FAR Study Guide - Students Notes - Updated Jan 2020

Study Guide
FINANCIAL ACCOUNTING AND REPORTING
Content
This module builds on the foundational knowledge of students on financial

accounting. It introduces the conceptual and regulatory framework for financial
reporting and provides an understanding of the development and application of
International Financial Reporting Standards (IFRS) in Singapore. It covers accounting
and disclosure topics concerning assets, inventories, liabilities, leases, taxation, and
cash flow and consolidated financial statements.
Module Aims
The aims of this module are to:
1. Provide an understanding of the conceptual and theoretical framework for

financial accounting.
2. Enable students to comprehend the essential components of financial

statements: cash flow statements, consolidated balance sheet and income
statement.
3. Enable students to understand the application and basis of selected financial

reporting standards in accordance with the prescribed accounting standards in
Singapore.
Learning Outcomes
On completion of this module, a participant will typically be able to:
1. Show a detailed knowledge and understanding of:
i) The overall conceptual framework for financial reporting.

ii) Regulatory framework for the preparation and presentation of financial
statements.
iii) Local accounting regulations, namely compliance of Singapore with
International Financial Reporting Standards (IFRSs).
iv) Reporting and disclosure policies relating to equity, cash flow statements,
valuation of assets, leases, liabilities, inventories and taxation.
i
2. Demonstrate module specific skills with respect to:
i) Preparing financial statements in accordance with relevant accounting

standards.
ii) Applying formats of financial information and statements in corporate
reporting.
iii) Analyzing and interpreting financial statements.
3. Show cognitive skills with respect to:
i) Assessing the alternative treatment of accounting data and information.

ii) Understanding the different perspectives and rationale through which financial
reporting may be studied.
iii) Studying how accounting information is useful to investors and creditors.
iv) Evaluating measurement and disclosure issues pertaining to an economic
entity and other selected topics.
4. Demonstrate transferable skills in:
i) Information retrieval and numerical analysis.

ii) Analytical reasoning.
iii) Communication and presentation.
iv) Financial reporting in context.
v) Problem formulation and decision making.
vi) Working with others.
Delivery of Module and Lesson Plan

TOPIC Topics TOPIC Learning Outcomes Prescribed Text,
Readings and/or
At the completion of this topic, participants Activities
will be able to:
1. The Conceptual 1. Understand the conceptual framework. Alexander and

Framework 2. Discuss the objectives and elements of Nobes, Ch 1 &
financial statements. 2
3. Discuss the financial accounting
conventions. Elliot & Elliot
4. Explain the limitations of historic costs Ch2,
accounts.
2. The Regulatory 1. Understand the regulatory system. Alexander and

Framework 2. Give an overview of compliance in Nobes,
Singapore with the International Financial Chapters 3, 4
Reporting Standards (IFRS) and 6
3. Understand the aims and operations of the
International Accounting Standards Board Elliot & Elliot
(IASB). Ch1,
4. Describe the standard setting process and
ii
its limitations.
5. Understand the features of the IASB
Framework for the Presentation of
Financial Statements.
3. Revenue Recognition 1. Outline the principles of revenue Alexander and

and Construction recognition. (IAS 18) Nobes, Ch 8
Contracts 2. Measurement of revenue (IAS 18)
(Updated according 3. Disclosure of revenue (IAS 18) Elliot & Elliot
to IFRS15) 4. Accounting treatment for construction Ch5
contracts (IAS 11)
4. Tangible Fixed 1. Define a fixed asset and describe the Alexander and
Assets components of its cost. Nobes, Ch 9
2. Understand and identify subsequent
expenditures that may be capitalized. Elliot & Elliot
3. Apply the principles of accounting for Ch10
depreciation and de-recognition of fixed
assets.
4. Understand relevant accounting standards
for the revaluation of property, plant and
equipment.
5. Investment Property 1. Define Investment Property IAS 40

2. Measure and prescribe the accounting
treatment.
6. Intangible Assets and 1. Understand the definition, recognition and Alexander and
Impairment of Assets measurement of intangible assets Nobes, Ch 9
2. Understand the characteristics and possible
accounting treatments for acquired and Elliot & Elliot
internally generated intangibles. Ch12
3. Discuss the accounting treatment for
research and development expenditure and FrankwoodV1
goodwill according to relevant accounting Ch26
standards.
4. Define impairment loss and identify
circumstances that may indicate
impairment of an asset.
7 Leases 1. Define the characteristics of a lease. Alexander and

2. Describe the method of determining a lease Nobes, Ch 9
type.
3. Account for operating leases in financial Elliot & Elliot
statements. Ch11
4. Account for finance leases in the financial
statements of lessor and lessees.
8. Inventories 1. Outline the principles of inventory Alexander and

valuation. Nobes, Ch 10
iii
2. Understand the various methods of valuing
inventory. Elliot & Elliot
3. Understand the valuation of inventory Ch13, 14
under the perpetual and periodic system.
4. Understand the reporting of inventory Frankwood
under the lower of cost or net realizable V1 Ch29, V2
value rule Ch3
9. Statement of Cash 1. Prepare a cash flow statement for a single Alexander and
Flows entity in accordance with relevant Nobes, Ch 13
accounting standards using the direct and
indirect method. Elliot & Elliot
2. Interpret cash flow statements to assess the Ch21
financial position of an entity.
Frankwood
V1 Ch39, V2
Ch15
10. Liabilities 1. Define a liability and distinguish between Alexander and

the different types of current liabilities. Nobes, Ch 11
2. Understand the treatment in dealing with
long-term debt instruments.
3. Account for provisions and contingent
liabilities and assets.
11. Taxation in Financial 1. Account for taxation in accordance with Alexander and
Statements relevant accounting standards. Nobes, Ch 12
2. Record entries on taxation in accounting
records. Elliot & Elliot
3. Understand the effect of timing differences Ch 9
on accounting and taxable profits.
4. Understand the concept of deferred
taxation.
12. Consolidated 1. Explain the different methods which could Alexander and
Financial Statements be used to prepare consolidated financial Nobes, Ch 14
statements.
2. Understand the preparation of consolidated Elliot & Elliot
balance sheets for a group of companies Ch15-19
with a simple group structure.
3. Take into account appropriate treatment in Frankwood
respect of goodwill and minority interests. V2 Ch16-21
4. Understand the preparation of consolidated
income statements for a group.
13. Revision
14. Revision
iv
Teaching and Learning Methods
Participants will learn through a combination of lectures, discussion and practice

exercises. Participants will be expected to learn independently by carrying out reading
and directed study beyond that available within taught classes.
Indicative Readings
David Alexander and Christopher Nobe (2016) Financial Accounting:
Reference An International Introduction 6th Edition, Pearson Education ISBN
Textbook 978129210299
Supplementar Alexander D., Britton A. and Jorissen A. 2014, International

y reading Financial Reporting and Analysis 6th Ed, Cengage, London.
Barry Elliot and Jamie Elliot 2015, Financial Accounting and

Reporting. 17th Ed. Pearson Education.
Frank Wood and Alan Sangster 2015, Business Accounting Volume 1

& 2. 13th Ed. Pearson Education
Singapore Financial Reporting Standards (FRSs) are available on the

following website: http://www.asc.gov.sg/frs/index.htm.
Institute of Singapore Chartered Accounts of Singapore (ISCA)

http://www.accountants.org.sg
IFRS Pocket Guide 2015, visit

https://www2.deloitte.com/content/dam/Deloitte/by/Documents/audit/
IFRS-in-your-pocket-eng.pdf
Assessment/Coursework
All assessments must comply with the SIM Rules and Regulations. To satisfy module
requirements, students must:
1) Satisfactorily complete and present on due dates their completed assignment. A
penalty of 20% of the total marks will be imposed for late submission. More than one
calendar will get zero marks.
2) Complete all assignments and the final examination in a satisfactory manner.
3) Must reference all their work and observe SIM’s policy on plagiarism. Students
found guilty of plagiarism will be dealt with severely.
4) Adopt either the Harvard or APA (American Psychological Association) Referencing
Styles.
5) Spend at least 100 hours (including class attendance and assignments) on the module
in order to fare reasonably.
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Specific for this module are the following requirements:
Weighting between components A and B - A: 60% B: 40%
Element Description Element Type % of Assessment
Component A (Controlled
Conditions)
Examination (120 minutes) Summative 60%
Component B (Assignments)
CA 1 – Individual Assignment Summative 30%

Week 4
CA 2 – Online Quiz Summative 10%
Due: Week 5
Total 100%
ACKNOWLEDGEMENTS
The following notes (from Topic 1 to Topic 12) are abridged, adapted and customized
from the following textbooks and the accompanying instructor’s manuals:
Alexander D., Britton A. and Jorissen A. 2011, International Financial Reporting 5th
Ed and Analysis, Cengage, London.
Alexander D and Nobes C 2016, Financial Accounting: An International Introduction

6th Ed Prentice Hall FT, Harlow.
Barry Elliot and Jamie Elliot (2011) Financial Accounting and Reporting. 14 ed.
Pearson Education.
Beams, Anthony, Clement and Lowensohn, 2014. Advanced Accounting 12 ed.

Prentice Hall Business Publishing.
Drafting Financial Statements, 2009, Kaplan Publishing.
Financial Accounting and Tax Principles, 2009 CIMA, Elsevier Publishing.
Frank Wood and Alan Sangster 2012, Business Accounting Volume 1 & 2. 12 ed.
Pearson Education.
Harrison & Horngren, 2016. Financial Accounting, 11/e. Prentice Hall Business
Publishing.
Kieso, Weygandt, and Warfield, Intermediate Accounting, 13th ed. John Wiley & Son
Inc.
A Practical Guide to Financial Reporting Standards (Singapore) 6th Edition. CCH

Asia Pte Ltd.
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TOPIC 1
THE CONCEPTUAL FRAMEWORK
At the completion of this TOPIC, participants will be able to:
o Understand the conceptual framework

o Discuss the objectives and elements of financial statements.
o Discuss the financial accounting conventions.
o Explain the limitations of historic costs accounts.
1.1 INTRODUCTION OF CONCEPTUAL FRAMEWORK
Historically, many accounting standard setters operated without having a conceptual

framework in place. This resulted in accounting standards that are inconsistent with each
other and there is no overall objective for the preparation of the financial statements. In
response to that, the Conceptual Framework is developed to drive the development and
consistency of the accounting standards.
Definition of Conceptual Framework:

A constitution, coherent system of interrelated objectives and fundamentals which can lead to
consistent standards and which prescribe the nature, function and limits of financial
accounting and financial statements.
1.1.1 PURPOSE OF CONCEPTUAL FRAMEWORK
The Framework is to be the foundation for building a set of coherent accounting standards
and rules. Hence, the Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users.
The purpose of the Conceptual Framework is to:
(a) to assist in the development of future financial reporting standards and the review of
existing financial reporting standards by setting out the underlying concepts;
(b) to assist preparers of financial statements in applying financial reporting standards

and in dealing with topics that have yet to form the subject of an financial reporting
standards;
(c) to assist auditors in forming an opinion on whether financial statements comply with
financial reporting standards; and
(d) to assist users of financial statements in interpreting the information contained in

financial statements prepared in compliance with financial reporting standards.
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1.1.2 SCOPE OF CONCEPTUAL FRAMEWORK
The Conceptual Framework deals with:
a) the objective of financial reporting;

b) the qualitative characteristics of useful financial information
c) the definition, recognition and measurement of the elements (assets, liabilities,
equity, income and expenses) of the financial statements
1.2 OBJECTIVE OF FINANCIAL STATEMENTS
To provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing resources
to the entity.
1.2.1 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

INFOMRATION
The qualitative characteristics of useful financial information identify the type of information
that are likely to be most useful to the existing and potential investors, lenders and other
creditors for making decisions about the reporting entity on the basis of information in its
financial reports.
If financial information is to be useful, it must be relevant and faithfully represents what it

purports to represent. The usefulness of financial information is enhanced if it is comparable,
verifiable, timely and understandable.
Fundamental Characteristics
The fundamental qualitative characteristics are relevance and faithful representation.
Relevance
For financial information to be relevant, it must have both predictive and confirmatory value.
Financial information has predictive value if it can be used as an input to processes employed by
users to predict future outcomes. Financial information has confirmatory value if it provides
feedback about (confirms or changes) previous evaluations.
Implicit within the characteristic of relevance is the notion of materiality. Information has to be
material in order to be relevant. Information is material if omitting it or misstating it could
influence decisions of that users make on the basis of financial information about a specific
reporting entity. Materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates in the context of an individual’s
entity financial report.
Example
Revenue information for the current year, which can be used as the basis for predicting revenues
in future years, can also be compared with revenue predictions for the current year that were
made in past years.
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Representational faithfulness
Financial reports provide useful information when it faithfully represents the phenomena that it
purports to represent. To be a perfectly faithful representation, a depiction would have to be
complete, neutral and free from errors.
A complete depiction of a group of assets would include, at a minimum, a description of the

nature of the assets, a numerical depiction of the assets, and a description of what the numerical
depiction represents (eg. original cost or fair value).
A neutral depiction is without bias in the selection of or presentation of financial information. It

is not slanted, weighted, emphasised, de-emphasised, or manipulated to increase the probability
that financial information will be received favourably or unfavourably by users.
Enhancing Characteristics
Comparability, verifiability, timeliness and understandability, are qualitative characteristics that
enhances the usefulness of information that is relevant and faithfully represented
Comparability
Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for another
period or another date.
Verifiability
Verifiability means that different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful
representation.
Timeliness
Timeliness means having information available to decision-makers in time to be capable of
influencing their decisions. Generally, the older the information is, the less useful it is.
Understandability
Classifying, characterising and presenting information clearly and concisely makes it
understandable.
1.2.2 BASIC ELEMENTS OF FINANCIAL STATEMENTS
The elements of the financial statements represent the economic characteristics of

transactions as shown on the financial statements, namely the Statement of Financial Position
(Balance Sheet) and Statement of Comprehensive Income (Income Statement).
Statement of Financial Position

The statement of financial position is simply a list of all the assets owned by a business and
all the liabilities owed by a business as at a particular date. It is a snapshot of the financial
position of the business at a particular moment.
The elements relating to the measurement of financial position are assets, liabilities and
equities. They are being defined as follows:
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Asset
An asset is a resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise;
Liability
A liability is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying
economic benefits;
Equity
An equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
Statement of Comprehensive Income

The statement of comprehensive income records the income generated and expenditure
incurred over a given period.
The elements relating to the measurement of financial performance are income and expenses.
They are being defined as follows:
Income
Income is increases in economic benefits during the accounting period in the form of:
• inflows or enhancements of assets; or
• decreases of liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
Income encompasses both revenue and gains. Revenue arises in the course of the ordinary
activities of an enterprise and is referred by a variety of names, such as sales, fees, interest,
dividends, royalties and rent. Gains, despite meeting the definition of income, may or may
not arise in the course of the ordinary activities of an enterprise. When gains are recognised
in the income statements, they are usually displayed separately because knowledge of them is
useful for the purpose of making economic decisions. Examples are gain from disposal of
non-current assets or gain in fair value of held-for-trading securities.
Expenses
Expenses are decreases in economic benefits during the accounting period in the form of:
• outflows or depletions of asset; or
• incurrences of liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.
Expenses encompass expenses that arise in course of the ordinary activities of the enterprise,
as well as losses. Expenses that arise in the course of the ordinary activities of the enterprise
include, for example, cost of sales, wages and depreciation. Losses, despite meeting the
definition of expenses, may or may not, arise in the course of the ordinary activities of the
enterprise. Examples are loss from disposal of non-current assets or loss in fair value of held-
for-trading securities. When losses are recognised in the income statement, they are usually
displayed separately because knowledge of them is useful for the purpose of making
economic decisions.
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1.2.3 COMPLETE SET OF FINANCIAL STATEMENTS
A complete set of financial statements comprises:
(a) a statement of financial position;

(b) a statement of profit or loss and other comprehensive income;
(c) a statement of changes in equity;
(d) a statement of cash flows;
(e) notes, comprising a summary of significant accounting policies and other explanatory
information; comparative information in respect of the preceding period
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1.3 FINANCIAL ACCOUNTING CONVENTIONS
1.3.1 RECOGNITION AND MEASUREMENT CRITERIA
Accounting conventions/ Assumptions
i. Economic/Business The economic entity can be identified with a particular unit

entity assumption of accountability. The business is separate and distinct from
its owners. Entity’s assets and other financial elements are
not commingled with those of the owners. The economic
entity assumption is an accounting concept, and not a legal
construct
ii. Going concern The business is assumed to continue indefinitely unless

assumption terminated by owners. The basis of recording financial
elements is historical accounting. Liquidation accounting
(based on liquidation values) is not followed unless so
indicated.
iii. Monetary Unit Money is the common unit of measure of economic

assumption transactions. Use of a monetary unit is relevant, simple to
understand and universally available. Price level changes
are ignored in accounting, leading to the assumption that the
dollar remains relatively stable.
iv. Periodicity (time Economic activity of an entity may be artificially divided

period) assumption into time periods for reporting purposes. Shorter time
periods are subject to revisions but may be more timely.
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1.3.2 ACCOUNTING PRINCIPLES
Accounting Principles
Historical cost Transaction is recorded at its acquisition price. It is not

principle changed to reflect market price. The principle applies to
most assets and liabilities. Users of financial statements may
find fair value information useful for certain types of assets
and liabilities. The current system is a “mixed attribute”
incorporating historical cost, fair value, and certain other
valuation bases.
Revenue recognition Revenue is recognized when it is realized or realizable and

Principle earned and the amount can be objectively determined.
Revenue is recognized at time of sale. There are exceptions:
- During production: In long-term construction revenue is
recognized periodically based on % of job completed.
- End of production: Where active markets exist for the
product and there are no significant future costs.
- Receipt of cash: Used when there is uncertainty of
collection. In installment sales contracts payment is required
in periodic installments.
Matching Expenses are matched to the revenues they help generate.

principle Match (record) expenses to the revenues which they helped
generate. There should be a logical, rational association of
revenues and expenses. If a cost does not benefit future
periods, it is recorded in the current period as an expense.
Full disclosure Financial statements must report what a reasonable person

principle would need to know to make an informed decision.
Disclosure may be made:
- within the body of the financial statements,
- as notes to those statements, or
- as supplementary information.
Disclosure is not a substitute for proper accounting.
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1.3.3 ACCOUNTING CONSTRAINTS
Accounting Constraints
Materiality Materiality refers to an item’s importance to a firm’s overall

financial operations. An item must make a difference to be
material and be disclosed. It is a matter of the relative
significance of the element. Both quantitative and qualitative
factors are to be considered in determining relative significance
Materiality has both quantitative and qualitative characteristics.

o Quantitative--Amount must be significant to be separately
disclosed.
o Qualitative--Transaction has selected characteristics that
require close attention, disclosure. For example, a forged
cheque of a minimal amount has cleared the company’s
account. This would indicate internal control problems.
Very pervasive concept with implications for many accounting
decisions.
Conservatism If there is a range of equally acceptable values, select the

alternative that will be least likely to overstate assets or understate
liabilities. It does not mean to purposely understate or misstate a
value.
Cost Benefit The cost of providing information should not outweigh the benefit
derived. Costs and benefits are not always obvious or measurable.
Sound judgment must be used in providing information.
Industry practices The nature of some industries sometimes require departures from
basic accounting theory. If application of accounting theory
results in statements that are not comparable or consistent, then
industry practices must be examined for possible explanations.
The financial statements shall not mislead a reader. If following

“pure” accounting theory results in statements that are not
comparable or consistent, not relevant or reliable then theory
should be adjusted.
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1.4 MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS
Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognised and carried in the Statement of Financial
Position (Balance Sheet) and Statement of Comprehensive Income (Income Statement).
A number of different measurement bases are employed to varying combinations to the

financial statements. They include the following:
(i) Historic Cost
• Assets are recorded at the amount of cash or cash equivalents paid to acquire them.
• Liabilities are recorded at the proceeds received in exchange for the obligation.
(ii) Current Cost
• Assets are carried at the amount of cash or cash equivalents that would have to be
paid if the same or an equivalent asset was acquired currently.
• Liabilities are carried at the undiscounted amount of cash or cash equivalents that
would be required to settle the obligation currently.
(i) Realisable (settlement) value
• Assets are carried at the amount of cash or cash equivalents that could currently be
obtained by selling the asset in an orderly disposal.
• Liabilities are carried at their settlement values; that is, the undiscounted amounts of
cash or cash equivalents expected to be paid to satisfy the liabilities in the normal
course of business.
(ii) Present value
• Assets are carried at the present discounted value of the future net cash inflows that
the item is expected to generate in the normal course of business.
• Liabilities are carried at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the normal course of business.
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1.5 PROBLEMS OF HISTORICAL COST ACCOUNTING
Problems with historical cost accounting are:
(i) Non-current assets values are unrealistic
The value of non-current assets shown on the statement of financial position may be
unrealistic if presented at their historical cost. For example, property assets have a
tendency to appreciate over time; hence the value on the statement of financial position
becomes understated. To overcome this problem a business may periodically revalue its
assets.
(ii) Potential capital reduction
Distributions made out of profit based on the historical cost basis may result in a reduction
of capital in real terms. Depreciation is regarded as a proxy for the contribution non-
current assets have made to the business over the accounting period. A criticism of
depreciation based on historical cost is that it may not adequately reflect the value of the
asset’s contribution during the year. This inadequacy is partly overcome by periodically
revaluing the assets.
(iii) Holding gains on inventory are included in profit
Closing inventory, during a period of rising prices, will tend to have a higher value than
goods purchased in earlier period under the FIFO (first-in first-out) cost flow
assumptions. Therefore, the gross profit will be overstated because the closing inventory
is deducted from the opening inventory plus purchases. However, when the inventory is
eventually sold it will probably cost more to replace.
(iv) Comparisons over time are unrealistic
Measuring the growth or the success of a business over time can be difficult during
periods of inflation. For example, comparing the current profitability of a company with
its performance ten years later would be meaningless without attempting to adjust the
figures for inflation.
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1.6 REVIEW QUESTIONS
Review Question 1
Explain the Conceptual Framework and its purpose.
Review Question 2
Explain what information the following users of financial statements are likely to be
interested in:
(i) Investors
(ii) Creditors
Review Question 3
Which do you think a shareholder is likely to find more useful: a report on the past or an
estimate of the future? Why?
Review Question 4
Explain the following qualitative characteristics of financial information that are currently
included in the Framework:
(i) Relevance;
(ii) Representational faithfulness;
(iii) Comparability;
(iv) Understandability.
Review Question 5
Discuss the problems with using historical cost accounting during a period of rising prices
and explain how some of these problems may be overcome.
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TOPIC 2:
THE REGULATORY FRAMEWORK OF ACCOUNTING
o Understand the regulatory system and the role of accounting bodies.

o Give an overview of compliance in Singapore with the International Financial
Reporting Standards (IFRS)
o Understand the aims and operations of the International Accounting Standards Board
(IASB).
o Understand the features of the IASB Framework for the Presentation of Financial
Statements.
2.1 THE REGULATORY SYSTEM
The regulatory framework of accounting is made up of a number of legislative and quasi-

legislative influences which are:
a) National company legislation

b) International financial reporting standard (IFRS) issued by the International
Accounting Standard Board (IASB).
c) The Stock Exchange
2.2 THE ROLE OF ACCOUNTING BODIES
2.2.1 The Accounting Regulatory Bodies in Singapore
The regulatory framework of accounting in Singapore is made up of:
a) The Companies Act

b) Financial Reporting Standards (FRS) issued by the Accounting Standard Council
(ASC)
c) The Singapore Exchange, if the entity is a listed company.
FRSs are included the Companies (Accounting Standards) Regulations and this is part of the
Companies’ Act.
Any director of a company which fails to comply with the FRS is guilty of an offence and is
liable on conviction to a fine not exceeding $50,000. If the offence is committed with
intention to defraud, then the fine is; not exceeding $100,000 and/or an imprisonment term
not exceeding three years.
The Accounting and Corporate Regulatory Authority of Singapore (ACRA) monitors and
enforces compliance with FRS.
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The full IFRS convergence for Singapore-listed companies was announced by ASC in May
2014. Singapore-incorporated companies that have issued, or are in the process of issuing,
equity or debt instruments for trading in a public market in Singapore shall apply the new
framework that will be identical to IFRSs for annual periods beginning on or after 1 January
2018.
The standards are known as Singapore Financial Reporting Standards (International)

(SFRS(I)s), Singapore’s equivalent of the International Financial Reporting Standards
(IFRSs).
(a) Accounting Standard Council (ASC)
The Accounting Standards Council (ASC) is empowered under the Accounting Standards Act
to prescribe accounting standards for use by companies, charities, co-operative societies and
societies. It is responsible for prescribing accounting standards in Singapore to ensure
consistency in accounting standards, facilitate comparison of financial statements between
different entities and to enhance the credibility and transparency of financial reporting.
The ASC is responsible only for the formulation and promulgation of accounting standards.
The monitoring and enforcement of compliance with accounting standards will remain the
prerogative of the respective regulators, viz. ACRA for companies, Commissioner of
Charities for charities, Registrar of Co-operative societies for co-operative societies and
Registrar of Societies for societies.
The broad policy intention is to adopt the International Financial Reporting Standards (IFRS)
issued by the International Accounting Standards Board (IASB). Convergence with
international accounting standards would achieve greater transparency and comparability of
financial information among companies and help lower compliance costs for companies
investing in Singapore as well as local companies going overseas. However, while the ASC
will track closely the introduction of new IFRS for possible adoption in Singapore, it will also
take into account the local economic and business circumstances and context, as well as the
entity to which the IFRS would apply to.
The ASC adopts a formal and rigorous process in prescribing Financial Reporting Standards
(FRS) so as to ensure that the accounting standards prescribed are of a consistent high quality.
The various sectors and stakeholder groups are all given adequate opportunities to express
their views. The ASC also works closely with the Institute of Singapore Chartered
Accountants [see note (b)] in reviewing new accounting proposals and prescribing accounting
standards.
The ASC believes it is useful to maintain good communication with the IASB, through
proactively surfacing views relating to local specific issues on the IASB’s projects for the
IASB’s attention and consideration. These include representation on the IASB Standards
Advisory Council, participation at standard setters meetings, reviewing and commenting on
relevant IASB’s research and improvement projects, and working with IASB liaison
representatives. The ASC also sees the benefit of collaborating with national standard setters
in the region in reviewing convergence issues, especially where there are similar concerns.
Note: Further information about the ASC, you can visit: http://www.asc.gov.sg.
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b) Institute of Singapore Chartered Accountants (ISCA)
The ISCA is the only professional body in Singapore. Prior to July 2013, it was known as the
Institute of Certified Public Accounts (ICPAS). According to the Companies Act, all limited
companies are required to appoint an external auditor who has to be a member of the ISCA.
Established in 1963, ISCA is the national accountancy body that develops, supports and
enhances the integrity, status and interests of the profession.
ISCA is a designated entity to confer the Chartered Accountant of Singapore, CA

(Singapore). As the Administrator of the Singapore Chartered Accountant Qualification
(Singapore CA), ISCA aims to raise the profile of this post-university professional
accountancy qualification programme, helping it to attain international recognition and
promoting it as the educational pathway of choice for professional accountants.
ISCA will work towards establishing the global recognition and reputation of the CA
(Singapore) designation by continuing to expand its extensive network of partnerships with
international accountancy bodies. It will also promote thought-leadership, support
professional development and cultivate a regional and global network of CAs (Singapore).
Note: For further information about ISCA, you can visit: http://corp.isca.org.sg/
2.2.2 The Accounting Standard Setting Process in Singapore
Exposure stage – Review and comments received
When the IASB issues an Exposure Draft (ED) on new IFRS/amendments to existing IFRS or
a draft Interpretation of the FRS/amendment to an existing Interpretation, the ASC also issues
an equivalent ED on the proposed equivalent FRS (ED FRS) or draft Interpretation (ED INT
FRS) on the ASC website. This is to invite comments from the public as well as interested
parties. ASC also seeks comments from its members. The ASC may conduct separate public
consultations to solicit comments on specific areas covered in the ED FRS or ED INT FRS.
The comments received will be channelled to the ASC secretariat and representatives from
ISCA. To facilitate an efficient and effective review, the ISCA sets up standing
subcommittees, comprising both ISCA members as well as representatives from certain key
affected or interested industries (e.g. banking, property, manufacturing, insurance etc). These
subcommittees form the core expert groups to review and deliberate on accounting issues
pertaining to their industries.
After reviewing the comments received and accounting issues in the ED, the ISCA
subcommittees will present their recommendations and propose draft comments to IASB on
the ED FRS or ED INT FRS to ASC for consideration.
Post exposure stage - submission of comments to the IASB
Upon receiving ISCA’ proposed comments to the IASB documents, the ASC would then seek
further feedback from its four Committees (namely the Committee for “For-Profit” Entities,
the Committee for Charities, the Committee for Co-operative societies and the Committee for
Societies) before deciding whether to approve the draft comment letter.
14
Once ASC approves the final draft comment letter, the ASC secretariat will email to the
IASB. The comment letter will also be posted on the ASC website for public view. The ASC
secretariat will send email alerts to subscribers on the comment letters sent to the IASB.
Issuance of final standards or interpretations by IASB
After the exposure period, ASC and ISCA will continue to monitor the IASB’s developments
to see if there are any further changes to the proposed standard.
When the IASB issues the final Standard or Interpretation, ISCA and its relevant
subcommittees will review the final Standard or Interpretation and consider any changes from
the earlier proposed Standard or Interpretation during the ED stage, taking into account the
impact on relevant stakeholders and will advise the ASC on whether the new Standard should
be adopted in full or in part in Singapore.
The ASC Committees will also consider whether to adopt the standard or interpretation, in
full, or with modifications, and recommend accordingly to the ASC.
Upon due consideration and after seeking independent counsel from a technical consultant,
the ASC will decide whether to prescribe the new standard or interpretation as accounting
standards in Singapore, in full or with modifications.
Following the ASC’s decision to adopt an IFRS or Interpretation of IFRIC, the ASC
secretariat will also work with ISCA in preparing the actual FRS or INT FRS to be issued.
The final approved FRS or INT FRS will be published on the ASC website.
15
The flowchart of prescribing accounting standards is provided below:
Note : ICPAS to be replaced by ISCA
16
2.3 AIMS AND OPERATIONS OF THE INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IASB)
a) International Financial Reporting Standards Foundation

(formerly known as International Accounting Standards Committee Foundation)
IFRS Foundation is the legal entity under which the International Accounting Standards
Board (IASB) operates. The role of the IFRS Foundation is to oversee the IASB and related
bodies and to raise the funds needed.
b) International Accounting Standards Board (IASB)
The role of the IASB is to develop and issue global accounting standards.
c) International Financial Reporting Interpretations Committee (IFRIC)
The role of IFRIC is to provide timely guidance on the application of IFRICSs where
unsatisfactory interpretations exist or new processes arise.
d) IFRS Advisory Council (formerly known as Standards Advisory Council (SAC))
The role of the IFRS Advisory Council is to provide a formal forum where the IASB can
consult individuals, academics and representatives of organizations affected by its work.
IFRS Advisory
Council
17
2.3.1 THE STRUCTURE OF THE IASB
The structure of the IASB was revised in May 2000 under a new constitution and can be
summarized as follows:
2.4 OBJECTIVES OF IASB FRAMEWORK
2.4 OBJECTIVES OF IASB FRAMEWORK
The objectives of the IASB framework are to assist:
(i) the IASB in the development of future International Accounting Standards and in
its review of existing International Accounting Standards;
(ii) the IASB in promoting the harmonisation of regulations, accounting standards

and procedures relating to presentation of financial statements by providing a
basis for reducing the number of alternative accounting treatments permitted by
International Accounting Standards.
(iii) the preparers of financial statements in applying International Accounting

Standards and in dealing with topics that have yet to form the subject of an
International Accounting Standard;
(iv) the auditors in forming an opinion as to whether financial statements conform

with International Accounting Standards;
(v) the users of financial statements in interpreting the information contained in

financial statements prepared in conformity with International Accounting
Standards; and
(vi) those who are interested in the work of IASB, providing them with information
about its approach to the formulation of accounting standards.”
18
2.4.1 The IASB’s Framework and the Standard Setting Process
2.5 ARGRUMENT FOR AND AGAINST ACCOUNTING STANDARD
2.5.1 The Arguments FOR Having Accounting Standards
The arguments FOR having accounting standards:

(i) Accounting standards require companies to disclose information which they might not
want to disclose if the standards did not exist
(ii) Accounting standards restrict the number of choices in the methods used to prepare
financial statements which should help the users to compare the financial performance
of different organizations. This may also reduce the risk of creative accounting.
(iii) Companies are obliged to disclose the accounting policies they have used in the
preparation of accounts. This should help the users of accounts better understand the
information presented.
(iv) Accounting standards should increase the credibility of accounts by increasing
uniformity of accounting treatment between companies.
(v) Accounting standards provide a focal point for in the accounting profession for
discussion about accounting practice.
2.5.2 The Arguments AGAINST Having Accounting Standards
The arguments AGAINST having accounting standards:

(i) Sometimes the accounting method advocated may not be appropriate in some
particular circumstances or for certain types of organization.
(ii) Accounting standards may be overly prescriptive, reducing flexibility and the
opportunity for accountants to use their professional judgement.
(iii) Standards may be too general, resulting in a lack of clear guidance in some situations.
(iv) If standards contain too many detailed rules, there is a danger that preparers will
develop creative accounting techniques that technically adhere to the rules but conflict
with the overall aims and principles behind financial statements.
(v) Accounting standards may have been drafted as a consequence of a particular pressure
group.
(vi) Some accounting standards can be expensive to comply with.
19
Review Question 1
What is the Regulatory Framework in Singapore? Briefly explain the role of the Accounting
Standard Council.
Review Question 2
State the main role of each of the following bodies:
(i) International Financial Reporting Standards Foundation (IFRS Foundation)
(ii) International Accounting Standards Board (IASB)
(iii) International Financial Reporting Interpretations Committee (IFRIC)
(iv) IFRS Advisory Council
Review Question 3
Discuss the arguments for and against having accounting standards as a basis for preparing
financial statements.
20
TOPIC 3
REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS15)

[Replace REVENUE (IAS 18) AND CONSTRUCTION CONTRACTS (IAS 11)]
o Explain the core principle of revenue recognition

o State and apply the five-step approach to recognize revenue from contracts with
customers
o Present and disclose revenue in financial statements
o Account for construction contracts
3.1 INTRODUCTION
Revenue is the the gross inflow of economic benefits during the period arising in the course
of the ordinary activities of an entity when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.
IAS 18 Revenue covers the accounting for revenue arises from the following transactions or
events:
(i) Sale of goods;

(ii) Rendering of services; and
(iii) Use by others of entity assets yielding interests, royalties and dividends
IAS 11 Construction Contracts covers the accounting for construction contracts addressing
the primary issue in the allocation of contract revenue and contract cost to the accounting
periods in which construction work is performed.
However, both of these standards provided little guidance on complex transactions and hence
a new standard IFRS 15 was issued to deal with the accounting of revenue.
IFRS 15 Revenue from Contracts with Customers establishes principles for reporting useful
information to users of financial statements about the nature, amount, timing and uncertainty
of revenue and cash flows arising from an entity’s contracts with customers.
IFRS 15 is effective for annual periods beginning on and after 1 January 2018 and will
supersede a few standards including IAS 18 and IAS 11.
21
3.2 Core Principle
IFRS 15 adopts a “contract-based” revenue recognition principle which is different from the
“risk and reward” principle of IAS 18 and “activity-based” principle of IAS 11.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer
of promised goods or services to customer at an amount that reflects the consideration which
the entity expects to be entitled in exchange of those goods and services.
The following five steps should be applied to achieve the core principle:
Step 1: Identify the contract with customer
Step 2: Identify the separate performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the separate performance obligation in the contract,
and
Step 5: Recognise the revenue when (or as) the entity satisfies a performance obligation
Illustration
A telephone company enters into a contract with its customer, under which the customer pays
$500 for a handphone and a two-year mobile line at $60 per month to be billed at the end of
each month. Assume that the fair values of the handphone and two-year mobile service are
$1,000 and $50 per month, respectively.
The following are defined in Appendix A of IFRS 15:
Contract: An agreement between two or more parties that creates enforceable rights and
obligations; can be written, oral or in other customary business practice.
Customer: A party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration.
A contract with a customer will be within the scope of IFRS 15 only when all the following
criteria are met:
1. Contract has been approved by the parties.
2. Each party’s rights to the goods and services to be transferred can be identified.
3. Payment terms for the goods and services to be transferred can be identified.
4. Contract has commercial substance.
5. Probable that the consideration to which the entity is entitled to in exchange for the
goods or services will be collected.
22
If a contract with a customer does not yet meet all of the above criteria, the entity will
continue to re-assess the contract going forward to determine whether it subsequently meets
the above criteria. From that point, the entity will apply IFRS 15 to the contract.
With reference to the illustration above, the telephone company have a contract with its
customer as selling handphones and providing telephone line service are goods and services
that are part of a telephone company’s ordinary business activities.
A performance obligation is defined in IFRS 15 as a promise to transfer to the customer

either:
- a good or service (or a bundle of goods or services) that is distinct, or
- a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
A good or service is distinct of both the following criteria are met:

- customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer; and
- the promise to transfer the good or service is separately identifiable from other promises
in the contract.
With reference to the illustration above, the telephone company has two separate
performance obligations, namely selling the handphone and providing the telephone line
service.
IFRS 15 provides that the transaction price to be the amount of consideration to which an
entity expects to be entitled in exchange for transferring the promised goods or services to a
customer, excluding amounts collected on behalf of third parties (e.g. goods and services tax).
With reference to the illustration above, the transaction price will be calculated as follows:
Handphone: $500 ________
Mobile service: [24 months x $60 ] ________= $1,440
Total = $________1,940
Note: The transaction price can be fixed or variable or both. Only fixed transaction price will
be covered in this module.
23
Step 4: Allocate the transaction price to the separate performance obligation in the
contract
Where a contract has multiple performance obligations, IFRS 15 requires an entity to allocate
the transaction price to each separate performance obligation by reference to the relative
stand-alone selling prices of the good and service.
With reference to the illustration above, the transaction price of _____________will be

allocated to the handphone and telephone line service as follows:
Transaction Stand-alone Allocation of

price price transaction price
Handphone:
$881.82 [$1,000/$2,200 x $1,940]
Mobile service:
$1,440 $1,200 [24 x $50] $1,058.18 [$1,200/$2,200 x $1,940]
Total
$1,940 $2,200 $1,940
IFRS 15 provides that an entity should recognise revenue when (or as) it satisfies a
performance obligation by transferring a promised good or service (i.e. an asset) to a
customer. A good or service is transferred when or as the customer obtains control of that
asset.
Control of an asset refers to the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. It also includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the
potential cash flows (inflows or savings in outflows) that can be obtained directly or
indirectly.
A performance obligation may be satisfied “over time’ or “at a point in time”.
A performance obligation is satisfied over time if one of the following three criteria is met:
1. The customer simultaneously receives and consumes the benefits provided by the
entity as the entity performs. E.g. cleaning service
2. The entity’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced. E.g. renovation service
3. The entity’s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to date.
E.g. housing development
24
If a performance is not satisfied over time, then it is satisfied at a point in time. Revenue
should therefore be recognised at the point when customer obtains control of the asset. The
following are indicators that customer has obtained control:
- The entity has a present right to payment for the asset.
- The customer has legal title.
- The entity has transferred physical possession of the asset.
- The customer has significant risk and rewards of ownership of the asset.
- The customer has accepted the asset.
With reference to the illustration above, the performance obligation arising from the sale of
handphone is satisfied at a point in time (i.e. at the point when the sales transaction is
completed) and that arising from the provision of mobile line service is satisfied over time
(i.e. over the two-year period). Thus the telephone company should recognise the revenue
from the sale of handphone of ___________ at the point of sale and revenue from the service
of ____________ over the two-year period, probably on a straight-line basis.
Journal entries: [excluding contract costs]
Upon sales of the handphone:
Upon billing of mobile service fee at end of month:
3.3 Recognition Issues – Specific Cases
IFRS 15 provides that an entity should recognize revenue only when buyer has gained control
of the goods and services. Therefore in the specific cases listed below, the crucial point is
determination of when the buyer obtains control of the goods and services.
(1) Sale with right to return/refund

In some contracts, an entity transfers control of goods to a customer and also grants the
customer the right to return the goods for various reasons.
The entity should only recognise revenue and the refund liability if refund can be reliably
measured. If not, recognition of revenue should be deferred until the expiry if the
return/refund period.
25
(2) Consignment
An entity delivers goods to another party for the party to sell to the final consumers.
Therefore the entity still retains control of the goods.
Accordingly, an entity shall not recognise revenue upon delivery of a goods to another
party if the delivered goods are held on consignment.
(3) Bill-and-hold
An entity bills a customer for the sale of a goods, but the entity retains physical
possession until it is transferred to the customer at a later date.
If the customer has the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the goods even though it has decided not to exercise its right to
take physical possession, the entity does not control the product and shall recognise
revenue.
(4) Customer acceptance

Customer acceptance of goods and services may be mere formality or substantive. The
entity shall consider clauses for acceptance in evaluating when a customer obtains
control of the goods or services.
If customer acceptance is merely a formality (e.g. acceptance clause is based on goods

meeting specified size and weight characteristics), the entity should recognise revenue
before acceptance. If customer acceptance is substantive (e.g. delivery of goods to
customer for trial before payment), revenue should only be recognized after customer
acceptance.
(5) Principal vs Agent

An entity is a principal if the entity controls a promised goods or services before the
entity transfers the goods or services to a customer. An entity is an agent if the entity’s
performance obligation is to arrange for the provision of goods or services by another
party.
The principal recognises revenue base on the gross amount of consideration to which it
expects to be entitled in exchange for those goods or services transferred. The agent
recognises revenue in the amount of any fee or commission to which it expects to be
entitled in exchange for arranging for the principal to provide its goods or services.
26
3.4 PRESENTATION
Separate presentations of “account receivable”, “contract asset” and contract liability” is

required in the statement of financial position.
When either party to a contract has performed, an entity shall present the contract in the
statement of financial position as a contract asset or a contract liability, depending on the
relationship between the entity’s performance and the customer’s payment. An entity shall
present any unconditional rights to consideration separately as a receivable.
Example 1:
On 1 January 20X9, ABC Ltd enters into a contract to deliver two machines, Machine A on
and Machine B to a customer for $10,000. The contract price of $10,000 will be payable after
Machine B is delivered. The customer is given a one-month credit period. ABC Ltd identifies
two performance obligations and allocated $3,000 to Machine A and $7,000 to Machine B.
Machine A is delivered on 1 February 20X9 followed by Machine B which is delivered on 1
March 20X9. The following journal entries illustrate how ABC Ltd accounts for the contract,
excluding contract costs:
January 1, 20X9
February 1, 20X9
March 1, 20X9
CR Revenue $4,000
If an entity performs by transferring goods or services to a customer before the customer pays
consideration or before payment is due, the entity shall present the contract as a contract asset.
A contract asset is an entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer.
A receivable is an entity’s right to consideration that is unconditional. A right to

consideration is unconditional if only the passage of time is required before payment of that
consideration is due.
27
Example 2:
On 1 January 20X9, XYZ Ltd enters into a contract to deliver a Machine X on 1 March 20X9.
The contract requires the customer to pay the consideration of $5,000 in advance on 1
February 20X9 which customer paid. XYZ Ltd delivered Machine X on 1 March 20X9.
The following journal entries illustrate how XYZ Ltd accounts for the contract, excluding
contract costs:
January 1, 20X9
February 1, 20X9
March 1, 20X9
If a customer pays consideration, or an entity has a right to an amount of consideration that is

unconditional (i.e. a receivable), before the entity transfers a good or service to the customer,
the entity shall present the contract as a contract liability when the payment is made or the
payment is due (whichever is earlier).
A contract liability is an entity’s obligation to transfer goods or services to a customer for
which the entity has received consideration (or an amount of consideration is due) from the
customer.
3.5 DISCLOSURE
The objective of disclosure requirements is for an entity to provide sufficient information to

enable users of financial statements to understand the nature, amount, timing and uncertainty
of revenue and cash flow arising from contracts with customers.
Therefore, an entity should disclose the qualitative and quantitative information on all of the
following:
- its contracts with customers,
- significant judgements, and changes in judgements, made in applying IFRS 15 to these
contracts, and
- any assets recognised from the costs to obtain or fulfil a contract with a customer.
An entity shall consider the level of detail necessary to satisfy the disclosure objective and
how much emphasis to place on each of the various requirements. An entity shall aggregate
or disaggregate disclosures so that useful information is not obscured by either the inclusion
of a large amount of insignificant detail or the aggregation of items that have substantially
different characteristics.
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3.6 CONSTRUCTION CONTRACTS
A construction contract is a contract specifically negotiated for the construction of an asset

(or a combination of assets, which together constitute a single project). A construction
contract may typically be negotiated for the construction of a single asset such as a bridge,
building, dam, pipeline, road, ship or tunnel.
Construction contracts may also be for the provision of services, which are directly related to
a contract for construction of an asset (e.g. for the services of a project manager or architect).
Due to the nature of the activity undertaken in construction contracts, the date at which the
contract activity is entered into and the date when the activity is completed usually fall into
different accounting periods.
The five-step approach in IFRS 15 will be used to determine whether a contract falls within
its scope, and also the timing and quantum of revenue recognition.
Construction contracts meets the definition of a contract and the construction

company will account for its construction contracts under IFRS 15.
Under construction contracts, the goods and services which are promised to the
customer are very much integrated and hence to be accounted for as a single
performance obligation.
Construction contracts take a couple of years to complete and it is a common

practice to have progress billings which are scheduled milestone payments for the
performance by the construction company throughout the construction period.
Step 4: Allocate the transaction price to the separate performance obligation in the
contract
This is not relevant for construction contracts which have a single performance
obligation.
Under construction contracts, the construction company will construct the building
that the customer controls as the asset is constructed. Thus, construction contracts
fall under IFRS 15 and consequently should be accounted for using the percentage of
completion based on either the input method (using costs incurred to-date as a
percentage of total estimated costs) or output method (surveys of work completed to-
date).
29
3.6.1 Accounting for overall profitable construction contracts
Illustration 1
Ace Building Pte Ltd is a construction company. On 1 January 20X6, it began to construct a
building at a fixed contract price of $10 million. It was estimated that the project would take
2 years to complete. Its year-end falls on 31 December. The company uses the percentage of
completion method for revenue recognition and the percentage of completion method is
measured by calculating proportion of cost incurred to-date to the estimated total cost of the
contract.
At the end of the 20X7, the house was completed and title was passed to the customer.
Other details of the project for the financial year-ends on 20X6 and 20X7 were as follows:
20X6 20X7
($m) ($m)
Cost incurred to-date 3.0 4.5
Estimated total cost 4.0 -
Progress billing to-date 3.5 10.0
Cash receipt to-date 2.0 6.0
Required:
(i) For the years ended 20X6 and 20X7, calculate the percentage of completion to-date,
revenue recognised for the year and profit recognised for the year.
(ii) Provide the necessary journal entries at the end of 20X6 and 20X7 to record the above
transactions in relation to the above contract.
30
Suggested Answer:
(i) See schedule below:
20X6 20X7
Cost incurred to-date $3.0m $4.5m
Estimated total cost $4.0m $4.5m
Percentage of completion 75% 100%

to-date (Note 1) ($3.0m/$4.0m) ($4.5m/$4.5m)
Revenue for the year $7.5m $2.5m

(Note 2) (75% x $10m) [(100% x $10m) - $7.5m]
Profit for the year (Note 3) $4.5m $1.0m

($7.5m - $3.0) [($2.5m – ($4.5m - $3.0m))
Note 1:
Percentage of completion is calculated by taking “cost incurred to-date” divided by estimated
total cost.
Note 2:
Notice that the key word here is “for the year”. This means the revenue recognised is only for
the respective year, and not on a cumulative to-date basis. The formulas involved are as
follows:
Revenue recognised to-date as at 20X6

= (Percentage of completion to-date as at 20X6) x (Contract price of $10m)
= Revenue recognised for the year 20X6
(since this is the first year of construction with no preceding year amount to deduct)
Revenue recognised to-date as at 20X7

= (Percentage of completion to-date as at 20X7) x (Contract price of $10m)
Revenue recognised for the year 20X7

= (Revenue recognised to-date as at 20X7) – (Revenue recognised to-date as at 20X6)
Note 3:
Profit for the year 20X7
= Revenue for the year 20X7 – Cost for the year 20X7
31
(ii) See journal entries below:
End 20X6 End 20X7

$m $m $m $m
DR CR DR CR
1. To record cost of construction
Construction work-in-progress (B/S) 3.0 1.5
Cash/Accounts payable (B/S) 3.0 1.5
(4.5 – 3.0)
2. To record progress billing

Accounts receivables (B/S) 3.5 6.5
Progress billing (B/S) 3.5 6.5
(10.0 – 3.5)
3. To record cash receipts

Cash (B/S) 2.0 4.0
(6.0 – 2.0)
4. To account for profit

Construction costs (P/L) 3.0 1.5
Contract Revenue (P/L) 7.5 2.5
5. To record final approval of contract

Progress billing (B/S) - 10.0
Construction work-in-progress (B/S) - 10.0
Note:
Construction work-in-progress a/c: to record all construction costs and profit/loss on the
construction contract to-date.
Progress billings a/c: to record amount invoiced to customer
32
3.6.2 Accounting for onerous construction contracts
IFRS 15 does not contain specific requirements to address contracts with customers that are,
or have become onerous which were previously covered in IAS 11. Therefore, it defers to
IAS 37 Provision, Contingent Liabilities and Contingent Assets to account for the required
provisions.
IAS 37 defines an onerous contract as one on which the unavoidable costs of meeting the
obligation under the contract exceeds the economic benefits expected to be received under it.
Since the costs of meeting the construction contract exceeds the construction revenue, a
provision for the future expected loss has to be made.
Illustration 2
Bob Building Pte Ltd is a construction company. On 1 January 20X6, it began to construct a
building at a fixed contract price of $10 million. It was estimated that the project would take
2 years to complete. Its year-end falls on 31 December. The company uses the percentage of
completion method for revenue recognition and the percentage of completion method is
measured by calculating proportion of cost incurred to-date to the estimated total cost of the
contract.
In 20X6, price of construction materials like sand and metal had risen sharply due to the
sudden shortage of supply. Hence, the estimated total cost had to be revised upwards.
At the end of the 20X7, the house was completed and title was passed to the customer.
Other details of the project for the financial year-ends on 20X6 and 20X7 were as follows:
20X6 20X7
($m) ($m)
Cost incurred to-date 3.0 11.0
Estimated total cost 11.0 -
Progress billing to-date 3.5 10.0
Cash receipt to-date 2.0 6.0
Required:
(i) For the years ended 20X6 and 20X7, calculate the overall profitability, percentage of
completion to-date, revenue recognised for the year and profit recognised for the year.
(ii) Provide the necessary journal entries at the end of 20X6 and 20X7 to record the above
33
Suggested Answer:
(iii)
20X6 20X7
Contract price $10.0m $10.0m
Est. total cost $11.0m $11.2m
Est. total profit/(loss) ($1.0m) ($1.2m)
20X6 20X7
Cost incurred to-date $3.0m $11.2m
Estimated total cost $11.0m $11.2m
Percentage of completion 27.27% 100%

to-date ($3.0m/$11.0m) ($11.2m /$11.2m)
Revenue for the year $2.727m $7.273m

(27.27% x $10m) [(100% x $10m) - $2.727m]
Profit/(loss) for the year $0.273m $0.927m

($2.727m - $3m) ($1.2m – $0.273m)
Loss on onerous contract
34
(iv) See journal entries below:
End 20X6 End 20X7

$m $m $m $m
DR CR DR CR
(11.2 – 3.0)

(10.0 – 3.5)

Cash (B/S) 2.0 4.0
(6.0 – 2.0)

5. Provision for future expected loss

Losses on onerous contracts (P/L) 0.727 -
Provision for losses on onerous
contracts (B/S) 0.727 -
6. Reversal of provision no longer needed

contracts (B/S) - 0.727
Losses on onerous contracts (P/L) - 0.727

2m = $4.5m
35
3.6.3 Accounting for construction contracts which outcome may not be reasonably
measured
When an entity is not able to reasonably measure the outcome of the performance obligation
in a construction contract but expects to recover the costs incurred in satisfying the
performance obligation, IFRS 15 requires the entity to revenue only to the extent of the costs
incurred.
Illustration 3
Charlie Construction entered into a $10m contract with SIMI University (“SIMI”) on 1
January 20X6 to build a new campus over the next 2 years. As at year-end 31 December
20X6, due to numerous labour disputes, the estimated costs to complete the campus building
and outcome may not be reasonably measured.
Other details of the project for the financial year-ends on 20X6 are as follows:
20X6
($m)
Cost incurred to-date 3.0
Estimated total cost unknown
Progress billing to-date 3.5
Cash receipt to-date 2.0
Required:
Prepare the necessary journal entries in relation to the above event for the year ended 31
December 20X6.
End 20X6
$m $m
DR CR
Construction work-in-progress (B/S) 3.0
Cash/Accounts payable (B/S) 3.0

Accounts receivables (B/S) 3.5
Progress billing (B/S) 3.5

Cash (B/S) 2.0
Accounts receivables (B/S) 2.0
4. To record revenue up to extent of costs incurred

Construction costs (P/L) 3.0
Contract revenue (P/L) 3.0
36
Review Question 1
A telephone company enters into a contract with its customer on 1 January 20X7, under
which the customer pays $600 for a handphone and a two-year mobile line at $55 per month
to be billed at the end of each month. Assume that the fair values of the handphone and two-
year mobile service are $1,200 and $40 per month, respectively.
Required:
Prepare the necessary journal entries to record the above transaction in the accounts of the
telephone company for the month ended 31 January 20X7. You are to exclude the contract
costs.
Review Question 2
Mall Pro Pte Ltd has been in the shopping mall construction business for the past 15 years.
The company contracted to build, over 3 years, a new shopping mall at Punggol. At the date
of signing the contract, the price was agreed at $10 million.
Details of the costs and billings for the first 2 years are as follows:
End of End of
Year 1 Year 2
$’m $’m
Cost incurred during the year 2.0 1.0
Estimated total costs 5.0 4.0
Billings to-date 2.2 4.5
Cash receipts to-date 1.5 4.0
The company accounted for the contract using the percentage-of-completion method in which
the stage of completion used is measured by calculating the proportion of costs incurred to
date to the estimated total costs of the contract.
Required:
(a) Complete the table below:
End of
Year 1 Year 2
Percentage of completion to-date (%)
40% 75%
Revenue to-date ($m)
4.0 7.5
Revenue for the year ($m)
4.0 3.5
Profit to-date ($m)
2.0 4.5
Profit for the year ($m)
2.0 2.5
37
(b) Prepare the necessary journal entries at the end of Year 1 and Year 2 to record the
End of Yr 1 End of Yr 2
$’m $’m $’m $’m
DR CR DR CR


Cash (B/S) 1.5 2.5

38
Review Question 3
Steady Construction Ltd commenced work on a 12-storey residential cum commercial

building in Punggol in January 20X5. Total estimated cost for the project is expected to be
$75 million and the contract price was $80 million. The construction project is expected to be
completed in the last quarter of 20X6.
During 20X5, cost of construction materials went up and Steady Construction Ltd expected
the total contract costs to increase while contract revenue is not expected to change.
Steady Construction Ltd uses the percentage-of-completion method for revenue recognition.
Details of costs and billings of the project at the end of the year are as follows:
20X5 20X6
$’mil $’mil
Costs incurred to-date 36.9 82.0
Estimated additional costs to complete 45.1 -
Billings to-date 45.0 80.0
Cash receipts to-date 33.0 76.0
Required:
(a) Complete the table below:
End of
20X5 20X6
Estimated total profit/(loss) ($m) (2.0) (3.0)
Percentage of completion to-date (%) 45% 100%
Revenue for the year ($m) 36.0 44.0
Profit/(loss) for the year ($m) (0.9) (2.2)
Loss on onerous contract
39
(b) Prepare the necessary journal entries at the end of 20X6 and 20X7 to record the
End 20X6 End 20X7

$m $m $m $m
DR CR DR CR


Cash (B/S) 33.0 43.0

5. Provision for future expected loss

Losses on onerous contracts (P/L) 1.1 -
contracts (B/S) 1.1 -
6. Reversal of provision no longer needed

contracts (B/S) - 1.1
Losses on onerous contracts (P/L) - 1.1

40
TOPIC 4
TANGIBLE FIXED ASSETS (IAS 16)
o Define a fixed asset and describe the components of its cost.

o Understand and identify subsequent expenditures that may be capitalized.
o Apply the principles of accounting for depreciation
o Apply the principles of accounting for de-recognition
o Understand relevant accounting standards for the reevaluation of property, plant and
equipment.
4.1 INTRODUCTION - PROPERTY, PLANT AND EQUIPMENT
Non-current tangible assets include:
a) Fixed Assets – Property Plant & Equipment – Non-Current Tangible Assets

b) Investment Property
This following discussion focuses on Property, Plant and Equipment (PPE).
Definition
Property, Plant and Equipment are tangible assets that are held by an entity:
• for the use in production or supply of goods and services,
• for rental to others, or
• for administrative purposes;
and are expected to be used during more than one period.
In other words, Property, Plant and Equipment (PPE) are long-term assets used in the day-to-
day operations of a business. The alternative terms are “Plant Assets,” “Operating Assets,”
and “Fixed Assets”. The common PPE assets include land, buildings, equipment, machinery,
furniture & fixtures, motor vehicles, and construction-in-progress.
41
4.2 RECOGNITION AND INITIAL MEASUREMENT
Recognition
IAS 16 requires that an item of property, plant or equipment should be recognised as an asset
when:
• it is probable that future economic benefits associated with the asset will flow to the
entity; and
• the cost of the item can be measured reliably.
The first point is based on the principle that the item should only be recognised as an asset
and included in the financial statements when it reaches its location and condition necessary
for it to be capable of operating in the manner intended by management.
The second point deals with cost. If the asset has been purchased then the asset is initially
recognised at its original cost.
Initial Measurement
Initially measured at cost which is the cash or cash equivalent paid or fair value of other
consideration given.
The cost of a fixed asset includes all reasonable and necessary costs to get the asset in place
and ready for its intended use. Costs that do not increase the asset’s usefulness are treated as
expenses.
Elements of cost
The cost of an item of property, plant or equipment can include any of the following:
• Invoice price, including any import duties and non-refundable purchase taxes;
• Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended.
Cost of asset include the following:

• purchase price
• import duties
• non-refundable purchase taxes
• any other direct cost in bringing the asset to working condition for its intended use
• site preparation
• initial delivery & handling cost
• installation costs
• professional fees
• trade discounts (less)
• rebates (less)
• initial estimate reinstatement costs (costs of dismantling and removal to restore the site
on which the item of fixed asset is located – FRS 16 # 17(c))
• financing cost (if criteria in IAS 23 on “Borrowing Costs” are met; i.e.borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying
asset)
42
Example
ABC Ltd bought a piece of land for the purpose of building a factory and incurred the
following expenditure:
a) Purchase price of land, $2,000,000

b) Legal fees for purchase of land, $80,000
c) Cost of clearing and leveling land, $20,000
d) Architect fees for building, $50,000
e) Cost of construction of factory, $1,500,000
f) Cost of constructing and demolishing construction workers’ living quarters, $70,000
Required:
Determine the cost of land and cost of factory building.
Cost of Land = $(2,000,000 + 80,000 + 20,000) = $2,100,000
Cost of Building = $(50,000 + 1,500,000 + 70,000) = $2,700,000
4.3 MEASUREMENT
IAS 16 requires that an entity must choose between the cost model or the revaluation model
as its accounting policy and apply that policy to an entire class of property, plant and
equipment.
Cost model
Once recognised as an asset, the item should be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
Revaluation model
Once recognised as an asset, an asset whose fair value can be measured reliably, can be held
at a revalued amount less any subsequent accumulated depreciation and impairment losses.
The revalued amount being its fair value at the date of revaluation. Revaluation should be
undertaken regularly to ensure that value of the asset does not vary significantly from its fair
value. The fair value of land and buildings will usually be market value determined by a
professional valuer. The fair value of plant and equipment is usually current market value.
If the asset is of a specialised type that is rarely sold, an entity may have to estimate fair value
using depreciated replacement cost (i.e. replacement cost reduced by taking into account the
effect of accumulated depreciation).
43
4.4 SUBSEQUENT EXPENDITURE
Subsequent to the acquisition of an asset, the enterprise may incur additional expenditures such
as:
• additions
• improvements
• rearrangements
• repairs
• replacements
The same general recognition principle under IAS 16 is used to evaluate whether subsequent
expenditures/costs should be capitalised (i.e. added to the asset account & known as capital
expenditure).
Only capitalised when it is probable that the expenditure will increase the future economic
benefits embodied in the asset, in excess of its standard of performance assessed immediately
before the expenditure was made. Examples of increased future benefits are:
• Extension of useful life

• Increase in volume of output
• Improvement in quality of output
• Substantial reduction in operating costs
Example of capital expenditure: cost of extension to an existing factory building.
All other subsequent expenditure which benefits the enterprise for current accounting period e.g.
costs of day to day servicing of the item should be expensed in the period in which it is incurred.
These are known as revenue expenditure.
Examples of revenue expenditure: maintenance cost of office machines, insurance and road
tax of delivery van.
4.5 ACCOUNTING FOR DEPRECIATION
Depreciation is a process of allocation, not valuation. The purpose is to allocate the cost of
the asset over the periods in which it will provide benefits. No attempt is made to adjust the
asset’s cost to approximate its current value.
Depreciation expense is based on estimates of the asset’s useful life and salvage value. Only
the original cost is known with certainty.
4.5.1 Depreciation methods
Various methods of calculating depreciation are acceptable

a) Straight line method : (Cost – salvage value) / useful life
b) Units of output method : (Cost – salvage value) / total expected output x current output
c) Diminishing balance method: Double declining balance method
44
a) Straight Line method
Annual depreciation expense = Depreciable cost/Useful life

OR = Depreciable cost x Depreciation rate (i.e. 100%/useful life)
Example – Straight Line method

Year-end
Depreciation Depreciable Depreciation Accumulated Year-end
Year Rate x Cost Expense Depreciation Book Value*
1 25% x $60,000 $15,000 $15,000 $45,000
2 25% x 60,000 15,000 30,000 30,000
3 25% x 60,000 15,000 45,000 15,000
4 25% x 60,000 15,000 60,000 0
*[Cost – Accumulated Depreciation]
b) Units of Output (UOP) method
Annual depreciation under the UOP method is a function of the usage of an asset each year.
First step: compute depreciation cost per unit . . .
Depreciation cost per unit = Depreciable cost / Expected usage over useful Life
Annual depreciation expense = Depreciation cost x Total units produced/used

per unit during the year
Example – UOP method

Asset cost $40,000
Salvage value $6,000
Estimated production (usage) over useful life 8,500 units
Production in 20X4 2,700 units
Depreciation cost per unit = $34,000/8,500 units = $4 per unit

Depreciation expense for 20X4 = $4 x 2,700 units = $10,800
c) Double Declining Balance method (DDB)
This is a common accelerated depreciation method. Under the DDB method, the accelerated
depreciation rate is twice the straight-line rate.
Straight line rate is calculated by dividing 100% by the useful life. Accelerated rate doubled
the straight line rate. This rate is multiplied by the book value each year to determine the
depreciation expense. Depreciation stops when the salvage value is reached.
Accelerated depreciation rate = (100%/Useful life) x 2
Annual depreciation expense = Beginning book value x Accelerated depreciation rate
45
Example - Double declining balance method
Asset cost $40,000
Acquisition date 1 Jan 20X4
Salvage value $6,000
Estimated useful life 5 years
Solution
Accelerated depreciation rate = 20% x 2 = 40%
20X4 depreciation expense = $40,000 x 40% = $16,000

20X5 depreciation expense = ($40,000 - $16,000) x 40% = $9,600
4.5.2 Choice and Application of Methods
The depreciation method must reflect the expected usage pattern of the asset and must be
applied consistently unless pattern changes.
The depreciation method, residual value and the useful life of an asset shall be reviewed at least
at each financial year-end and, if expectations differ from the previous estimates, the change(s)
shall be accounted for as a change in accounting estimate in accordance with IAS 8.
46
4.6 DERECOGNITION
Fixed assets should be derecognized:

• On disposal, or
• When no future economic benefits are expected from its use.
Example
Equipment acquired at a cost of $6,000 is disposed on March 31, 20X3. The accumulated
depreciation as at March 31, 20X3 is $4,900 and the net book value is therefore $1,100.
Scenario 1
The equipment is discarded. Therefore, the net book value of $1,100 will become a .
Write off equipment that was discarded
Scenario 2
The equipment is sold for $500. Since the net book value is $1,100, therefore the equipment
is sold at a .
Record sale of equipment at a loss
Scenario 3
The equipment is sold for $1,500. Since the net book value is $1,100, therefore the equipment
is sold at a .
Record sale of equipment for a gain
47
4.7 REVALUATION OF ASSETS
IAS16 provides that cost should be used to record an asset initially. After that, an entity may
choose between the cost model or the revaluation model as its accounting policy and apply
that policy to an entire class of property, plant and equipment.
4.7.1 Revaluation model
At the date of revaluation, the fair value of the asset is used to revalue the asset. Furthermore,
the fair value must be able to be measured reliably.
The fair value of land and buildings will usually be market value determined by a
professional valuer. Revaluation should be undertaken regularly to ensure that value of the
asset does not vary significantly from its fair value.
4.7.2 Revaluation of non-depreciable fixed assets
Example 1
a) A Ltd revalued the cost of its land of $10m to the market value of $15m in 20X1.
The journal entry is:
To record revaluation of land
b) The land was revalued downwards to the market value of $12m in 20X5.
c) The land was revalued down to $9m in 20X7.
48
Example 2
a) B Ltd revalued the cost of its land of $20m to the market value of $15m in 20X1.
b) It revalued the land upwards to the market value of $18m in 20X3.
c) The land was further revalued upwards to $21m in 20X5.
4.7.3 Revaluation of depreciable fixed asset
Example 3
C Ltd carries in its books a building with a cost of $10m and accumulated depreciation of
$2m. The building is to be revalued to $12m.
The accumulated depreciation is deducted from the cost of the asset:

Net Book Value: $10m – $2m = $8m
To eliminate the accumulated depreciation against the cost
The net amount of the building, is restated to the revalued amount.
To record the revaluation
49
4.7.4 Depreciation of revalued fixed assets
When a fixed asset has been revalued, the revalued amount instead of its cost, forms the basis
for calculating the depreciable amount. The residual value is also re-estimated.
The revaluation reserve is realized as the asset is used through a direct transfer to the retained
earnings.
Example 4
D Ltd acquired a building at a cost of $50m. The building was expected to have useful life of
50 years with no residual value. It was depreciated using the straight line method.
Before the revaluation, annual depreciation was ____________________________ .
After 10 years, the building had a net book value of . It was revalued to its
fair market value of $60m.
To eliminate the accumulated depreciation against the cost
To record the revaluation
At the date of revaluation, the building was estimated to have another 40 years of useful life
and no residual value.
The annual depreciation is now ______ .
To record deprecation
The revaluation reserve of $20m is realized as the asset is used. The amount of the reserve to
be realized yearly is the difference between the depreciation based on the revalued amount
and the original amount i.e.
The journal entries are:
To record realization of revaluation reserve
Note that the credit entry goes directly to the retained earnings account and not through the
P&L (i.e. no effect on the current year profit or loss).
When the building is fully depreciated in 40 years’ time, the revaluation reserve of $20m will
be fully realized.
50
4.7.5 Derecognition of revalued assets
Example 5
E Ltd purchased land at cost of $10m in 20X1.
It was revalued to $16m in 20X6
It was sold for $18m in 20X8.
The revaluation reserve is now realized and is transferred to the retained earnings.
4.8 DISCLOSURE REQUIREMENTS
The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation at the beginning and end
of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) assets classified as held for sale or included in a disposal group classified as held
for sale in accordance with and other disposals;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations and from impairment losses
recognised or reversed in other comprehensive income in accordance with IAS 36;
(v) impairment losses recognised in profit or loss in accordance with IAS 36;
(vi) impairment losses reversed in profit or loss in accordance with IAS 36;
(vii) depreciation;
51
(viii) the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation currency,
including the translation of a foreign operation into the presentation currency
of the reporting entity; and
(ix) other changes.
(f) the existence and amounts of restrictions on title, and property, plant and equipment
pledged as security for liabilities;
(g) the amount of expenditures recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(h) the amount of contractual commitments for the acquisition of property, plant and
equipment; and
(i) if it is not disclosed separately in the statement of comprehensive income, the
amount of compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in profit or loss.
(j) depreciation, whether recognised in profit or loss or as a part of the cost of other
assets, during a period; and
(k) accumulated depreciation at the end of the period.
(l) residual values;
(m) the estimated costs of dismantling, removing or restoring items of property, plant and
equipment;
If items of property, plant and equipment are stated at revalued amounts, the following shall
be disclosed:
(a) the effective date of the revaluation;

(b) whether an independent valuer was involved;
(c) the methods and significant assumptions applied in estimating the items’ fair
values;
(d) the extent to which the items’ fair values were determined directly by reference to
observable prices in an active market or recent market transactions on arm’s
length terms or were estimated using other valuation techniques;
(e) for each revalued class of property, plant and equipment, the carrying amount that
would have been recognised had the assets been carried under the cost model; and
(f) the revaluation surplus, indicating the change for the period and any restrictions on
the distribution of the balance to shareholders.
Encouraged Disclosures:
(a) the carrying amount of temporarily idle property, plant and equipment;
(b) the gross carrying amount of any fully depreciated property, plant and equipment that
is still in use;
(c) the carrying amount of property, plant and equipment retired from active use and not
classified as held for sale; and
(d) when the cost model is used, the fair value of property, plant and equipment when
this is materially different from the carrying amount.
52
ADDITIONAL NOTES
Term Accounting Treatment

1. Replacement costs Replacement cost of an item of PPE is capitalized if replacement
meets the recognition criteria. Carrying amount of items replaced
is derecognized.
2 Cost of major Costs of major inspections and overhauls are recognised in the
inspection carrying amount of PPE.
3 Revaluation Revaluation needs to be done to the entire class of assets under the
revaluation model.
4 Depreciation PPE are componentized and are depreciated separately.
5 Compensation for Compensation from third parties for impairment or loss of items of
impairment PPE are included in the profit and loss account when the
compensation becomes receivable.
6 Depreciation Depreciation rates are not prescribed as they are based on useful
life. Unit of Production method can also be applied.
7 Estimate of residual Estimates of useful life and residual value need to be reviewed at
useful life least at each financial year-end.
8 Revaluation Revaluations are required to be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the balance sheet
date.
9 Site Restoration Provision on site-restoration and dismantling is mandatory. To the
extent it relates to the fixed asset, the changes are added/deducted
(after discounting) from the asset in the relevant period.
Depreciation on Depreciation on revalued assets needs to be routed through P&L.
10 revalued assets However, subsequently the equivalent portion of depreciation on
revalued asset needs to be transferred to retained earnings.
11 Shift in Models Movement from Cost Model to Revaluation Model is permitted.
But vice-versa not permitted.
12 Method of Treated as Change in Accounting Estimate as per IAS 8 and given
Depreciation prospective effect.
13 Interest If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognised as interest over the period of credit.
53
APPENDIX
Terminology Explanation
Carrying The amount at which an asset is recognized, after deducting any
amount accumulated depreciation and impairment losses. Also referred to as book
value.
Cost The amount paid and the fair value of other consideration given to acquire
an asset at the time of its acquisition or construction.
Depreciable The cost or valuation of an asset less its residual value.
amount
Depreciation The systematic allocation of the depreciable amount of an asset over its
useful life.
Fair value The amount for which an asset can be exchanged between knowledgeable,
willing parties in an arm’s length transaction.
Impairment The amount by which the carrying amount exceeds its recoverable amount.
loss
Recoverable The higher of an assets net realisable value and its value in use.
amount
Residual value The residual value of an asset is the amount that the entity would currently
obtain from disposal of the asset, after deducting the estimated costs of
disposal, assuming that the asset was already at the point where it would be
disposed of (using the age and condition that would be assumed to apply at
the time of disposal).
Useful life IAS 16 defines useful life as the period over which the asset is expected to
be available for use by the entity or the volume of output expected from the
asset.
54
Review Question 1
Eminent Ltd started its operations on 1 January 20X2. The following payments made for the
financial year ended 31 December 20X2 were related to freehold land, land improvements,
building, plants and machinery purchased for use in the business:
Item Description of expenditure $

a) Commission paid to real estate agent related to purchase of land 75,000
b) Cost of purchase of freehold land 2,500,00
c) Fees paid to lawyer for legal work related to purchase of land 8,000
d) Architect and engineer’s fee for plans and supervision for 180,000
construction of building
e) Payment to building contractor for new building 900,000
f) Cost of removing an building on the freehold land 50,000
g) Cost of paving car parks 85,000
h) Cost of landscaping, trees and shrubbery planted 22,000
i) Cost of repair works done on the fences of the neighboring company 3,000
which was accidentally damaged by the contractors
j) Cost of purchase of plant & machinery (before 5% discount) 400,000
k) Freight charges paid for delivery of plant and machinery 6,500
l) Payment to contractor for installation of plant & machinery 2,500
m) Cost of repairing the building damaged in the process of moving in 4,000
the plant & machinery
Required:
Classify the above in the appropriate columns in the table provided below.
Land Plant &

Item Land Improvements Building Machinery Expenses
$ $ $ $ $
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
Total
55
Review Question 2
As at year end 31 December 20X7, the building with a cost of $9 million and accumulated
depreciation is of $3 million was revalued to $8 million by an independent valuer.
The building was purchased 10 years ago and has remaining useful life of 20 years as of 31
December 20X7. It was depreciated using the straight line method.
Required:
a) Prepare journal entries in relation to the building revaluation on 31 December 20X7.

b) Prepare journal entries to record depreciation of the revalued building for the year ended
31 December 20X8.
c) On 1 Jan 20X9, the building was sold for $7.8 million.
(i) Calculate the gain/loss the disposal.
(ii) Prepare the journal entries to record the disposal.
Review Question 3
A building was purchased on 1 January 20X1 for $800,000. The asset is used from the date of
acquisition and its estimated economic useful life is 50 years. After five years of use, the
asset is revalued on 1 January 20X6 at $830,000.
A subsequent valuation was completed one year later on 1 January 20X7, as the property
valuations in that area were experiencing significant fluctuations, and the building valuation
was $750,000.
Required:
a) Explain the treatment and prepare the accounting entries to record the revaluation on 1
January 20X6. Also record the necessary entries relating to the building at year-end 31
December 20X6.
b) Explain the treatment and prepare the accounting entries to record the revaluation on 1
January 20X7.
56
TOPIC 5
INVESTMENT PROPERTY (IAS 40)
o Define investment property.

o Discuss the 2 measurement models – cost and fair value model
o State the disclosure requirements
5.1 DEFINITION
An investment property is a property (land or building or part of a building or both) held to earn
rentals or for capital appreciation or both;
Examples of items that are NOT investment property:

- property held for use in the production or supply of goods or services or for administrative
purposes (i.e. an item classified as property under IAS 16);
- property held (or in the process of being constructed) for sale in the ordinary course of
business (i.e. an item classified as inventories under IAS 2);
- property being constructed on behalf of 3rd parties (i.e. accounted for as per IAS 11
Construction Contracts);
- owner-occupied property (whether currently in use, held for future use or awaiting disposal);
- property occupied by employees (whether or not employees pay rent at market rates);
- property leased to another entity under a finance lease.
(Note that property under construction for future use as investment property would be classified
as an investment property. [Refer to Improvements to IAS 40]
5.2 MEASUREMENT
5.2.1 Initial Measurement
Investment property is initially measured at cost, including transaction costs. The cost of a
purchased property comprises its purchase price and any directly attributable expenditure. The
cost of a self-constructed investment property is its cost at the date when the construction or
development is completed.
5.2.2 Subsequent Measurement
There are 2 measurement methods, using:

▪ fair value model; and
▪ cost model
One method must be adopted for all of an entity’s investment property. Change is permitted
only if it results in a more appropriate presentation (refer to IAS 8 on changes in accounting
policies). IAS 40 also notes that it is highly unlikely for a change from a fair value model to
a cost model.
57
Fair Value model
Using this model, an investment property is measured at fair value, which is the amount for
which the property could be exchanged between knowledgeable, willing parties in an arm’s
length transaction.
Gains or losses arising from changes in the fair value of investment property must be included in
the net profit or loss for the period in which it arises.
As the fair value of investment property reflects the market conditions at the balance sheet date,
there is no need to account for impairment. There is also no need to account for depreciation.
Example 1
Leeds Pte Ltd owns a building which has been appropriately classified as an investment
property under IAS 40. Leeds Ltd adopts the fair value measurement model for its investment
properties.
The carrying amount of the building as at 1 January 20X6 was $10 million. As at 31
December 20X6, an independent valuer ascertained that the fair value of the building was
$12 million.
a) Prepare the necessary journal entries relating to the above change in fair value of the
investment property.
b) How different would your solution be if the fair value was $9 million as at 31
December 20X6 instead?
Solution:
a) If the fair value of the building increased to $12 million, there would be a
arising from the change in fair value of the investment
property. The accounting entry will be:
31/12/20X6
(Being gain due to changes in the fair value of the investment property)
b) If the fair value of the building decreased to $9 million, there would be a
arising from the change in fair value of the investment

property.
The accounting entry will be:

31/12/20X6
(Being loss due to changes in the fair value of the investment property)
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Cost model
After initial recognition, investment property is accounted for in accordance with the cost
model as set out in IAS 16: Property, plant and equipment:
Cost less accumulated depreciation less accumulated impairment losses
The revaluation model in IAS 16 is prohibited, i.e, revaluation is NOT allowed.
This approach is easier to implement and less volatile. The downside is that the financial
statements would still show an expense when the asset is actually appreciating in value. In
addition, the fair value needs to be ascertained and disclosed.
5.3 DISCLOSURE
The disclosure requirements for an investment property are:
▪ whether the fair value or the cost model is used;

▪ the methods and significant assumptions applied in determining the fair value of
investment property;
▪ the extent to which the fair value of investment property is based on a valuation by a
qualified independent valuer; if there has been no such valuation, that fact must be
disclosed;
▪ the amounts recognised in profit and loss for rental income from investment property;
▪ restrictions on the realisability of investment property or the remittance of income and
proceeds of disposal.
Additional disclosures for the Fair Value Model:
▪ a reconciliation between the carrying amounts of investment property at the beginning

and the end of the period;
▪ significant adjustments to an outside valuation (if any).
Additional disclosures for the Cost Model:
▪ the depreciation methods used;

▪ the useful lives or the depreciation rates used;
▪ the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
▪ a reconciliation of the carrying amount of investment property at the beginning and end
of the period;
▪ the fair value of the investment property. If the fair value of an item of investment
property cannot be measured reliably, additional disclosures are required, including, if
possible, the range of estimates within which fair value is highly likely to lie.
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Review Question 1
Indicate if the following items below are investment properties to ABC Pte Ltd. The
company is a manufacturer and wholesaler of furniture.
(A) A piece of vacant land owned by ABC Pte Ltd. The company is hoping
to sell it when the market price is right.
(B) A factory owned and used by ABC Pte Ltd for its manufacturing
operations.
(C) A building owned by ABC Pte Ltd and currently under construction.
Upon completion, ABC Pte Ltd intends to rent it to another party.
(D) Some residential apartment units owned by ABC Pte Ltd currently
occupied by some of its employees at a market rental rates.
(E) The warehouse owned and used by ABC Pte Ltd for storing its goods.
(F) A piece of machine owned by ABC Pte Ltd but currently not in use.
ABC Pte Ltd intends to sell at a good value as soon as a potential buyer is
found.
(G) A building that is currently owned by ABC Pte Ltd and rented to a hotel
business. The lease is to be classified as an operating lease.
(H) A building owned by ABC Pte Ltd and currently under construction.
Upon completion, the building will be used as a showroom for the retailing
of furniture manufactured by ABC Pte Ltd.
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Review Question 2
Ace Realty Pte Ltd (“Ace”) is an investment holding company. On 1 January 20X2, Ace
acquired a shopping mall for $8 million in the town area, in its bid to expand its market share.
The management of Ace decides to adopt the fair value model for the accounting
measurement of all investment properties. As at year end 31 December 20X2, the shopping
mall was valued to be $10 million by an independent valuer firm. The useful life of the
shopping mall commencing 1 January 20X2 is 40 years with zero residual value.
Provide the appropriate journal entries in relation to Ace’s acquired shopping mall for the
year ended 31 December 20X2.
1/1/20X2
(Being acquisition of investment property
31/12/20X2
(Being _________due to changes in the fair value of the investment property)
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Review Question 3
Ace Realty Pte Ltd (“Ace”) is an investment holding company. On 1 January 20X2, Ace
acquired a shopping mall for $8 million in the town area, in its bid to expand its market share.
The management of Ace decides to adopt the cost model for the accounting measurement of
all investment properties. As at year end 31 December 20X2, the shopping mall was valued
to be $10 million by an independent valuer firm. The useful life of the shopping mall
commencing 1 January 20X2 is 40 years with zero residual value.
Provide the appropriate journal entries in relation to Ace’s acquired shopping mall for the
1/1/20X2
(Being acquisition of investment property)
31/12/20X2
(Being _________________ recorded for investment property)
The investment property will be carried at the net book value of:
Cost
Less: Accumulated depreciation __________
__________
The ____________________ of the investment property will need to be disclosed separately

(note to the accounts) and annual review for ____________ is necessary.
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TOPIC 6
INTANGIBLE ASSETS (IAS 38) AND IMPAIRMENT OF ASSETS (IAS 36)
o Understand the definition, recognition and measurement of intangible assets.

o Understand the characteristics and possible accounting treatments for internally
generated and purchased intangible assets.
o Account for research and development expenditure according to relevant accounting
standards.
o Define and impairment loss and identify circumstances that may indicate impairment
of an asset.
6.1 INTRODUCTION
Definition
Intangible asset: an identifiable non-monetary asset without physical substance. An asset is

a resource that is controlled by the entity as a result of past events (for example, purchase or
self-creation) and from which future economic benefits (inflows of cash or other assets) are
expected. Thus, the three critical attributes of an intangible asset are:
• identifiability
• control (power to obtain benefits from the asset)
• future economic benefits (such as revenues or reduced future costs)
Common Types of Intangible Assets
Intangible non-current assets are long-term assets without physical substance.
They include:
- Patents - franchises
- copyrights - trade names/brands
- goodwill - trademarks
- license
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6.2 COMMON TYPES OF INTANGIBLE ASSETS
(a) Patents
A patent is a right granted to the holder the exclusive right to produce, use and sell a product
or process without interference or infringement from others. Once a patent is granted, its term
is 20 years.
Accounting treatment:
If purchased from an inventor, the cost will include the purchase price plus any legal fees (to
successfully protect the patent). In addition, any legal fees occur after the acquisition of a
patent which successfully defend the right of the patent should also be capitalized. The cost of
a patent should be amortized over the legal life or the useful life, whichever is shorter.
If events indicate the book value of a patent may not be recoverable, an impairment test is
required. If a patent becomes worthless, the net value of the patent should be written off as
loss. If a patent is internally developed, no cost can be capitalized. Most of the research and
development (R&D) costs are expensed.
(b) Copyrights
A federally granted right to authors, sculptors, painters, and other artists for their creations.
A copyright is granted for the life of the creator plus 70 years. It gives the creator and heirs an
exclusive right to reproduce and sell the artistic work or published work.
If purchased, the cost includes the purchase price plus any legal fees. If developed by the
owner (the creator), no cost can be capitalized. Amortize by using straight-line method or a
unit-of-production method. Impairment test needed only if events indicate that book value
may not be recoverable.
(c) Franchise & License
A franchise is a contractual agreement under which the franchiser grants the franchisee the
right to sell certain products or service or to use certain trade names or trademarks. A license
is a contractual agreement between a governmental body (i.e., city, state, etc.) and a private
enterprise to use public property to provide services.
Costs is the franchise fees plus any legal fees should be capitalized. Amortise over the shorter
of the contractual life or the useful life, not to exceed 40 years. Impairment test is needed
only if events indicate that the book value may not be recoverable.
(d) Brands & Trademarks
A brand name identifies a specific product or name of a company and usually evokes positive
images or emotions in consumers. A trademark is a registered brand or trade name and can be
a word, a phrase, or a symbol that distinguishes a product or an enterprise from another (i.e.,
company names, XEROX). The cost is similar to that of copyrights. Life: register at the US
Patent Office for 10 years life. The registration can be renewed every 10 years for unlimited
times.
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Only purchased brands and trademarks can be recorded as assets in the financial statements.
No amortization necessary and impairment test is required at least annually.
Exception:
Start-Up Costs (including Organization Costs)
Start-up costs is any costs incurred for the preparation of introducing a new product or new
service or start business in a new territory. The organization costs are costs associated with
the formation of a corporation including fees to underwriters (for stock issuance), legal fees,
promotional expenditures, etc. These costs should be expensed as incurred.
6.3 RECOGNITION OF INTANGIBLE ASSETS
IAS 38 requires an enterprise to recognize an intangible asset if:

i. Probable future economic benefits attributable to the asset will flow of the entity, and
ii. Cost can be reliably measured
If an intangible item does not meet both the definition and criteria for recognition as an
intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense
when it is incurred.
Intangibles are recorded at cost and are also reported at cost at the end of an accounting
period. Intangibles with limited life are subject to amortization and possible impairment
test. Whereas intangibles with indefinite life are only subject to impairment test at least
annually.
6.4 INITIAL MEASUREMENT (OR COSTS) OF INTANGIBLE ASSETS
Costs of Intangibles include acquisition costs plus any other expenditures necessary to make
the intangibles ready for the intended uses (i.e., purchase price, legal fees, filing fees etc.; not
including internal R&D). Essentially, the accounting treatment of valuation for intangibles
closely parallels that followed by tangible assets.
Lump-sum purchase of intangibles, costs will be allocated in accordance with the fair market
value of each individual intangible.
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6.4.1 Separately-acquired intangible assets
The business pays a price to buy this asset hence it shows that the business will obtain
probable future economic benefits from this asset. Since this is a transaction, the cost of the
assets can be measured reliably.
6.4.2 Internally generated intangible assets
To assess whether an internally generated intangible asset meets the criteria for recognition,
IAS 38 requires the business to classify the development of this asset into:
a. research phase
b. development phase.
Expenditure during the research phase should be expensed.
Expenditure during the development phase can be recorded as an intangible asset if it meets
these criteria:
a. Technically feasible to complete
b. Intend to complete
c. Able to use or sell the asset
d. Expenditure can be measured reliably.
Research & development – Discussed in Item 6.7
IAS 38 states that internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance shall not be recognised as intangible assets.
Expenditure on internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance cannot be distinguished from the cost of developing the business as
a whole. Therefore, such items are not recognised as intangible assets
6.4.3 Intangible assets acquired in a business combination
Goodwill – Discussed in Item 6.8
6.5 SUBSEQUENT MEASUREMENT AFTER RECOGNITION
Cost Model
Carried at cost less any accumulated amortization and any accumulated impairment losses
Revaluation Model
Carried at a revalued amount, being its fair value at the date of the revaluation less any
accumulated amortization and any subsequent impairment losses (active market is required)
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6.6 AMORTISATION
After initial recognition at cost, intangible assets should be carried at cost less any
accumulated amortisation or impairment losses.
Amortisation is the name for the depreciation charge on an intangible asset. It is the
systematic allocation of depreciable amount of intangible asset over its useful life.
6.6.1 For intangible assets with FINITE useful life
- Amortization on a systematic basis over the asset’s useful life; usually not more than
twenty years.
- Commence amortization when assets is available for use.
- The amortization method is straight-line method. Other method can be applied if it is
more appropriate than the straight-line method.
- The residual value is usually zero.
- Review amortization period and method at least at each financial year-end
- The impairment test needed only when events indicate that the book value may not be
recoverable.
- Journal Entry:
Dr Amortization Expense
Cr Intangible Asset (or Accumulated Amortization)
Example:
X Ltd recorded $20 million of development costs as at 31 December 20X1. The company
expects the net profit from the sale of this newly developed product to be $$25m. 50% of this
profit is expected to be earned in 20X2, 30% in 20X3 and 20% in 20X4.
Calculate the amortisation amount for each year.
Solution:
20X2 : 50% x $20m = $10m
20X3 : 30% x $20m = $6m
20X4 : 20% x $20m = $4m
Note: If that pattern cannot be determined reliably, the straight-line method should be used.
6.6.2 For intangible assets with INDEFINITE useful life
- No amortization is required for intangible assets with indefinite useful life

- Examples include: trade names, trademarks, goodwill, in-process R&D.
- Impairment test is required at least annually and whenever there is an indication of
impairment
- The useful life of the intangible is to be reviewed each period
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6.7 ACCOUNTING FOR RESEARCH AND DEVELOPMENT
Research and Development is a type of internally generated intangible asset.
67.1 Research
Research, whether pure or applied, is original investigation undertaken to gain new scientific
or technical knowledge and understanding. There may, or may not, be a commercial use for
this research.
Examples of research activities include:
(i) activities aimed at obtaining new knowledge
(ii) search for applications of research findings or other knowledge
(iii) search for alternatives for materials, devices, products, processes, systems or
services
IAS 38 requires all expenditure on research to be written off to the Statement of

Comprehensive Income (income statement) in the year incurred as it does not meet the
criteria for recognition.
6.7.2 Development
Development is the use of existing scientific or technical knowledge to produce new or

substantially improved materials, devices, products, services or processes prior to the
commencement of commercial production or use.
Example of development activities include:

(i) design, construction and testing of pre-production prototypes and models
(ii) design of tools, moulds and dies involving new technology
(iii) design, construction and operation of a pilot plant that is not of a scale
economically feasible for commercial production
(iv) design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services
Development expenditure can only be recognized as an intangible asset and amortised if and
only if an enterprise can demonstrate all of the following:
(1) The technical feasibility of completing the intangible asset. (So that it will be
available for use or sale).
(2) Intention to complete the project and use or sell the asset
(3) Ability to use or sell the asset
(4) There is either an external market for the asset or an internal use for it
(5) The company has the financial resources needed to complete the project
(6) The related costs can be measured reliably
If development expenditure does not satisfy the above criteria, it should be expensed off to
the Statement of Comprehensive Income (income statement) in the year incurred. Once the
expenditure has been expensed off, it cannot be reinstated as an asset in a later period.
If a project meets the criteria for capitalization than all cost allocated to that specific project
should be capitalized. These costs will include materials, wages and salaries, depreciation of
scientific equipment and facilities, a proportion of overheads and any other direct costs.
68
Position of each development project needs to be reviewed annually on the recognition
criteria. Any projects not meeting the IAS 38 criteria must be written off. The amortization
period and method must also be reviewed annually for those projects that meet the criteria set
by IAS 38.
Example:
An entity is developing a new production process. During 20X9, expenditure incurred was
$ 100 million (of which $90 million was incurred before 1 December 20X9 and $10 million
was incurred between 1 December 20X9 and 31 December 20X9). The entity is able to
demonstrate that, at December 1, 20X9, the production process met the criteria for
recognition as an intangible asset. The recoverable amount of the know-how embodied in the
process (including future cash outflows to complete the process before it is available for use)
is estimated to be $ 50 million. What is the accounting treatment of this expenditure under
IAS 38?
Solution:
The production process is recognized as an intangible asset at a cost of ,

and is expensed as research expenditure.
6.8 ACCOUNTING FOR GOODWILL
Goodwill is created by good relationships between a business and its customers. It arises
from a combination of various factors including:
(i) Management skill or know-how

(ii) Reputation for service or quality of goods
(iii) Favourable location of the business
(iv) Good public relations or other positive factors
(v) Superior management team.
(vi) Outstanding sales organization.
(vii) Favorable tax condition.
(viii) Effective advertising.
(ix) Good labor relations.
(x) Outstanding credit rating
Goodwill cannot be separated from the business. It can only be recognized if the whole
business was purchased and the purchase price is greater than the market value of the net
assets (i.e., market value of assets − market value of liabilities).
Goodwill is an intangible asset and only exists as long as the business is a going concern.
Goodwill has a value because of the benefits it brings to the business but it is not recorded in
the books until the business is bought over.
(i) Non-purchased goodwill – internally generated goodwill/inherent goodwill cannot be

recognized as an asset as no event has occurred to provide a value to the business as a
whole
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(ii) Purchased goodwill – arises as a result of a purchase transaction. It is the excess of the
price paid for the business over the fair value of the identifiable assets and liabilities
acquired.
Treatment: Goodwill need to be treated as an intangible non-current asset. It is kept at cost in

the Statement of Financial Position subject to an annual review for impairment.
The movement in the carrying value of goodwill should be disclosed by note.
6.9 IMPAIRMENT OF ASSETS
At balance sheet date, an entity needs to assess whether there is any indication that an asset
may be impaired.
The entity should consider following:

- physical damage to an asset
- significant decline in the market value of the asset
- lower than expected economic performance of a segment of business
- discontinuance or restructuring of business
- significant changes in the technological, economic or legal environment.
If any such indication exists, the entity needs to assess the impairment loss.
All principles that apply to impairments of long-lived assets also apply to intangible assets
(IAS 36).
Example 1 – Impairment Loss
In January 20X1, A Ltd bought a machinery at a cost of $5m especially for the production of
product X. The machinery has an estimated useful life of 5 years with no salvage value.
Due to change in consumers’ taste, the demand for product X dropped substantially during
20X1.
Therefore, at December 20X1, there is indication that the machinery may be impaired
6.9.1 ACCOUNTING FOR IMPAIRMENT LOSS
If the recoverable amount of an asset is less than its carrying amount, the carrying amount
of the asset should be reduced to its recoverable amount and an impairment loss recognized
immediately.
Recoverable amount of an asset is the higher of its “fair value less costs to sell” and its “value
in use”. In practice it is easier to determine an asset’s FV less costs to sell. (FV is the price
that would be received to sell an asset.)
Example 2 - Impairment in Tangible Assets (depreciable):
Using the earlier Example 1 and assume that it was determined that the fair value of the
machinery less costs to sell is $1m.
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As at 31 December 20X1:
Cost of machinery = $5m
Accumulated depreciation = $5m/5 years = $1m
Carrying amount =
Recoverable amount = $1m

Therefore, impairment loss = $4m -$1m = $3m
Journal entry:
Record impairment in value
The net carrying amount of the machinery is now 1m

Presentation in the financial statements:
Machinery
Less : Accumulated depreciation
Accumulated impairment
Net carrying amount
The depreciation for the machinery for 20X2 onwards is:
Example 3 - Impairment in Tangible Assets (non-depreciable):
In January 20X1, A Ltd bought land for $10m

Journal entry:
Record purchase of land
In 20X3, land was revalued to market value of $15m.
Gain on revaluation =
Journal entry:
Record revaluation of land
In 20X5, due to financial crisis the land has become less valuable. A Ltd decided to provide
for impairment loss on the estimate FV less costs to sell of $11m as at 31 December 20x5.
Impairment loss =
Journal entry:
Record impairment of land

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In 20X7, the recoverable amount of the land further deteriorated to $8m.
Impairment loss =
Journal entry:
Record impairment of land.
Example 4 - Impairment in Intangible Assets
Carrying amount of a patent $1,200,000

Recoverable amount 500,000
Loss on Impairment $700,000
Journal entry:
Record impairment of patent
6.10 DISCLOSURE
Disclosure in the financial statements for each class of intangible assets include:
(i) useful life and amortization method used
(ii) gross carrying amount, the accumulated amortization and the accumulated
impairment loss as at the beginning and end of the period
(iii) reconciliation of the carrying amounts at the beginning and end of the period,
showing new expenditure incurred, amortization and amounts written off and
impairments
(iv) total research and development costs recognized as expenses during the period
(v) amortization during the period
Disclosure in the financial statements for impairment of assets include, for each class of
assets:
(i) the amount of impairment losses and reversals of impairment losses recognised in
profit or loss during the period and the line item(s) of the statement of
comprehensive income in which those impairment losses are included or reversed
(ii) the amount of impairment losses and reversals of impairment losses on revalued
assets recognised in other comprehensive income during the period
Disclosure in the financial statements for impairment of assets include, for individual
asset:
(i) the events and circumstances that led to the recognition or reversal of the
impairment loss
(ii) the recoverable amount of the asset and whether the recoverable amount of the
asset is its fair value less costs of disposal or its value in use (and discount rate
used in determining this value)
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Review Question 1
Compare the financial accounting and reporting of the following types of intangible assets:
i) internally generated
ii) separately-acquired
iii) acquired in a business combination
Review Question 2
Describe the different treatments relating to amortization and impairment of intangible assets.
Review Question 3
In 1 January 20X1, A bought a machinery at a cost of $2m especially for the production of
product Y. The machinery has an estimated useful life of 5 years with no salvage value.
Due to financial crisis, the demand for product Y dropped substantially during 20X1.
At 31 December 20X1, there is indication that the machinery may be impaired. The fair value
of machinery less costs to sell is estimated to be $1.2m.
Required:
(a) Prepare journal entry to record impairment loss in the books as at 31 December 20X1.
(b) Calculate the new depreciation charge for 20X2.
Review Question 4
B bought land for $5m in 20X1. The land was revalued to market value of $8m in 20x3.
In 20X5, due to government measures to dampen the property market, the land has become
less valuable. The company decided to provide for impairment loss on the estimate FV less
costs to sell of $6m as at 31 December 20X.
The recoverable amount of the land further deteriorated to $4m in 20X7.
Required:
Prepare journal entries to record the revaluation and impairment loss in

(a) 20X3
(b) 20X5
(c) 20X7
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TOPIC 7
LEASES (IFRS 16)
o Identification of a lease.
o Account for leases in financial statements by lessee.
o Account for leases in financial statements by lessor.
7.1 INTRODUCTION
Leasing is an increasingly popular way to acquire the use of assets. Businesses lease many
different assets including office equipment, medical equipment, and manufacturing
machinery.
IFRS 16 Leases was issued in January 2016 and specifies how to recognise, measure, present
and disclose leases. This new standard supersedes IAS 17 Leases and applies to annual
reporting periods beginning on or after 1 January 2019.
7.1.1 Lease
A lease is simply an agreement between two parties for the hire of an asset. The lessor is the
legal owner of the asset who rents out the asset to the lessee (i.e. the user of the asset). The
lessor conveys to the lessee the right to use specific property, real or personal, owned by the
lessor, for a stated period of time.
7.1.2 Advantages of leasing
(i) Leases may not require any initial large outlay of cash.
(ii) Lease payments are often fixed.
(iii)Leases reduce the risk of obsolescence to the lessee.
(iv) Leases may contain less restrictive covenants than other types of lending
arrangements.
(v) Leases may be a less costly means of financing.
(vi) Certain leases may not add to existing debt on the balance sheet.
7.1.3 Disadvantages of leasing
The primary disadvantage of leasing is that it is usually more expensive in the long run to
lease than to buy. However, for many companies the advantages of leasing outweigh the
disadvantages.
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7.2 MAIN FEATURES OF IFRS 16
IFRS 16 provides a single lessee accounting model which requires lessees to recognise assets
and liabilities for all leases unless the lease is short-term or the underlying asset has a low
value. For short-term leases or low value assets, the lease payments are simply charged to
profit or loss as an expense.
For all other leases, the lessee recognises a right-of-use asset, representing its right to use the
underlying asset and a lease liability representing its obligation to make lease payments.
For lessors, there is little change from the IAS 17 requirements. Lessors will continue to
recognise the distinction between finance and operating leases
7.2.1 Recognition Exemptions
Instead of applying the recognition requirements of IFRS 16 described below, a lessee may
elect to account for lease payments as an expense on a straight-line basis over the lease term
or another systematic basis for the following two types of leases (IFRS 16: paras. 5, 6 and 8):
(a) Short term leases

These are leases with a lease term of twelve months or less. This election is made by class of
underlying asset. A lease that contains a purchase option cannot be a short-term lease.
(b) Low value leases

These are leases where the underlying asset has a low value when new (such as tablet and
personal computers or small items of office furniture and telephones). This election can be
made on a lease-by-lease basis.
Example 1 - Accounting for short-term lease
B Café entered into a one-year lease in 20X1 for photocopy machines with monthly payments
of $1,200. The lease payments will be in the following way:
Journal Entry:
20X1
Lease payments for the year
Lease expense are reported as expenses in the Income Statement.
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7.3 IDENTIFICATION OF A LEASE
The definition of a lease under IFRS 16 is important because if a contract contains a ‘lease’
then the customer (lessee) will be required to recognize assets and liabilities arising from the
lease (subject to the exemptions mentioned earlier).
A contract is, or contains, a lease if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration (IFRS 16: para. 9).
According to the standard, a lease exists when the customer controls the use of the underlying
asset throughout the period of use. This requires the customer to:
• obtain substantially all of the economic benefits from the use of the asset throughout
the period of use; and .
• direct the use of the identified asset throughout that period of use, which means the
customer has the ability to change how, and for what purpose, the asset is used during
the contractual term.
A lessee does not control the use of an identified asset if the lessor can substitute the
underlying asset for another asset during the lease term and would benefit economically from
doing so. (IFRS 16: para. B14).
IASB provides some illustrative examples that provide insight into:

• whether there is an identified asset; and
• whether the customer controls the use of the identified asset throughout the period of
use.
Illustrative Example
Under a contract between a local government authority (L) and a private sector provider (P),
P provides L with 20 trucks to be used for refuse collection for a six-year period. P owns all
the trucks, all 20 of which are specified in the contract. L determines how they are used in the
refuse collection process. When the trucks are not in use, they are kept at L’s premises. L can
use the trucks for another purposes if it so chooses. If a particular truck needs to be serviced
or repaired, P is required to substitute a truck of the same type. Otherwise, and other than on
default by L, P cannot retrieve the trucks during the six-year period.
Is there an identified asset?

There are 20 trucks which are identified and explicitly specified in the contract. Once
delivered to L, the trucks can be substituted only when they need to be serviced or repaired.
Does the customer control the use of the identified asset throughout the period of use?
L has the right to control the use because:
(a) L has the right to obtain substantially all the economic benefits from the use of the
trucks over the six-year period of use.
(b) L has the right to direct the use of the trucks. L makes relevant decisions about how
and for what purpose the trucks are used.
Conclusion: The contract is a lease. L has the right to use the 20 trucks for six years. A
right-to-use asset and a lease liability shall be recognised.
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7.4 INITIAL MEASUREMENT
At commencement date, a lessee shall recognize a right-of-use asset and a lease liability.
7.4.1 Right-of-use asset
At the commencement date the right-of-use asset is measured at cost:

• Amount of initial measurement of the lease liability
• Any lease payments made to the lessor at, or before, the commencement date of the
lease, less any lease incentives received.
• Any initial direct costs incurred by the lessee.
• An estimate of any costs to be incurred by the lessee in dismantling and removing the
underlying asset, or restoring the site at the end of the lease term.
7.4.2 Lease liability
At the commencement date the lease liability is measured at the present value of future lease
payments, including any expected payments at the end of the lease, discounted at the interest
rate implicit in the lease (IFRS 16: para. 24). If that rate cannot be readily determined, the
lessee’s incremental borrowing rate should be used (IFRS 16: para. 26).
Example 2 – accounting for leases
On 1 January 20X1 D Ltd leased a new machine from E Ltd.
Date of inception 1 Jan 20X1

Lease term 4 years
Estimated economic life 5 years
Annual rental payment in arrears $10,000
Present value of lease payments $33,872 ($10,000 x 3.38721*)
Residual value at end of lease $0
Interest rate implicit in the lease 7%
* Present Value Annuity factor
Journal Entries:
1 January 20X1 – D Ltd records the lease liability
DR Right-of-use Asset- Machine

CR Lease Payable $33,872
[ $10,000 x ____________ ]
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Amortisation Schedule: (Split lease payment into interest and liability portion):
(1) (2) (3) (4) (5)
Lease Interest Lease Reduction in Lease
Payable Expense payment Lease Payable
Beg. Bal @ 7% $ liability End. Bal
$ $ $ $
Year ending (1) x 7% (3) - (2) (1) – (4)
31 Dec 20X1 33,872 2,371 (10,000) (7,629) 26,243
31 Dec 20X2 26,243 1,837 (10,000) (8,163) 18,080
31 Dec 20X3 18,080 1,266 (10,000) (8,734) 9,346
31 Dec 20X4 9,346 654 (10,000) (9,346) 0
31 December 20X1 – D Ltd made 1st lease payment

DR Interest Expense $2,371
DR Lease Payable $7,629
CR Cash
$10,000
31 December 20X1 – D Ltd records depreciation on the asset for Yr 1 of use

DR Depreciation Expense $8,468
CR Accumulated Depreciation $8,468
[ 33,872 / 4 years = $8,468 ]
31 December 20X2 – D Ltd made 2nd lease payment

CR Cash
$10,000
31 December 20X2 – D Ltd records depreciation for the asset for Yr 2 of use

CR Accumulated Depreciation
$8,468
31 December 20X3 – D Ltd made 3rd lease payment

CR Cash $10,000
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31 December 20X4 – D Ltd made 4th lease payment

DR Interest Expense $ 654
CR Cash
$10,000

Disclosure in Notes to the Accounts – Year ended 31 December 20X1
Finance Lease Liabilities $

Minimum lease payments due
- Not later than 1 year 10,000
- Later than 1 year and not later than 5 years 20,000
- Later than 5 years 20,000
30,000
Less Future finance charges (3,757)
Present value of finance lease liabilities 26,243
`
The present value of finance lease liabilities
- Not later than 1 year 8,163
- Later than 1 year and not later than 5 years
- Later than 5 years 18,080
Total 26,243
7.4.3 Disclosure for Leases - by the Lessee
The requirements for leases include:

(i) depreciation charge for right-of-use assets;
(ii) interest expense on lease liabilities;
(iii)expenses in relation to short-term and low-value leases;
(iv) the net carrying amount of right-of-use assets at the end of the reporting period, by
class of underlying assets;
(v) a reconciliation between the total of future minimum lease payments at the end of the
reporting period, and their present value;
(vi) the total of future minimum lease payments at the end of the reporting period, and their
present value, for each of the following periods.
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7.5 ACCOUNTING FOR LEASES BY LESSORS
A lessor shall classify each of its leases as either operating lease or finance lease.
A lease is classified as finance lease if it transfers substantially all the risks and rewards
incidental to ownership of an underlying asset. A lease is classified as an operating lease if it
does not transfers substantially all the risks and rewards incidental to ownership of an
underlying asset
Legally, of course, a finance lease is a rental agreement, and legally the lessee has not bought
the asset as title remains with the lessor.
However, to account for the finance lease in accordance with its legal form would be a
betrayal of the concept of ‘substance over form’. This important concept requires that the
commercial reality of events and transactions be reported in the financial statements if they
are to be relevant to the users of the financial statements and if the financial statements are to
be true and fair.
7.5.1 Classification of leases
This could be subjective and it is important that all the terms of the lease are reviewed so that
the substance of the lease agreement can be identified. Examples of situations that
individually or in combination would normally lead to a lease being classified as a finance
lease are:
(a) Transfer of ownership test
If the lessee is responsible for repairing, maintaining and insuring the asset then this is
consistent with the behaviour of the owner of the asset. The lessee has the risk of the
cost of repairs and of idle time but has the reward if the asset never breaks down.
Finance lease: ownership of the assets is transferred to the lessee.
Operating lease: ownership is not transferred.
(b) Bargain purchase option test
Bargain purchase option is a provision in the lease agreement which gives the lessee an
option to purchase the asset at a price which is expected to be sufficiently lower than
the fair value at the date the option can be exercised.
Finance lease: If the lease contains a bargain purchase option and at the start of the
lease, the lessee is reasonable certain to exercise the option.
Operating lease: There is no bargain purchase option.
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(c) Economic life test
We need to consider if the lease term is for major part of the useful life of the asset.
Lease term
This is the non-cancellable period the lessee has contracted to lease the asset plus
option to continue to lease the asset.
Example
A lease contract provides for a non-cancellable period of 5 years and an option for
another 3 years, then the lease term is 8 years.
Major part
“Major part” is not defined in IFRS 16. However the international Financial
Accounting Standards Board (FASB) Statement No 13 provides that if the lease term is
for equal or more than 75% of the asset’s useful life it is considered as a major part.
Finance lease: If the lease is for major part of the useful life of an asset.
Operating lease: If the lease is not for major part of the useful life of an asset.
Example
An asset with an useful life of 5 years is leased for 4 years, the lease is a finance lease.
(d) Recovery of investment test
We need to consider if the present value (PV) of the minimum lease payments is
substantially equal to the fair value of the asset.
Minimum lease payments

This is the rental payments which the lessee is required to make during the lease term.
Interest rate
To calculate the PV of the minimum lease payments, we use the interest rate implicit in
the lease agreement. If this rate is not available then the incremental borrowing rate is
used.
The incremental borrowing rate is the rate the lessee would have incurred to borrow the
funds necessary to buy the leased asset on similar terms as the lease.
Substantially equal
This is not quantified in IFRS 16. But FASB Statement No 13 uses 90%.
Finance lease: the PV of the minimum lease payments equals or exceeds 90% of the
fair value of the asset.
Operating lease: the PV of the minimum lease payments is less than 90% of the fair
value of the asset.
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(e) Specialised asset
Finance lease: the asset is of specialized nature
Operating lease: the asset is not of specialized nature
Example 3 - Classification of lease
B Café, entered into a lease for café operating equipment from C Ltd.
Details of the lease are as follows:

Inception date and first lease payment 1 Jan 20X1
Lease term 4 years
Present value of lease payments $33,195
Residual value at end of lease $38 000
Fair value of café equipment 1 Jan 20X1 $73 000
Lease is non-cancelable and there is no option to purchase asset at
end of lease term
Should the lease be classified as a finance or operating lease in the lessor, C Ltd’s accounts?
Factors taken into consideration in making this decision were:
(a) Economic life test

The term of the lease is not a major part of the economic life of the leased asset.
4 years x 100% = 40%

10 years
(b) Recovery of investment test
The present value of the minimum lease payments is not a substantial proportion of
the fair value of the leased asset.
$33,195 x 100% = 45.5%

$73,000
(c) Bargain purchase option test
The lease does not provide for ownership to be transferred to the lessee at the end of
the lease and there is no bargain purchase option.
Classification: Taking the above factors into consideration, the lease is to be classified as an
operating lease.
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Example 4 - Classification of lease
On 1 January 20X1 D Ltd leased a new machine from E Ltd.
Date of inception 1 Jan 20X1

Lease term 4 years
Present value of lease payments $33,872 ($10,000 x 3.38721*)
Residual value at end of lease $0
Fair value of machine on 1 Jan 20X1 $35 000
Lease is non-cancelable & option to purchase at end of lease term
* Present Value Annuity factor (See Appendix on page 81)
Explain, with justifications, how this lease should be classified in the lessor, E Ltd’ accounts.
Factors taken into consideration in making this decision were:
(a) Economic life test
The term of the lease is a major part of the economic life of the leased asset.
4 years x 100% = 80% → more than 75%

5 years
(b) Recovery of investment test
The present value of the minimum lease payments is a substantial proportion of the
fair value of the leased asset.
$33,872 x 100% = 97% → more than 90%

$35,000
(c) Bargain purchase option test
The lease contract provide for ownership to be transferred to the lessee at the end of
the lease.
Classification: Taking the above factors into consideration, the lease is to be classified as a
finance lease.
7.5.2 Accounting Treatment of Operating Leases - By the Lessor

The lessor has earned revenue from renting out the asset and accordingly recognises the lease
rental receivable as income in the profit and loss account.
The lessor depreciates the leased asset according to its depreciation policy. Maintenance
costs of the leased asset (payable by lessor) are charged to expense. Costs, such as finder’s
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fees and credit checks, are amortized over the lease term. The leased equipment and
accumulated depreciation are shown as Equipment Leased to Others.
7.5.3 Accounting Treatment of Finance Leases - by The Lessor
Such lessors are normally banks or similar lending institutions. When entering into a finance
lease the lessor is in substance making a loan which will be repaid with interest.
Despite having legal title to the asset subject to the lease, the lessor does not recognise this as
an asset on its balance sheet, as it does not control the asset and does not have access to the
future economic benefits. The lessor does however have the asset of a future income stream
and accordingly recognises a lease receivable.
A lessor has earned revenue from renting out the asset and accordingly recognises the lease
rental as income in the profit and loss account. The lessor also recognises finance income
over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of
return on the net investment.
7.5.4 Disclosure of leases by Lessor

The requirements for operating leases include:
(i) the future minimum lease payments under non-cancellable operating leases in the
aggregate and for each of the following periods:
- not later than one year;
- later than one year and not later than five years;
- later than five years.
(ii) total contingent rents recognised as income in the period.
(iii) a general description of the lessor’s leasing arrangements.
The requirements for finance leases include:

(i) a reconciliation between the gross investment in the lease at the end of the reporting
period, and the present value of minimum lease payments receivable at the end of the
reporting period
(ii) the gross investment in the lease and the present value of minimum lease payments
receivable at the end of the reporting period, for each of the following periods
• not later than one year;
• later than one year and not later than five years;
• later than five years.
(iii) a general description of the lessor’s material leasing arrangements.
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85
Review Question 1: Finance lease vs Operating lease in Lessor’s accounts
Indicate Yes or No to each of the following questions for the Lessor:
Finance Operating
Lease Lease
1. Are risks and rewards of ownership incidental to
asset transferred? Yes No
2. Can the lease be cancelled?
3. Will ownership be transferred at the end of lease?
4. Is the lease term a major part of the economic life

of the leased asset?
5. Is the present value of the minimum lease payments

substantially all of the fair value of the leased asset?
6. Is the lease of a short term nature?
7. Do the payments amount to a rental of the asset?
Review Question 2
On 1 July 20X6, Ann Ltd enters into an operating lease arrangement with Jo Ltd. Ann Ltd is
to lease equipment from Jo Ltd for a period of three years. The fair value of the asset was
$5,000. Rental payments of $800 each are payable six-monthly with the first payment made
on 1 July 20X6.
Prepare general journal entries to record the lease-related transactions in the books of Ann
Ltd for the year ended 30 June 20X7.
Review Question 3
On 1 Jan 20X4, CX Ltd entered into a lease for a machine that runs for 4 years, with annual
payments in arrears of $25,000. Fair value of the asset is $90,000 and estimated useful life is
5 years. The interest rate implicit in the lease is 5%.
Required:
Record the necessary journal entries to record the lease transaction in CX Ltd’s accounts for
the first year 20X4. Also show how the lease liabilities are disclosed at the end of the first
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TOPIC 8
INVENTORIES (IAS 2)
o Outline the principles of inventory valuation.

o Understand the various methods of valuing inventory
o Understand the valuation of inventory under the perpetual and periodic system.
o Understand the reporting of inventory under the lower of cost or net realizable value
rule
8.1 INTRODUCTION
IAS 2 prescribes the accounting treatment for inventories. A primary issue in accounting for
inventories is the amount of cost to be recognised as an asset and carried forward until the
related revenues are recognised. It provides guidance on the determination of cost and its
subsequent recognition as an expense, including any write-down to net realisable value. It
also provides guidance on the cost formulas that are used to assign costs to inventories.
8.2 INVENTORY
Inventories are define as assets that are:

- held for sale in the ordinary course of business
- used in the process of production for sale
- in the form of materials or supplies to be consumed in the production
process or in the rendering of services
8.3 COST OF INVENTORY
Cost of inventories is all expenditure incurred in the normal course of business in bringing an
item of inventory to its present location and condition. This INCLUDE the cost of purchase
and the cost of doing further work on the raw materials (cost of conversion)
(i) Cost of purchase include:

o the purchase price
o import duties and other taxes
o transport and handling cost (freight)
o less : trade discounts
(ii) Costs of conversion include:

o direct labour cost
o production overheads
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Example 1:
Z imports cars for resale in Singapore. The list price of the car is $20,000, subject to a trade
discount of 5%. The import duty is 100% on the net purchase price, and Z incurs a
transportation cost of $100 and an insurance cost of $200 for each imported car. What is the
inventory cost of the car?
Solution:
Purchase price $20,000
Less trade discount ($1,000)
Add import duty $19,000
Add transportation cost $100
Add insurance cost $200
Inventory cost $38,300
Costs EXCLUDED from the valuation of inventories:

- carriage outward => distribution cost
- administrative overheads => costs incurred for running the business
- selling and storage expenses => distribution cost
- abnormal costs => costs which are not incurred for production, but are incurred due to
abnormality of some process in production
8.4 METHODS OF VALUING INVENTORY
There are several ways to value inventory items:
(i) Specific identification

(ii) First in, first out (FIFO)
(iii) Weighted Average Cost (WAC)
The cost of inventories of items that are not ordinarily interchangeable shall be assigned by
using specific identification of their individual costs.
For other goods, IAS 2 nominates FIFO or WAC as benchmark treatments.
Method chosen must be adhered to from one period to the next so as to give a meaningful
trend of trading results (consistency)
8.4.1 Specific Identification
This method uses the actual cost of purchasing identifiable units of inventory. This method is
used in situations where inventory items are of high value and individually distinguishable.
E.g. jewelry retailers and art dealers.
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8.4.2 First In First Out (FIFO)
This method assumes that goods that are purchased first are sold first. Therefore, the
inventory remaining at year end is the most recently purchased inventory. Cost of goods sold
represents the cost of the oldest goods in inventory.
8.4.3 Weighted Average Cost (WAC)
This method is based on the assumption that all the goods are mingled together. Therefore it
is impossible to determine which goods are sold and which ones are retained in the
inventories on hand. The inventories (remaining at year-end and cost of goods sold) are
valued at the average prices paid for the goods, weighted according to the quantity purchased.
8.5 PERPETUAL VS PERIODIC SYSTEM OF ACCOUNTING FOR

INVENTORY
8.5.1 Perpetual System
• Inventories are recorded on a continuous basis (through the use of stock cards).
• Movement of inventories are recorded in the accounts.
• Physical count of inventory is mainly for the verification of the stock records.
8.5.2 Periodic System
• Inventories are not recorded on a daily basis.

• Movement of inventories are not recorded.
• Inventories must be valued at the end of the accounting period after a physical count.
Example 2:
Able Trading is a wholesaler of sports equipment. Transactions relating to the movement of
stock for resale during 20X3 were as follows:
Date Details Units Price per unit

Jan Opening bal 2,000 $ 3
Apr Purchases 3,000 $ 4
Jun Sales 4,500 $ 10
Oct Purchases 6,000 $ 5
Dec Sales 4,000 $15
Required:
Part A – Perpetual System.
a) Prepare a stock card to determine the cost of goods and ending inventory using the
following cost flow methods:
i) FIFO
ii) WAC
b) Calculate the gross profit for the year.
89
Part B – Periodic System.
c) Calculate the ending inventory value and cost of goods sold using the following cost
flow methods:
i) FIFO
ii) WAC
d) Calculate the gross profit for the year.
Part A – Perpetual System.

a)
i) FIFO
Date Purchases COGS Inventory
Qty Unit Total Qty Unit Total Qty Unit Total
Cost $ $ Cost $ $ Cost $ $
Jan 2000 $3 $6,000
Apr 3000 $4 $12,000 2000 $3 $6,000
3000 $4 $12,000
Jun 2000 $3 $6,000 500 $4 $2,000
2500 $4 $10,000
Oct 6000 $5 $30,000 500 $4 $2,000
6000 $5 $30,000
Dec 500 $4 $2,000 2500 $5 $12,500
3500 $5 $17,500
Bal Balance $42,000 $35,500 $12,500
ii) WAC
Date Purchases COGS Inventory
Qty Unit Total Qty Unit Total Qty Unit Total
Cost $ $ Cost $ $ Cost $ $
Jan 2000 $3 $6,000
Apr 3000 $4 $12,000 5000 $3.60 $18,000
Jun 4500 $3.60 $16,200 500 $3.60 $1,800
Oct 6000 $5 $30,000 6500 $4.89 $31,800
Dec 4000 $4.89 $19,560 2500 $4.89 $12,225
Bal Balance $42,000 $35,760 $12,225
b)
FIFO WAC
$ $
Sales (4,500 x $10) + (4,000 x $15)000 x $15) 105,000 105,000
Less: Cost of goods sold 35,500 35,760
Gross Profit 69,500 69,240
90
Part B – Periodic System
Cost of goods available for sale:
Jan 2,000 x $3 …………. $6,000 Beginning inventory
Apr 3,000 x $4 …………. $12,000

Purchases
Oct 6,000 X $5 …………. $30,000
11,000 $48,000 Cost of goods available for sale
Physical count at 31 Dec 20X3 revealed 2,500 units on hand.
c) i)
FIFO : Units from the earliest purchases will be sold first.
Ending inventory (i.e. units unsold) made up of the latest purchases
Ending Inventory:
1,000 $4 $4,000
2,500 x $5 $12,500
2,500 $12,500
Cost of Goods sold: Beginning Inventory + Purchases – Ending Inventory
$48,000 - $12,500 $35,500
c) ii)
WAC : Units sold & unsold are based on a weighted average cost
Ending Inventory:
2,500 x $4.36 * = $10,900
* Weighted average cost per unit = __$48,000 / 11,000 units = $4.36*
Cost of Goods sold: Beginning Inventory + Purchases – Ending Inventory

$48,000 - $10,900 $37,100
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d)
FIFO WAC
$ $
Sales (4,500 x $10) + (4,000 x $15) 105,000 105,000
Less: Cost of goods sold 35,500 35,769
Beginning inventory 6,000 6,000
Purchases 42,000 42,000
Less : Ending inventory (12,500) (10,900)
35,500 37,100
Gross Profit 69,500 67,900
8.6 LOWER OF COST AND NET REALISABLE VALUE
IAS 2 states that inventory is valued in the balance sheet at the lower of cost and net
realisable value.
This is in compliance with the prudence concept, which means that accountants will err on
the side of caution and avoid overstating profits or asset values.
Cost – the cost (e.g. based on FIFO or WAC) of getting the goods to the state that they are in.
Net realisable value – estimated selling price in the ordinary course of business less
estimated cost of completion and estimated costs necessary to make the sale.
Selling price x
Less: Trade discount x
All further costs to completion x
All marketing, selling and distribution costs x
(x)
Net realisable value (NRV) x
• When NRV is lower than cost, inventory value must be written down to NRV.
• Net realisable value must be reassessed at the end of each period and compared again
with cost. If net realisable value has risen for inventories held over the end of more than
one period, previous write down must be reversed to the extent that inventory is then
valued at lower of cost and net realisable value
• The comparison of cost and NRV should be done on an ‘item by item’ basis or “groups of
similar or related items”. It is not sufficient to compare the total cost of all items with
their total NRV.
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Illustration:
ABC Ltd has the following inventory items as at year-end 31 Dec 20X3:
Product Qty Unit Unit Total Total Lower of

Cost Selling cost NRV Cost or NRV
price*
A 100 $5 $3 $500 $300 $300
B 200 $8 $12 $1,600 $2,400 $1,600
C 300 $10 $7 $3,000 $2,100 $2,100
D 500 $12 $20 $6,000 $10,000 $6,000
$11,100 $14,800 $10,000
*There are no other costs of completion/making the sales.
Inventory value at 31 Dec 20X3 should be reported at .
Therefore, there will be a write-down of inventory by .
8.7 IAS 2 DISCLOSURE REQUIREMENT
Information which must be disclosed in the financial statements or in a note to those financial
statements include:
(i) the accounting policies adopted in measuring inventories, including the cost formula
used;
(ii) the total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity;
(iii) the carrying amount of inventories carried at fair value less costs to sell;
(iv) the amount of inventories recognised as an expense during the period;
(v) the amount of any write-down of inventories recognised as an expense in the period in
accordance with paragraph 34;
(vi) the amount of any reversal of any write-down that is recognised as a reduction in the
amount of inventories recognised as expense in the period
(vii) the circumstances or events that led to the reversal of a write-down of inventories in
accordance with paragraph 34; and
(viii) the carrying amount of inventories pledged as security for liabilities.
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Review Question 1
On 1 Dec 20X3, EZ Trading Ltd held 300 units of stocks valued at $12 each.
During December the following purchases took place:

Date Units purchased Cost per unit
$
10 December 400 13
20 December 400 17
25 December 400 22
Goods sold during December were as follows:

Date Units sold Sales price per unit
$
14 December 500 20
21 December 400 35
28 December 100 42
Required:
a) Calculate Cost of sales, closing inventory and gross profit for the month ended 31
December 20X3 using FIFO under:
i) Perpetual System
ii) Periodic System
b) Calculate Cost of sales, closing inventory and gross profit for the month ended 31
December 20X3 using WAC under:
i) Perpetual System
ii) Periodic System
Review Question 2
FX Ltd sells three products, SD, YN & US. At the end of the accounting year ended 30 June
20X4, the inventory on hand were as follows:
Product Cost Selling Price

SG $1,000 $1,300
YN $2,900 $2,800
US $720 $730
A sales commission of 5% of the selling price is payable to the agent by FX Ltd.
Required:
Determine the value of ending inventory that should be reported in the Statement of Financial
Position as at 30 June 20X4 and explain the basis for this valuation.
94
TOPIC 9
STATEMENT OF CASH FLOWS (IAS 7)
o Prepare a cash flow statement for a single entity in accordance with relevant
accounting standards using the direct and indirect method.
o Interpret cash flow statements to assess the financial position of an entity.
9.1 INTRODUCTION TO STATEMENT OF CASH FLOWS
IAS 7 requires all commercial, industrial or business enterprises to present a cash flow
statement and present it as an integral part of its financial statements for each period for
which financial statements are presented.
Information about the cash flows of an enterprise is useful in providing users of financial
statements with a basis to assess the ability of the enterprise to generate cash and cash
equivalents and the needs of the enterprise to utilise those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an enterprise to
generate cash and cash equivalents and the timing and certainty of their generation.
Users of an enterprise's financial statements are interested in how the enterprise generates and
uses cash and cash equivalents. Enterprises need cash for essentially the same reasons
however different their principal revenue-producing activities might be. They need cash to
conduct their operations, to pay their obligations, and to provide returns to their investors.
The cash flow statement analyses changes in cash and cash equivalents during a period. Cash
and cash equivalents comprise cash on hand and demand deposits, together with short-term,
highly liquid investments that are readily convertible to a known amount of cash, and that are
subject to an insignificant risk of changes in value. Bank overdrafts which are repayable on
demand and which form an integral part of an enterprise's cash management are also included
as a component of cash and cash equivalents.
The cash flow statement should report cash flows during the period classified by operating,
investing and financing activities.
KEY DEFINITIONS
Cash
comprises cash on hand and demand deposits.
Cash equivalents
are short-term, highly liquid investments that are readily convertible to known amounts of
cash and which are subject to an insignificant risk of changes in value.
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Cash flows
are inflows and outflows of cash and cash equivalents.
Operating activities
are the principal revenue-producing activities of the enterprise and other activities that are not
investing or financing activities.
Investing activities
are the acquisition and disposal of long-term assets and other investments not included in
cash equivalents.
Financing activities
are activities that result in changes in the size and composition of the contributed equity and
borrowings of the enterprise.
9.2 BENEFITS OF CASH FLOW INFORMATION
A statement of cash flows, when used in conjunction with the rest of the financial statements,
provides information that enables users to evaluate the changes in net assets of an enterprise,
its financial structure (including its liquidity and solvency) and its ability to affect the
amounts and timing of cash flows in order to adapt to changing circumstances and
opportunities.
9.2.1 External Uses of Cash Flow Statement (CFS)
o To assess the ability of a firm to manage cash flows

o To assess the ability of a firm to generate cash through its operations
o To assess the ability of a firm to maintain and expand its operating capacity
o To assess the company’s ability to meet its obligations and its dividend policy
o To provide information about the effectiveness of the firm to convert its revenues to cash
o To provide information to estimate or anticipate the company’s need for additional
financing
9.2.2 Internal Uses of Cash Flow Statement
Alongside with cash budget, CFS is used:
o To assess liquidity - Determine if short-term financing is necessary

o To determine dividend policy - Decide to distribute; or increase or decrease
o To evaluate the investment and financing decisions
96
9.3 PRESENTATION OF THE STATEMENT OF CASH FLOWS
The cash flow statement should report cash flows during the period classified by operating,
investing and financing activities.
An enterprise presents its cash flows from operating, investing and financing activities in a
manner which is most appropriate to its business. Classification by activity provides
information that allows users to assess the impact of those activities on the financial position
of the enterprise and the amount of its cash and cash equivalents. This information may also
be used to evaluate the relationships among those activities.
Key principles specified by IAS 7 for the preparation of a cash flow statement are as follows:
a) operating activities are the main revenue-producing activities of the enterprise that
are not investing or financing activities, so operating cash flows include cash received
from customers and cash paid to suppliers and employees
b) investing activities are the acquisition and disposal of long-term assets and other
investments that are not considered to be cash equivalents
c) financing activities are activities that alter the equity capital and borrowing structure
of the enterprise
**
* - can be reported under investing activities

** - can be reported under financing activities
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9.3.4 Format of the Cash Flow Statement
Statement of Cash Flows for the year ended 31 December 20X3
Cash flows from operating activities:

[List of individual inflows and outflows]
Net cash provided (used) by operating activities $XXX
Cash flows from investing activities:

Net cash provided (used) by investing activities $(XXX)
Cash flows from financing activities:

Net cash provided (used) by financing activities $XXX
Net increase (decrease) in Cash $XX
Cash (and equivalents) balance at beginning of period $XX
Cash (and equivalents) balance at end of period $XX
9.4 DIRECT METHOD VS INDIRECT METHOD
An enterprise should report cash flows from operating activities using either :
(a) direct method
(b) indirect method
Both method results in the same amount of cash flows.
Direct method Indirect method

whereby major classes of gross cash receipts whereby profit or loss is adjusted for the
and gross cash payments are disclosed effects of transactions of a non-cash nature,
any deferrals or accruals of past or future
operating cash receipts or payments, and
items of income or expense associated with
investing or financing cash flow
Calculates cash flow from operations by Calculates cash flow from operations by
subtracting cash disbursements to suppliers, adjusting net income for non-cash revenues
employees, and others from cash receipts and expenses (such as those in receivables &
from customers. payables and depreciation).
Standard recommends direct method. Most firms present their cash flows using the
indirect method.
Only operating activities section is different between the methods, investing and financing
sections are the same.
98
9.4.1 DIRECT METHOD
The direct method shows each major class of gross cash receipts and gross cash payments.
The operating cash flows section of the cash flow statement under the direct method would
appear something like this:
$
Cash receipts from customers XXX
Cash paid to suppliers (XXX)
Cash paid to employees (XXX)
Cash paid for other operating expenses (XXX)
Income taxes paid (XXX)
Net cash from operating activities XXX
9.4.2 INDIRECT METHOD
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash
transactions. The operating cash flows section of the cash flow statement under the indirect
method would appear something like this:
$
Profit before income taxes XXX
*Adjustments: Add/(Less)
Add depreciation XXX Non-cash expenses/income
Add loss on disposal of PPE/investment XXX
Less gain on disposal of PPE/investment XXX Interest paid reported as
financing outflow
Add interest expense incurred XXX Amt paid reported separately
Investment income (XXX) Investment income received
Increase in receivables (XXX) reported as investing inflow
Decrease in inventories XXX
Increase in trade payables XXX Changes in operating current
assets/liabilities
Cash flows from operations XXX (other than cash/overdraft)
Income taxes paid** (XXX)
Net cash from operating activities XXX
* Reason : To convert profit (based on accrual accounting) to cash from operation (net
cash received/paid)
**IAS 7 requires cash flows arising from taxes on income should be separately disclosed.
99
9.4.3 INDIRECT METHOD : INTERPRETATION OF CHANGES IN NON-CASH
OPERATING CURRENT ACCOUNTS
Adjustment
Implied
Change in Current Required
Effect on Interpretation
Account to calculate
Cash
Cash flows
Increase in Decrease Less Sales were included in income this
Accounts Receivable from profit year; however, the cash will not be
received until next year.
Decrease in Increase Add Cash was collected this year for sales
Accounts Receivable to profit that occurred in previous years.
Increase in Inventory Decrease Less Cash tied up in inventory has

from profit increased due to inventory was
purchased this year, but will not be
sold until next year.
Decrease in Increase Add Previously purchased inventory was

Inventory to profit sold this year.
Increase in Increase Add Goods purchased this year but only

Accounts Payable to profit paid next year.
Decrease in Decrease Less Payment made this year for goods

Accounts Payable from profit purchased in the previous year.
Increase in Increase Add Expenses incurred this year but only

Accrued Expenses to profit paid next year.
Decrease in Decrease Less Payment made this year for expenses

Accrued Expenses from profit incurred in the previous year.
100
9.5 COMPREHENSIVE EXAMPLE – DIRECT VS INDIRECT METHOD
ABC Ltd
Statement of Comprehensive Income for the year ended 20X3
$’000
Sales 13,900
Cost of sales (11,600)
Gross profit 2,300
Depreciation (440)
Administrative and selling expenses (805)
Interest expense (60)
Loss on disposal of PPE (20)
Investment income (received in 20X3) 70
Profit before tax 1,045
Income tax expense (200)
Profit after tax 845
Statement of Financial Position as at the end of
20X3 20X2
$’000 $’000 $’000 $’000
Assets
Cash and cash equivalents 240 160
Accounts receivable 1,900 1,200
Inventory 1,000 1,950
Long-term investments 2,500 2,400
Property, plant and equipment, at cost 3,730 1,910
Accumulated depreciation (1,450) (1,060)
Property, plant and equipment net 2,280 850
Total assets 7,920 6,560
Liabilities
Account payables 530 1,930
Interest payable 45 10
Income taxes payable 200 100
Long-term loans 2,300 1,900
Total liabilities 3,075 3,940
Shareholders’ equity
Share capital 2,600 1,100
Retained earnings 2,245 1,520
Total shareholders’ equity 4,845 2,620
Total liabilities and shareholders’ equity 7,920 6,560
101
The following additional information is also relevant for the preparation of the
Statement of Cash Flows in 20X3:
1) Analysis of the cash records showed the following:
$’000
Cash received from customers 13,200
Cash paid to suppliers (12,050)
Cash paid to employees (200)
Cash paid for other operating expenses (605)
2) Interest expense was $60,000 was provided for in 20X3, of which $15,000 was paid in the
same year. $10,000 relating to interest expense of 20X2 was also paid in 20X8.
3) Tax expense of $200,000 was provided for in 20X3. 20X2 tax of $100,000 was paid in
20X3.
4) ABC Ltd paid $1,900,000 and $100,000 for new plant and equipment and new
investments, respectively during the year.
5) Equipment with original cost of $80,000 and accumulated depreciation of $50,000 was
sold for $10,000
6) $1,500,000 was raised from the issue of shares and a further $400,000 was raised from
long-term borrowings.
7) Dividends paid were $120,000.
Required:
Prepare a Statement of Cash Flows for the year ended 31 December 20X3 under:
a) Direct method
b) Indirect method (see pg 104 for additional information)
102
a) Direct Method Cash Flow Statement
ABC Ltd
$’000 $’000
Cash flows from operating activities
Cash receipts from customers 13,200
Cash paid to suppliers and employees (12,250)
Cash paid for other operating expenses (605)
Cash generated from operations 345
Income taxes paid (100)
Net cash from operating activities 245
Cash flows from investing activities

Purchase of plant and equipment (1,900)
Proceeds from sale of equipment 10
Purchase of new investments (100)
Investment income received 70
Net cash used in investing activities (1,920)
Cash flows from financing activities

Proceeds from issue of shares 1,500
Proceeds from long-term borrowings 400
*Interest paid (25)
Dividends paid (120)
Net cash used in financing activities 1,755
Net increase in cash and cash equivalents 80
Cash and cash equivalents at beginning of period 160
Cash and cash equivalents at end of period 240
.
103
b) Indirect Method Cash Flow Statement
Refer to Pg 101 for the comparative Statements of Financial Position of ABC Ltd for 20x3
and 20X2
Additional information: (Given to prepare Statement of Cash Flows under INDIRECT

method)
1) Analysis of the Retained Earnings account showed the following:
$’000
Profit after tax 845
Dividends paid (120)
Increase in Retained Earnings a/c 725
2) Interest expense was $60,000 and tax expense of $200,000 for 20X3.
3) Investment income earned and received was $70,000.
4) Equipment with original cost of $80,000 and accumulated depreciation of $50,000 was
sold for $10,000.
[Note: Income Statement for 20x3 will not be given.]
Required:
Prepare a Statement of Cash Flows for the year ended 31 December 20X3 under the Indirect
method.
104
b) Indirect Method Cash Flow Statement
ABC Ltd
$’000 $’000
Cash flows from operating activities
Profit taxation
Adjustments for:
Depreciation
on disposal of PPE
Investment income earned
Interest expense incurred
in account receivables
in inventories
in account payables
Cash generated from operations
Income taxes paid
Net cash from operating activities 245
Cash flows from investing activities

Purchase of plant and equipment (1,900)
Proceeds from sale of equipment 10
____________________ investments
Investment income received 70
Net cash used in investing activities (1,920)
Cash flows from financing activities

Proceeds from issue of shares 1,400
__________________ of long-term loans 400
Interest paid* (25)
Dividends paid
Net cash used in financing activities 1,755
Net increase in cash and cash equivalents 80 80
Cash and cash equivalents at beginning of period 160 160
Cash and cash equivalents at end of period 240
105
Important calculations:
1. Calculate Profit before tax:
Use Retained Earnings a/c:

OB + Profit after tax – Dividends paid = EB
Profit before tax = Profit after tax + Income tax expense
2. Calculate depreciation expense:
Use Accumulated Depreciation a/c:

OB + Depreciation expense – Accumulated depreciation of disposed asset = EB
3. Calculate gain or loss on disposal of fixed assets:
Gain/(Loss) on disposal on:
• Fixed assets = Proceeds from sale - Net book value (Carrying amount)
• Investments = Proceeds from sales – Cost
4. Calculate additions/purchase of new fixed assets:
Use Fixed Assets a/c:

OB + Additions – Cost of disposed asset = EB
5. Calculate income tax paid:
Use Income Tax Payable a/c:

OB + Income tax expense – Income tax paid = EB
6. Calculate interest expense paid:
Use Interest Expense Payable a/c:

OB + Interest expense – Interest expense paid = EB
106
9.6 ADDITIONAL NOTES - DISCLOSURE
• The aggregate cash flows relating to acquisitions and disposals of subsidiaries and
other business units should be presented separately and classified as investing
activities, with specified additional disclosures.
• The aggregate cash paid or received as consideration should be reported net of cash
and cash equivalents acquired or disposed of.
• Investing and financing transactions which do not require the use of cash should be
excluded from the statement of cash flows, but they should be separately disclosed.
• The components of cash and cash equivalents should be disclosed, and a
reconciliation presented to amounts reported in the statement of financial position.
• The amount of cash and cash equivalents held by the entity that is not available for
use should be disclosed, together with a commentary by management.
107
Review Question 1
Global Ltd has prepared the following financial statements:
Statement of Comprehensive Income for the year ended 31 December 20X4

$
Sales 470,000
Cost of Goods Sold (360,000)
Gross Profit 110,000
Less : Depreciation expense (12,000)
Loss on disposal of equipment (1,200)
Other operating expenses (60,800)
Interest expense (2,000)
Add : Investment income received 3,000
Net profit before tax 37,000
Less: Income tax expense (3,000)
Net profit after tax 34,000
Statement of Financial Position as at 31-Dec-X4 31-Dec-X3

$ $
Cash & cash equivalents 11,000 23,000
Accounts Receivable 21,000 26,000
Inventory 43,000 39,000
Investments 50,000 40,000
Equipment, at cost 115,000 80,000
191,000 163,000
Accounts payable 30,000 16,000

Interest payable 6,000 8,000
Tax payable 3,000 7,000
Long Term Loan 10,000 30,000
191,000 163,000
108
The following information relating to financial year ended 31 December 20X4 was made
available:
1. Equipment costing $10,000 and accumulated depreciation of $8,000 was sold for
$800.
2. No investments were sold during the year.
3. Shares were issued for cash to finance the partial repayment of long term loans.
4. Dividends of $4,000 were paid during the year.
Required:
Prepare a Statement of Cash Flows, using the indirect method, for the year ended 31
December 20X4.
109
Review Question 2
Express Ltd has prepared the following financial statement:
Statement of Financial Position as at 31-Oct-X4 31-Oct-X3

$ $
Cash & cash equivalents 39,000 20,000
Accounts Receivable 37,000 28,000
Inventory 31,000 36,000
Investments 10,000 60,000
Plant & equipment, at cost 150,000 40,000
217,000 169,000
Accounts payable 30,000 37,000

Interest payable 5,000 2,000
Long Term Loan 30,000 10,000
217,000 169,000
The following information relating to financial year ended 31 October 20X4 was made
available:
1. Profit after tax was $39,000 and dividends of $7,000 were paid during the year.
2. Interest expense and income tax expense charged to income statement were $4,000 and
$7,000 respectively. The same amount of income tax were paid during the year.
3. Investment income earned and received was $5,000 during the year.
4. Part of the investments were sold at cost during the year.
5. Equipment costing $15,000 and accumulated depreciation of $5,000 was sold for
$12,000.
Required:
a) Prepare a Statement of Cash Flows, using the indirect method, for the year ended 31
October 20X4.
b) Evaluate Express Ltd’s Statement of Cash Flows for the year ended 31 October 20X4.
110
TOPIC 10
LIABILITIES (IAS 37)
o Define liabilities and classify current and long-term liabilities.

o Distinguish the accounting for the two different types of current liabilities.
o Understand the accounting treatment for long-term debt-bonds payable.
o Account for provisions, contingent liabilities and assets.
10.1 OVERVIEW OF LIABILITIES
10.1.1 Definition of liabilities
The Framework for the Preparation and Presentation of Financial Statements defines a
liability as a:
• present obligation arising from a past event;
• the settlement of which is expected to lead to an outflow of future economic benefits
from the entity
A liability is recognised when:

• it is probable that any future economic benefit associated with the item will flow
from the entity; and
• the item has a value that can be measured with reliability
Liabilities are separated into current and non-current based on the length of time that will
elapse before the obligation must be fulfilled.
10.1.2 Classification of liabilities
(a) Current liabilities are obligations that must be fulfilled within the current operating
cycle which is almost always one year.
(b) Non-current liabilities are obligations that need not be fulfilled within the current
operating cycle. Used to finance long-term assets
Obligations calling for periodic payments such as a mortgage may be non-current but have a
current portion; that is, the payments due within the operating cycle are current but the
remaining payments are noncurrent.
111
10.2 CURRENT LIABILITIES
There are two categories of current liabilities:

(a) definitely determinable liabilities
(b) estimated liabilities
10.2.1 Two Categories of Current Liabilities
(a) Definitely determinable liabilities (b) Estimated liabilities

Set by contract or by statute and can be Definite debts or obligations of which the
measured exactly exact dollar amount cannot be known until
a later date.
Examples Examples
accounts payable, bank loans, notes payable, income taxes, property taxes, product
accrued liabilities, sales taxes payable, warranties, vacation pay, environmental
current portions of long-term debt, payroll liabilities
liabilities, unearned or deferred revenues
10.2.2 Accounting for Current Liabilities
(a) Definitely determinable liabilities
(i) Short-Term Notes Payable
Example – Note payable
On 30 January 20X4, a business purchased inventory for $8,000 by issuing a 1-year, 10%
note payable. The accounting year ends on 30 April 20X4.
Journal entry on 30 Jan 20X4:
DR Inventory $8,000
CR Notes Payable $8,000
Purchased inventory by issuing a one-year, 10% note
Journal entry on 30 Apr 20X4:
DR Interest Expense $200

CR Interest Payable $200
To accrue interest at year-end
Interest expense for accounting year 20X4= $8$8,000 × 10% × (3/12) = $200
112
Journal entry on 30 Jan 20X5:
DR Note Payable $8,000

DR Interest Payable 200
DR Interest Expense 600
CR Cash $8,800
To record payment of loan principal and interest
Interest exp for accounting year 20X5= $8,000 × 10% × (9/12) = $600
(ii) Sales taxes payable
Goods & Services Tax (GST) is a broad-based consumption tax levied on the import of
goods (collected by Singapore Customs), as well as nearly all supplies of goods and services
in Singapore. GST is a Value Added Tax (VAT). GST-registered companies have to forward
the collected taxes to the tax authorities at regular intervals.
Example – Sale taxes payable

One month’s sales at a Home Depot Store totalled $200,000. The business collected an
additional 7% in GST. Record the month’s sales.
Solution
Journal entry:
DR Cash ($200,000 X 1.07) $214,000

CR Sales Revenue $200,000
CR GST Payable $14,000
To record cash sales and related GST
(iii) Accrued Liabilities
Obligations accumulated on a daily basis but not recorded until the end of period through
adjusting entries (i.e., Interest payable, salaries payable, rent payable…)
(b) Estimated liabilities
(i) Property taxes are assessed by local governments (city, state …) on the value of
properties. The assessed property taxes become a lien on the properties on a day specified
by law (i.e., July 1). In general, the bills of the property taxes are not received until a few
months after the lien day. The property taxes must be estimated and recognized on a
monthly basis starting the lien day.
113
(ii) Warranty Obligations (Product Warranty)
Estimate the warranty expense associated with the sales (of the period) at the end of the
period and recognize it.
Example - Warranty
As at 31 December 20X2, the estimated warranty liabilities account has an ending balance of
$2,000 before the year end adjustment. An additional amount of $3,000 was estimated for the
year 20X2:
31 Dec 20X2:
DR Warranty Expenses $$3,000

CR Provision for Warranty $3,000
000
During 20x3, the actual warranty expenses amounted to $5,800.
During the year 20X3:
DR Provision for Warranty $5,000

DR Warranty Expenses 800*
CR Inventory (or Cash) $5,800
* If the estimated warranty liabilities are not enough to cover the current year’s warranty
services, treat it as a change in accounting estimates (i.e. expense of with no retroactive
effect).
(iii) Premiums and Coupons Obligations
Liabilities of premiums and coupons should be estimated and recognized in the year when
sales are made.
Journal Entry:
DR Premium (or Coupon) Expense $XXX

CR Estimated Premium Claims (or coupon) outstanding $XXX
When premiums (or coupons) are claimed:
Journal Entry:
DR Estimated Premium Claims (coupon) outstanding $XXX

CR Inventory $XXX
* If the actual redemption of coupons (or premiums) is greater than the estimated liabilities,
the underestimated amount would be recognized as the expense of the current year.
114
10.3 LONG TERM LIABILITIES
Two types of long-term liabilities:

1) long-term loans (such as bonds payable)
2) long-term accrued liabilities (such as deferred tax liabilities)
Many businesses consolidate long-term borrowings into one balance sheet line item “Long-
Term Debt”.
10.3.1 Introduction to Debt instrument – Bonds
Introduction
Bonds are groups of long-term notes payable issued to multiple lenders (bondholders). They
are issued by large companies to borrow large amounts of cash. There are various types of
bonds, for example Term bonds, Serial bonds, Secured (mortgage) bonds, Unsecured
(debenture) bonds and etc.
Like a note, a bond requires periodic interest payments, and the face amount must be repaid
at the maturity date. The interest rate is also called the coupon rate and the face value is the
par value.
Bond prices
Bonds are sold at market price; the amount that investors are willing to pay. Market price is
the bond’s present value of its principal and interest payments which are received at future
dates. They are quoted at a percent of their maturity value.
[Present value is the current worth of a future sum of money or stream of cash flows given a
specified rate of return.]
Examples:
(i) Bond issued at face (par) value

E.g. A $1,000 bond quoted at 100 sells for $1,000
(ii) Bond issued above face (par) value – premium

E.g. A $1,000 bond quoted at 101½ sells for $1,000 × 1.015 = $1,015
(iii) Bond issued at below face (par) value – discount

E.g. A $1,000 bond quoted at 88⅜ sells for $1,000 × 0.88375 = $883.75
The issue price of bonds depends on the bond interest rate (coupon rate) and the market
interest rate.
A bond trades at a premium when its coupon rate is higher than market interest rate and
trades at a discount when its coupon rate is lower than market interest rate.
115
10.3.2 Accounting Treatment for Bonds
Issuing Bonds Payable at Par Value
On January 1, 20X4, Chrysler Corporation issued $50,000 of 9%, 5-year bonds at par.
Interest is payable semi-annually on July 1 and Jan 1. Chrysler Corporation accounting year
ends on December 31.
Journal entry:
Jan 1, 20X3 DR Cash $50,000

CR Bonds Payable $50,000
To issue 9%, 5-years bonds at par
Record semiannual interest payments.

Journal entry:
Jul 1, 20X3 DR Interest Expense $2,250
CR Cash $2,250
To pay semiannual interest [ $50,000 × 9% × 6/12 = $2,250]
Journal entry:
Dec 31, 20X3 DR Interest Expense $2,250
CR Interest Payable $2,250
To accrue interest [ $50,000 × 9% × 6/12 = $2,250 ]
Issuing Bonds at a Discount
On January 1, 20X4, Chrysler issues $100,000 of its 9%, five-year bonds when the market
interest rate is 10%. Chrysler receives $96,149 at issuance.
Journal entry:
Jan 1 DR Cash $96,149

DR Discount on Bonds Payable $3,851
To issue 9%, 5-years bonds at a discount.
Chrysler’s balance sheet immediately after issuance of the bonds:
Long-term liabilities
Bonds payable, 9%, due 2009 $100,000
Less: Discount on bonds payable ( 3,851)* 96,149
*Discount on Bonds Payable → contra account to Bonds Payable to determine the carrying
amount of the bonds.
116
Issuing Bonds at a Premium
On January 1, 20X4, Chrysler issues $100,000 of its 9%, five-year bonds when the market
interest rate is 8%. Chrysler receives $104,100 at issuance.
Journal entry:
Jan 1 DR Cash $104,100

CR Premium on Bonds Payable $4,100
To issue 9%, 5-years bonds at a premium.
Chrysler’s balance sheet immediately after issuance of the bonds:
Long-term liabilities
Bonds payable, 9%, due 2009 $100,000
Add: Premium on bonds payable 4,100 104,100
10.4 IAS 37 – PROVISION, CONTINGENT LIABILITIES, AND CONTINGENT

ASSETS
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement
bases are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to the financial statements to enable users to understand.
KEY DEFINITIONS
Provision:
• a liability (present obligation as a result of past events) of uncertain timing or amount
• settlement is expected to result in an outflow of resources (payment)
Contingent liability:
• a possible obligation depending on whether some uncertain future event occurs, or
• a present obligation but payment is not probable or the amount cannot be measured
reliably
Contingent asset:
• a possible asset that arises from past events, and
• whose existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity.
117
10.5 RECOGNITION OF A PROVISION
A provision should only be recognised when:
• there is an present obligation (legal or construed);

• it is probable (more likely than not) that an outflow of resources will be required to
settle the obligation;
• a reliable estimate can be made of the amount of the obligation.
A legal obligation is an obligation that derives from a contract, legislation or operation of

law.
Example 1
An exploratory company causes contamination but cleans up only when required to do so

under the laws of the country concerned. Suppose that in the financial year ending 31
December 20X3, the country that the company has been operating for several years is
drafting a law requiring clean-up of land which will been enacted soon.
In this case, as at 31 December 20X3, there is a legal obligation since the legislation is
virtually certain to be enacted as drafted.
A constructive obligation is an obligation that arises if past practice or company’s published

policies creates a valid expectation on the part of a third party that the enterprise will accept
and discharge certain responsibilities.
Example 2
A retail store that has a long-standing policy of allowing customers to return merchandise
within, say, a 30-day period.
10.6 MEASUREMENT OF PROVISIONS
The amount recognised as a provision should be the best estimate of the expenditure required
to settle the present obligation at the balance sheet date, that is, the amount that an entity
would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third
party. This means:
• Provisions for one-off events (restructuring, environmental clean-up, settlement of a

lawsuit) are measured at the most likely amount.
• Provisions for large populations of events (warranties, customer refunds) are
measured at a probability-weighted expected value.
In reaching its best estimate, the entity should take into account the risks and uncertainties
that surround the underlying events.
Re-measurement of Provisions
• Review and adjust provisions at each balance sheet date

• If outflow no longer probable, reverse the provision to income.
118
What Is the Debit Entry?
When a provision (liability) is recognised, the debit entry for a provision is not always an
expense. Sometimes the provision may form part of the cost of the asset. Examples:
obligation for environmental cleanup when a new mine is opened or an offshore oil rig is
installed.
Use of Provisions
Provisions should only be used for the purpose for which they were originally recognised.
They should be reviewed at each balance sheet date and adjusted to reflect the current best
estimate. If it is no longer probable that an outflow of resources will be required to settle the
obligation, the provision should be reversed.
Some Examples – Accounting Treatment of Provisions
Circumstance Accrue a Provision?
Accrue a provision (past event was the sale of

Warranty
defective goods)
Accrue if the established policy is to give refunds

Customer refunds (past event is the customer's expectation, at time of
purchase, that a refund would be available)
Accrue a provision if the company's policy is to clean

up even if there is no legal requirement to do so (past
Land contamination
event is the obligation and public expectation created
by the company's policy)
Planned major overhaul or repairs No provision (no obligation)
CPA firm to train staff for recent No provision (there is no obligation to provide the
changes in tax law training)
Onerous (loss-making) contract (e.g.

abandoned operating leasehold, four Accrue a provision
years to run)
Accrue a provision only after a binding sale

Restructuring by sale of an operation
agreement
Accrue a provision only after a detailed formal plan is

Restructuring by closure or
adopted and announced publicly. A Board decision is
reorganisation
not enough
Example - Accounting Entries
DR Clean-up costs $XXX

CR Provision for clean-up costs $XXX
DR Other losses $XXX

CR Provision for Onerous contract $XXX
119
10.7 CONTINGENT LIABILITIES
IAS 37 defines contingent liability as:
• possible obligation arising from past events whose existence will only be confirmed
by the occurrence of future events not wholly within the entity's control; or
• present obligation that arises from past events but it is not probable that an outflow
of resources will be required to settle the obligation; or the amount is not reliably
measured
IAS 37 provides that contingent liabilities should not be recognized. However, they should be
disclosed in the notes to the financial statements, unless the possibility of an outflow of
economic resources is remote.
Example:
In December 20X3, a customer fell and injured himself while visiting the Company.
What is the accounting treatment for the above event for the year ended 31 December 20X3,
given the following assumptions?
a) Customer sues the Company is January 20X4 for $100,000 in damages. Company
lawyer advises that there is a 30% chance of paying the amount.
b) Customer sues the Company is January 20X4 for $100,000 in damages. Company
lawyer advises that there is a 60% chance of paying the amount.
c) Customer had not sued the Company by 31 March 20X4.
d) Customer has decided not to sue the Company by 31 March 20X4
Answer:
The fall and the related injury is a past event that gives rise to an obligation at year-end 31
December 20X3.
a) As the loss is not probable, the Company will not recognise a provision.
The event will be disclosed as a contingent liability in the notes to the account.
b) In this case, the loss is probable, the Company will recognise a provision.
IAS 37 does not spell out clearly whether the amount provided should be $100,000 or
$60,000 (60% x $100,000). Proposed amendment to IAS 37 will require the Company
to provide $60,000.
DR Litigation loss $60,000

CR Provision for litigation loss $60,000
$60,000
Company is also required to give a brief description of the nature of the obligation and
the expected timing of the payment.
120
c) If the customer has not sued the Company by 31 March 20X4, the Company still has an
obligation on 31 Dec 20X3.
However, in this case, loss is not probable and the amount not reliably measured.
Therefore, the event will be disclose as a contingent liability in the notes to the
account.
d) If the customer informs the Company that he has decided not to sue the Company by 31
March 20X4, the Company still has an obligation on 31 Dec 20X3.
However, in this case, the loss would be remote and hence, the event can be ignored.
10.8 CONTINGENT ASSETS
A contingent asset is a possible asset arising from past events whose existence will only be
confirmed by future events not wholly within the entities control. Contingent assets may
require disclosure but should not be recognised in the accounts.
The terms of IAS 37 make it unlikely that disclosure of contingent assets will arise in practice.
Details of the asset should be not be disclosed unless the possible inflow of economic benefit
is probable, at which point it is no longer contingent.
Contingent assets should not be recognised - but should be disclosed where an inflow of
economic benefits is probable. When the realisation of income is virtually certain, then the
related asset is not a contingent asset and its recognition is appropriate.
10.9 DISCLOSURES
Disclosure for each class of provision include:

• the carrying amount at the beginning and end of the period;
• additional provisions made in the period,;
• amounts used during the period;
• unused amounts reversed during the period; and
• the increase during the period in the discounted amount arising from the passage of
time and the effect of any change in the discount rate.
For each class of provision, a brief description of:

• nature
• timing
• uncertainties
• assumptions
• reimbursement, if any
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Review Question 1
On January 1, 20X3, Ford Corporation issued $100,000 of its 6%, five-year bonds when the
market interest rate is lower than the coupon rate and received $104,150 at issuance.
Prepare the journal entry to record the issuance of bonds on 1 January 20X3
Review Question 2
During June 20X3, ABC Ltd made sales on a product for $600,000 on which there is a 12-
month warranty. Past experience indicates that the average cost to repair defects is 5% of the
sales price over the warranty period.
Explain the accounting treatment for warranty and prepare the necessary journal entry to
record the warranty.
Review Question 3
GH Airline is required by law to overhaul its aircraft once every three years which is
estimated to cost about $200,000.
Explain the accounting treatment for overhaul and prepare the necessary journal entry, if any.
Review Question 4
DEF Ltd is being sued for breach of patent right and asked to pay damages of $5,000,000.
Explain the accounting treatment of the above event given information as follows:
a) DEF Ltd’s lawyer advises that there is a 60% chance that the company will have to pay
$5,000,000.
b) DEF Ltd’s lawyer advises that the there is a 30% chance that the company will have to
pay $5,000,000.
Review Question 5
Define a ‘contingent liability’ and explain how each should be treated in the financial
statements.
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TOPIC 11
TAXATION IN FINANCIAL STATEMENT (IAS 12)
o Account for taxation in accordance with relevant accounting standards.

o Record entries on taxation in accounting records.
o Understand the effect of timing differences on accounting and taxable profits.
o Understand the concept of deferred taxation.
11.1 INTRODUCTION
Income tax is an expense item charged to the Income Statement and comprises current tax
expense and deferred tax expense.
Deferred tax expense arises because some components of accounting profit may not be
currently taxable but will give rise to future tax and we have to accrue for future tax
payments at the point when income is generated.
The main principle in IAS 12 is that the reporting entity should recognise the future tax
consequences of each asset or liability in the same period when the underlying asset or
liability is recognised.
It embodies accrual accounting concept and hence the balance sheet of the entity should
reflect both current tax liabilities and deferred tax liabilities arising from past transactions or
events.
11.2 DIFFERENCES BETWEEN ACCOUNTING PROFIT AND TAXABLE

PROFIT
Accounting profit (ie. profit before tax) is the net profit for a period before deducting tax
expense.
Taxable profit is the amount of profit for a period determined in accordance with the rules
established by the taxation authorities.
Financial statements are prepared for shareholders based on accounting standards. However,
the tax authorities have their own way of “accounting” and therefore, profit for tax purpose
may not be the same as the accounting profit reported in the financial statements.
In determining taxable profits, the tax law specifies the expenses that may be deductible and
what may not be deductible for tax purposes.
In addition, the tax law also specifies what income/gains that are exempt from tax or not
taxable.
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11.3 INTRODUCTION TO CURRENT TAX
Current tax for the current and prior periods should be recognised as a liability to the extent
that it has not yet been settled, and as an asset to the extent that the amounts already paid
exceed the amount due.
Current tax assets and liabilities should be measured at the amount expected to be paid to
(recovered from) taxation authorities, using the rates/laws that have been enacted or
substantively enacted by the balance sheet date.
11.3.1 EXAMPLE ON CALCULATION OF CURRENT TAX
Example 1:
Below is information related to T Ltd’s first year operations in 20X1:
(a) Pre-tax profit amounts to $400,000.

(b) Depreciation on fixed assets with cost of $100,000 was $25,000. Capital allowances,
which is the cost of wear and tear allowed on fixed assets for tax purpose, amount to
$50,000.
(c) Interest revenue accrued was $5,000. Interest revenue will be taxed when received in
cash in 20X2.
(d) T Ltd warrants its products for two years from date of purchase. Product warranty
liability accrued for the year was $12,000. Amount paid for the satisfaction of warranty
liability was $8,000. Warranty expenses are deductible for tax purposes only upon
payment of claims to customers.
(e) Dividend income of $14,000 was tax-exempt.
(f) Fines and penalties incurred was $3,000. These are non-deductible for tax purposes.
(g) Corporate tax rate is 17%.
Tax computation for T Ltd for the year ended 31 December 20X1.
$ $
Profit before tax 400,000
depreciation 25,000
capital allowances (50,000) (25,000)
interest revenue accrued (5,000)
warranty expense provided 12,000

warranty claims (8,000) 4,000
non-taxable dividend income (14,000)

non-deductible fine and penalty 3,000
Taxable profit 363,000
Tax rate 17%
Current tax expense 61,710
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11.3.2 ACCOUNTING FOR CURRENT TAX PAYABLE
Current income tax expense, although incurred in the current year, will only be paid the
following year after the necessary tax returns have been filed and agreed the tax authorities.
Therefore, for the current year, the income tax expense needs to be accrued.
DR Current tax expense $61,710

CR Current tax payable $61,710
To record current tax expense and payable
11.4 INTRODUCTION TO DEFERRED TAX
Deferred taxes arise when income tax expense differs from income tax liability. Some of
these differences are temporary and reverse over time. Others are permanent and do not
reverse.
Deferred tax is the amount of income tax payable or recoverable in future accounting periods
arising from temporary differences. If there are no temporary differences, there will be no
deferred tax. Conversely, if there are temporary differences, there will be deferred tax.
IAS 12 emphasizes the balance sheet liability method to account for deferred tax. Using this
method, the amount of deferred tax is computed from the balance sheet items (assets and
liabilities)
A deferred tax liability or asset is recognised for the future tax consequences of past
transactions with certain exemptions.
The standard assumes that each asset and liability has a value for tax purposes and this is
called a tax base. Differences between the carrying amount of an asset and liability in the
balance sheet and its tax base are called temporary differences.
Tax base of an asset = Amount deductible for tax purposes against benefit when the asset is
recovered.
(If benefit of asset is not taxable; tax base is the carrying amount)
Tax base of a liability = Carrying amount less any amount deductible for tax purposes
when the liability is settled.
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11.4.1 CLASSIFICATION OF TEMPORARY DIFFERENCES AND ITS
IMPLICATIONS
Deferred tax arises when there are temporary differences between carrying amounts of asset
or liability and its tax base. However, how does one determine if there will be a deferred tax
liability (i.e. tax will have to be paid in the future) or if there will be a deferred tax asset (i.e.
an asset “created” to reduce future taxes)? This will depend on whether the temporary
difference is a taxable temporary difference or a deductible temporary difference.
There are TWO types of temporary differences:
i) taxable temporary difference

ii) deductible temporary difference
126
The following table explains:
Balance Sheet Temporary Difference

Taxable Deductible
Assets Carrying amount > Tax Base Carrying amount < Tax Base
(e.g. fixed assets) (e,g, interest receivable)
=> ↑ future taxable profit => ↓ future taxable profit
=> deferred tax liability => deferred tax asset
Liabilities Carrying amount < Tax Base Carrying amount > Tax Base
=> ↑ future taxable profit (e,g. provision for warranty)
=> deferred tax liability => ↓ future taxable profit
=> deferred tax asset
Deferred tax assets and liabilities are determined using current tax rates.
Current tax rate x Taxable (or deductible)

Amount of deferred tax liability (or asset) =
temporary difference
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11.4.2 EXAMPLE ON CALCULATION OF DEFERRED TAX
Example 1 – Deferred tax on assets & liabilities
Refer to 11.3.1 Example – T Ltd

Based on the information given, the following are the carrying amount and tax base of assets
and liabilities as at end of 20X1.
Using the balance sheet liability approach, deferred tax liability as at end of 20X1will be
computed as follows:
Temporary
Differences
Carrying Amt Tax Base
Taxable/
(Deductible)
Fixed Assets $ $ $
Cost 100,000 100,000
Less Acc. Depn (25,000) (50,000)
Carrying amt 75,000 50,000 25,000
Interest receivable 5,000 0 5,000
Provision for warranty 4,000 0 (4,000)

($12,000 - $8,000 )
Net taxable temporary differences 26,000

Deferred Tax Liability @ 17% 4,420
DR Deferred tax expense $4,420

CR Deferred tax liability $4,420
To record deferred tax expense and liability.
In summary (Using T Ltd’s example):
Tax expense is made up of current and deferred tax. Current tax is computed based on
“taxable” income and not “accounting income”.
Hence, some of the accounting income may not be taxed in the current period but will give
rise to future tax (e.g. interest income accrued in 20X1 will only be taxed when received in
20X2).
There is a temporary tax reduction in the current period (20X1), but this will be “reversed”
out when income becomes taxable in the future (20X2 or later). Future tax is tax that will
arise when the temporary differences “reverse”.
We have to accrue for the future tax payable (i.e. deferred tax liability) in the period when
income is generated because it is a matter of time when the tax becomes a reality.
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Example 2 – Deferred tax for Fixed Asset
For the financial year-ended 31 December 20X2, the following information of Lee Pte Ltd
was available:
Machinery, at cost & purchased on 1 January 20X2: $1,200,000

Depreciation rate per annum: 20%
Capital allowance rate per annum: 50%
Tax rate for 20X2 10%
Required:
As at 31 December 20X2,
(a) Compute the carrying amount of the asset.
(b) Compute the tax base of the asset.
(c) Compute any temporary difference and state if it is taxable or deductible.
(d) Compute the amount of deferred tax which the company is to record in its balance
sheet in respect of the asset. State if it is a liability or asset.
Solution:
(a) Carrying amount = $1,200,000 – [(20% x $1,200,000) x 1 yr]
= $1,200,000 - $240,000
= $960,000
(b) Tax base = $1,200,000 – [(50% x $1,200,000) x 1 yr]
= $1,200,000 - $600,000
= $600,000
(c) Taxable temporary difference = $960,000 - $600,000
= $360,000
(Taxable temporary difference because the carrying amt of the asset is > tax base
Explanation: Less capital allowance to claim in the future → higher future taxable profit)
(d) Deferred tax liability = $360,000 x 10%
= $36,000
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Example 3 – Deferred tax for Trade receivables
was available:
Trade receivables on 31 December 20X2: $100,000

Allowance for doubtful debts $10,000
Required:
(a) Compute the carrying amount of the asset.
(b) Compute the tax base of the asset.
Solution:
(a) Carrying amount = $100,000 – $10,000
= $90,000
(b) Tax base = $100,000
(c) Deductible temporary difference = $90,000 - $100,000
= ($10,000)
(Deductible temporary difference because the carrying amt of the asset is < tax base
Explanation: Bad debts are deductible expenses when written off in the future → lower future
taxable profit)
(d) Deferred tax asset = $10,000 x 10%
= $1,000
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Example 4 – Deferred tax for Provision for Warranty
was available:
Provision for warranty on 31 December 20X2: $50,000

Required:
(a) Compute the carrying amount of the liability.
(b) Compute the tax base of the liability.
sheet in respect of the liability. State if it is a liability or asset.
Solution:
(a) Carrying amount = $50,000
(b) Tax base = $50,000 - $50,000
= $0
(Warranty claims are deductible for tax purposes upon claims/payments)
(c) Deductible temporary difference = $50,000 - $0
= $50,000
(Deductible temporary difference because the carrying amt of the liability is > tax base
Explanation: Warranty expense is deductible when paid in the future → lower future taxable
profit)
(d) Deferred tax asset = $50,000 x 10%
= $5,000
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Example 5 – Deferred tax for Provision for Litigation Loss
was available:
Provision for litigation loss on 31 December 20X2: $200,000

Required:
(a) Compute the carrying amount of the liability.
(b) Compute the tax base of the liability.
Solution:
(a) Carrying amount = $200,000
(b) Tax base = $200,000 - $0
= $200,000
(Litigation loss is not tax deductible)
(c) No temporary difference = $200,000 - $200,000
= $0
(d) No tax benefit arises when provision is settled,
i.e. settlement of the provision will not lead to a decrease in future taxable income.
(Explanation: Litigation loss is not deductible; it’s a permanent difference → no impact on

future taxable profit & hence no deferred tax effect)
132
Example 6 – Deferred tax on assets & liabilities
V Ltd has the following assets and liabilities recorded in its balance sheet at 31 Dec 20X8:
Tax base Type of Temporary
Carrying value (value for tax Differences
$m purposes) Taxable/(Deductible)
$m
Property 20 17 Taxable
Plant and equipment 10 6 Taxable
Inventory 8 8 Nil
Trade receivables 6 8 Deductible
Dividend receivable 5 5 Nil
Trade payables 12 12 Nil
Provision for leave pay 3 0 Deductible
Cash 4 4 Nil
Additional information:
• There is an impairment charge against trade receivables of $2m that will not be allowed in
the current year for tax purposes but will be in the future.
• Dividends receivable is from a corporation with exempt profits and is hence not taxable.
• Leave pay is tax-deductible when paid in the following year.
• Income tax paid is at 17%.
Required:
Calculate the deferred tax provision at 31 December 20X8.
Solution:
Carrying value Tax base Temporary
(value for tax purposes) difference
$m Taxable/
$m (Deductible)
$m
Property 20 17 3
Plant and equipment 10 6 4
Inventory 8 8 0
Trade receivables 6 8 (2)
Dividend receivable 5 5 0
Trade payables 12 12 0
Provision for leave pay 3 0 (3)
Cash 4 4 0
Net taxable temporary differences 2
Deferred tax liability = $2m x 17% = $340,000
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11.4.3 SUMMAY ON CALCULATION OF DEFERRED TAX
In summary, the process of accounting for deferred tax is as follows:

• determine the tax base of the assets and liabilities in the balance sheet
• compare the carrying amounts in the balance sheet with the tax base
• identify the temporary differences
• apply the tax rates to the temporary differences
• determine the movement between opening and closing deferred tax balances
11.5 ACCOUNTING FOR DEFERRED TAX
Recognition of deferred tax
A deferred tax liability should be recognized for all taxable temporary differences.
A deferred tax asset should be recognized for all deductible temporary differences to the
extent that it is probable that taxable profit will be available against which the deductible
temporary difference can be utilized.
(Note that however, there may be some exceptions to the above.)
Example 7
Refer to deferred tax liability calculated for V Ltd in Example 6:
Deferred tax liability = $2m x 17% = $340,000
Required:
Record the necessary journal entry to record the deferred tax for the year ended 31 December
20X8 given the following balances in the Deferred Tax Liability account at the beginning of
the year:
a) $0
b) $300,000
c) $400,000
Solution:
a) DR Deferred Tax Expense $340,000

CR Deferred Tax Liability $340,000
(Being deferred tax liability for the year)
b) DR Deferred Tax Expense $40,000

CR Deferred Tax Liability $40,000
(Being increase in deferred tax liability for the year)
134
c) DR Deferred Tax Liability $60,000
CR Deferred Tax Expense $60,000
(Being decrease/reversal in deferred tax liability for the year.)
11.6 DISCLOSURE
The following disclosures are required:

▪ current tax assets
▪ current tax liabilities
▪ deferred tax assets (always classified as noncurrent)
▪ deferred tax liabilities (always classified as noncurrent)
▪ tax expense (tax income) relating to profit or loss from ordinary activities (must be
shown on the face of the income statement)
▪ major components of tax expense (tax income)
▪ aggregate current and deferred tax relating to items reported directly in equity
▪ tax relating to extraordinary items
▪ explanation of the relationship between tax expense (income) and the tax that would
be expected by applying the current tax rate to accounting profit or loss (this can be
presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)
▪ changes in tax rates
▪ amounts and other details of deductible temporary differences, unused tax losses, and
unused tax credits
▪ temporary differences associated with investments in subsidiaries, associates,
branches, and joint ventures
▪ for each type of temporary difference and unusued tax loss and credit, the amount of
deferred tax assets or liabilities recognised in the balance sheet and the amount of
deferred tax income or expense recognised in the income statement
▪ tax relating to discontinuing operations
▪ tax consequences of post-balance-sheet dividends
▪ details of deferred tax assets
135
Review Question 1
AB Ltd depreciates all fixed assets at 20% a year on the straight line basis.
AB Ltd acquired fixed assets on 1 January 20X3 costing $240,000. The assets qualified for
accelerated tax allowance over 3 years on straight-line basis.
The corporate income tax rate applying to AB Ltd for 20X3 and 20X4 was 20%. Assume AB
has no other qualifying non-current assets.
Required:
Apply IAS 12 Income Taxes and calculate the:

a) deferred tax balance required at 31 December 20X3
b) deferred tax balance required at 31 December 20X4
c) charge to the income statement for the two years 20X3 and 20X4.
Review Question 2
The following information is given for B Ltd to prepare the tax return and account for
deferred tax for the year ended 31 December 20X4, its first year of operations:
1) Pre-tax profit for the year was $900,000.
2) Accounting depreciation expense charged was $40,000 and capital allowance for tax
purpose was $100,000.
3) Rental income receivable from its tenant of $15,000 in its balance sheet as at 31
December, 20X4. For tax purposes, rental income is taxed on cash basis.
4) Paid a penalty imposed by the government of $5,000 in 20X4. For tax purpose, the
penalty is not deductible.
5) Allowance for doubtful debts charged to Income Statement was 25,000. Actual bad
debts were $20,000. For tax purposes, the allowance for doubtful debts is deemed to be
a general allowance and is not allowed deduction until it is written off (or becomes a
specific provision).
6) Provision for warranty expenses charged to Income Statement was $55,000. Actual
warranty expense paid was $50,000. For tax purposes, warranty is deductible only upon
claims made (i.e. paid).
7) Corporate tax rate is 17%.
136
8) The following balances were extracted from the accounts as at 31 December 20X4:
Fixed Assets $200,000

Accumulated Depreciation $40,000
Trade receivables $100,000
Allowance for doubtful debts $5,000
Rental income receivable $15,000
Provision for warranty $5,000
Required:
a) Prepare a tax computation to calculate current tax payable for the year ended 31
December 20X4
b) Using the balance sheet liability approach, calculate the deferred tax as at 31
December 20X4
c) Prepare journal entries to record the tax expenses for the year ended 31 December
20X4
Review Question 3
On 1 January 20X2 C Ltd had a credit balance brought forward on its Deferred Tax account
of $1.5m. There was also an opening credit balance of $4,000 on its Income Tax Payable
account, representing the remaining balance after settling the liability for the year ended 31
December 20X1.
C Ltd made profits in 20X2 of $3m that are subject to a tax rate of 30%. The deferred tax
provision required is estimated at $1.7m at 31 December 20X2.
Required:
a) Calculate the current and deferred tax payable.

b) Prepare the journal entries to record the tax expense for the year ended 31 December
20X2.
c) Show how the tax liability of C Ltd will be presented in the Statement of Financial
Position as at 31 December 20X2.
137
TOPIC 12
CONSOLIDATED FINANCIAL STATEMENTS (IFRS 10)
o Explain the different methods which could be used to prepare consolidated financial
statements.
o Understand the preparation of consolidated balance sheets for a group of companies
with a simple group structure.
o Take into account appropriate judgments in respect of goodwill and minority interests.
o Understand the preparation of consolidated income statements for a group.
12.1 INTRODUCTION
Companies may expand by building up their business from their own trading (internal
growth), or by acquiring control of other companies (acquisitive growth).
When we acquire a sole trader or partnership, we acquire individual assets, liabilities, profits
and losses. The sole trader’s or partnership’s assets, liabilities, profits and losses which are
added to our statement of financial position and statement of comprehensive income, since
we now own them.
When we acquire control of a company, it is done by acquiring shares rather than individual
assets and liabilities. The acquiring company is called the parent. The investment in the
parent’s books represents ownership of shares, which in turn represents ownership of the net
assets of the acquired company (the subsidiary). After the transaction the acquired company
will continue to exist as a separate legal entity.
Consolidated financial statements are prepared primarily for owners and creditors of parent
and are not for non-controlling owners or subsidiary creditors.
Some key definitions are:
(i) Consolidated financial statements:

are the financial statements of a group presented as those of a single economic entity.
(ii) Group
is a parent and all its subsidiaries.
(iii) Parent:
an entity that has one or more subsidiaries.
(iv) Subsidiary:
an entity that is controlled by another entity (known as the parent).
138
12.2 IDENTIFICATION OF SUBSIDIARIES
According to IFRS 10, an investor determines whether it is a parent by assessing whether it

controls one or more investees.
An investor controls an investee when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those returns through its power
over the investee.
An investor controls an investee if and only if the investor has all of the following elements:
o power over the investee, i.e. the investor has existing rights that give it the ability to
direct the relevant activities (the activities that significantly affect the investee's
returns)
o exposure, or rights, to variable returns from its involvement with the investee
o the ability to use its power over the investee to affect the amount of the investor's
returns
In many cases, when decision-making is controlled by voting rights, and those voting rights
entitle an entity to returns (e.g., voting shares), it is clear that whoever holds a majority of
those voting rights controls the investee. However, in other cases (such as for structured
entities, or when these are potential voting rights, or less than a majority of voting rights), it
may not be so clear. In those instances, further analysis is needed and each of the factors
above needs to be considered in more detail to determine which investor controls an investee.
12.3 PRESENTATION OF CONSOLIDATED ACCOUNTS
IFRS 10 requires a parent company to prepare consolidated accounts incorporating the results
of the whole group (accounts of parent and subsidiary are combined and presented as a single
entity).
A parent is required to present consolidated financial statements in which it consolidates its

investments in subsidiaries, with the following exception:
A parent is not required to (but may) present consolidated financial statements if and only if
all of the following four conditions are met:
1. the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of

another entity and its other owners do not object to the parent not presenting
consolidated financial statements;
2. the parent's debt or equity instruments are not traded in a public market;
3. the parent did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any
class of instruments in a public market; and
4. the ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use.
139
The following key rules apply under the consolidation:
(1) Uniform accounting policies will be applied across the group

(2) Inter-company transactions and balances will be eliminated
(3) The same year end will be used across the group
When parent company buys ordinary shares in subsidiary company, the double entries for this
transaction is:
Dr. Investment in S $XX

Cr. Cash $XX
The investment in S Ltd will appear as a non-current asset in parent’s books. This represents
the portion of share capital and reserves of the subsidiary that were acquired on the date of
acquisition.
In preparing consolidated financial statements, the financial statements of the parent and the
subsidiary are combined on a line-by-line basis by adding like items of assets, liabilities,
equity, revenues and expenses. However, certain account balances have to be eliminated or
added to the consolidated financial statements because both companies are viewed as a single
economic entity for financial reporting purpose.
140
12.4 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
12.4.1 WHOLLY OWNED SUSIDIARY
Example 1 (100% owned subsidiary)
The summarized Statement of Financial Position of P Ltd and its subsidiary S Ltd as at 31
December 20X4 are as follows:
P S
$’000 $’000
Non-current assets 300 200
Investment in S Ltd at cost 220 -
Current assets 80 80
600 280
Ordinary share capital 400 180

Retained earnings 120 40
Total equity 520 220
Total liabilities 80 60
600 280
P Ltd acquired all the shares in S Ltd on 31 December 20X4 for a cost of $220,000.
Required:
Prepare the consolidated Statement of Financial position at 31 December 20X4 immediately

after the acquisition.
Solution:
Consolidation Worksheet: [For Illustration only]
P S Adjustments Consolidated
balances
$’000 $’000 Dr $’000 Cr $’000 $’000
Non-current assets 300 200 500
Investment in S Ltd 220 - 220 -
Current assets 80 80 160
600 280 660
Ordinary share capital 400 180 180 400
Retained profits 120 40 40 120
Total liabilities 80 60 140
600 280 220 220 660
141
Method/Effects:
(1) The cost of the investment in P’s books is eliminated against the shares and reserves
in S Ltd’s book.
(2) All other assets and liabilities are aggregated.
(3) The share capital & retained profits of the group which is only the parent’s balances.
(P only)
The P Group Statement of Financial Positions at 31 December 20X4 (Date of acquisition)
$’000 Workings ($’000)

Assets
Non-current assets 100
Current assets 83
183
Equity and Liabilities

Ordinary share capital 100 (Parent only)
Retained earnings 30
Total equity 130
Total liabilities 53
183
142
12.4.2 GOODWILL ON CONSOLIDATION
Goodwill on consolidation is the difference between the fair value of purchase consideration
and the sum of fair values of identifiable assets and liabilities at the date of acquisition.
Company usually has to pay a premium in order to purchase another successful company
from its existing shareholders. This premium is known as goodwill. Goodwill, like all assets,
must be capitalised at its cost as calculated on the day of acquisition.
Goodwill on consolidation should be capitalised and subject to impairment test. No

amortization is required.
Example 2 – Goodwill
P Ltd’s and S Ltd’s Statements of Financial Position on 31 December 20X4 were as follows:
P S
$’000 $’000
600 280

600 280
On 31 December 20X4 P Ltd paid $250,000 cash for all of the ordinary shares in S Ltd.
Required:
a) Calculate goodwill at acquisition date.

b) Prepare the consolidated Statement of Financial position at 31 December 20X4,
immediately after the date of acquisition.
Solution:
a) $’000
Fair value of the consideration 250
Less: Fair value of the net assets acquired 220
Goodwill 30
On 31 December the P Group will capitalised this goodwill as an intangible non-current

asset at its cost of $30,000.
Positive goodwill should be capitalized in the consolidated statement of financial position

requires and will be reviewed each year for impairment.
If the value of goodwill has fallen, the amount by which it has become impaired will be
written off.
Negative goodwill can be treated as a gain in the statement of comprehensive income
(income statement).
143
b)
balances
$’000 $’000 Dr $’000 Cr $’000 $’000
Goodwill on consolidation - - 30 30
600 280 660
600 280 250 250 660
Method/Effects:
in S’s book; plus
(2) Goodwill is capitalized
(3) All other assets and liabilities are aggregated
(4) The share capital & retained profits of the group is only the parent’s balances. (P only)
The P Group Statement of Financial Positions at 31 December 20X4 (Date of acquisition)
$’000 Workings ($’000)

Assets
Non-current assets 500 300 + 200
Goodwill on consolidation
Current assets 130 50 + 80
660
Retained earnings 120
Total equity 520
Current liabilities 140 80 + 60
660
660
Note: Review of impairment of goodwill is to be done annually. Impairment will be reported
as an expense in the Consolidated Income Statement. The amount will be reduced in the
Consolidated Statement of Financial Position with a corresponding reduction in the Group
retained earnings.
144
12.4.3 PRE AND POST-ACQUISITION RESERVES
Subsidiaries have usually traded on their own account before they are acquired by their new
parent, and so they will already have a balance on their revenues reserves, i.e. retained
earnings. On acquisition, this balance is frozen and does not form part of the group reserves.
This is because these profits have been bought rather than earned.
After the acquisition, the subsidiary continued to earned profits and the retained earnings
account balance will increase.
The retained earnings at the statement of financial position date need to be split between pre
and post- acquisition portions for consolidation purpose.
Pre-acquisition reserve represents reserves that arose before the subsidiary was acquired.
Post-acquisition reserve represents reserves that arose after the subsidiary was acquired and
is to be combined with the parent’s retained earnings to be shown in the consolidated
statement of financial position.
Example 3 - Pre and Post Acquisition Reserves
P Ltd acquired all the shares in S Ltd on 31 December 20X4 for a cost of $250,000. S Ltd
had already been trading for several years, and its share capital and reserves at acquisition
were $180,000 and $40,000, respectively.
P Ltd’s and S Ltd’s Statements of Financial Position on 31 December 20X7 were as follows:
P S
$’000 $’000
770 380

770 380
Required:
Prepare a consolidated statement of financial position as at 31 December 20X7
Solution
Calculation of Group reserve @ 31 Dec 20X7:

$000 $000
Parent’s own reserves at the reporting date 190
Subsidiary’s own reserves at the reporting date 110
Less : Subsidiary’s pre-acquisition reserves (40)
Subsidiary’s post-acquisition reserves 70

Group reserves 840
145
balances
$’000 $’000 Dr $’000 Cr $’000 $’000
Goodwill on consolidation 30 30
770 380 930

770 380 90 90 930
Method/Effects:
(1) The cost of the investment is eliminated.
(4) The share capital of the group is that of the parent alone
(5) The Group reserves are the parent’s reserves plus the Group’s share of the
post-acquisition reserves of the subsidiary.
1
The P Group Statement of Financial Positions at 31 December 20X7
$’000 Workings ($’000)

Assets
Goodwill on consolidation 32200

Retained earnings (Group reserves) 260
Total equity
Total liabilities 270 180 + 90
660
146
12.4.4 NON-CONTROLLING INTEREST
A company can have a subsidiary even if it does not own all its shares. This is known as
partly owned subsidiary ( > 50% but < 100% ).
Non-controlling interest - the proportion of the capital and reserves of the subsidiary which
relates to the shares in subsidiary not held by the parent company. Non-controlling interest
has three effects in which the statement of financial position is prepared:
a) The minority’s ownership interest in the net assets of the subsidiary needs to be
recognized in the capital and reserves (equity) section of the group statement of financial
position.
b) When goodwill is being calculated the purchase price is compared with the percentage
share of the net assets acquired
c) In the group reserves calculation, the group will only claim its share of the post
acquisition profits of the subsidiary
If parent does not buy 100% of the shares in a subsidiary company, the calculation of
goodwill:
$
Fair value of purchase consideration x
Non-controlling interest x
Less: fair value of net assets acquired (x)
Goodwill x
The non-controlling interest to be valued based on either:
a) Fair value (e.g. market value of shares)

b) Fair value of the net assets of the subsidiary company at the acquisition date
Example 4 – Non-controlling interest
On 31 December 20X4 P Ltd paid $150,000 for 18,000 out of 30,000 ordinary shares in S Ltd.
S Ltd’s share capital and reserves on that date were $180,000 and $40,000, respectively.
The statement of financial position of these two companies three years later on 31 December
20X7 are given below:
P S
$’000 $’000
770 380

770 380
147
Required:
(1) Calculate the ownership interest that P has in S. Is it a subsidiary?

(2) Calculate the cost of the goodwill arising on the acquisition of S on 31 December 20X4.
(3) Calculate the non-controlling interest in S as at 31 December 20X7
(4) Calculate the Group’s reserves as at 31 December 20X7
(5) Prepare the consolidated statement of financial position for the P Group as at 31
December 20X7
Solution
(1) Ownership interest: % holding = 12,000 shares / 20,000 shares = 60%

> 50% → Subsidiary
(2) Goodwill at cost @ 31 Dec 20X4:

$’000
Fair value of the consideration
Less: Fair value of the net assets acquired (35K+140K) x 60%
Goodwill [W1]
(3) The non-controlling interest in the statement of financial position @ 31 Dec 20X7:
$’000
Non-controlling interest at acquisition (35+140) x 40%
NCI share of post-acquisition profits: (250-140) x 40%
[W2]
(4) Group reserves @ 31 Dec 20X7:

$’000 $’000
The parent’s own reserves @ statement of financial position date 190
The subsidiary’s total reserves 250
Less: Pre-acquisition reserve (140)
Subsidiary’s post acquisition reserves
Parent’s share @ _______
Total group reserves [W3]
148
(5)
P S Adjustments Consol bal
$’000 $’000 Dr $’000 Cr $’000 $’000
Goodwill on consolidation 18 [W1] 18
770 380 1,018
Retained profits 190 110 68* [W3] 232
Non-controlling interest - - 116 [W2] 116
770 380 90 90 1,018
Pre-acquisition reserves $40K

NCI share of post-acquisition reserves (40% x $70K) 28K
S’ reserves to be eliminated $68K *
Method/Effects:
in S’s book; plus
post-acquisition reserves of the subsidiary
(5) NCI is reported under equity of the group
The P Group Statement of Financial Positions at 31 December 20X7
$’000 Workings ($’000)

Assets

Retained earnings (Group reserves) 256
Non-controlling interest 114
Total equity 445
Total liabilities 270 180 + 90
515
149
12.4.5 STEPS TO PREPARE CONSOLIDATION STATEMENT OF FINANCIAL
POSITION
Step 1
Analyse the shareholdings in S Ltd:
Wholly owned (100%) – no non-controlling interest (NCI)

Partly owned – need to calculate based on % of shareholding
%
Group P
Non-controlling interest NCI
100
Step 2
Determine date of acquisition:
Date of acquisition = Statement of Financial Position date

• All reserves belong to pre-acquisition period
• Used in calculation of goodwill on acquisition
From date of acquisition to Statement of Financial Position date

• Reserve are split between pre and post-acquisition periods
• Pre-acquisition profit (at date of acquisition) is used in calculation of goodwill
(step 3)
• Post- acquisition profit and reserves (i.e. from date of acquisition to statement
of financial position date) will be reported as part of consolidated profit and
loss (reserves) in the consolidated statement of financial position. (Step 4)
Step 3
Calculation of goodwill on consolidation:

$
Cost of investment / Fair value of the consideration Z
Non-controlling interest
Fair value of the net assets acquired
Share capital x
Pre-acquisition reserves x
X
x NCI % N
P
Fair value of net assets of parent (X)
Goodwill on consolidation goodwill
150
Step 4
Calculation of Group reserves on consolidation:

$ $
Parent’s total reserves X
Share of subsidiary’s
Post-acquisition reserves
Total reserve balance A
Less: Pre-acquisition reserve B
C
Parent’s share (P %) C*P%
Group reserves Z
Step 5
Calculate non-controlling interests in the net assets of consolidated subsidiaries.
$ $
Non-controlling interest at acquisition (from Step 3) N
NCI share of post-acquisition profits
(Total reserve – Pre acquisition reserve) x NCI% x
X
Step 6
Add up items of similar assets, liabilities and equity of the parent and subsidiary line by line
and total transferred to the consolidated statement of financial position together with figures
from Step 2 to 5. Share capital in the consolidated statement of financial position should only
be the parent’s.
151
12.5 CONSOLIDATED INCOME STATEMENT OF COMPREHENSIVE INCOME
If the parent owns 100% of the subsidiary (and assuming no inter-company transactions), the
consolidated statement of comprehensive income is prepared by adding together, line by line, all the
items in the parent and subsidiary’s statements of comprehensive income. There is no non-
controlling interest.
Example 5 – Non-controlling interest in subsidiary’s profit
P Ltd acquired 60% of S Ltd in 20X4 and goodwill at acquisition was $18,000.
Below are statements of comprehensive income of the two companies for the year ended 31
December 20X7
P S
$’000 $’000
Sales 100 80
Cost of sales (30) (20)
Gross profit 70 60
Operating expenses (20) (30)
Profit before tax 50 30
Tax (15) (10)
Profit after tax 35 20
It was ascertained that there was an impairment of goodwill of $5,000 as at 31 December 20X7.
Required:
(a) Calculate non-controlling interest (NCI) in subsidiary’s profit
(b) Prepare Consolidated Statement of Comprehensive Income for the year ended 31 December
20X7
Solution:
(a) NCI in subsidiary’s profit = 40% x $20,000 = $8,000
(b) P Group Consolidated Statement of Comprehensive Income

For the year ended 31 December 20X7
$’000 Workings ($’000)
Sales 180
Cost of sales 50
Gross profit 130
Operating expenses 50
Impairment of goodwill
Profit before tax 80
Tax 25
Profit after tax 55
Profit attributable to:

Owners of the parent 47
55
152
12.5.1 INTRA-GROUP TRADING
Companies in a group may trade or enter into transactions with each other.
This means that the selling company will have made a profit, and the cost of inventory in the
buying company’s books will also include an element of profit. For group purposes this
inter-company profit must be eliminated.
Reasons for elimination:

o A group cannot make a profit by trading with itself
o Inventory must be stated at its cost to the group. This will exclude any profit made by
one company any at the expense of another.
The same principle applies to any amounts owing by one company to another in the group.
These amounts are also to be eliminated upon consolidation.
Example 6 – Intra-Group transactions (Trading transactions)
P Ltd acquired 60% of S Ltd in 20X4 and goodwill at acquisition was $18,000. It was ascertained
that impairment of goodwill as at end 20X7 was $5,000.
P Ltd sold goods to S Ltd for $10,000 and also makes a loan to S Ltd and charges interest
of $2,000. All the goods were sold by S Ltd and interest has been received/paid.
Below are the Statement of Comprehensive Income for the year ended 31 December 20X7
below:
P S
$’000 $’000
Sales *100 80 *includes $10K sold to S
Cost of sales (30) **(20) **includes $10K bought from P
Gross profit 70 60
Interest income 5 -
Interest expense (3) (2)
Tax (15) (10)
Required:
Prepare a consolidated statement of comprehensive income for the year ended 31 December
20X7.
153
Solution:
balances
$’000 $’000 Dr’000 Cr’000 $’000
Sales 100 80 10 170
Cost of sales 30 20 10 40
Interest income 5 - 2 3
Operating expenses 20 30 50
Interest expense 3 2 2 (3)
Impairment of goodwill - - 5 5
Tax 15 10 25
Method/Effects:
(1) Intra-group sales & purchases are eliminated
(2) Intra-group interest income & expenses are eliminated.
(3) Impairment of goodwill is reported
(4) Share of profit is reported
P Group
Consolidated Statement of Comprehensive Income
For the year ended 31 December 20X7
$’000 Workings ($’000)
Sales 170
Cost of sales 40
Gross profit 130
Interest income
Operating expenses 50 20 + 30
Interest expense
Tax 25 15 + 10
Profit after tax 55

Owners of the parent 47
154
Example 7 – Intra-Group transactions (Inter-company amounts owing)
Refer to the Example 6. Additional information reveals that S Ltd (subsidiary) has not paid
for the purchases from P Ltd (parent) and the loan to S Ltd is still outstanding as at 31
December 20X7.
Statement of Financial Position as at 31 December 20X7:

P S
$’000 $’000
Loan to S Ltd 100 -
Recevables 50 20
Inventory 40 -
Other current assets 30 180
770 480

Loan from P Ltd - 100
Payables 100 70
Other liabilities 80 20
770 480
Required:
Prepare a consolidated statement of financial position as at 31 December 20X7.
Solution:
Consolidation worksheet: [For Illustration only]
balances
$’000 $’000 Dr’000 Cr’000 $’000
Goodwill on consolidation - - 18 5 13
Loan to S Ltd 100 - 100 -
Receivables 50 20 10 60
Inventory 40 - 40
Other current assets 30 180 210
770 480 1,003
Share capital 400 180 180 400
Retained profit 190 110 73 227
NCI - - 116 116
Loan from P Ltd - 100 100 -
Payables 100 70 10 160
Other liabilities 80 20 100
770 480 1,003
155
Method/Effects:
(1) The cost of the investment in P’s books is eliminated against the share capital
in S’s book (reserves are post-acquisition, hence not eliminated)
(2) Inter-company receivables and payables are eliminated
(3) Goodwill is capitalised less impairment
post-acquisition reserves of the subsidiary, less impairment of goodwill
P Group
Consolidated Statement of Financial Position
As at 31 December 20X7
$’000 Workings ($’000)

Assets 570
Receivables
Inventory 40 40 + 0
Other current assets 210 30 + 180

Retained earnings (Group Reserves) 114
Total equity
Payables
Other current liabilities 100 80 + 20
930
156
Example 8 – Intra-Group transactions (Unrealised profits)
Refer to the Example 6 & 7 with the following changes/additional info:

1. Loan and amounts owing by S Ltd to P Ltd have been settled by end 20X7.
2. P Ltd sells goods to S Ltd at cost plus 25%. (Sales during the year totaled $10,000)
3. 50% of the goods ($5,000) S Ltd bought from P Ltd was not sold by end 31 Dec 20X7
and hence in the ending inventory of S Ltd.
Below are the financial statements:
Statement of Comprehensive Income for the year ended 31 December 20X7 below:
P S
$’000 $’000
Sales *100 70 *includes $10K sold to S
Cost of sales (30) **(15) **includes $5K bought from P
Gross profit 70 55
Interest income 5 -
Interest expense (3) (2)
Tax (15) (10)
Statement of Financial Position as at 31 December 20X7:
P S
$’000 $’000
Recevables 40 20
Inventory 40 *5 *goods bought from P
Other current assets 140 60
770 365

Payables 100 60
Other current liabilities 80 20
770 365
Required:
a) Calculate the unrealized profits in S Ltd’s ending inventory.

b) Prepare a consolidated statement of comprehensive income for the year ended 31
December 20X7.
c) Prepare a consolidated statement of financial position as at 31 December 20X7.
157
Solutions:
a) Unrealized profit in ending inventory = $5,000 – ($5,000/125%)
= $1,000
Note: Only unrealized profits on ending inventory need to be eliminated.

Inter-company profits on goods that have eventually been sold onto third parties will
have been realized by the year end.
b) Consolidation Worksheet: [For Illustration only]

P S Adjustments Consolidatd
$’000 $’000 Dr’000 Cr’000 $’000
Sales 100 70 10 160
Cost of sales 30 15 1 10 36
Interest income 5 - 2 3
Operating expenses 20 30 50
Interest expense 3 2 2 3
Impairment of goodwill - - 5 5
Tax 15 10 25
Method/Effects:
(1) Intra-group sales & purchases are eliminated
(2) Intra-group interest income & expenses are eliminated.
(3) Unrealized profit in S’s ending inventory is eliminated from income statement
(4) Impairment of goodwill is reported.
P Group
Consolidated Statement of Comprehensive Income for the year ended 31 December 20X7
$’000 Workings ($’000)
Sales 180
Cost of sales 111
Gross profit 69
Interest income
Operating expenses 50 20 + 30
Interest expense
Tax 25 15 + 10
Profit after tax 25

Owners of the parent
Non-controlling interest
158
c) Consolidation worksheet: [For Illustration only]
balances
$’000 $’000 Dr’000 Cr’000 $’000
Goodwill on consolidation - - 18 5 13
Receivables 40 20 60
Inventory 40 5 1 44
Other current assets 140 60 200
770 365 997
Share capital 400 180 180 400
Retained profit 190 105 72 223
NCI - - 114 114
Payables 100 60 160
Other current Liabilities 80 20 100
770 365 997
Method/Effects:
(1) The cost of the investment in P’s books is eliminated against the share capital
in S’s book (reserves are post-acquisition, hence not eliminated)
(2) Goodwill is capitalised less impairment
(3) Unrealized profit in ending inventory of S eliminated.
(6) The Group reserves are the parent’s reserves plus the Group’s share of the post-
acquisition reserves of the subsidiary less impairment of goodwill & unrealized profit in
ending inventory.
P Group
Consolidated Statement of Financial Position as at 31 December 20X7
$’000 Workings ($’000)
Assets 570
Receivables 60 40 + 20
Inventory 44
Other current assets 200 140 + 60

Retained earnings (Group Reserves) 223
Total equity 737
Payables 160 100 + 60
Other current liabilities 100 80 + 20
930
159
12.6 DISCLOSURE
Disclosure provided under IFRS 12 include:

(i) the composition of the group; and the interest that non-controlling interests have in the
group’s activities and cash flows
(ii) the nature and extent of significant restrictions on its ability to access or use assets, and
settle liabilities, of the group
(iii) the nature of, and changes in, the risks associated with its interests in consolidated
structured entities
(iv) the consequences of changes in its ownership interest in a subsidiary that do not result
in a loss of control
(v) the consequences of losing control of a subsidiary during the reporting period
(vi) when the financial statements of a subsidiary used in the preparation of consolidated
financial statements are as of a date or for a period that is different from that of the
consolidated financial statements, an entity shall disclose:
• the date of the end of the reporting period of the financial statements of that
subsidiary; and
• the reason for using a different date or period
(vii) a schedule that shows the effects on the equity attributable to owners of the parent of
any changes in its ownership interest in a subsidiary that do not result in a loss of
control
(viii) the gain or loss, if any, calculated in accordance with, and the portion of that gain or
loss attributable to measuring any investment retained in the former subsidiary at its fair
value at the date when control is lost; and the line item(s) in profit or loss in which the
gain or loss is recognised (if not presented separately)
160
Question 1
S Ltd has 5,000,000 ordinary shares in issue. On 1 June 20X1, P Ltd acquired 80% of the
ordinary shares in S Ltd for $4,750,000. At that time, S Ltd had ordinary share capital of
$5,000,000 and reserves of $500,000.
The income statements of P Ltd and S Ltd for the year ended 31 May 20X4 are provided
below:
P Ltd S Ltd
$000 $000
Sales revenue 8,400 3,200
Cost of sales (4,600) (1,700)
Gross profit 3,800 1,500
Distribution costs (1,500) (510)
Administrative costs (900) (450)
Profit before tax 1,400 540
Tax (600) (140)
Profit for the period 800 400
1) P Ltd sold goods S Ltd at a mark-up of 50%. During the year ended 31 May 20X4
sales was $1,500,000 and 30% of these goods remained in S Ltd’s inventory at year-
end.
2) Annual review at year-end ascertained there was impairment of goodwill estimated to

be $35,000.
Required:
(a) Calculate the goodwill arising on the acquisition of S Ltd on 1 June 20X1.
(b) Calculate the unrealised profit in S Ltd’s ending inventory on 31 May 20X4.
(c) Prepare the consolidated income statement for P Ltd for the year ended 31 May 20X4.
161
Question 2
On 1 April 20X1 H Ltd paid $133,000 to acquire 6,400 out of the 8,000 shares in M Ltd.
M Ltd’s share capital was $8,000 and reserves were was $122,000 on that date.
The statement of financial position of these two companies as at 31 March 20X4 are as
follows:
H Ltd M Ltd
Assets $ $ $ $
Property, plant & equipment 22,000 175,000
Investment in M Ltd 133,000 -
Current assets
Inventories 138,000 76,000
Receivables 224,000 212,000
362,000 288,000
517,000 463,000
Equity & Liabilities
Ordinary shares 105,000 8,000
334,000 400,000
Current liabilities
Payables 183,000 63,000
517,000 463,000
1) During the year, H Ltd sold goods worth $40,000 to M Ltd. M Ltd had sold all the
goods during the year but has not yet settled the amount owing to H Ltd.
2) Annual review at year-end ascertained there was impairment of goodwill estimated to

be $9,000.
Required:
(a) Calculate the goodwill arising on the acquisition of J on 1 April 20X1.
(b) Calculate the non-controlling interest as at 31 March 20X4.
(c) Calculate the group reserves as at 31 March 20X4.
(d) Prepare the consolidated statement of financial position for H Ltd as at 31 March 20X4.
162

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Study Guide

FINANCIAL ACCOUNTING AND REPORTING

This module builds on the foundational knowledge of students on financial

The aims of this module are to:

1. Provide an understanding of the conceptual and theoretical framework for

2. Enable students to comprehend the essential components of financial

3. Enable students to understand the application and basis of selected financial

On completion of this module, a participant will typically be able to:

1. Show a detailed knowledge and understanding of:

i) The overall conceptual framework for financial reporting.

i) Preparing financial statements in accordance with relevant accounting

3. Show cognitive skills with respect to:

i) Assessing the alternative treatment of accounting data and information.

4. Demonstrate transferable skills in:

i) Information retrieval and numerical analysis.

Delivery of Module and Lesson Plan

1. The Conceptual 1. Understand the conceptual framework. Alexander and

2. The Regulatory 1. Understand the regulatory system. Alexander and

3. Revenue Recognition 1. Outline the principles of revenue Alexander and

5. Investment Property 1. Define Investment Property IAS 40

7 Leases 1. Define the characteristics of a lease. Alexander and

8. Inventories 1. Outline the principles of inventory Alexander and

10. Liabilities 1. Define a liability and distinguish between Alexander and

Participants will learn through a combination of lectures, discussion and practice

Supplementar Alexander D., Britton A. and Jorissen A. 2014, International

Barry Elliot and Jamie Elliot 2015, Financial Accounting and

Frank Wood and Alan Sangster 2015, Business Accounting Volume 1

Singapore Financial Reporting Standards (FRSs) are available on the

Institute of Singapore Chartered Accounts of Singapore (ISCA)

IFRS Pocket Guide 2015, visit

Weighting between components A and B - A: 60% B: 40%

Element Description Element Type % of Assessment

CA 1 – Individual Assignment Summative 30%

Alexander D and Nobes C 2016, Financial Accounting: An International Introduction

Beams, Anthony, Clement and Lowensohn, 2014. Advanced Accounting 12 ed.

Drafting Financial Statements, 2009, Kaplan Publishing.

Financial Accounting and Tax Principles, 2009 CIMA, Elsevier Publishing.

A Practical Guide to Financial Reporting Standards (Singapore) 6th Edition. CCH

THE CONCEPTUAL FRAMEWORK

At the completion of this TOPIC, participants will be able to:

o Understand the conceptual framework

1.1 INTRODUCTION OF CONCEPTUAL FRAMEWORK

Historically, many accounting standard setters operated without having a conceptual

Definition of Conceptual Framework:

1.1.1 PURPOSE OF CONCEPTUAL FRAMEWORK

The purpose of the Conceptual Framework is to:

(b) to assist preparers of financial statements in applying financial reporting standards

(d) to assist users of financial statements in interpreting the information contained in

The Conceptual Framework deals with:

a) the objective of financial reporting;

1.2 OBJECTIVE OF FINANCIAL STATEMENTS

1.2.1 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL

If financial information is to be useful, it must be relevant and faithfully represents what it

A complete depiction of a group of assets would include, at a minimum, a description of the

A neutral depiction is without bias in the selection of or presentation of financial information. It

1.2.2 BASIC ELEMENTS OF FINANCIAL STATEMENTS

The elements of the financial statements represent the economic characteristics of

Statement of Financial Position

Statement of Comprehensive Income

A complete set of financial statements comprises:

(a) a statement of financial position;

1.3.1 RECOGNITION AND MEASUREMENT CRITERIA

Accounting conventions/ Assumptions