ition).
Commentary
Accounting policies may be presented as a separate statement or incorpora
ted within the
notes. The notes are an integral component and as important as the four
“primary”
financial statements. In particular, there are many items of information w
hich may be
presented either in a primary statement or in the notes. The notes also dis
close
information required under IFRS that is not presented elsewhere.
2.3 Supplementary statements

present additional information on a voluntary basis, for e
xample:

 environmental reports;
value added statements; and

a review by management (“management commentary”) including
financial and other information.
Commentary
Any such additional statements are outside the scope of IFRSs.
3 General features
Commentary
The general features of IAS 1 contribute to the qualitative characteristics o
f the
Conceptual Framework. For example, “comparative information” clearly
relates
to comparability and “materiality” is an indicator of relevance.
3.1 Fair presentation and compliance with IFRS

Financial statements should “present fairly” the entity’s financial pos
ition,
financial performance and cash flows.
 This is achieved by appropriate application of IFRSs, with additional
disclosure, where
necessary. (Compliance with IFRS must be disclosed – see later in th
is session.)
3.1.1 Fair presentation
 Fair presentation encompasses:
 the selection and application of appropriate accounting policies (see
next session);
Commentary
Inappropriate accounting treatments are not rectified by either:
–
– disclosure of accounting policies used; or
notes or explanatory material.
 the presentation of information (including accounting policies) beari
ng the
qualitative characteristics of financial statements;
 additional disclosure when information provided under the requireme
nts of
IFRSs is insufficient to be understandable by users.
Commentary
Conflicting national requirements do not justify a departure from Standard
s. Also,
if an accounting matter is not the subject of a specific IFRS management
must
consider the appropriateness of any proposed treatment in the light of the
Conceptual Framework, other accepted practices and other policies adopte
d.
3.1.2 Compliance with IFRS
 In extremely rare circumstances, if compliance would be misleading,
and therefore
departure from a standard is necessary to achieve a fair presentation,
disclose:
 that management has concluded that the financial statements fairly p
resent the
entity’s financial position, performance and cash flows;

that applicable IFRSs have been complied with in all material respect
s except
for the departure required to achieve a fair presentation;

the Standard from which the departure was necessary;

the nature of departure:
–
–
– the reason why that treatment would be misleading in the circumstan
ces; and
 the financial impact of the departure on profit or loss, assets, liabiliti
es, equity
and cash flows for each period presented.
Commentary
Such detailed disclosure makes it possible for a user of the financial state
ments to
determine how the financial statements would have been presented if the St
andard
had been applied.
 When assessing the need to depart from a specific requirement in a S
tandard
management should consider:
 why the objective of the requirement cannot be met; and
 how the particular circumstances differ from those of other entities
which adhere to the requirement.
Commentary
If there is a legitimate need to “override” a requirement of a standard, the
financial statements can still be described as complying with IFRS.
3.2 Going concern

It is management’s responsibility to:

assess the entity’s ability to continue as a going concern
(considering all information available for the foreseeable future);

prepare statements on a going concern basis (unless it is
financial probable that the entity will be liquidated/ cease trading);
 disclose material uncertainties which may affect the going concern c
oncept.
Commentary
If a company is not a going concern the financial statements should be
prepared on a break-up basis.
3.3 Accrual basis of accounting

Financial statements (except the statement of cash flows) are prepare
d under
the accrual basis of accounting.
 This means that assets, liabilities, equity, income and expenses are:

recognised when they occur (not as cash or its equivalent is
received or paid); and
 recorded in the accounting records and reported in the financial
statements of the periods to which they relate.

Expenses are recognised on the basis of a direct association between
:

costs incurred; and

earning of specific items of income.
3.4 Materiality and aggregation
Definition
Omissions or misstatements of items are material if they could, singly or toge
ther,
influence the economic decisions of users taken on the basis of financial state
ments.
Materiality depends on the size and nature of the item judged in the particular
circumstances of its omission. Both must be considered together when makin
g a
decision about the materiality of an item.
Commentary
Materiality provides that the specific disclosure requirements of IFRS need
not be met if a transaction is not material.
3.5 Offsetting

Assets and liabilities, also income and expenses, cannot be offset exc
ept
when required or permitted by an IFRS.
Commentary
legally enforceable right of offset and settlement is on a net basis. IAS 20
permits off-
 Offsetting, except when it reflects the substance of the transaction or
event,
impairs understanding of the transactions undertaken and hinders ass
essment
of future cash flows.
Commentary
Reporting of assets net of valuation allowances (e.g. obsolescence on inven
tories and
depreciation on plant and equipment) does not constitute offsetting.
 Some netting off of income with related expenses arising on the sa
me
transaction is permitted. For example:
 gains/losses on the disposal of non-current assets are reported after
deducting the carrying amount and selling expenses from the procee
ds;
 expenditure related to a recognised provision that is reimbursed under
a contractual
arrangement with a third party may be netted against the reimbursem
ent;
Commentary
For example, where a warranty provision on goods sold will be
reimbursed by the supplier/manufacturer.
 gain/losses relating to a group of similar transactions are reported
on a net basis.
Commentary
For example, gains and losses arising on foreign exchange
transactions and financial instruments held for trading. However,
such gain or loss should be reported separately if material.
3.6 Frequency of reporting

A complete set of financial statements (including comparative infor
mation)
should be presented at least annually.
 In exceptional circumstances where there is a change in the end of th
e reporting
period (so the statements are presented for a period other than a year)
disclose:

 the fact that comparative amounts presented are not entirely compar
able.
3.7
Comparative information

Numerical information in previous period should be disclosed unless
an IFRS
permits/requires otherwise.
Commentary
Two of each statement is therefore a minimum requirement.
 Where there is a restatement of prior period information a statement
of financial
position is also required for the beginning of the earliest comparative
period.
Commentary
That is, a minimum of three statements of financial position (and two of ea
ch of
the other statements). Restatement arises when, for example, an accountin
g
policy is applied retrospectively in accordance with IAS 8 (see Session 4).
 Narrative and descriptive information from previous period should be
included
when relevant to understanding current period’s financial statements.
 When the presentation/classification of items in the financial stateme
nts is amended:
 if practicable, reclassify comparatives and disclose nature, amount
and reason for reclassification;
 if impracticable, disclose reason for not reclassifying and the nature
of the adjustments that would otherwise have been made.
Commentary
IAS 1 defines a requirement as “impracticable” when an entity cannot app
ly
it after making every reasonable effort to do so.
 Additional disclosure is not required for periods before the minimum
comparative
requirements of IAS 1.
 If a retrospective change in accounting policy has a material effect on
the statement of
financial position at the beginning of the preceding period then that st
atement should
also be presented. Other than the specified required disclosures, addit
ional
information relating to this statement is not required.
3.8 Consistency of presentation

Presentation and classification of items in financial statements shoul
d be
retained from one period to the next.

A change is only allowed if it:
 will result in a more appropriate presentation (e.g. if there is a
significant change in the nature of operations); or
 is required by an IFRS.
Commentary
Consistency is an aspect of comparability. What is “appropriate” can be
considered
in terms of the qualitative characteristics of “relevance” and “faithful
representation”.
4 Structure and content
4.1 “Disclosure”

IAS 1 uses the term in a broad sense, encompassing items presented i
n each
financial statement as well as in the notes to the financial statements.
4.2 Identification of financial statements

Financial statements must be clearly identified and distinguished fro
m other
information in the same published document (e.g. annual report or pr
ospectus).
 IFRSs apply only to the financial statements and not to other informa
tion so
users must be able to distinguish information prepared using IFRSs f
rom
other information not subject to accounting requirements.
5 Statement of financial position
5.1 Current/non-current distinction
 Current and non-current assets and current and non-current liabilities
are presented as
separate classifications in the statement of financial position, unless a
presentation
based on liquidity order provides more relevant and reliable informati
on.
Commentary
This may be the case for financial institutions.
 If a classification includes amounts that will be settled or recovered i
n less
than 12 months and more than 12 months, the amount to be settled or
recovered after more than 12 months must be disclosed.
Commentary
Whichever presentation is adopted.
Illustration 1
1. Significant accounting policies (extract)
Presentation
Presentation in the consolidated statement of financial position
differentiates between current and non-current assets and
liabilities. Assets and liabilities are classified as current if they
are expected to be realized or settled within one year or within
a longer and normal operating cycle. Deferred tax assets
and liabilities as well as assets and provisions for pensions and
similar obligations are generally presented as non-current items.
The consolidated statement of income is presented
sing
the cost-of-sales method. Daimler Annual Report 2016
 A separate classification:
 distinguishes net assets that are continuously circulating as working
capital from those used in long-term operations;
 highlights assets expected to be realised within the current operating
cycle, and liabilities due for settlement in the same period.
5.2
Current assets

An asset is classified as “current” when it is:
 expected to be realised, or is intended for sale or consumption, in
the normal course of the operating cycle; or

held primarily for trading purposes; or

expected to be realised within 12 months after the reporting period; o
r
 cash or a cash equivalent which is not restricted in use.
Commentary
Only ONE of the above criteria needs to be satisfied.
 All other assets are classified as “non-current”.
Commentary
The term “non-current” can be applied to all tangible, intangible and fina
ncial
assets of a long-term nature. The use of alternative descriptions (e.g. “fixe
d” or
“long-term”) is not prohibited as long as the meaning is clear.
 There are two conceptual views of the term “current”:
(1) the liquidity approach; and
(2) the operating cycle approach.
5.2.1 Liquidity approach
 Classification of assets and liabilities into current and non-current is i
ntended to give
an approximate measure of liquidity (i.e. ability to carry on day-to-
day activities
without encountering financial stringencies).
Commentary
Criterion: Will items be realised/liquidated in the near future?
5.2.2
Operating cycle approach
 Classification is intended to identify those resources and obligations t
hat are
continuously circulating.
Commentary
Criterion: – Will items be consumed or settled within the normal operating
cycle?
 The same normal operating cycle must be applied to both assets and l
iabilities.
Commentary
A normal operating cycle is assumed to be 12 months if it is not clearly id
entifiable.
5.3 Current liabilities
5.3.1 Classification
 A liability is classified as “current” when:

it is expected to be settled in the normal course of the operating cycle
(e.g.
salary accruals); or

it is held primarily for trading; or
 it is due to be settled within 12 months after the reporting period
(e.g. income taxes); or

the entity does not have an unconditional right to defer settlement
for at least 12 months after the reporting period.

All other liabilities are classified as “non-current”.
5.3.2 Refinancing
 Financial liabilities due to be settled within 12 months after the repor
ting
period are classified as current even if:

 the original term was more than 12 months; and
refinancing on a long-term basis is agreed after the reporting period
(and before the financial statements are authorised for issue).
Commentary
Refinancing or rescheduling payments after the reporting period is a non-
adjusting event that may require separate disclosure in accordance with
IAS 10 “Events after the Reporting Period” (see Session 30).
 Where a borrower expects to exercise a right to “roll over” or otherwi
se refinance an
obligation for at least 12 months after the reporting period it is non-
current.
Commentary
But it is current if the borrower has no such right.
 A liability which is payable on demand (e.g. as a result of breaching
a loan
covenant) is classified as current.
Commentary
The borrower does not have an unconditional right to defer settlement for
a
period of at least 12 months. Rectification of a breach after the end of the
reporting period is another example of a non-adjusting event.
 If a lender allows a grace period ending at least 12 months after the re
porting period,
within which a breach can be rectified, the liability is non-current.
Commentary
A grace period is the period of time before the borrower must begin or res
ume repaying a
loan or debt. In substance the lender cannot demand immediate repayment
.
5.4 Overall structure

There is no prescribed format although the guidance on implementing
IAS 1, that is not
part of the standard, provides examples.
 There are two main types of format found in practice, both of which a
re consistent with
IAS 1. They are expansions of two different expressions of the accou
nting equation:
 Net assets (assets – liabilities ) = Capital
 Assets = Capital + Liabilities
Commentary
The example in the implementation guidance applies the current/non-
current
distinction in the format Assets = Capital + Liabilities.
5.5 Line items

Certain items must be shown in the statement of financial position. T
he requirements
for these “line items” are:
 Property, plant and equipment;
 Investment property;
 Intangible assets;
 Financial assets (excluding amounts under * items below);
 Investments accounted for under the equity method *;
 Biological assets;
 Inventories;
 Trade and other receivables *;
 Held for sale non-current assets and disposal groups;
 Cash and cash equivalents *;
 Trade and other payables *;
 Provisions *;
 Financial liabilities (excluding amount under ** items above);
 Current tax liabilities and assets;
 Deferred tax liabilities and assets;
 Liabilities included in held for sale disposal groups;
 Non-controlling interests (presented as part of equity);

Issued equity capital and reserves (attributable to owners of the parent).
Commentary
“Owners” are holders of instruments classified as equity. Note that the
order of presentation is not prescribed.
5.6 Subclassifications

Further subclassifications of the line items presented should be discl
osed
either in the statement of financial position or in the notes, in a mann
er
appropriate to the operations.
 The detail provided in subclassifications depends on specific require
ments of
other IFRSs and the size, nature and amounts involved. The disclosu
res will
vary for each item.
Commentary
Typically companies will present the main headings in the statement of
financial position and the detail in the notes to the financial statements.
5.6.1 Examples
 Property, plant and equipment by class (IAS 16).
 Receivables disaggregated between trade customers, related parties, p
repayments
and other amounts.
 Inventories classifications such as merchandise, production supplies (
“consumables”),
materials, work in progress and finished goods (IAS 2).
 Provisions for employee benefits separate from other provisions.
5.6.2 Capital disclosures
Commentary
The following disclosures may be given either in the statement of financial
position or the statement of changes in equity, or in the notes.
 Classes of equity capital and reserves (e.g. paid-in capital, retained e
arnings
and revaluation surplus).
 For each class of share capital:
 the number of shares authorised;

the number of shares issued analysed between fully paid and not full
y paid;

par value per share (or no par value);

a reconciliation of the number of shares outstanding at the
beginning and at the end of the period;

the rights, preferences and restrictions (including restrictions on the
distribution of dividends and capital repayments);

held by the entity
or by its subsidiaries or associates
entity (“treasury shares”); and

shares reserved for issue under options, including terms and amounts
.
 A description of the nature and purpose of each reserve within equit
y.
6 Statement of profit or loss and othe
r
comprehensive income
6.1 Presentation

All items of income and expense recognised in a period must be pres
ented either:
 in a single statement of profit and loss and other comprehensive inco
 me; or
in two statements:
 a statement displaying line items of profit or loss ; and
 a second statement beginning with profit or loss and
displaying items of other comprehensive income.

Both r loss and total comprehensive income must be attributed, separatel
rofit y, to:
 non-controlling interests; and
 owners of the parent.
Commentary
This disclosure is required in the relevant statement(s).
6.2 Profit or loss

The requirement for line items in the statement of profit or loss inclu
des:
 Revenue;
 Finance costs;
 Share of profits and losses of associates and joint ventures;
 Tax expense;
 A single amount for the total of discontinued operations (see IFRS 5)
 .
Profit or loss (i.e. total income less expenses, excluding the items
of other comprehensive income (see 6.3 below)).
Commentary
ALL items of income and expense in a period MUST be included in profit
or loss unless
an IFRS requires or permits otherwise. Classification as “extraordinary” i
s prohibited.
6.3 Other comprehensive income

Other comprehensive income relates to items of income and expense
that are not
recognised in profit or loss, they include:

 changes in revaluation surplus;
 changes in fair value of specified financial assets;
 actuarial gains and losses on defined benefit plans;
 certain exchange differences; and
the deferred tax implications related to these items.
 Each item of other comprehensive income is presented as a line item,
classified by
nature (including share of the other comprehensive income of associa
tes and joint
ventures accounted for using the equity method).
 are grouped between those that:


will not be reclassified to profit or loss subsequently; and
will be reclassified to profit or loss at a future point in time.
 Items of other comprehensive income may be presented either:


and shown separately for the two groups (see Illustration 3).
Commentary
The income tax relating to each item must be disclosed in the notes if not i
n
the statement of other comprehensive income.
Commentary
“Property, Plant and Equipment”), actuarial gains and losses on defined b
enefit plans
(IAS 19 “Employee Benefits”) or cumulative gains or losses on some finan
cial assets
designated as “fair value through other comprehensive income” (IFRS 9 “
Financial
Instruments”). See later sessions for these topics.
Illustration 2
Year ended 31 December 2017 Before-tax Tax (expense)
Net-of-tax
Items that will not be reclassified in profit or loss:
Gains of property revaluation
X (X) X
Investments in equity instrument (X) X (X)
s
Actuarial gains (losses) on defined benef
it
pension plans (X) X (X)
Share of other comprehensive income

of associates X X
_____
Items that may be reclassified subsequently
to
profit or loss:
Exchange differences on translating X (X) X
foreign operations
Cash flow hedges X (X) X
_____ _____ _____
Other comprehensive income X (X) X
Commentary
Comparative information must be disclosed similarly.
Illustration 3
Year ended 31 December 2017 2016
Items that will not be reclassified in profit or loss:
Investments in equity instruments
Gains of property revaluation (X) X
Actuarial gains (losses) on defined benefit pension plan X X
s X (X)
Share of other comprehensive income of associates X X
Income tax relating to items that will not be reclassified (X) (X)
_____ _____
X (X)
Items that may be reclassified subsequently to profit or
oss:
Exchange differences on translating foreign operation
s X (X)
Cash flow hedges X (X)
Income tax relating to items that may be reclassified
to profit or loss (X) X
Other comprehensive income for the year X (X)

Commentary
Using the format in Illustration 3, the income tax relating to each compone
nt must be
disclosed in the notes.
6.4 Material items

The nature and amount of material items of income or expense shoul
d be
disclosed separately. For example:

 write-downs of assets (and reversals thereof);
 costs of restructurings;
 asset disposals (e.g. items of property, plant and equipment);
 discontinued operations; and
legal settlements.
6.5 Analysis of expenses

An analysis of expenses must be presented using a classification base
d on either:

 nature; or
function.
Commentary
Although this can be performed either in the statement of profit or loss or
in
the notes the former is encouraged.
Nature of expenditure metho Function of expenditure meth
d od
 Expenses are aggregated by nature e.g.:  Classifies expenses as
 depreciation and amortisation  cost of sales
 materials consumed  distribution
 employee benefit expense.  administrative activities.
Advantages – nature Advantage – function
 Simple to apply in many small  Provides more relevant information t
o
 ties users
No arbitrary allocati
ons
 More objective Disadvantage – function
 Less judgement required.  Cost allocation can be arbitrary an
d
involves considerable judgement.
Commentary
The “function of expense” method is also called “cost of sales” method as
it
classifies expenses according to their function within cost of sales.
Illustration 4 – Alternative classifications
BY NATURE $ BY FUNCTION $
Revenue X Revenue X
Other income X Cost of sales (X)
Changes in inventories of
finished goods and work in Gross profit/(loss) X
progress X/(X)
Other income X
Work performed by entity and
capitalised
X Distribution costs (X)
Raw materials and consumables
(X) Administrative expenses (X)
used
Staff costs
(X)
Depreciation and amortisation
expense
(X)
Other expenses (X) Other expenses (X)
Finance cost (X) Finance cost (X)
Share of profit from associates X Share of profit from associates X
Profit before tax X Profit before tax X
Commentary
Entities classifying expenses by function must disclose additional informati
on on the
nature of expenses, including depreciation and amortisation expense and st
aff costs.
7 Statement of changes in equity
7.1 A separate statement

The following should be presented as a separate component of the fin
ancial statements:
 total comprehensive income for the period, showing separately the to
tal
amounts attributable to owners of the parent and to non-controlling i
nterests;
 for each component of equity, the effects of retrospective application
or
retrospective restatement (per IAS 8);
 the amounts of transactions with owners in their capacity as owners,
showing separately contributions and distributions; and

for eac f equity, a reconciliation between the carrying amount at
h comp the beginning and the end of the period, disclosing each change separ
onent ately.
Commentary
Components of equity include, for example, each class of contributed share
capital,
the accumulated balance of each class of other comprehensive income and
retained
earnings. Changes in equity reflect the increase or decrease in net assets.
Except for
changes resulting from transactions with owners, the overall change clearl
y
represents the total amount of income and expense, including gains and los
ses,
generated by the entity’s activities.
 An entity should also present, either in this statement or in the notes,
dividends
recognised as distributions to owners during the period, and the relate
d amount per share.
7.2 Structure

The requirements are most easily satisfied in a columnar format with
a separate column for
each component of equity. A full year’s comparative information mu
st also be shown.
Attributable to owners of the parent Non- Total
RevaluationRetainedcontrolling
ShareTranslation equity
capital reserve surplus earnings interests
$ $ $ $ $
Balance at 1 January X X X X X X
017
Change in accoun (X) (X)
ting policy
Restated balan X X X X X X
ce
Changes in equity for 2017
Issue of share capi X X
tal
Di (X)
vi
de
nd
s
Total comprehensive in
come X X X X X
for the year
Transfer to retained earnings
(X) X
Balance at 31 December X X X X X X
017
1 A column showing the sub-total of amounts attributable to equity holders of the parent s
hould also be included.
2 This analysis may alternatively be presented in the notes to the financial statements.
8 Notes to the financial statements
8.1 Definition

Information presented in addition to that in the “financial statements”

(i.e. statement of financial position, statement of profit or loss and ot
her
comprehensive income, statement of changes in equity and statement
of cash
flows”.
 Notes provide:
 information about items that do not qualify for recognition in the
financial statements;
 narrative descriptions and disaggregations (i.e. breakdowns) items
disclosed in the financial statements.
8.2 Structure

Objectives of notes to the financial statements:
 To present information about:

the basis of preparation of the financial statements;
 specific accounting policies selected and applied for
significant transactions and events.
 To disclose information required by IFRSs that is not presented else
where.
 To provide additional information which is not presented in the finan
cial
statements but is necessary for a fair presentation.
 Presentation:
 Notes should be presented in a systematic manner;
Commentary
This could be based on what is most relevant to an entity or on items that
share a measurement feature.
 Each item in each of the financial statements should be cross-
referenced
to notes.
0319
Illustration 5
Other operating expenses (extract)
€ million
(22)
(183) (171)
Expenses related to significant legal ris (262)
ks
(181)
(298)
Total (1,275) (934)
of which special items (247) (205)
2015 figures restated
Notes to the Consolidated Financial Statements of the Bayer Group 2016
 Normal order of presentation is as follows:
 Statement of compliance with IFRS.
Commentary
This means that all applicable rules in all relevant IFRSs must be complie
d with.
When an IFRS is adopted before its effective date, that fact should be discl
osed.
Illustration 6
The principal accounting policies of the company, which are set out below, comply with
International Financial Reporting Standards and Interpretations of such standards issued by
the
IFRS Interpretations Committee (IFRS) adopted by the International Accounting Standards
Board (IASB), as required.
Audited financial statement for the year ended 30 June 2014
Commentary
Note that the Interpretations Committee is now referred to as IFRS IC.
 Statement of measurement basis and accounting policies applied.
 Supporting information for items presented in each financial stateme
nt in the
order in which each line item and each financial statements is present
ed.

Other disclosures, including:
 contingencies, commitments and other financial disclosures; and
 non-financial disclosures.
8.3 Disclosure of accounting policies

Matters to be disclosed in respect of significant accounting policies:
 Measurement basis (or bases) used;
 Each specific accounting policy that is significant to a fair presentati
on.
 Disclosure is also required of those judgements management has ma
de in the
process of applying accounting policies that have the most significant
effect
on amounts recognised.
8.4 Estimation uncertainty

Further disclosure must be made about assumptions concerning the f
uture,
and other major sources of estimation uncertainty at the end of the re
porting
period, that have a significant risk of causing a material adjustment t
o the
carrying amount of assets and liabilities within the next financial yea
r.
 Disclosure includes information about the nature of assets and liabilit
ies and
their carrying amounts at the end of the reporting period.
Focus
 state the objectives of IFRS governing presentation of financial state
ments;
 describe the structure and content of statements of financial position
and statements of
profit or loss and other comprehensive income including continuing o
perations; and
 discuss “fair presentation” and the accounting concepts/principles.
Commentary
The contents of a statement of profit or loss, statement of other comprehen
sive income,
statement of financial position and statement of changes in equity are esse
ntial for the
preparation of consolidated financial statements (see Sessions 22-24). It is
also fundamental
that you can distinguish between non-current assets and current assets.
0321
Key points summary
IAS 1 prescribes the basis for presentation of general purpose financial state
ments.
A complete set of financial statements includes four statements and notes incl
uding a
summary of accounting policies.
Fair presentation is presumed by application of IFRSs, with additional disclo
sure (if
necessary).
Inappropriate accounting policies are not rectified by disclosure.
Going concern is presumed. Significant uncertainties must be disclosed.
Accrual basis is required (except for cash flow information).
Consistency must be retained unless a change is justified (must disclose).
Material items must be presented separately. Dissimilar items may be aggreg
ated (if
individually immaterial).
Assets and liabilities, and income and expenses may not be offset unless requi
red or
permitted by an IFRS.
Comparative information is required unless another Standard requires otherwi
se.
Statement of financial position must normally be classified (current vs non-
current).
Note disclosure must separate longer-term amounts.
All assets/liabilities other than current assets/liabilities are non-current.
Minimum items are specified for the face of the financial statements. Additio
nal line
items may be needed for fair presentation.
Disclosures are specified for issued share capital and reserves.
“Profit or loss” describes the bottom line of the statement of profit or loss.
All items of income/expense recognised in a period must be included in profit
or loss
(unless a Standard requires otherwise).
Other comprehensive income includes unrealised gains and losses (e.g. on rev
aluation).
Comprehensive income may be presented as one or two statements. Allocat
ions to
non-controlling interests and owners must be shown.
No item may be presented as “extraordinary” but material items may be discl
osed
separately.
A separate statement of changes in equity must include effects of retrospectiv
e
application and dividends recognised as distributions.
Overview
Objective

To explain the need
for guidance on rep
orting performance.
 To prescribe the crit
eria for selecting an
d changing accounti
ng policies.
 To account for chan
ges in accounting po
licies, changes in ac
counting
estimates and the co
rrection of errors.
REPORTING Disaggregat
PERFORMANion
CE
A E
C
C R
O R
U O
N
R
TI
N S
G
P
O
LI
C
IE
S
 Accounti
ng treatmen
 Accounti
t
ng treatment
 Consistency of
CHANGES IN
ACCOUNTING
POLICY
 Disclosure
eserved. 0401
SESSION 4 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
1 Reporting performance
1.1 Information

One of the objectives of financial statements is to allow users to make economic
decisions. Such decisions require an evaluation of the entity’s ability to generate cash
and cash equivalents and of the timing and certainty of their generation.
 Information about performance, in particular profitability, is required:
 to assess potential changes in economic resources in the future;
 to predict the capacity to generate cash flows from existing resources; and
 to form judgements about the effectiveness of employing
additional resources.
 Information about variability of performance is important in this respect.
1.2
Disaggregation

In order to make economic decisions, users of financial statements need to
understand the make-up of figures in as much detail as possible. There is
therefore a tendency in financial reporting towards providing information
about the composition of figures.
Commentary
Information may be provided in the statements or in the notes.
 For example:
 Disclosure of material and unusual items which are part of ordinary activities;
 Information on discontinued operations;
 Segment reporting.
Commentary
Users can use such information to make better quality forecasts.
2 Accounting policies
2.1 Definition

Accounting policies are specific principles, bases, conventions, rules and practices
adopted in preparing and presenting financial statements.
2.2 Selection and application

Applicable IFRSs must be applied considering any relevant implementation
guidance issued by the IASB.
Commentary
Accounting policies set out in IFRSs need not be applied ONLY when the
effect of applying them is immaterial.
 If there is no applicable IFRS, management uses its judgement to develop and apply an
accounting policy resulting in information with the qualitative characteristics of:
 relevance; and
 reliability;
 faithful representation;
 substance over form;
 neutrality;
 prudence; and
 completeness.
 In making such judgements management should consider:
 IFRSs dealing with similar and related transactions; then

the Conceptual Framework; also
 recent pronouncements of other standard-setting bodies that use a similar
conceptual framework; and

accepted industry practice.
Commentary
This may be thought of as a “GAAP hierarchy”. An accepted industry practice that conflicts
with any IASB pronouncement (including the Framework) cannot be judged suitable.
Illustration 1
Kitty has recently purchased a Van Gogh painting to display in their client reception
area, with the hope it will lead to more contracts and that the painting will appreciate in
value.
Investment Property does deal with a particular type of asset that is held for capital
appreciation.
It would therefore seem appropriate to use IAS 40 as justification to value the painting
at fair value at the end of each reporting period.
more appropriate. Whereas, if Kitty was a retail art gallery then IAS 2 Inventory would
be more appropriate.
2.3 Consistency of accounting policies

Accounting policies must be applied consistently for similar items unless an
IFRS requires or permits categorisation of items.
 When categorisation is required or permitted the most appropriate accounting
policy is selected and applied consistently to each category.
Illustration 2
IAS 2 Inventories requires that inventory be valued at lower of cost and net realisable
value. In identifying cost it allows alternative cost formulas; first-in first-out and
weighted average. The same formula must be applied to similar items of inventory, but
a different formula can be applied to a different classification of inventory.
3 Changes in accounting policy
3.1 What?

to newly occurring items
(or items that were previously immaterial) is not a change.

A change in accounting policy occurs if the principles, bases, conventions
and/or practices applied in a previous period are changed.

Such a change can affect the way an item is recognised, measured, presented
and/or disclosed.
Examples
 Changing the presentation of profit or loss items from the nature of expenses
method to the function of expense method is a change of accounting policy.
 Changing the cost formula for the measurement of inventory to the first-in, first-
out (FIFO) method from a weighted average method.
Commentary
Adopting the revaluation model of IAS 16 “Property, Plant and Equipment”
where the cost model has been followed previously is another example of a
change of accounting policy. However, it is accounted for as a revaluation
under IAS 16 and not as a change in accounting policy under IAS 8.
Illustration 3
A carpet retail outlet sells and fits carpets to the general public. It recognises revenue
when a carpet is fitted, which is six weeks after the purchase of the carpet, on average.
It then decides to sub-contract out the fitting of carpets to self-employed fitters. It now
recognises revenue at the point-of-sale of the carpet.
This is not a change in accounting policy as the carpet retailer has changed the way
that the carpets are fitted. Therefore there would be no need to retrospectively change
prior period figures for revenue recognised.
0404
3.2 When?

The same accounting policies must be applied within each period and from
one period to the next unless a change:

is required by an IFRS; or
Commentary
This is a mandatory change.
 would result in the financial statements providing more relevant and
reliable information.
Commentary
This is a voluntary change.
3.3
How?
3.3.1 New IFRS
 If a new IFRS is issued the transitional provisions of that standard will be
applied to any change of accounting policy.
Commentary
For example, when IAS 23 “Borrowing Costs” was revised in 2007 amendments
were generally to be applied prospectively (see s.4.3).
 If a new IFRS does not have transitional provisions, or the change in policy is
Commentary
Early application of an IFRS is not a voluntary change.
3.3.2 Definition
 A “prior period adjustment” is an adjustment to reported income in the financial
statements of an earlier reporting period.
 Although retained earnings are affected, income in the current period is not affected.
Commentary
Although this term is not defined in IFRS it is widely used accounting term.
The most common reasons for making prior period adjustments are changes
to accounting policy (as in this section) and material errors (see s.5).
3.3.3 Retrospective application
 Retrospective application means applying a new accounting policy to transactions, other
events and conditions as though that policy had always been applied.
 balance of each affected component of equity is adjusted for the earliest prior
period presented and the comparative amounts disclosed as if the new policy had always
been applied.
 the effects of a change in policy to prior periods IAS 8
allows the change to be made from the earliest period for which retrospective
application is practicable.
Commentary
Under IAS 8 impracticable means that the entity cannot apply a requirement
after making every reasonable effort to do so.
3.4 Disclosure

Nature of the change in policy.
 For the current period and each prior period presented the amount of the
adjustment for each line item affected within the financial statements.
 The amount of the adjustment relating to periods before those presented.
 If retrospective restatement is not practicable:
 the circumstances that led to the existence of the condition; and
 a description of how and from when the change has been applied.
Additionally
New Standard Voluntary change
Title of new Standard Reasons why the new policy
or Interpretation provides more reliable and
relevant information
Worked example 1
Jethro changed its accounting policy for inventory in 2017. Prior to the change
inventory had been valued using the weighted average method, but it was felt that in
order to match current practice and to make the financial statements more relevant and
reliable that a first-in first-out (FIFO) valuation model was more appropriate.
The effect of the change on the valuation of inventory was as follow:
 31 December 2015 – increase of $12 million
Profit or loss under the weighted average valuation model are as follows:
2017 2016
$m $m
Revenue 324 296
(173) (164)
Cost of sales –––– ––––
151 132
Gross profit (83) (74)
Expenses –––– ––––
68 58
Profit –––– ––––
Retained earnings at 31 December 2015 were $423 million.
Required:
Present the change in accounting policy in the profit or loss and produce an
extract of the statement of changes in equity in accordance with IAS 8.
Worked solution 1
Profit or loss under the FIFO valuation model are as follows:
2017 2016
(restated)
$m $m
Revenue 324 296
(164) (157)
Cost of sales –––– ––––
160 139
Gross profit (83) (74)
Expenses –––– ––––
77 65
Profit –––– ––––
Retained Retained
earnings earnings
(original)
$m $m
At 1 January 2016 423 423
Change in inventory valuation policy 12
––––
435 ––––
At 1 January 2016 (restated) 65
Profit for 2016 –––– 58
500 ––––
77 481
At 31 December 2016 –––– 68
Profit for 2017 577 ––––
–––– 549
At 31 December 2017 ––––
Commentary
The cumulative effect on the retained earnings balance at 31 December 2017
is $28 million; of this amount $12 million has been adjusted against the
opening retained earnings at 1 January 2016 and the 2016 cost of sales is
reduced by $7 million and for 2017 it is reduced by $9 million.
The retained earnings (original) column shows what would have been
presented in 2016 financial statements if the change in policy had not
occurred. It is shown for comparison purposes.
Activity 1
has recently decided to adopt the provisions of IAS 38 Intangible Assets, for the year
ended 31 December 2017. Amory has been advised that the expenditure previously
capitalised does not qualify for capitalisation under the recognition criteria set out in
the standard.
The note to the accounts for the year ended 31 December 2016 in respect of the
deferred development expenditure was as follows:
Balance at 1 January 2016 1,000
Additions 500
Amortisation (400)
Balance at 31 December 2016 1,100
During the year ended 31 December 2017, the company has expensed all expenditure
in the period on projects, in respect of which, expenditure had previously been
capitalised.
Activity 1 (continued)
The following are extracts from the draft accounts for the year ended 31 December
2017.
Statement of profit or loss 2017 2016
(as previously
$000 $000
Revenue
Expenses (800) (680)
Profit for the year 400 420
Statement of changes in equity (extract) $000 $000

Balance as at 1 January 2017 3,000 2,580
Balance as at 31 December 2017 3,400 3,000
Required:
Show how the statement of profit or loss and statement of changes in equity
would appear in the financial statements for the year ended 31 December 2017
when the change in accounting policy is applied retrospectively.
Proforma solution

(As restated)
$000 $000
Revenue
Expenses
the
Balance as at 1 January 2017
As stated
period
the
at
4 Changes in accounting estimates
4.1 Definition
 A change in accounting estimate is an adjustment to the carrying amount
of an asset (or liability) that results from a reassessment of its expected future
benefits (and obligations).
 A change in accounting estimate occurs when it is determined that an estimate
previously used is incorrect.
Commentary
For example, the useful life of a non-current asset that is used to calculate
the depreciation of the asset is an estimate. A decrease in useful life from 10
years to 8 years would be a change in accounting estimate. In contrast, a
change in accounting policy would be moving from non-depreciation of
assets (which is not permitted under IFRS) to depreciating them.
 An estimate may have to be revised:
 if changes occur regarding the circumstances on which the estimate was based;
 as a result of new information, more experience or subsequent developments.
Commentary
Such changes are not therefore classified as correction of errors.
4.2 Examples

Many items recognised in the financial statements must be measured with an
element of estimation attached to them.
 Receivables may be measured after making an allowance against
those receivables for irrecoverable debts;
 is measured at lower of cost or net realisable value but
must provide for obsolescence;

Contingent Assets by its very nature may be an estimation of future
economic benefits to be paid out;
 Non-current assets are depreciated, the expected pattern of
consumption and useful life are estimates.
4.3 Accounting treatment

The effect of a change in estimate is recognised prospectively (i.e. by
including in the current and future (where relevant) periods profit or loss).
Commentary
A change in estimate is not an error or a change in accounting policy and
therefore does not affect prior period financial statements.
 A change in estimate that affects the measurement of assets or liabilities is
recognised by adjusting the carrying amount of the asset or liability.
 is to the statement of profit or loss and
comprehensive income in the period in which the estimate is changed.
Commentary
Under certain GAAPs reversals of provisions for items of expenditure are
accounted for as income. Under IFRS, reversals MUST be set off against the
relevant expense line item.
Illustration 4
Burden buys a machine for $100,000. It has an estimated useful life of 10 years and
the residual value is $nil. The annual depreciation is therefore $10,000, calculated as:
($100,000 – $0) ÷ 10 years = $10,000
After two years, the asset has a carrying amount of $80,000. Burden reassesses the
useful life of the machine as only four years remaining.
The annual depreciation charge from year three onwards will be $20,000, calculated as:
($80,000 – $0) ÷ 4 years = $20,000
5 Errors
5.1 Definition

Prior period errors are omissions from, and misstatements in, the financial
 was available; and
 could reasonably be expected to have been obtained,
when those prior period financial statements were authorised for issue.
 Examples include:
 mathematical mistakes;
 mistakes in applying accounting policies;
 misinterpretation of facts;
 fraud;
 oversights.

Material prior period errors are corrected retrospectively in the first set of financial
statements authorised for issue after their discovery by restating comparative
information for the prior period(s) presented in which the error occurred.
Commentary
So the current period financial statements are presented as if the error had
been corrected in the period in which it was originally made. However, the
financial statements of prior periods are not reissued.
 If the error occurred before the earliest prior period presented, the opening balances
of assets, liabilities and equity is restated for the earliest prior period presented.
Commentary
If it is not practicable to determine the period-specific effects of an error on
comparative information the opening balances are restated for the earliest
period practicable.
Illustration 5
In the year ended 31 December 2017 a fraud of $12 million is identified. Of this
amount $2 million relates to 2017, $3 million to 2016, $4 million to 2015 and $3
million to 2014.
The opening retained earnings as at 1 January 2016 will be adjusted by the sum of the
errors for 2014 and 2015 of $7 million; profit for 2016 will be adjusted for the error of
$3 million and the $2 million relating to 2017 will be reflected in that year’s profit or
loss.
The fraud is a prior period error, not a change in estimate or change in accounting
policy; although the treatment of the fraud (i.e. retrospective adjustment) is the same
that is applied to a change in accounting policy.
Key points summary
Changes in accounting policies are not changes in estimates.
Changes in accounting estimates are not corrections of errors.
A change in policy may be required by a Standard or voluntary.
A change in estimate is accounted for prospectively.
Changes in accounting policy are accounted for retrospectively unless a new/revised
standard specifies otherwise (in transitional provisions).
The correction of prior period errors is accounted for retrospectively.
Retrospective application means:
period presented; and
 restating comparative amounts.
Focus
 items requiring separate disclosure, including their accounting
treatment and required disclosure;
 recognise the circumstances where a change in accounting policy is justified;

define prior period adjustments and “errors” and account for the correction of
errors and changes in accounting policies.
Activity solution
Solution 1 – Change in accounting policy

(As restated)
$000 $000
Revenue 1,200 1,100
Expenses (800) (780)

at
As previously stated 3,000 2,580
Prior period adjustment (1,100) (1,000)
1,900 1,580
Balance as at 31 December 2017 2,300 1,900
Notes
1 Amory amortised $400,000 in 2016 but spent $500,000. The policy would have been to write
off the amount expenditure directly to profit or loss, therefore last year’s figures need to be
adjusted for the additional $100,000 expense.
The adjustment against last year’s profit or loss ($100,000) has the effect of restating it to what
it would have been if the company had been following the same policy last year. This is
important because the statements of profit or loss (and other comprehensive income) as
presented should be prepared on a comparable basis.
2 The balance left on the deferred expenditure account at the end of the previous year
($1,100,000) is written off against the retained earnings that existed at that time.
3 This $1,100,000 is made up of an amount that arose last year (the difference between the
amount spent ($500,000) and the amount amortised ($400,000), and the balance that existed at
the beginning of the previous year ($1,000,000).
These amounts are written off against last year’s profit and the opening balance on the retained
earnings last year, respectively.
©2017 Becker Educational Dev
elopment Corp. All rights reser
ved.
0414
Overview
Objective

To understand the princ
iples that govern the rec
ognition of revenue fro
m
contracts with customer
s.
PRINCIPLES
OF IF
REVENUE RS
15
RECOGNITI Contracts with
ON customers
 Performance obli
gations
 Transaction price
 Recognise revenue
 P
rinci
PER pal
FOR R v
MA E  Repu
NCE C rchase
O
OBL G agreemen
IGA N ts
TIO I  Bill-
NS T and-hold
I
O
N

O
F

C
O
N
T
R
A
C
T

C
O
S
T
S

 Satisfi c
ed over mental
 At 
oint in
 Presenta
C
tion o

n
C s
o i
s g
t n
s m
e
n
t
t
o s

f
u
l
f
i
l
c
o
n
t
r
a
c
t
M VAR
E
A IAB
S LE
U CON
R SID
I ERA
N
G TIO
N
P
R
O
G
R
E
S
S
T
O
W
A
R
D
S
C
O
M
P
L
E
LES
TAX

 Estim

ation

 
Oper
ation
©2017 Becker Educational Develo 0501
pment Corp. All rights reserved.
SESSION 5 – IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
1 Principles of revenue recognition
1.1 IFRS 15
The Conceptual Framework (see Session 2) introduced “income” as increases in eco
nomic
benefits (i.e. inflows or enhancements of assets or decreases of liabilities) that result i
n
increases in equity other than those that relate to contributions from equity participant
s.
IFRS 15 Revenue from Contracts with Customers defines revenue as income that ari
ses in
the course of ordinary activities.
This standard outlines the five steps of the revenue recognition process:
Step 1 Identify the contract(s) with the customer
Step 2 Identify the separate performance obligations
Step 3 Determine the transaction price
Step 4 Allocate the transaction price to the performance obligations
Step 5 Recognise revenue when (or as) a performance obligation is satisfied
The core principle of IFRS 15 is that revenue should be recognised from the transfer
of goods or services to a customer in an amount that reflects the consideration that the
seller expects to be entitled to receive in exchange for the goods or services.
1.2
Identify contracts with customers
Definitions
Contract – an agreement between two or more parties that creates enforceable rights
and obligations. Contracts can be written, verbal, or implied based on customary
business practices.
Customer – a party that has contracted with a seller to obtain goods or services in
exchange for consideration.
The revenue recognition principles of IFRS 15 apply only when a contract meets all
of
the following criteria:
 the parties to the contract have approved the contract;
 each party’s
rights regarding the goods or services in the contract can be identi
fied;
 the payment terms can be identified;
 the contract has commercial substance (i.e. the risk, timing or amount of
future cash flows is expected to change as a result of the contract); and

it is pr
obable
that the
entity
will col
lect the
conside
ration
due un
der the
contrac
t.
Commentary
Consideration may not be the same as the transaction price due to discounts
and bonuses.
 The criteria are assessed at the beginning of the contract and, if the contract
meets
them, they are not reassessed unless there is a significant change in circumst
ances
that make the contract rights and obligations unenforceable. A contract that
does
not initially meet the criteria can be reassessed at a later date.
1.3 Identify performance obligations
Definition
Performance obligation – a promise to transfer to a customer:
 a good or service (or bundle of goods or services) that is distinct; or
 a series of goods or services that are substantially the same and are
transferred in the same way.
 If a promise to transfer a good or service is not distinct from other goods an
d
services in a contract, the goods or services are combined into a single
performance obligation.
Key point
 A good or service is distinct if both of the following criteria are met:
1. The customer can benefit from the good or service on its own or when
combined with the customer’s available resources; and
2. The promise to transfer the good or service is separately identifiable from
other goods or services in the contract.
Commentary
A transfer of a good or service is separately identifiable if the good or service:
 is not integrated with other goods or services in the contract;
 does not modify or customise another good or service in the contract; or
 does not depend on or relate to other goods or services promised in
the contract.
Illustration 1 Identify Performance Obligations (I)
Tanner is building a multi-unit residential complex. It enters into a contract with a
customer for a specific unit that is under construction. The goods and services to be
provided in the contract include procurement, construction, piping, wiring, installatio
n
of equipment and finishing.
Analysis
Although the goods and services provided by the contractor are distinguishable, they
are not distinct in this contract because the goods and services cannot be separately
identified from the promise to construct the unit. Tanner will integrate the goods and
services into the unit, so all the goods and services are accounted for as a single
performance obligation.
0503
Illustration 2 Identify Performance Obligations (II)
A software developer, Jackson, enters into a contract with a customer to sell a packag
e
of benefits, including software license, installation, software updates and technical
support for five years. Jackson also sells the license, installation, updates and technic
al
support separately. Jackson determines that each good or service is separately
identifiable because the installation does not modify the software and the software is
functional without the updates and technical support.
Analysis
The software is delivered before the installation, updates and technical support and is
functional without the updates and technical support, so the customer can benefit fro
m
each good or service on its own. Jackson has also determined that the software licens
e,
installation, updates and technical support are separately identifiable. On this basis,
there are four performance obligations in this contract:
1. Software license
2. Installation service
3. Software updates
4. Technical support
1.4 Determine the transaction price
Definition
Transaction price – the amount of consideration to which an entity is entitled in
exchange for transferring goods or services.
 The transfer price does not include amounts collected for third parties (i.e.
sales taxes).
 The effects of the following must be considered when determining the
transaction price:
 The time value of money;
Commentary
The time value of money does not need to be considered if the length of the
contract is less than one year.
 The fair value of any non-cash consideration;
 Estimates of variable consideration;
 Consideration payable to the customer.
Commentary
Consideration payable to the customer is treated as a reduction in the transaction
price unless the payment is for goods or services received from the customer.
0504
Activity 1 Time-value of Money
On 1 January 2017, SDF sold furniture to a customer for $4,000 with three years’
interest-free credit. The customer took delivery of the furniture on 1 January 2017.
The $4,000 is payable to SDF on 31 December 2019. An appropriate discount rates i
s
8%.
Required:
Determine the transaction price for the sale of the furniture and calculate the
interest income to be recognised over the three years.
1.5 Allocate the transaction price

The transaction price is allocated to all separate performance obligations in
proportion to the stand-alone selling price of the goods or services.
Definition
Stand-alone selling price – the price at which an entity would sell a promised good o
r
 The best evidence of stand-alone selling price is the observable price of a
good or service when it is sold separately.
 It should be estimated if it is not observable.
The allocation is made at the beginning of the contract and is not adjusted for
subsequent changes in the stand-alone selling prices.
Activity 2 Allocating Transaction Price
Jackson enters into a contract with a customer to transfer a software license, perform
installation, and provide software updates and technical support for five years in
exchange for $240,000. Jackson has determined that each good or service is a separat
e
performance obligation. Jackson sells the license, installation, updates and technical
support separately, so each has a directly observable stand-alone selling price:
$000
Software license 150
Installation service 60
Software updates 40
50
Technical support ––––
300
––––
Required:
Allocate the $240,000 transaction price to the four performance obligations.
al Development Corp. All
rights reserved.
0505
1.6 Recognise revenue

Recognise revenue when (or as) a performance obligation is satisfied by
transferring a promised good or service (an asset) to the customer.
 An asset is transferred when (or as) the customer gains control of the asset.
 The performance obligation will be satisfied over time or at a point in time.
2 Performance obligations
2.1 Satisfied over time

A performance obligation is satisfied over time if one of the following
criteria is met:
 The customer receives and consumes benefits of the goods or
services while the contract is being fulfilled (e.g. service contracts,
such as a cleaning service or a monthly payroll processing service).
 The performance creates or enhances an asset that the customer
controls during that creation or enhancement.
 The performance does not create an asset which the supplier has an
alternative use for and the supplier has an enforceable right to
payment for performance completed to date.
 Revenue is recognised over time by measuring progress towards complete
satisfaction of the performance obligation.
 Output methods and input methods (see s.3) can be used to measure progres
s
towards completion.
Commentary
A single method of measuring progress should be applied to each
performance obligation and the same method should be used for similar
performance obligations in similar circumstances.

Revenue for a performance obligation satisfied over time can only be
recognised if progress can be reasonably estimated.
 Revenue is recognised to the extent of costs incurred if there is no reasonabl
e
estimate of progress but costs are expected to be recoverable.
2.2 Satisfied at a point in time

A performance obligation that is not satisfied over time is satisfied at a point
in time.
 Revenue should be recognised at the point in time when the customer obtain
s
control of the asset.
0506
 Indicators of the transfer of control include:
 the customer has an obligation to pay for an asset;
 the customer has legal title to the asset;
 the seller has transferred physical possession of the asset;
 the customer has the significant risks and rewards of ownership;
 the customer has accepted the asset.
Illustration 3 Satisfaction of Performance Obligations (I)
customer for a specific unit that is under construction. The contract has the following
terms:

The customer pays a non-refundable security deposit upon entering the
contract;

The customer agrees to make progress payments during construction;
 If the customer fails to make the progress payments, Tanner has the right to
all of the contract consideration if it completes the unit;

The terms of the contract prevent Tanner from directing the unit to another
customer.
Analysis
This performance obligation is satisfied over time because:
 The unit does not have an alternate future use to Tanner because it cannot be
directed to another customer;

Tanner has a right to payment for performance to date because it has a right
to all of the contract consideration if it completes the unit.
Illustration 4 Satisfaction of Performance Obligations (II)
customer for a specific unit that is under construction. The contract has the following
terms:

The customer pays a deposit upon entering the contract that is refundable if
Tanner fails to complete the unit in accordance with the contract;

The remainder of the purchase price is due upon completion of the unit next
year;

If the customer defaults on the contract before completion, Tanner only
Analysis
This performance obligation is satisfied at a point in time because it is not a service
contract, the customer does not control the unit as it is created, and Tanner does not
have an enforceable right to payment for performance completed to date (i.e. Tanner
only has a right to the deposit until the unit is completed).
2.3 Statement of financial position presentation

A contract asset or contract liability should be presented in the statement of
financial position when either party has performed in a contract.
Definition
Contract liability – an obligation to transfer goods or services to a customer for whic
h
the seller has received consideration or consideration is due (i.e. the customer pays or
owes payment before performance).
Contract asset – a seller’s right to consideration in exchange for goods or services
transferred to the customer (i.e. performance before the customer pays).

separately as a trade receivable in accordance with IFRS 9 Financial Instru
ments.
Commentary
A right to consideration is unconditional if only the passage of time is
required before payment is due.
Illustration 5 Contract Liability and Receivable
On 1 January Anderson enters into a non-cancellable contract with Tanner for the sal
e
of an excavator for $350,000. The excavator will be delivered to Tanner on 1 April.
The contract requires Tanner to pay the $350,000 in advance on 1 February and Tann
er
makes the payment on 1 March.
Required:
Prepare the journal entries that would be used by Anderson to account for this
contract.
Solution
On 1 February, Anderson recognises a receivable because it has an unconditional righ
t
to the consideration (i.e. the contract is non-cancellable):
Dr Receivable 350,000

Cr Contract liability 350,000
On 1 March, when Tanner makes the payment Anderson recognises the cash
collection:
Dr
Cash 350,000
Cr
Receivable 350,000
On 1 April, Anderson recognises revenue when the excavator is delivered to Tanner:
Dr Contract liability 350,000
Cr Revenue 350,000
0508
Illustration 6 Contract Asset and Receivable
On 1 January Anderson enters into a contract with Tanner for the sale of two
excavators for $350,000 each. The contract requires one excavator to be delivered on
1
February and states that the payment for the delivery of the first excavator is
conditional on the delivery of the second excavator. The second excavator is delivere
d
on 1 June.
Required:
Prepare the journal entries that would be used by Anderson to account for this
contract asset.
Solution
On 1 February, Anderson recognises a contract asset and revenue when it satisfies the
performance obligation to deliver the first excavator:
Dr Contract asset 350,000

Cr Revenue 350,000
A receivable is not recognised on 1 February because Anderson does not have an
unconditional right to the consideration until the second excavator is delivered.
On 1 June, Anderson recognises a receivable and revenue when it satisfies the
performance obligation to deliver the second excavator:
Dr Receivable 700,000

Cr Contract asset 350,000
Cr Revenue 350,000
3 Measuring progress towards completio
n
3.1 Output methods

Output methods recognise revenue on the basis of the value to the customer
of the goods or services transferred to date relative to the remaining goods o
r
services promised.
 Examples of output methods include:
 Surveys of performance completed to date;
 Appraisals of results achieved;
 Milestones achieved;
 Time elapsed;
 Units produced or delivered.
Commentary
The value of “work certified” to date may be a measure used to identify the degre
e
of completion and therefore revenue to be recognised in profit or loss.
 Output methods should only be used when the output selected represents the
performance towards complete satisfaction of the performance obligation.
Commentary
A disadvantage of output methods is that the outputs used may not be available or
directly observable. In this case, an input method may be necessary.
3.2 Input methods

Input methods recognise revenue on the basis of the efforts or inputs to satisf
y the
performance obligation relative to the total expected inputs.
Commentary
A disadvantage of input methods is that there may not be a direct relationship
between the inputs and the transfer of control of goods and services to a customer
.
 Examples of input methods include:
 Labour-hours worked;
 Costs incurred;
 Time elapsed;
 Resources consumed.
 Revenue can be recognised on a straight-line basis if inputs are used evenly
throughout the performance period.
Illustration 7 Straight-line Basis
A health club enters into a contract with a customer for one year of unlimited health
club access for $75 per month. The health club determines that the customer
simultaneously receives and consumes the benefits of the club’s performance, so the
contract is a performance obligation satisfied over time. Because the customer benefi
ts
from the club’s services evenly throughout the year, the best measure of progress
towards complete satisfaction of the performance obligation is a time-based measure.
Revenue will be recognised on a straight-line basis throughout the year at $75 per
month.
3.3 Cost recognition

Costs are recognised in the same proportion that applies to the recognition o
f
revenue, except for the following:
 Abnormal costs (e.g. to rectify an error in the production or service
process) are expensed as incurred; and
 Input costs that are not proportionate to the construction process.
 If an incurred cost is not proportionate to the progress in the satisfaction of
the performance obligation that cost shall be excluded when measuring the
progres contract. A cost that is not proportionate to the progress
s of the towards completion is excluded from the measurement of progress.
 In this situation revenue will be recognised to the extent of the actual cost
incurred in respect of that component.
Illustration 8 Non-proportionate costs
Jethro is constructing a property for a customer for a contract price of $4 million. Th
e
construction of the property is a single performance obligation satisfied over time.
The total costs of the contract are expected to be $3 million, of which $1 million is fo
r
the elevators to be included in the property and $2 million for all other contract costs.
The elevator is a distinct component of the contract and the customer obtains control
of
the elevator before the property itself has been completed.
Costs incurred to date are $1.4 million of which $1 million is for the elevator and
$400,000 for other contract costs. Revenue is recognised based on the input costs
incurred to date.
Jethro will recognise revenue as follows:
$1,000,000
/2,000 × ($4m – $1m)) $600,000
Total revenue recognised is $1.6 million with costs recognised of $1.4 million.
Activity 3 Output and Input Methods
Tanner is building a multi-unit residential complex. Last year, Tanner entered into a
contract with a customer for a specific unit that is under construction. This three-year
contract is expected to be completed next year. Tanner has determined the contract to
be a single performance obligation satisfied over time. Tanner gathered the following
information for the contract during the current year (i.e. second year of the contract).
Tanner – year ended 31 December
$000
Costs to date 1,500
Future expected costs 1,000
Work certified to date 1,800
Expected sales value 3,200
Revenue recognised in earlier years 1,200
Cost recognised in earlier years 950
Required:
Calculate the figures to be recognised in the statement of profit or loss in respect
of revenue and costs for the year ended 31 December on both:
(i) a sales basis (an output method); and
(ii) a cost basis (an input method).
0511
Proforma solution
(a) Total expected profit
$000
Revenue
———
Total expected profit
———
(b) Percentage completion
Sales basis
Cost basis
(c) Revenue and costs for the year
To date
Prior
year $000
year $000
Revenue
Cost of sales
——
Profit
——
Activity 4 Statement of Financial Position Presentation
Following on from Activity 3:
The contract is expected to take three years to complete and the customer has
contracted to pay $1,000 at the end of each of the first two years and the balance on
completion.
Activity 3 shows the position at the end of the second year; a contract asset of $200 w
as
recognised at the end of the first year. The customer paid the first two instalments
when they fell due.
Required:
Determine the figures to be included in the statement of financial position at the
end of the second year using both:
(i) a sales basis; and
(ii) a cost basis.
rights reserved.
0512
4 Recognition of contract costs
4.1 Incremental costs of obtaining a contract
Definition
Incremental costs of obtaining a contract – costs to obtain a contract that would no
t
have been incurred if the contract had not been obtained.
 These costs are recognised as an asset if the seller expects to recover them.
Commentary
Such costs (e.g. a sales commission) are capitalised when incurred and amortised
on
a systematic basis consistent with the transfer of the goods or services to the custo
mer.
 Costs to obtain the contract that would have been incurred regardless of
whether the contract was obtained are charged to expense when incurred.
Illustration 9
installation, and provide software updates and technical support for three years in
exchange for $240,000. To win this contract, Jackson incurred the following costs:
$000
Legal fees for drawing up the contract 10
Travel costs to deliver proposal 20
12
Commissions to sales employee ––––
42
Total ––––
Required:
Determine which costs should be recognised as an asset and which should be
expensed.
Solution
The travel costs should be expensed because they would have been incurred even if t
he
developer did not get the contract.
The legal fees and sales commissions should be recognised as an asset because they a
re
incremental costs of obtaining the contract, assuming that the developer expects to
recover them. The asset would be amortised over the contract term of three years.
rights reserved.
0513
4.2 Costs to fulfil a contract

Costs incurred to fulfil a contract that are not within the scope of another sta
ndard
should be recognised as an asset if they meet all of the following criteria:
 They relate directly to a contract;
 They generate or enhance the entity’s resources; and
 They are expected to be recovered.
 Costs that must be expensed when incurred include:
 General and administrative costs;
 Cost of wasted materials, labour or other resources; and
 Costs that related to satisfied performance obligations.
Activity 5 Recognition of Contract Costs
installation, and provide software updates and technical support for three years in
exchange for $240,000. In order to fulfil the technical support portion of the project,
Jackson purchases an additional workstation for the technical support team for $8,000
and assigns one employee to be primarily responsible for providing the technical
support for the customer. This employee also provides services for other customers.
The employee is paid an annual salary of $30,000 and is expected to spend 10% of hi
s
time supporting this customer.
Required:
Explain which costs should be recognised as an asset and which should be
expensed.
5 Specific transactions
5.1 Principal v agent

When a seller (supplier) uses another party to provide goods or services to a
customer, it needs to determine whether it is acting as a principal or an agent
.
Principal The seller controls the good Revenue = Gross consideration

or service before transferring
it to the customer.
Agent The seller arranges for the Revenue = Fee or commission

other party to provide the
good or service.
Commentary
The fee or commission may be the net consideration that the seller retains after p
aying
the other party the consideration received in exchange for the good or service.
 Indicators that a seller is an agent and does not control the good or service
before it is provided to the customer include:
 Another party is responsible for fulfilling the contract;
 The seller does not have inventory risk;
 The seller does not have discretion in establishing prices for the
other party’s goods or services;
 The consideration is in the form of a commission; and
 The seller is not exposed to credit risk.
Illustration 10
On 1 January Anderson enters into a contract with Tanner for the sale of an excavator
with unique specifications. Anderson and Tanner develop the specifications and
Anderson contracts with a construction equipment manufacturer to produce the
equipment. The manufacturer will deliver the equipment to Tanner when it is
completed.
Anderson agrees to pay the manufacturer $350,000 upon delivery of the excavator to
Tanner. Anderson and Tanner agree to a selling price of $385,000 that will be paid b
y
Tanner to Anderson. Anderson’s profit is $35,000.
Anderson’s contract with Tanner requires Tanner to seek remedies for defects from th
e
manufacturer, but Anderson is responsible for any corrections due to errors in
specifications.
Required:
Determine whether Anderson is acting as principal or agent in its contract with
Tanner.
Solution
Anderson is acting as principal in the contract based on the following indicators:
 Anderson is responsible for fulfilling the contract because it is responsible f
or
ensuring that the excavator meets specifications;
 Anderson has inventory risk because it is responsible for correcting errors in
specifications, even though the manufacturer has inventory risk during
production
 Anderson has discretion in establishing the selling price;
 Anderson’s consideration is in the form of profit, not commission;
 Anderson has credit risk for the $385,000 receivable from Tanner.
rights reserved.
0515
5.2 Repurchase agreements
Definition
Repurchase agreement – a contract in which a supplier sells an asset and also
promises or has the option to repurchase the asset.
 There are three forms of repurchase agreements:
(1)
(2) An obligation to repurchase the asset (a forward);
(3) A right to repurchase the asset (a call option);
An obligation to repurchase the asset at the customer’s request (a put option)
.
5.2.1 Forward or call option
 When a supplier has an obligation (i.e. through a forward contract) or a right
(i.e. through a call option) to repurchase an asset, the customer does not
obtain control of the asset and the supplier accounts for the contract as either
:
 A lease if the asset can or must be repurchased for less than the
original selling price; or
 A financing arrangement if the asset can or must be repurchased
for an amount greater than or equal to the original selling price.
 If the repurchase agreement is a financing arrangement, the “seller” will:
 continue to recognise the asset;
 recognise a financial liability for any consideration received; and
 recognise as interest expense (which increases the financial
liability) the difference between the consideration received and the
consideration to be paid.
Illustration 11
for $350,000. The contract includes a call option that gives Anderson the right to
repurchase the excavator for $385,000 on or before 31 December. Tanner paid
Anderson $350,000 on 1 January. On December 31 the option lapses unexercised.
Required:
Explain how Anderson should account for the transaction on 1 January, during
the year and on 31 December.
Solution
Anderson should account for the transaction as a financing arrangement because the
repurchase price is greater than the original selling price.
On 1 January Anderson recognises a financial liability of $350,000:
Dr Cash
350,000
Cr Financial liability
350,000
0516
Solution (continued)
During the year, Anderson recognises interest expense of $35,000, the difference
between the repurchase price of $385,000 and the cash received of $350,000.
Dr
Interest expense 35,000
Cr
Financial liability 35,000
On 31 December, when the option lapses, Anderson derecognises the liability and
records a sale:
Dr
Financial liability 385,000
Cr
Revenue 385,000
5.2.2 Put option
 If the seller has an obligation to repurchase the asset at the customer’s reque
st
for less than the original selling price, it accounts for the contract as either:
 A lease, if the customer has a significant economic incentive to
exercise the right; or
 A sale with a right of return, if the customer has no such incentive.
 If the repurchase price is equal to or greater than the original selling price,
the seller accounts for the contract as either:
 A financing arrangement, if the repurchase price is more than the
expected market value of the asset; or
 A sale with a right of return, if the repurchase price is less than or
equal to the expected market value of the asset and the customer
does not have a significant economic incentive to exercise the right.
Activity 6 Put Option
On 1 January Anderson entered into a contract with Tanner for the sale of an excavat
or
for $350,000. The contract includes a put option that obliges Anderson to repurchase
the excavator at Tanner’s request for $315,000 on or before 31 December.
Required:
(a) Determine whether Anderson should account for this transaction as a
lease, a financing arrangement or a sale with a right of return if the
market value of the excavator on 31 December is expected to be:
(i) $275,000;
(ii) $330,000.
(b) As for (a) assuming that the repurchase price and expected market valu
e
are now $350,000 and $360,000, respectively.
(c)
As for ming that the repurchase price and expected market value
a) assu are now $360,000 and $330,000, respectively.
5.3 Bill-and-hold arrangements
Definition
Bill-and-hold arrangement – a contract in which the seller bills a customer for a
product that it has not yet delivered to the customer.
 Revenue cannot be recognised in a bill-and-hold arrangement until the
customer obtains control of the product.
 Generally, control is transferred to the customer when the product is shipped
to the
customer or delivered to the customer (depending on the terms of the contrac
t).
Commentary
In some contracts, the customer obtains control of the product without taking
physical possession of the contract.
 For a customer to have obtained control of a product in a bill-and-hold
arrangement, all of the following criteria must be met:
 There must be a substantive reason for the bill-and-hold
arrangement (e.g. the customer has requested the arrangement
because it does not have space for the product);
 The product has been separately identified as belonging to the
customer;
 The product is currently ready for transfer to the customer; and
 The seller cannot use the product or direct it to another customer.
Illustration 12 Bill-and-Hold Arrangements
and spare parts. The manufacturing lead time is six months. On 1 July Tanner pays
for the machine and spare parts, but only takes possession of the machine. Tanner
inspects and accepts the spare parts, but requests that the parts be stored in Anderson’
s
warehouse because Tanner does not have a place to store the parts and its premises ar
e
very close to Anderson’s warehouse.
Anderson expects to store the spare parts in a separate section of its warehouse for
three years. The parts are available for immediate delivery to Tanner. Anderson
cannot use the spare parts or transfer them to another customer.
Required:
Identify the performance obligation(s) in this contract and determine when
revenue is recognised on each performance obligation.
rights reserved.
0518
Solution
There are three performance obligations in this contract:
1.
2. Promise to provide the excavator;
3. Promise to provide spare parts;
Custodial services related to the spare parts.
Tanner obtains control of the spare parts on 1 July because all of the criteria are met
(i.e. there is a substantive reason for Anderson to hold the spare parts, the parts are
separately identified and ready to transfer and Anderson cannot use the parts or transf
er
them to another customer).
Anderson recognises revenue for the excavator and spare parts on 1 July when the
excavator is transferred to Tanner and Tanner has obtained control of the spare parts.
Anderson recognises revenue on the custodial services over the three years that the
service is provided.
5.4 Consignments

When a supplier delivers its product to a dealer or distributor for sale to end
customers, it needs to determine whether the contract is a sale or a
consignment arrangement.
Sale The dealer or distributorRecognise revenue when the product is
has obtained control of shipped or delivered to the dealer or distributor
the product.
(depending on the terms of the contract).
Consignment The dealer or distributor Recognise revenue when the dealer or

has not obtained control distributor sells the product to a customer, or
of the product. when the dealer or distributor obtains control
of the product (i.e. after a specified period of
time expires).
 The following are indicators of a consignment arrangement:

The dealer controls the product until a specified event occurs, such as
the sale of the product to a customer or until a specified period expires;

The dealer can require the return of the product or transfer the
product to another party;

The dealer does not have an unconditional obligation to pay the entity for
the product (although it might be required to pay a deposit).
rights reserved.
0519
Illustration 13 Car Dealership Arrangement
FMC, a car manufacturer, delivers cars to a car dealer on the following terms:
 Legal title passes on sale to the public;

The car dealer must pay for the car when legal title passes. The price to the
car dealer is determined on the date FMC delivers the cars to the dealership;

FMC can require the return of the cars and, if not sold by the car dealer, can
transfer the cars to another dealer.
Required:
Determine whether FMC should account for the delivery of the cars to the car
dealer as a sale or a consignment arrangement.
Solution
FMC should account for the delivery of cars to the car dealer as a consignment
arrangement because the dealer has not obtained control of the cars, as evidenced by
the fact that FMC can require the return or transfer of the cars and the dealer does not
have an unconditional obligation to pay FMC for the cars.
Revenue should not be recognised until the dealer sells a car.
6 Variable consideration
6.1 Estimation
 If the consideration promised in a contract includes a variable amount, the
variable consideration must be estimated.

Examples of variable consideration include:

 volume discounts (see Illustration 14);
 incentives (e.g. for early completion)
 penalties (e.g. for late completion);
 customer referral bonuses;
 rebates and refunds; and
price concessions.
 One of two methods should be used to estimate the amount of variable
consideration (whichever method gives the best prediction):
1. Expected value (i.e. the sum of possible amounts weighted
2. Most likely amount (i.e. the single most likely amount of consideration).
Commentary
Expected value is more suitable for a large number of contracts with similar char
acteristics.
The most likely amount is more suitable when there are few possible outcomes.

The chosen method should be applied consistently throughout the contract.
 The estimated variable consideration should be updated at the end of each
reporting period; any changes in estimate are reflected in the current period
financial statements (i.e. treated prospectively).
6.2 Constraints on estimation

Variable consideration should be included in the transaction price only whe
n
it is highly probable that there will be no reversal of the cumulative revenu
e
recognised when the uncertainty associated with the variable consideration i
s
resolved.
 Both the likelihood and magnitude of revenue reversal should be considere
d
when assessing this probability. Factors that increase the likelihood or
magnitude include:
 A high likelihood that the variable consideration will change due to
factors that cannot be influenced by the entity (e.g. market performance);
 A long period of uncertainty about the variable consideration before
it is expected to be resolved;
 Limited experience with similar types of contracts;
 A practice of offering a wide range of variable terms or a history
 A contract with a large number and broad range of possible
consideration amounts.
Illustration 14 Volume Discount
Bellway has a contract to supply components to a customer on a monthly basis. The
contract price of $6 per unit is reduced to $5 per unit if the customer orders more than
10,000 units during the calendar year.
The customer ordered 1,200 units in the month of January. Bellway has significant
experience with this product and the purchasing patterns of this customer. Bellway
estimates that the customer’s purchases will exceed the 10,000 unit threshold and
recognises revenue using the discounted price of $5 per unit.
Bellway will recognise revenue of $6,000 (1,200 units × $5 per unit) for the goods sol
d
in January as this is the most likely outcome for the year.
Because revenue is recognised using the discounted price, a significant reversal in the
amount of revenue recognised will not occur when the total amount of purchases by t
he
customer is known at the year end. If at any time during the year it appears that the
total number of units ordered for the year will be less than 10,000, Bellway should
increase the amount of revenue previously recognised to reflect the higher (non-
discounted) price.
0521
7 Sales tax
7.1 General principles

sales tax to the purchase and sale of goods by
entities (e.g. “value added tax” (VAT) or “general sales tax” (GST)).
 A business liable for this tax must record its effect in the double-entry
bookkeeping system and make a settlement with the government agency of
the net sales tax figure (based on purchases and sales).
7.2 Operation
Worked example 1
On 1 January Oleg, a trader, purchases a flat-packed table-tennis table from Olga for
$300 net (i.e. exclusive of sales tax).
On 31 January Oleg sells the constructed table-tennis table to Pavel for $575 gross (i.
e.
inclusive of sales tax).
Sales tax is 15%.
Worked solution 1
Purchase day book (PDB)
Date Supplier Invoice (gros
Purchases (net) Sales tax
s)
$ $
$
1 January Olga 345 300 45
Sales day book (SDB)
Date Supplier Invoice (gross) Sales (net) Sales tax
$ $ $
31 January Pavel 575 500 75
Sales tax
1.1 PDB 45 31.1 SDB 75

31.1 Balance c/d 30
__ __ 75
__ __
Notes
 Oleg has paid $45 sales tax on goods purchased and received $75 sales tax o
n goods sold.
Commentary
The difference is the tax on the “value added”.
0522
 Only the end-user (Pavel) suffers the sales tax. Oleg acts as a collecting
agent for the government agency and is liable to pay over $30.
Commentary
Shown as a current liability in the statement of financial position.
 If at the end of a period when tax has to be settled, Oleg suffers more sales t
ax (on
purchases and expenses) than he recoups (on sales), he can reclaim the short
fall.
Key points summary
The five steps of the revenue recognition process are:
 identify the separate performance obligation(s);
A contract is an agreement between parties that creates enforceable rights and
obligations.
A promise to transfer a good or service that is not distinct from other goods and servi
ces
must be combined into a single performance obligation.
The transaction price is allocated in proportion to stand-alone selling price.
Input or output methods can be used to measure progress towards completion.
When a performance obligation is satisfied at a point in time, revenue is recognised
when the customer takes control of the asset.
A contract asset or liability is presented in the financial statements when either party
has
performed in a contract.
Incremental costs of obtaining a contract are recognised as assets.
A principal controls the good or service before it is transferred to the customer.
An agent arranges for another party to provide a good or service.
An option or right to repurchase an asset results in a lease or financing arrangement.
 Revenue cannot be recognised in a bill-and-hold arrangement until the custom
er takes
Revenue is recognised in a consignment arrangement when the dealer or distributor s
ells
the product to a customer or takes control of the product.
If the consideration promised in a contract includes a variable amount, the variable
consideration must be estimated using expected value or the most likely amount.
0523
Focus
 explain and apply the principles of revenue recognition:
 identification of contracts
 identification of performance obligations
 determination of transaction price
 allocation of the price to the performance obligation
 recognition of revenue when/as performance obligations are satisfied
 describe and apply the acceptable methods for measuring progress towards
complete satisfaction of performance obligation;
 explain and apply the criteria for the recognition of contract costs;
 specifically account for the following types of transactions:
 principal versus agent
 repurchase agreements

bill and hold arrangements
consignment agreements

 account for different types of consideration including variable consideration
and where a significant financing component exists in the contract;
 prepare financial statement extracts for contracts with multiple performance
obligations, some of which are satisfied over time and some at a point in
time; and
 describe the general principles of government sales taxes (e.g. VAT or GST)
.
Activity solutions
Solution 1 – Time-value of money
Taking the time-value of money into account, the transaction price is $3,175 ($4,000
× 1/(1.08) ).
Interest income will also be recognised as follows:
2017: $3,175 × 8% = $254
2018: ($3,175 + $254) × 8% = $274
2019: ($3,175 + $254 + $274) × 8% = $297
Solution 2 – Allocating transaction price
$000
Software license 120
Installation service (240 × /300) 48
Software updates (240 × /300) 32
40
Technical support (240 × /300) ––––
240
Total ––––
Solution 3 – Output and input methods
(a)
Revenue 3,200
(1,500)
(1,000)
––––––
700
––––––
(b)
Measure of progress towards completion
Sales basis
= 56.25% 1,500
2,500
(c) Calculate revenue and costs for the year
To date
To date P
ior
rior $

Reven year
ue 1,920 – 1200

Cost of sales 2,500 × 0.5625 1,406 – 950 (456) 2,500 × 0.6 1,500 – 950

(550)
Profit 1 170
4
4

Commentary
Revenue and costs recognised at end of the first year have been assumed to be the
same
using both sales and costs basis for simplicity. In practice this is unlikely to be th
e case.
Solution 4 – Statement of financial position presentation
(i) Sales basis
Dr Contract asset 600
Cr Revenue 600
Revenue recognised for the period.
Dr
Cr Cash 1,000
Cr Contract asset 800
Contract liability 200
Cash received $1,000 is offset against the contract asset of $800 ($200 opening balan
ce
plus $600 recognised in second year) to leave a contract liability of $200.
Contract costs of $1,500 have been incurred to date but only $1,406 has been expense
d
to profit or loss. This leaves $94 work in progress (asset) to include in inventories.
(ii) Cost basis
Dr Contract asset 720
Cr Revenue 720
Revenue recognised for the period.
Dr
Cr Cash 1,000
Cr Contract asset 920
Contract liability 80
Cash received $1,000 is offset against the contract asset of $920 ($200 opening balan
ce
plus $720 recognised in second year) to leave a contract liability of $80.
There is no work in progress using the cost method as all costs are expensed to profit
or
loss as incurred.
Solution 5 – Recognition of contract costs
The additional workstation should be recognised as an asset under IAS 16 Property,
The cost of the employee assigned to the contract should be recognised as payroll
expense because, although the costs related to the contract and are expected to be
recovered, the employee was already working for the developer and therefore the cost
s
do not generate or enhance the resources of the developer.
rights reserved.
0526
Solution 6 – Put option
(a)
Repurchase price is $315,000
(i) Market value – $275,000
The transaction should be accounted for as a lease because:
 to repurchase the excavator for less
than the original selling price; and
 Tanner has a significant economic incentive to exercise the option
because the repurchase price ($315,000) is greater than the market
value expected of $275,000 on 31 December.
(ii) Market value – $330,000
The transaction should be accounted for as a sale with a right of return because:
 to repurchase the excavator for less
than the original selling price; and
 Tanner does not have a significant economic incentive to exercise the
option because the repurchase price ($315,000) is less than the market
value of $330,000 expected on 31 December. Tanner could make more
by selling the excavator to a third-party rather than Anderson.
(b) Repurchase price is $350,000 and market value is $360,000
The transaction should be accounted for as a sale with a right of return because:
 The repurchase price is equal to the original selling price ($350,000); and
 Tanner does not have a significant economic incentive to exercise the option
because the repurchase price is less than the market value of $360,000
expected on 31 December. Tanner could make more by selling the excavato
r
to a third-party rather than Anderson.
(c) Repurchase price is $360,000 and market value is $330,000
The transaction should be accounted for as a financing arrangement because:
 Anderson has an obligation to repurchase the excavator for more than the
original selling price; and
 Tanner has a significant economic incentive to exercise the option because
the repurchase price of $360,000 is greater than the market value of $330,00
0
expected on 31 December.
rights reserved.
0527
Overview
Objective

To prescribe the acc
ounting treatment fo
r inventories under
historical cost.
 To provide practic
al guidance on:

 determination of cos
 t;
expense recognition
(including any write
-down to net realisa
ble value);
cost formulas.
BASICS  Definitions
N
C ET
R
E
A
LI
S
A
B
LE
V
A
L
U
E
 
RECOGNITIO As an asset
N
 In financial st
DISCLOSUatements
RE  Expense reco
gnition
eserved. 0601
SESSION 6 – IAS 2 INVENTORIES
1 Basics
1.1 Objective

To prescribe the accounting treatme
nt for inventories.
 Primary issue – the amount of cost t
o be recognised as an asset and carri
ed
forward until related revenue is reco
gnised.
 IAS 2 provides guidance on:
 cost determination;
 subsequent recognition as expense (i
ncluding any write-down to net
realisable value);
 cost formulas
used to assign costs to inve
ntories.
1.2
Definitions

Inventories are assets:
 held for resale in the ordinary cours
e of business (e.g. merchandise
purchased by retailer); or
 in the process of production for resa
le (e.g. finished goods, work in
progress, raw materials); or
 in the form of materials or supplies t
o be consumed in the production
process or rendering of services.
 Net realisable value is the estimated
selling price in ordinary course of bu
siness less
the estimated cost of completion, an
d estimated costs necessary to make
the sale.
1.3 Measurement

Inventories are measured at the low
er of cost and net realisable value.
2 Cost
2.1
Meanint
g of cos

Cost includes all costs involved in b
ringing the inventories to their prese
nt
location and condition.
 Components of cost:
 purchase costs;
 costs of conversion;

other costs.
©2017 Becker Educational Development Corp. 0602
ights reserved.
2.2 Components of cost
Purchas Con Othe
e costs versi r cos
on c ts
osts
 Purcha
 Direct p
se price; inventories to
roduction c present locatio
osts; n
refund and condition
able ta e.g. non-
on norm production ov
xes; al capacity (i.
e. erheads (e.g.
 Transport/h expected storage in whi
andling; on average un skey distillers)
der
 Deduct
normal and specific d
de esign costs;
ircumstances)
discou
;
nts/reb
 Joint produ circumstance
ates.
ct costs (dedu s (in accorda
ct nce
with IAS 23).
net reali
sable va
lue of b
y-
product
s).
Commentary
When inventories are bought on deferred
settlement terms, the financing element
(e.g. a difference between the purchase p
rice for normal credit terms and the amo
unt
paid) is recognised as interest expense o
ver the period of the financing.
 The following expenditures are ex
cluded:

 abnormal amounts of wasted materia
 ls, labour and other production costs
;
 storage costs unless necessary to the
production process;
administrative overheads; and
selling costs.
 For service providers the cost of inv
entories consists primarily of labour
including supervisory personnel and
attributable overheads.
Commentary
But not profit margins or non-production
costs that are often factored into
prices charged by service providers.
2.3 Techniques for measure
ment of cost

Two costing methods can be used fo
r convenience if results approximate
actual cost:
Standar
Retail
d cost
method
materials, labour, changing items with
efficiency and similar margins.
capacity utilisatio
n.
percentage gross
reviewed and revised margin.
s necessary.
for financial reporting purposes.
Commentary
An average percentag
This is a management
tool which may e for each retail
need to be adapted departme
conform to IAS 2. nt is ofte
n used.
ights reserved.
Illustration 1
Inventories comprise goods held for resale and prop
erties held for, or in the course of, development and
are valued on a weighted average cost basis and car
ried at the lower of cost and net realisable value. Ne
t
realisable value represents the estimated selling pri
ce less all estimated costs of completion and costs to
be incurred in marketing, selling and distribution. C
ost includes all direct expenditure and other
appropriate attributable costs incurred in bringing i
nventories to their present location and condition.
J Sainsbury plc Annual Report 20
2.4 Cost formulas
2.4.1 Specific identification
 Specific identification of individual
costs is required for:
 items not ordinarily interchangeable
 ; and
goods/services produced and segreg
ated for specific projects.
Commentary
This is not practicable in many businesse
s.
2.4.2 Formulae

individual items is not practicable.
Formulae permitted are:


Weighted average.
Commentary
Last-in, first out (LIFO) does not assign
up to date costs to inventory and its
use as a cost formula is prohibited.
Illustration 2
Basic Principles, Methods and Critical Acc
ounting Estimates (extract)
Inventories
In accordance with IAS 2 (Inventories), inventories en
compass assets consumed in production or in the ren
dering
of services (raw materials and supplies), assets in the
production process for sale (work in process), goods
held for
sale in the ordinary course of business (finished good
s and goods purchased for resale), and advance pay
ments on
inventories. Inventories are recognized at their cost o
f acquisition or production – calculated by the weighte
d-average
method – or at their net realizable value, whichever is
lower. The net realizable value is the estimated
selling price in the ordinary course of business less e
stimated cost to complete and selling expenses.
Notes to the Consolidated Financial St
atements of the Bayer Group 2016
ights reserved.
Commentary
In practice these formulas are likely to p
roduce similar results when price change
s
are small and infrequent and there is a f
airly rapid turnover of inventories.
Activity 1
record of the transactions is shown below.
Bought
Sold
$

January 10 @ $20 each 200
April
10 @ 240 May 8 @ 360
each 45 each
October
20 @ 600 Novemb
20 @ $601,200
each er each
40 1 1
Required:
Calculate the value of closing inventory
at 31 December.
Activity 2
Freya sets up in business on 1 September b
uying and selling CD players. These were
Q Price per
5 Sept u unit
ember a $150
n $185
16 Se ti
ptemb t
er y
2
0
0
8
0
On 24 September Freya sold a consignmen
t of 250 CD players for $50,000.
Required:
Calculate (a) gross profit and (b) total v
alue of closing inventory using each of t
he
following inventory valuation methods:
(i) FIFO; and
(ii) weighted average cost.
2.4.3 Consistency
 An entity must use the same cost for
mula for all inventories having a sim
ilar
nature and use within the entity.
Commentary
Different cost formulae may be used for i
nventories that have different characterist
ics.
ights reserved.
3 Net realisable val
ue
3.1 Need for

Costs of inventories may not be rec
overable due to:
 damage;
 obsolescence;
 decline in selling price; or
 an increase in estimated costs to co
mpletion/to be incurred.
 Any necessary write down to net rea
lisable value is usually on an item b
y item basis.
Commentary
Assets are not carried in excess of amou
nts expected to be realised from their
sale or use.
3.2 Considerations

Estimates of net realisable value tak
e into consideration:
 fluctuations of price or cost relating
 to events after the period end;
the purpose for which inventory is h
eld.
 Net realisable value is an entity-
specific value whereas fair value is n
ot (as
fair value reflects the price at which
the same inventory could be sold int
o the
principal (or most advantageous) ma
rket).
Commentary
Therefore net realisable value may not b
e the same as fair value less costs to
sell.
3.3 Materials

Materials for use in production are n
ot written down to below cost unless
cost
of finished products will exceed net
reali sable value.
3.4 Timing

A new assessment is made of net rea
lisable value in each subsequent peri
od.
When circumstances causing write-
down no longer exist (e.g. selling pri
ce
increases) write-down is reversed. N
ote that reversals are rare in practice.
ights reserved.
Activity 3
Barnes is trying to calculate the year-end i
nventories figure for inclusion in his
Product
Cost Realisabl
e Selling

v
alue expenses
$ $ $
Alpha 100 25
Beta 50 120 5
75 60 15
Omega
85
Required:
Calculate the value of closing inventory
which Barnes should use for his account
s.
4 Recognition
4.1 As an expense

When inventories are sold, their carr
ying amount is recognised as an exp
ense
in the period in which related revenu
e is recognised.
 Any write-down to net realisable val
ue and all losses are recognised in th
e
period the write-down/loss occurs.
 Any reversal of any write-down is r
ecognised as a reduction in
expense in the period the reversal o
ccurs.
Commentary
Inventories allocated to asset accounts (e
.g. self-constructed property plant
or equipment) are recognised as an expe
nse during the useful life of an asset.
4.2 As an asset
Commentary
Although mentioned in IFRS 15, it is app
ropriate to consider here the
“substance over form” issue of “consign
ment inventory”.
 A consignment sale is one under wh
ich the recipient (buyer) undertakes t
o
sell the goods on behalf of the shipp
er (seller).

The IFRS 15 issue is whether and w
hen revenue should be recognised in
the
accounts of the shipper. An implicat
ion of this is which party should rec
ord
the inventory as an asset?
Commentary
This is very common in the car industry.
Consignment inventory is held by
the dealer but legally owned by the manu
facturer.
ights reserved.
This will depend on whether it is the

dealer or the manufacturer who bear
s
the risks and benefits from the rewar
ds of ownership.
 Treatment – Is the inventory an asse
t of the dealer at delivery?
 If yes – the dealer recognises the inv
entory in the statement of financial
position with the corresponding liabi
lity to the manufacturer.
 If no – do not recognise inventory in
the statement of financial position u
ntil
the dealer has obtained control of th
e product (manufacturer recognises
inventory until then).
Worked example 1
David Wickes, a car dealer buys cars from
FMC (a large multi-national car
manufacturer) on the following terms.
 Legal title passes on the earlier of sa
le to the public or six months from
delivery.

The car is paid for when legal title p
asses. The price to David is determi
ned
at the date of delivery.

David must pay interest at 10% on c
ost for the period from delivery to
payment.

David has the right to return the cars
to FMC. This right has never been
exercised in 10 years of trading.
David’s financial year end is 31 December
.
Required:
Explain how David should account for t
he transaction. You should use, as an
example, a car delivered to David on 30
September that is still held at 31
December.
Worked solution 1
(1)
Have the risks and rewards of ownershi
p passed to David on delivery?

Risk/reward
Factors
passed?
Right to return
nventory (but it has never been
exercised so for all
intents and purposes th
e risk/reward
actually does pass on
delivery)
Price reflects an
interest (e.g. slow movement ri
charge varying sk is transferred)
with time
Conclusion
On balance the risks and rewards of owner
ship pass to David on delivery. The
transaction should be treated as a purchase
of inventory on credit.
ights reserved.
(2) Journal entries
On receipt of car
Dr Purchases
Up to date of earlier sale to third party or 6
months from delivery
Dr
Interest payable
Commentary
The purchase of goods for resale is debit
ed to purchases. Goods purchased
but not sold at the reporting date will be
included in inventory at that date.
5 Disclosure
5.1 In financial statements

Accounting policies adopted in mea
suring inventories including
5.1.1 Carrying amounts
 Total carrying amount – in appropri
ate classifications (e.g. merchandise,
raw
materials, work in progress, finished
goods).

Carrying amount at fair value less
costs to sell.

Carrying amount of inventories pled
ged as security for liabilities.
5.1.2
Expense in the period
 The amount of inventories recognis
 ed as an expense.
 The amount of any write-down.
 Any reversal of write-down recogni
sed as income.
Circumstances or events that led to
reversal of a write-down.
Illustration 3
6. Inventories
sundry supplies and manufactured finished goo
ds are valued at the lower of their weighted
In 2015
mill
ion
s o
f C
HF
Raw materials, work in progre
3 3 387
ss and sundry supplies
9 5 014
5
8
(226)
8 401 8 153
Inventories amounting to CHF 271 million (201
5: CHF 280 million) are pledged as security for
financial liabilities.
Consolidated Financial Statements of the Nestlé Group
2016
ights reserved.
5.2 Expense recognition
Commentary
The amount of inventories recognised as
an expense during the period is
often referred to as “cost of sales”.
EITHER
 Cost of inventories
 Operating costs, appl
recognised as an icable to revenues,
 measurement  Costs recognised as
inventory an expense for:
raw materials and
 unallocated consumables
production labour costs
other operating co
sts.
 abnormal producti
 Net change in inv
on costs.
entories.
Commentary
This corresponds Corresponding to the
the “cost of “by nature” format
sales” or “by functiof the statement of pr
on” format of the ofit or loss.
statement of profit
r loss.
 A write-down to net realisable value
may be of such size, incidence or nat
ure
to require separate disclosure.
Illustration 4
Inventories (extract)
Impairment losses recognized on inventories
were reflected in the cost of goods sold. The
y were
comprised as follows:
Impairmen 2016
ts of Inven
tories
€ million
Accumulated impairm
(4 (427)
ent losses, January 1
77
)
Changes in scope o (5)
f consolidation
Impairment losses in the r (216)
eporting period
Impairment loss revers 246
als or utilization
Exchange 2
difference
s
Tra
4
nsf
ers
(IF
RS
5)
Accumulated impairmen
(42 (416)
t losses, December 31
7)
Notes to the Consolidated Financial St
atements of the Bayer Group 2016
ights reserved.
Key points summary
Value at lower of cost and net realisable va
lue (NRV).
NRV is selling price less cost to complete
and sell.
Cost includes all costs to bring inventories
to their present condition and location.
If specific cost is not determinable, use FI
FO or weighted average.
Cost of inventory is recognised as an expe
nse in the period in which the related reven
ue
is recognised.
Any write-down is charged to expense. A
ny reversal in a later period is credited to
profit or loss by reducing that period’s cost
of goods sold.
Required disclosures include:
 accounting policy;
 carrying amount;
 by category;
 at fair value;
 pledged as security for liabilities;
 amount of any reversal of a write-down;
 cost charged to expense for the period.
Focus
 measure and value inventories.
Commentary
Within this learning outcome you should
be able to calculate inventory at cost and
net
realisable value. For the preparation of
external reports you also need to be able
to
present inventory in financial statements.
©2017 Becker Educational Development Corp.
ights reserved.
0611
Activity solutions
Solution 1 – FIFO
Commentary
This is a “long-hand” solution.
Rece I
ived
I after
January 1 200
0
@
$
2
0
ea
c
h
April 1 200
0
@

$
2
4
e
a
c
h
10 @ $24
240
20
440
M 2 40
@
$20
10 @ $24
240
12
280
Octobe 2 40
r
10 @ $24
240
20 @ $30
600
32
880
N 12 360
ov @ $
e 30
m
be
r
10 @ $24
___
8 @ $30
40 20
Value of inventory FIFO $360
31 December
ights reserved.
Solution 2 – Freya
(a)
Gross profit
WORKING
Unit

$
Units price
$
FIFO Weight 200 30,000

200 30,000
 150 ed 150 14,800
50 avera
 185 ge
39,250 28 44,800
0
Therefore 1 160
Therefore 250 40,000
(i)
(ii)
FIFO
Weighted
average
Proce ( $
eds 3
Less 50,00
0
Cost ( (40,0
W) 00)
——
Gr —
oss
pro
10,00
fit
0
——
—
(b) Closing inventory value
(i) FIFO 30  185 = $5,550

(iii) Weighted
30  160 = $4,800
average
Solution 3 – Net realisable v
alue

$
Alpha
Beta NRV 120 – 25 95
Omega Cost = 50
NRV 70
85 – 15
=
––––
215
––––
ights reserved.
ights reserved.
Overview
Objective

To explain the acco
unting rules for tang
ible non-current ass
ets.
 Scope
SCOPE
 Definitions
 Criteria
RECOGNITIO
N
 Bearer plants
of cost
INITIAL  Exchange o
MEASUREf assets
MENT
SUBS DEPR
EQU S ECIA
ENT U TION
B
COST S
S E
Q
U
E
N
T

M
E
A
S
U
R
E
M
E
N
ECO
GNIT
ION
 Accoun
treat 
p s
tingment ountin
g
 M   Depr
ajor in Re eciation
spectio val methods
n uat
ion
mo
del
IMPAI
REVAL RMEN
UATIO T
NS
LOSSE
S
  I
Fre mpa
que irme
ncy nt
 Compensation
 Subsequent accounting
 For each class
DISCLOS
URES  Items stated at
revalued amounts
0701
eserved.
SESSION 7 – IAS 16 PROPERTY, PLANT AND EQUIPMENT
1 Scope
1.1 Scope

This standard should be applied in accounting for property, p
lant and
equipment except when another IAS requires or permits a dif
ferent treatment.
Commentary
IAS 1 “Presentation of Financial Statements”, IFRS 16 “Leases”,
IAS 23
“Borrowing Costs”, IFRS 3 “Business Combinations” (which inclu
des rules of
accounting for goodwill), IAS 36 “Impairment of Assets”, IAS 38
“Intangible
Assets” and IFRS 5 “Non-current Assets Held for Sale and Discon
tinued
Operations” are also relevant to accounting for non-current assets
.
1.2 Exclusions

IAS 16 does not apply to:

items classified as held for sale (IFRS 5 Non-current Assets
Held for
 biological assets related to agricultural activity (IAS 41 Agri
culture);

the recognition and measurement of exploration and evaluati
on assets
 mineral rights and mineral reserves (e.g. oil, natural gas and
similar
non-regenerative resources).
Commentary
However, the standard does apply to items of property, plant and
equipment
used to develop or maintain the excluded assets listed above other
than those
classified as held for sale.
1.3 Definitions

Property, plant and equipment – Tangible items:

held for use in production or supply of goods or services or f
or
rental or admin purposes; and

expected to be used during more than one period.
 Depreciation – Systematic allocation of depreciable amount
over an asset’s

Depreciable amount – Cost (or amount substituted for cost) l
ess residual value.

Cost – Amount of cash/cash equivalents paid and fair value o
f other consideration
given to acquire an asset at the time of its acquisition or const
ruction.

Fair value – the price that would be received to sell an asset (
or paid to transfer a
liability) in an orderly transaction between market participant
s at the
measurement (e.g. reporting) date (IFRS 13).
 Residual value – Estimate of the amount that would currentl
y be obtained
from disposal of the asset, after deducting estimated disposal
costs, assuming
the asset to be of the age and condition expected at the end of
its useful life.
 Useful life – Either:


period of time over which an asset is expected to be used; or
number of production or similar units expected to be obtaine
d.
 Carrying amount – At which an asset is recognised after ded
ucting any
accumulated depreciation and any accumulated impairment l
osses.
 Impairment loss – The amount by which the carrying amoun
t of an asset
exceeds its recoverable amount.
Commentary
The rules on measurement and recognition of impairment loss are
set out in IAS 36.
 Recoverable amount – The higher of an asset’s fair value less
costs of disposal and its
value in use.
Commentary
Value in use is defined in IAS 36.
2 Recognition of property, plant a
nd equipment
2.1 Criteria

As for all assets (in accordance with the Conceptual Framew
ork), an item of
property, plant and equipment is recognised if, and only if:
 It is probable that future economic benefits associated with i
t will
flow to the entity; and
Commentary
This is satisfied when risks and rewards have passed to entity.
 Cost of the item can be measured reliably.
Commentary
This is usually readily satisfied because exchange transaction evid
encing
purchase identifies cost. For self-constructed asset, a reliable mea
surement
of cost can be made from transactions with third parties for the ac
quisition of
materials, labour and other inputs used (see Activity 1).
2.2 Capital expenditure v revenue expenditu
re

In determining whether items of expenditure should be recog
nised in the cost of asset it is
important to distinguish whether they should be included in th
e statement of financial
position (“capital expenditure”) or profit or loss (“revenue ex
penditure”):
STATEMENT OF
FINANCIAL PROFIT OR
LOSS
POSITION
Expenditure incurr Expenditure incurred in daily ru
ed in: nning of the
business, for example:
intended for long-term use (benefits
future accounting periods);
providing services;
 selling and distributing goods;
capacity of existing non-
current  administration; and
asset (by increasing efficiency
or  repairing long-term assets.
useful life).
 Items of capital expenditure (except for the cost of land) will
ultimately be expensed to
the profit or loss (through depreciation) as the asset is “consu
med” through its use.
 A revenue expense is charged to profit or loss immediately.
Thus it is
“matched” with the revenues of the accounting period in whi
ch it is incurred.
Illustration 1 – Capital v revenue
(i) $27,000 spent on acquiring new car for a sales executive is cap
ital expenditure.
(ii) An annual road (or vehicle) tax of $1,800 included in the purch
ase price of (i)
should be excluded from the amount capitalised as it is a reven
ue expense (a
“running” cost).
(iii) $10,000 on the purchase of a second hand delivery vehicle will
be capital cost
(that it is not a new asset which is purchased is irrelevant).
(iv) $12,000 spent on the refurbishment (i.e. renovation) of (iii) to b
ring it into use
will be capital also.
(v) $1,000 monthly rental for hire of a vehicle is revenue expendit
ure.
2.3 Bearer plants

Bearer plants, which are solely used to grow produce (e.g. ap
ple trees or grape vines), are
regarded as property, plant and equipment and accounted for i
n accordance with IAS 16.
Commentary
As these bearer plants mature and are not for sale the fair value
model in IAS
41 Agriculture (see Session 13) is not appropriate to measuring th
em.
 A bearer plant is measured at accumulated cost until it begins
to bear fruit and is then
depreciated over its remaining useful life.
Commentary
It is accounted for in a similar manner to a self-constructed asset;
all costs are
capitalised until the asset is in use and once in use those costs are
depreciated.
3 Initial measurement at cost
Commentary
Remember, an item must meet the recognition criteria before it is
measured.
3.1 Components of cost

Purchase price, including import duties and non-refundable p
urchase taxes
(after deducting trade discounts and rebates).
 Directly attributable costs of bringing the asset to location an
d working
condition, for example:

costs of employee benefits (e.g. wages) arising directly from
construction or acquisition;

costs of site preparation;
 initial delivery and handling costs;
 installation and assembly costs;
 borrowing costs, in accordance with IAS 23;
costs of testing proper functioning (net of any sale proceeds o

f items produced); and
professional fees (e.g. architects and engineers).

 An initial estimate of dismantling and removing (i.e. “decom
missioning”) the asset
and restoring the site on which it is located. The obligation f
or this may arise either:


on acquisition of the item; or
as a consequence of using the item other than to produce inv
entory.
Commentary
To include this estimate in initial cost the obligation must meet the
criteria for recognition
of a liability under IAS 37 “Provisions, Contingent Liabilities and
Contingent Assets”.
Activity 1 – Self-constructed asset
On 1 October 2017 Omega began the construction of a new factory.
Costs relating to
the factory are as follows:
$000
Purchase of the land 10,000
Costs of dismantling existing structures on the 500
6,000
site 1,800
Purchase of materials to construct the factory 1,200
600
Production overheads directly related to the construction 400
te 2) 300
Allocated general administrative overheads 200
1,200
Architects and consultants fees directly related to the constru
ction 6,000
Costs of relocating staff who are to work at the new factory
Interest on loan to partly finance factory construction (No
te 3)
Plant and machinery purchased for use in the factory
Notes
1. The factory took eight months to construct and was brought i
nto use on 30
June 2018. The employment costs are for the nine months to
30 June 2018.
2. The production overheads were incurred in the eight months
ended 31 May
2018. They included an abnormal cost of $200,000 caused b
y the need to
rectify damage caused by a gas leak.
3.
definition of a qualifying asset in accordance with IAS 23 Borrowing
Costs
interest is to be capitalised for the period of construction.
Required:
Determine the cost of the asset to be included in the statement of
financial position
upon initial recognition, giving reasons for the inclusion or exclus
ion of costs.
3.2 Exchange of assets

Cost is measured at fair value of asset received, which is equ
al to fair value of
the asset given up (e.g. trade-in or part-exchange) adjusted by
the amount of
any cash or cash equivalents transferred. Except when:
 the exchange transaction lacks commercial substance; or
 the fair value of neither the asset received nor the asset given
up is
reliably measurable.
Commentary
Whether an exchange transaction has commercial substance depen
ds on the extent
to which the reporting entity’s future cash flows are expected to ch
ange as a result.
 If the exchange transaction lacks commercial substance or nei
ther asset is measureable
at fair value, cost is measured at the carrying amount of the as
set given up.
 Part exchange or “trade-in” is particularly appropriate to asse
ts which are
periodically replaced or upgraded (e.g. cars and computers).
Trade-in allowance
Part of cost of Proceeds on sale
new asset of old asset
Dr Asset cost a/c Cr Disposals a/c
Illustration 2 – Exchange of assets
Tomas buys a BMW, list price $92,500. He pays cash of $80,000 an
d trades in a VW.
Solution
 D/E
$ $
Dr Motor vehicle a/c 80,000

Cr Cash (or bank) a/c 80,000
Being the cash paid for the new car.
Commentary
The cash cost of the BMW must be “grossed-up” for the trade-in v

alue of the
VW (i.e. its disposal proceeds).
$ $
Dr Motor vehicle a/c 12,500
Cr Disposals a/c 12,500
Commentary
The disposal of the VW is then treated in the normal way.
4 Subsequent costs
Commentary
The issue is whether subsequent expenditure is capital expenditure
(i.e. to the
statement of financial position) or revenue expenditure (i.e. to prof
it or loss).

equipment does not
include the costs of day-to-day servicing
he item.

Servicing costs (e.g. labour and consumables) are recognised
in profit or loss as incurred.
Commentary
Often described as “repairs and maintenance” this expenditure is
made to
restore or maintain future economic benefits.
4.2 Part replacement

Some items (e.g. aircraft, ships, gas turbines, etc) are a series
of linked parts which require
regular replacement at different intervals and so have differen
t useful lives.

equipment recognises the cost of
replacing a part when that cost is incurred, if the recognition c
riteria are met.

The carrying amount of replaced parts is derecognised (i.e. tr
eated as a disposal).
Illustration 3 – “Component” asset
The aircraft of an airline are treated as component assets; each fusela
ge (body) is
depreciated over a useful life of 20 years, with no residual value, and
each engine is
depreciated over 10,000 flying hours.
An aircraft cost $10 million with the fuselage accounting for 80% of
that cost. In year
one the aircraft flew 2,500 hours.
Depreciation in year one would be as follows:
1 $000
400
500
––––
900
––––
4.3 Major inspection or overhaul costs

Performing regular major inspections for faults, regardless of
whether parts of
the item are replaced, may be a condition of continuing to op
erate an item of
property, plant and equipment (e.g. a ship).
 The cost of each major inspection performed and any resultin
g overhaul costs
are recognised in the carrying amount, as a replacement, if th
e recognition
criteria are satisfied.
 The amount capitalised will be depreciated as a separately de
preciable
component over the period to the next major inspection, whe
n the costs
incurred at that point will be capitalised.
0708
Illustration 4 – Major inspection and overhaul
A shipping company is required by law to bring all its ships into dry
dock every five
years for a major inspection and overhaul. Overhaul expenditure mig
ht at first sight
seem to be a repair to the ships but is actually a cost incurred in gettin
g the ship back
into a seaworthy condition. As such the costs must be capitalised.
A ship that cost $20 million with a 20-year life must have a major ov
erhaul every five
years. The estimated cost of the first overhaul is $5 million.
The depreciation charge for the first five years of the assets life will b
e as follows ($m):

Overhaul Capital
Years ___
___
Annual depreciation
___ ___
Total annual depreciation for first 5 years will be $1.75 million and t
he carrying
amount of the ship at the end of year 5 will be $11.25 million.
The actual overhaul costs incurred at end of year 5 are $6 million. T
his amount will now
be capitalised into the costs of the ship, to give a carrying amount of
$17.25 million.
The depreciation charge for years 6 to 10 will be as follows ($m):

Overhaul Capital
Years ___
___
Depreciation per year
___ ___
Annual depreciation for years 6 to 10 will now be $1.95 million.
This process will then be continued for years 11 to 15 and years 16 to
20. By the end
of year 20 the capital cost of $20 million will have been depreciated
plus the actual
overhaul costs incurred at years 5, 10 and 15.
5 Measurement subsequent to ini
tial recognition
Commentary
Subsequent measurement (as opposed to “subsequent costs”).
5.1 Accounting policy

An entity may choose between the cost model and the revalu
ation model. However,
the same policy must be applied to each entire class of prope
rty, plant and equipment.
Commentary
Classes include land, land and buildings, factory plant, aircraft, ve
hicles,
office equipment, fixtures and fittings, etc.
5.2 Cost model

Carry at cost less any accumulated depreciation and any acc
umulated
impairment losses.
5.3 Revaluation model

Carry at a revalued amount equal to the fair value at the date
of the revaluation less
any subsequent accumulated depreciation and any accumulat
ed impairment losses.
 To use this model, fair values must be reliably measurable.
Commentary
A revalued asset must still be depreciated.
6 Revaluations
6.1 Frequency

Revaluations must be made sufficiently regularly to ensure n
o material difference
between carrying amount and fair value at the end of the repo
rting period.

Frequency depends on movements in fair values. When fair
value differs
materially from carrying amount, a further revaluation is nec
essary.

Fair value is assessed using the fair value hierarchy in IFRS
13 Fair Value
 Items within a class may be revalued on a rolling basis withi
n a short period
of time provided revaluations are kept up to date.
At the date of revaluation, the carrying amount of the asset is adjuste
d to the revalued
amount by eliminating accumulated depreciation and adjusting the co
st base of the
asset to the revalued amount.
Illustration 5
A company bought an item of plant for $10,000. The plant has a 10-
year life at the end
of which its residual value is expected to be zero. The company follo
ws a policy of
revaluing such items every two years.
The asset was revalued at the end of the second year to $8,800.
Eliminating the accumulated depreciation and adjusting the asset to t
he revalued
amount:
Dr Accumulated depreciation 2,000
1,200
Cr Asset (10,000 – 8,800) 800
Cr Revaluation gain
The carrying amount of the asset is now $8,800 and the revaluation s
urplus $800. The
gain will be included in other comprehensive income for the period a
nd accumulated in
a revaluation reserve.
Activity 2
$000
1,000
Accumulated depreciatio
______
n
Carrying amount
______
Required:
Determine the accounting entries required to restate the carrying
amount at a
revalued amount of:
(a)
$1,100,000; and
(b)
$900,000.
Proforma solution
(b)
$000 $000
Cost
Accumulated depreciation
________ ______
Carrying amount
________ ______
$000
$000 $000
$000
Dr Dr
Dr Cr
Cr Cr
6.3 Increase/decrease

Increases and decreases on revalued amounts must be recogni
sed on an asset-by-asset basis.
 which the
are recognised) and accumulated in equity under the heading
“revaluation surplus”.
Commentary
However a revaluation increase must be recognised in profit or lo
ss to the extent that it
reverses a revaluation decrease of the asset that was previously re
cognised as an expense.
 A decrease should be recognised in the period to which it rel
ates:

as an n profit or loss (unless reversing a gain previously
pense recognised in other comprehensive income);
 in other comprehensive income to the extent of any surplus p
reviously
recognised (and still remaining) in respect of the same asset.
Illustration 6
An asset was purchased for $100 on 1 January 2014. The entity has a
dopted the
revaluation model for subsequent measurement of the asset.
Asset
Revaluation Profit or
surplus loss
1.1.14 100   The surplus is recognised i
n
other comprehensive inco
me.
31.12.14
120 20 Cr
1.1.15 120 20 Cr A deficit is taken to the pr

ofit
 or loss unless it reverses a
31.12.15 105 5 Cr surplus held on the asset.
1.1.16 105 The deficit is reflected in

(5) Dr 4 me
31.12.16 96  but only to the extent that i
t
reverses the previously
recognised surplus. The
remainder is to profit or lo
ss.
1.1.17 96 That part of the surplus tha

t
11 Cr 4 reverses the previously
expensed deficit is
31.12.17 111 11
recognised in profit or loss.
Cr
The rest is recognised as
me.
Commentary
For simplicity annual depreciation has been excluded from this illu
stration. However,
depreciation would be charged each year before the revaluation a
djustment is made.
6.4 Subsequent accounting
6.4.1
Transfer to retained earnings
 IAS 16 allows, but does not require, an entity to make a trans
fer from the
revaluation surplus to retained earnings as the asset is used.
 This is a transfer within equity (shown in the statement of ch
anges in equity).
Illustration 7 – Extract from Statement of Changes in E
quity
Revaluation
Balance at 31 December x x x x
2016
Changes in equity for 2
017 x x
(x) (x)
Issuance of share capital
x/(x) x/(x) x/(x)
Dividends (paid and decl (x) x
___ ___
ared)
Total comprehensive income for
year
Balance at 31 December 2
x x x x
017
 The transfer is the difference between the annual depreciatio
n expense based on the
revalued amount and the annual depreciation expense based o
n historic cost.
 This portion of the revaluation surplus is deemed to be realise
d (and is now available
for distribution as a dividend to shareholders).
Illustration 8
The asset in Illustration 5, now revalued at $8,800, has a remaining u
seful life of eight
years. Annual depreciation is $1,100 (until the next revaluation). De
preciation based
on historic cost was $1,000. The annual transfer from revaluation sur
plus to retained
earnings is therefore $100.
6.4.2 Disposal
 The revaluation surplus may be transferred directly to retaine
d earnings when the
surplus is realised (e.g. on disposal).
Commentary
See Illustration 7. Rather than leave the surplus in a separate res
erve (consider if there had
been only one revalued asset) IAS 16 permits the “realised” surpl
us to be transferred to
retained earnings. However, it is not reclassified (i.e. it is not incl
uded in profit or loss).
Worked example 1
An item of equipment acquired on 1 January 2016 for $100,000 has a
n estimated
useful life of 10 years with a residual value of zero. The asset is depr
eciated on a
straight line basis. The asset was revalued to $104,000 on 31 Decem
ber 2017.
Required:
Calculate the depreciation charge for years 3 to 10 and the amou
nt of the
revaluation surplus that can be transferred to retained earnings
annually.
Worked solution 1
Assuming the useful life of the asset remains the same then the annua
l depreciation
charge for years 3 to 10 will be $13,000 (i.e. $104,000  8).
The amount that can be transferred from revaluation surplus to retain
ed earnings in accordance
with IAS 16 will be the difference between the depreciation expense
based on historic cost,
$10,000, and the depreciation expense based on the revalued amount,
$13,000. So an annual
transfer of $3,000 can be made from revaluation surplus to retained e
arnings.
Activity 3
Following on from Activity 2 and assuming that an annual transfer ha
s been made from
revaluation surplus to retained earnings. At the end of year 4, the ass
et was surplus to
requirements and was sold for:
(i) $7,000;
(ii) $5,400.
Required:
Show the accounting entries in respect of the disposal of the asset
.
Commentary
As shown in Illustration 8, in years 3 and 4 depreciation is $1,100
per annum with
$100 transferred from the revaluation surplus to retained earnings.
6.5
Deferred taxation
Commentary
You should come back to this section after covering this topic in S
ession 19.
 When an asset is revalued the amount of the revaluation is ad
justed to reflect
the effect of deferred tax on the revaluation.

The credit recognised in other comprehensive income will be
net of taxation and any
subsequent transfer from revaluation reserve to retained earni
ngs will also be net of taxation.
Illustration 9
Brewcast follows a policy of revaluing its buildings. At 31 Decembe
r 2017 the
revaluation gain was $200,000. The applicable income tax rate is 30
%. The
accounting entries are:
$200,000
Cr Other comprehensive income $140,000
(Revaluation gain)
Cr Deferred tax $60,000
Worked example 2
An asset has a carrying amount of $500,000 and an estimated useful l
ife of 10 years at
Required:
Show the double entries for the revaluation, annual depreciation
and related
transfer to retained earnings.
Worked solution 2
On revaluation
Dr Asset ($600,000 – $500,00 $100,000

0) $30,000
$70,000
The $70,000 surplus on revaluation is shown as other comprehensive
income in the
statement of total comprehensive income.
Annual depreciation
Dr Depreciation expense ($600,000
1 $60,000
 $60,000
The excess depreciation as a result of the revaluation is $10,000 ($60,
000 – ($500,000
 /10)).
Related transfer from revaluation reserve to retained ea
rnings
Dr Revaluation reserve ($10,000  70 $7,000

%) $7,000
©2017 Becker Educa
tional Development
Corp. All rights reser
ved.
0715
7 Depreciation
7.1 Accounting standards

Depreciable amount should be allocated on a systematic basi
s over useful life.
 Useful life and residual value must be reviewed at least at ea
ch financial year-
end. If expectations differ from previous estimates the chang
e(s) are
accounted for as a change in an accounting estimate.
Commentary
In accordance with IAS 8 “Accounting Policies, Changes in Accou
nting Estimates
and Errors” (i.e. adjusting depreciation charge for current and fut
ure periods).
 Depreciation method should reflect the pattern in which the a
sset’s economic
benefits are consumed.
 Depreciation charge for each period should be recognised as
an expense
unless it is included in the carrying amount of another asset.
Commentary
IAS 16 does not specify a method to be used.
 Each part of an item of property, plant and equipment that is
significant (in
relation to total cost) is separately depreciated.
7.2 Depreciable amount
7.2.1 Useful life
 Factors to be considered:
 expected usage assessed by reference to expected capacity o
r
physical output;
 expected physical wear and tear (depends on operational fact
ors e.g.
number of shifts, repair and maintenance programme, etc);
 technical obsolescence arising from:

changes or improvements in production; or

change in market demand for product or service output;
 legal or similar limits on the use (e.g. expiry dates of related
leases).

Asset policy may involve disposal of assets after a specified time
manag therefore useful life may be shorter than economic life.
ement
 extending
it or increasing residual value) but do not negate the need for
depreciation.
Activity 4
An asset which cost $1,000 was estimated to have a useful life of 10
years and residual
value $200. After two years, the useful life was revised to four remai
ning years.
Required:
Calculate the depreciation charge.
7.2.2 Residual value
 Depreciable amount is net of residual value.
Commentary
Residual value is often insignificant and immaterial to the deprecia
ble amount.

when residual value is greater than carrying amount (in which
case depreciation is zero).
Commentary
Note that the definition of residual amount does not include the eff
ect of inflation.
7.2.3 Depreciation period
 Depreciation commences when an asset is available for use.

Depreciation ceases at the earlier of the date the asset is:

 classified as held for sale in accordance with IFRS 5; and
derecognised (e.g. scrapped or sold).
Commentary
Depreciation does not cease when an asset is idle or retired from
use (unless
it is fully depreciated).
7.2.4 Land and buildings
 These are separable assets and are separately accounted for, e
ven when they
are acquired together:
 Land normally has an unlimited useful life and is therefore n
 ot depreciated;
Buildings normally have a limited useful life and are depreci
able assets.
Commentary
Where land has a limited useful life (e.g. a landfill site, mine, quar
ry) it is depreciated.
7.3 Depreciation methods

Straight-line  a constant charge over useful life.

Diminishing balance  a decreasing charge over useful life.

Sum-of-the-units  charge based on expected use (e.g. machi
ne hours) or output.
 The chosen method should be reviewed periodically and, if s
ignificant,
changed to reflect a change in pattern of consumption of futu
re benefits.
Commentary
Account for as a change in accounting estimate and adjust depreci
ation
charge for current and future period.
8 Impairment losses
8.1 Impairment

entity applies IAS 36 Impairment of Assets (see Session 14)
.
 Impairment losses are accounted for in accordance with IAS
36.
8.2
Compensation

In certain circumstances a third party will
for an impairment los
pensate an entity s.
Commentary
For example, insurance for fire damage or compensation for comp
ulsory
purchase of land for a motorway.
 Such compensation must be included in profit or loss when it
becomes receivable.
Commentary
Recognising the compensation as deferred income or deducting it f
rom the
impairment or loss or from the cost of a new asset is not appropri
ate.
9
Derecognition

Statement of financial position – Eliminate on disposal or wh
en no future
economic benefits are expected from use (“retirement”) or di
sposal.
 Statement of profit or loss and other comprehensive income –
Recognise gain or loss
(estimated net disposal proceeds less carrying amount) in pro
fit or loss.
Commentary
Gains are not classified as revenue but are income (in accordance
with the Conceptual
and equipment as defined in IAS 16 would not be an ordinary act
ivity. Any gain or loss
would therefore be classified as other operating income or loss.
Illustration 10
Property, plant and equipment (extract)
When assets are sold, closed down or scrapped, the difference between
the net proceeds and the net carrying
amount of the assets is recognized as a gain or loss in other operating in
come or expenses, respectively.
Notes to the Consolidated Financial Statements of the Bayer G
roup 2016
Commentary
Non-current assets classified as “held for sale” are separately acc
ounted for (IFRS 5).
10 Disclosure
Commentary
Although disclosures are not typically examined in great detail, it i
s useful to note in this
section some of the generalities of the disclosure requirements. Fo
r example, the need to
give disclosure for each class, the need for reconciliation, the discl
osures that relate to
estimates and assumptions, and that not all disclosures are mandat
ory but encouraged.
10.1 For each class

 Measurement bases used for determining gross carrying amo

unt.
Depreciation methods used.
Useful lives or the depreciation rates used.
Illustration 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING PRINCIPLES
Property, plant and equipment (extract)
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is
recorded on a straight-line basis over the expected useful lives of the assets as follows:
Buildings and constructions 20 – 33 years
Light buildings and constructions 3 – 20 years
Machinery and equipment
Production machinery, measuring
and test equipment 1 – 5 years
Other machinery and equipment 3 – 10 years
Land and water areas are not depreciated.
Nokia in 2016

Gross ng amount and accumulated depreciation at beginning and en
carryi d of period.
Commentary
Accumulated impairment losses are aggregated with accumulated
depreciation.
 A reconciliation of carrying amount at beginning and end of
period. showing:
 additions (i.e. capital expenditure);
 assets classified as held for sale (IFRS 5) and other disposal
 s;
 acquisitions through business combinations;
 increases or decreases resulting from revaluations;
 impairment losses (i.e. reductions in carrying amount);
 reversals of impairment losses;
 depreciation;
net exchange differences arising on translation of functional
currency into reporting currency;
other movements.

10.2 Others

Existence and amounts of restrictions on title, and property,
plant and
equipment pledged as security.
 Expenditures on account of property, plant and equipment in t
he course of construction.
 Contractual commitments for the acquisition of property, pla
nt and equipment.
 Compensation from third parties for items impaired, lost or gi
ven up that is included in
profit or loss, if not disclosed separately in the statement of pr
ofit or loss and other
10.3 Items stated at revalued amounts

Effective date of revaluation.
 Whether an independent valuer was involved.
 Methods and significant assumptions applied to estimate fair
values.
 The extent to which fair values were:
 determined directly (i.e. by reference to observable prices in
 an active market); or
estimated using other valuation techniques.
Commentary
For example indices may be used to determine replacement cost.
 Carrying amount of each class of property, plant and equipm
ent that would
have been included in the financial statements had the assets
been carried
under the cost model.

Revalu indicating movement for period and any restrictions on
ation distribution of balance to shareholders.
urplus,
10.4 Encouraged

Carrying amount of temporarily idle property, plant and equi
pment.
 Gross carrying amount of any fully depreciated property, pla
nt and equipment
that is still in use.
 Carrying amount of property, plant and equipment retired fro
m active use and
not classified as held for sale.
 When the cost model is used, the fair value of property, plant
and equipment
when this is materially different from the carrying amount.
Key points summary – IAS 16
An item of property, plant and equipment is recognised when:
 its cost can be measured reliably.
Initial measurement is at cost.
Subsequently, use:
 up-to-date fair value – “revaluation model”.
Long-lived assets (except land) are depreciated on a systematic basis
over their useful
lives:
 useful life should be reviewed annually (and any change reflecte
d in the current
period and prospectively).
Significant costs to be incurred at the end of an asset’s useful life are
reflected by:
 reducing the estimated residual value.
In either case the amount is effectively expensed over the life of the a
sset.
Revaluations should be made with sufficient regularity.
The entire class to which a revalued asset belongs must be revalued.
Revaluation gains are recognised in other comprehensive income and
accumulated in
equity (unless reversing a previous charge to profit or loss).
Decreases in valuation are charged to profit or loss (unless reversing
a revaluation
surplus).
When a revalued asset is sold/disposed of, any remaining revaluation
surplus is
transferred directly to retained earnings (not through profit or loss).
Gain/loss on retirement/disposal is calculated by reference to the carr
ying amount.
Focus
 define the initial cost of a non-current asset (including a self-
constructed asset) and apply
this to various examples of expenditure, distinguishing betwe
en capital and revenue items;

describe, and be able to identify, subsequent expenditures tha
t should be capitalised;

state and appraise the effects of the IASB’s rules for the reval
uation of property, plant
and equipment;

account for gains and losses on the disposal of re-valued ass
ets;

calculate depreciation on:
– revalued assets; and
–
assets that have two or more major items or significant parts
.
Activity solutions
Solution 1 – Determination of cost
Component Amount Reason
$000
Purchase of the site 10,000Cost includes cost of purchase
Dismantling c
Site preparation costs a direct cost of
osts
getting the
asset ready for use
Materials 6,000
All used in constructing the facto
ry
Employment co
Allowed to include employment cos
1,600
sts
ts in the
construction period so /9 × 1,800 in
cluded
Production overh A direct cost of getting the asset ready
1,000
eads for use but
must exclude abnormal element
Administrative overhe Nil
Only direct costs allowed to be capi
ads talised
Architects f
Architects fees a direct cost of gettin
ees
g the asset
ready for use
Relocation costs Specifically disallowed by IAS
Nil
16
Costs of opening the factor
NilSpecifically disallowed by IAS
y
––––––16
Total before capitalised interest
19,500
Capitalised intere
800
st –––––– capitalisation of interest for th
e period of
Total cost of factor construction (i.e. 12,000 × 10% ×
20,300
y /12)
––––––
Solution 2 – Revaluation
(a)
$000 $000
Cost
– –
Carrying amount 1,100 900
$000 $000 $000 $000
Dr Cost (1,100 – 1,000)
100 Dr Accumulated depreciation
Dr Accumulated depreciat
ion
Cr Cost (900 – 1,0 100
00)
Cr Revaluation gai
n 350 Cr Revaluation ga 150
in
Commentary
Where an asset is revalued to more than its previous carrying amo
unt all accumulated
depreciation is written back. The gain will be included in “other
comprehensive income”.
Solution 3 – Subsequent accounting
In both cases the plant will be removed from the books:
$ $
Dr Disposals 6,600
Dr Accumulated depreciatio 2,200
n
Cr 8,800

(i) Proceeds $7,000
7,000
Cr Disposals 7,000
400
Cr Profit or loss 400
0723
(ii) Proceeds $5,400
5,400
5,400
Being disposal proceed
s
1,200
1,200
Being loss on disposa
l
and may under IAS 16 be transferred to retained earnings:
600
Cr Retained earnings 600
Commentary
However, it is not reclassified (i.e. it is not included within profit
or loss).
Solution 4 – Revision of useful life
Year 3
$ $ $
Cost
_____ _____ _____
_____ _____ _____
,000200 ,000 200 840 200

Charge for year 4
= 80
= 80 = 160
Commentary
Useful life has halved, so depreciation expense has doubled.
©2017 Becker Educa
tional Development
ved.
0724
Overview
Objectives

To account for the tr
ansfer of resources f
rom government an
d indicate the extent
to which entities ben
efit from such assist
ance during the repo
rting period.
 To facilitate compar
ison of an entity’s fi
nancial statements
with prior periods
and other entities.
SCOPE
 Matters not dealt with
G G
O O
V V
E E
R R
N N
M M
E E
N N
T T
G A
R S
A SI
N S
T T
S A
N
C
E
 Loans at nil or low inter
est rates
recognition
 Accounting standards
DISCLOSURE
eserved.
0801
SESSION 8 – IAS 20 GOVERNMENT GRANTS
1 Scope
1.1 Application

Assistance deals with:

 Disclosure of other forms of government assist
ance.
1.2
Matters not dealt with

 Government grants covered by IAS 41 Agricultu
 re (see Session 13).
Income tax benefits (e.g. accelerated depreciatio
n allowances and reduced tax rates).
Government participation in the ownership of th
e entity.
Commentary
Government assistance takes many forms varying in b
oth the nature of the
assistance given and in conditions attached. Its purp
ose may be to encourage a
course of action that the recipient would not otherwis
e have taken.
2 Government grants
2.1 Definitions

Government – government, government agencie
s and similar bodies whether
local, national or international.

Government grants – assistance in the form of tr
ansfers of resources in return for past or
future compliance with certain conditions relatin
g to operating activities. (These are also
called subsidies, subventions or premiums.)
Commentary
Assistance which cannot reasonably be valued and tr
ansactions with government that
cannot be distinguished from normal trading are excl
uded from this definition.

to assets – primary condition is t
hat long-term assets should
be purchased, constructed or otherwise acquired.
Other conditions may
restri e or location of assets or periods acquired or hel
ct typ d.
 Grants related
to income – are other than those relate
d to assets.
2.2 Recognition criteria

Government grants should not be recognised unt
il there is “reasonable
assurance” that:
 the conditions attaching to them will be compli
 ed with; and
the grants will be received.
 Receipt of a grant does not of itself provide con
clusive evidence that
conditions have been or will be fulfilled.
 manner wh
ether received in cash or a
reduction of a liability to the government.
2.3 Forgivable loans

Definition – the lender undertakes to waive repa
yment under certain
prescribed conditions.
 A forgivable loan from government is treated as
a grant when there is
reasonable assurance that the terms for forgiven
ess will be met.
Commentary
If it will not be repaid the substance of such a loan is
that of a grant.
2.4 Possible approaches to recogni
tion
Immediate “capital” Deferred “income”
approach approach
 Credit shareholders’ inte
rests. one or more perio
ds.
Arguments Arguments
for for
 Like any other form Finance from a source other
inancing it than owners
should be dealt with should not be credited direc
he statement tly to
of financial position. shareholders’ interests.
 No repayment is expecGovernment grants are rarel
ted therefore y gratuitous (i.e.
free) but earned through com
benefit accrues to own pliance with
ers.
conditi
ons
d meeti
ng
gations
.
 Grants are not earned
come but an To match against the associ
incentive without relate
d costs ated costs for
therefore it is inappropr which the grant is intended t
iate to o compensate.
recognise in profit or
ss.
 As an extension of fiscal policies, deal with in
the statement of profit or loss and other
comprehensive income as for taxes.
2.5 Accounting standards
2.5.1 Assets
 Recognise as income over the periods necessary
to match them with related costs which
 depreciable assets – over periods in which depre
 ciation is charged;
non-depreciable assets – over periods bearing co
st of meeting obligations.
Commentary
Receipts basis does not accord with accruals therefor
e it is only acceptable if
no other basis exists.
 Do not credit directly to shareholders’ interests
.
2.5.2 Income
 Compensation for expenses or losses already inc
urred or for immediate financial support
with no future related costs should be recognised
as income in period receivable.
Illustration 1
Nova has threatened to close down its factory. As a res
ult the local Development
Agency has committed to paying Nova $5 million per a
nnum for the next three years.
The $5 million will be credited to profit or loss on a tim
e basis (i.e. annually).
2.6 Non-monetary government gra
nts

For example land or other resources;
 Usually account for both grant and asset at fair v
alue (as defined by IFRS 13).
Illustration 2
Nova is granted the free use of some council property w
hich would cost $50,000 per
annum to rent. Nova charges $50,000 as rent paid and r
ecognises a grant of equal
amount in profit or loss.
Commentary
Alternatively, under IAS 20, both asset and grant coul
d be recorded at a nominal amount.
2.7 Presentation of grants related t
o assets

The acceptable alternatives in the statement of fi
nancial position are to:
Either
Or
 Set up grant as deferr  Deduct grant in arriving
ed income at carrying
 Recognise income on  Recognise income over u
systematic seful life by
Commentary
Although permitted by IAS 20, offsetting may be proh
ibited in some jurisdictions.
Whichever presentation is used in the statement of fin
ancial position, the cash flows
must be disclosed separately in the statement of cash
flows.
Worked example 1
Nova receives $15 million from a local council to set u
p in a particular area. The
money is paid specifically to contribute to the $80 milli
on cost of a new factory. The
factory is to be depreciated over 40 years.
Required:
Show how the items will be dealt with in the stateme
nt of profit or loss and
statement of financial position at the end of Year 1 if
the grant is to be treated as:
(a) deferred income;
(b) a reduction in the carrying amount of the fa
ctory.
Worked solution 1
(a)
Deferred income
Statement of pro
fit or loss $0
00
Depreciation of factory (assuming no estimated
Governme
residual value) nt grant
(2,000)
375
Statement of financia
l position $00
Tangible non-current as 0
sets
Property (80 million – 78,00
2 million) 0
Non-current liabilities:
Deferred 14,2
income
50
Current liabiliti
es
Deferred inc 37
ome 5
(b) Reduction in carrying amount
Statement of profit or loss
Depreciation of factory (assuming no estimated$000
residual value) (1,625)
((80 million – 1
5 million) ÷ 40)
Statement of financial p
osition
Tangible non-current asse
ts $000
Property (65,000,000 – 63,37
1,625,000) 5
Activity 1
Nova receives $10 million to contribute to the creation
of 100 new jobs in the area,
which are to be maintained for a four-year period. The
grant is meant to cover the
costs of job creation and non-productive time and then t
he continuing costs of
employment over the four-year period. Both parties ha
ve anticipated the following
cost-structure for the employment of one new employee
:
$000
Year 1 Job creation 20
Non-productive time 12
Annual salary and related costs 30
Years 2–4 Annual salary and related costs ($30,
90
000 per annum)
152
In Year 1 the 100 employees are recruited and they wor
k for four months of Year 1,
including all the non-productive time.
Required:
Calculate the amounts to be included in profit or los
s in Years 1 to 5.
2.8 Presentation of grants related t
o income

Acceptable alternatives in profit or loss are to:

Either
Or
 Credit separately or un
 Deduct in reporting relat
der general
ed expense.
Arguments f
or
Arguments f
or

Inappropriate to net incom
 Expenses might not have b
e and expense een incurred
item. if grant had not been availa
ble.
 Separation of grant fro Therefore presentation
m expense without
facilitates comparison
with other offsetting may be misle
ading.
expenses grant.
Commentary
When a grant is received for revenue expenditure pre
viously incurred there is
no asset against which to match it – so deferral is no
t appropriate.
Activity 2
Nova is provided with a grant by the Government of Ru
ritania to set up and maintain a
manufacturing presence in the country. The grant and r
elated costs are as follows:
Grant Cost Notes
$000 $000
Factory co 80 40 year life. No expecte
30 d residual
st value. Full year’s depre
ciation
40 charge in Year 1.
New jo 10 Job creation and non-
bs productive
time: all incurred in Year
1.
To maintain a presence
for four years
12 –
Required:
Calculate the amount of the grant to be credited to p
rofit or loss in Years 1 and 2.
Illustration 3
Nova applied for a grant to cover expenditure on a new
venture. It incurred the
expenditure in 2017 and it was charged to profit or loss
in that year before any
response was heard from the Government Department.
In 2018 the government responded and contributed to t
he expenditure. The grant will
be recognised in 2018 (as income in the statement of pr
ofit or loss).
2.9 Repayment of government gra
nts

Account for as a change in accounting estimate
(see Session 4).
Related to inc
ome Related to an a
sset
deferred reduce deferred inco
credit. me balance by the
amount repayable.
an expense in pro
fit or loss.
depreciation (that absence of the grant)
would have been immediately as an expe
recognised in the nse.
3 Government assistance
3.1 Definition
 Government action designed to provide economi
c benefits specific to entities
that qualify for those benefits under certain crite
ria.
Commentary
This does not include indirect benefits (e.g. provision
of infrastructure (transport/irrigation,
etc) in development areas or imposition of trading co
nstraints on competitors.
3.2 Exclusions from government gr
ants definition
Assistance which cannot Transactions which cannot be
onably have distinguished
a value placed on it from normal trading transactio
ns
Examples Examples
 Free technical or marketin
g advice. portion of sales a
 Provision of g
s a customer.
uarantees. (Although benefit may exist s
eparating it
from trading activities would
be arbitrary.)
Significance of benefit may be such that disclosu

re of nature, extent and duration
of assistance is necessary in order that financial s
tatements may not be misleading.
3.3 Loans at nil or low interest rate
s

Government loans with a below market rate of i
nterest are a form of government
assistance.
 The benefit of such loans should be accounted fo
r as a government grant – measured as the
difference between the initial carrying amount of
the loan (determined in accordance with
IFRS 9) and the proceeds received.
Illustration 4
Drago operates in an area where the government provid
es interest-free loans to aid
investment.
On 1 January 2017 Drago received an-interest free loan
of $5 million for investment in
new projects. The loan is repayable on 31 December 2
020.
The fair value of the loan has been calculated to be $4
million using an effective
interest rate of 5.5%.
The accounting entries on receipt of the loan are:
Cr Go erred in
Cr Loan vernm come)
ent gra
nt (def
$5m $4m
$1m
Commentary
Drago will charge annual interest to profit or loss (in
accordance with IFRS 9)
with a matching credit to profit or loss of the deferre
d income. Total interest for
the period of the loan will be $1 million.
4 Disclosure

Accounting policy for government grants includi
ng methods of presentation adopted.

Nature and extent of government grants recognis
ed and an indication of other
forms of government assistance providing direct
benefit.
 Unfulfilled conditions and other contingencies a
ttaching to government
assistance recognised.
Illustration 5
Government grants are recognised initially as deferred income at fai
r value when there is reasonable
assurance that they will be received and the Group will comply with
the conditions associated with the
grant. Grants that compensate the Group (partly) for expenses incur
red are recognised in profit or loss on
a systematic basis in the same periods in which the expenses are rec
ognised. Grants that (partly)
compensate the Group for the cost of an asset are recognised in prof
it or loss on a systematic basis over
the useful life of the asset.
N o t e s t o t h e c o n s o l i d a t e d f i n a n c i
a l s t a t e m e n t s
FUGRO N . V. A n n u a
l R e p o r t 2016
Key points summary
IAS 20 applies to all government grants (excluding gra
nts covered by IAS 41) and all
other forms of government assistance including loans at
below-market rate of interest
(but excluding income tax benefits).
Grants are recognised when there is reasonable assuran
ce that:
 any conditions attached to them will be complie
 d with; and
the grant will be received.
A grant for costs already incurred or with no future rela
ted costs is recognised as income
in the period receivable.
Non-monetary grants (e.g. land) are usually accounted f
or at fair value (although
nominal amount is permitted).
An asset-related grant may be presented :
 as deferred income; or
 by deducting it from the asset’s carrying amou
nt.
Other grants may be reported separately, or as “other in
come” or deducted from the
related expense.
Assistance which cannot reasonably be valued or distin
guished from normal trading
transactions is excluded from the definition of governm
ent grants.
Disclosure includes accounting policy (including
method of presentation),
grants recognised, unfulfilled conditions and conti
ngencies and forms of
assistance which provided direct benefits.
Focus
 apply the provisions of accounting standards rel
ating to government grants
and government assistance.
Activity solutions
Solution 1 – Grant related to income
Year 1
Costs incurred per e $
mployee in Year 1: 0
Creation 0
Non- 0
productive time
Annual sala
ry ( /12 × 30) 2
0
1
2
1
0
_____
42
Amount credited to profit or loss:
$m
Year 1
( /152 2
× $10
millio
n)
Years 2
( 1
Year 5
( / / 1
Solution 2
Grant Proportion Profit
or loss
$000 $000
Year 1
12,000
Factory 30,00 2½%
Job creatio 0 100%
n 10,00 25%
0
Presence
750 3,000
10,000
13,750
Year 2
Factory 30,00 2½% 750
Job creatio 0 Nil –
n 10,00 25% 3,000
Presence 0
12,00
0
_________
3,750
Overview
Objective

To describe the acc
ounting treatment o
f borrowing costs.
 Recognition
ISSUE  Argument
s
 Core principle
IAS 23  Scope
 Definitions
C D
 Borrowing costs eligi
ble for
capitalisation
 Commencement of ca
pitalisation
 Suspension of capital
isation
eserved.
0901
SESSION 9 – IAS 23 BORROWING COSTS
1 Issue
1.1 Recognition

Entities borrow in order to finance their acti
vities. They incur interest
(finance charge) on the amounts borrowed.
 How should such debits be recognised in the
financial statements?
 Always as an expense; or
 Are there circumstances which justify capita
lisation as an asset?
Commentary
This would defer recognition in profit or loss (by
way of an increased
depreciation charge) to a later period.
1.2 Capitalisation
Arguments for
 Accruals: Better matching of cost (
 interest) to benefit (use of asset).
Comparability is improved. Better comparis
on between entities which buy the
assets and those which construct them.
 Consistency: Interest is treated like any othe
r “production” costs.
Arguments against
 Accruals: Benefit is the use of money. Intere
st should be reflected in profit or loss
for the period in which the cash was used.
 Comparability is distorted. Similar assets hel
d at different costs depending on the
method of finance.
 Consistency: Interest is treated differently fr
om period to period – depending on
what borrowing is used for.
 Reported profit distorted.
©2017 Becker Educational Development Corp. All rights reserv
ed.
0902
2 IAS 23
2.1 Core principle

Borrowing costs form part of the cost of qua
lifying asset if they are directly
 acquisition;
 construction; or
 production.
 Any borrowing costs that relate to a qualifyi
ng asset must be capitalised into
the cost of that asset.
 All other borrowing costs should be recognis
ed as an expense in the period in
which they are incurred.
Commentary
A project may be financed through specifically ar
ranged borrowings or a general
pool of borrowings. Both would meet the princip
le of “directly attributable”.
2.2 Definitions

Borrowing costs are interest and other costs
incurred in connection with the
borrowing of funds. They may include:

interest expense calculated using the effectiv
e interest rate method in
 interest in respect of lease liabilities;
 exchange differences on foreign currency bo
rrowings to the extent
that they are regarded as an adjustment to int
erest costs;

preference dividends when preference capita
l is classified as debt.
Commentary
This definition encompasses interest expense, amo
rtisation of discounts or
premiums on redemption in respect of borrowings
and costs incurred in the
arrangement of borrowings.
 A qualifying asset is an asset that necessaril
y takes a substantial period of
time ready for its intended use or sale. Examples
o get include:

 manufacturing plant;
 power generation facilities;
 intangible assets;

investment properties;
inventories that require a substantial period
of time to bring them to
a saleable condition (e.g. whisky);
but not

assets ready for their intended use or sale w
hen acquired.
©2017 Becker Educational Development Corp. All rights reserv 0903
ed.
3 Capitalisation
3.1 Borrowing costs eligible for c
apitalisation

Borrowing costs that are directly attributabl
e to acquisition, construction or
production is taken to mean those borrowing
costs that would have been
avoided if the expenditure on the qualifying
asset had not been made.
 When borrowing is specifically for the purp
ose of funding an asset the
identification of the borrowing costs present
s no problem.
Commentary
For example, interest on leased assets used in co
nstruction.
 The amount capitalised should be the actual
borrowing costs net of any
income earned on the temporary investment
of those borrowings.
 It is sometimes difficult to establish a direct
relationship between asset and
funding. For example:
 central coordination of financing activity (i.
e. treasury
management);
 groups may use a range of debt instruments
at varying rates to lend
to other members of the group;
 borrowing in foreign currency when the gro
up operates in a highly
inflationary economy.
Commentary
Judgement is required.
 If funds are borrowed generally:
 The amount of borrowing costs eligible for c
apitalisation should be
determined by applying a capitalisation rate
to the expenditures on
that asset.
The capitalisation rate should be the weighte
d average borrowing cost
of borrowings outstanding during the period,
other than borrowings
 The amount of borrowing costs capitalised d
uring a period should not
exceed the amount of borrowing costs incurr
ed during that period.
 In some circumstances, it is appropriate to in
clude all borrowings of the parent
and its subsidiaries when computing a weigh
ted average of the borrowing costs;
in other circumstances, it is appropriate for e
ach subsidiary to use a weighted
average of the borrowing costs applicable to
its own borrowings.
ed.
Activity 1
Cedar has three sources of borrowing in the period:
Outsta
nding liability Interest charge
$000
$000
7-year loan 8,000
1,000
25-year loan 12,000
1,000
Bank overdraft 4,000 (avera
ge ) 600
Required:
(a)
Calculate the appropriate capitalisation rate i
f all of the borrowings are used
to finance the production of qualifying assets
but none of the borrowings
relate to a specific qualifying asset.
(b) If the 7-year loan is an amount which can be
specifically identified with a
qualifying asset calculate the rate which shou
ld be used on the other assets.
3.2 Commencement of capitalisa
tion

Capitalisation should commence when:
 Expenditures for the asset are being incurred
 ;
 Borrowing costs are being incurred; and
Activities that are necessary to prepare the a
sset for its intended use
or sale are in progress.
Commentary
That is, spending + borrowing + building.
 Expenditures on a qualifying asset include
only:
 Payments of cash;
 Transfers of other assets; or
 The assumption of interest-bearing liabiliti
es.
 Expenditures are reduced by any progress pa
yments received and grants
received (IAS 20) in connection with the ass
et.
Commentary
The average carrying amount of the asset during
a period, including borrowing costs
previously capitalised, is normally a reasonable a
pproximation of the expenditures to
which the capitalisation rate is applied in that pe
riod.
ed.
 The activities necessary to prepare the asset f
or its intended use or sale include:
 Physical construction of the asset.
 Technical and administrative work prior to t
he commencement of
physical construction, such as the activities a
ssociated with obtaining
permits prior to the commencement of the p
hysical construction.
 Such activities exclude the holding of an ass
et when no production or
development that changes the asset’s conditi
on is taking place.
Commentary
For example borrowing costs incurred while land
is under development are capitalised
during the period in which activities related to th
e development are being undertaken.
However, borrowing costs incurred while land ac
quired for building purposes is held
without any associated development activity do no
t qualify for capitalisation.
3.3 Suspension of capitalisation

Capitalisation should be suspended during e
xtended periods in which active
development is interrupted.
Commentary
Interest expense is “abnormal” to the developmen
t rather than a normal cost.
 Capitalisation is not normally suspended:
 during a period when substantial technical a
nd administrative work
is being carried out;

when a temporary delay is a necessary part o
f the process of getting
an asset ready for its intended use or sale.
Commentary
For example capitalisation continues during the e
xtended period needed for
inventories to mature or the extended period duri
ng which high water levels
delay construction of a bridge, if such high water
levels are common during
the construction period in the geographic region i
nvolved.
©2017 Becker Educational Development Corp. All rights reserv
ed.
0906
3.4 Cessation of capitalisation

Capitalisation should cease when substantial
ly all the activities necessary to
prepare the qualifying asset for its intended
use or sale are complete.
 This is normally when the physical construct
ion of the asset is complete even though
routine administrative work might still contin
ue or there are minor modifications
(decoration of a property to the purchaser’s s
pecification) that are outstanding.
Commentary
Interest accruing during the period between comp
letion and resale is charged to profit
or loss. The asset will not be depreciated (but im
pairment must be considered).

When the construction of a qualifying asset i
s completed in parts and each part is
capable of being used while construction con
tinues on other parts, capitalisation of
borrowing costs should cease when substanti
ally all the activities necessary to
prepare that part for its intended use or sale a
re completed.
Commentary
For example, completion of a hotel by floors or a
hospital by wings.
Worked example 1
Apex issued a $10 million unsecured loan with a co
upon (nominal) interest rate of 6%
on 1 April 2017. The loan is redeemable at a premi
um and the effective finance cost is
7·5% per annum.
The loan was specifically issued to finance the buil
ding of the new store which meets
the definition of a qualifying asset in IAS 23. Cons
truction of the store commenced on
1 May 2017 and it was completed and ready for use
on 28 February 2018, but did not
open for trading until 1 April 2018.
During the year trading at Apex’s other stores
was below expectations so Apex
suspended the construction of the new store for a
two-month period during July and
August 2017. The proceeds of the loan were tempo
rarily invested for the month of
April 2017 and earned interest of $40,000.
Calculate the net borrowing cost that should be
capitalised as part of the cost of
the new store and the finance cost that should be
reported in the statement of
profit or loss for the year ended 31 March 2018.

ed.
Worked solution 1
The effective rate is 7·5%, so the total finance cost
for the year ended 31 March 2018 is
$750,000 ($10 million × 7·5%).
Capitalisation commences from when expenditure i
s incurred (1 May 2017) and must
cease when the asset is ready for its intended use (2
8 February 2018); in this case a 10-
month period.
However, interest cannot be capitalised during a per
iod where development activity is
suspended; in this case the two months of July and
August 2017. Thus only eight
months of the year’s finance cost can be capitalised
= $500,000 ($750,000 × /12).
The remaining four months’ finance costs of $250,0
00 must be expensed.
According to IAS 23 interest earned from the temp
orary investment of specific loans
should be deducted from the amount of finance cost
s that can be capitalised. However,
in this case, the interest was earned during a period
in which the finance costs were not
capitalised. Thus the $40,000 interest received wou
ld be credited to profit or loss and
not to the capitalised finance costs.
I
n $00
0
s
u (2
m 50
m )
a 40
r
y
:

Profit or loss for the yea
r ended 31 March 2018:
Finance cost (debit)
Investment income (credit
)
Statement of financial position as
at 31 March 2018: 500
Property, plant and equipment (fin
ance cost element only)
4 Disclosure

The fin
ancial
tatemen
ts shoul
d disclo
se:
 The accounting policy adopted for borrowi
ng costs;
 The amount of borrowing costs capitalised d
uring the period; and
 The capitalisation rate used to determine the
amount of borrowing
costs eligible for capitalisation.
Illustration 1
13.2 Net interest expense (extract)
Interest and similar expenses included interest expense of €
42 million (2015: €49 million) relating to
non-financial liabilities. Interest and similar income included i
nterest income of €10 million (2015:
€133 million) from nonfinancial assets.
Notes to the Consolidated Financial Statement
s of the Bayer Group 2016
ed.
Key points summary
Compliance with IAS 23 is not mandatory for:
 qualifying assets measured at fair value (e.g. IA
S 41);
Borrowing costs include:
 interest expense calculated by effective interest
method (IFRS 9);
A “qualifying asset” takes a substantial amount of ti
me to be ready for its intended
Borrowing costs directly attributable to a qualifying
asset must be capitalised.
Other borrowing costs are expensed when incurred.
For specific funds, costs eligible for capitalisation a
re actual costs incurred less
any income from temporary investment.
For general funds, apply a capitalisation rate (weigh
ted average borrowing cost) to
expenditures.
Capitalisation:
 commences when expenditure, borrowing and ac
tivities are in progress;
Focus
 identify pre-conditions for the capitalisation
 of borrowing costs; and
account for borrowing costs.
©2017 Becker E
ducational Devel
opment Corp. A
ll rights reserved
.
0909
Activity solution
Solution 1
(a) Capitalisation rate
1,000,000  1,000,000  600,000
= 10.833%
8,000,000  12,000,000  4,000,000
(b) Capitalisation rate
1,000,000  600,000
12,000,000  4,000,000 = 10%
ed.
Overview
Objective

To describe the account
ing for leases from the v
iewpoint of the lessee a
nd the
lessor.
INTRODUC Lease
v buy
TION
 Need for a
standard
 Ince
ption
LE LESS
 Sep
SS OR
aration EE ACC
OUN
A TING
C
C
O
U
N
TI
N
G


an

d
m
ea L
su e
re a
m s
en e
t


R m
e o
m d
ea i
su f
re
m i
en c
t a
ti
o 
n 

F
i
n
a
n
c
e

l
e
a
s
e


D

PRESENT
SALE A ATION
ND AND
LEASEB
ACK DISCLOSU
RE
 Recognising  Presentati
a sale on
 Sale not  Disclos
cognised ure
SESSION 10 – IFRS 16 LEASES
1 Introduction
1.1 Lease v buy

An entity may choose to buy or le
ase an asset.

The main advantage of leasing is no
t having to find the upfront cash for
large
capital expenditure. Leasing may b
e cheaper than borrowing funds to b
uy the
asset. Although a leased asset may
never be owned outright a lease
arrangement may allow for upgradi
ng or replacement of assets without
the
expense of buying newer models.
 Although any kind of equipment ca
n be leased common examples are
vehicles, computers and printers, p
ower tools, etc.
1.2 Need for a Standard

January 2019. Before IFRS 16 the
relevant standard was IAS 17 Leas
es.
 IAS 17 defined two types of leas
e:
 Operating leases; and
 Finance leases.

the definition of a fin
ance lease, the asset and liability we
re
recognised in the statement of finan
cial position. If the lease was an
operating lease, no asset or liability
was recognised and any lease rental
was
expensed to profit or loss as incurre
d.

This accounting model resulted in
many leases being excluded from th
e
statement of financial position, eve
n though the lessee had a present
obligation, and therefore a liability,
to make regular payments to the les
sor.
Commentary
The IASB has now eliminated such “off
balance sheet financing” by requiring e
ntities
to account for the substance of the trans
action rather than the legal form.
Key point
As a result of IFRS 16, more leased assets
and lease obligations will appear in the
statement of financial position. The annu
al expense arising from a lease now reduc
es
over time; operating leases were previousl
y accounted for on a straight-line basis.
IFRS 16 will therefore affect two key acc
ounting ratios:
Return on capital employed (higher); and
rights reserved.
1.3 Definitions
Lease: a contract for the right to use an as
set for a period of time.
Lessee: the party to a lease that obtains th
e right to use an underlying asset.
Lessor: the party to a lease that provides t
he right to use an underlying asset.
Right-of-use asset: an asset that the lesse
e has the right to use under the terms of th
e lease.
Interest rate implicit in the lease: the rat
e of interest at which the present value of
the
lease payments and any unguaranteed resi
dual value equals the fair value of the leas
ed
asset (including any initial direct costs of t
he lessor).
Commentary
That is, the internal rate of return of the
lessor’s cash flows.
Fair value: the amount for which an asset
could be exchanged, or liability settled,
between knowledgeable, willing parties in
an arm’s length transaction.
Commentary
This is not the same as the IFRS 13 defi
nition.
Short-term lease: of 12 months or less.
A lease with a purchase option is not a sh
ort-term lease.
Underlying asset: the subject of a lease.
2
Lessee accountin
g
2.1 Inception

A contract is a lease, or contains a l
ease, if the lessee has the right to co
ntrol
a specified asset for a period of tim
e in return for payment of considera
tion.

There
is cont
rol if
he less
ee has
the rig
hts:

 to obtain most of the economic ben
efits from use of the contracted asse
t; and
to direct the use of the contracted as
set.
Activity 1 – Identifying a lea
se
Jerbyn has entered a contract to lease 10 tr
ucks for a period of six years. The trucks
will be used to transport goods across Eur
ope. When not in use these trucks will be
kept at Jerbyn’s premises. If the trucks ar
e damaged or require maintenance they wi
ll
be sent back to the supplier to repair or re
place them.
The contract also provides for the renting
of additional trailers on an ad-hoc basis;
these trailers will be kept by the supplier.
Required:
Discuss whether Jerbyn has entered into a
leasing contract for the trucks and trailers.
rights reserved.
2.2 Recognition and meas
urement
2.2.1
Recognition
 On commencement of the lease the
lessee recognises:
 a right-of-use asset; and
 a lease liability.
 Exceptions to this are:
 short-term leases; and
 leases of assets with a low value (e
.g. laptops).
Commentary
Although the standard does not specify a
monetary amount, up to $5,000 is
indicated in the Basis for Conclusions.
Key point
recognises the right to use the asset, whic
h will result in more leases being
capitalised under IFRS 16.
Rental payments for short-term leas
 es and low-value assets are expense
d to
profit or loss (normally on a straigh
t-line basis); no asset or liability is
recognised other than rent prepaym
ents or accruals.
2.2.2 Liability measurement
 measured at
the commencement of the lease at t
he
present value of the future lease pay
ments.
 Lease payments are discounted usin
g the interest rate implicit in the lea
se, if
known, or the lessee’s incremental
cost of borrowing.
 Cash flows used in the present valu
e calculation include:

Fixed
payme
nts les
s any
ease
centive
s;

Variable payments that are based o
n a specified index (e.g. a
consumer price index) or rate (e.g.
LIBOR);

The value of any purchase option th
e lessee is likely to exercise; and

Penalties the lessee expects to pay
to cancel the lease.

any interest on the outstandin
g
liability (the so-called “unwinding
of the discount”) and decreased by t
he
lease payments made.
 may require remeasure
ment if the terms of the lease are
modified or the payment schedule i
s changed.
rights reserved.
Illustration 1 – Trade-in
Hick entered into a lease agreement on 1 J
anuary to lease a machine for six years. T
he
contract requires an up-front payment of $
2,000 on signing the lease plus a further fi
ve
payments of $2,000 at the end of each yea
r. Hick has an option to buy the asset at t
he
end of year six for $500, which Hick expe
cts to exercise. The rate of interest implic
it
in the lease is 10%.
The initial amount of liability recognised
will be calculated as:
End of
ar Cash 10% di Present v
low scount alue
$
1 2 0
2 , . 1,820
3 0 9
4 0 1 1,660
5 0
6 1,500
0
. 1,360
2 8
, 3 1,240
0
0 0 280
0 . –––––
7 –
5
2
, 7,860
0 –––––
0 0 –
0 .
6
8

2
, 0
0 .
0
0 6
2

2 0
, .
0 5
0 6
0

5
0
0

The initial payment of $2,000 is not inclu
ded in the schedule as it has been paid and
therefore is not a liability.
Illustration 2 – Interest allocation
Following on from Illustration 1 interest i
s allocated as follows:
Period
Interest RentalClosing bal
1 Liability 10% ance
2 $ $
3 $ 786(2,000) 6,646
4 7,860 665
5 6,646 531(2,000) 5,311
5,311 384(2,000) 3,842
6 3,842 223
2,226 51*(2,000) 2,226
449 449
–––––– (2,000)
2,640 (500) –
––––––
*Includes rounding difference.
At the end of year 1, the lease liability is $
6,646 of which $5,311 is non-current (the
amount outstanding at the end of year 2) a
nd $1,335 is current.
rights reserved.
2.2.3 Asset measurement
 The right-of-use asset is initially m
easured at cost which includes:
 The initial amount ofrecognised;
ability
 Payments made before the lease co
mmenced (e.g. a deposit) less
any incentives received;
 Direct costs incurred by the lessee (
e.g. installation costs); and
 Decommissioning costs expected to
be incurred in dismantling or
removing the asset at the end of its
useful life.
Commentary
The present value of the decommissionin
g costs is recognised as a provision
(IAS 37).
 The asset is subsequently measured
using the cost model. However, it
may
be revalued if it belongs to a class o
f assets that are revalued.
 Depreciation is charged on the sam
e basis as assets which are owned.
 If there is no reasonable certainty th
at the lessee will obtain ownership
at the
end of the lease term, the asset is de
preciated over the shorter of:
 the lease term; and
 its useful life.
 If the lessee will retain ownership a
t the end of the lease term, the asset
is
depreciated over its useful life.
 If the lessee uses the fair value mod
el of IAS 40 Investment Property, a
right-
of-use investment property will also
be subsequently measured at fair va
lue.
Illustration 3 – Initial asset
Following on from Illustration 1.
Hick incurs installation costs of $600. Ba
sed on the expectation that Hick will exer
cise
the option to buy the asset, Hick will depr
eciate the asset over eight years on a strai
ght
line basis.
The initial a
mount capit
alised will
be:
Initi
al li
abili
ty
Dep
osit
paid

Inst
allat
ion
cost
s
–
2,000
600
––––––
10,460
Annual depreciation for the asset will be $
10,460 ÷ 8 years = $1,308 per annum.
rights reserved.
Activity 2 – Right-of-use as
set
Delta entered into a contract to lease an as
set on 1 January 2018. The terms of the
lease are six annual payments of $2,000 w
ith the first payment on 31 December 201
8.
Delta will incur a further $1,000 installati
on costs. Delta will return the asset to the
lessor at the end of year six.
The initial measurement of the liability ha
s been calculated at $8,710 using the inter
est
rate implicit in the lease of 10%.
Required:
(a)
(b) Show the interest allocation over the
six-year term of the lease.
Show how the lease should be accou
nted for in the statement of financial
position of Delta as at 31 December
2018.
Exam Advice: The interest rate implicit
in the lease will be given in the exam; t
here
2.3 Remeasurement

The lease liability is required to be
remeasured when there is a change
in:
(i)
(ii) The expected amount payable under
(iii) a residual value agreement; or
(iv) Future lease payments due to chang
es to specified indices; or
The lease term due to a change in th
e non-cancellable period; or
The assessment of an option to purc
hase the underlying asset at the
end of the lease term.
Residual value agreement – a guarantee
given to the lessor that the value of
the underlying asset will be at least a spec
ified amount.
 Any remeasurement of the lease lia
bility will be adjusted against the ca
rrying
amount of the right-of-use asset.
 The right-of-use asset cannot be red
uced below zero. Any further adjus
tment
of the lease liability is taken to profi
t or loss.
2.3.1 Original discount rate
 Changes resulting from either i) or i
i) above will require an entity to ap
ply the
original discount rate to any change
s in the payment schedule.
rights reserved.
Illustration 4 – Rental based on p
rice index
On 1 January 2016 PQR enters into an eig
ht year lease of office space, being one flo
or
of a 10 storey building. The contract state
s that the lease rental for the first two year
s
of the contract will be $30,000. After two
years the rental will be re-assessed using a
retail price index (RPI), which at 1 Januar
y 2016 was 126.
The asset will be depreciated on a straight
line basis over the eight-year term of the
lease. PQR’s incremental cost of borrowi
ng is 5%.
On 1 January 2016 the initial accounting e
ntries were:
Dr Right-of-use a
sset $20
Cr Lease liabili 3,58
ty (30,000 × 5.78 0
6) $17
Cr Cash 3,58
0
$30,
000
Interest expense for 2016 is calculated at
$8,679 and for 2017 it is $7,613.
On 1 January 2018, the lease liability is $
159,872 and the value of the right-of-use
asset is $152,685.
On 1 January 2018, prior to making the th
ird payment, the lease rental is adjusted to
$32,000 to reflect the current RPI of 134.
4.
1 × $32,000 $
4.329 (5-year annuity fac
32,000
tor @ 5%) × $32,000
138,52
8
–––––
–––
170,52
8
–––––
–––
The lease liability is increased by $10,656
; the double entry is a debit to the right-
of-
use asset. The adjusted value of the asset,
$163,341, will now be depreciated on a
straight line basis over the remaining six y
ears of the lease to give an annual
depreciation charge of $27,223.
2.3.2 Revised discount rate

Changes resulting from either iii) or
iv) above require an entity to apply
to
any changes in the payment schedul
e the interest rate implicit in the lea
se for
the remainder of the lease term or, i
f the implicit rate is not known, the
lessee’s incremental borrowing rate
at the date of reassessment.
rights reserved.
Illustration 5 – Extension option
On 1 January 2015 LMN enters into a five
year lease of shop premises. The contract
gives LMN an option to extend the lease f
or a further five years.
The lease rental for the first five years is $
40,000 each year, payable in advance, and
if
LMN takes up the option the lease rentals
will increase to $50,000 each year.
Due to uncertainty about the level of reve
nue to be generated from the shop, LMN
initially determines that the extension opti
on will not be taken up. LMN uses an
incremental cost of borrowing of 5% as th
e interest rate implicit in the lease is not
available.
Based on the above information the value
of the liability and asset on 1 January 201
8,
immediately after the fourth instalment, w
ould be $38,098 and $72,736 respectively.
On 1 January 2018 the directors of LMN
decided that they would take up the offer
of
the five year extension because sales had
exceeded expectations. At this date LMN
’s
incremental cost of borrowing was 6%.
On 1 January 2018 the present value of fu
ture cash flows was calculated:
1 payment of
$40,000 0
5 payments of .
9 $37,72
$50,000 0
4
3 $198,7
00
–––––
3 –––
.
$236,4
9 20
7 –––––
4
–––
The amount of lease liability has increase
d by $198,322, the double entry being deb
it
to right-of-use asset.
The value of the asset is now $271,058 an
d this would be depreciated on a straight li
ne
basis over the next seven years.
2.4 Lease modification
A lease modification – arises when there
is a change in the scope of a lease,
or the consideration for a lease, that was n
ot part of the original lease terms and con
ditions.
Commentary
This could be adding or terminating the
right to use one or more underlying
assets, or extending or shortening the le
ase term.
 Any lease modification is accounte
d for as a separate lease if:
 It increases the scope of the lease b
y adding the right to use one or
more underlying assets; and

The consideration increases by an a
mount that corresponds to the
stand-alone price of the increase in
scope of the lease, after
adjusting for any specifics of the ne
w contract.
rights reserved.
 For any modification that is not acc
ounted for as a separate lease:

discounting the revised lease payme
nts using the
interest rate implicit in the lease for
the remainder of the lease term (or i
ncremental
borrowing rate on the date of modifi
cation).
 Make a corresponding adjustment t
o the right-of-use asset.
Commentary
For lease modifications that decrease th
e scope of the lease, the carrying
amount of the right-of-use asset should
be decreased to reflect the partial or
full termination of the lease and any gai
n or loss on the partial or full
termination of the lease should be recog
nised in profit or loss.
Illustration 6 – Modification
On 1 January 2013 FGH entered into a lea
se contract to lease 2 floors of a 10 storey
office building. The lease is for a period
of 10 years at an annual rent of $100,000,
payable in arrears.
FGH’s incremental cost of borrowing is 6
% and the asset will be depreciated over t
he
10 year life of the lease.
On initial recognition the right-of-use asse
t and lease liability will be measured at
$736,000 ($100,000 × 7.36).
On 1 January 2017 the lease liability is $4
91,722 and the carrying amount of the rig
ht-
of-use asset is $441,600. On this date FG
H arranged, with the lessor, to continue th
e
lease for just one of the floors, reducing th
e office space leased by 50%. The lease
rental for the remaining six years of the le
ase will be $55,000 each year. FGH’s
incremental cost of borrowing has increas
ed to 7%.
The lease liability and right-of-use asset a
re reduced by 50% to reflect the new lease
terms, the difference taken to profit or los
s.
Dr Lease li
ability
Cr Right-
of-use asse $220,800
t $25,061
Cr Profit
or loss
The lease liability is remeasured to reflect
the new terms of the lease:
$55,000 × 4.767 (6-year
annuity factor @ 7%) $262,1
85
The difference in the new liability of $16,
324 (262,185 – 245,861) is added to the
value of the asset, to give an adjusted carr
ying amount of $237,124.
rights reserved.
3 Sale and leaseba
ck
3.1 Recognising a sale

If the revenue recognition criteria o
f IFRS 15 are met the seller (lessee)
will:
 Recognise the cash received;

 Derecognise the asset sold;
 Recognise a right-of-use ass
 et for the asset leased back;
Recognise the lease liability; and
Recognise any gain or loss, but onl
y on the portion of the asset
transferred to the buyer (lessor).
 If the asset is sold at a price that dif
fers from its fair value the seller mu
st
adjust the sale proceeds to fair valu
e by treating the difference as:
 a prepayment of lease rentals, if sol
 d at a below-market price; or
additional financing if sold at an ab
ove-market price.
3.2 Sale not recognised

If the criteria of IFRS 15 are not me
t then no sale can be recognised and
the
asset cannot be derecognised.
 Instead the seller must apply IFRS
9 Financial Instruments and recogn
ise a
financial liability in respect of the p
roceeds received (i.e. account for it
as a loan).
Key point
The treatment of a sale and leaseback of a
n asset depends on whether the revenue
recognition criteria of IFRS 15 have been
met.
Illustration 7 – Sale and leasebac
k
On 1 January 2018 Juno enters into a sale
and leaseback contract to sell for $1,000,0
00
an asset that has a carrying amount of $60
0,000 and a fair value of $900,000.
A contract exists, benefits are to be transf
erred, a price is given and a performance
obligation has been satisfied; therefore the
criteria of IFRS 15 have been met and Jun
o
can treat the transaction as a sale and leas
eback in accordance with IFRS 16.
Juno will make 10 annual lease payments
of $115,000; the interest rate implicit in th
e
lease is 5%. The cumulative discount fact
or (annuity factor) for years 1 to 10 is 7.7
2.
The present value of the 10 payments is $
887,800. $100,000 of this relates to the
additional finance provided by the buyer (
the excess of $1,000,000 over the asset’s f
air
value, $900,000). The remaining $787,80
0 relates to the lease liability.
The right-of-use asset is measured as a pr
oportion of its carrying amount as follows
:
Carrying 600,000
Present value = 787,800
= 525,200
ount 900,000
se liability × Fair value
×
asset
rights reserved.
Illustration 7 – Sale and leasebac
k (continued)
Although the gain on the sale is $300,000
(900 – 600), only the portion that relates t
o
the rights transferred to the buyer is recog
nised as follows:
Fair value of asset - lease liability
Gain ×
Fair value of asset
(900,000 787,800)
300,000 × = $37,400
900,000
In summary, on 1 January 2018 Juno will
account for the sale and leaseback
transaction as follows:
$
Cash $
Right-of-use a 1,00
sset 0,00600,000
Asset sold 0 887,800
Liability rec
ognised 37,400
525,
Gain on righ
200
ts transferred
The right-of-use asset will be depreciated
over its 10 year life, usually on a straight-
line
basis, giving an annual charge of $52,520.
Interest on the liability will be calculated
using the interest rate implicit in the lease
of
5%. In 2018 this will lead to a finance ch
arge of $44,390 (5% × 887,800) to profit
or
loss.
4 Presentation and
disclosure
4.1 Presentation
4.1.1
Statement of financial positi
on
 Right-of-use assets are presented se
parately from other assets in the stat
ement
of financial position or in the disclo
sure notes.

of-use asset classified as investment
A rig property is included with any
ht- other owned investment property.

The lease liability should be present
ed separately from all other liabiliti
es in
the statement of financial position o
r the disclosure notes, separated int
o a
non-current and a current liability (i
n accordance with IAS 1).
4.1.2 Statement of profit or loss
 Depreciation of right-of-use assets a
nd rent payments for short-term and
low-
cost assets are expensed as operatin
g costs.
 Interest relating to a right-of-use as
set is presented as a finance cost.
rights reserved.
4.2 Disclosure

Extensive disclosure requirements a
llow users of financial statements to
assess how
leases affect financial performance,
financial position and cash flows.
 Disclosures include:
 Depreciation of right-of-use assets;
 Interest expense on lease liabilities;
 Expense relating to short-term lease
 s and lease of low-cost assets; and
Any gains or losses on sale and leas
eback contracts.
 Disclosures should also include qua
litative information such as the natu
re of leasing
activities and any restrictions or cov
enants included in leasing contracts.
5 Lessor accountin
g
5.1 Terminology
Finance lease – a lease that transfers subs
tantially all risks and rewards incidental to
ownership of the underlying asset.
Operating lease – a lease that does not tr
ansfer substantially all the risks and rewar
ds
incidental to ownership of the underlying
asset.
 The accounting of leases by the less
or is fundamentally the same as it w
as
under the previous standard, in that
the lease contract is accounted for e
ither
as a finance lease or as an operating
lease.
 The substance of the transaction dic
tates whether the lease is a finance l
ease
or an operating lease.
5.2 Finance lease
5.2.1
Indicators
 The followingwould be classified as
dicators that a a finance lease:
 Underlying asset is transferred to le
ssee at the end of the contract;

Lessee has an option to purchase th
e underlying asset at a price
below fair value;

Lease term is for the majority of th
e underlying asset’s useful life;

Present value of future lease payme
nts is substantially equal to the
fair value of the underlying asset; a
nd

The underlying asset is of a speciali
sed nature and can only be used
by the lessee.
rights reserved.
5.2.2 Accounting
 The lessor will derecognise the und
erlying asset and record an “asset h
eld under
finance lease” equal to the present v
alue of lease payments to be receive
d.
 If the lessor is a manufacturer/deale
r, gross profit (loss) on the sale of t
he
asset is recognised at the inception
of the lease.
 The lessor will apply the interest rat
e implicit in the lease to all lease pa
yments
receivable plus any unguaranteed re
sidual value that would accrue to th
e lessor.

Rentals received by the lessor will b
e split into a repayment of capital
element and an interest element. In
terest will be calculated to give a co
nstant
periodic rate of return on the lessor’
s investment in the lease.
Commentary
The interest income credited to profit or
loss will also decrease each year as
the “asset held under finance lease” rec
eivable is reduced.
Illustration 8 – Finance lease
Ivy leased an asset to Holly under a financ
e lease arrangement on 1 July 2016. The
terms of the lease were six payments of $
200 payable annually in arrears. The cash
price of the asset was $870.
The interest rate implicit in the lease is 10
%.
Sale of asset
As the transaction is a finance lease, the p
hysical asset should be derecognised thro
ugh
a sale transaction, with any profit or loss o
n sale included in profit or loss for the
period.
A receivable asset should be recognised in
stead of the physical asset sold. The
receivable recognised at lease inception is
equal to the cash price of the asset, $870.
Annual rent
The $200 rent needs to be split into the int
erest element and the repayment of capital
.
In this example the interest income for ye
ar ended 30 June 2017 would be $87 ($87
0 ×
10%) and the receivable would be reduce
d to $757 ($870 + $87 – $200).
5.3 Operating lease

The lessor will maintain the recogni
tion of the underlying asset and will
depreciate that asset based on norm
al depreciation policy for similar as
sets.
 Operating lease rentals will be credi
ted to profit or loss on a straight lin
e
basis, unless a more systematic basi
s is deemed appropriate.
rights reserved.
Illustration 9 – Operating lease
Under a lease agreement Cartright receive
s a non-returnable deposit of $100,000 an
d
then three years rental income of $100,00
0 paid on the first day of each year. The a
sset
has a life of 10 years and the lease agreem
ent is classified as an operating lease.
($100,000) ($300,000)
3 years = $133,333
Statement of financial position
At end of 1st
ear $
rec
200,00 eiv
0 ed
(133,33 cre
3) dite
–––––– d
–
66,667 unearned in
come
––––––
–
5.4 Disclosures

Information should be disclosed tha
t gives users of the financial statem
ents
knowledge of an entity’s leasing act
ivities and the effect those leases ha
ve on
an entity’s statement of financial po
sition, statement of profit or loss an
d
statement of cash flows.
 Information disclosed will includ
e:
 Profit or loss on the sale of an asset
 under a finance lease contract;
 Finance income earned on a financ
 e lease;

A maturity analysis for lease paym
ents receivable;
Operating lease income; and
Quan ative disclosures necessary to give
titativ users an
e and understanding of the leasing activiti
qualit es.
Focus
 account for right-of-use assets and l
ease liabilities in the records of the l
essee;
 explain the exemption from the reco
gnition criteria for leases in the reco
rds of the lessee;
 account for and discuss sale and lea
seback transactions in the financial
statements of lessees;
 explain the distinction between ope
rating leases and finance leases fro
m a
lessor perspective; and
 account for operating leases and fin
ance leases in the financial statemen
ts of lessors.
rights reserved.
Key points summary
Lessee accounting
All leases are capitalised except for leases
of less than 12 months duration and
leases of assets with low value.
It is a right-of-use asset that is capitalised
rather than a physical asset.
The initial lease liability is the present val
ue of future lease payments using the
interest rate implicit in the lease. Any upf
ront deposits are not included in the
calculation.
The initial right-of-use asset is measured a
t the initial lease liability plus any initial
deposit plus any direct costs incurred plus
any future decommissioning costs.
Lease payments will be split into the repa
yment of capital and interest using the
interest rate implicit in the lease.
The right-of-use asset is depreciated over
the useful life of the lease, unless it is
expected that ownership of the asset will
be transferred at the end of the lease
term, in which case the asset will be depre
ciated over the useful life of the asset.
Short-term leases and leases where the un
derlying asset is of a low value will
expense any rental payments, normally on
a straight-line basis.
The requirements of IFRS 15 Revenue fro
m Contracts with Customers will be
applied to sale and leaseback transactions.
If the revenue recognition criteria of IFRS
15 are met in a sale and leaseback, a
sale of the asset will be recognised and re
placed with a right-of-use asset and a
lease liability.
If the revenue recognition criteria of IFRS
15 are not met in a sales and leaseback,
Lessor accounting
The lessor classifies leases as either finan
ce leases or operating leases, dependant
on the substance of the contract.
For finance leases, the underlying asset is
derecognised and replaced with a
receivable asset.
Rentals are split, using the interest rate im
plicit in the lease, into interest income
and the repayment of the capital element
of the lease.
Operating leases recognise rental income
on a straight line basis and continue to
depreciate the underlying asset.
rights reserved.
Activity solutions
Solution 1 – Identifying a Le
ase
The contract for the rent of 10 trucks is a l
ease as the trucks have been explicitly ide
ntified in the
contract. They remain on Jerbyn’s premis
es and are under the control of Jerbyn. If
damaged or in
need of maintenance, the supplier will del
iver a replacement.
The trailers are not an identified asset as t
he supplier can deliver any trailer it has av
ailable and the
trailers are kept at the supplier’s premises;
Jerbyn has no control over the trailers. A
ny payments
for rent of the trailers will be expensed ov
er the period of use; the right-of-use of the
trailer will not
be capitalised.
Solution 2 – Right-of-use A
sset
(a)
Interest allocation
Rentals $
Initial li

ability re
cognised

1
I 2
n ,
0
t 0
e 0

r
e (
s 8
,
t 7
1
0
e )
x
p –
e –
n –
–
s –
e –

3
,290
––––––
Year Amount InterestRental

Amount owed
d at the @ at the
1 start of 10%(2,000) end of the
period 871 year
7,581
8,710
2 7, 75 (2,00 6,339
5 8 0)
8
1
3 6, 63 (2,00 4,973
3 4 0)
3
9
4 4, 49 (2,00 3,470
9 7 0)
7
3
5 3, 34 (2,00 1,817
4 7 0)
7
0
6 1, 18 (2,00 0
81 3 0)
7
3,290
rights reserved.
(b) Financial statements
Analysis of payable
Current (2,0
00 – 758 (W = 7,581
))
Non- 6,
curren 33
t 9
Right-of-use asset
Cost (8,710 lease liabili $

ty + 1,000 installation)
Depreciation (9,710 ÷ 6 9,710
)
(1,61
8)
C ––––
a ––
r
8,092
r
y ––––
i ––
n
g

a
m
o
u
n
t

WORKING
Lease payable
1.1.18 Right-of-use asset
8,710
31.12.18 31.12.18 871
Cash Interest
31.12.18 Bal c/d 7,581
9,581 9,581
1.1.19 Bal b/d 7,581
31.12.19
31.12.1 75
Cash 9 Inter 8
2,000 est
rights reserved.
Overview
Objective

To explain the acco
unting rules for inta
ngible non-current a
ssets.
INTRODUCTI
ON  Definitions
TO IAS
 Definition criteria
 INTE
RE RNAL
G CO LY
e GNI
n TIO
N GENE
e
RATE
r D
a AN INTA
l D I
NIT NGIB
c IAL LE AS
r ME SETS
i AS
t UR
e
r EM
i EN
a T

 Goodwil
l v other
tangibles
 
 Other internally gene
rated
 Expenses and costs
G
NI
TI
ME O
ASU D N
RE
ME
NT
AFT
ER
REC
OG
NITI
ON
SU
RE
D
 mo  I Inta
del mp ngible
air assets
men
t lo
sses
 Revalu  Reval
 Retireme
ation mod
nts and uations
el posals
USEFUL LIFE
 Factors
 Finite
 Indefinite
1101
eserved.
SESSION 11 – IAS 38 INTANGIBLE ASSETS
1 Introduction to IAS 38
1.1 Definitions

Intangible assets are identifiable, non-
monetary assets without physical substance.
Commentary
Some intangibles may be contained in or on a phys
ical medium (e.g. software on a
disk or embedded within the hardware). Judgemen
t has to be used to determine which
element is more significant (i.e. the intangible or t
he tangible asset).
Activity 1
Classify each of the following assets as either tangibl
e or intangible:
(1)
(2) the operating system of a personal computer
(3) an off-the-shelf integrated publishing software
(4) package
specialised software embedded in computer c
ontrolled machine tools
a “firewall” controlling access to restricted sec
tions of an Internet website.
 Examples of intangibles include:
 Patents;
 Copyrights (e.g. computer software);
 Licences;
 Intellectual property (e.g. technical knowledge
 obtained from development activity);
Trade marks including brand names and publi
 shing titles;
Motion picture films and video recordings.
1.2 Definition criteria
1.2.1 “Identifiability”
 generated inter
nally or acquired in a business
combination, is identifiable when it:
 is separable; or
Commentary
So it is capable of being separated or divided from
the entity and sold,
transferred, licensed, rented or exchanged, either i
ndividually or together
with a related contract, asset or liability.
 arises from contractual or other legal rights.
Commentary
These rights are regardless of whether they are tra
nsferable or separable
from the entity or from other rights and obligation
s.
These criteria distinguish intangible assets from go
odwill acquired in a
business combination (see later).
©2017 Becker Educational Development Corp. All rights reserve 1102
d.
1.2.2 “Control”
 Control means:
 the power to obtain the future economic bene
fits from the
underlying resource; and
 the ability to restrict the access of others to th
ose benefits.
Control normally stems from a legal right that
 is enforceable in a court of
law. However, legal enforceability is not a pr
erequisite for control as the
entity may be able to control the future econo
mic benefits in some other way.

Expenditure incurred in obtaining market and
technical knowledge, increasing
staff skills and building customer loyalty may
be expected to generate future
economic benefits. However, control over the
actions of employees and
customers is unlikely to be sufficient to meet t
he definition criterion especially
where there are non-contractual rights.
Commentary
Measures that seek to secure the future economic b
enefits of talent (e.g. “non-
compete” terms of employment) can restrict the ac
cess of others for a period
after the employee has left (“gardening leave”). E
ven so, the employee will
never be recognised as an intangible asset.
 In some types of business it might be possible
to capitalise the purchase of
“rights to use” an employee as an asset.
Commentary
For example, the transfer price of a footballer acq
uired by a football club
from another football club would be capitalised as
a “rights to use” asset.
1.2.3 “Future economic benefits”
 These are net cash
include increased revenues an
ows and may d/or cost savings.
Commentary
The use of intellectual property in a production pr
ocess may reduce future
production costs rather than increase future revenu
es.
2
Recognition and initial
measurement
2.1 General criteria

An intangible asset should be recognised wh
en it:
 complies with the definition of an intangible a

sset (see above); and
 probable future economic benefits; and
 reliable cost measurement.
d.
of future economic be

nefits must be assessed using reasonable
and supportable assumptions, with greater wei
ght given to external evidence.
Commentary
The criteria for recognition as an intangible asset
are therefore, in summary –
identifiability, control, probable future economic be
nefits and reliable cost measurement.
2.2 Goodwill v other intangibles
Commentary
This section introduces goodwill in the context of i
ntangible assets. Accounting for
goodwill in accordance with IFRS is detailed is Se
ssion 22.
2.2.1 Nature
 “Goodwill”, as a general term, describes such
things as brand name, reputation,
competitive advantage and high employee mo
rale which bring value to a business.
It contributes to the generation of revenue.

It is generated over many years with expenditu
re on promotion, the creation and
maintenance of good customer and supplier re
lations, the provision of high quality goods
and services, skilled workforce and experience
d management.
 It includes the worth of a corporate identity an
d is enhanced by such things as corporate
image and location. In well-established busin
esses this worth may be well in excess of
that of its physical assets.
Commentary
When acquiring a business goodwill is commonly v
alued using an earnings multiple.
2.2.2 Possible accounting treatments
 Expenditure can be recognised in only two
ways:

 asset; or
expense.
 to the
creation of goodwill but for related activities
(e.g. promotion, client services, quality control
, etc). Such costs are expensed as incurred.

goodwill cannot be recognised as an asset bec
Inter ause it does not meet the
nally definition of an intangible asset – it is not iden
- tifiable. In particular, it is clearly inseparable.
gene It can only be disposed of with the business as
rated a whole.
Commentary
IFRS generally does not permit recognition of an a
sset for costs initially expensed.

However, when a business is acquired as a wh
ole, the buyer will (usually) pay a price in
excess of the fair value of all the assets (net of
liabilities) that can be separately identified
(including other intangible assets such as intell
ectual property).
d.
Commentary
The IFRS 13 definition of fair value applies to IAS
38.

the future ec
onomic benefits expected to arise from the
intangible asset that is goodwill in the acquire
d company but also those that arise from
expected synergies (e.g. cost savings) and othe
r benefits of the acquisition.
Commentary
So the intangible assets recognised as goodwill by
the purchaser is not the same as the
goodwill that was inherent in the business acquired
.
 Possible accounting treatments for goodwill, a
s a purchased asset, in the consolidated
financial statements of an acquirer are:

 immediate write-off;
 carry at cost (with or without annual impairm
 ent review);
carry at cost with annual amortisation;
carry at revalued amount.
Key point
Under IFRS purchased goodwill is recognised as an
asset (“capitalised”) and
carried at cost but subject to an annual impairment re
view.
Argument Arguments a
s for gainst
It is inconsistent (and t
therefore it would be o herefore
incomparable) with the
ver-prudent to treatment of
expense rather than re internally-generated go
cognise an asset. odwill (which is
never recognised).
the normal course of busine
ss. It will not be Goodwill has a finite (albe
it unknown) life
worthless while the entity
which can be estimated.
a going concern.
amount falls to less th Purchased goodwill will d
an cost (i.e. it is eteriorate over
time as the factors which g
impaired). enerated it (e.g.
personnel) are replaced.
expens
efore to write-off goodwill
edalso
maintaining goodwill (e.g.
staff training) is
would result in a “double
harge” to profit. Goodwill is not separately
realisable
therefore it is imprudent to
carry as an asset.
2.3 Initial measurement – cost

Intangible assets should be measured initiall
y at cost.
 An intangible asset may be acquired:
 separately;
 as part of a business combination;
 by way of a government grant;
 by an exchange of assets.
d.
2.3.1 Separate acquisition
 The cost of the intangible asset can usually be
measured reliably when it has
been separately acquired (e.g. purchase of co
mputer software).
Commentary
As the price paid will normally reflect expectations
of future economic
benefits, the probability recognition criteria is alw
ays considered to be
satisfied for separately acquired intangible assets.
 “Cost” is measured according to the same prin
ciples applied in accounting for
other assets. For example: Purchase price + i
mport duties + non-refundable
purchase tax.
 Deferred payments are included at the cash pr
ice equivalent and the difference
between this amount and the payments made
are treated as interest.
 Expenditure that would not be classified as “c
ost” include those associated with:
 Introducing a new product or service (includin
g advertising and promotion);

Conducting business in a new location or with
a new class of customer;
 Administration and other general overheads
;
 Initial operating costs and losses;
 Costs incurred while an asset capable of oper
ating in the manner
intended has not yet been brought into use;

Costs incurred in redeploying the asset.
Worked example 1
Kirk is an incorporated entity. On 31 December it ac
quired the exclusive rights to a
patent that had been developed by another entity. Th
e amount payable for the rights
was $600,000 immediately and $400,000 in one year
’s time. Kirk has incurred legal
fees of $87,000 in respect of the bid. Kirk operates i
n a jurisdiction where the
government charges a flat rate fee (a “stamp duty”) o
f $1,000 for the registration of
patent rights.
Kirk’s cost of capital is 10%.
Required:
Calculate the cost of the patent rights on initial re
cognition.
Worked solution 1
$

Deferred consideration ($4 600,00
00,000 × /1.1) 0
Legal fees 363,63
Stamp duty 6
87,000
–––––
Cost on initial r ––––
ecognition
d.
2.3.2 Business combination
 The cost of an intangible asset acquired in a b
usiness combination is its fair value at the
date of acquisition, irrespective of whether the
intangible asset had been recognised by
the acquiree before the business combination (
IFRS 3).
 The fair value of intangible assets acquired in
business combinations can normally be
measured with sufficient reliability to be reco
gnised separately from goodwill.
Commentary
An assembled workforce would not normally meet t
he recognition criteria, however, the
rights to use an individual, such as a sportsman, m
ay meet the recognition criteria.
 There is a rebuttable presumption that if the i
ntangible asset has a finite
useful life, its fair value can be measured relia
bly.
Commentary
As fair value reflects market expectations about the
probability of future
economic benefits, the probability recognition crite
ria is always met for
intangible assets acquired in a business combinatio
n.
 Fair value at the date of the acquisition might
be measured using:
 the current bid price in an active market (whe
 re one exists);
 the price of the most recent, similar transactio
 ns for similar assets;
multiples applied to relevant indicators such a
s earnings;
discounted f
uture net cas
h flows.
Commentary
Using a weighted probability where there is a rang
e of possible outcomes
demonstrates uncertainty rather than inability to m
easure fair value reliably.
 Although an intangible asset acquired as part
of the business combination
may meet the recognition criteria, this may on
ly be it is considered
possi to be part of a related tangible or intangible as
ble set.
 Such a group of assets is recognised as a singl
e asset separately from goodwill if
the individual fair values of the assets within t
he group are not reliably measured.
Commentary
Such recognition removes from goodwill as many i
ntangible assets as possible.
Illustration 1
In acquiring a company, two separable intangible ass
ets are identified – a magazine’s
publishing title and a related subscriber database. Al
though similar databases are
traded, the fair value of the publishing title cannot be
reliably measured as it cannot be
sold without the database. The two intangible assets
are therefore recognised as a
single asset and the fair value of both as a single asse
t established.
d.
Illustration 2
The term “brand” and “brand name” are general mar
keting terms that are often used to
refer to a group of complimentary assets (e.g. a trade
mark its related trade name,
formulas, recipes and technical expertise). In a busin
ess combination, complementary
assets with similar useful lives may be recognised an
d valued as a single asset if the
fair values of the individual assets comprising the “br
and” cannot be reliably measured.
Worked example 2
Picard is an incorporated entity. On 31 December it
paid $10,000,000 for a 100%
interest in Borg.
At the date of acquisition the net assets of Borg as sh
own in its statement of financial
position had a fair value of $6,000,000. Borg also he
ld the following rights:
(1)
The brand name “Assimilation”, a middle of t
he range fragrance. Borg had
been considering the sale of this brand just pri
or to its acquisition by Picard.
The brand had been valued at $300,000 by Br
and International, a reputable
firm of valuation specialists, who had used a d
iscounted cash flow technique.
(2) Sole distribution rights to a product “Lacutus”
. It is estimated that the future
cash flows generated by this right will be $25
0,000 per annum for the next 6
years. Picard has determined that the appropri
ate discount rate for this right
is 10%. The 6 year, 10% annuity factor is 4.3
6.
Ignore taxation.
Required:
Calculate goodwill arising on acquisition.
Worked solution 2
account when the cost of acquisition is allocated in a
ccordance with IFRS 3 Business
Brand50,000 ×
acquire
Cost d 4.36)
Net assets recognised in Distrib
Borg’s
statement of financial p ution
osition ghts
Goodwill on a
$000
cquisition
10,000
6,000
1,090 7,390
––––––
–––––– 2,610
––––––
d.
Worked example 3
A water extraction company was obtained as part of
a business combination for a cost
of $1,000,000. The fair value of the net assets at the
date of acquisition was $750,000.
A licence for the extraction of the water had been gra
nted to the company prior to the
acquisition by the local authority for an administratio
n fee of $1,000. Whilst extremely
valuable to the company (as without the licence the b
usiness could not operate), the
licence cannot be sold other than as part of the sale o
f the business as a whole. The fair
value of the licence on acquisition was identified as
$20,000.
Required:
Calculate goodwill arising on acquisition.
Worked solution 3
The water extraction rights were obtained as part of a
business combination. Without
these rights, the acquiree cannot extract water and th
erefore could not operate as a
business.
The rights cannot be sold separately without the busi
ness but the licence can be
separately identified and therefore should be include
d in the consolidated financial
statements at its fair value.
$
Cost 1,000,000
Net assets recognised in statement of (750,000)
(20,000)
inancial position ––––––––
Licence 230,000
––––––––
Goodw
ill on a
cquisiti
on
2.3.3 Government grant

Some intangible assets may be acquired free o
f charge, or for nominal
consideration, by way of a government grant (
e.g. airport landing rights, licences to
operate radio or television stations, import qu
otas, rights to emit pollution).

Assis angible asset (debit entry) and the grant (credi
tance t entry) may
both be recorded initially at either fair value or cost
he int (which may be zero).
Illustration 3
Neelix harvests and produces seafood. On 31 Dece
mber 2016 it was awarded a fishing
quota of 1,000 tonnes of black cod per annum for fiv
e years.
The acquisition of the quota involves regulatory fees
amounting to $36,000. The fair
value of the fishing quota is $4,300,000 (net of the re
gistration fee).
d.
Analysis
 Measurement of the intangible asset on initial
recognition is at either:
or
$36,000 Fair value
$4,300,000
Commentary
Note that the credit entry falls to be treated as a g
rant under IAS 20. It may
be presented in the statement of financial position i
n one of two ways:
(1) As deferred income
(2) As a deduction from the carrying amount of
intangible asset.
Offsetting (i.e. (2)) is equivalent to ignoring it com
pletely (there would be no
amortisation) and so not permitted under certain G
AAPs. Therefore the
deferred credit treatment of a grant is likely to be
preferable.
2.2.4 Exchanges of assets

value unless:
 the exchange transaction lacks commercial su
 bstance; or
the fair value of neither the asset received nor
the asset given up is
reliably measurable.
 In the case of these exceptions the initial cost
of the asset acquired is the
carrying amount of the exchanged asset.
2.4 Subsequent expenditure
2.4.1 Intangible assets
 In most cases, there are no additions to an inta
ngible asset, or the replacement of
parts of such assets.

economic benefits embod
in an existing intangible asset and do not meet
the definition of an intangible asset and
IAS 38 recognition criteria.
 Also, it is often difficult to attribute subseque
nt expenditure directly to a particular
intangible asset rather than to the business as
a whole.
 Therefore, only rarely will subsequent expendi
ture be recognised in the carrying amount
of an asset. Normally, such expenditure must
be written off through profit or loss.
d.
2.4.2 Acquired in-process research and de
velopment
 Subsequent expenditure on an acquired in-
process research and development project is
accounted for like any cost incurred in the res
earch of development phase of internally
generated intangible asset (see next section).
 Research expenditure – expense when incurr
ed.
 Development expenditure – expense when inc
urred if it does not satisfy the
asset recognition criteria.
 Development expenditure that satisfies the rec
ognition criteria – add to the
carrying amount of the acquired in-process res
earch or development project.
3 Internally generated int
angible assets
3.1 Internally generated goodwill

Internally generated goodwill should not be r
ecognised as an asset.

Although goodwill may exist in any business i
ts recognition as an asset is precluded because
it is not an identifiable resource (i.e. it is not se
parable nor does it arise from contractual or
other legal rights) controlled by the entity that
can be measured reliably at cost.
Commentary
When goodwill is “crystallised” by a business acq
uisition it is recognised as
an asset and accounted for in accordance with IFR
S 3.
3.2 Other internally generated as
sets

It is sometimes difficult to assess whether an i
nternally generated intangible
asset qualifies for recognition. Specifically, it
is often difficult to:

identify whether there is an identifiable asset
that will generate
probable future economic benefits; and

measure
the cost
of the
set relia
bly.
Commentary
It is sometimes difficult to distinguish the cost of g
enerating an intangible
asset internally from the cost of maintaining or en
hancing the entity’s
internally generated goodwill or of running day-to-
day operations.
 Internally generated brands, mastheads, publis
hing titles, customer lists and
items similar in substance are not recognised
as intangible assets.
Commentary
Such expenditures cannot be distinguished from the
cost of developing the
business as a whole.
d.
3.3 Specific recognition criteria

In addition to complying with the general req
uirements for the recognition
and initial measurement of an intangible asset
(see s.2.1), an entity must also
apply the following to all internally generated
intangible assets.
 Generation of the asset must be classified in
to:

a “research phase”; and

a further advanced “development phase”.
Commentary
If the research and development phases of a projec
t cannot be distinguished they
should be regarded as research only and expensed
through profit or loss.
3.3.1 Accounting in the research phase
 cannot demonstrate that an intangibl
e asset exists that will generate
probable future economic benefits during the
research phase.
 Expenditure on research should be recognised
as an expense when it is incurred.
 Examples of research activities are:
 activities aimed at obtaining new knowledg
e;
 the search for, evaluation and final selection
of, applications of
research findings or other knowledge;

the search for alternatives for materials, devi
ces, products,
processes, systems or services; and
 the formulation, design, evaluation and final s
election of possible
alternatives for new or improved materials, d
evices, products,
processes, systems or services.
3.3.2 Accounting in the development pha
se
 An intangible asset arising from development
should be recognised if, and
only if, an entity can demonstrate all of the fo
llowing:
 the technical feasibility of completing the inta
ngible asset so that it
will be available for use or sale;

its intention to complete the intangible asset a
nd use it or sell it;

its ability to use or sell the intangible asset;
 how the intangible asset will generate probabl
e future economic benefits;
 the availability of adequate technical, financia
l and other resources to
complete the development and to use or sell t
he intangible asset; and

its ability to measure the expenditure attributa
ble to the intangible
asset during its development reliability.
d.
 Examples of development activities are:
 the design, construction and testing of pre-
production or pre-use prototypes;

the design of tools, jigs, moulds and dies invo
lving new technology;

the design, construction and operation of a pil
ot plant that is not of
a scale economically feasible for commercial
production; and
 the design, construction and testing of a chose
n alternative for new or
improved materials, devices, products, proces
ses, systems or services.

Expenditure on an intangible item that was ini
tially recognised as an expense
(e.g. research) should not be recognised as par
t of the cost of an intangible asset
at a later date (e.g. after the development phas
e has commenced).
Illustration 4
An entity is developing a new production process. T
he amount of expenditure in the
year to 31 December 2017 was as follows:
$
1 January to 30 Novembe 2,160
r 240
1 December to 31 Decem ––––––
2,400
ber ––––––
On 1 December the entity was able to demonstrate th
at the production process met the
criteria for recognition as an intangible asset. The a
mount estimated to be recoverable
from the process (including future cash outflows to c
omplete the process before it is
available for use) is $1,200.
Analysis

At 31 December 2017 the production process i
s recognised as an intangible asset at a cost of
$240 (expenditure incurred since 1 December
when the recognition criteria were met). The
intangible asset is carried at this cost (which is
less than the amount expected to be recoverabl
e).

The $2,160 expenditure incurred before 1 Dec
ember is recognised as an expense because the
recognition criteria were not met until that dat
e. This expenditure will never form part of the
cost e production process recognised in the stateme
of th nt of financial position.
Illustration 4 – continued
Expenditure in 2018 is $4,800. At 31 December 201
8, the amount estimated to be
recoverable from the process (including future cash o
utflows to complete the process
before it is available for use) is $4,500.
Analysis

At 31 December 2018, the cost of the producti
on process is $5,040 (240 + 4,800). The entity
recognises an impairment loss of $540 to adjus
t the carrying amount before impairment loss
($5,040) to its recoverable amount ($4,500).
 This impairment loss will be reversed in a sub
sequent period if the requirements for the
d.
3.3.3Research and development acquired
as part of a business combination
 An in-process research and development proje
ct acquired as part of a business
combination should be recognised separately f
rom goodwill if:
 the project meets the definition of an intangibl
 e asset; and
it is identifiable (i.e. is separable or arises fro
m contractual or other legal rights).
Commentary
The strict recognition criteria are not required to b
e met.
3.4 Recognition of expenses and
costs

Expenditure on an intangible item is recognise
d as an expense when it is incurred unless:
 it forms part of the cost of an intangible asset
that meets the
recognition criteria; or

the item is acquired in a business combinatio
n and cannot be
recognised as an intangible asset.
Commentary
Where an intangible item acquired in a business c
ombination cannot be recognised as
an intangible asset, the expenditure (included in th
e cost of the business combination)
will increase the amount attributed to goodwill at t
he acquisition date.

comprises all directly
attributable costs necessary to create, produce,
and prepare the asset to be capable
of operating in the manner intended by manag
ement.
 Examples include:
 costs of materials and services used;
 salaries, wages and other employment relate
 d costs;
fees to register a legal right.
 Expenses that are not components of cost in
clude:

 

sellin neral overhead costs;
g, ad identified inefficiencies and initial operating l
minist osses ;
ration those that have previously been expensed (e.g
and . during a research phase);
her
training expenditure.

incurred to provide future econo
mic benefits for which no
intangible asset can be recognised is expensed
when incurred. Examples,
except when they form part of the cost of a bu
siness combination, include:
 research costs;
 pre-opening costs for a new facility;
 plant start-up costs incurred prior to full scale
 production;
 legal and secretarial costs incurred in setting
 up a legal entity;
training costs involved in running a business
or a product line;
advertising and related costs.
d.
Commentary
This does not preclude recognising a prepayment
when payment for goods or services
has been made in advance of the delivery of goods
or the rendering of services. In
particular, a prepayment asset may be recognised f
or advertising or promotional
expenditure (e.g. mail order catalogues) up to the
point at which the entity has the right to
access the goods purchased (or the point of receipt
of service).
4 Measurement after rec
ognition
Commentary
An entity can choose either a cost or revaluation
model.
4.1 Cost model

Cost less any accumulated amortisation and a
ny accumulated impairment losses.
4.2
Revaluation model

Revalued amount, which is the fair value at th
e date of the revaluation less any
subsequent accumulated amortisation and any
accumulated impairment losses.
Fair value of a revalued intangible asset must
 be measured by reference to an
active market (i.e. one in which transactions
are of sufficient frequency and
volume to provide a price on an ongoing basis
).
Commentary
This is different to the treatment of revaluation und
er IAS 16 where depreciated
replacement cost can be used when there is no evi
dence of market value.
 Revaluations must be sufficiently regular that
carrying amount is not
 The revaluation model does not allow:
 the revaluation of intangible assets that have
not previously been
recognised as assets;

the initial recognition of intangible assets at a
mounts other than their cost.
 The revaluation is carried out according to the
same principles applied in accounting for
other assets. For example any surplus is recog
nised in other comprehensive income and
accumulated in equity and all intangible assets
in the class must be revalued.
Commentary
It is very rare for intangibles to be revalued in pr
actice.
d.
5 Useful life
5.1 Factors

The useful life of an intangible asset should b
e assessed as finite or indefinite.
Commentary
A finite useful life is assessed as a period of time o
r number of production or
similar units. An intangible asset with a finite life
is amortised. “Indefinite”
does not mean “infinite”.
 Useful life is regarded as indefinite when ther
e is no foreseeable limit to the
period over which the asset is expected to gen
erate net cash inflows.
Commentary
This must be based on an analysis of all of the rel
evant factors. An intangible
asset with an indefinite life is not amortised.
 Factors to be considered in determining usef
ul life include:
 expected usage of the asset by the entity;
 typical product life cycles for the asset;
 public information on estimates of useful live
s of similar types of
assets that are similarly used;
 technical, technological, commercial or other
obsolescence;
 expected actions by competitors or potential
competitors.
Commentary
For example, computer software is susceptible to t
echnological obsolescence
and so has a short useful life.
5.2 Finite useful lives
5.2.1
Contractual or other legal rights
 The useful life of an intangible asset arising fr
om contractual or other legal
rights should not exceed the period of such rig
hts, but may be shorter.
Illustration 5
An entity has purchased an exclusive right to operate
a passenger and car ferry for
thirty years. There are no plans to construct tunnels
or bridges to provide an alternative
river crossing in the area served by the ferry. It is ex
pected that this ferry will be in use
for at least thirty years.
d.
Illustration 6
An entity has purchased an exclusive right to operate
a wind farm for 40 years. The
cost of obtaining wind power is much lower than the
cost of obtaining power from
alternative sources. It is expected that the surroundin
g geographical area will demand a
significant amount of power from the wind farm for
at least 25 years.
Commentary
The entity amortises the right to generate power ov
er 25 (rather than 40) years.
5.2.2 Amortisation
 The depreciable amount of an intangible asset
should be allocated on a
systematic basis over the best estimate of its u
seful life.
 Amortisation begins when the asset is availa
ble for use.
Commentary
When it is in the location and condition necessary
for it to be capable of
operating as intended.
 Amortisation ceases at the earlier of the date
that the asset is:
 classified as held for sale; or
Commentary
IFRS 5 “Non-current Assets Held for Sale and Dis
continued Operations” applies.
 derecognised.
Commentary
It does not cease when an intangible asset is temp
orarily idle, unless it is
fully amortised.

The amortisation method used should reflect t
he pattern in which the asset’s economic
benefits are consumed by the entity (e.g. unit
of production method). If that pattern
cannot be determined reliably, the straight-
line method should be adopted.
5.2.3 Residual value
 The residual value is assumed to be zero unles
s there is a commitment to purchase
by a third party and there is an active market f
or that particular asset.
Commentary
A non-zero residual value attributed to an asset im
plies an intention to
dispose of it before the end of its economic life. T
hus development costs, for
example, are unlikely to have a residual value (oth
er than zero).
d.
Activity 2
On 1 April 2017 Brook established a new research a
nd development unit to acquire
scientific knowledge about the use of synthetic chem
icals for pain relief. The
following expenses were incurred during the year en
ded 31 March 2018.
(1) Purchase of building for $400,000. The buildi
ng is to be depreciated on a
straight line basis at the rate of 4% per annum
on cost.
(2)
Wages and salaries of research staff $2,355,
000.
(3) Scientific equipment costing $60,000 to be de
preciated using a reducing
balance rate of 50% per annum.
Brook charges a full year’s depreciation expense in t
he year of acquisition.
Required:
Calculate the amount of research and developmen
t expenditure to be recognised
as an expense in the year ended 31 March 2018.
Activity 3
In its first year of trading to 31 July 2018 Eco-chem i
ncurred the following expenditure
on research and development, none of which related
to the purchase of property, plant
and equipment.
(1) $12,000 on successfully devising processes to
convert the sap extracted from
mangroves into chemicals X, Y and Z.
(2)
$60,000 on developing an analgesic medicatio
n based on chemical Z.
No commercial uses have yet been discovered for ch
emicals X and Y.
Commercial production and sales of the analgesic co
mmenced on 1 April 2018 and are
expected to produce steady profitable income during
a five year period before being
replaced. Adequate resources exist for the company
to achieve this.
Required:
Calculate the maximum amount of development e
xpenditure that may be carried
©2017 Becker Educational Development Corp. All rights reserve
d.
1118
5.3 Indefinite useful lives

An intangible asset with an indefinite useful
life is:


not amortised; but
tested for impairment:

annually; and

whenever there is an indication of impairme
nt.
Commentary
Reassessing a useful life as finite rather than indefi
nite is an indicator that
the asset may be impaired.
 The useful life is reviewed each period to dete
rmine whether events and
circumstances continue to support an indefinit
e useful life assessment.
Commentary
If not, the change in accounting estimate is accoun
ted for in accordance with IAS 8.
6 Impairment and dereco
gnition
6.1 Impairment losses

IAS 36 Impairment of Assets contains provis
ions regarding:

 when and how carrying amounts are reviewe
d;
 how recoverable amount is determined; and
when an impairment loss is recognised or re
versed.
Commentary
The purpose of testing for impairment is to ensure
recovery of the carrying amount. Note
that the uncertainty about recovering the cost of a
n intangible asset before it is available
for use (e.g. development costs) is likely to be grea
ter than when it is brought into use.
6.2 Retirements and disposals

An t should be derecognised (i.e. eliminated from
angibl the
e asse statement of financial position ):

 on disposal; or
when no future economic benefits are expecte
d from its use or disposal.
 Gains or losses arising are determined as the
difference between:

 the net disposal proceeds; and
the carrying amount of the asset.
Gains or losses are recognised as income or expense
in the period in which
the retirement or disposal occurs. Gains are not class
ified as revenue.
d.
7 Disclosure
Illustration 7
Notes to consolidated financial statements
2. Significant accounting principles
Intangible assets
Intangible assets acquired separately are measured on initial
recognition at cost. The cost of intangible assets acquired in
a
business combination is their fair value as of the date of acqu
isition.
Internally generated intangibles, except for development cos
ts that
may be capitalized, are expensed as incurred. Development c
osts are
capitalized only if the Group has the technical feasibility to co
mplete
the asset; has an ability and intention to use or sell the asset;
can
demonstrate that the asset will generate future economic be
nefits;
has resources available to complete the asset; and has the abi
lity
to measure reliably the expenditure during development.
Nokia in 2016
Commentary
than, those of IAS 16 “Property, Plant and Equipm
ent”.
7.1
Intangible assets
7.1.1 General
 The financial statements should disclose the a
ccounting policies adopted for
intangible assets and, in respect of each class
of intangible assets:
 whether useful lives are indefinite or finite a
nd, if finite:

 the useful lives or the amortisation rates use
d;
the amortisation methods used;
 the gross carrying amount and any accumulat
ed amortisation (including
accumulated impairment losses) at the beginn
ing and end of the period;
 the line item of the statement of profit or loss
in which any amortisation is
includ ed;
 a reconciliation of the carrying amount at the
beginning and end of the period
showing all movements that have arisen in the
period analysed by type.
d.
Illustration 8
9. Goodwill and intangible assets
Intangible assets (extract)
Finite life intangible assets are amortised over the shorter
of their contractual or useful economic
lives. They comprise mainly management information syst
ems, patents and rights to carry on an
activity (e.g. exclusive rights to sell products or to perform
a supply activity). Finite life intangible
assets are amortised on a straight-line basis assuming a z
ero residual value: management
information systems over a period ranging from 3 to 5 year
s; other finite life intangible assets
over the estimated useful life or the related contractual peri
od generally 5 to 20 years or longer,
depending on specific circumstances. Useful lives and resi
dual values are reviewed annually.
Amortisation of intangible assets is allocated to the approp
riate headings of expenses by
function in the income statement.
Consolidated Financial Statements of the Nestlé Group 2016
7.1.2 Individually material intangible asset
s
 Disclose the nature, carrying amount and rem
aining amortisation period of any
individual intangible asset that is material to t
he financial statements as a whole.
Illustration 9
4. Basic principles, methods and critical acc
ounting estimates
(extract)
Other intangible assets
Other intangible assets are recognized at the cost of acquisition or
generation. Those with a determinable useful
life are amortized accordingly on a straight-line basis over a perio
d of up to 30 years, except where their actual
depletion demands a different amortization pattern. Determination
of the expected useful lives of such assets and
the amortization patterns is based on estimates of the period for w
hich they will generate cash flows. An impairment
t est is perf orm ed if t h er e is an indic at ion of poss ib le im p air
m ent.
Other intangible assets with an indefinite life (such as the Bayer C
ross trademark) and intangible assets not yet
available for use (such as research and development proj ects) ar
e not amortized, but tested annually for impairment.
Notes to the Consolidated Financial Statements
of the Bayer Group 2016
7.1.3 Indefinite useful life

g amount and reasons supporting the assessme
Discl nt of an indefinite
ose useful life (this includes describing the factors
he ca that played a significant role in
rryin determining that the asset has an indefinite use
ful life).
d.
7.1.4 Acquired by way of government gra
nt
 For intangible assets acquired by way of a go
vernment grant and initially
recognised at fair value:
 the fair value initially recognised for these ass
 ets;
 their carrying amount; and
whether they are measured after recognition u
nder the cost model
or the revaluation model.
7.2 Revaluations

The following should be disclosed when asset
s are carried at revalued amounts:
 the effective date of the revaluation (by clas
s);
 the carrying amount of the revalued intangibl
e assets (by class);
 the carrying amount that would have been rec
ognised using the cost
model (by class);
 the amount of the revaluation surplus that rela
tes to intangible
assets at the beginning and end of the period,
indicating movements
in the period and any restrictions on the distri
bution of the balance
to shareholders;
 the methods and significant assumptions appli
ed in estimating fair values.
7.3
Research and development ex
penditure

Disclose the total cost of research and develop
ment that has been recognised as
an expense during the period.
©2017 Becker Educational Development Corp. All rights reserve
d.
1122
Key points summary
Intangible assets are identifiable, non-monetary ass
et without physical
substance. Essential attributes include control.
An intangible is identifiable when it is separable or
arises from rights.
Intangibles can be acquired by purchase, grant, exch
ange or internal generation.
Usual asset recognition criteria. Other costs are expe
nsed when incurred.
Items expensed include expenditure on own research
, brands and internally-
generated goodwill and costs of start-up, training, ad
vertising and relocation.
Acquired in-process research and development is an
asset.
Intangible assets are initially measured at cost.
Subsequent expenditure is expensed when incurred.
Reinstatement as an intangible asset, at a later date, i
s prohibited.
For internally-generated intangible assets additional
criteria must be demonstrated.
Subsequent measurement: use cost model or revaluat
ion model.
Revaluation model only if fair value exists in an acti
ve market (rare).
Assess useful life as definite (amortise) or indefinite
(not amortised).
Amortise to reflect pattern of consumption, otherwis
e straight line.
Test annually for impairment assets not yet in use.
Disclosure requirements are comparable to IAS 16,
Also:
 amount of research and development expensed i
n the current period.
Focus

distinguish between goodwill and other intan
gible assets;

discuss the nature and possible accounting tre
atments of internally-generated
and purchased goodwill;

define the criteria for the initial recognition an
d measurement of intangible assets;
and

describe and apply the requirements of IFRS t
o internally generated assets other than
goodwill (e.g. research and development).
d.
Activity solutions
Solution 1 – Tangible versus intan
gible assets
(1)
Tangible: the operating system (e.g. DOS or
Windows) of a personal
computer is an integral part of the related hard
ware and should be accounted
for under IAS 16 Property, Plant and Equipment.
(2)
Intangible: such computer software is not an i
ntegral part of the hardware on
which it is used.
(3) Tangible: specialised software integrated into
production line “robots” is
similar in nature to (1).
(4) Intangible: companies developing “firewall” s
oftware to protect their own
websites may also sell the technology to other
companies.
Solution 2 – Research and develop
ment write-off
The following costs
should be written o
ff: $
Building depreciati
on (400,000  4%)
Wages and salaries 16,
of research staff 000
Equipment deprecia
2,3
tion (60,000  50% 55,
) 000
3
0
,
0
0
0

2,401,000
––––––––
Solution 3 – Maximum carry forwar
d
Cost
(1) This is research expenditure which cannot be
capitalised under any
circumstances and must therefore be expense
d in profit or loss.
(2) Initially recognise cost $60,000. Residual val
ue is presumed to be zero.
Amortisation
Amortise from 1 April 2018 for a period of 5 years.
Charge for 4 months is: /60 × $60,000 = $4,000
Carrying amount
$60,000 – $4,000 = $56,000.
Commentary
This is the maximum carry forward, assuming no i
mpairment.
d.
Overview
Objective

To explain the mea
ning of investment
property.
 To explain the acco
unting rules for the
se assets.
INVESTMENT
PROPERTY  E
 Initial mea
RECOGNIT
ION surement
S D
ll circumstances
 Cost model
 Change in method
eserved.
1201
SESSION 12 – IAS 40 INVESTMENT PROPERTY
1 Investment property
1.1 Objective

IAS 40 prescribes the accounting treatment for in
vestment property and
related disclosure requirements.
Commentary
It applies to investment properties (as defined) held by
all entities – not only
those held by entities specialising in owning such prope
rty.
1.2 Definitions

Investment property is property (land or a building
– or part of a building – or
both) held (by the owner or by the lessee as a right
-of-use asset):
 to earn rentals; or
 for capital appreciation (or both),
not
 of goods or se
rvices or for
administrative purposes (“owner-occupation”); or
 for sale in the ordinary course of business (i.e. in
ventory).

Owner-occupied property is property held by the
owner (or by the lessee as a
right-of-use asset) for use in the production or sup
ply of goods or services or
for administrative purposes.
1.3 Examples

Investment property includes:
 land held for long-term capital appreciation rather
than for short-
term sale in the ordinary course of business;

land held for a currently undetermined future use
;

a building owned by the reporting entity and leas
ed out under
operating leases;

a buildi
ng that
is vaca
nt but
s held
o be le
ased
t; and
 property that is being constructed or developed fo
r future use as an
investment property.
 The following do not meet the definition of inves
tment property:


 owner-occupied property (see IAS 16 Property, P
lant and Equipment).
2 Recognition
2.1 Rule

Investment property
should be recognised as an asset w
hen:
 it is probable that the future economic benefits tha
t are attributable
to the investment property will flow to the entity;
and
 the cost or fair value of the investment property ca
n be measured reliably.
Commentary
These are the rules that come from the “Framework”.
Cost is unlikely to be a problem.
2.2 Initial measurement

at its cost, which is the
fair value of the consideration given for it. Transa
ction costs are included in
the initial measurement.
2.3 Meaning of cost

The cost of a purchased investment property comp
rises its purchase price, and any
directly attributable expenditure. Directly attribut
able expenditure includes, for
example, professional fees for legal services and p
roperty transfer taxes.
 If a company uses the fair value model (see later) a
nd is self-constructing an investment
property then it should value that property at fair v
alue during construction.
 IAS 40 allows that if fair value cannot be measure
d reliably during construction
then the property can be valued at cost until constr
uction is complete.
 When construction is complete the property shoul
d be valued at its fair value.
2.4
Subsequent expenditure

Day to day costs of running the investment proper
ty are recognised as an
expense as incurred.

requires replacement during the useful life
If a of the property the replacement part is capitalised
art of when the cost is incurred as
an inv long as the recognition criteria are met. Any value
estme remaining in respect of
nt pro the replaced part will be de-recognised as the new
perty cost is capitalised.
Commentary
This replacement of components principle is the same a
s that applied to other
non-current assets (IAS 16).
3 Measurement subsequent
to initial recognition
3.1 Rule

There are two models to choose from:
 the fair value model; or
 the cost model.
3.2 Fair value model
3.2.1
Application of the model
 IAS 40 prescribes when to use fair value; IFRS 13
Fair Value Measurement defines fair
value and how it should be measured.
 After initial recognition, allmust be measured at fai
stment property r value
except in exceptional circumstan
ces.
 A gain or loss arising from a change in the fair val
ue of investment property
should be included in profit or loss for the period i
n which it arises.
Commentary
This is known as “marking to market”.
 The fair value should reflect the actual market and
circumstances at the end
of the reporting period, not as of either a past or fu
ture date.
3.2.2 Fair value measurement consideration
s
 The fair value of investment property should refle
ct, for example, rental
income from current leases and other assumptions
that market participants
would use to price it, under current market conditi
ons.
3.2.3 Exceptional circumstances
 There is a rebuttable presumption that fair value
can be measured reliably
on a continuing basis.
 However, in exceptional cases, there may be clear
evidence on acquisition
that fair value cannot be measured reliably on a co
ntinuing basis.
Commentary
For example, when the market for comparable properti
es is inactive (i.e. prices are not
current or observed prices indicate that the seller was f
orced to sell) and there is no
alternative reliable measurement (e.g. based on discoun
ted future cash flows).

The residual value of the investment property sho
uld be assumed to be zero.
Commentary
This is because no market is expected in which to sell i
t.
 All other investment property is measured at fair
value.
Commentary
The term revaluation should not be used when discussi
ng the fair value model
under IAS 40. Revaluation is an IAS 16/38 accounting
policy and fair value is a
method of valuing investment property under IAS 40.
3.3 Cost model

is
measured using the cost model
in IAS 16 (i.e. at cost less any accumulated deprec
iation and less any
accumulated impairment losses).
Commentary
Note that investment properties meeting the IFRS 5 crit
eria to be classified as
held for sale are measured in accordance with IFRS 5
“Non-current Assets
Held for Sale and Discontinued Operations”.
 An entity that chooses the cost model should discl
ose the fair value of its
investment property.
3.4 Change in method

result in a more appropriate presentation. IAS 40 s
tates that this is highly unlikely to be
the case for a change from the fair value model to t
he cost model.
3.5 Transfers
 owner occupation – for a transfer from investmen
t property to
owner occupied property;

development with a view to sale – for a transfer fr
om investment
property to inventories;
Commentary
The above transfers will be at fair value under IAS 40’
s fair value model.
 End of owner occupation – for a transfer from ow
ner occupied
property to investment property;
Commentary
Any revaluation surplus up to the date of transfer will
be recognised in other
comprehensive income and presented in equity.
 Commencement of an operating lease to another
party – for a
transfer from inventories to investment property.
3.6 Disposals

should be derecognised (i.
e. eliminated from the statement of
financial position) on disposal or when the invest
ment property is permanently
withdrawn from use and no future economic benef
its are expected from its disposal.
Worked example 1
A company, which follows a local GAAP, has four invest
ment properties, A, B, C and
D which are accounted for using the following accounting
policy:
“Investment properties are valued on a portfolio basis at t
he fair value at the end for the
reporting period, with any net gain recognised in the inve
stment property revaluation
surplus. Only net losses on revaluation are recognised in
profit or loss.”
At 1 January 2017, the carrying amounts of each of the fo
ur properties were $100m.
At 31 December 2017, following a professional appraisal
of value, the properties were
valued at:
A $140m
B $130m
C $95m
D $90m
Required:
Explain how applying IAS 40 would change the financ
ial statements of the
company.
Worked solution 1
Under the company’s existing accounting policy, the inve
stment properties in the
statement of financial position at 31 December 2017 woul
d be carried at a total of
$455m, and the net gain would be recorded in the revalua
tion surplus (455 – 400 = 55).
Applying IAS 40, the company would still carry the prop
erties at $455m, but the entry
in profit or loss (not revaluation surplus) would be:
Net gain in fair value of investment properties $55m
70m – $15m)
1206
Activity 1
An investment property company has been constructing a
new cinema. At 31
December 2017, the cinema was nearing completion, and
the costs incurred to date
were:
$m
Materials, labo 14.8
ur and sub- 2.5
contractors 1.3
Other directly
attributable ov
erheads
Capitalised int
erest on borro
wings
It is the company’s policy to capitalise interest on specific
borrowings raised for the
purpose of financing a construction. The amount of borro
wings outstanding at 31
December 2017 in respect of this project is $18m, and the
annual interest rate is 9.5%.
During the three months to 31 March 2018 the cinema wa
s completed, with the
following additional costs incurred:
$m
Materials, labo $1.7
ur and sub- $0.3
contractors
Other overhea
d
The company was not able to measure the fair value of th
e property reliably during the
construction period and so valued it at cost pending comp
letion (as allowed by IAS
40).
On 31 March 2018, the company obtained a professional
appraisal of the cinema’s fair
value, and the valuer concluded that it was worth $24m.
The fee for his appraisal was
$0.1m, and has not been included in the above figures for
costs incurred during the
three months.
The cinema was taken by a national multiplex chain on an
operating lease as at 1 April
2018 and was immediately welcoming capacity crowds.
Following a complete
valuation of the company’s investment properties at 31 D
ecember 2018, the fair value
of the cinema was established at $28m.
Required:
Set out the accounting entries in respect of the cinema
complex for the year ended
31 December 2018.
4 Disclosure
4.1 All circumstances

Classification criteria (to distinguish owner-
occupied, investment property,
property held for sale in situations where classific
ation is difficult).
 Methods and assumptions used to measure fair v
alue.
 Extent of involvement of independent, professiona
l and recently experienced valuers in
the measurement of fair value (whether used as me
asurement basis or disclosed).
 Amounts included in profit or loss for:
 Rental income

Direct operating expenses from rented property

Direct operating expenses from non-rented prope
rty
 Restrictions on realisability of property or remittan
ce of income/disposal proceeds.
 Material contractual obligations:
 to purchase, construct or develop investment pro

perty; or
for repairs, maintenance or enhancements.
4.2 Fair value model

Reconciliation between opening and closing carryi
ng amount of investment
property held at fair value.

that is not carried at fair
value should be similarly
subject to reconciliation separately from other pro
perties, and additional
disclosures made (e.g. including an explanation of
why it is an exception).
4.3 Cost model

Depreciation methods used.

Useful lives or depreciation rates used.

Gross carrying amount, accumulated depreciation
and impairment losses at
beginning and end of period.

Recon on of brought forward and carried forward amoun
ciliati ts.

The fair value of investment property (or an expla
nation why it cannot be measured).
Key point summary
Investment property is held for rentals and/or capital appr
eciation.
Owner-occupied property is excluded (unless portion is in
significant).
Property rented to group companies is not investment pro
perty in consolidated
financial statements.
Usual recognition, initial measurement and disposal provi
sions apply.
Subsequent measurement: fair value or cost model for all
properties.
Change is permitted only for more appropriate presentatio
n (i.e. from cost to fair
value model).
Fair value model:
Cost model may be applied to property under constructio
n.
If fair value cannot be measured reliably, use cost model (
IAS 16) and assume
zero residual value (until its disposal).
Transfers to/from investment property are only made on a
change in use;
 to owner-occupied or inventory (fair value becomes “c
ost”);
Transfers under cost model do not change carrying amou
nt.
Significant disclosures required.
Focus
 discussin which the treatment of investment propert
way ies differs from other properties;
 apply the requirements of international financial re
porting standards to investment properties.
1209
Activity solution
Solution 1
Commentary
On 1 January 2018 the property would have been value
d at its cost of $18.6m as
the fair value was not measurable during the period of
construction.
Costs incurred in the 3 months to 31 March 2
018
1.7
Cr 1
.7
0.3
Cr 0
.3
Cr expense
WORKING
Outstanding borrowing
s
Interest for 3 months $18m × /12 × 9.5% = 0.43
m
Accumulated costs at the date of transfer into
investment properties
$m
Costs to 31 December 18.6
2017 (14.8 + 2.5 + 1. 2
3) .
Costs to 31 March 20
4
18 (1.7 + 0.3 + 0.43)
3

Investment 2
property at
cost
2.97
Profit 2.97
Being the increase from cost to fair value on completio
n of the property.
Commentary
The receipt of the professional valuation at 31 March 2
018 has not improved the profit
earning potential of the asset. The property will be val
ued at fair value once construction is
complete and the gain will be recognised in profit or lo
ss at 31 March 2018.
At 31 December 2018
4
Profit 4
Being the increase in fair value following the first subs
equent re-measurement.
Overview
Objective

To explain the fair v
alue model to agricu
ltural accounting, in
cluding:
 when to recognise a
 biological asset or a

gricultural produce;
at what value; and
how to account for
differences in value
between the ends of
two
reporting period.
Objective
AGRICULTURAL 
Scope
Definitions
Features
Recogn
ition
REC
Measur GOV
ement OGN ERN
Gains
ITIO MEN
N T
and losses
If fair
value AND GRA
ot NTS
MEA
SUR
etermined
EME
NT
PRESENTATION
AND
DISCLOSURE
Presentation
Disclosure
eserved.
1301
SESSION 13 – IAS 41 AGRICULTURE
1 Agricultural activit
y
1.1 Objective

The standard prescribes the accounting
treatment and the presentation and
disclosures related to agricultural activi
ty.
 Prior to IAS 41, IFRS excluded assets r
elated to agricultural activity, such as
inventories of livestock and changes in
those assets.
1.2 Scope

IAS 41 covers the following relating to
agricultural activity:
 biological assets;
 agricultural produce at the point of ha
rvest;
Commentary
After the point of harvest such produce falls
under IAS 2 “Inventories”.
 government grants as described in the
standard.
Commentary
In summary, these are recognised as income
when receivable.
1.3 Definitions

transformation of biological assets for
sale, into agricultural produce, or into
additional biological assets.
Commentary
Agricultural activity covers a diverse range
of activities, including raising
livestock, forestry, annual or perennial crop
ping, cultivating orchards and
plantations, fish farming, etc.
 A biological asset is a living animal o
r plant.
 Bearer plant – a living plant that:
 of a
 gricultural produce;

is expected to bear produce for more th
an one period; and
has a remote probability of being sold a
s agricultural produce.
Commentary
These are accounted for in accordance with
IAS 16 (see s.2.3 Session 7).
©2017 Becker Educational Development Corp. All right 1302
s reserved.
Biological transformation comprises th
 e processes of growth, degeneration,
production, and procreation that cause q
ualitative and quantitative changes in
a biological asset.
 Harvest is the detachment of produce fr
om a biological asset or the cessation
of a biological asset’s life processes.
 Agricultural produce is the harvested p
roduct of the entity’s biological assets.
1.4
Features

The common features of agricultural a
ctivity are:
 Capability to change – living animals a
nd plants are capable of
biological transformation;

Management of change – management
facilitates biological
changes by enhancing or stabilising co
nditions (i.e. temperature,
moisture, nutrient levels, fertility and li
ght);

Measurement of change – the change i
n quality (i.e. ripeness,
density, fat cover, genetic merit) or qua
ntity (weight, fibre length,
cubic metres, and number of buds).
Commentary
Harvesting from an unmanaged source (e.g.
fish from the sea) is not an
agricultural activity (and is therefore outside
the scope of the standard).
2 Recognition and me
asurement
2.1 Recognition

An should recognise a biological asset
when, and only when:
 The entity controls the asset as a result
of past event;
Commentary
For example through legal ownership. In th
e case of livestock, this may be
evidenced by “branding”.
 It is probable that future economic bene
fits associated with the asset
will flow to the entity; and

The fair value can be measured reliab
ly.
2.2
Measurement

A biological asset is measured:

on initial recognition AND at the end o
f each reporting period;
 at its fair value less estimated costs to s
ell, except where the fair
value cannot be measured reliably.
s reserved.
 Agricultural produce harvested from an
entity’s biological assets is measured at:

fair value; less

estimated costs to sell at the point of h
arvest.
Commentary
This measure is “cost” at that date when ap
plying IAS 2 or another applicable IFRS.
Illustration 1
A farmer owned a dairy herd, of two-year old
cows, at 1 January 2017. The number of
cows in the herd was 120. The fair value of th
e herd at this date was $6,240. The fair
values of two-year and three year old animals
at 31 December 2017 are $58 and $76,
respectively.
Separating out the value increases of the herd
into those relating to price change and
those relating to physical change gives the foll
owing valuation:
$
Fair value at 1 January 2017 6,240
Increase due to price change (1 720
20 × ($58 – $52)) 2,160
Increase due to physical chang
e (120 × ($76 – $58))
_______
Fair value at 31 9
December 2017 ,
1
2
0
2.2.1 Costs to sell
 These include:
 commissions to brokers/dealers;
 levies by regulatory agencies; and
 transfer taxes and duties.
 They do not include transport and other
costs necessary to get the asset to the m
arket.
2.2.2
Fair value considerations
 When applying fair value to biological
assets and agricultural produce the
 Cost may sometimes approximate fair
value, particularly when:

little biological transformation has take
n place since initial cost
incurrence (i.e. for fruit tree seedlings p
lanted immediately before the
end of the reporting period); or
 the effect of the biological transformati
on on price is not expected to be
material (i.e. initial growth in a 30 year
pine plantation production cycle).
s reserved.
2.3 Gains and losses

A gain or loss arising on the following
should be included in profit or loss
for the period in which it arises:
 initial recognition of a biological asset
at fair value less costs to
sell;
 a change in fair value less estimated co
sts to sell of a biological asset;
 initial recognition of agricultural produ
ce at fair value less
estimated costs to sell.
2.4 If fair value cannot be det
ermined

There is a presumption that fair value ca
n be measured reliably for biological as
sets.
Commentary
This presumption can only be rebutted on in
itial recognition when quoted market
prices are not available and alternative fair
value measurements are clearly
unreliable.
 If rebutted, the biological asset must be
valued at cost less accumulated
depreciation and any impairment losses
.
 Once the fair value of the asset can be r
eliably determined it is measured at
fair value less estimated costs to sell.
Commentary
For a non-current biological asset that meet
s IFRS 5 criteria to be classified
as held for sale, reliable measurement of fai
r value is presumed.
Illustration 2
11. Biological Assets (extract)
Biological assets consist of tree plantations. The
group has 73.2 hectares of trees planted
initially for experimental purposes. When experim
ents are completed, they are classified as
biological assets. Trees will be harvested when th
ey reach maturity.
2016
ACTUAL
2015
$000
(Loss)/Gain from changes in fair valu (38)
e less estimated point-
of-sale costs
466
Carrying amount 30 June 550
The tree plantations were valued as at 30 June 2016 b
y PF Olsen Limited, an independent
forestry management and consultancy company.
The valuation method for immature trees is the net pre
sent value of future net harvest
revenue less estimated costs of owning, protecting, te
nding and managing trees. For mature
trees fair value is deemed to be the net harvest revenu
e value.
Scion Annual Report 2016
s reserved.
Worked example 1
As at 31 December 2017, a plantation consists
of 100 Insignis Pine trees that were
planted 10 years earlier. Insignis Pine takes 3
0 years to mature, and will ultimately be
processed into building material for houses or
furniture. The entity’s weighted average
cost of capital is 6% per annum.
Only mature trees have established fair values
by reference to a quoted price in an
active market. The fair value (inclusive of cur
rent transport costs to get 100 felled trees
to market) for a mature tree of the same grade
as in the plantation is:
As at 31 December 2017: $171
As at 31 December 2018: $165
Required:
(a)
Assuming immaterial cash flow betwe
en now and the point of harvest,
estimate the fair value of the plantati
on as at:
(i)
31 December 2017; and
(ii)
31 December 2018.
(b) Analyse the gain between the ends of
the two reporting periods into:
(i) a price change; and
(ii) a physical change.
Worked solution 1
(a)
Estimate of fair value
(i) 31 December 2017
The mature plantation would
= $5,332
ave been valued at $17,100: 1.06
(ii) 31 De
cemb 1
er 201 6
8 ,
5
0
0
The mature plantation would 1.06
= $5,453
ave been valued at $16,500:
(b) Analysis of gain
The difference in fair value between the two r
eporting periods is 121 (5,453 – 5,332) which
will be recognised as a gain in the statement o
f profit or loss, analysed as follows:
(i) Price change
Relates to the biological asset’s state as at t
he previous end of the reporting period.
$
16,500
5
Less: Value at prices prevailing as at
nd of the previous reporting period ________
L
_
s reserved.
(ii) Physical change
Commentary
This is calculated at current prices.
$
Value in its state as at the end 5,45
of the current reporting period 3
Less
Value in its state as at the end of the
evious reporting period (as in (i)) ________
G
_
3 Government grants
 An unconditional government grant rela
ted to a biological asset measured at
its fair value less estimated costs to sell
is recognised as income when, and
only when the government grant becom
es receivable.
If a government grant related to a biolo
 gical asset measured at its fair value les
s
estimated costs to sell is conditional (in
cluding restrictions on engaging in a spe
cified
agricultural activity), income is recogni
sed when, and only when, the condition
s
attaching to the grant are met.
Commentary
If a government grant relates to a biological
asset measured at cost (less accumulated
depreciation), IAS 20 is the applicable stand
ard rather than IAS 41.
4 Presentation and di
sclosure
4.1 Presentation

should present the carrying a
mount of its biological assets
separately in its statement of financial p
osition.
4.2 Disclosure
4.2.1 General

The aggregate gain or loss arising durin
g the current period on initial
recognition of biological assets and agri
cultural produce and from the change
in the fair value less estimated costs to s
ell of biological assets.
 A description of each group of biologi
cal assets.
©2017 Becker Educational Development Corp. All right
s reserved.
1307
 If not disclosedin the financial stateme
here nts:
 the nature of its activities involving eac
h group of biological assets; and
 non-financial measures or estimates of
the physical quantities of:

 each group of biological assets at the e
nd of the reporting period;
output of agricultural produce during th
e period.
 The existence and carrying amount of b
iological assets whose title is restricted,
and
the carrying amounts of biological asset
s pledged as security for liabilities.
 The amount of commitments for the de
velopment or acquisition of biological a
ssets.
Illustration 3
1.1 Summary of Significant Accountin
g Policies (extract)
f)
Biological assets consist entirely of tree plan
tations which are measured at
fair value less any point of sale costs. Gains
and losses arising on initial
recognition or change in fair value, less esti
mated point of sale costs, are
included in profit and loss in the period in wh
ich they arise.
The fair value of tree plantations is determined b
y an independent valuer.
The valuation method for immature trees is the n
et present value of future
net harvest revenue less estimated costs of owni
ng, protecting, tending
and managing trees. For mature trees fair value i
s deemed to be the net
harvest revenue value.
Scion Annual Report 2016
 Financial risk management strategies re
lated to agricultural activity.
 A reconciliation of changes in the carry
ing amount of biological assets
betw he beginning and the end of the current
een reporting period, including:

 the gain or loss arising from changes in

fair value less estimated costs to sell;
increases due to purchases and business
 combinations;
decreases due to sales and biological as
sets classified as held for sale;
net exchange differences arising on the
translation of financial statements of a
foreign entity.
s reserved.
Illustration 4
NOTES TO THE GROUP Annual fin
ancial statements
2012
Rm
2013
Restated*
11 Biological assets
5
Increase du 9
e to feed an
d productio
n costs
(
De (866)
cr
ea
se
du
e t
o
sal
es

(
C 9
Less:
Non- (
current
portion (
refer no
te 11.5)
C 98
11.1 The biological assets comprise live breeding chicke
n birds, live broilers,
Integrated Annual Report 2013
4.2.2 If fair value cannot be measure
d reliably
 If the entity measures biological assets
at their cost less any accumulated
depreciation and any accumulated impa
irment losses:

 A description of the biologic

al assets;
 An explanation of why the fa
 ir value cannot be measured

 reliably;
 If possible, the range of estimates withi
n which fair value is likely to lie;
The depreciation method used and the u
seful lives or depreciation rates used;
Any gain or loss recognised on disposal
;
The impairment losses or reversals reco
gnised in the period;
Depreciation charged in the period;
The gross carrying amount and the accu
mulated depreciation (and
impairment losses) at the beginning and
end of the reporting period.
4.2.3 If fair value becomes reliably m
easurable
 A description of the biological assets.

An explanation of why fair value has b
ecome reliably measurable.

The effect of the change.
4.2.4 Government grants
 The nature and extent of government gr
ants recognised in the financial stateme
nts.

Unfulfilled conditions and other contin
gencies attaching to government grants.

Significant decreases expected in the le
vel of government grants.
s reserved.
1309
Key point summary
A “biological asset” is living; “agricultural pr
oduce” is harvested.
“Costs to sell” are incremental costs directly a
ttributable to disposal (excluding
finance costs and income taxes).
Initial recognition criteria are control, probabil
ity of future benefits and reliable
measurement of fair value or cost.
Measurement is generally at fair value less co
sts to sell.
Gains and losses are included in profit or loss.
Presumption that fair value can be measured r
eliably is only rebuttable for initial
recognition of a biological asset without an est
imable market value. Cost model is
then used.
Unconditional government grants are recogni
sed in profit and loss when
receivable. Conditional grants are recognised
when conditions are met.
Focus
 recognise the scope of international acc
ounting standards for agriculture;
 discuss the recognition and measureme
nt criteria including treatment of gains
and losses, and the inability to measure
fair value reliably;
 identify and explain the treatment of go
vernment grants, and the presentation
and disclosure of information relating t
o agriculture;
 report on the transformation of biologic
al assets and agricultural produce at
the point of harvest;
 account for agriculture-related govern
ment grants.
s reserved.
1310
Overview
Objective

To give guidance on
the recognition and
reversal of impairm
ent losses.
 Objectiv
the standa
e of rd
INTRODUC
TION  Definit
ions
 All assets
BASIC
 Indications
LES
of potential
impairment los
s
N
T

M
E
A
S
U
R
M
E
N
T
O
F
R
E
C
O
V
E
R
A
B
L
E
A
M
O
U
A
T
I
N
G

C
A U
S N
H
- I
G T
E
N S
E
R
 General principles
 Fair
alues less
costs ACCO
 Basics
of UNTIN
 Allocati
disposal G FOR
on within a
 Value
cash-
in use IMPAI
RMEN
T generating
unit
LOSS
 Basic
SUBSEQU
ENT provisio
ns
REVIEW Reversals of
impairment
losses
class of
DISCLOS
URE  Materi
impairment l
al osses
eserved. 1401
SESSION 14 – IAS 36 IMPAIRMENT OF ASSETS
1 Introduction
1.1 Objective of the standard

Prudence is a widely applied concept in the prepar
ation of financial statements. A specific
application of prudence is that assets should not be
carried in the statement of financial
position at a value exceeding the cash flows expect
ed to be generated in the future.

Several standards (IAS 16, IAS 28 and IFRS 11) r
equire that if the recoverable amount of
an asset is less than its carrying amount (“impairm
ent”), the carrying amount should be
written down immediately to this recoverable amo
unt.
 IAS 36 prescribes detailed procedures to be follow
ed in terms of identifying impairments
and accounting for them. It applies to all assets (in
cluding subsidiaries, associates and
joint ventures) except those covered by the specifi
c provisions of other statements.
1.2 Definitions

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 f
air value less costs of
disposal and its value in use.

Fair value – is the price that would be received t
o sell an asset (or paid to
transfer a liability) in an orderly transaction betwe
en market participants at
the measurement date.
 Value in use – is the present value of the future ca
sh flows expected to be
derived from an asset (or cash-generating unit).
Commentary
The above definitions apply to “an asset” that is a “ca
sh-generating unit”.

A cash-generating unit (CGU) – is the smallest id
entifiable group of assets
that generates cash inflows that are largely indepe
ndent of the cash inflows
from other assets or groups of assets.
Commentary
The concept of a CGU is a solution to the problem of
measuring value in use
and comparison with the carrying amount of a group o
f assets in the situation
where a single asset does not generate cash flows in its
own right. (see s.4).
2 Basic rules
2.1 All assets

At the end of each reporting period any indication
s that an asset (or cash-
generating unit) may be impaired must be assessed
. If any such indication exists,
the asset’s recoverable amount needs to be estimat
ed.
 If no indications of a potential impairment loss are
present there is no need to make
a formal estimate of recoverable amount, except f
or certain intangible assets.
2.2 Intangible assets

The following intangible assets must be tested ann
ually for impairment regardless
of whether there is any indication of impairment:

 those with an indefinite useful life;
 those not yet available for use;
goodwill acquired in a business combination.
Commentary
The impairment tests for these assets may be performed
at any time during an annual period,
provided they are performed at the same time every ye
ar. Note that all other assets
(including intangibles that are amortised) are tested at
the end of the financial period.
 Where an intangible asset with an indefinite life f
orms part of a cash-
generating unit and cannot be separated, that cash-
generating unit must be
tested for impairment at least annually.
2.3 Indications of potential impairme
nt loss

Both external and internal indications of potential
impairment loss should be
considered.
2.3.1 External sources of information

significantly more than would be expected as a res
ult of the passage of time
or normal use.
Illustration 1
Meade owns a subsidiary called Lee. Lee is a property d
evelopment company with
extensive holdings in Malaysia. The Malaysian economy
has moved into a deep
recession.
The recession is an indication that the carrying amount of
the investment in Lee in
Meade’s accounts might be greater than the recoverable a
mount. Meade must make a
formal estimate of the recoverable amount of its investme
nt in Lee.

Significant changes with an adverse effect on the
enterprise have taken place
during the period, or will take place in the near fut
ure, in the technological,
market, economic or legal environment in which t
he enterprise operates.
Illustration 2
Buford is involved in the manufacture of steel. It owns a
steel production facility
constructed in 2006. The facility has 10 blast furnaces ea
ch of which is being written
off over 30 years from the date of construction.
Recent technological innovations have resulted in a new t
ype of furnace coming onto
the market. This furnace offers efficiency improvements
which the manufacturers
claim will reduce the unit cost of a tonne of steel by 15-
20%. The company that
supplied the furnaces for Buford has recently introduced
a series of price cutting
measures to try to preserve its own market share.
The market for the grade of steel that Buford produces is
very price sensitive and price
is often used as a basis of competition in this market. A
major competitor has
announced that it is constructing a new plant that will util
ise the new technology.
The existence of the new technology and the announceme
nt by the competitor are
indications that Buford’s blast furnaces might be impaire
d. Buford should make a
formal estimate of the recoverable amount of its blast fur
naces (or possibly the
production plant as a whole if it is deemed to be a cash-
generating unit – see later).

increased during the period, and those increases a
re likely to affect the
discount rate used in calculating an asset’s value i
n use and decrease the
asset’s recoverable amount materially.
Illustration 3
Gibbon owns a 60% holding in Pickett, an unquoted entit
y. Both entities operate in a
country with a stable economy. The government has rece
ntly announced an increase in
interest rates.
The increase in interest rates will cause a fall in value of e
quity holdings (all other
things being equal). This is due to the fact that risk free i
nvestments offer a higher
return making them relatively more attractive. The mark
et value of equity will adjust
downwards to improve the return available on this sort of
investment.
The increase in interest rates is an indication that Gibbon’
s holding in Pickett might be
impaired. Gibbon should make a formal estimate of the r
ecoverable amount of its
interest in Pickett.

The carrying amount of the net assets
is more than its
the reporting entity
market capitalisation.
Illustration 4
Sickles is a listed entity. The carrying amount of its net a
ssets is $100m. The market
capitalisation of the entity has recently fallen to $80m.
The value of the entity as compared to the carrying amou
nt of its net assets indicates
that its assets might be impaired. Sickles should make a f
ormal estimate of the
recoverable amount of its assets.
2.3.2 Internal sources of information
 Evidence is available of obsolescence or physical
damage.
Illustration 5
Custer manufactures machinery. It makes use of a large
number of specialised
machine tools. It capitalises the machine tools as a non-
current asset and starts to
depreciate the tools when they are brought into use.
A review of the non-current asset register in respect of m
achine tools has revealed that
approximately 40% of the value held relates to machine t
ools purchased more than two
years ago and not yet brought into use.
The age of the machine tools and the fact that they have n
ot yet been brought into use
is an indication that the asset may be impaired. Custer sh
ould make a formal estimate
of the recoverable amount of its machine tools.
Significant adverse changes have taken place duri
 ng the period, or are
expected to take place in the near future, in the ext
ent to which, or manner in
which, an asset is used or is expected to be used.
Illustration 6
Hood is a small airline. It owns a Dash 8 aircraft which it
purchased to service a
contract for passenger flights to a small island. The rest o
f its business is long-haul
freight shipping.
It has been informed that its licence to operate the passen
ger service will not be
renewed after the end of this current contract which finish
es in six months’ time. It is
proposing to use the aircraft in a new business venture off
ering pleasure flights.
The change in the use of the asset that is expected to take
place in the near future is an
indication that the aircraft may be impaired. Hood should
make a formal estimate of
the recoverable amount of its Dash 8 aircraft.

performance of an asset is, or will be, worse than
expected. Such evidence
that indicates that an asset may be impaired includ
es the existence of:
 cash flows for acquiring the asset, or subsequent c
ash needs for
operating or maintaining it, that are significantly
higher ose
than originally budgeted;
 actual net cash flows or operating profit or loss fl
owing from the
asset that are significantly worse than those budg
eted;
 a significant decline in budgeted net cash flows or
operating profit,
or a significant increase in budgeted loss, flowing
from the asset; or
 operating losses or net cash outflows for the asset,
when current
period figures are aggregated with budgeted figur
es for the future.
Illustration 7
Armistead operates in the professional training sector. It
has produced a series of CD
ROM based training products which have been on sale fo
r eight months. The entity
has capitalised certain development costs associated with
this product in accordance
with the rules in IAS 38 Intangible Assets. Early sales ha
ve been significantly below
forecast.
The failure of the entity to meet sales targets is an indicati
on that the development asset
may be impaired. Armistead should make a formal estim
ate of the recoverable amount
of the capitalised development cost.
Commentary
The above lists are not exhaustive. Where there is an i
ndication that an asset may be
impaired, this may indicate that the remaining useful lif
e, the depreciation
(amortisation) method or the residual value for the ass
et needs to be reviewed and
adjusted, even if no impairment loss is recognised for t
he asset.
3 Measurement of recovera
ble amount
3.1 General principles

The recoverable amount is the higher of the asset’
s fair value less costs of disposal
and value in use.
RECOVERABLE
AMOUNT
Higher of

FAIR VALUE
and LESS COSTS OF
VALUE IN USE
DISPOSAL
Commentary
Recoverable amount is determined for an individual ass
et, unless the asset does not
generate cash inflows from continuing use that are larg
ely independent of those from
other assets or groups of assets. If this is the case, rec
overable amount is determined for
the cash-generating unit to which the asset belongs (se
e later).
Illustration 8
Three similar assets, each with a carrying amount of $1,0
00, are tested for impairment
as the market rate of interest has recently increased.
Recoverable amount is
the greater of:
Value
Fair value Therefore Carrying Conclusion
in use
less costs ofrecoverable amount
disposal amount is
(1) 900 1,050 1,050 1,000 No impairment

(2) 900 980 980 1,000An impairment loss of $
20 must
be recognised immediate
ly in
profit or loss. The carryi
ng
amount of the asset is wr
itten
down to $980.
(3) 960 925 960 1,000An impairment loss of $

40 must
be recognised. The carr
ying
amount of the asset is wr
itten
down to $960.
It is not always necessary to measure both an asset

’s fair value less costs of
disposal and its value in use to determine the asset
’s recoverable amount if:
 either of these amounts exceed the asset’s carryin
g amount, the asset is
not impaired, and it is not necessary to estimate th
e other amount; or
 materially
exceeds its fair value less selling costs, the asset’s
recoverable
amount is its fair value less selling costs.
Commentary
For example when an asset is held for imminent dispos
al the value in use will consist
mainly of the net amount to be received for the disposa
l of the asset. Future cash
flows from continuing use of the asset until disposal ar
e likely to be negligible.
 Where the asset is an intangible asset with an inde
finite useful life, the most
recent detailed calculation of the recoverable amo
unt made in a preceding
perio be used in the impairment test in the current perio
d may d.
3.2 Fair value less costs of disposal

3.2.1
Definitions (IFRS 13)
 Fair value – the price would be received toin
n asset (or paid to transfer a liability)
an orderly transaction between market participant
s at the measurement date.
 Active market – a market in which transactions for
the asset (or liability) take place with
sufficient frequency and volume to provide pricing
information on an ongoing basis.
3.2.2 Hierarchy
 Fair value is assessed using thein IFRS 13 “Fair Va
value hierarchy” lue
Measurement”:
 Level 1 inputs – are quoted prices in active mark
ets for identical
assets (or liabilities) that can be accessed at the m
easurement date;
 Level 2 inputs – are inputs other than quoted pric
es (in level 1) that
are observable for the asset (or liability), either di
rectly or
indirectly;
 Level 3 inputs – are unobservable inputs for the a
sset (or liability).

has already been included as a liability. Examples includ
e:


 Stamp duty;
 Costs of removing the asset;
Other direct incremental costs to bring an asset int
o condition for its sale.
Commentary
Examples of costs that are not costs of disposal include
termination benefits
and costs associated with reducing or re-organising a
business following the
disposal of an asset.
Illustration 9
X owns a bottling plant which is situated in a single facto
ry unit. Bottling plants are
sold periodically as complete assets.
Professional valuers have estimated that the plant might b
e sold for $100,000. They
have charged a fee of $1,000 for providing this valuation.
X would need to dismantle the asset and ship it to any bu
yer. Dismantling and
shipping would cost $5,000. Specialist packaging would
cost a further $4,000 and
legal fees $1,500.
Fair value less costs of disposal:
$
Sales price 100,000
Dismantling and shipping (5,000)
Packaging (4,000)
Legal fees (1,500)
Fair value less costs of disposal 89,500
Commentary
The professional valuer’s fee of $1,000 would not be in
cluded in the fair value less
costs of disposal as this is not a directly attributable co
st of selling the asset.
3.3 Value in use

Value in use – is the present value of the future ca
sh flows expected to be
derived from an asset. Estimating it involves:
 estimating the future cash inflows and outflows to
be derived from
continuing use of the asset and from its ultimate d
isposal; and

applying the appropriate discount rate.
 Value in use differs from fair value in that it is m
ore entity
 Fair value would not normally reflect the followi
ng factors:
 additional value derived from the grouping of as
sets;
 synergies between the asset being measured and
other assets;
 legal rights or restrictions that are specific solely t
o the current
owner of the asset; and
 tax benefits or burdens that are specific to the curr
ent owner of the asset.
Worked example 1
X holds a patent for a drug that it manufactures. The pate
nt expires in 5 years. During
this period the demand for the drug is forecast to grow at
5% per annum.
Experience shows that competitors flood the market with
generic versions of a
profitable drug as soon as it is no longer protected by a pa
tent. As a result X does not
expect the patent to generate significant cash flows after
5 years.
Net revenues from the sale of the drug were $100m last y
ear.
The entity has decided that 15.5% is an appropriate disco
unt rate for the appraisals of
the cash flows associated with this product.
Time Discount factPresent
Cash flow or value ($m)
@15.5%
1 100 × 1.05 = 105 0.86580 91
2 100 × 1.05 = 110.3 0.74961 83
3 100 × 1.05 = 115.8 0.64901 75
4 100 × 1.05 = 121.6 0.56192 68
5 100 × 1.05 = 127.6 0.48651 62
Value in use 379
3.3.1 Cash flow projections
 Projections should be based on reasonable and sup
portable assumptions that
represent management’s best estimate of the set of
economic conditions that
will exist over the remaining useful life of the asse
t.
Commentary
Greater weight should be given to external evidence.
 They should be based on the most recent financial
budgets/forecasts that have
been approved by management.
Commentary
Projections based on these budgets/forecasts should cov
er a maximum
Beyond the period covered by the most recent bud
 gets/forecasts, the cash flows should be
estimated by extrapolating the projections based o
n the budgets/forecasts using a steady or
declining growth rate for subsequent years, unless
an increasing rate can be justified.
 Estimates of future cash flows should include:
 projected cash inflows including disposal proceed
 s;
projected cash outflows that are necessarily incurr
ed to generate the
cash inflows from continuing use of the asset.
 Estimates of future cash flows should exclude th
ose:
 relating to the improvement or enhancement of th
 e asset’s performance;
that are expected to arise from a future restructuri
ng that is not yet
committed;
Commentary
Future cash flows are estimated based on the asset in i
ts current condition or in
maintaining its current condition.
 cash outflows that will be required to settle obliga
tions that have
already been recognised as liabilities;

cash inflows or outflows from financing activitie
s; and
Commentary
These are already taken account of in discounting.
 income tax receipts or payments.
Commentary
The discount rate is a market-determined pre-tax rate.
 The discount rate(s) should reflect current market
assessments of the time value of
Activity 1
Sumter is testing a machine, which makes a product calle
d a union, for impairment. It has
compiled the following information in respect of the mac
hine:
$
Selling price of a union 100
Variable cost of production 70
Fixed overhead allocation per 10
unit 1
Packing cost per unit
All costs and revenues are expected to inflate at 3% per a
nnum.
Volume growth is expected to be 4% per annum. 1,000
units were sold last year. This is
in excess of the long term rate of growth in the industry.
The management of Sumter
have valid reasons for projecting this level of growth.
The machine originally cost $400,000 and was supplied o
n credit terms from a fellow
group entity. Sumter is charged $15,000 interest each ye
ar on this loan.
Future expenditure:
In 2 years’ time the machine will be subject to major serv
icing to maintain its
operating capacity. This will cost $10,000.
In 3 years’ time the machine will be modified to improve
its efficiency. This
improvement will cost $20,000 and will reduce unit varia
ble cost by 15%.
The asset will be sold in 8 years’ time. Currently the scra
p value of machines of
a similar type is $10,000.
All values are given in real terms (to exclude inflation).
Required:
Explain which cash flows should be included, and whi
ch excluded, in the calculation
of the value in use of the machine.
4 Cash-generating units
4.1 Basic concept

If there is any indication that an asset may be imp
aired, the recoverable
amount (the higher of the fair value less costs of d
isposal and value in use of
the set) must be estimated for the individual asset.
However, it may not be possible to estimate the re
coverable amount of an
individual asset because:
 its value in use cannot be estimated to be close to
its fair value less
costs of disposal (e.g. when the future cash flows
from continuing
use of the asset cannot be estimated to be negligib
le); and
 it does not generate cash inflows that are largely i
ndependent of
those from other assets.
In this case the recoverable amount of the cash-

generating unit to which the
asset belongs (the asset’s cash-generating unit) m
ust be determined.
 Identifying the lowest aggregation of assets that g
enerate largely independent
cash inflows may be a matter of considerable judg
ement.
Commentary
Management should consider various factors including
how they monitor
operations (e.g. by product lines, individual locations,
regional areas, etc) or
make decisions about continuing or disposing of assets
and operations.
Illustration 10
An entity owns a dry dock with a large crane to support it
s activities. The crane could
only be sold for scrap value and cash inflows from its use
cannot be identified
separately from all of the operations directly connected w
ith the dry dock.
It is not possible to estimate the recoverable amount of th
e crane because its value in
use cannot be measured. Therefore, the entity estimates t
he recoverable amount of the
cash-generating unit to which the crane belongs (i.e. the d
ry dock as a whole).
Sometimes it is possible to identify cash flows tha

t stem from a specific asset
but these cannot be earned independently from oth
er assets. In such cases the
asset cannot be reviewed independently and must
be reviewed as part of the
cash-generating unit.
Illustration 11
An entity operates an airport that provides services under
contract with a government
that requires a minimum level of service on domestic rout
es in return for licence to
operate the international routes. Assets devoted to each r
oute and the cash flows from
each route can be identified separately. The domestic ser
vice operates at a significant
loss.
Because the entity does not have the option to curtail the
domestic service, the lowest
level of identifiable cash inflows that are largely indepen
dent of the cash inflows from
other assets or groups of assets are cash inflows generate
d by the airport as a whole.
This is therefore the cash-generating unit.
If an active market exists for the output produced
 by an asset or a group of
assets, this asset or group of assets should be ident
ified as a cash-generating
unit, even if some or all of the output is used inter
nally.
Commentary
Where the cash flows are affected by internal transfer
pricing, management’s
best estimate of future market (i.e. in an arm’s length t
ransaction) prices
should be used to estimate cash flows for value in use
calculations.
 Cash-generating units should be identified consist
ently from period to period
for the same asset or types of assets, unless a chan
ge is justified.
4.2 Allocating shared assets

The carrying amount of a cash-generating unit sho
uld include the carrying
amount of only those assets that can be directly att
ributed, or allocated on a
reasonable and consistent basis, to it.
Commentary
Goodwill acquired in a business combination and corp
orate (head office)
assets are examples of shared assets that will need to b
e allocated.
4.2.1 Goodwill acquired in a business combin
ation

Goodwill acquired in a business combination must
be allocated to each of the
acquirer’s cash-generating units that are expected
to benefit from the
synergies of the combination, irrespective of whet
her other assets or
liabilities of the acquiree are assigned to those unit
s.

If the initial allocation of goodwill cannot be com
pleted before the end of the
financial year in which the business combination i
s effected, the allocation
must be completed by the end of the following fin
ancial year.

Where an acquirer needs to account for a business
combination using
provisional values, adjustments can be made to su
ch values within 12 months
of the date of acquisition (IFRS 3). Until such pro
visional values have been
finalised, it may not be possible to complete the in
itial allocation of goodwill.
Commentary
IFRS 3 allows 12 months from the date of acquisition t
o finalise goodwill;
IAS 36 allows up to the end of the following financial
period (i.e. in most
cases additional time) in which to allocate goodwill.
 Each unit (or group of units) to which the goodwil
l is so allocated must:
 represent the lowest level within the entity at whic
h the goodwill is
monit ored for internal management purposes; and
 not be larger than an operating segment as define
d in IFRS 8
“Operating Segments” (i.e. before the aggregatio
n permitted by
IFRS 8 when segments have similar economic ch
aracteristics).
Commentary
This aims to match the testing of impairment of goodwi
ll with the monitoring
level of goodwill within the entity. As a minimum, this
is considered to be
based on segmental reporting requirements such that li
sted companies will
not be able to “net-off” and shield goodwill impairmen
t at the entity level.
Once goodwill has been allocated to a cash-

generating unit, that unit must be
tested for impairment:
 at least annually; or
 as soon as there is an indication of impairment o
f:

goodwill; or

the cash-generating unit.

Different cash-generating units may be tested for i
mpairment at different
times. However, if some or all of the goodwill all
ocated to a cash-generating
unit was acquired in a business combination durin
g the current annual period,
that unit is tested for impairment before the end of
the current annual period.
4.2.2 Corporate assets
 Corporate assets – are assets, other than goodwill,
that contribute to the future cash
flows of both the cash-generating unit under revie
w and other cash-generating units.

The distinctive characteristics of corporate assets a
re that they do not generate cash
inflows independently of other assets or groups of
assets and their carrying amount
cannot be fully attributed to the cash-generating u
nit under review.
Commentary
Examples could include head office or divisional buildi
ngs, central
information system or a research centre.
Because corporate assets do not generate separate
cash inflows, the
recoverable amount of an individual corporate ass
et cannot be determined
unless management has decided to dispose of the
asset.
 If there is an indication that a cash-generating unit
may be impaired, the
appropriate portion of corporate assets must be inc
luded within the carrying
amount of that unit or group of units.
 Corporate assets are allocated on a reasonable and
consistent basis to each
cash-generating unit.
Commentary
If a corporate asset cannot be allocated to a specific c
ash-generating unit, the smallest
group of cash-generating units that includes the unit un
der review must be identified.

The carrying amount of the unit or group of units (
including the portion of
corporate assets) is then compared to its recoverab
le amount. Any impairment loss
is dealt with in the same way as dealing with an i
mpairment loss for goodwill.
Illustration 12
An entity has two cash generating units, CGU1 and CGU
2, and a single centrally-
located headquarters (HQ). The respective carrying amo
unts are as follows:
CGU1
CGU2 $14,000
$26,000
HQ $2,000
HQ does not generate cash flows in its own right so its ca
rrying amount will be
allocated to the two CGUs for impairment testing purpose
s; this will usually be based
on the respective carrying amounts of the CGUs.
/
CGU2 will be allocated $2,000 × /
The carrying amounts for impairment testing purposes wi
ll therefore be:
CGU1: $14,000 + $700 = $14,700
CGU2: $26,000 + $1,300 = $27,300
5 Accounting for impairme
nt loss
5.1 Basics

If, and only if, the recoverable amount is less than
its carrying amount, the
carrying amount of the asset should be reduced to
its recoverable amount.
That reduction is an impairment loss.
 An impairment loss should be recognised immedi
ately as an expense in profit
or loss, unless the asset is carried at revalued amo
unt under another IFRS.
 Any impairment loss of a revalued asset should be
treated as a revaluation
decrease under that other IFRS.
Commentary
This will usually mean that the fall in value must be re
cognised in other
comprehensive income to the extent that the loss is cov
ered by the revaluation
surplus. Any amount not so covered is then charged to
profit or loss.
Illustration 13
Situation
Recoverable
1
amount
fit or hensive incom
loss Other e
mpre-
Asset carried at historic100 80 20 Dr –
cost
Situation 2
Historic cost of asset
= 100
25 Dr
but revalued to 150 150 125 –
Situation 3
Historic cost of asset
= 100 50 Dr
but revalued to 150 150 95 5 Dr
Before recognition of impairment loss.
Commentary
achieved. The credit entry would usually be taken to a
n impairment account (much like
the accumulated depreciation account). This is then set
against the cost of the asset for
presentational purposes. For Situation 1 above the imp
airment double entry is:
Dr
Profit or loss 20
Cr “Impairment
account” 20
 After impairment the carrying amount of the asset
less any residual value is
depreciated (amortised) over its remaining expect
ed useful life.
5.2 Allocation within a cash-
generating unit

If an impairment loss is recognised for a cash-
generating unit, a problem
arises regarding the credit entry in the statement o
f financial position.
 The impairment loss should be allocated between
all assets of the cash-
generating unit in the following order:
 goodwill allocated to the cash-generating unit (if
 any);
then, to the other assets of the unit on a pro-rata b
asis based on the
carrying amount of each asset in the unit.
Commentary
However, where an individual asset within the CGU ha
s become impaired,
the impairment will first be taken against that asset. A
ny further impairment
is allocated to the remaining assets within the CGU.
 In allocating an impairment loss the carrying amo
unt of an asset should not
be reduced below the highest of:
 its fair value less costs of disposal (if determinab
 le);
 its value in use (if determinable); and
zero.
Commentary
The amount of the impairment loss that would otherwis
e have been allocated to
the asset should be allocated to the other assets of the
unit on a pro-rata basis.
Worked example 2
At 1 January, an entity paid $3,200 for a business whose
main activity consists of
refuse collection. The acquired company owns four refus
e collection vehicles and a
local government licence without which it could not oper
ate and some current assets.
At 1 January, the fair value less costs of disposal of each l
orry and of the licence is
$500 and the value of current assets (trade receivable and
inventory) is $400. The
company has no insurance cover.
At 1 February, one lorry crashed. Because of its reduced
capacity, the entity estimates the
value in use of the business at $2,620. The fair value of th
e current assets remains at $400.
Ignore the effects of depreciation.
The impairment loss would be allocated to the assets of t
he business as follows:
Impairment 1
January loss February
Goodwill 300 (80) 220
Intangible asset 500 – 500
Lorries 2,000 (500) 1,500
Current assets
– 400
400
3,200 (580) 2,620
Commentary
An impairment loss of 500 is recognised first for the lo
rry that crashed because its
recoverable amount can be assessed individually. (It n
o longer forms part of the CGUs.) The
remaining impairment loss (80) is attributed to goodwil
l. Current assets are not covered by
IAS 36 (e.g. IAS 2 deals with inventory and IFRS 15 fo
r trade receivables). For the purposes
of the example it is assumed that the fair value of the n
et current assets is unchanged.
If the entity’s assets include current assets these do not b
ear any of the impairment
loss as they would already be measured at a current value
.
Activity 2
Following on from Worked example 2. At 22 May, the g
overnment increased the
interest rates. The entity re-measured the value in use of t
he business as $2,260. The
fair value less costs of disposal of the licence had decreas
ed to $480 (as a result of a
market reaction to the increased interest rates). The dema
nd for lorries was hit hard by
the increase in rates and the selling prices were adversely
affected.
Assume fair value of current assets remains at $400
and ignore the effects of
depreciation.
Required:
Show how the above information would be reflected i
n the asset values of the
business.
If an individual asset within the cash-generating u

nit is impaired, but the cash-
generating unit as a whole is not, no impairment l
oss is recognised even if the
asset’s fair value less costs of disposal is less than
its carrying amount.
Illustration 14
Two machines within a production line (the cash-
generating unit) have suffered
physical damage, but are still able to work albeit at reduc
ed capacities. The fair value
less costs of disposal of both machines are below their car
rying amount. As the
machines do not generate independent cash flows and ma
nagement intends to keep the
machines in operation, their value in use cannot be estima
ted. They are considered to
be part of the cash-generating unit, the production line, w
hose recoverable amount has
been assessed to be greater that the carrying amount of th
e cash-generating unit.
Analysis

As an assessment of the recoverable amount of the
production line (as a whole) shows
that there has been no impairment of the cash-
generating unit there will be no
impairment loss to be recognised in respect of the
machines.
 However, the damage to the machines will require
that the estimated useful life and
residual values of the machines be reassessed (in a
ccordance with IAS 16).

If, because of the damage, management decided to
replace the machines and sell the
damaged ones in the near future, the value in use o
f the damaged machines could be
estimated (as the expected sale proceeds less costs
of disposal). If this is less than their
carrying amount, an impairment loss must be reco
gnised for the individual machines.
Commentary
If the assessment of the recoverable amount of the cash
-generating unit had
shown that it was impaired, clearly a loss would need t
o be accounted for.
Activity 3
Shiplake owns a company called Klassic Kars. Extracts f
rom Shiplake’s consolidated
statement of financial position relating to Klassic Kars ar
e:
Goodwill
Franchise costs $000
Restored vehicles (
at cost)
Plant 80,000
Other net assets
50,000
90,000
100,00
0
50,000

–––––
––
370,00
0
–––––
––
The restored vehicles have an estimated realisable value o
f $115 million. The
franchise agreement contains a “sell back” clause, which
allows Klassic Kars to
relinquish the franchise and gain a repayment of $30 milli
on from the franchisor. An
impairment review at 31 March 2018 has estimated that t
he value of Klassic Kars as a
going concern is only $240 million.
Required:
Explain how the information above would affect the p
reparation of Shiplake’s
consolidated financial statements to 31 March 2018.
6 Subsequent review
6.1 Basic provisions

Once an entity has recognised an impairment loss
for an asset other than
goodwill, it should carry out a further review in la
ter years if there is an
indication:
 that the asset may be further impaired;
 that the impairment loss recognised in prior years
may have decreased.
 An entity should consider, as a minimum, the foll
owing indications of both
external and internal sources of information.
6.1.1 External sources of information
 Observable indications that a significant increase i
n the asset’s market value
occurred during the period.

Significant favourable changes during the period,
or taking place in the near
future, in the technological, market, economic or l
egal environment in which
the entity operates or in the market to which the as
set is dedicated.
 Decrease in market interest rates or other market r
ates of return likely to
affect the discount rate used in calculating the ass
et’s value in use and
materially increase the asset’s recoverable amount
.
6.1.2 Internal sources of information
 Significant favourable changes in the actual or ex
pected extent or manner of
use of the asset.
Commentary
For example, if capital expenditure incurred enhances t
he asset.
 Evidence available from internal reporting indicat
es that the economic
performance of the asset is, or will be, better than
expected.
6.2 Reversals of impairment losses
6.2.1
On indivi
dual asse
ts, other
han good
will
 The carrying amount of an asset, other than good
will, for which an
impairment loss has been recognised in prior year
s, should be increased to its
recoverable amount only if there has been a change in the
estimates used to
determine the asset’s recoverable amount since the last i
mpairment loss was
recognised.

The increased carrying amount of the asset should
not exceed the carrying
amount that would have been determined (net of a
mortisation or depreciation)
had no impairment loss been recognised for the as
set in prior years.
Commentary
Any increase in the carrying amount of an asset above
the carrying amount
that would have been determined (net of amortisation o
r depreciation) had
no impairment loss been recognised for the asset in pri
or years is a
revaluation and should be treated accordingly.
Illustration 15
Xantia purchased a machine for $10,000 on 1 January 20
16 and determined that it will
have a useful life of 5 years and no residual value. The e
ntity prepares financial
statements to 31 December and uses the cost model to acc
ount for property, plant and
equipment. Machinery is depreciated using the straight li
ne method. On 31 December
2016 depreciation of $2,000 was charged; the carrying a
mount of the machine was then
$8,000.
However, actual performance of the machine during 2016
was below budget. On
testing it for impairment at 31 December 2016 the recove
rable amount of the machine
was found to be $7,200. Hence, an impairment loss of $8
00 was recognised.
At 31 December 2017, after charging depreciation ($7,20
0  4 = $1,800), the carrying
amount was $5,600. The accountant then learned that the
market value of a similar 2
year old machine is $7,500.
To reverse the impairment loss the accountant calculates
what the carrying amount of
the machine would have been had no impairment loss eve
r occurred:
$10,000 less depreciation of $2,000 for two years = $6,00
0
The double entry for the reversal is then:
$400
Cr Profit or loss $400
A reversal of an impairment loss for an asset shoul

d be credited to profit or loss
immediately, unless the asset is carried at revalued
amount under another IFRS.
 Any reversal of an impairment loss on a revalued
asset should be treated as a
revaluation increase under the relevant IFRS.
Commentary
This will usually mean that the increase in value will b
e recognised in other
comprehensive income unless it reverses an impairment
that has been previously
recognised as an expense in profit or loss. In this case
it is credited to profit or
loss to the extent that it was previously recognised as a
n expense.
6.2.2 Reversal of an impairment loss for a cas
h-generating unit
 A reversal of an impairment loss for a cash-
generating unit should be allocated to
increase the carrying amount of the assets (but ne
ver to goodwill) pro-rata with the
carrying amount of those assets.
Commentary
IAS 38 prohibits the recognition of internally-generated
goodwill. Any increase in the
recoverable amount of goodwill in the periods followin
g the recognition of an
impairment loss is likely to be an increase in internally
generated goodwill, rather than
a reversal of the impairment loss recognised for the ac
quired goodwill.
 Increases in carrying amounts should be treated as
reversals of impairment losses
for individual assets.
 In allocating a reversal of an impairment loss for a
cash-generating unit, the
 its recoverable amount (if determinable); and
 the carrying amount that would have been determi
ned (net of amortisation or
depreciation) had no impairment loss been recogni
sed for the asset in prior years.
Commentary
Equivalent to the “ceiling” for the reversal of an impai
rment loss for an
individual asset.
7
Disclosure
Commentary
Extensive disclosure is required by IAS 36 especially fo
r the key assumptions
and estimates used to measure the recoverable amount
of cash-generating
units containing goodwill or intangible assets with inde
finite useful lives.
7.1 For each class of assets

Impairment losses (and reversals of losses) recogn
ised during the period and the
line item(s) of the statement of profit or loss and o
ther comprehensive income in
which they are included.
7.2
Segment reporting

An entity that applies IFRS 8 Operating Segment
s, should disclose the
following for each reportable segment:
 the amount of impairment losses recognised in pr
ofit or loss and in
other comprehensive income during the period; an
d

the amount of reversals of impairment losses reco
gnised in profit or
loss and in other comprehensive income during th
e period.
7.3 Material impairment losses recog
nised or reversed

The events and circumstances that led to the recog
 nition or reversal of the impairment loss.
 The amount of the impairment loss recognised or r
eversed.
Whether the recoverable amount of the asset (cash
-generating unit) is its fair
value less costs of disposal or its value in use.
Key points summary
Indications of impairment (external and internal) must be
assessed annually. If
indicated, recoverable amount must be estimated.
Impairment testing must be measured annually (even if n
o indication) for certain
intangible assets (e.g. indefinite life, not available for use,
goodwill) and CGUs to
which goodwill has been allocated.
If either fair value less costs of disposal or value in use e
xceed carrying amount there
is no impairment.
If fair value less costs of disposal is indeterminable, recov
erable amount is value in
use.
For assets to be disposed recoverable amount is fair value
less costs of disposal. If
binding sale agreement, use price agreement less costs.
If an active market exists use the current bid price or mos
t recent transaction. If no
active market, make a best estimate.
Value in use reflects amount/timing of cash flows and tim
e value of money (using pre-
tax discount rate).
Cash flow projections based on supportable assumptions
and the asset’s current
condition exclude cash flows from financing activities or
taxation.
An impairment loss must be recognised when recoverabl
e amount is below carrying
amount:
 expense in profit or loss (any excess over revaluation s
urplus);
If recoverable amount for an individual asset cannot be es
timated, determine for its
cash-generating unit (CGU).
In allocating goodwill to CGUs, each CGU must:
 represent the lowest level at which goodwill is monitor
ed; and
An impairment loss reduces the carrying amount of a CG
U’s assets. Allocation is
firstly to goodwill then other assets (on pro-rata basis).
Carrying amount cannot be less than the higher of fair val
ue less costs of disposal,
value in use, and zero.
Assess annually if an impairment loss may have decrease
d. Reversal of an impairment
loss is restricted (to what carrying amount would have be
en).
Reversal of an impairment loss for goodwill is prohibite
d.
Focus

define and calculate the recoverable amount of an
asset and any associated
impairment losses;

identify circumstances which indicate that an imp
airment of an asset has
occurred;

describe what is meant by a cash-generating unit
;

state the basis on which impairment losses should
be allocated, and allocate a
given impairment loss to the assets of a cash-
generating unit; and

explain the principle of impairment tests in relatio
n to purchased goodwill.
Activity solutions
Solution 1 – Relevant cash flows
Net re
InclThis is a variable cash flow. 10
venue
ude0 – 70 – 1 = 29 in the
first year will be inflated each y
d
ear by 3%.
Fixed ove ExclThis is a sunk cost and not relev
ant to the calculation.
rhead udedIt will be incurred irrespective o
f the machine and so
is not a direct cost of using the
machine.
Volume g Management expects volume to
Incluincrease by 4% each
rowth ded year and this volume increase s
hould be incorporated
in the calculation for the first fi
ve years. After this,
IAS 36 prohibits the use of a m
anagement growth
rate that exceeds the industry av
erage. In the absence
of further information, zero gro
wth will be assumed.
Capital cost of the Excluded
This is a sunk cost and therefo
machine re not relevant.
Depreciation
Excluded
This is not a cash flow

.
Loan in
ExclIAS 36 states that cash flows ig
terest nore financing costs
uded
(and are pre-tax).
Major ser IncluThis cost is necessary to mainta
in operating capacity.
vicing ded This current value will need to
be inflated for two
years' inflation adjustment.
Machine modi This cost is an enhancing cost a
Exclud
fication ed nd will not be
included, as it does not relate to
the present condition
of the asset. The resulting savin
gs in variable cost
will also be excluded.
Scrap pro
IncluThis is a future cash flow relati
ceeds ng to the asset. As
ded this amount is a current value it
will need to be
inflated to a future value, reflec
ting the expected cash
flow in eight years’ time.
Solution 2 – Impairment loss
1
February Impairment 22
loss May
Goodwill
220 (220) –
Intangible asset 500 (20) 480 Note 1
Lorries 1,500 (120) 1,380Note 2
Current assets 400 – 400
2,620 (360) 2,260
Note 1
220 is charged to the goodwill to reduce it to zero. The b
alance of 140 must be pro
rated between the remaining assets in proportion to their
carrying amounts, excluding
the current assets as they are already measured at fair val
ue.
The ratio that the remaining assets bear to each other is 5
00:1,500. This implies that 25% ×
140 = 35 should be allocated to the intangible asset. How
ever this would reduce its carrying
amount to below its fair value less costs of disposal and t
his is not allowed. The maximum
that may be allocated is 20 and the remaining 15 must be
allocated to the lorries.
Note 2
The initial amount of impairment against the lorries is 10
5 (i.e. 75% × 140). Their total
impairment is 120 (i.e. 105 + 15 (Note 1)).
Solution 3 – Impairment loss
An impairment loss relating to a cash generating unit
should be allocated on the
following basis:

 first to any obviously impaired assets (none in this

example);
then to goodwill;
 then to the remaining asset on a pro-rata basis;
but no asset should be written down to less than it
s net realisable value.
Applying this to the impairment loss of $130 million ($37
0m – $240m):
Cost–––––––
370,000 Impairment
$000––––––– $000
Goodwill 80,000 (80,000)
Franchise costs (12,500)
Restored vehicl 50,000 nil
es (25,000)
Plant 90,000 (12,500)
Other net assets 100,000 –––––––
(130,000)
50,000 –––––––
Restated $00075,000 –––––––
value 37,500
37,500
–––––––
90,000
240,000
Commentary
The franchise cost has a fair value less costs of disposa
l of $30m, but there is no information
about its value in use (which it must have), therefore th
ere is no need to write down the value
of the franchise to $30m. The asset will share in any a
dditional impairment after the write-
off of goodwill. The restored vehicles have a realisabl
e value higher than their cost and
should not be written down at all.
Overview
Objective

To explain the requi
rements for the fina
ncial reporting of ex
ploration and
evaluation expendit
ures.
 Main feat
INTRO DU
ures
CTI ON  Objective
 Scope
 Defi niti
ons
 Recog
EXPLORnition
ATION  Meas
afiniti
recogniti
AND urementon
ALUATIO
 Meas
N
urement
ASSETS
 Changes in accounti
ng policy
 Classification
I D
 
W I
he n
n f
to o
te r
st m
 a
H ti
o o
w n
to
te
st

Im
pa
ir
m
en
t l
os
s
eserved.
1501
SESSION 15 – IFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES
1 Introduction
1.1 Reasons for standard

capital intensive and require significant
investment in “long-lived” assets.
 No specific standard deals with costs incurred in exploration and extraction
activities (they are “scoped out” of IAS 16 and IAS 38).
 Therefore, different accounting treatments have been established in the industry (e.g.
in the UK there is a Statement of Recommended Practice, “SORP”).
 However, listed (and other) entities need to report under IFRS.
 Therefore, in the absence of a specific standard, entities would have to
develop accounting policies to deal with costs incurred in the exploration and
evaluation of mineral resources in accordance with IAS 8 “Accounting
Policies, Changes in Accounting Estimates and Errors”.
Commentary
Using IFRSs dealing with similar and related issues (e.g. IAS 38 requirements and
guidance on research and development) and the Conceptual Framework definitions
and recognition criteria (e.g. for assets) would have resulted in entities having to
expense, as “research”, expenditure that has been capitalised under industry
practice.
1.2 Main features

IFRS 6 allows an accounting policy to be formulated without considering
paragraphs 11-12 of IAS 8.
 Accounting policies applied immediately before adoption of IFRS 6 can still
be used.
 However, impairment tests must be carried out when circumstances suggest
that carrying amounts exceeds recoverable amounts.

measurement principles are unchanged.
Commentary
Paragraphs 11-12 of IAS 8 give the “hierarchy” of regulations and recent
pronouncements of other standard setting bodies.
 In summary, the standard really deals with just two matters:
 accounting policies; and
 impairment.
1.3 Objective

To provide limited improvements to existing accounting practices.
 To apply this standard in the recognition of impairment.
Commentary
The measurement of impairment must still be in accordance with IAS 36.
 To require disclosures relating to amounts arising from exploration and
evaluation of mineral resources within the financial statements.
1.4 Scope
1.4.1 IFRS 6
 The standard applies to exploration and evaluation expenditures incurred.
 It does not apply to expenditure incurred:
 before exploration for and evaluation of mineral resources (e.g.
before legal rights obtained);
 after technical feasibility and commercial viability of extracting a
Commentary
The scope of IFRS 6 is, therefore, very narrow.
1.4.2 Overview of phases
Exploration &
Pre- Post-
evaluation
 Expense IFRS 6  IAS 38

(usually)
Commentary
The post-exploration and evaluation phase is also called the “construction” phase.
1.4.3 Implications
 Entities must develop separate accounting policies for costs incurred in each
of the phases. They must therefore be able to identify them separately.
 examples of pre-exploration and evaluation costs.
However, these would include:
 costs of obtaining speculative seismic or other data; and
 costs of geological or geophysical analysis on such data.
Commentary
Such costs are expensed as “research” costs.
 Exploration and evaluation activities cease when technical feasibility and
commercial viability are demonstrable. At this point:
 capitalisation of exploration and evaluation assets ceases;
 exploration and evaluation assets are tested for impairment;
 exploration and evaluation assets are reclassified.
Commentary
Because the scope of IFRS 6 is intentionally narrow, the terms in the
standard are tightly defined, as follows.
1.5 Definitions

obtained, including the determination of the technical feasibility and
commercial viability of extracting mineral resource.

with the exploration and evaluation of mineral resources before the technical
feasibility and commercial viability of extracting mineral resource are
demonstrable.
Commentary
Technical feasibility encompassed the existence of proven and probable reserves.
Commercial viability includes having the necessary financial means.
 Exploration and evaluation assets – exploration and evaluation expenditures
recognised as assets in accordance with the stated accounting policy.
2 Exploration and evaluation assets
2.1 Recognition

In developing an accounting policy
 relevant (to economic decision making needs of users); and
 reliable.
 IFRS 6 gives temporary exemption from paragraphs 11 and 12 of IAS 8 that
would otherwise require application of the “hierarchy”.
Commentary
Since IFRS 6 was published the IFRS IC has been asked if this exemption can
be applied to expenditure incurred after the exploration and evaluation stage
(i.e. to costs incurred in the “construction” phase). IFRS IC has confirmed
that it cannot.
 The policy specifying which expenditures are assets must be applied consistently.
Commentary
There is nothing new in this principle. However, it is likely to change current practices.
For example, an oil company may currently classify a cost as asset or expense depending
on the probability of a successful outcome (e.g. a cost incurred in Middle East may be
classified as “asset” if the probability of success is 50% or more; the same cost classified
as “expense” where incurred in a region with a probability of success that is less than
50%). Under IFRS 6 costs must be capitalised or expensed consistently, regardless of
where they are incurred. However, if the probability of success is less than 50% then this
may give rise to an impairment test on those assets.
2.2 Measurement

Initially at cost.
 Examples of expenditure that might be included in initial measurement:
 Acquisition of rights to explore;
 Topographical, geological, geochemical studies, etc;
 Exploratory drilling;
 Trenching;
 Sampling;
 Activities relating to the evaluation of technical feasibility
viability.
Commentary
This list is not exhaustive. For example, administrative and other general overheads
(e.g. payroll-related costs) should be included if considered to be “directly
attributable” and included in inventory or intangible assets (under IAS 2 or IAS 38
respectively). Where exploration and evaluation assets are “qualifying assets”
borrowing costs may also be capitalised (IAS 23).
 Obligations for removal and restoration must also be recognised (IAS 37), but
only where incurred as a consequence of having undertaken the exploration
and evaluation.
Commentary
This is likely to be a change to current practice where such costs are
expensed when paid or accrued on a “unit of production” basis.
2.3 Measurement after initial recognition

Apply either:

 cost model; or
revaluation model.
2.3.1 Cost model
 Exploration and evaluation assets are depreciated when available for use. For example, a
licence may be amortised on a straight-line or unit of production basis.
2.3.2 Revaluation model
 The revaluation model must be applied consistently according to the
classification of assets:

 tangible (IAS 16 revaluation model);
intangible (IAS 38 revaluation model).
Commentary
The distinction is important. Remember that there must be an active market
to revalue an intangible asset.
Activity 1
Suggest three reasons why it is unlikely that a revaluation model would be applied
to exploration and evaluation assets.
2.4 Changes in accounting policy

A change is permitted if it makes the financial statements :
 more relevant and no less reliable; or
 more reliable and no less relevant.
Commentary
Under IFRS 6, an accounting policy can only be changed “for the better”, without
achieving full compliance with IAS 8 criteria. So, for example, if exploration and
evaluation expenditure are currently capitalised the policy can be changed to expense
all such costs. However, an expense model should not be changed to a capitalisation
model (because expensing these costs provides more reliable information and is more
consistent with the Conceptual Framework’s definitions).
 Any change must be accounted for in accordance with IAS 8; that is applied
retrospectively (unless this is impracticable).
Commentary
Retrospective application may be impracticable where there is a lack of
information on previously “pooled” costs.
2.5
Classification

Exploration and evaluation assets should be presented as tangible or intangible, according
to their nature. Tangible assets are not defined by IFRS but are mostly identifiable
property, plant and equipment (e.g. drilling equipment, pipelines, storage containers, etc).
Commentary
This may be a change from current practice where, for example, all such assets are
classified as intangible
 The consumption of tangible assets (e.g. drilling rigs) may be included in
developing an intangible asset (e.g. an exploratory well).
Commentary
However, the use of a tangible asset to develop an intangible asset does not
change the classification of that asset (from tangible to intangible).
 Once technical feasibility and commercial viability have been demonstrated,
exploration and evaluation assets must cease to be classified as such.
 Exploration and evaluation assets must be tested for impairment and any loss
recognised as an expense, before reclassification.
Commentary
Assessment is required even if there are no impairment indicators. However,
impairment at this stage is likely to be rare if the decision to move to the
construction phase has been taken.
3 Impairment
3.1 When to test

As well as testing on reclassification, exploration and evaluation assets must be
assessed for impairment when facts and circumstances suggest that carrying
amount exceeds recoverable amount.
 Impairment indicators include:

 expiry of exploration rights without expectation renewal;
 lack of budget for substantive expenditure;
planned discontinuance due to lack of commercially viable quantities;

other data indicating that the carrying amount is unlikely to be recovered in
full.
1507
Commentary
Apart from expiry of rights these indicators are all based on management information
and decisions that are capable of being monitored. The list is not exhaustive.
 Impairment is measured, presented and any loss disclosed in accordance with
 There is no requirement to test for impairment at the end of every reporting period.
3.2
How to test

There must be a policy for allocating exploration and evaluation assets to one
or more cash-generating units (CGUs).
Commentary
Where possible assets should be tested separately; otherwise by consideration of a CGU.
Aggregation of CGUs is permitted, however the level of aggregation must be specified.
 A CGU (or group of CGUs) cannot be larger than an operating segment as
determined by IFRS 8 “Operating Segments”.
Commentary
So if off-shore and on-shore activities are reported separately (because they have
different risks and returns), they cannot be combined for impairment tests under IFRS
(even though this may be permitted under a national GAAP).
 Impairment is most likely to be assessed on value in use. (Cash flow projections in the
industry are usually longer than five-year budgets approved by management (IAS 36).)
Commentary
Only if value in use is less than carrying amount is it then necessary to
consider fair value less costs to sell.
3.3 Impairment loss

This must be recognised as an expense in accordance with IAS 36.
Commentary
Impairment losses cannot be kept in a pool of expenses that is written off over
a period of time to smooth profits.
4 Disclosure
4.1 Information

Information that explains the amounts recognised in the financial statements arising from
the exploration for and evaluation of mineral resources must be disclosed:
 Accounting policies for:
 exploration and evaluation expenditure; and
 recognition of exploration and evaluation assets.
 Amounts of assets, liabilities, income and expenses, and operating
and investing cash flows arising from exploration and evaluation.
 As exploration and evaluation assets are required to be treated as a separate
class, information required by IAS 16 (and/or IAS 38) is also disclosed.
Illustration 1
Explorat ion, evaluation and development expendit ure (ext ract)
In line with IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’, exploration and evaluation
expenditure can be capitalised as an intangible asset in respect of each area of interest. This expenditure
includes:
• Acquisition of rights to explore;
• Topographical, geological, geochemical and geophysical studies;
• Exploratory drilling;
• Trenching;
• Sampling; and
• Activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral
resource.
Capitalisation of exploration and evaluation expenditure commences on the acquisition of a right to explore a
specific area or evaluate a mineral resource, either by means of the acquisition of an exploration licence or an
option to a mineral right and ceases either on the acquisition of a mining lease or mineral production right in
respect of that specific area or mineral resource or the making of a decision by management of the Group as
to the technical feasibility or economic viability of conducting mining operations in that specific area or
extracting the mineral resource being evaluated.
2015 ANNUAL REPORT CHURCHILL MINING PLC
Key points summary
IFRS 6 applies only to exploration and evaluation expenditures incurred:
 before technical feasibility/commercial viability are demonstrated.
Accounting policies can be changed if financial statements will be more relevant
to users and no less reliable (or vice versa).
Assets are assessed for impairment when facts and circumstances suggest that
impairment may arise.
A cash-generating unit to which an asset is allocated cannot be larger than an
operating segment (IFRS 8).
Disclosure is required to explain the amounts recognised.
Focus

describe the method of accounting specified by the IASB for the exploration
for and evaluation of mineral resources;
 outline the need for an accounting standard in this area and clarify its scope;

give examples of elements of cost that might be included in the initial
measurement of exploration and evaluation assets;
 describe how exploration and evaluation assets should be classified and
reclassified; and
 explain when and how exploration and evaluation assets should be tested for
impairment.
Activity solution
Solution 1 – Revaluation model
Solution
(1) Many local GAAPs do not permit the revaluation of assets.
(2) The revaluation model has to be applied to all assets in the same class. This
will be particularly difficult as the “class” of exploration and evaluation
assets will not be made up of homogeneous items.
(3) The lack of market values will make it difficult to determine fair value.
(4) Alternative approaches to determining fair value will be difficult to apply.
For example, an income approach is unlikely to be reliable as cash flows will
be highly uncertain.
(5) The time and cost that would be involved (annually).
 SESSION 16 – IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSET
S 
Overview
Objectives

To define provisions, contingent liabilities and contingent assets.
 To explain the accounting rules for the recognition and measurement of provisions.
 To explain the disclosures for contingencies.
INTRODUCTION  Background
 Objective
 Terminology
 Provisions vs
RECOGNITION
 Provisions
 Recognition issues
MEASUREMENT
 General rules
 Specific points
APPLICATION OF THE
RULES TO SPECIFIC REPAIRS AND
DOUBLE ENTRY MAINTENANCE
CIRCUMSTANCES
 IAS 37 guidance  Future operating losses  Refurbishment – No

 Changes in provisions  Onerous contracts legislative
 Restructuring requirement
 Refurbishments –
DISCLOSURES legislative
requirement
 Provisions
 Contingent liabilities
DECOMMISSIONING
COSTS
 Background
 Recognition
 Measurement
SESSION 16 – IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
1 Introduction
1.1 Background

Before IAS 37 there were no international accounting standards governing the
definition, recognition, measurement, use and presentation of “provisions”.
 “Provisions” were created with a debit to expense and credit to the statement of
financial position. Such credits could increase liabilities (e.g. a “provision” for repairs
and renewals) or decrease assets (e.g. a “provision” for bad and doubtful debts).
 Because of the lack of prescription in this area provisions could be made, not made, or
“unmade” to suit management’s needs based largely on intent. Provisions were created in a
“good” year and later released to “smooth” profits. These “big bath” or “rainy day”
provisions were so called because they could be used for any and every purpose.
Commentary
Provisions were often made for one purpose and used for another.
Illustration 1
In 1999 an investor considered an investment in one of two comparable companies:
Company A
Company B
1996 1997 1998
1996 1997 1998
$000
$000 $000 $000 $000 $000
Results
2,500 3,200 3,700 Results 6,500 1,100 7,500
The higher profits in 1998 in Company B look more attractive but a risk averse
investor would be influenced by the possible repetition of poor performance in 1997.
The trend of rising profits in Company A gives an impression of quality earnings that
may contribute to supporting a higher share price.
Suppose now that, instead of publishing its results as above, Company B decided, in
1996, to restructure its operations and provide for potential costs of $3m and, in 1997,
decided that restructuring was no longer necessary. Its result would be reported as:
1996 1997 1998
$000
$000 $000
Original
6,500 1,100 7,500
Provision
(3,000)
Release of provision
3,000
Revised results
3,500 4,100 7,500
Now company B shows the investor the steadily increasing profits he is looking for.
 Although the usual objective of a “creative accountant” is to find accounting
policies and treatments that maximise reported profit and reduce reported
liabilities, the initial effect of using provisions creatively achieves the opposite.
 Diverse approaches to the recognition and measurement of provisions were found in the
absence of regulation. This reduced the comparability of financial statements and
affected, in particular, earnings per share, as a stock market indicator.
Illustration 2
On closure of its surface mines, a mining company must reinstate the soil excavated
and restores the surface with topsoil replacement and landscaping. In the absence of an
accounting standard the company could:
(i)
ignore the costs until the mine is closed;
(ii) make some disclosure about the likelihood of future costs for restoration;
(iii) accrue the expected costs of restoration annually over the expected
productive life of the mine;
(iv)
provide for the expected costs in full (at some point).
The most commonly used and accepted accounting practice was (iii) on the grounds
that it was consistent with the concepts of accruals and prudence.
Commentary
The introduction of IAS 37 no longer allows provisions to be set up for future
events and hence helps stop the abuse of provisions in “creative accounting”
for the “smoothing” of reported profits.
 As well as creating credit balances (purporting to be liabilities), provisions were widely
used to reduce the carrying amount of assets (inventory, receivables, non-current assets).
This also needed to be addressed when developing a standard on provisions.
 Defining a provision as a liability (in accordance with the Conceptual Framework) made a
further standard necessary to prescribe the accounting treatment for the loss in value
(“impairment”) of assets that was not otherwise dealt with.
Commentary
IAS 36 “Impairment of Assets” was issued simultaneously with IAS 37.
1.2 Objective

To ensure that appropriate recognition criteria and measurement bases are applied to:
 provisions;
 contingent assets; and
 contingent liabilities.
 Sufficient information is disclosed in the notes to the financial statements in
respect of each of these items.
1.3 Scope

The standard addresses only provisions that are liabilities (i.e. not “provisions”
for depreciation, doubtful debts, etc).
Commentary
Such “provisions” which write-down the carrying amounts of assets are “allowances”.
 The standard applies to provisions for restructuring (including discontinued operations).
Commentary
When a restructuring meets the definition of a discontinued operation, additional
disclosures may be required in accordance with IFRS 5 “Non-current Assets
Held For Sale and Discontinued Operations”.
1.4 Terminology

Provisions are liabilities of uncertain timing or amount.
 A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
 An obligating event is an event that creates a legal or constructive obligation that results
in an entity having no realistic alternative to settling that obligation.
Commentary
This is a key concept in the IAS 37 approach to the recognition of provisions.
 A legal obligation is an obligation that derives from:
 a contract;
 legislation; or

other operation of law (e.g. in a court of law).
 A constructive obligation is an obligation that derives from an entities actions where:
 the entity has indicated to other parties that it will accept certain
responsibilities by:

 an established pattern of past practice; or
published policies; or
 a sufficiently specific current statement; and

as a result of the above the entity has created a valid expectation on the
part of those other parties that it will discharge those responsibilities.
Commentary
The definitions of legal and constructive obligations reinforce the strict interpretation
which IAS 37 now requires in order for an entity to recognise a provision.
erved.
1604
 A contingent liability is:
 A possible obligation that arises from past events and whose existence will
be confirmed only on the occurrence or non-occurrence of one or more
uncertain future events that are not wholly within the control of the entity; or
 A present obligation that arises from past events but is not recognised because:
 an outflow of economic benefits is not probable; or
 the obligation cannot be measured with sufficient reliability.
Commentary
IAS 37 stresses that an entity will be unable to measure an obligation with
sufficient reliability only on very rare occasions.
 A contingent asset is a possible asset that arises from past events and whose existence
will be confirmed only on the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
 An onerous contract is one in which the unavoidable costs of meeting the obligations
exceed the economic benefits expected to be received from it.
 A restructuring is a programme that is planned and controlled by management, and
materially changes either:
 the scope of a business undertaken by an entity; or
 the manner in which that business is conducted.
1.5 Relationship between provisions and contingent liabilities

In a general sense all provisions are contingent because they are uncertain in
timing or amount.

assets and liabilities that are not recognised because their existence will be
confirmed only on the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
 The standard distinguishes between:
 Provisions – because they are present obligations; and
 Contingent liabilities – which are not recognised because they are either:
 possible obligations; or
 present obligations, which cannot be measured with sufficient reliability.
Key point
By definition, a provision is a liability (i.e. has a probable outflow of economic
benefits). In contrast, the outflow of economic benefits of most contingent
liabilities will be only possible so a liability cannot be recognised (in accordance
with the Framework).
2 Recognition
2.1 Provisions

A provision must be recognised when certain conditions have been met.
Those conditions are met when:
 an entity has a present legal or constructive obligation to transfer
economic benefits as a result of past events; and
 it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
 a reliable estimate of the obligation can be made.
 If these conditions are not met a provision should not be recognised. (The
liability is then disclosed as a contingent liability.)
Commentary
IAS 37 specifically notes that it does not deal with the classification of the debit balance,
which arises on the recognition of a provision. It goes on to say that it “neither prohibits
nor requires capitalisation of the costs recognised when a provision is made”. (IFRIC
Interpretation 1 provides guidance on how to account for the effect of changes in the
measurement of existing decommissioning, restoration and similar liabilities – however,
this is not examinable.)
Illustration 3
Provisions
Provisions for product warranties, legal disputes, onerous contracts or other claims are
recognised when the Group has a present legal or constructive obligation as a result of
past events, it is probable that the Group will be required to settle that obligation and a
reliable estimate can be made of the amount of the obligation. Provisions are
measured at management’s best estimate of the expenditure required to settle the
obligation at the reporting date, and are discounted to present value where the effect is
material at a pre-tax rate that reflects current market assessments of the time value of
money and, where appropriate, the risks specific to the liability. The unwinding of
discounts is recognised as a finance cost. Provisions are reviewed at each reporting
date and adjusted to reflect the current best estimate.
Annual financial statements 2015
2.2 Recognition issues
2.2.1
Present obligation

A present obligation exists when the entity has no realistic alternative but to make
the transfer of economic benefits because of a past event, (the “obligating event”).
Illustration 4 – Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for sale the manufacturer undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from
the date of sale. Based on past experience, it is probable (i.e. more likely than not) that
there will be some claims under the warranties.
Present obligation – Yes, the sale of the product with a warranty gives rise to a legal
obligation.
Probable settlement – Yes, for the warranties as a whole.
Conclusion – A provision is recognised for the best estimate of the costs of making
good under the warranty products sold before the end of the reporting period.
(Measurement is considered later.)
Commentary
Unless otherwise stated, the Illustrations in this session assume that a reliable estimate can be
made. So, for these warranties, all three of the recognition criteria have been met and
therefore a provision is recognised in the financial statements. The estimate of the provision is
based on past experience and on evidence from events occurring after the reporting period.
 A provision should be made only if the liability exists independent of the
entities future actions. The mere intention or necessity to undertake
expenditure related to the future is not sufficient to give rise to an obligation.
 If the entity retains discretion to avoid making any expenditure, a liability
does not exist and no provision is recognised.
 The mere existence of environmental contamination (e.g. even if caused by
the entity’s activities) does not in itself give rise to an obligation because the
entity could choose not to clean it up.
 A board decision alone is not sufficient for the recognition of a provision
because the board could reverse the decision.
 If a decision was made that commits an entity to future expenditure no
provision need be recognised as long as the board have a realistic alternative.
 In rare cases it is not clear whether there is a present obligation. In these cases a
past event should be deemed to give rise to a present obligation when it is more
likely than not that a present obligation exists at the end of the reporting period.
Commentary
Clearly this is a matter for judgement after taking into account all available evidence.
Illustration 5
Nine people die after a banquet in July 2016, possibly as a result of food poisoning.
Legal proceedings are started seeking damages from the catering company which
disputes liability. Up to the date of approval of the financial statements for the year to
31 December 2016, the caterer’s lawyers advise that it is probable that the caterers will
not be found liable. However, when preparing the financial statements for the year
ended 31 December 2017, the lawyers advise that, owing to the development of the
case, it is probable that the caterers will be found liable.
At 31 December 2016
Present obligation – No, on the basis of the evidence available when the financial
statements were approved, there is no obligation as a result of past events.
Conclusion – No provision is recognised. The matter is disclosed as a contingent
liability unless the probability of any settlement is regarded as remote.
At 31 December 2017
Present obligation – Yes, on the basis of the evidence available, there is a present
obligation.
Probable settlement – Yes
Conclusion – A provision is recognised for the best estimate of the amount needed to
settle the present obligation.
Commentary
Year ended 31 December 2016: Based on the advice of experts, there was not considered
to be a present obligation as the chances of the entity being successfully sued was unlikely.
The first recognition criterion was not met, so no provision could be made
Year ended 31 December 2017: New evidence has come to light which resulted in the
experts advising that it is likely that the entity will be found liable. Now all three criteria
have been met and a provision must be recognised in the financial statements.
2.2.2 Past event
 A past event that leads to a present obligation is called an obligating event.
 An obligating event exists when the entity has no realistic alternative but to
make the transfer of economic benefits. This may be due to:

 legal obligations; or
constructive obligations.
Commentary
An example of a constructive obligation is a retail store that habitually refunds purchases
made by dissatisfied customers even though it is under no legal obligation to do so, but
could not change its policy without incurring unacceptable damage to its reputation.
Illustration 6 – Contaminated land – constructive obligation
A conglomerate which extracts nickel causes contamination and operates in a country
where there is no environmental legislation. However, the conglomerate has a widely
published environmental policy in which it undertakes to clean up all contamination
that it causes. The conglomerate has a record of honouring this published policy.
Present obligation – Yes, the contamination of the land gives rise to a constructive
obligation because the conduct of the conglomerate has created a valid expectation, on
the part of those affected by it, that the contamination will be cleaned up.
Conclusion – A provision is recognised for the best estimate of the clean-up costs.
 Provisions are not made for general business risks since they do not give rise
to obligations that exist at the end of the reporting period.
 It is not necessary to know the identity of the party to whom the obligation is
owed in order for an obligation to exist.
2.2.3 Reliable estimate of the obligation
 A reasonable estimate can always be made where an entity can determine a
reasonable range of possible outcomes.
 Only in extremely rare cases will it be genuinely impossible to make any
quantification of the obligation and therefore impossible to provide for it. (In
these circumstances disclosure of the matter would be necessary.)
2.3 Contingent assets and liabilities

These should not be recognised. They are dependent on the occurrence or non-
occurrence of an uncertain future event not wholly within the control of the entity.
Commentary
It follows that they are no obligations (liability) or resources (asset) which exists at the
end of the reporting period.
 Contingent liabilities will be disclosed unless the possibility of an outflow of
economic benefits is remote. Most contingent assets will not be disclosed.

Business Combinations requires a subsidiary’s contingent liabilities, that are
present obligations, to be recognised and measured at fair value as part of the
 Contingent assets are not recognised as the inflow of economic benefits is
only a possibility. When realisation of income is virtually certain, the related
asset will be recognised (as no longer contingent).
3 Measurement
3.1 General rules

The amount provided should be the best estimate at the end of the reporting period of
the expenditure required to settle the obligation. The amount is often expressed as:
 the amount which could be spent to settle the obligation immediately; or
 to pay to a third party to assume it.
 The best estimate may derive from the judgement of management supplemented by:

experience of similar transactions; and

evidence provided from experts (in some cases).
 An entity should take account of the uncertainty surrounding the transaction. This may
involve:
 an expected value calculation in situations where there is a large
population (e.g. determining the size of warranty provisions);
 the use of the most likely outcome in situations where a single obligation
is being measured (as long as there is no evidence to indicate that the
liability will be materially higher or lower than this amount).
 Factors to be taken into account when deciding on the size of the obligation include:

the time value of money (the amount provided should be the present
value of the expected cash flows using a pre-tax discount rate);

evidence in respect of expected future events, for example:
 change in legislation;
 improvements in technology;

prudence.
Worked example 1
Alfa sells goods with a warranty under which customers are covered for the cost of
repairing any manufacturing defects discovered within the first 12 months after
purchase. If minor defects were detected in all products sold, repair costs of $100,000
would result. If major defects were detected in all products sold, repair costs of
$400,000 would result. Alfa’s past experience and future expectations indicate that, for
the coming year, of the goods sold:
75% will have no defects;
20% will have minor defects; and
5% will have major defects.
Required:
Calculated the amount to be provided in the financial statements in respect of the
warranty claims.
erved.
1610
Worked solution 1
The expected value of the cost of repairs is:
(75% × 0) + (20% × 100,000) + (5% × 400,000) = $40,000
Commentary
An entity should assess the probability of the outflow for the warranty obligations as a whole.
Activity 1
Jallopy, a car manufacturer, makes and sells vehicles with warranty contracts that
provide for the replacement or repair of manufacturing defects discovered within the
first year after manufacture. It estimates that 5% of vehicles sold will require a minor
repair, costing $50 per vehicle; 10% of vehicles sold will require an average repair
costing $80 per vehicle; 3% will require a major repair costing $140 per vehicle. The
remaining vehicles are not expected to require any warranty repairs.
During the last year, 140,000 vehicles were sold under warranty.
Required:
Calculated the amount to be provided in the financial statements in respect of the
warranty claims.
Worked example 2
Beeta has an obligation to restore the seabed for the damage it has caused in the past.
It has $1 million cash to pay on 31 December 2019 relating to this liability. Beeta’s
management consider that 15% is an appropriate discount rate. The time value of
money is considered to be material.
Required:
Calculate the amount to be provided at 31 December 2017 for the costs of
restoring the seabed.
Worked solution 2
$1 million
The present value of the provision is
1.151.15
3.2 Specific points

Reimbursement – If some (or all) of the expected outflow is expected to be reimbursed
from a third party, the reimbursement should be recognised only when it is virtually
certain that the reimbursement will be received if the entity settles the obligation.
 The expense in respect of the provision may be presented net of the
amount recognised for a reimbursement.
 The reimbursement should be treated as a separate asset and must not
exceed the provision in terms of its value.
 Gains from the expected disposal should not be taken into account when
measuring a provision.
 The provision should be measured as a pre-tax amount.
Activity 2
Cee has an obligation to restore environmental damage in the area surrounding its
factory. Expert advice indicates that the restoration will be carried out in two distinct
phases; the first phase requiring expenditure of $2 million to remove the contaminated
soil from the area and the second phase, commencing three years later, to replant the
area with suitable trees and vegetation. The estimated cost of replanting is $3.5
million. Cee uses a cost of capital (before taxation) of 10% and the expenditure, when
incurred, will attract tax relief at the company’s marginal tax rate of 30%. Cee has not
recognised any provision for such costs in the past and today’s date is 31 December
2017. The first phase of the clean-up will commence in a few months’ time and will be
completed on 31 December 2018 when the first payment of $2 million will be made.
Phase 2 costs will be paid three years later.
Required:
Calculate the amount to be provided at 31 December 2017 for the restoration
costs.
4 Double entry
4.1 IAS 37 guidance

IAS 37 gives detailed guidance on the recognition and measurement of provisions but
it does not give guidance on the treatment of the debit entries on initial recognition
(nor on the other side of the entry on subsequent measurement).
Commentary
The debit entry arising on initial recognition of a provision may be an expense or
an asset depending on circumstance. In order for the transaction to be treated as
an asset it would have to give rise to future economic benefits.
4.2 Changes in provisions

If the provision was originally measured as a present value its carrying
amount will increase with the passage of time as the “discount unwinds”.
Commentary
“Unwinding the discount” describes the process of adding to the liability the
financial cost of holding it for each year until it matures (see Worked
example 3). It is reported as an interest expense.
 IAS 37 requires that provisions are reviewed at the end of each reporting period and
adjusted to reflect current best estimates. If it is no longer probable that an outflow of
resources embodying economic benefits will be required to settle the obligation, the
provision should be reversed.
Commentary
A provision can be used only for expenditures that relate to the matter for which
the provision was initially recognised.
Worked example 3
Dee becomes subject to an obligating event on 1 January 2017.
Dee is committed to expenditure of $10m in 10 years’ time as a result of this event.
An appropriate discount factor is 8%.
1 January 2017
Initial measurement of the provision
$10m 
10
= 4,631,935
Cr Provision 4,631,935
31 December 2017
Measurement of the provision
$10m 
9
= 5,002,490
Presented as follows:
Borrowing cost (“unwinding of the discount”) (8%  370,555
4,631,935)
Carried forward
5,002,490
370,555
Cr Provision 370,555
31 December 2018
$10m 
8
= 5,402,689
5,002,490
Borrowing cost (“unwinding of the discount”)
(8%  5,002,490) 400,199
Carried forward
5,402,689
400,199
1613
5 Decommissioning costs
5.1 Background

In certain industries (extractive industries, nuclear power) expenditure has to be
incurred to remove facilities and restore the production area to its original condition.

Such costs are described as decommissioning costs or removal and restoration costs.
5.2 Recognition

A provision for these costs should be recognised as soon as an obligating event occurs.
This might be at the start of the contract.

A provision may represent delayed expenditure that is necessary to achieve access to
future economic benefits. If this is the case then it should be capitalised as an asset.
Illustration 7
Eta-oil operates an offshore oilfield where its licensing agreement requires it to remove
the oil rig at the end of production and restore the seabed. 90% of the eventual costs
relate to the removal of the oil rig and restoration of damage caused by building it, and
10% arise through the extraction of oil. At the end of the reporting period, the rig has
been constructed but no oil has been extracted.
Present obligation – Yes. The construction of the oil rig creates a legal obligation
under the terms of the licence to remove the rig and restore the seabed and is thus an
obligating event. At the end of the reporting period, however, there is no obligation to
rectify the damage that will be caused by extraction of the oil.
Conclusion – A provision is recognised for the best estimate of 90% of the eventual
costs that relate to the removal of the oil rig and restoration of damage caused by
building it. These costs are included as part of the cost of the oil rig. The 10% that
arise through the extraction of oil are recognised as a liability when the oil is extracted.
Commentary
Note that IAS 16 specifically includes “the estimated cost of dismantling and
removing an asset and restoring the site, to the extent that it is recognised as
a provision under IAS 37” as a component of cost.
5.3 Measurement

Initial measurement of a decommissioning provision is at the future cash
flows discounted at an appropriate discount factor (i.e. a present value).
 As time passes, the present value of the future cash flows increases. This
increases the provision. The debit entry for the “unwinding of the discount”
is charged to profit or loss as a finance cost.
erved.
1614
Worked example 4
Flite purchased an asset on 1 January 2017.
Flite is committed to expenditure of $10m in 10 years’ time in respect of this asset.
The obligation satisfies the recognition criteria in IAS 37.
An appropriate discount factor is 8%
1 January 2017
Initial measurement of the provision
$10m  1
= 4,631,935
(1 0.08)
Dr 4,631,935
31 December 2017
$10m  1
= 5,002,490
(1 0.08)
Balance brought forward
4,631,935
Carried forward 5,002,490
Profit or
loss
Provision
Dr Expense 370,555 370,555
Asset
Dr Expense 463,193 463,193
Cr Accumulated depreciation
463,193
4,631,935  /10 833,748
erved.
1615
Worked example 4 (continued)
31 December 2018
$10m  1
= 5,402,689
(1 0.08)
Balance brought forward
5,002,490
Carried forward 5,402,689
Profit or
loss
Provision
Dr Expense
400,199 400,199
Cr Provision
400,199
Asset
Dr Depreciation expense 463,193 463,193
Cr Accumulated depreciation
463,193
863,392
Commentary
Accounting for changes in accounting estimates associated with existing decommissioning
(and similar) costs (e.g. the timing of the future expense, its amount, the appropriate
discount factor) is prescribed by IFRIC Interpretation 1 and is not examinable.
6
Application of rules to specific circumstances
6.1 Future operating losses

Provisions should not be recognised for future operating losses because:
 they do not arise out of a past event;
 they are not unavoidable.
 An expectation of future losses is an indication that the assets of the entity may
be impaired. Assets should be tested for impairment according to IAS 36.
 However, to the extent that a loss is not avoidable because it amounts to an
onerous contract, provision should be made (see next).
erved.
1616
6.2 Onerous contracts

has a contract that is onerous the present obligation under that
contract should be recognised as a provision.
Illustration 8 – Take or pay contract
ZY energy has entered into a contract with GasB to purchase units of gas at $50 per
unit. The contract requires ZY to pay a penalty of $15 per unit of gas it does not
purchase.
The market price of gas has fallen to $30 per unit and ZY has decided to purchase the
gas from another supplier and incur the penalty.
ZY should recognise an onerous contract at $15 per unit of gas that it has decided not
to purchase.
6.3 Specific application – Restructuring
6.3.1 Examples
 Sale or termination of a line of business.

Closure of business locations in a region.
 Relocation from one region to another.

Changes in management structure.
 Fundamental reorganisations that have a material effect on the nature and
focus of the entities operations.
6.3.2 Recognition criteria
 be recognised when the general
recognition criteria are met. These are applied as follows.
 A constructive obligation to restructure arises only when an entity has a detailed
formal plan for the restructuring identifying as a minimum:

the business or part of a business concerned;
 the principal locations affected;
 approximate number of employees who
will be compensated for terminating their services;

the expenditures that will be undertaken; and

when the plan will be implemented.
Commentary
If there is a long delay before the plan will be implemented then it is unlikely that the
plan will raise a valid expectation that the entity is committed to the restructuring.
 has raised a valid expectation that it will carry out the restructuring by starting
to implement the plan or by announcing its main features to those affected by it.
1617
 A management decision to restructure does not give rise to constructive
obligation unless the entity has, before the end of the reporting period:
 started to implement the restructuring plan (e.g. by the sale of assets); or
 announced the main features of the plan to those affected in a manner which is
sufficient to raise a valid expectation in them that the restructuring will occur.
 No obligation arises for the sale of an operation until there is a binding sales agreement.
 Provisions for restructuring should include only those expenditures that are both:
 necessarily entailed by a restructuring; and
 not associated with the ongoing activities of the entity.
Illustration 9 – Closure of a division – no implementation before the end
of the reporting period
On 9 December 2017 the board of Geode decided to close down its overseas division.
This decision was not communicated to any of those affected and no other steps were
taken to implement the decision before the end of the reporting period (31 December
2017).
Present obligation – No, there has been no obligating event.
Conclusion – No provision is recognised.
Illustration 10 – Closure of a division – communication/implementation
before the end of the reporting period
On 9 December 2017 the board of Holme decided to close down one of its overseas
centres. On 22 December 2017 a detailed plan for closing down the centre was agreed
by the board: letters were sent to customers advising them to seek an alternative source
of supply and redundancy notices were sent to the centre’s staff.
Present obligation – Yes, the obligating event is the communication of the decision to
the customers and employees on 22 December. There is a constructive obligation from
that date because it creates a valid expectation that the centre will be closed.
Conclusion – A provision is recognised at 31 December 2017 for the best estimate of
costs of closing the centre.
Commentary
No obligation arises for the closure of a division until there is a detailed plan for
closure. For this to happen, a commitment to the closure must have been made
and have been communicated to those who this decision will affect. After this point
the decision cannot be reversed and the closure will go ahead.
The assets of the operation must be reviewed for impairment, under IAS 36.
7 Provisions for repairs and maintenance
Commentary
Some assets require, in addition to routine maintenance, substantial expenditure every few
gives guidance on allocating expenditure on an asset to its component parts where these
components have different useful lives or provide benefits in a different pattern.
7.1 Refurbishment costs – No legislative requirement
Illustration 11
A lime kiln has a lining that needs to be replaced every 10 years for technical reasons.
At the end of the reporting period, the lining has been used for seven years.
Present obligation – There is no present obligation.
Commentary
The replacement of the lining is a future event; there is no past event which results in a
present obligation. The replacement cost can be avoided by the entity’s future actions
(e.g. deciding not to continue to operate the kiln). The first recognition criterion is not
met and therefore no provision can be recognised.
IAS 16 offers an alternative treatment (see Session 7, s.4.3). The cost of the lining is
capitalised separately from the furnace and then depreciated over 10 years. This spreads
the cost of the lining over its useful life rather than charging the costs to profit or loss in a
single accounting period. This applies the matching concept in a way which meets the
IASB’s “Framework” recognition criteria (as the costs have already been incurred).
7.2 Refurbishment costs – Legislative requirement
Illustration 12
A national rail network is required by law to overhaul its trains once every four years.
Present obligation – There is no present obligation
Commentary
Overhaul costs are not recognised as a provision for the same reasons that replacement
cost is not recognised as a provision in the previous illustration. Even a legal requirement
to overhaul does not create a liability, because there is no obligation to overhaul the asset
independent of the entity’s future actions. The future expenditure could be avoided by
future actions (e.g. selling the trains).
Instead of recognising a provision, the depreciation takes account of the future incidence
of maintenance costs (i.e. an equivalent amount is depreciated over four years).
8 Disclosures
8.1 For each class of provision

The carrying amount at the beginning and end of the period with movements
by type including:
 additional provisions in the period including increases to existing provisions;
 amounts used;
 amounts reversed;
 increase during the period
 A brief description of the nature of the obligation and expected timing of the expenditure.
 An indication of the nature of the uncertainties about the amount or timing of the outflows;
 The amount of any expected reimbursement with details of asset recognition.
Illustration 13
26. Other provisions (extracts)
Changes in the various provision categories in 2016 were as follows:
Environ- Trade-
mental related Personnel
Other protec- Restruc- commit- commit- Miscella-
Litiga
Taxes tion turing ments ments neous
tions Total
€ million
€ million € million € million € million € million € million € million
December 31, 2015 65 272 306 2,113 663 3,099 267 6,785

Additions 18 67 113 4,679 240 3,109 382 8,608
Utilization (32) (23) (121) (4,019) (280) (2,503) (230) (7,208)
Reversal (12) (5) (29) (477) (123) (457) (48) (1,151)
Reclassification to
current liabilities
– – – (12) – (1) – (13)
Interest cost – 4 – – – 18 – 22
Exchange differences
2 6 7 91 12 25 15 158
December 31, 2016 41 321 276 2,375 512 3,290 386 7,201
Notes to the Consolidated Financial Statements of the Bayer Group 2016
erved.
1620
8.2 Contingent liabilities

For each class of contingent liability, unless the contingency is remote, disclose:
 a brief description of the nature of the contingency; and where practicable;
 the uncertainties expected to affect the ultimate outcome of the contingency; and
 an estimate of the potential financial effect; and

the possibility of any reimbursement.
8.3 Contingent assets

For each class of contingent asset, when the inflow of economic benefits is
probable, disclose:
 a brief description of the nature of the contingency; and where practicable;
 an estimate of the potential financial effect.
Focus
 explain why an accounting standard on provisions is necessary – give examples of
previous abuses in this area;
 define provisions, legal and constructive obligations, past events and the transfer of
economic benefits;
 state when provisions may and may not be made, and how they should be accounted for;
 explain how provisions should be measured;
 define contingent assets and liabilities – give examples and describe their accounting
treatment;
 identify and account for:

onerous contracts;

environmental and similar provisions;
 discuss the validity of making provisions for future repairs or renewals.
Key points summary
A provision can be recognised only when there is a liability.
An entity must recognise a provision if, and only if:
 a present obligation has arisen as a result of a past event;
 payment is probable (“more likely than not”); and
 the amount can be estimated reliably.
An obligating event creates a legal or constructive obligation that results in no
realistic alternative but to settle the obligation.
A constructive obligation arises if past practice creates a valid expectation.
A possible obligation is disclosed but not accrued.
A provision is measured at a best estimate of the expenditure required (using pre-
tax discount rate) :
 for repeated events – at the expected value;
In measuring a provision changes in legislation are taken into account only if
virtually certain to be enacted.
A restructuring may include sale, termination, closure or reorganisation.
 Closure or reorganisation: Requires a publicly announced formal plan.
Restructuring provisions can include only directly related expenses (must exclude
ongoing costs).
The debit entry for a provision is usually an expense but may be part of the cost of
an asset.
A provision can only be used for the purpose for which it was recognised.
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 are not recognised but disclosed (unless “remote”).
Contingent assets cannot be recognised only disclosed (when probable).
Activity solutions
Solution 1 – Expected value calculation
Expected number of vehicles
Repair cost Expected cost
5% × 140,000 = 7,000 50 350,000
10% × 140,000 = 14,000 80 1,120,000
3% × 140,000 = 4,200
140 588,000
________
2,058,000
––––––––
Commentary
An expected value is a “long-run” average so would not be suitable for
single obligations – where a most likely outcome should be determined.
Solution 2 – Present value
Present
factor value
2018
2,000,000 0.909 1,818,000
2021
3,500,000 0.683 2,390,500
________
Provision required at 31 December 2017 4,208,500
––––––––
Commentary
The provision is calculated using the pre-tax costs and a pre-tax cost of
capital. The fact that the eventual payment will attract tax relief will be
reflected in the recognition of a deferred tax asset for the deductible
temporary difference (assuming that the recognition criteria for deferred tax
assets are met).
Overview
Objectives

To prescribe the acc
ounting treatment in
respect of employm
ent and post-
employment benefit
costs and the disclos
ures that should be
made.
 Key probl
EMPLOY em
EE
 Sco
BENEFITS
pe
 Short-term benefits
 Long-term benefits
 Termination benefits
POST-
EMPLOYM Arrangeme
ENT nts
 Classific
BENEFITSation


DEF
INE D
D e
CON f
TRI i
BUT n
ION i
t
PLA i
NS o
n
s

 Accou
nting prin
ciples
 Recogni
tion and
m

 Recognition and
measurement
PRESEN
TATION
SUND
AND
RY
GUIDA
DISCLOS
NCE
URE
 Pres  Actuaria
entatio l valuation
n method
 Dis
closure  Regul
arity
 Settlements and curtai
lments
eserved. 1701
SESSION 17 – IAS 19 EMPLOYEE BENEFITS
1 Employee benefits
1.1 Key problem

Companies remunerate their staff by means of
a wide range of benefits.
These include wages and salaries, retirement b
enefits.
 Cost to employer needs to be matched with ben
efits derived from employees’ services.
1.2
Objective

IAS 19 prescribes the accounting and disclosur
e for employee benefits.
 An entity recognises:
 a liability when an employee has provided ser
vice in exchange for
employee benefits to be paid in the future; and
 an expense when the economic benefit arising f
rom service provided by an
employee in exchange for employee benefits ar
e consumed.
Commentary
Accounting for retirement benefit costs causes partic
ular problems because
pension plan cash flows and costs can fluctuate sign
ificantly from one year to
the next. The accounting attempts to “smooth” thes
e fluctuations.
1.3 Scope

IAS 19 applies to all employee benefits except
share-based payments (to which IFRS 2
applies).
 Employee benefits include:
 short-term employee benefits (e.g. wages, sala
ries and social
security contributions, paid annual leave and p
aid sick leave etc);
 post-employment benefits (e.g. pensions, other
retirement benefits, post-
emplo life insurance and post-employment medical ca
yment re);
 other long-term employee benefits (e.g. servic
e awards); and
 termination benefits.
 The standard does not deal with reporting by e
mployee benefit plans.
1.4 Terminology

Employee benefits – all forms of consideration
given in exchange for service
rendered by employees or for the termination o
f employment.
Commentary
Including permanent health insurance, maternity/pat
ernity leave, mobile phones, etc.

Short-term employee benefits – those which ar
e expected to be settled within 12
months after the end of the period in which the
employees render the related service
(other than termination benefits).

Termination benefits are provided in exchange
for a termination of employment.
This may result from management’s decision t
o terminate employment before the
normal retirement date or an employee’s decisi
on to accept the benefits in exchange
for the termination (e.g. voluntary redundancy)
.
 Post-employment benefits – those which are pa
yable after the completion of
employment (other than termination benefits).
 Other long-term employee benefits are all emp
loyee benefits other than short-
term employee benefits, post-employment ben
efits and termination benefits.
1.5 Short-term benefits
1.5.1
Types

The following are examples of short-term bene
fits if they are expected to be settled
wholly within 12 months after the end of the pe
riod in which the employees render
the related service:
paid absences (e.g. annual leave, holid
ay pay and sick leave);
profit sharing and bonuses; and
non-monetary benefits (e.g. medical c
are, housing, cars and free or
1.5.2 subsidised goods or services) for curre
nt employees.
Accounting for short-term employee be
nefits
 When an employee has rendered service during
an accounting period, the
entity should recognise the amount of short-
term employee benefits expected
to be paid in exchange for that service as:
Commentary
The expense is accounted for on an accruals basis.
For example, entitlements to
holiday pay outstanding at the reporting date should
be expensed and recognised
as a liability until paid.
1.6 Long-term benefits
1.6.1 Types
 Long-term paid absences (e.g. for “sabbatical
 ” leave).
 “Jubilee” awards (e.g. for long service).
 Long-term disability benefits.
 Participation in profit sharing and other bonus
schemes.
Deferred remuneration.
1.6.2 Recognition and measurement
 In principle this is similar to accounting for pos
t-retirement benefits (see next
section) in that a deficit or surplus may arise.
 A benefit that depends on length of service is re
cognised when the service is rendered.
 A benefit that is fixed irrespective of the length
of service is recognised when
an obligating event arises.
Illustration 1
A company provides senior executives with long-term
disability benefits. The amount
of benefit depends on the length of service. The comp
any’s obligation arises when the
service is rendered. This is measured based on the pr
obability that payment will be
made and the length of time for which payment is exp
ected to be made.
The same company provides all other employees with
disability benefits regardless of
length of service. The expected cost of those benefits
is recognised only when an event
occurs that causes a long-term disability.
1.7 Termination benefits
1.7.1 Types
 Typically lump sum payments.
 Enhanced post-employment benefits (e.g. pens
ions).

Salary to the end of a notice period during whi
ch the employee renders no
service (e.g. “gardening leave”).
 A liability and expense is recognised:
 when the offer of benefits cannot be withdraw
n (e.g. because it is
accepted by the employee); or

on recognising a restructuring (under IAS 37) i
nvolving termination
payments, if earlier.
 A termination benefit to be settled wholly with
in 12 month after the end of
the reporting period is treated as for a short-
term benefit.
 Otherwise it is treated as for a long-term benefi
t (i.e. with re-measurement at
the end of each reporting period).
2 Post-employment bene
fits
2.1 Arrangements

Arrangements which provide post-employment
benefits are post-employment
benefit plans.

It is useful to think of the plan as a separate ent
ity (even if a separate entity is not
established to receive contributions and to pay
benefits):
Transfer of
cash (funding)
THE ENTITY THE PLAN
Payment of post
retirement benefits
EMPLOYEE
 Post-employment benefit plans are classified as
either defined contribution plans or
2.2 Classification

Post-employment benefit plans are arrangemen
ts under which post-employment
benefits are provided to one or more employee
s.
Commentary
Arrangements may be formal or informal.
 Defined contribution plans

pays fixed contributions into a separate plan; a
 nd
has no legal or constructive obligation to pay f
urther contributions if the
plan does not have sufficient assets to meet be
nefits for service in the
current and prior periods.
Commentary
It is the employee who is exposed to the risk of loss
es.
 Defined benefit plans are those other than defi
ned contribution plans.
Commentary
The risk of further obligations is to the employer.
Defined benefit plans are
managed by fiduciaries (i.e. trustees) and underwritt
en by the sponsoring employer.
3 Defined contribution pl
ans
3.1 Introduction

Specified contributions are paid into a separate
fund and the entity has no
further obligation to pay additional contributio
ns even if the fund has
insufficient assets to meet all due employee be
nefits.
 The entity’s obligation is limited to the amount
that it agrees to contribute to the plan.
 Thus, the amount of the post-employment bene
fits received by the employee
is determined by the amount of contributions p
aid to the plan, together with
investment returns arising from the contributio
ns.
 In consequence any risks with regard to the size
of the pension paid fall on the employee.
 Accounting for defined contribution plans is str
aightforward because the reporting entity’s
obligation for each period is determined by the
amounts to be contributed for that period.
3.2 Recognition and measuremen
t

The accruals concept is applied:

charge contributions payable in respect of peri
od to the statement of profit or
loss; and

reflect any outstanding or prepaid contribution
s in the statement of
financial position.
 An expense will be recognised for the contribu
tion, unless another standard
allows that it be included in the cost of an asset
.
Commentary
Where employee cost are included in the cost of go
ods manufactured the
contribution will be included in inventory cost.
Illustration 2
On 1 January 2017 Westfield introduced a defined co
ntribution plan for its employees.
The plan requires Westfield to make a monthly payme
nt of $1,000 into a separate fund.
All monthly payments were made during the year, exc
epts for December, which was
paid in January 2018.
The accounting entries for the year will be as follows:
Dr Statement of profit or loss
$12,000
$11,000
4 Defined benefit plans

Defined benefit plans are those that fall outside
of the definition of a defined
contribution plan.
 The entity still makes contributions to a fund b
ut if the fund is in deficit (i.e.
liabilities exceed assets) any shortfall will requ
ire additional contributions.
4.1 Definitions
4.1.1
Relating to net defined benefit liability
(asset)
 The net defined benefit liability (asset) is the
deficit (or surplus) adjusted for
any effect of limiting a net defined benefit asse
t to the “asset ceiling”.
 The asset ceiling is the present value of availa
ble refunds from the plan or
reductions in future contributions to the plan.
 The deficit (or surplus) is:
 the present value of the defined benefit oblig
 ation; less
the fair value of plan assets (if any).

The present value of a defined benefit obligat
ion is the present value, without
deducting any plan assets, of expected future p
ayments required to settle the
obligation resulting from employee service in t
he current and prior periods.
 Plan assets comprise:
 assets held by a long-term employee benefit p
 lan; and
qualifying insurance policies.
Commentary
In brief, such assets are held by a separate legal en
tity and are not available
to the reporting entity’s own creditors (even in bank
ruptcy).
4.1.2 Relating to defined benefit cost
 Current service cost is the increase in the pres
ent value of the defined benefit
obligation resulting from employee service in t
he current period.

change in the present value of a defined benefit
obligation for
cost employee service in prior periods resulting fro
s the m a plan amendment or curtailment.
Commentary
Total service cost is the sum of current and past ser
vice cost and any settlement gain or loss.
the net defined liability (asset)
 (see later) is the change during
a period in the net defined liability (asset) that
arises from the passage of time
(i.e. because the benefits are one period closer t
o settlement).
Commentary
This will be referred to as “net interest” throughout
the remainder of this session.
 Remeasurements of the net defined liability (
asset) include:
 actuarial gains and losses;
 the return on plan assets (excluding “net intere
 st”); and
any change in the effect of the asset ceiling (ex
cluding “net interest”).
 Actuarial gains and losses are changes in the
present value of the defined
benefit obligation resulting from:
 experience adjustments (i.e. arising from differ
ences between previous
actuarial assumptions and what actually occurs
); and
 changes in actuarial assumptions.
 Return on plan assets includes interest, divide
nds, gains, etc net of losses,
management fees and taxes (if any).
4.2 Accounting principles

Payments to a plan (a separate legal entity) and
invested and used to pay
retirement benefits when they fall due for pay
ment. The plan is an entity
with assets and liabilities (to the beneficiaries).
 At the end of each reporting period the assets a
nd liabilities are valued and
the net liability (or, more rarely, the net asset) i
s recognised in the statement
of financial position.
Commentary
This seems a little strange at first. The entity is rec
ognising a net liability of a separate
legal entity. But remember that the ultimate obligat
ion to the employees is owed by the
entity. The plan is merely a vehicle which allows th
e entity to meet this obligation. In
substance the assets and liabilities of the plan are a
special area of the entity’s own
statement of financial position even though they are
held by a separate entity.
Illustration 3
The following information relates to the assets and lia
bilities of the retirement benefit
plan of entity X. (This is not a summary of X’s state
ment of financial position but that
of the plan.)
2016 2017
$m
Fair value of $m
plan assets
Present value of plan (1 (135)
obligations 20
)
Net liability of ( (25)
the plan
The basic rule (simplified) is that:
In 2016 X must recognise a liability $20m
of
In 2017 X must recog $2
nise a liability of 5m
Ignoring any actuarial differences, if X had made a ca
sh contribution of $1m to the
plan in 2017 the full journal would be:
Dr Statement of profit or loss
6
5
1
4.3 Recognition and measuremen
t
(a)
the deficit or surplus (using the services of an
actuary, as above);
(b)
the amount of the net defined benefit liability (
asset) as adjusted for
any effect of the asset ceiling (see later);
(c) the amount to be recognised in profit or loss;
(d)
the remeasurements of the net defined benefit l
iability (asset) to be
4.3.1 Statement of financial position
 The net defined benefit
(asset) is recognised in the sta
liability tement of
 If the net amount is an asset, the amount to be r
ecognised is limited to the lower of:
 the surplus in the plan; and
 the asset ceiling (see earlier definition).
4.3.2 Profit or loss
 The following costs are included in profit or lo
ss (unless another standard
requires them to be included in the cost of an a
sset):



“net interest” (as described in s.4.1.2).

Past service cost (i.e. the change in the present
value of the defined benefit
liability caused by an amendment to the plan o
r a curtailment) is recognised
as an expense at the earlier of:
 the date when the plan amendment or curtailm
 ent occurs; and
the date when any related restructuring costs (i
n accordance with
IAS 37) or termination benefits are recognised
.
Commentary
An amendment is when benefits payable are change
d and a curtailment is when
the number of employees covered by a plan is signif
icantly reduced.
4.3.3 Other comprehensive income
 Remeasurements of the net
(asset) recognised in o
ined liability ther
comprehensive income include
:


 any change in the effect of the asset ceiling exc
luding amounts included
in net interest.
4.3.4 Fair value of plan assets
 In a funded scheme the trustees invest contribu
tions into various assets (e.g.
property, shares, debt assets and cash).

IFRS 13 applies to the measurement of the fair
value of the plan assets. If no
market price is available fair value should be e
stimated (e.g. by discounting
expected future cash flows).
 The fair value of the plan assets is deducted fro
m the defined benefit liability
to identify the net deficit or surplus.

Plan assets exclude:
 unpaid contributions due from the entity;
 and
and held
non-transferable financial instruments
ued by the entity
by the fund.
Commentary
One of the issues of the Enron accounting disaster
was that its pension fund included
Enron equity shares as an asset. This helped “prop
up” Enron’s share price.
Illustration 4
Amicable has a defined benefit plan and a 31 Decemb
er financial year end. The table
below provides information about the plan. No contri
butions were made to the plan or
benefits paid in 2017.
1 January 2017
31 December 2017
Present value of defined bene $80 $120
$60 $70
fit obligation
Fair value of plan assets $20 $50
Net defined benefit liability
Service cost $20
Discount rate (high quality corporate bo 3%
nd yield)
Statement of financial position at 31 December 201
7
Net defined benefit liabilit
y 50
Statement of profit or loss and other comprehensiv
e income in 2017
Service cost
Net interest (W
1) 0.6
Profit or loss 20.6
Other comprehensive inco
me:
Remeasurements (W2)
______
Total comprehensive inco
me ______
WORKINGS
(1)
3% × $20 net defined benefit liability at 1 Janu
ary 2017 (i.e. $60 – $80).
(2)
Actuarial loss on defined benefit liability:
Opening liability
Current service c
ost
Interest ($80 × 3 to balance
0%) _____
Actuarial loss
Closing liability
_____
Actu
urn on plan a
Opening asset al sset
____
to balance
Closing asset
____
Net interest on opening plan asset is $1.8 ($60 × 3%)
and so increase in plan
assets due to remeasurement is $8.2 ($10 – $1.8).
Net remeasurement is $9.4 ($17.6 - $8.2).
Commentary
Remember that the plan assets and liabilities are no
t included in the reporting entity’s
books. The entries to record the movement in the n
et defined benefit liability (asset)
and account for any contribution can be summarise
d as follows:
Dr Profit or loss
Dr Other comprehensive income
Cr Cash (contribution)
Cr Net defined benefit liabili
ty (50 – 20)
Activity 1
Daktari provides a defined benefit pension scheme for
its employees. The following
information relates to the balances on the fund’s asset
s and liabilities at the beginning
and end of the year and the year ending 31 December
2017:
1 Jan 31 Dec
Present value of benefit o 1,270 1,450
bligation 1,025 1,130
Fair value of plan assets
Service cost for yea
r 70
Contributions to the 100
plan –
Benefits paid 3%
Discount rate
Required:
(a)
Identify the balance to be included in Daktari’s
statement of financial
position at 31 December 2017.
(b) Calculate the amounts to be included in the stat
ement of profit or loss and
other comprehensive income for the year ended
31 December 2017.
(c)
Present a journal summarising the accounting
entries.
Proforma solution
(a)
Net defined liability
(b) Statement of profit or loss and other c
omprehensive income
Service cost
Net interest (W1)
____
Profit or loss
Other comprehensive income:
Remeasurements (W2)
____
Total comprehens
ive income _
_
_
_
1712
WORKINGS
(1)
(2)
Remeasurements:
Actuarial gain or loss on defined benefit liability:
Opening liability
Current service cost
Interest on opening liability
Actuarial
loss ____
___
Closing lia
bility _____
__
Actual return on plan assets:
Opening asset
Cash contribution
Actual re
turn ____
___
Closing
asset ____
___
(c) Journal entries
5 Other guidance
5.1 Actuarial valuation method

The “projected unit credit” method should be
used to determine:
 the present value of its defined benefit obligat
 ions;
 the related current service cost; and
past service cost (where applicable).
 Under this method each period of service gives
rise to an additional unit of benefit
entitlement and measures each unit separately t
o build up the final obligation.

The me
thod
quires
benefit
s to be
attribut
ed to:
 the current period (to determine current servic
 e cost); and
current and prior periods (to determine the pre
sent value of defined
benefit obligations).
5.2 Discount rate

The discount rate should be determined by refe
rence to market yields on high
quality corporate bonds at the end of the report
ing period (i.e. “AAA-rated”).
Commentary
In countries where there is no “deep” market in suc
h bonds, the market
yields on government bonds should be used.
5.3 Regularity

Valuations should be carried out with sufficien
t regularity that the amounts
recognised in the financial statements do not di
ffer materially from the
amounts that would be determined at the end o
f the reporting period.
 The use of a qualified actuary to measure of all
material post-employment
benefit obligations is encouraged but not requir
ed.
5.4 Asset ceiling

IAS 19 sets an “asset ceiling” on how much of
a surplus in a defined benefit
plan can be recognised.

This ceiling is the present value (discounted at
the rate in 5.2 above) of future
economic benefits available in the form of:

a reduction in future contributions; or

cash refund.
Commentary
The standard is in effect applying a degree of prude
nce by setting a limit on
the amount of the asset that can be recognised.
 The asset may arise in circumstances where a p
lan has been overfunded.
5.5
Settlements and curtailments

A settlement of a plan eliminates all further obl
igations (both legal and
constructive) for all or part of the benefits prov
ided a defined benefit
under plan.
Commentary
For example, on a transfer of employment a one-off
payment may be made to
members of the plan in return for the cancellation o
f any future obligations.
 A curtailment is a significant reduction in the n
umber of employees covered
by the plan (e.g. on closure of a factory). A cu
rtailment may result in
settlement (e.g. where a plan ceases to exist).
Illustration 5
An entity is making 100 employees redundant who ha
ve pension entitlements under the
entity’s defined benefit scheme. As a result of the red
undancies, an obligation of $1.2
million is to be settled with immediate payments amo
unting to $1.1 million. The gain
on the settlement of $100,000 which is recognised in
profit or loss immediately.
6 Presentation and disclo
sure
6.1 Presentation

An asset relating to one plan shouldrelating to
ffset against a liability
another when, and only when, the entity:

 has a legal right of offset (i.e. to use a surplus i
n one plan to settle
obligations in another); and

intends to settle the obligations onthe surplus
basis or realise
and settle the obligation simultaneously
.
6.2 Disclosure

The characteristics of the defined benefit plan
and any risks associated with
them. For example:
 the nature of the benefits (e.g. final salary);
 the regulatory framework in which it is opera
 tes;
 responsibilities of the trustees;
 primary classes of investment (e.g. in propert
y);
amendments, curtailments and settlements.

Explanations of the figures included in the fina
ncial statements including a
reconciliation of the opening and closing net d
efined liability (asset), showing
separate reconciliations for plan assets, the pre
sent value of the obligation and
the effect of the asset ceiling (if any).
Commentary
Reconciling items will include, for example, all the i
tems in profit or loss and other
comprehensive income, contribution, payments and
effects of exchange rates.
 A description of how the defined benefit plan
may affect the timing and
uncertainty of the entity’s future cash flows.
 Factors to consider in meeting the disclosure r
equirements include:
 the level of detail necessary;
 the emphasis that should be placed on each re
 quirement;
 the level of aggregation or disaggregation;
whether users need additional information to e
valuate the
qualitative information disclosed.
Key points summary
For short-term employee benefits, the undiscounted b
enefits expected to be paid
in a period should be recognised in that period.
Expected costs of profit-sharing and bonuses should b
e recognised when there is a
legal or constructive obligation to make payments.
The accounting treatment for a post-employment bene
fit plan depends on whether
it is a defined contribution or a defined benefit plan.
Defined contribution: entity has no obligation beyond
fixed contributions.
Expense is contributions payable in exchange for servi
ce rendered by employees
during the period. (Discounted if they are not expect
ed to be wholly settled
within 12 months.)
Defined benefit: all other plans. Net defined benefit l
iability (asset) is the deficit
or surplus (as adjusted for the asset ceiling).
The deficit or surplus is:
(i) the present value of the defined benefit obligation
(using projected unit
credit method); less
(iv) the fair value of plan assets (if any).
Actuarial gains and losses are recognised in full in the
period in which they occur
in other comprehensive income.
Also included in other comprehensive are returns on p
lan assets.
The amount recognised in profit or loss includes:
 net interest on the net defined benefit liability (ass
et);
Focus
 describe the nature of defined contribution, mul
ti-employers and defined benefits schemes;
 explain the recognition and measureme
in the financia
nt of defined benefit schemes l
statements of contributing employers;

account for defined benefit plans in the financia
l statements of contributing employers.
Commentary
Note that it is accounting for multi-employer benefit
schemes that is excluded
from the syllabus.
Activity solution
Solution 1
(a)
Closing net defined liability ( 320
1,450 – 1,130)
(b) Statement of profit or loss and other c
omprehensive income
Service
cost
Net inte 7
rest (W
1)
Profit or loss
Other comprehensive income: Remea
surements (W2) 98
Total comprehens
ive income _
_
_
_
WORKINGS
(1)
3% × 245 opening net defined benefit liability
(i.e. 1,270 – 1,025).
(2)
Remeasurements:
Opening liability 1,270
Current service cost 70
Interest on opening liability (1,2 38
70 × 3%)
Actuarial loss to b
______
alance _
Closing lia
bility _____
__
Opening asset 1,02
Cash contribution
5
Actual return to b
alance 100
_______
Closing
asset ____
___
Net interest on opening plan assets is 31 (1,025 × 3%)
, so decrease due to remeasurement is
26 (5 – 31). Net remeasurement is 98 (72 loss on liabi
lity + 26 loss on return).
(c) Journal entries
Dr Profit or loss 77

Dr Other comprehensive inco 98
me
Cr Cash (contribution) 100
Cr Net defined benefit lia 75
bility (W)
WORKING
Opening net liability (1,
270 – 1,025)
Closing net liability (as ___
(a)) _
Increase i
n liability _
1717
Overview
Objective

To explain how to acco
unt for the granting of s
hares and share options
to
executives, employees a
nd other parties.
 ObjectS TER
H
ive of IFRA MIN
S 2 RE OLO
- GY
B
A
SE
D
P
A
Y
M
E
N
TS
 Types of transactions
RECOGNITION
 Fair value

AND
MEASUREMEN
T
EQ
C
UI
A
TY
S
-
H
SE
-
T FE
RR
T
ED
L TA
E XA
D TI
ON

 Accounting
rights
 Valuation technique
 Cancellations and modifi
cations
DISCLOSURES
 Effect of expenses
SESSION 18 – IFRS 2 SHARE-BASED PAYMENT
1 Share-based payments
1.1 Need for a standard

Share plans and share option plans have become a
common feature of remuneration
packages for directors, senior executives and other
employees in many countries.
Commentary
Shares and share options may also be used to pay supp
liers (e.g. for
professional services).
 IFRS 2 “Share-based Payments” fills a gap in acco
unting for the recognition
and measurement of such transactions under IFRS.
Commentary
IAS 19 “Employee Benefits” originally prescribed certa
in disclosures relating to share-
based payments but did not seek to address the recognit
ion and measurement issues.
However, IAS 19 now “scopes out” all share-based pay
ments.
1.2 Key issues

Recognition: When to recognise the charge for sh
are-based payments?
Commentary
Recognition must reflect accrual accounting in keeping
with the “Conceptual
Framework”.
 Measurement: How much expense to recognise
?
Commentary
IFRS 2 limits the measurement possibilities. In principl
e, share-based payment transactions
are accounted for to reflect the “value” of goods or ser
vices received. However, the
measurement method depends on the type of transaction
s and who it is made with.
1.3 Objective of IFRS 2

To specify the financial reporting of share-based p
ayment transactions.
Commentary
In summary, IFRS 2 requires the recognition of all shar
e-based payment
transactions measured at fair value.
2 Terminology
2.1 Share-based payment arrangem
ent

An agreement between an entity and another party
(including an employee)
which entitles the other party to receive:

 equity instruments (including shares or share optio
ns) of the entity; or
cash (or other assets) for amounts based on the pri
ce (or value) of
equity instruments of the entity (or another group
entity),
provided any specified vesting conditions are met.
Commentary
To “vest” means to give entitlement to. A party’s right
to shares of an entity
may be free or at a pre-arranged exercise price.
 Share-based payment transaction: A transaction in
a share based payment
arrangement in which the entity:

 receives goods or services from a supplier (includi
ng an employee); or
incurs an obligation (to the supplier) when another
group entity
receives those goods or services.
Commentary
As many entities mostly receive services (e.g. from their
executives and employees)
references to “goods or services” are simplified to “ser
vices” in this session.
 Equity instrument: A contract that gives a residual
interest in the assets of an
entity after deducting all of its liabilities.
 Share option: A contract that gives the holder the r
ight, but not the obligation, to
subscribe to shares at a fixed (or determinable) pric
e for a specified period of time.
 Vesting conditions: The conditions that must be sa
tisfied for a person to be entitled to
receive cash, other assets or equity instruments und
er a share-based payment arrangement.
Commentary
Examples of vesting conditions include completion of a
service period and
meeting performance targets (e.g. an increase in revenu
e over a period of time).
2.2 Types of transactions

There are three types of share-based payment tran
sactions:
 equity-settled share-based payment transactions;
 cash-settled share-based payment transactions; an
 d
share-based payment transactions with cash altern
atives.
Commentary
The latter are outside the scope of the syllabus and will
not therefore be referred to again.
2.2.1 Equity-settled
 The entity receives goods or services:
 as consideration for its own equity instruments; or
 with no obligation to settle the transaction with t
he supplier.
 An example of an equity-settled share-based paym
ent is share options to
employees which give them the right to purchase s
hares in the entity at a
discounted price.
2.2.2 Cash-settled
 The entity acquires services by incurring liabilities
for amounts that are based on
the price (or value) of equity instruments of the ent
ity or another group entity.

An example of a cash-settled share-based payment
is where employees are given
rights to cash payments that are based on an increa
se (“appreciation”) in the price
of the entity’s shares (see s.5.2).
3 Recognition and measure
ment
3.1 Initial recognition

Normal recognition rules apply to the goods or ser
vices received:
Dr Expense (e.g. purchases, labour)
Commentary
Or debit an asset account.
 If settlement by equity settled share-based paymen
t then increase equity:
Cr Equity
 If settlement by cash settled share-based payment t
hen recognise a liability:
Cr Trade (or other) payables
3.2
Fair value measurement

Goods or services are measured at fair value.
Commentary
That is, the amount for which an asset could be exchan
ged, a liability settled, or an equity
instrument granted, between knowledgeable, willing part
ies in an arm’s length transaction.
The IFRS 13 definition of fair value does not apply as I
FRS 2 is “scoped out”.
4 Equity-settled transactio
ns
4.1 Fair value

The fair value of the services received (and the cor
responding increase in equity)
is measured either:

 directly, at the fair value of the services received;
or
indirectly, by reference to the fair value of the equi
ty instruments granted.
 Direct measurement is at the date the entity receive
s the services (or obtains the goods).

return of an equity settled instrument. This surrogate mea
surement is fixed at the grant date.

Fair value is recognised over the vesting period. M
easurement is based on conditions at
the grant date; any subsequent changes will not aff
ect the grant date valuation.
Commentary
The grant date is the date when the parties to the arran
gement share an understanding of
its terms and conditions. The right to cash, other asset
s, or equity instruments is
conferred at grant date (provided any vesting conditions
are met). If an agreement is
subject to approval (e.g. by shareholders), grant date w
hen that approval is obtained.
4.1.1 Employee’s remuneration
 Direct measurement of services received for partic
ular components of an employee’s
remuneration package (e.g. cash, shares and other e
mployee benefits) may not be possible.

Also, it may not be possible to measure the fair val
ue of a total remuneration package,
without measuring directly the fair value of the equ
ity instruments granted.
Commentary
Measurement will be further complicated where equity i
nstruments are granted as part of
a bonus arrangement (e.g. a loyalty bonus) rather than
as a part of basic remuneration.

Grant ing additional remuneration to obtain additional
ing benefits. Estimating the fair value of the additiona
quity l benefits is likely to be more
instru difficult than measuring the fair value of the equity
ments
is pay instruments granted.
 The most common type of equity transaction with
employees is share options; the
illustrations and examples in the sections that follo
w show how these are accounted for.
4.1.2 Transactions with others
 For transactions with parties other than employees,
there is a rebuttable presumption
that the fair value of the goods or services received
can be estimated reliably.

Fair value is measured at the date the goods are obt
ained or the service is rendered.
Commentary
In rare cases, if the presumption is rebutted, measureme
nt will be indirect, at
the date the entity obtains the goods or service (rather t
han at the grant date).
4.1.3 Unidentifiable goods or services

If the identifiable consideration received (if any) a
ppears to be less than the fair value
of the equity instruments granted or liability incurr
ed, this suggests that other
consideration (i.e. unidentifiable services) has been
(or will be) received.
 are measured on the gr
ant date as the difference between
the fair values of the share-based payment and the i
dentifiable services.
4.2 Granting equity instruments
4.2.1
Without vesting conditions

When equity instruments granted vest immediately
, employees (executives or other
suppliers) are not required to complete a specified
period of service before becoming
unconditionally entitled to those equity instruments
.
 Unless there is evidence to the contrary, the entity
presumes that services rendered by
the employee have been received. So, on grant dat
e the entity recognises:

 the services received in full; and
a corresponding increase in equity.
Commentary
Recognition is immediate when equity instruments are g
ranted for past performance.
4.2.2 With vesting conditions

If the equity instruments granted do not vest until a
specified period of
service has been completed, it is presumed that the
services to be rendered as
consideration will be received over the future vesti
ng period.
 Services must then be accounted for as they are re
ndered by the employee
during the vesting period, with a corresponding in
crease in equity.

A service condition requires an employee to compl
ete a period of service.

A performance condition requires a service condi
tion and that the entity
achieves a performance target. A performance tar
get may be:

a non-market condition (e.g. a revenue or profit t
 arget); or
a market condition (e.g. referenced to the price of
the entity’s
shares or share options).
Illustration 1
An employee is granted share options conditional only up
on completing three years of
service. The entity presumes that the services to be render
ed by the employee as
consideration for the share options will be received in the
future, over that three-year
vesting period.
Illustration 2
An entity grants share options to an employee with a requi
rement that he gives three
years’ service. The employee gives service in years one a
nd two but then leaves the
entity in year three.
The entity will charge an estimated expense for years one
and two but as the employee
leaves service in year three a reversal of the prior periods’
cumulative charge will be
made in year three’s profit or loss.
This change in estimate will result in a credit to profit or
loss and a debit against the
equity component.
Illustration 3
An employee is granted share options conditional upon:


the employee’s continuing employment until that
non-market performance
condition is satisfied.
Thus the length of the vesting period varies depending on
when that revenue target is
satisfied. The entity therefore presumes that the services t
o be rendered for the share
options will be received over an expected vesting period.
Key point
If a non-market condition is not met the equity instrument
will not vest and there
 Market conditions relate to the market price of a
n entity’s equity
instruments (e.g. attaining a specified share price):

of the equity instrument at the grant date;

This fair value is the minimum recognised irrespec
tive of whether
or not market conditions are subsequently satisfie
d.
4.2.3 Expected vesting period
 The expected vesting period at grant date is estima
ted based on the most
likely outcome of the performance condition.
 A performance condition may be a market conditio
n (i.e. based on the market
price of the entity’s equity instruments).
 If the performance condition is a market condition,
the estimate must be consistent with
the assumptions used in estimating the fair value of
the options granted.
Commentary
Such an estimated length of vesting period is not subseq
uently revised.

If the performance condition is not a market condit
ion, the entity revises its
estimate of the length of the vesting period, if nece
ssary.
Commentary
If subsequent information indicates that the length of th
e vesting period
differs from previous estimates.
Worked example 1
Omega grants 120 share options to each of its 460 employ
ees. Each grant is
conditional on the employee working for Omega over the
next three years. Omega has
estimated that the fair value of each share option is $12.
Omega estimates that 25% of employees will leave during
the three-year period and so
forfeit their rights to the share options.
Everything turns out exactly as expected.
Required:
Calculate the amounts to be recognised for services rec
eived as consideration for
the share options during the vesting period.
Commentary
Estimates of leavers could be made on the basis of a w
eighted average probability
applied to a historic pattern of leavers as adjusted for e
xpected changes in that pattern.
Worked solution 1
Year
Calc
ulati Cumulative
on expense for
remuneration
period
expense
$ $
1 165,6 165,600
00
2
3 years)
– $165, 165,60 331,200
600 0
3
– $33 3
3 years)
1,200
165,60 496,800
0
Activity 1
As for Worked example 1 except that everything does not
turn out as expected.
Year 1: 25 employees leave. Omega revises its estimate
of total leavers over the three-
year period from 25% (115 employees) to 20% (92 emplo
yees).
Year 2: Another 22 employees leave. Omega revises its
estimate of total leavers over
the three-year period from 20% to 15% (69 employees).
Year 3: A further 13 employees leave.
Required:
Calculate the amounts to be recognised for services rec
eived as consideration for
the share options during the vesting period.
Worked example 2
On 1 January 2015, Kappa granted 1,000 options to an ex
ecutive, conditional on his
remaining in Kappa’s employment for three years. The e
xercise price is $35, but falls
to $25 if earnings increase by 12% on average over the thr
ee-year period.
On grant date the estimated fair value of an option is:
 $12 for an exercise price of $25;
 $9 if the exercise price is $35.
2015 earnings increase by 14%. This increase is expected
over the next two years,
giving expected exercise price of $25.
2016 earnings increase by 13%. The earnings target is stil
l expected to be achieved.
2017 earnings increase by only 7%. The earnings target is
not achieved.
On 31 December 2017 the executive completes three year
s’ service. Rights to the
1,000 options are now vested at an exercise price of $35.
Required:
Calculate the remuneration expense arising from the s
hare options over the three
year period.
Commentary
The exercise price is the price at which the executive ca
n buy the shares
under the option contract.
Worked solution 2
Year
Calc Remuneratio
ulati n expense
on Period
Cumulative
$ $
1 1,000 options × $12 4,00 4,000
× /3 years 0
2
(1,000 options 4,0 8,000
× $12 × / 00
3
(1,000 options × $ 1,00 9,000
9) – $8,000 0
Commentary
The performance condition is not a market condition.
As the condition was
not actually met in year three the exercise price is $35
and the fair value of
the option at grant date is $9.
4.3 Indirect measurement

Fair value of equity instruments granted is based
on:
 market prices, if available; otherwise
 a valuation technique.
Commentary
The measurement date is the grant date for employees a
nd other providing
similar services. For transactions with parties other th
an employees it is the
date the goods are received (or the services rendered).
 Vesting conditions other than market conditions ar
e not taken into account
Commentary
Instead, they are reflected in the estimate of the likely o
utcome of these conditions (i.e.
the number of instruments expected to vest. Market con
ditions are taken into account.
 Services received measured at the grant date fair va
lue of equity instruments granted is
the m amount recognised (unless the instruments do no
inimu t vest due to forfeit).
Commentary
This is irrespective of any modifications to the terms an
d conditions on which
the equity instruments were granted, including cancellat
ions and settlement.
4.4 Valuation technique

It is highly unlikely that market prices will be avail
able for employee share options
because the grant terms and conditions do not appl
y to options that are actively traded.
 Where similar traded options do not exist the fair v
alue of options granted is
estimated by applying an options pricing model.
Commentary
IFRS 2 suggests possible option-pricing models (e.g. “B
lack-Scholes-Merton”)
but does not prescribe their use.
4.5 Cancellations and modifications
4.5.1 Cancellation

A common example of cancellation of a grant of e
quity instruments arises when
employees forfeit their rights by leaving their empl
oyment. Another example is
where a grant is forfeited due to failure to meet a n
on-market performance
condition.

Cancellation is treated as an acceleration of vesting
. The expense that would have
been recognised for services given over the origina
l vesting period must be
recognised immediately.
Illustration 4
An entity granted share options to employees in return for
four years of service. The
fair value at grant date of the options was calculated to be
$8 million and it was
expected that all employees would give the full four years
of service.
The cumulative expense after two years was $4 million.
In year three the entity cancelled the options. IFRS 2 requ
ires the full fair value of the
transaction to be recognised. Therefore the remaining $4
million fair value will be
expensed to profit or loss in year three.
The expense has now been charged against profits over th
ree years rather than the
original four years.
1811
4.5.2 Modification
 An entity may modify the terms of a share-based p
ayment. For example, if the
share price falls, the exercise price of the options g
ranted may be reduced. This
would increase the fair value of the options and so
help maintain the incentive.
 This increase in fair value must be accounted for fr
om the repricing date to
the vesting date.
 A modification in terms therefore has a major effe
ct on reported profits. The
 the expense related to the original share-based pay
 ment contract; and
Illustration 5
An entity granted share options to employees in return for
four years of service. The
fair value at the grant date was calculated to be $8 million
and it was expected that all
employees would give the full four year service.
The cumulative expense after two years was $4 million.
In year three the entity modified the share option contract.
The modification resulted
in an increase in fair value of $1 million.
The entity must now expense a further $5 million over the
remaining two-year vesting
period. An expense of $2.5 million will be made in each
of years three and four.
 If a modification results in a decrease in fair value
then the full amount of the original
contract is expensed to profit or loss.
 In summary:
 an increase in fair value increases the total expens
 e; and
a reduction in fair value does not change the total
expense.
Commentary
Cancelling or modifying the terms of a share-based con
tract can be used as a
means to reprice the contract. For example, if subsequ
ent to issue of share
options it becomes obvious that the exercise price is goi
ng to be higher than
the market price per share; no party would exercise the
ir options if this
relationship existed.
5 Cash-settled
5.1 Fair value

For cash-settled transactions, the goods or services
acquired and the liability
incurred are measured at the fair value of the liabil
ity.
 The liability is remeasured to fair value at the end
of each reporting period, with
any changes in value recognised in profit or loss,
until it is settled.
Commentary
In contrast with equity-settled where there is no remeas
urement.
 Where either the entity or the supplier may choose
whether the entity settles
the transaction in cash or by issuing equity instrum
ents, it is accounted for as:
 cash-settled if the entity has a liability to settle in
 cash; or
5.2 Share appreciation rights (SARs)


A common example of a cash-settled share-based
payment transaction is that
These are granted to employees and give the empl
 oyee an entitlement to a
future cash payment based on the increase in the e
ntity’s share price from a
determined level and for a specific period of time.
 The right means that the entity will be required to
make a cash payment and will
therefore be required to recognise a liability based
upon its estimated value.
 As the transaction is cash-settled the liability will
be re-measured each
reporting date with any change in value taken to p
rofit or loss.
 When the rights are exercised the difference betwe
en the liability and the
cash ayment will also be expensed to profit or loss.
Worked example 3
On 1 January 2014 Pepco granted 60 share appreciation ri
ghts to each of its 200
employees, on condition that the employees work for Pep
co until 31 December 2015.
During 2014 12 employees leave and Pepco estimates that
a further 15 will leave
during 2015.
During 2015 a further 14 employees leave.
Employees exercise their rights as follows:
Number of employee
31 December 2015 s
31 December 2016 61
31 December 2017 77
36
The fair value of the rights for the years in which Pepco h
as a liability, and the intrinsic
Required:
For each of the four years calculate:
(a)
(b) the liability to be included in the statement of fi
nancial position; and
the expense to be recognised in profit or loss.
Commentary
The fair value of the share appreciation rights would be
identified from using an option
pricing model. The fair value would be provided in an
examination question.
Commentary
Fair value is a forward looking value that is used to me
asure the liability;
intrinsic value is the cash value of the right at the prese
nt point in time.
1814
Worked solution 3
Year
Calc Expense
ulati $
on
2014 (200 – 27) × 60 × $16. 84,07 84,078

20 × /2 years 8
2015 Not yet exercised ((200 – 26 – 61)
122,718 38,640
60 × $18.10)
Exercised (61 × 60 57,4
× $15.70) 62
–––
––
96,1
02
–––
––
2016 Not yet exercised
((200 – 26 – 61 – 77) × 60 ×
$20.50) 44,280 (78,348)
Exercised (77 × 60 91,4
× $19.80) 76
–––
––
13,1
28
–––
––
2 (44,280)
Exercised (36 × 60 47,5
× $22.00) 20
–––
––
3,24
0
–––
––
Total expense = $84,078 + $96,102 + 196,548
$13,128 + $3,240
Total cash flow = $57,462 + $
91,476 + $47,520 196,4
58
The expense and cash flow are the same over the four yea
r time frame of the SAR, the
difference is that the expense is recognised earlier than the
cash flow, based on the fact
that the employee gives service.
Commentary
The liability is de-recognised at 31 December 2017 as t
he exercise period of
the rights has now lapsed. All SARS in this example we
re exercised.
6 Deferred Taxation
Commentary
This section should be left until the study of deferred ta
x (Session 19) has been completed.
6.1 Issue

In many jurisdictions the legislation allows for the
recovery of tax for the
share option expense.
 In many cases the amount of benefit will be based
upon the intrinsic value of
the share and will only be available once the optio
ns have been exercised.
 The intrinsic value of a share option is the differen
ce between the exercise
price of the option and the market price of the shar
e.

The timing difference and difference in value will
give rise a deductible
temporary difference in the financial statements le
ading to the recognition of
a deferred tax asset in the statement of financial po
sition, provided the IAS 12
Income Taxes recognition requirements are met.
6.2
Accounting

The tax expense within the profit or loss will be cr
edited with the double
entry to the recognition of the deferred tax asset.
 The amount that can be credited to profit or loss is
set as a maximum equal to
the cumulative share option expense multiplied by
the tax rate. Any
additional benefit will be credited to other compre
hensive income.
Worked example 4
On 1 January 2016, Robinson granted 10,000 share option
s to an employee vesting two
years later on 31 December 2017. The fair value of each
option measured at the grant
date was $4.
Tax legislation in the country in which the entity operates
allows a tax deduction of the
intrinsic value of the options on when they are exercised.
The intrinsic value of the
share options was $2.20 at 31 December 2016 and $4.40 a
t 31 December 2017, at
which point the options were exercised.
Assume a tax rate of 30%.
Required:
Show the deferred tax accounting treatment of the sha
re options in the financial
statements for the years ending 31 December 2016 and
31 December 2017.
Worked solution 4
Deferred tax asset
31 December
2016 2017

Carrying amount of share-based$ 0 0
ment expense
Less: Tax base of share-based payme
nt expense
(10,000 × $2.2 × ½) (11,000)
(10,000 × $4.40)
–––––––––––
––– (44,000)
Temporary
difference –––––––
(11,013,200
00)–––––––
Deferred tax ass
–––
et @ 30% –––
–
3,30
0
–––
–––
–
Credit entries
Deferred tax 31 Dec 2016
Profit or loss 3,30
Other comprehensive 0
income
0
Deferred tax 31 Dec 2017
Profit or loss (13,200 – 3,300 – ( 8,700
W) 1,200) 1,200
Other comprehensive income (
W)
The maximum benefit that can be credited to profit or loss
is the cumulative expense charged
against profits of $40,000 (10,000 options × $4) by the tax
rate of 30% which is $12,000. Any
benefit above the $12,000 must be credited to other compr
ehensive income.
On exercise
On exercise, the deferred tax asset is replaced by a current
tax one. The double entry is:
Dr Profit or loss (deferred tax e
xpense) 12,000
Dr Other comprehensive incom 1,200
e
13,200
Cr Deferred tax asset
Dr Curr asset
ent tax
Cr Profit or loss
Cr Other comprehensive i 13,200
ncome 12,000
1,200
WORKING
Accounting expense reco
(10,000 × $4 × 20,000
gnised
(10,000 × $4) 40,000
Tax ded (11,000)
(10,000 × $2.20
uction ½)
(10,000 × $4.40)
–––––––––––––
– (4,000)
Excess tempora
ry difference –––––––
0 1,200
Excess deferred tax asset to e –––––––
quity @ 30% ––––––
–
7 Disclosures
7.1 Nature and extent of schemes
Commentary
The following are the minimum disclosure requirements.
 A description of each type of scheme that existed a
t any time during the period.
 The number and weighted average exercise prices
of share options.
 For share options exercised during the period, the
weighted average share
price at the date of exercise.
Commentary
If options were exercised on a regular basis throughout
the period, the
weighted average share price during the period may be
disclosed instead.
 For share options outstanding at the end of the peri
od, the range of exercise
prices and weighted average remaining contractual
life.
Commentary
A wide range of exercise prices should be sub-divided
meaningfully for
assessing the number and timing of additional shares th
at may be issued and
the cash that may be received in future.
7.2 Determination of fair value
7.2.1 Share options
 The weighted average fair value of share options g
ranted during the period at
the measurement date and information on how that
fair value was measured.
7.2.2 Other equity instruments
 The number and weighted average fair value of ot
her equity instruments at
the measurement date, and information on how tha
t fair value was measured.
7.2.3 Modifications

For sch
emes
at were
modifie
d durin
g the
eriod:
 an explanation of the modifications;
 the incremental fair value granted (as a result of th
 e modifications); and
information on how the incremental fair value gra
nted was measured.
7.2.4 Direct measurement

Where the fair value of goods or services received
during the period has been
measured directly, disclose how that fair value was
determined (e.g. whether
at a market price).
7.3 Effect of expenses

The total expense recognised for the period where
the goods or services
received did not qualify for recognition as assets.
 Separate disclosure of that portion of the total exp
ense that arises from
equity-settled transactions.
 For liabilities arising from cash-based transaction
s:
 the total carrying amount at the end of the period;
 and
any vested share appreciation rights.
Commentary
That is where another party’s right to cash or other ass
ets has vested by the
end of the period.
Key points summary
In a share-based payment transaction an entity acquires go
ods or services for its
equity instruments or by incurring liabilities based on the
price of the entity’s
shares or other equity instruments.
Accounting treatment depends on whether settlement is eq
uity and/or cash.
Issuing shares (or rights to shares) increases equity. This i
s an expense unless
goods or services meet asset recognition criteria.
Expense is recognised as the goods or services are consu
med.
Fully vested shares (or rights) are presumed to relate to pa
st service and must be
expensed immediately (at the grant-date fair value).
The fair value of share-based payments with a vesting peri
od is expensed over the
Goods or services received for equity instruments are mea
sured at their fair value
when received (otherwise fair value of the equity instrume
nts).
Transactions with employees, etc are measured at the fair
value of the equity
instruments granted.
Fair value of equity instruments is estimated at the grant d
ate. (Use a model if no
market value.) Vesting conditions other than market cond
itions are ignored in
Focus
 understand the term “share-based payment”;
 discuss the key issue that measurement of the trans
action should be based on fair value;
 explain the difference between:
 cash-settled share-based payment transactions; a
 nd
equity-settled share-based payment transactions;
 identify the principles applied to measuring both c
ash and equity-settled
share-based payment transactions; and
 compute the amounts that need to be recorded in t
he financial statements
when an entity carries out a transaction where the
payment is share based.
Activity solution
Solution 1 – Description
Year
Calc
ulati Cumulative
on expense for
remuneration
period
expense
$ $
1 176,6 176,640
40
2
3 years)
– $176, 198,720 375,360
640
3
(48,000 options × $1 200,6 576,000
2) – 375,360 40
Commentary
A total of 60 employees (25 + 22 + 13) forfeited their r
ights to the share options
during the three-year period. Therefore a total of 48,00
0 share options (400
employees × 120 options per employee) vested at the en
d of year 3.
Overview
Objective

To describe the rule
s for recognition an
d measurement of ta
xation.
INTRODUCTI
 Objective
ON
 Terminology
CURRENT
TAX
DE
FE
RR
ED
TA
XA
TI
RE ON
CO – A
GN N
ITI
ON IN
OF TR
OD
DE UC
FE TI
RR
ED ON
TA
X
LI
AB
ILI
TI
ES
RE
CO
GN
ITI
ON
OF
DE
FE
RR
ED
TA
X
AS
SE
TS
 
 

T
D h
is e

c
r
u u
ss l
io e
n

Di
scu
ssi
on
 Temporary difference
s
PRE
ME SEN
ASU TAT
REM ION
ENT AN
D
ISSU DIS
ES
CLO
SUR
E
  
 D
R ef
a e
t rr
e e
s d
ta
 Ch x
ange i at
n tax io
n
rates
p
r
e
s
e
nt
at
io
n

D
ef
e
rr
ed tax
ation
disclosure
eserved.
1901
SESSION 19 – IAS 12 INCOME TAXES
1 Introduction
1.1 Objective

future tax consequences of:

the future recovery (or settlement) of th
e carrying amount of assets
(or liabilities) in the statement of financi
al position ; and

transactions and other events of the curr
ent period in the financial
statements.
1.2 Terminology

Accounting profit is profit or loss for a p
eriod before deducting tax expense.
 Tax profit (tax loss) is the profit (loss) f
or a period on which income taxes are
payable (recoverable).
Commentary
As determined in accordance with the rules e
stablished by the taxation authorities.

determination of profit or loss for the pe
riod for current and deferred tax.
 Current tax is the amount of income tax
es payable (recoverable) in respect of
taxable profit (tax loss) for a period.
 Deferred tax liabilities are the amounts
of income taxes payable in future
periods in respect of taxable temporary
differences.
 Deferred tax assets are the amounts of i
ncome taxes recoverable in future
periods in respect of:
 deductible temporary differences;
 the carry forward of unused tax losses;
 and
the carry forward of unused tax credits
.
 The tax base of an asset is the amount at
tributed to that asset for tax purposes.

It is the amount that will be deductible f
or tax purposes against any
taxable economic benefit that will flow t
o the entity when it
recovers the carrying amount of the asse
t.

asset is equal to its carrying amount (se
e s.3.4.5).
 The tax base of a liability is the amount
attributed to that liability for tax
purposes.

less any amount that will be
deductible for tax purposes in respect of
that liability in future
periods.
©2017 Becker Educational Development Corp. All rights 1902
reserved.
 Temporary differences are differences b
etween the carrying amount of an
2 Current tax
Commentary
The recognition of current tax liabilities and
assets is quite straightforward.
 The tax payable to (or receivable from) t
he tax authorities in the
jurisdiction(s) in which the business ope
rates is accounted for according to
the basic principles of accounting for lia
bilities and assets.
 Current tax (for current and prior period
s) should, to the extent unpaid, be
recognised as a liability.
 If the amount already paid in respect of
current and prior periods exceeds the
amount due for those periods, the excess
should be recognised as an asset.
 The benefit relating to a tax loss that can
be carried back to recover current
tax of a previous period should be recog
nised as an asset.
3 Deferred taxation – a
n introduction
3.1 The underlying problem

In most jurisdictions accounting profit a
nd taxable profit differ, meaning that
the tax charge may bear little relation to
profits in a period.
 Differences arise due to the fact that tax
authorities follow rules that differ
from IFRS rules in arriving at taxable pr
ofit.
 Transactions, which are recognised in th
e accounts in a particular period, may
have their tax effect deferred until a later
period.
Illustration 1
Most non-current assets are depreciated.
Most tax systems allow companies to deduct th
e cost of purchasing non-current assets
from their profit for tax purposes according to
provisions specified in tax legislation. If
such “tax depreciation” differs from the accoun
ting depreciation , the asset will be
written down by the tax authority and by the co
mpany but by different amounts.
Thus the tax effect of the transaction (which is
based on the tax laws) will arise in a
different period to the accounting effect.
 It is convenient to envisage two separat
e sets of accounts:
 one set constructed following IFRS rule
s; and

a second set following the tax rules of th
e relevant jurisdiction (the
“tax computations”).
reserved.
Commentary
Of course there is not really a full set of tax
accounts but there could be. Tax
files in reality merely note those areas of diff
erence between the two systems.

The differences between the two sets of
rules will result in different numbers
in the financial statements and in the tax
computations. These differences
may be viewed from the perspective of:
 method”); or
 effect on profit or loss (“income stateme
nt liability method”).
Commentary
Although in most situations the two methods
will give the same result but the “balance
sheet approach” will capture differences that
an “income statement approach” would
not recognise, such as the difference created
on the revaluation of an asset. IAS 12 takes
the “balance sheet approach” (i.e. performan
ce is viewed as a change in net assets from
one period to the next and this change is exp
lained through the statement of profit or loss
and other comprehensive income or the state
ment of changes in equity).

The current tax charge for the period wil
l be based on the tax authority’s view of
the
profit, not the accounting view. This me
ans that the relationship between the
accounting “profit before tax” and the ta
x charge will be distorted. The tax charg
e is
the tax rate applied to a tax computation
figure (not the accounting profit figure).
3.2 The concept illustrated
Worked example 1
EXpekt bought a non-current asset on 1 Januar
y 2016 for $9,000. This asset is to be
depreciated on a straight line basis over three y
ears. Accounting depreciation is not
allowed as a taxable deduction in the jurisdicti
on in which the company operates.
Instead tax allowable depreciation (capital allo
wances), under the tax regime in the
country of operation is available as follows.
2016 $4,000
2017 $3,000
2018 $2,000
Accounting profit before tax for each of the thr
ee years is budgeted to be $17,000 (after
depreciation of $3,000 each year) and income t
ax is to be charged at 30%.
Required:
Determine the tax expense for each year.
reserved.
Worked solution 1
Differences arising
Difference
in the

Tax bas Statement Profit or
Carrying
e of loss
amount financial
position
January 9,000

Charge for t (3,0 (4 (1,0
he year 00) ,0 00)
0
0)
Cost at 31 December6,000 5,000 1,000
2016
Charge for th (3,00 ( 
e year 0) 3,
0
0
0
)
Cost at 31 December3,000 2,000 1,000
2017
Charge for t (3,00 (2 1,0
he year 0) ,0 00
0
0)
Cost at 31 Decem    
ber 2018

 At the end of each reporting period the d
eferred tax liability might be
identified from the perspective of financ
ial position or profit or loss.
Commentary
The difference in the statement of financial p
osition is the sum of the differences
in profit or loss. A difference “originates” i
n 2016, is carried forward in 2017
and “reverses” in 2018.

From the perspective of the statement of
financial position the deferred
taxation balance is identified as that whi
ch is required in the statement of
financial position whereas the profit or l
oss approach identifies the deferred
tax that arises during the period.

IAS 12 takes the first approach called “v
aluation adjustment approach” to full
provisioning.
Analysis
 The financial position approach calculat
es the liability (or more rarely the
asset) that would need to be set up in the
statement of financial position.
Differences Tax @

Tax base financial 30%
position (the
emporary
difference”)
31 December
6,000 5,00 1, 300
2016
0 00
0
31 December3,000 2,00 1, 300
2017 0 00
0
31 December    
2018

 Application of the tax rate to the differe
nce in financial position will give
the deferred tax balance that should be r
ecognised in the statement of
financial position.
reserved.
In 2016, EXpekt will recognise a deferre

d tax liability of $300 in the
statement of financial position. This wil
l be released to profit or loss in later
years.
 The $300that exists at the end of the repo
iability rting period which will
be paid in
uture.
Commentary
In years to come (i.e. looking forward from t
he end of 2016) the company will earn
profits against which it will charge $6,000 de
preciation but will only be allowed
$5,000 capital allowances. Therefore taxable
profit will be $1,000 bigger than
accounting profit in the future. This means t
hat the current tax charge in the future
will be $300 (30% × $1,000) bigger than wo
uld be expected from looking at the
financial statements. This is because of even
ts that have occurred and been
recognised at the end of the reporting period.
This satisfies the definition and
recognition criteria for a liability as at that d
ate.
 The charge to profit or loss is found by l
ooking at the movement on the liability:
Liability required
Profit or loss entry
2016
300 Dr 300
2017 300 NIL
2018 NIL Cr 300
 In summary, the process involves a com
parison of the accounting balance to the t
ax
authority’s version of the same transacti
on and applying the tax rate to the differ
ence.
Statement of financial position – extra
cts
2018
$ $
$
Deferred taxation 300 30 
ovision 0
Statement of profit or loss – extracts
2016
2017 2018
$
$ $
Profit befor 17,0 17,00 17,000
e tax 00 0
Income tax @ 30 4,80 5,10 5,400
% (W) 0 0
Deferred  (300)
tax 3
0
0
(5,100) (5,100) (5,100)
Profit afte 11,9 11,90 11,900

r tax 00 0

Accounting for the tax on the difference
s through profit or loss restores the
relationship that should exist between th
e accounting profit and the tax
charge. It does this by taking a debit or
a credit to the statement of profit or
loss. This then interacts with the current
tax expense to give an overall
figure that is the accounting profit multi
plied by the tax rate.
reserved.
As can be seen from this example, the ef
 fect of creating a liability in 2016
and then releasing it in 2018 is that profi
t after tax ($11,900 for all three
years) is not distorted by temporary diffe
rences. A user of the financial
statements now has better information a
bout the relationship between profit
before tax and profit after tax.
Commentary
If deferred tax had not been accounted for th
e accounting profit after tax for each of
the three years would have been $12,200, $1
1,900 and $11,600, respectively.
 Accruals and provisions for taxation wil
l affect earnings per share, net
assets per share and gearing.
WORKING Calculations of tax for the per
iods
Accounting profit
(after 17,00 17,000
depreciation) 17,00
0
0
Add back deprec 3,00 3,00 3,000
iation 0 0
Deduct capital allo (4,000 (3,000 (2,000)
wances ) )
(1,000) 1,000
Taxable p 16,0 17,00 18,000
rofit 00 0
Tax @ 3 4, 5,10 5,400
0% 800 0
3.3 Tax bases

The tax base ofis defined as the amount a
set or liability ttributed to that
asset or liability
ax purposes.
Illustration 2
Amalgam buys a machine at a cost of $1,000.
Tax depreciation will be allowed on the
total cost of this machine at a rate of 20% per a
nnum on a reducing balance basis. At
the end of the first year this asset will have a ta
x base of $800 ($1,000 – (20% of
1,000)).
At the end of the second year this asset will ha
ve a tax base of $640 ($800 – (20% of
$800)).
These amounts both represent the future deduct
ible tax expenses.
Illustration 3
Intangible Assets. The local tax rules deduct al
l research and development as they are
incurred. At the year end the development asse
t has a tax base of $nil. This is because
there is no future benefit for tax purposes; the c
osts have been deducted in the current
income tax calculation.
reserved.
Illustration 4
Shares with a cost of $50 were acquired during
the year and are treated as at fair value
through other comprehensive income financial
assets. At the end of the reporting
period they are included in the statement of fin
ancial position at their market value of
$75. The tax authorities only tax the profit on t
he shares when they are sold.
Therefore, at the end of the reporting period th
e tax base of the shares is $50.
Commentary
Accounting for fair value through other comp
rehensive income financial assets is
dealt with in the next session.
Illustration 5
Provisions, Contingent Liabilities and Contin
gent Assets. The local tax rules deduct
restructuring costs ONLY when the costs are a
ctually incurred. The tax base of the
provision is nil.
Illustration 6
A statement of financial position shows an inte
rest accrual of $25.
If the tax laws deduct interest on a cash basis t
hen the tax base of this item will be nil.
However, if the tax laws deduct interest on an
accruals basis then the tax base of this
item will be $25.
©2017 Becker
Educational De
velopment Cor
p. All rights res
erved.
1908
Illustration 7
An item of property, plant and equipment is ac
quired under a lease. The asset has a
fair value of $200, a lease term of 5 years, ann
ual payments of $50 in arrears, and a
accordance with IFRS 16 Leases. However, fo
r tax purposes, the right-of-use asset is
not recognised and lease rentals are deductible
for tax purposes when they fall due.
The following entries have been made in the fi
nancial statements:
Cr Lease liability 200
Being the recognition of the asset an
d the liability.
40
Being straight line depreciation of the asset o
ver its lease term.
NOTE: The asset has a carrying amount of $16
0.
16
Cr Lease liability 16
Being interest at 8%
of $200.
Dr Lease liability
50
Cr Cash 50
Being the annual rep
ayment.
NOTE: the liability has a carrying amount of $
166 ($200 + $16 – $50) at the end of the
reporting period. The tax base of the liability i
s $nil because the tax authority does not
recognise it.
The lessor will obtain the tax allowances for th
e asset – the lessee can only deduct the
lease rentals. Therefore the tax base of the ass
et will be nil.
There is a net deductible timing difference of $
6 ($160 – $166).
Commentary
If the annual repayment was made after the r
eporting period (i.e. the liability at
the end of the reporting period was $216) the
tax base of the liability would be
$50 if the tax authority allows the expense w
hen it is accrued but $nil if the
lease rental were allowed only when paid.
reserved.
3.4 Temporary differences
3.4.1 Definition

asset or liability in the statement of fina
ncial position and its tax base.
Temporary differences may be either:
 Taxable – these arise when the carryin
g amount:

 of an asset is greater than its tax base;
of a liability is less than its tax base.
 Deductible – these arise when the carry
ing amount:

of an asset is less than its tax base;

of a liability is greater than its tax base
.
3.4.2 Situations where temporary di
fferences may arise
 When income or expense is included in
accounting profit in one period but
included in the taxable profit in a differe
nt period. For example:
 situations where the accounting depreci
ation does not equal tax
allowable depreciation; and
 items which are taxed on a cash basis bu
t which will be accounted
for on an accruals basis.
Illustration 8
A statement of financial position shows interes
t receivable of $10,000. No cash has yet
been received and interest is taxed on a cash ba
sis. The interest receivable has a tax
base of nil. Deferred tax will be provided on
the temporary difference of $10,000.

when the asset is revalued. (See Worke
d Example 5.)
 The tax base of an item differs from its i
nitial carrying amounts. For example.
if a non-taxable government grant is rec
eived in respect of an asset.

business combination where the net asse
Cost ts are recognised at their
of a fair values but the tax authorities do not
allow adjustment.
3.4.3 Taxable temporary differences
 These will normally result in deferred ta
x liabilities (unless excluded – see s.3.4.
5).
reserved.
Illustration 9
Argon buys a machine at a cost of $1,000. Tax
depreciation will be allowed on the
total cost of the machine at 20% per annum on
a reducing balance basis. For
accounting purposes, the asset is depreciated o
n a straight line basis over six years.
At the end of the first year the asset will have:
 a carrying amount of $833 ($1,000 – (1,
000 ÷ 6));

a tax base of $800 ($1,000 – (20% of 1,0
00)). This means that in the future,
Argon will be able to deduct tax depreci
ation of $800.
Therefore there is a temporary difference of $3
3 ($833 – $800). This difference is
taxable – there is a debit in the statement of fin
ancial position when compared with the
tax authority’s perspective.
Commentary
Another way to consider this is that the futur
e benefits included in the statement of
financial position for this asset are $833 but
the tax authorities will only allow the
deduction of $800 depreciation in the future.
So there is net taxable income of $33
based on what has been included in the state
ment of financial position to date.
Argon would have deducted $200 for depreci
ation when calculating this year’s
current income tax.
Illustration 10 – Illustration 4 revisited
At the end of the reporting period the temporar
y difference is $25 (75 – 50). This is a
taxable temporary difference. For tax purposes
, only $50 can be deducted against an
item carried in the statement of financial positi
on at $75 – so there is a net taxable
position.
3.4.4 Deductible temporary differen
ces
 These will normally result in deferred ta
x assets (unless excluded – see s.3.4.5).
Illustration 11
Argon buys a machine at a cost of $1,000. Tax
depreciation will be allowed on the
total cost at 20% per annum on a reducing bala
nce basis. For accounting purposes the
asset is depreciated straight line over four years
.
At the end of the first year the asset will have:
 a carrying amount of $750 ($1,000 – (1,
000 ÷ 4));

a tax base of $800 ($1,000 – (20% of 1,0
00)). This means that in the future,
Argon will be able to deduct tax depreci
ation of $800.
Therefore there is a temporary difference of $(
50) ($750 – $800). This difference is
deductible – there is a credit in the statement of
financial position when compared with
the tax authority’s perspective.
reserved.
Commentary
Another way to consider this is that the futur
e benefits included in the statement
of financial position for this asset are $750 b
ut the tax authority will allow the
deduction of $800 depreciation in the future.
So there is a net tax deductible
expense of $50 based on what has been inclu
ded in the statement of financial
position to date.
Again, Argon would have deducted $200 for
depreciation when calculating
this year’s current income tax.
Illustration 12
A provision of $50 for restructuring recognised
in accordance with IAS 37 Provisions,
There is a deductible temporary difference of $
50. There is a credit in the statement of
financial position compared to the tax authority
’s perspective.
Commentary
The tax authorities will not allow the deducti
on of any costs until they have actually
been incurred so they are not recognised as
a provision in the “tax books”.
3.4.5 Exclusion of non-taxable items
 The definition of temporary difference c
aptures certain items that should not
result in deferred taxation accounting. F
or example accruals for items which
are not taxed or do not attract tax relief.
The explanation of tax base in IAS 12 ef
 fectively excludes such items by
deeming that the tax base of the asset w
hose economic benefits will not be
taxable is equal to its carrying amount.

 Thus no taxable difference arises.
Illustration 13
Erbium provided a loan of $250,000 to Osmiu
m. At 31 December 2016, Erbium’s
accounts show a loan creditor of $200,000. Th
e repayment of the loan has no tax
consequences. Therefore the loan creditor has
a tax base of $200,000.
No temporary taxable difference arises.
reserved.
4 Recognition of defer
red tax liabilities
4.1 The rule

should be recogn
ised for all taxable temporary
differences, unless the deferred tax liabil
ity arises from:
 the initial recognition of goodwill; or
 the initial recognition of an asset or liabi
lity in a transaction which:
 is not a business combination; and
 at the time of the transaction, affects ne
ither accounting
profit nor taxable profit.
4.2 Discussion
4.2.1
“all taxable temporary differenc
es”
 IAS 12 requires recognition of a deferre
d tax liability for all taxable
temporary difference unless they are exc
luded by the paragraph above.
Commentary
The definition of temporary differences includ
es all differences between
accounting rules and tax rules, not just the te
mporary ones! IAS 12 contains
other provisions to correct this anomaly and
excludes items where the tax
effect is not deferred, but rather, is permanen
t in nature.
4.2.2 “affects neither accounting profit
nor loss”
 No deferred tax liability would be recog
nised if the item will not affect
profits – it is irrelevant for tax purposes,
as no tax will arise on this item.
Illustration 14
Platinum acquired an asset at a cost of $300. P
latinum intends to use the asset
throughout its useful life of three years and the
n scrap it (i.e. at a residual value of nil).
Depreciation is not tax deductible, but any eco
nomic benefits flowing from the asset
are taxable. On disposal of the asset any capita
l gain would not be taxable and any
capital loss would not be deductible.
The asset has a tax base of zero on initial recog
nition – no depreciation is deductible
but the economic benefits that flow are taxable
so the asset is a taxable item.
paid on that difference.
Commentary
The rule here is an application of the idea th
at if an item is not taxable it
should be excluded from the calculations.
reserved.
5 Recognition of defer
red tax assets
5.1 The rule

A deferred tax asset should be recognise
d for all deductible temporary
differences to the extent that it is probab
le that taxable profit will be available
against which the deductible temporary
difference can be utilised, unless the
deferred tax asset arises from the initial r
ecognition of an asset or liability in a
transaction which:
 is not a business combination; and
 at the time of transaction, affects neither
accounting profit nor
taxable profit (tax loss).

A deferred tax asset will also be recogni
sed for the carry forward of tax losses
and tax credits to the extent that it is pro
bable that future taxable profits will
be available against which these losses a
nd credits can be used.

The carrying amount of a deferred tax a
sset should be reviewed at the
end of each reporting period. The carryi
ng amount of a deferred tax
asset should be reduced to the extent tha
t it is no longer probable that
sufficient taxable profit will be available
to utilise the asset.
5.2 Discussion
5.2.1 General issues
 Most of the comments made about deferr
ed tax liabilities also apply to deferred ta
x assets.

Major difference between the recognitio
n of deferred tax assets and liabilities is i
n
the use of the phrase “to the extent that it
is probable that taxable profit will be
available against which the deductible te
mporary difference can be utilised”.
Commentary
IAS 12 therefore has a different standard for
the recognition of deferred tax assets than it
does for deferred tax liabilities. In short, lia
bilities will always be provided in full (subjec
t
to the specified exemptions) but assets may n
ot be provided in full or, in some cases at all
.
This is an application of the concept of prude
nce.
 expects to receive a benefit
from its existence. The existence of defe
rred tax liability (to the same jurisdiction
)
is strong evidence that the asset will be r
ecoverable.
reserved.
5.2.2“initial recognition of an asset or l
iability in a transaction that
affects neither accounting nor tax
profit”
 This is the same rule as for deferred tax
liabilities.
Illustration 15
Platiunum acquired an asset at a cost of $300.
Platinum also received a non-taxable
government grant of $50.
On initial recognition, the carrying amount of t
he asset may be $250 (or an asset of
$300 and deferred income of $50).
The tax base on initial recognition is $300 (or t
he tax base of the asset is $300 and the
tax base of the deferred income is nil).
This gives a temporary difference of $50. But
a deferred tax asset should not be
recognised as no tax benefit will be received.
5.2.3 Tax losses and credits
 A deferred tax asset will be recognised o
nly if the credits or losses can be used.
Illustration 16
Radium has losses of $100 which can be carrie
d forward and offset against future
current tax liabilities for the next three years on
ly.
If it is probable that Radium will make sufficie
nt taxable profits in the next three years,
it should recognise the deferred tax asset on the
se losses.
However, if it is not probable that Radium will
make profits, it cannot recognise a
5.2.4 Debt instruments measured at f
air value
 IAS 12 was amended in 2016 to reflect
concern over debt instruments
measured at fair value and the recogniti
on of a deferred tax asset.
 The amendment clarifies that unrealised
losses arising when the fiar value
falls below cost will give rise to a deduc
tible temporary difference.
 The recognition of the difference is rega
rdless of whether the holder expects to
recover the carrying amount of the instru
ment by holding to maturity or by sale.
reserved.
6 Measurement issue
s
6.1 Rates

to
the period when the asset is realised or t
he liability is settled, based on
tax rates that have been enacted by the e
nd of the reporting period.
Worked example 2
The following information relates to Boniek as
at 31 December 2017:
Note Carrying Tax
amount base
Plant and e 175,000
quipment
1
Interest receivab 1,000
le
Interest pay
2,00
able
0
Note 1
The trade receivables balance in the accounts is
made up of the following amounts:
Doubtful (5,000)
debt provi
––––––
sion
––––––
Further information:
1.
The deferred tax balance as at 1 January
2017 was $1,200.
2. Interest is taxed on a cash basis.
3. Allowances for doubtful debts are not de
ductible for tax purposes. Amounts
in respect of receivables are only deducti
ble on application of a court order to
a spe
cific
amou
nt.
4.
Fines are not tax deductible.
5. The tax rate is 30% for 2017. The gover
nment has not announced the tax
rate for 2018 but it is expected to rise to
31%
Required:
Calculate the deferred tax provision which i
s required at 31 December 2017 and
the charge to profit or loss for the period.
reserved.
Worked solution 2
Carrying Tax Tempo
rary
Plant and equipm
200,000 175,00 25,000
ent 0
Receivables
Trade receivabl 50,000 55,000 (5,000)
es
1,000  1,000
Interest receivab
le
Payables
Fine 10,000 10,000 
Interest payab 2,000  (2,000)
le
Temporary
Deferre
d tax lia (2,100)
bilities
Deferre –––––
d tax as
sets 5,700
–––––
D
e
f
e
Deferred tax as a r
t 1 January 2017 r
Profit or loss Bal e
d
anc
Deferred tax as at
ing
December 2017
fig t
ure a
x
@

3
0
%

$
1
,
2
0
0
– –
4,500
––––– –– –
5,700
Commentary
The temporary difference is taxed at the curr
ent enacted rate of 30%. Even
though the government is expected to increas
e the rate to 31% next year, this
has not yet been enacted and so cannot be pr
e-empted.
reserved.
Worked example 3
The following information relates to Tomasze
wski at 31 December 2017:
Carrying Tax base
amount
$
Non-current 460,
assets 000
1. Tax rates (enacted by the 2016 year en
d)
2017
36% 2018 2019 2020
32% 31%
2. The loss above is the tax loss incurred in
2017. The company is very
confident about the trading prospects in
2018.
3. The temporary difference in respect of n
on-current assets is expected to grow
each year until beyond 2020.
4. Losses may be carried forward for offset
, one third into each of the next three
years.
Required:
Calculate the deferred tax provision that is r
equired at 31 December 2017.
Worked solution 3
difference

Non-current assets $
(460,000  320,00
0)
Losses
2
Deferr 0

ed tax l
iability
(31% ×
140,00 D
0)
Deferr
ed tax
asset
Reve
rsal in
2018 (
30,000
× 34%)
Reve
rsal in
43,4
00
(10,20
0)
(9,600)
(9,300)
–––––
––
14,300
–––––
––

The tax rate used should reflect the tax c
onsequences of the manner in which the
entity expects to recover or settle the car
rying amount of its assets and liabilities.
Illustration 17
Polonium has an asset with a carrying amount
of $5,000 and a tax base of $3,000. A
tax rate of 25% would apply if the asset was so
ld and a tax rate of 33% would apply to
other income.
Polonium would recognise a deferred tax liabil
ity of $500 ($2,000 @ 25%) if it expects
to sell the asset without further use and a deferr
ed tax liability of $660 ($2,000 @33%)
if it expects to retain the asset and recover its c
arrying amount through use.
reserved.
6.2 Change in tax rates

Companies are required to disclose the a
mount of deferred taxation in the tax
expense that relates to change in the tax
rates.
Worked example 4
Carrying Tax base
amount
320,000
Acc
rued
inter
est:
(15,000) 
The balance on the deferred tax account on 1 J
anuary 2018 was $10,000. This was
calculated at a tax rate of 30%. During 2018 th
e government announced an unexpected
increase in the level of corporate income tax up
to 35%.
Required:
Set out the note showing the movement on t
he deferred tax account showing the
charge to profit or loss and clearly identify t
hat part of the charge that is due to an
increase in the rate of taxation.

Deferred
Opening bal
ance restated 35
Profit or loss
 originatio (Ba
n of lan 3
temporary di 8
cin ,
fferences g fi 3
8
gur 3
Deferred tax as at e)
December 2018 –
–
( –
–
–
–

50,050
––––––
W
Temporary
No difference
n- $
curr
$
ent
ass
ets
Acc
rue
d in
tere
st:
R  18,000
e  (15,000
c )
ei
v
a
bl
e
P
a
y
a
bl
e
3
Deferre
d tax lia
bility (3
5% × 15
8,000)
Deferre
d tax ass
et (35%
× 15,00
0)
D
e
f
e
r
r
e
d

t
a
x

a
t

55,300
(5,250)
––––––
50,050
––––––
reserved.
6.3 Accounting for the moveme
nt on the deferred tax balan
ce

Deferred tax is recognised as tax income
or expense and included in the profit or
loss for the period, except to the extent t
hat the tax arises from:
 A transaction or event which is recognis
ed, in the same or a different
period, directly in equity or within other
comprehensive income; or
 A business combination that is an acqu
isition.

Deferred tax should be recognised outsid
e profit or loss (i.e. charged or credited t
o
other comprehensive income or directly
to equity) if the tax relates to items that a
re
recognised outside profit or loss, in the s
ame or different period.
Commentary
Revaluation of an asset does not (normally) c
hange its tax base. The revaluation
will be credited to other comprehensive inco
me and the related deferred tax
debited to other comprehensive income (see S
ession 7 s.6.5).
Worked example 5
Carrying Tax base
amounte
At 1 January 2 1,0 800

017 00
31 December 2 650
017 900 –––––
––––
–
At the year end the company revalued the asset
to $1,250. The tax base is not affected
by this revaluation.

Temporary
$
$
Required: 6
Assuming that the only temporary differenc
e that the company has relates to this
asset construct a note showing the movemen
t on the deferred taxation and
identify the charge to profit or loss in respec
t of deferred taxation for the year
ended 31 December 2017.
W
o
r
k
e
d

s
o
l
u
t
i
o
n

5

D f
e
Deferred tax as a (1,000  800) 60

t 1 January 2017 30% 105
Other comprehen  100) × 30%)
30% × (1,250
sive income 900) 15
Profit or loss –––
Balancing figure
(or as (150 180
Deferred tax as at –––
December 2017
reserved.
6.4 Summary of approach

Set out the carrying amounts of every a
sset and liability.
 Calculate the tax base for each asset an
d liability.
Commentary
Any specific tax rules will be stated in an ex
amination question.
 Calculate the temporary difference by d
educting the tax base from the
carrying amount using the following pro
forma:
Carrying Tax Temporary

a
mount
$ $ $
 Calculate the deferred tax liability and
asset:
 Deferred tax liabilities: sum all positive
temporary differences and
apply the tax rate.
 Deferred tax asset: sum all negative te
mporary differences and
apply the tax rate.
 Calculate the net deferred tax liability or
asset by summing the deferred tax
liability and deferred tax asset.
Commentary
This will be the asset or liability carried in t
he statement of financial position. If it is
not appropriate to offset the asset and liabilit
y they should be shown separately.
 Calculate any amount to be recognised o
utside of profit or loss – by
multiplying the amount taken to other co
mprehensive income or directly to
equity by the tax rate.
 Deduct the opening deferred tax liability
or asset to give the profit or loss
charge/credit.
 Where there has been a change in the tax
rate it is necessary to calculate the
effect of this change on the opening defe
rred tax provision. Follow the same
proce calculating the required closing deferred
dures tax liability or
as ab asset and the charge/credit to profit or lo
ove, ss.
 The charge/credit to profit or loss is the
n analysed into the amount
that relates to the change in the tax rate
and the amount that relates
to the temporary differences.

The amount that relates to the change in
tax rate will equal the
amount of the temporary difference in t
he previous period × the
change in the tax rate.
reserved.
Activity 1
Gorgon operates in country where the tax regi
me is as follows:

are “booked”
(i.e. double entered into statutory accoun
ting records). This means that there
is often little difference between account
ing profit under local GAAP and the
taxable profit. However, it is common p
ractice for large companies to
maintain a parallel set of records and acc
ounts for reporting according to
IFRS rules. These are notably different
to the rules in the domestic tax code
and as a result the accounting profit und
er IFRS can be very different from
the taxable profit.
The tax code allows for the general appl

ication of the accounting principles
of prudence and accruals, but states the f
ollowing:
 tax allowable depreciation is computed
according to rules set out in
the tax code;
 allowances for trade receivables are onl
y deductible under very
strict and limited circumstances;
 interest is taxable/allowable on a cash
basis.

The government operates a system of in
centive through the tax system
known as “investment relief”. Under thi
s system a company is able to claim
a proportion of the costs of “qualifying”
non-current assets as deductible, in
excess of the normal depreciation rates
which would result from adoption of
IFRSs.
 The tax rate is 30%.
©2017 Becker Educational Development Corp. All rights
reserved.
1922
Activity 1 (continued)
The following balances and information are rel
evant as at 31 December 2017:
Carrying Tax Notes
value base
Non-current assets $ $
Assets subject to invest63,000
ment relief 1
200,000 2
Land 100,000
Plant and equipment 3
90,00
0
Receivables
0
Trade recei 7
vables
Interest rece 1
ivable ,
0
0
0
4
Payables
Fine 10,000
Interest payable 3,300
Note 1
This asset cost the company $70,000 at the star
t of the year. It is depreciated on a 10%
straight line basis for accounting purposes. Th
e company’s tax advisers have said that
the company can claim $42,000 as a taxable ex
pense in this year’s tax computation.
and Equipment. It originally cost $150,000. L
and is not subject to depreciation under
IFRS nor under local tax rules.
Note 3
The balances in respect of plant and equipment
are after allowing for accounting
depreciation of $12,000 and tax allowable depr
eciation of $10,000 respectively.
Note 4
The trade receivables balance in the accounts is
made up of the following amounts:
B (
7
Note 5
The liability balance on the deferred taxation a
ccount on 1 January 2017 was $3,600.
Note 6
The applicable tax rate is 30%.
Required:
(i)
Identify the tax base of each item liste
d and then identify the temporary
difference.
(ii) Calculate the deferred tax provision r
equired at 31 December 2017 and
the charge to profit or loss in respect o
f deferred taxation for the year.
reserved.
7 Business combinati
ons
Commentary
This section should be left until the study of
business combinations in the
sessions that follow has been completed.
7.1 Introduction
7.1.1 Background

Acquisition accounting and equity accou
nting share certain features in common
which
are relevant to an understanding of the d
eferred taxation consequences of employ
ing
these techniques.

Each involves the replacement of cost wi
th a share of net assets and goodwill arisi
ng on
acquisition, the subsequent impairment o
f the goodwill and the crediting of post-
acquisition growth in equity balances to t
he equivalent equity balances of the grou
p.
7.1.2 Sources of temporary differenc
es

may
change the carrying amounts of assets an
d liabilities but not their tax bases. The
resulting deferred tax amounts will affec
t the value of goodwill but IAS 12 prohi
bits the
recognition of the deferred tax arising.
 Deferred tax will be recognised on any f
air value differences identified but will n
ot be
recognised on the actual goodwill figure.

Retained earnings of subsidiaries (simila
rly branches, associates and joint
arrangements) are included in consolidat
ed retained earnings, but income taxes w
ill be
payable if the profits are distributed to th
e reporting parent.

Furthermore, IFRS 10 Consolidated Fin
ancial Statements requires the eliminati
on of
unrealised profits/losses resulting from i
ntra- group transactions. This generates
temporary differences.
7.2 Temporary differences arisi
ng on calculation of goodwi
ll

The cost of the acquisition is allocated to
the identifiable assets and liabilities
acquired by reference to their fair values
at the date of the exchange transaction.
 Temporary differences arise when the ta
x bases of the identifiable assets and liab
ilities
acquired are not affected by the business
combination or are affected differently.
 Deferred tax must be recognised in respe
ct of the temporary differences. This wil
l
affect the share of net assets and thus the
goodwill (one of the identifiable liabiliti
es
of the subsidiary is the deferred tax bala
nce).
 The goodwill itself is also a temporary d
ifference but IAS 12 prohibits the
recognition of deferred tax on this item.
reserved.
Illustration 18
Parent paid $600 for 100% of Subsidiary on 1 J
anuary 2017. Subsidiary had not
accounted for deferred taxation up to the date o
f its acquisition. The tax rate is 40%.
The following information is relevant in respec
t of Subsidiary:
Fair value at Tax base T
date of emporary
acquisition
differences
Retirement benefit
(3 –
bligations
0)
(30)
$
Fair value of net assets acquired
504
Deferred tax liability arising
the (54) (450)
fair valuation exercise (40%
135)
Goo 1
dwil 5
l 0

7.3 Intra-group transactions

Unrealised profits and losses arising on i
ntra-group trading must be eliminated on
consolidation. Such adjustments may gi
ve rise to temporary differences. In man
y tax
jurisdictions, the individual members of t
he group are the taxable entities. As far
as the tax
authorities are concerned, the tax base of
an asset purchased from another member
of the
group will be the cost that the buying co
mpany has paid for it. Also, the selling c
ompany
will be taxed on the sale of an asset even
if it is still held within the group.
Commentary
Deferred tax is provided for at the buyer’s ta
x rate.
©2017 Becker
Educational De
velopment Cor
p. All rights res
erved.
1925
Illustration 19
S has sold inventory to Parent for $700. The in
ventory cost Subsidiary $600
originally. Subsidiary has therefore made a pr
ofit of $100 on the transaction.
Subsidiary will be liable to tax on this amount
at say 30%. Thus Subsidiary will
reflect a profit of $100 and a tax expense of $3
0 in its own financial statements.
If Parent has not sold the inventory at the year-
end it will include it in its closing
inventory figure at a cost (to itself) of $700.
On consolidation the unrealised profit must be
removed by
Dr Profit o
r loss
Cr Invent $100
ory (asset)
In the consolidated financial statements the inv
entory will be measured at $600 (700-
100) but its tax base is still $700. There is a de
ductible temporary difference of $100.
This requires the recognition of a deferred tax
asset of $30 (30% × 100).
The other side of the entry to set this up will be
a credit to profit or loss. This will
remove the effect of the tax on the transaction.
(However if Parent operated in a
different tax environment and was taxed at 40
% the deferred tax asset would be $40
(40% × 100).
8 Presentation and di
sclosure
8.1 Deferred taxation – prese
ntation

Tax assets and tax liabilities should be p
resented separately from other
assets and liabilities in the statement of f
inancial position.
 Deferred tax assets and liabilities should
be distinguished from current
tax assets and liabilities.
 Current tax assets and current tax liabilit
ies should be offset if, and only
if, the entity:
 has a legally enforceable right to set off
the recognised amounts; and

intends either to settle on a net basis, or
to realise the asset and
settle the liability simultaneously.
 Deferred tax assets and deferred tax liab
ilities should be offset if, and only if:
 the entity has a legally enforceable right
to set off current tax assets
against current tax liabilities; and

the deferred tax assets and the deferred t
ax liabilities relate to
income taxes levied by the same taxatio
n authority on either:
 the same taxable entity; or
 different taxable entities which intend to
settle current taxes on a net
basis (or to realise the assets and settle t
he liabilities simultaneously).
 The tax expense (income) related to prof
it/loss from ordinary activities
should be presented in the statement of
profit or loss.
reserved.
8.2 Deferred taxation  separa
te disclosure

The major components of tax expense/
(income), including:
 Current tax expense/(income);
 Adjustments in respect of a prior period;
 Deferred tax expense/(income);
 Deferred tax expense/(income) arising d
 ue to a change in tax rates;
Deferred tax consequence of a change i
n accounting policy or a
correction of a fundamental error.
The aggregate current and deferred tax r

elating to items that are charged or
credited to equity.
 An explanation of the relationship betwe
en tax expense (income) and
accounting profit in the form of a numer
ical reconciliation either between:

tax expense (income) and the product of
accounting profit multiplied
by the applicable tax rate(s) disclosing a
lso the basis on which the
applicable tax rate(s) is (are) computed;
and/or

the average effective tax rate and the ap
plicable tax rate, disclosing
also the basis on which the applicable ta
x rate is computed.
 An explanation of changes in the applic
able tax rate(s) compared to the
previous accounting period.

date, if any) of
deductible temporary differences,
unused tax losses, and unused tax credits
for which no deferred tax asset is
recognised in the statement of financial
position.
reserved.
1927
Illustration 20
14. Taxes (extract)
The reconciliation of expected to reported income tax e
xpense and of the expected to the
effective tax rate for the Group was as follows:
Reconciliation of Expected to Actual Income Tax Ex
pense
2015
€ million %
Expected income tax expense1,34225.6 1,45724.7
and expected tax rate
Reduction in taxes due to tax-free income
Income related to the opera (155)
(3.0)
ting business
Income from affiliated companie
(10) (0.2) (2) –
s and divestment proceeds
First-time recognition of previousl
y unrecognized (30) (0.6) (27)(0.5)
deferred tax assets on tax loss
d interest carryforwards
Use of tax loss and interest
carryforwards on which
deferred tax assets were not (0.1) (19)(0.3)
previously recognized
Increase in taxes due to non-tax-deductible expenses
Expenses related to the oper 148 2.8
ating business
Impairment losses on investm 0.1 –
ent in affiliated companies
81 1.5
Existing tax loss and interest carr
yforwards on which
deferred tax assets were previou
sly recognized but which 16 0.3 0.1
are unlikely to be usable
Tax income (–) and expenses (+) relating(95) (1.8)
to other periods
Tax effects of change (0.5)
s in tax rates
Ot (0.8) (41)(0.6)
he
r t
ax
eff
ec
ts
Actual income tax expense 23.4 1,32922.6

1,223
and effective tax rate
Notes to the Consolidated Financial State
ments of the Bayer Group 2016
reserved.
1928
Focus
 account for current tax liabilities and ass
ets in accordance with IFRSs;
 explain the effect of taxable temporary d
ifferences on accounting and taxable pro
fit;
 outline the principles of accounting for
deferred tax;
 identify and account for the IASB requir
ements relating to deferred tax assets an
d
liabilities;
 calculate and record deferred tax amoun
ts in the financial statements.
Key points summary
Current tax (for current and prior periods) is a l
iability to the extent that it has not yet
been settled and an asset to the extent that amo
unts paid exceed the amount due.
The benefit of a tax loss which can be carried
back to recover current tax of a prior
period should be recognised as an asset.
Current tax assets and liabilities are measured
using the rates/laws that have been
enacted or substantively enacted by the reporti
ng date.
Deferred tax liabilities should be recognised fo
r all taxable temporary differences.
Exceptions are liabilities arising from initial re
cognition of:
goodwill;
(ii) an asset/liability in a transaction which is
not a business combination and does
not affect accounting or taxable profit.
A deferred tax asset should be recognised for d
eductible temporary differences to
the extent that it is probable that taxable profit
will be available against which they
can be utilised. Exception as (ii) above.
A deferred tax asset is recognised for unused ta
x losses/credits carried forward to the
extent that sufficient future taxable profits are
probable.
Deferred tax assets and liabilities are measured
at tax rates expected to apply (enacted
or substantively enacted by the end of the repor
ting period).
Deferred tax assets and liabilities are not disco
unted.
Current and deferred tax is recognised in profit
or loss except to the extent that the
tax arises from:
 a business combination.
Current tax assets and liabilities should only be
offset if there is a legal right to offset
and intention to settle on a net basis. Similarly
for deferred tax.
reserved.
Activity solution
Solution 1
Carrying
amount Tax (i)
base Temporary
difference
Non c $ $
urren
t asset
s
Assets subject to inv 63,00 28,00 35,000
estment relief 0 0
L 150,0 50,000
00
Plant and e 10 90,00 10,000
quipment 0,0 0
00
Receivables:
Trade re 80,00 (7,000)
ceivable 0
s
Interest r  1,000
eceivabl
e
Payables
Fine 
(10,00
Interest 0) (3,300)
payabl  –––––––
e
85,700
–––––––
Temporary tax @ 30%
differences
Deferre bilities
d tax lia Deferred tax assets
(3,090)
28,800 –––––––

25,
710
–––––––
(ii) Deferred
tax @ 30%
$
De 3
ferr
ed
tax
as
at
1 J
anu
ary
20
17
To other comp 30
rehensive inco % 1
me 5,
× 5 0
Profit or loss 0,0 0
00 0
Deferred tax as at
Bal 7,
1 December 2017 an 1
cin 1
g fi 0
–
gu –
re –
–
–
–
–
2
5,
7
1
0
–
–
–
–
–
–
–
©2017 Becker
Educational De
velopment Cor
p. All rights res
erved.
1930
Overview
Objective

To explain the rules
on measurement, rec
ognition, presentatio
n and disclosure
of financial instrum
ents.
 Financial inst
BACKGROU
ND ruments
APPLICATI
ON  IFRS 7: Disc
AND SCOP
E losure
TERMINOLO
GY
 Executory co
ntracts
IAS 32 & IFRS 7
P DERE
COGN
ITION

 Own 
equity i F
nstrume in
nts a
n
ci
al
li
a
bi
lit
y
FINANCIAL
ASSETS
 Subse
D
I quent
IMPAIRMENT
 Assets and liabilities
 Loss
 Objec
lowance
HED tive
GING
2001
eserved.
SESSION 20 – FINANCIAL INSTRUMENTS
1 Background
1.1 Traditional accounting

Traditional accounting practices are based o
n serving the needs of manufacturing
companies. Accounting for such businesses
is concerned with accruing costs to be
matched with revenues. A key concept in su
ch a process is revenue and cost
recognition.

The global market for financial instruments
has expended rapidly over the last twenty
years, not only in the sheer volume of such i
nstruments but also in their complexity.
Entities have moved from using “traditional”
instruments (e.g. cash, trade receivables,
long-term debt and investments) to highly so
phisticated risk management strategies
based around derivatives and complex combi
nations of instruments.
 The traditional cost-based concepts are not a
dequate to deal with the recognition and
measurement of financial assets and liabilitie
s. Specifically:
 Traditional accounting bases recognition on
the transfer of risks and
rewards. It does not deal with transactions t
hat share the risks and
rewards associated with a particular asset (o
r liability) and allocate
them to different parties.
 Some financial instruments have little or no
initial cost (e.g.
options) and are not adequately accounted f
or (if at all) under
traditional historical cost-based accounting
systems.
Commentary
If a transaction has no cost it cannot be accounte
d for; there is no debit and
credit. Further the historical cost of financial as
sets and liabilities has little
relevance to risk management activities.
1.2 Financial instruments

contract that gi
ves rise to both a financial asset
of one entity and a financial liability or equit
y instrument of another entity.
 Instruments include:

 primary instruments (e.g. receivables, paya
bles and equity securities); and
derivative instruments (e.g. financial option
s, futures and forwards,
interest rate swaps and currency swaps).
©2017 Becker Educational Development Corp. All rights reser 2002
ved.
1.3 History of development

IAS 32 “Financial Instruments: Disclosure a
nd Presentation” was first issued in 1995.
 IAS 39 “Financial Instruments: Recognition
and Measurement” was first issued in 1998.
 IFRS 7 “Financial Instruments: Disclosure”
was issued in 2005 to replace IAS 30:
“Disclosures for Banks” and the disclosure r
equirements of IAS 32. IAS 32 now
only deals with presentation issues.
Commentary
The time lag between the initial issue of IAS 32 a
nd IAS 39 reflects the complexity of the
recognition and measurement issues. The first ex
posure draft on financial instruments had
sought to address disclosure, presentation, recog
nition and measurement in one standard.
Subsequent revisions reflect the “learning proces
s” of dealing with financial instruments
and new issues that have been raised since the st
andards were first issued.

IFRS 9 Financial Instruments was first issue
d in 2009, but the complete standard was
not finalised until 2014. Due to the complex
nature of the subject matter, which the
IASB has sought to simplify, it took more th
an five years to complete. Particularly
difficult issues requiring the agreement of th
e global accounting profession included
accounting for the impairment of financial as
sets and hedge accounting.
 When first issued IFRS 9 dealt with the reco
gnition and measurement of financial
The full standard is effective for periods begi

nning on or after 1 January 2018. Entities
Commentary
The remaining project on macro-hedge accountin
g is outside of the scope of the syllabus.
1.4 Key areas

Ever since IAS 32 was first issued the IASB
(formerly IASC) has been trying to
ensure that the accounting profession has a
manageable standard on accounting for
financial instruments. The main areas on wh
ich the IASB has sought consensus
inclu de:
 What instruments should be recognised?
 Once recognised what value should be assig
 ned to an instrument?
How should hedging transactions be accoun
ted for?
 Disagreements between the IASB and FASB
delayed the finalisation of IFRS 9. These
bodies had opposing opinions on how and w
hen to recognise an impairment loss.
ved.
2 Application and scop
e
2.1 IAS 32 Financial Instruments:
Presentation
2.1.1 Application
 Classification of financial instruments bet
ween:
 financial assets;
 financial liabilities; and
 equity instruments.
 Presentation and offset of financial instrume
nts and the related interest,
dividends, losses and gains.
2.1.2 Scope

financial instruments except for financial in
struments that are dealt with by
 interests in subsidiaries, associates, and join
t arrangements
accounted for under IFRS 10 and IAS 28 re
spectively;

contracts for contingent consideration in a b
usiness combination
under IFRS 3 (only applies to the acquirer);

employers’ rights and obligations under emp
loyee benefit plans (IAS 19 applies);

financial instruments, contracts and obligati
ons under share-based payment
transactions to which IFRS 2 applies (unless
relating to treasury shares).
2.2 IFRS 7 Financial Instruments:
Disclosure
2.2.1 Application
 IFRS 7 applies to the disclosure of:

 the use of financial instruments and the busi
 ness purpose they serve; and
the associated risks and management’s polic
ies for controlling those risks.
2.2.2 Scope

instruments, both recognised and unrecognis
ed, except for financial instruments that
2.3 IFRS 9 Financial Instrument
s

IFRS 9 applies to the recognition and dereco
gnition of all financial assets and
financial liabilities within its scope. It also d
eals with impairment of certain
financial assets and the criteria for hedge acc
ounting.
ved.
3 Terminology
3.1 From IAS 32

A financial asset is any asset that is:
 cash;
 a contractual right to receive cash or another
financial asset from
another entity;

a contractual right to exchange financial inst
ruments with another
entity under conditions that are potentially f
avourable;

an equity instrument of another entity; or
 certain contracts that will (or may) be settled
in the entity’s own equity
instruments.
 A financial liability
that is a contractual obli
ny liability gation:
 to deliver cash or another financial asset to
another entity;
 to exchange financial instruments with anot
her entity under
conditions that are potentially unfavourable
; or
 certain contracts that will (or may) be settle
d in the entity’s own
equity instruments.
Commentary
Physical assets, prepaid expenses, liabilities that
are not contractual in
nature (e.g. taxes), right-of-use assets, and contra
ctual rights and obligations
relating to non-financial assets that are not settle
d in the same manner as a
financial instrument are not financial instruments.
Preference shares that provide for mandatory red
emption by the issuer, or
that give the holder the right to redeem the share
, meet the definition of
liabilities and are classified as such even though,
legally, they may be equity.

An t is any contract that evidences a residual int
quity erest in the
instr assets of an entity after deducting all of its li
umen abilities.

Fair value is the price that would be receive
d to sell an asset or paid to transfer a
liability in an orderly transaction between m
arket participants at the measurement
date. (IFRS 13).
3.2 Executory contracts

An executory contract is a contract in which
the terms are set to be fulfilled at
a later date. Both sides must fulfil their obli
gation before a contract is fully
executed.
Contracts to buy and sell a non-financial ite
 m that can be settled net in cash
are not financial instruments if the contract s
atisfies normal sale and purchase
requirements of the two parties. They are ex
ecutory contracts.
ved.
Some executory contracts may be settled net

in cash. That is, the value of the
item given up is matched against the value o
f the item to be received and the
holder of the net asset position receives the n
et amount.
Illustration 1 – Executory contract
BA agrees to exchange 1 million litres of fuel oil fo
r 750,000 litres of diesel with DT in
three months’ time. The value of the initial contrac
t is $nil as 1 million litres of fuel oil
has the same value as 750,000 litres of diesel. BA i
ntends to settle the contract net in
three months. This is an executory contract. As th
e price of fuel oil fluctuates against
the price of diesel, BA will recognise either a net as
set or net liability position.
BA has also entered into a forward contract to buy
500,000 litres of diesel at a
specified price on a specified date. BA will not tak
e delivery of the diesel. This
contract will give rise to a financial instrument and
BA must recognise, as a financial
liability, the obligation to deliver cash on the comm
itment date.
3.2 From IFRS 9
3.2.1 Derivatives
 A derivative is a financial instrument:
 whose value changes in response to the cha
nge in a specified
interest rate, financial instrument price, com
modity price, foreign
exchange rate, index of prices or rates, credi
t rating or credit index,
or other variable (sometimes called the “und
erlying”);
 that requires little or no initial net investm
ent relative to other
types of contracts that would be expected to
have a similar response
to changes in market conditions; and

that is settled at a future date.
 Amortised cost of a financial asset or finan
cial liability is:
 the amount at which it was measured at initi
al recognition;

principal repayments;
 the cumulative amortisation of any differenc
e between that initial
amount and the maturity amount; and
minus
 any write-down (directly or through the use
of an allowance
account) for impairment or irrecoverability.

The effective interest method is used to calc
ulate the amortised cost of a
financial asset or a financial liability, as well
as the allocation and recognition
of the interest revenue or expense in profit o
r loss over the relevant period.
ved.
The effective interest rate is the rate that dis
 counts the estimated future cash
payments or receipts over the expected usefu
l life of the financial instrument
to the gross carrying amount of the financial
asset (or to the amortised cost of
the financial liability). The computation incl
udes all cash flows (e.g. fees,
transaction costs, premiums or discounts) be
tween the parties to the contract.
Commentary
The effective interest rate is sometimes called the
“level yield-to-maturity” and is
the internal rate of return of the financial asset (
or liability) for that period.
 Transaction costs are incremental costs that
are directly attributable to the
acquisition, issue or disposal of a financial a
sset (or financial liability).
Commentary
An incremental cost is one that would not have b
een incurred if the financial
instrument had not been acquired, issued or disp
osed of (e.g. fees and commissions
paid to agents). Transaction costs do not include
debt premiums or discounts,
financing costs or internal administrative or holdi
ng costs.
Illustration 2 – Amortised cost using the
effective interest rate method
A company issues a $100,000 zero coupon bond re
deemable in 5 years at $150,000.
The internal rate of return (the yield) on these flows
is 8.45%. This should be used to
allocate the expense.
Period Opening balancInterest @ Closing

e 8.45% balance
1
100,000 8,450 108,450
2 108,450 9,164 117,614
3 117,614 9,938 127,552
4 127,552 10,778 138,330
5 138,330 11,689 150,019
This s
hould be 150,000.
due to rounding
Commentary
Definitions relating to hedging are given later in
this session.
ved.
4 Presentation (IAS 32)
4.1 Liabilities and equity

On issue, financial instruments should be cla
ssified as liabilities or equity in
accordance with the substance of the contrac
tual arrangement on initial recognition.

Some financial instruments may take the leg
al form of equity, but are in
substance liabilities.
Illustration 3 – Preference shares
Redeemable preference shares are not classified as
equity under IAS 32 as there is a
contractual obligation to transfer financial assets (e.
g. cash) to the holder of the shares.
They are therefore a financial liability.
If such shares are redeemable at the option of the is
suer, they would not meet the
definition of a financial liability as there is no prese
nt obligation to transfer a financial
asset to the holder of the shares. When the issuer b
ecomes obliged to redeem the
shares, they become a financial liability and will th
en be transferred out of equity.
For non-redeemable preference shares, the substanc
e of the contract needs to be
examined. For example, if distributions to the hold
ers of the instrument are at the
discretion of the issuer, the shares are equity instru
ments.
4.2 Settlement in own equity inst
ruments

The distinction between an equity instrument
and a financial liability can, in some cases,
be “blurred”. Special care must be taken wh
en classifying certain equity instruments to
ensure faithful representation of transactions
that have occurred in the period.
Commentary
Key accounting ratios, such as gearing and ROE,
can be affected if the
instrument has not been classified correctly.
 A contract is not an equity instrument solely
because it may result in the
receipt or delivery of the entity’s own equity
instruments.

A finan ility
cial liab will arise when:
 there is a contractual obligation to deliver ca
sh or another financial
asset, to exchange financial assets or financi
al liabilities, under
conditions that are potentially unfavourable
to the issuer;
 there is a non-derivative contract to deliver,
or be required to
deliver, a variable number of own equity ins
truments;
 there is a derivative that will or may be settl
ed other than by issuing
a fixed number of own equity instruments.
ved.
 An equity instrument will arise when:
 there is a non-derivative contract to deliver,
or be required to
 there is a derivative that will or may be settl
ed by issuing a fixed
number of own equity instruments.
Illustration 4 – Settlement in own equity i
nstruments
(a) A company enters into a contract to deliver 1
,000 of its own ordinary shares
to a third party in settlement of an obligation.

As the number of shares is fixed in the contra
ct to meet the obligation, it is an
equity instrument. There is no obligation to t
ransfer cash, another financial
asset or an equivalent value.
(b) The same company enters into another contr
act that requires it to settle a
contractual obligation using its own shares in
an amount that equals the
contractual obligation.
In this case the number of shares to be issued
will vary depending on, for
example, the market price of the shares at the
date of the contract or
settlement. If the contract was agreed at a di
fferent date, a different number
of shares may be issued. Although cash will
not be paid, the equivalent
value in shares will be transferred. The contr
act is a financial liability.
(c) Company G has an option contract to buy go
ld. If exercised, it will be
settled, on a net basis, in the company’s shar
es based on the share price at the
date of settlement.
As the company will deliver as many of its own sha
res (i.e. variable) as are
equal to the value of the option contract, the contra
ct is a financial asset or a
financial liability.
This will be so even if the amount to be paid was fi
xed or based on the value
of the gold at the date of exercising the option. In b
oth cases the number of
shares issued would be variable.
4.3 Offset

Finan sets and liabilities must be offset where the
cial re is:
 a legal right of offset; and
 intention to settle on a net basis (or to realis
e the asset and settle the
liability simultaneously).
Commentary
Offset might be of trade receivables and payables
, or of accounts in debit and
credit at a bank.
ved.
4.4 Compound instruments
4.4.1
Presentation
 Financial instruments thatand an equity eleme
ain both a liability nt are
classified into separate compo
nent parts.
Commentary
The economic effect of issuing such an instrument
is substantially the same as
issuing simultaneously a debt instrument with an
early settlement provision
and warrants to purchase ordinary shares.
 As an example, convertible bonds are primar
y financial liabilities of the issuer which
grant an option to the holder to convert them
into equity instruments in the future.
Such bonds consist of:
 the obligation to repay the bonds, which sho
 uld be presented as a liability; and
the option to convert, which should be prese
nted in equity.
4.4.2 Carrying amounts
 The liability is initially measuring by discou
nting the future cash flows to their
present values. The discount rate to be used
is the effective interest rate of the
instrument (i.e. a market rate).

This effective interest rate will be higher tha
n the coupon rate of the
instrument. (The coupon rate is the rate appl
ied to the nominal value of the
bond that determined the cash interest paid.)
This is because the bond holders
are prepared to accept lower cash interest for
the benefit of the option to
convert the debt in the future.
 The equity component is the residual amoun
t after deduction of the more easily
measurable debt component from the value
of the instrument as a whole.
Commentary
The liability is measured by discounting the strea
m of future payments at the
prevailing market rate for a similar liability with
out the associated equity component.
Worked example 1
Tetany issues 2,000 convertible, $1,000 bonds at pa
r on 1 January 2017.
Interest is payable annually in arrears at a nominal i
nterest rate of 6%.
The prevailing market rate of interest at the date of
issue of the bond was 9%.
The bond is redeemable 31 December 2019.
Required:
Calculate the amounts at which the bond will be
included in the financial
statements at initial recognition, and the amount
of the liability at 31 December
2017.
ved.
Worked solution 1
$
Present value of the principal repayable
in 3 years’ time
$2,000,000 × 0.772 (3 year, 9% discou 1,544,000
nt factor)
Present value of the interest stream 303,720
$120,000 × 2.531 (3 year, cumulative,
9% discount factor)
Total liability component 1,847,72
Equity component (taken as a 0
balancing figure)
Proceeds 2,0
of the iss 00,
ue 00
0
$
Liability at 1 January 2017 1,847,720
Interest @ 9% on initial liability (cha 166,295
(120,000)
rge to profit or loss)
____________
C _
a
s
h

p
a
i
d

Liability at 31 D 1,89
ecember 2017 4,01
5
Commentary
1
A simple discount factor
where r is the discount rat
r
s e.
A cumulative discount factor is the sum of simple
discount factors.
On 31 December 2019 the value of the liability w
ill be $2,000,000, the redemption amount.
Activity 1
On 1 April 2017 Deltoid issued a $3 million 6% co
nvertible loan note at par. The loan
note is redeemable at a premium of 10% on 31 Mar
ch 2021 or it may be converted into
ordinary shares on the basis of 50 shares for each $
100 of loan note at the option of the
holder. The interest (coupon) rate for an equivalent
loan note without the conversion
rights would have been 10%. In the draft financial
statements Deltoid has paid and
charged interest of $180,000 and shown the loan no
te at $3 million in the statement of
financial position.
The present value of $1 receivable at the end of eac
h year, based on discount rates of
6% and 10% can be taken as:
6% 10%
0·94 0·91
End of year1
0·89 0·83
2 0·75
3 0·84 0·68
0·79
Required:
Calculate the amounts at which the bond will be
included in the financial
statements of Deltoid as at 31 March 2018.
ved.
Proforma solution
$
Present value of the principal repayable in 4 years’
time
Present value of the interest stream
_____________
Total liability component
Equity component (take
n as a balancing figure)
______
______
_
Pro
cee _
ds o
f th
e is
sue
___
$
Liabil
ity at
1 Apr
il 201
7
Interest @ 10% on initial liability
Cash paid
_____________
Liability
at 31 Ma
_
rch 2018 _
_
_
_
_
_
_
_
_
_
_
_

4.5 Treasury shares

Own equity instruments acquired (“treasury
shares”) are deducted from
equity.
 No gain or loss is recognised in profit or loss
on the purchase, sale, issue or
cancellation of treasury shares.
 Treasury shares may be acquired and held b
y the entity or by other members
of the consolidated group.
Commentary
If treasury shares are acquired from related parti
es IAS 24 applies.
 Consideration paid or received is recognise
d directly in equity.

statement of financial position or in the note
s, in accordance with IAS 1.
©2017 Becker E
ducational Deve
lopment Corp.
All rights reserv
ed.
2012
5 Recognition

A financial asset (or liability) is recognised i
n the statement of financial position when, a
nd
only when, the entity becomes a party to the
contractual provisions of an instrument.
Commentary
As a consequence of this rule, all contractual rig
hts or obligations under derivatives must
be recognised in the statement of financial positio
n as assets or liabilities.
 On initial recognition, a financial asset must
be classified as either:
 fair value through profit or loss;
 fair value through other comprehensive in
 come; or
amortised cost.
5.2 Examples

A forward contract (i.e. a commitment to pu
rchase or sell a specified financial instrument
or commodity on a future date at a specified
price) is recognised as an asset or liability on
the commitment date, not the closing date on
which the exchange actually takes place.
 Financial options are recognised as assets or
liabilities when the holder or writer becomes
a party to the contract.

Planned future transactions, no matter how
likely, are not assets and liabilities. At the
financial reporting date, there is no contract r
equiring future receipt or delivery of assets
arising out of the future transactions.
6 Financial assets
6.1 Initial measurement

On initial recognition, financial assets (exce
pt trade receivables) are
measured at fair value. If the financial asset
is not classified as fair value
through profit or loss, any directly attributab
le transaction costs are adjusted
against the fair value.
Illustration 5 – Transaction costs
Nanite purchases a financial asset for $1,000 which
is classified as a financial asset at
fair value through other comprehensive income. Tr
ansaction costs of $20 were
incurred on the purchase.
The asset is initially measured at $1,020.
If the asset had been classified as fair value through
profit or loss it would be measured
at $1,000 and the $20 would be expensed to profit
or loss immediately.
ved.
Trade receivables, which do not have a majo

r financing element, are
measured at their transaction price in accord
ance with IFRS 15. This will
generally mean that the transaction price wil
l be equivalent to fair value.
Commentary
That is, the amount of consideration expected to
be received from a customer
in exchange for the transfer of promised goods or
services.
6.2 Subsequent measurement

Once recognised, a financial asset is subseq
uently measured at either:
 Amortised cost;
 Fair value through other comprehensive inc
 ome; or
Fair value through profit or loss.
 Classification requires consideration of:
 the entity’s business model. This refers to
how the financial assets
are managed to generate cash flows. (To co
llect contractual cash
flows (i.e. interest and principal repayments
), to sell financial assets
or both?); and
 the contractual cash flow characteristics of t
he financial asset.
Key point
 An equity instrument purchased can never be
classified at amortised cost.
6.2.1 Amortised cost
A financial asset is subsequently measured at amor
tised cost if it meets two
conditions:
(1) The business model is to hold financial asset
s to collect contractual cash
flows; and
(2) The contractual terms give rise to cash flows
on specified dates which are
solely payments of principal and interest.
Commentary
These conditions capture simple debt instruments
that are intended to be held
for the long term, maybe until maturity.
ved.
Illustration 6 – Amortised cost
Titan purchased a debt instrument for $1,000. The
instrument pays interest of $60
annually and had 10 years to maturity when purcha
sed. Titan intends to hold the asset
to collect the contractual cash flows and the instru
ment was classified as a financial
asset at amortised cost.
Nine years have passed and Titan is suffering a liqu
idity crisis and needs to sell the
asset to raise funds.
The sale was not expected on initial classification a
nd does not affect the classification
(i.e. there is no retrospective reclassification).
6.2.2 Fair value through other comprehen
sive income
A financial asset that is a debt instrument is measur
ed at fair value through other
comprehensive income if it meets two conditions:
(1) The business model is to collect contractual
cash flows and sell financial
assets; and
(2) The contractual terms give rise to cash flows
on specified dates which are
solely payments of principal and interest.
Commentary
There is no commitment to keep the asset until m
aturity. Cash may be
realised by selling the asset at any time. This cat
egory also captures debt
instruments when there is no intention to hold unt
il maturity.
Illustration 7 – Business model
Intent anticipates the purchase of a large property i
n eight years’ time. It invests cash
surpluses in short and long-term financial assets.
Many of the financial assets
purchased have a maturity in excess of eight years.
Intent holds the financial assets for their contractual
cash flows but will sell them and
re-invest the cash for a higher return as and when a
n opportunity arises.
The objective of the business model is achieved by
collecting contractual cash flows
and selling the financial assets. Intent’s decisions t
o hold or sell aim to maximise
returns from the portfolio of financial assets.

The asset is measured at fair value in the stat
ement of financial position and
interest income, based on the amortised cost
of the asset, is recognised in the
statement of profit or loss. Any change in fa
ir value, after allowing for
impairment, is recognised in other comprehe
nsive income.
Commentary
See s.7 for details of accounting for the impairme
nt of financial assets.
ved.
6.2.3 Fair value through profit or loss
 All other financial assets are measured at fai
r value through profit or loss
with one possible exception:
On initial recognition, an entity may elect to desig
nate an equity instrument
This election is irrevocable.
Also, any financial asset may be designated

as “at fair value through profit or
loss” in order to eliminate an accounting mis
match (i.e. where a linked
financial liability is measured at fair value th
rough profit or loss).
Commentary
This so-called “fair value option” is also irrevoc
able.
 Once a financial asset is classified at fair val
ue it will be measured at each
reporting at fair value, in accordance with IF
RS 13.
 Changes in fair value will either be recognis
ed in profit or loss or other comprehensive
income, depending on the classification.
6.2.4 Classification and measurement
summary
The diagram below summarises the application of t
he classification and measurement
model for debt instruments as financial assets (as d
escribed above):
No
Contractual cash flows are
solely principal and interest?
Yes
No
Held to collect contra Held to collect contra
ctual ctual
cash flows only? cash flows and for s
ale?
Yes No Yes
Fair value opti Fair value opti
on? on?
No
Y
es
Yes No
Amort Fair Fair value th

ised valu rough other
e thr
cost ough comprehens
ive income
profi
t or l
oss
Commentary
The above diagram deals only with debt instrume
nts. All equity instruments will be
classified at fair value through profit or loss unle
ss they are held for the long term and
have been designated as at fair value through oth
er comprehensive income.
ved.
6.3 Amortised cost

Measuring a financial asset at amortised cost
means that interest revenue will
be calculated using the effective interest met
hod:
 The credit to profit or loss is based on the ef
fective interest rate;
 The cash flow is based on the instrument’s c
oupon (nominal) rate
of interest.
Commentary
For many instruments the two rates may be the s
ame.
 Any difference between the interest credited
to profit or loss and the cash
received adjusts the value of the financial as
set.
6.4 Gains and losses

Interest income is recognised in profit or lo
ss using the effective interest rate.
 Dividend income is recognised in profit or l
oss when the right to the
dividend has been established.
 Gains and losses on financial assets measure
d at amortised cost are
 Generally, gains and losses on financial asse
ts that are measured at fair value
are recognised in profit or loss with the foll
owing exceptions:
 If it is part of a hedging relationship;
 If it is an equity investment measured at fai
r value through other
comprehensive income;
Commentary
reclassified on derecognition (but can be transfer
red to retained earnings).
 Gains and losses on debt instruments measu
red at fair value
through other comprehensive income are re
cognised as follows:
 impairment gains and losses and foreign exchan
ge gains and
losses are recognised in profit or loss; and
 changes due to the movement in fair value of th
e instrument
are recognised in other comprehensive income.
Commentary
These fair value changes are reclassified through
profit or loss on derecognition.
ved.
Illustration 8 – Accounting for gains and l
osses
Tinny purchased a debt instrument at its fair value,
$1,000. It was classified as at fair
value through other comprehensive income because
the business model is to collect
contractual cash flows and sell financial assets.
The instrument had five years to maturity and a con
tractual par value of $1,250. It
pays fixed interest of 4.7% and its effective interest
rate is 10%.
At the end of the first year the fair value of the instr
ument is $1,020. Tinny has
calculated the impairment loss on the asset to be $8
.
Dr Cash – interest received ($1,250
4.7%) $59
Dr Financial asset (increase in fair $20
lue) $8
Dr Profit or loss – impairment (as $13
en)
Dr Other comprehensive income $100
value change)
Cr Profit or loss – interest income
$1,000 × 10%)
The change in fair value recognised in other compr
ehensive income (in this case a
balancing loss of $13) will be reclassified through
profit or loss on derecognition.
6.5 Reclassification

If the business model for managing financial
assets is changed, all affected financial
assets must be reclassified prospectively, fr
om the date of the change.

Amounts previously recognised based on th
e financial assets original
classification are not restated.
6.6 Embedded derivatives

be stand-alone or
combined (i.e. made up of more than one
component). An example a combined (or hy
brid) financial instrument is a convertible
bond. Its components include the right to re
payment of the principal amount and the
option to convert. An option is an example o
f a derivative. Although many options are
stand-alone, the option in a convertible bond
is “embedded” (in the bond).
 An embedded derivative is therefore a comp
onent of a combined instrument that includes
a non-derivative host contract.

The effect of an embedded derivative is that
some of the cash flows of the combined
instrument will vary in a manner that is simil
ar to that of a stand-alone derivative.

A derivative that is attached to a financial ins
trument but can be transferred separately
from that instrument (e.g. a warrant) is not a
n embedded derivative, but a separate
financial instrument.
 If the instrument contains a host contract that
is a financial instrument (within the scope
of IFRS 9) then the whole contract is accoun
ted for in accordance with at fair value
through profit or loss and does not need to b
e separated.
Commentary
A purchased convertible instrument would be an
embedded derivative that is not separated
because the host instrument (the debt asset) falls
within the scope of IFRS 9. If the host
contract is not a financial instrument the embedd
ed contract is accounted for separately.
ved.
Illustration 9 – Embedded derivative
A company with $ as its functional currency buys r
aw materials for use in production
from a UK company that has £ as its functional cur
rency. The transaction is
denominated in €. As this is not the functional curr
ency of either party to the
transaction an embedded derivative has been includ
ed in the purchase contract.
There are now two elements to the contract:
(1)
(2) Contract to buy/sell goods; and
Movement on the $/€ and £/€ exchange rat
es.
The contract to buy/sell goods is the host contract.
The movement in exchange rates is
the embedded derivative.
7 Impairment
7.1 Terminology

Past due – A financial asset is past due
a
en the debtor has failed to make
payment that was contractually due.
 Impairment gain or loss – Gains or losses r
ecognised in profit or loss that
arise from the impairment requirements of I
FRS 9.

Credit loss – The present value of the differ
ence between all contractual cash
flows due to be received and those expected
to be received (i.e. all cash
shortfalls).
Commentary
Discounted at the original effective interest rate.
 Lifetime expected credit losses – Losses th
at result from all possible default
events over the expected life of a financial in
strument.
 Loss allowance – The allowance for expect
ed credit losses on:
 financial assets measured at amortised cost
or fair value through
other comprehensive income;
 lease receivables;
 contract assets (under IFRS 15), loan comm
itments and financial
guarantee contracts.
ved.
7.2 Loss allowance

Financial assets measured at amortised cost
and financial assets measured at
fair value through other comprehensive inco
me according to the business
model are subject to impairment testing.
 A loss allowance for any expected credit loss
es must be recognised in profit or loss or
other comprehensive income, depending on t
he classification of the asset.
 The loss allowance is measured at each rep
orting date.
Illustration 10 – Recognition of expected
credit losses
As at 31 December 2016 Daimler had recognised a
loss allowance on its trade
receivables of $10,200.
At 31 December 2017 the loss allowance has been r
eassessed and is now measured at
$8,700.
Dr Loss all
owance $1,
Cr Profit 50 $1,500
or loss 0
 The amount of the loss allowance depends o
n whether or not the instrument’s
If significant, the loss allowance is the amou

nt of the lifetime expected credit
losses;
 If not significant, the loss allowance is 12-
month expected credit
losses.
Commentary
A credit loss can arise even if all cash flows due
are expected to be received
in full; if receipts are expected to be late the exp
ected present value will fall.
 Practical methods may be used to measure e
xpected credit losses as long as
they are consistent with the principles prescr
ibed by the standard.
Illustration 11 – Expected credit losses
Nette purchased a debt instrument for $2,000. Nett
e’s business model is to hold
financial assets for contractual cash flows and sell t
hem when conditions are
favourable. The asset has a coupon rate of 5% whi
ch is also the effective interest rate.
At the end of the first year the fair value of the asse
t has fallen to $1,920; part of the
fall in value is due to 12-month expected credit loss
es on the asset of $60.
Of the fall in value $60 will be expensed to profit o
r loss as an impairment loss and
$20 will be debited to other comprehensive income
.
ved.
7.3 Credit risk

The credit risk associated with a financial as
set must be assessed at each
reporting date:
Commentary
Comparison is with the risk of default assessed o
n initial recognition.
 If it has increased significantly the credit los
s is measured based on
the credit losses expected over the life of the
asset.

If it has not increased significantly the credit
loss is measured based
on the 12-month expected credit losses.
Illustration 12 – Expected credit losses
Magic has a portfolio of loan assets spread through
out a number of countries.
One group of loan assets is in a country where a ne
w government has recently been
elected. This government has stated that controls w
ill be introduced in respect of loans
from foreign companies; they will only be repaid if
very strict criteria are met.
Previously Magic had recognised impairment losse
s based on 12-month expected
credit losses.
Magic identifies that there has been a significant in
crease in the risk of default and
therefore measures the expected credit losses for th
e life of the loan asset, for this
group.
The loss allowance for all other loan assets will con
tinue to be measured based on the
12-month expected credit losses.
 The probability of a significant increase in c
redit risk will be higher for assets
with a low credit risk on initial recognition t
han for those with a high credit
risk on initial recognition.
 Factors that could significantly increase cre
dit risk include:
 An actual or forecast deterioration in the eco
nomic environment which is
expected to have a negative effect on the de
btor’s ability to generate cash
flows.
 The debtor is close to breaching covenants
which may
 A decrease in the trading price of the debtor
’s bonds and/or
significant increases in credit risk on the de
btor’s other bonds.

The fair value of an asset has been below its
amortised cost for
some time.

A reassessment of the risk of loans made.

An actual or expected decline in the debtor’
s operating results.
ved.
There is a rebuttable presumption that any as

set that is more than 30 days past
due is an indicator that lifetime expected cre
dit losses should be recognised.
Commentary
This presumption can only rebutted if reasonable
and supportable
information demonstrates that the credit risk is n
ot significantly increased.
7.4
Trade receivables

assets resulting from transactions under IFR
S 15 Revenue from Contracts
with Customers) is allowed. The loss allow
ance is measured as the lifetime
expected credit losses.

A provision matrix is a practical method of
calculating expected credit
losses on trade receivables. It applies percen
tages (using appropriately
adjusted historic experience) to trade receiva
ble categories based on the
number of days past due. For example, 1% i
f not past due, 2% if less than 30
days past due, 5% if more than 30 but less th
an 90, etc.
Illustration 13 – Provision matrix
Antenna has receivables of $1 million analysed as f
ollows:

Balance Default Expected
outstandin risk credit loss
g % $
Current $ 0.25 815
1-30 days past due 326,000 1.3 5,551
31-60 days past due 427,000 4,752
More than 60 days 2.4 5,145
198,000 10.5 –––––––
st due 16,263
49,000
Loss allo –––––––
wance
8 Financial liabilities (IF
RS 9)

A financial liability is recognised only when
an entity becomes a party to the
contr actual provisions of the instrument.
 The liability, if classified at amortised cost, i
s initially recognised at fair value
less any directly attributable transaction cost
s.
 If classified at fair value through profit or lo
ss any relevant transaction costs
are charged immediately to profit or loss.
8.2 Subsequent measurement

the effective interest rate method (see Illu
stration 2).
ved.
 Groups of financial liabilities that are not me
asured at amortised cost include:

those designated at fair value through profit
or loss (including
derivatives) – measured at fair value;
Commentary
The designation of a financial liability at fair val
ue through profit or loss on
initial recognition is irrevocable.
 financial guarantee contract; and
 commitments to provide a loan at below-
market interest rate –
measured at the higher of the amount deter
mined under IAS 37 and
the initial amount recognised less any cumul
ative amortisation.
9 Derecognition
9.1 Financial assets
9.1.1
Basic derecognition criteria
 A financial asset (or a part of it) must be der
ecognised when, and only when:
 the contractual rights to the cash flows from
 the financial asset expire; or
the financial asset is transferred and the tran
sfer qualifies for derecognition.
Commentary
In many cases derecognition of a financial asset i
s straight forward – if there are no longer
any contractual rights, the asset is derecognised.
If contractual rights remain, IFRS 9
requires three further steps to be considered (i.e.
transfer, risks and rewards, control).
9.1.2 Transfer of a financial asset
 A financial asset is transferre
contractual rights to r
d if, and only if, the eceive
the cash flows are either:
 given to a third party; or
 retained, but a contractual obligation to pay
the cash to a third party
is taken on.
9.1.3 Transfer of risks and rewards of o
wnership

When a transfer takes place, the risks and re
wards of ownership must be
reconsidered.
 If substantially all the risks and rewards of o
wnership of the financial asset
have been transferred, the financial asset is d
erecognised.
 neither transfers nor r
etains substantially all the risks and
rewards of ownership, the entity determines
whether it has retained control.
ved.
9.1.4 Control
 If control has not been retained, the financia
l asset is derecognised.
 If the third party is able to use the asset as if
it owned it (e.g. sell the asset without
attaching conditions such as a repurchase op
tion) the entity has not retained control.
 In all other cases, the entity has retained co
ntrol.
Illustration 14 – Control
(a) As part of a contract, Enigma is required to t
ransfer to Brevity a financial
asset comprising 5,000 shares in a listed entit
y. Under the terms of the
contract, Brevity is required to return the sa
me number of shares to Enigma
on demand.
As the shares are listed and are therefore freely trad
ed in an active market,
Brevity can sell the shares when received and repur
chase 5,000 shares when
required to return them to Enigma.
Enigma should derecognise the shares when transfe
rred to Brevity as it has
lost control.
(b) The same situation, except that the “shares” t
ransferred are a rare collection
of shares issued by a Russian railroad entity
in the late 1800s.
In this case, the shares are not freely available on a
n active market and if
sold, could not be re-purchased (without attaching
a repurchase option).
Control has not been passed and the financial asset
is not derecognised.
Where a financial asset is transferred to anot

her entity but control has not been lost,
the transferor accounts for the transaction as
a collateralised borrowing.
 If control passes the asset is treated as sold
:
Cr Financial asset
See s.9.1.5 for treatment of any profit or loss on
derecognition.

If control does not pass, the asset has not be
en sold but used as
collate ral (security) for borrowing:
Cr
9.1.5 Profit or loss on derecognition
 On derecognition, the gain or loss included i
n profit or loss for the period is
the difference between:
 the carrying amount of an asset (or portion o
f an asset) transferred
to another party; and

the consideration received, adjusted for any
new asset received (or
new liability assumed).
ved.
Illustration 15 – Factoring of receivables
Yeti has receivables of $1 million which it sells to
a factor for $940,000.
If the debtors fail to pay, or have not paid within th
ree months of the sale, the factor
can return the debts to Yeti.
As the receivables have been sold “with recourse” t
hey cannot be derecognised.
Instead, a current liability loan of $940,000 is recog
nised, with $60,000 finance costs.
If the receivables had been sold “without recourse”
they would have been
derecognised and $60,000 recognised as an operati
ng cost.
9.2 Financial liabilities

is removed from the stat
ement of financial position when,
and only when, it is extinguished (i.e. when t
he obligation specified in the
contract is discharged, cancelled, or expires)
.
 This condition is met when either:
 settlement of the debt is made by the party o
wing the debt, normally
by cash, other financial assets, goods, or ser
vices; or
 the party obliged to settle the contract is leg
ally released from
primary responsibility for their liability (or
part thereof) either by
process of law or by the party to whom the
obligation is owed.
Commentary
The fact that a guarantee has been given by the
party owing the debt does not
necessarily mean that this condition is not met.
 The difference between:
 the carrying amount of a liability (or portion
) extinguished or transferred
to another party (including related unamortis
ed costs); and
 the amount paid for it (including any non-
cash assets transferred or
liabilities assumed),

should be included in profit or loss for the
period.
ved.
10 Hedging
10.1 Economic hedges

Many large companies enter into economic
hedges to reduce or eliminate
their exposures to economic risks such as int
erest rate risk, foreign exchange
risk and credit risk.
 Economic hedges can be accounted for in t
wo ways:
(1)
recognise financial assets and financial liabil
ities in accordance with the normal
accounting rules of IFRS 9; or
(2) apply hedge accounting in accordance wit
h IFRS 9.
10.2
Objective of hedge accounti
ng

Most businesses are exposed to risks that co
uld affect profit or loss or other
comprehensive income. Hedging is one of t
he strategies that management
may choose to adopt to reduce exposure to ri
sk.

IFRS 9 allows an economic hedge to be acco
unted for using hedge
accounting, which eliminates some of the m
ovement in value of the hedged
item or hedging instrument that would other
wise be reflected in profit or loss.
 Hedge accounting is voluntary. If hedge ac
counting is not used hedged
items and hedging instruments are accounte
d for in the same manner as other
financial asset and liabilities.
10.3
Terminology

instruments so that their change in fair value
is an offset, in whole or in part,

A hedged item is an asset, liability, firm co
mmitment, or highly probable
forecast transaction that:

exposes the entity to the risk of changes in f
air value or changes in
future cash flows; and

is designated as being hedged.

A hedging instrument is a designated derivat
ive (or, in limited circumstances,
another financial asset or liability) whose fai
r value or cash flows are expected
to offset changes in the fair value or cash flo
ws of a designated hedged item.

Hedge effectiveness is the degree to which c
hanges in the fair value or cash flows
of the hedge item that are attributable to a he
dged risk are offset by changes in the
fair value or cash flows of the hedging instru
ment.
 of the hedging instrument
and the quantity of the hedged item in terms
of their relative weighting.
ved.
10.4 Hedging instruments

All derivatives (except written options, since
the writer has accepted risk rather than
reducing risk) may be designated as hedging
instruments.
Commentary
Purchasing options involves paying a premium a
nd transferring risk to the seller;
selling (writing) options means receiving a premi
um and taking the risk.
 Non-derivative financial instruments (e.g. fo
reign currency loans) may only be
designated as a hedging instrument if classifi
ed at fair value through profit or loss.
10.5 Hedged items

A hedged item can be:
 a recognised asset or liability;

an unrecognised firm commitment; or

a highly probable forecast transaction.
 The hedged item can be:
 a single asset, liability, firm commitment, or
 forecasted transaction; or
a group of assets, liabilities, firm commitme
nts, or forecasted
transactions with similar risk characteristics.

Commentary
For hedge accounting purposes (see next) only it
ems involving a party external to the
reporting entity can be designated as hedged item
s. Hedge accounting is not applied to
transactions between entities or segments in the s
ame group (neither in consolidated
financial statements nor separate financial statem
ents).
10.6 Hedge accounting
10.6.1 Background
 Hedge accounting recognises symmetrically
the offsetting effects on profit or loss of
changes in the fair values of the hedging inst
rument and the related item being hedged.
Commentary
The hedge accounting rules do not relate to the o
ffset of any asset and liability.
ved.
10.6.2 Hedging relationships – two types
(1) Fair value hedge: a hedge of the exposure to
changes in the fair value of a recognised
asset (or liability or an identified portion of s
uch an asset or liability) that:

 is attributable to a particular risk; and
will affect reported profit or loss.
(2) Cash flow hedge: a hedge of the exposure to
variability in cash flows that:

is attributable to a particular risk associated
with a recognised asset or
liability (e.g. future interest payments on var
iable rate debt) or a highly
probable forecast transaction (e.g. an anticip
ated purchase or sale); and
 will affect reported profit or loss.
Commentary
Hedging a net investment in a foreign operation i
s not in the DipIFR syllabus.
10.6.3 Hedge Accounting Criteria
A hedge relationship qualifies for hedge accounting
if all the following criteria are met:
 The relationship consists only of eligible he
dging instrument and hedged items;
 At inception, there is a formal designation
of the relationship and the
entity’s risk management objective; and

The relationship meets all the hedge effectiv
eness requirements.
10.6.4 Hedge effectiveness
 In order to use hedge accounting a hedge m
ust be effective.

To be effective, the following criteria must
be met:

An economic relationship exists between th
e hedge item and the
hedging instrument;
 The effect of credit risk does not dominate v
alue changes in the
relationship; and

flects the actual quantity of the hedged item
The with
edge the actual quantity of the hedging instrumen
atio t.
Illustration 16 – Hedge ratio
Romeo wants to hedge 88 tonnes of wheat purchas
es with standard wheat futures
contracts. The exchange market defines each contr
act as 25 tonnes.
Romeo could therefore choose to purchase three or
four standard contracts, amounting
to either 75 or 100 tonnes. Such designation would
result in a hedge ratio of either
85% ( /88) or 114% (
Romeo should designate the hedge ratio it actually
uses. The hedge ineffectiveness
resulting from the mismatch would not result in an
accounting outcome that is
inconsistent with the purpose of hedge accounting.
ved.
10.6.5 Fair value hedges
 The gain or loss from remeasuring the hedgi
ng instrument at fair value should
be recognised immediately in profit or loss.
 The gain or loss on the hedged item attributa
ble to the hedged risk should
adjust the carrying amount of the hedged ite
m and be recognised immediately
in profit or loss.
Illustration 17 – Fair value hedge
Romeo owns inventories of 5,000 tonnes of timber
which it purchased three months ago for
$50,000. Management is concerned that the price o
f timber might fall, which would have an
effect on the selling price of the products that will u
se the timber. It has therefore entered into
a futures contract to sell the timber at an agreed pri
ce of $60,000 on 31 March 2018.
At 31 December 2017, Romeo’s year end, the fair v
alue of the timber has fallen to $48,000
and the futures price for delivery on 31 March 2018
is now $58,000. Management has
designated the timber as a hedged item and the futu
res contract as the hedging instrument and
the hedge is deemed to be effective.
If hedge accounting is not used
The futures contract will be recognised as a derivati
ve asset at a value of $2,000
(60,000 – 58,000) and the inventory will still be me
asured at cost of $50,000. The
accounting entries would be:
Dr Derivati
ve asset $2,
Cr Profit 00 $2,000
or loss 0
The gain on the futures contract is recognised imm
ediately in profit or loss but no loss
would be recognised on the value of inventory, cau
sing a mis-match.
If hedge accounting is used
The futures contract will still be recognised as a der
ivative asset of $2,000 but the
value of inventory will now be measured at fair val
ue of $48,000, so matching the gain
and loss in the profit or loss in the same period. Th
e accounting entries would be:
Dr Derivati
ve asset $2,
Cr Profit 00 $2,000
or loss 0
Dr Profit Cr Inve
or loss
ntory
$2,000 $2,000
This time both the gain and the loss affect profit
or loss in the same period; hedge
accounting has facilitated matching the upside with
the downside.
ved.
10.6.6 Cash flow hedges
 The portion of the gain or loss on the hedgin
g instrument that is determined to be
an effective hedge is recognised in other co
mprehensive income.
 The ineffective portion should be
or loss if the
orted immediately in profit
hedging instrument is a derivative.
Commentary
There is no guidance on how effectiveness and in
effectiveness should be
measured. It is up to the entity to decide. The m
ethodology must be
explained in the formal hedge documentation. Th
e methodologies can be
quite complicated in practice.
Illustration 18 – Cash flow hedge
Romeo has items of inventory whose selling price i
s based upon the fair value of their
commodity content. Romeo is concerned that the f
air value of the commodity will fall
and so reduce the cash flow on the sale of the inven
tory. The company enters into a
forward contract to sell the inventory at a fixed pric
e in the future. The cash flow from
the forecast sale of inventory is the designated hedg
e item and the forward contract is
designated as the hedging instrument. The hedge is
effective and qualifies as a cash
flow hedge.
If the fair value of the commodity falls by $600 the
n the fair value of the forward
contract will increase by $600, assuming a perfect
hedge, and create a derivative asset.
The accounting entries, if hedge accounting is not
used would be;
Dr Derivati
ve asset
Cr Profit $600
or loss
The sale proceeds will be $600 lower (or more) wh
en the inventory is sold, presumed
to be in the following period in this illustration. Th
erefore there is a mis-match in
profit.
The accounting entries, if hedge accounting is used
would be;
Dr Derivative asset
Cr Other comprehensive income 600
(then equity) 600
The $600 gain, which was included as other compr
ehensive income, will be
reclassified through profit or loss when the cash flo
w impact of the inventory affects
profit or loss (i.e. when the inventory is sold). Usin
g hedge accounting has allowed the
gain to be matched with the loss.
ved.
Worked example 2
On 30 September X contracted to buy a plane for 1
million Swiss Francs (CHF). The
spot rate on this date was 2.5 CHF = $1.
Being concerned about possible changes in the rate
X enters into a forward exchange
contract, on the same date, to buy SwFr/sell $ at a r
ate of 2.5 CHF = $1.
At the reporting date, 31 December, the spot rate w
as 2.4 CHF = $1.
The plane was purchased on 31 March when the sp
ot rate was 2.3 CHF = $1.
Required:
Show the accounting entries to reflect these tran
sactions, including the cash flow
hedge.
Worked solution 2
Note F Rese
(1)
30 September or rve
w
ar
d
31 Decemb
(2) 1 1
er
31 March (3) 18,1 18,116
16 34,
(6) 783 34
,7
83
Cash Plane – Asset
30 September
31 December

31 March 434, 434
(5) 34,78783 ,78
3 3 34,783
4
434,783 434,783
4
©2017 Becker Educational Development Corp. All rights reser
ved.
2031
Notes
(1) The spot rate (2.5) is the same as the forward
so the fair value of the forward is zero.
(2)
The fair value of forward is the difference bet
ween the spot and contracted rate, $16,667
((1 million ÷ 2.4) – (1 million ÷ 2.5)). This i
s a gain (because the exchange contract gives
more CHF to the $ than the spot rate).
(3) When the asset is purchased the value of the
forward is $34,783 ((1 million ÷2.3) – (1
million ÷ 2.5)). There is an increase of $18,1
16 on the gain already accounted for.
(4) The purchase of the plane is recorded at the
spot rate (1 million ÷ 2.3).
(5)
The actual cash flow is reduced by the value
of the forward.
(6)
This “basis adjustment” recognises that the a
sset’s real cost was actually $400,000.
Activity 2
Artright produces artefacts made from precious met
als. Its customers vary from large
multinational companies to small retail outlets and
mail order customers.
On 1 December 2016, Artright had a number of fini
shed artefacts in inventory valued
at cost $4 million (selling value $5·06 million) havi
ng a precious metal content of
200,000 ounces. The selling price of artefacts prod
uced from a precious metal is
determined substantially by the price of the metal.
The inventory value of finished
artefacts is the metal cost plus 5% for labour and de
sign costs. The selling price is
normally the spot price of the metal content plus 10
% (approximately).
Having become worried about a potential decline in
the price of the precious metal and
its effect on the selling price of inventory, manage
ment sold futures contracts for
200,000 ounces in the metal at $24 an ounce on 1
December 2016. The contracts
matured on 30 November 2017.
Management designated the futures contracts as cas
h flow hedges of the anticipated
sale of the artefacts. Historically this had proved to
be highly effective in offsetting
any changes in the selling price of the artefacts. Th
e finished artefacts were sold for
$22·8 per ounce on 30 November 2017. The costs
of establishing the hedge were
negligible.
The metal’s spot and futures prices per ounce were
as follows:
1 Decembe
24
r 2016
21
30 Novemb
er 2017
Required:
Discuss, using the principles of IFRS 9 “Financi
al Instruments”: whether the cash
flow hedge of the sale of the inventory of artefac
ts was effective and how it should
be accounted for in the financial statements for t
he year ended 30 November 2017.
ved.
11 Disclosure (IFRS 7)
11.1 Rules

The purpose of disclosure is to:
 enhance understanding of the significance o
f financial instruments
to the financial position, performance and c
ash flows;

assist in assessing the factors affecting the a
mount, timing and certainty
of future cash flows associated with those in
struments; and

provide information to assist users of financ
ial statements
Information sufficient to allow reconciliatio

n to the line items in the
statement of financial position must be prov
ided.
 The information disclosed should facilitate u
sers evaluating the significance
of financial instruments on the financial posi
tion and performance.
11.2 Assets and liabilities
Categories of financial assets and liabiliti
es
 Carrying amounts must be analysed into the
following categories:
 financial assets at fair value through profit o
r loss, showing separately:
–
those designated on initial recognition; and
–
those that must be measured at fair value;
 financial liabilities at fair value through prof
it or loss, showing separately:
– those designated on initial recognition; and
–
those that meet the definition of held for tradin
g;
 financial assets measured at amortised cost;
 financial liabilities measured at amortised cost;
 financial assets measured at fair value through o
ther comprehensive income.
 Disclosure may be in the statement of financ
ial position or in the notes.
ved.
11.3 Hedge accounting

For each category of hedge:
 a description of each type of hedge;
 a description of the designated hedging instr
uments and their fair
values at the end of the reporting period; an
d
 the nature of the risks being hedged.
Commentary
Additional IFRS 7 disclosures for cash flow hedg
es are not examinable.
 The following require separate disclosure:
 gains and losses on fair value hedges (on th
e hedging instrument;
and the hedged item);
 the ineffectiveness included in profit or loss
for cash flow hedges
and hedges of net investments in foreign op
erations.
Key points summary
Accounting for financial instruments is covered by
IAS 32, IFRS 7 and IFRS 9.
Instruments must be distinguished between equity a
nd liabilities. Convertible
instruments that are a mix of equity and liability m
ust be split; the liability is the
present value of future cash flows and the equity el
ement the balancing figure.
Financial assets are either measured at fair value or
amortised cost.
Any changes in fair value of a financial asset are ta
ken to profit or loss or other
comprehensive income (according to initial classifi
cation).
Financial assets and liabilities at amortised cost are
measured using the
instrument’s effective interest rate based on market
rates.
Financial assets measured at amortised cost and at f
air value through other
comprehensive are subject to annual impairment te
sting. Measured at each
reporting date, the loss allowance must be recognis
ed in profit or loss.
Hedging is the minimisation of risk attached to fina
ncial instruments.
Hedged items may be matched with hedging instru
ments and changes in value
offset against each other.
Hedge accounting is voluntary. If hedge accountin
g is not used hedged items and
hedging instruments are accounted for in the same
manner as other financial asset
and liabilities.
Disclosure requirements are very extensive and rela
ted mostly to risks.
ved.
Focus
 explain the definition of a financial instru
ment;
 determine the appropriate classification of a
financial instrument, including those
instruments that are “split classification” (e.
g. convertible loans);
 discuss and account for the initial and subseq
uent measurement (including the impairment
)
of financial assets and liabilities in accordanc
e with applicable financial reporting standard
s
and the finance costs associated with them;
 discuss the conditions that are required for a
financial asset or liability to be de-
recognised;
 explain the conditions that are required for h
edge accounting to be used;
 prepare financial information for hedge acco
unting purposes, including the impact of
treating hedging arrangements as fair value h
edges or cash flow hedges; and
 describe the financial instrument disclosures
required in the notes to the
Activity solutions
Solution 1
$
Present value of the principal repaya
ble in 4 years’ time
2,244,000
$3,000,000 × 1.10 × 0.68 (4 year, 10
% discount factor)
Present value of the interest stream
$180,000 × 3.17 (4 year, cumulative,
570,600
0% discount factor)
Total liability component 2,814,60
Equity component (taken as a 0
balancing figure)
Proceeds 3,0
of the iss 00,
ue 00
0
Liability at 1 April
2017 2,814
Interest @ 10% on ,600
initial liability
281,4
60
C (
a
s
h

p
a
i
d

8 ,
0
Liability at 31 2,91
March 2018 6,06
0
Commentary
On 31 March 2021 the value of the liability will
be approximately $3,300,000, the
redemption amount. The interest rate used in the
example is not exact; there is a
rounding difference (as may be the case in an ex
amination question).
ved.
Solution 2
The hedge is a cash flow hedge of the metal invent
ory. Hedge accounting must follow strict
criteria before it can be used:
 Management must identify, document and te
st the effectiveness of the hedge;
 The hedged item and instrument must be sp
ecifically identified;
 The gains and losses on the hedged item and
instrument should almost fully offset each
other over the life of the hedge;
 The hedge relationship must meet the hedge
effectiveness requirements.
One of the requirements for hedge effectiveness is t
hat there is an economic relationship between
the hedged item and the hedging instrument; which
is the case in this situation as the hedging
instrument is a derivative based on the movement i
n price of the hedged item.
Hedge effectiveness is the extent to which changes
in fair value or cash flows related to the
hedging instrument offset changes in fair value or c
ash flows associated with the hedged item.
This normally means that the value changes in resp
ect of the hedged item and hedging instrument
move in opposite directions; movement in the same
direction is rare. The change in value will
not necessarily be an exact match (i.e. a perfect hed
ge) and many hedges are effective even when
they do not match exactly. The effectiveness must
be identified at the outset of the hedge and on
an on-going basis throughout the life of the hedge.
The change in fair value of the futures contract is $
600,000 (200,000 ounces × $24 – $21) and the
change in cash flows expected from the sale of inve
ntory is $500,000 (i.e. $5·06m – (200,000 ×
$22·8)). There is no information to assess hedge ef
fectiveness at the start of the hedge but on an
on-going basis it appears to be an effective (albeit i
mperfect) hedge.
Using hedge accounting, the futures contracts woul
d be recorded at fair value when taken out on 1
December 2016 ($4·8 million). On the subsequent
settlement of the contracts, for $21 per ounce, a
gain of $600,000 would be transferred from the hed
ging reserve to profit or loss. The purpose of
hedge accounting is to ensure that gains and losses
on the hedging instrument are recognised in the
same performance statement as the gains and losses
on the hedged item. Hence the gains and
losses on the instrument will be recorded in the hed
ging reserve until the sale of the artefacts.
Statement of profit or loss (extract)
$000
Revenue – 4,560
(4,000)
artefacts ($ ––––––
22·8 × 200 560
,000) 600
Cost of sal ––––––
es 1,160
––––––
Profit on futures contracts from hedging
rve (200,000 × ($24 – $21))
ved.
Overview
Objectives

To summarise the pr
ovisions of IAS 27
Separate Financial
Statements.
 To explain the main
provisions of IFRS
10 Consolidated Fi
nancial Statements.

 To describe the discl
osure requirements
of IFRS 12 Disclosu
re of Interests in Ot
her Entities.
 Separate finan
INTRODUC
TION cial statements
IF
RS
10
PA
RE
NT
AN
D
CO
NT
RO
L
PT
IO
N
 Rationale
 Vari  Date of a
able retu cquisition or
rns disposal
DISCLOSU
 Unconsolid
RE
ated
eserved.
2101
SESSION 21 – CONCEPTUAL PRINCIPLES OF GROUP ACCOUNTING
1 Introduction
1.1 Terminology

A business combination – a transaction or other event in which the acqu
irer
obtains control of one or more businesses.
 Acquisition date – the date on the acquirer obtains control of the acquir
ee.
 Control – control over an investee arises when an investor is exposed, o
r has
rights, to variable returns from its involvement with the investee and ha
s the
ability to affect those returns through its power over the investee.
 A subsidiary – an entity that is controlled by another
(known as the parent).
entity
 A parent – an entity that controls one or more entities.
 A group – a parent and its subsidiaries.
 Separate financial statements – those presented by a parent in which in
vestments
 Consolidated financial statements – the financial statements of a group
which present the
elements and cash flows of the parent and its subsidiaries as a single eco
nomic entity.
 Non-controlling interest – the equity in a subsidiary not attributable, dir
ectly or
indirectly, to a parent.
 Goodwill – an asset which represents the future economic benefits arisin
g from
other assets acquired in a business combination that are not individually
identified
and separately recognised.
1.2 Separate financial statements (IAS 27)

Separate financial statements are those presented in addition to:
 consolidated financial statements; or
 financial statements in which investments (in associates or joint
ventures) are accounted for using the equity method (see Session 25).
 In separate financial statements, investments in subsidiaries (also associ
ates and
joint ventures) are carried at:
 cost; or
 fair value in accordance with IFRS 9.
Commentary
An investment classified as held for sale is accounted for under IFRS 5 (see
Session 29).
 Any dividends received from the investment are included in profit or los
s when the
1.3 Truth and fairness

Group accounts aim to give a true and fair view to the owners of a paren
t of what
their investments represents (i.e. control and ownership of the net assets
of
subsidiary companies).
 Rules are therefore needed to ensure that consolidation includes all entit
ies
controlled by the parent.
2 Parent and control
2.1 Inclusion in consolidated financial statements
and domestic, other than those excluded for the reasons specified in IFRS 10 (see
s.2.4).
 Control exists when the definition of control of an investee is met.
Commentary
It is the substance of the ability to control which drives the definition rather t
han
legal ownership of shares.

If on acquisition a subsidiary meets the criteria to be classified as held f
or sale, in
accordance with IFRS 5, it is accounted for at fair value less costs to se
ll.
Commentary
If a large group of subsidiaries are acquired, the parent may intend to dispos
e of unwanted
subsidiaries. These may fall within the definition of held for sale.
2.2 Power

holding more than 50% of the v
oting rights
in an investee (subsidiary). However, power can also arise through cont
ractual
arrangements, without holding a majority of voting rights.
 For example, when there is power:
 over more than half of the voting rights by virtue of an agreement with
other investors;

to govern the financial and operating policies of the entity under a statut
e
or an agreement;

to appoint or remove key management personnel (e.g. directors); or
 to cast the majority of votes at meetings of the board of directors or
equivalent governing body.
 When assessing whether control exists, the existence and effect of curre
ntly exercisable
potential ordinary shares (i.e. options or convertibles) should be conside
red.
Illustration 1
Alpha holds 40% of the voting right in Beta. It also holds share options which if
it
were to exercise them would take its share-holding in Beta to 80%.
Ignoring any other issues, it would be probable that Alpha had control over Beta
through both its current share-holding and its potential future shares. Beta shoul
d be
recognised as a subsidiary of Alpha.
Activity 1
Identify the entities to be included in the group as defined by IFRS 10, in each of
the
following situations:
(a)
A C
it through a contract with C’s owners
(b)
A
60%
B
45% Holders of another 30% equity in
C have are contractually obliged to
vote according to B’s direction
C
(c)
A
60% 60%
B D
30% 30%
C
(d)
Shareholders in common
100% 100%
B
2104
2.3 Variable returns

An investor is exposed to variable returns from the investee when there i
s potential
for variable performance by the investee.
 That is, the returns, dividends and profits, from the investee will depend
on the
performance of the subsidiary. There will be no fixed right to a specific
return.
 Clearly there is a relationship between power and returns. To have cont
rol, the
investor must have the ability to use its power to affect the returns from
the investee.
Commentary
So an investor with decision-making rights must determine if it is acting as a
principal or an agent. It will only have control if acting as a principal. An
agent
would need powers delegated to it by a controlling body.
2.4 Exclusions

In this case it is carried at fair value less costs to sell and disclosed separately.
 Previously, and still in some countries, grounds for excluding individual
subsidiaries from
consolidation have included:

 a subsidiary having sufficiently different activities from the parent;
 temporary control of a subsidiary;
 immateriality (separately or in aggregate);
 disproportionate expense or undue time and effort in obtaining informati
on required.
 Clearly management might want to exclude any subsidiary which reflect
s poorly on the
economic performance and financial position of the group (e.g. a loss-
making subsidiary).
The IASB has gradually removed all exclusions.
 Under IFRS 10 there are no exclusions from consolidation of individual
subsidiaries which
meet the control criteria.
Commentary
But see “intermediate parent” exemption (s.4.1).
2.5
Acquisition method (IFRS 3)

IFRS inations requires that all business combinations are
Busines accounted for using the acquisition method of accounting. This involv
s Comb es:
 identifying an acquirer;

determining the acquisition date;
 recognising and measuring the identifiable assets acquired, the liabilitie
s
assumed and any non-controlling interest in the acquiree; and

recognising and measuring goodwill or a gain from a “bargain purchase
”.
3 Sundry provisions of IFRS 10
3.1 Results of intra-group trading

Intra-group balances and intra-group transactions and resulting unrealise
d profits
should be eliminated in full.
3.2 Accounting year ends
3.2.1
Co-terminous year ends
 The financial statements of the parent and its subsidiaries used in the pre
paration of the
consolidated financial statements are usually drawn up to the same date.
3.2.2 Different reporting dates
 Either the subsidiary must prepare special statementsdate as the group.
the same

Or, if it is impracticable to do this, financial statements drawn up to a di
fferent end
of a reporting period may be used if:

 the difference is no greater than three months; and
adjustments are made for the effects of significant transactions or events
that
occur between those dates and the date of the parent’s financial stateme
nts.
3.3 Accounting policies

Consolidated financial statements must be prepared using uniform acco
unting
policies for similar transactions and events.
Commentary
Adjustments on consolidation will be needed if there are material differences i
n accounting
policies used in the preparation of financial statements being consolidated (se
e Session 23).
3.4 Date of acquisition or disposal

The results of operations of a subsidiary are included in the consolidated
financial
statements as from the date the parent gains control of the subsidiary.
Commentary
The date of acquisition and the date of disposal are based on when control p
asses not
necessarily the legal date of acquisition or date of disposal.
 The results of operations of a subsidiary disposed of are included in the
consolidated statement of profit or loss and other comprehensive incom
e until
the date of disposal, which is the date on which the parent’s control ceas
es.
 Group profit or loss on disposal is calculated as proceeds less net assets
of the
subsidiary including any remaining goodwill as adjusted for the valuatio
n of
non-controlling interest (see Session 24).
 Any remaining holding is measured at fair value at the disposal date, w
hich
becomes the initial cost of the remaining holding going forward.
3.5 Non-controlling interests

Non-controlling interest (i.e. equity in a subsidiary that is not attributabl
e to a
parent) is presented as a separate line item in the statement of financial
position
within equity. (See next session for more details.)
4 Exemption from preparing group acc
ounts
4.1 Rule

A parent need not present consolidated financial statements if:
 it is a wholly-owned or partially-owned subsidiary;
Commentary
As long as the other shareholders have no objection to this.
 the parent’s debt or equity instruments are not traded on a public marke
t;

the parent has not filed its financial statements with a recognised stock
market;
 the ultimate (or an intermediate) parent presents consolidated financial
statements in accordance with IFRSs.
Commentary
National rules may specify exemptions subject to certain conditions. For exa
mple, in the UK,
a parent subject to the “small company’s regime” is not obliged to prepare g
roup accounts.
4.2 Rationale

Users of the financial statements of a parent are usually concerned with,
and need to be
informed about, the financial position, results of operations and changes
in financial
position of the group as a whole.
 Consolidated financial statements present financial information about th
e group as that of a
single entity without regard for the legal boundaries of the separate legal
entities.
 A parent that is wholly-owned by another entity may not always present
consolidated
financial statements since such statements may not be required by its par
ent and the needs
of othe may be best served by the consolidated financial statements of its parent.
r users
5 Disclosure
5.1 IFRS 12 disclosures

IFRS 12 Disclosure of Interests in Other Entities requires disclosure in
respect of
 the nature of, and risks associated with, its interests; and
 the effects of those interests on its financial position, financial
performance and cash flows.
 Requirements encompass:
 significant judgement and assumptions made in determining control;
 interests in subsidiaries;
 non-controlling interest;
 the nature and extent of significant restrictions;
 the nature of associated risks;
 the consequences of changes in ownership interest, including loss of co
ntrol.
 An entity should state, for example, that although it holds less than 50%
of voting
rights it nevertheless controls it through other factors (described). Also
whether it
is acting as agent or principal.
 Information about interests in subsidiaries should:
 name each subsidiary and its place of business;

specify, with reasons, if reporting dates are different;
enable users to understand the structure of the group and the non-

controlling interest’s share in activities and cash flows.
 Disclosures about non-controlling interests include:
 the proportion of ownership and voting rights held;
 any profit or loss allocated to them during the period; and
 accumulated non-controlling interest at the beginning and end of the per
iod.
 be
statutory, contractual or regulatory. Guarantees, covenants, etc which m
ay restrict
dividends or loan repayments should also be disclosed.
 Associated risks include contractual arrangements to provide financial s
upport.
 The effect on equity attributable to owners of the parent should be prese
nted as a
schedule for changes in ownership that do not result in a loss of control.
When control is
lost the gain or loss is disclosed (and the line item(s) in which it is recog
nised).
Illustration 2
Group accounting
Subsidiaries
The financial results of subsidiaries (including structured entities, at this stage limited to the sha
re
trusts) are fully consolidated from the date on which control is transferred to the Group and are
no
longer consolidated from the date that control ceases.
Investments in subsidiaries are accounted for at cost less any accumulated impairment losses i
n the
separate Annual Financial Statements of Aspen Pharmacare Holdings Limited. None of the
investments in subsidiaries is listed.
When the end date of the reporting period of the parent is different to that of the subsidiary, the
subsidiary prepares, for consolidation purposes, additional Annual Financial Statements as of t
he
same date as the Annual Financial Statements of the parent.
the policies adopted by the Group.
Annual Financial Statements 2014
5.2 Unconsolidated structured entities

is one that has been constructed in such a way that th
e voting
rights are not the dominant factor in deciding which party controls it. It
may have
some of the following features:
 restricted activities;
 narrow and well-defined objectives;
 lack of equity finance;
 multiple contractually-linked instruments.
 An entity that controls a structured entity but does not consolidate it mu
st disclose
its interests in the unconsolidated structured entity in the notes to the co
nsolidated
 Disclosure is needed to enable users of the consolidated financial statem
ents to:
 understand the nature and extent of interests in the unconsolidated
structured entity; and
 evaluate the nature of the risks associated with the interests in the uncon
solidated
structured entity.
Key points summary
In the financial statements of a separate entity investments are accounted for at c
ost or in
accordance with IFRS 9.
Group accounts should truthfully reflect the assets and liabilities under the contr
ol of the
parent.
Control exists if an investor has the ability to exercise power to control variable r
eturns
from the investee.
Control can be achieved through voting rights or other power (e.g. of the board o
f
directors).
There are no exclusions from consolidation of individual subsidiaries which mee
t the
control criteria (IFRS 10).
A parent which is part of a larger group may be exempted from presenting group
accounts.
Group accounts are prepared using the acquisition method.
Intra-group balances, transactions and unrealised profits are eliminated on consol
idation.
Accounting policies within the group must be uniform.
Extensive disclosure requirements in IFRS 12 include the nature and extent of int
erests
and risks relating to unconsolidated structured entities.
Focus
 explain the concept of a group and the purpose of preparing consolidate
d financial
statements;
 explain and apply the definition of subsidiary companies;
 explain the need for using co-terminous year-ends and uniform accounti
ng policies when
preparing consolidated financial statements and describe how it is achiev
ed in practice.
Activity solution
Solution 1 – Entities in the group
(a)
Even though A only holds 10% of the equity in C it is highly likely that
C will be a
subsidiary due to the fact that A has contractual arrangements with C’s o
wners to
control the entity.
(b) A is the parent of B. A is also the parent of C as it has control of 75% o
f the
voting rights of C.
(c) A is the parent of B and D. A may therefore appear to control C throug
h a 60%
indirect shareholding. In which case A would be the parent. However,
A
effectively owns only a 36% interest in C. The substance of this relatio
nship
would therefore require scrutiny.
(d) There is no group in this situation as A and B fall within the ownership
of
shareholders in common which are scoped out of consolidated accounts.
A and B
however may be related parties and would have to make necessary discl
osures in
accordance with IAS 24 (see Session 31).
2110
 SESSION 22 – CONSOLIDATED STATEMENT OF FINANCIAL POSITION 
Overview
Objectives

To explain the need for group accounts.
 To introduce basic principles of acquisition accounting.
THE ISSUE
 Rule
Substance
 Goodwill
Individual company accounts
 Consolidation adjustments
CONSOLIDATED
STATEMENT OF
FINANCIAL  Post-acquisition growth in reserves
POSITION
COMPLICATIONS ADJUSTMENTS
 Mid-year acquisitions  Intra-group balances
 Non-current
asset transfers
SESSION 22 – BASIC PRINCIPLES – CONSOLIDATED STATEMENT OF FINANCIAL POSITION
1 The issue
1.1 Background

Many companies carry on part of their business through the ownership of other
companies which they control. Such companies are known as subsidiaries.
 Controlling interests in subsidiaries generally appear at cost in the statement of financial
position of the investing company. Such interests may result in the control of assets of a very
different value to the cost of investment.
 Separate financial statements of the parent cannot provide the shareholders of the parent with
a true and fair view of what their investment actually represents.
Commentary
The substance of the relationship is not reflected in the accounts.
Illustration 1
Parent Subsidiary
$ $
Investment in 80% of Subsidiary 100
Other net assets 900 1,800

–––––– ––––––
1,000 1,800
–––––– ––––––
 The investment of $100 in Parent’s accounts is, in substance, the cost of
owning assets of 80% of $1,800 in Subsidiary (i.e. $1,440).
 Parent’s shareholders cannot see this from looking at the accounts.
 The solution is to prepare group accounts to reflect the substance of
the investment.
 The group accounts required by IFRS are called consolidated
1.2 Rule
A company with a subsidiary on the last day of its reporting period (i.e. a parent must
 In practice a parent usually will prepare (and publish):
 its own statement of financial position with relevant notes; and
 a consolidated statement of financial position, statement of profit or loss and other
comprehensive income and statement of cash flows; all with relevant notes.
2 Conceptual background
2.1 Substance

Consolidation involves the replacement of cost of investment in the parent’s
accounts by “what it actually represents” namely:
 Parent’s share of the net assets of the subsidiary as at the end of the
reporting period;
AND
any remaining element of the goodwill which the parent paid for at the
date of acquistion.
 In addition to this, the reserves of the parent must be credited with the parent’s
share of the subsidiary’s post-acquisition reserves (representing the portion of
profit or loss accruing to the parent since acquisition).
Commentary
The remainder of this session will build up to an understanding of this.
2.2 Goodwill

Goodwill is the difference between the value of the business taken as a whole and
the fair value of its separate net assets.
Commentary
The idea is that when a company buys an interest in another it will pay a price that
reflects both the assets it buys and the goodwill.
It can be calculated as:
Fair value of consideration
Amount of any non-controlling interest X
Less: Fair value of net assets at acquisition X
(X)
–––
Goodwill at acquisition X
–––
the financial statements of the parent as “Investment in subsidiary”. Goodwill is
dealt with in greater depth in the next session. For the time being it is sufficient to
consider the relationship above.
Non-controlling interest can be measured in one of two ways on acquisition (s.4.4).
Illustration 2
Parent acquires a subsidiary with net assets of $800 for $1,000. A year later, at the
reporting date, the subsidiary’s net assets have increased to $1,200.
Parent’s own Consolidated accounts
accounts
COST NET ASSETS + GOODWILL
At the date of acquisition
1,000 800 + 200
The consolidated accounts will balance.
Cost 1,000 has been replaced with 800 +
200
At the reporting date
1,000 1,200 + 200
The consolidated accounts will not balance
without further adjustment; 1,000 has been
replaced with 1,200 + 200 = 1,400
The 400 increase in the subsidiary’s net assets is attributable to
profitable trading since the acquisition. This must be reflected in
the consolidated reserves for the consolidated accounts to balance.
Commentary
Any impairment of the goodwill over its life would reduce the 200.
3 Overview of the technique

The approach may be broadly represented as follows:
INDIVIDUAL COMPANY ACCOUNTS

Net assets X + X + CONSOLIDATION = X

__ __
X X
Issued capital X X
Reserves __ __
__
X X
3.1 Individual company accounts

There is no such thing as “a separate set of consolidated accounts”; the group does not
maintain a double entry accounting system.
 The individual members of the group maintain their own financial statements and at the
period end, after year-end adjustments, the individual accounts of the members of the
group are combined together to form the basis of the consolidated financial statements.
 The financial statements of the individual companies should be finalised in accordance
with IFRS before the consolidation adjustments are made.
3.2 Consolidation adjustments
Two
types
Major Intra-group
adjustments adjustments
Those that “drive” the * Intra-group balances
double entry: * Unrealised profit
* Inventory
*Goodwill
*Non-controlling interests * Non-current asset transfers
*Consolidated reserves
4 Consolidated statement of financial position
4.1 Basic principles
Commentary
This section builds to an understanding of consolidation through a series of
examples which will increase in complexity. In each case it is assumed that any
individual company adjustments have already been made.
Worked example 1
As at 31 December 2017
Parent Subsidiary
Non-current assets:
500
Net current assets 2,000 500

––––––– –––––––
Retained earnings 4,500
Parent bought 100% of Subsidiary on 31 December 2017.
Features to note:
The issued capital of the group is the issued capital of Parent. This is always the case.
The cost of investment is to disappear. It is “replaced”.
The assets and liabilities of the group are simply a line-by-line cross cast of those of
Parent and Subsidiary. Parent controls 100% of Subsidiary’s net assets. This is always
the case.
Worked solution 1
Consolidated statement of financial position
$
Non-current assets:
2,500
 Cost of investment has disappeared
Net current assets (2,000 + 500) 2,500
–––––
5,000
–––––
Issued capital 500  Issued capital of Parent
–––––
5,000
–––––
WORKINGS
(1)
Subsidiary’s net assets
End of reporting Acquisition
period
$ $
Issued capital 1,000 1,000
Retained earnings
——— ———
1,000
———
$
———
–
———
(3) Retained earnings
$
4,500
Share of Subsidiary –
———
4,500
———

This is the simplest of examples:
 Parent owns 100% of Subsidiary (so there is no non-controlling interest);
 Consolidation is at the date of acquisition;

Cost = 100% of net assets (i.e. there is no goodwill).
Commentary
The session will now proceed to relax these simplifications to build towards a
realistic example.
4.2 Goodwill

An asset that represents the future economic benefits that arise from other assets acquired in a
business combination that are not individually identified and separately recognised.
 It is the excess of the cost (i.e. fair value) of an acquisition over the acquirer’s interest in the
fair value of the identifiable net assets and liabilities acquired at the date of the exchange
transaction.
 Goodwill only arises on consolidation; goodwill is not an asset of the parent or subsidiary.
 Once recognised, goodwill must be tested annually for impairment and any fall in value
will be recognised as an expense in the consolidated profit or loss.
Commentary
This is dealt with in Session 23.
Worked example 2
At 31 December 2017
800
Investment in Subsidiary
400 200
–––––– ––––––
Retained earnings 2,500 100

–––––– ––––––
–––––– ––––––
1. Parent bought 100% of Subsidiary on the 31 December 2017.
2. Subsidiary’s reserves are $100 at the date of acquisition.
1. to 3. As before.
4. Part of the cost is goodwill. This must be separately identified as a debit (in this
case) to help replace the cost of investment.
5. Parent’s share of the post-acquisition profits of Subsidiary is included in the
consolidated retained earnings. In this case it is zero.
Worked solution 2
$
Non-current assets:
Goodwill (W2) 200
Tangible assets 1,800
Net current assets 600
–––––
2,600
–––––
Issued capital 100
Retained earnings (W3) 2,500
–––––
2,600
–––––
WORKINGS
period
$ $
Issued capital 900 900
Retained earnings 100
——— ———
1,000
———
$
———
200
———
$
Parent (as given) 2,500
100% × (100 – 100) –
———
2,500
———
4.3 Post-acquisition growth in reserves

In the period after acquisition (post-acquisition) the subsidiary will either make
profits or losses.
 The group will include its share of those post-acquisition profits or losses in the
consolidated retained earnings.
 It is therefore necessary to identify the profits or losses of the subsidiary in the post-
acquisition period using the net assets working.
Worked example 3
At 31 December 2017
1,000
Investment in Subsidiary
700 600
–––––– ––––––

–––––– ––––––
–––––– ––––––
1. Parent bought 100% of Subsidiary two years ago.
2. Subsidiary’s reserves were $100 at the date of acquisition.
3. Goodwill has been impaired by $80 since the date of acquisition.
1. to 3. As before.
4 As before, part of the cost is goodwill. This must be separately identified as an
asset to help replace the cost of investment.
5 Parent’s share of the post-acquisition profits of Subsidiary is included in the
consolidated retained earnings.
Worked solution 3
$
Non-current assets:
Goodwill (W2) 120
Net current assets 1,300
––––––
3,820
––––––
100
3,720
Retained earnings (W3) ––––––
3,820
––––––
WORKING
period
$ $
700 100
Retained earnings –––––– ––––––
1,600 1,000
–––––– ––––––
$
———
200
———
80
As an asset 120
$
Share of Subsidiary (W1) 100% (700 – 100)
600
Goodwill written off (W2) (80)
–––––
3,720
–––––
4.4 Non-controlling interest

Non-controlling interest represents the proportion of the subsidiary’s net assets that
are not owned by the parent.
 IFRS 3 allows for the non-controlling interest to be valued in one of two ways at
the date of acquisition:
(1)
Worked example 4); or
(2)
at fair value (see Worked example 5).
 The difference between the two methods is that if non-controlling interest is valued at fair
value then that value will include the non-controlling interest’s share of goodwill.
 The increase in value of non-controlling interest is debited to the value of goodwill.
Commentary
This issue will be looked at in more detail in the next session.
Worked example 4
Parent
Subsidiary
Non-current assets
1,000 600
Investment in Subsidiary 1,200 –
Net current assets 500 600

–––––– ––––––
–––––– ––––––
Issued capital
Retained earnings 2,600 1,150

–––––– ––––––
2,700 1,200
3. Goodwill has been impaired by $200 since the date of acquisition.
4. Non-controlling interest is valued at the proportionate share of the subsidiary’s
identifiable net assets.
Features:
1. and 2. As before.
3. As before, the assets and liabilities of the group are simply a cross cast of
those of Parent and Subsidiary. Parent’s share of Subsidiary’s net assets is
100% on a line by line basis.
That part that does not belong to the parent is called “non-controlling
interest”. It is shown as a credit balance, within equity, in the statement of
financial position.
4. As before, only this time goodwill is impaired by $200.
5. As before, Parent’s share of the post-acquisition profits of Subsidiary is
included in the consolidated retained earnings.
Worked solution 4
$
Goodwill (W2) 840
1,100
Net current assets ––––––
3,540
––––––
Issued capital 100
3,200
––––––
3,300
240
Non-controlling interest (W3) ––––––
3,540
––––––
WORKINGS
period
$ $
1,150 150
1,200 200
–––––– ––––––
$
1,200
(2) Goodwill
Cost 40
Less:Net assets on acquisition (100%)
———
1,040
———
To retained earnings
(via statement of profit or loss and other comprehensive income) 200
Asset in the statement of financial position 840
(3) Non-controlling interest
240
——
(4) Retained earnings $
2,600
800
Share of subsidiary 80% × (1,150 – 150) (W1)
(200)
——
3,200
——
Worked example 5
Parent Subsidiary
$ $
Non-current assets
Tangible assets 1,000 600
Investment in Subsidiary 1,200 –
Net current assets 500 600
–––––– ––––––
2,700 1,200
–––––– ––––––
100 50
Issued capital ($1 shares) 2,600 1,150
–––––– ––––––
Retained earnings 2,700 1,200
–––––– ––––––
1.
4. Goodwill has been impaired by $200 since date of acquisition.
Non-controlling interest is valued at fair value on acquisition. The market
price of a share in the subsidiary at the date of acquisition was $29.60
Features:
1. and 2. As before.
3. As before, the assets and liabilities of the group are simply a cross cast of
those of Parent and Subsidiary. Parent’s share of Subsidiary’s net assets is
100% on a line by line basis.
That part that does not belong to the parent is called “non-controlling
interest”. It is shown as a credit balance, within equity, in the statement of
financial position. This example measures non-controlling interest at fair
value and so includes its share of goodwill. Fair value, in this example, is
calculated using the market price of the subsidiary’s share and applying it to
the number of shares owned by non-controlling interest.
4. As before, only this time goodwill is impaired by $200. The impairment of
goodwill is shared between the parent and non-controlling interest in the
proportion of their shareholdings (i.e. 80%:20%).
5. Under this method non-controlling interest is valued based on the fair value
on acquisition, plus its share of any post-acquisition profits, less its share of
goodwill written off.
6. As before, Parent’s share of the post-acquisition profits of Subsidiary is
included in consolidated retained earnings.
Worked solution 5
$
Non-current assets:
Goodwill (W2) 1,096
Net current assets 1,100
––––––
3,796
––––––
100
3,240
456
Retained earnings (W4) ––––––
Non-controlling interest (W3) 3,796
––––––
WORKINGS
(1) Subsidiary’s net assets
Reporting date Acquisition
$ $
1,150 150
1,200 200
–––––– ––––––
(2)
Goodwill
$
1,200
Add: Fair value of non-controlling interest (10 shares × $29.60) 296
(200)
––––––
1,296
––––––
200
Impaired 1,096
Goodwill recognised
Of the goodwill impaired, 80% is debited to consolidated retained earnings and 20% is
debited to non-controlling interest.
$
Fair value on acquisition (W2) 296
200
Add: Share of post-acquisition profits (1,000 × 20%) (40)
Less: Share of goodwill impaired (200 × 20%) –––––
456
–––––
(4) Retained earnings $

Share of Subsidiary
800
Goodwill impairment (200 × 80%) (160)
–––––
3,240
–––––
4.5 Exam technique

If a question states that non-controlling interest is to be valued at its proportionate
 If non-controlling interest is to be valued at fair value on acquisition then use the
 Both methods of calculating goodwill need to be understood. The method in
4.6 Other accounting models
Commentary
The statements that follow relate to the net asset position of the subsidiary used in
Worked example 4.
 Parent now owns only 80% of Subsidiary’s shares.
 It must consolidate 80% of 1,200 (i.e. 960).
 This is achieved in two stages:
(1)
100% of Subsidiary’s net assets are consolidated on a line by line basis
(as before); and
(2) a credit balance representing that part of Subsidiary’s net assets not
owned is put into the accounts.
 Thus the balances included in the consolidated financial statements are:
Assets and liabilities 1,200
Component of equity
240
Overall effect 960
 Another accounting model which would achieve a replacement more easily is equity
accounting. Under this method cost of $1,200 is replaced by $960 as a single figure.
 The reason for using the “two-stage” method for subsidiaries is that it provides more
information to users, as it gives information about control and ownership.
 However, equity accounting is used in prescribed circumstances:

 joint arrangements that are joint ventures (see Session 25).
5 Complications
5.1 Mid-year acquisitions

A parent may not acquire a subsidiary at the start or end of a year. If a subsidiary
is acquired mid-year, it is necessary to calculate the net assets at date of
acquisition.
Commentary
The subsidiary’s profit after tax is assumed to accrue evenly over time unless
indicated to the contrary.
Worked example 6
Parent acquired 80% of Subsidiary on 31 May 2017 for $20,000.
Subsidiary’s net assets at 31 December 2016 were:
$
Issued capital ($0.50 shares) 1,000
15,000
Retained earnings ––––––
16,000
––––––
During the year to 31 December 2017, Subsidiary made a profit after tax of $600.
Non-controlling interest is valued at the proportionate share of the identifiable net
assets on acquisition.
Required:
(a) Calculate Subsidiary’s net assets at acquisition.
(b) Calculate goodwill on acquisition.
(c) Show the profits from Subsidiary to be included in the consolidated
retained earnings.
(d) Assuming that the market price per share on acquisition was $12.125
calculate goodwill on acquisition if the non-controlling interest is valued
at fair value.
Worked solution 6
(a)
Net assets of Subsidiary at acquisition
$ $
Issued capital 1,000
Retained earnings:
At 31 December 2016 15,000
250 15,250
1 January – 31 May 2017 (600 × /12)
–––––– ––––––
16,250
––––––
(b) Goodwill on acquisition
$
Cost of investment 20,000
Less: Share of net assets acquired
80% × 16,250 (W1) (13,000)
––––––
7,000
––––––
(c) Profit from Subsidiary included in consolidation retained earnings reserve
Share of post-acquisition reserve of Subsidiary
280
––––––
(d) Goodwill on acquisition
$
20,000
4,850
Non-controlling interest (1,000 ÷ $0.50 × 20%) × $12.125 (16,250)
––––––
8,600
––––––
6 Adjustments
6.1 Intra-group balances

Consolidation represents the position and performance of a group of companies as
if they were a single entity.
 If the group companies trade with each other (as is likely) a receivable in one set of
accounts will be balanced out by a payable in another. When statements of
financial position are consolidated these amounts are cancelled out against each
other.
 Intra-group balances are typically recorded in ledger accounts described as “Current
accounts” and included in receivables/payables in each individual company’s
statement of financial position. For the individual entity it is correct that the balances
represent amounts that will be received by/paid to the separate entities.
 When statements of financial position are consolidated intra-group balances must
be eliminated. The assets and liabilities of the group represent those amounts due
to or from external parties.
erved.
2218
Illustration 3
Parent owns 80% of Subsidiary. Parent sells goods to Subsidiary. At the end of the
reporting period the accounts of the two entities include the following intra-group
balances.
Parent Subsidiary
Receivables
1,000
Payables
1,000
Usually the assets and the liabilities of the group are a straightforward summation of the
individual items in the accounts of the parent and its subsidiaries. If these include intra-
group balances the financial statements of the group would show cash owed from and to
itself. This would clearly be misleading.
To avoid this, the intra-group amounts are cancelled on consolidation:
Parent Subsidiary Adjustments on Consolidated
consolidation statement of
financial position
Receivables Dr
1,000
1,000 
Payables
1,000 1,000 
Commentary
All intra-group amounts in the statement of financial position (loans, receivables
and payables) and the statement of profit or loss (income and expenses) are
cancelled on consolidation. The “direction” of sale (Parent to Subsidiary or vice
versa) is irrelevant.
Commentary
At the end of the reporting period intra-group trading may result in a group company
owning inventory which it purchased from another group company. This is a separate
issue.
 Balances between the parent and subsidiary may not always agree with each other
due to either goods in-transit or cash in-transit.

The unrealised profit will be deducted from the selling company’s profits
 For cash in-transit add the cash to the consolidated cash balance.
6.2 Unrealised profit

Intra-group balances are cancelled on consolidation. The main reason for these
arising is intra-group trading.
Commentary
Another example is intra-group transfers of non-current assets (see later).
 to another member of the group and that inventory is
still held by the buying company at the end of the reporting period:
 The company that made the sale will show profit in its own accounts. This is
correct from the individual selling company’s perspective. However, this profit will
not have been realised from the group’s perspective.

The company that made the purchase will record the inventory at cost to itself. This
is also correct from the individual buying company’s perspective. However,
consolidation of this cost will include the selling company’s profit element which is
not a cost to the group.
Key point
“… resulting unrealised profits are eliminated in full.”
 This implies that the unrealised profit is eliminated from the inventory value.
 Unrealised profit on goods held in inventory by the buying company at the year end is
deducted from group inventory.
Commentary
Add together the parent and subsidiary inventory amounts and then deduct the
amount of unrealised profit.
 The effect of the double entry is to reduce group profits. The standard does not specify how
the adjustment should be made but for exam purposes the reduction is against the selling
company’s profits.
Commentary
If the parent sold the goods the adjustment is against consolidated retained
earnings. If the subsidiary sold the goods the adjustment is made in the
determination of net assets at the reporting date.
Worked example 7
Parent owns 80% of Subsidiary. During the current accounting period, Parent
transferred goods to Subsidiary for $4,000, which earned Parent a profit of $1,000.
These goods were included in Subsidiary’s inventory at the end of the reporting period.
Required:
Show the adjustment in the consolidated statement of financial position.
Worked solution 7
Dr
Retained earnings $1,000
Cr Inventory $1,000
Worked example 8
Parent owns 80% of Subsidiary. During the current accounting period, Subsidiary
sold goods to Parent for $18,000 which earned Subsidiary a profit of $6,000. At the
end of the reporting period, half of these goods are included in Parent’s inventory.
At the end of the reporting period, Parent’s accounts showed retained profits of
$100,000 and Subsidiary’s accounts showed net assets of $75,000, including retained
profits of $65,000. Subsidiary had retained profits of $20,000 at acquisition.
Required:
Show the adjustment to eliminate unrealised profits in the consolidated financial
statements.
Worked solution 8
Dr
Retained earnings (1/2 × 6,000) $3,000
Cr Inventory $3,000
WORKING
Reporting Acquisition
$ $
Issued capital 10,000 10,000
Retained earnings
Per the question 65,000 20,000
Unrealised profit (3,000) 62,000
———
———
72,000 30,000
———
(20% × 72,000) $14,400
————
$
80% × (62,000 – 20,000) 33,600
———
133,600
———
6.3 Non-current asset transfers

In accordance with the single entity concept, the consolidated financial statements
of a group should reflect the non-current assets at the amount at which they would
have been stated had the transfer not been made.
 have been recognised by the
selling company. This must be eliminated on consolidation. If the subsidiary sold
the asset, the non-controlling interest will take its share of the unrealised profit.
 The buying company will include the asset at its cost (which is different to the cost
to the group) and depreciate it. The expense for the year will be different to what
it would have been if no transfer had occurred. If the subsidiary is the buyer, the
non-controlling interest will share in the depreciation adjustment.
 Summary of adjustments needed:
 eliminate profit; and
 adjust the depreciation charge.
Commentary
Once made, the two adjustments will re-establish cost to the group.
 and the
depreciation adjustment will be made in the accounts of the buying company.
Approach
 Construct a working, which shows the figures in the accounts (“with transfer”),
and what would have been in the accounts if no transfer had been made (“without
transfer”).
Worked example 9
Parent owns 80% of Subsidiary. Parent transferred an asset to Subsidiary at a value
of $15,000 on 1 January 2017. The original cost to Parent was $20,000 and the
accumulated depreciation at the date of transfer was $8,000. The asset had a useful
life of 5 years when originally acquired, with a residual value of zero. The useful life
at the date of transfer remains at 3 years. Full allowance is made for depreciation in
the year of purchase and none in the year of sale.
Required:
Calculate the adjustment for the consolidated statement of financial position at 31
December 2017.
Worked solution 9
With Without
transfer transfer A
djustment
$ $ $
Cost 15,000 20,000
(5,000) *(12,000)
–––––– ––––––
10,000 8,000
–––––– –––––– 2,000
5,000 4,000
Charge for the year 1,000
–––––– ––––––
Profit on disposal
Proceeds
Carrying amount 15,000
(20,000 – 8,000) (12,000)
––––––
3,000 – 3,000
Dr Parent profit or loss – profit on disposal 3,000
3,000
and
Dr Non-current assets 1,000
1,000
* Accumulated depreciation of $12,000 is calculated as 3 years @ 20% per annum based on
the original cost of $20,000.
Activity 1
Close Steele
$ $
Assets
Non-current assets
Tangible assets 84,000 58,200
Investments 80,000 –
Current account – Close – 3,200

Cash at bank 10,000 3,000
Investments – 2,500
Trade receivables 62,700 21,100
Inventory 18,000 12,000
———– ———–
254,700 100,000
———– ———–
Equity and liabilities
Trade payables 35,000 11,000
Current account – Steele 2,700 –
Called up share capital ($1 ordinary shares) 120,000 60,000
Other components of equity 18,000 –
Revaluation surplus on 1 January 2017 23,000 16,000
Retained earnings on 1 January 2017 40,000 8,000
Profit for 2017 16,000 5,000
———– ———–
254,700 100,000
———– ———–
The following information is relevant.
(1)
On 31 December 2016, Close acquired 48,000 shares in Steele for $80,000
cash.
(2) The inventory of Close includes $4,000 goods from Steele invoiced to Close
at cost plus 25%.
(3) A payment for $500 by Close to Steele, sent before 31 December 2017, was
not received by Steele until January 2018.
(4)
Goodwill has been impaired by $2,800 since the acquisition took place.
(5) Non-controlling interest is valued at fair value on acquisition. The market
price of one share in Steele on acquisition was $1.60.
Required:
subsidiary Steele as at 31 December 2017.
Key points summary
The cost of an investment in a subsidiary does not reflect the true substance of the
transaction.
Consolidation replaces the equity of the subsidiary with the cost of the investment,
creating goodwill as a balancing amount.
100% of the net assets of the subsidiary are added to the net assets of the parent.
Any holding of less than 100% is reflected in the calculation of non-controlling interest.
This can be measured at either:
 fair value; or
 a proportion of the fair value of the identifiable net assets.
The difference between these two measurement bases affects the amount of goodwill
recognised.
Post-acquisition profits of the subsidiary are shared between the parent and non-
controlling interest.
Goodwill is tested annually for impairment and any loss allocated to retained earnings
and non-controlling interest (depending on the method used to value it).
All intra-group balances are eliminated on consolidation.
Unrealised profit is deducted from the profits of the selling company and inventory still
Focus
 prepare a consolidated statement of financial position for a simple group (one or more
subsidiaries) dealing with pre and post-acquisition profits, non-controlling interests and
goodwill;
 explain why intra-group transactions should be eliminated on consolidation;
 report the effects of intra-group trading and other transactions including:
 unrealised profits in inventory and non-current assets; and
 intra-group loans.
Activity solution
Consolidated statement of financial position as at 31 December 2017
$ $
Assets
Non-current assets
Goodwill (15,200 – 2,800) 12,400
13,500
Investments 2,500
Receivables 83,800
Inventory 29,200
———–
129,000
———–
283,600
———–
Equity and liabilities
Capital and reserves
120,000
18,000
Revaluation surplus 23,000
Retained earnings (W5) 57,120
———–
218,120
19,480
Non-controlling interest (W4)
———–
237,600
Current liabilities 46,000
———–
283,600
———–
WORKINGS
(1) Group structure
Close
80%
Steele
Post-
reporting period
acquisition
$ $ $
Share capital 60,000 60,000 –
Revaluation surplus 16,000 16,000 –
13,000 8,000 5,000
(800) (800)
Provision for unrealised profit ——— ———
88,200 ——— 4,200
——— 84,000 ———
———
Goodwill
$
80,000
19,200
Non-controlling interest (20%  60,000 shares  $1.60) (84,000)
———
15,200
Goodwill ———
$
19,200
Share of post-acquisition profit (20%  4,200) 840
(560)
Less: Goodwill impaired (20%  2,800) ———
19,480
———
Retained earnings
$
56,000
3,360
(2,240)
Goodwill impaired (80%  2,800) ———
57,120
———
Overview
Objectives

To explain the acco
unting adjustments
which must be made
before consolidation
can
proceed.
ADJUSTMENTS


G D
R e
O
U f
P i
A n
C i
C t
O i
U
N o
TI n
N
G  Cost
of acqui
P
O sition
LI
C
Y
A
DJ
U
S
T
M
E
N
T
S

 1
 r
uring

ACCO
UNTI
NG F ACC
OR OUN
THE
FAIR TING
VALU
E FOR
GOO
ADJU DWI
STME LL
NT
 Exam qu 
estion compl
ication G
 o
o

d
w
i
D l
e l
f
e  Barga
r in purcha
r ses
e
d

t
a
x

provisionally
 Impairment of
©2017 B
ecker Edu
cational
Develop
ment Cor
p. All rig
hts reserv
ed.
2301
SESSION 23 – FURTHER ADJUSTMENTS
1 Adjustments

Consolidation problems are usually tackled
in two stages:
Stage 1
Stage 2 Process any individual company adjustme
nts.
Do the consolidation.
 Stage 2 was introduced in the previous ses
sion.

proceed. Once these adjustments are proces
sed consolidations are rarely more complex
2 Group accounting poli
cy adjustments
2.1 IFRS 10

IFRS 10 requires that a subsidiary’s financia
l statements be drawn up using the same
accounting policies as the parent. If this is n
ot the case those accounts may have to be
restated in line with the group policy.

in practice becau
se a situation that required it would
generally be contrary to the concept of contr
ol which determines whether an investee
should be accounted for as a subsidiary.
 It might be necessary:

where the subsidiary is foreign and followi
ng local GAAP.
3 Goodwill
3.1 Definition

Goodwill is an asset that represents the futur
e economic benefits arising from
assets acquired in a business combination th
at are not individually identified and
separately recognised.

be recognised as part of t
acquisition process. The option to measure
non-controlling interest is allowed on a
transaction-by-transaction basis.
I
culation as:
Acquisition date fair value of t $
he consideration transferred X
Amount of any non-controlling interest in X
the entity acquired
Less: Acquisition date amounts of identifi
able assets acquired
and liabilities assumed measured in accor (X)
dance with IFRS 3
____
G
o _
o
d
w
i
l
l
_
_
©2017 Becker Educational Development Corp. All rights rese 2302
rved.
Commentary
Exam questions will indicate how non-
controlling interest, and therefore goodwill, is to
be
measured.
Illustration 1
Parent acquires 80% of Subsidiary for $120,000.
The fair value of the non-controlling
interest’s share in subsidiary is $28,000. The valu
e of non-controlling interest based on
the proportionate share of identifiable net assets ac
quired is $25,000. The fair value of
the subsidiary’s net assets on acquisition has been
measured as $125,000.
Goodwill can be cal
culated as either:
$
Cost of invest 120,000
25,000
ment –––––––
120,000
Non- 145,000
controlling in (125,000)
28,000
terest –––––––
––––––
– 20,000
–––––––
148,000
Fair value of net asset
s acquired (125,00
0)
––––––
G –
o
o 23,000
d ––––––
w –
i
l
l

If non-controlling interest is valued at fair value (a
), the value of goodwill and non-
controlling interest will be higher to the extent of t
he non-controlling interest’s share of
the fair value of the subsidiary.
Commentary
The goodwill calculated in (a) means that goodw
ill attributable to non-controlling
interest is $3,000. The proportion of goodwill at
tributable to non-controlling interest
of 13% ($3,000 ÷ $23,000) is unlikely to be the
same as the proportion of shares held
(20%). This is because the parent is likely to pa
y a premium for control. Any
impairment loss will always be allocated using t
he shareholding percentages (e.g.
80:20 in the above illustration).
 If the subsidiary has not reflected fair value
s in its accounts, this must be done before
consolidating.
Commentary
There are several issues to address:
 What is included in cost of acquisition?
 The meaning of the term “identifiability”.
 The calculation of fair value.

Accounting for the revaluation in the acc

ounts of the subsidiary.
Accounting for the goodwill arising on co
nsolidation.
©2017 Becker Educational Development Corp. All rights rese
rved.
2303
3.2 Cost of acquisition – Fair valu
e of purchase consideration

An acquisition is accounted for at its fair va
lue. Fair value is:
 the amount of cash or cash equivalents pai
 d; and
the fair value of any other purchase consid
eration given.
 The purchase consideration must faithfully r
epresent the fair value of all elements of the
consideration paid in order to identify the va
lue of goodwill paid to acquire the subsidiar
y.
 Any costs directly associated with the acqui
sition of the subsidiary are expensed to
profit or loss as a period costs.
3.2.1 Deferred consideration
 The cost of the acquisition is the present va
lue of the consideration, taking into
account any premium or discount likely to b
e incurred in settlement (and not the
nominal value of the payable).
Worked example 1
Parent acquired 60% of Subsidiary on 1 January 2
017 for $100,000 cash payable
immediately and $121,000 after two years. The fai
r value of Subsidiary’s net assets
at acquisition amounted to $300,000. Parent’s cost
of capital is 10%. The deferred
consideration was completely ignored when prepar
ing group accounts as at 31
December 2017.
Non-controlling interest is measured at the proport
ionate share of identifiable net
assets.
Required:
Calculate the goodwill arising on acquisition an
d show how the deferred
consideration should be accounted for in Parent
’s consolidated financial
statements.
Worked solution 1
Cost of investment in Subsidiary at acquisition: $
100,000 + $121,000/1.21 = $200,000
G
o
o $00
d 0
w
i 200
l
l
120

(30
Cost 0)
Non-controlling i –––
nterest (40%  3
––
00,000)
Less: Net assets a
cquired
–––––
rved.
Deferred consideration
Double entry at 1 January:
Dr Cost of Investment in
Subsidiary $100,00
0 $100,000
On 31 December, due to unwinding of discount, th
e deferred consideration will equal
$121,000/1.1 = 110,000
Dr Group retained $10,0
earnings 00 $10,000
In the consolidated statement of financial position,
the cost of investment in Subsidiary will be
replaced by the goodwill of $20,000. The deferred
consideration will equal $110,000.
Commentary
The increase in the deferred consideration to $1
10,000 has no effect on the cost of
investment, which is fixed at the date of acquisiti
on. The increase (debit entry) is a
finance cost and included as a post-acquisition e
xpense in profit or loss.
3.2.2 Contingent consideration
 When a business combination agreement pr
ovides for an adjustment to the cost,
contingent on future events, the acquirer inc
ludes the acquisition date fair value of the
contingent consideration in the calculation o
f the consideration paid.
 If the contingent settlement will be cash, a li
ability will be recognised. If settlement is
to be through the issue of further equity inst
ruments, the credit entry will be to equity.
 Any non-measurement period changes to th
e contingent consideration recognised will
be accounted for in accordance with the rele
vant IFRS and will not affect the original
calculation of goodwill.

Contingent consideration classified as equit
y will not be remeasured. However, any
difference between the initial amounted reco
gnised and the final settlement value will
be recognised directly in equity.
 Contingent consideration that is classified a
s a liability is measured at fair value at
Illustration 2
Parent acquired 80% of Subsidiary paying $120,00
0 immediately. Parent also agreed to make an
additional payment of $60,000 if the subsidiary’s r
evenue increases by 10% each year for the next tw
o
years. The fair value of this contingent considerati
on was $25,000 on the date of acquisition. The fir
st
year of trading after the acquisition proved very su
ccessful and the subsidiary’s revenue grew by 18%
.
As a result of this the fair value of the contingent c
onsideration was remeasured to $40,000.
On acquisition the cost of investment in subsidiary
will be $145,000 (120,000 + 25,000); $120,000 wi
ll
be credited to cash and $25,000 will be credited to
a liability.
One year later the liability will be remeasured to $
45,000 and the increase of $20,000 expensed as a
finance cost to profit or loss.
rved.
3.2.3 Share exchange
 It is quite common for a parent to acquire sh
ares in the subsidiary by issuing its own shar
es
to the previous shareholders in a share excha
nge.

The cost of acquisition is the number of shar
es issued by the parent multiplied by the mar
ket
price of the parent’s shares at the date of acq
uisition.
Illustration 3
Parent acquired 80% of Subsidiary’s 100,000 shar
es in a three for five exchange.
Market price of one share in P on acquisition was
$4.00 and that of S was $2.20.
3
The value of S’s share is irrelevant in this calculati
on.
3.3 Recognition
3.3.1 Introduction
 The identifiable assets and liabilities acquire
d are recognised separately as at the date of
acquisition (and therefore feature in the calc
ulation of goodwill).

This may mean that some assets, especially i
ntangible assets, will be recognised in the
consolidated statement of financial position
that were not recognised in the subsidiary’s
single entity statement of financial position.
 Any future costs that the acquirer expects to
incur in respect of plans to restructure the
subsidiary must not be recognised as a provi
sion at the acquisition date. They will be
treated as a post-acquisition cost.
Commentary
Such liabilities are not liabilities of the acquiree
at the date of acquisition. Therefore they
are not relevant in allocating the cost of acquisit
ion.
Historically companies recognised large provisio
ns on acquisition, which had the effect of
reducing net assets and thereby increasing good
will. Goodwill was then charged against
profits (through amortisation) over a much longe
r period than through immediate
recognition as an expense. IFRS 3 and IAS 37 h
ave virtually eliminated these practices.
3.3.2 Contingent liabilities of the acquire
e
 IAS 37 Provisions, Contingent Liabilities a
nd Contingent Assets does not allow contin
gent
liabilities to be recognised in the financial st
atements.
 of a subsidia
ry that is a present obligation that has not be
en
recognised (because an outflow of economic
benefits is not probable) must bet recognised
in the
consolidated financial statements as long as
its fair value can be measured reliably (IFRS
3).
 Some contingent liabilities will therefore be
recognised in the consolidated statement of
financial position that were not recognised i
n the subsidiary’s statement of financial posi
tion.
 Recognition of the contingent liability on co
nsolidation will decrease the net assets of th
e
subsidiary; this will have the effect of increa
sing the amount of goodwill on acquisition.
rved.
3.4 Measurement

that are recognised in the consolidated state
ment of
financial position are measured at their acqu
isition date fair values.
 This reflects the amount that would have be
en paid to acquire the individual assets and
liabilities at the acquisition date and correctl
y identify the value of goodwill acquired.
 The non-controlling interest of the subsidia
ry is measured at either:
 fair value; or
 the non-controlling interest’s proportionate
share of the subsidiary’s
identifiable net assets.
Commentary
The choice can be made for each acquisition, so
a company does not have to be consistent
in its measurement of non-controlling interests re
lating to separate acquisitions.
In examination questions
 How the non-controlling interest is to be m
easured will be indicated.

the marke
subsidiary’s shares multiplied by the number
of shares owned by non-controlling sharehol
ders).
 If non-controlling interest is valued at fair v
alue, at the reporting date the non-
controlling interest will be measured in the f
ollowing way:
less
 Goodwill impaired in respect of the non-
controlling interest’s shareholding.
3.5 Measuring fair values
3.5.1
IFRS 13 “Fair Value Measuremen
t”

Marketable securities – quoted price in an
active market.

Land and buildings and other non-financial
assets –fair value considers the economic
benefits of:

 the highest and best use; and
selling to another market participant that wo
uld make the highest and best
use of the asset.
Commentary
“Highest and best use” takes account of physical
characteristics (e.g. location of
property), any legal restrictions (e.g. on plannin
g permission) and financial feasibility. It
is considered from a market perspective even if t
he entity intends a different use.
rved.
be

measured using an income approach. IFRS
13
specifies but does not explain the multi-
period excess earnings method (“MPEEM”).
Commentary
The key principle of this methodology is that the
intangible asset (e.g. a customer list or
licence) does not generate cash flows “in a vacu
um” but is supported by other assets.
3.5.2 Other IFRSs
 Long-term loans and receivables – at the pr
esent values of the amounts to be paid or rec
eived,
discounted at using a prevailing market inter
est rate (IFRS 9).
Commentary
Discounting is not required for short-term monet
ary assets and liabilities when the
difference between the nominal amount of the re
ceivable and the discounted amount is not
material.
 Inventories (IAS 2):
 finished goods and merchandise at selling
price less:
 costs of disposal; and
 a reasonable profit allowance for the acquir
er’s selling effort
(based on profit for similar items);
 work in progress at selling price of finishe
d goods less:
 costs to complete;
 costs of disposal; and
 a reasonable profit allowance for the compl
eting and selling effort; and
 raw materials at current replacement cost
s.
4 Accounting for the fair
value adjustment
4.1 Exam question complicatio
n
The fair value adjustment will not normally have b
een reflected in the financial statements of the
subsidiary at the date of acquisition.
 If the subsidiary has not reflected fair values
in its accounts, this must be done before
consolidation.
 This is not a revaluation exercise under IAS
16 but a fair value exercise in accordance
with IFRS 3.
 An increase from carrying amount to fair val
ue of an asset will have the effect of reducin
g
the value of goodwill as value has now been
attached to an identifiable asset. A decrease
will have the effect of increasing the amount
of goodwill.
 At the acquisition date identify the differenc
e between fair value and carrying amount of
the
asset, or liability, and include this difference
in the schedule of net assets.
rved.
In the post-acquisition period account for an

y change in depreciation as a result of the fai
r value
change (see below).

In summary, all assets and liabilities, both
monetary and non-monetary, should be
valued at fair value on acquisition and any c
hanges to those values in the post-
acquisition period will be adjusted against r
etained earnings.
Depreciating assets
 Any additional (or reduced) depreciation ba
sed upon the fair value difference must be
allowed for and the reporting date figure sho
wn as a balancing item.
Illustration 4
On acquisition of a subsidiary the carrying amount
of its buildings was $25 million and
their fair value $30 million. The buildings had a re
maining useful life at the date of
acquisition of 20 years. Two years have passed sin
ce the acquisition took place.
The fair value difference on the acquisition date is
$5 million.
The post-acquisition adjustment for depreciation is
$500,000 ($5 million × /20 years).
The fair value difference remaining at the reportin
g date is $4.5 million.
Reporting Acquisition Post-
date date acquisition
4.5 5 (0.5)
Non-depreciating assets
 Since there will be no depreciation in the po
st-acquisition period the fair value differenc
e at
the reporting date will be the same as at the
acquisition date.
Illustration 5
As for Illustration 4 with an asset of land (rather t
han buildings).
The fair value difference remaining at the reportin
g date is $5 million.
5 5 0
rved.
Inventory
 If the inventory has been sold there will be n
o fair value difference remaining at the repor
ting date
and so the post-acquisition amount will be th
e balancing figure.
 has not been sold then the fa
ir value difference will be the same at the
reporting date as it was on acquisition.
Illustration 6
As for Illustration 4 with an asset of inventory that
has now been sold. The fair value
difference remaining at the reporting date is $0.
0 5 (5)
Contingent liabilities
 Again, any change in the fair value of the co
ntingent liability between the reporting date
and
the acquisition date is a post-acquisition adj
ustment to net asset.
4.2 Deferred tax

If the fair value of an asset on consolidation
is greater than the asset’s carrying
amount, an additional taxable temporary dif
ference will arise, over and above that
already recognised in the subsidiary’s single
entity accounts.
 is balanced by an increase i
amount of goodwill recognised on acquisiti
on, as the value of net assets has
decreased.
Illustration 7
On acquisition of a subsidiary the carrying amount
of its buildings was $25 million and
their fair value $30 million. The buildings had a ta
x base of $22 million and this does
not change on acquisition. Tax rate of 30% applie
s.
A taxable temporary difference of $3 million alrea
dy exists and this will lead to a
deferred tax liability of $0.9 million.
As a result of the acquisition, the taxable temporar
y difference is now $8 million
leading to a deferred tax liability of $2.4 million.
The increase in the liability of $1.5 million is balan
ced by an increase in the amount of
goodwill recognised, as the amount of net assets o
n acquisition has decreased.
Two years after the acquisition the carrying amoun
t of the building in the consolidated
financial statements is $27 million and the tax base
is $19.8 million.
This leads to a taxable temporary difference of $7.
2 million and a deferred tax liability
of $2.16 million. The decrease in the deferred tax
liability of $0.24 million will have
been credited to profit or loss over the two years si
nce acquisition.
rved.
4.3 Accounting for fair value

IFRS 3 requires the entire fair value differen
ce to be reflected in the consolidated group
accounts. The non-controlling interest’s bal
ance will reflect its share of the adjusted val
ue.
Commentary
IFRS 3 refers to this as “allocation of the cost o
f acquisition”. The non-
controlling interest shares in both the fair value
difference and any
consequential depreciation adjustment.
Worked example 2
Parent acquires 60% of Subsidiary on 31 Decembe
r 2015 for $80,000. The carrying
amount of Subsidiary’s net assets on this date is as
follows:
$
20,000
5,000
Goodwill arising on the acquisition o
80,000
f a sole trader
105,000
Issued cap
ital 10,0
Retained e 00
arnings
95,0
00
——
–—
105,000

——–—
Subsidiary’s statement of financial position as at 3
1 December 2017 included the
following:
Land and buildin
gs at cost 20,00
0
——–
—
Goodwill arising on the acq
uisition of a R
sole trader (unimpaired am e
ount) t
a
Issued i
capital n
ed ear
nings 3,000
——–—
10,000
120,000
130,000
Non-controlling interest is valued at its proportion
ate share of the identifiable net
assets.
Required:
Show what would be included in the group acco
unts in respect of Parent’s
interest in Subsidiary as at 31 December 2017.
(Ignore impairment of
consolidated goodwill.)
rved.
Worked solution 2
WORKINGS
Net assets su
At consol At acquis
mmary
idation ition
$ $ $
Issued 10,000 10,000
capital
Retained earnin
gs 120,000 95,000
As per the que (3,000 (5,000 90,000
stion
) 117,000 )
goodwill
–––––– ––––––
– –––––– –
–
127,000
Fair value adjust 10,000
ments ––– 10,00
––– 0
– –––––
Net ––
asse 137,
ts 000 110,0
––– 00
––– –––––
––
–
80,000
40%  110,000 (44,000)
Less: Net assets acquired (110,000)
–––––––
14,000
–––––––
40%  137,000 $54,800
–––––––
Included in consolidated retained earnings
60% (117,000 – 90,000) $16,200
–––––––
Commentary
Goodwill in the accounts of the subsidiary is not
separately identifiable and
therefore cannot be recognised as an asset in the
consolidated statement of
financial position; in effect it is included in the a
mount of consolidated goodwill.
rved.
2312
Activity 1
As at 31 December 2017
Parent Subsidiary
$ $
1,800 1,000
1,000
Cost of investment in Subsidi 400 300
ary –––––– ––––––
3,200 1,300
–––––– ––––––

Retained earnin 2,900 1,000
gs 200 200
––––––––––––
Current liabilitie
s 3,200 1,300
––––––––––––
Parent bought 80% of Subsidiary on the 31 Decem
ber 2015.
At the date of acquisition Subsidiary’s retained ear
nings stood at $600 and the fair
value of its net assets were $1,000. The revaluatio
n was due to an asset that had a
remaining useful life of 10 years as at the date of a
cquisition.
Goodwill has been impaired by $40 since acquisiti
on. Non-controlling interest is to be
valued at its proportionate share of the identifiable
net assets.
Required:
Prepare the consolidated statement of financial
position of Parent as at 31
December 2017.
Proforma solution
$
Non-current assets:
Goodwill
Tangibles
Current assets
_____
_____
Issued capital
Retained earnings
Non-controlling interest
Current liabilities
_____
_____
rved.
5 Accounting for good
will
5.1 Goodwill

Goodwill reflects the future economic benef
its arising from assets that cannot be
identified individually or recognised separat
ely.
 measured at cost. It is recognise
d as an asset.
 Subsequent to initial recognition goodwill is
carried at cost less any accumulated
impairment losses.

Goodwill is tested annually for impairment;
any loss is expensed to profit or loss. If non
-
controlling interest is valued at fair value the
n its value will be reduced to the extent of th
e
impairment loss relating to its percentage sh
areholding.
5.2 Bargain purchase

If on initial measurement the fair value of th
e acquiree’s net assets exceeds the cost of
acquisition , the acquirer reassesses:
 the value of net assets acquired;
 that all relevant assets and liabilities have b
 een identified; and
that the cost of the combination has been co
rrectly measured.
 If there still remains an excess after the reass
essment then that excess is recognised imme
diately
in profit or loss. This excess (gain) could ha
ve arisen due to:
 future costs that are not reflected in the acq
uisition process;
 measurement of items not at fair value, if re
quired by another standard, such
as undiscounted deferred tax;

a bargain purchase.
Commentary
This excess used to be called “negative goodwill
”. This term is no longer used in
IFRS 3 but is still frequently used in practice.
 the parent, none of the gai
non-controlling n is shared with
interest.
5.3
Initial accounting determined
provisionally
5.3.1 Provisional accounting
 If accurate figures cannot be assigned to ele
ments of the business combination then
provisional values are assigned to those ele
ments at the date of acquisition.
 Any new information that becomes availabl
e, relating to acquisition date assets and liabi
lities,
is retrospectively adjusted against the initial
provisional amounts recognised as long as th
e
information is known within the “measurem
ent period”.
rved.
5.3.2 Measurement period
 The measurement period is the period after t
he acquisition date during which the
parent may adjust the provisional amounts r
ecognised on acquisition of a subsidiary.
 The measurement period cannot exceed on
e year after the acquisition date.
5.3.3 Subsequent adjustments

Changes in Accounting Estimates and Er
rors.

 An error in acquisition values is treated ret
rospectively.
A change in estimate is treated prospectiv
ely.
Illustration 8
Parent acquires 80% of Subsidiary for $60,000. T
he subsidiary’s net assets at date of
acquisition were recognised at a provisional fair va
lue of $62,500. At the end of the
first year goodwill has been impaired by $1,000.
Non-controlling interest is not
credited with goodwill.
Year 1:
Cost of investment
Non-controlling interest (62,5
00 × 20%)
Less :Net assets on acquisitio ______
n
Goodwi
ll _____
_
Goodwill impairment charge to profit 1,000
or loss
In the year following acquisition, but within 12 mo
nths of the acquisition date, the
value of land on the acquisition date was determin
ed to be $2,500 more than the
amount recognised on acquisition. The value of g
oodwill at the end of year 2 was
determined to be $7,400.
Year 2: $
Cost of investment 60,000
Non-controlling interest (65,0 13,000
00 × 20%)
Less: Net assets on acquisitio ______
n
Amended goodwill on acquis Goodwill
ition
at year end
______
Goodwill impairment charge to profit
______
or loss
Journal
Dr Land
Dr Profit or loss (goodwill impairm
600
ent)
1,600
Cr Goodwill (9,000 – 7,400)
Cr Non-controlling interest (2,500 500
20%) 1,000
Cr Opening retained earnings
(prior year charge for goodwill revers
ed)
The fair value adjustment on land does not affect
profit or loss; it increases the
carrying amount of the land and decreases the amo
unt of goodwill initially recognised.
rved.
5.4 Impairment of goodwill
5.4.1 General
 Goodwill must be tested annually for impa
irment.
 If non-controlling interest is measured at fair
value the impairment loss is shared between
the
parent company and non-controlling interest
in the proportion of shareholding, rather tha
n the
proportion of goodwill.
Illustration 9
Parent owns 80% of shares in a subsidiary. Non-
controlling interest is measured at fair
value on acquisition. Goodwill was measured at $
10,000 on acquisition; Parent’s share
of this was measured at $8,400.
The shareholding ratio is 80:20 but the ratio of the
proportion of goodwill is 84:16.
One year later it is identified that goodwill is impai
red by $1,000. The impairment loss
will be shared $800 to Parent and $200 to the non-
controlling interest (not $840:$160).
Goodwill on acquisition must be allocated to

a cash generating unit (CGU) that benefits fr
om
the acquisition. A CGU need not necessaril
y be a unit of the subsidiary acquired; it coul
d be a
unit of the parent or another subsidiary in th
e group.
 The unit must be at least that of an operating
segment (as defined under IFRS 8 Operatin
g
Each CGU must be tested annually for impa

irment. The test must be carried out at the
same time each year, but does not have to be
carried out at the year end.
 Once goodwill has been impaired it can nev
er be re-instated, there is no reversal of the
impairment of goodwill.
rved.
2316
Illustration 10
On 1 April 2017 Alphonso purchased 60% of the e
quity shares of Borodin and gained
control of Borodin. Goodwill arising on the acquis
ition of Borodin totalled $60
million. Non-controlling interest is measured at fa
ir value on acquisition. On
acquisition Borodin had three cash-generating unit
s and the goodwill on acquisition
was allocated to the three units as follows:
– Unit X – 40% (i.e. $24 million)
– Unit Y – 35% (i.e. $21 million)
– Unit Z – 25% (i.e. $15 million)
In the year ended 31 March 2018, despite Borodin
making a profit overall, Borodin
suffered challenging trading conditions. Therefore
the directors of Alphonso carried
out an impairment review on the goodwill and dete
rmined the following as at 31 March
2018:
Unit
X $000
$00
0 206,000
Y
173
Z ,00 185,000
0
127,000
158 –––––––
,00 –
Tota 0 518,00
l 0
122 –––––––
,00
0 –
–––
–––
––
453
,00
0
–––
–––
––
The carrying amount of net assets including good
will amounts to $513 million (453 +
60). When $60,000 goodwill is allocated to the C
GUs (45:35:25 gives $ the carrying
amounts are as follows:
Unit
Y (1 Z (122 +
58 + 15)
X (173 + 21)
24)
Tot
al
$000
$000
206,000
197, 185,000
000
127,000
179, –––––––
000 –
518,00
137, 0
000 –––––––
–––– –
––––
513,
000
––––
––––
The carrying amounts of Units X and Y are less th
an their recoverable amount and so
no impairment losses are recognised.
The carrying amount of Unit Z is $10 million more
than its recoverable amount and so
an impairment loss of $10 million must be recogni
sed against Unit Z and therefore
against Borodin in total.
Journal
Dr Retained earnings ($10m × 60 $6m
%)
$4m
Dr Non-controlling interest ($10m
× 40%)
Cr Go $
odwil 1
l 0
m

The excess recoverable amounts in Units X and Y
cannot be used to offset the
impairment loss in Unit Z.
rved.
5.4.2 Partially-owned subsidiary
 Any goodwill in a partially-owned subsidiar
y, where the amount of the non-controlling
interest’s share of goodwill has not been rec
ognised, must be grossed up to include the
non-
controlling interest’s share of goodwill for t
he purposes of the impairment test.
 Any impairment is firstly allocated against t
his grossed up goodwill figure.
 Any impairment in excess of this grossed up
goodwill is then allocated against the
remaining assets of the CGU on a pro-rata b
asis.
Worked example 3
Parent acquires 75% of Subsidiary. The carrying a
mount of the subsidiary’s net assets
at the year-end was $1,800, this included $300 of g
oodwill. Non-controlling interest is
measured at the proportion of subsidiary’s identifia
ble net assets. The recoverable
amount of the subsidiary on the same day was $1,6
40.
Worked solution 3
$
Goodwill grossed up 100 400
× 1,500
Other net assets ________
1,900
Recoverable amo
unt
Impairme 260
nt
Of this amount 75% ($195) will be allocated again
st the goodwill recognised in the group
financial statements, leaving goodwill included in t
he consolidated statement of financial
position of $105. The carrying amount of the subs
idiary’s net assets, including goodwill, will
now be $1,605.
rved.
2318
6 Consolidated statemen
t of financial position
workings
(1) Establish group structure. W1
(2) Process individual company adjustments:
 do the double entry on the face of the questi
on (as far as possible).
(3)
Net assets summary: W2
 one for each subsidiary;
 the aim is to show the net assets’ position a
t two points in time.

At reporting
At

date ac
quisition
Issued X X
capital
Retained earnin
X X
gs (X)
(X) _____
____ _
__
X
X
Fair
valu
e X
res ____
erve __

X
X
NON-
CONT
ROLLI G
NG O
INTER O
EST D
W
I
L
L
% Net asset at end of Cost X
+ X
the reporting period O –
R assets
at (X)

uisitio
n
X
CONSOLI
DATED R
ETAINED
EARNING
S

 All of Parent
per Q X
Adjustments (X)
X

 Subsidiary share of post-
acquisition profits
 Goodwill adjustment (X)
X
rved.
Key points summary
Goodwill is the difference between the fair value o
f the consideration given and the fair
value of the net assets acquired.
Purchase consideration is valued at fair value; any
transactions costs are expensed to
profit or loss when incurred.
Deferred consideration is calculated as the present
value of the future cash flows; the
unwinding of the discount is charged to profit or lo
ss.
Contingent consideration is valued at fair value an
d credited to equity (if settled in
shares) or to liabilities (if settled in cash). Any pos
t-acquisition change in fair value is
only accounted for if settlement is in cash, and tak
en to profit or loss.
The subsidiary’s net assets are valued at fair value
on acquisition; any fair value
difference is reflected in the net asset working sche
dule.
Goodwill is tested annually for impairment. Any f
all in value is shared between parent
and non-controlling interest.
Goodwill impairment can never be reversed.
Where non-controlling interest is not credited with
its share of goodwill the goodwill is
grossed up for the impairment test.
A bargain purchase is credited immediately to prof
it and loss.
An entity has 12 months from the acquisition date
to measure the subsidiary’s net assets
on the acquisition date. Any change to provisional
values is accounted for
©2017 Becker E
ducational Deve
lopment Corp.
All rights reserv
ed.
2320
Focus

explain why it is necessary for both the cons
ideration paid for a subsidiary and the
subsidiary’s identifiable assets and liabilitie
s to be accounted for at their fair values
when preparing consolidated financial state
ments;
 compute the fair value of the consideration
given including the following elements:
 cash
 share exchanges
 deferred consideration
 contingent consideration
 prepare consolidated financial statements de
aling with fair value adjustments
(including their effect on goodwill) in respe
ct of:
 depreciating and non-depreciating non-
 current assets;
 inventory;
 deferred tax;
 liabilities; and
assets and liabilities (including contingenci
es) not included in the
subsidiary’s own statement of financial pos
ition;
identify the circumstances in which a gain o

n a bargain purchase (negative goodwill)
arises, and its subsequent accounting treatm
ent.
Activity solution
As at
31 December 2017
$
Non-current assets:
160
3,040
Tangibles (1,800 + (1,000 + 300  [ / 700
× 300])) ––––––
3,900
––––––
Non-
controlli
Issued capita ng intere
l st
Retained ear
nings
Current liabilities (200 +
200)
100
3,132
268
400
––––––
3,900
––––––
rved.
WORKINGS
(1) Net assets summary
At consol At acquis
idation ition
$ $
Issued ca
100
pital 100
Retained earni
ngs 1,000
As given 60
Extra depreci (60) 9 0
ation _____ 4
_ 0

Fair value ad
justments _ ____
_ __
_
_
_
_

Net
ass _ ____
ets __
Goodwill
$
1,000
20%  1,000
Less: Net assets acquired
______
______
160
Profit or loss 40
20%  1,340
$268
––––––
(4) Consolidated retained earnings
Parent 2,900
Share of Subsidiary
80% (940 – 600) 272
Goodwill (40)
––––––
3,132
––––––
rved.
 SESSION 24 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 
Overview
Objectives

To explain the accounting treatment of subsidiaries in consolidated statements of profit or
loss and other comprehensive income.
 Income generation
GROUP INCOME DISPOSAL
 Control and ownership
 Possibilities
 Parent’s accounts
 Group profit or loss
 Discontinued operations
INTRA-GROUP
TRANSACTIONS AND NON-CONTROLLING MID-YEAR
UNREALISED PROFIT INTEREST ACQUISITIONS
 Dividends  Inclusion of subsidiary’s
 Intra-group results
CONSOLIDATED  IAS 1
STATEMENT OF
CHANGES IN EQUITY
SESSION 24 – CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
1 Group income
1.1 Income generation

shows the inco
me
generated by resources (i.e. net assets in the statement of financial position):

will include dividend income from its investments in subsidiaries (see s.2.1).
 The consolidated statement of profit or loss and other comprehensive income
shows the income generated by the group’s resources (i.e. net assets shown in
the consolidated statement of financial position).

on a basis consistent with that used in the preparation of the consolidated statem
ent of
financial position.
1.2 Control and ownership
Consolidated statement of profit or loss
[Parent + Subsidiary (100%) – intra-group items]
 
Profit for the period (CONTROL) X
——
OWNERSHIP
Owners (“equity holders) of the parent
X
(% × subsidiary’s profit after tax) X
——
Profit for the period X
——

On consolidation, the subsidiary’s income and expenses (100%) will be
summed, line-by-line, with the parent’s income and expenses.

concept).
Commentary
For example, for interest paid by subsidiary to parent, cancel interest payable in subs
idiary’s
profit or loss against interest receivable in parent’s profit or loss.

controlling interest and the owners of the parent.
©2017 Becker Educationa
l Development Corp. All ri
ghts reserved.
2402
2 Intra-group transactions and unrealised
profit
2.1 Dividends

A parent’s share of a dividend paid by a subsidiary will be investment income
in the parent’s single-entity financial statements.
 However, the consolidated financial statements will include 100% of the
subsidiary’s profit (income less expenses).
 Dividends from a subsidiary are distributions (appropriations) of profit.
Dividends received by its parent are intra-group items.
 Therefore, the parent’s dividend income from the subsidiary needs to be
eliminated.
Commentary
This “leaves” the non-controlling interest’s share of the subsidiary’s dividends.
 Non-controlling interest in subsidiary in profit or loss is calculated on profit
Commentary
In short, simply ignore dividends from the subsidiary on consolidation.
 Dividend income in the consolidated statement of profit or loss will be
2.2 Intra-group items
2.2.1 Trading
 Intra-group trading will be included in the revenue of one group company and
in the purchases of another. Such trading must be cancelled out on
consolidation (single entity concept) by taking the following steps:
 add parent and subsidiary revenue and cost of sales;
 deduct amount of intra-group sales from revenue and cost of sales.
Commentary
Revenue of the seller will equate to purchases (cost of sales) of the buyer,
therefore the adjustment has no effect on profit and hence will have no effect on
the non-controlling interest’s share of profit.
2.2.2 Unrealised profits on trading
 If any items sold by one group company to another are included in inventory
(i.e. have not been sold outside the group by the year end), their value must be
adjusted to the lower of cost and net realisable value to the group.
ghts reserved.
2403
 The adjustment for unrealised profit should be made against the profits of the
selling company. If the subsidiary sold the goods then the reduction in profit is
shared between the parent and non-controlling interest.
 Steps to set up an allowance for unrealised profit:
 any inventory purchased from a group company that is
remaining at the year end. .
 Calculate the intra-group profit included in that inventory.
 Make an allowance against the inventory to reduce it to cost to the
group (or net realisable value if lower).
Worked example 1
Porpoise
$ $
Gross profit
During the year Porpoise made sales to Whale amounting to $30,000. $15,000 of these
sales were in inventory at the year end. Profit made on the year-end inventory items
amounted to $2,000.
Required:
Calculate group revenue, cost of sales and gross profit.
Worked solution 1
Seller adjustment
$ $ $ $

120,000 70,000 (30,000) 160,000
(80,000) (50,000) 30,000
(2,000)
– unrealised profit ——— (102,000)
———– 18,000 ——— ———
40,000 ——— 58,000
Gross profit
———– ———
———
Non-controlling interest (25% × (20,000 – 2,000) (4,500)
) ———
Commentary
By adding the unrealised profit to cost of sales the total profit will be reduced
by the amount of the unrealised profit.
2.2.3 Unrealised profit in opening inventory
 Any unrealised profit in opening inventory will be deducted from cost of sales o
f the
original selling company, thereby reversing the originating adjustment made ag
ainst
the previous year’s closing inventory.
Commentary
The adjustment for unrealised profit is merely a timing adjustment. The period of
recognition of profit by the group is moved to a later period than that recognised by
the single entity.
 Last year’s closing inventory is the current year’s opening inventory so any unr
ealised
profit adjustments in the previous year will be reversed in the current year, assu
ming
that the inventory has been sold outside the group in the current period.
 Therefore, any unrealised profit in opening inventory will be deducted from the
costs of
the original selling company, thereby increasing the profits for the current year.
 This adjustment only ever affects the gross profit calculation, never the stateme
nt of
financial position at the reporting date.
Illustration 1
In year 1 Parent sells goods to Subsidiary for $100, the cost of these goods was $80.
At the end of the year the goods are still held by the subsidiary.
In year 2 the Subsidiary sells the goods on for $110:
P S Group
Year 1 Profit $20 0
Year 2 Profit $10 $30
The profit recognised by the Parent and Subsidiary over the two years is $30 and the
group also recognises profit of $30. The adjustment for unrealised profit merely
changes the period of recognition of profit; in this example moving, by one year, the
recognition of the initial $20 profit.
2.2.4 Non-current asset transfers
 The consolidated statement of profit or loss should include depreciation of non-
current assets based on cost to group and exclude profit or loss on non-current a
sset
transfers between group members. This is consistent with treatment in the
consolidated statement of financial position.
 Eliminate profit or loss on transfer and adjust depreciation in full (control).
 These adjustments are made in full against the consolidated amounts.
2405
Worked example 2
Parent owns 80% of subsidiary. Parent transferred a non-current asset to subsidiary
on 1 January 2017 at a value of $15,000. The asset originally cost Parent $20,000
and depreciation to the date of transfer was $8,000. The asset had a useful life of 5
years when originally acquired, with a residual value of zero. The useful life at the
date of transfer remains at 3 years. A full year’s depreciation charge is made in the
year of acquisition and none in the year of disposal. Total depreciation for the year
was $700,000 for parent and $500,000 for subsidiary.
Required:
Show the adjustments required for the above transaction in the consolidated
statement of profit or loss for the year ended 31 December 2017.
Worked solution 2 – As a selling company adjustment
Parent Subsidiary
Adjustment Consolidated
$ $ $
3,000 3,000
(1,000) (1,000)
————–
1,202,000
————–

This depreciation adjustment would be part of the profit after
tax of subsidiary and would therefore be shared with the
non-controlling interest.
2.2.5 Interest and other charges
 Where a group company lends money to another group company the
 Where the loan carries interest payments there will be interest income in one co
mpany
and interest expense in the other, this interest will also need to be eliminated.
Illustration 2
Parent has made an 8% $100,000 loan to its subsidiary. The Parent’s single entity
accounts include interest income of $8,000. The Subsidiary’s single entity accounts
show interest expense of $8,000. These two figures will be cancelled against each
other in the consolidated accounts and no interest income or interest expense will be
recognised.
 Many companies also make a form of management charge against other group
companies, normally from the parent to the subsidiary. The parent will reflect o
ther
income in its profit or loss whilst the subsidiary will include the charge as part o
f its
operating expenses. On consolidation these intra-group charges must also be
cancelled against each other.
3 Non-controlling interest
3.1 Recognition

The non-controlling interest’s share of subsidiary’s profit after tax must be
shown, leaving group profit remaining.
3.2 Treatment of goodwill

IFRS 3 rules that goodwill arising on acquisition must be capitalised and tested
annually for impairment. Any impairment is recognised as an expense and char
ged to
profit or loss in the period.
 If non-controlling interest is valued at fair value (i.e. credited with its share of g
oodwill)
any impairment loss relating to goodwill must be allocated between the parent a
nd non-
controlling interest in the proportion of their respective share ownerships.
 Any excess of the fair value of the assets and liabilities acquired over the cost o
f the
acquisition is credited to profit or loss immediately.
Non-controlling interest does not share in this excess.
Activity 1
Pathfinder owns 75% of Sultan . Statements of profit or loss for the two companies
for the year ending 30 September 2017 are as follows:
Pathfinder Sultan
$ $
Revenue 100,000 50,000
Cost of sales (60,000) (30,000)
——— ———
Gross profit 40,000 20,000
(20,000) (10,000)
Expenses ——— ———
20,000 10,000
Profit for the period ——— ———
During the year, Pathfinder sold goods to Sultan for $20,000, at a gross profit margin
of 40%. Half of the goods remained in inventory at the year end. Non-controlling
interest is valued at fair value and goodwill is to be impaired by $2,000 for the
current year.
Required:
Prepare the consolidated statement of profit or loss of Pathfinder for the year
ended 30 September 2017.
2407
Proforma solution
Consolidated statement of profit or loss for the year ended 30 Septemb
er 2016
$
Revenue
Cost of sales
———
Gross profit
Expenses
———
Profit
———
Attributable to:
Owners of the parent
Non-controlling interest (W3)
———
———
WORKINGS
(1) Group structure
(2) Consolidation schedule
Pathfinder Sultan Adjustment
Consolidated
$ $ $ $
Revenue
Cost of sales
Expenses
———
Profit
———
$
–——
(4) Unrealised profit
$
Selling price
Cost
—— ——— $
Gross profit
—— ——— –——
4 Mid-year acquisitions
4.1 Inclusion of subsidiary’s results

include a subsidiary’s results from the date of acquisition
(i.e. when control is gained). If subsidiary is acquired during a year:
 Consolidate subsidiary from date of acquisition;
 Identify net assets at date of acquisition for goodwill (as for
consolidated statement of financial position );
 Assume revenue and expenses accrue evenly over the year (unless
contrary is indicated). Therefore, time-apportion totals for revenue
and costs, then deduct intra-group items.
Worked example 3
Parent acquired 75% of subsidiary on 1 April 2017. Extracts from the companies’
statements of profit or loss for the year ended 31 December 2017 are:
Parent Subsidiary
$ $
Revenue 100,000 75,000
Cost of sales (70,000) (60,000)
———
Gross profit 30,000
——— ———
Since acquisition, parent has made sales to subsidiary of $15,000. None of these
goods remain in inventory at the year end.
Required:
Calculate revenue, cost of sales and gross profit for the group for the year
ending 31 December 2017.
Worked solution 3
Consolidated statement of profit or loss
$ $
Revenue
100,000
Cost of sales
15,000 (100,000)
——————
Gross profit 30,000 11,250
——————
5 Disposal
5.1 Possibilities

The disposal of an interest in a subsidiary needs to be reflected in the parent’s
books and, more importantly, in the consolidated financial statements.

Consolidated financial statements reflect:

 inclusion of results and cash flows of entity disposed of;
calculation and presentation of profit or loss on disposal; and

any remaining interest (after a part-disposal).
 Disposal may be:

full disposal (i.e. sell entire holding); or

part disposal, retaining some interest in the undertaking.
Commentary
Only full disposal is examinable in DipIFR.
5.2 Treatment in parent’s own accounts

Parent will carry its investment in a subsidiary in its own statement of financial
position as a non-current asset investment, usually at cost.
 The sale of all or part of an investment is recorded as a disposal in the parent’s o
wn
financial statements and will usually give rise to a profit or loss on disposal (i.e.
proceeds
less cost of investment sold). An accrual may be required for tax on any gain on
disposal.

$ $
Dr Cash/receivables (proceeds) X
X
Dr P or L loss on disposal (or Cr profit on disposal) X X
If required
Dr P or L tax charge (tax on gain on disposal) $ $
X
X
5.3 Treatment in consolidated financial statements
5.3.1 Consolidated statement of financial position
 Applying the single entity
 If at the year end the parent has sold its shares in the subsidiary, there will be n
o
reference to the subsidiary in the statement of financial position (even if the
subsidiary was sold on the last day of the year).
5.3.2 Consolidated statement of comprehensive income
 The consolidated statement of profit or loss and other comprehensive income
must reflect the pattern of ownership in the period.
 Profit or loss on disposal must be calculated from the group’s perspective. This
will be different to that recognised by the parent because:
 The group recognises 100% of the subsidiary’s profit (or loss) during
the term of ownership whereas the parent recognises only dividends
received from the subsidiary; and
 The group will recognise impairment of goodwill (the parent does not).
5.3.3 Pattern of ownership
Status of investment Treatment in Treatment in

Before
After consolidated statement of consolidated statement of
disposal
disposal comprehensive income financial position
Sub  zero  Consolidate up until the date

 The subsidiary no longer
E.g. 90%
0%

Illustration 3 Revenue and costs
Paper purchased 60% of the shares in Scissors a number of years ago.
On 30 September of the current period, Paper sold all of its shares in Scissors. Paper’s
year end is 31 December.
Scissors revenue and costs for the year are $60,000 and $42,000, respectively.
Revenue and costs accrue evenly throughout the year.
Revenue and costs of Scissors included in the consolidated profit or loss for the year
will be as follows:
Revenue (60,000 × 9/12) $45,000
Cost (42,000 × 9/12) $31,500
Non-controlling interest will be $5,400 (i.e. 40% × (45,000 – 31,500)).
ghts reserved.
2411
5.4 Group profit or loss on disposal

Any disposal of a shareholding that results in the loss of control will give rise to
recognition of a gain or loss on disposal in the statement of profit or loss.
 On the date that control is lost the following adjustments must be made:
 Derecognise the carrying amount of assets, including goodwill,
liabilities and non-controlling interest from the consolidated statement
of financial position;
 Recognise the fair value of the consideration received on the disposal
of the shareholding;
 Recognise any resulting difference as a gain or loss in profit or loss
attributable to the parent.
Illustration 4 Profit on disposal
Plumber purchased 80% of the shares in System a number of years ago for $125
million. On the acquisition date, non-controlling interest was valued at a fair value of
$25 million, the fair value of System’s net assets was $140 million and goodwill of $10
million was recognised.
Since acquisition, System has made $20 million profit and goodwill has been impaired
by $4 million. Today, Plumber sells all of its shares in System for $160 million.
Parent and group profit or loss on disposal is calculated as follows:
Parent
$m
Proceeds on disposal 160
(125)
Cost of investment ––––
35
Profit on disposal ––––
This profit would be included in Plumber’s profit or loss in the year of disposal, tax
would be applied to this figure where relevant.
Group
$m
Proceeds on disposal 160
System net assets on disposal (140 + 20) (160)
Goodwill remaining (10 – 4) (6)
Non-controlling interest on disposal (25 + ((20 – 4) × 20%)) 28.2
––––––
22.2
Profit on disposal ––––––
This profit would be included in the consolidated profit or loss in the year of disposal.
Illustration 4 (continued)
Difference in profit
The $12.8 million difference in the two profit figures is Plumber’s share (80%) of
System’s post-acquisition profit of $20 million less goodwill impaired of $4 million:
($20 − $4) × 80% = $12.8 million
This difference exists because the consolidated statement of profit or loss included
Plumber’s share of System’s post acquisition profits (less goodwill impaired) during
the period of control, while Plumber’s own (single entity) statement of profit or loss
only included dividends received from System.
The higher profit recognised in the consolidated statement of profit or loss during the
term of ownership results in less profit recognised on disposal.
5.5 Discontinued operation

It is highly likely that the disposal of a subsidiary will be classified as a
discontinued operation.
 In this case the results for the subsidiary to the date of disposal will be
presented separately from the results of the continuing operations.
 profit or loss on the actual dis
posal are
presented as a single item in the statement of profit or loss and analysed further
either in
the statement of profit or loss or in the disclosure notes (IFRS 5).
6 Consolidated statement of changes in eq
uity
6.1 IAS 1

IAS 1 requires a statement of changes in equity to be included in a set of financi
al
statements, whether they are from a single entity perspective or that of a group.
 The statement will reconcile how the equity position has changed during the per
iod.
The consolidated statement will look at the movements from the point of the gr
oup,
but will include a reconciliation in respect the movement of the non-controlling
interest’s share of group equity. The statement may include some of the followi
ng:
 Opening balances;
 Cumulative effect of changes in accounting policy and prior period errors;
 Profit for the year;
 Ordinary dividends;
 Issue of shares;
 Equity component of convertible bond;
 Deferred tax implications (if any) to above items.
Key point
Ordinary dividends in the consolidated statement of changes in equity will include
dividends paid by the parent company and those paid by the subsidiary to the non-
 A column for non-controlling interest will include, where relevant:
 Opening balances;
 Profit for the year;
 Acquisitions or disposals during the year;
 Subsidiary dividends paid to non-controlling interest;
 Issue of shares by subsidiary.
Illustration 5
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY in $m at 31December 20X7
Other reserves
Total
Total Share attributable Non-
share premium Retained to equity controlling Total
capital reserves earnings holders interests equity
921 798
Total comprehensive income 227 227 24 251
1183 1647 754 3584
Worked example 4
The draft accounts of two companies at 31 March 2017 were as follows:
Statements of financial position
Hamble Group
$
–
Retained earnings
——— ———
39,890 6,500
——— ———
Jemima
$ $
Retained earnings b/d
——— ———
Retained earnings c/f
Worked example 4 (continued)
Hamble had acquired 90% of Jemima, on 1 April 2015, when the reserves of Jemima
were $700. Goodwill of $110 arose on the acquisition. This had been impaired by $22
in each year since the acquisition occurred.
Required:
Prepare extracts from the Hamble Group statement of financial position,
statement of profit or loss and statement of changes in equity.
Worked solution 4
(1)
Consolidated retained earnings 1 April 2016 (2) 31 March 2017
$ $
19,890
90% (3,5002,520
700) ——— (44)
(22
22,366
) ———
Consolidated statement of financial position as at 31 March 2017
$
Share capital 20,000
650
Non-controlling interest (6,500 × 10%) ———
43,016
———
Consolidated statement of profit or loss for the year ended 31 March 2
017
Hamble Jemima Consolidated
Profit before taxation
(5,400) (2,150)
——— ———
Profit after taxation 7,550 1,650
Attributable to:
Non-controlling interest (1,650 × 10%) 165
9,013
Owners of the parent ———
9,178
———
Consolidated statement of changes in equity for year ended 31 March
2017
capital earnings
interest Equity
$ $ $ $ $
At 1 April 2016 20,000 13,353 33,353 485 33,838
9,013 9,013 165 9,178
Profit for year ——— ——— ——— ———
——— 22,366 42,366 650 43,016
20,000
At 31 March 2017 ——— ——— ——— ———
———
Commentary
Opening non-controlling interest is calculated as 10% of the share capital and
the retained earnings at 1 April 2016 (3,000 + 1,850).
Key points summary
The profit or loss of the parent as a single entity will reflect the dividends received from
its subsidiary, whereas the consolidated profit or loss will reflect the parent’s share of
the subsidiary’s profit (or loss).
Consolidated profit or loss will include 100% of the subsidiary’s profits with the non-
controlling interest’s share shown as an allocation of the profit after tax.
The same principles are followed for items of other comprehensive income.
All intra-group revenue and expenses are cancelled on consolidation.
Unrealised profit in closing inventory is added to the costs of the selling company.
Unrealised profit in opening inventory is deducted from the costs of the original selling
company.
Consolidated profit or loss must reflect any adjustments for depreciation in respect of
fair value differences or intra-group sales treated as non-current assets by the buyer.
Goodwill impairment for the year is shown as:
 a subsidiary expense if non-controlling interest is valued at fair value; and
 an expense against the parent under the alternative model.
If the subsidiary is acquired part way through the year only the post-acquisition period
income and expenses of the subsidiary are consolidated.
Group profit on disposal is calculated as Proceeds – (S net assets on disposal + goodwill
remaining – fair value of non-controlling interest).
The subsidiary disposed of is likely to be presented as a discontinued operation.
parent company and those paid by the subsidiary to the non-controlling interest.
Focus
You should be able to:
 prepare a consolidated statement of profit or loss and other comprehensive inco
me and
a statement of changes in equity for a simple group (one or more subsidiaries),
including where an acquisition occurs during the year and where there is a non-
controlling interest;
 report the effects of intra-group trading and other transactions including
 unrealised profits in inventory and non-current assets; and
 intra-group interest and other intra-group charges; and
 intra-group dividends.
 explain and illustrate the effect of a disposal of a parent’s investment in a subsid
iary in
the parent’s individual financial statements and/or those of the group (restricted
to
disposals of the parent’s entire investment in the subsidiary).
Activity solution
Solution 1
Consolidated statement of profit or loss for the year ended 30 Septemb
er 2017
$
130,000
Cost of sales (74,000)
———
56,000
(32,000)
Expenses ———
24,000
Profit ———
Attributable to:
Owners of the parent (balance) 22,000
Non-controlling interest (W3) 2,000
———
24,000
———
WORKINGS
(a) (1) Group structure

Pathfinder
75%
Sultan
ghts reserved.
2417
(2)
Pathfinder Sultan Adjustment
Consolidated
$ $ $ $
Revenue 100,000 50,000 (20,000) 130,000
(30,000) 20,000
(4,000) (74,000)
Expenses (10,000) (30,000)
(20,000) (2,000)
Goodwill impairment (2,000) ———
24,000
Profit ———
$
2,000
Sultan 8,000 (W2) × 25% =
–——
Commentary
If the non-controlling interest was valued at its proportionate share of the identifiable
net assets the goodwill impairment would be shown against the adjustment column
and non-controlling interest would have been calculated at 25% of 10,000.
(4) Unrealised profit
100
Cost (60) (12,000)
—— ——— $
Gross profit 40 8,000 × ½ = 4,000
—— ——— –——
(5) Revenue
$
100,000
50,000
(20,000)
Intra-group sales ———
130,000
———
(6) Gross profit
$
40,000
20,000
(4,000)
Unrealised profit ———
56,000
Profit ———
Therefore cost of sales could be taken as a balancing figure of $74,000.
Overview
Objectives

To explain the acco
unting treatment for
associates and joint
arrangements.
 Equity accounting
BACKGROU  Related stan
ND dards
 Terminology
 Significant influence
 Separate financial statem
ents
ASS
OCI JO
ATE IN
S A T
ND OP
ER
JOI AT
NT IO
VEN NS
TUR
ES
(IF
RS
ADJ
11)
UST
ME
NTS
 Rela  R
tionship elati
to a gr ons
oup hip
 Consolidated statement o
f financial
comprehensive income
 Recognition of
 Accounting policies and
year ends
 Exemptions to equity acc
ounting
DI
TRA SC
NSA L
CTI O
ONS S
U
WIT R
H A E
SSO
CIA (IF
TES RS
12
)
 

T
r
a
d
i
n
g

S o
c p
 D 
ivide
Inf
nds
 U or
nreal mat
ised ion
profit
eserved. 2501
SESSION 25 – ASSOCIATES AND JOINT ARRANGEMENTS
1 Background
1.1 Equity accounting

Where one company has a controlling investment in another c
ompany, a parent-subsidiary
relationship is formed and accounted for as a group. Compani
es may also have substantial
investments in other entities without actually having control.
Thus, a parent-subsidiary
relationship does not exist between the two.
 An investing company that can exert significant influence ove
r the financial and operating
policies of the investee company will have an active interest i
n its net assets and results.
 The nature of the relationship differs from that of a simple in
vestment (i.e. it is not
a passive interest).
Commentary
Including the investment at cost in the company's accounts would n
ot fairly present
the investing interest.
 Equity accounting solves this issue by reflecting the investm
ent as a share of the
associate’s net assets, rather than the cost of investment. The
investor’s profit or loss
includes a share of the associate’s profit, rather than any divid
end received.
 A different relationship exists where an entity shares control
with one or more other
entities. This shared or joint control, does not give any one p
arty dominant or significant
influence. All parties sharing control must agree how the shar
ed entity is to be run.
 Joint ventures are also accounted for using the equity metho
d.
1.2
Related standards
1.2.1
IAS 28 “Investments in Associates and Joint Ven
tures”
 IAS 28 prescribes the accounting for investmentsand the
sociates
application of the equity method also for joint ventures
.
 It explains when significant influence exists and the procedur
es used in applying the
equity method (many of which are similar to consolidation pr
ocedu res).
1.2.2 IFRS 11 “Joint Arrangements”
 IFRS 11 sets out the principles for financial reporting of inte
rests in
arrangements that are controlled jointly (i.e. “joint arrangem
ents”).
 A joint arrangement is contractual and classified as either:
 a joint operation; or
 a joint venture.
 This classification depends on the rights and obligations of th
e parties to the arrangement:
 if the parties have rights to assets and obligations for liabiliti
es it is
a joint operation, to which IFRS 11 applies;
 if the parties have rights to the net assets of the arrangement
it is a
joint venture, to which IAS 28 applies.
1.2.3 IFRS 12 “Disclosure of Interests in Other Entities
”
 IFRS 12 requires disclosure of information to enable users to
evaluate:
 the nature of, and risks associated with, interests in other enti
 ties; and
the effects of those interests on the financial statements.
 It requires disclosures of investments in subsidiaries, associat
es and joint arrangements
1.3 Terminology

An associate is an entity over which an investor has signific
ant influence.
 Significant influence is the power to participate in the financi
al and operating policy
decisions of the investee but is not control or joint control ove
r those policies.
 Control exists if the investor is exposed, or has rights to, vari
able returns
from its investment and has the ability to affect those returns
through its
power over the investee.
 The equity method is a method of accounting whereby the in
vestment is initially
recognised at cost and adjusted thereafter for the post acquisit
ion change in the
investor’s share of net assets of the investee. The investor’s p
rofit or loss
includes its share of the profit or loss of the investee. The sa
me applies to other
 A joint arrangement is an arrangement under which two (or
more) parties
have joint control.
 Joint control is the contractually agreed sharing of control o
f an arrangement.
Commentary
It exists only when decisions about the relevant activities require t
he
 A joint venture is a joint arrangement under which the partie
unanimous consent of the parties sharing control.
s having joint
control have rights to the net assets of the arrangement.
Commentary
These parties are “joint venturers”.
Illustration 1
An entity may commence a business in a foreign country in conjuncti
on with the
government or other agency in that country, by establishing a separat
e entity which is
jointly controlled by the entity and the government or agency.
Commentary
A joint venture maintains its own accounting records and prepares
and presents
financial statements (e.g. under IFRS) in the same way as other en
tities.
 A joint operation is a joint arrangement under which the part
ies having joint control
have rights to the assets, and obligations for the liabilities, of
the arrangement.
Commentary
These parties are “joint operators”.
Illustration 2
Many activities in the oil, gas and mineral extraction industries invol
ve jointly
controlled assets. For example, a number of oil production companie
s may jointly
control and operate an oil pipeline. Each venturer uses the pipeline to
transport its own
product in return for which it bears an agreed proportion of the expen
ses of operating
the pipeline.
Illustration 3
Two or more venturers combine their operations, resources and exper
tise in order to
manufacture, market and distribute jointly a particular product, such a
s an aircraft.
Different parts of the manufacturing process are carried out by each o
f the venturers.
Each venturer bears its own costs and takes a share of the revenue fro
m the sale of the
aircraft, as determined in the contractual arrangement.
1.4 Significant influence

The term significant influence means that an investor is invol
ved, or has the right
to be involved, in the financial and operating policy decisions
of the investee.

one or
an investor is usually evidence
more
d in
f the
ollowi
ng wa
ys:
 Representation on the board of directors or equivalent gover
 ning body;
 Participation in policy making processes;
 Material transactions between the investor and the investee;
 Interchange of managerial personnel; or
Provision of essential technical information.
 A holding of 20% or more of the voting rights of the investee
indicates significant
influence, unless it can be demonstrated otherwise.
Commentary
Conversely, a holding of less than 20% presumes that the holder d
oes not have
significant influence, unless such influence can be clearly demonstr
ated (e.g.
representation on the board).
 currently exercisable
convertible by the investor should be or
onsidered.
Commentary
Such potential voting rights may occur through holding share warr
ants,
share call options, debt or equity instruments (or other similar inst
ruments)
that are convertible into ordinary shares.
 When significant influence is lost, any remaining shareholdin
g will be remeasured to
fair value and that value is regarded as its cost on initial meas
urement thereafter (and
will be accounted for as a financial asset in accordance with I
FRS 9).
1.5 Separate financial statements (IAS 27)

Separate financial statements are those presented in addition
to:
 consolidated financial statements; or
 financial statements in which investments (in associates or j
oint
ventures) are accounted for using the equity method.
 In the separate financial statements, investments in subsidiar
y, associates and
joint ventures are accounted for:

under IFRS 5 if classified as held for sale; or

at cost or in accordance with IFRS 9.
Commentary
The emphasis is on the performance of the assets as investments.
2 Associates and joint ventures
Commentary
In this section all references to associate apply also to joint ventur
es.
2.1
Relationship to a group

A group is defined as a parent and all of its subsidiaries. An
associate is not part of
a group as it is not a subsidiary (i.e. it is not controlled by the
group).
 As such, the accounting treatment of the associate is different
to that of subsidiaries.
2.2 Basic rule

An investment in an associate is accounted for using the equi
ty method.
Commentary
Associates must be accounted for using the equity method regardle
ss of the fact
that the investor may not have investments in subsidiaries and doe
s not therefore
prepare consolidated financial statements.
2.3 Equity accounting

The investment in an associate is initially recognised at cost.
 The carrying amount is increased or decreased to recognise t
he investor’s
share of the profit or loss of the investee after the date of acq
uisition and then
decreased by any impairment loss.
 Distributions received from the associate, normally in the for
m of a dividend, reduce the
carrying amount of the investment.

Adjustments to the carrying amount may also be necessary fo
r changes in the
investor’s proportionate interest in the associate arising from
changes in the
associate’s equity that have not been recognised in the profit
or loss.
 Such changes include those arising from the revaluation of pr
operty, plant
and equipment and from foreign exchange translation differe
nces.
Commentary
The logical way of recognising these changes in equity would be t
o show the
investor’s share of the changes in other comprehensive income.
 The investor’s share of the current year’s profit or loss of the
associate is
recognised in the investor’s profit or loss.
2.4 Treatment in consolidated statement of fi
nancial position

The method described below applies equally to the financial s
tatements of a non-
group company that has an investment in an associate and to
group accounts.
 In group accounts, replace the investment as shown in the ind
ividual company’s
statement of financial position with:
 the cost of investment;
plus/minus
share of post-acquisition profit or loss;
 less
any impairment loss recognised.

 Do not consolidate line-by-line the associate’s net assets. Th
e associate is not a
subsidiary, therefore the net assets are not controlled as they a
re for a subsidiary.
 In group reserves, include the parent’s share of the associate’
s post-acquisition
reserves (the same as for subsidiary).
 Where the share of the associate’s net assets acquired at fair
value is in
excess of the cost of investment, the difference is included as
income in
determining the investor’s share of the associate’s profit or lo
ss.
Worked example 1
Parent acquired, during the current year, a 40% holding in Associate f
or $18,600.
Goodwill on acquisition was calculated as $1,000 and there has been
no impairment of
goodwill during the year. The fair value of Associate’s net assets at t
he year end is
$48,000.
Required:
Calculate the investment in associate to be included in the consoli
dated statement
of financial position and state the amount of Associate’s profits to
be included in
the consolidated statement of profit or loss for the current year.
Worked solution 1
Net assets on acquisiti
on $
18,600
Cost of investme (1,000)
nt –––––––
Less: Goodwill 17,600
/40
40% of Associate’s net assets on acquisiti –––––––
on 44,000
Gross up to 100% –––––––
Investment in associate
Cost of investment
Plus: 40% of post-acquisition profits (48,000 – 44,00 18,600
1,600
0) 0
Less: Impairment loss recognised –––––––
20,200
–––––––
Income from associate
included in consolidated statement of profit or lo
ss
40% of post-acquisition profits (48,000 – 44,000) 1,600
–––––––
©2017 Becker Educa
tional Development
ved.
2507
Activity 1
companies at 31 December 2017 are:
$ $ $
Investment: shares in S 800 – –
–
Investment: shares in A 600 800 1,400
3,300
1,600 3,250
2,200—–— —–—
Other non-current asset 4,100 4,650
s —–— —–—
400 800
Current asset 3,400 3,600
s —–— 300 250
1,000—–— —–—
4,0004,100 4,650
—–— —–—
Liabilitie
s
—–—
P acquired its shares in S seven years ago when S’s retained earnings
were $520 and
its shares in A on the 1 January 2017 when A’s retained earnings wer
e $400.
Non-controlling interest is not credited with goodwill, which was full
y written off
prior to 1 January 2017. There were no indications during the year th
at the
investment in A was impaired.
Required:
Prepare the consolidated statement of financial position at 31 Dec
ember 2017.
Proforma solution
Consolidated statement of financial position as at 31 De
cember 2016
$
Non-current assets
Current assets
———
———
Issued capital
Retained earnings
———
Non-controlling interests
Liabilities
———
———
WORKINGS
(1) Group structure
(2) Net assets working
Reporting Acquisition

date
$ $
Issued capital
Retained earnings
——— ———
———
———
(3)
Goodwill
$
Cost of investment
Net assets acquired
———
———
(4)
Non-controlling intere
sts $
S on
ly
———
(5) Retained earnin
gs $
P – from questi
on
Share of S
Share of A
Less: Goodwill
———
———
(6)
$
Cost of investment
Share of post-acquisition profits
———
———
2.5 Treatment in consolidated statement of p
rofit or loss

Treatment is consistent with consolidated statement of financ
ial position and
applies equally to a non-group company with an associate:
 Include group share of the associate’s profits after tax in the
consolidated profit or loss. This replaces dividend income s
hown
in the investing company’s own profit or loss.
 Do not add in the associate’s revenue and expenses line-by-
line as
this is not a consolidation and the associate is not a subsidiar
y.
 Time-apportion the associate’s results if acquired mid-year.
Commentary
Note that the associate statement of financial position is NOT time
apportioned as the statement of financial position reflects the net a
ssets at the
end of the reporting period to be equity accounted.
Activity 2
P has owned 80% of S and 40% of A for several years. Statements of
profit or
loss for the year ended 31 December 2017 are:
P S A
$ $
Reven 12,000 10,000
ue
Cost of sales (3,000)
(9,000) (4,000
—––—
) 7,000
Gross profit
(3,000)
—––— —––— —––—
3,0002,000 4,000
–
Dividend from associate 400
—––— –
2,000
(1,200)
—––—
(1,000)
Profit before taxatio 800 —––—
n —––— 2,000
—––—
Profit after taxation

Extract from statement of changes in equ
ity: 1,000 – 1,000
Goodwill was fully written off three years ago.
Required:
Prepare the consolidated statement of profit or loss for the year
ended 31
December 2017.
2.6 Recognition of losses

If an investor’s share of losses of an associate equals or excee
ds its interest in
the associate, the investor discontinues recognising its share
of further losses.
 The interest in the associate is its value under the equity met
hod plus any
long-term interest that forms part of the investor’s net invest
ment.
Commentary
Such interests may include preference shares and long-term receiv
ables or
loans but do not include trade receivables, trade payables or any l
ong-term
receivables for which adequate collateral exists, such as secured lo
ans.
 After the investor’s interest is reduced to zero, additional loss
es are provided
for, and a liability is recognised, only to the extent that the in
vestor has incurred
legal or constructive obligations or made payments on behalf
of the associate.
 If the associate subsequently reports profits, the investor resu
mes recognising its share of
those profits only after its share of the profits equals the share
of losses not recognised.
Commentary
The investment in the associate can be reduced to nil but no furthe
r (i.e. the investment in
associate will not be negative, even if there are post-acquisition lo
sses of the associate).
Illustration 4
A parent company has a 40% associate, which was acquired a numbe
r of years ago for
$1m. A long-term loan was also made to the associate of $250,000
Since the acquisition the associate has made losses totalling $5m.
The parent’s share of those losses would be $2m.
The parent would only be required to recognise the losses to the exte
nt of the
investment of $1m plus $250,000, the remaining share of losses ($75
0,000) would not
be recognised unless the parent had a present obligation to make goo
d those losses.
If the associate then became profitable, the parent would not be able t
o recognise those
profits until its share of unrecognised losses had been eliminated.
 However the investor should continue to recognise losses to t
he extent of any
guarantees made to satisfy the obligation of the associate. Thi
s may require
recognition of a provision in accordance with IAS 37.

Continuing losses of an associate is objective evidence that fi
nancial interests
in the associate other than those included in the carrying amo
unt may be
impaired.
2.7 Accounting policies and year ends
2.7.1
Accounting policies
 If an associate uses accounting policies other than those of th
e investor,
adjustments must be made to conform the associate’s account
ing policies to
those of the investor in applying the equity method.
2.7.2 Year ends
 The most recent available financial statements of the associat
e are used by the investor.
 When the ends of the reporting periods of the investor and th
e associate are
different, the associate prepares, for the use of the investor, fi
nancial
statements as at the same date as the financial statements of t
he investor.
Commentary
Unless it is impracticable to do so.
 When it is not practicable to produce statements as at the sam
e date, adjustments
must be made for the effects of significant transactions or eve
nts that occur
between that date and the date of the investor’s financial state
ments.
 In any case, the difference between the end of the reporting p
eriod of the
associate and that of the investor must not be more than three
months.
 The length of the reporting periods and any difference in the
end of the
reporting periods must be the same from period to period.
2.8 Impairment

After application of the equity method, including recognising
the associate’s losses,
the investor should consider whether it is necessary to recogn
ise any additional
impairment losses.
 The entire carrying amount of the investment is tested for imp
airment by comparing it
with its recoverable amount.
 In determining the value in use of the investment, an entity e
stimates:
 its share of the present value of the estimated future cash flo
ws expected to
be generated by the associate, including the cash flows from t
he operations of
the associate and the proceeds on the ultimate disposal of the
investment; or
 the present value of the estimated future cash flows expected
to arise from
dividends to be received from the investment and from its ult
imate disposal.
Commentary
Using appropriate assumptions, both methods give the same result.
2.9 Exemptions to equity accounting

An associate that is classified as held for sale is accounted fo
r under IFRS 5
Commentary
It will be measured at the lower of its carrying amount (e.g. cost)
and fair
value less costs to sell.
 If the investor is also a parent that has elected not to present c
onsolidated financial
statements the investment in the associate will be measured at
cost or in accordance
with IFRS 9. All of the following conditions must apply:
 the investor is a wholly-owned subsidiary (or partially-owned
and other owners
do not object); and

the investor’s debt or equity instruments are not traded in a p
ublic market; and

the investor does not file its financial statements with a securi
ties regulator; and

the ultimate (or any intermediate) parent of the investor prod
uces
consolidated financial statements available for public use un
der IFRS.
Commentary
This allows investors who do not have investments in a subsidiary,
but only
have an investment in an associate, to be exempt from the require
ment to
equity account on the same basis as parents under IFRS 10.
3 Transactions with Associates
Commentary
The methods described below apply equally to the financial statem
ents of a non-
group company that has an investment in an associate as they do t
o group accounts.
All references to associates in this section apply also to joint ventu
res.
3.1 Trading

Members of the group can sell to or make purchases from an
associate.
This trading will result in the recognition of receivables and p
ayables in the
individual company accounts.
 Do not cancel balances between parent and an associate and
do not
 In consolidated statement of financial position, show balance
s with the
associate separately from other receivables and payables.
Commentary
This is appropriate as the associate is not part of the group.
3.2 Dividends

Consolidated statement of financial position:
 Ensure dividends payable/receivable are fully accounted for
in the
individual companies’ books.

Include receivable in the consolidated statement of financial
 Do not cancel balances for dividends receivable and propos
ed.
 The consolidated statement of profit or loss and other compre
hensive income does
not include dividends from an associate. Parent’s share of th
e associate’s profit
after tax (hence before dividends) is included under equity ac
counting in the
income from the associate.
Commentary
It would be double-counting to include dividend in the consolidate
d statement
of profit or loss as well.
3.3 Unrealised profit

If a parent sells goods to an associate (“downstream”) and the
associate still holds
them in inventory at the year end, their carrying amount will i
nclude the profit made
by parent and recorded in its books. Hence, profit is included
in the inventory value
in the associate’s net assets (profit is unrealised) and parent’s
profit or loss.
 If an associate sells to its parent (“upstream”), a similar situat
ion arises; profit is
included in the associate’s profit or loss and the parent’s inve
ntory.
 To avoid “double counting”, this unrealised profit needs to b
e eliminated.
 Unrealised profits are eliminated to the extent of the investor’
s interest in the associate.
 However, unrealised losses should not be eliminated if the tr
ansaction provides
evidence of an impairment in value of the asset that has been
transferred.
Commentary
To eliminate unrealised profit, Dr Share of associate profit and Cr
Investment in
associate, irrespective of whether sale is from associate to parent
or vice versa.
Worked example 2
Parent has a 40% associate.
Parent sells goods to associate for $150 which originally cost parent $
100. The goods
are still in associate’s inventory at the year end.
Required:
State how the unrealised profit will be dealt with in the consolidat
ed accounts.
Worked solution 2
To eliminate unrealised profit:
 Deduct $50 from associate’s profit before tax in the statemen
t of profit or
loss, thus dealing with the profit or loss effect.
 Deduct $50 from retained earnings at end of the reporting per
iod in net assets
working for associate, thus dealing with the effect on financia
l position.
Share of net assets and post-acquisition profits included under equity
accounting will
then be $20 (50  40%) lower.
Commentary
The simple rule to follow is that the unrealised profit will only be
Parent’s %, $20
in this example.
Double entry for $20
Dr Consolidated retained earning 20

Cr s 20
Be aware that there is more than one way of making the adjustme
nt; this is
just one of the possible methods.
4 Joint operations (IFRS 11)
4.1 Relationship

A joint operation exists when an entity only has a share in the
individual assets or
liabilities of the joint arrangement (e.g. an oil company sharin
g control of a pipeline).
 It is the rights to individual assets and obligations for liabiliti
es that drive the
relationship (rather than rights to the net asset position).
4.2 Accounting

A joint operator recognises:
 its assets to include a share of any jointly-held assets;
 its liabilities, to include a share of any liabilities jointly incurr
 ed;
 its revenue from the sale of its share of any output from the j
 oint operation;
its share of any revenue from the sale of the output of the join
t operation; and
its expenses, to include a share of any jointly-incurred expens
es.
 The accounting for any assets, liabilities, revenue and expens
es will be in
accordance with the relevant standard (e.g. IAS 16 for proper
ty).
Commentary
IFRS 11 also applies to an entity that participates in a joint operat
ion but
does not have joint control, as long as that entity has rights to the
assets or
obligations for the liabilities of the joint operation.
4.2.1 Sales or contributions of assets to joint operatio
n
 If a joint operator sells goods to the joint operation at a profit
or loss then it
recognises the profit or loss only to the extent of the other par
ties’ interests in
the joint operation.
Illustration 6
A, B, C and D each hold a 25% stake in the joint operation of Z. A s
ells goods to Z
making a profit of $1,000. A recognises only $750 (75%) profit in its
financial
statements.
4.2.2 Purchases of assets from a joint operation
 If a joint operator purchases goods from a joint operation it c
annot recognise
its share of any gains or losses until it resells them to an exter
nal party.
5 Disclosure (IFRS 12)
5.1 Scope

IFRS 12 applies to any entity which has an interest in a subsi
diary, associate or
joint operation or unconsolidated structured entity.
 It does not apply to:

 post-employment benefit plans (IAS 19);

separate financial statements (IAS 27);
 participation in a joint arrangement which does not have join
t control;
an interest that is accounted for under IFRS 9.
5.2 Information

In relation to interests in joint arrangements and associates, i
nformation must
be disclosed to allows users to evaluate:
 the nature, extent and financial effects of such interests;

the nature and effects of any contractual relationship with oth
er investors having
joint control or significant influence over associates or joint a
rrangements;

the nature of, and changes in, the risks associated with such i
nterests.
 Disclosures should include:

the name of the joint arrangement or associate;

the nature of the relationship;

the proportio ip;
n of ownersh

any significant restrictions on the ability of the associate or j
oint
venture to transfer funds to the entity;

its commitments to joint ventures;

its share of unrecognised losses of a joint venture or associat
e.
Key points summary
Holding 20% or more of the voting power (directly or indirectly) indi
cates
significant influence unless it can be clearly demonstrated otherwise.
Significant influence is usually evidenced (e.g. board representation).

Investments in associates are accounted for in consolidated financial
statements
using the equity method (i.e. initially at cost and subsequently adjuste
d for share
of profit or loss).
Dividends received reduce carrying amount.
On acquisition, any difference between cost and share of net fair valu
e of
identifiable assets of the associate is accounted for like goodwill.
If impairment is indicated, the carrying amount is tested for impairme
nt as a single
asset (i.e. goodwill is not tested separately).
Use of the equity method ceases from the date when significant influe
nce ceases.
The carrying amount at that date is the new cost.
The investor’s share in unrealised profits and losses arising on intra-
group
transactions should be eliminated.
On loss of significant influence, any difference between carrying amo
unt and the
fair value of any retained investment and disposal proceeds is recogni
sed in profit
or loss.
Joint arrangements that are joint ventures are accounted for as for ass
ociates (IAS
28).
Joint arrangements that are joint operations are accounted for in accor
dance with
IFRS 11.
IFRS 12 prescribes disclosure requirements for associates and joint ar
rangements
Focus
 define associates and joint arrangements;
 distinguish between joint operations and joint arrangements;
 prepare consolidated financial statements to include a single
subsidiary and
an ass ociated company or a joint arrangement.
Commentary
the exam involving two subsidiaries.
Activity solutions
Solution 1
P Consolidated statement of financial position as at 31 December
2017
$
Investment in associate 1,880
Non-current assets (1,600 +
800) 2,400
5,500
Current assets (2,200 + 3,
300) ———
9,780
——
—
Issued capit
al 1,000
7,520
———
8,520
Non-controlling interests (W 760
4) 500
———
9,780
——
WORKIN —
GS
(1) Group structure
P
GROUP 80%
S
(2) Net assets working
S
$ $
——— ——
3,800
———
2518
(3) Goodwill
S $
800
184
(920)
——
64
——
(4) Non-controlling inter
ests $
760
——
(5) Retained ear
$
nings 4,000
2,304
1,280
Share of S [80%  (3,400 – 520) (W2) (64)
]
Share of A [40%  (3,600 – 400)]
Less Goodwill impaired (W3 per Act
ivity)
———
7,520
———
(6) Investment in associ
ate
$
Cost of investment 600
1,280
Share of post-acquisition profits (W5 ———
) 1,880
———
©2017 Becker Educa
tional Development
ved.
2519
Solution 2
P Consolidated statement of profit or loss for the year ending 31
December 2017
$
Revenue
Cost of sal 26,000
es
(13,00
0)
———
13,000
Administrative expen (8,000)
ses
Income from associat 800
e
———
5,800
Income ta (2,200)
xes ———
Profit after taxatio 3,600
n ———
Attributable
to: 3,440
Owners of P 160
Non-controlling inter ———
ests 3,600
——
WORKIN —
GS
(1) Group structure
P
40%
80%
A

40%
P S A Adjustment Consolidation
$ $ $ $
$ 26,000
14,00012,000
(9,000)(4,000) (13,000)
(8,000)
Administration expense (2,000)(6,000)
s
Income from associate
40% × 2,000 800 800
Tax – group (1,000)(1,200) (2,200)
———
800
Profit after tax
———
(3) Non-controlling interests
S only 20% × 800 $160

——
Overview
Objectives

To prescribe translat
ion rules for transact
ions in a currency di
fferent to the
reporting currency.
 To prescribe the acc
ounting treatment fo
r exchange differen
ces.
ACCOUNTING
 Key issues
ISSUES
FU
NC I
TI N
ON D
AL I
AN
V
D
I
PR D
ES U
EN A
TA L
TI
ON
E
CU
N
RR T
EN I
CY T
I
E
S


DISCLOSU
RE  Exchange diff
erences
eserved.
2601
SESSION 26 – IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
1 Accounting issues
1.1 Introduction

A company may engage in foreign currency operations in two ways:
 by entering directly into transactions denominated in foreign currencies;
 by conducting foreign operations through a foreign entity
(subsidiary, associate or joint arrangement).
 Resultant transactions and balances must be translated into the functional
currency for inclusion in financial statements.
Commentary
The Diploma syllabus only concerns accounting for transactions and balances
denominated in foreign currencies for individual entities. Accounting for foreign
subsidiaries, associates and joint arrangements are excluded from the syllabus.
1.2 Key issues

Which exchange rate should be used for translation of the transaction or balance?
 How to treat any exchange differences that arise – should they
 profit or loss; or
 other comprehensive income (and accumulated in equity)?
1.3 Terminology

Functional currency – the currency of the primary economic environment in
which the entity operates.
 Presentation currency – the currency in which the financial statements are presented.
 Closing rate – the spot exchange rate at the date of the statement of financial position.
 Foreign currency – a currency other than the functional currency.
 Net investment in a foreign entity – the amount of the reporting entity’s interest in the
net assets of that operation.
 Monetary items – money held and assets and liabilities to be received or paid in fixed
or determinable number of units of currency.
 Monetary items include trade receivables, cash, trade payables and loans.
 Non-monetary items comprise non-current assets, investments and inventory.
2 Functional and presentation currency
2.1 Functional currency

This is dictated by the primary economic environment in which the entity operates.
 The following factors should be considered:
 the currency that mainly influences the selling price of goods or services;
 the currency that affects labour, material and other costs of
providing goods and services.
 Secondary factors include:
 the currency in which funds from financing activities are generated; and
 the currency in which monies from operating activities are kept.
 Other factors to be considered in determining the functional currency of a foreign
operation and whether that currency is the same as the reporting entity include:
 whether activities are carried out as an extension of the reporting entity
or with a significant degree of autonomy by the foreign operation;
 whether transactions between the reporting entity and foreign operation
are a high percentage of total transactions;
 whether cash flows of the foreign operation directly affect the cash
flows of the reporting entity and whether cash is available for
remittance to the reporting entity;
 whether the foreign operation depends on the reporting entity to help
service current and future debt obligations.
 If the functional currency is not obvious management must use their judgement in
identifying the currency that most faithfully represents the economic effects of
the underlying transactions.
 Once a functional currency has been identified it should only be changed if there
is a change to the economic climate in which it was initially identified.
2.2 Presentation currency

The functional currency will usually also be the presentation currency.
 choose to present its financial statements in a
currency that is different to its functional currency.
 In this case the financial statements must be translated each year in
accordance with IAS 21.
Commentary
You will not be required to translate financial results from a functional
currency to a presentation currency in the examination.
3 Individual entities

A foreign currency transaction is initially recorded at the spot exchange rate
of the functional currency on the date of the transaction.

transaction
in the same reporting period are recognised in profit or loss for the period.
3.2 Subsequent recognition

At the end of each reporting period, any foreign currency monetary item is
re-translated using the closing exchange rate.

Exchange differences arising on re-translation of a foreign currency balance
are recognised in profit or loss for the period.

Non-monetary items measured at historical cost are translated at the
exchange rate at the date of the transaction.

Non-monetary items measured at fair value, or revalued in accordance with IAS 16, are
translated using the exchange rate when the fair value was measured. Any exchange
translation difference will be included in either profit or loss or other comprehensive in
come,
depending on where the fair value change itself is presented.
Commentary
The exchange component for an investment property will go to profit or loss; for an
IAS 16 revalued asset it will be presented in other comprehensive income.
Illustration 1
Rose has a property located in a country where the currency is the Dinar. The property was
acquired on 1 May 2016 and is carried at a cost of 30 million dinars. The property is being
depreciated over 20 years on a straight-line basis.
On 30 April 2017, the property was revalued to 35 million dinars. Depreciation has been
charged for the year but the revaluation has not been taken into account in the preparation of the
financial statements as at 30 April 2017. The following exchange rates are relevant:
Dinars to $
1 May 2016 6
30 April 2017 5
The property will be revalued to a Dinar fair value at the year-end and translated using the
closing exchange rate:
Revaluation surpl
Cost (30m ÷ 6 dinars) us to equity ($7m
Depreciation (5m ÷ 20 years)
– 4·75m)
Carrying amount prior to revaluation
Revalued amount (35m ÷ 5 dinars)
$
5.00 ––––
(0·25) 2·25
–––– ––––
4.75
3.3 Overview IAS 21
Transactions
during the year
 Actual rate at date the transaction took place (i.e. historic rate)
 Or average rate for the period (if no significant fluctuations)
Transactions
Balances at the end of the reporting period settled during the
reporting period
Non-monetary
Monetary items items
Retranslate at the No retranslation
date of the (therefore no
statement of exchange
financial position difference arises)
using the closing
rate
Exchange Exchange
differences will differences will
arise at the end of arise during the
the reporting reporting period
period
All exchange differences(on settled and unsettled transactions) are
Worked example 1
Aston has a financial year end of 31 December 2017. On 25 October 2017 Aston buys
goods from a Mexican supplier for Peso 286,000.
On 16 November 2017 Aston pays the Mexican supplier in full. The goods remain in
inventory at 31 December 2017.
Exchange rates 2017
25 October $1:Peso 11.16
16 November $1:Peso 10.87
31 December $1:Peso 11.02
Required:
Show the accounting entries for the transactions in each of the following
situations:
(a) on 16 November 2017 Aston pays the Mexican supplier in full;
(b) the supplier remains unpaid at 31 December 2017.
Worked solution 1 – Purchase of goods on credit
(a) Supplier paid
$ $
25 October Dr Purchases (W1) 25,627
Cr Trade payables 25,627
16 November
Dr Trade payables 25,627
Dr Other operating expense 684
Cr Cash (W2) 26,311
The goods will remain in inventory at end of the reporting period at $25,627.
WORKINGS
(1)
Peso 286,000 ÷ 11.16 = $25,627
(2)
Peso 286,000 ÷ 10.87 = $26,311
Development Corp. All right
s reserved.
2606
(b) Year-end trade payable
$ $
25 October Dr Purchases (W1) 25,627
Cr Trade payables 25,627
31 December Dr Other operating expense 326
Cr Trade payables (W2) 326
The goods will remain in inventory at the end of the reporting period at $25,627.
WORKING
$
(1)
(2) Peso 286,000 ÷ 11.16 25,627
Peso 286,000 ÷ 11.02 25,953
326
Worked example 2
Warrior has a reporting period ending 31 December 2017. On 29 November 2017
Warrior received a loan from an Australian bank of AUD 1,520,000.
The proceeds are used to finance in part the purchase of a new office block. The loan
remains unsettled at 31 December 2017.
Exchange rates 2017
29 November USD 1 = AUD 1.52
31 December USD 1 = AUD 1.66
Required:
Show the accounting entries for these transactions.
Worked solution 2 – Loan
US $000
US $000
29 November Dr Cash 1,000
Cr Loan 1,000
31 December
Dr Loan 84
Cr Other operating income 84
WORKINGS
US $000
(1) AUD 1,520,000 ÷ 1.52 1,000
(2) AUD 1,520,000 ÷ 1.66
84
2607
Activity 1
On 30 October Barney, a company with the $ as its functional currency, buys goods
from Rubble for £60,000. The contract requires Barney to pay for the goods in
sterling, in three equal instalments on 30 November, 31 December and 31 January
Barney’s end of reporting period is 31 December.
Exchange rates
30 October $1.90 = £1
30 November $1.98 = £1
31 December $2.03 = £1
31 January $1.95 = £1
Required:
Prepare the journal entries that would appear in Barney’s books in respect of the
purchase of the goods and the settlement made.
4 Disclosure
4.1 Exchange differences

The amount of exchange differences included in profit or loss for the period.
Illustration 2
Foreign currencies (extract)
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the
transactions. Gains and losses resulting from the settlement of such transactions and from the
remeasurement of monetary assets and liabilities denominated in foreign currencies are recognized
in the subsidiary’s income statements in the corresponding period.
Actelion Annual Report 2016
 Net exchange differences classified in equity as a separate component of
equity, and a reconciliation of the amount of such exchange differences at
the beginning and end of the period.
 that fact
must be stated along with the functional currency and the reason for using a
different reporting currency.
 Any changes in functional currency, and the reasons for the change.
Key points summary
The reporting entity:
A foreign currency transaction is initially recorded at the rate of exchange at the
date of the transaction (averages are permitted if they approximate to actual).
At each subsequent reporting date report:
Exchange differences arising when monetary items are settled or translated at
different rates are reported in profit or loss in the period.
If a gain or loss on a non-monetary item is recognised in other comprehensive
income any foreign exchange element of that gain or loss is also recognised in
other comprehensive income.
Disclosure includes:
 the reason for a change in functional currency.
Focus
 discuss the recording of transactions and retranslation of monetary and non-
monetary items at the reporting date for individual entities in accordance
with IFRS;
 distinguish between reporting and functional currencies;
 determine an entity’s functional currency.
Activity solution
Solution 1 – Purchase of goods on credit
US $000
US $000
30 October Dr Purchases 114,000
Cr Payables 114,000
Being purchase of goods from UK supplier for £60,000 translated at $1.90 = £1
30 November Dr Payables 38,000

Dr Profit or loss 1,600
Cr Cash 39,600
Being settlement of £20,000 of balance outstanding translated at $1.98 = £1.
One third of the original payable balance has been settled (114,000/3)
31 December Dr Payables 38,000

Dr Profit or loss 2,600
Cr Cash 40,600
A further one third of the original payable balance has been settled (114,000/3)
31 December Dr Profit or loss 2,600

Cr Payables 2,600
Being restatement of outstanding balance of £20,000 at $2.03 = £1
31 January Dr Payables 40,600

Cr Cash 39,000
Cr Profit or loss
1,600
Development Corp. All right
s reserved.
2610
Overview
Objective

To explain the pro
visions of IAS 33.
 Earnings performance
 Scope
INTRODUCTI
 Terminolo
ON
gy
EAR W
NIN E FU
GS P I LL
G Y
ER H
T DIL
SHA E UT
RE ( D ED
EPS) EP
A S
V
E
R
A
G
E

N
U
M
B
E
R

O
F

S
H
A
R
E
S

 as
ic
E
P
S
 Whic
h earnin
gs?
of shares
 – no cons
 Is ideration
sues
 EPS vs
SIGNIFICA
earnings
NCE  Performanc
OF e measure
PRESENTATION
AND
DISCLOSURE
 Presentation
 Disclosure
eserved. 2701
SESSION 27 – IAS 33 EARNINGS PER SHARE
1 Introduction
1.1 Earnings performance

Earnings per share (EPS) show the trend of earn
ings performance for a
company over the years.
 It is felt to be more useful than an absolute profit
figure, which will not contain
information about the increase in investment tha
t has been made in the period.
 It is not useful in comparing companies.
1.2
Scope

IAS 33 applies to the separate financial statemen
ts of entities whose debt or equity
instruments are publicly traded (or are in the pro
cess of being issued in a public market).
 It also applies to the consolidated financial state
ments of a group whose parent is required
to apply IAS 33 to its separate financial statemen
ts.
 An entity that discloses EPS must calculate and
present it in accordance with IAS 33.
1.3
Terminology

An ordinary share is an equity instrument that i
s subordinate to all other
classes of equity instruments.
 An equity instrument is any contract that eviden
ces a residual interest in the
assets of an entity after deducting all of its liabil
ities.
 A potential ordinary share is a financial instrum
ent or other contract that may
entitle its holder to ordinary shares. For exampl
e:
 convertible instruments;
 share options and warrants;
 share purchase plans;

shares will be issued subject to certain conditions bein
which g met.
 Options, warrants and their equivalents are fin
ancial instruments that give
the holder the right to purchase ordinary shares.

assumption that convertible instruments are conv
erted, that warrants/options are
exercised, or that ordinary shares are issued upo
n the satisfaction of specified conditions.

the same assumption.
2 Earnings per share (EP
S)
2.1 Basic EPS

Basic earnings per share must be presented for
:

profit or loss attributable to ordinary shareholde
 rs; and
profit or loss relating to continuing operations at
tributable to those
ordinary shareholders.
 The basic EPS calculation is made by dividing t
he profit (or loss) relating to
the ordinary shareholders by the weighted avera
ge number of ordinary shares
outstanding in the period.
2.2 Which earnings?

Basic EPS should be:

the profit or loss attributable to ordinary shareh
 olders; and
the profit or loss relating to continuing operatio
ns attributable to the
ordinary shareholders.
 Adjusted for:

 post-tax effect of preference dividends; and
non-controlling interests.
3 Weighted average numb
er of ordinary shares
3.1 Basic rule

The number of ordinary shares will be the weig
hted average number of
ordinary shares outstanding during the period.

The number in existence at the beginning of the
period should be adjusted for
shares that have been issued for consideration d
uring the period.

Consideration be received in a number of ways
:

 Issue for cash;

Issue to acquire a controlling interest in another
entity;
Redemption of debt.

In each case earnings will be boosted from the d
ate of issue. To ensure
consistency between the numerator and denomi
nator of the basic EPS
calculation the shares are also included from the
date of issue.
 Therefore weight the number of shares:
Number before × /12 = X
Number after × /12 = X
____
X
____
3.2 Issues of shares where no consi
deration is received

The weighted average number of ordinary shares
outstanding during the period
(and for all periods presented) should be adjuste
d for events that have changed the
number of ordinary shares outstanding without a
corresponding change in
resources. For example:
 Bonus issues;
 Bonus elements in another issue (e.g. a rights iss
 ue);
 Share splits (issue of new shares with proportion
ate reduction in par value);
Reverse share splits (reduction in number of sha
res with
proportionate increase in par value).
Commentary
Par value is the stated or face value (also called nom
inal value).
3.2.1 Bonus issues
 These are treated as if the new shares have been
in issue for the whole of the
period.
 the number of shares in issue by the bo
nus fraction.
Illustration 1
Bonus issue of 1 for 10.
Bonus fraction: 
The EPS will fall (all other things being equal) b
 ecause the earnings are
spread over a larger number of shares. This wo
uld mislead users when they
compare this year’s figure to those from previou
s periods.
 The comparative figure and any other figures fr
om earlier periods that are
used in an analysis must be adjusted. This is do
ne by multiplying the
comparative by the inverse of the bonus fraction.
Illustration 2
Last year’s EPS 
3.2.2 Rights issues
 A rights issue has features in common with a bo
nus issue and with an issue at
fair value. A rights issue gives a shareholder the
right to buy shares from the
company at a price set below the fair value. Thu
s:
 the company will receive a consideration which
is available to
boost earnings (like an issue at fair value); and
 the shareholder receives part of the share for no
consideration (like
a bonus issue).
 The method of calculating the number of shares
in periods when there has
been a rights issue reflects the above.
 A bonus fraction is applied to the number of shar
es in issue before the date of the rights issue
and the new shares issued are pro-rated as for iss
ues for consideration.
 The bonus fraction is the cum-rights price per sh
are divided by the theoretical
ex-rights price per share.
Worked example 1
X Inc
1 January Shares in issue 1,000,000
31 March
 Fair value of shares $1 (cum-
rights price)
Required:
Calculate the number of shares for use in the EPS c
alculation.
Worked solutio
Number
n 1
1 January  31 March: 1,000,0
3 1
× 254,237
00 × 12 0.9833
1 April  31 December 9
1,200,000 900,000
: 12
–––––––––
Rights issue bonus fraction
$
1 5.0
1 0.9
0.9
Ex-rights
59
Theoretical ex-rights pri = 0.9833
6
ce
Cum - rights price 1
Bonus fraction = =
Theoretical ex - rights price 0.9833
Commentary
For presentational purposes, in order to ensure consi
stency, the comparative figure
for EPS must be restated to account for the bonus ele
ment of the issue. This is
achieved by multiplying last year’s EPS by the invers
e of the bonus fraction.
3.3 Multiple capital changes
Method
 Write down the number of shares at start of ye
ar.
 Look forward through the year and write down t
he total number of shares
after each capital change.
 Multiply each number by the fraction of the yea
r that it was in existence.
 If the capital change has a bonus element multip
ly all preceding slices by the
bonus fraction.
Worked example 2
X Inc
1 January
28 February 1,000,000 in issue
31 August Issued 200,000 at fair value
30 November Bonus issue 1 for 3
Issued 250,000 at fair value
Required:
Calculate the number of shares which would be use
d in the basic EPS calculation.
Worked solution 2
1 January  28 February
1,000,000 2 4
× × = 222,222
12 3
1 March  31 August
1,200,000 6 4
× × = 800,000
12 3
1 September  30 November
1,600,000 3
× = 400,000
12
1 December  31 December
1,850,000 1
× = 154,167
12
1,576,389
Activity 1 – Multiple capital changes
1 January
28 February 1,000,000 in issue
31 March Issue at fair value 400,000
31 July Bonus issue 1 for 2
Issue at fair value
30 September

Rights issue 1 for 

Required:
Calculate the number of shares which would be use
d in the basic EPS
calculation.
4 Diluted earnings per sh
are
4.1 Purpose

Potential ordinary shares may exist whose owne
rs may become shareholders
in the future.
 If these parties become ordinary shareholders th
e earnings will be spread over
a larger number of shares (i.e. they will become
diluted).
Commentary
Diluted EPS is calculated as a warning to existing sh
areholders that this may
happen. It is a conservative measure of the earnings
accruing to each share.

shares would decrease earnings per share from
continuing operations.
Commentary
value. This will be the case where the issuer is incre
asing earnings per share
by a proportionate amount. For example, the issue o
f shares through the
conversion of a convertible bond would increase the
number of shares
(lowering EPS) but also save interest expense (increa
sing earnings).
4.2 Convertible instruments

First calculate basic EPS – this is the benchmark
against which each
conversion or exercise will be determined to be
dilutive or anti-dilutive.

Adjust the profit attributable to ordinary shareho
lders and the weighted
average number of shares outstanding for the eff
ects of all dilutive potential
ordinary shares.
 Diluted EPS is calculated using:
 a new number of shares;
 a new earnings figure.
4.2.1 Dilutive or anti-dilutive?
 Whether convertible securities (bonds and prefe
rence shares) are dilutive or
Options (and warrants) are dilutive if the exercis

e price is less than the fair
value (market price) of the ordinary shares as de
monstrated by the “treasury
method” (see Illustration 3).
4.2.2
New number of ordinary shares
 This is the weighted average number of ordinary
shares used in the basic EPS
calculation plus the weighted average number of
ordinary shares that would be issued
on the conversion of all the dilutive potential ord
inary shares into ordinary shares.
 IAS 33 presumes that the maximum number of
shares will be issued on conversion.
 Dilutive potential ordinary shares are deemed to
have been converted into ordinary
shares at the beginning of the period or, if later, t
he date of the issue of the shares.
 New number of shares:
Basic number
Number of shares which could exist in th X
e future:
From the later of  first day of ac
counting period
 date of issue X
–––
X
–––
4.2.3 New earnings figure
 The amount of profit or loss for the period attrib
utable to ordinary shareholder, used in
the basic EPS calculation, is adjusted for the afte
r-tax effect of the potential ordinary
shares becoming ordinary shares. This means ad
ding back:
 Any dividends on dilutive potential ordinary sha
res, which have been
deducted in arriving at the profit or loss for the p
eriod, attributed to ordinary
shareholders.
 Interest recognised in the period for the dilutive
potential ordinary shares.

Any me or expense that would result from the
ther conversion of the dilutive potential ordinary sha
anges res.
in inco
Worked example 3 – Convertible bonds
1 January Shares in issue
1,000,000
Profit for the year ended 31 $200,000
December
31 March Issue of convertible bonds. The liability ele
ment is measured at
$200,000, calculated using an effective inter
est rate of 6%.
The terms of conversion are as follows:
200,000 shares will be issued if converted within five y
ears
220,000 shares will be issued if converted after five yea
rs
Tax rate 33%
Basic EPS: 200,000  1,000,000 = $0.20
Required:
Calculate diluted EPS.
Worked solut
NumbeProfit
ion 3 r of $
200,000
res
B
1,000,
a
s 000
i
c

D
i
l
u
t
i
o
n

Shares: 9
220,000 165,000
12
Interest: 9
$200,000 × × (1 – 0.33) 6,030
12
×
______________
206,030
1,165,000
E
1 ents
When there has been an actual conversion of the

dilutive potential ordinary
shares into ordinary shares in the period, a furth
er adjustment has to be made.
 The new shares will have been included in the b
asic EPS from the date of
conversion. These shares must then be included
in the diluted EPS
calculation up to the date of conversion.
Worked example 4 – Diluted EPS – Actual co
nversion during the year
1 January Shares in issue
1,000,000
5% Convertible bonds $100,000
(terms of conversion 120 ordinary
shares for $100)
Profit for the year ended 31 Dece $200,000
mber
31 MarchHolders of $25,000 debentures converted to or
dinary shares.
Tax rate 30%
Required:
Calculate basic and diluted EPS. You should ig
nore the need to split the
convertible bond into liability and equity elements.
Worked soluti
Number Profit
on 4 $
shares
Basic 1,000,000
New shares on conve
rsion
9
$25,000
× 120 22,500 –––––––
100
–––––––
––
Figures for the basi
1,022,50 200,000
c EPS
0
Basic EPS is
Dilution adjustments
Unconverted shares

$75,000
× 120 90,000
100
Interest: $75,000 × 5% × 0.7
2,625
Converted shares pre conversio
n adjustment
3 $25,000
× 120 7,500
100
Interest: /12 × $25,000 × 5 219
% × 0.7 –––––––––––––––––
202,844
1,120,000––––––––
–––––––––
$202,844
Diluted EPS is
,000
4.3 Options

Options give the holder the right to buy a share
at a price, normally below
market price, at some time in the future. As the
purchase price is aimed to be
below the market price options will normally be
dilutive.
 There is an assumption that dilutive options (an
d other dilutive potential
ordinary shares) will be exercised.
 The assumed proceeds from these issues are co
nsidered to be
received from the issue of shares at fair value.
 The difference between the number of shares iss
ued and the number
of shares that would have been issued at fair val
ue are treated as an
issue of ordinary shares for no consideration.
when they result i
 n issue of shares at below fair
value; this will usually be when the exercise pri
ce is lower than the market
price of the share.
Illustration 3 – Treasury method
Options are outstanding to purchase 100 shares at an ex
ercise price of $10 per share.
Exercising the options will increase shares by 100 for $
1,000 cash. Assuming that all
proceeds are used to purchase treasury shares:
(i) if the average fair value of the share during the p
eriod is $20 a share (i.e.
issue at $10 is below fair value) the company ca
n purchase only 50 shares;
(ii) if the average fair value of the share during the p
eriod is $5 a share the
company could purchase 200 shares.
(i) is dilutive and (ii) would be anti-dilutive.
Commentary
The options would not be exercised in (ii) so the effe
ct would not be
calculated.
 Each issue of shares under an option is deemed t
o consist of two elements.
 A contract to issue a number of shares at a fair v
alue. (This is taken
to be he average fair value during the period.)
Commentary
These are non-dilutive.
 A contract to issue the remaining ordinary share
s granted under the
option for no consideration (i.e. a bonus issue).
Commentary
These are dilutive.
Worked example 5 – Options
1 January Shares in issue 1,000,00
Profit for the year ende 0
d 31 December
Average fair value duri $100,00
0
ng period
$8
200,000 or
dinary share
Exerc s
ise pr $6
ice
Required:
Calculate the diluted EPS for the period.
Worked solution 5
Number of
shares
Profit EPS
$ Cents
Basic 1,000,000 100,000 10

–
––––
9.5
1,050,000 100,000
––––
WORKING
Proceeds of issue
200,000 × $6 1,200,000
Number that would have been issued at F 150,000
V  $8 =
Number actual
ly issued 200,
000
––––
Number for –––
“free”
50,0
00
––––
–––
5 Significance of EPS
5.1 EPS vs earnings

Prior to the issue of IAS 33 the decision to repor
t EPS, the manner in which it
was nd where it was reported was left solely to the di
alcula scretion of
ted, company management.

As expected, management chose to report perfor
mance in whole dollar
earnings only, which tended to favour large corp
orations over small
companies. EPS became a reporting necessity t
o create a “level playing
field” in performance measurement comparabili
ty.
 EPS allows comparison between different-sized
companies whereas, if only
actual earnings were compared, the relative size
of the company could not be
taken into account.
5.2 Performance measure

The EPS figure is used by market analysts in the
calculation of a company’s
Price/Earnings (P/E) ratio. Great emphasis is pl
aced on this measure which
can have a significant effect on the way a compa
ny’s share price moves.
The P/E ratio is also used by investors in assisti
ng in their decisions to
buy/hold or sell shares in a company.
5.3 Problems with EPS

EPS is affected by a company’s choice of accou
nting policy, so can be
manipulated. It also means that comparison wit
h other companies is not
possible if different policies are used.
 EPS is a historic figure and should not be used a
s a prediction of future
earnings. A high EPS figure could be achieved t
hrough a lack of investment
in new assets, but this will have a detrimental ef
fect on future profits as lack
of investment will lead to companies falling beh
ind their competitors.
 Many managers are concerned about the immedi
ate dilutive or anti-dilutive
effect of a merger or acquisition on EPS. Howe
ver, focus on current earnings
is inappropriate when the target company has dif
ferent prospects or capital
structure.

EPS is a measure of profitability, but this is only
one measure of
performance. Many companies now place much
higher significance on other
performance measures such as:
 customer satisfaction;
 cash flow;
 manufacturing effectiveness, and
 innovation.
 EPS ignore the amount of capital from which ear
ning are generated. This can affect
comparisons between companies and analysis of
a company over time. A company
can, for example, improve earning by the repurc
hase of ordinary shares.
sure
6.1 Presentation

Basic and diluted earnings per share (or loss per
share if negative) should be
presented in the statement of profit or loss and o
ther comprehensive income
for:

profit or loss from continuing operations attribu
table to ordinary
equity holders of the parent; and
 of ordinary shares th
at has a different
right o share in the profit for the period.

prominence for all periods presented.
If components of profit or loss are presented in a

separate statement (IAS 1),
that statement should present:
 basic and diluted earnings per share; and

basic and diluted earnings per share for disconti
nued operations.
Illustration 4
Consolidated income statement for year ended 31 December
2016 (extract)
Earnings per shar 2016 2015

e (in C H F )
Basic earnings 2.76 2.90

per share
Diluted earnings 2.75 2.89

per share
6.2 Disclosure
6.2.1 General
 The amounts used as the numerators in calculati
ng basic and diluted earnings per share,
and a reconciliation of those amounts to the profi
t or loss for the period.
 The weighted average number of ordinary shares
used in the denominator to calculate basic
and diluted earnings per share, and a reconciliati
on of these denominators to each other.
 Instruments that could potentially dilute basic E
PS in the future but have not been
included in the diluted EPS because they are anti
-dilutive for the period
 A description of ordinary or potential share trans
actions that occurred after the reporting
period that would have significantly changed the
number of ordinary shares or potential
ordinary shares had the transactions occurred bef
ore the end of the period.
Illustration 5
15. Earnings per share (extract)
2016
2015
Basic earnings per
2.90
share (in CHF)
N e t p ro fit (in
m illio n s o f C 8 531
H F )
9 066
W eighted average number of shares outstanding
(in m illio 3 129
ns of uni
ts)
Diluted earnings per 2.89
share (in CHF)
Net profit, net of effects of dilutive potential ordinary shares
(in m illi 9 066
ons of C
HF)
W eighted average number of shares outstanding, net of
e ffe cts o f d ilu tive p o te n tia l o rd in a ry s h a re s
3 097 3 136
6.2.2 Additional EPS

If an additional EPS figure using a reported com
ponent of profit other than
“profit or loss for the period attributable to ordin
ary shareholders” is
disclosed, it must be calculated using the weight
ed average number of
ordinary shares determined according to IAS 33.
Commentary
A non-standard profit figure can be used to calculate
an EPS in addition to that
required by IAS 33 but the standard number of share
s must be used in the calculation.

If a profit figure is used which is not a reported l
ine item in the statement of profit
or loss and other comprehensive income, a recon
ciliation should be provided
between the figure used and a line item which is
reported in the statement of profit
or loss and other comprehensive income.
6.2.3 Retrospective adjustments
 If an EPS figure includes the effects of:
 a capitalisation or bonus issue; or
 share split; or

decreases as a result of a reverse share split.
The calculation of basic and diluted earnings per share f
or all periods
presented should be adjusted retrospectively.
 Basic and diluted EPS of all periods presented s
hould be adjusted for the effects of
errors, and adjustments resulting from changes i
n accounting policies.
Focus
 recognise the importance of comparability in rel
ation to the calculation of
earnings per share (EPS) and its importance as a
stock market indicator;

be a more ac
curate indicator of
performance than a company’s profit trend;

define earnings;
 calculate the EPS in the following circumstanc
es:
 basic EPS;

where there has been a bonus issue of shares/sto

ck split during the year; and
where there has been a rights issues of shares du
ring the year;
 explain the relevance to existing shareholders of
the diluted EPS, and
describe the circumstances that will give rise to
a future dilution of the EPS;
 compute the diluted EPS where:
 convertible debt or preference shares are in iss

ue; and
share options and warrants exist;
 identify anti-dilutive circumstances.
Key points summary
IAS 33 applies to entities whose securities are or will b
e publicly traded. Other
entities that choose to present EPS information must als
o comply.
If both parent and consolidated statements are presente
d in a single report, EPS is
required only for the consolidated statements.
Basic and diluted EPS must be presented, with equal pr
ominence for all periods,
in the statement of profit or loss and other comprehensi
ve income, even if
negative. For discontinued operations as well as contin
uing.
If components of profit or loss are presented in a separa
te statement, EPS is
presented only in that separate statement.
Basic EPS is calculated as profit or loss attributable to
ordinary shareholders
divided by weighted average number of ordinary shares
during the period.
Diluted EPS is calculated by adjusting earnings and nu
mber of shares for the
effects of dilutive options and other dilutive potential or
dinary shares. Anti-
dilutive effects are ignored.
Convertible securities: adjust for the after-tax effects of
dividends and interest
charged relating to dilutive potential ordinary shares. I
nclude all shares that
would be issued on conversion.
Diluted EPS for prior periods is not adjusted for change
s in assumptions used or
conversions of potential ordinary shares into ordinary s
hares.
Activity solution
Solution 1 – Multiple capital change
1 January  28 February
2 3 22
× × = 261,905
12 2 21
1 March  31 March
1 3 22
× × = 183,333
12 2 21
1 April  31 July
4
× = 733,333
12
1 August  30 September
2
× = 523,810
12
1 January  31 December
3
12
________
––––––––
Overview
Objective

To provide users of
financial statements
with information ab
out the nature and
financial effects of b
usiness activities an
d the economic envi
ronment in which
the business operate
s.
OPERATING
SEGMENTS
 Scope
 Reportable segments
 Core principle
DISCLO
SURE  Information a
bout profit or lo
ss,
assets and liabili
ties
 Basis of measurement
 Restatement of previo
usly
reported informa
tion
 Entity-wide disclosure
s
SEGMENT
 Usefulnes
s
INFORMATI
ON
 Associated problems
eserved.
2801
SESSION 28 – IFRS 8 OPERATING SEGMENTS
1 Operating segments
1.1 Scope

IFRS 8 applies to the separate financial statements
of companies whose debt or equity
instruments are publicly traded (or are in the proc
ess of being issued in a public market).
 IFRS 8 also applies to the consolidated financial s
tatements of a group whose
parent is required to apply IFRS 8 to its separate f
inancial statements.
 An entity which is not required to apply IFRS 8, b
ut chooses to do so, must not describe
information about segments as “segment informat
ion” unless it complies with IFRS 8.
 Where a parent’s separate financial statements are
presented with consolidated financial
statements, segment information is required only i
n the consolidated financial statements.
1.2 Definitions
1.2.1
Operating segment
 This is a component that meets the following thr
ee criteria:
(1)
it engages in business activities from which it ma
y earn revenues and
incur expenses (including intersegment revenues
and expenses arising
from transactions with other components of the s
ame entity);
Commentary
Thus a start-up operation not yet earning revenues ma
y be an operating
segment, as revenues would be expected in the future.
(2) its operating results are regularly reviewed by the
“chief operating
decision maker” to make decisions (about resourc
es to be allocated)
and to assess its performance; and
(3) discrete financial information is available.
Commentary
A component, as defined by IFRS 5 (see next session),
should meet this last criterion.

Post-employment benefit plans are not operating
segments.
 Corporate headquarters or other departments that
may not earn revenues (or
only incidental revenues) are not operating segm
ents.
1.2.2 “Chief operating decision maker”
 Chief operating decision maker (CODM) describe
s the function which
allocates resources to and assesses the performan
ce of operating segments (e.g.
a CEO or board of directors).
Commentary
An operating segment will generally have a segment m
anager who is directly
accountable to and maintains regular contact with the
CODM to discuss
operating activities, financial results, forecasts, etc.
1.3
Reportable segments
1.3.1
Separate information
 Separate information must be reported for each o
perating segment that:
 meets the definition of an operating segment or a
ggregation criteria
for two or more segments; and
 exceeds the quantitative thresholds.
1.3.2 Aggregation criteria
 Two or more operating segments may be aggrega
ted into a single operating
segment if:
 aggregation is consistent with the core principle
 of this IFRS;
 the segments have similar economic characteristi
cs; and
the segments are similar in respect of:
 the nature of products and services (e.g. domestic
 or industrial);
 the nature of the production process (e.g. maturin
 g or production line);
 types or class of customer (e.g. corporate or indiv
idual);
distribution method (e.g. door-to-door or web sal
es); and
the regulatory environment (e.g. in shipping, ban
king, etc).
Commentary
An operating segment that does not meet a qualitative
threshold may be
aggregated with another segment that does only if the
operating segments
have similar economic characteristics and share a maj
ority of the above
aggregation criteria.
1.3.3 Quantitative thresholds
 Separate information must be reported for an oper
ating segment that meets any
of the following quantitative thresholds:
 reported revenue (including both external and int
ersegmental) is 10%
or more of the combined revenue (internal and ex
ternal) of all
operating segments;
 profit or loss is 10% or more, in absolute amount,
of the greater of:
(i)
the combined profit of all operating segments tha
t did not
report a loss; and
(ii) the combined loss of all operating segments that r
eported a loss;
 assets are 10% or more of the combined assets of
all operating segments.

At least 75% of revenue must be included in repo
rtable segments. Thus
operating segments that fall below the quantitativ
e thresholds may need to be
identified as reportable.
Commentary
Segments that fall below the threshold may also be co
nsidered reportable, and
separately disclosed, if management believes that the i
nformation would be
useful to users of the financial statements.
 Information about other business activities and op
erating segments that are not
reportable are combined and disclosed in an “all o
ther segments” category.

When an operating segment is first identified as a
reportable segment
according to the quantitative thresholds, comparat
ive data should be presented,
unless the necessary information is not available a
nd the cost to develop it
would be excessive.
Commentary
The Standard suggests 10 as a practical limit to the nu
mber of reportable
segments separately disclosed as segment information
may otherwise become
too detailed.
Activity 1
Fireball group has three significant business lines which
make up about 70% of
combined revenue and five small business lines, each of
them contributing about 6% to
the combined revenue.
Required:
Explain how many segments Fireball group should re
port.
2 Disclosure
2.1 Core principle

Information must be disclosed to enable users of t
he financial statements to
evaluate:

the nature and financial effects of the business ac

tivities; and
the economic environments in which it operates.
 This includes:
 general information;
 information about reported segment profit or loss
, segment assets,
segment liabilities and the basis of measurement;
and

reconciliations.
Commentary
This information must be disclosed for every period for
which a statement of profit or
loss is presented. Reconciliations of amounts in the st
atements of financial position
are required for each date at which a statement of fina
ncial position is presented.
 If segments have been aggregated, information m
ust be given relating to the
Commentary
Information should include an overview of the segment
s that have been aggregated and the
economic factors that determined that the segments sh
ared some economic characteristics.
2.2 General information

The factors used to identify reportable segments,
including:
 the basis of organisation (e.g. around products an
d services,
geographical areas, regulatory environments, or a
combination of
factors and whether segments have been aggregat
ed); and
Illustration 1 – Basis of organisation
Eandem’s reportable segments are strategic business unit
s that offer different products
and services. They are managed separately because each
business requires different
technology and marketing strategies. Most of the busine
sses were acquired as
individual units, and the management at the time of the a
cquisition was retained.
 types of products and services from which each r
eportable segment
derives its revenues.
Illustration 2 – Types of products and service
s
Eandem has five reportable segments: machine parts, las
er, prototyping, waterjet and
finance. The machine parts segment produces parts for s
ale to aviation equipment
manufacturers. The laser segment produces laser cutters
to serve the petrochemical
industry. The prototyping segment produces plastics for
sale to the pharmaceutical
industry. The waterjet segment produces cutting equipm
ent for sale to car
manufacturers and jewellers. The finance segment is res
ponsible for parts of Eandem’s
financial operations including financing customer purcha
ses of products from other
segments and car leasing operations.
2.3 Information about profit or loss, a
ssets and liabilities

The following measures must be reported for eac
h reportable segment:
 profit or loss;
 total assets*.
 liabilities*.
* Disclosure is only required if such information is regul
arly reported to the CODM.
Commentary
Note that segment cash flow information (which is not
examinable) is voluntary
and unlikely to be produced as it would provide infor
mation to an acquirer to
value and target for a takeover bid.
2.3.1 Profit or loss
 The following must also be disclosed if the specif
ied amounts are regularly provided
to the chief operating decision maker (even if not
included in segment profit or loss):
 revenues from external customers;
 intersegment revenues;
 interest revenue;
Commentary
Interest revenue may be reported net of interest expens
e if the segment’s revenues are
mostly from interest and the CODM relies primarily o
n reporting of net interest revenue.

interest expense;
 depreciation and amortisation;
 other material items of income and expense requi
red by IAS 1;
 interests in the profit or loss of associates and join
t ventures (under equity method);

income tax expense or income; and

material non-cash items other than depreciation a
nd amortisation.
Commentary
Impairment losses also have to be disclosed (but as an
IAS 36 requirement).
2.3.2 Assets
 The following must also be disclosed if the specif
ied amounts are regularly
provided to the chief operating decision maker (e
ven if not included in the
measure of segment assets):
 the investment in associates and joint ventures ac
counted for by the
equity method; and
 additions to non-current assets (other than financ
ial instruments,
deferred tax assets and post-employment benefit
assets).
Illustration 3 – Profit or loss, assets and liabili
ties
Machine Laser Proto- Water-
Finance All Totals
parts typing j
et other
$ $ $ $ $ $ $
Revenues from
external custome 85,200
rs – – 7,2003,600 – 10,800
Intersegment reven
1,080 1,920 2,4003,600 – 9,000
ues 6,600
Interest revenue 8401,4401,6802,640 – 2,400
Interest expense – – – – 2,400
(b)
240 1203,6002,640 – 7,080
Reportable segment 168 2,1605,5201,200 240 9,768
fit 480
Impairment of – 480

– – – – 480
sets
Reportable segmen
t
7,200 28,800 4,800 194,40
4,800 12,000
800
Expenditures for reportable 0
segment non-current
720 1,680 1,200 1,920 1,440 – 6,960
liabilitie 2,520
7,2004,320 19,200 – 105,240
s ,000
(a) Revenues from segments below the quantitative thresholds are att
ributable to three operating
segments of Eandem. Those segments include a small warehouse
leasing business, a car rental
business and a design consulting practice. None of those segment
s has ever met any of the
quantitative thresholds for determining reportable segments.
(b)
Therefore only the net amount is disclosed.
Commentary
This company does not allocate tax expense or no-
recurring gains or losses to
reportable segments. Also, not all reportable segments
have material non-cash
items other than depreciation and amortisation.
2.4 Basis of measurement

The amount of each segment item reported is the
measure reported to the chief
operating decision maker.
Commentary
Segment information is no longer required to conform
to the accounting
policies adopted for preparing and presenting the cons
olidated financial
statements.
 If the chief operating decision maker uses more th
an one measure of an operating
segment’s profit or loss, assets or liabilities, the re
ported measures should be those
that are most consistent with those used in the fin
ancial statements.
Illustration 4 – Measurement
The accounting policies of the operating segments are th
e same as those described in
the summary of significant accounting policies except th
at pension expense for each
operating segment is recognised and measured on the bas
is of cash payments to the
pension plan. Eandem evaluates performance on the basi
s of profit or loss from
operations before tax expense not including non-
recurring gains and losses and foreign
exchange gains and losses.
Eandem accounts for intersegment sales and transfers at
current market prices (i.e. as if
the sales or transfers were to third parties).
 An explanation of the measurements of segment
profit or loss, segment assets
and segment liabilities must disclose, as a minimu
m:
 the basis of accounting for intersegment transact
ions;
 the nature of any differences between the measur
ements of the reportable
segments and the financial statements (if not appa
rent from the
reconciliations required);
Commentary
Differences could include accounting policies and poli
cies for allocation of
centrally incurred costs, jointly used assets or jointly u
tilised liabilities.
 the nature of any changes from prior periods in th
e measurement
methods used and the effect, if any, of those chan
ges on the measure
of segment profit or loss;
 the nature and effect of any asymmetrical allocati
ons to reportable
segments.
Commentary
For example, the allocation of depreciation expense wi
th the related
depreciable assets.
2.5 Reconciliations

Reconciliations of the total of the reportable seg
ments with the total for the
entity are required for all of the following:
 revenue;
 profit or loss (before tax and discontinued operat
 ions);
 assets (if applicable);
 liabilities (if applicable);
every other material item.
 All material reconciling items must be separately
identified and described (e.g.
arising from different accounting policies).
Illustration 5 – Revenue reconciliation
Total revenues for rep $
ortable segments
Other revenues 93,6
Elimination of inter- 00
segment revenues
2,40
0
E (10,
800)
n –––
t –––
i
t 85,2
y 00
’ –––
s –––

r
e
v
e
n
u
e

Illustration 6 – Profit or loss
Adjus
tment
Total profit or loss for reporta
ble segments
Other profit or loss
Elimination of intersegment p
rofits
Unallocated amounts:
Litigation settlement receiv
ed
Other corporate expenses
to pension expense in consoli
dation $

9,52
Income before in 8
come tax expens
e 240
(1,20
0)
1,200
(1,80
0)
(600)
–––––
–
7,368
–––––
–
Illustration 7
Entity totals
Reportable Adjustments

segment totals
$ $ $
Interest revenue 9,000 180 9,180
Interest expense 6,600 (120) 6,480
Net interest revenue (finance 2,400 – 2,400
gment only) 6,960 2,400 9,360
Expenditures for assets – 7,080
Depreciation and amortisation 7,080 – 480
Impairment of assets 480
The reconciling item is the amount incurred for the comp
any head office building
which is not included in segment information.
2.6 Restatement of previously report
ed information

Where changes in the internal organisation structu
re result in a change in the composition
of reportable segments, corresponding informatio
n must be restated unless the
information is not available and the cost to develo
p it would be excessive.
 An entity
should disclose whether corresponding items
have been restated.

If not restated, the current period segment inform
ation must be disclosed on
both the old and new bases of segmentation, unle
ss the necessary information
is not available and the cost to develop it would b
e excessive.
2.7 Entity-wide disclosures

All entities subject to this IFRS are required to dis
close information about the
following, if it is not provided as part of the requir
ed reportable segment information:
 products and services:
 geographical areas; and
 major customers.
Commentary
Including those entities that have only a single reporta
ble segment.
 The only exemption for not providing informatio
n about products and services
and geographical areas is if the necessary informa
tion is not available and the
cost to develop it would be excessive, in which ca
se that fact must be
disclosed.
2.7.1 By product and service
 Revenues from external customers for each produ
ct and service (or group of similar products
and service) based on the financial information us
ed to produce the financial statements.
Illustration 8 – By product group
2 Operating segme
nts (extract)
US$m US$m
Gross sales revenue
Other Oper
ations
36,81
4
Inter-segment
transactions 50,041
Items excluded from unde
rlying earnings 50,041
Share of equity accounted units and
adjustments for (1,955) (2,377)
(1,555)
inter-subsidiary/equity accounted unit
s sales
Consolidated sales revenue per in 34,829
47,664
come statement
Rio Tinto 2016 Annual report and financial stat
ements
2.7.2 By geographical area
 Revenues from external customers attributed to:
 the entity’s country of domicile;
 all foreign countries in total; and
 individual foreign countries, if material.
 Similarly, non-current assets (other than financial
instruments, deferred tax
assets and post-employment benefit assets).
Commentary
Again based on the financial information used to prod
uce the financial statements.
Illustration 9
(a)
Non-current

assets

Unit ––––––
ed St 85,200
ates ––––––
Cana
da
Chin
a
Japa
n
Other c
ountrie
s
T
o
t
a
l

$ 0
7,200
26,400 ––––––
– 57,600
––––––
15,600
(a) Revenues are attributed to countries on the basis of the customer
’s location.
2.7.3 Major customers
 The extent of reliance on major customers should
be disclosed by stating:
 if revenues from a single external customer amou
nt to 10% or more
of the entity’s total revenue;
 the total revenues from each such customer; and
 the segment(s) reporting the revenues.
 of a major customer and the amount
of revenues that each segment
reports from that customer are not required to be
disclosed.
Commentary
For the purposes of this IFRS, a group of entities kno
wn to be under
common control (including entities under the control o
f a government) is a
single customer.
Activity 2
Silver is applying IFRS 8 for the first time in financial st
atements for the financial year
ended 31 December 2017. This will cause changes in th
e identification of Silver’s
reportable segments and require additional disclosures.
Required:
Comment on whether Silver should restate the compa
rative information.
3 Segment information
3.1 Usefulness

Different business activities and geographic areas
have different profit
potentials, growth opportunities, types and degree
s of risk, rates of return and
capital requirements.

When businesses diversify and enter into oversea
s markets their operations
become too complex for their financial performan
ce to be analysed from the
statement of profit or loss and other comprehensi
ve income and statement of
position alone and there is a huge loss of detail in
the amalgamation of financial
information from many companies into consolidat
ed financial statements.

The management of diversified corporations will
be interested in disaggregated
information to make comparisons with similar lin
es of business in other
organisations.
 Employees are likely to be more interested in fina
ncial information that is most
relevant to them (business activity or geographica
l location) than company-
wide information.
Competitor companies may find the additional di
sclosure advantageous
(although they too may be required to make equi
valent disclosures). For
corporations the disclosure requirements set a “le
vel playing field” of
information for each industry.
 be intereste
d in information at a country
(geographic) level rather than for the entire corpo
ration.
 Segment information provides shareholders and o
ther users of financial
statements with information about:
 activities that are making money and those which
 are losing money;
 profit potential in specific segments;
 cash flows and their associated risks; and
factors which influence areas of industry or geogr
aphic segments that
affect cash flows.
 Also, whereas intra-group sales and transfers are
eliminated in consolidated
financial statements these may be significant and
therefore provide relevant
additional information.
3.2 Benefits

Users of financial information generally want mo
re information rather than
less. The more information that is provided to the
financial markets, the more
“true” are the share prices which reflect that infor
mation.
 Stock market studies have shown that the disclos
ure of segment data decreases
the market assessments of risk for the disclosing e
ntity.
 A forecast based on disaggregated data should be
more accurate
3.3 Associated problems

In providing more information other qualitative c
haracteristics of useful
information may suffer (e.g. timeliness and accur
acy and hence relevance and
reliability). Comparability may be compromised
for relevance.
 There are a number of costs associated with provi
ding with segmental
information:

costs of compiling, processing and reporting it;
Commentary
Arguably this should not be significant (since the infor
mation should be
disaggregated for internal purposes and therefore avai
lable). However, it may
be less easy for globally integrated companies.
 costs of competitive disadvantage arising from ad
ditional disclosure.
 Significant judgements are involved in determini
ng reporting segments that
should take account of the relevance, reliability a
nd comparability over time of
the segment financial information and its usefulne
ss for assessing the risks and
returns of the entity as a whole.

There may be a lot of information on revenues an
d gross margins (e.g. in the
retail industry) but systems for the assignment of
costs and allocation of assets,
liabilities and capital expenditure may not provid
e reliable information, For
example, in the assignment of costs:


some costs may be omitted in the assignment pro
 cess;
inappropriate methods may be used in allocating
costs between segments;
common costs to the entire organisation may be i
ncorrectly assigned
to segments.

The greater the disaggregation the greater the sen
sitivity of the information.
Competitors can see more precisely where profits
are generated. Also, the
greater the need to allocate costs (which can disto
rt segment profits).

As a matter of practicality IFRS 8 effectively rest
ricts the number of reporting
segments to 10. However, unless there are only a
few segments making up a
substantial portion (at least 75%) there may be to
o much information for users
to reasonably comprehend.
In some respects segment information can be con
 sidered misleading. For
example, segments may not be autonomous altho
ugh this may be implied in
reporting segment information.

Research shows that the incidence of measureme
nt errors particularly in
earnings and cost/revenue allocations is higher in
segment reporting than entity
reporting. These have been attributed to manage
ment intervention in segment
reporting and the operational structure of segment
ed corporations.
In many countries segmental reports must be audi
ted (e.g. in the UK and
USA). For auditors there may be problems of ver
ifiability (e.g. of cost
allocations and transfer prices).
Key points summary
An operating segment is a component:
 that engages in business activities from which it earns
revenues and incurs
decision maker; and
 for which discrete financial information is available.
Reportable segments are individual or aggregated operati
ng segments that exceed
any one of the quantitative thresholds:
 reported revenue is 10% or more of combined revenu
e;
 the amount of profit or loss is 10% or more of the gre
ater of the combined:
profit of all non-loss-making operating segments; an
d
(ii) loss of all operating segments that reported a loss;
 assets are 10% or more of combined assets.
If the total external revenue reported by operating segme
nts is less than 75% of
the entity’s revenue, additional operating segments must
be identified as
reportable segments.
Required disclosures include:
 general information (e.g. about the identification of o
perating segments);
basis of measurement;
statements;
 some entity-wide disclosures (even if there is only on
e reportable segment);
 analyses of revenues and certain non-current assets by
geographical area; and
 information about transactions with major customers.
Focus
 define an operating segment;
 identify reportable segments (including applying t
he aggregation criteria and
quantitative thresholds);
 discuss the usefulness and problems associated wi
th the provision of segment
information.
Activity solutions
Solution 1 – Reportable segments
Commentary
The issue is whether or not it is acceptable to report t
he three major business lines
separately and to include the rest for reconciliation pu
rposes as “all other segments”.
Since the reported revenues attributable to the three busi
ness lines that meet the separate
reporting criteria constitute less than 75% of the combine
d revenue, additional segments
must be identified as reportable, even though they are bel
ow the 10% threshold, until at
least 75% of the combined revenue is included in reporta
ble segments.
If at least one of the small segments meets the aggregatio
n criteria to be aggregated with
one of the three reportable segments, there will be four re
portable segments (including
“all other segments”).
Alternatively, two or more of the smaller segments may
be aggregated, if they meet the
aggregation criteria. In this case there will be five report
able segments.
If none of the small segments meet the criteria to be aggr
egated with any of the other
business lines one of them must be identified as reportabl
e, though it does not meet the
10% threshold. In this case there will be five reportable
segments also.
Solution 2 – Comparative information

Comparative information for all periods presented
should be restated (IAS 1) in
conformity with IFRS 8.
 information is not available and t
he cost to develop it would be
exces sive, this fact should be disclosed.
Commentary
In this case there appears to be no requirement to disc
lose current period
segment information on both the old and new bases of
segmentation (as there
is when there is a change in composition of reportable
segments). The
difference, perhaps, being that adoption of IFRS 8 is a
mandatory change for
those complying with IFRS, whereas an internal reorg
anisation is voluntary.
 Silver should also disclose early adoption of IF
RS 8.
Overview
Objective

To explain the need
for IFRS 5 “Non-
current Assets Held
for Sale and Discont
inued
Operations”.
 Reasons for
INTRODU
issuing IFRS 5
CTION
DEFINITIO Disposal
NS group
O
N

H
E
L
D
F
O
R
S
A
L
E
C
L
A
S
S
I
F
I
C
A
T
I
N
D

D
I
P
R S
E C
S L
E
N O
T S
A
T U
I R
O
N E

 Held f  Disc
or sale no ontinued
n-current operatio
assets ns
eserved.
2901
SESSION 29 – IFRS 5 NON-CURRENT ASSETS HELD FOR SALE
1 Introduction
1.1 Reasons for issuing IFRS 5

To establish principles for the classification, measurement and pres
entation of held-for-
sale non-current assets.
 The information provided enhances the ability of users of financial
statements to make
projections of cash flows, earnings-generating capacity and financia
l position, by
segregating information about discontinued assets and operations fr
om the information
about continuing operations.
2 Definitions
2.1 Component of an entity

Operations and cash flows that are clearly distinguishable from the r
emainder of the entity –
both operationally and for financial reporting purposes.
Commentary
So a component will have been a cash-generating unit (or a group of cas
h-generating
units) when held for use.
2.1.1 “distinguishable”
 A discontinued operation must be distinguishable operationally
 its operating assets and liabilities can be directly attributed to it;
 its income (gross revenue) can be directly attributed to it; and
 at least a majority of its operating expenses can be directly attribute
d to it.
Commentary
Elements are directly attributable to a component if they would be elimin
ated when the
component is discontinued.
2.2 Disposal group

A group of assets to be disposed of collectively in a single transacti
on, and directly
associated liabilities that will be transferred in the transaction.
 The assets include goodwill acquired in a business combination if t
he group is:


a cash- ng unit to which goodwill has been allocated; or
generati an operation within such a cash-generating unit.
Activity 1
Identify which of the following is a disposal group at 31 December 2017:
(1) On 21 December 2017, ABC announced the Board’s intention to se
ll its
shares in an African company, Sucoma (sugar), contingent upon the
approval
of Sucoma’s other shareholders. It seems unlikely that approval wi
ll be
granted in the near future and no specific potential buyer has been i
dentified.
(2) DEF has entered into a contract to sell the entire delivery fleet of ve
hicles
operated from its warehouse in Milton Keynes (in UK) to a competi
tor,
WheelsRUS, on 14 December 2017. The assets will be transferred
on 28
January 2018 from which date the Group will outsource its delivery
activities
to another company, Safe & Sound.
(3) On 31 December 2017, the GHI’s management decided to sell its
supermarkets in Germany. The shareholders approved the decision
at an
extraordinary general meeting on 19 January 2018.
(4) On 16 October 2017 JKL’s management and shareholders approved
a plan to
sell its retail business in Eastern Europe and a working party was se
t up to
manage the sale. As at 31 December 2017 heads of agreement had
been
signed although due diligence and the negotiation of final terms are
still in
process. Completion of the transaction is expected in spring 2018.
2.3 Discontinued operation

A discontinued operation is a component that either:

 is classified as held for sale,
and
 represents a separate major line of business or geographical area of
operations (a
“major operation”);

is part of a single co-ordinated plan to dispose of that major operati
on; or

is a subsidiary acquired exclusively with a view to resale.
Commentary
The linkage between discontinued operations and the held for sale classif
ication is developed
later (see s.3.6) after consideration of the held for sale classification.
2903
2.3.1 “separate”
A discontinued operation must be a “major operation” (i.e. a separate major
line of business or
geographical area of operations).

 A part of a segment may also satisfy the criterion.
 For an entity that does not report segment information, a major prod
uct or service line
may also satisfy the criteria of the definition.
Commentary
Businesses frequently close facilities, abandon products and change the s
ize of their work
but they can occur in connection with a discontinued operation. For exa
mple:
 gradually phasing out of a product line or class of service;
 relocating some production or marketing activities for a line of busine
ss;
 sale of a subsidiary whose activities are similar to those of other grou
p companies.
2.3.2 “a single co-ordinated plan”
 A discontinued operation may be disposed of in its entirety or piece
meal, but always pursuant
to an overall co-ordinated plan to discontinue the entire component.
Illustration 1
On 5 January 2015, the group completed the sale of Close Brothers Seydler (“Seydl
er”) to Oddo
& Cie for a gross cash consideration of €46.5 million (£36.4 million), which include
s a post year
end adjustment of £0.5 million following finalisation of completion accounts. The p
rofit on
disposal was £10.3 million.
Based in Frankfurt, Seydler provided equity and debt capital markets services, sec
urities trading
and research primarily in German small and mid‐sized companies and was part of t
he Securities
division.
in the consolidated income statement, the results of which are set out below:
Results of discontinued operations
(10.4)(24.4)
Operating loss before
tax
Profit on disposal of discontinued operations, ne
t of tax
10.3 –
Profit after tax is up until the point of disposa
l
Close Brothers Group plc Annual Report
2015
3 Held for sale classification
3.1 Definition

Non-current asset: An asset that does not meet the definition of a c
urrent asset.
 A non-current asset (or disposal group) is classified as held for sale
if its carrying
amount will be recovered principally through a sale transaction rath
er than through
continuing use.
Commentary
“Non-current assets (or disposal groups) classified as held for sale” will
be referred to
more simply as “held for sale non-current assets” in this session.
3.2 Held for sale non-current assets
3.2.1 Recognition criteria
 The asset must be available for immediate sale in its present condi
tion.
Commentary
Assets are not available for immediate sale if they continue to be needed
for ongoing
 An asset cannot be classified as held for sale retrospectively.
Commentary
An asset that is renovated to enhance its value before it is sold cannot be
classified as
held for sale until the renovation is complete and the asset is available f
or immediate
sale. The classification cannot be “back-dated”.
 The sale must be highly probable (i.e. significantly more likely than
probable).
3.2.2 Highly probable
 Management must be committed to a plan to sell the asset.
Commentary
An exchange of non-current assets constitutes a sale transaction when th
e exchange has
commercial substance (IAS 16 “Property, Plant and Equipment”).
 An active programme to locate a buyer and complete the plan must
have been initiated.

The asset must be actively marketed forthat is reasonable relative to i
at a price ts
current fair value.
Commentary
“Fair value” and “active market” are as defined by IFRS 13.
 The sale should be expectedfor recognition as a completed sale with
alify in one
year from the date of classificatio
n.
Commentary
However, an extension period does not preclude classification as held for
sale if the
delay is beyond management’s control and there is sufficient evidence of
management’s
commitment to its plan.
 The actions required to complete the plan should indicate that signif
icant changes to the
plan or withdrawal from the plan are unlikely.
3.2.3 Assets acquired exclusively for disposal
 Non-current assets acquired exclusively with a view to subsequent
disposal are
classified as held for sale at the acquisition date if:
 the one-year criterion is met; and
 it is highly probable that any other criteria that are not met at that d
ate will be
met within three months.
3.2.4 Events after the reporting period
 Assets are not classified as held for sale if the recognition criteria ar
e only met after the
reporting period.
 However, if the criteria are met before the financial statements are a
uthorised for issue,
the notes will disclose the facts and circumstances.
Commentary
The event is non-adjusting (see IAS 10 “Events after the Reporting Perio
d”).
3.3
Abandoned non-current assets

An asset that is to be abandoned is not classified as held for sale.
Commentary
Its carrying amount will be recovered principally through continuing use.
 However, a disposal group that is to be abandoned is treated as a dis
continued operation
when it ceases to be used.
Commentary
Providing that the definition of a “discontinued operation” is met.

Non- l groups) to be abandoned include those that are to be used to
curren the end of their economic life and those that are to be closed rather t
t asset han sold. A non-current
s (or asset that has been temporarily taken out of use should not be treate
isposa
d as abandoned.
Activity 2
Activity 1 give rise to the classification of non-current assets held for sale at
31
December 2017.
3.4 Measurement
3.4.1 Principle
 On classification as a held for sale non-current asset, the asset or dis
posal group is
measured at the lower of:
 carrying amount; and

fair value less costs to sell.
Commentary
Immediately before initial classification as held for sale, carrying amount
is measured
in accordance with the applicable IFRS.
3.4.2 Time value
 If a sale is expected after one year, costs to sell are discounted to th
eir present value.
Commentary
Any increase in the present value of the costs to sell arising from the pas
sage of time is
treated as a financing cost.
3.4.3 Subsequent remeasurement
 If the asset or disposal group is still held at the year end, it will agai
n be measured at the
lower of carrying amount and fair value less costs to sell.
 Assets and liabilities in a disposal group are remeasured in accordan
ce with applicable
IFRSs before the fair value less costs to sell of the disposal group is
remeasured.
3.4.4 Impairment losses and reversals
 Impairment losses for initial or subsequent write-downs to fair valu
e less costs to sell
must be recognised.
Commentary
Reversals are recognised, but not exceeding cumulative impairment losse
s recognised so far.
3.4.5 Depreciation
 Held for sale non-current assets are depreciated to the date of classi
fication and from
that date onwards are no longer depreciated.
Commentary
But interest and other expenses attributable to the liabilities of a disposal
group
continue to be recognised.
Illustration 2 – Measurement
Artemis is planning to sell an asset with a carrying amount of $20 million.
The asset
meets the requirements of IFRS 5 and is classified as held for sale. On class
ification as
held for sale, the fair value of the asset is $18 million and Artemis expects t
o incur
costs of $1 million in selling the asset.
The asset should be measured at fair value less cost to sell of $17 million, i
n
accordance with IFRS 5.
On initial recognition as a non-current asset held for sale, it is remeasured in
accordance with the relevant standard (IAS 16, IAS 38 or IAS 40) and an in
itial loss of
$2 million recognised in profit or loss (or against revaluation reserve if rele
vant) and
then a further loss of $1 million is recognised in profit or loss, bringing the
asset to its
fair value less costs to sell.
3.5 Changes to a plan of sale

If held for sale recognition criteria are no longer met, that classifica
tion ceases.
 A non-current asset that ceases to be classified as held for sale is me
asured at the lower
of:
 its carrying amount before it was classified as held for sale, adjust
ed for any
depreciation, amortisation or revaluations that would have been rec
ognised had
the asset not been classified as held for sale; and

its recoverable amount at the date of the decision not to sell.
 Any adjustment to the carrying amount is included in income from c
ontinuing operations in
the period in which the held for sale criteria ceased to be met.
3.6 Discontinued operations and held for sale cl
assification

If a group of assets (and liabilities) that meets the held for sale criter
ia also represents a
“major operation” both a disposal group and a discontinued operati
on arise.
 However, the linkages between discontinued operations and the hel
d for sale
classification are not always clear. For example:
 A co-ordinated but piecemeal sale of a group of assets and liabilitie
s might
represent a discontinued operation, but would not give rise to a disp
osal group; or
 A plan to abandon an operation (rather than sell it) would not lead t
o held for
sale classification. It would be presented as a discontinued operatio
n only on
abandonment.
Activity 3
Identify whether each of the following scenarios gives rise to a discontin
ued
operation and/or classification as assets as held for sale:

Discontinued Assets
operation held for sale
Yes/No Yes/No
(1) ABC disposes of a discontinued operation by
selling the underlying assets. The sales

transaction is incomplete at the reporting date.
(2) DEF has ceased activities that meet the
definition of a discontinued operation without

selling any assets.
(3) GHI ceases activities and has already
completed the sale of the underlying assets at

the reporting date.
(4) JKL will sell or has sold assets that are within
the scope of IFRS 5, but does not discontinue

any of its operations.
4 Presentation and disclosure
4.1 Purpose

To enable users of financial statements to evaluate the financial eff
ects of:

discontinued operations; and

disposals of non-current assets (or disposal groups).
4.2 Discontinued operations
4.2.1
A single amount
 A single amount in the statement of profit or loss and other compre
hensive income
comprising:

 post-tax profit or loss of discontinued operations;
post-tax gain or loss recognised on:
 the measurement to fair value less costs to sell; or

the disp he assets (or disposal groups) constituting the
osal of discontinued operation.
Commentary
Where components of profit or loss are presented as a separate statemen
t (as permitted
by IAS 1) a section identified as relating to discontinued operations is pr
esented in that
separate statement.
4.2.2 An analysis
 An analysis of the single amount (either in the statement of profit or
loss or in the
notes) into:

 the revenue, expenses and pre-tax profit or loss of discontinued ope
rations;
the gain or loss recognised on:
 the measurement to fair value less costs to sell; or
 the disposal of the assets (or disposal groups) constituting the
discontinued operation.
Commentary
Each with its related income tax expense.
 If presented in the statement of profit or loss rather than the notes it
is identified as
relating to discontinued operations separately from continuing oper
ations.
4.2.3 Net cash flows

discontinued operations must be presented in a financial statement
or in the notes.
Commentary
Comparative information must be re-stated for prior periods presented.
4.2.4 Importance of disclosure
 It is essential that users of financial statements understand what info
rmation is relevant to
future years and what is not. Information about discontinued operat
ions informs the user
that the results of discontinued operations will not happen in future
years and therefore
should not be taken into account when making decisions.
 Information provided in financial statements should be both “predic
tive” (i.e. about what
will happen in the future) and “confirmatory” (i.e. that what was pre
dicted to happen
actually happened). The disclosures required for discontinued oper
ations goes someway
to providing this information.
2910
Activity 4
Hamlet is considering the acquisition of another company in order to expan
d its
operations. It has obtained the published financial statements of two compa
nies, Recall
and Revival, for the year to 31 March 2017. By coincidence both companie
s reported
the same operating profit before tax. Market expectations are that profits wi
ll increase
(or losses will reduce) by an average of 8% in the year to 31 March 2018.
Hamlet has extracted the following analyses of operating profits from the co
mpanies’
Operating profit: $m $m

Continuing activities 175 200
Acquisitions (25) 75
Discontinued activities 100 (25)
–––– ––––
250 250
–––– ––––
Additional information
Notes to the financial statements of both companies referred to significant r
estructuring
during the year. Recall’s discontinued operation represented the sale of its f
inancial
services division on 30 September 2016; Recall’s acquisition occurred on 1
January
2017. Revival’s acquisition occurred on 1 July 2016 and its discontinued o
peration
represented the closure of its loss-making mining operations.
Required:
Assuming the market forecast of increased profits and reduced losses is
correct
and applies to all sectors, calculate the expected operating profit for eac
h
company for the year to 31 March 2018:
(a) if the analyses of operating profits had NOT been extracted; an
(b) d
using the analyses and additional information provided above.
Comment on your results.
4.3 Continuing operations

If a component ceases to be classified as held for sale, the results of
operations
previously presented as discontinued are reclassified to continuing
operations for all
periods presented.
Commentary
Amounts for prior periods are then described as having been re-
presented.

Gains and losses on the remeasurement of held for sale non-current
assets that do not
meet the definition of a discontinued operation are included in profi
t or loss from
continuing operations.
4.4 Held for sale non-current assets
Commentary
The following requirements also apply to the assets of disposal groups cl
assified as
held for sale.
4.4.1 Separate classification
 Non-current assets classified as held for sale are to be shown separa
tely from other
assets in the statement of financial position.
 The liabilities of a held for sale disposal group are similarly present
ed separately from
other liabilities in the statement of financial position.
Commentary
Offsetting of such assets and liabilities is strictly prohibited.
 The major classes of held for sale assets and liabilities are separatel
y disclosed either in
the statement of financial position or in the notes.
 Any cumulative income or expense recognised in other comprehens
ive income relating to a
held for sale non-current asset must be presented separately.
 Comparative information is not restated.
Commentary
Classification as held for sale is reflected in the period when the held for
sale
recognition criteria are met.
4.4.2 Additional disclosures
Commentary
The following note disclosures are made in the period in which a non-
current asset is
classified as held for sale or sold.
 A description of the non-current asset.
 A description of the facts and circumstances of the sale or expected
disposal (and the
expected manner and timing of that disposal).
 Fair value gains or losses.
 The reportable segment in which the non-current asset (or disposal
group) is presented
in accordance with IFRS 8 “Operating Segments” (if applicable).
 If held for sale criteria are no longer met disclose:



the decision to change the plan to sell the non-current asset;
the facts and circumstances leading to the decision; and
the effect of the decision on the results of operations for the period
and any
prior periods presented.
Key points summary
A “disposal group” is a group of assets (and associated liabilities) to be disp
osed
of in a single transaction.
An item is classified as held for sale if it carrying amount will be covered
principally through sale rather than continuing use. This is the case when:
 sale is highly probable (i.e. there is management commitment, etc).
Operations to be wound down or abandoned are not held for sale.
Measurement principles for held for sale items:
 after classification: at the lower of carrying amount and fair value less c
osts
to sell.
Impairment must be considered on classification and subsequently.
For assets carried at fair value prior to initial classification costs to sell must
be
deducted (expense to profit or loss).
Assets held for sale are:
 presented separately on the statement of financial position.
A previously consolidated subsidiary now held for sale is consolidated until
actually disposed.
A discontinued operation is a component that has been disposed of or is clas
sified
as held for sale and:
 represents a “major operation” and is part of a single co-ordinated plan; o
r
 a subsidiary acquired exclusively for resale (with disposal of control.)
Discontinued operations are presented as a single amount in the statement o
f
profit or loss.
Detailed disclosure is required either in the notes or in the statement of profi
t or
loss distinct from continuing operations.
Net cash flows attributable to the operating, investing, and financing activiti
es of a
discontinued operation are presented separately.
Retrospective classifications of non-current assets held for sale and disconti
nued
operation, when criteria are met after the reporting date, are prohibited.
2913
Focus
 discuss the importance of identifying and reporting the results of dis
continued operations;
 define and account for non-current assets held for sale and disconti
nued operations;
 describe the criteria that need to be present before non-current asset
s are classified as held
for sale, either individually or as a disposal group;
 account for non-current assets and disposal groups that are held for
sale.
©2017 Becker Educati
onal Development Cor
p. All rights reserved.
2914
Activity solutions
Solution 1 – Disposal groups
(2) the vehicle fleet and (4) the retail business are disposal groups because e
ach of them is a
collection of assets to be disposed of by sale together as a group in a single t
ransaction.
The sale of the 50 supermarkets is not classified as a disposal group as there
is no indication that
they are to be sold as a package, each supermarket could be sold as a separa
te item.
Solution 2 – Non-current assets held for sale
Presented as held for sale
(2) DEF’s fleet is classified as held for sale because it constitutes a grou
p of assets to be
sold in their present condition and the sale is highly probably at the
reporting date (as a
contract has been entered into).
(4) JKL’s sale of its retail business will not be completed until the final
terms (e.g. of
purchase price) are agreed. However, the business is ready for imm
ediate sale and the
sale is highly probable unless other evidence after the reporting date
, before the
financial statements are authorised for issue, comes to light to indica
te the contrary.
Not presented as held for sale
(1) ABC’s shares in Sucoma are not available for an immediate sale as
shareholder
approval is required. In taking this into account of the assessment o
f whether the sale is
highly probable it is clearly not highly probable.
(3) GHI’s supermarkets are not available for immediate sale at the repor
ting date as the
shareholders’ approval was required. The held-for-sale criteria are
only met after the
end of the reporting period and the assets cannot be treated retrospe
ctively as held for
sale. However, the matter should be disclosed in a note to the finan
cial statements (as a
non-adjusting event after the reporting period).
Solution 3 – Discontinued operations and assets h
eld for sale

Discontinued Assets
operation held for sale
(1)
ABC peration by selling the
poses underlying assets. The sales transaction is inco
a disconmplete at Yes Yes
tinued the reporting date.
(2) DEF has ceased activities that meet the defin
ition of a Yes No
discontinued operation without selling any a
ssets.
(3) GHI ceases activities and has already complete
d the sale Yes No
of the underlying assets at the reporting date.
(4) JKL will sell or has sold assets that are within
he scope No Yes
of IFRS 5, but does not discontinue any of its
perations.
Solution 4 – Expected operating profit
Commentary
Note in the first paragraph that both companies have reported the same
profit before
tax for the year ended 31 March 2017.
(a) No information on continuing and discontinued activiti
es
If the information on continuing and discontinued activities was not a
vailable the
forecast of the operating profits of both companies for the year to 31 March
2018 would
be $270 million (i.e. $250 million × 108%)
(b) Using the analysis and additional information
Recall
Revival
$m
From continuing operations
(other than acquisitions) 216 (200 × 108
Impact of acquisitions (see below (92) %)
) ––– 108
97 –––
324
–––
Net operating prof –––
it
Recall: Losses of $25 million for three months would extrapolate to $100 m
illion for a
full year. The improvement in market expectations would reduce these loss
es by 8% to
$92 million. The previous profit of $100 million in 2017 from the financial
services
division would no longer be attributable to Recall as it has been sold.
Revival: Profit of $75 million for a nine-month period would extrapolate to
$100
million plus another 8% for improved market expectations giving a total of
$108
million. The previous losses of $25 million from its mining operations wou
ld not recur
as they have been closed down.
Comments
The information on the discontinued operations and the acquisitions is very
useful.
Without it, both companies would have forecast profits of $270 million and
on this
basis it would be difficult to choose between the two companies. However
, with the
provision of the information a very different position arises. Revival has far
higher
forecast profits, $324 million compared to only $97 million for Recall. It w
ould seem
that Revival has the better strategy; it has closed down its loss-making oper
ations and
replaced it with a profitable one. Whereas Recall has sold a profitable divis
ion and
bought a loss-making one. That said it does not mean that Revival is a bette
r purchase
than Recall. A lot would depend on the relative price of the two companies,
and it may
be that Recall has a reputation for turning round loss-making companies and
then
selling them on for a substantial profit.
Overview
Objective

To provide guidance
on the treatment of i
tems that arise after
the reporting
period and before th
e date upon which t
he financial stateme
nts are approved
by management.
INTRODUCTION
 Objective
 Definitions
RECOGNITION
 Adjusting events
 Non-adjusting events
 Dividends
DISCLOSURE

Authorisation
©2017 B
ecker Edu
cational
Develop
ment Cor
p. All rig
hts reser
ved.
3001
SESSION 30 – IAS 10 EVENTS AFTER THE REPORTING PERIOD
1 Introduction
1.1 Objective

IAS 10 describes:
 when financial statements should be adjusted for events after the
reporting period; and
 the necessary disclosures:
–
– the date when the financial statements were authorised for issue; a
nd
about events that occurred after the reporting period.
Commentary
The fundamental question is whether or not to change amounts in the
1.2 Definitions

Events after the reporting period – are those events, both favourab
le and
unfavourable, that occur between the end of the reporting period an
d the date
on which the financial statements are authorised for issue.
Commentary
The process involved in authorising the financial statements for issue wil
l
vary depending upon the management structure, statutory requirements a
nd
procedures followed in preparing and finalising the financial statements.
Essentially, it is when they are approved for publication.
 Two types of events can be identified:
 those that provide further evidence of conditions that existed at the
end of the reporting period (“adjusting events”); and
 those that are indicative of conditions that arose after the end of th
e
reporting period (“non-adjusting events”).
3002
2 Recognition and measurement
2.1 Adjusting events

Financial statements must be adjusted for “adjusting events” after t
he end of
the reporting period.
Examples
 The settlement after the end of the reporting period of a court case t
hat confirms
the existence of a present obligation at the end of the reporting peri
od. Any
provision previously recognised is adjusted in accordance with IAS
37.
Commentary
Mere disclosure of a contingent liability is not suitable as settlement pro
vides
additional evidence regarding the obligation.
 Bankruptcy of a customer which occurs after the end of the reportin
g period and
confirms that a loss already existed at the end of the reporting perio
d on a trade
receivable account.
2.2 Non-adjusting events

Financial statements must not be adjusted for non-adjusting events
after the
reporting period.
 An example of a non-adjusting event is a decline in fair value of in
vestments after
the end of the reporting period and before the date on which the fin
ancial
statements are authorised for issue.
Commentary
The fall in fair value does not normally relate to the condition of the inv
estments at
the end of the reporting period, but reflects circumstances, which have a
risen in
the following period. Therefore, the amounts recognised in the financial
statements for that investment are not adjusted.
Examples
 The following events after the end of the reporting period are exam
ples of non-adjusting
events that may be of such importance that non-disclosure would af
fect the ability of
the users of the financial statements to make proper evaluations and
decisions:

 a major business combination;
 the destruction of a major production plant by a fire; and
abnormally large changes in asset prices or foreign exchange rates.
Commentary
Non-adjusting events do not change amounts in the statement of financial
position but if sufficiently important, they are disclosed.
2.3 Dividends

Dividends to owners declared after the reporting period should not
be
recognised as a liability at the end of the reporting period.
Commentary
Dividends are often thought of as a distribution of profit and historically
have
been accounted for in the period to which they relate. However, they do
not
meet the IAS 37 criteria of present obligation.
 IAS 1 requires disclosure of the amount of dividends that were pro
posed or
declared after the reporting period, but before the financial stateme
nts were
authorised for issue.
Commentary
Disclosure is in the notes.
Activity 1
Which of the following events after the reporting period provide evidence o
f
conditions that existed at the end of the reporting period?
Proforma solution
YES/NO
(a) Closure of one of fifteen retail outlets
(b)
Discovery of a fraud
(c)
Sales of inventories at less than cost
(d)
Exchange rate fluctuations
(e)
Nationalisation or privatisation by government
(f)
Out of court settlement of a legal claim
(g)
Rights issue of equity shares
(h)
Strike by workforce
(i)
Earthquake.
(j)
Announcing a plan to discontinue on operation
3004
2.4 Going concern

Financial statements should not be prepared on a going concern ba
sis if
management determines, after the reporting period, that:
 It intends to liquidate the entity or to cease trading; or
 It has no realistic alternative but to do so.
Commentary
Deterioration in operating results and financial position after the reporti
ng
period may indicate a need to consider whether the going concern
assumption is still appropriate.
 If the going concern assumption is no longer appropriate the standa
rd
requires a fundamental change in the basis of accounting, rather tha
n an
adjustment to the amounts recognised within the original basis of a
ccounting.
 The following disclosures are required by IAS 1 if the accounts are
not
 A note saying that the financial statements are not prepared on a
going concern basis; or
 management is aware of material uncertainties related to events or
conditions, which may cast significant doubt on the entity’s ability
to continue as a going concern.
3 Disclosure
3.1 Authorisation

The date when the financial statements were authorised for issue (a
nd who
gave that authorisation) must be disclosed.
 If the entity’s owners or others have the power to amend the financ
ial
statements after issuance, that fact must be disclosed.
Commentary
Users need to know when the financial statements were authorised for is
sue,
as the financial statements do not reflect events after this date.
3.2 Updating

Disclosures about conditions that existed at the end of the reporting
period should be
updated in the light of the new information received after the report
ing per iod.
Commentary
This applies even when the information does not affect the amounts that i
t
recognises in its financial statements (e.g. in respect of a contingent liabi
lity).
3.3 Non-adjusting events

For material non-adjusting events, the following should be disclos
ed:
 the nature of the event; and
 an estimate of its financial effect (or a statement that such an
estimate cannot be made).
Commentary
By definition, non-disclosure of such a material matter could influence th
e
economic decisions of users.
Illustration 1
In January 2016, Deutsche Post DHL Group acquired a minority
interest of 27.5 % in French e-commerce logistics specialist Relais
Colis. This acquisition aims to improve the DHL divisions’ access to
the French e-commerce market. The investment supports the expansion
of the collection point network and special delivery services
for Relais Colis’ e-commerce customers. Relais Colis will be
accounted for using the equity method in the consolidated financial
statements.
The remaining shares in the property development companies
King’s Cross Central General Partner Ltd., UK, and King’s Cross
Central Property Trust, UK, assigned to the Supply Chain division
were sold at the end of January 2016, resulting in income of €63 million
for the Group.
There were no other significant events after the reporting date.
Deutsche Post AG Annual Report 2015
 If information is received after the reporting period about condition
s that
existed at the end of the reporting period, disclosures relating to th
ese
conditions should be updated, in the light of the new information.
3006
Key points summary
Financial statements are adjusted for adjusting events (that provide further
evidence of conditions existing at the end of the reporting period).
The basis of preparation of financial statements is changed if events indicat
e that
the going concern assumption is no longer appropriate.
Non-adjusting events (events or conditions that arose after the end of the re
porting
period) are disclosed if of such importance that non-disclosure would affect
the
ability of users to make decisions. Disclose:
 financial effect (or state that this cannot be estimated).
Dividends declared after the reporting period are not a liability at the end o
f the
reporting period (therefore disclose as a non-adjusting event).
The date when the financial statements are authorised for issue (who author
ised
and who can amend subsequently) must be disclosed.
Focus
 distinguish between and account for adjusting and non-adjusting ev
ents after
the reporting date.
3007
Activity solution
Solution 1 – Adjusting vs non-adjusting events
(a)
No – Going concern assumption is not appropriate for only a part ( /1
5 ) of the entity.
(b)
Yes – Fraud was perpetrated in year under review.
(c)
Yes – Sales of inventories at less than cost (i.e. net realisable value l
ess than cost).
(d)
No – Movements in foreign exchange rates after the reporting period
are in response to
changes in economic conditions, etc after the reporting period.
(e) No – Government action is after the reporting period.
(f)
Yes – Out of court settlement of a legal claim means ultimate outco
me known therefore
uncertainty eliminated.
(g) No – Rights not available to shareholders until after the reporting pe
riod.
(h)
No – Strike action is after the reporting period (even if the reason for
action was an
event before the end of the reporting period – e.g. sacking of a collea
gue).
(i) No – Natural disaster was not a condition existing at the end of the re
porting period.
(j)
No – The operation was not disposed of as at the end of the reporting
period. The
operation cannot be classified as held for sale at the end of the report
ing period as there
is no commitment to a plan at that time. (IFRS 5)
3008
Overview
Objective

To evaluate related
party involvement a
nd explain the discl
osure of related
parties and transacti
ons between them.
SCOPE
 Included in the stand
ard
 Parties deemed not to
be related
TERMINOLOGY
 Related party
 Related party transact
ions
 Control
 Government
THE RELATED
PARTY ISSUE
 Effect on reporting en
tity
DIS GOVE
CLO RNME
SUR NT-
RELAT
E
ED EN
TITIES


D

is
c
Situ l
ations o
s
u
r
e requ
ired
eserved.
3101
SESSION 31 – IAS 24 RELATED PARTY DISCLOSURES
1 Scope of IAS 24
1.1 Scope

IAS 24 applies in identifying:
 related party relationships and transactions;
 outstanding balances between an entity and its related pa
 rties;
 when disclosure of the above items is required;
the disclosures to be made.
 IAS 24 requires disclosure in the consolidated and separa
te financial
statements of a parent or investors with joint control of, o
r significant
Consolidated Financial Statements or IAS 27 Separate Financia
l Statements.
1.2
Parties deemed not to be related

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.
 Two venturers simply because they share joint control.
 Providers of finance, trade unions, public utilities, govern
ment departments
and agencies, in the course of their normal dealings with
an entity (even
though they may restrict business activities).
 significant
volume of business is transacted as a result of economic d
ependence.
2 Terminology
2.1 Related party

A related party is a person or an entity that is related to
the reporting entity.
(a)
A person or a close family member is related if he:
 has control or joint control of the reporting entity;
 has significant influence over the reporting entity; or
 is a member of the key management personnel of the re
porting
entity or its parent.
Commentary
Close family members are those that may be expected to influe
nce, or be influenced by
that person – this includes the individual’s domestic partner an
d any children or
dependents of the individual or their domestic partner. Non-
executive directors are
included in key management personnel.
(b) An entity is related to a reporting entity if any of the follo
wing conditions applies:
 They are members of the same group; this means a parent
, subsidiary and
fellow subsidiaries are related to each other.

One is an associate or joint venture of the other.

Both are joint ventures of the same third party.
 One is a joint venture of a and the other is an associate of
party the
third entity.

The entity is a post-employment benefit plan for the empl
oyees of the
reporting entity.

The entity is controlled or jointly controlled by a person i
n (a) above.
 A person having control or joint control of the reporting e
ntity has significant
influence over the entity or is a member of the key manag
ement personnel.

The entity provides key management personnel services t
o the reporting entity
or to the parent of the reporting entity.
Commentary
Substance of relationship, not merely legal form, should be con
sidered. One
party has the ability to control the other party or exercise signi
ficant
influence over the other party in making financial and operatin
g decisions.
Illustration 1
35. Related party transactions (extract)
Transactions with pension fund
The Group has borrowings amounting to EUR 69 million (EUR 69 million in 201
5) from Nokia
Unterstü tzungsgesellschaft GmbH, the Group’s German pension fund, a separate
legal entity. The loan
bears interest at the rate of 6% per annum and its duration is pending until furt
her notice by the loan
counterparties even though they have the right to terminate the loan with a 90‐
day notice. The loan is
included in long‐term interest‐bearing liabilities in the consolidated statement o
f financial position.
The Group has guaranteed a loan of EUR 11 million (EUR 15 million in 2015) for
an associated company.
Nokia in 2016
2.2 Related party transaction

A transfer of resources, services or obligations between r
elated parties,
regardl ess of whether a price is charged.
2.3 Control

Control arises when an investor:
 has power over the investee;
 rights to variable returns; and

the ability to affect those returns.
 Joint control is the contractually agreed sharing of control
of an arrangement, which
exists when decisions require unanimous consent of the p
arties sharing control.
2.4 Significant influence

Power to participate in, but not control, the entity’s financ
ial and operating
policy decisions.
 May be gained by share ownership, statute or agreement
.
2.5
Government

Government refers to government, government agencies
and similar bodies
whether local, national or international.
 A government related entity is an entity that is controlle
d, jointly controlled
or significantly influenced by a government.
3 The related party issue
3.1 Effect on reporting entity

Related party relationships are a normal feature of comm
erce and business.
 A related party relationship could have an effect on finan
cial position and
operating results of the reporting entity if:
 transactions occur which would not be entered into with u
 nrelated parties;
transactions are not at the same amounts as for unrelated
parties.
 transactions do not occur, the mere e
xistence of the
relationship may affect transactions with other parties.
Illustration 2
Artur is the managing director of Aspic. Aspic buys goods from
Jelly. Jelly is
managed by Boris, Artur’s father. Jelly supplies goods to Aspic a
t a substantial
discount which is not offered to other customers.
Aspic’s gross profit margin will be higher and Jelly’s gross profit
margin will be lower
than if the transactions had been at “arm’s length”. Disclosure it t
herefore essential to
ensure that the users of the financial statements are not misled.
3.2 Pricing methods

Comparable uncontrolled price (i.e. price of comparable
goods sold in an
economically comparable market to a buyer unrelated to t
he seller).
 Resale price reduced by a margin to arrive at a transfer p
rice.
 Cost-plus method (i.e. supplier’s cost plus an appropriate
mark-up).
 No price (e.g. free provision of management services and
interest free credit).
3.3 Examples of related party relationshi
ps
Illustration 3 – Person as an investor
Person Y
Entity G Entity H
(controlled or jointly (controlled, jointly
controlled by Y) controlled or significantly
influenced by Y)
 Y controls or has joint control of entity G, and has control
, joint control of or
significant influence over entity H.
 H is a related party for G’s financial statements. G is a re
lated party for H’s
Commentary
If Y only had significant influence over G and H the two entitie
s would not be
Illustration 4 – Investments by key management pers
onnel
Person X Entity J
(key management
personnel of K)
Entity I
(controlled or jointly Entity K
controlled by X) (subsidiary of J)
 For I’s financial statements, K is a related party because
X controls I and is a
member of the key management personnel of K.
 For the same
reasons I is a related party for the financial state
ments of K.
Commentary
I would also be a related party if X was member of J’s key per
sonnel instead
of K’s.
Illustration 5 – Close family members
Person S Person T
Domestic partners
Entity L Entity M
(controlled or jointly (controlled, jointly
controlled by S) controlled or significantly
influenced by T)
 Both entities, L and M, are related parties.
Commentary
If S and T only had significant influence over L and M respecti
vely, the two
entities would not be related parties.
Activity 1
Explain whether the following should be disclosed as related
party transactions:
(a)
Entity X has a 15% shareholding in Entity Y. X controls
the financial and
operating policies of Y. X supplies goods to Y.
(b) During the current year Luka made a payment for $95,00
0 to Zed Bank on
behalf of one of its directors in settlement of a personal lo
an.
4 Disclosure
4.1 Examples of transactions

Examples of transactions that are disclosed if they are wit
h a related party include:
 Purchases or sales of goods, property
 and other assets;
Rendering or receiving of services;

Leasing arrangements;

 Transfer of research and development;
 Transfers of licence agreements;
Finance (including loans and equity contributions);

Guarantees and collaterals.
4.2 Disclosure required

All related party relationships where control exists (irres
pective of whether there
have elated party transactions), for example, between a parent a
been nd subsidiaries.
Commentary
This disclosure is in addition to the disclosure requirements in
IAS 27 and IFRS 12 –
in these standards only significant investments are required to
be disclosed.
 Name of the parent and the ultimate controlling party.
Commentary
So that the reader can form a view about the effects of related
party relationships.
Illustration 6
The Company’s major shareholder, Kukly Inc and its subsidiaries
are related parties.
It is the company’s policy to conduct all transactions and settle ba
lances with related
parties on normal trade terms.
 Key management compensation must be disclosed in total
and for each of the following:
 Short term employee benefits;
 Post-employment benefits;
 Other long term benefits;
 Termination benefits; and
 Share-based payment.
 If there have been transactions between related parties, th
e nature of the
relationships and information about the balances and tran
sactions must be
disclosed. The minimum disclosures are:

amount of the transactions;
 amount of outstanding items – along with their terms an
d
conditions, and any guarantees;

doubtful debt provisions and expense relating to bad and
doubtful debts.
Commentary
Note that although IAS 24 was revised in November 2009 it sti
ll uses the obsolete term
“provision” rather than “allowance” (against receivables). It
is not a provision as
there is no liability as defined under IFRS.
 Sufficient disclosure must be made to ensure that the natu
re of the transaction
is understood. These disclosures are for each classificati
on of related parties:

 parent;
 subsidiaries;
 associates;
 joint ventures;
key management personnel;

parties with joint control or significant influence;
 other.
Commentary
This is an extension of IAS 1 which requires amounts payable t
o and
receivable from related parties to be disclosed. For example, f
ees received by
a group director from another group company.
Illustration 6 – Continued
The following transactions were carried out with related parties:
Sale of $m
goods 50
Kukly 35
Inc 22
Kokosch
ka Inc
130
107
Sales were carried out on commercial terms and conditions and at
market prices.

2017 2016
Purchases of $m
goods
60
Purchases were carried out on commercial terms and conditions.
Tass Inc is a fellow
subsidiary of Kukly Inc.
Year end balances relating to related parties)
Receivables from related $ $m
parties m 15
10
5 2
15
Payables to related
parties
2 5
0

Illustration 7
19. Transactions with related parties (extract)
Furthermore, throughout 2016, no director of the Group had a personal i
nterest in any
transaction of significance for the business of the Group.
4.3 Aggregation

Similar items may be aggregated so long as users can und
erstand the effects
5 Government-related entities

The requirements of IAS 24 are quite onerous for many g
overnment-related entities.
 There are many countries in which thousands of governm
ent entities would be related
to each other. IAS 24 has therefore relaxed the disclosure
s for some related parties.
5.1 Exemption

A reporting entity is exempt from disclosure requirement
s in relation to
related party transactions and outstanding balances, with:

a government that has control, or joint control of, or signif
 icant influence over it; and
another entity that is a related party because the same gov
ernment
has control or joint control of, or significant influence ove
r it also.
Illustration 8
Government Z
Entity A Entity B
Entity C Entity D Entity E Entity F
 Government Z has control, either directly or indirectly of
entities A to F.
 C, for example, can claim the disclosure exemption in res
pect of transactions
with Government Z and all the other entities.
 However, there is not exemption for other related party tr
ansactions (e.g. if C
enters into transaction with key management personnel of
A).
5.2 Disclosure required if exemption appl
ied

The name of the government and the nature of the relation
ship with the reporting entity.

The ion in sufficient detail to enable users to understand the ef
ollowi fect
ng inf of the related party transactions on its financial statements
ormat :
 the nature and amount of each individually significant tr
 ansaction; and
for other transactions that are collectively significant a q
ualitative or
quantitative indication of their extent.
 Factors to be considered in determining the significance o
f transactions include:
 monetary amount;
 whether on non-market terms;
 whether outside day-to-day business activities;
 whether disclosed to regulatory or supervisory bodies;
 whether reported to senior management or subject to shar
eholder approval.
Key points summary
A related party is a person or entity related to the reporting entity.
A person (or close family member) is related on grounds of contr
ol, joint control
or significant influence or key management role.
An entity is related on grounds of control, joint control or signific
ant influence or
if a pension plan for employees.
Some parties are deemed not to be related (e.g. common directors
hips).
A transfer of resources, services or obligations between related pa
rties is a related
party transaction, regardless of whether a price is charged.
Disclosure requirements are extensive.
Similar items may be aggregated.
There is an exemption for reporting entities for transactions with
government-
related entities only. However, individually and collectively sign
ificant
transactions must still be disclosed.
Focus
 define and apply the definition of related parties in accord
ance with IFRS;
 describe the potential to mislead users when related party
transactions are accounted for;
 explain the disclosure requirements for related party tran
sactions.
Activity solution
Solution 1 – Related party transactions
(a)
The supplies of goods are related party transactions becaus
e even though X does not have
majority shareholding it has control of Y’s financial and o
perating policies. Therefore
control exists for the purpose of applying IAS 24.
(b) Luka will have made the payment only on the basis that th
e director reimburses the loan
(e.g. out of salary or bonus entitlements). Such a “quasi lo
an” must be disclosed as a
related on. Clearly Luka would not have entered into such a trans
party action
ansacti with an unrelated third party.
Overview
Objective

To explain how first
-time IFRS financial
statements should b
e prepared and
 Bac
kgroun
d P
I R

N A
Obj
T C
ectiv T
R
e I
O
C
D
A
U L
C
T M
I A
O T
T
N
E
R
S
 
 
OPENING IFRS
STATEMENT OF
FINANCIAL POSITION
 Recognition and meas
urement principles
 Exemptions from oth
er IFRSs
 Business combination
s
 Compound financial
instruments
 Designation of financ
ial instruments
 Share-based payment
transactions
 Joint arran
gements to retrospective
 Mandatory
application
exceptions
PRESENTATION
AND DISCLOSURE
 Comparative informat
ion
 Explanation of transi
tion
 Other disclosures
eserved. 3201
SESSION 32 – IFRS 1 FIRST-TIME ADOPTION
1 Introduction
1.1 Background

issued, the first-time application of IASs as the pr
imary basis of accounting required
full retrospective application unless a standard re
quired otherwise or amounts could not
be determined).

The European Union’s requirement that all listed
companies in the European Economic
Area publish their consolidated financial stateme
nts in accordance with IFRSs by 2005,
meant that entities with a financial year end of 31
December needed to have an IFRS
statement of financial position as at 1 January 20
04 (for comparative purposes).

IFRS 1 permits certain exemptions from recognit
ion and measurement
requirements where compliance would otherwise
cause undue cost or effort in
application.
Commentary
However, there are NO exemptions from IFRS 1’s enh
anced disclosure
requirements, detailing how the change to IFRSs has
affected financial
position, performance and cash flows.
1.2 Objective

To ensure that the first set of financial statement
s prepared under IFRS
contain high quality information that is:

 transparent for users;
 comparable over all period presented;

a starting point for accounting under IFRS; and
generated at a cost that does not exceed the bene
fit (to users).
Commentary
A first time adopter uses the provisions of IFRS 1 and
not the transitional
provisions of other standards unless IFRS 1 specifies
otherwise.
1.3 Scope

This standard applies to:


Financial Reporting for any part of the period covered
by the first
IFRS financial statements.
Commentary
So, for example, if first IFRS financial statements are
to be prepared to 31
December 2017, interim financial statements for six m
onths to 30 June 2017
will also fall within the scope of IFRS 1. (IAS 34 is
not examinable.)
1.4 Terminology

First IFRS financial statements – the first annua
l financial statements in which
IFRSs are adopted by an explicit and unreserved
statement of compliance with IFRS.
Commentary
That is compliance with all IFRSs (issued by IASB) a
nd IASs (adopted by IASB
from predecessor body IASC) and applicable interpret
ations (IFRICs and SICs).
 First IFRS reporting period – the latest reportin
g period covered by first

First-time adopter – an entity that presents first
IFRS financial statements. If
an explicit and unreserved statement of complian
ce has already been made an
entity is not a first-time adopter.
Commentary
That is even if there was non-compliance and the aud
itor’s report carried a
qualified opinion.
 Opening IFRS statement of financial position –
the statement of financial
position at the date of transition to IFRSs.
 Previous GAAP – the basis of accounting used i
mmediately before the
adoption of IFRS.
 Date of transition – the beginning of the earliest
period for which full comparative
information under IFRSs is presented in the first
 Deemed cost – an amount used as a surrogate for
cost or depreciated cost at a given date.
Illustration 1
An entity with a 31 December year end presenting its fi
nancial statements for 2017 will
have a date of transition as 1 January 2016.
Commentary
IAS 1 requires first IFRS financial statements to inclu
de at least three statements of
financial position and at least two of each of the othe
r statements (Session 3).
3203
1.5 Stages in transition to IFRSs
1.5.1 Accounting policies
 Select accounting policies that will comply wit
h IFRSs.
 The same accounting policies are used for all per
iods presented including the
opening IFRS statement of financial position.

period (i.e. 31 December 2017 in Illustration 1)
is used subject to the
exemptions permitted under IFRS 1 (see later).
Commentary
Different versions effective at earlier dates must not b
e applied.
 If a new IFRS permits early application then a fi
rst-time adopter may adopt
that standard early, but it is not required to do so.

The transitional arrangements in other IFRSs app
ly to existing users of IFRS. They do
not apply to first time adopters except in relation
to the derecognition of financial assets
and financial liabilities and hedge accounting und
er IFRS 9.
1.5.2 Opening IFRS statement of financial p
osition
 Prepare and present an opening IFRS statement
of financial position (i.e. at
the date of transition).
Commentary
This is the starting point to accounting under IFRS.
1.5.3 Estimates
 Make estimates in accordance with IFRSs for the
opening statement of
financial position and all other periods covered b
y the financial statements.
Commentary
Estimates must be made consistently with estimates m
ade as at the same date
under previous GAAP, after adjustments to reflect diff
erent accounting
policies, unless there is objective evidence that those
estimates were in error.
 made
under previous GAAP is treated as for non-
adjust ing events (IAS 10).
Illustration 2
Bravado’s date of transition to IFRSs is 1 January 2017.
New information on 15 July 2017 required an increase i
n the estimate of the allowance
for slow-moving inventory made under previous GAAP
at 31 December 2016.
This new information is not reflected in Bravado’s open
ing IFRS statement of
financial position. The increase in estimate will be an a
dditional expense in the
statement of profit or loss for the year ended 31 Decemb
er 2017.
Accounting estimates may need to be made unde
 r IFRSs at the date of transition
that were not required at that date under previous
GAAP (e.g. if there was no
requirement to state inventory at the lower of cos
t and net realisable value). Such
estimates must reflect conditions that existed at the dat
e of transition to IFRSs.
Commentary
For example, market prices, interest rates, foreign exc
hange rates, etc.
Estimates require Calculation
d YES consistent with
Evidence of NO
by previous IFRSs?
r?
GAAP?
NO Y YE NO
E S
S
Make estimat
e Use previous
reflecting conditi estimate and adjust
ons at Use previous
to
relevant date stimate reflect IFRSs
 These same principles apply to estimates made f
or any comparative period
1.5.4 Presentation and disclosure
 Make presentation and disclosure requirements i
n accordance with IFRS 1.
Commentary
IFRS 1 does not provide any exemptions from the pre
sentation and disclosure
requirements of other accounting standards.
position and at least two of each of the other stat
ements (IAS 1).
 Historical summaries of selected data need not c
omply with recognition and
measurement requirements of IFRS 1. However,
such summaries and comparative
information under previous GAAP must be clearly label
led as not being prepared
Commentary
The adjustments are not required to be quantified.
1.6 Transition overview
1 Jan 2016
31 Dec 2016 31 Dec 2017
Previous FP FP

GAAP
CI, CF,
SOCIE (if any)
IFRS FP FP FP
CI, CF, CI, CF,
SOCIE SOCIE
Abbreviations:
FP – Statement of Financial Position
CI – Statement of Profit or Loss and Other Comprehens
ive Income
CF – Statement of Cash Flows
Commentary
The financial statements to 31 December 2016 are pu
blished under previous
GAAP. The financial statements to 31 December 201
7 are prepared under
IFRS with the comparative information restated.
2 Opening IFRS statement
of financial position
2.1 Recognition and measurement
principles

Recognise all assets and liabilities required by IF
RSs (e.g. leased assets and
lease liabilities).
 Do not recognise assets and liabilities that are no
t allowed to be recognised
under IFRSs (e.g. “provisions” which do not mee
t the definition of a liability).
 Reclassify items as current/non-current, liability/
equity in accordance with IFRSs as
necessary (e.g. preferred shares with fixed maturi
ty as debt rather than equity).
 Measure all recognised assets and liabilities in ac
cordance with IFRSs (e.g. at
cost, fair value or a discounted amounted).
Commentary
Because the adjustments that result from changes in a
ccounting policy on transition arise
from events and transactions before the date of transit
ion they are recognised directly in
retained earnings (or, if appropriate, elsewhere in the
statements of changes in equity) at
the date of transition.
2.2 Exemptions from other IFRSs

IFRS 1 basically requires full retrospective appli
cation of all extant IFRSs on
first-time adoption with limited exemptions whic
h include the following:
 deemed cost;
 business combinations;
 cumulative translation differences;
 compound financial instruments;
 assets and liabilities of subsidiaries, associates an
 d joint ventures;
 designation of previously recognised financial in
 struments;
 share-based payment transactions;
 decommissioning liabilities included in the cost
 of property, plant and equipment;
leases;
 fair value measurement of financial assets and lia
bilities; and
borrowing costs; and
joint arrangements.
Commentary
A first-time adopter may elect to use any one or more
of the available exemptions.
Some of the exemptions that may be examined in mor
e detail are described below.
2.3
Deemed cost

Cost based measurement of some items of proper
ty, plant and equipment may involve
undue cost or effort (e.g. if fixed asset registers h
ave not kept).
 Items of property, plant and equipment can there
fore be measured at their fair value
at the date of transition and that value deemed to
be cost (i.e. “deemed cost”).
 If assets have been revalued under previous GAA
P and the revaluation is broadly in line
with IFRSs, the revalued amount can be taken to
be the deemed cost.
Commentary
These exemptions are also available for investment pr
operty accounted for
under IAS 40’s cost model and intangible assets meeti
ng IAS 38’s criteria for
asset recognition and revaluation.

If a fair value exercise has been carried out on all
(or some) assets and liabilities
for a particular event (e.g. an initial public offeri
ng or privatisation), that fair
value may be as the deemed cost at the event dat
e.
Commentary
Comparing revaluation under IFRS 1 with that under
IAS 16:
 for IFRS 1 it is a “one-off” exercise – under I
AS 16 revaluations
must be kept up-to-date; and

any ite
m(s) – under IAS 16
all items in the same class must be revalued.
2.4 Business combinations
2.4.1
Electing not to apply IFRS 3

A first-time adopter does not have to apply
IFRS 3 Business Combinations
retrospectively to past business combinatio
ns (i.e. business combinations that
occurred before the date of transition to IF

RSs).
If, however, a first-time adopter restates an
y business combination to comply with
IFRS 3, all later business combinations must be r
estated and IAS 36 and IAS 38 applied.
Illustration 3
A first-time adopter reporting at 31 December 2017 elec
ts to restate a business
combination that occurred on 30 June 2014. It must rest
ate all business combinations
that occurred between 30 June 2014 and 1 January 2016
.
Commentary
This exemption also applies to past acquisitions of inv
estments in associates
and of interests in joint ventures.
2.4.2 Consequences of not applying IFRS
3 retrospectively
 The classification (as an acquisition, reverse acq
uisition or a “uniting of
interests”) in its previous GAAP financial statem
ents is not changed.
 All assets and liabilities acquired or assumed are
recognised at the transition date except:
 some financial assets and financial liabilities der
ecognised under
previous GAAP (as above ); and
 assets, including goodwill, and liabilities that we
re not recognised in the
acquirer’s consolidated statement of financial po
sition under previous
GAAP and also would not qualify for recognitio
n under IFRSs in the
separate statement of financial position of the ac
quiree.
Commentary
Any resulting change is adjusted against retained ear
nings (or, if appropriate,
another category of equity), unless it results from the
recognition of an intangible
asset that was previously subsumed within goodwill (s
ee adjustments below).
 The opening IFRS statement of financial position
must exclude any item recognised under
previous GAAP that does not qualify for recognit
ion as an asset or liability under IFRSs:
 An intangible asset that does not qualify for reco
gnition under IAS 38 is
reclassified (together with any related deferred ta
x and non-controlling
interests) as goodwill;
Commentary
That is unless goodwill was deducted directly from eq
uity under previous GAAP, in
which case goodwill is not recognised in the opening
 All other resulting changes are adjusted in retain
ed earnings.
Where IFRS requires subsequent measurement o

f assets and liabilities on a basis
that is not based on original cost (e.g. fair value)
such assets and liabilities must be
measured on that basis in the opening IFRS state
ment of financial position.
Commentary
That is, even if they were acquired or assumed in a p
ast business combination
– any resulting change in the carrying amount is adju
sted against retained
earnings, not goodwill.
 Immediately after the business combination, the
carrying amounts determined
under previous GAAP are deemed cost under IF
RSs at that date.
Commentary
This is used for cost-based depreciation or amortisati
on from the date of the
business combination.

An item that is not recognised under previous G
AAP but recognised under
IFRS does not have a deemed cost of zero. It is
measured in the consolidated
statement of financial position on the basis that I
FRSs would require in the
separate statement of financial position of the ac
quiree.
Illustration 4
consolidated financial statements as IFRS 16 Leases wo
uld require in the acquiree’s
separate IFRS statement of financial position.
 The converse also applies. An item subsumed in
goodwill under previous GAAP that
would have been recognised separately under IF
RS 3 remains in goodwill unless IFRSs
would require its recognition in the separate fina
ncial statements of the acquiree.
2.4.3 Goodwill adjustments
 The carrying amount of goodwill in the opening
IFRS statement of financial
position is the same as under previous GAAP at t
he transition date after the
following two adjustments (if applicable):
 increasing the carrying amount of goodwill for a
n item previously
recognised as an intangible asset that does not m
eet IF RS criteria;
Commentary
Similarly, decreasing the carrying amount of goodwill
if an intangible asset previously
subsumed in recognised goodwill meets IFRS criteria
for recognition.
 an impairment test at the date of transition. Any
impairment loss is
adjusted in retained earnings (or revaluation surp
lus if required by IAS 36).
Commentary
This is regardless of whether there are any indication
s that the goodwill may be impaired.
 No other adjustments are made to the carrying a
mount of goodwill at the date of transition.
2.4.4 Exclusion from consolidation
 If a subsidiary was not previously consolidated, t
he carrying amounts of the
subsidiary’s assets and liabilities are adjusted to t
he amounts that IFRSs
would require in the subsidiary’s separate statem
ent of financial position.
 The deemed cost of goodwill is the difference at
the transition date between:
 the parent’s interest in the adjusted carrying amo
 unts; and
the cost of its investment in the subsidiary in the
parent’s separate
Activity 1
Suggest three reasons why a subsidiary may not have be
en consolidated under previous
GAAP.
2.4.5 Deferred tax and non-controlling intere
sts
 The measurement of deferred tax and non-
controlling interests follows from
the measurement of other assets and liabilities.
Commentary
All the above adjustments to recognised assets and lia
bilities therefore affect
non-controlling interests and deferred tax.
2.5 Cumulative translation differen
ces

All translation adjustments arising on the translat
ion of the financial statements of
foreign entities can be recognised in retained ear
nings at the date of transition (i.e.
any translation reserve included in equity under p
revious GAAP is reset to zero).
 will then be adjusted on
those accumulated translation adjustments arising
after the first IFRS reporting period.
Commentary
If this exemption is not used, the translation reserve
must be restated for all
foreign entities since they were acquired or created.
2.6
Comp
ound
inanci
al instr
ument
s

The “split-accounting” provisions of IAS 32 need
not be applied where the liability
component of a compound financial instrument is
no longer outstanding at the transition date.
Commentary
That is, the original equity component of the compoun
d instrument does not
have to be reclassified out of retained earnings and in
to other equity.
2.7 Assets and liabilities of subsidi
aries
Commentary
These exemptions apply also to associates and joint v
entures.
 A subsidiary who adopts later than its parent ma
y measure assets/liabilities at
carrying amounts determined for:
 its own transition; or

the parents consolidated financial statements at a
n earlier transition.
Commentary
A parent who adopts later than a subsidiary must me
asure assets/liabilities based
on the same carrying amounts determined for that sub
sidiary’s transition.
2.8 Designation of previously recogn
ised financial instruments

IFRS 9 Financial Instruments: Recognition and
Measurement allows that financial
instruments be designated on initial recognition a
t fair value through profit or loss.
 This designation is permitted at the date of trans
ition also.
2.9
Share-based payment transacti
ons

Application of IFRS 2 is encouraged for liabilitie
s arising from share-based payment
transactions that were settled before the date of tr
ansition and 1 January 2005.
2.10 Joint arrangements

be ap
plied with one exception. When
changing from proportionate consolidation to the
equity method the investment
must be tested for impairment (IAS 36) as at the
beginning of the earliest period
presented. This is regardless of whether there is
any indication of impairment.
Commentary
Any impairment loss will be adjusted against opening
retained earnings for the
earliest period presented.
Proportionate consolidation means including a percen
tage of every asset, liability,
income and expense; IFRS no longer allows this meth
od of consolidation.
2.11
Mandatory exceptions to retrosp
ective application

As well as the optional exemptions, there are ma
ny mandatory exceptions, including:
 derecognition of financial assets and financial li
 abilities;
 hedge accounting;
 non-controlling interests
 classification and measurement of financial asse
ts; and
embedded derivatives.
2.11.1 Derecognition of financial assets and
financial liabilities

Financial Instruments prospectively for transacti
ons occurring on or after the
date of transition.
Commentary
An exception to this is if the information needed to ap
ply IFRS 9 retrospectively was
obtained when the transactions were initially accounte
d for.
2.11.2 Hedge accounting (IFRS 9)
 At the date of transition:
 all derivatives must be measured at fair value; a
 nd
all deferred losses and gains arising on derivativ
es reported under
previous GAAP as assets or liabilities must be el
iminated.
Commentary
So a hedging relationship that does not qualify for he
dge accounting cannot
be reflected in an opening IFRS statement of financial
position.
2.11.3 Non-controlling interests
 Total comprehensive income must be split betwe
en owners of the parent and non-
controlling interests even if this results in a defici
t balance for non-controlling interests.

Any change in control status between the owners
of the parent and non-controlling
interests is to be accounted for from the date of tr
ansition unless the adopter has
elected to apply IFRS 3 retrospectively to past bu
siness combinations.
Commentary
In this case IFRS10 requirements must also be applie
d retrospectively to the
past business combinations.
2.11.4 Financial assets (classification and m
easurement)

The conditions to be met for measuring a financi
al asset at amortised cost
(i.e. concerning objectives of the business model
and contractual terms) must
be ass on facts and circumstances existing at the date of
essed transition.
2.11.5 Embedded derivatives
 The need to separate an embedded derivative fro
m a host contract is based on
the conditions which existed when the contract
was first entered into.
sure
3.1 Comparative information

To comply with IAS 1 Presentation of Financia
l Statements the first IFRS
financial statements must include at least:
 three statements of financial position;
 two statements of profit or loss and other compr
 ehensive income;
 two statements of cash flows;
 two statements of changes in equity; and
related notes, including comparative information
,
3.2 Explanation of transition

How the transition to IFRSs affected the reporte
d financial position,
performance and cash flows must be explained.
Commentary
exemptions to the requirements for these.
Illustration 5
Key changes in accounting policies (extracts)
The following notes highlight the main differences between UK G
AAP and IFRS that had a material effect
on the financial statements of the Group.
(a) Share-based payment
Under UK GAAP, the Group recognised a charge in respect of em
ployee share options based on the
difference between the exercise price of the option and the market
value of a Tate & Lyle share at the grant
date. Accordingly, only grants made under the Tate & Lyle 2003 P
erformance Share Plan attracted a
charge under UK GAAP, based on their intrinsic value. Under IFR
S2 the Group recognises a charge
reflecting the fair value of all employee share options granted sinc
e 7 November 2002 that had not vested
by 1 January 2005.
The UK GAAP charge for the year to 31 March 2005 totalled £2 m
illion, reflecting expense for two years of
option grants. The impact of IFRS on profit before taxation for the
year to 31 March 2005 is an additional
charge of £2 million. In the year to 31 March 2006, the IFRS charg
e increased to reflect expense covering
three years of option grants.
Net assets increased by £3 million at 31 March 2005 reflecting the
deferred taxation impact.
Events after the balance sheet date
Under UK GAAP, the Group recognised a provision for the dividen
d declared within its financial statements.
IFRS specifically states that dividends approved by the relevant a
uthority after the reporting date do not
meet the definition of a present obligation and should not therefor
e be recognised. The impact of this is to
increase net assets at 31 March 2005 by £65 million (1 April 2004
– £62 million).
Tate & Lyle Annual Report 2006
3.3 Reconciliations

These help users to understand the material adjus
tments to the statement of financial
position and statement of profit or loss and other
comprehensive income:
 A reconciliation of equity under IFRSs and prev
ious GAAP as at:

the transition date; and
 the end of the latest period presented under prev
ious GAAP.
Commentary
That would be 1 January 2016 and 31 December 201
6 for the
transition overview shown at s.1.6.

A reconciliation to total comprehensive income u
nder IFRSs for the latest
period in the most recent annual financial statem
ents. The starting point is total
comprehensive income (or profit or loss) under p
revious GAAP.
Commentary
That would be total comprehensive income (or profit
or loss) for
the year to 31 December 2016 for the transition overv
iew.
Illustration 6
2. FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
Reconciliation and explanatory notes on how the transition to IFRS ha
s affected profit/(loss) and net assets
previously reported under UK Generally Accepted Accounting Principl
es (UK GAAP) are given below. No
Balance Sheet Reconciliation as at 1 July 2005 has been shown due t
o there being no measurement changes
from the adoption of IFRS:
INCOME STATEMENT RECON
CILIATION
FOR THE YEAR ENDED 30 JU note £ £ £
NE 2006
Revenue
GROSS PROFIT/(LOSS)
- -
Administrative exp (1,655,986) (1,655,986)

enses (545,033)
(545,033)
Share based paym (1,655,373)(545,033)
(2,200,406)
ents
LOSS FROM OPE
RATIONS
Financ
67,826
e inco
me
-
-
LOSS FOR T (1,58(545,033)
(2,132,580)
HE YEAR 7,54
7)
2007 ANNUAL REPORT CHURCHILL MINING PLC
 These reconciliations must distinguish between
changes in accounting
policies and errors. IAS 8 disclosure requireme
nts do not apply.
Illustration 7
Consolidated Balance Sheet as at 31 March 2005 (extract)
Inta ngible Business Joint
benef its assets combinati Vent ures Taxation Other
GAAP in ons Note (e)
Note (b) Note (c) Note (f) Note (g)
£m Note (d) £m
£m £m £m £m
£m
Non-current assets
Intangible assets 173 194
Property, plant and 1 111 – 11 5 150 (4) – 1 264
uipment – (4) – – 7
Investments in associa – – – (211) – – 3
tes – – – – –
Investments in j oint (51) –
ntures – –
Trade and other receiv 60
16 (51) – –
(47) (4)
–
13
16
ables
1 573 7 5 7 1 490
Other non-current
ets
Inventories 288 – – – 85 – (1) 372

Trade and other recei 361 – – – 56 – 418
vables 59 – – – 30 – 295 384
Cash and cash equiv 296 – – – – – (295) 1
alents 1 004 – – – 171 – 1 175
Current asset invest
ments
TOTAL ASS
2 (51) 7 5 124 (4) 7 2 665
ETS
Tate & Lyle Annual Report 2006
3.4 Other disclosures

If a statement of cash flows was presented under
previous GAAP, material
adjustments must be explained.

plant and
equipment (or investment property or intangible
asset) as an alternative to
cost-based measurement, the following must be
disclosed for each line item:
 the aggregate of those fair values; and
 the aggregate adjustment to carrying amounts re
ported under
previous GAAP.
©2017 Becker Ed
ucational Develo
pment Corp. All r
ights reserved.
3215
4 Practical matters
4.1 Overview

The finance director is most likely to be responsi
ble for the conversion process. A
steering committee may be formed to manage the
process.
 Key stakeholders need tohow staff may be affect
ade aware ed –
particularly in respect of
ng.
 Matters to be considered when making a prelimi
nary assessment of the
impact of conversion will include:

the level of readily available IFRS competence
of staff, internal
audit and non-executive directors;

whether specialist help may be needed and, if so
, who can provide it;
Commentary
Many entities turn to their auditors, business consulta
nts, etc to advise them.
The skills and competence of professional advisors mu
st be assessed.
 identifying agreements, contracts and
the change in
ports affected by
the financial reporting framework;

making an initial estimate of the financial effect
of changes in key
accounting policies;

assessing the significance of fair values (e.g. in r
elation to IASs 39 and 40);

reviewing any existing weaknesses in internal fi
nancial reporting systems;

deciding the extent to which previous year’s fina
ncial information (prior to
the date of transition) is to be restated.
Activity 2
Suggest FOUR contractual arrangements that could
be affected by the change.
4.2 Making the transition
4.2.1 Accounting
 Accounting policies should be selected after a de
tailed review of the choices
available (especially on transition).
 need to be made to the accounting
system to collect the information
necessary to meet disclosure requirements (e.g. o
f segment reporting).
 The group accounting manual should be updated
to reflect changes in
terminology as well as changes in accounting pol
icies, measurement bases, etc.
 Accounting policies used for internal reporting (e
.g. in budgeting systems) may need to
be standardised or made compatible with those u
sed for external financial reporting.
4.2.2 Treasury
 Treasury managers will need to review treasury
policy and how they hedge risk.
Commentary
Some entities may not be able to hedge account in ac
cordance IFRS 9 even if
they change their hedging strategy.
 Loan agreement
need to be renegotiated to avoid breac
s may hing covenant limits.
4.2.3
IT and systems
 Accounting system changes may be required as a
direct result of the change to IFRS.
 also be required
in response to the
identification of business improvement opportun
ities.
4.2.4 Human resources
 Resource planning should take account of:
 the impact of the change on long-term recruitme
 nt plans;
 how day-to-day responsibilities of seconded staf
f will be covered;
temporary specialist assistance needed.
 Remuneration schemes will need to be reviewed
and renegotiated.
 Staff will need to be trained.
4.2.5 Training

Internal experts with specialist IFRS knowledge
will need to be involved in
the training of others in the organisation. This m
ay require that they be
trained as trainers.
 Subsidiary finance managers will need a broad u
nderstanding of the impact
of IFRS on the entity and changes in policy and
procedure.
 General business managers will need to be made
aware of the impact of IFRS
on the business, its reporting and planning proce
sses.
4.2.6 Communication

The financial effects of the change must be com
municated to shareholders,
analysts, employees, lenders, etc. This may requ
ire a public relations plan to
advertise the adoption of IFRS.
Key points summary
A first-time adopter makes an explicit and unreserved
statement that its general
purpose financial statements comply with IFRSs.
A first-time adopter selects accounting policies based o
n effective IFRSs.
An entity’s first IFRS statements will include at least thr
ee statements of financial
position and at least two of each of the other statements
Previous GAAP assets and liabilities that do not qualify
for recognition under
IFRS are eliminated from the opening financial position
(e.g. research
expenditure).
Conversely, all assets and liabilities that are required to
be recognised by IFRS
must be recognised (e.g. deferred tax liabilities) and app
ropriately classified.
IFRS measurement principles should be used. Adjustm
ents from previous GAAP
are recognised directly in retained earnings (or, if appro
priate, another category of
equity).
For IFRS estimates at the transition date, assumptions u
sed to determine previous
GAAP estimates should be used. Later information can
only be used to correct a
previous-GAAP error.
How the transition from previous GAAP to IFRS affects
the previously reported
financial statements must be disclosed, with reconciliati
ons.
Optional exemptions to the general restatement and mea
surement principles relate
to a wide range of transactions including business comb
inations and deemed cost.
Previous-GAAP accounting need not be restated for cert
ain items (e.g. goodwill
written-off from reserves).
An initial IAS 36 impairment test must be made for goo
dwill in the opening
Focus
 account for the first time adoption of IFRSs.
3218
Activity solutions
Solution 1 – Exclusion from consolid
ation

It was not regarded as a subsidiary under previou
s GAAP – the definition of
subsidiary being based on legal ownership rather
than control.
 Previous GAAP permitted that certain subsidiari
es be excluded from
consolidation (e.g. on the grounds that their acti
vities are sufficiently
different from those of the rest of the group).
 The parent did not prepare consolidated financia
l statements (e.g. in
jurisdictions where financial statements are for l
egal entities only).
Solution 2 – Arrangements affected

Bank and other loan agreements (e.g. financial r
atios specified in loan
covenants may be adversely affected).
 Reporting to industry regulators.
 Remuneration schemes and profit-related pay.
Negotiations with the tax
authorities may be necessary to maintain tax effi
cient schemes.
 Performance-related share option schemes.
©2017 Becker Ed
ucational Develo
pment Corp. All r
ights reserved.
3219
SESSION 33 – INDEX
Com
A 305
plian
ce 303, 29
ith02
FRS
Com
3210
pone
nt
Com2010
poun
d 212
anci
al
stru
ment
s
Com
poun
d
trum
ents
Con
cepts
of
pital
Accounting policies
201
520
308
205 Consolidated
statement of f
inancial positi
Acquired in- on
process resear
ch and develo
pment
Consolidated
Acquisition
1111
method statement of
Active 2105 profit or loss
et 213, Consolidatio
n
Actuarial1115, Contingent a
luation 1304 ssets
od Contingent c
Adjusting1713 onsideration
vents Contingent li
Aggregation
3003 abilities
Aggregation Continuing o
306, perations
criteria 108
Agricultural Contract liab
ility
activity 2803
Contracts wit
Amortisatio h customers
n 1302
1117
2006,
2014,
2017
Autho
Amortised Bargain
Basic earni
purchas
cost rity of e ngs per sha
AssetIFRS Barriers
Asset ceilin re
to
g opment
Associated
B
companies
Contro Credit
oss2402
l and
111 Credit
wners
sk
hip 1414
Corpo 215
rate as
sets
Cost 208
pproac 604
h 710, 1115,
Cost 1205, 1506
onstrai
2314
nt 511
Cost
113
ormul 1408
as
Cost
2703 1304
model
Cost
ecogni 2019
tion
Costs 2021
of disp
osal
Costs 3210
o sell
Bearer
ants Cumulat
Big GAA 70
P
5 ive trans 309
Bill-and- 11 lation 310
hold arra 5 fference 1903
ngements
s
Biologica 9
51 Current 309
assets 1714
l assets Current
Bonus iss 13 liabilitie
ue s
Borrowin 02 Current
g costs tax
Business 27 04 Current/
combinat non-
ions 90 current
Business 3 distincti
model 11 on
07,
19 Curtail
24 ment
20
14
D
Decom
Cans missioni
acti
Call opti ng costs
on ons
Deemed
Capital 517 cost
xpenditur Deferred
e 704 consider
Capital ation
maintena 212 Deferred
nce income
Capitalis 904 Deferred
ation taxation
Cash flo
w hedges 2030 Defined
1402,benefit p
Cash- 411, lans
generatin 08 Defined
g units contribu
tion plan
Cash- 1813 s
settled Depreci
410 able am
ount
Depreciatio 714,
n 1614 16, 716, 290
Derecogniti 3 7
on
Derivatives
3207 1707
2023
2304 1706
2002, 20
805 716
06
Develo
Changes pment1112
hase
n accounti Differe
ng estimat ntial 116
es ounting
Changes 2707
Diluted
n accounti earning
ng policy
Chief oper s per 402
ating deci are
sion make Disaggr
r
Comparab egation
ility
Comparati
ve inform
ation
Compensa
tion for i
mpairmen
t
r
g
Discontin F i
ued oper 2903 i v
ation n a
Discount a b
rate n l
Discussio1007 ci e
n docum , 171 al
ents 4
p l
Discussio o
n papers 107 o
si a
Disposal ti
costs 107 o
n
Disposal n s
group 1408
Disposal F F
possibilit i o
ies 2902 n r
Disposals a w
2410 n a
Dividend ci
s r
al d
Due Proc713 st
ess 2403 at c
, 251 e o
3, 30 m n
e
04 n t
ts r
107 F a
i c
n t
it
e F
u u
s n
e c
f t
u
l i
li o
v n
e a
s l
F c
ir u
st r
- r
ti e
m n
e c
a
d y
o
p F
te u
r t
F u
o r
r e
ei
g o
n p
e e
x r
c a
h t
a
n
g
e
F
o
ing losse 0
s 8 3
0
205 3 1
303 2
0 6
1116 1 1
3203 3 6
2602 2
6
G
E
Earnings
share 2702
Earnings
ormance2702
Economic
enomena206 Goo
Economic dwil
ources l adj
Effective205 ust
rest method men
Elements2006 ts
inancial Gov 3109
ments 209 ern
Embedded 2018, men 805
rivatives3212 t ass
Employee istan 806
nefits 1702 ce
Employee’s Gov
1805
emuneration ern
Enhancing 207 men111
aracteristics t gra
2810
Entity-wide 1303
isclosures nts 2027, 203
Equity 209 4, 3212
Equity accou
2502, Governm
nting 2506 ent 2027
Equity instru
1803, Governm
ment 1806 ent- 2026
Equity- related
settled transa
1805 ntities
2027
ctions Grants
Errors 412
Estimates lated2905
Estimation ssets
ncertainty3204 216
Grants
Events After lated
321
the Reporting 213
Period ncome
Exchange 2906 2905
ferences
Exchange 2608 H
assets 706, Harmon
Executory 1110 isation
ntracts Harvest
Exemptions Hedge
rom IFRSs 2005 ccounti
Expenses ng
Exploration
3207 Hedged
nd evaluation items
assets 210 Hedgin
Exposure g
ft 1505 Hedgin
Extractive g instru
ments
dustries 108 Held
r sale
1502 assificat
ion
Hierarc
hy of
puts
Highest
and
market
Highly
probabl
e
I
F Fair v
a alue
Fair
ue hedgF
IAS 0
es 2 “Inv
entori
es”
IAS 0
8 “Ac
counti
ng Pol
icies,
Chang
es in
Accou
nting
Estim
ates a
nd Err
ors” 4
01, 15
02
IAS 1
0 “Ev
ents A
fter th
e Rep
orting
Period
”
IAS 12 “Income T
axes”
1204
IAS 16 “Property,
1204 Plant and Equipme
nt” 701
2304
1701
207 IAS 20 “Accounti
ng for Governmen
1013 t Grants”
201
3, 801
023, IAS 21 2601
Financia 2 321
Foreign 901
l instru Currency
ments 200 Rates” 3101
Financia 2 IAS 23
l liabilit Borrowin
y 202 g Costs”
5 IAS 24
Related
Party Dis
closures”
International
Accounting S
tandards Boar
d 103
International
Financial Rep
orting Standar
ds
IAS 32 “Fina
ncial Instrum Intern 110
ents: Presenta ational
tion” harmo 111
nisatio
IAS 33 “Earn n
ings Per Shar Interpr 105
e” etation
IAS 36 “Impa s 2218
irment of Ass Intra-
ets” group
balanc
IAS 37 “Prov es 2406
isions, Contin Intra-
gent Liabiliti group 2106
interes 1925,
es and t 2403
Intra-
group 2308
tradin
g 1202
Intra-
103 group
transa
ctions 112
Invent
IFRS 01 “Firs
ories
t-time adoptio Invest
n of Internatio ment
nal roperti
es
IOSC
O
J
J 2502, 3
o 211
IFRS 03 “Bus
i
iness Combin 3103
n
ations” 2105,
t
2302

IFRS 05 “No
a
n-current Ass
r 1003
ets Held for
r
ale
a 1009
n
IFRS 06 “ Ex g 1013
ploration for e
nd Evaluation m 216
209, 1
of e 604
n 2019
IFRS 07 “Fin t
ancial Instru s 312
ments: Disclo 115
sure”
J 2020
IFRS 08 “Op o
erating Seg i
ments”
IFRS 09 “Fi n
nancial Instr t
uments”
IFRS 10 “Co c
nsolidated Fi o
nancial State n
t
ments”
r
o
l

L
Lessee
ccountin
g
Lessee
modifica
tion
Lessor
ccountin
g
Level
nputs
Liability
Lifetime
expected
credit
sses
Line
ms
Little
AAP
Loss
owance
O
2502, 25
15
IFRS 12
“Disclos
ure of In
terests in
M
2811
708
IFRS 1
6 “Leas
es” 215
IFRS C
ouncil
IFRS fo 2307
r SMEs
IFRS F 306
oundati
on 211
IFRSs
Impair 2315
ment 2217,
Impair N 2409
ment ga
in or los 1501
s
Impair 2602
ment in
dicators
Impair 104
ment lo
sses
Impair
ment of
goodwil
l
Improv
ements
Project
Income
Income Net realis
approac able valu
h
Increme e
ntal cos Non-
ts adjusting
events
Indefini Non-
te usefu controllin
l lives g interest
Informa
tion sou Non-
rces current as
Input m set
ethods Non-
current as
Intangi set transf
ble asse ers
ts Non-
Internal depreciat
ly gener ing assets
Non-
financia 2222, 24
l assets 05
2309
215
804
Internal No
ly gener
ated int n- 319
angible mo
assets
net
ary
gov
ern
me
nt
rant
s
Not
es
o th
e fi
nan
cial
stat
em
ents
1111
O R
Obje Reco 210,
ctive gnitio 2306
s of t n
he I Reco
ASB gnitio
n crit 1112
Offs eria
et Reco 2809
Offs 320 ncilia
ettin 6 tions 1402
g Reco , 140
101 verab 6
Oner le am
ous 4 ount
Refur 1619
cont 280
racts bish
2 ment
costs 102
181 Regu
3102
Operating 1
201
latory
lease frame
Operating 3, work
segment 711 Relat 3103
Option- ed pa
pricing rty 206
del 314 Relat
Options ed pa 1619
Other com510 rty tr
prehensive ansac 2803
income tions
Output Relev
thods 708 ance 402
Overhaul Repai
osts 200 rs an 517
Own equit d mai
8 ntena
y instrume 1122
nce
nts Repo
rtable
segm
ents
Repo
rting
perfo
rman
ce
Repu
rchas
e agr
eeme
nts
P
rP
P
Part excha
nge
Part replac
ement
Past due
Past event
Performan
ce obligati
ons
Physical
apital mai
ntenance
Planned S
ture transa
ctions
Positive
oodwill
Post-
employme
nt benefits
1
1112 4 704
703, 717,
1117 1419
1003
1617
2705
Price
Pricing 214 Sale and
ethods leaseback
Sales tax
Primary 310 Segment
4
nstrument reporting
s Separate
200 Financial
2 Statemen
ts
213 Separate
Principal
market informati
Prior perio405 on
d adjustme Share
nt preciatio
Prior perio412 n rights
d errors Share
Products change
nd services281 Share
0 ion
Projected Share-
nit credit 171 based
Projects 3 yments
date Short
Property, 108 m benefit 313
lant and s 707
uipment Significa1110
Provision 320 nt influen 607
matrix 7 ce
Sources
Provisions of inform
Put option202 ation
2 Standard
setting
160 Statemen
6 t of chan
Q ges in
Qualif 518 uity
ying as Statemen
sets t of finan
Qualit cial posit
ative c ion
haracte Statemen
ristics t of profit
Quanti or loss
d other
tative t
hresho compreh
lds 903 ensive
come
Subseque
206 nt costs
280 Subseque
nt expen
4
diture
Substanc
e over
m
©2017 Be
cker Educa
tional Dev
elopment
Corp. All r
ights reser
ved.
3304
T V
Timelin Valuati 215,
ess on 1811
Trade r niques 1402,
eceivab Value 1409
les n use
Trade- Variabl 2105
in e return
Transac s
tion cos Verifia 208
ts bility 1803,
Transac Vesting 1806
tion pri
ce conditio
Transfe nsW 1807
r to reta Vesting
ined ear
period 522
nings Volume
Transiti Discou
on over nt
view
Transiti
on to IF
RSs
Treasur
y shares
True an
d fair
1
U
Unconsolidated structured en
tities
Underlying
Underlying assumption
Understandability
Unidentifiable goods or servi
ces
Unrealised profit
Useful life
ACCA
Diploma in International
Financial Reporting
Study Question Bank
For Examination to June 2018
®
No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in
this publication can be accepted by the author, editor or publisher.
This training material has been published and prepared by Becker Professional Development International
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Editorial material Copyright ©2017 Becker Educational Development Corp. All rights reserved.
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No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole
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Acknowledgement
Past ACCA DipIFR Examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
INTERNATIONAL FINANCIAL REPORTING
Contents
Question
Page Answer
Marks
INTRODUCTION TO IFRS
1
I 1001 10
CONCEPTUAL FRAMEWORK
2
3 Faithful r 1002 25
epresenta 1004 25
tion
Forest
IAS 1 PRESENTATION OF FINANCIAL STAT
EMENTS
4
5 M 1006 10
el 1007 8
d
Fr
es
no
Gr
ou
p
IAS 8 ACCOUNTING POLICIES
6
7 L 1008 12
e 1009 22
o
n
ar
d
K
e
y
c
h
a
n
g
es

IFRS REVENUE FROM CONTRACTS WITH C
USTOMERS
8
9 Telec 6 1011
10 ast In 7 1012
11 dustri 8 1014
es 8 1015
14
13
IAS 2 INVENTORIES
12
13 Retail invent 1016 12
ory 1017 12
Measuremen
t of inventori
es
IAS 16 PROPERTY, PLANT AND EQUIPMENT
14
15 F
D
1018 14
16 1019 14
1022 6
IAS 20 GOVERNMENT GRANTS AND ASSIST
ANCE
17
S 1023 12
IAS 23 BORROWING COSTS
18
19 D 1025 6
a 1025 15
w
e
s

(
I
I
)

K
i
p
l
i
n
g

IAS 17 ACCOUNTING FOR LEASES
20 ow
21 D 14
22 a 15
w 15
e
s
(
I
I
I
)

X
Y
Z

1027 1 15
1028 7
0 10
©2017 Becker Educational Development Corp. All rights reserv (iii)
ed.
Contents
Question
Page Answer
Marks
IAS 38 INTANGIBLE ASSETS
23
24 Research an 1032 20
d developm 1033 10
ent
Defer
IAS 41 AGRICULTURE
25
Sigma 1034 25
(DipIF
R J04)
IAS 36 IMPAIRMENT OF ASSETS
26
J 1036 8
IAS 37 PROVISIONS, CONTINGENT LIABILIT
IES AND
27 G 1037 25

e
n
p
o
w
e
r

IAS 19 EMPLOYEE BENEFITS
28
Klondike 1040 15
(DipIFR
J02)
IFRS 2 SHARE-BASED PAYMENT
29
V 1042 15
IAS 12 INCOME TAXES
30 1046
31 S
S 1044 1048
32 1045
33
10 1
10
FINANCIAL INSTRUMENTS
34
A 1049 17
GROUP ACCOUNTING
35
36 Co 1051 19
37 ns 1054 15
38 oli 1056 25
39 dat 1058 10
40 ion 1060 16
41 s 1063 10
Hu 1064 25
t
Ho
ldi
ng
Ha
ley

W
ate
r
H
©2017 Becker Educational Development Corp. All rights reserved. (iv
)
Contents
Question
Page Answer
Marks
IAS 21 THE EFFECTS OF CHANGES IN FOREI
GN EXCHANGE RATES
42
B 1066 8
IAS 33 EARNINGS PER SHARE
43
E 1067 14
IFRS 8 OPERATING SEGMENTS
44
45 A 1070 25
1072 17
IFRS 5 DISCONTINUED OPERATIONS
46
D 1073 6
a
w
e
s
(
I
V
)

IAS 10 EVENTS AFTER THE REPORTING PER
IOD
47
E 1074 12
IAS 24 RELATED PARTY DISCLOSURE
48
R 1075 25
IAS 34 INTERIM FINANCIAL REPORTING and
49 Eptilon 1077 19

(DipIF
R J04)
©2017 Becker Educational Development Corp. All rights reserved. (v
)
©2017 Becker Educational Development Corp. All rights reserved. (vi
)
Question 1 IASB
(a)
State the objectives of the Internation
(3 marks)
al Accounting Standards Board (IAS
B).
(b)
Compare and contrast a “Discussion Pa
per” and an “Exposure Draft” of an
(c) Outline THREE steps taken by the IASB t
o ensure consistent interpretation of IFRSs
.
(10 marks)
Question 2 FAITHFUL REPRESENTATION
The IASB’s Conceptual Framework for Financial
Reporting requires an entity’s financial statements t
o
faithfully represent the events and transactions that
have occurred. One aspect of faithful representatio
n
is that transactions and events should be accounted
for according to their substance if this differs from
their legal form. This requirement sought to respon
d to concerns about arrangements which resulted in
the omission of assets and liabilities from the state
Required:
(a)
Explain the reasons why entities may wish
to omit assets and liabilities from their
(b) Explain why accounting for (5 ma

“substance over form” is ne rks)
cessary.
(c)
Discuss the proposed treatment of the follo
wing items in the financial statements:
(i)
Bill sells land to a property investment comp
any, Tail. The sale price is $20 million
and the current market value is $30 million.
Bill can buy the land back at any time
in the next five years for the original selling
price plus an annual commission of 1%
above the current bank base rate. Tail cannot
require Bill to buy the land back at
any time.
The accountant of Bill proposes to treat this transac
tion as a sale in the financial
(ii) A car manufacturer, Gray, supplies cars to a
car dealer, Sprake on the following
terms. Sprake has to pay a monthly fee of $1
00 per car for the privilege of
displaying it in its showroom and also is resp
onsible for insuring the cars. When a
car is sold to a customer, Sprake has to pay G
ray the factory price of the car when it
was first supplied. Sprake can only return th
e cars to Gray on the payment of a
fixed penalty charge of 10% of the cost of the
car. Sprake has to pay the factory
price for the cars if they remain unsold withi
n a four-month period. Gray cannot
demand the return on the cars from Sprake.
The accountant of Sprake proposes to treat the cars
unsold for less than four months
as the property of Gray and not show them as inven
tory in the financial statements.
(8
(25 marks)

Question 3 FOREST
The overriding requirement of an entity’s general p
urpose financial statements is that they should
represent faithfully the underlying transactions and
other events that have occurred. To achieve this
transactions have to be accounted for in terms of th
eir “substance” or economic reality rather than their
legal form. This principle is included in the Conce
ptual Framework for Financial Reporting.
Required:
(a)
Describe why it is important that substanc
e rather than legal form is used to account
for
transactions, and describe how financial st
atements can be adversely affected if the
Describe, using an example, how the follow
(b)
ing features may indicate that the substanc
e
of a transaction is different from its legal f
orm:
(i) separation of ownership from b
(ii) eneficial use;
(iii) the linking of transactions inclu (9 marks
ding the use of option clauses;
when an asset is sold at a price )
hat differs to its fair value.
(c)
On 1 April 2015 Forest had an inventory of c
ut seasoning timber which had cost $12 milli
on
two years ago. Due to shortages of this qualit
y of timber its value at 1 April 2015 had risen
to
$20 million. It will be a further three years b
efore this timber is sold to a manufacturer of
high-class furniture. On 1 April 2015 Forest
entered into an arrangement to sell Barret Ba
nk
the timber for $15 million. Forest has an opti
on to buy back the timber at any time within t
he
next three years at a cost of $15 million plus
accumulated interest at 2% per annum above
the
base rate. This will be charged from the date
of the original sale. The base rate for the peri
od
of the transactions is expected to be 8%. For
est intends to buy back the timber on 31 Marc
h
2018 and sell it the same day for an expected
price of $25 million.
Note: Ignore any storage costs and capitalisation of
interest that may relate to inventories.
Required:
Assuming the above transactions take place as e
xpected, prepare extracts to reflect the
transactions in profit or loss for the years to 31
March 2016, 2017 and 2018 and the
statement of financial position (ignore cash) at t
hose year ends:
(i) if Forest treated the transactions in their l
(ii) egal form; and
if the substance of the transactions is reco
rded.
Comment briefly o (1
n your answer to (c) 1
above. ma
rks
)
(25 marks)

Question 4 MELD
$
Revenue 472,800
Cost of sales and expenses (including (376,800)
erest payable of $15,000)
T
_
P
r _
o
fi
t
a
ft
e
r
t
a
x
_ _
_
D
_
Additional information
(1) Meld acquired an unincorporated business du
ring the year for $12,000. The fair value of
separable net assets acquired was $9,120
and goodwill to the extent of $576 has b
een
impaired during the period. Revenue and ope
rating expenses (included in the figures above
)
for this business since acquisition were $4,80
0 and $3,600 respectively.
(2)
that this was an error as the capitalisation crit
eria of IAS 38 Intangible Assets had not be
en
met. At present, development costs are inclu
ded in the draft figures as follows:

Cost
Amortisation
At 1 May
2017
Costs inc
urred ______
Amortisat
ion charg
ed
At 30
April ______
2018
(3) In May 2017, non-current assets which had or
iginally cost $19,200 were revalued to $28,80
0.
Accumulated depreciation at the date of reval
uation was $7,200. At the date of revaluation
,
the remaining useful life of these assets was f
ive years and depreciation has been charged o
n the revalued amount for the year.
(4) At 1 May 2017, capital and reserves compr
ised
Equity share capita
l
Revaluation surplu
s (relating to land)
Retained earnings __
__
__
_
_______
Required:
Prepare the following for the year ended 30 Apri
l 2018, insofar as the information given permits,
as required by IAS 1 “Presentation of Financial
Statements”:
(a)
(b) statement of profit or loss a (5 ma
nd other comprehensive inc rks)
ome; and (5 ma
a statement of changes in eq rks)
uity.
(10 marks)

Question 5 FRESNO GROUP
Fresno Group is preparing its financial statements f
or the year ended 31 January 2018. However the
financial accountant of Fresno Group had difficulty
in preparing the full statements and approached you
for help. The financial accountant has furnished yo
u with the following information:
(i) Profit or loss extract for the year ended 3
1 January 2018
$m
Operating profit – contin 290
uing operations
1
Profit on sale of property
0
in continuing operations
Profi
t bef (
ore t
axati
on
Prof 2
it af
ter t
axat
ion
Dividends for the year amounted to $15 million.
The financial accountant has not yet made any
necessary provision for discontinued
operations. (However, you may assume that the tax
ation provision incorporated the effects of
any provision for discontinued operations.)
(ii) The shareholders’ funds at the beginning of t
he financial year were as follows:
$
Share capital
($1 equity sh 7
ares)
Share premiu
m
Revaluation s
urplus
Retained earn
ings
1,395
(iii) Fresno Group regularly revalues its non-
current assets and at 31 January 2018, a reval
uation
surplus of $375 million had been credited to r
evaluation surplus. During the financial year,
a
property had been sold on which a revaluatio
n surplus of $54 million had been credited to
reserves. Further, if Fresno had charged depr
eciation on a historical cost basis rather than t
he
revalued amounts, the depreciation charge for
non-current assets in profit or loss would hav
e
been $7 million. The current year’s charge fo
r depreciation was $16 million.
(iv) To facilitate the purchase of subsidiaries, Fres
no had issued $1 equity shares of nominal val
ue
$150 million and share premium of $450 mill
ion. The premium had been taken to the
statutory reserve. All subsidiaries are currentl
y 100% owned by the group.
(v) During the financial year to 31 January 2018,
Fresno discontinued the operations of a wholl
y-
owned subsidiary, Reno. It had also made a
decision to close down the operations of anot
her
wholly-owned subsidiary, Dodge, in the next
financial period. The estimated costs of the
closures are $45 million for Reno and $23 mi
llion for Dodge. The directors had drawn up
detailed formal plans for the closure of D
odge by the year end but had not made thi
s
information available to the public.
Required:
Prepare a statement of changes in equity for the
Fresno Group for the year ended 31 January
2018 in accordance with IAS 1 “Presentation of
Financial Statements”.

Question 6 LEONARD
Leonard incurs considerable research and developm
ent expenditure. It had previously been capitalising
its development expenditure but this treatment has
now been identified as an error as the capitalisation
criteria of IAS 38 Intangible Assets had not been m
et. The final accounts for the year ended 30 June
2017 and the 2018 draft accounts reflect this capital
isation policy and show the following:

2018
2017
R $000
e 101,26
0
v
e (56,01
n 0)
u
e
——
—

45,250
C
o
s (37,39
t 7)
——
o —
f
7,853
s
a
l (3,141)
e
s ——
—
4,712
Ad
——
mini
—
strat
ive
exp
ense
s
T
a
x

o
n

$000 3,200
97,250 ——
(60,53
0) —
——
—
36,720
(31,26
0)
——
—
5,460
(2,260
)
Statement of changes in equity (extract)
Retained prof
it for the fina
3,200
ncial year
Retained ear 22,500
nings brough
t forward (1,750
D )
——
i —
v
i 23,950
d
——
e —
n
d
s

Retained e
arnings car
ried forwar
d
The carrying amount of development costs incl
uded in intangible non-current assets has been
as
follows:
$
A 0
4
——
Amortisation of development costs (charged to cost
of sales) and expenditure on development has been.

Amortisatio
n Expenditure
$00
Year 0
ende
d 30 500
June
600
2017
Year
ende
d 30
June
2018
Required:
Show how the error will be reflected in the finan
cial statements for the year ended 30 June 2018.
(12 marks)

Question 7 KEY CHANGES
(a)
(b) Explain the criteria which determine:
(i)
(ii) whether an item is recognised
n the financial statements; or loss or o
ther
(8 m
arks)
On 1 January 2013, an entity acquired a non-
(c) current asset for $25,000. It is to be depreciat
ed
at 20% on the reducing balance method. The
entity’s policy is to revalue its assets every t
wo
years. On 31 December 2014 the asset was r
evalued to $18,000, its remaining useful life
was
determined to be six years and the depreciatio
n method was changed to the straight line
method.
On 31 December 2016 the asset was revalued to $8,
000, but the useful life and depreciation
method were not changed. On 1 April 2017 the ass
et was sold for $8,500. Depreciation is not
charged in the year of sale of an asset. The entity p
repares financial statements to 31
December.
Required:
Show the annual effect (if any) of the above tran
sactions for the period 1 January 2013
to 31 December 2017 on:
(i) profit or loss and other
(ii) comprehensive income;
(9 ma
and
the revaluation surplus. rks)
Note: You should assume that the entity wishes to
maximise its distributable profit for the
(22 marks)
Question 8 TELECAST INDUSTRIES
(a)
Telecast Industries is preparing its accounts f
(b) or the year ended 30 September 2017. In Ma
y
2017 it bought the rights to a film called “Wi
nd of Change”. It paid a fixed fee and will no
t
incur ignificant costs or commissions. It has entere
any d into the following contracts
rther with:
(i) Warmer Cinemas
This is a large entity with a chain of cinemas throug
hout the world. Warmer Cinemas has
negotiated the right to screen the film during the pe
riod from 1 July 2017 to 31 December
2017 in as many of its cinemas and as frequently as
it chooses. Telecast Industries will be
paid 15% of gross box office receipts.
(ii) Big Screen
This small entity operates a single cinema. Under t
he terms of the contract it may screen the
film twice a day for the same period as the above c
ontract. It has paid a fixed fee of $10,000.

(iii) Global Satellite
This is a satellite television company that broadcast
s to South East Asia. The contract states
that Global Satellite will pay $500,000 every six m
onths for the next three years. This will
give Global Satellite the right to screen the film 10
times at intervals of not less than one
month apart during 2018.
Required:
Applying the requirements of IFRS 15 “Revenue
from Contracts with Customers”,
describe how Telecast Industries should treat
the income from each of the above
Note: You are not required to discuss how the cost
of the film should be expensed.
(14 marks)
Question 9 MESON
Meson is a recently incorporated company. Its busi
ness is the development of standard computer
software packages, the sale or “licensing to use” of
standard or customised standard software packages
and the design, development and maintenance of be
spoke software to order. Payment by customers is
usually in stages over the term of the design-
development work. More recently, Meson has com
menced
the retailing of computer hardware.
Meson has also developed a prototype “retail shop”
which will aim to sell computer time (on PCs) –
customers will be able to visit the “shop” and use ei
ther their own or Meson’s software to process data,
etc. It is Meson’s aim to establish a nation-
wide chain of such shops by licensing intereste
d
entrepreneurs to use the concept and benefit from
Meson’s nation-wide advertising campaign. Meson
will supply, in addition to know how and advertisin
g, administrative back up, software and hardware.
Meson is considering alternative methods of chargi
ng the independent proprietors of shops, including:
(i) an up-front license fee followed by regular fe
(ii) es based on turnover of the shops;
no advance payment but regular fees based o
n a larger percentage of revenue of the shops.
Software and hardware supplied by Meson will be
charged on delivery at normal selling prices.
Required:
Advise the directors of Meson on the matters the
y should consider in determining the policies for
accounting for revenue from:
(a) the design and sale of softwa (8 mar

(b) re and the retailing of hardw ks)
are; and (5 mar
the proposed retail shop lice ks)
nsing operation.
(13 marks)

Question 10 WILLIAM
William is an entity that designs and builds racecou
rses, commenced a four-year contract early in 2014.

The price was initially agreed at $12,000,000.
Revenue is recognised over the term of the contract
as the performance obligation is satisfied over time.

William recognises revenue based on the perce
ntage of costs incurred to date compared to tot
al
expected costs.
Relevant figur
es are as follo 2014 2015
2016
ws: 2017
$000 $000 $000 $000
Costs incurred in year 2,750 3,000 4,200 1,150
Anticipated future costs 7,750 7,750 1,550 –
Work certified and cash 3,000 5,00011,00012,500
eceived to date
Required:
Show how the above would be disclosed in the fi
nancial statements of William for each of the fou
r
years ended 31 December 2017.
Not (
e:
Wo
rk t
o th
e n
ear
est
$00
0.
rks
)
Question 11 BIG
Big commenced work on three long-term contracts
during the financial year to 31 March 2018. The
first contract with Nose commenced on 1 July 2017
and had a total sales value of $3.6 million. It was
envisaged that the contract would run for two years
and that the total expected costs would be $3
million. On 31 March 2018 Big revised its estimat
e of the total expected costs to $3.1 million on the
basis of the additional rectification costs of $100,00
0 incurred on the contract during the current
financial year. An independent surveyor has estima
ted at 31 March 2018 that the contract is 40%
complete. Big has incurred costs up to 31 March 2
018 of $1.5 million and has received payments on
account of $1.2 million.
The second contract with Head commenced on 1 O
ctober 2017 and was for a two year period. This
contract was relatively small and had a total sales v
alue of $60,000. The total expected costs were
$48,000. A valuation has not been carried out by a
n independent surveyor, as it was not required unde
r
the terms of the contract. The directors estimated a
t 31 March 2018 that the contract was 30%
complete. The costs incurred to date were $19,000
and the payments on account received were
$21,000. A non-current asset which had cost $8,00
0 and had been purchased specifically for the proje
ct
was considered to be obsolete as at 31 March 2018.
The non-current asset was being depreciated on the
straight-line basis over the two-year period of the c
ontract assuming no residual value. The cost of
depreciation to date was included in the amount of t
he costs incurred.
The third contract with Horn commenced on 1 Nov
ember 2017 and was for 1½ years. The total sales
value of the contract was $2.4 million and the total
expected costs were $2 million. Payments on
account already received were $1 million and total
costs incurred to date were $700,000. Big had
insisted on a large deposit from Horn because the c
ompanies had not traded together prior to the
contract. The independent surveyor estimated that
at 31 March 2018 the contract was 25% complete.
The three contracts meet the requirements of IFRS
15 Revenue from Contracts with Customers to
recognise revenue over time as the performance obl
igations are satisfied over time.
Big also has several short-term contracts of betwee
n six and nine months in duration. Some of these
contracts fall into two accounting periods and were
not completed as at 31 March 2018. The directors
have decided to accrue profit earned to date on thes
e contracts in the financial statements.

Required:
(a)
Draft financial statement extracts for Big i
n respect of the three construction contract
s
(b) Discuss the acceptability of the accounting
treatment by the directors of the contracts
(15 marks)
Question 12 RETAIL INVENTORY
A retailer has the following purchases and sales of
a particular product line:

Units Purchase Units
Selling
price
$
$
At 31 December the physical inventory was 150 un
its. The cost of inventories is determined on a FIF
O
basis. Selling and distribution costs amount to 5%
of selling price and general administration expenses
amount to 7% of selling price.
Required:
(a)
State three reasons why the net realisable
value of inventory may be less than cost.
(b) Calculate to the nearest $ the value of inv
entory at 31 December:
(i)
(ii) at cost;
at net realisable value;
(iii)
at the amount to be included in the financi
al statements in accordance with
IAS 2 (
“Inve
ntori
es”.
(12 marks)
Question 13 MEASUREMENT OF INVENTO
RIES
IAS 2 Inventories prescribes the accounting treatme
nt for inventories under the historical cost system.
Required:
(a)
Briefly explain how IAS 2 requires the foll
owing to be dealt with:
(i)
(ii) fixed production overheads;
the determination of the lower of cost and net
(iii) realisable value;
the identification of costs when there are
large numbers of items which are
ordinarily (
interchan 8
geable.
m
a
r
k
s
)
(b) State FOUR disclosure requirements of
IAS 2 in respect of inventories. (4
(12 marks)

Question 14 FAM
Fam had the following tangible non-current assets a
t 31 December 2016:
Cost Depreciation Carrying
amount
$000 $000
– 500
L 80 320
458 1,155
140 250
91
– 91
2,994 678 2,316
In the year ended 31 December 2017 the following
transactions occur:
(1)
Further costs of $53,000 are incurred on buil
dings being constructed by the Fam.
A building costing $100,000 is completed du
ring the year.
(2) A deposit of $20,000 is paid for a new compu
ter system which is undelivered at the year en
d.
(3)
Additions to plant are $154,000.
(4)
Additions to fixtures, excluding the deposit o
n the new computer system, are $40,000.
(5)
The following
assets are sold Cost Deprec
iation Proceed
: s
brought
forward
$000 $000
195 86
P
31 2
(6) Land and buildings were revalued at 1 Januar
y 2017 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by
Messrs Jackson & Co, Chartered Surveyors,
on
the basis of their fair value.
(7) The useful life of the buildings is unchanged.
The buildings were purchased ten years befor
e
the revaluation.
(8) Depreciation is provided on all assets in use
at the year-end at the following rates:
Buildin
2% per annum straigh
gs t line
20% per annum straigh
t line
25% per annum reduci
ng balance
Required:
Show the disclosure under IAS 16 “Property, Pl
ant and Equipment” that is required in the notes
to Fam’s published accounts for the year ended
31 December 2017.
0
Question 15 PORSCHE
Porsche has the following non-current assets at 1 Ja
nuary 2017:

Cost Depreciation
Carrying

amount
$ $000
0
Plant a 0
nd equi 0 1,296
pment
1,711
1
4
4 255
305
2 ——
5 –
7
3,567
1
9
4 ——
–
5
8
3
—
—
–
1,
1
7
8
—
—
–
You are given the following information for the yea
r ended 31 December 2017:
(1) The factory was acquired in March 2012 and
is being depreciated over 50 years.
(2) Depreciation is provided on cost on a straight
line basis. The rates used are 20% for
fixtures and fittings, 25% for cars and 10% fo
r machines.
(3) Early in the year the factory was revalued to
a market value of $2.2 million and an
extension was built costing $500,000.
(4) The directors decided to change the meth
od of depreciating motor vehicles to 30%
reducing balance to give a fairer presentation
of the results and of the financial position.
(5) Two cars costing $17,500 each were bought i
n February. Plant and fittings for the factory
extension cost $75,000 and $22,000 respectiv
ely.
(6) When reviewing the expected lives of its non
-current assets, the directors felt that it was
necessary to reduce the remaining life of a tw
o year old grinding machine to four years
when it will be sold for $8,000 as scrap. The
machine originally cost $298,000 and at
1 January 2017 had related accumulated depr
eciation of $58,000.
(7) The accounting policy for depreciation is to c
harge a full year’s depreciation in the year of
acquisition.
Required:
Prepare the disclosure notes for non-current
assets for the year ended 31 December 2017
required under IAS 16 “Property, Plant and Eq
uipment”.
Question 16 DAWES (I)
The following problem and issues have arisen durin
g the preparation of the draft financial statements of
Dawes for the year to 30 September 2017:
On 1 October 2011 Dawes purchased a new industr
ial storage building for $4million, the building had
a
useful life of 25 years. Prior to the current year this
property was being depreciated over its useful life.
The directors are now questioning the necessity for
this as a similar building was sold on 1 October
2016, by the builders, for $6 million. With effect fr
om the same date (1 October 2016) the directors
wish to value the building at $6 million and cease d
epreciating it.
1
Note: the regulatory requirements applicable to Da
wes permit revaluation of non-monetary assets in
Required:
Critically comment on the directors’ views in rel
ation to revaluation and depreciation of the
property, and show calculations of the amounts t
o be included in the financial statements for the
year ended 30 September 2017 assuming:
(i) there is no revaluation of the property;
(ii) the property is revalued to $6 million at 1
October 2016.
(6 marks)
Question 17 SPONGER
Sponger has been having financial difficulties recen
tly due to the economic climate in its industry
sector. However, its financial director Mr Philip Ti
slid has discovered that there are a number of
schemes by which he can obtain government financ
ial assistance. Details of the assistance obtained are
as follows:
(a) Sponger has received three grants of $10,000
each in the current year relating to on-going
research and development projects. One gran
t relates to the Cuckoo project which involves
research into the effect of various chemicals
on the pitch of the human voice. No construc
tive
conclusions have been reached yet.
The second relates to the development of a new typ
e of hairspray which is expected to be
extremely popular. Commercial production will co
mmence in 2019 and large profits are
foreseen. The third relates to the purchase of high
powered microscopes.
In 2016 Sponger’s premises were entirely isol
(b) ated from the outside world for four months d
ue
to the renovation of roads by the local council
. All production was lost in that period. Mr
Tislid has been assured by the council’s offic
ers that a $25,000 compensation grant will be
paid on submission of the relevant triplicate f
orm. Mr Tislid had not yet filled in the form
by
31 December 2017.
Sponger entered into an agreement with the g
(c) overnment that, in exchange for a grant of
$60,000, it will provide “vocational experien
ce” tours around its factory, for twelve young
ear period starting on 1 January 2017. The gr
crimi ant was to be
nals paid on the date Sponger purchased a minibu
er mo s (useful life three years) to take the inmates t
nth o
ver the factory and back. The bus was bought an
five
d the grant received on 1 January 2017.
The grant becomes repayable on a pro rata basis for
every monthly visit not fulfilled. During
2017 five visits did not take place due to the pressu
re of work and this pattern is expected to
be repeated over the next four years.
No repayments have yet been made.
Mr Tislid is totally confused as to how to account f
or these grants.
Required:
Explain how Mr Tislid should account for the ab
ove grants in the accounts for the year ended 31
December 2017.
2
Question 18 DAWES (II)
Dawes capitalises borrowing costs in respect of qua
lifying assets, in accordance with IAS 23Borrowin
g
Manufacturing plant
On October 1 2016 Dawes commenced constructio
n of a manufacturing plant that is expected to take
four years to complete. It is being financed entirely
by a four-year term loan of $5 million (taken out at
the start of the construction). The loan carries fixed
interest at 14% per annum and issue costs of 2%
(of the loan value) were incurred on the loan. Duri
ng the year $72,000 had been earned from the
temporary investment of these borrowings.
Note: you may use the straight-line method to amor
tise issue costs.
Investment property
Due to the poor state of the property letting market,
construction of this property was halted for the first
three months of the year. On 30 June 2017, after a
prolonged construction period, Dawes completed
the property. Despite attempts to let the property it
remained empty at the year end. The average
carrying amount of property before inclusion of the
current year’s borrowing cost is $12 million. The
investment property has been financed out of funds
borrowed generally for the purpose of financing
qualifying assets. The weighted average cost of ca
pital for Dawes is 11% including all borrowings, an
d
10% if the $5 million referred to above is excluded.
Required:
Calculate, with explanations, the amount of borr
owing costs that should be capitalised in respect
of each qualifying asset.
Question 19 KIPLING
Kipling manufactures and operates a fleet of small
aircraft. It draws up its financial statements to 31
March each year.
Kipling has recently finished manufacturing a fleet
of five aircraft to a new design. These aircraft are
intended for use in its own fleet for domestic carria
ge purposes.
Kipling commenced construction of the assets on 1
April 2013 and wishes to recognise them as non-
current tangible assets as at 31 March 2015.
Kipling had taken out a three year loan of $20 milli
on to finance the aircraft on 1 April 2013. Interest i
s
payable at 10% per annum but is to be rolled over a
nd paid at the end of the three year period together
with the capital outstanding. Kipling capitalises int
erest on manufactured assets in accordance with the
rules in IAS 23 Borrowing Costs.
The aircraft were completed on 1 January 2015 but
their exterior painting was delayed until 31 March
2015. The costs (excluding finance costs) of manuf
acturing the aircraft were $28 million.
During the construction of the aircraft, certain com
puterised components used in the manufacture fell
dramatically in price.
3
The directors estimated that at 31 March 2015 the r
ecoverable amount of the aircraft was $30 million.
The engines used in the aircraft have a three year lif
e and the body parts have an eight year life; Kipling
has decided to depreciate the engines and the body
parts over their different useful lives on the straight
line basis. The engine costs represent 30% of the to
tal cost of manufacture. The engines will be
replaced on 31 March 2018 at an estimated cost of
$15 million.
The directors have decided to revalue the aircraft a
nnually:

 On 31 March 2016, the aircraft have a mark
et value of $21 million.
On 31 March 2017, the aircraft have a mark
et value of $19·6 million.
Revaluation surpluses or deficits are apportioned be
tween the engines and the body parts on the basis o
f
their year-end book values before the revaluation.
Required:
Show the accounting treatment of the aircraft fle
et in the financial statements on the basis of the
above scenario for the financial years ending:
(a) 31 March 2015;
(b) 31 March 2016, 2017;
(c) 31 March 2018 before revaluation.
(15 marks)
Question 20 DAWES (III)
At 1 October 20
16
32.50
(including right- 81.
of-use leased ass 20 –
ets) 19.84
Additions at cost excluding 23. _____
Right-of-use leased assets (s 00
ee (i) and (ii) below)
Depreciation charge for the –
year
___
Disposal (see (iii) below)
__
Balance 30
September 2 _____
(i) The addition to plant i
s made up of: $m
Basic cost from suppl
ier 20.
Recoverable sales tax 00
(see (iv) below)
Installation costs 3.5
Pre-production testing 0
Annual insurance and
maintenance contract 1.0
0
0.5
0
1.0
0
Less government grant
(see (v) below) ___
__
_____
4
(ii) During the year some assets were acquired u
nder right-of-use lease contracts. The
fair value of these assets is represented by the
movement on the lease liabilities.
These increased from $21.4 million at 1
October 2016 to $29 million at 30
September 2017 after capital repayments of l
ease liabilities during the year of $8.4
million. All right-of-use leases for plant are f
or five years and none are more than
three years old.
(iii) The disposal figure of $5 million is the proce
eds from the sale of an item of plant
during the year which had cost $15 million o
n 1 October 2016 and had been
correctly depreciated prior to disposal. Dawe
s charges depreciation of 20% per
annum on the cost of plant held at the year en
d.
(iv) The recoverable sales tax paid on the acquisit
ion of assets is recoverable from the
taxing authorities.
(v) The accounting policy for government grants
is to treat them as deferred income in
the statement of financial position.
Required:
Prepare a corrected schedule of the cost and dep
reciation of plant, including right-of-use leased
assets.
Question 21 XYZ
A lessor, ABC, leases an asset, which it purchased f
or $4,400, to XYZ, the lease is classified as a right-
of-use lease. It estimates that its residual value afte
r five years will be $400 and after seven years will
be zero.
The lease is for five years at a rental of $600 per ha
lf year in advance, with an option of two more year
s
at nominal rental. The lease commences on 1 Janu
ary 2017. The directors of XYZ consider that the
asset has a useful life of seven years. The finance c
harge is to be allocated using the interest rate
implicit in the lease of 7.68%; the initial amount re
cognised for the lease liability and right-of-use asse
t
is $4,400. Title to the asset will pass to XYZ at the
end of seven years if the option is exercised. It is
likely that it will be.
Required:
Show the relevant extracts from the financial sta
tements of XYZ for the year ended 31 December
2017.
(10 marks)
Question 22 SNOW
On 1 January 2017, Snow entered into the followin
g lease agreements:
(a)
Snowplough
To lease a snowplough for three years from Ice. Th
e asset is initially measured at $35,000.
A deposit of $2,000 was payable on 1 January 2017
followed by six half-yearly instalments of
$6,500 payable in arrears, commencing on 30 June
2017. Finance charges are to be allocated
using the actuarial method, assuming that the semi-
annual interest rate implicit in the lease is
5%.
5
(b) Snow machine
To lease a snow machine for five years from Slush.
The asset is initially measured at
$150,000 and is estimated to have a useful life of fi
ve years.
Snow has agreed to make five annual instalme
nts of $35,000, payable in advance,
commencing on 1 January 2017.
The interest rate implicit in the lease is 8.36%.
Required:
Show the relevant extracts from the accounts of
Snow for year ended 31 December 2017.
(15 marks)
Question 23 RESEARCH AND DEVELOPME
NT
“Expenditure on research costs is to be recognised
as an expense when it is incurred … An intangible
asset arising from development expenditure will
be recognised if, and only, if, an entity can
demonstra
te all of th IAS
e followin 38 In
g …” tangi
ble
R Asset
e s
q
u
i
r
e
d
:

(a)
(b)
An entity has incurred the following costs pri
(c)
or to commercial production of a new polluti
on
filter for use on commercial vehicles:
salaries of st
marketing awareness campaign aff testing fi
patent royalty payable to inventor of lter prototyp
lter es
$38,500
$50,000
$12,000
(d) Describe how and when development ex
penditure should be amortised. (6
(20 marks)
Question 24 DEFER
Your client wishes to defer expenditure on develop
ment activities where possible and for as long as
possible. The finance director has asked for your a
dvice on what procedures to set up in order to
identify relevant expenditure and comply with best
accounting practice.
Required:
Draft a reply that respon
ds to the finance director
’s request. (10
ma
rks
)
6
Question 25 SIGMA
Sigma prepares financial statements to 30 Septemb
er each year. On 1 October 2016 Sigma carried out
the following transactions:
 Purchased a large piece of land for $20 millio
 n.
 Purchased 10,000 dairy cows (average age at
1 October 2016 two years) for $1 million.
Received a grant of $400,000 towards the ac
quisition of the cows. This grant is not repay
able.
During the year ending 30 September 2017 Sigma i
ncurred the following costs:

 $500,000 to maintain the condition of the an
imals (food and protection);
$300,000 in breeding fees to a local farmer.
On 1 April 2017 5,000 calves were born. There we
re no other changes in the number of animals durin
g
the year ended 30 September 2017. At 30 Septemb
er 2016 Sigma had 10,000 litres of unsold milk in
inventory. The milk was sold shortly after the year
end at market prices.
Information regarding fair values is as follows:
I
t Fair value le
e ss costs to se
m ll

1 1 April 30 September
tober
17 2017
2016 $
L 24 million
a $ 22 million 22
20 25
n llion 94
d 97
20 0·55
23
90 0·55

93
0·6
Required:
(a)
Discuss how the requirements of IAS 41 “A
griculture” regarding the recognition and
measurement of biological assets and ag
ricultural produce are consistent with the
(b) Prepare extracts from the statement of pro
fit or loss and the statement of financial
position that show how the transactions ent
ered into by Sigma in respect of the purcha
se
and maintenance of the dairy herd would b
e reflected in the financial statements of th
e
entity for the year ended 30 September 201
7.
Note: A reconciliation of changes in the carryi
ng amount of biological assets is NOT
(25 marks)
7
Question 26 JUSTIN
On 1 July 2017 Justin acquired Steamdays, a comp
any that operates a scenic railway along the coast of
a popular tourist area. The summarised statement o
f financial position at fair values of Steamdays on 1
July 2017, reflecting the terms of the acquisition wa
s:
Goodwill 1
Operating licen ,
ce
Property – train _
stations and lan _
d _
Rail track and c
oaches _
Steam engines _
(2)
Purchas
e consi _
deration

The operating licence is for ten years. It has recentl
y been renewed by the transport authority and is
stated at the cost of its renewal. The carrying amou
nts of the property and rail track and coaches are
based on their estimated replacement cost. The eng
ines are valued at their fair values, less costs to sell.
On 1 August 2017 the boiler of one of the steam en
gines exploded, completely destroying the whole
engine. Fortunately no one was injured, but the eng
ine was damaged beyond repair. Due to its age a
replacement could not be obtained. Because of the
reduced passenger capacity the estimated value in
use of the business after the accident was assessed a
t $2 million.
Passenger numbers after the accident were below e
xpectations even after allowing for the reduced
capacity. A market research report concluded that t
ourists were not using the railway because of the
fear of a similar accident occurring to the remainin
g engine. In the light of this the value in use of the
business was re-assessed on 30 September 2017 at
$1·8 million. On this date Justin received an offer
of
$900,000 in respect of the operating licence (it is tr
ansferable).
Required:
Briefly describe the basis in IAS 36 “Impairmen
t of Assets” for allocating impairment losses; an
d
show how each of the assets of Steamdays would
be valued at 1 August 2017 and 30 September
2017 after recognising the impairment losses.
Note:
Ignor (
e dep
reciat
ion of
assets
.
Question 27 GENPOWER
measurement, presentation and disclosure require
ments for provisions, contingent liabilities and
contingent assets.
Required:
(a)
(i) Explain the need for an accounting sta
ndard in respect of provisions. (5 mar
ks)
(ii) Describe the principles in IAS 37 of accou
nting for provisions. Your answer
should refer to definitions and recognition
and measurement criteria. (7 marks)
8
(b) Genpower is engaged in the electricity genera
ting industry. It operates some nuclear power
stations for which environmental clean-up cos
ts can be a large item of expenditure. The
company operates in some countries where en
vironmental costs have to be incurred as they
are written into the licensing agreement, and i
n other countries where they are not a legal
requirement. The details of a recent contract
Genpower entered into are as follows:
A new nuclear power station has been built at a cos
t of $200 million and was brought into
commission on 1 October 2016. The licence to pro
duce electricity at this station is for 10
years. This is also the estimated useful life of the p
ower station. The terms of the licence
require the power station to be demolished at the en
d of the licence. It also requires that the
spent nuclear fuel rods (a waste product) be buried
deep in the ground and the area “sealed” to
avoid contamination. Genpower will also have to p
ay clean-up costs for any contamination
leaks from the water cooling system that surrounds
the fuel rods when they are in use.
Genpower estimates that the cost of the demolition
of the power station and the fuel rod
“sealing” operation will be$180 million in 10 years
’ time. The present value of these costs at
an appropriate discount rate is $120 million. From
past experience there is a 30% chance of a
contaminating water leak occurring in any 12 mont
h period. The cost of cleaning up a leak
varies between $20 million and $40 million depend
ing on the severity of the contamination.
Relevant extracts from the company’s draft financi
al statements to 30 September 2017 after
applying the company’s normal accounting policy f
or this type of power station are:
Profit or loss:
$
Non-current asset deprec
m
iation (power station)

10% × $200 2
million
Provision for demolitio 0
n and “sealing” costs
10% × $180 million 18
Provision for cleaning up contami
nation due to water leak
(30% × an average of 9
$30 million)
47
Statement of financial position:
Tangible Non-current assets:
Power station at cost
D
atio (
n
180
Non-
curren 2
t liabili
ties:
Note: No contamination from water leakage occurr
ed in the year to 30 September 2017.
Genpower is concerned that its current policy does
not comply with IAS 37 Provisions,
Required:
(i)
Comment on the acceptability of Genpowe
r’s current accounting policy and
redraft the extracts of the financial statem
ents in line with the regulations of
Note: your answer should ignore the “unwinding”
of the discount to present value.
9
(ii) Assuming Genpower was operating the nucle
ar power station in a country that does
not legislate in respect of the above types of e
nvironmental costs.
Explain the effect this would have on (5 marks)
your answer to (i) above.
include
environmental policy a consideratio
ofwhatGenpower’s
might be. n
(25 marks)
Question 28 KLONDIKE
IAS 19 Employee Benefits deals with the treatment
of post-employment benefits such as pensions and
other retirement benefits. Post-employment benefit
s are classified as either defined contribution or
defined benefit plans.
Required:
(a)
treatmendefined
contribution and defined benefi
t
t plans under IAS 19. (7 marks)
(b) Klondike operates a defined benefit post-
retirement plan for its employees. The plan i
s
reviewed annually. Klondike’s actuaries hav
e provided the following information:
31 31 March 2
arch018
Present val 2017 $000
ue obligati 1,750
on
$0001,650
Fair value
of plan ass 1,500
ets
1,280
Current service cost – year to 31
March 2018 160
Contributions paid – year to 31 85
March 2018 125
Benefits paid to employees – ye
ar to 31 March 2018 10%
Discount rate for plan liabilities
at 1 April 2017
Required:
Prepare extracts of Klondike’s financial stateme
nts for the year to 31 March 2018 in
compliance with IAS 19 insofar as the informati
on permits. (8
(15 marks)
Question 29 VIDENT
The directors of Vident, a listed entity, are reviewin
g the impact of IFRS 2 “Share-based Payment” on
the company’s financial statements for the year end
ed 31 May 2018. However, the directors of Vident
are unhappy about the standard and have put forwar
d the following arguments why they should not
recognise an expense for share-based payments:
(i) share options have no cost to the company an
d, therefore, there should be no expense char
ged
in the statement of profit or loss;
(ii)
the expense arising from share options under
IFRS 2 does not, in their opinion, meet the
definition of an expense under the “Framewo
rk” document;
(iii)
the dual impact of the IFRS on earnings per s
hare is worrying as an expense would be sho
wn
in the statement of profit or loss and the share
options would be recognised in the diluted
earnings per share calculation;
0
The following share option schemes were in existen
ce at 31 May 2018:
Director’s name
Grant date J Van R Ashworth
Options granted flin
Fair value of options a 1 June 1 June 2017
t grant date 016 50,000
Exercise price
Performance conditio 20,000 $6
ns $6
Vesting date $5
B
Exercise date 1 June 2020
$4∙50
1 June 2021
June 201
8
1 June
019
The price of Vident’s shares at 31 May 2018 is $12
per share and at 31 May 2017 was $12·50 per
share.
The performance conditions which apply to the exe
rcise of executive share options are as follows:
Performance Condition A
The share options do not vest if the growth in the c
ompany’s earnings per share (EPS) for the year is
less than 4%. The rate of growth of EPS was 4·5%
(2016), 4·1% (2017), 4·2% (2018). The directors
must still work for the company on the vesting date
.
Performance Condition B
The share options do not vest until the share price h
as increased from its value of $12·50 at the grant
date (1 June 2017) to above $13·50. The director
must still work for the company on the vesting date
.
No directors have left the company since the issue
of the share options and none are expected to leave
before June 2018. The shares vest and can be exerc
ised on the first day of the due month.
Required:
(a)
Explain why share-based payment should
be recognised in financial statements and
why
(b) Discuss, with supporting calculations, ho
w the directors’ share options should b
e
accounted for in the financial statements fo
r the year ended 31 May 2018 including the
(15 marks)
Questions 30 – 33
Assume the following tax rules in respect of questi
ons Shep (I) – (IV):

Transactions are only deductible for tax purp
oses when they are “booked” (i.e. double-
entry is
made in the statutory accounting records). T
his means that there is often little difference
between accounting profit under local GAAP
and the taxable profit. However, it is commo
n
practice for large companies to maintain a pa
rallel set of records and accounts for reportin
g
according to IFRS rules. These are notably d
ifferent to the rules in the domestic tax code
and
as a result the accounting profit under IFRS c
an be very different from the taxable profit.
The tax code allows for the general applicati

on of the accounting principles of prudence a
nd
accruals, but it does state the following:
 Tax allowable depreciation is computed acco
 rding to rules set out in the tax code.

Interest is taxable/allowable on a cash basis.
Development expenditure is allowable for ta
x in the period in which it is incurred.
1
Question 30 SHEP (I)
Shep was incorporated on 1 January 2016. In the y
ear ended 31 December 2016 the company made a
profit before taxation of $121,000.
This figure was after a depreciation charge of $11,0
00.
During the period Shep made the following capital
additions.
1
P
Tax allowances for 2016 are $15,000.
Corporate tax is chargeable at the rate of 30%.
Required:
(b)
Calculate the deferred tax balance that is r
equired in the statement of financial positi
on
as at 31 December 2016.
(c) Prepare a note showing the movement on t
he deferred tax account and thus calculate
the deferred tax charge for the year ended
31 December 2016.
(d) Prepare the note which analyses the tax ex
pense for the year ended 31 December 201
6.
(e)
Prepare a note which reconciles accountin
g profit multiplied by the applicable tax ra
te
and the tax expense.
(f) Prepare a note to the statement of financia
l position showing the movement on deferr
ed
tax in respect of each type of temporary di
fference.
Question 31 SHEP (II)
Continuing from the previous year. The following i
nformation is relevant for the year ended 31
December 2017.
D
(1) C
a
pi
ta
l t
r
a
n
s
a
ct
io
n
s
precia
tion
harge
d $
Tax
lowan 1
ces 4,0
0
0
1
6,
0
0
0
(2) Interest payable
On 1 April 2017 the company issued $25,000 of 8
% loan notes. Interest is paid in arrears on
30 September and 30 March.
(3) Interest receivable
On 1 April Shep purchased loan notes with a nomin
al value of $4,000. Interest at 15% per
annum is receivable on 30 September and 30 Marc
h. The investment is regarded as a
financial asset and is measured at amortised cost.
2
(4) Provision for warranty
In preparing the financial statements for the year to
31 December 2017, Shep has recognised a
(5) Fine
During the period Shep has paid a fine of $6,000.
The fine is not tax deductible.
(6)
Further information
The accounting profit before tax for the year was $
125,000.
Required:
(b)
on
31 December 2017.
7.
(e)
te
ed
fference.
Question 32 SHEP (III)
Continuing from the previous year. The following i
nformation is relevant for the year ended 31
December 2018.
(1) Interest payable/Interest receivable
Shep still has $25,000 of 8% convertible loan notes
in issue and still retains its holding in the
loan notes purchased in 2017.
(2) Provision for warranty
During the year Shep had paid out $500 in warranty
claims and provided for a further $2,000.
(3)
Development costs
During 2018 Shep has capitalised development exp
enditure of $17,800 in accordance with the
3
(4) Further information
Profit befo $
re taxation
Depreciati
on charged
Tax allowa 1
7
ble depreci 5
ation ,
0
0
0

1
8
,
5
0
0

2
4
,
7
0
0

(5) Entertainment
Shep paid for a large office party during 2018 to cel
ebrate a successful first two years of the
Required:
(b)
on
31 December 2018.
8.
(e)
te
ed
fference.
Question 33 SHEP (IV)
Use the information provided in Shep III and assum
e that the government changed the rate of tax to
28% during 2018.
Required:
(b)
on
31 December 2018.
8.
(e)
te
ed
fference.
4
Question 34 AMBUSH
The directors of Ambush are assessing the impact o
f implementing IFRS 9 Financial Instruments on
the company’s financial statements. The directors r
ealise that significant changes may occur in their
accounting treatment of financial instruments and t
hey understand that on initial recognition financial
assets and financial liabilities must be classified int
o certain categories.
Required:
(a)
Explain how financial assets and liabilities
are measured and classified, briefly setting
(b) Ambush made a loan of $200,000 to Bromwi
ch on 1 December 2015. The effective and
stated interest rate for this loan was 8%. Inter
est is payable by Bromwich at the end of each
year and the loan is repayable on 30 Novemb
er 2019. At 30 November 2017, the directors
of
Ambush have heard that Bromwich is in finan
cial difficulties and is undergoing a financial
reorganisation. The directors feel that it is lik
ely that they will only receive $100,000 on 30
November 2019 and no future interest payme
nt. Interest for the year ended 30 November
2017 had been received. The financial year e
nd of Ambush is 30 November 2017.
Required:
(i)
Outline the requirements of IFRS 9 regard
ing the impairment of financial
(ii) Explain the accounting treatment under I
FRS 9 of the loan to Bromwich in the
(17 marks)
Question 35 CONSOLIDATIONS
(a)
Statements of financial position at 31 Dec
ember 2017

Pink Sink

$ $
Equity share ca
pital ($1 shares
)
1 30,000
4
0
, 25,000
0 ——
0 —
0
55,000
——
4 —
0
,
0
0
0

—
—
—
–

1
8
0
,
0
0
0

—
—
—
–

Pink acquired the whole of the issued share capital
of Sink for $65,000 on 31 December
2017.
Required:
position at 31 December 2017. (3
5
(b) Statements of financial position at 31 Dec
ember 2017

Pink Sink

$ $
Equity share ca
pital ($1 shares 30,000
1
) 4
0
, 32,000
0 ——
0 —
0
62,000
——
5 —
4
,
0
0
0

—
—
—
–

1
9
4
,
0
0
0

—
—
—
–

Pink acquired the whole of the issued share capital
of Sink for $65,000 on 31 December
2015, when the retained earnings of Sink were $25,
000.
Goodwill has been impaired by $4,000 since acquis
ition.
Required:
Prepare the consolidated statement of
(4 marks)
ncial position at 31 December 2017.
(c) Facts are as in part (a) above except that 80%
of share capital of Sink was acquired for
–
Inves
tment
in Sin 55,000
k ——
Sundr —
y net 55,000
assets
——
—
Equity share ca
pital ($1 shares 1
2 30,000
) 7
,
0 25,000
0 ——
0 —

55,000
——
4
0 —
,
0
0
0

—
—
—
–

1
6
7
,
0
0
0

—
—
—
–

Pink has chosen to value non-controlling interest ba
sed on its share of the identifiable net
assets in Sink.
Required:
position at 31 December 2017. (4
6
Statements of financial position at 31 D
ecember 2017

Pink Sink

$ $
Inves –
tment
in Sin
k 62,000
——
Sundr —
y net
assets 62,000
——
—
Retai 30,000
ned e
arnin 32,000
gs ——
—
62,000
——
—
Pink acquired 80% of the share capital of Sink two
years ago when the retained earnings of
Sink were $25,000. Pink has chosen to value non-
controlling interest based on its share of the
identifiable net assets in Sink.
Required:
(i)
Prepare the consolidated statement of fina
ncial position at 31 December 2017
assuming that goodwill has been impaired
by $3,200 since acquisition. (4 marks)
(ii)
(19 marks)
Question 36 HUT
On 1 July 2016 Hut acquired 128,000 $1 equity sha
res of Shed. The following statements of financial
position have been prepared as at 31 December 201
7:
$
80,000
L 72,000

$
160,000
112,000
R 24,000
———–
296,000
———–
7
The following information is available.
(1)
At 1 July 2016 Shed had a debit balance of $
11,000 on retained earnings.
(2)
In fixing the bid price for the shares of Shed,
Hut valued the land at $90,000. All Shed’s
plant was acquired since 1 July 2016.
(3) The inventory of Shed includes goods purcha
sed from Hut for $16,000. Hut invoiced thos
e
goods at cost plus 25%.
(4) The fair value of non-controlling interest on a
cquisition was $50,750. On 31 December 20
17
goodwill is valued at $52,050.
Required:
position of Hut as at 31 December 2017.
(15 marks)
Question 37 HOLDING
Holding acquired 18 million of Subside’s equity sh
ares on 1 January 2017 at a cost of $10 per share.
Holding’s accounting year end is 30 September; the
year-end of Subside prior to its acquisition had
been 30 June. In order to facilitate the consolidatio
n process Subside has changed its year end to 30
September and prepared its financial statements for
the 15 months period to 30 September 2017. The

Holding Sub
side
12 months to 15 months to
30 September 30 September
Revenue
Cost of sales 350
Gross profit
Operating expe (20
nses 0)
Interest payabl
e
Dividend from 150
Subside
Profit before ta
x
Income tax exp (72
)
ense
(10
)
15
83
(22)
_____
_____
Prof
it aft _____
er ta
x
(25)
– final paid (15 Septemb
_____ _____
er 2017)
The share capital and reserves of Subside at 30 Jun
e 2016 were:
Share capita
l ($1 shares)

Reserves:
Retained ear _____
nings
Revaluation
surplus
_____
8
The following information is relevant:
(i)
In the post-acquisition period Holding sold g
oods to Subside at a price of $30 million.
Holding had marked up the cost of these goo
ds by 25%. One third of these goods were sti
ll
held in inventory by Subside at 30 September
2017.
(ii) The revaluation surplus of Subside relates to l
and carried at its fair value. It was last revalu
ed
on 30 June 2016. At the date of acquisition th
e value of the land had increased by a further
$4
million.
(iii) The only other fair value adjustment that is re
quired in respect of the acquisition is in relati
on
30 J
une
2016
Cos $m
t on
1 J
uly 100
201
4 (40)
De
pre
ciat
ion
(2 y
ears
)
C 6
ar
ry
in
g
a
m
ou
nt
The plant is being depreciated over a 5-year life usi
ng the straight-line method. This is in line
with group policy. The cost of sales expense of Su
bside contains an amount of $25 million in
respect of depreciation on the plant for the 15
months to 30 September 2017. The
replacement cost of the type of plant used by Subsi
de has increased dramatically since it was
acquired and Holding estimated that the fair value o
f Subside’s plant at the date of acquisition
was $90 million. The estimate of its remaining life
was unaltered.
(iv) Subside’s business activities are not seasonal
in nature and therefore it can be assumed that
profits, and related dividends, accrued eve
nly throughout the 15 month period to 30
September 2017. Dividends paid out of pre-
acquisition profits are to be treated as income
and
should not be deducted from the cost of acqui
ring the shares in the subsidiary.
(v) Non-controlling interest is valued at the prop
ortionate share of the subsidiary’s identifiable
net assets. The value of goodwill was $42 mi
llion at 30 September 2017. Any impairment
should be treated as an operating expense.
Required:
(a) Calculate the consolidated goodwill in r
espect of the acquisition of Subside. (8
(b)
Prepare the consolidated statement of p
rofit or loss of Holding for the year to
30
(25 marks)
9
Question 38 HALEY
The draft statements of financial position as at 31 D
ecember 2017 of three companies are set out below
:

Haley Socrates
Aristotle
$00 $ $00
Assets
Non-current 0 0 0
assets 0
Tangible 18,000 shares 0
ssets 30 16
Socrates 0 0
18,000 shares 75
Investments –
t cost Aristotle –
30 1
–
C
1 80
ur 6 —
re 0 —
nt
— 240
as —
—
se —
ts
2
6
0

—
—

Equity a
nd liabili
ties 3 60
Share cap 0
ital ($1 sh 100
ares)
Ret 1 80
ain 8 —
0 —
ed
ear 240
nin 5 —
gs 0
—
No
—
n- —
cur
ren
t lo 2
ans 6
0

—
—

The reserves of Socrates and Aristotle when the inv
estments were acquired were $70,000 and $30,000
respectively. Goodwill in respect of the acquisition
of Socrates has been fully impaired and a write
down in the investment in Aristotle of $3,000 is req
uired.
Required:
Prepare the consolidated statement of
nancial position as at 31 December 2017
(10 mark
.
s)
0
Question 39 WATER
The draft statements of financial position of three c
ompanies as at 30 September 2017 are as follows:

Water Hydrogen
Oxygen
$ $
$ $ $ $
Assets
Non-current assets
Tangible
assets 69 64 349,4
Investme 7, 8, 00
nts: 21 01
0 0
–
–
80,000 shares –
xygen 184,00
0 –
—— ———
———
— —— –
1,443,210 648,010 349,400
Current assets
Cash at bank 80,331
nd in hand 101,274 95,010
251,065
320,540 286,925
385,717
I 388,619 ———–
n 495,165 ———
——— —
v
—
e
n
t
o
r
y
9 — 804,1
8 — 69
2 — ——
, — ——
Equity an 1 1,452,
d liabilitie 5 179
s 6
——
Sharehold — ——
er’s equity —
—
—

2
,
4
2
5
,
3
6
6
618,321 7, ——
———– 9 72 —–
6 1
Share capital 600,000 200,000
shares)
1,050,000 478,000
Retained earning 1,050,000 678,000
s ———— ———–
1,650,000
———
Lo 1 100,0
an 5 00
not 0
es ,
0
0
0
Trade p 3 2 189,7
ayables 5 21
2
,
1
7
9
———— ————
2,425,366 1,452,179 967,721
———— ———— ———–
You are given the following additional information.
(1)
Water purchased the shares in Hydrogen on 1
3 October 2012 when the balance on retained
earnings was $500,000.
(2) The shares in Oxygen were acquired on 11 M
ay 2012 when retained earnings stood at
$242,000.
(3) The following dividends have been declared
but not accounted for before the year end.
H
(4) Included in the inventory figure for Oxygen i
s inventory valued at $20,000 which had been
purchased from Water at cost plus 25%.
1
(5) Goodwill in respect the acquisition of Hydrog
en has been fully impaired at 30 September
On 30 September 2017 Hydrogen made a bon
(6) us issue of one equity share for every share
held. This had not been reflected in the state
(7) Included in the current liabilities figure of W
ater is $18,000 payable to Oxygen, the amou
nt
receivable being recorded in the receivables f
igure of Oxygen.
Required:
position and notes for Water as at 30 September
2017.
Question 40 HAMISH
Hamish holds 80% of the share capital of Shug (acq
uired on 1 February 2018) and 30% of the share
capital of Angus (acquired on 1 July 2017).
A director of Hamish has been appointed to th
e board of Angus to take an active part in the
management of that company.
Hamish had no other investments, and none of the c
ompanies has any preferred capital.
The draft statements of profit or loss for the year en
ded 30 June 2018 are set out below:

Hamish Shug
Angus
R 171
$0
e 00 ——
v —
e 1,467
12
n ,6
u 14 (621)
(1
e 1, ——
31 —
8)

846
—
—
Op — ——
—
era
1,
tin 29
g p 6
$000
6,160
(5,524)
——–
636
–
——–
636
(275)
——–
361
——–
Statement of change
s in equity (extract) 5 1 250
Included in the inventory of Shug at 30 June 2018
was $50,000 for goods purchased from Hamish in
May 2018 which the latter company had invoiced a
t cost plus 25%. These were the only goods sold by
Hamish to Shug but it did make sales of $180,000 t
o Angus during the year. None of these goods
remained in Angus’s inventory at the year end.
Required:
Prepare a consolidated statement of profit or los
s for Hamish for the year ended 30 June 2018.
There was no impairment of goodwill, or write d
own of the investment in associate, during the
year.
(10 marks)
2
Question 41 KANE
Kane holds investments in two other entities, Vardy
and Rooney. The statements of financial position
of the three entities at 31 March 2018 were as follo
ws:
Kane Vardy Rooney

$000
ASSETS $000 $000
Non-current assets:
Property, plant and equipm 110,000
ent (Note 1) 135,000100,000 Nil
Investments (Notes 1 and –––––––
15,000
) 139,000–––––––110,000
–––––––115,000–––––––
274,000
––––––––––––––
Current assets:
Inventories (Note
4) 27,000
Trade receivables 32,000 35,000
(Note 5) 45,00034,000 8,000
4,000–––––––
Cash and cash eq ––––––– 70,000
uivalents 50,000 70,000–––––––
––––––– 180,000
185,000–––––––
10,0
00 –––––––
–––––
To ––
tal
105,00
as 0
set –––––
––
s
379,00
0
–––––
––
EQUITY AND LIA
BILITIES
Equity 80,000 60,000
Share capital ($1 sh 44,000 55,000
ares) ––––––––––––––
120,00
Retained earnings 0 124,000115,000
––––––––––––––
163,00
To 0
tal ––––––
–
eq
uit 283,00
y 0
––––––
–
Non-current l Total
iabilities:
Long-term b on- 40,000 25,000
orrowings current20,000 8,000
Deferred tax ––––––––––––––
liabiliti60,000 33,000
es ––––––––––––––
30,0 10,000 40,000
00 ––––––––––––––
Current liabilitie
s:
Trade and other 22,000 20,000
payables 30,000 6,000 5,000
––––––––––––––
Short-term borr 00 28,000 25,000
owings ––––––––––––––
–––––
–– 185,000 180,000
Total current l ––––––––––––––
36,000
iabilities
–––––
Total equity and ––
liabilities 379,00
0
–––––
––
Note 1 – Kane’s investment in Vardy
On 1 April 2017 Kane purchased 60 million shares
in Vardy for an immediate cash payment of $100
million. The retained earnings of Vardy at 1 April
2017 were $35 million.
It is the group policy to value the non-controlling in
terest in subsidiaries at the date of acquisition at fai
r
value. The fair value of an equity share in Vardy at
1 April 2017 was estimated at $1·70. This fair
value is considered by the directors of Kane to
be an appropriate basis for measuring the non-
controlling interest in Vardy on 1 April 2017.
3
The terms of the business combination provide for t
he payment of an additional $15 million to the
former shareholders of Vardy on 31 March 2019.
On 1 April 2017 Kane’s credit rating was such that
it
could have borrowed funds at an annual finance cos
t of 8%. The statement of financial position of
Kane includes this investment at its original cost of
$100 million.
The directors of Kane carried out a fair value exerci
se to measure the identifiable assets and liabilities
of Vardy at 1 April 2017. The following matters e
merged:

A property with a carrying amount of $40 mi
llion (depreciable amount $24 million) had a
fair
value of $60 million (depreciable amount $3
6 million). The estimated remaining useful li
fe
of the depreciable amount of the property at
1 April 2017 was 30 years.
 Plant and equipment with a carrying amount
of $51 million had a fair value of $54 million
.
The estimated remaining useful life of the pl
ant at 1 April 2017 was three years.
The fair value adjustments have not been reflected i
n the individual financial statements of Vardy. In
the consolidated financial statements the fair va
lue adjustments will be regarded as temporary
differences for the purposes of computing defer
red tax. The rate of tax to apply to temporary
differences is 30%.
The goodwill arising on acquisition of Vardy has n
ot suffered any impairment since 1 April 2017.
Note 2 – Kane’s investment in Rooney
On 1 October 2017 Kane paid $39 million for 30%
of the equity shares of Rooney. This investment
gave Kane significant influence over Rooney. The
retained earnings of Rooney on 1 October 2017
were $60 million. You can ignore any deferred tax
ation implications of the investment by Kane in
Rooney. The investment in Rooney has not suffere
d any impairment since 1 October 2017.
Note 3 – Vardy’s investment
Vardy’s investment is a strategic equity investment
in Sigma – key supplier. This investment does not
give Vardy control or significant influence over Sig
ma. Sigma is not a joint venture for Vardy. The
investment in Sigma is classified as a financial asse
t at fair value through other comprehensive income
and on 1 April 2017 was included in the financial st
atements of Vardy at its fair value of $15 million.
The fair value of the investment in Sigma on 31 Ma
rch 2018 was $17 million. In the tax jurisdiction in
which Vardy is located unrealised profits on the rev
aluation of equity investments are not subject to
current tax. Any such profits are taxed only when t
he investment is sold.
Note 4 – Intra-group sale of inventories
The inventories of Vardy and Rooney at 31 March
2018 included components purchased from Kane
during the year at a cost of $10 million to Vardy an
d $12 million to Rooney. Kane generated a gross
profit margin of 25% on the supply of these compo
nents. You can ignore any deferred tax implication
s
of the information in this note.
Note 5 – Trade receivables and payables
The trade receivables of Kane included $5 million r
eceivable from Vardy and $4 million receivable
from Rooney in respect of the purchase of compone
nts (see Note 4). The trade payables of Vardy and
Rooney do not include any amounts payable to Kan
e. This is because on 29 March 2018 Vardy and
Rooney paid $5 million and $4 million respectively
to Kane to eliminate the balances. Kane received
and recorded these payments on 2 April 2018.
Required:
position of Kane at 31 March 2018.
(25 marks)
4
Question 42 BERTIE
The following transactions took place at Bertie, a c
ompany reporting in dollars, in the year ended 31
December 2017:
(a) Sale of goods on credit on 1 October 2017 fo
r £50,000. The customer paid on 3 Decembe
r.
(b) Purchases of goods on credit for £60,000.
The goods were received by Bertie on
15
December 2017 and the account had not been
settled by the year end.
(c)
An asset with a useful life of five years was p
urchased on 1 January 2017 for £200,000 cas
h.
(d) A long term loan of £800,000 was taken out
with a bank on 3 December 2017 for the purp
ose
of improving the company’s working capital.
Relevant $
2017 ex
change r
ates are:
£
£
1£
3
Required:
Show how each of the above transactions would
be represented in the financial statements of
Bertie in the year ended 31 December 2017.
Question 43 EPS

$ $
85,400
(31,600
Share of pr )
ofit of assoc 8,900
iate ———
62,700
———
At —
tri
bu
ta
bl
e t
o:
58
,8
00
(3,
90
0)
—
—
—
62
,7
00
—
—
—
Capital structure

$
Equity shares (
100,
50 cent shares) 000
—
—
—
—
100,000
————
Required:
Calculate earnings per share for the year ended
31 December 2017 (with comparative).
5
(b) Bonus issues
The consolidated profit or loss is as in part (a). Cap
ital structure as in part (a), except that a
bonus issue was made on 1 February 2017 of one n
ew bonus share for every four shares
already held, this issue is not reflected in the capital
structure of part (a).
Required:
(c) New shares to new shareholders
Equity capital at 30 September 2017: $100,000 (50
cent shares)
On 1 October 2017 the company issued 200,000 eq
uity shares in order to acquire 90% of the
Year 2017 Year 2016
Company
Profit aft S
er tax Company
Required:
(d) Rights issue
Profit after tax:
Year ended
31 December 2016 $40
Year ended ,00
31 December 2017 0
$50
,00
0
Equity shares (before rig
200,000 (50 cent s
hts issue)
hares)
On 1 October 2017 a rights issue was made of one s
hare for every four held, at $3 per share.
The price quoted on the last day cum rights was $3.
60.
Required:
(e) Convertible loan notes
Equity shares in issue through
$100,000 (25 cent sh
out the year:
ares)
The company issued (in 2015) $100,000 8% loan n
otes convertible into equity shares on the
following alternative bases:
31 Dece
mber 20 $100 loan not
20 e for 140 shar
31 Dece es
mber 20 $100 loan not
21 e for 120 shar
es
Profit after loan inter
est and tax:
Year ended
$40
31 December 2016
,00
Year ended
0
31 December 2017
$50
,00
0
Convertible loan inte
rest expense:
Year ended $10
31 December 2016 ,00
Year ended 0
31 December 2017 $10
,40
0
Assume a marginal rate of tax of 33%.
6
Required:
Calculate basic and diluted earnings per share f
or the year ended 31 December 2017
(f) Options
Equity shares in issue:
$100,000 (25 cent shares)
Options have been granted to directors and certain s
enior executives. These give the right to
subscribe for equity shares between 2020 and 2022
at 80 cents per share. Options were
available in respect of 50,000 shares during the yea
r ended 31 December 2017.
The average fair value of one share during the year
was $1.00 per share.
Profit after tax for 2017 was $50,000.
Required:
Calculate basic and diluted earnings per share f
or the year ended 31 December 2017.
(14 marks)
7
Question 44 AZ
For entities that are engaged in different busine
sses with differing risks and opportunities, the
usefulness of financial information concerning thes
e entities is greatly enhanced if it is supplemented
by information on individual business segments. It
is recognised that there are two main approaches to
segment reporting. In the “risk and returns” approa
ch segments are identified on the basis of different
risks and returns arising from different lines of busi
ness and geographical areas. In the “managerial”
approach segments are identified corresponding to t
he entity’s internal organisation structure.
Required:
(a)
Explain how financial statements are impr
oved by the inclusion of segment informati
on.
(b) Discuss the advantages and disadvantages
of providing segment information using:
(c) AZ, a listed entity, operates in the global m
arketplace.
(i) The major revenue-earning asset is a fleet of
aircraft which are registered locally
and its other main source of revenue comes fr
om the sale of holidays. The directors
are unsure how to identif (3 m
y business segments. arks)
(ii) The company also owns a small aircraft man
ufacturing plant which supplies aircraft
to its domestic airline and to third parties. Th
e preferred method for determining
transfer prices for these aircraft between the g
roup companies is market price, but
where the aircraft is of a specialised nature w
ith no equivalent market price the
companies negotiate a (2 m
price for the aircraft. arks
)
(iii) The company has incurred an exceptional los
s on the sale of several aircraft to a
foreign government. This loss occurred due t
o a fixed price contract signed several
years ago for the sale of second hand aircraft
and resulted through the fluctuation of
the exchange rates betwe (3 m
en the two countries. arks)
(iv)
Duringdecided to discontinue its holiday business du
the e to
r the competition in the sector. This plan had been
mpanyapproved by the board of directors
and annou (
nced in the 3
press. m
a
r
k
s
)
(v)
The company owns 40% of the equity shares
of Eurocat, an unlisted company
which specialises in the manufacture of aircra
ft engines and has operations in China
and Russia. The investment is accounted
for by the equity method and it is
proposed to exclude the company’s results from seg
ment assets and revenue.
Required:
Discuss the implications of each of the above poi
nts for the determination of the segment
information required to be prepared and dis
closed under relevant International
Financial Reporting Standards.
Note: The mark allocatio
n is shown against each p (25
oint. mar
ks)
8
Question 45 TAB
TAB, a UK company, has recently acquired four lar
ge overseas subsidiaries. These subsidiaries
manufacture products which are totally different
from those of the parent company. The parent
company manufactures paper and related products
whereas the subsidiaries manufacture the following
:
Product Location
Spain
Korea
France
Thailand
The directors have purchased these subsidiaries in o
rder to diversify their product base but do not have
any knowledge on the information which is req
uired in the financial statements, regarding thes
e
subsidiaries, other than the statutory requirements.
The directors of the company realise that there is a
need to disclose segment information but do no
t understand what the term means or what the
implications are for the published financial stateme
nts.
Required:
(a)
Explain to the directors the purpose of seg
ment reporting of financial information.
(b) Explain the criteria which should be used t
o identify the separate reportable segments
.
(c) State which information should be disclose
d in financial statements for each segment.
(
(17 marks)
9
Question 46 DAWES (IV)
On 20 September 2017 Dawes sold its loss-making
engineering operation to Manulite. Dawes account
s
for its operations on a divisional basis, but they are
not separate legal entities. The sale was completed
at an agreed value of $30 million. Associated dispo
sal costs were $2 million. The book values of the
division’s net assets at the date of sale were $46 mil
lion. The revenues and post-tax losses for the
period 1 October 2017 to the date of sale were $22
million and $4.5 million respectively.
The engineering division is currently being sued for
damages relating to a faulty product. Independent
engineering consultants have prepared a report whi
ch confirms that the product was faulty, but this wa
s
partly due to a component that was manufactured b
y Holroyd as a sub-assembly. The damages and
costs are estimated at $5 million and the level of co
ntributory negligence of Holroyd is considered to b
e
40%. The directors of Dawes believe that, as the di
vision has been sold, there is no need to provide for
the claim damages. Dawes operates in a country w
here a limited liability company and its shareholder
s
are separate legal persons.
The above amounts are material in the context of th
e financial statements of Dawes.
Required:
Advise the directors on the correct treatment of
the disposal of the engineering division and the
claim for damages. Your answer should be supp
orted by appropriate calculations.
Question 47 ETERNITY
Eternity is finalising its accounts for the year ended
31 December 2017. The following events have
arisen since the year and the financial director has a
sked you to comment on the final accounts:
At 31 December 2017 trade receivables inclu
(1) ded a figure of $250,000 in respect of Wico.
On
8 March 2018, when the debt was $200,000,
Wico went into receivership. Correspondenc
e
with the receiver indicates that no dividend w
ill be paid to unsecured creditors.
(2)
h 2018 Eternity sold its former head office bu
On ilding for $2.7 million. At the year
Marc end the building was unoccupied and carried
at a value of $3.1 million.
Inventories at the end of the year included $6
(3) 50,000 of a new electric tricycle. In January
2018 the EU declared the tricycle to be unsaf
e and prohibited it from sale. An alternative
market is being investigated, although the cur
rent price is expected to be cost less 30%.
(4) Future, an overseas subsidiary was nationalis
ed in February 2018. The overseas authoritie
s
have refused to pay any compensation. Futur
e’s net assets are valued at $200,000 at the ye
ar
end.
(5) Freak floods caused $150,000 damage to a br
anch of Eternity in January 2018. The branch
was fully insured.
(6) On 1 April 2018 Eternity announced a one-
for-one rights issue aiming to raise $15 millio
n.
Required:
Comment on the accounting tre
atment of the matters described
(12 m
above.
arks)
0
Question 48 RP GROUP
Related party relationships and transactions are a
normal feature of business. Entities often carry on
their business activities through subsidiaries and as
sociates and it is inevitable that transactions will
occur between group companies. Until relatively re
cently the disclosure of related party relationships
and transactions has been regarded as an area whic
h has a relatively low priority. However financial
scandals have emphasised the importance of an acc
ounting standard in this area.
Required:
(a)
Explain why the disclosure of related p
arty relationships and transactions is an
(b) Discuss the view that small entities should
be exempt from the disclosure of related
The RP Group, merchant bankers, has a num
(c) ber of subsidiaries, associates and joint ventu
res
in its group structure. During the financial ye
ar to 31 October 2017, the following events
occurred:
(i) The company agreed to finance a manageme
nt buyout of a group company, AB. In
addition to providing loan finance, the compa
ny has retained a 25% equity holding
in the company and has a main board director
on the board of AB. RP received
management fees, interest payment (6 mark
s and dividends from AB. s)
(ii)
On 1 July 2017, RP sold a wholly owned sub
sidiary, X, to Z, a listed entity. During
the year RP supplied X with second hand offi
ce equipment and X leased its factory
from RP. The transactions were all con (4 marks)
tracted for at market rates.
(iii)
The retirement benefit scheme of the group is
managed by another merchant bank.
An investment manager of the group retirem
ent benefit scheme is also a non-
executive director of the RP Group and receiv
ed an annual fee for his services of
$25,000 which is not material in the group co
ntext. The company pays $16 million
per annum into the scheme and occasionally t
ransfers assets into the scheme. In
2017, non-current tangible assets of $10 milli
on were transferred into the scheme
and a recharge of administrative costs of $3
million was made. (5
Required:
Discuss whether each of these events should be d
isclosed in the financial statements of
(25 marks)
1
Question 49 EPTILON
Eptilon is listed in a jurisdiction that allows entities
to file financial statements that are prepared under
either local accounting standards or International Fi
nancial Reporting Standards (IFRSs). The stock
exchange on which Eptilon is listed does not requir
e any interim financial statements and Eptilon does
not currently produce such statements. Eptilon is s
eeking a listing on another stock exchange that also
allows financial statements to be filed that are prep
ared under IFRSs but would not accept financial
statements that are prepared under the local account
ing standards that are relevant to Eptilon. Eptilon
wishes to adopt IFRSs for the first time in its
financial statements for the year ending 31 Decem
ber
2017. The Chief Executive Officer has two questio
ns regarding the adoption of IFRSs in 2017:
(1) I am aware that the adoption of IFRSs will re
quire us to make a number of changes to our
existing accounting practices and that the IAS
B has issued IFRS 1 to detail the procedures
that need to be undertaken when adopting IF
RSs for the first time. I know very little abou
t
this standard and need a summary of wha
t IFRS 1 requires us to do together with
an
indication of any practical difficulties this
will give us. Please provide me with this
information addressing issues concerni
(12 mark
ng the annual financial statements.
s)
(2)
One of the most sensitive aspects of the chan
ge we are making is the future need to disclos
e
transactions with certain related parties. Plea
se outline the disclosures that are needed and
the
parties that (
the disclosu
res apply to
.
Required:
Draft a reply that answers the questions raised b
y the Chief Executive Officer. Your answer
should refer to specific International Financial
Reporting Standards where relevant.
(19 marks)
2
Answer 1 IASB
(a)
Objectives of IASB

To develop, in the public interest, a si
ngle set of high quality, understandabl
e and 2
enforceable global accounting standar
ds that require high quality, transparen
t and
comparable information in financial
atements to help users make economic
decisions.
 To promote the use and ri 1
gorous application of tho
se standards.
 To take account of the needs of a r 1
ange of sizes and types of entity in
diverse
economic settings.
To promote and facilitate adoption of 1
 International Financial Reporting
Standards (IFRSs), through the conver
gence of national accounting standard
s and
IFRSs.
(b) Discussion Paper (DP) v Exposure Draft
(ED)

The DP is an optional stage in the IASB’ 2
s due process, although the IASB will
normally adopt a DP as the first stage
a new project, before the ED stage. Due
process in the development of an
RS requires the publication of an
in
accordance with IASB’s Constitution.
The DP concentrates on the issues to 2
 ddressed by a proposed IFRS whereas
the ED includes the proposed IFRS
nd transitional provisions. The ED
summarises the Board’s considerations
a separate “Basis for Conclusions”.
 Both documents are issued
period which 1½
or public comment for normally
four months.

DP requires only a simpl 2
e majority of the Board Members presen
t ————
at a meeting attended by 60% or more max 4
f the Board Members. An ED requires ————
“super majority” of members to vote
favour of the document. (A super
majority is 10 of the 16 members or
embers if there are15 or fewer members.
)
(c) Steps taken by IASB
To ensure consistent interpretation of IFRSs

the revision of
International Financial Reporting Standards t
hat had “alternative accounting
treatments”. These alternatives have now be
en eliminated and disclosure
requirements reviewed in the context of “Th
e Framework”.
Issue of
a newsle
 Publication of Discussion
tter “IAS
Papers – to make IASB’s i B update
 ntentions clear. ” – provi
ding a st
aff f the tentative
umm decisions reached at IASB meetings.1 each,
ary max 3
————
 Issue of interpretations by the Int
ernational Financial Reporting St ————
andards 10
Interpretations Committee (IFRS ————
IC).
ed.
Answer 2 FAITHFUL REPRESENTATION
(a)
Possible reasons for omitting assets and lia
bilities from a statement of financial positi
on

Companies are concerned to maintain low ge
aring ratios. This is because brokers
and analysts tend to favour companies with r
elatively low levels of gearing. “Off
balance sheet finance” schemes have been de
signed to conceal information about
the actual amount of debt finance.
Such schemes can increase a company’s borrow
ing capacity by avoiding debt
covenants or by misleading investors about the true
level of gearing.

Accounting ratios such as return on capital e
mployed can be improved if certain
assets in their development stage can be kept
off the statement of financial position
until they produce a higher level of profit. O
nce the development stage is complete,
the assets and related borrowing can then be
brought into the statement of financial
position.

It has been argued that stock market percepti
ons of the likelihood of a rights issue
can be affected by the reported level of borro
wings. If a listed company has high
levels of borrowing, then the likelihood of fi
nance being raised by a rights issue is
perceived to be higher and this is said to adv
ersely affect the share price. “Off
balance sheet” transactions can lower the stat
ed level of borrowing and the
expectations of a rights issue.

Some companies have devised “special purp
ose entities” (SPEs) whose assets and
liabilities are effectively controlled by the re
porting company but excluded from
consolidation (because an SPE does not meet
the legal definition of a subsidiary).
One reasons for doing this is if the subsidiar
y is loss-making, its losses would
otherwise have to be reported as post-
acquisition losses in the group accounts.

Many “off balance sheet finance” schemes ar
e entered into for genuine commercial
reasons. For example, to provide a means of
sharing the risk in a joint venture
between a merchant bank and a company; th
e merchant bank bears most of the
financing risk and the company bears most o
f the operating risk. Financial markets
now allow companies to protect themselves f
rom certain risks, and such transactions
are not undertaken to mislead users of financ
ial statements but because they are
judge
d to
be
the
est
terest
s of
he
mpan
y.
(b) Need for substance over form
Since the 1980s, many complex arrangements have
been developed which, if accounted for in
accordance with their legal form, would result in fi
nancial statements that did not reflect the
commercial effect of the arrangement. Rapid innov
ation in the financial markets and new
arrangements for financing assets has led to accoun
ting practices that conceal the true nature
of the transactions.
These developments raised questions about the natu
re of assets and liabilities and when they
should be included in the statement of financial pos
ition. The concept of substance over form
is fundamental to addressing the serious concer
ns raised about “creative accounting”
practices:
 Such practices conflict with the fundamental
aims and objectives of financial
statements. Users of financial statements mu
st be able to appreciate the full effect
of such transactions on financial position and
performance, but cannot if there is
insufficient information about them.
ed.
Significant (“bad”) press comment about the

use of such arrangements brings into
question the credibility of standard setters.
 Such schemes raise doubts about the compar
ability, consistency and truth and
fairness of financial statements. If financial
statements and related notes do not
allow proper assessment of a company’s res
ults, a significant problem exists.
(c)
Transactions
(i) Sale and repurchase
Bill has the option of buying the land back at any ti
me in the next five years but is not
compelled to do so, and therefore is protected from
any collapse in the value of the land
below $20 million. This risk has therefore bee
n transferred to Tail in return for the
commission of 1% above the current bank base rate
. However, Bill has retained the benefits
of ownership and can also benefit from any increas
e in the value of the land by exercising its
option. At the time of the agreement, both parties
must have anticipated that the option would
be exercised. Bill would presumably not sell the la
nd at below the current market price. Tail
must have anticipated that any profit from the contr
act would be derived from the receipt of
the “commission” payment from Bill. It is unlikely
that the land value would fall below one
third of its present value and therefore the degree of
risk transferred to Tail is quite minimal.
The essence of the contract is effectively a loan of
$20 million secured on the land held by
Bill. Accounting practice would dictate that the co
mmercial substance of the transaction
reflected a financing deal rather than the legal form
of a sale.
IFRS 15 Revenue from Contracts with Customers
backs up this view by stating that if an
entity has a right or obligation (a forward or call op
tion) to repurchase an asset then the
customer (buyer) does not obtain control of the asse
t as the customer is limited in its ability to
direct the use of the asset.
(ii) Consignment inventory
The main problem surrounding this example is the
determination of the substance of the
agreement. The accountant has to determine wheth
er Sprake has bought the cars or whether
they are on loan from Grey.
There are certain factors which point towards the tr
eatment of the cars as inventory of Sprake.
Sprake has to pay a monthly rental fee of $100 per
car and after four months has to pay for the
cars if they are unsold. This could be regarded as a
financing agreement as Sprake is
effectively being charged, by Grey, for interest whi
ch varies with the length of time that
Sprake holds the inventory. Sprake is also bearing
any risk of slow movement of the cars.
The purchase price of the car is fixed at the price w
hen the car was first supplied. Thus any
price increases in the product are avoided by Sprak
e which would indicate that there is a
contract for the sale of goods. Sprake has to insure
the cars and is partially suffering some of
the risks of ownership of the vehicles.
Grey cannot require Sprake to return the inventory t
o them and further, Sprake is effectively
bearing the obsolescence risk as a penalty is charge
d if Sprake returns the inventory to Grey.
In conclusion, the above factors indicate that the in
ventory of cars is an asset of Sprake at the
time of their delivery and should be accounted for a
ccordingly.
Again, IFRS 15 requires the evaluation of a contrac
t to identify which party has control of an
asset at a particular point in time.
ed.
Answer 3 FOREST
(a)
Importance
In order to be useful, information contained in finan
cial statements must be relevant and
faithfully represent the events and transactions that
have occurred in the period. This can only
be achieved if the substance of transactions is recor
ded. If this did not happen the financial
statements would not represent faithfully the transa
ctions and other events that had occurred.
Although there are many instances where there are
genuine commercial reasons for contracts
and transactions adopting the legal form that they d
o (e.g. to create a secure legal title to
assets), equally the legal form is often used to achie
ve less desirable purposes. In general
these amount to manipulating the financial stateme
nts to create a favourable impression. The
typical outcomes of such manipulation are:
the omission of assets, and particularly liabil
–
ities, from the statement of financial
position;
–
improved profits and profit smoothing;
– improvements in other performance measure
s such as earnings per share, liquidity
ratios, profitability ratios and gearing.
Clearly such effects are not helpful to users of finan
cial statements and thus it is important
that the substance of a transaction should be record
ed in order to avoid the above distortions.
(b) Transactions
The following important features are often found in
transactions or arrangements where the
substance may be different to the legal form. These
features need to be fully understood and
investigated in order to determine the substance of
a transaction:
(i) Separation of ownership and beneficial u
se
The separation of legal title from the benefits and ri
sks related to an asset has been used to
avoid assets, and often their related financing, from
being recognised in the statement of
financial position. Where an asset is “sold” but the
seller still substantially enjoys the risks
and rewards of ownership, it should remain an asset
of the “seller”. This is the principle used
in IFRS 16 Leases to record right-of-use asset lease
s. Often when the substance of an
agreement is applied to transactions it will have a v
ery different effect on the statement of
financial position than if the legal form is recorded.
For example an asset that is “sold” and
leased back for the remainder of its useful life is in
substance a financing arrangement and not
a “sale” at all. The asset should remain in the state
ment of financial position and the
“proceeds” should be treated as a loan.
(ii) Linking of transactions
A common arrangement is to link a series of transa
ctions. It is not always obvious when
transactions are linked, but it would be difficult to a
ppreciate the commercial effect without
considering such transactions as a “whole”. Invent
ories may be “sold” to a third party. A
condition of the sale is that there is an option giving
the seller the right to buy back the
inventory at a future date. This is often at a predete
rmined value which is designed to give
the purchaser what is, in substance, a return on a lo
an. When all of the “linked” transactions
are considered together it becomes apparent that thi
s is again a financing arrangement and
should be recorded as such. This type of transactio
n is commonly referred to as a “sale and
repurchase”, with each party to the transaction havi
ng either an option to repurchase or resell.
The contract would be worded in such a way that o
ne of the parties would invoke their option
and the goods would legally return to the original s
eller.
ed.
The “seller” would not recognise a sale from the tra
nsaction nor would they derecognise the
asset but would be required to recognise a liability t
o the other party, emphasising that in
substance this is a financing transaction.
(iii) Sale price at other than fair value
Where assets are sold at prices below or above their
fair values there is likely to be related (or
linked) transactions that will explain the reason for
it. A selling price above fair value is
almost certain to be a form of loan which will be lin
ked to future transactions that will affect
its repayment. A selling price below fair value is li
kely to be a way of deferring the profit on
sale. This may be affected by reducing a future ite
m of expense. For example, an entity
could “sell” some plant to a third party below its fai
r value. The “sale” is linked to an
agreement to lease the plant back in future years at
a rental below commercial rates. In effect,
the profit foregone on the sale is being used to redu
ce future rental payments; the profit on
the sale is then spread over several accounting peri
ods rather than reported in the year of sale.
IFRS 16 has tried to eliminate such “profit smoothi
ng” associated with sale and leaseback
arrangement by requiring any non-market terms to
be accounted for as a prepayment of lease
payments (below-market) or additional financing (a
bove market).
(c) Sale of timber
(i) Legal form
Forest – Profit or loss year to 31 March
2016 2017 2018
Total
$000
Revenues nil
Cost of sales
______ ______ ______ ______
Gross profit
______ ______ ______ ______
The cost of sales in the year 2018 is the original sell
ing price of $15 million plus compound
interest at 10% for the previous three years (see bel
ow).
Forest – Statement of financial position as at 31
March
2016 2017 2018
$000 $000 $000
Inventory nil nil nil
Loan nil nil nil
(ii) Substance
Forest – Profit or loss year to 31 March
$000 $000 $000 $000

Revenues nil nil 25,000 25,000
nil nil (12,000) (12,000)
Cost of sale ______ ______ ______ ______
s nil nil 13,000 13,000
(1,500) (1,650)
Gross profit
Interest (@ 10%______ ______ ______ ______
)
Profit/(loss)
______ ______ ______ ______
ed.
Forest – Statement of financial position as at 31
March
2016 2017 2018
$000 $000 $000
Inventory 12,000 12,000 nil
Loan 15,000 15,000 15,000
plus accrued interest
1,500 3,150 4,965
19,965
Repaid 31 March 20 (19,965)
18
nil
As can be seen from the figures in (i) if the legal fo
rm of the transaction is applied it results in
a spreading of the profit, some in the year to
31 March 2016 the rest in 2018. The
arrangement could have been made such that some
of the “sale” to the bank was made in
2017 thus reporting a profit in all three years. Also
no inventory or loans appear in the
statement of financial position; this improves many
ratios, particularly gearing.
In contrast (ii) applies the substance of the tran
saction and (ignoring Forest’s other
transactions) this results in “losses” in 2016 and 20
17 and a large profit in 2018; there is no
profit “smoothing”. It also shows an interest charg
e, which in (i) is “lost” in the cost of sales
figure. In addition both the inventory and the loan (
including accrued interest) appear in the
statement of financial position. Note both methods
eventually report the same profit.
Answer 4 MELD
(a)
Statement of profit or loss and other com
prehensive income
t
Revenue
Cost of sales
and expenses
(W)
Operating profit
Interest payable a
nd similar charge
s
P
r
o
f
i
$
472,800 68,
(360,676)
––––––– 324
112,124
(15,000)
–––––––
97,124
(28,800)
–––––––
Profit for the year
Other comprehensive inco
mes
Gain on revaluation (28,80 16,80
0 – (19,200 – 7,200)) 0
––––
–––
Total comprehensive
income for the year 85,12
4
––––
–––
ed.
(b) Statement of changes in equity
Share
Revaluation Retained Total
capita
l surplus earnings
$
At 1 May 2017
As previously 48,000168,000456,000
ated (14,400)(14,400)
240,00 ––––––– –––––––
Prior year adjust –––––––
ment 0 153,600441,600
–––––– 48,000
–
240,000
Total comprehensiv
e
income for year – 16,800 68,324 85,124
Dividends (21,600)(21,600)
Transfer retained
rnings – (3,360) 3,360 –
––––––– –––––––
(16,800 ÷ 5 years)240,000––––––––––––––505,124
––––––– 61,440203,684–––––––
–––––––
At 30 Apri
–––––––
l 2018
WORKING
Cost of sales and expenses

$
376
,80
Goodwill impair 0
ment
Error re develop (15,
ment costs 000
)
576
Amortisation
Expenditure in (4,800)
curred
3,100
——
—–
360,67
6
——
—–
Answer 5 FRESNO GROUP
Statement of changes in equity for the year ende
d 31 January 2018

Share
RevaluatRetain
Share ion ed Total
premiu $m
$m m surplus earnin
$m $m gs
$m
Brought 5 2 7 1,395
forward 5 1 7
5 5
Total c
ompreh 1 540
ensive 6
income (15)
for the 5
period (
W) (1
Divide 5)
nd
Issue of shar 1 4
e capital 5
0
Transfers
On asset sold –
(5
the period 4) –
5
Depreciating ass ( 4 –––––
ets –– – 9)
– – 9 2,520
50 – – – –––––
Carri 0 5 – –
ed for –– 0 – –
5 9
ward –
– 5 8
2 8
–
7 –
–
– –
– –
–
ed.
WORKING – Statement o
f total comprehensive inco $m
me 300
Profit befor _
e taxation
– continuin
g operation
s
Provision f
or loss on d
iscontinued
operation
Profi
t bef
ore t (
axati
on
Taxa
tion
Prof
it fo 3
r the
year
Rev
alua
tion
surp
lus
Total comp
_
rehensive i
ncome
Answer 6 LEONARD

2018
2017

As restated
$000
97,250
C (60,58
0)
Adm ——
—
inistr
ative 36,670
expe
(31,26
nses 0)
——
—
T
5,410
P
(2,260)
——
—
3,150
——
—
Statement of changes in equity – extract
R
A
s
p
r
e
v
i
o
u
sl
y
st
a
t
e
d
d pr
ofit
for t
he y
ear
At 30 June 20
18 (26,162 – 1
80 (W3))
—
———
23,500
4,982
(2,500)
———
25,982
WORKINGS
(1) 2
C
os 0
1
t 8
of
sa
le

s

2
0
1
7

A $000
s 56,010
p (870)
r 600
e ———
v 55,740
i
o ———
u
s
l
y
L
e
s
s
A
m
o
rt
i
s
a
ti
o
n
Add E
xpendit
ure in y
ear
A
s

r
$000
60,530
(450)
500
———
60,580
———
ed.
(2) Prior year adjustment (in statement of fin
ancial position at 30 June 2017)
Adjustment is the elimination of the $450,000 asset
. This gives the figure for the prior year
adjustment in the statement of changes in equity (i.
e. adjustment in opening balances for
current year).
(3) Statement of financial position at 30 Jun
e 2018
Adjustment is $180,000 asset to be eliminated.
Answer 7 KEY CHANGES
(a)
Calculation of profit or loss on disposal
The profit or loss on the disposal of an asset is calc
ulated as the difference between the net
sale proceeds and the carrying amount, whether car
ried at historical cost (less any write
downs) or at valuation. The reason for this approac
h to determining the profit or loss on the
disposal of an asset lies in the “balance sheet appro
ach” to the recognition of gains and losses
set out in the IASB’s “Framework”. Recognition o
f income and expenses (including gains
and losses) results in increases and decreases in equ
ity (other than dividends and new share
issues). Consequently once an asset has been reval
ued in the statement of financial position,
any subsequent transactions must be based on this v
alue.
(b) Criteria
(i) Recognition
For an item to be recognised in the financial statem
ents it must:
 meet the definition of an element of the fina
ncial statements;

be probable that any future economic benefit
associated with the item will flow to or
from the entity;

be measured reliably.
Thus, before an item can appear in profit or loss it
must meet the definition of an “income” or
an “expense”. Also a transaction or event must hav
e occurred which has resulted in a gain or
loss, and this transaction must be capable of measur
ement. Where a change in assets is not
offset by an equal change in liabilities a gain or loss
will result (unless the change relates to
the owners of the entity).
(ii)
Profit or loss or other comprehensive inc
ome
All gains and losses must be recognised in the
statement of profit or loss and other
comprehensive income. Gains that are earned and r
ealised are recognised in profit or loss;
those earned but not realised are recognised in othe
r comprehensive income. The same gains
and losses cannot be recognised twice. A revaluati
on gain on a non-current asset should not
be recognised a second time when the asset is sold.
This latter point explains the logic of the
above definition.
For a gain to be earned there must be no material ev
ent to be performed. For example, the
performance under a contract must have been c
ompleted. For a gain to be realised, a
transaction which is measurable must have occurre
d, or a “capital” item (e.g. non-current
asset or loan) must have been sold/redeemed resulti
ng in cash or cash equivalents, or a
liability must have ceased to exist. Thus other com
prehensive income recognises those items
which do not meet the above “realisation” criteria.
ed.
Some items that have initially been recognised in ot
her comprehensive income are later
reclassified to profit or loss when the relevant asset
or liability is de-recognised. Items that
are reclassified include:
 gains/losses on cash flow hedges; and
 cumulative exchange differences in respect
of foreign subsidiaries.
Other items that have initially been recognised in ot
her comprehensive income cannot be
reclassified at a later date. Items that are not reclas
sified include:
 revaluation surplus; and
 fair value differences in respect of financial
assets classified as fair value through
other comprehensive income.
IFRS deals with reclassification (or not) on an item
by item basis, there is no one specific rule
stating what will or will not be reclassified.
(c) Annual
ects StatementProfit OtherRevaluatio
of n
financial
or loss comprehensive surplus
Year ended position income
31 December 2013

25,000

31 December 2014
Cost 25,000
(9,000) (4,000)
Carrying amount16,0
Revaluation surpl 2,000
00 2,0
us
00
31 December
015 18,000
Valuation (3,000) (3,000) (333)
Depreciation (Note
15,000 1,667
Carrying amo
unt
31 December 2016
Valuation 18,000

Revaluation loss (4,000) (2,333)
ed.
31 December 2017
Valuation 8,000

Profit on sale 500 500
Notes:
As the entity wishes to maximise distributabl
(1) e profit a transfer from the revaluation surplu
s to
retained earnings of the difference in deprecia
tion charge based on original historical cost
(16,000 ÷ 6 years = $2,667) and revalued am
ount (18,000 ÷ 6 years = $3,000) will be mad
e.
If this amount were transferred to profit or los
s it would contravene the rule that amounts
previously reported in other comprehensive i
ncome should not pass through profit or loss.
(2) As there remains a revaluation surplus of $1,6
67 it is highly likely that this will be utilised
first in the fall in value of the asset with the re
maining loss of $2,333 being charged against
profit or loss.
Answer 8 TELECAST INDUSTRIES
(a)
Framework criteria
The Framework approaches income and expense
recognition from a “balance sheet
perspective”. The definition of income encompasse
s both revenue and other gains, whilst that
of expense includes losses. Recognition of gains an
d losses takes place when there is an
increase or decrease in equity other than from contr
ibutions to, or withdrawals from, capital.
Thus increases in economic benefits in the form of i
nflows or enhancements of assets or
decreases in liabilities result in income or gains; an
d decreases in assets or increases in
liabilities results in expenses or losses.
Although the definitions identify the essential featu
res of assets and liabilities they do not
specify the criteria that need to be met before they a
re recognised. Recognition is the process
of incorporating in the financial statements an item
that meets the definition of an element
(e.g. an asset or a gain). It involves both a descripti
on in words and an assignment of a
monetary amount. An item meeting the definition i
s recognised if:
 it is probable that any future economic benef
it associated with the item will flow to
or from the entity; and

the item has a cost or value that can be meas
ured (in monetary terms) with reliability.
The above are generally regarded as tests of realisat
ion or of being earned. Failure to
recognise such items in the financial statements is n
ot rectified by disclosures in the notes or
explanatory material. However such treatment may
be appropriate for elements meeting the
definitions of an item, but not its recognition criteri
a (e.g. a contingency).
(b) Telecast Industries (TI)
(i) Warmer Cinemas
TI has given the licence to show the film to Warme
r cinemas for a period of six months. The
performance obligation is the granting of the licenc
e to show the film. The licence in effect
gives TI the right to sales (usage) based royalties on
ce the ticket sales occur.
ed.
TI will recognise revenue at a point in time which i
s based on the ticket sales achieved by
Warmer Cinemas. Therefore TI should accrue for
15% of Warmer Cinemas box office
revenues from this film for the period 1 July 2017 t
o the year end of 30 September 2017. The
only problems here would be prompt access to
the relevant information from Warmer
Cinemas and the possibility, which is probably rem
ote, of a bad debt.
(ii) Big Screen
TI identifies that the performance obligation is the
granting of the licence to show the film as
many times as the customer wishes in the six month
period. As TI will not be making any
amendments to the recording the granting of the lic
ence is static and so TI concludes that the
nature of the promise is the transfer of the licence g
iving the customer the rights to show the
film from the point in time that the licence was gra
nted. Therefore, the promise to grant the
licence is a performance obligation satisfied at a po
int in time. TI will therefore recognise the
revenue on the granting of the licence in full and in
clude the $10,000 fee as revenue in year
ended 30 September 2017.
(iii) Global satellite
The contract with Global Satellite is very simil
ar to the one with Big Screen. The
performance obligation is the granting of the licenc
e to Global Satellite. TI has performed
that obligation and has no intention to change the fi
lm, so revenue will be recognised at a
single point in time. As the obligation has been per
formed in the year ended 30 September
2017, revenue will be recognised in this period. Ho
wever, although Global Satellite will be
paying a total of $3 million that payment will be ov
er a three-year period and therefore the
contract includes a financing element. The revenue
recognised will be the discounted amount
of the $3 million cash flow with the difference bein
g recognised over the three-year period as
interest income.
Answer 9 MESON
General considerations for revenue recognition
prescribes the principles to be considered when
identifying when and how much revenue should be
recognised. The basic principle of IFRS 15 is that
revenue should only be recognised once the selling
entity has performed its obligation regarding the
sale of goods or services. Only when this obligatio
n has been performed can revenue be recognised;
the obligation may be performed at a point in time
or over a period of time; clearly this can affect the
timing of revenue recognition (i.e. in which reporti
ng period). Meson has a number of different types
of contract, each having its own performance oblig
ation, which must be considered separately.
Having identified individual contracts, the perform
ance obligations and the value of each component,
the transaction price will be allocated to component
s (when there is more than one obligation) and
revenue recognised when each obligation has been
performed. Meson’s transactions relate to the sale
and licensing of software packages, software de
velopments to customer order, maintenance and
franchise arrangements; the related cash flows will
have no bearing on when and how much revenue is
recognised.
ed.
(a) Design and sale of software and the retail
ing of hardware
There are three distinct transactions that Meson nee
ds to consider in the revenue recognition
process, bespoke software to order, “off-the-shelf”
packages and computer hardware.
(1) Bespoke software to order
It is likely that Meson will take a period of time to
ensure that the software is to the customer’s
specification, as it is being made to order. Presuma
bly a contract exists and the performance
obligation is to construct and deliver the software t
o the customer. It is likely that Meson will
have priced each contract which appears to be stand
-alone; so the main issue is at what point
in time should revenue be recognised or should it b
e recognised over a period of time.
Revenue should be recognised over a period of tim
e if one of the following criteria is met:
 The customer receives and consumes the ben
 efits as the obligation is performed;

The entity’s performance creates or enhances
an asset that the customer controls; or
The performance does not create an asset wit
h an alternative use and the entity has
an enforceable right to payment for performa
nce completed to date.
For bespoke software it is unlikely that the custome
r will receive the asset until it is complete.
The customer will not take control of the software u
ntil it is completed and Meson will
probably not have a right to payment until the softw
are has been tested to the customer’s
specifications. As none of the three criteria are met
Meson must recognise revenue at a single
point of time.
That point in time will be when the customer obtain
s control of the software. Until then
Meson will recognise the costs incurred as an inven
tory asset. Although the customer makes
stage payments this does not alter when revenue sh
ould be recognised. If the software could
be broken down into a number of separate elements
and the customer takes control of each
element as it is completed then this would be releva
nt (and revenue may be recognised over a
period of time in this instance).
If the contract also includes a maintenance ele
ment then this is likely to be a separate
performance obligation and therefore distinct from
the sale of the developed software. The
price will need to be allocated against the two perfo
rmance obligations, based on the stand-
alone selling prices of the customised software and
the maintenance contract.
The terms of the maintenance contract (e.g. if it is f
or monthly maintenance or only when
problems arise) will be relevant to the timing of the
revenue recognition for the maintenance
element. The same three criteria, as above, must be
considered. For a monthly contract it is
likely that revenue will be recognised over a period
of time; but for ad hoc maintenance it is
more likely that revenue will be recognised at a poi
nt in time.
(2) Off-the-shelf
The timing of revenue recognition for off-the-shelf
software packages should be relatively
straightforward. By the nature of retail trade there
will be no contract until the customer’s
offer to purchase the software has been accepted by
Meson. Revenue will therefore be
recognised once the software has been handed over
to the customer when the customer pays
for it. If there is a requirement for Meson to
install the software in the customer’s
environment then this will be considered as a separ
ate performance obligation and the price of
the contract will need to be separated into these two
components. If installation is a lengthy
process this could defer recognition of revenue unti
l the process has been completed and the
customer has control of the complete package.
ed.
(3) Retailing of hardware
If the contract for the sale of computer hardware is
straight forward (i.e. the customer takes it
and installs it themselves) revenue will be recognis
ed at the point in time when the customer
takes delivery. Again, if Meson carries out the
installation the contract will have two
components which must be considered separate per
formance obligations and may defer the
recognition of revenue.
(b) Retail shop licensing operation
The franchise agreement includes several performa
nce obligations; the sale of software and
hardware and the supply of know-how, advertising
and administrative back-up. The sale of
software and hardware will follow the same consid
erations as a normal retail sale (see above).
The remainder could be considered collectively as “
intellectual property”. It appears that
Meson is providing a service over the period of the
franchise agreement. If the customer
simultaneously receives and consumes benefit from
the service provided by Meson or Meson’s
performance enhances the asset then revenue will b
e recognised over a period of time.
If the software and hardware are not paid for separa
tely then the price of the franchise
agreement will need to be allocated to the distinct p
erformance obligations. An up-front fee
may include the software and hardware and the reg
ular fees just the intellectual property
whereas regular larger payments (with no up-front f
ee) would reflect all components of the
contract. If the latter, the allocation of the fee will
need to consider the stand-alone selling
prices of the software and hardware.
In both cases the fees paid will be based on turnove
r of the shops; this turnover would
therefore give the basis for revenue recognition, it i
s an output method.
Answer 10 WILLIAM
(a)
Statement of profit or loss (extracts)
For the year ended 31 December
ofit/ 2014
2015
(loss) 3,143 $000
$000
1,968
Re
(2,750)
(3,000)
ve ——– ——–
nu 393
(1,032)
e ( ——– ——–
W
)
C
os
t o
201 00) 2017
(1,150)
6 ——– $000——–
$000 1,0722,117 967
5,272 ——– ——–
(b) Statement of financial
position (extracts) As at 3
1 December
2017
2016 $000
11,100
Act 00 1400
ual (1,2500)
cost 9,950
s
Prof 433
it or (5,000) (11,0
loss 00)
Cas
h re
ceiv
ed
——–——–——–
111 (617) nil
Asset
——–——–——–
/
(liabi
lity)
ed.
WORKING
Allocation of revenue on a costs basis
2014 2015 2016
$000 $000 $ 2017
Costs to 2,750 5,750
000 $000
e (2,750 + (5,750 + 9,950
50) 50) (9,950 + 1
Total costs 11,10
= 10,500= 13,500,550)
= 11,500 0
11,10
0
% complete 100%
× tender 26.19%42.59% 86.52% × Actual
(12,500)
lue × 12,00 × 12,00
× 12,000
0 0
Revenue
date 3,14 5,1 10 12,5
3 11 ,3 00
83
Less taken
in prior – (3,1 (5, (10,38
ods 43) 11 3)
—— 1)
– — ——–
Revenue in —– —
year 3,143 —
– 2,117
—— 1,96
– 8 ——–
5,
— 27
—– 2
—
—
–
Answer 11 BIG
(a)
Profit or loss for the year ended 31 Marc
h 2018 (extract)
R (
Gross profit on co 2
nstruction contrac
ts
Statement of financial position as at 31 March 2
018 (extract)
$
C
ur 4
re
nt
as
se
ts

C
on
tra
ct
as
se
ts
Curr
ent l
iabil 2
ities
Co
ntrac
t lia
biliti
es
WORKINGS
(1) Profit or loss for year ended 31 March 2
018
$000 $000 $000 $000
Revenue
40% of $3. 1,440 (30% (25% 2,058
18 600
6m of 60) of 2.4m)
Cost of sal
es (25% 500
12 1,712
40% of $ of 2m)
3m (30%
8 108
0) ___
Additional c 100 Non-
osts current
(1,300) (20) (500) (1,820)

Profit/(loss) on
construction
racts 140 ( 1 238
2 0
) 0

ed.
(2) Statement of financial position as at 31
March 2018
Nose He Hor Total

ad n $000
Costs incurr 2,225
ed
Profit/(loss) _______
14
0 (2) ____
___
Billing
_______
s ____ ___ ____
___ ___ ___
_
(To)/from custo
mers _______ ___ ____ _______
___ ___
_
(b) Acceptability of treatment
states that revenue should be recognised
once a performance obligation has been satisfied. I
f certain criteria are met then IFRS 15
states that the performance obligation is satisfied ov
er time. A performance obligation is
satisfied over time if one of the following criteria is
met:

The customer receives and consumes the ben
efits of the entity’s performance as the
entity performs (e.g. service contracts, such a
s a cleaning service or a monthly
payroll processing service).
 The entity’s performance creates or enhances
an asset that the customer controls as
the asset is created or enhanced (e.g. a work-
in-process asset).

The entity’s performance does not create an
asset with an alternate use to the entity
and the entity has an enforceable right to pay
ment for performance completed to date.
It would appear that the proposed accounting treat
ment by the directors is acceptable under
IFRS 15. It is acceptable to apply the same accoun
ting policy to both long and short
contracts. However it is important that the accounti
ng policy is applied on a consistent basis.
The directors should not adopt the completed contr
act method when it is expedient to do so.
Criteria must be established for determining which
contracts are to be accounted for under
IFRS 15 as contracts where performance obligation
is satisfied over time and appropriate
policies must be established and applied consistentl
y.
Answer 12 RETAIL INVENTORY
(a)
Reasons why net realisable value may be
less than cost
 1

 (wholly or in part e
a
 ) c
Declining selling h
prices
Increasing cost of
completion/costs m
of making sale. a
x

3

—
—
—
—

(b) (i) Cost on a FIFO basis
Date
purch
ased $
1
$ 1
30 1½
De
ce
mb
er
16
De
ce
mb
er
2 D
ece
mb
er
_________
75,600 3½
———
ed.
(ii) Net realisable value (NRV)
NRV = selling price less selling and distribution c
osts = selling price  95%
Date
sold Per un NRV
it $
$
14 497.3 1½

Jan 80 4,
uar 495.8 1½
90 4
y
1½
28 494.6
Jan 2
00 4, 
uar 7
y 9
11 5
Feb 1
rua
ry 4,
8
2
0
___
___
___
74,461 4½
———
(iii) Amount to be include in financial stateme
nts
Low $
er of
cost
and
net r
ealis
able
valu
e
Answer 13 MEASU
REMENT OF INVE
NTORIES
1 1
————
9
————
(a)
IAS 2 requirements
Overheads
The Standard requires inventories to be measured at
the lower of cost and net realisable
value. The term “cost” includes “cost of conversio
n” (where appropriate). “Cost of
overheads”. Fixed production overheadsmax 3
indirect costs of production that remain
relatively constant regardless of the volume
roduction (e.g. Depreciation and maintenance
of factory buildings and equipment, and the
of factory management and administration).
Lower of cost and net realisable value
Inventories are usually written down to net max 2
lisable value on an item by item basis. In
some circumstances it may be appropriate
roup similar or related items.
Identification of costs
Specific identification of costs is inappropriate
where there are large numbers of items
which are ordinarily interchangeable. The max 3
t of such inventories should be assigned by ————
using the first-in, first-out (FIFO) or weighted 8
average cost formulas. The last-in, first-out ————
(LIFO) is not permitted under IFRS.
(b) Disclosure requirements of IAS 2
 Accounting policies used in measuring
 ventories including the cost formula 1 each
 .

The total carrying amount and the carryi
————
ng amount in appropriate classifications.
4
The carrying amount of inventories ————
ed at net realisable value. 12
The carrying amount of inventories ————
ged as security for liabilities.
ed.
Answer 14 FAM
Accounting policies
(a)
Property, plant and equipment is stated at hist
orical cost less depreciation, or at valuation.
(b)
Depreciation is provided on all assets, except
land, and is calculated to write down the cost
or
valuation over the estimated useful life of the
asset.
The principal rates are as follows:
Buildings
Plant and machi 2% per annum straight l
nery ine
20% per annum straight l
Fixtures and fitti ine
ngs
25% per annum reducing
balance
Land Plant Fixtures, on

and and fittings, acc
ount and
Total

equip
ment course of

construction
Cost at 1 Janu $000
ary 2017 2,994
600
Revaluation a 267
djustment
Additio –
ns (318)
Reclass ———
ificatio 2,043
ns
1,500
D
1,500
is
p
os
al
s
2017 valu ——— ——
ation —— —— — ——
— — 389
——
1,60 1,490
0
——
—— —— 3,543
— ———
458 140 – 678

Revaluation adj (80) – – (80)
298 70 385
ustment (195) (31) (226)
Provisions for y —— —— – ——
——
ear (W2) 561 179 757
–
Di —— —— —— ——
sp –
——
osa
ls –
——
At 31 Decemb
er 2017
At 31 December 1,583 929 2,786

210 64
2017 ———
—— ——
———
———
At 31 December 1,155 250 91 2,316

2016 —— —— ———
———
———
Land and buildings have been revalued during the y
ear by Messrs Jackson & Co on the basis of their
fair values.
ed.
The corresponding historical cost
ormation is as follows: Land and buil
dings
$000
C
o 9
s 0
t
0

B
r 1
o 0
u 0
g
h
t

f
o
r
w
a
r
d

R
e
c
l
a
s
s
i
f
i
c
a
t
i
o
n

1,000

——
Depreciation
Br 8
oug
ht fo
rwar
d
Pro
vide
d in
year
90

——
910

——
WORKINGS (in $000)
(1)
—
D
ep
os
it
on
co
m
pu
ter
——
600
(2) Depreciation + (10 1
40
uildings 0  2 7
%)
2% straight line depreciation is equivalent to a 50 y
ear life.
Buildings are 10 years old at valuation, therefore 40
years remaining.
Depreciation on plant (1,613
+ 154 – 277)  20% 29
8
Depreciation on fixtures (390 + 40 – 70
41 – 140 + 31)  25%
Answer 15 PORSCHE
Notes to the financial statements for the year en
ded 31 December 2017 (extracts)
(1)
Accounting policies
Tangible non-current assets
Interests in buildings are stated at a valuation. Othe
r tangible non-current assets are stated
at cost, together with any incidental expenses of ac
quisition.
Depreciation is calculated so as to write off the dep
recibale amount of tangible non-current
assets over their expected useful lives. A full year’
s charge is provided in the year of
acquisition. The annual rates and bases used are as
follows:
Asset
%
Basis
2% Straight line
10% Straight line
20% Straight line
Fixtures, fittings, tools and
30% Reducing balan
equipment ce
ed.
(2) Operating profit is stated after charging
Depreciation of tan
$
gible non-current a 56
ssets 2,0
00
—
—
—
—
Total

and machinery
hicles fittings,

buildings
etc
$000 $000 $000 $000 $000
1,440 1,968 449 888 4,745
500 75 35 22 632
Revaluations (W1)
At 31 Decembe
r 2017 ———
——— —— —————
257 1,178
Charge for –
year 60 (W2)(144)
33 (W5)87 (W3) 182 (W4)
562
At 31 Decembe
r 2017 ———
——— —— —————
At 31 Decembe
———
——— —— —————
r 2017 1,711 255 305 3,567
1,296
——— —— —————
At 1 Januar ———
y 2017
(a) Buildings were valued for the purposes of the
2017 accounts at their market value. This
valuation was made by a firm of independe
nt chartered surveyors. The historical cost of
the factory is $1,940,000 (W6) and the relat
ed depreciation is $183,000(W6).
(b) The depreciation policy on motor vehicles ha
s been changed from a rate of 25% per annu
m
on cost to 30% per annum on reducing bala
nce in order to give a fairer presentation of
the results and of the financial position. Th
e effect of this change is to reduce the
depreciation charge for the year by $34,000
(W7).
WORKINGS
(1)
F
a $000
c
t
o
r
y

r
e
v
a
l
u
a
t
i
o
n

Cr R 9
evalu
ation
surpl
us
(2) Factory depreciation charge
a
Annual depr
eciation cha
(3) rge ($2.7m
÷ 45 years)

M
o
t
o
r
v
e
h
i
c
l
e
s
d
e
p
r
e
c
i
—— 0

$
0
Additions
Depreciation – re
ducing balance ——
method @ 30%

ed.
(4) Fixtures a
nd fittings $
depreciati —
—
on charge

C
o
s
t

a
t

3
1

D
e
c
e
m
b
e
r

2
0
1
7

Depreciation 18
– straight lin 2
e method @ —
20% —

t
A
(5) Mac
hine
ry d
epre
ciati
on c
harg
e
C
o
s
$000 —
1,968
(298)
75
——–
1,745
Depreciation – str 1
aight line method
@ 10%
Grinding machine – cost 2
less residual value (298 9
– 8) 0

(
5
8
)
—
C —
Must be written off over the remaining us
eful life of four years:

$
Depreciation2
5
arge
———
Total depre $
ciation char
1
ge for plant
——
233
—
(6) Histor —
ical co
st dep
reciati
on on
factor
y
C
o
s 5
t

a
t

1

J
a
n
u
a
r
y

2
0
1
7

Cost —
at 31
Dece
mber
2017
Accumulated depr 1
eciation at 1 Janua
ry 2017
Depreciation char
ge 1,940 ÷ 45 year
s
—
Accumulated deprecia —
tion at 31 December 2 –
017
1
8
7
—
—
–
ed.
(7) Effec
t of c $——
hang
e in
121
depr
87
eciat
ion
meth
od
C
o
s
t

o
f

c
a
r
s

a
t

3
1

D
e
c
e
m
b
e
r

2
0
1
7

Depreciation
under straight
line method
@ 25%
Depreciation
under reducin
g balance met
hod (W3)
—
Reduc —
tion in

deprec

iation
charge 3
4
—
—

Answer 16 DAWES (I)
Non-depreciation
Depreciation is the process of allocating the cost (o
r revalued amount) less the estimated residual value
of a non-current asset over the periods that are expe
cted to benefit. It is an example of the use of the
accruals and matching concept. It is not meant to b
e a process of valuing assets.
The directors of Dawes are confusing the two issue
s. Even though the value of an asset may have
increased, it does not mean depreciation is unneces
sary. Each year a portion ( /25) of the value of the
property is consumed, and the depreciation charge r
eflects this cost. The carrying amount of the
property is a different issue.
Dawes is based in a country where the regulatory re
quirements permit the directors to choose to value
the property on the historical cost basis or at a “curr
ent value” (i.e. current replacement cost). This is
permitted under IAS 16 Property, Plant and Equip
ment. Regardless of which valuation method is
selected, depreciation must still be charged based o
n the chosen value. Some regulatory requirements
take the view that where the life of an asset (which
is of a type whose life is normally considered to be
finite) can be determined to be infinite, perhaps due
to exceptionally high standards of maintenance, no
depreciation may be necessary. In effect the
maintenance costs become a substitute for the
depreciation. Hotel properties have sometimes bee
n treated this way. This argument would not be
applied to this property.
IAS 8 Accounting Policies, Changes in Accountin
g Estimates and Errors says the initial adoption of
a
policy to carry property at a revalued amount is a c
hange in accounting policy, but should be treated as
a revaluation in accordance with IAS 16.
If the directors do decide to revalue the property the
n all of Dawes’s properties (within the same class)
must be simultaneously revalued; and these valuati
ons kept up to date. In this case the alternatives are
:
Statement of fin Historical
ancial position Current value
cost
(revaluation)
Non-current assets – property, p
lant and equipment $000
Cost/Valuation $000 6,000
Accumulated depreciation (300)
4,00
0
(960
)
Carry 5,700
ing a
moun
t
Reserves:
Revaluation sur
plus (see below)
2,660
Profit or loss
Depreciatio
n of propert
y:
– 4,000 × /
25
– 6,000 × /
20
300
ed.
WORKING
5
Re (
val
ue
d a
mo
unt
0)
1 (140)
Revaluation surplus
_
30 September 2017
_
_
_
_
Answer 17 SPONGER
IAS 20 Accounting for Government Grants and D
isclosure of Government Assistance requires that n
o
grant should be recognised until there is reasonable
assurance that the entity will comply with the
conditions attaching to them and that the grants will
actually be received. The Standard also covers the
treatment of forgivable loans and non-monetary gra
nts.
(a) Research and development grants
The general principle of IAS 20 is that grants shoul
d be matched in profit or loss with the
expenditure to which they are intended to contribut
e. They should not be credited directly to
shareholders interests.
Cuckoo project
The expenditure on the Cuckoo project is research
and therefore is written off as incurred
under IAS 38 Intangible Assets. Accordingly the g
rant of $10,000 should be recognised in
profit or loss in the years in which the expenditure t
o which it relates is incurred.
Hairspray project
The Hairspray project appears to satisfy the criteria
of IAS 38 for deferral of development
expenditure, and thus may be carried forward a
s an intangible non-current asset until
commercial production commences (2019). It will
then be amortised to profit or loss over the
cre
uncertainties that restrict the time period over whic
h development costs should be amortised,
and so the amortisation model should be reviewed a
nnually.
The grant of $10,000 relating to it will therefore als
o be carried forward as deferred income,
and will be released to profit or loss in line w
ith the amortisation of the development
expenditure. The balance of $10,000 will appear in
the statement of financial position at 31
December 2017 under current and non-current liabi
lities as appropriate.
Grants relating to assets can either be:
 set up as deferred income and recognised in
profit or loss over the useful life of the
asset (to match the depreciation charge); or
 deducted from the carrying amount of the ass
et in the statement of financial position
(i.e. being recognised over the useful life of t
he asset by means of a reduced
depreciation charge).
ed.
(b) Compensation grant
IAS 20 states that grants receivable as compensatio
n for expenses or losses already incurred
should be recognised as income when they become
receivable. They cannot be taken back to
prior periods, as their receipt does not constitut
e correction of an error or a change in
accounting policy
However, in order to apply the prudence concept, t
he standard requires grants not to be
recognised until conditions for receipt have been sa
tisfied and receipt is reasonably assured.
In this situation the conditions for receipt, namely fi
lling out the triplicate form, have not been
fully satisfied and therefore the grant should no
t be recognised in the accounts at 31
December 2017.
(c) “Vocational experience” grant
General accounting
This grant relates not to specific expenditure but to
a non-financial objective.
The terms of the grant suggest that it is effectively
earned at a rate of $1,000 per visit, and
therefore it should be credited to income at that rate
. In the year to 31 December 2017 the
credit will be $7,000. Amounts to be recognised in
future periods will be carried forward as
deferred income.
The grant is not spread over the life of the bus as it
does not specifically contribute to its cost.
Repayments
A repayment of $5,000 is due relating to unfulfilled
visits in the current year and should be
provided for. However, as this is expected to recur
in each of the next four years, provision
also needs to be made in total for repayments relati
ng to 20 further unfulfilled visits.
A contingent liability should be disclosed relating t
o the potential repayment of the grant
relevant to the visits in future periods which are exp
ected to take place.
Amounts for the financial statements
Prof
it or $
loss
7,00
Grants received (7 0
 $1,000)
Statement of financ
$
ial position 7,000
Current liabilities (1  7  $1,000 21,000
) 25,000
Non-current liabilities (3  7  $1
,000)
Provision for grant repayment (5
 5  $1,000)
Note to the financial statements
There is a contingent liability in respect of pot
entially repayable government grants of
$28,000 (7 monthly visits for next four years).
ed.
Answer 18 DAWES (II)
Borrowing costs
Manufacturing plant
Where assets are financed by specific borrowings, I
AS 23 Borrowing Costs requires that the specific
borrowing costs related to the financing (in this cas
e interest and amortisation of issue costs) are those
that should be capitalised. Interest from the tempor
ary investment of any surplus funds relating to the
specific finance are treated as a reduction of the bor
rowing costs.
Interest on $5 million at $
14% 700,
Amortisation of issue co
sts using 000
straight-line apportionm
ent (¼ × 100,000) 25,
Less interest earned on t 00
emporary investment
of surplus funds 0
(72,
000)
Amount of borrowin 65
gs to be capitalised 3,0
00
Investment property
Borrowing costs are not capitalised during periods
when no construction or development takes place.
Capitalisation ceases at the point in time when the a
sset is ready for use, notwithstanding that it may
take time to market the asset, or, in this case, find a
tenant. Thus during the current year the above rule
s
exclude capitalisation of interest for the first and th
e last three months of the accounting year. Where
general, rather than specific, borrowings are used to
finance qualifying assets then a weighted average
cost of capital excluding specific borrowings is app
lied to the average investment in the asset. In this
case the appropriate cost of capital is 10% per annu
m.
Amount capitalised is $12 million × 600,000
0% × /12
Answer 19 KIPLING
(a) 3
A
t C
os
t
of
manuf
acture
Interes $000
t capit 28,000
alised
($20m
3,650
× 10%
+ ($20
m ×
10%
10%)
× ¾)
31,650
Capitalisation of finance costs ceases when the non
-current assets are substantially complete
IAS 23. Hence only 1¾ years finance costs are cap
italised.
Initial recognition of the assets will be at cost. Ho
wever if the amount recognised when a
non-current tangible asset is constructed exceeds its
recoverable amount then it should be
written down to its recoverable amount. Thus the fl
eet of aircraft will be recognised in the
statement of financial position at $30 million.
Tutorial note: This is covered in detail by IAS 3
6 “Impairment of Assets”.
ed.
(b) 31
Carrying Dep
Mar reciation Car
ch 2 rying
016
amount amount
31 March 2
$000 016
3,000 $000
E 6,000
2,625
n 18,3
gi 75
n
es

30,000 5,625 24,375
Revaluation lo (
ss to profit or l 3
oss ,
3
7
5
)
Closing carrying am 21
ount (market value) ,0
00
31 Mar
ch 2017 Carrying Deprec
iation Carrying
amount amount
31 March 2
$000 017
2,585 $000
E
2,262 2,584
n 13,5
gi 69
n
es

21,000 4,847 16,153
To profit or lo
ss 3
To other comp ,
rehensive inco 3
7
me 5

7
2

00
IAS 16 states that where an asset’s carrying amount
is increased as a result of a revaluation,
the increase should be credited to equity. However,
if this reverses a revaluation decrease of
the same asset then part should be recognized i
n income to the extent of the previous
revaluation loss.
(c) 31
Carrying Dep
Mar reciation Car
ch 2 rying
018
amount amount
31 March 20
$00018
3,135 $000
E –
2,744
n 13,721
gi
ne
s
19,600 5,879 13,721
A 1
21
ed.
Answer 20 DAWES (III)
Schedule of cost and accumulated depreciation

Cost Depr
eciation
At 1 October 2016 32.50
Addition at cost (s 81
ee below) .2
Right-of-use additi 0
ons (see below)
Disposals (see belo 21 20.74
w) .5
Depreciation charg 0
e for year
16
.0
0
(1
5.
00
)
Balance 30 Se
ptember 2017
WOR $
KING m
S
Additions
– basic c 20.
ost 00
– install
ation 1.0
– testing 0
__
__
____
form part of its cost. The accounting policy for g
overnment grants does not allow them to be
offset against the cost of the asset. Insurance an
d maintenance are revenue items.
Right- $
of-use
additi
ons
L
i
a
b
i
l _
i
t
y

b
/
f
w
d

R
e
p
a
y
m
e
n
t
s
L
i
a
b
i
l
i
t
y

c
/
f
w
d

_
_
Difference – new
right-of-use lease _
s _
_
_

Disposal: The accumulated depreciation on the plan
t disposed of would be 20% of $15
million for three years = $9 million.
The depreciation charge for year is 20% of the corr
ected cost of plant at the year-end (i.e.
20% × $103.7 million = $20.74 million).
ed.
Answer 21 XYZ
Extracts from the financial statements of XYZ a
t 31 December 2017
(i)
Tangible non-current assets held under ri
ght-of-use leases

$
x

At 31 D 4
ecember ,
2017 4
0
0

—
—
—

4
,
4
0
0

—
—
—

At 1
Januar x
y 2017
Char
ge for 6
the ye 2
9
ar
—
—
At 31 D —
ecember
2017
6
2
9

—
—
—

Carrying
amount
At 31 D
ecember 3
,
2017
7
7
1

—
—
—

At 1
Januar
y 2017
x —
——
(ii) Lease liability
$
Non-current
Outstanding at 31 December
2018 (W1)
Current 2,80
To be paid in 2018 (1,200 –
(268 + 243) 3
Interest element of payment
due 1 January 2018 68
9
26
8
Statement
of profit or
loss
Finance char
ges (292 + 2
68)
Depreciation
($4,400 ÷ 7)
6
ed.
WORKINGS
(1)
Table of lease payments
Period end
AmountRepaidCapital due
ed borrowed for period
30 June 2017 4,40 (600) 3,800 292 4,092

31 Decembe 0 (600) 3,492 268 3,760
r 2017 4,09 (600) 3,160 243 3,403
30 June 2018 2 (600) 2,803 215 3,018
31 Decembe 3,76 (600) 2,418 186 2,604
r 2018 0 (600) 2,004 154 2,158
30 June 2019 3,40 (600) 1,558 119 1,677
31 Decembe 3 (600) 1,077 83 1,160
r 2019 3,01 (600) 560 40 600
30 June 2020 8 – –
31 Decembe (600) –
2,60
r 2020 4
30 June 2021 2,15
31 Decembe 8
r 2021 1,67
7
1,16
0

0
Calculation of finance charge

$
Fair va (4,400)
———
lue of 1,600
asset ———
Fin
anc
e ch
arge
$3,760
Interest
$3,492 $268
 $2,803
Answer 22 SNOW
Extracts from the financial statements of Snow f
or year ended 31 December 2017
P
t is
sta
ted
aft
er
ch
ar
gi
ng
:
$
1
Finance char
$(1,650 + 1,4 2
,
ges 08((W2) + $9 6
7
Depreciatio,614) (W3) 2

n
4
1
,
6
6
7

ed.
Tangible non-current assets held under right-of-
use lease contracts – Plant and machinery
A
—
A —
5
At 1 Janua
ry 2017 1
Charge fo
r year $
At 31 Decemb
er 2017
–
41,667
———
41,667
———
C
a
A 1
A
Finance lease liabilities
Non-current
Outstanding at 31 December 201
8 (12,097 (W2) + 89,614 (W3)) 101,7
11
Current
To be paid in 2018 ((13,000 – (1
,153 + 886) + (35,000 – 9,614)) 36,3
Interest element of payment due 47
1 January 2018
9,61
4
WORKINGS
Snowplough finance charge

$
Lease paymen
2,
ts (6  $6,500 00
) 0
39
,0
F 00
i (3
5,
n 00
a 0)
n —
c —
e —

c 6,
h 00
a 0
r
—
g —
e —

ed.
(2) Snowplough allocation of finance charg
e
$ $
$ $ $
presented for completion. The interest in the fina
l period of $298 is a rounding figure as the
interest rate is not exactly 5%.
$23,058
Capital
$23,058 –
 $12,097
(3) Snow machine allocation of finance char
ge
Amount Repayment Capital Interest
Amount
$ $
$ $ $
$124,614
Capital Interest
$115,000 $9,614
 $89,614
©2017 Becker
Educational De
velopment Cor
p. All rights res
erved.
1031
Answer 23 RESEARCH AND DEVELOPMEN
T
(a)
Why different treatment

For research (or the research phase
of an internal project) it is not possi
ble to 1
demonstrate that an intangible asset
exists that will generate probable fu 1
ture
economic benefits. Therefore expe
nditure is always recognised as an e
xpense
when it is incurred.

For development (or the development
phase of an internal project), in some
instances, it can be demonstrated that 1
an intangible asset exists that will gen 1
erate
probable future economic benefits. T
his is because development is further
advanced than research.
 Development costs are therefore recog
nised as an intangible asset from the 1
oint
in time when they meet certain criteria
that indicate that future economic ben
efits
are probable.
 If research cannot be distinguished
m development, expenditure is treated 1
————
as max 4
research. ————
(b) Criteria for asset recognition
All of the f 1
ollowing
must be de
monstrate
d:
 Technical feasibilit 1
y of completing the
intangible asset.
 Intention to complete 1
the intangible asset an
d use or sell it.

A 1
 The existence of a marke 1
t for the output of the int
angible asset.
 Availability of adequate technical, fi
nancial and other resources to compl 1
ete the
development and use or sell the intan
gible asset.
 1
Ability
to measure reliably the attributable
————
expenditure during development. max 6
(c) D
—
Marketing awareness campaign
Exclude – selling costs cannot be directly
buted or allocated on a reasonable basis to ½ + 1
development activities.
Patent royalty payable to inventor of filter
Include – expenditure represents a direct
½ + 1
ost of a service consumed in development
activities.
Salaries of staff testing filter prototypes
Include – expenditure on testing pre-
production prototypes is a typical develop½ + 1
————
ment max 4
activity. ————
ed.
(d) Amortisation
How
 The depreciable amount (e.g. cost) sh
ould be allocated on a systematic basi 1
s over
the best estimate of useful life.
The method used should reflect the pa 1
 ttern in which the related economic
benefits are consumed. If that pattern
cannot be determined reliably, the stra 1
ight-
line method should be used.
 The determination of useful life will depend
on such factors as:
 typical produce l 1
 ife cycles for the
asset; and
technological ob
solescence.
When
 Amortisation commences when the 1
asset is available for use. If the asse
t is not
yet ready for use then it will be teste
d for impairment on an annual basis.
 If the asset is deemed to have an in 1
definite life, it is not amortised but
will be
tested annually for impairment.

Amortisation (period and method) 1
ould be reviewed at least at each fina
ncial 1
year end, and changed if useful life ————
the pattern of consumption of econommax 6
ic ————
benefits is significantly changed.
Answer 24 DEFER
Deferred development expenditure
if, certain criteria are demonstrated. Research costs
, and development costs which do not meet all the
criteria should be recognised as an expense when th
ey are incurred. Accordingly my recommendations
are as follows:
Guidelines to distinguish research based activities
from development activities
IAS 38 defines development as the application of re
search findings (or other knowledge) to a plan or
design to produce new or substantially improved m
aterials, products, processes, etc. Research is work
undertaken to gain new scientific or technical know
ledge and understanding.
IAS 38 criteria for asset recognition are satisfied
for identified development costs
These criteria, which must be demonstrated, are set
out in the Standard. For example, there must be an
intention to complete and use or sell the intangible
asset. If any of the criteria are not satisfied the
expenditure must be written off.
If, however, all the criteria are demonstrated, the ex
penditure must be deferred (i.e. capitalised).
ed.
Amortisation period and method for development
expenditure recognised as an asset
IAS 38 requires that an intangible asset should be a
mortised on a systematic basis over the best estimat
e
of useful life. In determining useful life, reference i
s made to such factors as expected usage of the
asset, typical product life cycles, technical obsolesc
ence and expected competition. Where there are
rapid changes in technology (e.g. Computer softwar
e) useful life is likely to be very short. If the asset
is not yet ready for use or it has an indefinite life th
en it is not amortised but is tested annually for
impairment.
The straight-line method should be used unless anot
her method better reflects the pattern in which the
asset’s economic benefits are consumed.
IAS 38 disclosure requirements
 Useful lives or amortisation rates and amort
isation methods.
 Gross carrying amount and accumulated amo
rtisation at beginning and end of period.
 A reconciliation of the carrying amount at th
e beginning and end of the period showing
additions, etc.
 The aggregate amount of research and devel
opment expenditure recognised as an expens
e
during the period.
Answer 25 SIGMA
(a)
IAS 41 “Agriculture” – recognition and m
easurement requirements
An entity should recognise a biological asset or agri
cultural produce when:
 it controls the asset as a result of past events;
 it is probable that future economic benefits a
 ssociated with it will flow to the entity;
the fair value or cost of the asset can be meas
ured reliably.
These criteria are consistent with the IASB Framew
ork, which states that an element should
be recognised if:
 it is probable that any future economic benef
it associated with the element will flow
to the entity;

the el has a cost or value that can be determined re
ement liably.
IAS 41 further states that biological assets or a
gricultural produce should normally be
measured at fair value less costs to sell. The
standard assumes that the fair value of a
biological asset or agricultural produce can be meas
ured reliably. This presumption can only
be rebutted for a biological asset or agricultural pro
duce for which quoted market prices are
not available and for which alternative measuremen
ts of fair value are “clearly unreliable”.
Even then this rebuttal must be made on initial reco
gnition of the asset.
The measurement basis selected by IAS 41 is one t
hat is envisaged in the IASB Framework.
However the Framework states that the most comm
on measurement basis used is historical
cost. For this to be a basis to produce relevant and
reliable financial information the cost of
the asset needs to be determinable. For many biolo
gical assets (e.g. newly born calves) the
concept of “cost” is not an easy one to apply and so
fair value seems to be more appropriate.
ed.
(b) Financial statements extracts
$00 $000
Income
Change in fair value of purch 0
ased herd (W2)
Government grant (W3) (30)
Change in fair value of newly
born calves (W4) 400
125
Fair value of milk (W5)
5·5
––––
5
Expense
Maintenance cos
ts (W2)
Breeding fees ( 500
W2)
300
–––
–
T
o
t
a
l

e
x
p
e
n
s
e

N
(
8
0
0
)

–
–
–
–
–
–
–

(
2
9
9
·
5
)

–
–
–
–
–
–
–

Property, plant and eq
uipment: 20,00
Land (W1) 0
Mature herd (W2)
Calves (W4) 970
125
––––
–
21,095
––––––
Inven
tory:
Milk
(W5)

WORKINGS
(1)
Land
transaction is IAS 16 Property, Plant and Equipm
ent. Under this standard the land would
initially be recorded at cost and depreciated over its
useful life. This would usually be
considered to be infinite in the case of land and so n
o depreciation would be appropriate.
Under the cost model of IAS 16 no recognition wou
ld be made of post-acquisition changes in
the value of the land. The revaluation model would
permit the land to be revalued to market
value, with the surplus shown in other comprehensi
ve income.
(2) Cows
Under the “fair value model” laid down in IAS 41 t
he mature cows would be recognised in
the statement of financial position at 30 September
2017 at their fair value of 10,000 × $97 =
$970,000. The difference between the fair value of
the mature herd and its cost ($970,000 –
$1 million – a loss of $30,000) would be charged to
profit or loss, along with the maintenance
costs of $500,000.
ed.
(3) Grant
Assistance. Under IAS 41 such grants are credited
to profit or loss as soon as they are
unconditionally receivable rather than being recogn
ised over the remaining useful life of the
herd. Therefore $400,000 would be credited to pro
fits by Sigma.
(4) Calves
They are a biological asset and the fair value model
is applied. The breeding fees are charged
to profit or loss and an asset of 5,000 × $25 = $125,
000 recognised in the statement of
financial position and credited to profit or loss.
(5) Milk
This is agricultural produce and is initially recognis
ed on the same basis as biological assets.
Thus the milk would be valued at 10,000 × $0·55 =
$5,500. This is regarded as “cost” for the
future application of IAS 2 Inventories to the unsol
d milk.
Answer 26 JUSTIN
IAS 36 Impairment of Assets says that an impairme
nt loss for a cash-generating unit is recognised if its
recoverable amount is less than its carrying amount
. An impairment loss for a cash-generating unit is
allocated in the following order:
 to the goodwill of the unit; then
 to other asset on a pro rata basis, based on th
eir carrying amounts.
In allocating an impairment loss as above, the carry
ing amount of an individual asset must not be
reduced to less than the highest of:
 its fair value less costs of disposal;
 its value in use (if separately determinable)
 ; and
zero.
The IASB has concluded that there is no practical
way to estimate the recoverable amount of each
individual asset (other than goodwill) as they all wo
rk together as a single unit. Nor do they believe
that the value of an intangible asset is necessarily m
ore subjective than a tangible asset.
Pro and
Steam
pertnd nes
y Rail Assets First
trai ck 1 Julyprovision
n $000 $000
Goodwill atio coaches 200 (200)
Operating lic ns 1,200 (200)
ence
(50)
Revised asse 250 (50)
Revised 2
ts Second assets 0
1 August provisi 30 0
$000 on tember
– $000
1,000 $000 2
0
–
25 0
0
900
_____ _____ _____ _____ _____
_____ _____ _____ _____ _____
ed.
Tutorial notes:
The first impairment loss of $1 million:
–
$500,000 is written off the engines as one
of them no longer exists and is no longer p
art of the
cash-generating unit
–
the goodwill of $200,000 is eliminated; a
nd
–
the balance of $300,000 is allocated pro ra
ta to the remaining net assets other than th
e
engine which must not be reduced to less t
han its net selling price of $500,000.
The second impairment loss of $200,000:
–
– the first $100,000 is applied to the licence
to write it down to its net selling price
the balance is applied pro rata to assets ca
rried at other than their net selling prices (
i.e.
$50,000 to both the property and the rail tr
ack and coaches).
Answer 27 GENPOWER
(a)
Provisions
(i)
Need for a standard
The use of provisions can have a significant effect
on an entity’s financial statements. They
arise in many areas of business and often relate to c
ontroversial areas such as restructuring
costs, environmental and decommissioning liabil
ities, and guarantees and warranties.
Provisions have often been based on management’s
intentions rather than on the existence of
a relevant liability.
In the recent past there has been much criticism of t
he use and abuse of provisions. The main
area of abuse has been that of “profit smoothing” or
creating artificial growth. In essence this
amounts to creating a provision, usually for some f
uture intended expenditure, when profits
are healthy, and subsequently releasing the provisio
n through profit or loss to offset the
expenditure when it is incurred. This has the effect
of reducing the profit in the years in
which provisions are made and increasing profits in
the years in which they are released.
A common abuse was that provisions created for a
specific purpose (or type of expenditure)
were aggregated with other provisions and subsequ
ently used to offset expenditures of future
years that had not (and should not have) been provi
ded for. Such provisions were often very
large (hence the term “big bath” provisions) and tre
ated as extraordinary or exceptional items
(terms which are also not permitted under IFRS). T
his treatment may have caused some users
to disregard the expense in the belief that it was a n
on-recurring item thus minimising the
adverse impact of the provision. Extreme cases occ
urred where provisions were deliberately
over provided with the intention that their release in
future years would boost profits.
In some cases provisioning was used to “create” pr
ofits rather than just smooth them. This
occurs if a provision is created without it being char
ged to profit or loss before its subsequent
release. The most common examples of this were p
rovisions for restructuring costs as a
consequence of an acquisition. The effect of such p
rovisions was that they added to the
goodwill rather than being expensed to profit or los
s. This practice created the ironic situation
that (given an agreed purchase price) the more
restructuring needed and the larger the
anticipated losses, the greater the reported value of
the acquired company’s goodwill. Many
commentators, including the IASB, thought this per
verse and IFRS 3 Business Combinations
has now eliminated this practice completely.
Some of the above practices are often referred to as
“big bath” provisioning.
ed.
(ii) Accounting principles
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets establishes appropriate
recognition and measurement criteria for provisions
and contingent assets and liabilities. It
also requires much more detailed disclosure of prov
isions. Although not specifically referred
to in the IAS, it does not apply to “provisions” that
are used to write down asset values (e.g.
“provisions” for bad debts and depreciation of non-
current assets) – that is because these are
not provisions (as they do not meet the definition of
a liability). Also, IAS 37 does not apply
to executory contracts or provisions required by oth
er accounting standards (e.g. deferred tax
provisions). The main thrust of IAS 37’s definition
of a provision is that it represents a
liability of uncertain timing or amount. This is furt
her expanded upon in that a liability is an
obligation (which may be legal or constructive) whi
ch will probably require an entity to
transfer economic benefits that result from a past tr
ansaction or event.
This definition relies heavily on the IASB’s “F
ramework”. The distinction between a
provision and a liability (or accrual) is the degree of
uncertainty in the timing or amount of
the liability. A contingent liability is (i) a possible
obligation which will be confirmed only
by the occurrence of uncertain future events that ar
e not wholly within the entity’s control, or
(ii) where there is a present obligation but it is not p
ossible to measure it with sufficient
reliability. In essence, if an obligation is probable i
t is a liability, if it is only possible
(presumably less than a 50% chance) then it is a co
ntingent liability. The definition of a
contingent asset is a “mirror” of that of a liability.
An obligating event is one which cannot realisticall
y be avoided. This is obviously the case if
it is enforceable by law, but IAS 37 adds to this the
concept of a constructive obligation. A
constructive obligation derives from an established
pattern of past practice or some form of
public commitment to accept certain responsibilitie
s that creates a valid expectation on the
part of other parties that the entity will dischar
ge them. Although the concept of a
constructive obligation does introduce an eleme
nt of subjectivity, the new definition is
intended to prevent provisions being made as a resu
lt of future intentions by management.
The last element of the definition is that of reliable
measurement. This is taken to be the best
estimate of the expenditure required to settle the ob
ligation at the end of the reporting period.
The estimate may be based on a range of possible o
utcomes and it should take into account
any surrounding risk and uncertainty and the time v
alue of money if it is material (i.e.
settlement may be some years ahead). Also where t
here are a number of similar obligations
(e.g. product warranties) the estimate should be bas
ed (often statistically) on the class as a
whole. The IAS considers that the circumstances in
which a reliable estimate cannot be made
will be extremely rare, but if they do exist the liabil
ity should be treated as a contingent
liability and given appropriate disclosures in the not
es to the financial statements.
(b) Transactions
(i)
Acceptability of accounting policy
Genpower’s current policy of providing for environ
mental costs relating to the demolition of
the power station and “sealing” the fuel rods on an
annual basis is no longer acceptable under
IFRS. IAS 37 requires that where an entity has a pr
esent obligation that will (probably)
require the transfer of economic benefits as a result
of a past event, a provision is required for
the best estimate of the full amount of the liability.
If the liability is measured in expected
future prices this should be discounted at a nominal
rate. Applying these principles means
that Genpower should provide for $120 million (not
$180 million) for environmental costs on
1 October 2016 as this is the date the obligation aro
se. An interesting aspect of the provision
is the accounting entries to record it. The credit ent
ry is shown in the statement of financial
position under “non-current liabilities” as would be
expected, but the debit is included as part
of the cost of the asset (i.e. the power station).
ed.
The effect of this is to “gross up” the statement of fi
nancial position (initially) by the amount
of the liability and create an asset of equivalent val
ue. Understandably, some commentators
believe that non-current assets that have been incre
ased by the cost of a future liability will
confuse many users of accounts and calls into quest
ion the nature of an asset. The effect on
profit or loss of IAS 37’s requirements is not too di
fferent from Genpower’s current treatment
(ignoring the error of using $180 million). As the c
arrying amount of the power station
(which now includes the amount of the provisi
on as well as the cost of the asset) is
depreciated over its 10 year life, the provision is eff
ectively charged to profit or loss over the
life of the asset. This has the same effect on profit
as the previous policy.
The treatment of the provision for contamination le
aks needs careful consideration. It could
be argued that the obligating event relating to such
a cost is the occurrence of a leak. As this
has not happened there is no liability and therefore
a provision should not be made. An
alternative view is that it is the generation of electri
city that creates the possibility of a
leakage and, as this has occurred, a liability should
be recognised. The difference between a
liability and a contingent liability is one of probabil
ity. If it is probable (presumably more
than a 50% chance) then it is a liability that should
be provided for, conversely if it is not
probable, it is a contingent liability which should be
disclosed by way of a note to the
financial statements. In any 12 month period there
is only a 30% chance of a contamination
occurring. It could be argued that the liability is the
refore not probable, as turned out to be
the case in the current year.
Again there is an alternative view. Over the expect
ed period of electricity generation (of 10
years), statistically there will be three leakages caus
ing contamination that will cost a total of
$90 million. As Genpower has produced a tenth of
the electricity, it should provide for a
tenth of the expected contamination costs. On bala
nce and applying prudence it would be
acceptable to provide $9 million for contamination
costs each year.
Applying the above would give the following revis
ed extracts:
Charge to profit or loss
$
Non-current asset deprec
iation m
10% × ($200 million +
$120 million)
Provision for clean-up of
contamination leaks
10% × $90 million (or
30% × $30 million)
32
___
___
Statement of financial positi
on
Tangible non-current assets
Power station at “cost” ($200
million + $120 million)
Depreciation (32
)
___
Non-current liabilities
Provision for environmental costs ($
120 million + $9million) 129
(ii)
Impact of environmental legislation
In part (i) the environmental legislation in relation t
o this industry created an obligation which
led to a provision for the consequent liability. In th
e absence of environmental legislation
there would be no legal or enforceable obligation.
However, IAS 37 refers to a “constructive”
obligation. This occurs where there is a valid expe
ctation by other parties that an entity will
discharge its responsibilities. A constructive obliga
tion usually derives from an entity’s
actions.
ed.
These may be in the form of an established pattern
of past practice, a published policy
statement or by indications to other parties that it w
ill accept certain responsibilities. Thus if
it can be established that Genpower has a publicly k
nown policy of environmental cleaning
up, or has a past record of doing so when it is not le
gally required to, then this could be taken
as giving rise to a constructive obligation and the tr
eatment of the environmental costs would
be the same as in part (i). If there is no legal requir
ement to incur the various environmental
costs, and Genpower has not created an expectation
that it will be responsible for such costs,
then there is no obligation and no provision should
be made. The power station would be
recorded at a cost of $200 million and depreciated a
t $20 million per annum.
Answer 28 KLONDIKE
(a)
Relevant features
Defined contribution plans
These are relatively straightforward plans that do n
ot present any real problems. Normally
under such plans employers and employees contrib
ute specified amounts (often based on a
percentage of salaries) to a fund. The fund is often
managed by a third party. The amount of
benefits an employee will eventually receive will d
epend on the investment performance of
the fund’s assets. Thus in such plans the actu
arial and investment risks rest with the
employee. The accounting treatment of such plans
is also straightforward. The cost of the
plan to the employer is charged to profit or loss on
an annual basis and (normally) there is no
further on-going liability. This treatment applies th
e accruals concept in that the cost of the
post-retirement benefits is charged to the period in
which the employer received the benefits
from its employee. Post-retirement benefits are eff
ectively a form of deferred remuneration.
Defined benefit plans
These are sometimes referred to as final salary sche
mes because the benefits that an employee
will receive from such plans are related to his salar
y at the date they retire. For example,
employees may receive a pension of /60 of their fin
al year’s salary for each full year of
employment. The majority of defined benefit plans
are funded (i.e. the employer makes cash
contributions to a separate fund). The principles of
defined benefits plans are simple, the
employer has an obligation to pay contracted re
tirement benefits when an employee
eventually retires. This represents a liability.
In order to meet this liability the employer makes c
ontributions to a fund to build up assets
that will be sufficient to meet the contracted liabilit
y. The problems lie in the uncertainty of
the future, no one knows what the eventual lia
bility will be, or how well the fund’s
investments will perform. To help with these estim
ates employers make use of actuaries who
advise the employers on the cash contribution requi
red to the fund. Ideally the intention is
that the fund and the value of the retirement liabiliti
es should be matched, however, the
estimates required are complex and based on many
variable estimates (e.g. the future level of
salaries and investment gains and losses of the fund
). Because of these problems regular
actuarial estimates are required and these may reve
al fund deficits (where the value of the
assets is less than the post-retirement liability) or su
rpluses.
Experience surpluses or deficits will give rise to a r
evision of the planned future funding.
This may be in the form of requiring additional con
tributions or a reduction or suspension
(contribution holiday) of contributions. Under such
plans the actuarial risk (that benefits will
cost more than expected) and the investment risk (t
hat the assets invested will be insufficient
to meet the expected benefits) fall on the company.
Also the liability may be negative, in
effect an asset.
ed.
Accounting treatment
The objective of the standard is that the financial st
atements should reflect and adequately
disclose the fair value of the assets and liabilities ar
ising from a post-retirement plan and that
the cost of providing retirement benefits is charged
to the accounting periods in which the
benefits are earned by the employees.
In the statement of financial position
An amount is recognised as a defined benefit liabili
ty where the present value of the defined
benefit obligation is in excess of the fair value of th
e plan’s assets (in an unfunded scheme
there would be no plan assets) and a defined benefit
asset is recognised in the reverse
situation. The amount of asset to be recognised is li
mited to the “asset ceiling”, which is the
present value of any economic benefits available in
the form of refunds from the plan or
reductions in future contributions to the plan.
In the statement of total comprehensive income
The following items should be recognised in profit
or loss:


net interest on the net defined benefit liabili
ty or asset.
Remeasurements of the net defined benefit liabi
lity should be recognised in other
Remeasurements comprise:

actuarial gains and losses on the defined ben
 efit obligation; and
the return on the plan assets excluding any a
mounts that have been included in the
net interest on the net defined liability, whic
h has been included in profit or loss as
part of the net interest figure.
(b) Financial statement extracts
Profit or loss
$000
Current service cost 160
Net interest on opening net liability (
_____
10% × (1,500 – 1,280))
Post-retirement c
ost in profit or los _
s _
_
_
_
Other comprehensive income
$0
Actuarial loss on li 00
ability (W1)
Actual gain on ass (6
et (W1) 5)
__
__
_
Post-retirement cost in other c
____
omprehensive income
_
Present val
ue of oblig
ation _
Fair value
of plan’s a
ssets
_____
ed.
WORKINGS
(
1 Plan liabiliti
) es
$000
1,500
160
150
Balance 1 A
pril 2017 (12
Current servi
ce cost 5)
Interest
Contribution
s paid
Benefits paid
to employees

Actual return
(balance)
Actuarial los
s (balance)
_____ _____
Balance 31
March 201 _____
8
The actual return on the asset of $410 is reduced by
the net interest that has been included in
profit or loss.
Net interest on opening asset included in profit or l
oss is $1,280 × 10% = $128
Amount of actual return included in remeasurement
is $282 (410 – 128)
Tutorial note: Journal entry not required but pr
ovided for information:
Dr
Profit or loss Cr
Liability ((1,500 – 1,280) – (1, $182
750 – 1,650)) $120

Cash contri
bution $8
5
Other compreh $
ensive income 2
1
7
Answer 29 VIDENT
(a)
Why share-based payment should be rec
ognised
IFRS 2 applies to all share option schemes. The ar
guments put forward by the directors for
not recognising the remuneration expense have bee
n made by many opponents of the IFRS.
The argument that the share options do not ha
ve a cost and, therefore, should not be
recognised, is not consistent with the way that
other share issues are dealt with. An
accounting entry is required to recognise the resour
ces received as consideration for the
shares issued, just as occurs when shares are issued
in a business acquisition. The expense
recognised represents the consumption of the resou
rces received, just as depreciation will be
charged on the non-current assets acquired in a busi
ness acquisition. The consumption of the
resources in the case of share options is immediate
and may be spread over a period of time.
The question as to whether the expense arising fro
m share options meets the definition of an
expense as set out in the “Framework” document is
problematic. The “Framework” requires
an outflow of assets or a liability to be incurred bef
ore an expense is created. Services do not
normally meet the definition of an asset and, theref
ore, consumption of those services does
not represent an outflow of assets. However, s
hare options are issued for “valuable
consideration”, that is the employee services and th
e benefits of the asset received results in
an expense. The main reason why the creation of t
he expense is questioned is that the receipt
of the asset and its consumption in the form of emp
loyee services occur at virtually the same
time. The conclusion must, therefore, be that the re
cognition of the expense arising from
share-based payment transactions is consistent with
the “Framework”.
ed.
The argument that any cost from share-based paym
ent is already recognised in the dilution of
earnings per share (EPS) is not appropriate as t
he impact of EPS reflects the two economic
events that have occurred. Vident has issued share
options with the subsequent effect on the
diluted EPS and it has consumed the resources that
it received for awarding those options,
thereby decreasing earnings. These two different ef
fects on EPS are each taken account of
only once.
(b) Accounting in the financial statements for
the year ended 31 May 2018
IFRS 2 requires an expense to be recognised for the
share options granted to the directors with
a corresponding amount shown in equity. Where o
ptions do not vest immediately but only
after a period of service, then there is a presumptio
n that the services will be rendered over the
“vesting period”. The fair value of the services ren
dered will be measured by reference to the
fair value of the equity instruments at the date that t
he equity instruments were granted. Fair
value should be based on market prices. The treat
ment of vesting conditions depends on
whether or not the conditions relate to the market pr
ice of the instruments. Market conditions
are effectively taken into account in determinin
g the fair value of the instruments and
therefore can be ignored for the purposes of estimat
ing the number of equity instruments that
will vest. For other conditions such as remaini
ng in the employment of Vident the
calculations are carried out based on the best estima
te of the number of instruments that will
vest. The estimate is revised when subsequent info
rmation is available.
Remuneration expense
Prior to 1 Ju Year ended 31
ne 2017 May 2018
J Van Heflin (20,000 $000 $000
× $5 × ½)
50 50
R Ashworth (50,000 100
× $6 × ⅓) –––
– 150
–
– –––
5
0
–
–
–
The conditions set out in performance condition A
and the service condition by the director
have been met. The expense is spread over two yea
rs up to the vesting date of 1 June 2018.
The increase in the share price to above $13·50 in c
ondition B has not been met but IFRS 2
says that the services received should be recog
nised irrespective of whether the market
condition is satisfied. Additionally the director has
to work for Vident for three years for the
options to vest and, therefore, the expense is spread
over three years.
The opening balance of retained earnings at 1 June
2017 would be reduced by $50,000 and
equity (separate component) increased by $50,000.
The statement of profit or loss for the year ended 3
1 May 2018 would be charged with
directors’ remuneration relating to share options of
$150,000 and equity (separate component)
increased by the same amount.
ed.
Answer 30 SHEP I
Corporate income tax liability – year e
nded 31 December 2016

$
Profit per accounts
Add: Depreciation
Less: Tax allowance (25% of ($48,000 + 12,000)
Taxable profits
T
ax
pa
ya
bl
e
@
30
%
35
,1
00

—
—
—
—
Deferred tax liability

$
Carrying amount (60,000 – 11,000)
T
e
—
m —
p —

o
r
(
a 1
r ,
y 2
0
0
d )

i
—
f
—
f
—
e

r
e
n
c
e

Deferred tax pr
ovision require
d @ 30%
Movement on the deferred tax liability

$
Profit or l
oss (balan —
cing figur
e)
B
a
l
a
n
c
e

c
/
f
w
d

—
(d) Analysis of tax expense
C
ur
re —
nt
ta
x
ex
pe
ns
e
D
ef
er
re
d
ta
x
ex
pe
ns
e
T
— —

3
6,
3
0
0
—
—
(e) Reconciliation of accounting profit multipl
ied by applicable tax rate to tax expense
A
—
T
T
(f)
Movement on deferred tax by each catego
ry of temporary difference

B/fwd Movem
ent C/fwd
$ $
$ 1,200
Tangib
———
le asset 1,20
s – 0
—
— —
— —
—

——— ——— ———
ed.
Answer 31 SHEP II
(a)
Corporate income tax liability – year end
ed 31 December 2017

P
r
o
f
i L
t

p
e T
r

a
c
c
o
u
n
t
s

A
d
d
:

D
e
p
r
e
c
i
a
t
i
o
n

I
n
t
e
r
e
s
t

p
a
y
a
b
l
e

125,00
0
14,000
500
1,200
6,000
———
146,70
0
(16,00
0)
(150)
———
130,55
0
———
T
a
x
p
a
y
a
b
l
e
@

3
0
%

3 ,
9

Carrying Tax
Temporary

amount base
difference
$ $ $
35,00
0 6,000
29,0
00 (500)
Interest receivable (4,00 150
0 × 15% × /12) (500)

(1,200)
150 ———
 4,450
(1,200) ———
 1,335
Defer —— ——
— — ———
red ta
x @3 33,450 29,0
00
0%
—— ——
— —
(c) Movement on the deferred tax liability
B —
—
—
B
C
ur
re
nt
ta
x
ex
pe
ns
e
D
ef
er
re
d
ta
x
ex
pe
ns
e
T
3 9
9, ,—
1
6
5
1
3
5
—
—
—

3
ed.
Reconciliation of accounting profit

$
A
—
Tax effect on non-
deductible expenses (6,00 —
—
0 × 30%) —
T 39,
30
a 0
x —
—
e —
x
p
e
n
s
e

(f)
Movement on deferred tax by each catego

B/fwd Movem
ent C/fwd
$ $
Tangible 1,800
assets (150)
Interest 60
payable 0 45
Interest r (1
eceivabl 50
)
e
Provisio 45
n (3
60
)
——— —— ———
1,200 135 1,335
——— —— ———
Answer 32 SHEP III
(a)
ed 31 December 2018
t
P
r
o
f
i
t
p
e
r

a
c
c
o
u
n
1
7
5
,
0
0
0

1
8
,
5
0
0

Provision
Entertainment
Interest receivable
(note) 
Taxable profits
Tax payable @ 30%

Carrying Tax
Temporary

amount base
difference
$ $ $
16,50
(35,000
b/fwd – 18,500) 0 4,3 12,200
Tax base (29,000 b/fwd 00 (500)
24,700) 150
 (2,700)
Interest pa (500)
yable 150
Interest re (2,700 
ceivable )
Provision 
17,800
Developm
ent expend
iture
—— ———
— —
— 26,950
— 4,30 ———
Deferred t 0
ax @30% —— 8,085
3 ———
1, —
2
5
0
—
—
—

ed.

$
Balance c/fwd

$
Tax expense
(e) Reconciliation of accounting profit
A —
T —
—
—
T
(f) Movement on deferred tax by each catego

B/fwd Movement
C/fwd
$ $
Tangible 1,860 3,660
assets – (150)
Interest p – 45
ayable (450) (810)
5,340 5,340
Interest re ——— ———
ceivable 6,750 8,085
Pr ——— ———
ov
isi
on

Tutorial note:
There is no adjustment to profit for the interest p
aid and the interest receivable.
Consider the interest payable. The tax authority
will disallow the closing accrual but will
allow last year’s accrual (that has been paid in t
his year) as a deduction. These amounts are
equal so there is no net effect.
Similar comments can be made about the interest
receivable.
ed.
Answer 33 SHEP IV
(a)
ed 31 December 2018

$
Tax payable @ 28%
(b) Deferred tax liability

$
Deferred tax @28%

$
Opening balance restated to 28% (1,335 × /
Balance c/fwd

$
Tax expense
(e) Reconciliation of accounting profit

$
8
Tax
effec
T
a t on
x non-
dedu
@

2
ctible expenses (20,000 × 2
8%)
T
a 49,0
00
x

(89)
e
x 5,60
p 0
——
e –—
n
s 54,5
e 11
——
–—
ed.
(f) Movement on deferred tax by each catego

B/fwd Rate Originating
C/fwd

adjustment
$ $ $ $
Tangible as 1,800 (120) 1,736 3,416
sets (150) 10 (140)
45 42
Interest pay (360) 24 (420) (756)
able – – 4,984 4,984
Interest rec —–— —————— ———
eivable 1,335 (89) 6,300 7,546
—–— —————— ———
Deferred developme
nt costs
Answer 34 AMBUSH
(a)
IFRS 9
Classification and initial measurement
Financial assets and liabilities are initially measure
d at fair value which will normally be the
fair value of the consideration given or received. T
ransaction costs are included in the initial
carrying amount of the instrument unless it is carrie
d at “fair value through profit or loss”
when these costs are recognised in profit or loss.
Financial assets should be classified into one of thr
ee categories:
(1)
(2) financial assets at fair value through profit o
r loss;
(3) financial assets at fair value through other co
mprehensive income;
amortised cost.
A financial asset is measured at amortised cost only
if the following conditions are met:

the asset is held in a business model
assets in order
whose objective is to hold to
collect their contractual cash flows;
and

the contractual terms of the asset give rise to
cash flows that are solely payments of
principal and interest on the principal.
A financial asset is measured at fair value thro
ugh other comprehensive income if the
following conditions are met:

the asset is held in a business model whose o
bjective is by both collecting
contractual cash flows and selling financial
assets; and

the contractual terms of the asset give rise to
cash flows that are solely payments of
principal and interest on the principal.
The above two classifications relate to loan assets; t
he entity’s business model will determine
which category the asset will fall into (an entity can
not choose).
On initial recognition an asset may be designated at
fair value through profit or loss if it will
eliminate or significantly reduce an accounting mis
match.
Any gain or loss on derecognition, impairment or re
classification is recognised in profit or
loss along with any investment income generated b
y the asset. The cumulative fair value gain
or loss on debt assets classified as fair value throug
h other comprehensive income will be
reclassified through profit or loss on derecognition
of the asset.
ed.
All other financial assets are subsequently measure
d at fair value.
Any changes in fair value are recognised in profit o
r loss as well as any profit or loss on
derecognition.
On initial recognition of an investment in equity ins
truments of another entity that is not held
for trading an entity may elect to present changes in
fair value through other comprehensive
income. This election is permanent and cannot be
changed at a later date.
All changes in fair value are recognised in other co
mprehensive income. On disposal of the
asset any cumulative gain or loss is not reclassified
through profit or loss.
Any dividends received from the equity investment
are included in profit or loss.
Most financial liabilities are subsequently measured
at amortised cost using the effective
interest rate method.
Groups of financial liabilities that are not measured
at amortised cost include:

those at fair value through profit or loss (incl
uding derivatives) – measured at fair
value; and

commitments to provide a loan at a below-
market interest rate. These are measured
at the higher of the amount determined under
IAS 37 and the initial amount
recognised less any cumulative amortisation.
(b) (i) Impairment of financial assets
IFRS 9 applies an “expected loss” approach to the r
ecognition of impairment losses on
financial assets classified at amortised cost and thos
e classified at fair value through other
comprehensive income due to the entity’s business
model. This captures debt-based assets
and trade receivables. Equity instruments are meas
ured at fair value which takes account of
any fall in value.
The expected loss approach means that an entity m
ust recognise any impairment losses at the
earliest opportunity.
IFRS 9 requires an entity to create a loss allowance
based on the likely incurrence of credit
losses on relevant financial assets. If the credit risk
relating to a financial asset has not
increased significantly since its initial recognition t
he loss allowance is measured as the 12-
month expected credit losses. If the credit risk has i
ncreased significantly the loss allowance
is based on lifetime expected credit losses.
The standard allows a simplified approach to expec
ted loss allowance on trade receivables. A
provision matrix based on past empirical evidence,
adjusted for any subsequent changes, may
be applied to receivable based on the number of da
ys amounts have been outstanding.
(ii)
Loan to Bromwich
An impairment loss on the loan has arisen bec
ause of the financial difficulties and
reorganisation of Bromwich. It will be calculated b
y discounting the estimated future cash
flows. The future cash flows will be $100,000
on 30 November 2019. This will be
discounted at an effective interest rate of 8% to giv
e a present value of $85,733. The loan
will, therefore, be impaired by $114,267 ($200,000
– $85,733).
Tutorial note: IFRS 9 requires accrual of interes
t on impaired loans at the original effective
ed.
Answer 35 CONSOLIDATIONS
(a)
Consolidated statement of financial positi
on at 31 December 2017
G
180,000
————
1
180,000
————
(1) Net assets of Sink

reporting period
acquisition
$
Share ca $
pital
Retained
earnings
(2)

$
C u
o
s
t
o
f

s
h
a
r
e
s

N
e
t
a
s
s
e
t
s

a
c
q
6 ,
5
Sink (100
%  55,00 —
0) (W1)
——
(b) Consolidated statement of fina —
$
017
6,000
S 191,00
u 0
n
d
r
y
n
e
t
a
s
s
e
ts
(
1
2
9
,
0
0
0
+
6
2
,
0
0
0
)
197,000
————
E e
q
u
i
t
y

c
a
p
i
t
a
l

R
1 0
4
197,000
————

reporting period
acquisition
$
Share ca $
pital
Retained
earnings —
—
—

55,000

—
—
—

ed.
(2)

$
———
10,000
———
(3) R
e
t
a
i
n
e
d
e
a
r
n
i
n
g
s

0
7,000
(4,00
0)
———
57,000
———
(c) Consolidated statement of fina
$
017
8,000
G 170,00
o 0
o
d
w
i
l
l

————
E 1
q
u
i
t
y

c
a
p
i
t
a
l

R
e
t
a
i
n
e
d

e
a
r
n
i
n
g
s

7 0
,
————
Non-
contr
ollin
g inte
rest
End of the Acquisition
$
———
(2)

$
C 5
o
s
t
o
f

s
h
a
r
e
s

N
e
t
a
s
s
e
t
s

a
c
q
u
i
r
e
d

, 0
0
Sink (80 (
%  55,0
00) (W1)
———
(3) N $
o
n
-
c
o
n
t
r
o
ll
i
n
g
i
n
t
e
r
e
s
t
S
i
n
k
(
2
0
%



5
5
,
0
0
0
(
W
1
)
)
ed.
(d) Consolidated statement of financial positi
on at 31 December 2017
(i)
Non-controlling interest valued at proporti
onate share of identifiable net assets
Sundry net ass
ets (129,000 +
62,000)
1
195,800
————
1
1
Non
-
cont
rolli
ng i
nter
est
1
195,800
————

reporting period
acquisition
$
Share ca $
pital
Retained
earnings —
—
—

55,000

(2)

$
Net assets acquired: S 52
,0
ink (80%  55,000) (
00
W1)
(4
4,
00
0)
—
—
—

8
,
0
0
0
———
(3) No k
n-
co
ntr
olli
ng
int
ere
st
Sin
$ 0
12,40
———
(4)
S
i
n
k

(
8
0
%



7
,
0
0
0

(
W
2
)
)
0
5,600
(3,20
0)
———
56,400
—
(ii) Non-
controlling int
erest valued a
t fair value
Goodwill
Fair value of non-
52,
controlling interest (6,000 000
 $2.15)
12,
900
(55
,00
0)
———
9,900
———
ed.
(2)
1
Share of post- 2
acquisition profi ,
ts (7,000  20% 9
) 0
0
Share of goodwi
ll impairment (3
,200  20%)
1
,
4
0
0

(
6
4
0
)

———
13,660
—
(4)
5
4
Goodw (—
ill imp
aired (
3,200
 80%
)
—
A
Consolidated statement of financial position as a
t 31 December 2017
$
$
Land (80,000 + 72,000
+ 18,000 (W2)) 170,
000
129,
600
52,0
50
——
—–
351,
650
Bank (41,
000 + 8,00
420,200
0)
———–
———–
n
R
e
t
a
i
4
0
0
,
0
0
0

2
2
7
,
4
4
0

—
—
—
–

6
2
7
,
4
4
0

Non-
controlli —
ng intere
st (W4)
695,850
Current liabilities (52,000 + 24,000)
———–
ed.
WORKINGS
(1) Group structure
Hut
128
160 = 80% ords
Shed

Date of
Acquisition Post

consolidati
on acquisition

$ $ $
290,000 167,000
(3)
Goodwill
2
Fair value of
non-
controlling int
erest
Value a
t 31 De
cember
2017
86,750
Impairment loss
Allocated to:
Shareholders of Hut (Dr Retained earnings) (34,700
 80%)
Non-controlling interest (Dr Non- 6,940
controlling interest) (34,700  20%)
5
0,
Share of impairment loss 7
since acquisition (W3) 5
0
2
4,
6
0
0
—
—
—
Hut 16
Less 0,
00
Provision for u 0
nrealised profit
(W6) (2
7,
76
0)
(3,
20
0)
98
,4
00
227,440
ed.
(6) Provisi
$
on for 16,000
unreali (12,800)
———
sed pro
3,200
fit ———
S
e
l
l
i
n
g

p
r
i
c
e

G
r
o
s
s

p
r
o
f
i
t

Answer 37 HOLDING
(a)
Goodwill
Holding has acquired 18 million of Subsi
de’s 24 million equity shares which represents 75%
ownership. The consolidated goodwill is
calculated as follows:

$
1
Share capital 24
64
88
G
17 48
6 ––
––
×
75
%
=
Holding has included in its profit or loss $15 millio
n ($20m × 75%) which is the whole of its
share of Subside’s dividend. This dividend is deem
ed to accrue evenly during the reporting
period of 15 months. Therefore /15 of this amount
= $6 million is a dividend payable out of
pre-acquisition profits.
Consolidated goodwill at the date of acquisition is
$48 million.
(b)
Consolidated profit or loss of Holding for
the Year to 30 September 2017
$
R
e
v
e
n
u
e
(
W
3
)
C
o
st
o
f
s
a
l
e
s
(
W
4
)

Gross profit 2
Operating ex
penses (W5)
Interest payab
le (10 + 60%
× 5)
(
Profit before tax
Income tax expen
se (22 + 60% × 1
0)
P 6
r
o
f
i
t
a
f
t
e
r

t
a
x

Attributable
to:
Owners of 5
Holding
Non-
controlling i
nterest (W6)

62
ed.
WORKINGS
(1)
F
$
– at 30 June 2
016
– increase up t 4
o 1 January
24
Plant:
Carrying 60
amount a
t 30 June (10
2016 )
Depreciation 6 months to date
of acquisition (20 × /12)
Carrying amount a
t date of acquisitio
n
Fair value at date
of acquisition
Fair 4
val
ue i
ncr
eas
e
Total fair val 6
ue gains (24
+ 40)
(2) P
r $
e m

-
a 6
c 4
q
u 2
i
s
i
t
i
o
n

p
r
o
f
i
t
s

Retained ear
nings at 30 J
une 2016
Retained pr
ofit for perio
d $60 millio
n
of which /15
is earned to
1 January 20
17
Total pre- 8
acquisition
profits
(3) Most of the figures in the consolidated profit
or loss are based on the whole of the parent’s
figures plus the post-acquisition figures of the
subsidiary. The results of the subsidiary are f
or
a 15 month period, of which nine months is p
ost acquisition. Thus the post-acquisition res
ults
would be /15 or 60% of Subside’s relevant fig
ures.
$
Re
ve 3
nu (
e:
Ho
ldi
ng

Su
bsi
de
(60
%
× 2
80)

Int
ra-
gro
up
sal
es
488
Su
(4) C bs
id
o e (
s 60
%
t ×
17
0)
o
f In
tra
-
s gr
a ou
p
l sa
e le
s
s U
nr
ea
Holding lis
ed
profit
in inv
entory $m
200
(see 102
elow) (30)
2
Additi 12
onal
epreci
ation
see
low)
____
286
Unrealised profit:
ed.
A mark-up of 25% on cost is equivalent to 20% of t
he selling price. Holding has $10 million
($30 m × /3) of inventories at the transfer price, thu
s the unrealised profit is ($10 m × 20%)
$2 million.
Additional depreciation (plant of Subside):
At the date of the acquisition (1 January 2017) the
plant is 2½ years old and has a remaining
life also of 2½ years. Therefore the revaluation gai
n of $40 million will be amortised at $16
million per annum ($40 m ÷ 2½). The post-
acquisition period is 9 months and would thus
require additional depreciation of $12 million ( /12 ×
$16)
(5) O
p $
m
e
r
a 7
t 2
i
n
2
g
1

e
6
x
p
e
n
s
e
s

Holding

Subside
(60% ×
35)
Goodwil
l amortis
ation ($4
8 – $42)
99
The profit after tax of Subside is $60 million of whi
ch $36 million ( /15) is post acquisition.
The depreciation adjustment of $12 million (see (3)
above) is deducted from this to give an
adjusted figure of $24 million. The non-controlling
interest has a 25% interest in this profit =
$6 million.
Answer 38 HALEY
t 31 December 2017
$000
$000
4
4
C
8
T
5
E 0
q
R 5

——
No 953
n- ——
co
ntr 250
olli 469
——
ng 719
int 84
ere
——
st (
803
W
4)
N 1
9
T
—
ed.
WORKINGS
(1) Group structure
Haley
30%
Aristotle
Socrates

Reporting
Post-

date Acq
uisition acquisition
$000 $000 $000
30 30 –
110
——

Socrates
$000
75
(60)

——

15

——
All fully written off to retained earnings.
(4) N
$
S —
R
(5)
4
Soc (
rate
—
s (6
0%
 1
10
(W
2))
Ari
stot
le (
30
%
 7
0 (
W2
))
I
469
t
(6) I
——

3
Aris (
totle
(30
% 
70 (
W2)
)
Imp
airm
ent
writ
e do
wn
——
ed.
Answer 39 WATER
t 30 September 2017
$
Tangible asset
s (697,210 + 6 1
48,010) ,
3
Interest in asso 4
ciated underta 5
king (W6) ,
2
2
0
2
7
0
,
8
0
0
—
—
—
—
–
1
,
6
1
6
,
0
2
0
883,
Receivables (385,717 + 784
320,540 + 6,000) 712,
257
Cash at bank and in han
d (101,274 + 95,010) 196,
284

T
R
et
ai
ne
d
ea
rn
in
gs
(n
ot
e
2)
60
0,
00
0
1
,3
55
,8
00
—
—
—
—
–
1
,9
55
,8
00
N
o
n
-
c
o
n
t
r
o
l
l
i
n
g

i
n
t
e
r
e
s
t

2
0
4
,
0
0
0

—
—
—
—
–

2
,
1
5
9
,
8
0
0

Loan not 5
es (400,0
00 + 150,
000)
627,5
Dividends paya 45
ble – non-
65,00
controlling int 0
erest
6,000
T
o
ta
l
e
q
u
it
y
a
n
d
li
a
b
il
it
ie
s
6
9
8
,
5
4
5
—
—
—
—
–

3
,
4
0
8
,
3
4
5
—
—
—
—
–
Notes to the accounts
Payables

$
Amounts owed t 6
0
o associated unde 9
rtaking ,
5
4
5
1
8
,
0
0
0
—
—
—
–
6
2
7
,
5
4
5
—
—
—
–
(2)
Retained earnings
Of the $1,355,800, $86,800 has been retained by th
e associated undertaking.
ed.
WORKINGS
(1)
Group structure
Water
80% 40%
Hydrogen
Oxygen
(2) Net assets
Hydrogen

reporting period Acquisiti
on acquisition
$
Original $ $
share ca
pital
Bonus i
ssue
–
Ret
ain
ed
ear
nin
gs
Bo
nus
iss
ue
Div
ide
nds
pay
abl
e
620,000 320,000
–———– ———–
1,020,000 320,000
700,000
–———– ———–
———–
Oxygen

reporting period Acquisit
ion acquisition
$
$ $
Unrealiseinventory
478,000
d profit (15,000)
Less
(4,000)
0 242,000 217,000
459,00 –——— –——— –———
659,000 442,000 217,000
–——— –——— –———
ed.
(3) Goodwill
Hydrogen

$
———–
2,000
———–
All written off to retained earnings as value impaire
d.
As the recoverable amount exceeds the carrying am
ount of the investment there will be no
impairment of the investment in associate Oxygen.
Share of net assets
(20%  1,020,000) 2
(W2) 0
4,
0
0
0
—
—
—
–
$
Water
– Hydrogen (80% 
Add Dividends receiv
able 30,000)
– Oxygen (40%  1
5,000)
Hydrogen post- 30
acquisition (80%  320, ,0
00
000 (W2))
Oxygen post-acquisition 25
(40%  217,000 (W2)) 6,
00
– Hydrogen 0
86
,8
00
(6
5,
00
0)
(2,000)
————–
1,355,800
————–
(6) Interest i
n associat
$
ed undert
aking 184,
000
Cost of investment
Oxygen post acquisiti 86,8
00
on (40%  217,000 ( —
W2)) —
—–
270,
800
—
—
—–
ed.
Answer 40 HAMISH
Consolidated statement of profit o r
r loss for the year ended 30 June 2 e

018 t
a
x
C

o
s S
t h
a
o r
e
f
o
s f
a
l p
r
e
o
s f
i
a t
n s
d
o

f
e
x a
p s
e s
n o
c
s
i
e a
s t
e

O T
p a
e
x
r
a
t
i P
n r
g o
f
p i
r
o t
f
i a
t f
t
b
e
e
f r
o
t
a
x $000

15,13
1
(13,58
0)
——
—
1,551
178
(736)
——
—
993
——
—
Att
rib
uta
ble
to:
No
n-
co
ntr
olli
ng
int
ere
st (
W
3)
O
wn
ers
of t
he
par
ent
P
30
96
3
—
—
—
99
3
—
—
—
WORKINGS
(1)
Group structure
Hamish
30%
80%
Angus
Shug
(2) Consolidation schedule

Hamish Shug Angus Adjustme
nt Consolidated
5
30%
$000 $000 $000 $000
Sales reven 2,567 (50)
15,131
ue $000
(2,302) 50
Cost of sale
12,61
s – per Q 4
(11,3
18)
– unrealised profit
(50 25 ) (1 (13,58
0) 0)
Profit from associate 178
(594  30%) (115) —— (736)
(621)

150
—
(3) Non-
contro $
0
lling in
0
terest 0

Shug (
20%
 150 3
0
,000)

——

ed.
Answer 41 KANE
(a)
Consolidated statement of financial positi
on at 31 March 2018
(all figures in $000 unless otherwise stated)
ASSETS
Non-current assets:
Property, plant and equipment
(135,000 + 100,000 + 19,600
2,000 (W1)) ½ +
Goodwill (W2) ½
Investment in associate (W6) 256,6 4 (W2
Financial asset at fair value throu 00
)
1½ (W6
gh other comprehensive income )
15,76
0 ½
36,60
0
17,00
0
––––
–––
325,9
60
––––
–––
Current assets:
Inventories (45,000 + 32,000 –
00 (W4)) ½ + ½
Trade receivables (50,000 + 34,000 74,50
– 5,000 (intra-group)) 0 ½ + 1

Cash and cash equivalents (10,000
79,00 ½ + ½
+ 4,000 + 5,000 (cash in transit)) 0
19,00
0
––––
T –––
o 172,5
t 00
a ––––
–––
l
498,4
a 60
s ––––
–––
s
e
t
s

S e capita
EQUITY AND LIA h l
BILITIES a Retaine
Equity attributable to r d earni
equity holders of the ngs (W
parent 4)
Other components of ––––––
equity (W5) –
1
N 2
0
on ,
- 0
co 0
0
ntr
oll
1
in 6
g i 3
,
nt 0
er 8
est 6
( 1
W ,
0
3) 5
0
T
o –
–
t –
a –
–
l –
–
e
2
q 8
u 4
,
i 1
t 3
6
y

3
6
,
3
5
5

–
–
–
–
–
–
–
3
2
0
,
4
9
1
½ (W5)
½
8½ (W4) 1 (W3
)
Non-current liabilities:
Long-term borrowings (40
,000 + 25,000)
65, ½
Deferred tax (20,000 + 8,0 000 ½ + ½ +
00 + 600 (W1) + 6,480 (W ½
7))
35,
T 080
o
–––
t –––
a –
l 100
,08
n 0
–––
o
–––
n
–
-
c
u
r
r
e
n
t

l
i
a
b
i
l
i
t
i
e
s

Current liabilities: l
Trade and other payabl
es (30,000 + 22,000)
Deferred consideration T
(12,860 (W2) + 1,029 ( 52,00
W4)) 0
Short-term borrowings
(6,000 + 6,000) 13,88
9
T 12,00
0
o ––––
t –––
a 77,88
9 ½ + ½
–––––––
498,460 ½
––––––– ½ ————
25
————
ed.
WORKINGS – unless stated all figures in $000 – d
o not double count marks
(1)
Net assets table – Vardy
1 April 2017
80,000 31 March 2018 For (W2) For (W4)
80,000
35,000
20,000
3,000
(6,900)
–––––––
131,100
Net assets for the consolidation
–––––––
and 8,020 (9,42 ———
——
0 – 1,400) to ret —
2
ained earnings 3
½
———
——
—
Post-acquisition depreciation adjustments
For the property this is 400 ((36,000 – 24,000) × /3
0). This makes the closing adjustment
19,600 (20,000 – 400).
3).
Fair value of the investment
The carrying value should be 17,000 – an increase
of 2,000 from the 15,000 shown in the
draft accounts of Vardy. The related deferred tax is
600 (2,000 × 30%) so the net adjustment
is 1,400 (2,000 – 600).
(2) Goodwill on consolidation (Vardy)
e
S 100,
Deferred consideration (15, 000
000 ÷ (1·08) ) 12,8
Fair value of non-
controlling interest at date o 60
f acquisition
(20,000 × $1·70)
34,000

N –––––
––
et
a 146,86
ss
0
(131,100)
––––––– 2 (W1)
15,760 ½
––––––– ————
1
4
½
————
(3) Non-controlling interest in Vardy
Fair value at date of acq
uisition (W2) ½
Share of post- 3
4 ½
acquisition profits (25% , ————
× 9,420 (W1)) 0
0 1
0 ————

2
,
3
5
5

–
–
–
–
–
–
–

3
6
,
3
5
5

–
–
–
–
–
–
–

ed.
163,0 ½
Interest on deferred considerati 00
on (12,860 (W2) × 8%) (1,021
Vardy (75% × 8,020 (W1)) ½ + 3½ (W
Rooney (30% × (55,000 – 60,0 9) 1)
00)) 1
Unrealised profits on sales to 1
6,015 1
Vardy (10,000 × 25%)
Unrealised profits on sales to ————
(1,500
Rooney (12,000 × 25% × 30% )
))
8½
(2,500
)
————
(900)
–––––
––
163,08
6
–––––
––
(5) Other components of equity
Change in FV of FVTOCI i
½
nvestment 75% × 1,400 (W 1,
1) 0 ————
5
0
–
–
–
–
–
–
–
(6) Investment in Rooney
½
Share of post
½
-acquisition l
osses (W4) ½
Unrealised pr ————
ofits (W4) 1½
————
(7)
Deferred tax on temporary differences
F justme ary differ
a nt ences
i
r Net Related d
xable eferred ta
v empor x (30%)
a
l
A
n 31 Marc
s h 2018
w 19,600
2,000
e
r ––––––– ½
21,600
½
4 ––––––– ————
6,480 1
2
————
–––––––  W1

B
E
R
T
I
E

P
Statement
ro
of financial
fit
position
or
lo
ss
(a) Revenue (W1) $30,303
Exchange differences (W1) $3,030
(b) Purchases (W2 $42,85Trade paya $44,44

) 7
Exchange diffe bles (W2) 4
rences (W2) $1,587
(c) Depre
$2 ciation
 $1 3,5  £
17,64 29 200,000 Carr
7 ying

 amo
1.70 
5 unt

117, )
———
647 94,118
———
(d) Interest payable
$59,26 Loa $592
harges (W3) 0 n ( ,593
W3)
ed.
WORKINGS
(1)
Custom
er
50,000 3 Dec
Cash 50,00033,333
31 DecP or
———
50,000 50,00033,333
(2) Supplie
r
£ $
60,000
31 DecC/fwd 31 Dec
or L ———
60,00044,444
———
1 Jan B/fwd
(3)
Loan
£ $
800,000
31 DecC/fwd 31 P or
————
800,000
592,593
————
1 JanB/fwd
Answer 43 EPS

$ $
Number of$1 200,00
es 00, 0
00
0
$0.
50
———
E 29.4c
———
(b) Bonus issue
Comparative E
PS – original ( 2
as above)
2
Restated 27.75
2
c 
C
ur
re
nt
E
P
S

E
ar
ni
ng
s (
as
ab
ov
e)
N
E
58
,8
00
–
—
—
—
25
0,
00
0
–
—
—
—
23
.4
c
–
—
—
—
ed.

$ $
Less Non-controlling interest 10%  $5,000
Number of shares
Weighted average
/12) + (400,000
/
250,000
00,000  
–
E 25 ———
P c 27c
S —
—
——
(d) R
C

4 shares quoted c
um rights at 360c 3
0
0

, c
Theoretical ex-rights
34
ice =
8c
(ii) EPS
Comparative
Original
2
,
Restated 3
1

C
u
$
1 January 200,000  × = 155,172
1 October /
= 62,500
————
217,672
————
$
EPS 2
———
ed.
(e) Diluted – Convertible loan notes
$ $
Add Interest on loan notes
———

Basic
———–
–———
Basic
8.6c
1

2017

$
50,000
———
EPS
Basi
c (50,
000 ÷
400,0
00)
12.5c —
——
Dilute
d (50,0
00 ÷ 41
0,000)
Numbe 50,000
r of sha 50 000
(40,000)
res und
er optio 100c
n
Number of shares that would have
been issued at fair value
Number
of shares
outstandi
ng
410,000
————
ed.
Answer 44 AZ
(a)
How segment information improves finan
cial statements
Many entities and groups of companies conduct the
ir business in several industrial sectors and
in a number of different countries. Such entities als
o may manufacture in one country and
supply goods to customers in another country. The
se different parts of the business will be
subject to different risks determined by the business
environment in which they are operating.
Additionally each segment may have a different gro
wth potential because of the region of the
world in which it is trading and may have different
regional problems to deal with. For
example, there may be high inflation in that part of
the world, or currency problems. There is
greater awareness of cultural and environmental dif
ferences between countries by investors
and therefore geographical knowledge of business
operations is increasingly important.
Segment information helps users to better understa
nd the entity’s past performance and to
make more informed judgements about the entity as
a whole. For users to be able to assess
performance and attempt to predict likely future
results, information in the financial
statements must be disaggregated.
It is particularly important for to be are aware of th
e impact that changes in significant
components of the business may have on the busine
ss as a whole. When entities demerge
their activities, segment information becomes incre
asingly important. Key accounting ratios
for the different segments provide important inf
ormation for potential investors in the
demerged activities.
(b) Advantages and disadvantages of differe
nt approaches
“Risk and returns” approach
Segment reporting on the risks and returns basi
s produces information which is more
consistent over time and comparable between entiti
es, although the use of the directors’
judgement in segment analysis affects comparabilit
y. The greater consistency of this method
arises because the managerial method is subject to f
luctuations due to the changing allocation
of managers to the task of producing segment infor
mation. This method assists in the
assessment of profitability, and returns and the risk
s of the component parts of the entity. The
determination of business segments under this meth
od had been somewhat subjective and it is
thought segments based on an existing internal stru
cture should be somewhat less subjective.
In any event, knowledge of the entity’s internal stru
cture is valuable information in itself and
may enhance a user’s ability to predict the actions o
f management.
“Managerial” approach
This approach should be more cost effective as the i
ncremental cost of providing segment
information will be lower. If segment information i
s reported on the same basis as for
internal decision making, then this will reflect the c
lassifications used by managers to discuss
the progress of the business. However, the inf
ormation produced by this form of
classification is more likely to be sensitive because
of the strategic way in which business is
organised. Also segments with different risks and r
eturns will be combined thus affecting the
quality of the financial information produced. If th
e managerial approach is adopted, the
definition of a segment will be determined solely b
y management which means that the nature
of the information disclosed will be highly variable.
This is the approach that is now used by
IFRS 8 Operating Segments.
ed.
(c) Transactions
(i)
Fleet of aircraft
IFRS 8 requires disclosure of information relating t
o operating segments. Those segments are
based on the components that report directly to
the Chief Operating Decision Maker
(CODM). This position has the responsibility for
managing and allocating resources to the
segment. The previous standard required segments
to be identified based on segments of a
business, either by product or geographical, having
different risk and returns.
If the two business’s report separately to manageme
nt for internal purposes and management
view the business’s as two separate components the
n it is highly likely that they will be
classed as operating segments under IFRS 8.
Information would need to be presented to users of
accounts relating to the revenue, profit,
assets and liabilities of the segments. The informati
on provided is based on that given to the
CODM, which may be measured in a manner differ
ent to that required for the full IFRS
financial statements. Where there is a difference in
the method of measurement then IFRS 8
requires reconciliation between that disclosed under
IFRS 8 and the figures presented in the
full financials.
IFRS 8 not only concerns itself with the quantitativ
e disclosures but also requires a number of
qualitative disclosures to be made to users, giving t
he users the information that is available to
the internal management of the business.
(ii) Manufacturing plant
IFRS 8 requires that in measuring and reporting seg
ment revenue from transactions with other
segments, inter-segment transfers should be measur
ed on the basis that the entity actually
used to price the transfers. The basis of pricing inte
r-segment transfers and any change is
disclosed in the financial statements. Thus the fact
that market prices are used to price intra-
group transfers except where such a price is not ava
ilable, will give important information to
users of financial statements.
(iii) Material items
A segment expense is one which results from the o
perating activities of a segment that is
directly attributable to that segment or the relevant
portion of an expense that can be allocated
on a reasonable basis to that segment. Any materia
l items relating to a specific segment
should be disclosed as part of the disclosure require
ments of IFRS 8.
IAS 1 Presentation and Preparation of Financial
Statements requires an entity to disclose
information of a material nature, either due to the si
ze or nature of the transaction. IFRS 8 is
carrying this principle forward into the disclosu
re requirements for individual operating
segments, allowing users to make their own decisio
ns about the events that have affected that
segment of the business.
(iv) Holiday business
IFRS 5 Non-current Assets Held for Disposal and
Discontinued Operations requires NCA or
groups of assets that are held for disposal to b
e presented separately in the financial
statements. Assets are to be classed as held for disp
osal if the economic benefits from that
asset will primarily be generated through its dispos
al.
It would seem the disposal or discontinuance of the
holiday business may well meet the
definition of held for disposal, requiring the assets t
o be presented separately in the statement
of financial position and to be valued at the lower o
f the current carrying amount and fair
value less costs to sell.
ed.
(v) Unquoted investment
IFRS 8 requires that an entity should disclose for ea
ch reportable segment the aggregate of the
entity’s share of the profit or loss of associates acco
unted for using the equity method.
The entity should also disclose the amount of any i
nvestment in associates accounted for
using the equity method that is reported in the oper
ating segment.
Answer 45 TAB
(a)
Explanation of the purpose
The purpose of segment information is to provide u
sers of financial statements with sufficient
details for them to be able to appreciate the di
fferent rates of profitability, different
opportunities for growth and different degrees of ris
k that apply to an entity’s classes of
business and various geographical locations. The s
egment information should enable users to:
appreciate more thoroughly the results an
(i) d financial position of the entity by
permitting a better understanding of an entity
’s past performance and thus a better
assessment of its future prospects;
(ii)
be aware of the impact that changes in signifi
cant components of a business may
have on the business as a whole.
(b) Criteria
IFRS 8 requires that an entity should look to its inte
rnal organisational structure and internal
reporting system for the purpose of identifying a re
portable segment. In identifying separate
reportable segments, the directors should have rega
rd to how components of a business are
managed in terms of the reporting structure and the
allocation of resources.
Separate information must be reported for an o
perating segment that meets any of the
following quantitative thresholds:
 reported revenue (including both external an
d inter-segment) is 10% or more of the
combined revenue (internal and external) of
all operating segments;

profit or loss is 10% or more, in absolute am
ount, of the greater of:
(i)
the combined profit of all operating segment
(ii)
s that did not report a loss; and
the combined loss of all operating segments t
hat orted a loss;

assets are 10% or more of the combined asse
ts of all operating segments.
At least 75% of the entity’s revenue must be includ
ed in reportable segments. Thus operating
segments that fall below the quantitative thresholds
may need to be identified as reportable.
Information about other business activities and oper
ating segments that are not reportable are
combined and disclosed in an “all other segments”
category.
thenecessary
information is not available and the cost
develop it would be excessive.
It is highly likely that each subsidiary that TAB acq
uires would be reporting directly to some
function in the entity, and therefore be classed as an
operating segment in accordance with
IFRS 8. This would require segment informati
on to be disclosed to users of financial
statements irrespective of whether the subsidiaries
had different risk or return profiles.
ed.
(c) Required information
The following must be reported for each reportable
segment:
 a measure of profit or loss and total assets.
 a measure of liabilities if such an amount is r
egularly provided to the Chief
Operating Decision Maker (CODM).
The following must also be disclosed if the specifie
d amounts are regularly provided to the
CODM (even if not included in the measure of seg
ment profit or loss):
 revenues from external customers;
 inter-segment revenues;
 interest revenue;
 interest expense;
 depreciation and amortisation;
other material items of income and expense r
 equired by IAS 1 ;
 interest in the profit or loss of associates and
 joint ventures under the equity method;
 income tax expense or income; and
material non-cash items other than depreciati
on and amortisation.
The following must also be disclosed if the specifie
d amounts are regularly provided to the
CODM (even if not included in the measure of seg
ment assets):
 the investment in associates and joint ventur
es accounted for using the equity
method; and

additions to non-current assets (other than fi
nancial instruments, deferred tax assets
and post-employment benefit assets).
Answer 46 DAWES (IV)
Discontinued operation
The engineering division appears to be a major
and separate line of business that is clearly
distinguishable from other business activities of Da
wes. As such its sale requires separate disclosure,
usually in the notes to the financial statements, as a
discontinued activity. The following disclosures
are required by IFRS 5 Non-current Assets Held fo
r Sale and Discontinued Operations:
 in profit or loss a single amount made up o
f:

the post-tax loss on discontinued operations
 ($4.5m);
the post-tax loss on disposal of discontinued
operations ($18m (($30m – $2m) –
$46m )).
 an analysis of the amount above into:

 revenue ($22m), expenses and pre-tax profit
 or loss on discontinued operations;

related income tax of above;
gain or loss on disposal of discontinued oper
ations;
related income tax of above.
(This analysis can either been shown in profit or los
s or in the notes to the accounts.)
 net cash flow attributable to operating, invest
ing and financing activities of discontinued
operations.
ed.
Comparative figures should be restated so that com
parisons can be made.
The directors appear to be mistaken in their views o
f the damages claim. If the engineering division
had been a separate legal entity, say a subsidiary, it
may be that its liabilities would be sold with it. In
this instance Dawes is selling some of its net assets
to Manulite and the liability for the claim will
remain with Dawes. Pending legal actions are exa
mples of contingencies, however the wording of the
question implies that the liability is probable, if not
almost certain. In these circumstances the provisio
n
of $5 million must be accrued by Dawes in the curr
ent year’s accounts to comply with IAS 37
Provisions, Contingent Liabilities and Contingent
Assets.
The contributory negligence of Holroyd relating to
the failure of the sub-assembly complicates the
issue. In respect of Dawes this is a contingent asset
and its treatment is not necessarily a “mirror
image” of the liability. An assessment of the likeli
hood of the success of the counter-claim must be
made. The most appropriate treatment in such circ
umstances would probably be to disclose it as a not
e
in the financial statements giving details of the circ
umstances. A separate contingent asset should not
be accrued unless it is virtually certain to arise.
Answer 47 ETERNITY
(1)
This event requires adjustment under IAS 10
Events After the Reporting Period as it clarif
ies
the situation of the trade receivable at the yea
r end. Consequently $200,000 should be writ
ten
off as an irrecoverable debt.
Although accounts would not normally be am
(2) ended to reflect disposals of non-current asset
s
after the reporting period , the event should b
e disclosed in the notes. However, in this cas
e
the sale price may be evidence of an impairm
ent in the value of the building at the year end
and, unless it can be shown that the impairme
nt arose from circumstances arising after the
end
of the reporting period, the financial statemen
ts should be adjusted to reflect the impairmen
t.
This event provides further evidence as to the
(3) net realisable value of the electric tricycles at
the year end, and should be adjusted for. The
remaining unsold year end inventories should
be alue, which should include provision for all a
itten nticipated
down costs of transporting the tricycles to the altern
to net ative market. Prudence may dictate a write
realis down to scrap value if the alternative appears
able unlikely to arise.
Government actions, such as a nationalisation
(4) , after the end of the reporting period should
not
be adjusted for but disclosed in the notes to th
e financial statements. Full provision for the
loss arising from the nationalisation would on
ly be made in the 31 December 2018 account
s if
the going concern assumption was not approp
riate.
The flood could be disclosed in the notes. Ho
(5) wever, as the branch is fully insured, it is
unlikely that a material loss will arise. There
fore, as non-disclosure may not affect the use
rs
of financial statements, disclosure of the floo
d may be considered unnecessary.
Under IAS 10 the share issue should not be a
(6) djusted for but disclosed in the notes to the
financial statements. Non-disclosure would c
learly affect the ability of users to make prop
er
evaluations and decisions, since, for example,
the rights issue affects earnings per share (an
d
market value).
ed.
Answer 48 RP GROUP
(a)
Importance of related party relationships
and transactions
Related party relationships are part of the normal b
usiness process. Entities operate the
separate parts of their business through subsidiaries
and associates and acquire interests in
other entities for investment or commercial reasons.
Thus control or significant influence can
be exercised over the investee by the investor. The
se relationships can have a significant
effect on the reported financial position and operati
ng results and lead to transactions which
would not normally be undertaken. For example, a
n entity may sell a large proportion of its
production to its parent because it cannot and could
not find a market elsewhere. Additionally
the transactions may be effected at prices which wo
uld not be acceptable to unrelated parties.
Even if there are no transactions between the relate
d parties it is still possible for the operating
results and financial position of an entity to be affec
ted by the relationship. A recently
acquired subsidiary can be forced to finish a relatio
nship with a major supplier or customer in
order to benefit group companies. Transactions ma
y be entered into on terms different from
those applicable to an unrelated party. For example
, a parent may lease equipment to a
subsidiary on terms unrelated to market rates for eq
uivalent leases.
In the absence of contrary information, it is assume
d that the financial statements of an entity
reflect transactions carried out on an arm’s length b
asis and that the entity has independent
discretionary power over its actions and pursues
its activities independently. If these
assumptions are not justified because of related part
y transactions, then disclosure of this fact
should be made. Even if transactions are at arm’s l
ength, the disclosure of related party
transactions is useful because it is likely that future
transactions may be affected by such
relationships. The main issues in determining such
disclosures are the identification of related
parties, the types of transactions and arrangements
and the information to be disclosed.
(b) Exemption for small entities
The disclosure of related party information is as im
portant to the user of the accounts of small
entities as it is to the user of larger entities. If the tr
ansaction involves individuals who have
an interest in the small entity then it may have
greater significance because of the
disproportionate influence that this individual may
have. The directors may also be the
shareholders and this degree of control may affect t
he nature of certain transactions with the
entity. It is argued that the confidential nature of su
ch disclosures would affect a small entity
but these disclosures are likely to be excluded from
abbreviated accounts made available to
the public. In any event if these disclosures are so s
ignificant then it can be argued that they
ought to be disclosed.
It is possible that the costs of providing the informa
tion to be disclosed could outweigh the
benefits of reporting it. However, this point of vie
w is difficult to evaluate but the value of
appropriate related party disclosures is particularly
important and relevant information in
small entity accounts since transactions with related
parties are more likely to be material.
It may be claimed that company legislation in many
countries in this area is sufficient to
ensure adequate disclosure. However, although co
mpanies’ legislation may require disclosure
requirement
andhelps
produce
a more
comprehensive set of regula
s
tions in the area.
In other countries, where there is no legislation in t
his area, the disclosure of related party
transactions is a sensitive issue. IAS 24 attempts to
ensure that some degree of uniformity
exists in the disclosure of such transactions.
ed.
The IASB has now issued “IFRS for SMEs” in whi
ch the disclosure requirements for related
party transactions are virtually the same for small a
nd medium-sized entities as under IAS 24.
Clearly then, the IASB believes that such disclosur
es are important for all entities, not just the
larger ones.
(c) Transactions
(i) Management buy-out
IAS 24 does not require disclosure of the relationsh
ip and transactions between the reporting
entity and providers of finance in the normal course
of their business even though they may
influence decisions. Thus as RP is a merchant bank
there are no requirements to disclose
transactions between RP and AB because of this rel
ationship. However, RP has a 25% equity
Investments in Associates and Joint Ventures if R
P has 20% or more of the voting power it is
presumed that significant influence exists and that
AB is an associate. However if it can be
demonstrated that significant influence does not exi
st, then it is not an associate. Thus the
equity holding in AB may not necessarily mean tha
t AB is an associate especially as the
remaining seventy-five per cent of the shares are he
ld by the management of AB who are
likely to control decisions on strategic issues. Also
merchant banks often do not regard
entities in which they have invested as associates b
ut as an investment. Often if the business
of the investor is to provide capital to the entity acc
ompanied by advice and guidance then the
holding should be accounted for as an investment r
ather than an associate.
However, IAS 28 presumes that a person owning (o
r able to exercise control over) 20% or
more of the voting rights of the reporting entity is a
related party. An investor with a 25%
equity holding and a director on the board would be
expected to have influence over the
financial and operating policies in such a way as to
inhibit the pursuit of their separate
interests. If it can be shown that such influence doe
s not exist, then there is no related party
relationship. The two entities are not necessarily re
lated parties simply because they have a
main board director on the board of AB, although I
AS 28 does state that significant influence
may be evidenced by representation on the board.
Thus the determination of a related party
relationship requires consideration of several issues
.
If, however, it is deemed that they are related partie
s then all material transactions will require
disclosure including the management fees, interest,
dividends and the terms of the loan.
(ii)
Second hand office equipment
No disclosure under IAS 24 is required in consolida
ted accounts of intra-group transactions
and balances eliminated on consolidation. IAS 24
does not address the situation where an
undertaking becomes or ceases to be a subsidiary d
uring the year. However international
practice would seem to indicate that the transaction
s between related parties will be disclosed
to the extent that they were undertaken when X was
not part of the group. Disclosure should
be made of transactions between related parties if t
hey were related at any time during the
financial period. Thus any transactions between R
P and X during the period 1 July 2016 to
31 October 2017 will be disclosed but transactions
prior to 1 July 2017 would have been
eliminated on consolidation. There is no related pa
rty relationship between RP and Z, as it is
simply a business transaction unless there has been
a subordinating of interests when entering
into the transaction due to influence or control.
However, IAS 24 requires the disclosure in the sepa
rate financial statements of RP of the
amount of any transactions, including intra-
group transactions that are eliminated on
consolidation. (These disclosures also include the a
mount of intra-group balances, if any.)
ed.
(iii) Retirement benefit schemes
Retirement benefit schemes for the benefit of empl
oyees of the reporting entity are related
parties. The rendering or receipt of services is an e
xample of a situation which could lead to
disclosure and also the payment of contributions in
volves the transfer of resources which has
a degree of flexibility attached to it, even though IA
S 19 Employee Benefits attempts to
regulate accounting for retirement benefit contributi
ons. Contributions paid to the scheme
may not have to be disclosed under IAS 24 (depend
ing on the nature of the plan and whether
or not the reporting entity controls the plan), but the
other transactions with the RP Group
must be disclosed.
Therefore, the transfers of non-current assets ($10m
) and the recharge of administrative costs
($3m) must be disclosed. The pension scheme’s in
vestment managers would not normally be
considered a related party of the reporting entity; n
or does it follow that related parties of the
pension scheme are also the entity’s related parties.
However, there would be a related party
relationship if it can be demonstrated that the invest
ment manager can exercise significant
influence over the financial and operating decisions
of RP Group through his position as a
non-executive director. Directors are deemed t
o be related parties. The fact that the
investment manager is paid $25,000 as a fee and thi
s is not material to the group does not
mean that it should not be disclosed. Materiality is
looked at in the context of its significance
to the other related party which in this instance is th
e investment manager. It is possible that
the fee will be material in this respect.
In addition to the above RP Group must disclose ke
y management personnel compensation in
total and by category. Amounts relating to post-
employment benefits would be included in
this disclosure.
Answer 49 EPTILON
(1)
IFRS 1
The International Accounting Standards Board (IA
SB) addressed this issue in International
Financial Reporting Standard (IFRS) 1 First Ti
me Adoption of International Financial
Reporting Standards. IFRS 1 states that the startin
g point for the adoption of IFRSs for the
year ended 31 December 2017 is to prepare an open
ing IFRS statement of financial position
at 1 January 2016 (the beginning of the earliest com
parative period). The general rule is that
this statement of financial position will need to com
ply with each IFRS effective at 31
December 2017 (the reporting date). This means th
at the opening IFRS statement of financial
position should:

Recognise all assets and liabilities whose rec

ognition is required by IFRSs.
Not recognise items as assets or liabilities if

IFRSs do not permit such recognition.
Apply IFRSs in the measurement of all recog
nised assets and liabilities.
ed.
This requirement causes a number of practical diffi
culties:

At the effective date of transition to IFRSs (1
January 2016) it is not totally clear
which IFRSs will be in force two years later
so the originally prepared statement of
financial position may well need to be amen
ded several times prior to the
publication of the first IFRS financial statem
ents.
 The costs of retrospectively applying the rec
ognition and measurement principles of
IFRSs might well be considerable. As far as
this issue is concerned IFRS 1 grants a
limited number of exemptions from the gene
ral requirements where the cost of
complying with them would be likely to exce
ed the benefits to users.
For example:
 There is no need to retrospectively apply IF
RS 3 Business Combinations
to combinations that occurred before the dat
e of transition to IFRSs.

An entity can elect to measure and item of P
roperty, Plant and Equipment
at the date of transition at its fair value and u
se that fair value as its
deemed cost going forward. This is not a re
valuation and any difference
between the carrying amount under previous
GAAP and the carrying
amount for IFRS will be taken to retained ea
rnings.
The 2016 financial statements will need to be prepa
red under two different sets of accounting
standards and resources (both human and capital) m
ust be available to complete this task.
(2) IAS 24
IAS 24 Related Party Disclosures deals, as its nam
e suggests, with the disclosure of matters
concerning related parties. Broadly the disclosures
fall into two parts:
(i) It is always necessary to disclose related part
y relationships when control exists
even if there have been no transactions betwe
en the parties.
(ii) In other circumstances disclosure is only requ
ired where there have been related
party transactions. A related party transa
ction is the transfer of resources or
obligations between related parties, regardles
s of whether a price is charged. Where
such ntities should disclose the nature of the relate
ansactid
ons party relationship as well as the types of trans
ve occactions and the elements of the
urred transaction necessary for an understanding of
the financial statements. This would
normally include:
 the monetary amounts of the transactions;
 the monetary amounts of any outstanding ite
 ms;
any irrecoverable debts expense associated
with the transactions.
Parties are considered to be related if one part
y has the ability to control or exercise
significant influence over the other party in making
financial and operating decisions. A
related party may be another entity or an individual.
An entity is usually a related party to its
key management personnel and also to fellow mem
bers of the same group.
ed.
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DipIFR

POSITIO PERFORM FINANCIA

 STATEMENT  STATEMENT OF  STATEMENT O

The actual markets in which the entity trades are irr

Transaction costs are ignored because they are a cost

_____ _____ _____

Year ended 31 December 2017 2016

New Standard Voluntary change

Statement of changes in equity (extract) $000 $000

Statement of profit or loss 2017 2016

Statement of changes in equity (extract) $000 $000

Statement of profit or loss 2017 2016

Statement of changes in equity (extract) $000 $000

Dr Receivable 350,000

Dr Contract asset 350,000

Dr Receivable 700,000

Principal The seller controls the good Revenue = Gross consideration

Agent The seller arranges for the Revenue = Fee or commission

Consignment The dealer or distributor Recognise revenue when the dealer or

1.1 PDB 45 31.1 SDB 75

Cost of sales 2,500 × 0.5625 1,406 – 950 (456) 2,500 × 0.6 1,500 – 950

FIFO Weight 200 30,000

(i) FIFO 30  185 = $5,550

Dr Motor vehicle a/c 80,000

The cash cost of the BMW must be “grossed-up” for the trade-in v

1.1.15 120 20 Cr A deficit is taken to the pr

1.1.16 105 The deficit is reflected in

1.1.17 96 That part of the surplus tha

Dr Asset ($600,000 – $500,00 $100,000

Dr Revaluation reserve ($10,000  70 $7,000

Carrying amount 1,100 900

$000 $000 $000 $000

_____ _____ _____

,000200 ,000 200 840 200

Year Amount InterestRental

(1) 900 1,050 1,050 1,000 No impairment

(3) 960 925 960 1,000An impairment loss of $

 Expense IFRS 6  IAS 38

 IAS 37 guidance  Future operating losses  Refurbishment – No

December 31, 2015 65 272 306 2,113 663 3,099 267 6,785

Dr Profit or loss 77

2014 (200 – 27) × 60 × $16. 84,07 84,078

Differences Tax @

Profit afte 11,9 11,90 11,900

At 1 January 2 1,0 800

Deferred tax as a (1,000  800) 60

Carrying Tax Temporary

Actual income tax expense 23.4 1,32922.6

Period Opening balancInterest @ Closing

Yes No Yes

Amort Fair Fair value th

Other net assets 900 1,800

Net assets X + X + CONSOLIDATION = X

Net current assets 2,000 500

Retained earnings 2,500 100

Retained earnings 3,200 700

Net current assets 500 600

Retained earnings 2,600 1,150

(4) Retained earnings $

Current account – Close – 3,200

Issued capital 100 100

$ $ $ $

Year 2 Profit $10 $30

___ _ ___

___ _ ___

___ _ _ _ ___