ACCA SBR Notes - Asra

(0) 2018 CONCEPTUAL FRAMEWORK DEFINITIONS

Financial Posi+on

Economic Resource Claims

Asset Liability Equity

A present economic A present The residual

resource controlled by obliga+on of the interest in the
the en3ty as a result en3ty to transfer an assets of the en3ty
of past events ecomomic a6er deduc3ng all
resource as a result its liability
An economic resource is of past events.
a right that has the
poten+al to produce
economic benefits.

! Economic benefits include :

● Cash flows, such as returns on investment sources
● Exchange of goods, such as by trading, selling goods, provision of services
● Reduc3on or avoidance of liabili3es such as paying loans

! Obliga+on is a duty or responsibility that the en3ty has no prac3cal ability to aviod:
● A present obliga3on exists as a result of past events if the en3ty has already
obtained economic benefits or taken an ac3on, and as a consequence, the en3ty
will or may have to transfer an economic resource that it would not otherwise
have had to transfer.
Fundamental qualita+ve characteris+cs :

1. Relevance ● Relevant informa3on is capable of making a difference in decisions

made by users. It has predic3ve and conformatory value.
● Consider materiality : informa3on is material if omIng or missta3ng it
could influence decisions of primary users.

2. Faithful A faithful representa3on reflects economic substance rather than legal

Representa+on form and is :
● Complete : all informa3on necessary for undestanding
● Neutral : without bias, supported by exercise of prudence
● Free from error : processes and descrip3on without error,
does not mean perfect

Enhancing Qualita+ve Characteris+cs

● Comparibility
● Verifiability Usefulness of informa3on is enhanced if these
● Timeliness characteris3cs are maximised
● Undestandibility

1. Comparability : Comparability is the quali3ta3ve characteris3c that enables users to

2. Verifiability :
3. Timeliness :
4. Undestandability :
iden3fy and undestand similari3es in and differences among items.
Verifiability helps assure users that informa3on faithfully represents
the economic phenomena it purports to represents.
It means having informa3on available to decision makers on 3me to be
capable of influencing their decisions. Generally, the older informa3on
is less useful.
Classifying, characterising and presen3ng informa3no clearly and
concisely makes it undestandable.

The new Conceptual Framework states that assets and liabilities should be recognised if
such recognition provides users of financial statements with:

(a) relevant information about the asset or the liability and about any income, expenses or
changes in equity;

(b) a faithful representation of the asset or the liability and of any income, expenses or changes
in equity; and

(c) information which results in the benefits exceeding the cost of providing that information.

The Five fundamental ethical principals set out in our ACCA Rulebook are:

● Integrity : Being straighNorward and honest in all professional and business

rela3onships

● Objec+vity : Not allowing bias, conflicts of interest or undue influence to others

to override professional or business judgements

● Professional Competence and Due Care : To maintain professional knowledge and

skill at a level required

● Confiden+ality : To respect the confiden3ality of informa3on acquired as a result

of professional and business rela3onships and therefore, not disclose any such
informa3on to third par3es without proper and specific authori3es.

● Professional Behaviour : To comply with relevant laws and regula3ons and avoid
any ac3on that discredits the profession.

How to write Ethical Responsibili+es of Accountants

1. The purpose of financial statements is to present a fair representa3on of the

company's posi3on and if the financial statements are deliberately falsified, then
this could be deemed unethical.

2. Accountants have a social and ethical responsibility to issue financial statements

which do not mislead the public.

3. Any manipula3on of the accountants will harm the credibility of the profession
since the public assume that professional accountants will act int an ethical
capacity.

4. The directors should remember that professional ethics are in integral part of the
profession and that they must follow the ethical guidelines such as ACCA's
Code of Ethics and Conduct.

5. Deliberate falsifica3on of the financial statements would contravene the guiding

principles of intergrity, objec3vity and professional behaviour.

6. The judgement made by professional accountants should be independent and not

affected by business pressures.

7. Financial Statements must comply with Interna3nal Financial Repor3ng Standards

(IFRS), the framework and local legisla3on.

8. Transparency, and full and accurate disclosure is important if the financial

statements are not misleading.
(1) IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Property plant and equipment are tangible assets that:

(i) Are held for use in the produc3on or supply of goods or services ,for rental to others, or for
administra3ve purposes; and
(ii) Are expected to be used during more than one period.

Carrying amount is the amount at which an asset is recognized a6er deduc3ng any accumulated
deprecia3on and accumulated impairment losses

Deprecia+on is systema3c alloca3on of the depreciable amount of assets over its useful life.

Depreciable amount is the cost of an asset less its residual value.

Residual Value is the es3mated amount that an en3ty can obtain when disposing of an asset a6er its
useful life has ended. When doing this the es3mated costs of disposing of the asset should be
deducted.

First +me Revalua+on

(1)Revalua+on Upward : Surplus !Revalua3on Reserve !OCI

Debit. Non-current Asset

Credit. Revalua3on Reserve

(2)Revalua+on Downward : Deficit/Impairment !Expense ! SOPL

Debit. Profit or Loss Account

Credit. Non-current Asset

● Old Deprecia3on - New Deprecia3on = Excess Deprecia3on

"
(Op3on given to the company Revalua3on Reserve
to transfer excess deprecia3on "
when there is a change in Retained Earnings
deprecia3on) "
SOCIE

Journal Debit. Revalua3on Reserve

Credit. Retained Earnings
 Second +me Revalua+on

Case 1 : Before Revalua+on Upward ! Now Downward Revalua+on

Journal : Debit. Revalua3on Reserve

Debit. Profit & Loss Account (Balancing Figure)
Credit.Non-current Asset

Case 2 : Before Revalua+on Downward ! Now Upward Revalua+on

Journal : Debit. Non-current Asset

Credit. Profit or loss Account (Previous Deficit)
Credit. Revalua3on Reserve (Balancing Figure)

● If the revalued asset is disposed off, then the remaining revalua3on

surplus need to be transferred from Revalua3on Surplus to Retained
Earnings within SOCIE.

(2) IAS 38 - INTANGIBLE ASSETS

An intangible asset is an iden3fiable non-monetary asset without physical substance held for use in
the produc3on or supply of goods or services, for rental to others, or for administra3ve purposes.

Thus, the three cri+cal aTributes of an intangible asset are:

• Iden3fiability
• control (power to obtain benefits from the asset
• future economic benefits (such as revenues or reduced future costs)

Intangible assets are business assets that have no physical form. Unlike a tangible asset, such as a
computer, you can‘t see or touch an intangible asset.

An intangible asset can be termed iden+fiable if it:

• is separable or
• arises from contractual or other legal right

Research is original and planned inves3ga3on undertaken with the prospect of gaining new scien3fic
or technical knowledge and understanding.

Development is the applica3on of research findings or other knowledge to a plan or design for the
produc3on of new or substan3ally improved materials, devices, products, processes, systems or
services before the start of commercial produc3on or use
Internally Generated Goodwill Research and
Intangible Asset Development Expenditure
●Should not be recognised in Research
Financial Statements
Inherient Purchased
●Purchased goodwill = Goodwill Goodwill
Recognise in FS Write off as expense in SOPL

Cost of considera3on X Development Cost

Less: FV of Don’t recognise PIRATE
iden3fiable
Net asset X ●Probable future economic
Goodwill X +ve -ve benefits

●Inten3on to complete and

use/sell asset
Gain on
bargain ●Resource adequate and
purchase available to complete and
use/sell asset

●Ability to use/sell asset

Recognise
in SOPL ●Technical feasibility of
comple3ng asset for use/sale

Recognise as asset in SOFP. ●Expenditure can be

Impairment review at the measured relaibly
end of each financial year.
If PIRATE yes capitalise

If PIRATE no then write off in

SOPL
(3) IAS 36 - IMPAIRMENT OF ASSETS
Recoverable amount is the higher of an asset‘s net selling price and its value in use.

Value in use is the present value of es3mated future cash flows expected to arise from the con3nuing
use of an asset and from its disposal at the end of its useful life.

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

A cash-genera+ng unit is the smallest iden3fiable group of assets that generates cash inflows from
con3nuing use that are largely independent of the cash inflows from other assets or groups of assets.

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash-genera3ng unit under review and other cash-genera3ng units.

The discount rate should be a pre-tax rate. It should reflect the current market assessments of the
3me value of money and the risks that relate to the asset for which the future cashflows have not yet
been adjusted.

Reversal should not be more than depreciated historical cost

Cost 100,000
(-)Deprecia3on (20,000)
Carrying Value 80,000
Impairment (30,000)
Recoverable Amount 50,000

Now the revalued amount is 90,000

But this revalued amount that is to be recorded in books cannot be more than $80,000.
Reversal of Impairment loss
2 Years 5 Years
Cost 30,000 Cost 16,000
Dep (2/10) (6,000) Dep (3/8) (6,000)
CV 24,000 Recoverable Amt 10,000
Impairment (8,000)
Recoverable Amt 16,000 New Recoverable amount = 40,000

Calculate as if there was no impairment from the beginning

Cost 30,000
Dep (5/10) (15,000)
CV 15,000

Now asset cannot be more than 15,000.

So the reversal of impairment loss is 15,000 - 10,000 = $5,000
(4) IAS 40 - INVESTMENT PROPERTY
The Investment property is property held to earn rentals or for capital apprecia3on or both, rather
than for:
- Use in the produc3on or supply of goods or services or for administra3ve purposes; or
- Sale in the ordinary course of business.

The Owner-occupied property is property held (by the owner or by the lessee under a finance lease)
for use in the produc3on or supply of goods or services or for administra3ve purposes.

Par+al own use - If the owner uses part of the property for its own use, and part to earn rentals or for
capital apprecia3on, and the por3ons can be sold or leased out separately, they are accounted for
separately. Therefore the part that is rented out is investment property. If the por3ons cannot be sold
or leased out separately, the property is investment property only if the owner-occupied por3on is
insignificant.

An investment property should be derecognized on disposal or when the investment property is

permanently withdrawn from use and no future economic benefits are expected from its disposal.

Change from Investment to PPE & vice versa

FV CV
PPE Investment PPE Investment
" (FV Model) " (Cost Model)
Revalua3on Current CV
"
Gain/loss
"
OCI

FV CV
Investment PPE Investment PPE
(FV Model) (Cost) (Cost Model) (Cost)
" " " "
Revalua3on Dep Current CV Dep
"
Gain/loss
"
SOPL
(5) IAS 2 - INVENTORIES
Inventories are assets; -
I. Held for sale in the ordinary course of business
II. In the process of produc3on for such sale; or (work in progress, finished goods awai3ng to be sold)
III. In the form of materials or supplies to be consumed in the produc3on process or in the rendering of
services

Net Realizable Value is the es3mated selling price in the ordinary course of business less the
es3mated costs of comple3on and the es3mated cost necessary to make a sale.

IAS 2 Inventories Value

The Lower of

Cost Net Reliasable Value

The cost of inventory ! Revenue expected to be

comprises all cost incurred earned in the future when the
in bringing the asset to its goods is sold
present condi3on and Less: Any selling cost
loca3on
! Expected Selling price of the
inventory
Less: Es3mated cost of
comple3on and sale or
es3mated cost necessary to
make sale

! Fair Value
Less: Future cost to sell

! NRV is the net amount that

would be realised a6er
incurring any future cost
required to make the same

! NRV is the 'Best es3mate'

available at the reporing date.
 Journal

✓ Purchase of Inventory
Debit. Inventory A/c
Credit. Cash/Trade Payable

✓ Inventory is sold
Debit. Cost of Sales (SOPL)
Credit. Inventory (SOFP)

✓ Closing Inventory
Debit. Inventories (SOFP- Creates asset)
Credit. Cost of Sales (SOPL-Reduces from COS)

✓ Opening Inventory
Debit.Cost of Sales (SOPL-Increases COS)
Credit. Inventories (SOFP- Reduces asset in SOFP)

(6) IAS 41 - AGRICULTURE

Biological asset: A living animal or plant.

Agricultural produce: The harvested produce of the en3ty‘s biological assets. Agricultural produce is
measured at fair value less es3mated costs to sell at the point of harvest.

Biological transforma+on: The process of growth, degenera3on, produc3on, and procrea3on that
cause an increase in the value or quan3ty of the biological asset.

Harvest: The process of detaching produce from a biological asset or cessa3on of its life.

Bearer plant: A living plant that:

- Is used in the produc3on or supply of agricultural produce
- Is expected to bear produce for more than one period, and
- Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

Costs to sell: The incremental costs directly asributable to the disposal of an asset, excluding finance
costs and income taxes

Ac+ve market exist when; the items traded are homogenous, willing buyers and sellers can normally
be found at any 3me and prices are available to the public.

Biological assets or agricultural produce are recognised when:

- En3ty controls the asset as a result of a past event
- Probable that future economic benefit will flow to the en3ty; and
- Fair value or cost of the asset can be measurement reliably.
 IAS 41

Biological Agricultural Proceeds

Assets Proceeds

Sheep Wool Tea

Diary Casle Milk Chease
Sugar Cane Picked Leaves Sugar
Picked Fruits Yarn

Living Plant
or Animal Measurement
!FV less cost to sell IAS 2 Inventories
!Gain/loss = SOPL
!Produce = Harvest
✓ Probable "
Economic Benefits Inventory

✓ Cost of FV can be
measured
reliably

✓ En3ty controls
asset

Measurement
✓ Ini+al Measurement: FV Less: Point of Sale cost
If no FV, then cost model
✓ Subsequent Measurement: Revalue to FV Less: Point of Sale cost
Gain/Loss !SOPL

IAS 41 IAS 2

←Biological Transforma+on !
Plan+ng/Slaughter Harvest/Slaughter Sale
(7) IAS 23 - BORROWING COST
Borrowing costs are interest and other costs, incurred by an en3ty in connec3on with the borrowing
of funds in order to construct an asset.

Qualifying asset: A qualifying asset is an asset that necessarily takes a substan3al period of 3me to
get ready for its intended use or sale (e.g. inventories, manufacturing plants, power genera3on
facili3es, intangible assets, investment proper3es etc.). However, financial assets, inventories
produced over short period of 3me and assets ready for intended sale are not qualifying assets.

Recogni+on :
- An en3ty should capitalize the borrowing costs that are directly asributable to the acquisi3on,
construc3on or produc3on of a qualifying asset as part of the cost of that asset and, therefore, should
be capitalized.
- Other borrowing costs are expensed in statement of profit or loss when occurred.
- Return on any surplus funds invested is first deducted from the amount of interest and then the
remaining amount is capitalized.

The capitaliza+on commences: -

- Expenditures for the assets are being incurred;
- Borrowing costs are being incurred; and
- Ac3vi3es necessary to prepare the asset for its intended use/sale are in progress

The capitaliza+on should cease, when substan3ally all the ac3vi3es necessary to complete the
qualifying asset for its intended use/sale are complete (physical construc3on is complete,
administra3ve or decora3ve work may con3nue).

Disclosures :
- The accoun3ng policy adopted.
- Amount of borrowing cost capitalized during the period.
- Capitaliza3on rate used.

(8) IAS - 20 ACCOUNTING FOR GOVERNMENT GRANTS

AND DISCLOSURE OF GOVERNMENT ASSISTANCE
Government refers to government, government agencies and similar bodies whether local, na3onal
or interna3onal.

Government assistance is provision of economic benefits by government to a specific en3ty or range

of en33es which meet specific criteria. Government assistance for the purpose of this Standard does
not include benefits provided only indirectly through ac3on affec3ng general trading condi3ons, such
as the provision of infrastructure in development areas or the imposi3on of trading constraints on
compe3tors.

Government grants are transfer of resources to an en3ty, from government, in return for compliance
with certain condi3ons.
 The following must be disclosed:
- Accoun3ng policy adopted for grants, including method of statement of financial posi3on
presenta3on
- Nature and extent of grants recognized in the financial statements
- Unfulfilled condi3ons and con3ngencies asaching to recognized grant

Government grants do not include government assistance whose value cannot be reasonably
measured, such as technical or marke3ng advice. The government grants are not recognized because
no value can be assigned to them or they are not dis3nguishable from the other transac3ons of the
en3ty if material shall be disclosed.

(9) IAS - 8 ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AND ERRORS
Accoun+ng Policies are the specific principles, bases, conven3ons, rules and prac3ces applied by an
en3ty in preparing and presen3ng financial statements.

IAS 8 Accoun+ng Policies, Changes in Accoun+ng Es+mates and Errors states that a change in
accoun3ng es3mate is an adjustment of the carrying amount of an asset or liability, or related
expense, resul3ng from reassessing the expected future benefits and obliga3ons associated with that
asset or liability.

A change in accoun+ng es+mate is an adjustment of the carrying amount of an asset or liability, or

related expense, resul3ng from reassessing the expected future benefits and obliga3ons associated
with that asset or liability.

Examples of change in accoun+ng es+mates:

- Es3ma3ng the recoverability of receivables at the year end, i.e. bad debts
- Inventory obsolescence
- Fair values of assets/liabili3es
- Determining the remaining useful lives of; or the expected paserns of consump3on of depreciable
assets
- Es3ma3ng Income tax expenses

It can be changed only if the change :

● Is required by an IFRS Standard
● Result in the financial statement providing reliable and more relevant informa3on

A change in accoun3ng policy occurs only if there is a change in

Recogni+on Presenta+on Measurement Basis

An expsense is now Deprecia3on is now Sta3ng asset at
recognised rather included in COS replacement cost
than an asset rather than admin than at historical
expense cost LIFO or
FIFO
Accoun+ng for changes in Policy

● Changes should be applied retrospec3vely.

● Compara3ve Informa3on should be restated.
Restate Opening Retained Earnings.

Accoun+ng Es+mate : It is the method adopted by an en3ty ot es3mate the amount in

financial statement.
● Exercise judgement based on latest informa3on
● Revise es3mate if new informa3on is available.

Changes in accoun+ng es+mate

● Change in useful life of asset

● Change in residual value of asset
● Method of deprecia3on of asset
● Warrenty provision

Prior Period Errors

They are omission and misstatements in financial statements for one or more prior period
arising from failure to use informa3on that :
● Was available
● Expected to have been taken

Errors include :
● Mathema3cal Mistakes
● Mistakes in applying policies
● Fraud

Correc+on of Prior Period Errors

● Resta3ng Opening Balance of

✓ Asset
✓ Liability
✓ Equity
✓ Retained Earnings

● Resta3ng compara3ve figures

● Correc3ng effects in Financial System

✓ End of CY
✓ End of PY
✓ Beginning of PY
 Prior period errors are omissions from, and misstatements in, the en3ty‘s financial statements for
one or more prior periods arising from a failure to use, or misuse of, reliable informa3on that:
- Was available when financial statements for those periods were authorized for issue; and
- Could reasonably be expected to have been obtained and taken into account in the prepara3on and
presenta3on of those financial statements.

(10) IAS - 10 EVENTS AFTER REPORTING DATE

Event aeer the repor+ng period occurs between the end of the repor3ng period and the date that
the financial statements are authorized for issue.

Adjus+ng events provide evidence of condi3ons that existed at the end of the repor3ng period.

Non-adjus+ng events are those that are indica3ve of condi3ons that arose a6er the repor3ng period.

Adjus+ng events example :

- Invoices received in respect of goods or services received before the year end
- The resolu3on a6er the repor3ng date of a court case giving rise to a liability
- Evidence of impairment of assets, such as news that a major customer is going into liquida3on or the
sale of inventories below cost
- Discovery of fraud or errors showing that financial statements were incorrect
- Determina3on of employee bonuses/profit shares
- The tax rates applicable to the financial year are announced
- The auditors submit their fee
- The sale of a non-current asset at a loss indicates that it was impaired at the repor3ng date
- The bankruptcy of a customer indicates that their debt was irrecoverable at the repor3ng date
- The sale of inventory at less than cost indicates that it should have been valued at NRV in the account
- The determina3on of cost or proceeds of assets bought/sold during the accoun3ng period indicates
at the what amount they should be recorded in the accounts

Non Adjus+ng events example :

- Business combina3ons
- Discon3nuance of an opera3on
- Major sale/purchase of assets
- Destruc3on of major assets in natural disasters
- Major restructuring
- Major share transac3ons
- Unusual changes in asset prices/foreign exchange rates
- Commencing major li3ga3on
- A purchase or sale of a non-current asset
- The destruc3on of assets due to fire or flood
- The announcement of plans to discon3nue an opera3on
- An issue of shares

Disclosures
- When the financial statements were authorized for issue
- Who gave that authoriza3on
- Who has the power to amend the financial statements a6er issuance
(11) IAS - 37 PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS
A provision is a liability of uncertain 3ming or amount.

An obliga+ng event is an event that creates a legal or construc3ve obliga3on that results in an
enterprise having no realis3c alterna3ve to sesling that obliga3on.

A legal obliga+on is an obliga3on that derives from:

(a) A contract (through its explicit or implicit terms)
(b) Legisla3on; or
(c) Other opera3on of law.

A construc+ve obliga+on is an obliga3on that derives from an enterprise‘s ac3on where:

(a) By an established pasern of past prac3ce, published policies or a sufficiently specific current
statement, the enterprise has indicated to other par3es that it will accept certain responsibili3es;
and
(b) As a result, the enterprise has created a valid expecta3on on the part of those other par3es that it
will discharge those responsibili3es.

An onerous contract is a contract in which the unavoidable costs of mee3ng the obliga3ons under
the contract exceed the economic benefits expected to be received under it.

A restructuring is a program that is planned and controlled by management, and materially changes
either:
(a) The scope of a business undertaken by an enterprise; or (b) The manner in which that business is
conducted.
(b) The manner in which the business is conducted

A provision shall be recognized when:

(a) An en3ty has a present obliga3on (legal or construc3ve) as a result of a past event;
(b) It is possible than an ouNlow of resources embodying economic benefits will be required to sesle
the obliga3on; and
(c) A reliable es3mate can be made of amount of the obliga3on.

Restructuring examples:
- Sale or termina3on of a line of business
- Closure of business loca3ons
- Changes in management structure
- Fundamental re-organiza3on of company

Closure or re-organiza+on: Accrue only a6er a detailed formal plan is adopted and announced
publicly. A board decision is not enough.

Restructuring provision on acquisi+on (merger): Accrue provision for termina3ng employees, closing
facili3es, and elimina3ng product lines only if announced asached acquisi3on and, then only if a
detailed formal plan is adopted 3 months a6er acquisi3on.
A con+ngent liability is a possible obliga3on 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 enterprise

A con+ngent asset is 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 enterprise.

Provision Con)ngent Con)ngent

Liability Asset
3 Condi+ons: ●Disclosed by ●Possible
✓Present Obliga3on as a Notes will not be
result of past event recognised,
✓Probable ouNlow of ●Possible provided or
economic benefits OuNlow disclosed
✓Reliable Es3mate of
Obliga3on ●Not to be ●Probable
disclosed in disclosed in notes
●Liability of uncertain amount Financial
or 3ming Statements ●Virtually certain
" " recognise as an
Legal Construc3ve ●Occurance or Non asset
Obliga3on Obliga3on occurance of
" " events ●Occurance or Non
Contract Past Behaviour occurance of
events
●Provision calcua3on :
-Expected Values
-Management Judgement

●Journal :
Debit. Expense (SOPL)
Credit.Provision (SOFP)

●Warenty Provision:
Past experience

●Guarantees:
Make provision if probable
Payment Degree of Probability Ou8low Inflow
Virtually Certain Recognise Liability Recognise Asset
●Environmental Provision: Probable Recognise Provision Disclose Con. Asset.
Present Value of it. Possible Disclose Con. Liab. Ignore
Remote Ignore Ignore
 Shortcomings of IAS 37

IAS 37 is generally consistent with the Conceptual Framework. However there are some issues
with IAS 37 that have led to it being criticised:

(i) IAS 37 requires recognition of a liability only if it is probable, that is more than 50% likely,
that the obligation will result in an outflow of resources from the entity. This is inconsistent
with other standards, for example IFRS 3 Business Combinations and IFRS 9 Financial
Instruments which do not apply the probability criterion to liabilities. In addition, probability
is not part of the Conceptual Framework definition of a liability nor part of the Conceptual
Framework's recognition criteria.

(ii) There is inconsistency with US GAAP as regards how they treat the cost of restructuring
a business. US GAAP requires entities to recognise a liability for individual costs of
restructuring only when the entity has incurred that particular cost, while IAS 37 requires
recognition of the total costs of restructuring when the entity announces or starts to
implement a restructuring plan.

(iii) The measurement rules in IAS 37 are vague and unclear. In particular, 'best estimate'
could mean a number of things: the most likely outcome, the weighted average of all
possible outcomes or even the minimum/maximum amount in a range of possible
outcomes. IAS 37 does not clarify which costs need to be included in the measurement of
a liability, and in practice different entities include different costs. It is also unclear if 'settle'
means 'cancel', 'transfer' or 'fulfil' the obligation. IAS 37 also requires provisions to be
discounted to present value but gives no guidance on non-performance risk that is the
entity's own credit risk. Non-performance risk can have a lead to a significant reduction in
non-current liabilities.

(12) IFRS 16 - LEASES

Lease term is the non-cancellable period for which a lessee has the right to use an underlying asset,
plus:
i. Periods covered by an extension op3on if exercise of that op3on by the lessee is reasonably certain;
and
ii. Periods covered by a termina3on op3on if the lessee is reasonably certain not to exercise that op3on

Lessee’s incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow
over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar
value to the right-of-use asset in a similar economic environment.

A lease is an agreement whereby the lessor (the legal owner of an asset) conveys to the lessee (the
user of the asset) the right to use an asset for an agreed period of 3me in exchange for considera3on
(return for a payment or series of payments).

The ‘right of use asset‘ would include the following amounts, where relevant:
- Any payments made to the lessor at, or before, the commencement date of the lease, less any lease
incen3ves received.
- Any ini3al direct costs incurred by the lessee.
- An es3mate of any costs to be incurred by the lessee in dismantling and removing the underlying
asset, or restoring the site on which it is located (unless the costs are incurred to produce inventories,
in which case they would be accounted for in accordance with IAS 2 – Inventories). Costs of this
nature are recognised only when an en3ty incurs an obliga3on for them. IAS 37 – Provisions,
Con3ngent Liabili3es and Con3ngent Assets would be applied to ascertain if an obliga3on existed.

If the fair value of the considera3on for the sale of an asset does not equal the fair value of the asset,
or if the payments for the lease are not at market rates, an en3ty shall make the following
adjustments to measure the sale proceeds at fair value:
- Any below-market terms shall be accounted for as a prepayment of lease payments; and
- Any above-market terms shall be accounted for as addi3onal financing provided by the buyer- lessor
to the seller-lessee

A sale and leaseback transaction occurs where an entity transfers an asset to another
entity and leases that asset back from the buyer/lessor. The first required criteria of IFRS
standards is to determine whether a sale has occurred. Under IFRS 16, an entity must apply
the IFRS 15 Revenue from Contracts with Customers requirements to determine when a
performance obligation is satisfied. If it is concluded that the transfer of an asset is not a
sale, then the seller/lessee will continue to recognise the transferred asset. In this event, a
financial liability and financial asset will be recognised under IFRS 9 Financial Instruments.
The entity should follow IFRS 15 to account for the sale and then apply IFRS 16 to account
for the lease. Thus, the entity should account for the sale and leaseback as follows:

- Derecognise the underlying asset

- Recognise the sale at fair value

- Recognise only the gain/loss which relates to the rights transferred to buyer/lessor.

- Recognise a right-of-use asset as a proportion of the previous carrying amount of the

underlying asset

- Recognise a lease liability.

 Sale and lease back example

Sale value = $ 5 million
Carrying Value = $ 4.2 million
PV of lease payments = $ 3.85 million
Life of asset = 15 years

Solu+on:

Workings:

Step 1 :
ROU asset at the start of the lease = CV x PV of lease payment
FV

= 4.2 x 3.85
5

= $ 3.234 million

Step 2 :
Calcula+on of gain on rights transferred

(A) Normal gain = 5 - 4.2 = 0.8

(B) Gain on rights retained = 100% gain x PV of lease payment

FV

= 0.8 x 3.85
5

Thus, gain on rights transferred = A-B = $ 0.184 million

Step 3 :
Journal

Debit. Bank 5
Debit. ROU asset 3.234 WN 1
Credit. PPE 4.2
Credit. Lease Liability 3.85
Credit. Profit 0.184 WN 2

Lease implicit rate formula : PV of future lease payments = Annual Payments x Cumulative
Discount Factor (CDF). This CDF will help to find the rate using the table.

(13) IFRS 15 - REVENUE FROM CONTRACTS WITH

CUSTOMERS
5 Step process :
- Step 1: Iden3fy the contract
- Step 2: Iden3fy the separate performance obliga3ons within the contract
- Step 3: Determine the transac3on price
- Step 4 : Allocate the transac3on price to the performance obliga3ons in the contracts
- Step 5 : Recognize revenue as or when the en3ty sa3sfies a performance obliga3on

Revenue will be recognised when control is passed at a certain point in 3me. Factors that may
indicate the point in 3me at which control passes include :
1. The en3ty has a present right to payment for the asset;
2. The customer has legal 3tle to the asset;
3. The en3ty has transferred physical possession of the asset;
4. The customer has the significant risks and rewards related to the ownership of the asset; and
5. The customer has accepted the asset.

Indicators that an en3ty is an agent are as follows:

(1) Another party is primarily responsible for fulfilling the contract
(2) The en3ty does not have inventory risk before or a6er the goods have been ordered by a customer,
during shipping or on return;
(3) The en3ty does not have discre3on in establishing prices for the other party‘s goods or services and,
therefore, the benefit that the en3ty can receive from those goods or services is limited;
(4) The en3ty‘s considera3on is in the form of a commission; and
(5) The en3ty is not exposed to credit risk for the amount receivable from a customer in exchange for
the other party‘s goods or services.

Indicators for bill and hold agreement :

(a) The reason for the bill-and-hold arrangement must be substan3ve (e.g., the customer has requested
the arrangement).
(b) The product must be iden3fied separately as belonging to the customer.
(c) The product currently must be ready for physical transfer to the customer.
(d) The en3ty cannot have the ability to use the product or to direct it to another customer.

Indicators for consignment agreement :

I. The product is controlled by the en3ty un3l a specified event occurs, such as the sale of the product
to a customer of the dealer or un3l a specified period expires;
II. The en3ty is able to require the return of the product or transfer the product to a third party (such as
another dealer); and
III. The dealer does not have an uncondi3onal obliga3on to pay for the product (although it might be
required to pay a deposit).
 IFRS 15 Revenue from Contracts with Customers requires that non-cash consideration
received should be measured at the fair value of the consideration received. If fair value
cannot be reasonably estimated, the consideration should be measured by reference to the
stand-alone selling price of the good or service promised in the contract. The fair value of
non-cash consideration may vary. If the non-cash consideration varies for reasons other than
the form of the consideration, entities will apply the guidance in IFRS 15 related to
constraining variable consideration. However, if fair value varies only due to the form, the
variable constraint guidance in IFRS 15 would not apply.

The incremental borrowing rate should be used to discount the revenue (IFRS 15) to be
received over the period to present value terms and to find the financing component.

(14) IFRS 13 - FAIR VALUE MEASUREMENT

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transac3on between market par3cipants at the measurement date.

Ac+ve market or Principal market is a market in which transac3ons for the asset or liability take place
with sufficient frequency and volume to provide pricing informa3on on an ongoing basis.

Fair value measurement assumes that the transac3on to sell the asset or transfer the liability takes
place in the principal market for the asset or liability or, in the absence of a principal market, in the
most advantageous market for the asset or liability.

The most advantageous market- It is assumed that transac3ons take place in the most advantageous
market to which the en3ty has access. This means that the en3ty is in a posi3on to receive the
maximum amount on sale of the asset or pay the minimum amount to transfer a liability a6er
considering transac3on and transport costs. While transac3on and transport costs are relevant to
iden3fy the market, they are not considered in determining the fair value.

Valua+on techniques:
I. Market approach: uses price and other relevant market informa3on for iden3cal or comparable
assets or liabili3es
II. Income approach: converts future amounts to a single discounted present value amount or
III. Cost approach: amount that would currently be required to replace the service capacity of the asset

Examples of use of fair values in IFRS include:

- IAS 16 Property, Plant and Equipment allows revaluation through other comprehensive
income, provided it is carried out regularly.

- While IAS 40 Investment Property allows the option of measuring investment properties at
fair value with corresponding changes in profit or loss, and this arguably reflects the
business model of some property companies, many companies still use historical cost.

- IAS 38 Intangible Assets permits the measurement of intangible assets at fair value with
corresponding changes in equity, but only if the assets can be measured reliably through the
existence of an active market for them.

- IFRS 9 Financial Instruments requires some financial assets and liabilities to be measured at
amortised cost and others at fair value. The measurement basis is largely determined by the
business model for that financial instrument. For financial instruments measured at fair value,
depending on the category and the circumstances, gains or losses are recognised either in
profit or loss or in other comprehensive income.

Rules in business combina+on:

IFRS 3 sets out general principles for arriving at the fair values of a subsidiary's assets and liabili3es only
if they sa3sfy the following criteria:

I. In the case of an asset other than an intangible asset, it is probable that any associated future
economic benefits will flow to the acquirer, and its fair value can be measured reliably. Vice versa for
liabili3es

II. In the case of an intangible asset or a con3ngent liability, its fair value can be measured reliably.

III. The acquiree's iden3fiable assets and liabili3es might include assets and liabili3es not previously
recognised in the acquiree's financial statements An acquirer should not recognise liabili3es for
future losses or other costs expected to be incurred as a result of the business combina3on.

IV. The acquiree may have intangible assets which can only be recognised separately from goodwill if
they are iden3fiable. They must be able to be capable of being separated from the en3ty.

V. The acquirer should measure the cost of a business combina3on as the total of the fair values at the
date of acquisi3on

VI. If part of the considera3on is payable at a later date, this deferred considera3on is discounted to
present value at the date of exchange.

VII.In case of equity instruments as cost of investment, the published price at the date of exchange
normally provides the best evidence of the instrument's fair value.

VIII.Costs asributable to the combina3on, for example professional fees and administra3ve costs, should
not be included: they are recognised as an expense when incurred.

IX. If an asset or liability has been recognised at fair value at acquisi3on, it must be recorded in the
subsidiary‘s statement of financial posi3on at fair value consequently also

X. Some fair value adjustments are made on depreciable assets such as buildings, the assets with fair
value adjustment must be depreciated at its fair value so there will be an adjustment, which flows
through to profit or loss for this addi3onal deprecia3on.

Disclosures :
- Informa3on about the hierarchy level into which fair value measurements fall
- Transfers between levels 1 and 2
- Methods and inputs to the fair value measurements and changes in valua3on techniques, and
- Addi3onal disclosures for level 3 measurements that include a reconcilia3on of opening and
- closing balances, and quan3ta3ve informa3on about unobservable inputs and assump3ons used.
(15) IAS 19 - EMPLOYEE BENEFITS
Employee benefits are all forms of considera3on given by an en3ty in exchange for service rendered
by employees or for the termina3on of employment.

Short-term employee benefits are employee benefits (other than termina3on benefits) that are
expected to be sesled wholly before twelve months a6er the end of the annual repor3ng period in
which the employees render the related service.

Short-term compensated absences: Compensated absences are periods of absence from work for
which the employee receives some form of payment and which are expected to occur within 12
months of the end of the period in which the employee renders the services.

Post-employment benefits are employee benefits (other than termina3on benefits and short-term
employee benefits) that are payable a6er the comple3on of employment.

Defined contribu+on schemes where the future pension depends on the value of the fund.

Defined contribu+on plans are post-employment benefit plans under which an en3ty pays fixed
contribu3ons into a separate en3ty (a fund) and will have no legal or construc3ve obliga3on to pay
further contribu3ons if the fund does not hold sufficient assets to pay all employee benefits rela3ng
to employee service in the current and prior periods.

Defined benefit schemes where the future pension depends on the final salary and years worked.

Defined benefit plans are post-employment benefit plans other than defined contribu3on plans.

The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limi3ng a
net defined benefit asset to the asset ceiling.

The deficit or surplus is:

(a) The present value of the defined benefit obliga3on less
(b) The fair value of plan assets (if any).

The asset ceiling is the present value of any economic benefits available in the form of refunds from
the plan or reduc3ons in future contribu3ons to the plan.

The present value of a defined benefit obliga+on is the present value, without deduc3ng any plan
assets, of expected future payments required to sesle the obliga3on resul3ng from employee service
in the current and prior periods.

Plan assets comprise:

(a) Assets held by a long-term employee benefit fund; and
(b) Qualifying insurance policies.
 Current service cost is the increase in the present value of the defined benefit obliga3on resul3ng
from employee service in the current period.

Past service cost is the change in the present value of the defined benefit obliga3on for employee
service in prior periods, resul3ng from a plan amendment (the introduc3on or withdrawal of, or
changes to, a defined benefit plan) or a curtailment (a significant reduc3on by the en3ty in the
number of employees covered by a plan).

A seTlement is a transac3on that eliminates all further legal or construc3ve obliga3ons for part or all
of the benefits provided under a defined benefit plan, other than a payment of benefits to, or on
behalf of, employees that is set out in the terms of the plan and included in the actuarial
assump3ons.

Asset ceiling is the term established by IAS 19 to ensure that any defined benefit asset (i.e. a pension
surplus) is carried at no more than its recoverable amount. In simple terms, this means that any net
asset is restricted to the amount of cash savings that will be available to the en3ty in future.

Other long-term employee benefits are all employee benefits other than short-term employee
benefits, post-employment benefits and termina3on benefits.

Termina+on benefits are employee benefits provided in exchange for the termina3on of an
employee‘s employment as a result of either:
(a) An en3ty‘s decision to terminate an employee‘s employment before the normal re3rement date; or
(b) An employee‘s decision to accept an offer of benefits in exchange for the termina3on of
employment.

Investment risk: This is defined as the risk that there will be insufficient funds in the plan to meet the
expected benefits.

Actuarial risk: This is the risk that the actuarial assump3ons such as those on employee turnover, life
expectancy or future salaries vary significantly from that actually happens.

If the pension is paid or contribu3on is made at the start of the year, this should be adjusted to the
opening balances of PV of Liability & FV of Plan Asset to calculate the interest on them.

The remeasurement component is taken to other comprehensive income and comprises:

- Actuarial gains and losses, such as the return on plan assets which differs from the expected
return on the assets included within the net interest figure;
- Changes in the asset ceiling not included within the net interest calcula3on.

IAS 19 Employee Benefits requires seslement payments to be recognised at the earlier of when the
plan of termina3on is announced and when the en3ty recognises the associated restructuring costs
associated with the closure of the firm.

IAS 19 requires the past service cost to be recognised in profit or loss at the earlier of:
- When the plan curtailment occurs; and
- When the en3ty recognises the related restructuring costs.
IAS 19 was amended in 2018 to clarify that when a net defined benefit liability is remeasured as a
result of a curtailment (or plan amendment or seslement), updated actuarial assump3ons should be
used to determine current service cost and net interest for the remainder of the repor3ng period.

Prior to the amendment, the accoun3ng was not clear as IAS 19 implied that en33es should not
update the actuarial assump3ons for the calcula3on of current service cost and net interest during the
period, even if a plan amendment, curtailment or seslement had resulted in remeasurement of the
net defined benefit liability. The IASB believes that by amending IAS 19 to require updated
assump3ons to be used, the resul3ng informa3on will be more useful to users of accounts.

IAS 19 defines a curtailment as occurring when an en3ty significantly reduces the number of
employees covered by a plan. It is treated as a type of past service costs. The past service cost may be
nega3ve when the benefits are withdrawn so that the present value of the defined benefit obliga3on
decreases.

The reduc3on in the net pension liability as a result of the employees being made redundant and no
longer accruing pension benefits is a curtailment under IAS 19 Employee Benefits.

Service cost is a non-cash item because it is the change in the PV of liability due to change in the
number of employees.

Benefits paid out of the scheme will have nil affect on opera3ng cash flows it is removed from the
asset and then paid out.

PV of defined FV of plan
benefit asset
obliga+on

Balance b/f (advised by actuary) X X

Re3red benefits paid out (X) (X)
Contribu3ons paid into the plan X
Expected return on plan assets X
Unwinding of interest X
Current Service cost X
X X
Remeasurement gain/loss (Bal. Fig) X/(X) X/(X)
Balance c/f (adviced by actuary) X X
Steps Items Recogni3on
1 Record Opering Figures
●Asset
●Liability
2 Interest cost on obliga+on : Debit. Interest Cost (P/L) X% * b/d obliga3on
●Based on discount rate and Credit. PV of defined benefit obliga3on (SOFP)
PV obliga3on at start o period
●Should also reflect any
changes in obliga3on during
period
3 Interest on plan assets : Debit. Plan assets (SOFP)
●Based on discount rate and Credit. Interest cost (P/L)
asset value at the start of X% * b/d asset
period
●Technically, this interest is
also 3me appor3oned on
contribu3on less benefits paid
in the period.
4 Current Service Cost: Debit. Current Service Cost (P/L)
●Increase in the PV of the Credit. PV of defined benefit obliga3on (SOFP)
obliga3on resul3ng from
employee service in the
current period.
5 Contribu+ons Debit. Plan assets (SOFP)
●As adviced by actuary Credit. Company Cash
6 Benefits Debit. PV of defined benefits obliga3on (SOFP)
●Actual pen3on payments Credit. Plan assets (SOFP)
made
Steps Items Recogni+on
7 Past service cost Posi+ve (increase in obliga+on)
●Increase/decrease in PV Debit. Past service cost (P/L)
obliga3on as a result of Credit. PV defined benefit obliga3ons (SOFP)
introduc3on or improvement
of benefits Posi+ve (decrease in obliga+on)
Debit. PV defined benefit obliga3ons (SOFP)
Credit. Past service cost (P/L)
8 Gains and losses on Gain
seTlement Debit. PV defined benefit obliga3ons (SOFP)
●Difference b/w the value of Credit. Service cost (P/L)
the obliga3on being sesled
and the seslement price Loss
Debit. Service cost (P/L)
Credit. PV defined benefit obliga3ons (SOFP)
9 Remeasurement : acturarial Gain
gains and losses Debit. FV plan assets (SOFP)
●Arising from annual Credit. Other comprehensive income (P/S)
valua3on of obliga3on
●On obliga3on, difference b/w Loss
actuarial assump3ons and Debit. Other comprehensive income (P/S)
actual experience during the Credit. FV plan assets (SOFP)
period, or changes in
actuarial assump3ons
10 Remeasurement : Returm on Gain
assets Debit. FV plan assets (SOFP)
●Arising from annual valua3on Credit. Other comprehensive income (P/S)
of plan assets.
Loss
Debit. Other comprehensive income (P/S)
Credit. FV plan assets (SOFP)
(16) IFRS 2 - SHARE BASED PAYMENTS
Equity-seTled share-based payment transac+ons is where the en3ty receives goods or services in
exchange for equity instruments of the en3ty (including shares or share op3ons).

Cash-seTled share-based payment transac+ons is where the en3ty receives goods or services in
exchange for amounts of cash that are based on the price (or value) of the en3ty's shares or other
equity Instruments of the en3ty.

Transac+ons with a choice of seTlement is where the en3ty receives goods or services and either
the en3ty or the supplier has a choice as to whether the en3ty sesles the transac3on in cash (or
other assets) or by issuing equity instruments.

Share-based payment transac+on is a share-based payment transac3on in which the en3ty acquires
goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods
or services for amounts that are based on the price (or value) of equity instruments (including shares
or share op3ons) of the en3ty or another group en3ty.

Equity instrument granted The right (condi3onal or uncondi3onal) to an equity instrument of the
en3ty conferred by the en3ty on another party, under a share-based payment arrangement.

Share op+on A contract that gives the holder the right, but not the obliga3on, to subscribe to the
en3ty's shares at a fixed or determinable price for a specified period of 3me.

Grant date: The date at which the en3ty and another party (including an employee) agree to a share-
based payment arrangement. At grant date the en3ty confers on the other party (the counterparty)
the right to cash, other assets, or equity instruments of the en3ty, provided the specified ves3ng
condi3ons, if any, are met.

Intrinsic value The difference between the fair value of the shares to which the counterparty has the
(condi3onal or uncondi3onal) right to subscribe or which it has the right to receive, and the price (if
any) the other party is (or will be) required to pay for those shares. For example, a share op3on with
an exercise price of $15 on a share with a fair value of $20, has an intrinsic value of $5.

Measurement date The date at which the fair value of the equity instruments granted is measured.
For transac3ons with employees and others providing similar services, the measurement date is grant
date.For transac3ons with par3es other than employees (and those providing similar services), the
measurement date is the date the en3ty obtains the goods or the counterparty renders service.

Vest To become an en3tlement. Under a share-based payment arrangement, a counterparty‘s right to

receive cash, other assets or equity instruments of the en3ty vests when the counterparty‘s
en3tlement is no longer condi3onal on the sa3sfac3on of any ves3ng condi3ons.
 Ves+ng condi+ons The condi3ons that must be sa3sfied for the counterparty to become en3tled to
receive cash, other assets or equity instruments of the en3ty, under a share-based payment
arrangement. Ves3ng condi3ons include service condi3ons, which require the other party to
complete a specified period of service, and performance condi3ons, which require specified
performance targets to be met (such as a specified increase in the en3ty's profit over a specified
period of 3me).

Ves+ng period The period during which all the specified ves3ng condi3ons of a share-based payment
arrangement are to be sa3sfied.

Disclosures:
I. Informa3on that enables users of financial statements to understand the nature and extent of the
share-based payment transac3ons that existed during the period.
II. Informa3on that allows users of financial statements to understand how the fair value of the goods or
services received, or the fair value of the equity instruments which have been granted during the
period, was determined.
III. Informa3on that allows users of financial statements to understand the effect of expenses, which
have arisen from share-based payment transac3ons, on the en3ty‘s profit or loss in the period.

(17) IAS 12 - INCOME TAXES

The tax base of an asset is the tax deduc)on which will be available in future when the asset
generates taxable economic benefits, which will flow to the en3ty when the asset is recovered. If the
future economic benefits will not be taxable, the tax base of an asset is its carrying amount.

The tax base of a liability is its carrying amount, less the tax deduc3on which will be available when
the liability is sesled in future periods. For revenue received in advance (or deferred income), the tax
base is its carrying amount, less any amount of the revenue which will not be taxable in future
periods.

A taxable temporary difference arises when the carrying amount of an asset exceeds its tax base or
the carrying amount of a liability is less than its tax base. All taxable temporary differences give rise to
a deferred tax liability.

A deduc)ble temporary difference arises in the reverse circumstance (when the carrying amount of
an asset is less than its tax base or the carrying amount of a liability is greater than its tax base). All
deduc3ble temporary differences give rise to a deferred tax asset.

Deferred tax assets are not recognised where it is more likely than not that the assets will not be
realised in the future and reference to IAS 37 Provisions, Con3ngent Liabili3es and Con3ngent Assets
is useful in this regard. The evalua3on of deferred tax assets’ recoverability requires judgements to be
made regarding the availability of future taxable income.
 Disclosures:
I. Current tax expense (income)
II. Any adjustments of taxes of prior periods
III. Amount of deferred tax expense (income) rela3ng to the origina3on and reversal of temporary
differences
IV. Amount of deferred tax expense (income) rela3ng to changes in tax rates or the imposi3on of new
taxes
V. Amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary
difference of a prior period
VI. Write down, or reversal of a previous write down, of a deferred tax asset
VII. Amount of tax expense (income) rela3ng to changes in accoun3ng policies and correc3ons of errors.

IAS 12 Income Taxes requires that deferred tax liabili+es must be recognised for all taxable
temporary differences. Deferred tax assets should be recognised for deduc3ble temporary differences
but only to the extent that taxable profits will be available against which the deduc3ble temporary
differences may be u3lised.

Deferred taxes represent the amounts of income taxes payable or recoverable in future periods in
respect of temporary differences. Temporary differences are differences between the carrying
amount of an asset or liability and its tax base. A deferred tax asset arises where the tax base of an
asset exceeds the carrying amount. A deferred tax asset can also occur when the tax base of a liability
differs from its carrying amount; the eventual seslement of the liability represents a future tax
deduc3on. In rela3on to unused trading losses, the carrying amount is zero since the losses have not
yet been recognised in the financial statements of Hudson. A poten3al deferred tax asset does arise
but the determina3on of the tax base is more problema3c. The tax base of an asset is the amount
which will be deduc3ble against taxable economic benefits from recovering the carrying amount of
the asset. Where recovery of an asset will have no tax consequences, the tax base is equal to the
carrying amount.

Current tax is based on taxable profit for the year. Taxable profit is different from accoun3ng profit
due to temporary differences between accoun3ng and tax treatments, and due to items which are
never taxable or tax deduc3ble. Tax benefits such as tax credits are not recognised unless it is
probable that the tax posi3ons are sustainable.

Provision for deferred tax is made for temporary differences between the carrying amount of assets
and liabili3es for financial repor3ng purposes and their value for tax purposes. The amount of
deferred tax reflects the expected recoverable amount and is based on the expected manner of
recovery or seslement of the carrying amount of assets and liabili3es, using the basis of taxa3on
enacted or substan3vely enacted by the financial statement date.
 ! For assets:
CV < Tax base
Deferred tax asset
CV> Tax base
Deferred tax liability

! For liability:
CV < Tax base
Deferred tax liability
CV> Tax base
Deferred tax asset

Provision for tax

Case 1 : Under provisioning

Debit Credit
Cash (Tax paid) 45000 Opening balance 30000
Balance c/d 15000
45000 45000
Balance b/f 15000

Case 2 : Over provision

Debit Credit
Cash (Tax paid) 45000 Opening balance 60000
Balance c/d 15000
60000 60000
Balance b/f 15000
(18) IFRS 8 - OPERATING SEGMENTS
An opera+ng segment is a component of an en3ty:
(a) that engages in business ac3vi3es from which it may earn revenues and incur expenses (including
revenues and expenses rela3ng to transac3ons with other components of the same en3ty),
(b) whose opera3ng results are regularly reviewed by the en3ty’s chief opera3ng decision maker to
make decisions about resources to be allocated to the segment and assess its performance, and
(c) For which discrete financial informa3on is available.

The term ‘chief opera+ng decision maker’ iden3fies a func3on, not necessarily a manager with a
specific 3tle. That func3on is to allocate resources to and assess the performance of the opera3ng
segments of an en3ty.

This defini3on means that not every part of an en3ty is necessarily an opera3ng segment. IFRS 8
quotes the example of a corporate headquarters that may earn no or incidental revenues and so
would not be an opera3ng segment.

Recogni+on criteria: An en3ty shall report separately informa3on about an opera3ng segment that
meets :
a. the defini3on of an opera3ng segment, and
b. any of the following quan3ta3ve thresholds:

(1) Its reported revenue, including both sales to external customers and inter segment sales or
transfers, is 10 % or more of the combined revenue, internal and external, of all opera3ng
segments.

(2) The absolute amount of its reported profit or loss is 10 % or more of the greater, in absolute
amount, of
I. the combined reported profit of all opera3ng segments that did not report a loss and
II. the combined reported loss of all opera3ng segments that reported a loss.

(3) Its assets are 10 % or more of the combined assets of all opera3ng segments.

IFRS 8 Opera+ng Segments requires opera3ng segments to be reported separately if they exceed at
least one of certain qualita3ve thresholds. Two or more opera3ng segments below the thresholds
may be aggregated to produce a reportable segment if the segments have similar economic
characteris3cs, and the segments are similar in a majority of the following aggrega3on criteria:
- The nature of the products and services
- The nature of the produc3on process
- The type or class of customer for their products or services
- The methods used to distribute their products or provide their services
- If applicable, the nature of the regulatory environment
 IFRS 8 does not prescribe a basis on which to allocate common costs, but it does require that that
basis should be reasonable.

Disclosures:

I. En33es are required to provide general informa3on on such masers as how the reportable segments
are iden3fied and the types of products or services from which each reportable segment derives its
revenue.

II. En33es are required to report a measure of profit or loss and total assets for each reportable
segment. Both should be based on the informa3on provided to the chief opera3ng decision maker. If
the chief opera3ng decision maker is regularly provided with informa3on on liabili3es for its
opera3ng segments then these liabili3es should also be reported on a segment basis.

III. Revenues - internal and external.

IV. Interest revenues and interest expense.

V. These must not be nesed off unless the majority of a segment's revenues are from interest and the
chief opera3ng decision maker assesses the performance of the segment based on net interest
revenue.

VI. Deprecia3on and amor3za3on.

VII.Material items of income and expense disclosed separately.

Cri+cisms of IFRS 8

(a) Some commentators have cri3cized the 'management approach' as leaving segment iden3fica3on
too much to the discre3on of the en3ty.

(b) The management approach may mean that financial statements of different en33es are not
comparable.

(c) Segment determina3on is the responsibility of directors and is subjec3ve.

(d) Management may report segments which are not consistent for internal repor3ng and control
purposes, making its usefulness ques3onable.

(e) For accoun3ng periods beginning on or a6er 1 January 2005 listed en33es within the EU are
required to use adopted interna3onal standards in their consolidated financial statements. The EU
has not yet adopted IFRS 8 and un3l it does IAS 14 will con3nue to apply here. Some stakeholders
believe the standard to be flawed due to the amount of discre3on it gives to management.

(f) Geographical informa3on has been downgraded. It could be argued that this breaks the link
between a company and its stakeholders.

(g) There is no defined measure of segment profit or loss

(19) IAS 33 - EARNINGS PER SHARE

✓ Earnings avaialble to equity shareholders = PAT - Irredemable Preference Divident

✓ Earnings Per Share = (EPS) = Earnings available to equity shareholders

Weighted Average Number of Equity Shares

✓ Weighted Average No. of equity shares denotes the number of months for
which the shares were in existence.

✓ Whenever there is a bonus issue, irrespec3ve of the date of bonus issue,

weighted average is not applicable.
Reason : Since bonus shares are issued from exis3ng profits and these profits
were in existence from the earliest repor3ng date.

✓ Whenver there is a bonus issue, restate the EPS of previous year (with bonus).

✓ Whenever there is a rights issue, compute Theori3cal Ex-rights Price.

✓ Theori+cal Ex Rights Price (TERP) =

(No. of shares before rights x Market Price before rights) + (No. of shares offered
as rights x Rights Price)
Total Number of Equity Shares

✓ Bonus shares in rights issue = Rights issue shares x (TERP - Rights price)
TERP

✓ Diluted EPS refers to reduc3on in Basic EPS when there are poten3ally conver3ble
Equity shares
Example :
1. Conver3ble Debentures
2. Conver3ble Preference Shares
3. Op3ons

✓ Computa+on of Diluted EPS =

Net profit available to Equity Shareholders + Incremental Earnings (Net of tax)
Exis3ng Equity Shares + Addi3onal Shares

✓ In diluted EPS calcula3on, always assume that the maximum possible number of
shares will be issued.
 ✓ Computa+on of Diluted EPS when there are op+ons

Op3ons are offered at concessional price compared to the market price, to the
extend of the concession, the incremental earnings is zero. Therefore, in
compu3ng the weighted average no. of the equity shares, consider the shares
for which the incremental earnings is zero.

✓ No. of equity shares to be considered for the purpose of op+ons =

No. of op3ons x Concessional Price ie, (FV - Exercise Price)
Market Price

✓ Price Earnings Ra+o = Market Value of Shares

EPS

✓ The trends in EPS is more accurate performance indicator than trend in profit.
Reason : EPS measures performance from the perspec3ve of investors and
poten3onal investors.

✓ Restated EPS = TERP x EPS (Basic)

MP

(20) IFRS 5 – NON-CURRENT ASSETS HELD FOR SALE

AND DISCONTINUED OPERATIONS
Held for sale refers to a non-current asset whose carrying amount will be recovered principally
through a sale transac3on rather than through con3nuing use.

A discon+nued opera+on includes the following criteria (Discussed in detail a6er measurement):
- is a separately iden3fiable component
- must represent a major line of the en3ty‘s business
- is part of a plan to dispose of a major line of business or a geographical area
- is a subsidiary acquired with a view to resell

Recogni+on:
1. Asset must be available for immediate sale in its present condi+on
2. Management is commiTed to sell asset
3. Ac3ve program to locate the buyer is ini3ated
4. Asset is ac+vely marketed at a reasonable price
5. Sale should be made within one year of the date of classifica+on
6. Plan to sell should not be withdrawn

Under IFRS 5, a subsequent increase in fair value less costs to sell may be recognised in profit or loss
only to the extent of any impairment previously recognised.
 Approach :

Step 1 : Immediately before ini3al classifica3on as held for sale, the asset (or disposal
group) is measured in accordance with the applicable IFRS (eg property, plant and
equipment held under the IAS 16 revalua3on is revalued).
Step 2 : On classifica3on of the non-current (or disposal group) as held for sale, it is
wriTen down to fair value less cost to sell (if less than carrying amount).

Any impairment loss arising under IFRS 5 is charged to profit or loss (and the credit
allocated to assets of a disposal groups using the IAS 36 rules, ie, first to goodwill
tehn to other assets pro rata based on carrying amount).
Step 3 : Non-current assets/disposal groups classified as held for sale are not depreciated/
amor+sed.
Step 4 : Any subsequent charnges in falur value less costs to sell are recognised as futher
impairment loss (or reversal of an imparment loss).

However, gians recognised cannot exceed cumula3ve impairment losses to date

(whatever under IAS 36 or IFRS 5).
Step 5 : Presented :
● As single amounts (of assets and liabili3es);
● On the face of the statement of financial posi3on
● Separately from other assets and liabili3es; and
● Normally as current assets and liabili3es (not offset).
(21) IAS 32 - FINANCIAL INSTRUMENTS: PRESENTATION

The Financial Instrument is any contract that gives rise to a financial asset of one en3ty and a
financial liability or equity instrument of another en3ty.

Financial Asset is :
I. Cash
II. Equity instrument of another en3ty
III. Contractual rights to :
• Receive cash or other financial asset
• Exchange financial asset or financial liability under terms poten3ally favourable to the en3ty
IV. A contract that may or will be sesled in an en3ty’s own equity instruments for which the en3ty is
obliged to receive a variable number of its own equity instruments

Financial Liability is a contractual obliga3on:

I. To deliver cash or other financial asset
II. Exchange financial asset or financial liability under terms poten3ally unfavourable to the en3ty
III. A contract that will or may be sesled in an en3ty's own equity instruments.

Deriva+ves: A deriva3ve is a financial instruments with the following characteris3cs:

I. It does not have its own price rather it’s price is determined from some other underlying
instruments
II. Ini3a3ve investment is very low or zero
III. Sesled at a later date

An Equity Instrument is any contract that evidences a residual interest in the assets of an en3ty a6er
deduc3ng all of its liabili3es.

A PuTable Instrument is a financial instrument that gives the holder the right to put the instrument
back to the issuer for cash or another financial asset or is automa3cally put back to the issuer on the
occurrence of an uncertain future event or the death or re3rement of the instrument holder.

An instrument may be classified as an equity instrument if it contains a con3ngent seslement

provision requiring seslement in cash or a variable number of the en3ty's own shares only on the
occurrence of an event which is very unlikely to occur – such a provision is not considered to be
genuine. If the con3ngent payment condi3on is beyond the control of both the en3ty and the holder
of the instrument, then the instrument is classified as a financial liability.

A contract resul3ng in the receipt or delivery of an en3ty's own shares is not automa3cally an equity
instrument. The classifica3on depends on the so- called 'fixed test' in IAS 32. A contract which will be
sesled by the en3ty receiving or delivering a fixed number of its own equity instruments in exchange
for a fixed amount of cash is an equity instrument. In contrast, if the amount of cash or own equity
shares to be delivered or received is variable, then the contract is a financial liability or asset.
(22) IFRS 9 - FINANCIAL INSTRUMENTS

Classifica+on of Financial Assets :

I. Equity Instruments:
• FV Through PnL : Short term inten3ons
• FV Through OCI : Long term inten3ons
II. Debt Instruments:
• FV Through PnL: All other debt instruments
• FV Through OCI : To both collec3ng contractual cash flows and selling financial assets
• Amor3sed Cost : To collect contractual cash flows (Timings of Cashflows should be fixed)

Accoun+ng of Financial Assets :

I. FV Through PnL :

• Classifica3on :
- Short term inten3ons
- Deriva3ves other than hedging purpose
- Default category

• Accoun3ng:
- Ini3ally recorded at fair value
- Transac3on cost PnL
- Subsequently measured at fair value
- FV changes taken to PnL
- Interest, dividends and gain or loss on disposal taken on PnL.

II. FV Through OCI :

• Classifica3on :
- Long term inten3ons

• Accoun3ng:
- Ini3ally recorded at cost
- Transac3on cost capitalise
- Subsequently measured at FV
- FV changes taken to OCI
- Interest, dividends and gain or loss on disposal taken on PnL.su

Derecogni+on of Financial Assets :

I. Exercise
• Debit. Bank
• Credit. Financial Asset
 II. Transfer

• Risk & Reward is transferred

- Debit. Cash
- Credit. Financial Asset

• Risk & Reward is not transferred

- Debit. Cash
- Credit. Financial Liability

III. Lapse
• Debit. PnL
• Credit. Financial Asset

A financial asset (debt instrument only) shall be measured at amor3sed cost if both of the following
condi3ons are met:
I. The asset is held within a business model whose objec3ve is to hold assets in order to collect
contractual cash flows (Solely principal amount and interest).
II. The contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding. Interest is
compensa3on for 3me value of money and credit risk.

Assess risk and rewards of financial asset immediately before and aeer transfer

(a) Substan+al risk and rewards transferred

- Derecognize:
- Dr. Cash/Asset xx
- Dr/Cr. (loss)/Profit xx
- Cr. Financial asset xx

- Example:
• Uncondi3onal sale of financial asset
• Factoring of receivables (without recourse)
• Sales of asset on repurchase terms where repurchase will be at market price
• Sale of asset with call or put op3on and op3on is deep out of money

(b) Substan+al risk and rewards retained

- Con3nue to recognize the asset and any cash received would be a secured loan
- Dr. Cash xx
- Cr. Loan xx
- Example:
• Factoring of receivables with recourse
• Sales of asset on repurchase term where repurchase price is already decided
• Sale of asset with call or put op3on and op3on is deep in the money
• Sale of asset with return swap contract
Classifica+on of Financial Liabili+es :

I. Financial Liability at amor+sed cost

• Ini3al Measurement : Fair Value - Issue cost
• Subsequent Measurement: At amor3sed cost using effec3ve interest rate method
II. Financial liabili+es as at fair value through profit or loss (FVTPL).
• Ini3al Measurement : Fair Value
• Subsequent Measurement:
- Fair value will be calculated by PV(FCF) by using current market interest rate
- Any Gain or loss will be charged to P&L
- Examples of items at FVTPL are Held for trading liability, Deriva3ves standing at loss,
Con3ngent liability arising at business combina3on
• Fair value Gain/Loss will be split
- Gain/Loss due to own credit risk will be charged to OCI
- Gain/Loss due to other credit risk will be charged to P&L

IFRS 9 does not allow reclassifica+on where:

(a) Financial assets have been classified as equity instruments, or
(b) The fair value op3on has been exercised in any circumstance for a financial assets or financial
liability.

Impairment of financial instruments:

1. Stage 1 : 12 month expected credit losses (gross interest)

• Applicable when no significant increase in credit risk
• En33es con3nue to recognise 12 month expected losses that are updated at each repor3ng
date
• Presenta3on of interest on gross basis

2. Stage 2 : Life3me expected credit losses (gross interest)

• Applicable in case of significant increase in credit risk
• Recogni3on of life3me expected losses
• Presenta3on of interest on gross basis

3. Stage 3 : Life3me expected credit losses (net interest)

• Applicable in case of credit impairment
• Recogni3on of life3me expected losses
• Presenta3on of interest on a net basis

Hedging, for accoun3ng purposes, means designa3ng one or more hedging instruments so that their
change in fair value is an offset, in whole or in part, to the change in fair value or cash flows of a
hedged item.

Hedging instruments: A hedging instrument is a designated deriva3ve or (in limited circumstances)

another financial asset or liability whose fair value or cash flows are expected to offset changes in the
fair value or cash flows of a designated hedged item.
 Fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or liability or
an unrecognised firm commitment, or an iden3fied por3on of such an asset, liability or firm
commitment, that is asributable to a par3cular risk and could affect profit or loss. It is the exposure
to changes in fair value of recognized asset or liabili3es

- Accoun3ng treatment
• Hedge Instrument:
- Hedge instrument gain/loss will be charged to P&L (unless hedge item is equity instrument
measured at FVTOCI).
• Hedge Item:
- Hedge item gain/loss will be charged to P&L (unless hedge item is equity instrument at
FVTOCI, then recognize in OCI)

Cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is asributable to a
par3cular risk associated with a recognised asset or liability (such as all or some future interest
payments on variable rate debt) or a highly probable forecast transac3on and (ii) could affect profit or
loss.

It is a hedge of the exposure to variability in cash flows that:

• Asributable to par3cular risk associated with recognized asset or liability or a high probable forecast
transac3on,
• Could affect profit or loss

- Accoun3ng treatment

• Hedge Instrument:
- Gain or loss on hedge instrument that‘s determined to be an effec3ve hedge must be
recognized in OCI (will become spate reserve in SOCIE) and ineffec3ve por3on will be
charged to P&L , and effec3ve por3on (separate reserve) will be reclassified to P&L when
cash flows expected to effect P&L
- If non-financial asset recognized due to hedge item then reserve can be adjusted in ini3al
cost of non-financial asset

An embedded deriva+ve is a component of a hybrid contract that also includes a non-deriva3ve host
— with the effect that some of the cash flows of the combined instrument vary in a way similar to a
stand- alone deriva3ve.

- Accoun3ng treatment
• Fair value through profit and loss
• Ini3al measurement: Fair Value
• Subsequent measurement: Fair value and gain/(loss) will be charged to P&L
• Deriva3ve Standing at gain; Financial Asset
• Deriva3ve Standing at loss; Financial Liability
 IFRS 9 Financial Instruments states that ‘any embedded deriva3ve included in a contract for the sale
or purchase of a non-financial item that is denominated in a foreign currency shall be separated
when its economic characteris3cs and risks are not closely related to those of the host contract’.
Thus, in contrast to the treatment for hybrid contracts with financial asset hosts, deriva3ves
embedded with a financial liability will o6en be separately accounted for. That is, they must be
separated if they are not closely related to the host contract, they meet the defini3on of a deriva3ve,
and the hybrid contract is not measured at fair value through profit or loss (FVTPL).

IFRS 9 Financial Instruments requires that a financial asset only qualifies for derecogni3on once the
en3ty has transferred the contractual rights to receive the cash flows from the asset or where the
en3ty has retained the contractual rights but has an unavoidable obliga3on to pass on the cash flows
to a third party. The substance of the disposal of the bonds needs to be assessed by a considera3on
of the risks and rewards of ownership.

Fair value hedge:

- Hedges changes in value of recognised asset/liability
- All gains/losses = P/L (but = OCI if re an investment in equity instruments measured at FV through
OCI)

Cash flow hedge:

- Hedges changes in value of future cash flows: gain/loss on effec3ve por3on = OCI un3l CF occurs
excess = P/L
- Reclassified from OCI to P/L when cash flow occurs (unless results in recogni3on of non-financial
item = include in ini3al CA instead)

(23) IFRS 7 - FINANCIAL INSTRUMENTS: Disclosures

Disclosures

Statement of financial posi+on:

- Financial assets measured at fair value through profit and loss, showing separately those held for
trading and those designated at ini3al recogni3on

- Special disclosures about financial assets and financial liabili3es designated to be Measured at fair
value through profit and loss, including disclosures about credit risk and market risk, changes in
fair values asributable to these risks and the methods of measurement.

- Reclassifica3ons of financial instruments from one category to another (e.g. from fair value to
amor3sed cost or vice versa) informa3on about financial assets pledged as collateral and about
financial or non- financial assets held as collateral
- Reconcilia3on of the allowance account for credit losses (bad debts) by class of financial Assets.
- Informa3on about compound financial instruments with mul3ple embedded deriva3ves
- Breaches of terms of loan agreements
 Statement of financial profit or loss and other comprehensive income :

- Items of income, expense, gains, and losses, with separate disclosure of gains and losses from
financial assets measured at fair value through profit and loss, showing separately those held for
trading and those designated at ini3al recogni3on

- total interest income and total interest expense for those financial instruments that are not
measured at fair value through profit and loss

- fee income and expense

- amount of impairment losses by class of financial assets
- interest income on impaired financial assets

(24) IFRS 10 – CONSOLIDATED FINANCIAL STATEMENTS

According to IFRS 10 Consolidated, Financial Statements an investor controls 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.

Parent subsidiary rela+onship exists when:

i. The parent holds more than one half of the vo3ng power of the en3ty

ii. The parent has power over more than one half of the vo3ng rights by virtue of an agreement with
other investors (common control)

iii. The parent has the power to govern the financial and opera3ng policies of the en3ty under the
ar3cles of associa3on of the en3ty

iv. The parent has the power to appoint or remove a majority of the board of directors

v. The parent has the power to cast the majority of votes at mee3ngs of the board
 Considera+on might be paid in the following ways:

1. By cash
- The considera3on is calculated by mul3plying the number of shares acquired with per share cash
paid i.e.
- Total no. of shares of subsidiary co. x % holding x cash paid per share.

2. By share for share exchange

- The considera3on is calculated by mul3plying the number of shares issued by Parent Co. with per
share price of Parent Co. at the date of acquisi3on. i.e. No. of shares issued by Parent co. x Parent
co. per share price

3. By deferred considera+on
- Deferred considera3on is recorded at present value at the date of acquisi3on.
- Ini3al recogni3on:
- Dr. Cost of investment
- Cr. Provision for deferred considera3on
- Subsequent recogni3on Unwinding of discount
- Dr. Consolidates retained earnings
- Cr. Provision for deferred considera3on

4. By con+ngent considera+on
- At 3mes, the parent Co. agrees to pay the considera3on only if some specified condi3ons are met
such condi3ons are con3ngent events and IFRS 3 requires to measure such considera3on at fair
value.
- Ini3al recogni3on:
- Dr. Cost of investment
- Cr. Provision for con3ngent considera3on
- Subsequent recogni3on
- Fair value of con3ngent considered is re-assessed at every subsequent repor3ng date. Increase/
Decrease in fair value is charged to consolidated retained earnings.
- In case of increase in fair value, following double entry will be passed.
- Dr. Consolidates retained earnings
- Cr. Provision for con3ngent considera3on

5. By loan notes
- The considera3on is calculated by recording the loan notes issued to shareholders of subsidiary co.
at the date of acquisi3on.
- The loan notes are issued to shareholders of subsidiary co. so these are NOT subsequently
adjusted as inter company loan.
Consolidated Statement of Financial Position
$
Non-current Asset
Tangible asset
Land and Building (P + S + FV @ acquisa+on - Dep + FV @ repor+ng) X
Plant & Machinery X
Motor Vehicles X

Intangible Assets
Goodwill (Working Notes 2) X
Investment in Subsidiary
Investment in Associates X
Other investments X

Current Asset
Inventory (P + S - PURP + Goods in transit) X
Trade Receivable (P + S - Intercompany) X
Prepaymet and accrual income (P + S ) X
Cash (P + S + Cash is transit + When S paid int. X
but P did not receive )

Total Assets X

Equity aTributable to the owners of parent

Share Capital (P only + P issued shares to S) X
Share Premium (P only + P issued shares to S) X
Revalua3on Surplus (Parent only + P's % of S's revalua+on) X
Retained Earnings (Working Notes 4) X

NCI (Working Notes 5) X

Non-current Liability
Loan Notes (P+S - Intercompany Loan) X
Liability (Con+ngent Liability of S @ Fair Value) X

Current Liability
Trade payable (P+S - Intercompany Loan) X
Accruals and prereceived income (P+S) X
Deferred Liability (Amount payable to subsidiary in Future for acquisa+on) X
Accural Interest (P+S) X

Total Equity and Liability X

Working Notes
(1) Estabilshment of Group Struc+ure

P DOA - Date of Acquisa3on

% DOR - Date of Repor3ng

(2) Calcula+on of Iden+fiable Net Asset of the Subsidiary

Par+culars DOA DOR

Share Capital X X
Share Premium X X
Retained Earnings X X
Revalua3on Surplus X X
Fair Value (Only at acqusa+on) X X
Less: Deprecia3on (X)
Assets Recognised X X
Less: Deprecia3on (X)
PV of decommission (Provision) X X
Less: Deprecia3on (X)
Less: Finance cost (X)
Less: PURP (Only when S sells goods & NCA) (X)
Total X X

Difference = PAR
Important Note :

Fair Value of S's asset a6er acquisa3on

P's Share = Revalua3on Surplus
NCI's Share = Calcula3on of NCI
(3) Calcula+on of Goodwill

Par+culars $
Cost of considera3on X
(Taken from P's balance sheet - Investment)
Or S's total share x % of holding x share price of P )
+(Deferred cash @ Present Value )
+ ( Con+ngent considera+on)

NCI's Value at acquisa3on X

(Two methods -
(1) FV Method : S's total share x % of holding x Share price of S
(2) Net Asset : NCI% FV of iden+fiable net asset)
FV of considera3on for addi3onal interest (Step Acquisa+on) X

Less: Fair value of Inden3fiable Net asset (X)

Less: Impairment (Full) (X)

Goodwill X

(4) Calcula+on of Group Retained Earnings

Par+culars $
P's Retained Earnings 100% X
Add: S's share of PAR X
Less: Impairment (S's % if NCI is calculated using FV (X)
Full if NCI - Propor+onate of Net asset)
Less: PURP (For Parent sells goods or Non-current asset) (X)
Less: Unwinding of discount (Deferred Considera+on) (X)
Add: Interest Receivable or Gain on bargain Purchase X
Less: Decrease/Increase in Con3ngent considera3on X/(X)
Group Retained Earnings carried to SOFP X

(5) Calcula+on of NCI

Par+culars $
NCI's value @ acquisa3on X
Add: S's share of PAR X
Less: Impairment (Only if FV Method is used) (X)
Add: Fair Value (NCI's % of S's asset aeer acquisa+on) X
Value of NCI Carried to SOFP X
(6) Intercompany Receivables/Payables

Cash in transit Goods in transit

Debit. Cash Debit. Inventory
Credit. Receivables Credit. Payables
Then reduce Receivable and Payable as usual

(7) Intercompany Trading PURP in Inventory

SOPL
Revenue (P + S - Intercompany Sales)
Cost of Sales (P + S - Intercompany Sales + PURP)

P is the seller
Reduce PURP from Group RE (Step 5)

S is the seller
Reduce PURP from net assets at Repor3ng date (Step 2)

(8) Unrealised Profit in Non-current asset

Without With Difference

Transfer Transfer
Cost 10,000
-Dep -6,000
CV 4,000 6,000 2,000
Dep -2,000 -3,000 -1000
CV 2,000 3,000 1,000

Increase

If P is the seller
Debit. Group RE 2,000
Credit. PPE 1,000
Credit. Subsidiary Earnings (WN 2 @ Repor3ng) 1,000

If S is the seller
Debit. Subsidiary Earnings (WN 2 @ Repor3ng) 2,000
Credit. PPE 1,000
Credit. Group RE 1,000
(9) Mid Year acquisa+on - Interest Paid/Received

Everything same except R.E

Example: Profit = 8,000 Opening RE = ?
Interest paid = 2,000 Closing RE = 15,000
6 months acquisa3on

So, 8,000 + 2,000

5,000 5,000 Post

Pre -2,000 Interest paid
3,000 Post acquired profit

Closing RE 15,000
Less: Post acquired profit -3,000
RE @ acquisa3on 12,000

Notes

(1) Goodwill

✓ Posi+ve Goodwill
Capitalise in Intangible Asset
Check for Impairment
Don’t Amor3sa3on
Impairment
FV- Parent % & NCI %
Net Asset - Parent full and NCI nill

✓ Nega+ve Goodwill
When cost of investment is less than net asset
Also called Gain on bargain purchase
Nega3ve goodwill Credit in SOPL or Retained Earnings

(2) Cost of Investment

✓ Unwinding of Discount - Treated as finance cost in SOPL

(Deferred considera3on)
In Q if SOPL is only told to make, then subtract from retained earnings

✓ Difference in FV of con3ngent considera3on and actual considera3on -

treated as change in accoun3ng es3mate - adjust prospec3vely.

✓ Increase/decrease in con3ngent considera3on = SOPL = Retained Earnings

(3) Con+ngent Liabili+es

✓ Treated as liability if Fair Value is assigned to it.

(4) Inter Group Trading

✓ Current Accounts b/w P & S

✓ Loan held by one company in the other
✓ Dividents and loan interest
✓ Unrealised profit on sale of inventory
✓ Unrealised profit on sale of NCA

(5) Mid year acquisa+on

SOFP
Full consolida3on

Net asset of subsidiary

Everything except Retained earnings is same :

Retained earnings @ repor3ng date 69,000

Post acquired profit (7/12 x 9,000) -5,250
Retained earnings @ acquisa3on 63,750

(6) Incidental cost

✓ Incidental cost of acquisa3on such as legal, accoun3ng, valua3on and other

professional fees should be wrisen off as expense through SOPL.

(7) Non-controlling Interest

Subsidiary's Profit a6er tax X

Less: Fair Value deprecia3on (X)
Less: PURP (S is the seller) (X)
Less: Impairment (X)
Adjusted Subsidiary Profit X
NCI % X
Consolidated Statement of Profit & Loss
Par+culars $
Revenue (P + S - Intercompany Sales) X
Cost of Sales (P + S - Intercompany Sales + PUPR + Dep) (X)
Gross profit X
Distribu3on Cost (P + S) (X)
Administra3on Cost (P + S + Impairment of goodwill) (X)
Share of profit of assocate X
Opera+ng profit X
Finance cost (P + S + Unwinding of discount - Interest paid) (X)
Investment Income (P + S - Interest Received - Divident Received) (X)
(Don’t include profit on sale of NCA and Inventory)
Profit before tax X
Less: Tax (P + S) (X)
Profit aeer tax X

Other Comprehensive Income

Gain on revalua3on (Total reval. Surplus of subsidiary of X
post acquisa+on)
Total comprehensive income X

Profit aTributable to:

Owner of parent (Bal fig) X
NCI X
X
Total comprehensive income aTributable to:
Owner of parent (Bal fig) X
NCI X
X

Important Notes:

✓ For mid-year acquisa3on - SOPL

= P + ( S x Months b/w acquisa3on & repor3ng)
12

✓ Profit and Total comprehensive income aTributable to NCI

Par+cular Profit TCI

Balance b/f X X
(From S' SOPL)
FV adjustment X X
PURP (X) (X)
Goodwill impairment loss (X) (X)
Total X X
% of NCI from total X*% X*%
Group Disposals
(1) Parent's Individual Financial Statements

Sale Proceeds X
Less: Cost of Investment (X)
Profit/Loss on Disposal X/(X)

(2) Group Financial Statements

Sale Proceeds
Less: Net Assets at disposal X X
Net Goodwill at disposal X
NCI at disposal (X) (X)
Gain/Loss on disposal X/(X)

Working Note (1) : Goodwill at disposal

Cost of considera3on X
Add: NCI at acquisa3on X
Less: FV of iden3fiable net asset (X)
Goodwill at acquisa3on X
Less: Impairment 3ll disposal (X)
Goodwill at disposal X

Working Note (2) : Net asset at disposal

Net asset b/d X

Add: Profit 3ll disposal X
Less: Dividents paid before disposal (X)
Net asset at disposal X

Working Note (3) : NCI at disposal

NCI at acquisa3on X
Add: S's share of PAR 3ll disposal X
Less: Impairment (X)
NCI at disposal X
 Group Financial Statements

Statement of Financial Statement

Gain on disposal inculde in Retained earnings. Consolida3on 100%

Statement of Profit and Loss

Consolidate 100% 3ll date of disposal
Add: Gain on disposal a6er opera3ng profit

If the subsidiary represents a discon+nued opera+ons

Statement of Profit and Loss

Add gain on disposal in profit from discon3nued opera3on.

(25) IAS 28 - INVESTMENT IN ASSOCIATE

An associate is an en3ty, including an unincorporated en3ty such as a partnership, over which the
investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.

The equity method is a method of accoun3ng whereby the investment is ini3ally recognized at Cost
and adjusted therea6er for the post-acquisi3on change in the investor‘s share of net assets of the
investee. The profit or loss of the investor includes the investor‘s share of the profit or loss of the
investee.

Significant influence is the power to par3cipate in the financial and opera3ng policy decisions of the
investee but is not control or joint control over those policies. Investments of 20% to 50% in vo3ng
power of companies lead to existence of significant influence. Significant influence by an investor is
usually evidenced in one or more of the following ways:-
- Representa3on on the board of directors or equivalent governing body of the investee.
- Par3cipa3ng in policy making process, including par3cipa3on in decisions about dividends or
other distribu3ons.
- Material transac3ons between the investor and the investee
- Interchange of managerial personnel; or
- Provision of essen3al technical informa3on.

Associate An en3ty over which the investor has significant influence.

Signficant Influence: It is the power to par+cipate in the financial and opera+ng policy
decisions of the investee but is not control or joint control over those
policies.

Equity Accoun+ng: 100% consolida3on of SOFP of parent and subsidiary

Investment in associate (SOFP)- Cost of investment+ A's share of profit
(SOPL)- Share of profit of associate.
Working Notes

(1) Estabilshment of Group Struc+ure

P DOA - Date of Acquisa3on

% DOR - Date of Repor3ng

Working notes (2), (3) and (5) same as subsidiary

(4) Calcula+on of Group Retained Earnings

Par+culars $
P's Retained Earnings 100% X
Add: S's share of PAR X
Less: Impairment (S's % if NCI is calculated using FV (X)
Full if NCI - Propor+nf of Net asset)
Less: PURP (For Parent sells to S - goods or Non-current asset) (X)
Less: Unwinding of discount (Deferred Considera+on) (X)
Add: Interest Receivable or Gain on bargain Purchase X
Less: Decrease/Increase in Con3ngent considera3on X/(X)
Add: A's share of PAR X
Less: Impairment (Associate) (X)
Less: PURP (P sells to A or A sells to P only % ) (X)
Group Retained Earnings carried to SOFP X

(6) Invesment in Associates (SOFP)

Par3culars Amount
Cost of investment (RE @ acq -(RE @ Repor+on - Divident)) X
Add: A's share of PAR (Same as sub net asset) X
Less: Impairment (X)
Less: PURP (%) (X)
Less: Divident (X)
Investment in Associates carreid to SOFP X
(7) Share of Associate (SOPL)

Par+culars Amount
P's share of PAR (Same as sub net asset) X
Less: PURP (%) (X)
Less: Impairment (X)
Share of Associate carrried to SOPL X

(8) Never cancel intercompany transac+ons

(9) Unrealised Profit in Inventory

If associate is the seller

Debit. Share of Profit of associate in SOPL
Credit. Investment in associate

If associate is the purchaser

Debit. Cost of sales (SOPL)/Retained Earnings (SOFP)
Credit. Investment is associate

Important points:

● IAS and IFRS standards convered in consolida3on :

1 IAS 28 Investment in associate and joint venture
2 IFRS 3 Business combina3on
3 IFRS 10 Consolidated Financial Statement
4 IFRS 11 Joint arrangements
5 IFRS 12 Disclosure of interest in other en33es

● Out of 50 Marks consolida3on, not more than 25 marks will be asked for calcua3on.

● Condis+ons for PURP

1 Intercompany Sales
2 Profit on Sale
3 Applica3on on unsold stock only

● Fair value of considera+on paid

1 Cash paid immediately
2 Differed considera3on (cash paid a6er 2 years) discount to PV
3 Ordinary shares issued at premium
4 Con3ngent considera3on - it should be recorded even if not payable
● Gain or loss on remeasurment of of investment (now a subsidiary)

Par+culars $
Fair value of investment at the date of control X
Less: Carrying value of the investment (X)
Gain on remeasuremnt X

● Calcula+on of decrease in NCI on step acquisa+on

NCI @ the date of step acquisa3on x % of decrease in holding

Old NCI %

● Calcula+on of adjustment to equity aeer step acquisa+on

Par+culars $
FV of considera3on paid X
Less: NCI Value at step acquisa3on (X)
Adjustment to Equity X
 ● IFRS 3 (Revised) requires all of the iden3fiable assets and liabili3es of the
acquiree to be included in the consolidated statement of financial posi3on. Most
assets are recognised at fair value, with excep3ons for certain items such as
deferred tax and pension obliga3ons. The Interna3onal Accoun3ng Standards
Board provided addi3onal clarity that has resulted in more intangible assets
being recognised than previously. Acquirers are required to recognise brands,
licences and customer rela3onships, and other intangible assets.

● Con3ngent assets are not recognised, and con3ngent liabili3es are measured at
fair value. A6er the date of the business combina3on, con3ngent liabili3es are
re-measured at the higher of the original amount and the amount in accordance
with the relevant standard.

● The ability of an acquirer to recognise a liability for termina3ng or reducing the

ac3vi3es of the acquiree is severely restricted. A restructuring provision can be
recognised in a business combina3on only when the acquiree has, at the
acquisi3on date, an exis3ng liability for which there are detailed condi3ons in
IAS 37, but these condi3ons are unlikely to exist at the acquisi3on date in most
business combina3ons.

● An acquirer has a maximum period of 12 months from the date of acquisi3on

to finalise the acquisi3on accoun3ng. The adjustment period ends when the
acquirer has gathered all the necessary informa3on, subject to the 12-month
maximum. There is no exemp3on from the 12-month rule for deferred tax assets
or changes in the amount of con3ngent considera3on. The revised standard will
only allow adjustments against goodwill within this one-year period

● Where NCI is measured at fair value, the valua3on methods used for
determining that value require to be disclosed; and, in a step acquisi3on,
disclosure is required of the fair value of any previously held equity interest in
the acquiree, and the amount of gain or loss recognised in the statement of
profit or loss resul3ng from re-measurement.

IFRS 10 Consolidated Financial Statements views the par3al disposal of a subsidiary, in which control
is retained by the parent company, as an equity transac3on accounted for directly in equity. The
accoun3ng treatment is driven by the concept of substance over form. In substance, there has been
no disposal because the en3ty is s3ll a subsidiary, so no profit on disposal should be recognised and
there is no effect on the consolidated statement of profit or loss and other comprehensive income.
The transac3on is, in effect, a transfer between the owners of Parent and the non-controlling
interests.
 IFRS 3 gives a defini3on of a business, which needs to be applied in determining whether a
transac3on is a business combina3on:
• 'An integrated set of ac3vi3es and assets that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or par+cipants.'

How to find the value of NCI in full goodwill method when no informa3on is given about it ? Answer :
Find the carrying value of net asset of subsidiary and add goodwill to it. Then mul3ply this amount
with the NCI’s share.

When an en3ty disposes off a small part of the control of the subsidiary, the relevant por3on of the
exchange rate gain should be re asributed to the NCI, rather than the Retained Earnings.

Con+ngent considera+on should be included at its fair value which should be assessed taking into
account the probability of the targets being achieved as well as being discounted to present value.

(26) IFRS 11 - JOINT VENTURE

Joint arrangement: An arrangement of which two or more par3es have joint control.

Joint control: The contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant ac3vi3es require the unanimous consent of the par3es sharing control.

Joint opera+on A joint arrangement whereby the par3es that have joint control of the arrangement
have rights to the assets, and obliga3ons for the liabili3es, rela3ng to the arrangement.

Separate vehicle A separately iden3fiable financial structure, including separate legal en33es or
en33es recognised by statute, regardless of whether those en33es have a legal personality.

(27) IFRS 12 - DISCLOSURE OF INTERESTS IN OTHER ENTITIES

Structured en+ty: An en3ty that has been designed so that vo3ng or similar rights are not the
dominant factor in deciding who controls the en3ty, such as when any vo3ng rights relate to
administra3ve tasks only and the relevant ac3vi3es are directed by means of contractual
arrangements.
 Disclosures

(a) The significant judgements and assump+ons made in determining whether the en3ty has control,
joint control or significant influence over the other en33es, and in determining the type of joint
arrangement

(b) Informa3on to understand the composi+on of the group and the interest that non-controlling
interests have in the group's ac3vi3es and cash flows

(c) The nature, extent and financial effects of interests in joint arrangements and associates, including
the nature and effects of the en3ty's contractual rela3onship with other investors

(d) The nature and extent of interests in unconsolidated structured en33es

(e) The nature and extent of significant restric3ons on the en3ty's ability to access or use assets and
sesle liabili3es of the group

(f) The nature of, and changes in, the risks associated with the en+ty's interests in consolidated
structured en33es, joint ventures, associates and unconsolidated structured en33es (eg
commitments and con3ngent liabili3es)

(g) The consequences of changes in the en+ty's ownership interest in a subsidiary that do not result in
loss of control (ie the effects on the equity asributable to owners of the parent)

(h) The consequences of losing control of a subsidiary during the repor3ng period (ie the gain or loss,
and the por3on of it that relates to measuring any remaining investment at fair value, and the line
item(s) in profit or loss in which the gain or loss is recognised if not presented separately

(28) IAS 21 - THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE

RATES

Exchange difference is the difference resul3ng from transla3ng a given number of units of one
currency into another currency at different exchange rates.

Exchange rate is the ra3o of exchange for two currencies.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transac3on between market par3cipants at the measurement date.

Foreign opera+on is an en3ty that is a subsidiary, associate, joint venture or branch of a repor3ng
en3ty, the ac3vi3es of which are based or conducted in a country or currency other than those of the
repor3ng en3ty.

Func+onal currency is the currency of the primary economic environment in which the en3ty
operates.
Monetary items are units of currency held and assets and liabili3es to be received or paid in a fixed
or determinable number of units of currency.

Net investment in a foreign opera3on is the amount of the repor3ng en3ty‘s interest in the net assets
of that opera3on.

Presenta+on currency is the currency in which the financial statements are presented.

Spot exchange rate is the exchange rate for immediate delivery.

Indicators of func+onal currency

(1) Primary economic indicators

• The currency:
- That mainly influences sales prices for goods and services and
- Of the country whose compe33ve forces and regula3ons mainly determine the sales prices of
its goods and services.
• The currency that mainly influences labour, material and other costs of providing goods or services

(2) Secondary economic indicators

• The currency y in which funds from financing ac3vi3es (i.e. issuing debt and equity instruments)
are generated.

• The currency in which receipts from opera3ng ac3vi3es are usually retained.

Monetary items :

- Cash and bank balances

- Trade receivables and payables
- Loan receivables and payables
- Foreign currency bonds held as available for sale
- Foreign currency bonds held to maturity
- Pensions and other employee benefits to be paid in cash
- Provisions that are to be sesled in cash
- Cash dividends that are recognised as a liability
- A contract to receive (or deliver) a variable number of the en3ty's own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency
Non - Monetary items :

- Amounts prepaid for goods and services (e.g. prepaid rent)

- Goodwill
- Intangible assets
- Inventories
- Property, plant and equipment
- Provisions to be sesled by the delivery of a non-monetary asset
- Equity instruments that are held as available for sale financial assets
- Equity investments in subsidiaries, associates or joint ventures
(29) IAS 7 - STATEMENT OF CASH FLOWS

Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily conver3ble to known
amounts of cash and which are subject to an insignificant risk of changes in value.

Cash flows are inflows and ouNlows of cash and cash equivalents.

Opera+ng ac+vi+es are the principal revenue-producing ac3vi3es of the en3ty and other ac3vi3es
that are not inves3ng or financing ac3vi3es.

Inves+ng ac+vi+es are the acquisi3on and disposal of long-term assets and other investments not
included in cash equivalents.

Financing ac+vi+es are ac3vi3es that result in changes in the size and composi3on of the contributed
equity and borrowings of the en3ty.

When the proper3es held under opera+ng lease are sold, the proceeds are included under opera3ng
cash flows.
Consolidated Statement of cash flows for the year ended

Cash flow from opera+ng ac+vi+es

Profit before tax X
Adjustment for :
Deprecia3on and Amor3sa3on changes X
Loss on disposal of plant and machinery X
Share of profit of associate and joint venture (X)
Foreign exchange loss X
Investment income (X)
Interest expense X
Changes in Working Capital :
Increase/Decrease in trade and other receivables (X)/X
Increase/Decrease in inventories (X)/X
Increase/Decrease in trade payables X/(X)
Cash generated from opera3on X
Interest paid (X)
Income tax paid (X)
Net cash from opera3ng ac3vi3es X

Cash flow from inves+ng ac+vity

Acquisa+on of subsidiary, net of cash acquired (Note 1) (X)
Purchase of property, plant and equipment (Note 2) (X)
Proceeds from the sale of equipment X
Interest received X
Dividents received from associate X
Net cash from inves3ng ac3vity X

Cash flow from financing ac+vity

Proceeds from issue of share capital X
Proceeds from long term loan X
Redemp3on of debt security (X)
Payment of finance lease liability (X)
Dividents paid to NCI (X)
Dividents paid to parent company's shareholders (X)
Net cashflow from financing ac+vity X

Net increase in cash and cash equivalents X

Cash and cash equivalents at the beginning of the period (note 3)
Cash and cash equivalents at the end of the period (note 3)
(30) IAS 24 – RELATED PARTY TRANSACTIONS

A related party is a person or en3ty that is related to the en3ty that is preparing its financial
statements (in this Standard referred to as the ‘repor3ng en3ty‘).

A Related party is a person or a close member of that person‘s family is related to a repor3ng en3ty
if that person:
I. has control or joint control over the repor3ng en3ty;
II. has significant influence over the repor3ng en3ty; or
III. is a member of the key management personnel of the repor3ng en3ty or of a parent of the
repor3ng en3ty.

A related party transac+on is a transfer of resources, services or obliga3ons between a repor3ng

en3ty and a related party, regardless of whether a price is charged.

Close members of the family of a person are those family members who may be expected to
influence, or be influenced by, that person in their dealings with the en3ty and include:
(a) That person‘s children and spouse or domes3c partner;
(b) Children of that person‘s spouse or domes3c partner; and
(c) Dependants of that person or that person‘s spouse or domes3c partner.

Rela+onships between parents and subsidiaries.Regardless of whether there have been transac3ons
between a parent and a subsidiary, an en3ty must disclose the name of its parent and, if different,
the ul3mate controlling party.

Disclosures
I. The amount of the transac3ons
II. The amount of outstanding balances, including terms and condi3ons and guarantees
III. Provisions for doubNul debts related to the amount of outstanding balances
IV. Expense recognised during the period in respect of bad or doubNul debts due from related par3es

(31) IAS 34-INTERIM FINANCIAL REPORTING

Interim period is a financial repor3ng period shorter than a full financial year.

Interim financial report means a financial report containing either a complete set of financial
statements (as described in IAS 1 Presenta3on of Financial Statements (as revised in 2007)) or a set of
condensed financial statements (as described in this Standard) for an interim period.

Minimum components of an interim financial report

1. a condensed statement of financial posi3on;
2. a condensed statement of profit or loss and other comprehensive income, presented as either;
3. a condensed statement of changes in equity;
4. a condensed statement of cash flows; and
5. Selected explanatory notes.
 Recogni+on and measurement principles

(32) IFRS FOR SMES

Small and medium-sized en33es are en33es that:

I. Do not have public accountability, and
II. Publish general purpose financial statements for external users. Examples of internal users
include, owners who are not involved in managing the business, exis3ng and poten3al creditors,
and credit ra3ng agencies. General purpose financial statements are those that present fairly
financial posi3on, opera3ng results, and cash flows for external capital providers and others.

OmiTed Topics
I. Earnings per share
II. Interim accoun3ng
III. Segment repor3ng
IV. Insurance (because en33es that issue insurance contracts are not eligible to use the standard) and
V. Assets held for sale

Investments in associates and joint ventures

I. Can be measured at cost unless there is a published price quota3on (Then fair value must be
used).
II. Jointly controlled en33es can be accounted for using the cost model, the equity method or the fair
value model (propor3onate consolida3on is not allowed)

Investments in proper+es
I. Must be measured at fair value (cost model not allowed, unless fair value cannot be measured
reliably without undue cost or effort)
II. If fair value cannot be calculated then must be treated as property, plant and equipment
 Property, plant and equipment
I. Historical cost-deprecia3on-impairment model or revalua3on model
II. Residual value, useful life and deprecia3on need to be reviewed only if there is an indica3on they
may have changed since the most recent annual repor3ng date (full IFRSs require an annual
review).
III. Impairment tes3ng and reversal

Borrowing costs
I. All borrowing costs must be recognised as expense when incurred (cannot be capitalised)

Intangible assets
I. Revalua3on not allowed
II. Research and development costs must be recognised as expenses (cannot be capitalised)
III. Indefinite-life intangibles are amor3sed over their useful lives, but if useful life cannot be reliably
es3mated then use the management‘s best es3mate but not more than 10 years

Business combina+on and Goodwill

I. Acquisi3on (purchase) method used.
II. Acquisi3on costs are capitalized in the cost of investment
III. Goodwill is amor3sed over its useful life (10 years if this can‘t be es3mated reliably )
IV. Con3ngent considera3ons are included as part of the cost of investment if it is probable that the
V. amount will be paid and its fair value can be measured reliably.

Leases
I. Lease classified either as finance lease or opera3ng lease and treated accordingly
II. If a sale and leaseback results in a finance lease, the seller should not recognise any excess as a
profit, but recognise the excess over the lease term. If a sale and leaseback results in an opera3ng
lease, and the transac3on was at fair value, the seller shall recognise any profits immediately.

Government Grants
I. All grants are measured at the fair value of the asset received or receivable

Advantages of the IFRS for SMEs

I. It is virtually a 'one stop shop'.
II. It is structured according to topics, which should make it prac3cal to use. (c) It is wrisen in an
accessible style.
III. There is considerable reduc3on in disclosure requirements.
IV. Guidance not relevant to private en33es is excluded.

Disadvantages of IFRS for SMEs

I. It does not focus on the smallest companies.
II. The scope extends to 'non-publicly accountable' en33es. Poten3ally, the scope is too wide.
III. The standard will be onerous for small companies.
(33) IFRS 1 : FIRST-TIME ADOPTION OF INTERNATIONAL
REPORTING STANDARDS

The general rule in IFRS 1 is that in the opening IFRS statement of financial posi3on, a first-3me
adopter must:
I. recognise all assets and liabili3es whose recogni3on is required by IFRSs
II. Not recognise assets or liabili3es if IFRSs do not permit such recogni3on
III. Re-classify items recognised under the previous GAAP as one type of asset, liability or component
of equity if IFRSs require that they should be classified differently
IV. Apply IFRSs in measuring all assets and liabili3es.

Main exemp+ons from applying IFRS in the opening IFRS statement of financial posi3on

I. Property, plant and equipment, investment proper+es and intangible assets

• Fair value/previous GAAP revalua3on may be used as a subs3tute for cost at date of transi3on
to IFRSs.

II. Business combina+ons : For business combina3ons prior to the date of transi3on to IFRSs:
• The same classifica3on (acquisi3on or uni3ng of interests) is retained as under previous GAAP.
• For items requiring a cost measure for IFRSs, the carrying value at the date of the business
combina3on is treated as deemed cost and IFRS rules are applied from thereon.
• Items requiring a fair value measure for IFRSs are revalued at the date of transi3on to IFRS.
III. Employee benefits
• Unrecognised actuarial gains and losses can be deemed zero at the date of transi3on to IFRSs.
IAS 19 is applied from then on.

IV. Cumula+ve transla+on differences on foreign opera+ons

• Transla3on differences (which must be disclosed in a separate transla3on reserve under IFRS)
may be deemed zero at the date of transi3on to IFRS. IAS 21 is applied from then on.

V. Adop+on of IFRS by subsidiaries, associates and joint ventures

• If a subsidiary, associate or joint venture adopts IFRS later than its parent, it measures its assets
and liabili3es:
• Either: At the amount that would be included in the parent‘s financial statements, based on the
parent‘s date of transi3on
• Or: At the amount based on the subsidiary (associate or joint venture)‘s date of transi3on.

(34) Other important points

Important Notes for Ethics Ques+ons

- Accountants have a duty to ensure that the financial statements are fair, transparent and comply with
accoun3ng standards.
- The accountant appears to have made a couple of mistakes which would be unexpected from a
professionally qualified accountant.

- Accountants must carry out their work with due care and asen3on for the financial statements to
have credibility. They must therefore ensure that their knowledge is kept up to date and that they do
carry out their work in accordance with the relevant ethical and professional standards. Failure to do
so would be a breach of professional competence.

- The accountant must make sure that they address this issue through, for example, asending regular
training and professional development courses.

- Accountants have an ethical duty to be professionally competent and act with due care and asen3on.
It is fundamental that the financial statements comply with the accoun3ng standards and principles
which underpin them.

- This may be a genuine mistake but even so would not be one expected from a professionally qualified
accountant. The financial statements must comply with the fair presenta3on principles embedded
within IAS 1 Presenta3on of Financial Statements.

The return on equity (ROE) ra3o measures the rate of return which the owners of issued shares of a
company receive on their shareholdings in terms of profitability. ROE signifies how good the company
is in genera3ng profit on the investment it receives from its shareholders. This metric is especially
important from an investor’s perspec3ve, as it can be used to judge how efficiently the firm will be
able to use shareholder’s investment to generate addi3onal revenues.

The net profit margin (net profit/sales) tells how much profit a company makes on every dollar of
sales. Asset turnover (sales/assets) ra3o measures the value of a company’s sales or revenues
generated rela3ve to the carrying amount of its assets. The asset turnover ra3o can o6en be used as
an indicator of the efficiency with which a company is deploying its assets in genera3ng revenue. The
equity ra3o indicates the rela3ve propor3on that equity is used to finance a company’s assets. The
equity ra3o is a good indicator of the level of leverage used by a company by measuring the
propor3on of the total assets which are financed by shareholders, as opposed to creditors.

Materiality needs to be taken into account when making disclosures. Prac3ce Statement 2 Making
Materiality Judgements confirms that disclosure does not need to be made, even when prescribed by
an IFRS, if the resul3ng informa3on presented is not material.

En3ty could improve the usefulness of underlying EPS by:

• Including an appropriate descrip3on of how the measure is calculated

• Ensuring that the calcula3on of underlying EPS is consistent year on year and that compara3ves are
presented
• Explaining the reasons for presen3ng the measure, why it is useful for investors and for what purpose
management may use it
• Presen3ng a reconcilia3on to the most directly reconcilable measure in the financial statements, for
example EPS calculated in accordance with IAS 33
• Not excluding items from underlying EPS that could legi3mately reoccur in the future, such as
impairment losses on goodwill