IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Compiled by: Murtaza Quaid

SCOPE
PROPERTY, PLANT AND EQUIPMENT
IAS 16 does not apply to:
PPE are tangible items that:  PPE classified as held for sale in accordance with IFRS 5: Non-
 are held for use in the production or supply of goods or services, for current assets held for sale and discontinued operations;
rental to others, or for administrative purposes; and  Biological assets related to agricultural activity - refer IAS 41:
 are expected to be used during more than one period. Agriculture;
 Recognition and measurement of exploration and evaluation
assets - refer IFRS 6: Exploration for and evaluation of mineral
RECOGNITION resources;
Recognize cost of PPE when:  Mineral rights and mineral reserves such as oil, natural gas and
 It is probable that future economic benefits associated with the asset similar non-regenerative resources.
will flow to the entity; &
 The cost of the asset can be reliably measured. DEPRECIATION

 Depreciation is the systematic allocation of depreciable amount of

INITIAL MEASUREMENT an asset over its useful life.
 Initially recorded at cost.  Depreciation method reflects the pattern in which future
economic benefits are expected to be consumed.
Cost comprises:  The residual value, the useful life and the depreciation method of
 Purchase price plus import duties and non-refundable taxes, after an asset are reviewed annually at reporting date.
deducting trade discounts and rebates.  Changes in residual value, depreciation method and useful life are
 Any costs directly attributable to bringing the asset to the location and changes in estimates are accounted for prospectively in
condition necessary for it to be capable of operating in a manner accordance with IAS 8.
intended by management. For e.g:  Significant parts/components are required to be depreciated
o Employee costs arising directly from the installation or separately over their estimated useful life.
construction of the asset;  Depreciation is charged to profit or loss, unless it is included in the
o Cost of site preparation; carrying amount of another asset.
o Delivery costs (‘carriage inwards’);  Depreciation commences when the asset is available for use.
o Installation and assembly costs;  Depreciation ends at the earlier of when asset is classified as held
o Testing costs to assess whether the asset is functioning properly for sale in accordance with IFRS 5 and when it is derecognized.
(net of sale proceeds of items produced during the testing phase).  Revenue based depreciation is prohibited.
o Professional fees directly attributable to the purchase.
 Initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located. RULES FOR REVALUATION
Deferred Payment  If an asset is revalued, the entire class of assets to which that asset
 If payment is deferred beyond normal credit terms, the difference belongs is required to be revalued
between the cash price equivalent and the total payment is  An increase in value of PPE is credited to revaluation surplus.
recognized as interest over the period of credit unless such interest is However, the increase shall be credited in profit or loss to the
capitalized in accordance with IAS 23. extent that it reverses a revaluation decrease of the same asset
Not part of cost previously debited in profit or loss.
 Costs of opening a new facility;  A decrease in value of PPE is debited to profit or loss. However,
 Costs of introducing a new product or service (including costs of the decrease shall be debited to revaluation surplus to the extent
advertising and promotional activities); of any credit balance existing in the revaluation surplus in respect
 Costs of conducting business in a new location or with a new class of of that asset.
customer (including costs of staff training); and  The net carrying amount of the asset is adjusted to the revalued
 Administration and other general overhead costs. amount by one of the following ways:
o Restate accumulated depreciation proportionately with the
EXCHANGE TRANSACTION change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its
An asset may be acquired in exchange for another asset. The cost of revalued amount; or
acquired asset is measured at: o Eliminate accumulated depreciation against the gross
i. the fair value of the asset given up; carrying amount and then change the carrying amount of the
ii. the fair value of the asset received, if it is more clearly evident; assets to the revalued amount.
iii. the carrying amount of the asset given, if Depreciation of revalued asset
o the exchange transaction lacks commercial substance or  Revalued assets are depreciated the same way as under the cost
o fair value of neither the asset received nor the asset given up is model. However, an amount equal to incremental depreciation
reliably measurable. must be transferred from “Revaluation Surplus” to accumulated
profit/retained earning through statement of changes in equity.
Frequency of revaluation
SUBSEQUENT MEASUREMENT  Revaluations should be carried out regularly to ensure that
carrying amount of an asset should not differ materially from its
COST MODEL REVALUATION MODEL
fair value at the reporting date.
Asset is carried at cost Asset is carried at a revalued amount, being its  Revaluation frequency depends upon the changes in fair value of
less accumulated fair value at the date of the revaluation, less the items measured (annual revaluation for volatile items or
depreciation and subsequent depreciation, provided that fair intervals between 3 - 5 years for items with less significant
impairment losses. value can be measured reliably. changes)

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 IAS 16 – PROPERTY, PLANT AND EQUIPMENT
BEARER PLANT
 A bearer plant is a living plant that:
a. is used in the production or supply of agricultural produce;
b. s expected to bear produce for more than one period; and
c. has a remote likelihood of being sold as agricultural produce,
except for incidental scrap sales.
 Bearer plants are used solely to grow produce. The only significant
future economic benefits from bearer plants arise from selling the
agricultural produce that they create. Therefore, bearer plants meet
the definition of property, plant and equipment in IAS 16 and their
operation is similar to that of manufacturing. Accordingly, bearer
plants are included within the scope of IAS 16, instead of IAS 41.
SUBSEQUENT EXPENDITURE
 Subsequent expenditure are recognized as an asset if it meets the
recognition criteria.
 In practice, subsequent expenditure is capitalised if it:
o improves the asset (for example, by enhancing its performance
or extending its useful life); or
o is for a replacement part (provided that the part that it replaces
is treated as an item that has been disposed of).
 Repairs and maintenance expenditure is revenue expenditure thus
recognised as an expense as it is incurred.
OTHER CONCEPTS
 Costs of replacing components are required to be capitalized
 Continued operation of an item of property, plant and equipment
(PPE) may require regular major inspections for faults. The cost of
such major inspection is recognized in the carrying amount of the item
of PPE as a replacement if the recognition criteria are satisfied.
 Spare parts, stand-by or servicing equipment are classified as PPE
when they meet the definition of PPE, and are classified as inventory
when definition is not met.
DERECOGNITION
 Carrying amount of an item of property, plant and equipment shall be
derecognized:
o on disposal; or
o when no future economic benefits are expected from its
use or disposal.
 Gain or loss on disposal is the difference between the proceeds and
the carrying amount and is recognized in profit or loss
 When a revalued asset is disposed of, any revaluation surplus may be
transferred directly to retained earnings. The transfer to retained
earnings is not made through profit or loss.
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Compiled by: Murtaza Quaid
IMPORTANT DEFINITIONS
Cost is the amount of cash or cash equivalents paid or the fair value of
the other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount attributed
to that asset when initially recognised in accordance with the specific
requirements of other IFRSs. (For example assets held under finance
leases).
Carrying amount is the amount at which an asset is recognised after
deducting any accumulated depreciation and accumulated impairment
losses. Net book value (NBV) is a term that is often used instead of
carrying amount.
Useful life is:
a) the period over which an asset is expected to be available for use
by an entity; or
b) the number of production or similar units expected to be obtained
from the asset by an entity.
Recoverable amount the higher of an asset’s net selling price or its value
in use.
Depreciable amount is the cost of an asset, or other amount substituted
for cost, less its residual value
Residual value of an asset is the estimated amount that an entity would
currently obtain from its disposal, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.
DISCLOSURE REQUIREMENTS
Disclosures include but are not limited to:
 Measurement bases used for determining the gross carrying
amount.
 Depreciation methods used.
 Useful lives or the depreciation rates used.
 Gross carrying amount and the accumulated depreciation at the
beginning and end of the period.
 A reconciliation of the carrying amount at the beginning and end of
the period showing:
o Additions
o Assets classified as held for sale or included in a disposal
group classified as held for sale
o Other disposals
o Acquisitions through business combinations
o Changes resulting from revaluations recognized or
reversed
o Impairment losses recognized/reversed in profit or loss
o Depreciation
o Exchange differences and other changes.
 Existence and amounts of restrictions on title, and PPE pledged as
security for liabilities
 Contractual commitments for the acquisition of PPE.
IFRIC 1 - CHANGES IN EXISTING DECOMMISSIONING, RESTORATION AND SIMILAR LIABILITIES
Compiled by: Murtaza Quaid
ISSUE SCOPE

 Under IAS 16, the cost of property, plant and equipment includes the
initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located.
 IAS 37 contains requirements on measurement of such
decommissioning, restoration and similar liabilities. IAS 37 also requires
that such provisions are reviewed at each reporting date and adjusted
to reflect the best estimate of the expected outcome.
 This Interpretation provides guidance on how to account for the effect
of subsequent changes in the measurement of decommissioning,
restoration provision.
 Carrying amount of a provision might need to change in order to reflect:
o unwinding of the discount; and
o change in estimates including:
• timing of the cash flows;
• size of the cash flows; or
• discount rate.
IFRIC 1 applies to changes in the measurement of any existing
decommissioning, restoration or similar liability that is both:
 Recognised as part of the cost of property, plant and
equipment in accordance with IAS 16
 Recognised as a liability in accordance with IAS 37.
UNWINDING OF DISCOUNT
 The periodic unwinding of discount is recognised in P/L
account as a finance cost as it occurs.
 Capitalisation under IAS 23 Borrowing Costs is not permitted.
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CHANGE IN ESTIMATE MEASUREMENT MODEL

COST MODEL REVALUATION MODEL

Increase in provision Increases carrying amount of asset. Thereafter, Decreases revaluation surplus to the extend of credit balance in
for decommissioning the asset needs to be tested for impairment in revaluation surplus in respect of that asset. Further decrease in
and restoration cost accordance with IAS 36. provision is debited to P/L.

Decrease in provision Decreases carrying amount of the asset to the Is credited to: (in following order)
for decommissioning extend of debit balance of such asset. Further i. P/L account to the extent of reversal of revaluation deficit on
and restoration cost decrease in provision is credited to P/L. the asset that was previously recognised in P/L account.
ii. Revaluation surplus to the extend that revaluation surplus does
not exceed the carrying amount of assets.
iii. P/L account.

Other concepts The adjusted depreciable amount of the asset
is depreciated over its remaining useful life.
 A change in the provision is an indication that the asset may have
to be revalued in order to ensure that the carrying amount does
not differ materially from the fair value of the assets at the end of
the reporting period
 The change in the revaluation surplus arising from a change in the
liability is separately identified and disclosed as such.

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 IAS 10 - EVENTS AFTER THE REPORTING PERIOD
Compiled by: Murtaza Quaid
EVENTS AFTER THE REPORTING PERIOD

Favorable or unfavorable event, that occurs between the reporting date and the date that the financial statements are authorized for issue.

ADJUSTING EVENTS NON-ADJUSTING EVENTS

An event after the reporting date that provides further evidence of
conditions that existed at the reporting date.
Examples:
 Events that indicate that the going concern assumption in relation to
the whole or part of the entity is not appropriate
 Settlement of litigation after reporting date, in respect of events
that occurred before the end of reporting period
 Bankruptcy of a customer that occurs after reporting date that
confirms a loss existed at reporting date on trade receivables
 Sales of inventories after reporting date that give evidence about
their net realizable value at reporting date
 Determination after reporting date of cost of assets purchased or
proceeds from assets sold, before reporting date
 Detection of fraud or errors after the reporting period may indicate
that the financial statements are misstated
GOING CONCERN (Exception)
An entity shall not prepare its financial statements on a going concern if
events after the reporting period indicate that the entity shall not be
able to continue as a going concern irrespective of whether such events
are indicative of conditions that arose after the end of reporting period
or not.
An event after the reporting date that is indicative of a condition that
arose after the reporting date.
Examples:
 Declaration of dividends after the reporting date does not indicate
existence of liability to pay dividends at the reporting date
 Major business combination of entities or disposal of a subsidiary
 Major purchase or disposal of assets, classification of assets as held
for sale or expropriation of major assets by government
 Destruction of assets of the entity by floods occurring after the
reporting period
 Management's plan to discontinue or significantly curtail its
activities in major geographic segments
 Announcing a major restructuring after reporting date
 Major share transactions
 Abnormal large changes after the reporting period in assets prices or
foreign exchange rates
 Changes in tax rates or tax law
 Entering into significant commitments or contingent liabilities such
as guarantees
 Initiation of a major litigation arising solely out of events that
occurred after the reporting period.

An entity shall adjust the amounts recognised in its financial statements to
reflect adjusting events after the reporting period.
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An entity shall not adjust the amounts recognised in its financial
statements to reflect non-adjusting events after the reporting period.
However, disclose the following for each material category of non-
adjusting event after the reporting period:
 The nature of the event
 An estimate of its financial effect or the statement that such estimate
cannot be made.

ADDITIONAL DISCLOSURE

 Date of authorization of issue of financial statements and by whom

 If the entity’s owners or others have the power to amend the financial statements after issue, the entity is required to disclose that fact
 For any information received about conditions that existed at reporting date, disclosure that relate to those conditions should be updated with the
new information.
 IAS 37 - PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
KnS Institute of Business Studies Compiled by: Murtaza Quaid

PROVISIONS CONTINGENT LIABILITIES CONTINGENT ASSETS

A liability of uncertain timing or amount.  A possible obligation that arises from Possible asset that
past events, whose existence will be arises from past events
confirmed only by the occurrence or and whose existence
Provisions are recognised when all of the following conditions are met: non-occurrence of one or more will be confirmed only
 The entity has a present obligation (legal or constructive) as a result uncertain future events not wholly in by the occurrence or
of a past event the control of the entity; or non-occurrence of
 It is probable that an outflow of economic benefits will be required  A present obligation that arises from one or more uncertain
to settle the obligation; and past events that is not recognised future events not
 A reliable estimate can be made of the amount of the obligation. because: wholly within the
o it is not probable that an outflow control of the entity.
MEASUREMENT OF PROVISION of resources embodying economic
benefits will be required to settle
 Provisions are measured at the best estimate of the expenditure the obligation; or Contingent assets are
required to settle the present obligation at reporting date. Best o the amount of the obligation not recognised.
estimate is the amount that an entity would rationally pay to settle cannot be measured with However, when the
the obligation or to transfer it to a third party. sufficient reliability. realization of income is
 There are 2 methods of measuring a provision: virtually certain, then
i. Expected value method - Where the provision being measured the related asset is not
involves a large population of items (i.e. goods’ warranties), the Contingent liabilities are not recognised. a contingent asset and
obligation is estimated by weighting all possible outcomes by Contingent liabilities are disclosed in its recognition is
their associated probabilities. notes to the financial statement, unless appropriate.
ii. Most likely outcome - Where the provision involves single the possibility of an outflow of resources
obligation, the individual most likely outcome may be the best embodying economic benefits is remote.
estimate of the liability.
 In determining the best estimate, the related risks and uncertainties
are taken into account For your valuable feedback, any update, error or
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of the provision is the present value of the expenditures expected to
be required to settle the obligation. The discount rate used is a pre- PROVISION IN SPECIAL CIRCUMSTANCES
tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the liability FUTURE OPERATING LOSSESS
 The discount rate does not reflect risks for which future cash flow
estimates have been adjusted.  Provision for future operating loss is not recognized because there is
 Future events that may affect the amount required to settle the no past event. The future operating losses can be avoided by some
obligation are reflected in the amount of the provision where there future actions, for example – by selling/closing a business.
is sufficient objective evidence that they will occur  However, assets should be tested for impairment under IAS 36
 Gains from the expected disposal of assets are not taken into Impairment of Assets.
account in measuring the provision ONEROUS CONTRACTS
 Provisions are reviewed at each reporting date and adjusted to
reflect the current best estimate  Onerous contract is a contract in which unavoidable costs of
fulfilling the contract exceed the economic benefits expected to be
ACCOUNTING FOR PROVISION received from the contract (A loss contract that cannot be avoided).
Recognition of Provision  For onerous contract, the provision is recognised and measured at
 In most cases, provision is recognized in profit or loss. Sometimes, a the lower of:
provision is recognized in the cost of another asset, for example, o The un avoidable cost of fulfilling the contract; or
provision for removing the asset and restoring the site after its use. o The costs/penalties incurred in cancelling the contract.
 Split the provision in the current and non-current liabilities for  Before a separate provision for an onerous contract is recognised,
presentation purposes in statement of financial position. an entity recognizes any impairment loss (IAS 36 Impairment of
Unwinding of discount Assets) that has occurred on assets dedicated to that contract.
 When a provision has a long-term nature (beyond 12 months), the RESTRUCTURING
amount of provision is the present value of the expenditures
expected to be required to settle the obligation.  Restructuring is a plan of management to change the scope of
 In each reporting period, interest on the opening balance of the business or a manner of conducting a business.
provision is recognize in profit or loss and it also increases the  Restructuring provisions are recognized when an entity has:
amount of a provision. o A detailed formal plan for the restructuring identifying business
Reimbursement or part of business concerned; principal locations affected;
 Reimbursements from third parties for some or all expenditure location, function, approximate number of employees to be
required to settle a provision are recognised only when it is virtually compensated for termination of their services; expenditures
certain that the reimbursement will be received. The reimbursement that will be undertaken and when the plan will be implemented.
is treated as a separate asset, which cannot exceed the amount of o Raised a valid expectation in those affected that it will carry out
the provision. the restructuring by starting to implement that plan or
Utilization / Reversal of provision announcing (e.g. by a public announcement) its main features to
 Provision is utilized when expenditure associated with the those affected before the end of the reporting period
settlement of the obligation is incurred.  Restructuring provisions only include the direct expenditures arising
 If it is no longer probable that an outflow of economic benefits will from the restructuring – i.e. those that are both necessarily entailed
be required to settle the obligation, the provision is released / by the restructuring and not associated with the entity’s on-going
reversed. activities.
 IAS 23 – BORROWING COSTS
Compiled by: Murtaza Quaid
DEFINITIONS

BORROWING COSTS QUALIFYING ASSET

 Borrowing costs are interest and other costs incurred by an entity in  A qualifying asset is an asset that necessarily takes a substantial
connection with the borrowing of funds period of time to get ready for its intended use or sale
 Borrowing costs may include:  Examples include:
 Interest on bank overdrafts and short-term and long-term  Inventories (that are not produced over a short period of
borrowings (including intercompany borrowings) time)
 Amortisation of discounts or premiums relating to borrowings  Property, plant and equipment
 Amortisation of ancillary costs incurred in connection with the  Power generation facilities
arrangement of borrowings  Intangible assets
 Finance charges in respect of finance leases  Investment properties.
 Exchange differences arising from foreign currency borrowings to  Assets that are ready for their intended use or sale when acquired
the extent that they are regarded as an adjustment to interest are not qualifying assets. Qualifying assets are usually self-
costs. constructed non-current assets.

RECOGNITION

 Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset are required to be capitalised as part of the cost of that asset
 Other borrowing costs are recognised as an expense when incurred.

SPECIFIC BORROWING GENERAL BORROWING

 If funds are borrowed specifically, the amount of borrowing costs
eligible for capitalisation are the actual borrowing costs incurred on
that borrowing less any investment income on the temporary
investment of any excess borrowings not yet used
 If funds are borrowed generally, the amount of borrowing
costs eligible for capitalisation are determined by applying a
capitalisation rate (weighted average of borrowing costs
applicable to the general borrowings) to the expenditures on
that asset
 The amount of the borrowing costs capitalised during the
period cannot exceed the amount of borrowing costs incurred
during the period.
 The capitalisation rate is applied from the time expenditure on
the asset is incurred.

Commencement of capitalization Suspension of capitalization Cessation of capitalization

Capitalisation of borrowing costs commences
when:
 Expenditures for the asset are being incurred;
 Borrowing costs are being incurred; and
 Activities necessary to prepare the asset are in
progress.
Capitalisation of borrowing
costs is suspended if
development of the asset is
suspended for an extended
period of time.
Capitalisation of borrowing costs should cease when the asset
is substantially complete. When the construction of a qualifying
asset is completed in parts and each part is capable of being
used while construction continues on other parts, capitalisation
of borrowing costs ceases when substantially all the activities
necessary to prepare that part for its intended use or sale are
completed.

DISCLOSURE For your valuable feedback, any

update, error or query, kindly let me
 Amount of borrowing cost capitalised during the period
 Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. know at emquaid93@gmail.com

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 IAS-38: INTANGIBLE ASSETS
INTANGIBLE ASSETS
An intangible assets is an
 Identifiable,
 Non-monetary asset,
 Without physical substances.
An intangible asset is identifiable if
 It is separable (i.e. it can be sold, transferred,
exchanged, licensed, or rented to another party);
or
 It arises from contractual or other legal rights
Examples of intangibles:
 Computer software.
 Patent.
 Copyright.
 Customer list.
 License.
 Franchise.
 Marketing right.
 Customer/supplier relationship.
RECOGNITION CRITERIA
An intangible should be recognized if
 It is probable that future economic benefits
attributable to the asset will flow to the entity;
and
 The cost of the asset can be measured reliably.
AMORTIZATION OF INTANGIBLE ASSETS
FINITE LIFE
 An intangible asset with a finite life should be
amortized over its expected useful life.
 Residual value should be assumed to be nil unless
in rare circumstances when an active market
exists or there is a commitment by third party to
purchase the asset at the end of its useful life.
 Amortization begin when the asset is available for
use.
 Amortisation method should reflect the pattern in
which future economic benefits are expected to
be consumed.
 Rebuttable presumption that revenue based
amortization is inappropriate
 Change in amortization method and useful life is
change in accounting estimate and its effect is
applied prospectively.
INDEFINTE LIFE
 An intangible asset with indefinite life should not
be amortized, but should be reviewed for
impairment on annual basis and when indicators
of impairment exist.
 There must also be annual review of whether the
indefinite life assessment is still appropriate, and
if no longer indefinite change to finite useful life.
KnS School of Business Studies
Compiled by: Murtaza Quaid
MEASUREMENT AT INITIAL RECOGNITION
1) SEPARATE ACQUISITION
 Recognize at cost, which includes
o Purchase price including non refundable taxes and duties less trade discount and
refundable taxes and duties.
o Directly attributable cost to prepare the asset for its intended use.
 Capitalization of cost ceases when asset is in useful condition.
2) ACQUIRED IN BUSSINESS COMBINATION
 Recognize at FV at acquisition date
 Recognize separately from goodwill (even if acquiree had not recognized it).
3) GOVERNMENT GRANT
 Initially recognised at either:
o Fair value; or
o Nominal value plus direct expenses to prepare for use.
 Examples include:
i. License to operate national lottery
ii. Radio station.
4) EXCHANGE OF ASSETS
 Recognize acquired asset at its fair value.
 If fair value not available, recognize at book value of assets given up.
5) INTERNALLY GENERATED GOODWILL
 Never recognize it as an asset.
 Example includes customer lists, internally generated brands etc.
6) INTERNALLY GENERATED INTANGILES (OTHER THAN GOODWILL)
Research Phase
 Original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge and understanding.
 Expenditure on research phase is expense out.
Development Phase
 Application of research findings or other knowledge to a plan or design for the production
of new or substantially improved materials, devices, products, processes, systems or
services before the start of commercial production or use.
 Expenditure on development phase is capitalized if all criteria are met:
i. Technical feasibility to complete the asset.
ii. Intention to complete.
iii. Ability to sell/use the asset.
iv. Adequate technical, financial and other resources available to complete.
v. Probable future economic benefits.
vi. Expenditure is reliable measurable.
 Expenditure incurred prior to the criteria being met may not be capitalized retrospectively.
SUBSEQUENT RECOGNITION
COST MODEL REVALUATION MODEL
After initial recognition, intangible asset can  After initial recognition, revaluation
be recognized at lower of: model can be adopted only if an active
 Historical cost; or market exists for the type of asset.
 Recoverable Amount  Intangible asset shall be revalued as per
the same rules prescribed for
revaluation of PPE.
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 SIC-32 INTANGIBLE ASSETS: WEBSITE COSTS
Compiled by: Murtaza Quaid

ISSUE CONSENSUS

When accounting for internal expenditure on the development and
operation of an entity’s own web site for internal or external access,
the issues are:
 Whether the web site is an internally generated intangible asset
that is subject to the requirements of IAS 38 Intangible Assets
 The appropriate accounting treatment of such expenditure.
SCOPE
 An entity’s own web site that arises from development and is for
internal or external access is an internally generated intangible
asset that is subject to the requirements of IAS 38
 If a web site is developed solely (or primarily) for promoting and
advertising its own products and services then an entity will not
be able to demonstrate how it will generate probable future
economic benefits. All expenditure on developing such a web
site should be recognised as an expense when incurred.
 The best estimate of a website’s useful life should be short.

SIC-32 does not apply to expenditure on

 purchasing, developing and operating hardware of a website. The USE OF WEBSITE
cost of purchasing, developing, and operating hardware (e.g.
servers and Internet connections) of a web site are accounted for A web site designed for A web site designed for
as property, plant and equipment (IAS 16). external access may be used for internal access may be used to:
 an internet service provider hosting the entity’s web site. (This various purposes such as to:  store company policies /
expenditure is recognised as an expense as and when the services  advertise products and customer details, and
are received) services,  search relevant
 the development or operation of a web site for sale to another  provide electronic services, information.
entity. and
 sell products and services

STAGES OF WEBSITE DEVELOPMENT AND ACCOUNTING TREATMENT:

STAGE ACTIVITIES ACCOUNTING TREATMENT

Planning (This stage  Undertaking feasibility studies Expense when incurred.

is similar in nature to  Defining hardware and software specifications
the research phase)  Evaluating alternative products and suppliers
 Selecting preferences

Application and  Obtaining a domain name Capitalize as an intangible assets if expenditure:

infrastructure  Purchasing or Developing operating software (e.g.  Meets the following recognition criteria as per IAS 38:
development* (This operating system and server software) i. the technical feasibility of completing the website
stage is similar in  Developing code for the application ii. its intention to complete the website and use it
nature to the  Installing developed applications on the web server iii. its ability to use website
development phase)  Stress testing iv. how the website asset will generate probable future
economic benefits
Graphical design  Designing the appearance of web pages v. the availability of adequate technical, financial and
development* other resources to complete the development and to
use the website
Content  Creating, purchasing, preparing and uploading
vi. ability to measure the expenditure attributable to the
development* information, either textual or graphical in nature,
website during its development
on the web site before the completion of the web
 Is not for promoting or advertising entity’s own product or
site’s development.
service.

Operating  Updating graphics and revising content Expense when incurred, unless it meets the IAS 38 criteria for
 Adding new functions, features and content the capitalisation of subsequent expenditure (this will only
 Registering the web site with search engines occur in rare circumstances).
 Backing up data
 Reviewing security access
 Analyzing usage of the web site

KnS School of Business Studies For your valuable feedback, any update, error or
query, kindly let me know at emquaid93@gmail.com
 IAS-40: INVESTMENT PROPERTY
RECOGNITION
Investment property is recognized as an asset when:
 it is probable that future economic benefits associated with
the property will flow to the entity; &
 Cost of the property can be reliably measured.
INITIAL MEASUREMENT
 Investment property is initially measured at cost, including
the transaction cost.
 The cost of investment property includes:
- Its purchase price and
- Any directly attributable expenditure, such as legal fees or
professional fees, property taxes, etc.
 Such cost does include:
- Start-up expenses;
- Operating losses incurred before investment property
achieves the planned occupancy level; &
- Abnormal waste.
 When payment for investment property is deferred, discount
it to its present value to set cash price equivalent.
SUBSEQUENT MEASUREMENT
 After initial recognition, an entity can choose between fair
value and cost model.
 The accounting policy choice must be applied to all
investment property (with few exception).
COST MODEL
 Investment property is measured in accordance with
requirements set out for that model in IAS 16.
FAIR VALUE MODEL
 The entity shall measure all of its investment property at
fair value, except in the extremely rare cases where this
cannot be measured reliably. In such cases it should
apply the IAS 16 cost model.
 Fair value is the price that would be received to sell the
investment property in an orderly transaction between
market participants at the measurement date (see IFRS
13 Fair Value Measurement)
 Gain or loss arising from changes in fair value of
investment property is recognized in profit or loss for the
period in which it arises.
 In rare exceptional circumstances, if fair value cannot be
determined (e.g. active market ceased existing), the cost
model in IAS 16 is used to measure the investment
property.
SWITCHING THE MODELS – CHANGE IN POLICY
 Switching from cost model to fair value or vice versa is
allowed but only if the change results in the financial
statements providing reliable and more relevant information.
 Switching from cost model to fair value model would
probably meet the condition and is therefore allowed.
 However, switch from fair value model to cost model is highly
unlikely to result in more reliable presentation.
KnS School of Business Studies
Compiled by: Murtaza Quaid, ACA
INVESTMENT PROPERTY - DEFINITION
Investment property is
 a land or building (or a part of it) or both;
 that is held (by the owner or by the lessee as a right-of-use asset);
 to earn rentals or for capital appreciation or both.
INCLUDES
 Land held for long-term capital appreciation
 Land held for undetermined future use
 Building leased out under an operating lease
 Vacant building held to be leased out under operating lease
 Property being constructed/developed for future use as investment
property.
EXCLUDES
 Property held for production or supply of goods or services (IAS 16);
 Property held for administrative purposes (IAS 16);
 Property held for sale in the ordinary course of business or in the
process of construction or development for such sale (IAS 2);
 Property being constructed or developed on behalf of 3rd parties
(IAS 11/IFRS 15);
 Owner-occupied property (IAS 16);
 Property occupied by employees whether or not the employees pay
rent at market rates (IAS 16); or
 Property leased to another entity under a finance lease (IFRS 16).
EXCEPTION TO THE RULE
An entity may:
(a) choose either fair value or cost model for all investment property
backing liabilities that pay a return linked directly to the fair value of, or
returns from, specified assets including that investment property; and
(b) choose either fair value or cost model for all other investment
property, regardless of the choice made in (a).
INABILITY TO MEASURE FAIR VALUE RELIABLY
If fair value of investment property under construction is not reliably
measurable but the fair value of the property is expected to be reliably
measurable when construction is complete, the entity shall measure that
property at cost until either its fair value becomes reliably measurable or
construction is completed (whichever is earlier).
 In exceptional cases, there is clear evidence that fair value of investment
property is not reliably measurable on a continuing basis. This arises
only when the market for comparable properties is inactive and
alternative reliable measurements of fair value are not available.
 In such case, the entity shall measure that investment property using
cost model in IAS 16.
 Residual value of the investment property shall be assumed to be zero.
 The entity shall apply IAS 16 until disposal of the investment property.
If an entity has previously measured an investment property at fair value, it
shall continue to measure the property at fair value until disposal even if
comparable market transactions become less frequent or market prices
become less readily available.
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 IAS-40: INVESTMENT PROPERTY
Compiled by: Murtaza Quaid, ACA
TRANSFER TO / FROM INVESTMENT PROPERTY

Transfers to / from investment property can be made only when there is a change in the use of the property.

FOR INVESTMENT PROPERTY AT COST MODEL

Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred
and they do not change the cost of that property for measurement or disclosure purposes.

FOR INVESTMENT PROPERTY AT FAIR VALUE MODEL

Circumstance Transfer Accounting treatment

Commencement of owner From IAS 40  Revalue the property as per IAS 40 and then transfer it to IAS 16
occupation to IAS 16  Fair value at the date of transfer becomes the deemed cost for future accounting
purposes.

Commencement of development From IAS 40  Revalue the property as per IAS 40 and then transfer it to IAS 2
with a view to sale to IAS 2  Fair value at the date of transfer becomes the deemed cost for future accounting
purposes.

End of owner occupation & From IAS 16  Revalue the property to its fair value as per the rules of IAS 16 and then transfer it to
commencement of operating lease to IAS 40 IAS 40

End of inventory & From IAS 2  Transfer the property at carrying amount and then revalue it as per IAS 40
commencement of operating lease to IAS 40  Fair value at the date of transfer and any difference between previous carrying amount
is recognized in P/L

DERECOGNITION OF INVESTMENT PROPERTY OTHER CONCEPTS

When an investment property is derecognized, a gain or loss on
disposal should be recognized in P/L. This gain or loss should
normally be determined as the difference between the net disposal
proceeds and the carrying amount of the asset.
SUMMARY OF DISCLOSURE REQUIREMENTS
An entity shall disclose:
 Whether it has follow the fair value model or cost model
 Whether property interest held as operating lease are included
in investment property
 Criteria for classification as investment property
 Assumptions in determining fair value
 Use of independent professional valuer (encouraged but not
required)
 Rental income and expenses
 Any restrictions or obligations
Fair value model – additional disclosures
An entity that adopts this must also disclose a reconciliation of the
carrying amount of the investment property at the beginning and
end of the period.
Cost model – additional disclosures
These relate mainly to the depreciation method, rates and useful
lives used as well as a reconciliation of the carrying amount at the
beginning and end of the period. In addition, an entity which adopts
the cost model must disclose the fair value of the investment
property.
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KnS School of Business Studies
Partial own use
 Some properties comprise a portion that is held to earn rentals or for
capital appreciation and another portion that is held for own use.
 If these portions could be sold separately (or leased out separately
under a finance lease), they are accounted for the portions separately.
The part that is rented out is investment property.
 If the portions cannot be sold or leased out separately, the property is
investment property only if the owner-occupied (property, plant and
equipment) portion is insignificant.
Provision of ancillary services to occupants
 If those services (e.g. security or maintenance services) are a relatively
insignificant component of the arrangement as a whole, then the
entity may treat the property as investment property.
 Where the services provided are more significant (such as in the case
of an owner-managed hotel), the property should be classified as
owner-occupied property, plant and equipment.
Inter-company rentals
 Property rented to a parent, subsidiary, or fellow subsidiary is not
investment property in consolidated financial statements that include
both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.
 However, such property will be investment property in the separate
financial statements of the lessor, if it meets the definition of
investment property.
Property held under an operating lease
A property interest that is held by a lessee under an operating lease may
be classified and accounted for as investment property if:
 The rest of the definition of investment property is met;
 The operating lease is accounted for as if it were a finance lease in
accordance with IFR 16 Leases; and
 The lessee uses the fair value model set out in IAS 40 for all investment
properties.
 IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
Compiled by: Murtaza Quaid
SCOPE GOVERNMENT GRANT GOVERNEMENT ASSISTANCE

IAS 20 deals with all types of government grant except:  Assistance by government
 Government assistance in the form of tax reliefs (tax  In the form of transfers of resources to
holidays, tax credits etc.) an entity
 Government participation in the ownership of an entity  In return for past or future compliance
 Government grants covered by IAS 41 Agriculture. with certain conditions relating to the
operating activities of the entity
RECOGNITION  Exclude forms of government
assistance which cannot reasonably
Grants are recognized when both: have a value placed on them and
 There is reasonable assurance the entity will comply with which cannot be distinguished from
the conditions attached to the grant the normal trading transactions of the
 The grant will be received. entity.
 Action by government designed to
provide an economic benefit specific
to an entity or range of entities
qualifying under certain criteria.
 Government assistance does not
include benefits provided only
indirectly through action affecting
general trading conditions, such as
the provision of infrastructure in
development areas or the imposition
of trading constraints on
competitors.

TYPES OF GOVERNMENT GRANT

GRANTS RELATED TO INCOME (Compensation of cost) GRANTS RELATED TO ASSETS

Definition

Government grants other than those related to assets. Government grants whose primary condition is that an entity qualifying for
them should purchase, construct or otherwise acquire long-term assets.

Recognition and presentation in Financial statement

“Income approach’ should be used, and the grant should be taken to There are 2 options to present grant relating to assets in financial
income over the periods necessary to match the grant with the costs that statements:
the grant is intended to compensate.  As deferred income (and recognize it as income on a systematic basis
There are 2 options to present grant relating to income in financial over the useful life of the asset)
statements:  By deducting the grant from the asset’s carrying amount. Depreciate the
 Separately as ‘other income’ net amount of asset over its useful life.
 Deduction from the related expense..

If the grant is provided to If grant is provided to reimburse costs

reimburse costs already incurred to be incurred, then it is recognized in
in the past, then it is recognized profit or loss in the periods when the
immediately in profit or loss. costs are incurred.

Repayment of government grants: Govt. grant might become repayable by the entity (e.g. when underlying conditions for the grant are not met).
Repayment of government grant is accounted for as a change in accounting estimate

Repayment of government grant is
• First applied against any unamortized deferred credit recognized in
respect of such grant.
• If the repayment exceeds any such deferred credit any excess is
recognized as expense immediately in profit or loss.
 If grant was accounted for as reduction in carrying amount of asset, its
repayment is recognised by increasing the carrying amount of asset. The
cumulative additional depreciation that would have been recognised in
profit or loss to date in the absence of the grant shall be recognised
immediately in profit or loss. (Repayment of grant might indicate the
possible impairment of the new carrying amount of the asset)
 If the grant was accounted for as deferred income, its repayment is
recognized by reducing the deferred income balance by the amount
repayable.

OTHER GOVERNMENTS GRANTS Definition Accounting Treatment

Forgivable loans Forgivable loans are loans which the lender A forgivable loan from government is treated as a government
undertakes to waive repayment of under grant when there is reasonable assurance that the entity will meet
certain prescribed conditions the terms for forgiveness of the loan.

Loans at below market rates of The benefit of a government loan at a below- The benefit of below-market rate of interest is measured as the
interest market rate of interest is treated as a difference between the initial carrying value of loan determined in
government grant. accordance with IAS 39 (IFRS 9) and the proceeds received.

Non-monetary grants A government grant may take the form of a Usually such grant is accounted for at fair value, although
transfer of a non-monetary asset, such as land recording both the asset and the grant at a nominal amount is
or other resources, for the use of the entity permitted.

DISCLOSURE

 Accounting policy adopted for grants, including method of presentation in statement of financial position
 Nature and extent of grants recognized in the financial statements
 An indication of other forms of government assistance from which the entity has directly benefited
 Unfulfilled conditions and contingencies attaching to recognized grants.
 IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations
KnS Institute of Business Studies
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS) HELD FOR SALE
 Classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than
through continuing use. The following criteria must be met
- The asset (or disposal group) is available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of
such asset (or disposal group);
- The sale must be highly probable i.e Sale is expected to be completed
within one year from classification date;
- Management is committed to a plan to sell the asset (or disposal group);
- Asset must be actively marketed for a sale at a reasonable price in
relation to its current fair value;
- Actions required to complete the plan indicate that it is unlikely that plan
will be significantly changed or withdrawn.
MEASUREMENT
Immediately prior to classification as held for sale - Carrying amount of the asset
is measured in accordance with applicable IFRSs (For e.g. IAS 16, IAS 38 etc.)
After classification as held for sale - It is measured at lower of carrying amount
and fair value less costs to sell. However, following assets are covered under
other IFRSs are scoped out of measurement requirements of IFRS 5 (Disclosure
requirements still to be complied with):
 Deferred tax assets (IAS 12 Income Taxes).
 Assets arising from employee benefits (IAS 19 Employee Benefits).
 Financial assets in the scope of IAS 39 / IFRS 9 Financial Instruments.
 Non-current assets at fair value model (IAS 40 Investment Property).
 Non-current assets measured at fair value less estimated point of sale costs
(IAS 41 Biological Assets).
 Contractual rights under insurance contracts (IFRS 4 Insurance Contracts).
Impairment - Impairment must be considered both at the time of classification as
held for sale and subsequently.
 Immediately prior to classifying an asset as held for sale, impairment is
measured and recognised in accordance with the applicable IFRSs.
 After classification of asset as held for sale, any impairment loss will be
recognized in profit or loss only.
Reversal of impairment - Subsequent increases in fair value can be recognised in
P/L to the extend that it is not in excess of the cumulative impairment losses that
have been recognised with this IFRS or IAS 36 Impairment of Assets
No depreciation - Non-current assets (or disposal groups) classified as held for
sale are not depreciated.
DISCLOSURE
 Non-current assets (or disposal group) held for sale are disclosed separately
on the face of Balance sheet. If there are any liabilities, these are disclosed
separately from other liabilities
 Description of the nature of assets (or disposal group) held for sale and facts
and circumstances surrounding the sale
 Gain or loss resulting from initial or subsequent fair value measurement of
non-current asset held for sale or disposable group and if not presented
separately in P/L account, the line item that includes that gain or loss
 Prior year balances in balance sheet are not reclassified as held for sale
 If applicable, the reportable segment (IFRS 8) in which the non-current asset
or disposable group is presented.
CHANGES TO THE “PLAN OF SALE”
 If IFRS 5 classification criteria no longer met, entity shall cease to classify the
asset (or disposal group) as held for sale and shall measure it at lower of:
- its carrying amount before such asset was classified as held for sale,
adjusted for any depreciation, amortization or revaluations that would
have been recognised if the asset not been classified as held for sale, and
- its recoverable amount at the date of the subsequent decision not to sell.
 Above adjustment to carrying amount of such asset shall be recorded in P/L.
Compiled by: Murtaza Quaid
DISPOSAL GROUP
 A 'disposal group' is a group of assets, possibly with some
associated liabilities, which an entity intends to dispose of in a
single transaction.
 Measurement basis required for non-current assets classified as
held for sale is applied to the group as a whole. The entire group is
measured at lower of its:
- Carrying amount (CA) and
- Fair value less costs to sell.
 Impairment loss (if any) reduces the CA of non-current assets in
the disposal group in the order of allocation required by IAS 36.
ABANDONED ASSET
Non-current asset (or disposal group) that is to be abandoned must
not be classified as held for sale. (but may be classified as
discontinued once abandoned)
HELD FOR DISTRIBUTION TO OWNERS CLASSIFICATION
Classification criteria, presentation and measurement requirements of
non-current asset (disposal group) held for sale also apply to a non-
current asset (or disposal group) that is classified as held for
distribution to owners.
DISCONTINUED OPERATION
A component of an entity that either has been disposed of or is
classified as held for sale and either:
 Represents a separate major line of business or geographical area
of operations;
 Is part of a single coordinated plan to dispose of a separate major
line of business or geographical area of operations;
 Is a subsidiary acquired exclusively with a view to resale and the
disposal involves loss of control.
PRESENTATION OF DISCONTINUED OPERATION
Results of discontinued operations are presented separately from
results of continuing and on going activities
In statement of financial position (SOFP)
Non-current asset or assets of disposal group are classified as held for
sale separately from other assets. The same applies for liabilities of a
disposal group classified as held for sale.
In statement of comprehensive income (SOCI)
A single amount comprising the total of:
 Post-tax profit or loss of discontinued operations, and
 Post tax gain or loss recognized on the measurement to fair value
less costs to sell a or on the disposal of assets or disposal groups.
The analysis of a single amount (i.e. revenue, expense, PBT, tax etc.)
shall be reported in the notes or in SOCI in a section distinct from
continuing operations.
In statement of cash flows (SOCF)
Net cash flows attributable to the operating, investing and financing
activities of discontinued operation is separately presented on the
face of the SOCF or disclosed in the notes.
IFRS 5 prohibits retroactive classification as a discontinued operation,
when discontinued criteria are met after the end of reporting period.
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 IAS 21 - THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Functional currency is the currency of the
primary economic environment in which the
company operates. It is the own entity’s
currency and all other currencies are “foreign
currencies”.
Presentation currency is the currency in which
the financial statements are presented.
REPORTING OF FOREIGN CURRENCY
TRANSACTIONS IN THE FUNCTIONAL
CURRENCY
Initially  Spot exchange rate at the date of
transaction
Subsequently Rate?
Monetary items Closing rate
Non-monetary items Historical rate
at historical cost (transaction date)
Non-monetary items Rate at the date when
at fair value FV was measured
CONSOLIDATION OF FOREIGN ENTITIES AND
TRANSLATION OF FINANCIAL STATEMENTS TO
A PRESENTATION CURRENCY
 Assets & liabilities – closing rate
 Income and expenses – rate at transaction
date (for practical purposes some period
average rate might approximate the
transaction date rates)
 The resulting exchange differences are
recognised in other comprehensive income
(foreign currency translation reserve).
KnS Institute of Business Studies
Compiled by: Murtaza Quaid
MONETARY OR NON-MONETARY ?
Is there a right/obligation to deliver fixed / determinable amount of currency units?
Yes No
Monetary items Non-monetary items
Examples Examples
 Trade receivables  Property, plant and equipments
 Trade payables  Intangibles (including goodwill)
 Investment in debt securities  Inventories
 Deposit and bank accounts  Equity investment (e.g. shares)
 Cash  Biological assets
 Lease liability  Share capital
 Tax payable  Reserve / other component of equity
TREATMENT OF EXCHANGE RATE GAIN / LOSS
Monetary items Non-monetary items
Exchange rate gain / loss on a monetary Exchange rate gains or losses on non-
item that forms a part of a reporting monetary items are recognized
entity’s net investment in a foreign consistently with the recognition of gains
operation shall be recognized: or losses on an item itself.
 In separate entity’s or foreign For example, when an item is revalued
operation’s financial statements: in with the changes recognized in OCI, then
P/L also exchange rate component of that
 In consolidated financial statements: gain or loss is recognized in OCI, too.
o initially in OCI and
o subsequently, on disposal of net For your valuable feedback, any update,
investment in foreign operation,
error or query, kindly let me know at
they shall be reclassified to P/L
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 IAS 32 - FINANCIAL INSTRUMENTS: PRESENTATION
Compiled by: Murtaza Quaid
CLASSIFICATION AS LIABILITY OR EQUITY TREASURY SHARES

 Is there a contractual obligation to transfer economic benefit?  Treasury shares are reacquired entity’s own equity shares.
- If YES → Liability (For e.g. Loan, redeemable preference share etc.)  Gain or loss is not recognised on the purchase, sale, issue, or
- If NO → Equity (For e.g. Ordinary shares, irredeemable preference cancellation of treasury shares
shares etc.)  Consideration paid or received is recognised directly in equity.
 An entity must on initial recognition of an instrument classify it as a  Double entry
financial liability or equity. Debit: Equity xxxx
 The classification may not be changed subsequently . Credit: Cash / Payable xxxx

Classification COMPOUND FINANCIAL INSTRUMENT

Characteristics of instrument Example
for issuer
 A non-derivative financial instrument that contains
Instrument that will be Financial Redeemable preference two component:
settled/redeem in cash liability shares - Financial liability - Issuer’s contractual
obligation to pay cash (principal and interest),
Instrument that will be settled in Loan mandatorily - Equity instrument - A call option written to the
variable number of entity own convertible into variable holder to convert the loan into equity shares.
Financial
equity instrument (Mandatorily) number of borrower’s  Compound instruments are required split into
liability
(i.e. Fixed amount ÷ market value equity shares for the value liability component and equity component as
per shares) of loan. follow:
Fair value of the instrument as a whole xxxx
Equity Loan mandatorily
Instrument that will be settled in a Less. Fair value of the liability component (xxxx)
instrument convertible into fixed
fixed number of entity own equity Equity component (Residual amount) xxxx .
(interest part number of borrower’s
instrument (Mandatorily)  The split is made on initial recognition of the
is liability) equity shares.
instruments and is not subsequently revised due
Instrument that may be settled in Loan convertible into to change in interest rate, share price or possibility
Equity of exercise of conversion option.
fixed number of entity own equity borrower’s equity shares at
instrument  Transaction / issue cost on compound financial
instrument at the option of issuer the option of borrower
instrument will be allocated on pro-rata basis of
Instrument that may be settle in a initially recognized amounts of equity and liability.
Loan convertible at the
variable number of entity own
option of lender into On issue of compound financial instrument
equity instrument at the option of Financial
variable umber of Debit: Cash / Bank xxxx
holder. liability
borrower’s equity shares for Credit: Financial liability xxxx
(i.e. Fixed amount ÷ market value
the value of loan amount Credit: Equity xxxx
per shares)
Transaction / issue cost (if any)
Loan convertible at the Debit: Financial liability xxxx
Instrument that may be settle in a Compound
option of lender into fixed Debit: Equity xxxx
fixed number of entity own equity Financial
number of borrower’s Credit: Cash / Bank xxxx
instrument at the option of holder instrument
equity shares. Interest expense in subsequent years
Debit: Interest expense – P/L (IRR) xxxx
Credit: Cash / Bank (interest paid) xxxx
OFFSETTING A FINANCIAL ASSET AND A FINANCIAL LIABILITY Credit: Financial Liability (Bal.) xxxx
If conversion is exercised
 Presenting a financial asset and a financial liability as a single net amount Debit: Financial Liability xxxx
 Offsetting only when: Credit: Share capital + premium xxxx
- there is a legally enforceable right to offset; and If conversion is not exercised
- an intention to settle net or to settle both amounts simultaneously. Debit: Financial Liability xxxx
 The right of set-off: Credit: Cash / Bank xxxx
(a) Must not be contingent on a future event
(b) Must be legally enforceable in all of the following circumstances:
- The normal course of business For your valuable feedback, any update,
- The event of default error or query, kindly let me know at
- The event of insolvency or bankruptcy of the entity and all of the emquaid93@gmail.com
counterparties.

KnS Institute of Business Studies

 IFRS 9 – FINANCIAL INSTRUMENTS
Compiled by: Murtaza Quaid

CLASSIFICATION OF FINANCIAL ASSET

No Are the asset’s contractual Yes Is the business model’s Yes

Is the asset an equity
cash flows solely principal objective to hold to collect
investment?
and interest? contractual cash flows?
Yes
Yes No No
Is it held for trading?
No Is the business model’s
No
objective achieved both by
Has the entity elected the OCI collecting contractual cash
option (irrevocable)? No flows and by selling financial
assets?
Yes
Yes

Accounting Treatment FVTOCI FVTPL FVTPL FVOCI Amortized Cost

Initial measurement Fair value + TC Fair value Fair value Fair value + TC Fair value + TC

Transaction cost (TC) Capitalized Expensed out Expensed out Capitalized Capitalized

Subs. measurement Fair value Fair value Fair value Fair value Amortized cost

Δ in fair value OCI P/L P/L OCI Not applicable

Impairment Not applicable Not applicable Not applicable P/L P/L

FCY gain / (loss) OCI P/L P/L P/L P/L

Dividend / Interest P/L P/L P/L (IRR) P/L (IRR) P/L (IRR)

Recycling of gain/(loss)
to P/L on derecognition Not allowed Not applicable Not applicable Allowed Not applicable

For your valuable feedback, any update,

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emquaid93@gmail.com CLASSIFICATION OF FINANCIAL LIABILITY

Yes
Is the liability a derivative or financial liability that is held for trading?

No
Yes
Is it designated under the fair value option?

No

Accounting Treatment Amortized Cost FVTPL

Initial measurement Fair value – TC Fair value

Transaction cost (TC) Capitalized Expensed out

Subs. measurement Amortized cost Fair value

P/L (except Δ in fair value

Δ in fair value Not applicable due to Δ in credit risk – OCI)

FCY gain / (loss) P/L P/L

Interest expense P/L (IRR) P/L (IRR)

KnS Institute of Business Studies
 IFRS 9 – FINANCIAL INSTRUMENTS
Compiled by: Murtaza Quaid

REGULAR WAY TRANSACTIONS

Definition
A purchase or sale of a financial asset under a contract whose terms require delivery of the asset within the time frame established generally
by regulation or convention in the marketplace concerned.
Accounting policy
An entity can choose to account for a regular way purchase / sale of financial assets using either trade date accounting or settlement date
accounting. The same method must be applied consistently for all purchases and sales of financial assets that are classified in the same way.
Settlement date accounting issues
An entity must account for any change in the fair value of the asset between the trade date and the settlement date in the same way as it
accounts for the acquired asset. In other words any change in value:
 is not recognised for assets measured at amortized cost; but
 is recognised in P/L or OCI as appropriate for financial assets measured at fair value.

TRADE DATE ACCOUNTING SETTLEMENT DATE ACCOUNTING

PURCHASE OF FINANCIAL ASSET

Asset to be received and the liability to pay for it are recognised on Asset recognised on the date it is received by an entity.
the trade date

At trade date At trade date

 Record financial asset and financial liability  No entry
Debit: Financial asset xxxx At reporting date
Credit: Financial liability xxxx  Revalue financial asset, if measured at FV.
Debit: Receivable xxxx
At reporting date Credit: Gain - P/L or OCI (if any) xxxx
 Revalue financial asset, if measured at FV.  Do not revalue financial asset, if measured at amortized cost.
Debit: Financial asset xxxx At Settlement date
Credit: Gain - P/L or OCI (if any) xxxx  Record financial asset at FV, if measured at FV, derecognize
 Do not revalue financial asset, if measured at amortized cost. the receivable recorded at reporting date (if any),record
outflow of cash with difference to P/L or OCI.
At Settlement date Debit: Financial asset xxxx
 Revalue financial asset, if measured at FV. Credit: Cash / Bank xxxx
Debit: Financial asset xxxx Credit: Receivable (If any) xxxx
Credit: Gain - P/L or OCI (if any) xxxx Credit: Gain – P/L or OCI (if any) xxxx
 Do not revalue financial asset, if measured at amortized cost.  Record financial asset at purchase price, if measured at
 Settle financial liability against cash amortized cost and record outflow of cash
Debit: Financial liability xxxx Debit: Financial asset xxxx
Credit: Cash / Bank xxxx Credit: Cash / Bank xxxx

SALE OF FINANCIAL ASSET

Derecognition of an asset with recognition of receivable and gain or Derecognition of an asset and recognition of any gain or loss on
loss arising occurs on the trade date disposal on the day that it is delivered by the entity.

At trade date At trade date

 Derecognize the financial asset and record receivable with any  Revalue the financial asset to its selling price and record any
gain/(loss) in P/L gain/(loss) in P/L
Debit: Receivable xxxx Debit: Financial asset xxxx
Credit: Financial asset xxxx Credit: Gain – P/L xxxx
Credit: Gain – P/L xxxx
At Reporting date At Reporting date
 No entry  No entry
At settlement date
 Record inflow of cash and derecognize the receivable At settlement date
Debit: Cash / Bank xxxx  Record inflow of cash and derecognize the financial asset
Credit: Receivable xxxx Debit: Cash / Bank xxxx
Credit: Financial asset xxxx

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 IFRS 9 – FINANCIAL INSTRUMENTS - IMPAIRMENT
SCOPE
 Investment in debt securities measured at amortized cost;
 Investment in debt securities measured at FVTOCI;
 Loan commitments when there is a present obligation to
extend credit (except where these are measured at FVTPL);
 Financial guarantee contracts to which IFRS 9 is applied
(except those measured at FVTPL);
 Lease receivables (IFRS 16); and
 Contract assets (IFRS 15).
 IFRS 9 introduces a new impairment model based on
expected losses, (rather than incurred loss as per IAS 39).
 Anticipating credit losses is a prudent approach, meaning it
is less likely that assets will be over-stated. Users of the
financial statements are also provided with timely
information, because they are warned about potential
impairment issues before actual defaults have occurred.
EXPECTED LOSS MODEL
GENERAL APPROACH
Compulsory application
 Debt instrument measured at amortized cost
 Debt instruments carried at FV through OCI
Optional application
 Trade Receivable with significant financing component
 Contract Assets with significant financing component
 Lease Receivables
Measurement at Initial recognition
A loss allowance measured as the 12-month expected credit losses.
Measurement at subsequent recognition
Expected credit loss associated with financial asset is then reviewed at
each reporting date. Expected credit loss recognised as a loss allowance
depends on the extent of credit deterioration since initial recognition.
 If there is no significant increase in credit risk the loss allowance for
that asset is re-measured to 12 month expected credit loss.
 If there is a significant increase in credit risk the loss allowance for
that asset is re-measured to lifetime expected credit losses. The
entity still hopes to collect amounts due but the possibility of a loss
event has increased. (Rebuttable presumption that credit risk has
increased significantly when contractual payments are more than 30
days past due)
 If the asset is credit impaired, expected credit losses should be
measured as the difference between the asset’s gross carrying
amount and the present value of the estimated future cash flows
when discounted at the original effective rate of interest. The
financial asset is written down to its estimated recoverable amount.
The entity accepts that not all contractual cash flows will be
collected and the asset is impaired.
Future revenue recognition
Interest is recognised in the future by applying the effective rate to
the new amortized cost (after recognition of the impairment loss).
Subsequently, if the credit risk of the financial instrument improves
so that the financial asset is no longer credit-impaired and the
improvement can be related objectively to an event since the net
method was applied, the calculation of interest revenue reverts to
the ‘gross method’ from the beginning of the next reporting period.
KnS Institute of Business Studies
Compiled by: Murtaza Quaid
IMPORTANT DEFINITION
Credit loss: The difference between all contractual cash flows that are due to an
entity in accordance with the contract and all the cash flow that the entity expects
to receive (i.e. all cash shortfalls), discounted at the original effective interest rate.
Contractual cash flows (as per the terms) xxxx
Expected cash flow (now) (xxxx)
Cash shortfall xxxx
PV at original effective rate xxxx
Expected credit losses: The weighted average of credit losses with the respective
risks of a default occurring as the weights.
Lifetime expected credit losses: The expected credit losses that result from all
possible default events over the expected life of a financial instrument.
12-month expected credit losses: The portion of lifetime expected credit losses that
represent the expected credit losses that result from default events on a financial
instrument that are possible within the 12 months after the reporting date.
SIMPIFIED APPROACH
Compulsory application
 Trade Receivable without significant financing component
 Contract Assets without significant financing component
Optional application
 Trade Receivable with significant financing component
 Contract Assets with significant financing component
 Lease Receivables
 A loss allowance measured as the lifetime expected credit losses is
recognised.
 Expected credit losses on trade receivables can be calculated using
provision matrix
LOSS ALLOWANCE
Adjustments to the loss allowance are charged to P/L.
Loss allowance for financial assets carried at amortized cost
The loss allowance balance is netted against the financial asset to which
it relates on the face of the statement of financial position.
NB: this is just for presentation only; the loss allowance does not reduce
the carrying amount of the financial asset in the double entry system.
Loss allowance for financial assets at fair value through OCI
The loss allowance balance is not netted against the financial asset to
which it relates as this is carried at fair value. The increase (or decrease)
in the allowance is still charged to profit or loss but the other side of the
entry is recorded in other comprehensive income.
PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSETS
If a financial asset is credit impaired when purchased, then interest
income is calculated using a credit adjusted effective interest rate. This
incorporates expected lifetime credit losses at the inception date and
therefore the allowance recorded against such assets should only be the
change in the lifetime expected credit losses since inception.
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 IFRS 9 – FINANCIAL INSTRUMENTS
Compiled by: Murtaza Quaid

RECLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITY

 Reclassification of financial assets is required if, and only if, the objective of the entity’s business model for managing those financial assets changes.
 If an entity determines that its business model has changed in a way that is significant to its operations, then it reclassifies all affected assets
prospectively from the first day of the next reporting period (the reclassification date). Prior periods are not restated.
 Reclassification of financial liability is not allowed.

MEASUREMENT ON RECLASSIFICATION OF FINANCIAL ASSETS

Reclassification to

FVTPL FVOCI Amortized cost

Fair value on reclassification date = new Fair value on reclassification date = new
FVTPL

carrying amount. carrying amount.

Calculate effective interest rate based on Calculate effective based on new carrying
new carrying amount. amount.
Reclassification from

Fair value on reclassification date = new Reclassify financial asset at fair value.
carrying amount. Remove cumulative balance from OCI and
Reclassify accumulated OCI balance to P/L use it to adjust the reclassified fair value.
FVTOCI

on reclassification date. Adjusted amount = amortized cost.

Effective interest rate determined at initial Effective interest rate determined at initial
recognition is not adjusted as a result of recognition is not adjusted as a result of
reclassification. reclassification.

Remeasure to fair value, with any Remeasure to fair value, with any
Amortized cost

difference recognized in P/L difference recognised in OCI.

Fair value on reclassification date = new
carrying amount. Effective interest rate determined at initial
recognition is not adjusted as a result of
Calculate effective interest rate based on
reclassification.
new carrying amount.

MODIFICATION / RESTRUCTURING OF FINANCIAL ASSET

 For modifications that do not result in derecognition, recalculate gross carrying amount of asset by discounting modified contractual cash flows using
original IRR. Any difference between this recalculated amount and existing gross carrying amount is recognised in P/L as a modification gain / loss.
 Any modification costs or fees incurred adjust the carrying amount of modified financial asset, and are amortized over remaining term of modified
financial asset.

MODIFICATION / RESTRUCTUIRNG OF FINANCIAL LIABILITY

(PV of modified CF @ original IRR + modification fee paid – modification fee received) - PV of original CF @ original IRR (i.e. Carrying amount) x 100
PV of original CF @ original IRR (i.e. Carrying amount)

≥ 10% < 10%

Modification with substantially different terms Modification with terms that are not substantially different

Extinguishment Accounting Modification Accounting

 Derecognize the original liability  Do not derecognize the original liability.

 Record any modification fee paid / received in P/L.
 Recognize new liability at its fair value, with any gain / (loss) in P/L.
 The new liability is recognised at its FV in accordance with the
normal rules of recognition of financial instruments. This is found
by discounting the revised future payments at the market rate of
interest that applies to such cash flows.
 Adjusted the carrying value of original liability for any
modification fee paid / received.
 Recalculate amortized cost of modified financial liability by
discounting modified contractual cash flows using original EIR.
 Any difference between this recalculated amount and existing
carrying value is recognized as modification gain/(loss) in P/L.

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 IFRS 9 – FINANCIAL INSTRUMENTS – DERECOGNITION
KnS Institute of Business Studies Compiled by: Murtaza Quaid

DERECOGNITION OF FINANCIAL LIABILITIES DERECOGNITION OF FINANCIAL ASSETS

 A financial liability is derecognized only Consolidate all subsidiaries including special purpose
when extinguished i.e. when the entities (SPEs). For your valuable feedback,
obligation specified in the contract is any update, error or query,
- Discharged; kindly let me know at
- Cancelled; or Determine whether the derecognition principles are emquaid93@gmail.com
- Expired applied to all or part of the asset.
 The difference between the carrying
amount of a financial liability Yes
extinguished or transferred to a 3rd party Have the right to the cash flow from the asset expired? Derecognize the asset
and the consideration paid is recognised
in P/L. No
Yes Has the entity transferred its rights to receive the cash
flows from the asset?
Where the contractual rights to receive cash
flows have been retained by the entity but it No
has assumed a contractual obligation to pay No
Has the entity assumed an obligation to pay Continue to recognize
those cash flows to one or more entities,
the cash flows from the asset? the asset
additional derecognition criteria will be
considered only if : Yes
 Entity has no obligation to pay unless it Yes
Has the entity transferred substantially all
collects amounts from the original asset; Derecognize the asset
risks and rewards?
 Entity is prohibited by “terms of transfer
contract” to sell or pledge the original No
asset other than as security to the Yes
Has the entity retained substantially all Continue to recognize
eventual recipients of cash flows; and
risks and rewards? the asset
 Entity must remit any cash flows it
collects on behalf of eventual recipients No
without material delay. The entity is not No
entitled to reinvest cash flows except for Has the entity retained control of the asset? Derecognize the asset
short period between collection and Yes
remittance. Any interest earned thereon
is remitted to the eventual recipients. Continue to recognize asset to the extent of the
entity’s continuing involvement.

FACTORING REPURCHASE AGREEMENT

In a factoring transaction, one party transfer the right to some In repurchase agreement, a financial asset is sold with a simultaneous
receivables to another party for an immediate cash payment. agreement to buy it back at some future date at an agreed price.

With out recourse With recourse Repurchase at specified price Repurchase at fair market price

Derecognize the financial Continue to recognize the Continue to recognize the Derecognize the financial asset
asset and debit consideration financial asset and recognize the financial asset and recognize and debit the consideration
received with any gain / (loss) financial liability for cash the financial liability for cash received with any gain / (loss)
recognized in P/L. received. received. recognized in P/L.

GUARANTEE (Continuing involvement)

Where the entity provide guarantee to pay for default losses on a transferred assets, the entity shall record:

Transferred asset Associated liability

 Transferred asset is measured at lower of:  Associated liability is initially measured at the
- Carrying amount of asset; or - Guarantee amount plus
- Maximum amount of the consideration in the transfer that - FV of the guarantee.
the entity could be required to repay (“Guarantee amount”).  Subsequently, FV of guarantee is recognized in P/L on time
 Subsequently, the carrying amount of the asset is reduced by an proportion basis.
impairment losses.
 IFRS 9 – FINANCIAL INSTRUMENTS – HEDGE ACCOUNTING
HEDGE ACCOUNTING CRITERIA
Hedge accounting is optional, not obligatory. Under
IFRS 9, hedge accounting rules can only be applied if
hedging relationship meets the following criteria:
 Hedging relationship consists only of
- Eligible hedged items and
- Eligible hedging instruments
 At inception of hedge, there must be formal
designation and documentation identifying
- Eligible hedged item
- Eligible hedging instrument
- Nature of the risk being hedged.
- How hedge effectiveness will be assessed.
 Hedging relationship must meet hedge
effectiveness requirements.
 If the hedged item is a forecast transaction, then
transaction must be highly probable.
FAIR VALUE HEDGE
Fair value hedge is a hedge of exposure to
changes in fair value of a recognised asset
or liability or firm commitment to buy that
is attributable to a risk that could effect P/L.
At the reporting date, hedging instrument
and hedged item will be re-measured to fair
value.
Gain / (loss) on hedge instrument and (loss)
/ gain on hedge item will be recorded:
- in P/L in most cases, but
- in OCI if the hedged item is an
investment in equity measured at
FVTOCI.
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DISCONTINUATION OF HEDGE
ACCOUNTING
 Discontinuance of hedge accounting is
accounted for prospectively
 Hedge accounting must be
discontinued if :
- Hedging relationship no longer
meets the qualifying criteria
- Hedging instrument is expired, sold,
terminated or exercised
KnS Institute of Business Studies
Compiled by: Murtaza Quaid
 Assets / Liabilities / Unrecognized firm commitment / Highly
ELIGIBLE HEDGE
probable forecast transactions.
ITEM
 Net investment in a foreign operation.
ELIGIBLE HEDGE  Derivatives
INSTRUMENT  Other financial asset / liability measured at FVTPL
HEDGE EFFECTIVENESS CRITERIA
 An entity must assess at inception and at each reporting date whether the hedge
meets all effectiveness criteria. These criteria are as follows:
- There must be an economic relationship between hedged item & instrument
- Effect of credit risk does not dominate the change in value from that economic
relationship
- Hedge ratio is the same for both the:
• Hedging relationship
• Quantity of the hedged item actually hedged, and the quantity of the hedging
instrument used to hedge it.
 Hedge effectiveness relates to expectations and therefore the assessment of
effectiveness must be forwards-looking.
CATEGORIES OF HEDGE
CASHFLOW HEDGE HEDGES OF A NET INVESTMENT IN
A FOREIGN OPERATION
Cash flow hedge is a hedge of exposure to variability in
cash flows that is attributable to a particular risk associated  It is a hedge of an entity’s
with a recognised asset or liability or a highly probable interest in the net assets of a
forecast transaction. foreign operation.
 It can be applied only to
At the reporting date, hedge instrument will be re- foreign exchange differences
measured to fair value. arising between parent’s
functional currency and
 Effective portion of gain / (loss) on hedge instrument is
foreign operation’s functional
recognized in OCI (Cash Flow Hedge Reserve – CFHR)
currency
 Ineffective portion of gain / (loss) on hedge instrument is
 Hedge accounting in respect of
recognized in P/L.
exchange risk associated with
 Gain / (loss) on hedge instrument is recognised in OCI.
an investment in a foreign
However, if gain / (loss) on the hedging instrument since
subsidiary is only allowed in
inception of hedge is greater than (loss) / gain on the
consolidated FS.
hedged item then the excess gain / (loss) on the
instrument must be recognised in P/L. Same as cash flow hedge
 Effective portion of gain / (loss)
 Gain / (loss) on hedging instrument recognised in OCI
on hedge instrument is
(i.e. CFHR) will reclassified to P/L when the hedged cash
recognized in OCI.
transaction affects P/L.
 Ineffective portion of gain /
 However, in case of forecast transactions that results in
(loss) on hedge instrument is
a non-financial asset/liability, CFHR is removed and
recognized in P/L
included in initial cost of the non-financial asset/liability.
Upon disposal of the foreign
 If hedge accounting ceases for a CF hedge because
operation, Following will be
forecast transaction is no longer expected to occur,
reclassified to P/L:
gain / (loss) deferred in OCI must be taken to P/L
- cumulative translation reserve
immediately.
recorded on consolidation of
 If transaction is still expected to occur but hedge
net investment (IAS 21); &
relationship ceases, amounts accumulated in equity
- Cumulative effective gain /
will be retained in equity until the hedged transaction
(loss) on hedging instrument
occurs.
 FINANCIAL INSTRUMENTS
Compiled by: Murtaza Quaid

EMBEDDED DERIVATIVE

HYBRID CONTRACT = N0N-DERIVATIVE HOST CONTRACT + EMBEDED DERIVATIVE

Contract outside Financial  Embedded derivative is a component of a

the scope of IFRS 9 liability
 If host contract is not a financial asset within the
scope of IFRS 9, then the embedded derivative be
separated from its host contract and measured in
accordance with IFRS 9 (i.e. at FVTPL ) if:
- Economic characteristics and risks of the
embedded derivative and the host contract are
not closely related;
- A separate instrument with same terms as
embedded derivative would meet the
definition of a derivative; and
- Entire (hybrid) contract is not measured at FV
with changes in FV recognised in P/L.
 If embedded derivative is separated, the host
contract is accounted for in accordance with
appropriate standard.
Financial asset
If the host contract is a
financial asset within the
scope of IFRS 9 then
entire contract must be
classified and measured
in accordance with IFRS 9.
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Where an entity is unable to
measure the embedded derivative
that is required to be separated from
its host, entire hybrid contract should
be designated as at FVTPL.
hybrid (combined) instrument that also
includes a non-derivative host contract, with
the effect that some of the cash flows of the
instrument vary in a way similar to a stand-
alone derivative.
 An embedded derivative causes some or all
the cash flows of the host to be modified.
Based in specified interest rate, financial
instrument price, commodity price, foreign
exchange rate, credit rating , credit index or
other variables.
 A key characteristics of embedded derivative
is that the embedded derivative can not be
transferred to a third party independently of
the instrument.
If FV of embedded derivative cannot
be determined reliably, then value of
embedded derivative would be the
difference between value of hybrid
and host contract.

IFRIC 19 - EXTINGUISHING FINANCIAL LIABILITIES WITH EQUITY INSTRUMENTS

SCOPE PART EXTINGUISHMENT – ADDITIONAL CONCERNS

 Terms of a liability might be renegotiated such that the lender (creditor)
accepts equity instruments as payment instead of cash.
 IFRIC 19 sets out how a borrower that issues equity instruments to extinguish
all or part of financial liability should account for the transaction.
 Following transactions are scoped out of IFRIC 19:
- Transactions with the creditor in its capacity as an existing shareholder
(e.g. a rights issue);
- Lender and borrower are controlled by the same party or parties before
and after the transaction; or
- Issue of equity shares to extinguish debt is in accordance with original
terms of financial liability (such as convertible debt).
 If only part of the financial liability is extinguished,
entity is required to assess whether some of the
consideration paid relates to a modification of the
terms of the outstanding liability
 If some of the consideration paid relates to
modification of terms of remaining liability, the
entity allocates the consideration paid between
- Part of the liability extinguished and
- Part of the liability that remains outstanding.
and apply “modification of financial liability” rules
accordingly.

ISSUES CONSENSUS

1. Are equity instruments issued to extinguish Issue of equity instruments is “consideration paid” to extinguish all or part of
financial liability considered “consideration paid”? a financial liability. This leads to derecognition of the liability.

If fair value of equity instrument issued is reliably measured

- Equity instruments issued must be initially measured at fair value of the
2. How should an entity initially measure the equity issued equity instruments.
instruments issued? If fair value of equity instrument issued is not reliably measured
- Equity instrument issued can be measured at fair value of the liability
extinguished.

3. How should the entity account for any difference Difference between the carrying amount of liability extinguished and
between the carrying amount of the liability and consideration paid must be recognised in P/L.
the equity instruments issued? Separate line item or disclosure in the notes is required.

KnS Institute of Business Studies

 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
Compiled by: Murtaza Quaid
IFRS 15 supersedes
SCOPE
 IAS 11 Construction  IFRIC 18 Transfers of
Applies to all contracts with customers, except: Contracts Assets from
 Lease contracts (IFRS 16)  IAS 18 Revenue Customers,
 Insurance contracts (IFRS 4)  IFRIC 13 Customer Loyalty  SIC 31 Revenue -
 Financial instruments and other contractual rights or obligations (IFRS 9/IAS 39, Programs Barter Transactions
IFRS 10, IFRS 11, IAS 27, and IAS 28)  IFRIC 15 Agreements for Involving Advertising
 Non-monetary exchanges between entities in same business to facilitate sales Construction of Real Estate Services

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THE ‘FIVE STEP’ MODEL - Revenue from contracts with customers is recognised based on the application of a principle-based ‘five step’ model

Step 1 Step 2 Step 3 Step 4 Step 5

Identify the contract Identify performance Determine the Allocate the TP to the Recognize revenue
with a customer obligations (PO) in transaction price (TP) PO in the contract when (or as) an entity
the contract satisfies a PO

STEP 1 - IDENTIFY THE CONTRACT WITH A CUSTOMER STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS IN CONTRACT

CONTRACTS PERFORMANCE OBLIGATION

 Contract is an agreement between two or more parties that creates
enforceable rights and obligations.
 Contracts can be written, oral or implied by an entity’s customary business
practices.
 IFRS 15 requires contracts to have following attributes:
- Parties approved the contract and committed to perform their respective
obligations.
- Each party’s rights to goods/services can be identified.
- Payment terms for goods/services can be identified.
- Contract has commercial substance.
- It is probable that the consideration will be received (Evaluate customer’s
ability and intention to pay).
 If each party to the contract has a unilateral enforceable right to terminate a
wholly unperformed contract without compensating the other party (or
parties), no contract exists under IFRS 15.
COMBINATION OF CONTRACTS
Contracts are combined if either:
 Consideration for one contract depends on price/performance of other contract;
 Contracts are negotiated as a package with single commercial objective; or
 Goods or services in the contracts are a single performance obligation.
CONTRACT MODIFICATION
 A promise to transfer to the customer either:
(i) Good/service (or bundle of good/service) that is
distinct; or
(ii) Series of distinct goods/services that are substantially
same & have same pattern of transfer to customer.
 Activities that an entity must perform to fulfill a contract
but do not result in a transfer of goods / services to
customer (e.g. certain administrative task to set up a
contract) are not PO and do not give rise to revenue.
What is DISTINCT good /service ? (2 criteria to be met)
1. Customer can ‘benefit’ from the good or service
 Customer can benefit from good or service either
- on its own or
- together with other resources that are readily
available to the customer.
 Customer can benefit from good/service through:
- Use, consumption, or sale (but not as scrap); or
- Held in a way to generate economic benefits.
2. Promise to transfer good or service is separable
from other promises in the contract.

 A change in enforceable rights and obligations (i.e. scope and/or price) is only
accounted for as a contract modification if
- it has been approved by the parties, and
- creates new or changes existing enforceable rights & obligations.
No
Are additional goods / services in
CM distinct?
Yes
Does consideration for added
No
goods/services reflect stand-alone
price of distinct goods/services
Yes
Treat as “SEPARATE CONTRACT”
KnS Institute of Business Studies
 Assessment requires judgment & consideration of all
relevant facts and circumstances.
 Factors that indicate that good / service is separately
identifiable include:
- Vendor does not provide a significant service of
integrating the good/service with other
 Adjust the existing contract goods/services promised in the contract as a
bundle which represents a combined output for
which customer has contracted (i.e. the vendor is
 Terminate old contract &
not using the good / service as an input to
create new contract
produce the combined output).
 Allocation of consideration :
- Good/service does not significantly modify or
 Consideration allocated to
customize another good/service promised in
remaining PO = consideration
contract.
from old contract not yet
- Good/service is not highly dependent or
recognized + consideration in
interrelated with other promised goods/services
the contract modification
(i.e. if customer decides not to purchase
good/service, it would not significantly affect
other promised goods or services in the contract).
 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
STEP 3 - DETERMINE THE TRANSACTION PRICE (TP)
TRANSACTION PRICE
 Transaction price is the amount of consideration an entity expects to
be entitled to in exchange for goods or services (not amounts collected
on behalf of 3rd parties, e.g. sales taxes etc.)
 Transaction price may be affected by nature, timing, and amount of
consideration.
1. CONSIDERATION PAYABLE TO THE CUSTOMER
 It includes cash paid / payable to customer as well as credits or other
items such as coupons and vouchers.
 It is a/c for as a reduction in TP, unless payment is in exchange for a
good or service received from customer. However, where:
- Consideration paid > FV of goods / services received from customer
 Difference is accounted for as reduction in TP
- FV of goods or services cannot be reliably determined
 Full amount is accounted for as reduction in TP
2. VARIABLE CONSIDERATIONS
 Examples are discounts, rebates, refunds, concessions, incentives,
performance bonuses, penalties, and contingent payments.
 Variable consideration must be estimated using either:
- Expected value method: based on probability weighted amounts
within a range (i.e. for large number of similar contracts)
- Single most likely amount: Amount within a range that is most likely
to eventuate (i.e. where there are few amounts to consider)
 Variable consideration is only recognised if it is highly probable that
subsequent change in estimate would not result in reversal of revenue.
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STEP 4 – ALLOCATE THE TRANSACTION PRICE (TP) TO EACH PERFORMANCE OBLIGATION (PO)
WHETHER STAND-ALONE SELLING PRICE OF EACH PERFORMANCE OBLIGATION IS DIRECTLY OBSERVABLE OR NOT?
Yes
 Allocate TP to each PO based on stand-alone selling price of each PO.
 Stand-alone selling price should be determined at contract inception
and represents the price at which an entity would sell a good or
service separately to a customer.
 Ideally, this will be an observable price at which an entity sells similar
goods or services under similar circumstances and to similar customers
ALLOCATION OF VARIABLE CONSIDERATION (VC)
Variable consideration should be allocated proportionately to all PO.
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 be willing to pay.
 However, VC may be attributable either to:
- One or more PO; or
- One or more distinct goods or services of a single PO.
 Variable consideration is allocated entirely to a single PO if :
- Terms of a VC relate specifically to satisfy that PO; and
- Allocation of VC to a single PO is consistent with the objective that
the TP is allocated based on what the entity expects to receive for
satisfying the PO.
ALLOCATION OF DISCOUNTS
 A discount exists if the sum of stand-alone selling prices of each PO in
the contract exceeds the total consideration for the contract.
 A discount is allocated on a proportionate basis to all PO in the
contract, UNLESS there is observable evidence that the discount relate
to only some performance obligations in a contract.
Compiled by: Murtaza Quaid
3. NON-CASH CONSIDERATION
 Non- cash consideration is accounted for at its FV.
 If FV is not reliably determinable, it is measured at stand-alone
selling price of goods/services.
4. SIGNIFICANT FINANCING COMPONENT
 If timing of payments specified in contract provides either customer
or entity with significant benefit of financing the transfer of goods /
services, TP is adjusted to reflect financing component of contract.
 Significant financing component can either be explicitly stated in
the contract or implied by payment terms agreed between parties.
 Adjustment for effect of significant financing component is not
required if period b/w transfer and payment is 12 months or less.
 Factors to consider in determining whether a contract contains a
significant financing component are:
- Difference between promised consideration & cash selling price.
- Combined effect of interest rates and length of time between
transfer of control of the goods or services and payment.
 A significant financing component does not exist when
- Timing of transfer of control of goods / services is at the
customer’s discretion.
- Consideration is variable and the amount or timing of
consideration is based on factors outside of control of parties.
- Difference between consideration and cash selling price arises
for other non-financing reasons (i.e performance protection e.g.
completion of post completion remedial work on a building).
DISCOUNT RATE
 Discount rate used must reflect credit characteristics of the party
receiving the financing and any collateral/security provided.
 Discount rate is the rate that would apply to a separate financing
transaction between the parties at contract inception.
 After contract inception, discount rate is not updated for changes
in interest rate or other circumstances (including credit risk).
No
 Estimate stand-alone selling price of each PO by considering all
available information including market conditions, entity-specific
factors and information about customer or class of customers.
 Use of observable inputs to be maximized to the extent possible.
 Approaches that might be used include:
1. MARKET ASSESSMENT APPROACH
 Evaluate the market in which goods or services are sold.
 Estimate the price that customers in that market would
 Refer to prices from competitors for similar goods or
services adjusted for entity-specific costs and margins.
2. EXPECTED COST PLUS MARGIN
 Estimate the expected costs of satisfying a PO adjusted
for an appropriate margin.
3. RESIDUAL APPROACH
 Total transaction price less the sum of the observable
stand-alone selling prices.
 This method may only be used when:
- Selling price is highly variable; or
- Selling price is uncertain (price has not been established
yet or good/service has not been previously sold).
 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
Compiled by: Murtaza Quaid
STEP 5 – RECOGNIZE REVENUE AS EACH PERFORMANCE OBLIGATION IS SATISFIED

WHEN CONTROL OF THE ASSET IS TRANSFERRED OVER TIME?

Performance obligation is satisfied when
control of the promised goods or services is
transferred to the customer.
TRANSFER OF CONTROL OF ASSET
 “Control” is defined as
- Ability to direct the use of the asset
and
- Obtain substantially all of the
remaining benefits from the asset’
underlying the good or service.
 Control can transfer, and hence revenue
to be recognised,
- Over time
For e.g. 6 night stay at a hotel
- At a point in time
For e.g. the provision of a meal.
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update, error or query, kindly let
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Control is deemed to have transferred over time if any one of the following is met:
Customer simultaneously receives and consumes all of the benefits as the entity performs
Where another entity were to take over providing of remaining PO to a customer, it would
not have to substantially re-perform the work already completed by the initial provider. This
criterion applies to service contracts where the customer consumes the benefits of the
services as they are provided (for e.g. cleaning services etc.)
Entity’s performance creates or enhances an asset controlled by the customer
Where terms of the contract transfer control of the asset to the customer as the asset is
being built (i.e. control of work in progress). This asset may be tangible or Intangible.
(i) Entity’s performance does not create an asset with an alternative use to the entity and
 Assessment requires judgment and consideration of all facts and circumstances.
 An asset does not have an alternate use if the entity cannot practically or contractually
redirect the asset to another customer, such as:
- Significant economic loss, i.e. through rework, or reduced sale price (practical)
- Enforceable rights held by customer to prohibit redirection of asset (contractual).
(ii) Entity has an enforceable right to payment for performance completed to date
 Consider both specific contractual terms and any applicable laws or regulations.
 Except due to its own failure to perform as promised, an entity must be entitled to
compensation that approximates the selling price of goods/services transferred to date
 Profit margin does not need to equal the profit margin expected if the contract was
fulfilled as promised.

Whether the performance obligation meet the criteria to be satisfied over time or not?

No Yes
RECOGNIZE REVENUE AT A POINT IN TIME RECOGNIZE REVENUE OVER TIME

Recognize revenue in a way that depicts the entity’s performance in transferring

Consider following indicators in evaluating the point in control of goods or services to customers. Methods include:
time at which control of asset has transferred to customer:
- Entity has transferred title to the asset;
- Entity has transferred physical possession of the asset; Output methods: For e.g. Input methods: For e.g.
- Entity has a present right to payment for the asset; - Surveys of performance - Resources consumed,
- Customer has accepted the asset; and completed to date, - Labour hours,
- Customer has the significant risks and rewards of - Appraisals of results achieved, - Costs incurred,
ownership of the asset. - Milestones reached, - Time lapsed,
- Units produced/delivered etc.) - Machine hours etc.).
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CONTRACT COSTS

COST TO OBTAIN A CONTRACT COST TO FULFILL A CONTRACT

 Only incremental costs of obtaining a contract that are
expected to be recovered can be recognized as asset.
 Incremental costs are costs incurred in obtaining a
contract that would not have been incurred if the
contract is not obtained. Such as sales commission
that is only paid if a specified contract is obtained.
 Incremental costs of acquiring a contract can be
expense out if amortization period is equal to or less
than 1 year.
 If costs to fulfil a contract are within the scope of other IFRSs (e.g. IAS 2, IAS 16,
IAS 38 etc.) apply those IFRSs.
 If not, a contract asset is recognized under IFRS 15 if, and only if:
- Costs relate directly to a contract or anticipated contract that can specifically
be identified (e.g. direct labour, materials, overhead allocations, explicitly
on-charged costs, other unavoidable costs (e.g. subcontractors));
- Costs generate or enhance resources of vendor that will be used to satisfy
performance obligations in future; and
- Costs are expected to be recovered.

AMORTISATION AND IMPAIRMENT OF CONTRACT ASSETS

 Contract cost to be amortized on a systematic basis that reflects the transfer of goods or services to the customer.
 Contract cost to be impaired if its carrying amount is greater than remaining consideration receivable, less directly related costs to be incurred.
 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
ADDITIONAL GUIDANCE WITHIN IFRS 15

1. LICENCING 4. WARRANTIES

 A licence establishes customer’s rights over the intellectual property

of a entity such as software & technology, media & entertainment SERVICE TYPE ASSURANCE TYPE
(e.g. motion pictures), franchises, patents, trademarks & copyrights.
 The accounting treatment depends on whether or not the licence is  Warranties that provides a  Warranties that provide a
‘distinct’ from other goods or services promised. customer with a service in customer with the assurance
addition to the assurance that that the product will function
the product will function as as specified.
WHEN LICENCE IS NOT DISTINCT FROM OTHER GOODS / SERVICES
specified.  Customer cannot purchase
 Such licence and other goods or services are accounted for  This applies regardless of this warranty separately from
together as a single performance obligation. whether customer is able to the entity.
 A licence is not distinct if either: purchase this warranty  These warranties are
- It is integral component to the functionality of tangible good, or separately from the entity or accounted for under IAS 37.
- Customer can only benefit from the licence in conjunction with not.
a related service.  “Additional service”
warranties are a/c for as For your valuable feedback,
performance obligation and any update, error or query,
WHEN LICENCE IS DISTINCT FROM OTHER GOODS / SERVICES allocated a portion of kindly let me know at
transaction price in
 Such licence is a/c for as separate performance obligation (PO).
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accordance with IFRS 15.
 The entity must establish whether the PO is satisfied ‘at a point in
time’ or ‘over time’. In this case, the entity should consider
whether the nature of the entity’s promise in granting the licence In determining classification of a warranty, an entity considers:
to a customer is to provide the customer with either:  Whether the warranty is required by law (warranties required by
(a) A right to access the entity’s intellectual property as it exists law are usually assurance type)
throughout the licence period; or  Length of the warranty coverage period (longer the length of
(b) A right to use the entity’s intellectual property as it exists at coverage, more likely additional services are being provided)
the point in time at which the licence is granted.  Nature of the tasks that the vendor promises to perform (do they
Revenue over time provide a service or are they related to assurance (e.g. return
 A right to access exists where shipping for defective goods)).
(a) The entity can make changes to the intellectual property
throughout the licence period; Compiled by: Murtaza Quaid
(b) The customer is exposed to the effects of these changes; and
(c) The changes do not constitute transfer of good/service to 5. NON-REFUNDABLE UPFRONT FEES
customer
 In this case, the promise to grant a licence is treated as a PO A vendor may charge a non-refundable upfront fee at (or near) contract
satisfied over time & entity recognizes revenue over time by inception (e.g. joining fees, activation fees, set-up fees etc.)
measuring the progress towards complete satisfaction of that PO.
Revenue at a point in time
 Where the above does not apply, the nature of entity’s promise is If fee relates to transfer If fee is not related to performance
the right to use its intellectual property as it exists at the point in of goods or services to obligation but to setup activities or
time at which the licence is granted. This means that customer the customer, recognize other administrative tasks, such fee is
can direct the use of, and obtain substantially all of the remaining revenue in accordance a/c for as advance payment for future
benefits from, the licence at the point at which it is transferred. with IFRS 15 (as or goods or services and is recognized as
when goods or services revenue when those future goods or
transferred) services are provided.
2. SALES-BASED OR USAGE-BASED ROYALTIES

When consideration takes the form of a sales-based or usage-based
royalty for a licence of intellectual property, the entity recognizes
revenue only when (or as) the later of the following events occurs:
- Subsequent sale or usage occurs; and
- PO to which some or all of sales or usage-based royalty has been
allocated has been satisfied (or partially satisfied).
3. CUSTOMER OPTIONS FOR ADDITIONAL GOODS OR SERVICES
 Customer options to acquire additional goods or services (either free
of charge or at a discount) come in many forms, including sales
incentives, customer award credits (or points), contract renewal
options, or other discounts on future goods or services.
 Such customer options give rise to a performance obligation in the
contract when the option provides a material right to the customer
that it would not receive without entering into the contract.
 In such case, vendor is required to defer portion of consideration
received that relates to those future goods or services and recognises
that portion as revenue only when those future goods or services are
transferred to the customer (or when the option expires).
6. SALE WITH A RIGHT OF RETURN
 When product are transferred with a right of return, revenue should
not be recognized for goods that are expected to be returned.
 Calculate the level of returns using
- Expected value method (probability-weighted sum of amounts); or
- Single most likely amount.
 Refund liability (rather than revenue) is recognized for any
consideration received to which vendor does not expect to be
entitled (which relates to goods expected to be returned).
 Asset is also recognized for vendor’s right to recover goods from
customers on settling the refund liability. Such asset is measured w.r.t
carrying amount of the good less any expected costs to recover those
products.
 Asset is presented separately from refund liability.
 If value is less than amount recorded in inventory, inventory is
reduced with a corresponding adjustment to cost of goods sold.
KnS Institute of Business Studies
 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
Compiled by: Murtaza Quaid
ADDITIONAL GUIDANCE WITHIN IFRS 15

7. CONSIGNMENT ARRANGEMENTS 9. PRINCIPAL VERSUS AGENT

 When a product is delivered to a customer under a consignment
arrangement, customer (dealer) does not obtain control of product at
that point in time, so revenue is not recognized upon delivery.
 Indicators of a consignment arrangement include:
(a) Product is controlled by the entity until a specified event occurs,
such as the product is sold on, or a specified period expires.
(b) Entity can require the return of the product, or transfer it to
another party.
(c) Customer (dealer) does not have an unconditional obligation to
pay for the product.
8. BILL-AND-HOLD ARRANGEMENTS
 In any transaction, the entity must establish whether it is acting as
principal or agent.
 Indicators that an entity is agent rather than principal include:
i. Another party is primarily responsible for fulfilling the contract.
ii. The entity does not have inventory risk before or after the goods
have been ordered by a customer, during shipping or on return.
iii. The entity does not have discretion in establishing prices for the
other party’s goods or services and, therefore, the benefit that
the entity can receive from those goods or services is limited.
iv. The entity’s consideration is in the form of a commission.
v. The entity is not exposed to credit risk for receivable from a
customer in exchange for the other party’s goods or services.

 Under bill-and-hold arrangement, goods are sold but remain in the

PRINCIPAL AGENT
possession of the seller for a specified period, perhaps because the
customer lacks storage facilities.  Entity is principal if it  Entity is agent if its PO is to
 Entity will need to determine at what point the customer obtains controls the promised good arrange for provision of
control of the product. or service before it is goods or services by another
- For some contracts, control will not be transferred until the goods transferred to the customer. party.
are delivered to the customer.  When PO is satisfied, the  When PO is satisfied, the
- For other contracts, customer may obtain control even though the entity recognizes revenue in entity recognizes revenue in
goods remain in the entity’s physical possession. In this case the the gross amount of the the amount of any fee or
entity would be providing custodial services to the customer over consideration for those commission to which it
the customer’s asset. goods or services.. expects to be entitled in
 For a customer to have obtained control of a product in a bill and exchange for arranging to
hold arrangement, following criteria must all be met: provide its goods or services
(a) The reason for bill-and-hold must be substantive (for e.g. for the other party .
requested by the customer).
(b) Product must be separately identified as belonging to customer.
(c) The product must be ready for physical transfer to the customer. For your valuable feedback, any update, error or
(d) The entity cannot have the ability to use the product or to query, kindly let me know at emquaid93@gmail.com
transfer it to another customer.
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10. REPURCHASE AGREEMENTS

Under repurchase agreement, an entity sells an asset and promises, or has the option, to repurchase it. Repurchase agreements generally come in 3 forms:

FORWARD CONTRACT IF REPURCHASE PRICE < ORIGINAL SELLING PRICE

 In Forward contract, entity has an obligation to
repurchase the asset.
 In case of forward, customer does not obtain control of
the asset, even if it has physical possession.
Entity will account for the contract as a lease in accordance with IFRS 16
IF REPURCHASE PRICE ≥ ORIGINAL SELLING PRICE
Entity will account for the contract as a financing arrangement.

CALL OPTION IF REPURCHASE PRICE < ORIGINAL SELLING PRICE

Entity will account for the contract as a lease in accordance with IFRS 16
 In call option, entity has the right to repurchase the asset.
 In case of call option, customer does not obtain control
IF REPURCHASE PRICE ≥ ORIGINAL SELLING PRICE
of the asset, even if it has physical possession.
Entity will account for the contract as a financing arrangement.

PUT OPTION IF REPURCHASE PRICE < ORIGINAL SELLING PRICE

 In put option, entity must repurchase the asset if
requested to do so by the customer.
 It must consider whether or not the customer is likely to
exercise that option.
Entity will account for the contract as outright sale, with a right of return
IF REPURCHASE PRICE ≥ ORIGINAL SELLING PRICE
Entity will account for the contract as a financing arrangement.
 IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS
PRESENTATION AND DISCLOSURE
PRESENTATION
 Contracts with customers will be presented in an
entity’s statement of financial position as a contract
liability, a contract asset or a receivable, depending
on the relationship between the entity’s
performance and the customer’s payment.
 A contract liability is recognised and presented in
the statement of financial position where a
customer has paid an amount of consideration prior
to the entity performing by transferring control of
the related good or service to the customer.
 When the entity has performed but the customer
has not yet paid the related consideration, this will
give rise to either a contract asset or a receivable.
 A contract asset is recognised when the entity’s
right to consideration is conditional on something
other than the passage of time, for instance future
performance.
 A receivable is recognised when the entity’s right to
consideration is unconditional except for the
passage of time.
 In practice, where revenue has been invoiced a
receivable is recognised. Where revenue has been
earned but not invoiced, it is recognised as a
contract asset.
For your valuable feedback, any update, error or
query, kindly let me know at emquaid93@gmail.com
KnS Institute of Business Studies
Compiled by: Murtaza Quaid
DISCLOSURE
 Following amounts should be disclosed unless they have been presented separately in
the F/S in accordance with other standards:
(a) Revenue recognised from contracts with customers, disclosed separately from other
sources of revenue.
(b) Any impairment losses recognised (in accordance with IFRS 9) on any receivables or
contract assets arising from an entity’s contracts with customers, disclosed
separately from other impairment losses.
(c) The opening and closing balances of receivables, contract assets and contract
liabilities from contracts with customers.
(d) Revenue recognised in the reporting period that was included in the contract liability
balance at the beginning of the period; and
(e) Revenue recognised in the reporting period from performance obligations satisfied
in previous periods (such as changes in transaction price).
 Other information that should be provided;
(a) An explanation of significant changes in the contract asset and liability balances
during the reporting period
(b) Information regarding the entity’s performance obligations, including when they are
typically satisfied (upon delivery, upon shipment, as services are rendered etc.),
significant payment terms (such as when payment is typically due) and details of any
agency transactions, obligations for returns or refunds and warranties granted.
(c) The aggregate amount of the transaction price allocated to the performance
obligations that are not fully satisfied at the end of the reporting period and an
explanation of when the entity expects to recognise these amounts as revenue.
(d) Judgements, and changes in judgements, made in applying the standard that
significantly affect the determination of the amount and timing of revenue from
contracts with customers.
(e) Assets recognised from the costs to obtain or fulfil a contract with a customer. This
would include pre-contract costs and set-up costs. The method of amortisation
should also be disclosed.
 IFRS 16 - LEASES
Compiled by: Murtaza Quaid

EFFECTIVE DATE SCOPE

 Accounting periods beginning on or after 1 January 2019
 Early adoption is permitted if IFRS 15 Revenue from Contracts with
Customers is also adopted
LEASE
A contract is, or contains, a lease if the contract conveys the right to control
the use of identified asset for a period of time in exchange for consideration.
IFRS 16 applies to all leases except for:
 Leases to explore for / use of minerals, oil, natural gas and
similar non-regenerative resources;
 Leases of biological assets (IAS 41) held by a lessee;
 Service concession arrangements (IFRIC 12);
 Licenses of intellectual property granted by a lessor (IFRS 15); &
 Rights held by a lessee under a licensing agreement under IAS
38 e.g. Rights to motion pictures, video recordings, plays,
patents and copyrights, etc.

LEASE ACCOUNTING : LESSEE

INITIAL RECOGNITION AND MEASUREMENT OPTIONAL EXEMPTIONS

At the commencement date of a lease, a lessee shall recognize a right-of- In addition to the above scope exclusions, a lessee can elect not to
use asset and a lease liability. apply IFRS 16’s recognition and requirements to:

Debit: RIGHT TO USE ASSET 1. SHORT-TERM LEASES

At the commencement date of the lease, a lessee recognizes a right-
of-use asset at cost, comprising:
 Amount of the lease liability;
 Lease payments made at or before the commencement date,
less any lease incentives;
 Initial direct costs incurred; and
 Estimate of costs to be incurred to dismantle and remove an
asset and restore the site based on the terms and conditions of
the lease.
Credit: LEASE LIABILITY
At the commencement date of the lease, a lessee recognizes a lease
liability for the unpaid portion of lease payments, comprising of:
 Fixed payments (including in-substance fixed payments), less
any lease incentives receivable;
 Variable lease payments dependent on an index or rate;
 Residual value guarantees;
 Exercise price of a reasonably certain purchase options; and
 Lease termination penalties, if a lessee termination option was
considered in setting the lease term.
 discounted at
- Interest rate implicit in the lease, if readily determinable; or
- Otherwise, incremental rate of borrowing.
 Can be applied to leases with a lease term ≤ 12 months.
 Cannot be applied to leases containing a purchase option
 Apply the exemption by class of underlying asset. A class
of underlying asset is a grouping of underlying assets of a
similar nature and use in an entity’s operations.
2. LEASES OF LOW VALUE ASSETS
 Can be applied to leases for low value items – i.e. assets
with a value of USD 5,000 or less.
 Low value assessment applies:
- To the value of underlying asset when new;
- On an absolute basis: and
- Irrespective of materiality.
 Apply the exemption on a lease-by-lease basis.
 Exemption cannot be applied
- if the underlying asset is highly dependent or
interrelated with other assets;
- if lessee cannot benefit from using the underlying asset
on its own or with other readily available resources
- to the head lease in a sublease arrangement; or
- if the nature of the underlying asset, when new, is not
typically low value

LESSEE ACCOUNTING FOR EXEMPT LEASES

LEASE TERM
 The lessee shall recognise the lease payments as an expense on
Non-cancellable period of lease; together with straight-line basis over the lease term (or another systematic
 Periods covered by extension option if the lessee is reasonably certain to basis).
exercise that option;  No balance sheet assets and liabilities (other than prepaid and
 Periods covered by termination option if the lessee is reasonably certain accrued lease payments)
not to exercise that option;  Disclose expense relating to each exemption in the notes to the
financial statements
Reasonably certain assessment

Assess whether the extension/termination option will be exercised by

considering: For your valuable feedback, any update, error or query, kindly
 Favorable terms and conditions of option compared to market; let me know at emquaid93@gmail.com
 Significant leasehold improvements;
 Termination or relocation costs;
 Specialized asset or lack of available alternative assets. KnS Institute of Business Studies
 IFRS 16 - LEASES
Compiled by: Murtaza Quaid
SUBSEQUENT MEASUREMENT (LESSEE)

RIGHT TO USE ASSET LEASE LIABILITY

Subsequent to initial recognition, an entity may apply three potential models to account for
right-of-use assets:
 Under “cost model”, lessee measures ROU asset at cost less
accumulated depreciation and accumulated impairment
Cost Model losses.
(IAS 16)  Depreciation period is the useful life of the asset if the lease
transfers ownership of the underlying asset; otherwise earlier
of the asset’s useful life and lease term.
Revaluation If a lessee applies “Revaluation model” to a class of asset, it may
Model (IAS 16) elect to apply that model to the same class of right-of-use assets.
If a lessee applies “Fair value model” to its investment property,
Fair Value
the lessee is required to apply that model to ROU assets that meet
Model (IAS 40)
the definition of investment property in IAS 40.
KnS Institute of Business Studies
REMEASUREMENT OF LEASE
 After the commencement date, a lessee
accounts for the lease liability by:
- Increasing the carrying amount to reflect
interest on lease liability;
- Reducing the carrying amount to reflect
lease payments made;
- Re-measuring the carrying amount to reflect
any reassessment and lease modifications.
 Variable lease payments (that are not
dependent on rate/index) are not included in
the initial measurement of the lease liability.
Such payments are recognized in P/L in the
period in which the event or condition that
triggers such payments occur.

 Re-measurement of lease (i.e. lease liability and ROU asset) arises from revisions in estimates and judgements made on initial recognition of the lease.
 Re-measurement that arises from modification to the original contractual terms agreed between lessor and lessee, is addressed in another section.

 When there is a change in original assessment of lease term; or  When there is a change in estimate of guarantee residual value; or
 When there is a change in original assessment of exercise of  When there is a change in future lease payment due to change in
purchase / termination options. index/rate.

Re-measure lease liability using revised estimate of lease term and Re-measure lease liability using revised estimate of lease term and
cash flows and discounting at revised interest rate i.e. current rate. cash flows and discounting at original interest rate.

Re-measurement of lease liability is adjusted against the carrying value of ROU asset. Therefore, there is no immediate gain or loss. However, if reduction
in carrying value of lease liability is greater than carrying value of ROU asset, the asset is reduced to ‘zero’ and excess reduction in lease liability is
recognized in P/L.

For your valuable feedback, any update, error or query, kindly let me know at emquaid93@gmail.com

LEASE MODIFICATIONS (LESSEE)

 A change in scope or consideration of a lease that was not part of the original terms and conditions of the lease. For e.g. adding or terminating the right
to use one or more underlying assets, or extending or shortening the contractual lease term.
 Accounting for lease modification depends on whether modified terms increase or decrease the scope of lease, and whether the consideration for
increase in scope is commensurate with a ‘standalone price’ for the new scope of the lease.

Does modification increases the scope of the
lease by adding the right to use of one or
more underlying assets?
Yes
Does the increase in consideration
commensurate with the stand-alone price for
the increase in scope?
Yes
LEASE MODIFICATION = SEPARATE LEASE
No LEASE MODIFICATION = CHANGE IN EXISTING LEASE
 Decrease ROU asset and lease liability by their
relative scope compared to the original lease
Decrease in scope taking the difference to P&L
 Re-measure lease liability using revised
No discount rate with off-set to ROU asset
 Re-measure lease liability using revised
Other modification:
discount rate
• Increase in scope;
 Re-measure ROU asset by same amount
• Change in consideration
 No P&L impact
 IFRS 16 - LEASES Compiled by: Murtaza Quaid
LEASE AND NON-LEASE COMPONENTS

For a contract that contains a lease component and non lease component(s),  For e.g. Contract for the lease of an asset together with its maintenance.
 Lessee may accounts for each lease component separately from non-lease components.
 Lessor shall allocate the consideration in contract in accordance with IFRS 15 i.e. On the basis of their relative stand-alone prices.

LESSEE PERSPECTIVE LESSOR PERSPECTIVE

A lessee may apply a practical expedient by class of underlying asset, and ignore the requirement to
separate non-lease components from the lease components.
Separating lease & non lease component
 If this practical expedient is not used, a lessee
allocates the total contract consideration to
the lease and non-lease component on the
basis of their relative stand-alone prices.
 If standalone prices are not available, then
they must be estimated.
 Unlike lessees, lessors do not have an
option to account for the entire
contract as a single lease.
 Lessors must allocate the
Not separating lease & non lease component consideration in the contract in
accordance with IFRS 15 i.e.
 If this practical expedient is used, lessee according to the stand-alone selling
accounts for the entire contract as a prices of the goods and services
single lease contract. included in each component.
KnS Institute of Business Studies
SALE AND LEASEBACK TRANSACTIONS

A company (seller-lessee) transfers an underlying asset to another company (the buyer-lessor) and leases that asset back from the buyer-lessor

whether the transfer of underlying asset from seller-lessee to buyer-lessor is a sale under IFRS 15?

Transfer to buyer-lessor is a sale Transfer to buyer-lessor is not a sale

Seller-Lessee Buyer-Lessor Seller-Lessee Buyer-Lessor

 Derecognize the
underlying asset
 Apply the lessee
accounting model to the
leaseback
 Recognise the underlying  Continue to recognise the  Do not recognise the
asset underlying asset underlying asset
 Apply the lessor  Recognise financial liability  Recognise a financial asset
accounting model to the under IFRS 9 for any amount under IFRS 9 for any amount
leaseback received from buyer-lessor paid to the seller-lessee

Lease under IFRS 16 Short-term lease or low value

asset exemption

Sale proceed = Fair value
 Recognise lease liability at
PV of lease payments.
 Recognise right-of-use
asset* as proportion of
carrying amount of asset
retained by seller-lessee
 Recognise sale at fair value
 Recognise gain/loss** that
relates to rights
transferred to buyer-lessor
*Right to use asset Carrying value of asset x
Sale proceed < Fair value
 Recognise lease liability at PV of lease
payments.
 Recognise right-of-use asset* as
proportion of carrying amount of
asset retained by seller-lessee
 Recognise gain/loss** that relates to
rights transferred to buyer-lessor
 Recognise sale at fair value
 Difference between sale proceed and
fair value will be accounted for as
prepayment of lease payments
PV of lease payment
Fair value of asset
Sale proceed > Fair value
 Recognise lease liability at PV of
lease payments
 Recognise right-of-use asset* as
proportion of carrying amount of
underlying asset retained by
seller-lessee
 Recognise gain/loss** that
relates to rights transferred to
buyer-lessor
 Recognise sale at fair value
 Difference between sale proceed
and fair value will be accounted
for as additional financing
provided by buyer-lessor to
seller-lessee
 Recognize any gain/(loss)
as a difference between
consideration received
(i.e. sale proceed) and
carrying value of
underlying asset
 Recognise lease payments
as expense on straight-line
basis (or systematic basis)
over the lease term
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(Fair value of asset − PV of lease liability)

(Fair value − Carrying value of asset) x
Fair value of asset
**Gain / (loss)
(Carrying value of asset − Right to use asset)
(Fair value − Carrying value of asset) x
Carrying value of asset

HEAD LEASE
HEAD LESSOR
CONCEPT OF SUB LEASE
 Sub lease is a transaction in which the underlying asset is
re-leased by a lessee (‘intermediate lessor’) to a 3rd party,
and the lease (‘head lease’) between the head lessor and
lessee remains in effect.
 Intermediate lessor shall account for the head lease and
sublease as two separate contracts, applying both lessee
and lessor accounting requirements.
 For intermediate lessor, obligations that arise from head
lease are generally not extinguished by the terms and
conditions of sublease.
 Intermediate lessor shall classify the sub-lease as finance
lease or operating lease w.r.t to the ROU-asset arising
from head lease i.e. right-of-use asset is treated as
underlying asset in sub-lease, not PPE that it leases from
the head lessor.
 At commencement of sub-lease, if intermediate lessor
cannot readily determine the rate implicit in sub-lease,
then it uses the discount rate of head lease to account for
sub-lease, adjusted for any initial direct costs associated
with sub-lease.
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PRENSENTATION AND DISCLOSURE : LESSEE
PRESENTATION
STATEMENT OF FINANCIAL POSITION
 ROU assets:
- Present separately from other assets; or
- Include within the same line item as
underlying asset, with separate disclosure
in notes.
 ROU assets that meet the definition of
investment property shall be grouped with
investment property.
 Lease liabilities:
- Present separately from other liabilities; or
- Disclose the line item in which they are
included.
STATEMENT OF PROFIT AND LOSS
 Interest expense with other finance costs.
 Depreciation of right-of-use assets.
STATEMENT OF CASH FLOWS
 Principal payments of lease liabilities as
financing activities.
 Interest payments in accordance with IAS 7’s
requirements for interest paid.
 Short-term, low-value and variable lease
payments (not within lease liability) as
operating activities.
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IFRS 16 - LEASES Compiled by: Murtaza Quaid
SUB-LEASE
ORIGINAL LESSEE / SUB LEASE SUB LESSEE
INTERMEDIATE LESSOR
1. LEASE UNDER IFRS 16
Type of Accounting treatment for intermediate lessor
sublease
Operating  Keep recognizing the ROU-asset and lease liability
lease of head lease.
H  Recognize lease income from sublease on straight-
E line basis (or systematic basis) over the lease term.
A Finance  Derecognize ROU-asset of head lease transferred
D lease to sub-lessee and recognize net investment in the
sublease with any difference in P/L.
 Keep recognizing the lease liability of head lease.
 During sublease, recognize both finance income on
L
sublease and interest expense on head lease.
E
A
2. SHORT-TERM LEASES
S
E If the head lease is accounted for as a short-term lease, intermediate
lessor shall classify the sublease as operating lease.
3. LEASES OF LOW VALUE ASSETS
If a lessee subleases an asset, or expects to sublease an asset, the
head lease does not qualify as a lease of a low-value asset.
QUALITATIVE DISCLOSURE REQUIREMENTS
 A summary of the nature of entity’s leasing activities;
 Potential cash outflows the entity is exposed to that are not included in the lease
liability, including:
- Variable lease payments;
- Extension options and termination options;
- Residual value guarantees; and
- Leases not yet commenced but committed by lessee.
 Restrictions or covenants imposed by leases; and
 Information about sale and leaseback transactions.
QUANTITATIVE DISCLOSURE REQUIREMENTS -
IFRS 16 requires quantitative disclosures to be presented in a tabular format, unless another
format is more appropriate.
Statement of Financial Position
 Additions to ROU assets.
 Carrying value of ROU assets at the end of reporting period by class.
 Maturity analysis of lease liabilities separately from other liabilities based on IFRS 7
requirements.
Statement of Profit and Loss
 Depreciation for assets by class.
 Interest expense on lease liabilities.
 Short-term leases expensed.
 Low-value leases expensed.
 Variable lease payments expensed.
 Income from subleasing.
 Gains or losses arising from sale and leaseback transactions.
Statement of Cash Flows
 Total cash outflow for leases.
 IFRS 16 – LEASES : LESSOR ACCOUTING Compiled by: Murtaza Quaid
LESSOR ACCOUNTING CLASSIFICATION OF LEASE

A lessor classifies a lease as either a
finance lease or an operating lease, as
follows:
 Finance lease: A lease that transfer
substantially all of the risks and
rewards incidental to ownership of
the underlying asset. Title may or
may not eventually be transferred.
 Operating lease: Lease other than a
finance lease.
Examples of situations that would normally lead to a lease being classified as a finance lease are:
(a) Lease transfers the ownership of underlying asset to the lessee by the end of the lease term;
(b) Lessee has an option to purchase the asset at a price that is sufficiently lower than the fair value;
(c) Lease term is for a major part of the economic life of the asset;
(d) At inception date, PV of lease payments equals to at least substantially all of the asset’s fair value;
(e) Underlying asset is of such specialized nature that only the lessee can use it without modification;
Other indicators that could also lead to a lease being classified as a finance lease are:
(a) If lessee cancels the lease, lessor’s losses associated with the cancellation are borne by the lessee;
(b) Gains or losses from the fluctuation in the fair value of the residual value accrue to the lessee; or
(c) Lessee has ability to continue lease for secondary period at a rent substantially lower than market.

ACCOUTING TREATMENTT DISCLOSURE REQUIREMENT

OPERATING LEASE QUANTITATIVE DISCLOSURE REQUIREMENTS

 Continue to recognize the underlying asset. IFRS 16 requires quantitative disclosures to be presented in
 Any indirect direct costs incurred in connection with obtaining the tabular format, unless another format is more appropriate.
lease is added to the carrying amount of underlying asset. FINANCE LEASES
 Recognize lease income over the lease term on a straight line basis (or  Selling profit or loss;
other systematic basis).  Finance income on the net investment;
 Income from variable lease payments;
 Qualitative and quantitative explanation of changes in
FINANCE LEASE the net investment; and
 Maturity analysis of lease payments receivable.
 Derecognize the underlying asset and recognize finance lease OPERATING LEASES
receivable with any gain or loss in P/L as follow:  Lease income, separately disclosing variable lease
Debit: Finance lease receivable XXXX payments.
Credit: Underlying asset XXXX  Disclosure requirements of IAS 16 for leased assets,
Credit: Cash - Initial direct cost (if any) XXXX separating leased assets from non-leased assets.
Credit: Gain on disposal (balancing) XXXX  Other applicable disclosure requirements based on the
 Initially, lessor recognize finance lease receivable as follow: nature of the underlying asset (e.g. IAS 36, 38, 40, 41).
PV of future **lease payments @ interest rate implicit in lease XXXX  Maturity analysis of lease payments.
PV of any unguaranteed residual value accruing to the lessor
@ interest rate implicit in lease XXXX
Finance lease receivable (Net investment in finance lease) XXXX QUALITATIVE DISCLOSURE REQUIREMENTS

 IFRS 16 requires a lessor to disclose additional qualitative

KnS Institute of Business Studies

 Recognize finance income on lease receivable using effective interest

method. information about its leasing activities in order to provide
users with a basis for assessing the impact on the
financial statements from lease contracts.
FINANCE LEASE BY MANUFACTURER / DEALER LESSOR  This disclosure would include the nature of the lessor’s
leasing activities and how the lessee manages risks
 A finance lease of an asset by a manufacturer / dealer lessor gives rise associated with those activities, including risk
to two types of income: management on rights retained in underlying assets and
- Selling profit or loss, resulting from outright sale of the asset; and risk management strategies including:
- finance income over the lease term. - Buy-back agreements;
 Sales revenue is recognized at lower of: - Residual value guarantees;
- Fair value of the underlying asset; and - Variable lease payments for excess use; and
- PV of lease payments discounted at market rate of interest. - Any other risk management strategies.
 Cost of sale is recognized at carrying amount of the asset less PV of
unguaranteed residual value (if any).
For your valuable feedback, any update, error or query,
 Any costs incurred in connection with obtaining the lease is charged to
P/L at the commencement date. kindly let me know at emquaid93@gmail.com
 Journal entries are as follow:
- Debit: lease receivable XXXX **Lease Payments
Credit: Sales XXXX
A lessor includes the following lease payments in the
- Debit: Cost of sales – P/L XXXX
measurement of the finance lease receivable:
Credit: Inventory XXXX
 Fixed payments (including in-substance fixed payments), less
- Debit: Selling expense – P/L XXXX
lease incentives payable;
Credit: Cash – Initial Direct Cost (if any) XXXX
 Variable payments that depend on an index or rate;
 If artificially low rate of interest is charged by manufacturer / dealer
 Residual value guarantees provided to the lessor;
lessor, selling profit is restricted to that which would apply if a market
 Exercise price of reasonably certain purchase options; &
rate of interest were charged. This is done by discounting future lease
 Termination penalties payable in accordance with expected
payments using market rate of interest.
lease term.