B2 Idiana Manual (Secured)

IDIANA CONSULTANCY & CPA (T) REVIEW CLASSES
TABLE OF CONTENTS
Conceptual Framework for Financial Reporting .............................................................................................................2
IAS 16 – Property, Plant and Equipment .....................................................................................................................11
IAS 16 – Property, Plant and Equipment (Depreciation) ..............................................................................................23
IAS 40 – Investment Property ......................................................................................................................................26
IAS 2 - Inventories........................................................................................................................................................33
IFRS 5 – Non Current Assets Held for Sale and Discontinued Operations ..................................................................42
IAS 23 – Borrowing Costs. ...........................................................................................................................................53
IAS 20 – Government Grant.........................................................................................................................................59
IAS 36 – Impairment of assets .....................................................................................................................................66
IAS 38 – Intangible Assets ...........................................................................................................................................77
IAS 7 – Statement of cash flows ..................................................................................................................................86
IAS 10 – Events after Reporting Period. .................................................................................................................... 101
IAS 17 – Leases......................................................................................................................................................... 112
IAS 37 - Provisions, contingent liabilities and contingent assets ................................................................................ 121
IAS 1 - Presentation of Financial Statements. ........................................................................................................... 131
Please visit idianaconsultancy.blogspot.com 0713 298 054/ 0625 703 054 Page | 1
Conceptual Framework for Financial Reporting
Purpose of the Conceptual framework

i. To assist the Board in the development of future IFRSs and in its review of existing IFRSs
ii. To assist the Board in promoting harmonisation of regulations, accounting standards and procedures
relating to the presentation of financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by IFRSs
iii. To assist national standard-setting bodies in developing national standards
iv. To assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet to form
the subject of an IFRS
v. To assist auditors in forming an opinion as to whether financial statements comply with IFRSs
vi. To assist users of financial statements in interpreting the information contained in financial statements
prepared in compliance with IFRSs
vii. To provide those who are interested in the work of the IASB with information about its approach to the
formulation of IFRSs
Note: The Conceptual Framework is not an IFRS and so does not overrule any individual IFRS. In the (rare) case of
conflict between an IFRS and the Conceptual Framework, the IFRS will prevail.
Scope of Conceptual Framework.

a) The objective of financial statements
b) The qualitative characteristics that determine the usefulness of information in financial statements
c) The definition, recognition and measurement of the elements from which financial statements are
constructed
d) Concepts of capital and capital maintenance
Users of financial information and their information need.

USERS NEED INFORMATION TO:
Present and potential investors Make investment decisions, therefore need information on:
– Risk and return on investment
– Ability of entity to pay dividends
Employees -Assess their employer's stability and profitability
-Assess their employer's ability to provide remuneration, employment
opportunities and retirement and other benefits
Lenders -Assess whether loans will be repaid, and related interest will be paid,
when due
Suppliers and other trade payables -Assess the likelihood of being paid when due
Customers -Assess whether entity will continue in existence – important
where customers have a long-term involvement with, or are dependent
on, the entity, eg where there are product warranties or where specialist
parts may be needed
Governments and their agencies -Assess allocation of resources and, therefore, activities of entities
-Assist in regulating activities
-Assess taxation
-Provide a basis for national statistics
The public -Assess trends and recent developments in the entity's prosperity and
its activities – important where the entity makes a substantial
contribution to a local economy, eg by providing employment and using
local suppliers
The objective of general purpose financial reporting

The objective of general purpose financial reporting is to provide information about the reporting entity that is useful
to existing and potential investors, lenders and other creditors in making decisions about providing resources to the
entity.
Underlying assumptions
Going concern is the underlying assumption in preparing financial statements. Going concern.The entity is
normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that
the entity has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.
Qualitative characteristics of useful financial information
The Conceptual Framework distinguishes between fundamental and enhancing qualitative characteristics, for analysis
purposes. Fundamental qualitative characteristics distinguish useful financial reporting information from information
that is not useful or misleading. Enhancing qualitative characteristics distinguish more useful information from less
useful information.
Fundamental qualitative characteristics

a) Relevance
Relevant financial information is capable of making a difference in the decisions made by users. Information may be
capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware
of it from other sources. It is capable of making a difference in decisions if it has predictive value, confirmatory value
or both.
i. Predictive value
Financial information has predictive value if it can be used as an input for processes employed by users to predict
future outcomes.
ii. Confirmatory value
Financial information has confirmatory value if it provides feedback (confirms or changes) about previous evaluations.
b) Faithfull representation (True and Fair view)

Faithful representation. Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it
purports to represent. To be a faithful representation information must be complete, neutral and free from error.
i. A complete depiction includes all information necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations.
ii. A neutral depiction is without bias in the selection or presentation of financial information. This means that
information must not be manipulated in any way in order to influence the decisions of users.
iii. Free from error means there are no errors or omissions in the description of the phenomenon and no errors
made in the process by which the financial information was produced. It does not mean that no inaccuracies
can arise, particularly where estimates have to be made.
Enhancing qualitative characteristics

i. Comparability
Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and
differences among, items. Information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for another period or date.
ii. Understandability
Classifying, characterising and presenting information clearly and concisely makes it understandable. These users
are likely to use the information to make economic decisions and must therefore be able to understand the contents
of the statements.
iii. Verifiability
Information has the quality of verifiability when different knowledgeable and independent observers could reach
consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation. If
users are to take decisions based on the financial statements, the information in the statements has to be verifiable;
otherwise it would not be of any help even if it is relevant.
iv. Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions.
Generally, the older the information is, the less useful it is. For the users of general purpose financial statements, the
information is useful for decision making only if it is timely.
The elements of financial statements

Statement of financial position
i. Assets
ii. Liabilities
iii. Equity
Statement of profit or loss
iv. Revenues
v. Expenses
i. Asset. A resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow to the entity.
Breaking down this definition;
A resource controlled If the resource is not controlled by the entity, it cannot be considered an asset in
by an entity: financial accounting terms. For example, a building is a resource which is ‘controlled’,
as the entity has the option of using the building in whichever way it wants to.
As a result of past Something must have happened in the past, to ensure that the asset has the right to
events: be controlled by the entity.
From which future An asset contribute, directly or indirectly, to the flow of cash and cash equivalents to
economic benefits are the entity.
expected to flow:
An asset may be classified as current or non-current asset. Examples of assets are machinery, land, bank,
receivables, inventory etc.
An entity shall classify an asset as current when:

(a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
(b) It holds the asset primarily for the purpose of trading;
(c) It expects to realise the asset within twelve months after the reporting period; or
(d) The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current. A similar logic applies to classification of liabilities into current
and non-current.
ii. Liability. A present obligation of the entity arising from past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits.
An essential feature of a liability is that the entity has a present obligation.
Obligation: A duty or responsibility to act or perform in a certain way. Obligations may be legally enforceable as
a consequence of a binding contract or statutory requirement. Obligations also arise, however, from normal
business practice, custom and a desire to maintain good business relations or act in an equitable manner.
As seen above, obligations may be:
 Legally enforceable as a consequence of a binding contract or statutory requirement.
 The result of business practice. For example, even though a company has no legal obligation to do so,
it may have a policy of rectifying faults in its products even after the warranty period has expired.
A management decision (to acquire an asset, for example) does not in itself create an obligation, because it can
be reversed. But a management decision implemented in a way which creates expectations in the minds of
customers, suppliers or employees, such as the warranty example above, becomes an obligation. This is
sometimes described as a constructive obligation.
Liabilities must arise from past transactions or events. For example, the sale of goods is the past transaction
which allows the recognition of repair warranty provisions.
Settlement of a present obligation will involve the entity giving up resources embodying economic benefits
in order to satisfy the claim of the other party. In practice, most liabilities will be met in cash but this is not
essential.
iii. Equity. The residual interest in the assets of the entity after deducting all its liabilities.
Equity may be sub-classified in the balance sheet providing information which is relevant to the decision
making needs of the users. This will indicate legal or other restrictions on the ability of the entity to distribute or
otherwise apply its equity.
iv. Income. Increases in economic benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from
equity participants.
Breaking down this definition
Increase in economic benefits: The entity should see an increase in economic benefits e.g. cash
through sales etc.
Inflows or enhancements of This shows a SOFP approach. All inflows are measured in terms of increasing
assets or decreases of assets or decreasing liabilities.
liabilities:
Result in increases in equity, The resultant effect should be to see that equity increases. So if a dividend is
other than those relating to received, it means cash (asset) increases and correspondingly profit for the
contributions from equity: period increases (dividend income), thereby increasing equity.
Both revenue and gains are included in the definition of income. Revenue arises in the course of ordinary activities of
an entity. Examples of income include sales revenue, dividends received, consultancy receipts, revaluation of non-
current assets etc.
v. Expenses. Decreases in economic benefits during the accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to
equity participants.
The same logic shown above in income can be used here for expenses. Examples of expenses include operating
expenses, administrative expenses, selling expenses etc.
Recognition of the elements of financial statements

Recognition is the process of incorporating in the statement of financial position or statement of profit or loss and
other comprehensive income an item that meets the definition of an element and satisfies the following criteria for
recognition:
(a) It is probable that any future economic benefit associated with the item will flow to or from the entity.
(b) The item has a cost or value that can be measured with reliability (the cost or value of an item in many
cases must be estimated)
Measurement of the elements of financial statements
For an item or transaction to be recognised in an entity's financial statements it needs to be measured as a monetary
amount. IFRS uses several different measurement bases but the Framework refers to just four.
The four measurement bases referred to in the IASB Framework are:
Historical cost. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the
consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of
proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at
the amounts of cash or cash equivalents expected to be paid to satisfy the liability in the normal course of
business.
Current cost. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash
or cash equivalents that would be required to settle the obligation currently.
Realisable (settlement) value.
– Realisable value. The amount of cash or cash equivalents that could currently be obtained by selling
an asset in an orderly disposal.
– Settlement value. The undiscounted amounts of cash or cash equivalents expected to be paid to
satisfy the liabilities in the normal course of business.
Present value. A current estimate of the present discounted value of the future net cash flows in the normal
course of business.
Historical cost is the most commonly adopted measurement basis, but this is usually combined with other bases, eg
an historical cost basis may be modified by the revaluation of land and buildings.
REVIEW QUESTIONS.
Question 1. (NBAA November 2015 Qn. 2)
a) There has be some mechanisms to ensure the accounting work is performed according to set principles and
standards. Furthermore, an assurance is needed that the assumed professional expertise does actually exist and
is applied to the work in hand. This is achieved by means of a regulatory framework. Regulatory framework is a
structure which helps an entity decides how to treat item that need to be included in the financial statements.
REQUIRED
i. Evaluate the reasons why do we need regulatory framework. (6 marks)

ii. What does the IASBs Conceptual Framework of Financial Reporting deals with?
b) The word faithful ‘representation’, indicates truthfulness and fairness in the financial statements presentations. In
the financial statements each element therein (assets, liability, equity, income and expense) represents something
to us. If all representations regarding these elements are true and fair, we call them faithful representations.
Financial information that faithfully represents economic phenomena has three characteristics.
REQUIRED:
i. Explain the three characteristics that make financial statement presentation being faithfully represented.
ii. What are the things needed to be observed to ensure above characteristics are achieved?
Question 2. (CPA IRELAND August 2012 Qn. 4)

The International Accounting Standards Board is currently in the process of updating its conceptual framework for
financial reporting. The updated project is being conducted in phases. To date, two chapters of the updated framework
have been issued: Chapter 1: The Objective of General Purpose Financial Reporting, and Chapter 3: Qualitative
Characteristics of Useful Financial Information. Chapter 4 of the conceptual framework contains the remaining text of
the approved 1989 conceptual framework. Within this chapter, it describes the elements of financial statements and
discusses definitions of each.
REQUIREMENT:
(a) (i) Explain the objective of “General Purpose Financial Reporting” as described in Chapter 1 of the revised
conceptual framework; and (5 Marks)
(ii) Discuss the usefulness of Chapter 1 in helping accountants determine appropriate accounting policies and practices.
(5 marks)
(b) Prepare a short memo for your Finance Director in which you briefly discuss the recognition and measurement of
one element of financial statements relating to financial performance and another element relating to financial position.
(10 marks)
[Total: 20 MARKS]
The IASB’s Conceptual Framework for Financial Reporting attempts to set out the concepts that underlie the
preparation and presentation of financial statements for external users. The most recent version was issued in
September 2010.
REQUIREMENT:
(a) Discuss the purpose and status of the Conceptual Framework. In particular, you should cover the aims of the
framework and its status in the event of a conflict between it and a particular standard. (10 marks)
(b) Outline the advantages and disadvantages of having a statement such as the Conceptual Framework.
(10 marks)
[Total: 20 MARKS]
Question 4.
Nette, a public limited company, manufacturer mining equipment and extracts natural gas. The directors are uncertain
about the role of the IASB’s Conceptual Framework for Financial Reporting (the “Framework”) in corporate reporting.
Their view is that accounting is based on the transactions carried out by the company and these transactions are
allocated to company’s accounting period by using the matching and prudence concepts. The argument put forward
by the directors is that the Framework does not take into account business and legal constraints within which
companies operate.
Required:
Explain the importance of the “Framework” to the reporting of the reporting of corporate performance and whether it
takes into account the business and legal constraints placed upon companies.
Question 5.
Financial statements identify positions, performance and changes in position over a period of time. The main
statements include Statement of Financial Position, Statement of Comprehensive Income and Statement of Cash
Flows. These statements are intended to show well a company has performed and give an indication of the value of
the business. However, many accountants feel that the financial statements are limited in their value to the users of
financial statements.
Required:
Identify and discuss the limitations of financial statements.
Question 6.
(a) State the main purpose of the Conceptual Framework Reporting (“The Framework”) adopted by the International
Accounting Standard Board (IASB)
(b) Explain the status of (“The Framework”)
(c) State the underlying assumption of financial statements identified by (“The Framework”)
Question 7.
Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a regulatory framework
in financial reporting.
Question 8.
Define the following accounting concepts and explain for each their implications for the preparation of financial
statements:
 The entity concept
 Going concern
 Materiality
 Fair presentation (true and fair view)
Question 9.
Comparability is an enhancing qualitative characteristics which add to the usefulness of financial statements.
Required:
(a) Explain what is meant by the term “comparability” in financial statements, referring to TWO types of comparison
that users of financial statements may make.
(b) Explain TWO ways in which the IASB’s Conceptual Framework of Financial Reporting and the requirements of
accounting standards aid the comparability of financial information.
Question 10.
“The accounting treatment and disclosure of the vast majority of transactions will remain the same whether they are
accounted for on the basis of ‘substance’ or ‘form’. However, some transactions will have a commercial effect not fully
indicated by their legal form, and where this is the case, it will not be sufficient to account for them merely by recording
that form”
Required:
Discuss the proposal that accounts should always reflect the commercial substance of transactions.
IAS 16 – Property, Plant and Equipment
 Introduction.
Asset a resource controlled by an entity as a result of past events and from which future economic benefits are
expected to flow to the entity
Classification of Assets
I. Tangible asset ie identifiable non-monetary assets without physical substance (eg. Property, plant and
equipment)
II. Intangible asset ie identifiable non-monetary assets with physical substance (eg. Goodwill)
The tangible assets can be non – current assets or current assets.
 Definition of Property, plant and equipment

Property, plant and equipment are tangible assets that:
 Are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes
 Are expected to be used during more than one period
 Recognition
Recognition simply means incorporation of the item in the business's accounts, in this case as a non-current asset.
The recognition of property, plant and equipment depends on two criteria:
a) It is probable that future economic benefits associated with the asset will flow to the entity
b) The cost of the asset to the entity can be measured reliably
These recognition criteria apply to subsequent expenditure as well as costs incurred initially. There are no separate
criteria for recognising subsequent expenditure.
 Measurement of Property, plant and equipment

Initial measurement.
Once an item of property, plant and equipment qualifies for recognition as an asset, it will initially be measured at cost.
Components of cost
The standard lists the components of the cost of an item of property, plant and equipment.
 Purchase price, less any trade discount or rebate
 Import duties and non-refundable purchase taxes
 Directly attributable costs of bringing the asset to working condition for its intended use, eg:
 The cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Testing
 Professional fees (architects, engineers)
 Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring the site on which
it is located
 Borrowing costs (IAS 23)
Additional guidance on directly attributable costs included in the cost of an item of property, plant and equipment.
a) These costs bring the asset to the location and working conditions necessary for it to be capable of operating
in the manner intended by management, including those costs to test whether the asset is functioning properly.
b) They are determined after deducting the net proceeds from selling any items produced when bringing the
asset to its location and condition.
The following costs will not be part of the cost of property, plant or equipment unless they can be attributed directly
to the asset's acquisition, or bringing it into its working condition.
 Administration and other general overhead costs eg rent of office
 Start-up and similar pre-production costs e.g. expenses of an inaugural function
 Initial operating losses before the asset reaches planned performance
 Costs of relocating e.g. costs of shifting a factory consequent to a government order.
 Costs of incidental operations not necessary to bring the asset to its required location and condition.
All of these will be recognised as an expense rather than an asset.
Example 1 (NBAA May 2015 Qn. 5)

a) IAS 16: Property, Plant and Equipment, outlines the accounting treatment for most types of property, plant
and equipment.
REQUIRED:
Present the recognition criteria under this standard. (4 marks)
b) The IASB’s Conceptual framework specifies manner of determining the value of different elements (i.e
measurement of elements).
REQUIRED:
Briefly illustrate the measurements bases as spelled by framework. (6 marks)
c) Discuss the criteria for classifying an asset as either a current asset or non-current asset. (2 marks)
d) Makao Ltd started a construction of new building to be used as a store on 1st April 2013. The following costs
were incurred on the construction:-
Tshs. "000"
Freehold land 4,500
Architect fees 620
Site preparation 1,650
Materials 7,800
Direct labour costs 11,200
Legal fees 2,400
General overheads 940
The store was completed on 1st January 2014 and brought into use following its grand opening on the 1st April
2014. Makao Ltd issued a Tshs.25 million unsecured loan on 1st April 2013 to aid construction of new store;
this meets the definition of qualifying asset as per IAS 23. The loan carried an interest rate of 8% per annum
and is repayable on 1st April 2016.
REQUIRED:
i. Calculate the total amount to be included as property, plant and equipment in respect of new store
ii. State what impact the above information would have on the Statement of Comprehensive income (if
any) for the year ended 31st March 2014.
(8 marks)
Example 2 (NBAA MAY 2017 Qn.5 (a)
(a) Damari Limited is a company involved in building wind farms In Singida. The financial controller has asked you, a
newly qualified CPA for some help in correctly accounting for Property, Plant and Equipment (PPE) within the company
for the financial year ended 31st December 2016.
The following costs have occurred on a wind farm site:
TZS’000’
Preparation of site 80,000
Annual maintenance once operational 30,000
VAT on materials (recoverable) 120,000
Staff training on correctly operating the wind farm once operational 25,000
Import duty on material purchased 28,000
Initial surveying of site 40,000
Project manager’s salary to build and manage the wind farm 140,000
Wages of employees to build the wind farm 300,000
Annual wages of employees once the wind farm is operating 100,000
Testing costs 60,000
Materials purchased for wind farm net of VAT 250,000
Discount received on materials purchased 33,000
REQUIRED:
(i) Calculate the amount that should be capitalized as Property, Plant and Equipment for the above wind farm.
(ii) In accordance with IAS 16 - Property, Plant and Equipment explain the accounting treatment allowed for the
measurement of PPE:
a) At recognition;
b) After recognition.
(iii) In the context of IAS 16 - Property, Plant and Equipment:
a) Discuss what is meant by the term ‘fair value’

b) How can the fair value of a building be determined?
Subsequent expenditure.
This are cost incurred after the initial recognition of an asset. Subsequent expenditure will only recognized when:
 Costs can be reliably measured, and
 Cost will lead to additional economic benefit flowing to the entity.
 Exchanges of assets
The exchange of items of property, plant and equipment, regardless of whether the assets are similar, are measured
at fair value, unless the exchange transaction lacks commercial substance or the fair value of neither of the assets
exchanged can be measured reliably. If the acquired item is not measured at fair value, its cost is measured at the
carrying amount of the asset given up
 Measurement subsequent to initial recognition

IAS 16 allows two possible treatments, which are
a) Cost model. Carry the asset at its cost less depreciation and any accumulated impairment loss.
b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation
less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Note: IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured
reliably, once this model adopted should be used consistently and revaluation of an asset should be done after one
year (if the price of an asset is volatile), but if not volatile should be done after three (3) years.
 Revaluation
The market value of land and buildings usually represents fair value, assuming existing use and line of business. And
In the case of plant and equipment, fair value can also be taken as market value.
The revaluation of PPE could result into either surplus (which should be credited to revaluation surplus, unless the
increase is reversing a previous decrease which was recognised as an expense) or impairment (which should be
debited to profit or loss account, except where it offsets a previous increase taken as a revaluation surplus in owners'
equity.).
Example 3. (Revaluation surplus)

Binkie Co has an item of land carried in its books at $13,000. Two years ago a slump in land values led the company
to reduce the carrying value from $15,000. This was taken as an expense in profit or loss. There has been a surge in
land prices in the current year, however, and the land is now worth $20,000.
Account for the revaluation in the current year.
Example 4 (Decrease in value)

The original cost was $15,000, revalued upwards to $20,000 two years ago. The value has now fallen to $13,000.
Account for the decrease in value.
Note: When an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should
be revalued and all items within a class should be revalued at the same time.
 Depreciation (see the next part)
 Derecognition
An entity is required to derecognise the carrying amount of an item of property, plant or equipment that it disposes of
on the date the criteria for the sale of goods would be met. This also applies to parts of an asset. An entity cannot
classify as revenue a gain it realises on the disposal of an item of property, plant and equipment.
 Disclosure
The standard has a long list of disclosure requirements, for each class of property, plant and equipment.
a) Measurement bases for determining the gross carrying amount (if more than one, the gross carrying amount
for that basis in each category
b) Depreciation methods used
c) Useful lives or depreciation rates used
d) Gross carrying amount and accumulated depreciation (aggregated with accumulated impairment losses) at
the beginning and end of the period
e) Reconciliation of the carrying amount at the beginning and end of the period showing:
i. Additions
ii. Disposals
iii. Acquisitions through business combinations
iv. Increases/decreases during the period from revaluations and from impairment losses
v. Impairment losses recognised in profit or loss
vi. Impairment losses reversed in profit or loss
vii. Depreciation
viii. Net exchange differences (from translation of statements of a foreign entity)
The financial statements should also disclose the following.

(a) Any recoverable amounts of property, plant and equipment
(b) Existence and amounts of restrictions on title, and items pledged as security for liabilities
(c) Accounting policy for the estimated costs of restoring the site
(d) Amount of expenditures on account of items in the course of construction
(e) Amount of commitments to acquisitions
Revalued assets require further disclosures.

(a) Basis used to revalue the assets
(b) Effective date of the revaluation
(c) Whether an independent valuer was involved
(d) Nature of any indices used to determine replacement cost
(e) Carrying amount of each class of property, plant and equipment that would have been included in the financial
statements had the assets been carried at cost less accumulated depreciation and accumulated impairment losses
(f) Revaluation surplus, indicating the movement for the period and any restrictions on the distribution of the balance
to shareholders
The standard also encourages disclosure of additional information, which the users of financial statements may find
useful.
(a) The carrying amount of temporarily idle property, plant and equipment
(b) The gross carrying amount of any fully depreciated property, plant and equipment that is still in use
(c) The carrying amount of property, plant and equipment retired from active use and held for disposal
(d) The fair value of property, plant and equipment when this is materially different from the carrying
REVIEW QUESTIONS.
Question 1. (CPA April 2017 Qn.5)
IAS 16 Property Plant and Equipment sets out the accounting requirements for initial recognition and measurement,
subsequent measurement and derecognition of items of property, plant and equipment. IAS 16 expands on and applies
the definition of an asset in the Conceptual Framework, as well as the recognition criteria set out in that document.
On 31 December 2016, Stanley Plc completed the construction of a new headquarters building. Some costs associated
with this were as follows:
€ʼ000
Purchase of site 200
Legal costs and stamp duty on site purchase 16
Demolition of existing derelict building on site 18
Design and planning costs 49
Redesign costs due to conditions of planning permission 15
Redesign costs due to errors in the original design 12
Tendering and procurement costs 5
Management time spent on the above, estimated apportionment 22
Construction contractor’s fee to builder’s finish 754
Rectification costs due to contractor error, not covered by the contractor 13
Completion, painting and furnishing 113
Cost of moving in staff, files and equipment 37
Cancellation costs of operating lease on previous headquarters building 31
The new building was brought into use on 1 January 2017. It was estimated to have a useful economic life of 50 years
from that date, and a residual value of €140,000 at the end of its life (excluding the land).
All the above costs were debited to a suspense account and credited to cash. No other entries were made. All items
were paid as incurred.
REQUIREMENT:
(a) Outline how a newly constructed building should be recorded in the financial records applying the principles of IAS
16 Property Plant and Equipment. (4 marks)
(b) Recommend how further expenditure on an existing building should be treated under IAS 16 Property Plant and
Equipment? (4 marks)
(c) Set out journal entries and supporting calculations to show how the principles of IAS 16 Property Plant and
Equipment should be applied in accounting for the transactions described above for year ended 31 March 2017.
(12 marks)
[Total: 20 Marks]
Question 2. (ACCA JUNE 2014 Qn. 4)
(a) A director of Enca, a public listed company, has expressed concerns about the accounting treatment of some of
the company’s items of property, plant and equipment which have increased in value. His main concern is that the
statement of financial position does not show the true value of assets which have increased in value and that this
‘undervaluation’ is compounded by having to charge depreciation on these assets, which also reduces reported profit.
He argues that this does not make economic sense.
Required:
Respond to the director’s concerns by summarising the principal requirements of IAS 16 Property, Plant and Equipment
in relation to the revaluation of property, plant and equipment, including its subsequent treatment. (5 marks)
(b) The following details relate to two items of property, plant and equipment (A and B) owned by Delta which are
depreciated on a straight-line basis with no estimated residual value:
Item A Item B
Estimated useful life at acquisition 8 years 6 years
$'000 $'000
Cost on 1 April 2010 240,000 120,000
Accumulated depreciation (two years) (60,000) (40,000)
Carrying amount at 31 March 2012 180,000 80,000
Revaluation on 1 April 2012:

Revalued amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalised on 1 April 2013 Nil 14,400
At 31 March 2014 item A was still in use, but item B was sold (on that date) for $70 million.
Note: Delta makes an annual transfer from its revaluation surplus to retained earnings in respect of excess
depreciation.
Required:
Prepare extracts from:
(i) Delta’s statements of profit or loss for the years ended 31 March 2013 and 2014 in respect of charges
(expenses) related to property, plant and equipment;
(ii) Delta’s statements of financial position as at 31 March 2013 and 2014 for the carrying amount of property,
plant and equipment and the revaluation surplus.
Question 3. (NBAA NOV 2016 Qn.4)

SHAMBANI Company Ltd had the following tangible non-current assets in its financial statement of financial position
as at 31st December 2014:
Cost Depreciation Carrying Amount

TZS.’000’ TZS.’000’ TZS.’000’
Land 1,000,000 - 1,000,000
Building 800,000 160,000 640,000
Plant and machinery 3,226,000 916,000 2,310,000
Fixture and fittings 780,000 280,000 500,000
Assets under construction 182,000 - 182,000
5,988,000 1,356,000 4,632,000
In the year ended 31st December 2015 the following transactions occurred.
i. Further costs of TZS.106 million were incurred on building being constructed by the company. A building
costing TZS.200 million was completed during the year.
ii. A deposit of TZS.40 million was paid for a new computer system which is undelivered at the year end.
iii. Additions to plant were TZS.308 million.
iv. Additions to fixtures, excluding the deposit on the new computer system, were TZS.80 million.
v. The following assets were sold:
Cost Depreciation Proceeds

Brought forward
TZS.’000’ TZS.’000’ TZS.’000’
Land 554,000 390,000 172,000
Fixture and fittings 82,000 62,000 4,000
Land and Buildings were revalued at 1st January 2015 to TZS.3 billion of which land worth TZS.1.8 billion. The
revaluation was performed by Garson & Co, Property Valuers, on the basis of existing use value on the open market.
The useful economic life of the building is unchanged. The buildings were purchased 10 years before the revaluation.
Depreciation is provided on all assets in use at the year end at the following rates:
Buildings 2% per year straight line

Plant 20% per year straight line
Fixtures 25% per year reducing balance.
REQUIRED:
By using the above information, show the disclosure under IAS 16 in relation to non-current assets in the notes on the
published accounts for the year ended 31st December 2015. (20 marks)
Question 4. (NBAA MAY 2017 Qn.5 (b)

(b) Damari Limited’s head office building is the only building it owns. Using professional valuers, it revalued this building
on 1st January 2016, at TZS.2,100,000,000. Damari Limited has adopted a revaluation policy for building from this
valuation date and has decided that the original useful life of buildings has not changed as a result of the revaluation.
The building was acquired on 1st January 2006. The cost of the building on acquisition was TZS.2,500,000,000 and
the accumulated depreciation to 31st December 2015 amounted to TZS.500,000,000. The depreciation up to 1st
January 2016 was depreciated evenly since acquisition. The professional valuer believes that the residual value on the
building would be TZS.600,000,000 at the end of its useful life.
REQUIRED.
In accordance with IAS 16 - Property, Plant and Equipment:
i. State how should the depreciable amount of an asset be allocated
ii. State how often the residual value and the useful life of an asset should be reviewed.
iii. Calculate the depreciation amount of the building for the year ended 31st December 2016 based on the
information provided in the above scenario.

IAS16 Property, Plant and Equipment and IAS40 Investment Property outlines the accounting treatment of tangible
non-current assets. Hegarty PLC is a Limerick based computer manufacturer and during the year ended 31 October
2009 the following transactions in relation to property, plant and equipment took place.
1. On 1 April 2009, a new machine was purchased by Hegarty PLC in order to improve productivity. The cost of the
machine was €600,000, but the company also incurred the following:
€
Delivery costs 4,000
Labour installation costs (Note i) 15,000
Management and supervision costs (allocated from head office) 10,000
Material costs used for the installation -inclusive of €223 recoverable VAT. 1,500
Cost of testing of new machine (Note ii) 3,000
Maintenance service contract costs per annum 400
Proceeds from sale of by-products produced as a result of the testing process (100)
Notes:
(i) These were 20% higher than budgeted due to an industrial dispute at the time of installation.
(ii) Included in the testing costs of the machine was €150 in connection with a quarterly diagnostic check of
machinery. Plant and equipment are depreciated at 25% straight line. The cost of plant and equipment at 1
November 2008 amounted to €300,000 and the accumulated depreciation was €180,000 at that date.
2. Hegarty PLC’s head office building was originally acquired on 1 November 2003 for €2m, and is depreciated at
4% per annum straight line. On 1 November 2007, it was revalued to €2.5m. Due to the recent downturn in
commercial property prices, valuers acting for the company have advised that the valuation on 31 October 2009
should be €2m.
3. On 1 November 2008, Hegarty PLC purchased a property in Ennis, Co. Clare costing €500,000 for its investment
potential. The amount attributable to land was negligible, and the buildings are expected to have a useful life of 40
years. Local property indices indicate that property prices in this area have gone against the downward national
trend, and that the fair value of the property has increased during the year to 31 October 2009.
REQUIREMENTS:
(a) In relation to the machinery and head office building, draft the non-current asset note showing the movements on
property, plant and equipment for the year to 31 October 2009. (12 marks)
(b) Define the term ‘Investment Property’ and explain why it may not be appropriate to charge depreciation in relation
to such a property. (4 marks)
(c) Assuming that Hegarty PLC adopts a fair value policy for the property in Ennis, explain how the property would be
presented in the financial statements for the year to 31 October 2009, if the property has risen in value by 5%
during the year. (Disclosure notes are not required). (4 marks)
[Total: 20 marks
Question 6. (CPA IRELAND April 2011 Qn. 4)

IAS 16 Property, Plant and Equipment and IAS 40 Investment Property deals with the accounting treatment of tangible
non-current assets.
You have recently been appointed as the Financial Accountant of Norfolk PLC, and are currently involved in the
preparation of the financial statements for the year ended 31 October 2010. You have been provided with the following
information in relation to transactions relating to property, plant and equipment which took place during the year:
1. New factory premises were completed and ready for occupation on 1 April 2010. Production was not transferred
to the factory until 30 September 2010 due to an industrial dispute arising from a decision by the company to make
some compulsory redundancies. Capital expenditure in relation to the new factory premises is recorded in the
Statement of Financial Position for the year ended 31 October 2009 at €1.4 million (including land of €800,000).
The following costs, which also relate to the new factory premises, have been incurred during the year to 31
October 2010:
€ʼ000
Additional construction costs 104
Professional fees (legal and architects) 20
General and administrative overheads 55
Relocation of staff to new factory 15
2. On 1 April 2010, new machinery for a highly automated production line became available for use within the factory.
Costs of the new machinery amounted to €620,000 and, in addition, the company also incurred the following:
 Allocated supervisory costs of €9,500.
 €25,000 was incurred in testing the new process. €10,000 of this was incurred in relation to putting on an
ʻopen dayʼ for customers to view the new machinery.
 Installation costs of €50,000 were incurred. These were 10% higher than originally budgeted due to an
unofficial strike action.
 Fees of €3,000 were paid to Casement Haulage for the cost of transporting the machinery to the factory.
3. Norfolk PLCʼs headquarters building was acquired on 1 November 2003 for €2.5 million and depreciated at 4%
per annum. On 1 November 2007, it was revalued to €3 million. Following this revaluation, the company did not
make any reserve transfers for additional depreciation. As a consequence of the recent financial downturn,
professional valuers have advised that as at 31 October 2010, the building was worth €2 million.
4. Norfolk PLC also has a leasehold property held under a finance lease and leased out under an operating lease.
The carrying value of the property at 1 November 2009 was €2 million and during the year Norfolk PLC spent
€300,000 in extending the rented floor capacity of the property. An independent valuer valued the property at €3.2
million on 31 October 2010.
5. Norfolk PLC uses the straight line method of depreciation, and depreciates buildings at 4% per annum and
machinery at 20%. The company values investment properties using the fair value model.
REQUIREMENT:
(a) Distinguish between the ʻcost modelʼ and the ʻrevaluation modelʼ for the measurement of property, plant and
equipment subsequent to its initial recognition. (3 marks)
(b) Prepare extracts from the Statement of Financial Position in relation to the above transactions as at 31 October
2010 and draft the note showing movements on property, plant and equipment for the year ending 31 October
2010 (working to the nearest €000). (14 marks)
(c) Comment briefly on your accounting treatment in relation to item (4) above. (3 marks)
[Total: 20 MARKS]
Question 7.
The broad principles of accounting for tangible Non-current Assets involve distinguishing between capital and revenue
expenditure, measuring the cost of assets, determining how they should be depreciated and dealing with the problems
of subsequent measurement and subsequent expenditure. IAS 16 Property, Plant and Equipment has the intention of
improving consistency in these areas.
Required:
(a) Explain:
(i) How the initial cost of tangible Non-current Assets should be measured, and (4 marks)
(ii) The circumstances in which subsequent expenditure on those assets should be capitalised (3 marks)
(b) Explain IAS 16's requirements regarding the revaluation of Non-current Assets and the accounting treatment of
surpluses and deficits on revaluation and gains and losses on disposal. (8 marks)
(c) (i) Broadoak has recently purchased an item of plant from Plantco, the details of this are:
$ $
Basic list price of plant 240,000
Trade discount applicable to Broadoak 12.5% on List price
Ancillary costs:
Shipping and handling costs 2,750
Estimated pre-production testing 12,500
Maintenance contract for three years 24,000
Site preparation costs:
Electrical cable installation 14,000
Concrete reinforcement 4,500
Own labour costs 7,500 26,000
Broadoak paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an early
settlement discount of 3%.
Broadoak had incorrectly specified the power loading of the original electrical cable to be installed by the contractor.
The cost of correcting this error of $6,000 is included in the above figure of $14,000.
The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of $15,000 to dismantle
the plant and $3,000 to restore the site to its original use condition.
Calculate the amount at which the initial cost of the plant should be measured
(Ignore discounting.) (5 marks)
(ii) Broadoak acquired a 12-year lease on a property on 1 October 2012 at a cost of $240,000. The company policy is
to revalue its properties to their market values at the end of each year. Accumulated amortisation is eliminated and the
property is restated to the revalued amount. Annual amortisation is calculated on the carrying values at the beginning
of the year. The market values of the property on 30 September 2013 and 2014 were $231,000 and $175,000
respectively. The existing balance on the revaluation reserve at 1 October2012 was $50,000. This related to some
non-depreciable land whose value had not changed significantly since 1 October 2012.
Prepare extracts of the financial statements of Broadoak (including the movement on the revaluation reserve) for the
years to 30 September 2013 and 2014 in respect of the leasehold property. (5 marks)
(Total: 25 marks)
Question 8.
A company purchases an asset that had a list price of $100,000 but was offered a trade discount of 10%. If the company
pays for the asset within the next twenty days it can take advantage of a further 5% settlement discount.
In addition to the list price the company also incurred the following charges:
$ $
Shipping & handling charges 2,500
Pre-production testing 10,000
Maintenance contract for three years 18,000
Site preparation costs
electrical cabling costs 10,000
floor reinforcing 5,000
in-house labour costs 7,000 22,000
Included in the electrical cabling costs is $3,000 which is as a result of the company providing incorrect requirements
for the asset.
The company paid after eighteen days.

Required:
What initial cost should be recorded for the asset in the Statement of Financial Position?
IAS 16 – Property, Plant and Equipment (Depreciation)

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Purpose
i. The portion that is used up is reported as an expense in the statement of profit or loss and the
corresponding amount is reduced from the value of the asset in the statement of financial position.
ii. The accruals assumption requires that expenditure should be recognised when there is a decrease in future
economic benefit, as represented by a reduction in the value of an asset.
iii. Retention of funds: The charge for depreciation reduces disposable profits. Drawings or disposals of
resources to the owners are normally restricted to profit after depreciation.
Complex assets: Significant parts to be depreciated separately

Some assets may have one or more significant parts:
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the
item should be depreciated separately (eg. airframe and engines of an aircraft)
Note: If two or more significant parts of an item have the same useful life and depreciation method, these parts may
be grouped together to determine the depreciation charge.
Not significant parts (remainder)

After the significant parts of an asset are treated separately for the purpose of depreciation, what remain are the parts
that are individually not significant. They are collectively known as the remainder, and these are depreciated
separately. If there are varying expectations (about useful life and residual value) for these parts, approximation
techniques may be used.
Recognition of the depreciation charge

According to IAS 16, the depreciation charge for each period should be recognised in the profit or loss unless it is
included in the carrying amount of another asset. Depreciation of an asset is a necessary charge against profit.
Important terms
 Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
According to IAS 16, the depreciable amount of an asset should be allocated on a systematic basis over its
useful life.
Depreciable amount = Cost – Scrap/residual value.
 Residual value/Scrap value is the value which the entity expects to realise from the disposal of the asset at
the end of its useful life.
 Useful life is the period over which the asset is likely to be in existence for an entity’s use. It may also be
denoted in terms of the number of units expected to be obtained from the asset. The residual value and
useful life of an asset should be reviewed at least at each financial year-end. If expectations differ from
previous estimates, the change(s) should be accounted for as a change in an accounting estimate
When does depreciation begin and cease?

Depreciation begins when the asset is available for use at the location and in the condition intended by management.
Depreciation of an asset ceases at the earlier of the following:
a) The date on which the asset is classified as held for sale (or included in a disposal group that is classified as
held for sale) in accordance with IFRS 5; and
b) The date on which the asset is derecognised.
Depreciation does not cease when the asset becomes idle or is retired from active use, unless it is fully depreciated.
However, under the usage method of depreciation, if there is no production, the depreciation charge can be zero.
Estimation of useful life

The estimation of the useful life of the asset is a matter of judgement, based on the entity’s experience with similar
assets. The useful life is determined in terms of the asset’s expected utility to the entity, and it may therefore be
shorter than its economic life. Useful life may be reviewed and the changes are treated as change in accounting
estimates and are accounted for prospectively as adjustments to future depreciation.
The factors are considered in determining the useful life of an asset:

1. Expected usage, with reference to the assets expected capacity or physical output. A machine working at full
capacity right from the beginning may have a lower useful life in terms of years than one gradually increasing
capacity utilisation.
2. Expected physical wear and tear.
3. Technical or commercial obsolescence i.e. changes or improvements in a production process or technique,
or changes in the market demand for the asset.
4. Legal or similar limits on the use of the asset, e.g. the expiry dates of patents related to the process used on
the machine
Land and buildings

The land and building requires some special considerations. Land and buildings are separate assets. Therefore, they
are accounted for separately, even when they are acquired together.
With some exceptions (such as quarries or mines), land has an unlimited useful life and therefore is not depreciated
while Buildings have a limited useful life and therefore are depreciable assets. Any increase in the value of land on
which a building is standing will have no impact on the determination of the building's useful life.
Depreciation methods
According to IAS 16, the depreciation method used should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.
There are a variety of depreciation methods, including the following main methods:
i. The straight-line method: This results in a constant charge over the useful life if the asset’s residual value
does not change.
ii. The reducing (diminishing) balance method: This result in a decreasing charge over the useful life.
iii. The units of production method: This results in a charge based on expected use or output.
iv. Sum of years digit.
The method selected is to be applied consistently from period to period unless there is a change in the expected
pattern of consumption of those future economic benefits. The method decided is to be reviewed at the end of each
financial year. If there is a change in consumption pattern, the method may be changed. The impact of such a change
should be accounted for as a change in accounting estimates in accordance with IAS 8.
Example
On January 1, 20X4, Kalbros Ltd purchased a second-hand item of plant for Tshs72 million and immediately spent
Tshs48 million in putting the plant into working condition. On July 1, 20X4, additional plant costing Tshs48 million was
purchased. On July 1, 20X6 the plant purchased on January 1, 20X4 became obsolete and was sold for Tshs60 million.
On July 1, 20X6 another new item of plant was purchased at a cost of Tshs144 million. The firm provided depreciation
on reducing balance method at 15% per annum according to the period of use in each year.
Required:
Show the machinery account and accumulated depreciation account for the calendar years 20X4 to 20X6.
Depreciation calculation and accounting after revaluation

After a revaluation, depreciation will be based on the revalued amount. The full depreciation amount is charged as an
expense to the statement of profit or loss. As discussed earlier, an amount equal to the difference between depreciation
on revalued amount and that on original cost may be transferred from revaluation surplus to retained earnings.
Impairment of asset values

An impairment loss should be treated in the same way as a revaluation decrease ie the decrease should be recognised
as an expense. However, a revaluation decrease (or impairment loss) should be charged directly against any related
revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in
respect of that same asset.
A reversal of an impairment loss should be treated in the same way as a revaluation increase, ie a revaluation increase
should be recognised as income to the extent that it reverses a revaluation decrease or an impairment loss of the same
asset previously recognised as an expense.
Overhauls
Where an asset requires regular overhauls in order to continue to operate, the cost of the overhaul is treated as an
additional component and depreciated over the period to the next overhaul.
IAS 40 – Investment Property

 Meaning of Investment property.
Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee
under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
a) Use in the production or supply of goods or services or for administrative purposes, or
b) Sale in the ordinary course of business.
It includes,
 Land held for long term appreciation
 Land held for indeterminate future use
 Building leased out under an operating lease
 Vacant building held to be leased out under an operating lease
 Property being constructed/developed for future use as investment property
It excludes,
 Property held for use in production or supply of goods or services or for administrative purposes (IAS 16 –
Property, Plant and Equipment)
 Property intended for sale in the ordinary course of business (IAS 2 – Inventories)
 Owner-occupied property (IAS 16 – Property, Plant and Equipment)
 Property leased to another entity under a finance lease (IAS 17 – Leases)
 Property being constructed for third parties (IAS 11 – Construction Contracts)
Point to note:-
 If there is partial own use
If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the
portions can be sold or leased out separately, they are accounted for separately. Therefore 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 portion is insignificant.
 If entity provides ancillary services

If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classi-
fication as investment property is determined by the significance of the services provided. If those services are a rela-
tively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and
maintenance services to the lessees), 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.
 If there is intracompany rentals

Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial state-
ments that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the
group. However, such property could qualify as investment property in the separate financial statements of the lessor,
if the definition of investment property is otherwise met.
 Recognition of Investment Property

Investment property should be recognised as an asset when two conditions are met:
a) It is probable that the future economic benefits that are associated with the investment property will flow to
the entity.
b) The cost of the investment property can be measured reliably.
 Initial measurement
An investment property should be measured initially at its cost, including transaction costs. And a property interest
held under a lease and classified as an investment property shall be accounted for as if it were a finance lease. The
asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments.
An equivalent amount is recognised as a liability.
 Measurement subsequent to initial recognition

IAS 40 requires an entity to choose between two models:
i. The fair value model
ii. The cost model
Whatever policy it chooses should be applied to all of its investment property.
Where an entity chooses to classify a property held under an operating lease as an investment property, there is no
choice. The fair value model must be used for all the entity's investment property, regardless of whether it is
owned or leased.
i. Fair value model.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
After initial recognition, an entity selecting the fair value model should measure all of its investment property
at fair value. Also, there is a rebuttable presumption that an entity can determine fair value on a continuing basis. Only
in rare exceptions change from fair value model to cost model is permitted.
Note: A change in accounting policy from the fair value model to the cost model is allowed only when the change will
result in a more appropriate presentation. The IAS adds that it is highly unlikely that a change from fair value model
to the cost model will result in more appropriate presentation; it therefore discourages a change in this direction.
The IAS expects that once an entity measures an investment property at fair value, it should continue to do so until:
a) Disposal; or
b) The property becomes owner-occupied property; or
c) The entity begins to develop the property for subsequent sale.
 Treatment of gain on change in fair value

A gain or loss arising from a change in the fair value of investment property should be recognised in the profit or
loss for the period in which it arises.
ii. Cost model.

The cost model is the cost model in IAS 16. Investment property should be measured at depreciated cost, less any
accumulated impairment losses. An entity that chooses the cost model should disclose the fair value of its
investment property.
 Transfers
Transfers to or from investment property should only be made when there is a change in use (if the conditions
change). For example, owner occupation commences so the investment property will be treated under IAS 16 as an
owner-occupied property.
Transfer type Manner of transfer

1 When the entity uses the cost model (for At carrying amounts.
any kind of non-current asset.)
2 The properties deemed cost for subsequent accounting in
Investment property carried at fair value to accordance with IAS 16 or IAS 2 should be its fair value as on
owner - occupied property or inventories. the date of change.
3 Owner - occupied property to investment An entity should apply IAS 16 up to the date of change; any
property to be carried at fair value. difference between carrying value and fair value should be
treated as a revaluation surplus in accordance with IAS 16
4 Any difference between fair value (as an investment property)
Inventory to investment property to be and previous carrying value (as inventory) should be
carried at fair value. recognised in profit or loss.
 Retirement or disposal
An investment property shall be derecognised (eliminated from the statement of financial position) on disposal or when
the investment property is permanently withdrawn from use and no future economic benefits are expected from its
disposal.
Gains or losses arising from the retirement or disposal of investment property are:
(a) Equal to the difference between net disposal proceeds and carrying amount of the asset.
(b) Recognised in the statement of profit or loss in the period when the asset is sold or retired. For sale and leaseback
transactions, IAS 17 should be followed.
Disclosure (Both Fair Value Model and Cost Model)

 Choice of fair value or the cost model
 If the fair value model is used, whether property interests held under operating leases are classified and
accounted for as investment property
 If classification is difficult, the criteria to distinguish investment property from owner-occupied property and from
property held for sale
 The methods and significant assumptions applied in determining the fair value of investment property
 The extent to which the fair value of investment property is based on a valuation by a qualified independent
valuer; if there has been no such valuation, that fact must be disclosed
 The amounts recognised in profit or loss for:

— Rental income from investment property
— Direct operating expenses (including repairs and maintenance) arising from investment property that
generated rental income during the period
— Direct operating expenses (including repairs and maintenance) arising from investment property that did
not generate rental income during the period
— The cumulative change in fair value recognised in profit or loss on a sale from a pool of assets in which
the cost model is used into a pool in which the fair value model is used
 Restrictions on the realisability of investment property or the remittance of income and proceeds of disposal
 Contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or
enhancements
Additional Disclosures for the Fair Value Model

 A reconciliation between the carrying amounts of investment property at the beginning and end of the period,
showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from in-
ventories and owner-occupied property, and other changes
 Significant adjustments to an outside valuation (if any)
 If an entity that otherwise uses the fair value model measures an item of investment property using the cost
model, certain additional disclosures are required
Additional Disclosures for the Cost Model

 The depreciation methods used
 The useful lives or the depreciation rates used
 The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period
 A reconciliation of the carrying amount of investment property at the beginning and end of the period, showing
additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers
to and from inventories and owner-occupied property, and other changes
 The fair value of investment property. If the fair value of an item of investment property cannot be measured
reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value
is highly likely to lie.
REVIEW QUESTIONS.
Question 1. (SEQ 2)
The carrying value of property X is Tsh.120 and of property Y, Tsh.160 million. They are revalued at Tsh.100 million
and Tsh.176 million respectively. On the previous revaluations, X’s value was increased by Tsh.14 million (being the
amount lying to the credit of revaluation surplus against this asset) and Y’s value decreased by Tsh.10 million. Show
the accounting entries under the alternative assumptions that properties are:
1. Owner-occupied properties
2. Investment properties
Question 2. (ACCA JUNE 2013 Qn. 5)
(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment Property.
Required:
(i) Define investment property under IAS 40 and explain why its accounting treatment is different from that
of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value model differs from an
owner-occupied property carried under the revaluation model.
(b) Speculate owns the following properties at 1 April 2012:
Property A: An office building used by Speculate for administrative purposes with a depreciated historical cost of $2
million. At 1 April 2012 it had a remaining life of 20 years. After a reorganisation on 1 October 2012, the property was
let to a third party and reclassified as an investment property applying Speculate’s policy of the fair value model. An
independent valuer assessed the property to have a fair value of $2·3 million at 1 October 2012, which had risen to
$2·34 million at 31 March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a fair value of $1·5
million which had risen to $1·65 million at 31 March 2013.
Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive income and statement of
financial position for the year ended 31 March 2013 in respect of the above properties. In the case of property B only,
state how it would be classified in Speculate’s consolidated statement of financial position.
Note: Ignore deferred tax. (5 marks) (10 marks)

International Financial Reporting Standards (IFRS) support the use of fair values when reporting the values of assets
wherever practical. This involves periodic remeasurements of assets and the consequent recognition of gains and
losses in the financial statements. There are several methods of recognising gains and losses on remeasurement of
assets required by IFRS.
REQUIREMENT:
(a) Advise how IFRS require gains or losses on remeasurement to be dealt with in the financial statements in the case
of each of the following assets. The calculation of such gains or losses is not necessary, merely their accounting
treatment. Your answer should indicate clearly where in the performance statement each component of gain or loss
should appear.
I. Property, plant & equipment held under the revaluation model of IAS 16. (4 marks)
II. Investment property held under the fair value model of IAS 40. (2 marks)
III. Financial assets held at fair value under IFRS 9. (4 marks)
(b) In each case (i) and (ii) below, outline briefly the appropriate accounting treatment and show the journal entries in
the financial statements of Williamson plc (Williamson) for year ended 31 March 2015, resulting from recording the
events described. Any entry affecting the performance statement must be clearly classified as either ‘profit or loss’ or
‘other comprehensive income’. Williamson adopts the revaluation model of IAS 16 Property, Plant & Equipment and
the fair value model of IAS 40 Investment Property. Williamson chooses to recognise any fair value gains or losses
arising on its equity investments in ‘other comprehensive income’ as permitted by IFRS 9 Financial Instruments.
I. Williamson owns a piece of property it purchased on 1 April 2012 for €3.5 million. The land component of the
property was estimated to be €1 million at the date of purchase. The useful economic life of the building on
this land was estimated to be 25 years on 1 April 2012. The property was used as the corporate headquarters
for two years from that date. On 1 April 2014, the company moved its headquarters to another building and
leased the entire property for five years to an unrelated tenant on an arm’s length basis in order to benefit
from the rental income and future capital appreciation. The fair value of the property on 1 April 2014 was €4.1
million (land component €1.9 million), and on 31 March 2015, €4.8 million (land component €2.1 million). The
estimate of useful economic life remained unchanged throughout the period. Land and buildings are
considered to be two separate assets by the directors of Williamson. (5 marks)
II. Williamson holds a portfolio of equity investments the value of which was correctly recorded at €12 million on
1 April 2014. During the year ended 31 March 2015, the company received dividends of €0.75 million. Further
equity investments were purchased at a cost of €1.6 million. Shares were disposed of during the year for
proceeds of €1.1 million. These shares had cost €0.4 million a number of years earlier but had been valued
at €0.9 million on 1 April 2014. The fair value of the financial assets held on 31 March 2015 was €14 million.
(5 marks)
[Total: 20 MARKS

IAS 16 Property, Plant & Equipment sets out the accounting treatment of tangible non-current assets while, IAS 40
Investment Property deals with properties held for their investment potential only. The distinction between investment
and non-investment property is very important, as the accounting treatment required is significantly different in each
case.
REQUIREMENT:
(a) Explain the definition of ‘Investment Property’ according to IAS 40. (3 marks)
(b) Discuss the key differences between the accounting treatment of investment properties and the accounting
treatment of non-investment properties. Why does the International Accounting Standards Board (IASB) require a
different treatment in each case? (5 marks)
(c) In each case (i) to (iii) below, show the entries in the financial statements of Muttingham plc for year ended 31 July
2014 resulting from recording the events described. Your answer should clearly identify any depreciation charges
involved and how each transaction may impact upon the statement of profit or loss and other comprehensive income
of Muttingham plc for the year ended 31 July 2014, if at all. Muttingham plc has several properties on its books. During
the year ended 31 July 2014, the events detailed below took place.
(i) Property A was acquired on 1 August 2009 for €1.6 million for use as company offices. The buildings element of
the property was estimated at 90% of the purchase price and this was assigned a 50 year useful economic life
from the date of purchase (the balance consisted of land). On 1 August 2013 an independent valuation was
obtained and the property was revalued to €1.8 million including land, this being assigned a value of €300,000.
The useful economic life of the building was assessed at 50 years from that date.
(ii) Property B was acquired in March 2013 at an auction of distressed properties. This property is a block of land in
Galway city, which was bought for investment potential. The cost was €750,000. No revaluation took place on 31
July 2013. However, on 31 July 2014, a professional valuer placed a value of €1,200,000 on the land.
(iii) Property C was a building acquired on 1 August 2006 for €4.4 million for use as a factory. This was a leasehold
property with 20 years left to run. Following a national decline in property values, a revaluation on 1 August 2008,
reduced the value of the leasehold to €1.26m. On 1 August 2013, the property was estimated by the same
professional valuers to have a value of €2.6m. The company applies straight-line depreciation wherever
depreciation is required. The fair value model of valuation is applied wherever permitted. The company does not
apply the option to transfer revaluation surpluses annually to retained earnings. Assume all properties were
correctly accounted for up to 31 July 2013, unless otherwise instructed. (12 marks)
[Total: 20 MARKS
IAS 2 - Inventories
 Inventories are assets:

− Held for sale in the ordinary course of business;
− In the process of production for such sale; or
− In the form of materials or supplies to be consumed in the production process or in the rendering of
services.
 Inventories can include any of the following.

 Goods purchased and held for resale, eg goods held for sale by a retailer, or land and buildings held
for resale
 Finished goods produced
 Work in progress being produced
 Materials and supplies awaiting use in the production process (raw materials)
 Measurement of inventories
The standard states that 'Inventories should be measured at the lower of cost and net realisable value.'
 Cost of inventories
The cost of inventories will consist of all costs of:
 Purchase
 Costs of conversion
 Other costs incurred in bringing the inventories to their present location and condition
 Costs of purchase
The standard lists the following as comprising the costs of purchase of inventories.
− Purchase price PLUS
− Import duties and other taxes PLUS
− Transport, handling and any other cost directly attributable to the acquisition of finished goods, services
and materials LESS
− Trade discounts, rebates and other similar amounts
 Costs of conversion
Costs of conversion of inventories consist of two main parts.
a) Costs directly related to the units of production, eg direct materials, direct labour
b) Fixed (allocated based on normal capacity) and variable production overheads that are incurred in
converting materials into finished goods, allocated on a systematic basis.
 Other costs
Any other costs should only be recognised if they are incurred in bringing the inventories to their present location and
condition.
 Costs excluded from the cost of inventory

The standard lists types of cost which would not be included in cost of inventories. Instead, they should be recognised
as an expense in the period they are incurred.
a) Abnormal amounts of wasted materials, labour or other production costs

b) Storage costs (except costs which are necessary in the production process before a further production
stage)
c) Administrative overheads not incurred to bring inventories to their present location and conditions
d) Selling costs eg commission paid to salesmen
e) Borrowing costs, except to the extent permitted by IAS 23 – Borrowing costs
 Techniques for the measurement of cost

Two techniques are mentioned by the standard, both of which produce results which approximate to cost, and so
both of which may be used for convenience.
a) Standard costs: Standards based on the normal level are decided for the elements of cost such as
materials, labour and overheads. The standard costs are used for the valuation of inventories and the
issues of materials.
b) Retail method: this is often used in the retail industry where there is a large turnover of inventory items,
which nevertheless have similar profit margins. The only practical method of inventory valuation may be
to take the total selling price of inventories and deduct an overall average profit margin, thus reducing the
value to an approximation of cost. The percentage will take account of reduced price lines. Sometimes
different percentages are applied on a department basis.
Cost formulae
A cost formula is required to determine the value of material issued and material remaining in inventory. The selection
of the correct cost formula depends upon the nature of the items.
1. Specific identification method
This method is applied to items that are not ordinarily interchangeable and goods and services produced and
segregated for specific projects. Specific costs are attributed to the items of inventory.
For special made-to-order furniture, specific costs of material and labour used therein are identified and included in the
cost.
2. Other methods allowable under IAS 2

Either of the following two methods is to be used for items not covered under the specific identification method above.
This means that the two methods are for ordinarily interchangeable goods and services.
a) First In First Out (FIFO)

This method assumes that the item which came first into inventory (by way of purchase or production) went out first
(as sales or consumption). This means that the items remaining in hand are those which were purchased the last.
b) Weighted Average
Total cost of material (opening inventory plus subsequent purchases) is divided by the total quantity (opening inventory
plus subsequent purchases). This is done either after every purchase or periodically.
Weighted average = Total cost of material
Total quantity of material
It is to be noted that the Last In First Out method (LIFO) is not permitted by IAS 2.
Example 1
Date Details Quantity Rate (Tshs)

01/4/20X2 Opening inventory 500 20,000
04/4/20X2 Purchase 150 22,000
08/4/20X2 Issue 200
Determine the value of the inventory as at 8 April 20X2 under the FIFO and Weighted Average methods.
 Net realisable value

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of
completion and estimated costs necessary to make the sale.
Costs are compared with the realisable value, since the inventories are to be measured at the lower of the two. This is
based on the view that assets should not be carried at a value which is in excess of their realisable value. In the case
of inventories this amount could fall below cost when items are damaged or become obsolete, or where the costs to
completion have increased in order to make the sale.
In fact we can identify the principal situations in which NRV is likely to be less than cost, ie where there has been:
a) An increase in costs or a fall in selling price
b) A physical deterioration in the condition of inventory
c) Obsolescence of products
d) A decision as part of the company's marketing strategy to manufacture and sell products at a loss
e) Errors in production or purchasing
A write down of inventories would normally take place on an item by item basis, but similar or related items may be
grouped together. This grouping together is acceptable for, say, items in the same product line, but it is not acceptable
to write down inventories based on a whole classification (eg finished goods) or a whole business.
Example 2.
Group Item Quantity Cost per unit Sales price per unit Costs to completion Selling costs
Tshs’000 Tshs’000 Tshs’000 Tshs’000
A 1 10 100 111 14 2
B 2 25 80 97 11 4
A 3 8 90 104 12 2
A 4 15 110 132 15 2
B 5 6 125 130 13 5
Required:
Value the inventory at the lower of cost and net realisable value.
Considerations in computing NRV

Net realisable values are determined after taking into consideration
a) The most reliable estimates available.
b) Fluctuations after the end of the reporting period, to the extent that they confirm the conditions existing on
the end of the reporting period. (Remember IAS 10)
c) The purpose for which the inventory is held.
 Recognition as an expense
Inventory may be recognised as an expense when:
1. Inventory is sold, its carrying amount is recognised as an expense.
2. Write-downs to net realisable value are needed (as discussed above).
3. Losses of inventory e.g. loss by fire or theft
 Disclosures
The IAS requires the financial statements to disclose the following:
1. The accounting policies adopted and cost formula used;
2. The carrying amount of inventories: the total amount and the amount in classifications appropriate to the
entity;
3. The carrying amount of inventories carried at fair value less costs to sell;
4. The amount of inventories recognised as an expense during the period;
5. Any write-down of inventories recognised as an expense in the period;
6. Any reversal of any write-down recognised as a reduction in the amount of inventories recognised as an
expense in the period;
7. The circumstances or events that led to the reversal of a write-down of inventories;
8. The carrying amount of inventories pledged as security for liabilities
REVIEW QUESTIONS.
a) IAS 2: Inventories requires inventories of raw materials and finished goods to be valued in financial statements at
lower cost of cost and net realizable value.
REQUIRED:
i. Explain the rationale of the “lower of cost and net realizable value” principle.
ii. Describe three methods of arriving at cost of inventories which are acceptable under IAS 2 and explain
how they are regarded as acceptable.
(b) SIMPLE is a manufacturer of garden furniture. The company has consistently used FIFO method (first in first out)
in valuing inventory, but it is interested to know the effect valuation of using weighted average cost instead of FIFO on
its inventory.
At 28th February 2013, the company had inventory of 4,000 standard plastic tables, and has computed its value on
each side of the two methods as:
Method Unit cost Total value (TZS.)
FIFO 16,000 64,000,000
Weighted average 13,000 52,000,000
During March 2013, the movements on the inventory of tables were as follows:
Received from factory:

Date Number of units Production cost per unit (TZS.)
8th March 2013 3,800 15,000
22nd March 2013 6,000 18,000
Revenue/Sales
Date Number of units Price per unit
12th March 2013 5,000 30,000
18th March 2013 2,000 30,000
24th March 2013 3,000 32,000
28th March 2013 2,000 31,000
On FIFO basis the inventory on 31st March 2013 was TZS. 32,400,000.
REQUIRED:
Compute the value of the inventory as at 31st March 2013 using weighted average cost method.
NB: in arriving at the total inventory value you should make calculations to two decimal places (where necessary)
and use the perpetual inventory system.
Question 2. (NBAA MAY 2017 Qn.4)
IAS 2: Inventories requires that inventories are valued at lower cost of cost or net realizable value.
REQUIRED:
State the rationale for such a requirement.
Malyimu retailers had the following figures of reported profit before tax:
Year Profit (TZS)

2014 27,200,000
2015 28,400,000
2016 24,000,000
Analysis of inventories shows that certain errors were made with the following results:
Date Incorrect inventory figure Correct inventory figure

(TZS) (TZS)
December 31, 2014 4,800,000 5,680,000
December 31, 2015 5,600,000 4,680,000
REQUIRED:
Calculate the corrected profit before tax figures (where applicable) for the years 2014, 2015 and 2016.

IAS 2 Inventories was first issued in October 1975, and most recently revised in December 2003. Its most important
principle is that inventories be measured at the lower of their cost and their net realisable value.
Herald plc (Herald) manufactures plastic water tanks for the farming industry. On 31 May 2013, its closing inventory
consisted of 950kg of plastic resin raw material, and also 250 finished units (plastic water tanks).
Plastic:
The purchase price of plastic resin was €3 per kg throughout the year to 31 May 2013. Delivery costs an additional
€0.50 per kg. Herald has a policy of always keeping plenty of plastic resin in inventory, as its supply can be unreliable.
However, close to the year-end, the price of plastic resin collapsed due to market oversupply. The purchase price of
Herald’s raw material is now €2.10 per kg plus the €0.50 per kg delivery charge. The existing inventory of plastic resin
can be sold in the market for €1.80 per kg net of all costs.
Tanks:
Each tank requires 10 kg of plastic to manufacture, plus each unit incurs €25 in conversion costs (labour and overhead).
Herald sells the tanks for €100. It is expected that this price will drop to €90 as a result of the fall in the market price of
plastic. All completed units sold by Herald incur a €6 selling and distribution cost.
REQUIREMENT:
(a) Describe how the “cost” of inventory is determined under IAS 2 (5 marks)
(b) Discuss the principles for determining the “Net Realisable Value” of inventory under IAS 2. (5 marks)
(c) Calculate the value of closing inventory in the books of Herald plc at 31 May 2013 applying the principles of IAS
2. (10 marks)
Allrights is an old established company operating in the highly competitive business of manufacturing and marketing
radios and television sets.
A new board of directors is considering
Question 4. (CPA Ireland April 2012 – Financial Accounting Qn.3)

(a) In the context of IAS 2 - Inventories, define what is meant by the terms ‘inventory’ and ‘net realisable value’ and
explain how inventories should be measured (6 Marks)
(b) In the context of IAS 2 - Inventories, describe what is meant by ‘the allowable costs of purchase’ and use an example
to help explain your answer. (3 Marks)
(c) Bacon Timothy (BT) has opened a new luxury retail outlet located in Grafton Street in Dublin. BT’s accountant
previously worked abroad and is not familiar with international financial reporting standards and has asked you, the
trainee accountant, to give advice on the accounting treatment necessary for the following items:
(i) One of BT’s product lines is beauty products, particularly cosmetics such as lipsticks, moisturisers and compact
make-up kits. BT sells hundreds of different brands of these products. Each product is quite similar, is purchased
at similar prices and has a short lifecycle before a new similar product is introduced. The point of sale and inventory
system in BT is not yet fully functioning in this department. The Sales Manager of the cosmetic department is
unsure of the cost of each product but is confident of the selling price and has reliably informed you that BT, on
average, make a gross margin of 65% on each line.
(ii) BT also sells handbags which are manufactured in its own factory in the United Kingdom (UK). This is because
BT wishes to be assured of the quality and craftsmanship which goes into each handbag. The UK factory which
has made handbags for the last fifty years is located in BT’s head office. Normally, BT manufactures 100,000
handbags a year in it’s handbag division which uses 15% of the space and overheads of the factory. The division
employs ten people and is seen as being an efficient division within the overall company.
REQUIREMENT:
In accordance with IAS 2 - Inventories, explain how the items referred to in (i) and (ii) above should be measured. (5
Marks)
(d) Ginga Ltd. manufactures shovels. The company has consistently used Last in First out (LIFO) in valuing inventories
but has recently been told by it’s accountant that this method is not acceptable under accounting standards and it has
agreed to adopt the Weighted Average Cost (WAC) valuation method.
At the 1st March 2012, the company had inventories of 4,000 shovels and has computed its value on each basis as
follows:
Basis Unit Cost - € Total Value - €

FIFO 9.00 36,000
LIFO 7.50 30,000
WAC 8.00 32,000
The following is the amount of shovels which the inventory department has received from the manufacturing department
during March 2012:
Received from Factory Manufacturing Cost

Date No. of Units per Unit - €
8/3/2012 3800 7
22/03/12 6000 9
The following are the sale dates and quantity of shovels sold in March 2012:
Date No. of Units Sold

10/3/2012 5000
17/03/12 2000
29/03/12 3000
REQUIREMENT:
Calculate the correct closing inventory value as at 31st March 2012 using the Weighted Average Cost (WAC) method.
(6 Marks)
Note: In arriving at the total inventory values, one should make calculations to two (2) decimal places where necessary
and deal with each inventory movement in date order.
Question 5. (CPA Ireland August 2016 – Financial Accounting Qn.3)

Note: This question consists of two parts; Part 1 and Part 2. Students should note that the companies in each part are
separate and are not related to each other.
Part 1
Mr. Toby Jordan, the managing director of Tojo limited has a number of specific queries in relation to Inventory and
has asked you for advice in relation to IAs 2 - Inventories. As part of its overall inventory, Tojo limited has three items
of inventories whose costs and net realisable values are as follows:
Item Cost - € NRV - €

1 72 80
2 56 48
3 92 96
220 224
REQUIREMENT:
(a) Calculate the closing value of each item of inventory and hence the total value of closing inventory for these items
for Tojo limited at the year-end. (4 marks)
(b) In the context of IAs2 - Inventories, prepare a report for Mr. Toby Jordan which:
(i) Outlines the items that comprise inventory.
(ii) Explains how inventories are measured.
(iii) Provides three examples of costs which are specifically excluded from the costs of inventories and instead
are recognised as expenses in the period in which they are incurred.
(iv) Briefly discusses three situations in which net realisable value is likely to be less than cost.
Part 2
Davis Limited’s closing inventory at 31 December 2015 is €347,841. This includes €4,640 for items accidentally
destroyed on 31 December 2015 after the count was completed. Also included is €2,980 which relates to the cost of
inventory damaged in October 2015, which can be reworked at a cost of €680 and which can then be sold for €2,410.
REQUIREMENT:
Calculate the closing value of inventory at the year-end. (4 marks)
Question 6. (ACCA)
Allrights is an old established company operating in the highly competitive business of manufacturing and marketing
radios and television sets.
A new board of directors is considering the draft accounts, prepared under the historical cost convention, for the year
ended 31 March 2013. The main executive directors involved in the policy discussion are:
− Stevie Striver (managing)
− Charlie Chatty (sales)
− Gordon Gloome (production)
You are in attendance to give advice.
A standard model radio has the following disclosed costs:
$
Direct labour and material 38
Bought-in components 5
Factory overhead costs 8
Royalty on sale payable to the owner of a patent 2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
$
Salary and space costs of executive responsible for production planning 4,000
General office administration 2,500
Selling and distribution costs, including a fixed $4 per set commission payable to salesmen 7,500
The advertised selling price of the model has recently been reduced to $60 because of the intensive competition.
The three directors have expressed the following views on the most appropriate method of valuing the company’s
closing inventories:
(1) Stevie Striver
“A most prudent approach is necessary, particularly as the company has a cash flow problem which means
that the amount locked up in inventory should be kept as low as possible. I propose a valuation of $43 per
set”
(2) Charlie Chatty
“All the functions of the company are directed towards the production and sale of a good finished product and
therefore I think each set should be valued at the total cost involved, including the other overhead costs.”
(3) Gordon Gloome
“$47 per set, because that’s what the production cost would have been if we had been more efficient and kept
in line with budgets”
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the principles involved.
IFRS 5 – Non Current Assets Held for Sale and Discontinued Operations
Introduction:
The types of tangible non- current assets
1. Property, plant and equipment e.g. building, machinery, computers used for the business. Traditionally these
assets are called non-current assets. In some cases, these may also be called owner-occupied properties
and used for the business of the owners (IAS 16)
2. Investment properties e.g. rented plot of land held for capital appreciation only (IAS 40)
3. Non-current assets held for sale: These are dealt with by IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
IFRS 5 requires assets and groups of assets that are 'held for sale' to be presented separately in the statement of
financial position and the results (profit or loss) of discontinued operations to be presented separately in the statement
of profit or loss and other comprehensive income.
Meaning:
A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use. A number of detailed criteria must be met:
a) The asset must be available for immediate sale in its present condition.
b) Its sale must be highly probable (ie significantly more likely than not).
For the sale to be highly probable, the following must apply:

a) Management must be committed to a plan to sell the asset.
b) There must be an active programme to locate a buyer.
c) The asset must be marketed for sale at a price that is reasonable in relation to its current fair value.
d) The sale should be expected to take place within one year from the date of classification.
e) It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Note: An asset (or disposal group) can still be classified as held for sale, even if the sale has not actually taken place
within one year. However, the delay must have been caused by events or circumstances beyond the entity's control
and there must be sufficient evidence that the entity is still committed to sell the asset or disposal group. Otherwise the
entity must cease to classify the asset as held for sale.
If an entity acquires a disposal group (eg, a subsidiary) exclusively with a view to its subsequent disposal it can classify
the asset as held for sale only if the sale is expected to take place within one year and it is highly probable that all the
other criteria will be met within a short time (normally three months).
An asset that is to be abandoned should not be classified as held for sale. This is because its carrying amount will be
recovered principally through continuing use. However, a disposal group to be abandoned may meet the definition of
a discontinued operation and therefore separate disclosure may be required (see below).
Example 1.
Jerome Sales Services is an entity which has a manufacturing facility. It intends to sell the facility. On the date of
contract, it has uncompleted customer orders.
Required:
Show whether it meets the criteria specified in IFRS 5 para 7 if:
It transfers the operations and the unexecuted customer orders

It transfers only the manufacturing facility, after completion of the remaining orders.
Example 2
On 1 December 20X3, a company became committed to a plan to sell a manufacturing facility and has already found
a potential buyer. The company does not intend to discontinue the operations currently carried out in the facility. At 31
December 20X3 there is a backlog of uncompleted customer orders. The company will not be able to transfer the
facility to the buyer until after it ceases to operate the facility and has eliminated the backlog of uncompleted customer
orders. This is not expected to occur until spring 20X4.
Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 20X3?
Measurement of assets held for sale

A non-current asset (or disposal group) that is held for sale should be measured at the lower of its
 Carrying amount, and
 Fair value less costs of disposal.
Fair value less costs of disposal is equivalent to net realisable value.
Impairment loss
An impairment loss should be recognised where fair value less costs of disposal is lower than carrying amount. Note
that this is an exception to the normal rule. IAS 36 does not apply to assets held for sale. An impairment loss on an
asset held under IFRS 5 is charged to profit or loss.
Subsequent increase in value

When fair value less costs to sell increases subsequently, an entity recognises the gain only to the extent of any
cumulative impairment loss previously recognised in accordance with IFRS 5 or IAS 36.
In the case of a disposal group, on subsequent remeasurement of the asset, if some gain has already been recognised,
then that part is not again recognised as a gain.
When the asset (or disposal group) is sold.

A gain or loss not previously recognised by the date of the sale of a non-current asset (or disposal group) shall be
recognised at the date of derecognition.
No depreciation or amortisation
While an asset is classified as held for sale or belongs to a group classified as such, it is not depreciated or amortised.
The impairment loss shall be allocated in the following order:

(a) First, to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and;
(b) Then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in
the unit (group of units).
These reductions in carrying amounts shall be treated as impairment losses on individual assets and recognised as
such.
Reversal of an impairment loss

A reversal of an impairment loss for a cash-generating unit shall be allocated to the assets of the unit, except for
goodwill, pro rata to the carrying amounts of those assets. These increases in carrying amounts shall be treated as
reversals of impairment losses for individual assets and recognised as such.
Changes to a plan for sale

If the criteria discussed above are not met, an entity should cease to classify an asset or a disposal group as held for
sale.
These assets are measured at the lower of:
i. The possible carrying value of the asset at the date of subsequent decision not to sell if it was not classified earlier
as held for sale. In other words, its carrying amount before the asset (or disposal group) was classified as held for
sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset
(or disposal group) not been classified as held for sale and
ii. Its recoverable amount at the date of the subsequent decision not to sell. If this is lower, it would indirectly mean
the recognition of impairment loss based on the carrying value of the asset had the asset not been classified as
held for sale?
Some adjustments would be needed in the carrying value in the period in which the classification is changed.
The adjustments are included in income from continuing operations.
Presentation of a non-current asset or disposal group classified as held for sale

Non-current assets and disposal groups classified as held for sale should be presented separately from other
assets in the statement of financial position. The liabilities of a disposal group should be presented separately from
other liabilities in the statement of financial position.
i. Assets and liabilities held for sale should not be offset.
ii. The major classes of assets and liabilities held for sale should be separately disclosed either on the face
of the statement of financial position or in the notes.
iii. IFRS 5 requires non-current assets or disposal groups held for sale to be shown as a separate component
of current assets/current liabilities.
For example
Statement of Financial Position as at ……….
ASSETS
Non – current Assets XXX
Current Assets XXX
XXX
Non-current assets classified as held for sale XXX
Total Assets XXXX
EQUITY & LIABILITIES
Equity XXX
Non – current liabilities XXX
Current liabilities XXX
XXX
Liabilities directly associated with non-current assets classified as held for sale XXX
Total Equity & Liabilities XXXX
Discontinued Operation
Discontinued operation. A component of an entity that has either been disposed of, or is classified as held for sale,
and:
a) Represents a separate major line of business or geographical area of operations
b) Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of
operations, or
c) Is a subsidiary acquired exclusively with a view to resale.
Component of an entity. Operations and cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity.
An entity should present and disclose information that enables users of the financial statements to evaluate the financial
effects of discontinued operations and disposals of non-current assets or disposal groups. This allows users to
distinguish between operations which will continue in the future and those which will not, and makes it more possible
to predict future results.
An entity should disclose a single amount in the statement of profit or loss comprising the total of:
(a) The post-tax profit or loss of discontinued operations
(b) The post-tax gain or loss recognised on the measurement to fair value less costs of disposal or on the disposal of
the assets or disposal group(s) constituting the discontinued operation
An entity should also disclose an analysis of this single amount into:

(a) The revenue, expenses and pre-tax profit or loss of discontinued operations
(b) The related income tax expense
(c) The gain or loss recognised on the measurement to fair value less costs of disposal or on the disposal of the
assets of the discontinued operation
(d) The related income tax expense
This may be presented either in the statement of profit or loss or in the notes. If it is presented in the statement of profit
or loss it should be presented in a section identified as relating to discontinued operations, ie separately from continuing
operations. (This analysis is not required where the discontinued operation is a newly acquired subsidiary that has
been classified as held for sale).
In the statement of cash flows, an entity should disclose the net cash flows attributable to the operating, investing and
financing activities of discontinued operations. These disclosures may be presented either on the face of the statement
of cash flows or in the notes.
Gains and losses on the remeasurement of a disposal group that is not a discontinued operation but is held for sale
should be included in profit or loss from continuing operations.
Example
ABC Ltd
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED………….
Continuing Operations
Revenue XXX
Cost of sales XXX
Gross profit XXXX
Other income XXX
Distribution costs XXX
Administrative expenses XXX
Finance costs XXX
Profit before tax XXXX
Income tax XXX
Profit after tax XXXX
Discontinued operations
Profit for the year for discontinued operations XXX
Profit for the year XXXX
Example 3.
Hatter plc has decided to dispose of a major division of its business. The related assets qualify to be classified as “held
for sale” in the statement of financial position. The following summary draft statement of profit or loss and other
comprehensive income has been prepared.
Hatter plc: Statement of Profit or Loss and Other Comprehensive Income for year ended 31 December 2012
€m
Revenue 800
Cost of sales & expenses (560)
Profit before tax 240
Tax (115)
Profit after tax 125
The division being disposed of was a component of Hatter plc, and was a major line of business which is now ceasing
permanently and in its entirety. The division contributed revenue of €200m, costs of €275m and a tax refund of €15m
in the year ended 31 December 2012 (net loss 60). These amounts are included in the above figures. The assets to
be sold have a combined fair value less costs to sell of €39m below their carrying value. This has not yet been
recognised.
Required:
Redraft the above SPLOCI to comply with IFRS 5.
REVIEW QUESTIONS.
Question 1 (CPA IRELAND August 2017 Qn. 5)
Part A:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations sets out the principles governing the
measurement and presentation of non-current assets that are expected to be realised through sale rather than through
continuing use. The standard also deals with reporting the results of operations that qualify as discontinued.
REQUIREMENT:
Discuss the conditions which must be present in order to classify a non-current asset as being “held for sale” and
explain the accounting treatment that applies when such a classification is deemed appropriate. (7 marks)
Part B:
Strawboy Plc is a long-established travel agent, operating through a network of retail outlets and an online store. In
recent years, the business has seen its revenue from the online store grow strongly, and that from retail outlets decline
significantly. On 25 January 2017, the board decided to close the retail network at the financial year end of 31 July
2017, and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the
buildings in the statement of financial position, as well as the treatment of the trading results of the retail division for
the year. The following figures are available at 31 July 2017:
Carrying value of buildings €20.0 million

Fair value less costs to sell of buildings €17.2 million
Other expected costs of closure €3.9 million
Year ended 31 July 2017 Year ended 31 July 2016

Online Store € m Retail Outlet € m Online Store € m Retail Outlet € m
Revenue 39 9 32 12
Cost of Sales (13) (7) (11) (9)
Gross profit 26 2 21 3
Operating costs (10) (5) (8) (5)
Profit before tax 16 (3) 13 (2)
REQUIREMENT:
(a) Outline the conditions which must be present in order to present the results of an operation as “discontinued” and
the accounting treatment that applies when such a classification is deemed appropriate.
(5 marks)
(b) Draft the Statement of Profit or Loss for Strawboy Plc for year ended 31 July 2017, together with the comparative
for 2016, taking the above information into account. (8 marks)
[Total: 20 Marks]
Question 2 (CPA IRELAND April 2011 Qn. 5)

An important business issue arises when an entity closes or discontinues a part of its overall business activity. IFRS 5
Non Current Assets Held for Sale and Discontinued Operations provides guidance on the accounting treatment in such
circumstances.
Archway PLC, a company that prepares its financial statements to 31 December each year, manufactures light fittings
which it sells to the European market. The company has three manufacturing plants based in Limerick, Dublin and
Barcelona. Due to increased competition and a change in consumer buying patterns within the Spanish market, the
performance of the Barcelona operation has deteriorated over the last twelve months. At a Board meeting on 14
December 2010, the Directors of Archway PLC decided, reluctantly, to cease manufacturing at the Barcelona site and
sell the factory. Immediately after the meeting the staff, suppliers and key customers were notified and an
announcement was made to the press. You are employed as the Financial Accountant for the company and the
Managing Director has let it be known that that the Barcelona operationsʼ results should be shown as a discontinued
operation in the financial statements for the year ending 31 December 2010. Due to the declining business performance
of the Barcelona site on 1 October 2010, Archway PLC increased production capacity at its Limerick site. The following
are the extracts from Archway PLCʼs Statement of Comprehensive Income:
31-Dec-10 31-Dec-09
Dublin Barcelona Limerick Total Total
€ ʼ000 € ʼ000 € ʼ000 € ʼ000 € ʼ000
Revenue 30,000 19,000 4,500 53,500 61,000
Cost of sales (23,500) (23,180) (3,375) (500,500) (51,800)
Gross profit/(loss) 6,500 (4,180) 1,125 3,445 9,200
Operating expenses (1,800) (1,100) (225) (3,125) (2,400)
Profit/(loss) before tax 4,700 (5,280) 900 320 6,800
The year ending 2009 figures for the Barcelona operation were: revenue €21.5 million, cost of sales €19 million and
operating expenses of €1.5 million.
REQUIREMENT:
(a) Explain what is meant by a ʻnon-current asset for saleʼ and a ʻdiscontinued operationʼ. (5 marks)
(b) Explain whether the Managing Directorʼs wish to show the results of the Barcelona operation as a discontinued
operation is justifiable. (4 marks)
(c) Assuming the Barcelona operation is to be treated as a discontinued operation, re-draft the extracts from the
Statement of Comprehensive Income for the year ended 31 December 2010 (including comparatives) in accordance
with the requirements of IFRS 5, and draft a suitable note relating to discontinued operations which would appear in
the notes to the financial statements. (8 marks)
(d) On 1 October 2010 the Directors of Archway PLC decided to sell a machine, used within the Dublin operation and
which was now surplus to requirements. The machine had a cost of €60,000 on 1 January 2008 and was expected to
sell for €25,000. A buyer was found on 20 December 2010 at that price, although the sale was not completed until after
the year end. On 1 October 2010, the machine met the ʻheld for saleʼ criteria of IFRS 5. The company charges
depreciation on plant and equipment at 20% on cost.
Explain how the above transaction should be treated in the financial statements for the year ending 31 December 2010.
[Total: 20 MARKS]
Question 3 (CPA IRELAND April 2013 Qn. 4)

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations provides guidance on the accounting treatment
of discontinued operations and non-current assets held for sale.
(a) Fish plc purchased a machine at a cost of €220,000 on 1 January 2009. The machine was being depreciated under
the cost model of IAS 16 Property, Plant and Equipment on a straight-line basis over five years assuming a zero
residual value. On 30 June 2012 the machine was classified as held for sale. Its fair value was estimated at €80,000
and costs to sell at €4,000. At 31 December 2012, the reporting date, the machine had not been sold. At that date the
fair value was estimated to be €62,000 and the estimate of costs to sell was unchanged. On 31 March 2013, the
machine still remained unsold and the decision was taken to withdraw it from sale, and to redeploy the machine to
another part of the business, where it is expected to recover more than €58,000.
REQUIREMENT:
(i) Discuss the IFRS 5 criteria which must be satisfied in order for a non-current asset to be classified as held for sale.
(3 marks)
(ii) Calculate the amounts that should be recognised in respect of this machine in Fish plcʼs * Statements of Profit or
Loss and Other Comprehensive Income for the year ended 31 December 2012 and three months ended 31 March
2013 and in its Statements of Financial Position as at the same dates. (8 marks)
(b) An extract from the draft * Statement of Profit or Loss and Other Comprehensive Income of Pascal plc for the year
ended 31 December 2012 is shown below:
€ʼ000
Revenue 1,116
Cost of sales (375)
Gross profit 741
Investment income 25
Distribution costs (110)
Administration expenses (300)
Taxation (89)
Profit for year 267
Pascal plc is an Irish company with several divisions, all of which are reported separately and represent major
distinctive components of the company. During the year ended 31 December 2012, Pascal plc carried out a
reorganisation as follows:
 The activities of Division East were moved to a new factory in Eastern Europe. Management of this division
remains in Ireland.
 Division West has been wound down. The company has decided to outsource this part of the business to an
external distributor from 1 January 2013.
The results of Divisions East and West are set out below, and are included in the above figures.
Division East Division West

€ʼ000 €ʼ000
Revenue 73.0 200.0
Cost of sales (26.0) (80.0)
Distribution costs (13.0) (5.5)
Administration expenses (20.0) (24.0)
Taxation charge (12.0) (20.0)
REQUIREMENT:
(i) What is meant by a ʻdiscontinued operationʼ? Assess whether either Division East or Division West of Pascal plc
should be treated as a discontinued operation under IFRS 5. (4 marks)
(ii) Redraft the extract from the above * Statement of Profit or Loss and Other Comprehensive Income to comply with
IFRS 5. Show the required note in respect of any discontinued operation. (5 marks)
[Total: 20 MARKS]
Question 4 (ACCA June 2013 Qn.4)
(a) The objective of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations specifies, amongst other
things, accounting for and presentation and disclosure of discontinued operations.
Required:
Define a discontinued operation and explain why the disclosure of such information is important to users of financial
statements. (5 marks)
(b) Radar’s sole activity is the operation of hotels all over the world. After a period of declining profitability, Radar’s
directors made the following decisions during the year ended 31 March 2013:
− it disposed of all of its hotels in country A;
− it refurbished all of its hotels in country B in order to target the holiday and tourism market. The previous target
market in country B had been aimed at business clients.
Required:
Treating the two decisions separately, explain whether they meet the criteria for being classified as discontinued
operations in the financial statements for the year ended 31 March 2013. (4 marks)
(c) At a board meeting on 1 July 2012, Pulsar’s directors made the decision to close down one of its factories on 31
March 2013. The factory and its related plant would then be sold.
A formal plan was formulated and the factory’s 250 employees were given three months’ notice of redundancy on 1
January 2013. Customers and suppliers were also informed of the closure at this date.
The directors of Pulsar have provided the following information:
Fifty of the employees would be retrained and deployed to other subsidiaries within the group at a cost of $125,000;
the remainder will accept redundancy and be paid an average of $5,000 each.
Factory plant has a carrying amount of $2·2 million, but is only expected to sell for $500,000 incurring $50,000 of selling
costs; however, the factory itself is expected to sell for a profit of $1·2 million.
The company rents a number of machines under operating leases which have an average of three years to run after
31 March 2013. The present value of these future lease payments (rentals) at 31 March 2013 was $1 million; however,
the lessor has said they will accept $850,000 which would be due for payment on 30 April 2013 for their cancellation
as at 31 March 2013.
Penalty payments due to non-completion of supply contracts are estimated at $200,000.
Required:
Explain and quantify how the closure of the factory should be treated in Pulsar’s financial statements for the year ended
31 March 2013.
Note: The closure of the factory does not meet the criteria of a discontinued operation. (6 marks)
(15 marks)
Question 5 (NBAA May 2017 Qn. 3 – C1)
RWIZ is an entity selling clothes & home wears. The business has operated retail shops in town centre for many years
but in the last 10 years has also established online operations. The directors have now decided to withdraw from their
town centre retail operations and to focus entirely on becoming online business. This decision was taken on 1 st April
2015 and since then buyers have actively been located for their town centre properties. It is anticipated that the closure
and sale of retail operations will be completed by 31st March 2016.
Extract from the Trial Balance of RWIZ as at 30st June 2015 are as follows:
Dr Cr
TZS Million TZS Million
Revenue - retail 1,230
Revenue - online 7,540
Cost of sales - retail 980
Cost of sales - online 4,520
Operating expenses - retail 110
Operating expenses - online 450
Finance costs 200
Income tax - retails 40
Income tax - online 720
Property, Plant & Equipment 3,100
The following additional information is relevant:

1. The start of the year, property, plant & equipment included properties associated with the retails operations
with an original cost of TZS 2 billion and a carrying value of TZS 1.2 billion. At 1st April 2016, it was anticipated
that the fair value less costs to sell of these properties was TZS 2.5 billion.
2. As a result of restructuring within the entity’s operations, it was also decided that their current head office
building will be sold. The head office function and staff would be relocated to office space within the distribution
warehouse that is used for online operation.
The property satisfied the criteria to be classified as held for sale on 30th June 2016. The head office building
had a cost of TZS 500 million and had a carrying value of TZS 420 million at the start of the year.
The building is being marketed at TZS 5,400 million and the directors have been advised by their estate
agents that it is likely to be sold at 90% of the asking price. Commission of TZS 5 million will be payable to
the agency.
3. Properties are depreciated at 2% per annum based on cost. Depreciation is charged to cost of sales.
Depreciation for the year on the above retail and head office properties has not been charged but depreciation
charges on all other tangible non-current assets are included within the above trial balance.
REQUIRED:
(a) Prepare Profit/Loss from Discontinued Operations
(b) Show Retail properties and comment on the write down amount
(c) Show all Property & Equipment for continuing business
(d) Prepare RWIZ’s statement of comprehensive income (extracts) for the year ended 30th June, 2015
(e) Prepare RWIZ’s statement of financial position (extracts) as at 30th June, 2015.
IAS 23 – Borrowing Costs.

 Meaning of Borrowing costs and qualifying asset.
Borrowing costs. Interest and other costs incurred by an entity in connection with the borrowing of funds.
Borrowing costs may include:

 Interest on bank overdrafts and short-term and long-term borrowings
 Amortisation of discounts or premiums relating to borrowings
 Amortisation of ancillary costs incurred in connection with the arrangement of borrowings
 Finance charges in respect of finance leases recognised in accordance with IAS 17
 Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs
Qualifying Asset.
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or
sale.
Examples of qualifying assets;
 Inventories (that are not produced over a short period of time)
 Manufacturing plants
 Power generation facilities
 Intangible assets
 Investment properties
Financial assets and inventories that are manufactured, or otherwise produced over a short period of time are not
qualifying assets. Assets that are ready for their intended use or sale when purchased are not qualifying assets.
 Capitalization of borrowing costs

An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the
period in which it incurs them.
 Borrowing costs eligible for capitalisation

According to Para 10 of IAS 23, the borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset are those borrowing costs that would have been avoided if the expenditure on the
qualifying assets had not been made.
 Specific borrowing costs, e.g., interest on the funds borrowed specifically

Interest on the funds borrowed specifically for the purpose of obtaining /constructing a particular qualifying asset, less
any investment income on the temporary investment of these borrowings is eligible for capitalisation.
Example 1.
An office building is constructed for Tshs100 million, out of which Tshs75 million is borrowed and interest of Tshs7.5
million was paid. At some point when the loan was not needed, part of the Tshs75 million borrowed was put into a high
interest deposit account and interest of Tshs2 million was received.
 Borrowing costs on funds borrowed generally and used for the purpose of obtaining a qualifying
asset.
Sometimes, a specific loan may not be taken out. Instead, the company may use part of general loans to finance the
construction of an asset. The capitalisation rate shall be the weighted average of the borrowing costs applicable to the
borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose
of obtaining a qualifying asset.
Example 2.
5% Overdraft 1,000
8% Loan 3,000
10% Loan 2,000
We buy an asset with a cost of 5,000 and it takes one year to build
Required:
How much interest goes to the cost of the asset?
Example 3.
Acruni Co had the following loans in place at the beginning and end of 20X6.
01-Jan 31-Dec
20X6 20X6
$m $m
10% Bank loan repayable 20X8 120 120
9.5% Bank loan repayable 20X9 80 80
8.9% debenture repayable 20X7 - 150
The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment),
construction of which began on 1 July 20X6.
On 1 January 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a hydroelectric plant,
using existing borrowings. Expenditure drawn down for the construction was: $£30m on 1 January 20X6, $20m on 1
October 20X6.
Required
Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.
 Commencement of capitalisation
An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the commencement date.
The commencement date is the date when the entity first meets all the following conditions:
a) It incurs expenditure for the asset;
b) It incurs borrowing costs; and
c) It undertakes activities that are necessary to prepare the asset for its intended use or sale.
 Cessation of capitalisation
An entity shall cease capitalising borrowing costs when all the activities necessary to prepare the qualifying asset for
its intended use or sale are substantially complete.
Note: When the physical construction of an asset is completed in parts, the capitalisation of borrowing costs shall
cease when all the activities necessary to prepare that part for its intended use or sale are substantially completed.
 Suspension of capitalisation
When the necessary activities necessary to prepare the asset for its intended use or sale are temporarily stopped an
entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development
of a qualifying asset, and costs should be treated as normal expenses (to profit and loss)
 Disclosure
(i) Amount of borrowing costs capitalized during the period
(ii) Capitalization rate used.
REVIEW QUESTIONS.
Question 1
On 1 January 20X5, Sainsco began to construct a supermarket which had an estimated useful life of 40 years. It
purchased a leasehold interest in the site for $25 million. The construction of the building cost $9 million and the fixtures
and fittings cost $6 million. The construction of the supermarket was completed on 30 September 20X5 and it was
brought into use on 1 January 20X6.
Sainsco borrowed $40 million on 1 January 20X5 in order to finance this project. The loan carried interest at 10% pa.
It was repaid on 30 June 20X6.
Required:
Calculate the total amount to be included at cost in property, plant and equipment in respect of the development at 31
December 20X5.
Question 2 (ACCA JUNE 2010 Qn. 4)

(a) Apex is a publicly listed supermarket chain. During the current year it started the building of a new store. The
directors are aware that in accordance with IAS 23 Borrowing costs certain borrowing costs have to be capitalised.
Required:
Explain the circumstances when, and the amount at which, borrowing costs should be capitalised in accordance with
IAS 23. (5 marks)
(b) Details relating to construction of Apex’s new store:

Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 2009. The loan is
redeemable at a premium which means the loan has an effective finance cost of 7·5% per annum. The loan was
specifically issued to finance the building of the new store which meets the definition of a qualifying asset in IAS 23.
Construction of the store commenced on 1 May 2009 and it was completed and ready for use on 28 February 2010,
but did not open for trading until 1 April 2010. During the year trading at Apex’s other stores was below expectations
so Apex suspended the construction of the new store for a two-month period during July and August 2009. The
proceeds of the loan were temporarily invested for the month of April 2009 and earned interest of $40,000.
Required:
Calculate the net borrowing cost that should be capitalised as part of the cost of the new store and the finance cost
that should be reported in the income statement for the year ended 31 March 2010. (5 marks)
Question 3 (ACCA)
Edigijus has arranged a loan with Swedbank to enable him to build a new football stadium in Vilnus. He will be allowed
to borrow up to $300,000,000 to be used in such amounts and at such times as he requires the funds. The bank
charges interest at the rate of 7% per annum, and Edigijus is able to invest any surplus at the rate of 5% per annum.
He borrowed $100,000,000 on 1 January 2008, and immediately invested $50,000,000. On 28 February he withdrew
$30,000,000. On 1 April he borrowed a further $120,000,000 of which he invested $70,000,000. On 31 May, he spent
$60,000,000. On 31 August he borrowed a further $80,000,000 and spent $20,000,000 immediately. On 1 November
work was stopped because of a strike by the workforce. The work recommenced on 1 January, 2009, and Edigijus
spent the rest of the loan in completing the project, which was ready for final inspection by 29 February. The local
authority finally gave their approval of the stadium on 1 April, and paid Edigijus the full contract price of $350,000,000.
Required:
Calculate the carrying amount in Edigijus financial statements immediately before the sale transaction.
Question 4 (NBAA May 2016 Qn. 6)
a) Ramon is publicly listed company that operates a number of leather products factories. During the current
year it started the building of a new factory. The directors are aware that accordance with IAS 23: Borrowing
costs, certain borrowing cost have been capitalized.
REQUIRED:
i. Define qualifying asset using examples. (3 marks)

ii. Explain the circumstances when, borrowing costs and the amount at which, borrowing costs should be
capitalized in accordance with IAS 23. (6 marks)
iii. Explain when capitalization of borrowing costs commences. (3 marks)
b) The following are details relating to construction of Ramon’s new factory:
Ramon issued a TZS.10 billion unsecured loan with a coupon (nominal) interest rate of 6% on 1st April 2015.
The loan is redeemable at a premium which means the loan has an effective finance cost of 7.5% per annum.
The loan was specifically issued to finance the building of the factory which meets the definition of qualifying
asset in IAS 23. Construction of the factory commenced on 1st May 2015 and it was completed and ready for
use on 28th February 2016, but did not open for trading until 1st April 2016. During the year trading at Ramon’s
other factories was below expectations so Ramon suspended the construction of the new factory for a two-
month period during July and August 2015. The proceeds of the loan were temporarily invested for the month
of April 2015 and earned interest of TZS.40,000,000.
REQUIRED:
Calculate the net borrowing cost that should be capitalized as part of the new factory and the finance cost that
should be reported in the Statement of profit or loss the year ended 31st March 2016. (8 marks)
(Total: 20 marks)
Question 5
Paulo Transport takes a loan of Tshs.20 million at an interest rate of 8% to increase the number of its luxury buses by
five on 1st April 20X7. The luxury buses are to be designed according to certain specifications and with the Paulo logo.
It will therefore take around three months from 1st April 20X7 for them to be ready for use. The work on the buses
started on 1st April 20X7. The loan of 20 million is used in the following way:
Bus 1 Bus 2 Bus 3 Bus 4 Bus 5

Tshs million Tshs million Tshs million Tshs million Tshs million
1 April 20X7 2 2 2 2 2
1 June 20X7 1 3 2 3 1
Paulo intends to invest its surplus funds at an interest rate of 6%

Required:
Calculate the interest accrued on each of the buses to be capitalized and the value of each bus as at 31st March 20X8.
Question 6
On 1 January 20X6 Rechno Co borrowed $15m to finance the production of two assets, both of which were expected
to take a year to build. Production started during 20X8. The loan facility was drawn down on 1 January 20X8, and was
utilised as follows, with the remaining funds invested temporarily.
Asset X Asset Y
$m $m
1 January 20X8 2.5 5
2 July 20X8 2.5 5
The loan rate was 10% and Rechno Co can invest surplus funds at 8%.
Required
Ignoring compound interest, calculate the borrowing costs which may be capitalised for each of the assets and
consequently the cost of each asset as at 31 December 20X8.
Question 7
On December 1, 20X4, Compassionate Inc. began construction of homes for those families that were hit by the
Typhoon and were homeless. The construction is expected to take 3.5 years. It is being financed by issuance of bonds
for $7 million at 12% per annum. The bonds were issued at the beginning of the construction. The bonds carry a 1.5%
issuance cost. The project is also financed by issuance of share capital with a 14% cost of capital. Compassionate Inc.
has opted under IAS 23 to capitalize borrowing costs.
Required:
Compute the borrowing costs that need to be capitalised under IAS 23.
IAS 20 – Government Grant

 Scope
The treatment of government grants is covered by IAS 20 Accounting for government grants and disclosure of
government assistance.
IAS 20 does not cover the following situations.
 Accounting for government grants in financial statements reflecting the effects of changing prices
 Government assistance given in the form of 'tax breaks'
 Government acting as part-owner of the entity
 Definitions (IAS 20)

Government refers to government, government agencies and similar bodies whether local, national or international.
Government assistance can be defined as an action by government designed to provide an economic benefit specific
to an entity or range of entities qualifying under certain criteria.
Government grants are assistance by government in the form of transfers of resources to an entity in return for past
or future compliance with certain conditions relating to the operating activities of the entity.
Fair value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length transaction.
 Recognition conditions.
Government grants, including non-monetary grants at fair value, should not be recognised until there is reasonable
assurance that:
i. The entity will comply with any conditions attached to the grant
ii. The entity will actually receive the grant
Note: All conditions should be met, even if the grant has been received, this does not prove that the conditions attached
to it have been or will be fulfilled.
 Types of Government Grant

i. Grant related to income
A grant receivable as compensation for costs, either:
 Already incurred
 For immediate financial support, with no future related costs.
Recognize as income in the period in which it is receivable.
A grant relating to income may be presented in one two ways:
 Separate as “other income”
 Deducted from related expenses.
ii. Grants related to Assets

This are Government grants whose primary condition is that an entity qualifying for them should purchase, construct
or otherwise acquire non-current assets. Subsidiary conditions may also be attached restricting the type or location of
the assets or the periods during which they are to be acquired or held.
A grant relating to assets may be presented in one of two ways:

(i) As deferred income (Income Approach)
This method treats government grants as deferred income, recognised as income over the useful life of the assets.
The balance not yet recognised as income is presented in the statement of financial position as deferred income. Each
year an appropriate part of that should be transferred to statement of profit or loss.
(ii) By deducting the grant from the asset’s carrying amount (Capital Approach)
This method deducts the government grant from the carrying amount of the asset. As the carrying value is reduced,
the depreciation charge is reduced. By reducing the charge of depreciation, indirectly the grant is recognised as income.
Example 1
A grant of Tshs. 100,000 was received. This grant related to the purchase of equipment costing Tshs. 200,000 and
which would be depreciated over ten years.
Required:
Present Government Grant by using method (i) and (ii) above.
 Non-monetary government grants

Non – monetary grants, such as land or other resources, are accounted for at fair value, although recording both the
asset and the grant at a nominal amount is permitted.
 Repayment of government grants

If a grant must be repaid it should be accounted for as a revision of an accounting estimate (see IAS 8).
a) Repayment of a grant related to income: apply first against any unamortised deferred income set up in
respect of the grant; any excess should be recognised immediately as an expense.
Dr Income statement
Cr Cash
b) Repayment of a grant related to an asset: increase the carrying amount of the asset or reduce the deferred
income balance by the amount repayable. The cumulative additional depreciation that would have been
recognised to date in the absence of the grant should be immediately recognized as an expense.
Dr Any deferred income balance/ Cost of asset
Dr Income statement with any balance
Cr Cash with the amount repaid
It is possible that the circumstances surrounding repayment may require a review of the asset value and an impairment
of the new carrying amount of the asset.
Example 2
Mwamtobe Limited purchased some plant in June 2016 costing €1,600,000. Its useful life is expected to be ten years
and the residual value at the end of its useful will be €100,000. It received a grant of 30% of the cost of the asset in
August 2016 having received government approval before it purchased the plant. Any grant received becomes
repayable if the asset is sold within five years. Its company policies are to depreciate in full in the year of purchase and
none in the year of sale and to maximise asset values.
Required:
Prepare the relevant extracts for the financial statements for the year ended 31 December 2016.
 Disclosure
Disclosure is required of the following.

 Accounting policy adopted, including method of presentation
 Nature and extent of government grants recognised and other forms of assistance received
 Unfulfilled conditions and other contingencies attached to recognised government assistance
REVIEW QUESTIONS.
Question 1. (ACCA June 2014 Qn.4 [iii])
On 1 April 2013, Skeptic received a government grant of $8 million towards the purchase of new plant with a gross
cost of $64 million. The plant has an estimated life of 10 years and is depreciated on a straight-line basis. One of the
terms of the grant is that the sale of the plant before 31 March 2017 would trigger a repayment on a sliding scale as
follows:
Sale in the year ended: Amount of repayment
31 March 2014 100%
31 March 2015 75%
31 March 2016 50%
31 March 2017 25%
Accordingly, the directors propose to credit to the statement of profit or loss $2 million ($8 million x 25%) being the
amount of the grant they believe has been earned in the year to 31 March 2014. Skeptic accounts for government
grants as a separate item of deferred credit in its statement of financial position. Skeptic has no intention of selling the
plant before the end of its economic life.
REQUIRED:
Advise, and quantify where possible, how the above item should be treated in Skeptic’s financial statements for the
year ended 31 March 2014.
Question 2. (ACCA June 2008 Qn.3)

Norman has obtained a significant amount of grant income for the development of hotels in Europe. The grants have
been received from government bodies and relate to the size of the hotel which has been built by the grant assistance.
The intention of the grant income was to create jobs in areas where there was significant unemployment. The grants
received of $70 million will have to be repaid if the cost of building the hotels is less than $500 million.
Required:
Discuss how the above income would be treated in the financial statements of Norman for the year ended 31 May
2008.

AS 20 Accounting for Government Grants and Disclosure of Government Assistance sets out the requirements for
recognising as income any grants received from government agencies, together with any repayments of such grants.
On 1 January 2014, Gilmartin Plc (Gilmartin) applied to a government agency for a grant to assist with the construction
of a factory in Portlaoise. The proposed construction cost of the factory was €52 million and the company projected
that 350 people would be employed on its completion. The land was already owned by Gilmartin.
On 1 March 2014, the government agency offered to grant a sum amounting to 25% of the factory’s construction cost
to a maximum of €13 million. The grant aid was to be payable on completion, and would be repayable on demand if
total employment at the factory fell below 300 people within 5 years of completion.
At the financial year end, 31 March 2014, Gilmartin had accepted the offer of grant aid, and had signed contracts for
the construction of the factory at a total cost of €52 million. Construction work was due to commence on 1 April 2014.
By 31 March 2015, the factory had been completed on budget, 400 people were employed ready to commence
manufacturing activities, and the government agency agreed that the conditions necessary for the drawdown of the
grant had been met.
On 1 April 2015, the factory was brought into use. It was estimated that it would have a ten-year useful economic life.
On 1 June 2015, the government agency paid over the agreed €13 million. In addition, the company sought and was
paid an employment grant of €1.2 million as employment exceeded original projections. This is expected to be payable
annually for 5 years in total, at a rate of €12,000 per additional person employed over 300 in each year. There are no
repayment provisions attached to the employment grant. The directors of Gilmartin expect employment levels to exceed
350 people for at least 4 further years from 31 March 2016.
REQUIREMENT:
(a) Detail the requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
with respect to government grants to aid capital expenditure. Your answer should cover the initial recognition and
subsequent treatment of these grants. (7 marks)
(b) Discuss, showing calculations and journal entries where relevant, how Gilmartin Plc should record the above
transactions and events in its financial statements for years ended 31 March 2014, 2015 and 2016.
(10 marks)
(c) Advise what accounting adjustments which would be necessary should it become apparent at 31 March 2017, that
employment at the factory would soon drop below 300 people. (3 marks)
[Total: 20 MARKS

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance and IAS 23 Borrowing
Costs cover the accounting treatment of grants and borrowing costs.
REQUIREMENTS:
a) Describe how grants received for non-current assets acquired should be disclosed in the financial statements.
(5 Marks)
b) Careforall PLC, a manufacturer and supplier of mobility devices for the elderly, has recently established a new facility
in Condrum, Co. Laois. To help in this new operation, Careforall PLC have secured a number of grantsnfrom Irish and
EU sources and are unsure how the grants are to be accounted for in the financial statements. The company has a
year end 31 December 2008 and all the following transactions took place at the beginning of 2008.
i. Careforall PLC has received a grant for €80,000, to be received over three years, in respect of providing
employment in a deprived area.
ii. Careforall PLC received a €5,000 grant from the EU for the initial training of the new employees.
iii. The company also received a grant of €120,000 from the European Social Economic Fund towards the cost
of a €600,000 machine. The machine has a useful economic life of 8 years and an estimated residual value
of €60,000. Depreciation is on the straight line basis.
iv. The company extended its premises to house the new machine at a cost of €340,000. It financed this new
build with a five year loan at 8% annual interest. The extension was completed in seven months.
Write a memorandum to the Finance Director explaining how each of the above should be accounted for in the financial
statements of Careforall PLC for the year ended 31 December 2008, in accordance with IAS 20 and IAS 23.
(8 Marks)
c) A competitor of Careforall PLC, Smith PLC has commissioned a new piece of equipment to be constructed on its
behalf. The company has a number of loan agreements in place which are shown below:
Loan 1 of €600,000, interest paid at 9%
Loan 2 of €2million, interest paid at 8%
Loan 3 of €400,000, interest paid at 7.5%
The total cost of the new equipment will be €800,000 and the company will be able to fund the purchase from its
existing borrowings since it has arranged for stage payments to be made. It is expected that the construction will
commence on 1 January 2008 and be completed at the end of July 2008.
Calculate the amount of borrowing costs that Smith PLC can capitalise. (4 Marks)
d) Set out the conditions that must be satisfied before borrowing costs can be capitalised under IAS 23.
[TOTAL: 20 MARKS]
Question 5. (CPA IRELAND April 2013 Qn. 3 – Financial Accounting)
Mr. Burns, the owner of the accountancy practice in which you work has recently been approached by a client, Marunda
Limited with some specific issues in relation to IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance. Mr. Burns has asked you to assist in advising this client.
The client has briefed your manager with the following details;
Marunda Limited has applied for a capital grant from the government in relation to the building of an office extension
to its nursing home.
 In 2012, the government introduced new rules for nursing homes, allowing grant aid to be given to nursing homes
which were undertaking capital improvements. The specific terms of the new rules state that, subject to the nursing
home fulfilling certain criteria and conditions, a grant of up to 60% of total outlay may be obtained.
 On 1 September 2012, Marunda Limited signed a preliminary contract with the department in charge of
administrating the grant.
 Marunda Limited were unable to sign the full contract at that time as they had not sufficient people employed in
the nursing home which was one of the pre-conditions of receiving the grant.
 At the time of signing the preliminary contract, Marunda Limited was in the process of hiring ten extra staff, which
would allow Marunda Limited to qualify for the government grant.
 On 8 January 2013, Marunda Limited had finally hired the ten extra staff and therefore, had now met the conditions
of receiving the grant.
 The contract for receiving the grant was signed on 14 January 2013.
 The grant money was received on 28 January 2013.
 The financial statements were not authorised for issue until 20 March 2013.
 The cost of the extension amounted to €96,000 which has been paid for.
 Marunda Limited wishes to adopt the income approach in accounting for the government grant.
 Marunda Limited depreciates in full in the year of purchase to the tune of 5% straight line.
REQUIREMENT:
Mr. Burns has asked you to prepare a report which addresses the following issues:
(a) Explain, with supporting reasons, why the above grant should be included in Marunda Limited’s financial
statements for the year-ended 31 December 2012. (8 Marks)
(b) Provide the journal entries to account for the above information in accordance with International Financial
Reporting Standards. (6 Marks)
(c) Outline the closing balance in the financial statements of Marunda Limited for the government grant at 31
December 2012. (2 Marks)
(d) Outline the accounting treatment necessary in the event of the government grant having to be repaid to the
government. (4 Marks)
[Total: 20 Marks]
Question 6. (CPA IRELAND April 2017 Qn. 3 – Financial Accounting)
A) Ireland has committed to a target that 16% of its total final energy consumption will come from renewable sources
by 2020. As part of its plan to encourage a diverse and sustainable renewable energy sector the government has
recently introduced grants to companies investing in solar farms. Encouraged by this government support your
employer, Duyan Plc, has also recently entered into the solar energy market. It purchases or leases farmland upon
which it installs solar panels. The financial controller of this section of the business has asked you to research IAS 20
- Accounting for Government Grants and Disclosure of Government Assistance and advise how it should account for
government grants in the company’s financial statements for the financial year ending 31 December 2016.
REQUIREMENT:
Prepare a memo addressed to the Financial Controller which, in accordance with IAS 20 – Accounting for
Government Grants and Disclosure of Government Assistance will:
(a) Explain:
(i) The term ‘a government grant’;
(ii) The difference between government grants relating to assets and government grants relating to income;
(iii) When government grants should be recognised; and
(iv) How government grants should be recognised in the Statement of Profit or Loss and Other Comprehensive
Income account. (8 Marks)
(b) Outline the two methods of presenting a government grant in the financial statements. (3 Marks)
(B) In March 2016, Duyan Plc installed and paid for €500,000 of property, plant and equipment (PPE) on a farm. The
PPE will be depreciated over twenty five years. In July 2016, the government provided a grant of 40% to the company
towards this PPE. The company’s depreciation policy is to charge a full year’s depreciation in the year of purchase and
none in the year of sale.
REQUIREMENT:
(a) For each method of presenting a Government Grant in financial statements as referred to in your answer to b)
above, provide the journal entries based on the above information. (6 Marks)
(b) Explain how the repayment of a Government Grant already received should be accounted for in the financial
statements. (3 Marks)
[Total: 20 Marks]
IAS 36 – Impairment of assets

 Introduction.
Impairment. A fall in the value of an asset, so that its 'recoverable amount' is now less than its carrying amount in the
statement of financial position.
Carrying amount is the net value at which the asset is included in the statement of financial position (ie after deducting
accumulated depreciation and any impairment losses).
An entity should assess at the end of each reporting period whether there are any indications of impairment to any
assets. The concept of materiality applies, and only material impairment needs to be identified.
IAS 36 suggests how indications of a possible impairment of assets might be recognised. The suggestions are based
largely on common sense.
(a) External sources of information
i. A fall in the asset's market value that is more significant than would normally be expected from passage of
time over normal use
ii. A significant change in the technological, market, legal or economic environment of the business in which
the assets are employed
iii. An increase in market interest rates or market rates of return on investments likely to affect the discount rate
used in calculating value in use
iv. The carrying amount of the entity's net assets being more than its market capitalisation
(b) Internal sources of information

i. Evidence is available of obsolescence or physical damage of an asset.
ii. Significant changes have taken place during the period or are expected to take place in the near future. These
changes have an adverse effect on the entity in the extent to which, or manner in which, an asset is used or
is expected to be used. For example plans to discontinue or restructure the operation to which an asset
belongs or reassessing the useful life of an asset as finite rather than indefinite.
iii. Evidence is available from internal reporting that indicates that the economic performance of an asset is, or
will be, worse than expected.
Even if there are no indications of impairment, the following assets must always be tested for impairment annually.
a) An intangible asset with an indefinite useful life
b) Intangible asset not yet available for use (which includes on-going developmental work)
c) Goodwill acquired in a business combination.
 Measuring the recoverable amount of the asset

What is an asset's recoverable amount?
The recoverable amount of an asset should be measured as the HIGHER VALUE of:
(a) The asset's fair value less costs of disposal
(b) Its value in use (IAS 36)
(a) Assets fair value less costs of disposal.
An asset's fair value less costs of disposal is the price that would be received to sell the asset in an orderly transaction
between market participants at the measurement date, less direct disposal costs (e.g. legal expenses, stamp duty and
transaction taxes), less direct incremental cost (e.g. cost of dismantling an asset to bring it to a ‘ready-for-sale’
condition) but it does not include termination benefits or costs of reorganizing business after disposal of an asset.
(a) If there is an active market in the asset, the fair value should be based on the market price, or on the
price of recent transactions in similar assets.
(b) If there is no active market in the asset it might be possible to estimate fair value using best estimates
of what market participants might pay in an orderly transaction.
(b) Value in use.
The value in use of an asset is measured as the present value of estimated future cash flows (inflows minus outflows)
generated by the asset, including its estimated net disposal value (if any) at the end of its expected useful life.
Example 1.
Air Co has a machine whose original cost was Tshs25 million. The accumulated depreciation on the machine is Tshs8.5
million. Air recently sold another similar machine for Tshs34 million and the selling expenses were Tshs2.3 million.
Management has determined the value in use of the machine as Tshs33 million.
Required:
Calculate
 Recoverable amount
 Impairment loss
 Recognition and measurement of an impairment loss

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be
reduced to its recoverable amount. That reduction is an impairment loss. The treatment of impairment it depends
whether the asset is at historical cost or revalued amount.
 Rule for asset at historical cost.

Impairment loss should be reduced from the carrying amount, which also should be charged as an expense in profit
or loss.
 Rule for asset at a revalued amount.
The impairment loss is to be treated as a revaluation decrease under the relevant IAS.
In practice this means:

(i) To the extent that there is a revaluation surplus held in respect of the asset, the impairment loss should be
charged to revaluation surplus
(ii) Any excess should be charged to profit or loss
Example 2.
In December 2015, Me & You Ltd revalued it’s plant from its original cost of Tsh.15 million to Tsh.22 million. An
impairment test conducted in December 2016 shows that the plant is impaired by Tsh.9 million.
Required: Show the accounting treatment of impairment in December 2016.
 Cash Generating Unit (CGU).

At times a group of assets are linked with each other in such a manner that:
 It is not possible to ascertain the cash flows to be derived from a single asset.
 An individual asset may have a negligible value in use by itself, but its value in use could be much higher
when considered along with a group of assets.
 The asset’s value in use cannot be estimated to be close to its fair value less costs to sell.
At such times, it becomes necessary to assess whether this whole group of interlinked assets (called a cash- generating
unit) have impaired or not.
A cash-generating unit is the smallest identifiable group of assets for which independent cash flows can be identified
and measured.
While identifying a cash-generating unit, it is essential to remember that:

1. Cash-generating units should be capable of generating cash inflows by themselves.
2. Cash-generating units should be identified consistently from period to period for the same asset or types of
assets, unless a change is justified.
An impairment loss shall be recognised for a cash-generating unit if the recoverable amount of the unit is less than its
carrying amount. In identifying the impairment loss of CGU, the same procedure should be applied as individual asset
(i.e Carrying amount less Recoverable amount)
Allocation of an impairment loss

When an impairment loss is recognised for a cash- generating unit, the loss should be allocated between the assets in
the unit in the following order.
(a) First, to any assets that are obviously damaged or destroyed
(b) Next, to the goodwill allocated to the cash generating unit
(c) Then to all other assets in the cash-generating unit, on a pro rata basis
In allocating an impairment loss, the carrying amount of an asset should not be reduced below the highest of:
(a) Its fair value less costs of disposal
(b) Its value in use (if determinable)
(c) Zero
Any remaining amount of an impairment loss should be recognised as a liability if required by other IASs.
 Reversal of an impairment loss

The annual assessment to determine whether there may have been some impairment should be applied to all assets,
including assets that have already been impaired in the past.
In some cases, the recoverable amount of an asset that has previously been impaired might turn out to be higher than
the asset's current carrying value. In other words, there might have been a reversal of some of the previous impairment
loss.
(a) The reversal of the impairment loss should be recognised immediately as income in profit or loss.
(b) The carrying amount of the asset should be increased to its new recoverable amount.
An exception to this rule is for goodwill. An impairment loss for goodwill should not be reversed in a subsequent period.
Example 3.
A cash generating unit comprising a factory, plant and equipment etc and associated purchased goodwill becomes
impaired because the product it makes is overtaken by a technologically more advanced model produced by a
competitor. The recoverable amount of the cash generating unit falls to $60m, resulting in an impairment loss of $80m,
allocated as follows.
Carrying amounts Carrying amounts
before impairment after impairment
$m $m
Goodwill 40 0
Patent (with no market value) 20 0
Tangible non-current assets (market value $60m) 80 60
140 60
After three years, the entity makes a technological breakthrough of its own, and the recoverable amount of the cash
generating unit increases to $90m. The carrying amount of the tangible non-current assets had the impairment not
occurred would have been $70m.
Required
Calculate the reversal of the impairment loss.
Example 4.
Jimsung Ltd acquired a machine with an estimated useful life of 10 years at a cost of TZS 200,000. at the end of year
3 there was an indication that the machine might be impaired.
The recoverable amount was estimated to be TZS 120,000 at that stage. 2 years later there was an indication that the
impairment loss might have reversed, and consequently the recoverable amount was re-estimated at TZS 105,000
Required: Show the accounting treatments.
Example 5.
Machine X was revalued at the beginning of 2011 with TZS 500,000.
At the end of 2012 there was an indication that it might be impaired and consequently an impairment loss of TZS
800,000 was recognized.
Two years later there was an indication that this impairment loss might have reversed, and calculations revealed a
reversal of TZs 400,000.
The revaluation surplus is regarded as realized only on disposal of the machine
REVIEW QUESTIONS.
Question 1 (ACCA DEC 2012 Qn. 4)
The objective of IAS 36 Impairment of assets is to prescribe the procedures that an entity applies to ensure that its
assets are not impaired.
Required:
Explain what is meant by an impairment review. Your answer should include reference to assets that may form
a cash generating unit.
Note: you are NOT required to describe the indicators of an impairment or how impairment losses are allocated against
assets. (4 marks)
(b) (i) Telepath acquired an item of plant at a cost of $800,000 on 1 April 2010 that is used to produce and package
pharmaceutical pills. The plant had an estimated residual value of $50,000 and an estimated life of five years, neither
of which has changed. Telepath uses straight-line depreciation. On 31 March 2012, Telepath was informed by a major
customer (who buys products produced by the plant) that it would no longer be placing orders with Telepath. Even
before this information was known, Telepath had been having difficulty finding work for this plant. It now estimates that
net cash inflows earned from the plant for the next three years will be:
$'000
Year ended: 31-Mar-13 220
31-Mar-14 180
31-Mar-15 170
On 31 March 2015, the plant is still expected to be sold for its estimated realisable value.
Telepath has confirmed that there is no market in which to sell the plant at 31 March 2012.
Telepath’s cost of capital is 10% and the following values should be used:
value of $1 at: end of year 1 0.91
end of year 2 0.83
end of year 3 0.75
(ii) Telepath owned a 100% subsidiary, Tilda, that is treated as a cash generating unit. On 31 March 2012, there was
an industrial accident (a gas explosion) that caused damage to some of Tilda’s plant. The assets of Tilda immediately
before the accident were:
$’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
12,000
As a result of the accident, the recoverable amount of Tilda is $6·7 million
The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of $500,000.
Tilda has an open offer from a competitor of $1 million for its patent. The receivables and cash are already stated at
their fair values less costs to sell (net realisable values).
Required:
Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 2012 after applying any impairment
losses.
Calculations should be to the nearest $1,000.
Question 2
As at 30 September 2013 Dune’s property in its statement of financial position was:
Property at cost (useful life 15 years) $45 million
Accumulated depreciation $6 million
On 1 April 2014, Dune decided to sell the property. The property is being marketed by a property agent at a price of
$42 million, which was considered a reasonably achievable price at that date. The expected costs to sell have been
agreed at $1 million. Recent market transactions suggest that actual selling prices achieved for this type of property in
the current market conditions are 10% less than the price at which they are marketed. At 30 September 2014 the
property has not been sold.
Required:
At what amount should the property be reported in Dune’s statement of financial position as at 30 September 2014?
Question 3.
Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips for mobile phones.
It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of ten years and is depreciated on the
straight-line basis, time apportioned in the years of acquisition and disposal. The machine was revalued to $81,000 on
1 July 20X4. There was no change to its useful life at that date.
A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating capacity. The accountant
considers that Aphrodite Co will need to recognise an impairment loss in relation to this damage. The accountant has
ascertained the following information at 1 October 20X6:
1. The carrying amount of the machine is $60,750.
2. An equivalent new machine would cost $90,000.
3. The machine could be sold in its current condition for a gross amount of $45,000. Dismantling costs would
amount to $2,000.
4. In its current condition, the machine could operate for three more years which gives it a value in use figure of
$38,685.
Required:
(i) In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation charged to Aphrodite Co’s
profit or loss in respect of the machine for the year ended 31 December 20X4?
(ii) IAS 36 Impairment of Assets contains a number of examples of internal and external events which may
indicate the impairment of an asset, what are those?
(iii) What is the total impairment loss associated with Aphrodite Co’s machine at 1 October 20X6?
Question 4 (ACCA June 2010 Qn.2 (b)

At 31 May 2010 Cate held an investment in and had a significant influence over Bates, a public limited company. Cate
had carried out an impairment test in respect of its investment in accordance with the procedures prescribed in IAS 36,
Impairment of assets. Cate argued that fair value was the only measure applicable in this case as value-in-use was
not determinable as cash flow estimates had not been produced. Cate stated that there were no plans to dispose of
the shareholding and hence there was no binding sale agreement. Cate also stated that the quoted share price was
not an appropriate measure when considering the fair value of Cate’s significant influence on Bates. Therefore, Cate
estimated the fair value of its interest in Bates through application of two measurement techniques; one based on
earnings multiples and the other based on an option–pricing model. Neither of these methods supported the existence
of an impairment loss as of 31 May 2010.
Required:
Discuss whether the accounting treatments proposed by the company are acceptable under International Financial
Reporting Standards.
Question 5 (ACCA December 2009 Qn.2 (a)

Key, a public limited company, is concerned about the reduction in the general availability of credit and the sudden
tightening of the conditions required to obtain a loan from banks. There has been a reduction in credit availability and
a rise in interest rates. It seems as though there has ceased to be a clear relationship between interest rates and credit
availability, and lenders and investors are seeking less risky investments. The directors are trying to determine the
practical implications for the financial statements particularly because of large write downs of assets in the banking
sector, tightening of credit conditions, and falling sales and asset prices. They are particularly concerned about the
impairment of assets and the market inputs to be used in impairment testing. They are afraid that they may experience
significant impairment charges in the coming financial year. They are unsure as to how they should test for impairment
and any considerations which should be taken into account.
Required:
Discuss the main considerations that the company should take into account when impairment testing non-current
assets in the above economic climate. (8 marks)
Question 6 (ACCA December 2009 Qn.2 (b)

There are specific assets on which the company wishes to seek advice. The company holds certain non-current assets,
which are in a development area and carried at cost less depreciation. These assets cost $3 million on 1 June 2008
and are depreciated on the straight-line basis over their useful life of five years. An impairment review was carried out
on 31 May 2009 and the projected cash flows relating to these assets were as follows:
Year to 31-May-10 31-May-11 31-May-12 31-May-13

Cash flows ($000) 280 450 500 550
The company used a discount rate of 5%. At 30 November 2009, the directors used the same cash flow projections
and noticed that the resultant value in use was above the carrying amount of the assets and wished to reverse any
impairment loss calculated at 31 May 2009. The government has indicated that it may compensate the company for
any loss in value of the assets up to 20% of the impairment loss.
Key holds a non-current asset, which was purchased for $10 million on 1 December 2006 with an expected useful life
of 10 years. On 1 December 2008, it was revalued to $8·8 million. At 30 November 2009, the asset was reviewed for
impairment and written down to its recoverable amount of $5·5 million.
Key committed itself at the beginning of the financial year to selling a property that is being under-utilised following the
economic downturn. As a result of the economic downturn, the property was not sold by the end of the year.
The asset was actively marketed but there were no reasonable offers to purchase the asset. Key is hoping that the
economic downturn will change in the future and therefore has not reduced the price of the asset.
Required:
Discuss with suitable computations, how to account for any potential impairment of the above non-current assets in
the financial statements for the year ended 30 November 2009. (15 marks)
Note: The following discount factors may be relevant
Year 1 0.9524
Year 2 0.9070
Year 3 0.8638
Year 4 0.8227
Question 7 (ACCA December 2014 Qn.4)

(a) An assessment of accounting practices for asset impairments is especially important in the context of financial
reporting quality in that it requires the exercise of considerable management judgement and reporting discretion. The
importance of this issue is heightened during periods of ongoing economic uncertainty as a result of the need for
companies to reflect the loss of economic value in a timely fashion through the mechanism of asset write-downs. There
are many factors which can affect the quality of impairment accounting and disclosures. These factors include changes
in circumstance in the reporting period, the market capitalisation of the entity, the allocation of goodwill to cash
generating units, valuation issues and the nature of the disclosures.
Required:
Discuss the importance and significance of the above factors when conducting an impairment test under
IAS 36 Impairment of Assets. (13 marks)
b)
(i) Estoil is an international company providing parts for the automotive industry. It operates in many different
jurisdictions with different currencies. During 2014, Estoil experienced financial difficulties marked by a decline in
revenue, a reorganisation and restructuring of the business and it reported a loss for the year. An impairment test of
goodwill was performed but no impairment was recognised. Estoil applied one discount rate for all cash flows for all
cash generating units (CGUs), irrespective of the currency in which the cash flows would be generated. The discount
rate used was the weighted average cost of capital (WACC) and Estoil used the 10-year government bond rate for its
jurisdiction as the risk free rate in this calculation.
Additionally, Estoil built its model using a forecast denominated in the functional currency of the parent company. Estoil
felt that any other approach would require a level of detail which was unrealistic and impracticable. Estoil argued that
the different CGUs represented different risk profiles in the short term, but over a longer business cycle, there was no
basis for claiming that their risk profiles were different.
(ii) Fariole specialises in the communications sector with three main CGUs. Goodwill was a significant component of
total assets. Fariole performed an impairment test of the CGUs. The cash flow projections were based on the most
recent financial budgets approved by management. The realised cash flows for the CGUs were negative in 2014 and
far below budgeted cash flows for that period. The directors had significantly raised cash flow forecasts for 2015 with
little justification. The projected cash flows were calculated by adding back depreciation charges to the budgeted result
for the period with expected changes in working capital and capital expenditure not taken into account.
Required:
Discuss the acceptability of the above accounting practices under IAS 36 Impairment of Assets.
Question 8.
Acquirer is an entity that regularly purchases new subsidiaries. On 30 June 20X0, the entity acquired all the equity
shares of Prospects for a cash payment of $260 million. The net assets of Prospects on 30 June 20X0 were $180
million and no fair value adjustments were necessary upon consolidation of Prospects for the first time.
On 31 December 20X0, Acquirer carried out a review of the goodwill on consolidation of Prospects for evidence of
impairment. The review was carried out despite the fact that there were no obvious indications of adverse trading
conditions for Prospects. The review involved allocating the net asset of Prospects into three cash-generating units
and computing the value in use of each unit. The carrying values of the individual units before any impairment
adjustments are given below.
Unit A Unit A Unit A

$ million $ million $ million
Patents 5
Property, plant and equipment 60 30 40
Net current assets 20 25 20
85 55 60
Value in use of unit 72 60 65
It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash-generating units, but all
other net assets of Prospects are allocated in the table shown above. The patents of Prospects have no ascertainable
market value but all the current assets have a market value that is above carrying value. The value in use of Prospects
as a single cash-generating unit at 31 December 20X1 is £205 million.
Required
a) Explain what is meant by a cash-generating unit. (5 marks)
b) Explain why it was necessary to review the goodwill on consolidation of Prospects for impairment at 31 December
20X0. (3 marks)
c) Explain briefly the purpose of an impairment review and why the net assets of Prospects were allocated into cash-
generating units as part of the review of goodwill for impairment. (5 marks)
d) Demonstrate how the impairment loss in unit A will affect the carrying value of the net assets of unit A in the
consolidated financial statements of Acquirer. (5 marks)
e) Explain and calculate the effect of the impairment review on the carrying value of the goodwill on consolidation of
Prospects at 31 December 20X0. (7 marks)
(Total = 25 marks)
Question 9.
The net assets of Asha N, a cash generating unit (CGU), are:
$
Property, plant and equipment 200,000
Allocated goodwill 50,000
Product patent 20,000
Net current assets (at net realisable value) 30,000
Total 300,000
As a result of adverse publicity, Asha N has a recoverable amount of only $200,000.
Required:
What would be the value of Asha Property, plant and equipment after the allocation of the impairment loss?
Question 10.
On 1 September 20X2, Comfort Travels acquired Swift Tours and Travels, a popular travel company in Brazil. The
summarised statement of financial position of Swift Tours and Travels at fair value on 1 September 20X2, which shows
the terms of the acquisition, is as follows:
Tshs Million
Goodwill 120
Operatng licence 720
Property (bus stations and rest rooms) 180
Town trucks 180
Bus coaches (4 coaches) 600
Purchase consideration 1,800
Swift Tours and travels had recently renewed its operating licence for ten years. It is recorded at its renewal cost. The
carrying values of the property and tow trucks are stated at their estimated replacement cost. The bus coaches are
valued at net selling price.
Two of the coaches rolled down a valley on 1 October 20X2 in a road accident which destroyed the two buses
completely. The buses did not have any passengers on board as they were returning from the garage after a routine
servicing. Luckily, the drivers of the coaches managed to escape. However, there was no way either of the coaches
could be repaired or brought back into business. This affected the company’s business, and at this date was valued at
an estimated Tshs1,200 million. The other two buses had a recoverable value at least equal to the carrying value on 1
October 20X2 and 30 November 20X2.
After this incident the number of passengers fell considerably – even below the expected reduced capacity. The tourists
felt they could not rely on the drivers of Swift Tours and Travels, as they were suspected of being drunk on the job, at
the time of the accident. Therefore the business value was reassessed on 30 November 20X2 at Tshs1,080 million,
and on the same day Comfort Travels obtained an offer of Tshs540 million for the license.
Required:
State the allocation of impairment losses in accordance with IAS 36 Impairment of Assets and the valuation of each
asset of Swift Tours and Travels at 1 October 20X2 and 30 November 20X2 after impairment losses are recognized
assuming that the company does not charge depreciation monthly.
Question 11.
Ambakysye owns a company called Sofia. Extracts from Ambakysye’s Statement of Financial Position relating to Sofia:
$000
Goodwill 80,000
Franchise costs 50,000
Restored furniture (at cost) 90,000
Buildings 100,000
Other net assets 50,000
370,000
The restored furniture has an estimated realisable value of $115 million. The franchise agreement contains a ‘sell back’
clause, which allows Sofia to relinquish the franchise and gain a repayment of $30 million from the franchisor. An
impairment review at 31 March 2014 has estimated that the value of Sofia as a going concern is only $240 million.
Required:
Show how the impairment would be dealt with.
IAS 38 – Intangible Assets

The objectives of IAS 38 – Intangible Assets.
(a) To establish the criteria for when an intangible asset may or should be recognised
(b) To specify how intangible assets should be measured
(c) To specify the disclosure requirements for intangible assets
Definition of intangible assets.

An intangible asset is an identifiable non-monetary asset without physical substance. The asset must be:
a) Controlled by the entity as a result of events in the past
b) Something from which the entity expects future economic benefits to flow
Examples of intangible assets are goodwill, brand names, computer software, patents, copyrights, motion picture films,
customer lists, franchises and fishing rights.
 Characteristics of intangible assets

i. Identifiability
ii. Control of an asset
iii. Existence of future economic benefit
 Identifiability
An intangible asset must be identifiable in order to distinguish it from goodwill. With non-physical items, there may be
a problem with 'identifiability'.
(a) The intangible asset must be separable i.e. it should be capable of being separated from the entity and sold /
transferred.
(b) When the asset arises from contractual or other legal rights, regardless of whether the asset is separable and
transferable or not.
 Control of an asset
An intangible asset is that it must be under the control of the entity as a result of a past event. The entity must therefore
be able to enjoy the future economic benefits from the asset, and prevent the access of others to those benefits. A
legally enforceable right is evidence of such control, but is not always a necessary condition.
a) Control over technical knowledge or know-how only exists if it is protected by a legal right.
b) The skill of employees, arising out of the benefits of training costs, are most unlikely to be recognisable as an
intangible asset, because an entity does not control the future actions of its staff.
c) Similarly, market share and customer loyalty cannot normally be intangible assets, since an entity cannot control
the actions of its customers.
 Existence of future economic benefit

An item can only be recognised as an intangible asset if economic benefits are expected to flow in the future from
ownership of the asset.
These could exist in any one of the following ways:

a) Revenue from the sale of products or services
b) Cost savings
c) Other benefits resulting from the use of an asset
 Exchanges of assets
If one intangible asset is exchanged for another, the cost of the intangible asset is measured at fair value unless:
(a) The exchange transaction lacks commercial substance, or
(b) The fair value of neither the asset received nor the asset given up can be measured reliably.
Otherwise, its cost is measured at the carrying amount of the asset given up.
 Types of intangible assets

i. Purchased intangible assets: This are intangible assets that are acquired outside of an entity eg An import
license purchased for Tshs15 million.
ii. Internally developed intangible assets: Certain assets may be internally developed by an entity by using
its own resources eg A pharmaceutical company develops a new medicine through research and
development. It spends material, man days and uses assets to carry out this task. This is an internally
developed intangible asset.
 Internally generated goodwill

Internally generated goodwill may not be recognised as an asset. The standard deliberately precludes recognition of
internally generated goodwill because it requires that, for initial recognition, the cost of the asset rather than its fair
value should be capable of being measured reliably and that it should be identifiable and controlled. Thus you do not
recognise an asset which is subjective and cannot be measured reliably.
 Other internally generated intangible assets

The standard prohibits the recognition of internally generated brands, mastheads, publishing titles and customer lists
and similar items as intangible assets. These all fail to meet one or more (in some cases all) the definition and
recognition criteria and in some cases are probably indistinguishable from internally generated goodwill.
 Measurement of Intangible Assets

(i) Initial measurement
Intangible assets should be initially at cost
(ii) Measurement of intangible assets subsequent to initial recognition

The standard allows two methods (cost model and revaluation model) of valuation for intangible assets after they have
been first recognised.
 Cost Model
Applying the cost model, an intangible asset should be carried at its cost, less any accumulated amortisation and less
any accumulated impairment losses.
 Revaluation model
The revaluation model allows an intangible asset to be carried at a revalued amount, which is its fair value at the date
of revaluation, less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
(a) The fair value must be able to be measured reliably with reference to an active market in that type of asset.
(b) The entire class of intangible assets of that type must be revalued at the same time (to prevent selective
revaluations).
(c) If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active
market for this asset, the asset should be carried at its cost less any accumulated amortisation and impairment
losses.
(d) Revaluations should be made with such regularity that the carrying amount does not differ from that which
would be determined using fair value at the end of the reporting period.
Note: increase/decrease of carrying value of an asset as a result of using revaluation model should be treated as
assets are IAS 16.
 Useful life
Useful life is:
(a) The period over which an asset is expected to be available for use by an entity; or
(b) The number of production or similar units expected to be obtained from the asset by an entity.
The accounting of an intangible asset depends on its useful life, i.e. whether it is finite or indefinite.
1. Finite useful life
(a) Intangible assets that have a determinable life are classified under this head.
(b) An intangible asset with a finite useful life is amortised. Amortisation means that a part of the asset value is
transferred from the statement of financial position to the statement of profit or loss and other comprehensive
income as a cost, in the same way as depreciation in the case of tangible assets
(c) The amortised amount is allocated on a systematic basis over its useful life. The useful life may be shorter than
the legal or contractual life.
(d) The amortisation period and method shall be reviewed at least at the end of each financial year-end.
(e) Amortisation is not stopped when the asset is not in use, unless it has been fully amortised or classified as held
for sale.
(f) Only if there is an indication of impairment, the recoverable amount is compared with the carrying amount and
impairment loss is recognised if necessary.
2. Indefinite useful life

(a) If the useful life of an intangible asset cannot be determined, it is known as an asset with indefinite useful life.
(b) An intangible asset with an indefinite useful life is not amortised.
(c) Impairment test: in accordance with IAS 36 Impairment of Assets, an intangible asset with an indefinite useful life
should be tested for impairment by comparing its recoverable amount with its carrying value. This is to be done
annually or when there is an indication that the asset may be impaired.
(d) The useful life will be reviewed each period, to determine whether it is still appropriate to assess the asset’s useful
life as indefinite. If the assessment does not support the indefinite life of an intangible asset it shall be accounted
for as change in accounting estimate in accordance with IAS 8.
 Recognition of an expense
All expenditure related to an intangible which does not meet the criteria for recognition either as an identifiable
intangible asset or as goodwill arising on an acquisition should be expensed as incurred. The IAS gives examples of
such expenditure which includes startup costs, Advertising costs, Training costs, and Business relocation costs
Prepaid costs for services, for example advertising or marketing costs for campaigns that have been prepared but
not launched, can still be recognised as a prepayment.
 Retirements and disposals: Derecognition

Derecognition means removing an asset from the statement of financial position. An intangible asset is derecognised
when
1. It is disposed of; or
2. No future economic benefits are expected from its use or disposal.
The gain or loss arising on derecognition is determined as the difference between the net proceeds, if any, and the
carrying amount of the asset. The gain or loss is recognised immediately in the profit or loss part of the statement of
profit or loss and other comprehensive income. The gain is not classified as revenue, but shown as other income.
 Research and Development cost

Research
Research activities by definition do not meet the criteria for recognition under IAS 38. This is because, at the research
stage of a project, it cannot be certain that future economic benefits will probably flow to the entity from the project.
There is too much uncertainty about the likely success or otherwise of the project.
Research costs should therefore be written off as an expense as they are incurred.
Examples of research costs

a) Activities aimed at obtaining new knowledge
b) The search for, evaluation and final selection of, applications of research findings or other knowledge
c) The search for alternatives for materials, devices, products, processes, systems or services
d) The formulation, design evaluation and final selection of possible alternatives for new or improved materials,
devices, products, systems or services
 Development costs
Development costs may qualify for recognition as intangible assets provided that the following strict criteria can be
demonstrated.
a) Probable future economic benefits
b) Intention to complete and use or sell the asset
c) Ability to use or sell the asset
d) Technical feasibility of completing the intangible asset (so that it will be available for use or sale)
e) Expenditure can be measured reliably
In contrast with research costs development costs are incurred at a later stage in a project, and the probability of
success should be more apparent. Examples of development costs include:
a) The design, construction and testing of pre-production or pre-use prototypes and models
b) The design of tools, jigs, moulds and dies involving new technology
c) The design, construction and operation of a pilot plant that is not of a scale economically feasible for
commercial production
d) The design, construction and testing of a chosen alternative for new or improved materials, devices, products,
processes, systems or services
 Goodwill
Goodwill is created by good relationships between a business and its customers.
(a) By building up a reputation (by word of mouth perhaps) for high quality products or high standards of service
(b) By responding promptly and helpfully to queries and complaints from customers
(c) Through the personality of the staff and their attitudes to customers
The value of goodwill to a business might be extremely significant. However, goodwill is not usually valued in the
accounts of a business at all, and we should not normally expect to find an amount for goodwill in its statement of
financial position. For example, the welcoming smile of the bar staff may contribute more to a bar's profits than the fact
that a new electronic cash register has recently been acquired. Even so, whereas the cash register will be recorded in
the accounts as a non-current asset, the value of staff would be ignored for accounting purposes.
On reflection, we might agree with this omission of goodwill from the accounts of a business.
(a) The goodwill is inherent in the business but it has not been paid for, and it does not have an 'objective' value. We
can guess at what such goodwill is worth, but such guesswork would be a matter of individual opinion, and not
based on hard facts.
(b) Goodwill changes from day to day. One act of bad customer relations might damage goodwill and one act of good
relations might improve it. Staff with a favourable personality might retire or leave to find another job, to be replaced
by staff who need time to find their feet in the job. Since goodwill is continually changing in value, it cannot
realistically be recorded in the accounts of the business.
Purchased goodwill
If a business has goodwill, it means that the value of the business as a going concern is greater than the value of its
separate tangible assets. The valuation of goodwill is extremely subjective and fluctuates constantly. For this reason,
non-purchased goodwill is not shown as an asset in the statement of financial position.
There is one exception to the general rule that goodwill has no objective valuation. This is when a business is sold.
People wishing to set up in business have a choice of how to do it – they can either buy their own non-current assets
and inventory and set up their business from scratch, or they can buy up an existing business from a proprietor willing
to sell it. When a buyer purchases an existing business, he will have to purchase not only its long-term assets and
inventory (and perhaps take over its accounts payable and receivable too) but also the goodwill of the business.
Purchased goodwill is shown in the statement of financial position because it has been paid for. It has no tangible
substance, and so it is an intangible non-current asset.
REVIEW QUESTIONS
IAS 38 Intangible Assets sets out the principles for accounting for intangible assets.
REQUIREMENTS:
(a) Identify the criteria that must be satisfied before an intangible asset can be recognised in the financial statements.
(5 marks)
(b) What criteria must be satisfied before expenditure on internally generated research and development can be
capitalised? (3 marks)
(c) Smith PLC, a developer and manufacturer of household and commercial cleaning products, prepares its financial
statements to 31 December 2009. The Board of Directors are finalising the financial statements and need assistance
on the treatment of the following issues:
i. On 1 January 2008, Smith PLC acquired a six year patent to manufacture and distribute a product called
Clean Line Fluid. The fluid is for use in restaurants and public houses. The patent cost €12m and it is to be
amortised on a straight line basis. In January 2010 a review of the sales of Clean Line Fluid indicated a very
disappointing level of sales. The decision was taken that production would cease at 31 December 2010
despite the product delivering a net profit.
ii. Research and Development expenditure in the year to 31 December 2009 totalled €4m. Half of this was
incurred on research costs and the remaining amounts were incurred on the development costs of the
following three products:
€
Products: Wash and Go 1,000,000
Wipe Clear 400,000
Soft and Clean 600,000
The Wash and Go product is expected to generate high levels of sales and matching profits over the next 4
years, after which it will be replaced. The Wipe Clear product is experiencing difficulties in the final stage of
product testing and there is uncertainty within the product development team of the length of time or costs
needed to complete the product prior to its launch. Smith PLC registered a 6 year patent for the Soft and
Clean product effective from 1 January 2009.
iii. During the year ended 31 December 2009, a staff training programme was carried out at a cost of €200,000.
The external training provider has demonstrated to the Directors of Smith PLC that the training should result
in additional profits of €380,000.
Advise the Directors of Smith PLC on the treatment of the above issues in the financial statements for the
year ended 31 December 2009. (9 marks)
(d) What information needs to be disclosed for each class or type of intangible asset? (3 marks)
[TOTAL: 20 MARKS]

(a) IAS 38 Intangible Assets sets out the principles of accounting for the recognition and measurement of intangible
assets. The standard differentiates between intangible assets acquired individually, those acquired as part of a
business combination, and those which are internally generated. IAS 38 relies on the concept of fair value to measure
intangibles, but the strength of the fair value test varies depending on the objective.
Handsetter Plc (Handsetter) has entered into the following transactions during the financial year ended 31 March 2016.
The company seeks to maximise the reported value of its assets wherever possible.
i. On 1 April 2015, Handsetter acquired, from a bankrupt competitor, a licence to provide radio broadcast
services to a region within Ireland. This licence would have been originally issued by the government for a
ten-year period at zero cost, but has a market value due to its exclusivity. The cost of the licence to Handsetter
was €3.3 million, and the remaining useful economic life was 6 years.
ii. On 1 April 2015, Handsetter commenced work on developing a new technology to enhance the quality of the
radio broadcasts. It purchased a number of patents at a cost of €2 million and spent a further €6 million
developing the technology, as well as €2 million researching the international market for the technology in
advance of its launch. The directors of Handsetter were confident throughout the development process that
the technology had massive potential to generate future economic benefit. On 31 March 2016, this opinion
was validated when a rival broadcaster offered Handsetter €15 million for its partially developed technology
project.
iii. As a result of Handsetter’s growing reputation in the broadcasting industry, the directors commissioned a
consulting firm to value its brand name. The brand name has not been recognised as an asset in the financial
statements to date. On 31 March 2016, the consultants issued a report stating that the fair value of
Handsetter’s brand was €20 million.
iv. Handsetter has a portfolio of patents it developed over the past few years. These represent technologies and
processes used in the company’s business to generate economic benefits. The total carrying value of these
patents was €2.8 million at 1 April 2015. They originally had a 15-year useful economic life, but on average
seven years remain to their expiry date. The directors propose, at 31 March 2016, to revalue this portfolio to
its estimated fair value of €5 million.
REQUIREMENT:
(a) Discuss the requirements of IAS 38 Intangible Assets with respect to the initial recognition and measurement of
intangible assets acquired:
1. Separately for cash,
2. As part of a business combination, and
3. Internally generated. (9 marks)
(b) In each of the scenarios (i) to (iv) above, prepare a briefing not for Handsetter’s financial controller advising on the
appropriate accounting treatment for the intangible assets for year ended 31 March 2016.
(11 marks)
[Total: 20 MARKS]
Question 3.
The problems of identifying and valuing intangible assets with a view to recognizing them on the statement of financial
position has been an area of inconsistent practice that has been an area of inconsistent practice that has led to great
debate within the accountancy profession. IAS 38 Intangible Assets was issued in order to try and eliminate these
inconsistent practices.
Required:
(a) Discuss the recognition and initial measurement criteria for intangible assets contained in IAS 38. (9 marks)
(b) On 1 July 2012 Heywood, a company listed on a recognized stock exchange, was finally successful in acquiring
the entire share capital of Fast Trak. The terms of the bid by Heywood had been improved several times as rival
bidders also made offers for Fast Trak. The terms of the initial bid by Heywood were:
 20 million $1 ordinary shares in Heywood. Each share had stock market price of $3.50 immediately prior
to the bid
 A cash element of $15 million.
The final bid that was eventually accepted on 1 July 2012 by Fast Trak’s shareholders. Heywood had improved the
cash offer to $25 million and included a redeemable loan note of a further $25 million that will be redeemed on 30 June
2016. It carried no interest, but market rates for this type of loan note were 13% per annum. There was no increase in
the number of shares offered but at the date of acceptance the price of Heywood’s shares on the stock market had
risen to $4.00 each.
The present value of $1 receivable in a future period where interest rates are 13% can be taken as:
at end of year three $0.70

at end of year four $0.60
The fair value of Fast Trak’s net assets, other than its intangible long-term assets, was assessed by Heywood to be
$64 million. This value had not changed significantly throughout the building process. The detail of Fast Trak’s
intangible assets acquired were:
(i) The brand name “Kleenwash”; a dish washing liquid. A rival brand name thought to be of a similar reputation
and value to Kleenwash had recently been acquired for a disclosed figure of $12 million.
(ii) A government licence to extract a radioactive ore from a mine for the next ten years. The licence is difficult to
value as there was no fee payable for it. However, a Fast Trak is the only company that can mine the ore, the
directors of Heywood have estimated the licence to be worth $9 million. The mine itself has been included as
part of Fast Trak’s property, plant and equipment.
(iii) A fishing quota of 10,000 tonnes per annum in territorial waters. A specialist company called Quotasales
actively trades in these and other quotas. The price per tonne of these fishing quotas at the date of acquisition
was $1,600. The quota is for an indefinite period of time, but in order to preserve fish stocks the Government
has the right to vary the weight of fish that may be caught under a quota. The weights of quotas are reviewed
annually.
(iv) The remainder of the long-term intangible assets is attributed to the goodwill of Fast Trak.
Required:
Calculate the purchase consideration and prepare an extract of the intangible assets of Fast Trak that would be
separately recognized in the consolidated financial statements of Heywood on 1 July 2012. Your answer should include
an explanation justifying your treatment of each item. (8 marks)
Question 4.
On the same date, but as a separate purchase to that of Fast Trak, Heywood acquired Steamdays, a company that
operates a scenic railway along the coast of a popular tourist area. The summarized statement of financial position at
fair values of Steamdays on 1 1 July 2012, reflecting the terms of the acquisition was:
$000
Goodwill 200
Operating licence 1,200
Property - train stations and land 300
Rail trak and coaches 300
Steam engines (2) 1,000
Purchase consideration 3,000
The operating licence is for ten years. It has recently been renewed by the transport authority and is stated at the cost
of its renewal. The carrying amounts of the property and rail track and coaches are based on their estimated
replacement cost. The carrying amount of the engines closely equites to their fair values less any disposal costs.
On 1 August 2012 the boiler of one of the steam engines exploded, completely destroying the whole engine. Fortunately
no one was injured, but the engine was beyond repair. Due to its age a replacement could not be obtained. Because
of the reduced passenger capacity the estimated value in use of the business after the accident was assessed at $2
million.
Passenger numbers after the accident were below expectations even after allowing for the reduced capacity. A market
research report concluded that tourist were not using the railway because of the fear of a similar accident occurring to
the remaining engine. In the light of this the value in use of the business was re-assessed on 30 September 2012 at
$1.8 million. On this date Heywood received an offer of $900,000 in respect of the operating licence (it is transferable).
Required:
Briefly describe the basis in IAS 36 ‘Impairment of Assets” for allocating impairment losses; and show how each of the
assets of Steamdays would be valued at 1August 2012 and 30 September 2012 after recognizing the impairment
losses.
IAS 7 – Statement of cash flows

 Scope
A statement of cash flows should be presented as an integral part of an entity's financial statements. All types of entity
can provide useful information about cash flows as the need for cash is universal, whatever the nature of their revenue-
producing activities. Therefore all entities are required by the standard to produce a statement of cash flows.
 Benefits of cash flow information

The use of statements of cash flows is very much in conjunction with the rest of the financial statements.
 Users can gain further appreciation of the change in net assets, of the entity's financial position (liquidity and
solvency) and the entity's ability to adapt to changing circumstances by affecting the amount and timing of
cash flows.
 Statements of cash flows enhance comparability as they are not affected by differing accounting policies
used for the same type of transactions or events.
 Cash flow information of a historical nature can be used as an indicator of the amount, timing and certainty of
future cash flows.
 Past forecast cash flow information can be checked for accuracy as actual figures emerge.
 The relationship between profit and cash flows can be analysed as can changes in prices over time.
 Definitions
Cash flows are inflows and outflows of cash and cash equivalents.
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
 Classification of cash flows.

i Operating activities
ii Investing activities
iii Financing activities
 Operating activities.
This are the principal revenue-producing activities of the entity and other activities that are not investing or financing
activities. This is the key part of the statement of cash flows because it shows whether, and to what extent, companies
can generate cash from their operations. It is these operating cash flows which must, in the end pay for all cash
outflows relating to other activities, ie paying loan interest, dividends and so on.
Examples of cash flows from operating activities:

a) Cash receipts from the sale of goods and the rendering of services
b) Cash receipts from royalties, fees, commissions and other revenue
c) Cash payments to suppliers for goods and services
d) Cash payments to and on behalf of employees
 Investing activities
Are the acquisition and disposal of non-current assets and other investments not included in cash equivalents. The
cash flows from investing activities show the extent of new investment in assets which will generate future profit and
cash flows.
Examples of cash flows arising from investing activities:

a) Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including
those relating to capitalised development costs and self-constructed property, plant and equipment
b) Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
c) Cash payments to acquire shares or debentures of other entities
d) Cash receipts from sales of shares or debentures of other entities
e) Cash advances and loans made to other parties
f) Cash receipts from the repayment of advances and loans made to other parties
 Financing activities
This are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.
Examples of cash flows from financing activities:

a) Cash proceeds from issuing shares
b) Cash payments to owners to acquire or redeem the entity's shares
c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term
borrowings
d) Principal repayments of amounts borrowed under finance leases
 Reporting cash flows from operating activities

The standard offers a choice of method for this part of the statement of cash flows:
i. Direct method: disclose major classes of gross cash receipts and gross cash payments
ii. Indirect method: net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals
or accruals of past or future operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
Direct method
Proforma
Cash flows from operating activities Tsh.

Cash receipts from customers X
Cash paid to suppliers and employees (X)
Cash generated from operations X
Interest paid (X)
Income taxes paid (X)
Net cash from operating activities X
Indirect method
Take net profit or loss before tax for the period and adjusted for:
a) Changes during the period in inventories, operating receivables and payables
b) Non-cash items, eg depreciation, provisions, profits/losses on the sales of assets
c) Other items, the cash flows from which should be classified under investing or financing activities.
Proforma
Cash flows from operating activities Tsh.

Profit before taxation X
Adjustments for:
Depreciation X
Foreign exchange loss X
Investment income (X)
Interest expense X
X
Increase in trade and other receivables (X)
Decrease in inventories X
Decrease in trade payables (X)
Cash generated from operations X
Interest paid (X)
Income taxes paid (X)
Net cash from operating activities X
Indirect versus direct

The direct method is encouraged where the necessary information is not too costly to obtain, but IAS 7 does not require
it. In practice the indirect method is more commonly used, since it is quicker and easier.
Interest and dividends

Cash flows from interest and dividends received and paid should each be disclosed separately. Each should be
classified in a consistent manner from period to period as either operating, investing or financing activities.
Dividends paid by the entity can be classified in one of two ways:
(a) As a financing cash flow, showing the cost of obtaining financial resources
(b) As a component of cash flows from operating activities so that users can assess the entity's ability to pay dividends
out of operating cash flows
Taxes on income
Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from
operating activities unless they can be specifically identified with financing and investing activities. Taxation cash flows
are often difficult to match to the originating underlying transaction, so most of the time all tax cash flows are classified
as arising from operating activities.
Example 1. (NBAA May 2016 Qn. 5)

Holmes Plc
Statement of Profit or Loss for the year ended 31st December 2015
TZS Million
Revenue 173
Cost of sales (96)
Gross profit 77
Administrative expenses (43)
Profit from operations 34
Finance costs (4)
Investment income received 2
Tax (12)
Profit for the year 20
Holmes Plc
Statement of Financial Position as at:
31.12.2015 31.12.2014
TZS. Million TZS. Million
ASSETS
Non-current assets
Property, plant and equipment 155 153
Current assets
Inventories 24 25
Trade and other payables 29 16
Cash and cash equivalent 27 8
80 49
Total assets 235 202
Capital and reserves

Share capital 100 100
Retained earnings 42 36
142 136
Non-current liabilities
Loan notes 40 20
Current liabilities
Total Equity and Liabilities 235 202
Notes:
1. During the 2015 plant costing TZS.15 million with accumulated depreciation of TZS.10 million was sold for TZS.4
million. Plant and machinery costing TZS.25 million was purchased during 2015.
2. An analysis of trade and other payables shows the followings:
2015 2014
TZS. Million TZS. Million
Trade payables 41 31
Taxation 12 15
53 46
Tax paid during the year amounted to TZS.15 million
3. Administrative expenses include depreciation of TZS.18 million and loss on sale of fixed asset of TZS.1 million
4.
Retained earnings at 31st December 2014 36

56
Dividend paid 14
Retained Earnings at 31st December 2015 42
REQUIRED:
Prepare a statement of cash flows of Holmes Plc for the year ended 31st December 2015 using Indirect Method.
REVIEW QUESTIONS.
Question 1. (ACCA December 2013 Qn. 3)
Kingdom is a public listed manufacturing company. Its draft summarised financial statements for the year ended 30
September 2013 (and 2012 comparatives) are:
Statements of profit or loss and other comprehensive income for the year ended 30 September:
2013 2012
$’000 $’000
Revenue 44,900 44,000
Cost of sales (31,300) (29,000)
Gross profit 13,600 15,000
Distribution costs (2,400) (2,100)
Administrative expenses (7,850) (5,900)
Investment properties – rentals received 350 400
– fair value changes (700) 500
Finance costs (600) (600)
Profit before taxation 2,400 7,300
Income tax (600) (1,700)
Profit for the year 1,800 5,600
Other comprehensive income (1,300) 1,000
Total comprehensive income 500 6,600
Statements of financial position as at 30 September:
2013 2012
$’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment 26,700 25,200
Investment properties 4,100 5,000
30,800 30,200
Current assets
Inventory 2,300 3,100
Trade receivables 3,000 3,400
Bank nil 5,300 300 6,800
Total assets 36,100 37,000
Equity and liabilities
Equity
Equity shares of $1 each 17,200 15,000
Revaluation reserve 1,200 2,500
Retained earnings 7,700 8,700
Non-current liabilities 26,100 26,200
12% loan notes 5,000 5,000
Current liabilities
Trade payables 4,200 3,900
Accrued finance costs 100 50
Bank 200 nil
Current tax payable 500 5,000 1,850 5,800
Total equity and liabilities 36,100 37,000
The following information is relevant:
On 1 July 2013, Kingdom acquired a new investment property at a cost of $1·4 million. On this date, it also transferred
one of its other investment properties to property, plant and equipment at its fair value of $1·6 million as it became
owner-occupied on that date. Kingdom adopts the fair value model for its investment properties.
Kingdom also has a policy of revaluing its other properties (included as property, plant and equipment) to market value
at the end of each year. Other comprehensive income and the revaluation reserve both relate to these properties.
Depreciation of property, plant and equipment during the year was $1·5 million. An item of plant with a carrying amount
of $2·3 million was sold for $1·8 million during September 2013.
Required:
(a) Prepare the statement of cash flows for Kingdom for the year ended 30 September 2013 in accordance with IAS
7 Statement of Cash Flows using the indirect method. (14 marks)
(b) At a board meeting to consider the results shown by the draft financial statements, concern was expressed that,
although there had been a slight increase in revenue during the current year, the profit before tax had fallen
dramatically. The purchasing director commented that he was concerned about the impact of rising prices. During
the year to 30 September 2013, most of Kingdom’s manufacturing and operating costs have risen by an estimated
8% per annum.
Required:
(i). Explain the causes of the fall in Kingdom’s profit before tax. (6 marks)
(ii). Describe the main effects which the rising prices may have on the interpretation of Kingdom’s financial statements.
You are not required to quantify these effects. (5 marks)
(25 marks)
Question 2. (ACCA December 2011 Qn. 3)

(a) The following information relates to the draft financial statements of Mocha.
Summarised statements of financial position as at 30 September:
2011 2010
$’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 32,600 24,100
Financial asset: equity investments (note (ii)) 4,500 7,000
37,100 31,100
Current assets
Trade receivables 3,500 3,700
Bank nil 1,400
13,700 12,300
Total assets 50,800 43,400
Equity and liabilities
Equity
Equity shares of $1 each (note (iii)) 14,000 8,000
Share premium (note (iii)) nil 2,000
Revaluation reserve (note (iii)) 2,000 3,600
Retained earnings 13,000 15,000 10,100 15,700
Non-current liabilities 29,000 23,700
Finance lease obligations 7,000 6,900
Deferred tax 1,300 8,300 900 7,800
Current liabilities
Tax 1,000 1,200
Bank overdraft 2,900 nil
Provision for product warranties (note (iv)) 1,600 4,000
Finance lease obligations 4,800 2,100
Trade payables 3,200 13,500 4,600 11,900
Summarized income statements for the years ended 30 September:

2011 2010
$’000 $’000
Revenue 58,500 41,000
Cost of sales (46,500) (30,000)
Gross profit 12,000 11,000
Operating expenses (8,700) (4,500)
Investment income (note (ii)) 1,100 700
Finance costs (500) (400)
Profit before tax 3,900 6,800

Income tax expense (1,000) (1,800)
Profit for the year 2,900 5,000
The following additional information is available:

(i) Property, plant and equipment:
Cost Accumulated Carrying
depreciation amount
$’000 $’000 $’000
At 30 September 2010 33,600 (9,500) 24,100
New finance lease additions 6,700 6,700
Purchase of new plant 8,300 8,300
Disposal of property (5,000) 1,000 (4,000)
Depreciation for the year (2,500) (2,500)
At 30 September 2011 43,600 (11,000) 32,600
The property disposed of was sold for $8·1 million.
(ii) Investments/investment income:
During the year an investment that had a carrying amount of $3 million was sold for $3·4 million. No investments
were purchased during the year.
Investment income consists of:
Year to 30 September: 2011 2010
$’000 $’000
Dividends received 200 250
Profit on sale of investment 400 nil
Increases in fair value 500 450
1,100 700
(iii) On 1 April 2011 there was a bonus issue of shares that was funded from the share premium and some ofthe
revaluation reserve. This was followed on 30 April 2011 by an issue of shares for cash at par.
(iv) The movement in the product warranty provision has been included in cost of sales.
Required:
Prepare a statement of cash flows for Mocha for the year ended 30 September 2011, in accordance with IAS 7
Statement of cash flows, using the indirect method. (19 marks)
(b) Shareholders can often be confused when trying to evaluate the information provided to them by a company’s
financial statements, particularly when comparing accruals-based information in the income statement and the
statement of financial position with that in the statement of cash flows.
Required:
In the two areas stated below, illustrate, by reference to the information in the question and your answer to (a),
how information in a statement of cash flows may give a different perspective of events than that given by accruals-
based financial statements:
(i) operating performance; and

(ii) Investment in property, plant and equipment.
(25 marks)
Question 3. (NBAA May, 2018 Qn. 4)
Jabir Majura Limited is a Company operating in the hotel sector and its financial statements are as follows:
Jabir Majura Limited Statement of Profit or Loss and other Comprehensive Income for the year ended 31st
December 2017
TZS"000,000"
Operating Profit 2,130
Other Income - Interest Received 126
Finance Costs - Interest (387)
Profit before Tax 1,869
Income Tax (341)
Profit for the Year 1,528
Other Comprehensive Income:
Gains on Property Revaluations 3,240
Total Comprehensive Income for the year, net of tax 4,768
Jabir Majura Limited Statement of Financial Position as at 31st December 2017
2017 2016
TZS"000,000" TZS"000,000"
Non-Current Assets
Property, Plant & Equipment 101,650 95,300
Investment Properties 15,000 19,625
Total Non-current Assets 116,650 114,925
Current Assets
Inventories 6,300 2,600
Trade Receivables 11,460 10,850
Cash & Cash Equivalents 8,600 -
Total Current Assets 26,360 13,450
Total Assets 143,010 128,375
Equity & Liabilities

Equity
Ordinary Share Capital 48,000 40,000
Ordinary Share Premium 13,000 5,000
Preference Share Capital 2,600 2,600
Retained Earnings 3,573 2,595
Revaluation Surplus 21,540 18,300
Total Equity 88,713 68,495
Non-Current Liabilities
Bank Loans 42,311 48,800
Total Non-Current Liabilities 42,311 48,800
Current Liabilities
Trade Payables 9,216 7,450
Bank Overdraft - 1,010
Accruals 610 120
Current Tax Payable 2,160 2,500
Total Current Liabilities 11,986 11,080
Total Equity & Liabilities 143,010 128,375
Jabir Majura Limited Statement of Changes in Equity for the year ended 31st December 2017
TZS."000,000"
Ordinary Preference
Share Retained Revaluation Total
Share Share
Premium Earnings Surplus Equity
Capital Capital
At 1 January 2017 40,000 5,000 2,600 2,595 18,300 68,495
Issue of Share Capital 8,000 8,000 16,000
Dividends - Preference (200) (200)
Dividends - Ordinary (350) (350)
Total Comprehensive 1,528 3,240 4,768
Income for the Year At
31 December 2017 48,000 13,000 2,600 3,573 21,540 88,713
Notes:
i. During the year, Property, Plant & Equipment which had originally cost TZS.540,000,000 was sold for
TZS.240,000,000. This asset had been purchased in the year ended 31st December 2014. Jabir Majura Limited’s
depreciation rate is 10% straight line per annum with full depreciation being charged in year of purchase and none
in year of sale.
ii. Depreciation of Property, Plant & Equipment for the year ended 31st December 2017 amounted to
TZS.1,860,000,000.
REQUIRED:
Prepare a Statement of Cash Flows for the year ended 31st December 2017 for Jabir Majura Limited in accordance
with IAS 7 Statement of Cash Flows. (20 marks)
Question 4. (NBAA May 2017 Qn.3)

(a) Briefly discuss how to investors commonly use (analyses) free cash flow to value a firm and how best should cash
flow statements be disclosed to enable the analysis.
(b) The comparative statement of financial position for Clay Company show the following information:
31-12-2016 31-12-2015
TZS '000' TZS '000' TZS '000' TZS '000'
Non-Current Assets
Building - 29,750
Accumulated depreciation on building - - 6,000 23,750
Equipment 45,000 20,000
Accumulated depreciation on equipment 2,000 43,000 4,500 15,500
Patent 5,000 6,250
Total Non-current Assets 48,000 45,500
Current Assets
Cash 33,500 13,000
Accounts Receivable 12,250 10,000
Allowance for doubtful accounts 3,000 9,250 4,500 5,500
Investments - 3,000
Total Current assets 54,750 30,500
Total Assets 102,750 76,000
Long-term notes payable 31,000 25,000
Total Non-current Liabilities 31,000 25,000
Current Liabilities
Account Payable 5,000 3,000
Dividend Payable - 5,000
Notes payable, short-term (nontrade) 3,000 4,000
Total current liabilities 8,000 12,000
Total liabilities 39,000 37,000
Equity
Common stock 43,000 33,000
Total equity & liabilities 102,750 76,000
Additional data related to 2016 are as follows:
i. Equipment that had cost TZS.11,000,000 and was 40% depreciated at time of disposal was sold for
TZS.2,500,000.
ii. TZS.10,000,000 of the long – term note payable was paid by issuing common stock.
iii. Cash dividend paid were TZS.5,000,000.

iv. On January 1st 2016, the building was completely destroyed by floods. Insurance proceeds on the building
were TZS.30,000,000 (net of TZS.2,000,000 taxes).
v. Investments (available-for-sale) were sold at TZS.1,700,000 above their cost. The company has made similar
sales and investments in past.
vi. A long-term note for TZS.16,000,000 was issued for the acquisition of equipment, and the remaining balance
was acquired in cash.
vii. Interest of TZS.2,000,000 and income taxes of TZS.6,500,000 were paid in cash.
REQUIRED:
Prepare a Statement of Cash Flows using indirect method. Flood damage is unusual and infrequent in that part of the
country.
Question 5. (NBAA November 2016 Qn.2)

The followings information has been taken from the financial statement for Messe plc for the year ended 31st March
2016.
Statement of Profit or loss and Other Comprehensive income (Extracts) for the year ended 31st March 2016.
TZS.
'000,000'
Profit before interest & tax 981
Finance costs (108)
Income tax expense (305)
Other Comprehensive income
Revaluation surplus on Property, Plant and Equipment 418
Total Comprehensive Income 986
Statement of financial Position as at 31st March 2016.

2016 2015
TZS.'000,000' TZS.'000,000'
Assets
Non-current Assets
Property, plant and equipment 11,250 10,500
Intangibles 500 452
11,750 10,952
Current Assets:
Inventories 840 1,125
Trade and other receivables 260 210
Investments 38 18
Cash and cash equivalents 5 30
1,143 1,383
Equity and Liabilities
Equity:
Ordinary share capital 6,000 5,250
Share premium 1,800 1,425
Revaluation surplus 750 356
10,561 10,400
Non-current liabilities:
Preference share capital (redeemable) 760 600
Current Liabilities:
Taxation 600 525
Ordinary dividend payable 750 600
1,572 1,335
Statement of Changes in Equity for the year ended 31st March 2016 (extracts)
Retained Earnings Revaluation Surplus

TZS. TZS.
000,000' 000,000'
Balance at 1 April 2015 3,369 356
Dividends declared (1,950)
Total comprehensive income for the year 468 418
Transfer from revaluation surplus to retained earnings 24 (24)
Balance at 31 March 2016 2,011 750
The following additional information is relevant:
i. During the year Messe issued both ordinary shares and redeemable preference shares for cash. The later
were issued at par.
ii. Investments classified as current assets are held for the short term and are readily convertible into stated
amounts of cash on demand.
iii. During the year, Messe sold plant and equipment with a carrying amount of TZS.840,500,000 for
TZS.900,000,000. Total depreciation charges for the year amounted to TZS.1,100,000,000. Plant costing
TZS.50,000,000 was purchased on credit. The amount is included within trade and other payables.
iv. Trade and other payables include accrued interest of TSZ.5,000,000 as at 31st March 2016 (2015:
TZS.10,000,000).
v. Intangibles relate to development costs capitalized in accordance with IAS 38: Intangible Assets. Costs
amounting to TZS.70,000,000 were capitalized during the year.
REQUIRED:
Prepare the Statement of Cash Flows for Messe Plc for the year ended 31st March 2016 in accordance with IAS 7:
Statement of Cash Flows.
Question 6. (CPA Ireland April 2017 Qn.5)

Falylk Ltd is involved in the manufacture of agricultural products and its financial statements are as follows:
2016 2015
€’000 €’000
Non-Current Assets
Property, Plant & Equipment (PPE) 5,120 3,940
Total Non-Current Assets 5,120 3,940
Current Assets
Inventories 1,380 1,220
Trade Receivables 780 680
Cash & Cash Equivalents 50 112
Total Current Assets 2,210 2,012
Equity & Liabilities

Equity
Share Capital 240 200
Share Premium 60 50
Retained Earnings 3,798 2,402
Revaluation Surplus 120 80
Long Term Loan 1,500 1,600
Total Non-Current Liabilities 1,500 1,600
Current Liabilities
Trade Payables 1,470 1,500
Bank Overdraft 32 60
Current Tax Payables 110 60
Total Current Liabilities 1,612 1,620
Total Equity & Liabilities 7,330 5,952
Notes:
(i) The company’s profit for the year before tax amounted to €1,476,000.
(ii) The company’s income tax expense for the year was €80,000.
(iii) The cost of Property, Plant & Equipment (PPE) at 1 January 2016 amounted to €4,860,000. The company’s
depreciation policy is to depreciate all assets at 20% straight line on cost from the date of purchase to the date of
sale. The additions to PPE occurred on 31 December 2016. On 1 July 2016, the company sold PPE which originally
had cost €1,000,000. On the date this PPE was sold, its carrying value was €600,000 and the firm made a loss on
the sale of the PPE of €40,000. The revaluation was performed on 31 December 2016.
(iv) The company’s finance cost for the year equals its cash payment of €92,000.
REQUIREMENT:
Prepare a Statement of Cash Flows for the year-ended 31 December 2016 for Falylk Ltd in accordance with IAS 7
Statement of Cash Flows. [Total: 20 Marks]
IAS 10 – Events after Reporting Period.

IAS 10, Events after the reporting period, provides guidance on accounting and disclosure of events after reporting
period.
Events occurring after the reporting period are those events, both favourable and unfavourable, that occur between
the end of the reporting period and the date on which the financial statements are authorised for issue.
Examples of events occurring after the reporting period:
 Theft of plant and equipment
 Amalgamation of companies
 Resignation of the CEO of the company
 Closure of one of the manufacturing facilities
 Significant purchase of shares of other companies
The conditions for events after the end of reporting period to apply are:
 The event may be either favourable or unfavourable (i.e. good or bad for the company)
 The event arises after the end of reporting period
 The event occurs between the end of reporting period and the date of authorisation of financial
statements for issue
Events after the reporting period
Types of Events after the reporting period.

i. Adjusting events
ii. Non-adjusting events
(i) Adjusting Events.

This are those that provide evidence of conditions that existed at the end of the reporting period. This events
necessitates adjustments to the figures in the financial statements.
Examples of adjusting events would be:

 The settlement of a court case after the reporting period confirms that the entity had a present obligation at
the end of reporting period.
 The bankruptcy/insolvency of a customer that occurs after the reporting period usually confirms that a loss
existed at the end of the reporting period on a trade receivable.
 Sale of inventory after the reporting period for less than its carrying value at the year end
 The determination after the reporting period of the cost of assets purchased, or the proceeds from assets
sold, before the end of reporting period.
 Evidence of permanent diminution in the value of long term investments prior to the year.
 Evidence of a permanent diminution in property value prior to the year end
 Amounts received or paid in respect of legal or insurance claims which were in negotiation at the year end
 Discovery of error or fraud which shows that the financial statements were incorrect
Example 1.
Sun Engineering was preparing its financial statements for 20X8. The company’s lathe machine is under repair. Its
carrying value in the books is Tshs175 million. While the financial statements are under preparation, on 27 January
20X9, the company is informed that the machine is irreparable and the scrap value is Tshs25 million.
Required:
Discuss how this would be dealt with in the books.
(ii) Non – adjusting events.

This are those events that are indicative of conditions that arose after the reporting period. This events should not be
adjusted in the financial statements. Instead they should be disclosed where the outcome of such events would
influence the economic decisions made by users of the financial statements, and the entity should provide details of
the nature of the event and an estimate of its financial effect, or state that such an estimate cannot be made.
Examples of the non – adjusting events.

 According to IAS 10, if an entity proposes or declares dividends to shareholders after the reporting period, the
entity shall not record those dividends as a liability in the financial statements. However, if dividends are
proposed and declared after the reporting period, but before the financial statements are approved for issue,
the dividends are to be disclosed in the notes to the financial statements.
 A major business combination or disposal of a subsidiary.
 Major purchases and disposals of assets.
 Destruction of a production facility by fire after the reporting period.
 Announcement of a plan to discontinue an operation.
 Announcement or commencement of implementation of a major restructuring and
 Major litigation arising from events occurring after the reporting period.
 Share transactions after the reporting period
Example 2
Sona Lights has prepared its financial statements for the period to 31 December 20X9. On 28 January 20Y0 (before
the authorisation of the financial statements), the directors declare dividends totalling Tshs2 million.
Required:
Explain whether this is an adjusting event or a non-adjusting event and mention the effect of this event in the financial
statements.
Disclosure of Non-Adjusting Events

If non-adjusting events after the reporting period are material, non-disclosure could influence the economic decisions
that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each
material category of non-adjusting event after the reporting period:
i. The nature of the event; and
ii. An estimate of its financial effect, or a statement that such an estimate cannot be made
Dividends
If an entity declares dividends to holders of equity instruments after the reporting period, the entity shall not recognise
those dividends as a liability at the end of the reporting period.
If dividends are declared after the reporting period but before the financial statements are authorised for issue, the
dividends are not recognised as a liability at the end of the reporting period because no obligation exists at that time.
Such dividends are disclosed in the notes in accordance with IAS 1 Presentation of Financial Statements.
Going Concern
An entity shall not prepare its financial statements on a going concern basis if management determines after the
reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but
to do so.
Deterioration in operating results and financial position after the reporting period may indicate a need to consider
whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate,
the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an
adjustment to the amounts recognised within the original basis of accounting
IAS 1 specifies required disclosures if:

i. The financial statements are not prepared on a going concern basis; or
ii. Management is aware of material uncertainties related to events or conditions that may cast significant doubt upon
the entity's ability to continue as a going concern. The events or conditions requiring disclosure may arise after the
reporting period.
REVIEW QUESTIONS.
Question 1 (NBAA NOV 2016 Qn.6)
In relation to IAS 10: Events after the Reporting Period
(a) (i) Explain the term ‘Events after the Reporting Period’, defining clearly the period within which
IAS 10 requires events to occur in order to be considered as such. (2 marks)
(ii) Distinguish clearly between “adjusting” and “non-adjusting” events, and explain the accounting
treatment and disclosures required in each case. (4 marks)
(b) It is now August 2016 and Hombolo plc is in process of finalizing its financial statements for the year ended 31 st
July 2016. The draft statements were completed on 15th August 2016, and the audit is currently going on. The financial
statements are expected to be approved by the board of directors on 15th September 2016. The matters (i) to (iv) below
have come to light during the audit.
i. The directors of Hombolo plc wish to propose on 15th September 2016 a dividend to be paid in November
2016. The amount of dividend will be TZS. 60,000,000.
ii. Some investments held by Hombolo plc at the reporting date have fallen significantly in value since the
reporting date due to a shock increase in interest rates by interest rate by the Central Bank on 10th August
2016. The effect of the fall in value is material to the company’s financial position.
iii. Hombolo plc has been sued by a client claiming breach of contract. The suit was filled early in 2016, but the
case was heard in August 2016. No provision has been made, as the directors expected they would win the
case. As required by IAS 37 (‘Provisions, Contingent Liabilities and Contingent Assets’) a disclosure was
made of the contingent liability in the draft financial statements. The outcome of the case, decided on 25th
August, was a judgement against Hombolo plc for a material sum in damages.
iv. On 5th August 2016, Hombolo Plc entered into an agreement to acquire another entity. The acquisition is
planned to take place on 15th October 2016.
REQUIRED:
Explain the accounting treatment and/or disclosures required as a result of the event after the reporting date.
(14 marks)
Question 2 (NBAA MAY 2017 Qn.6 (a)

Consider the following list of events that occurred between 31st December 2016 (reporting date) and 31st March 2017
(date of authorization of financial statement for issue) and decide which one you would classify as adjusting events
and which one are non-adjusting events. You should also state clearly the treatment that you proposing in each case.
i. The receipt of net proceeds of sales TZS.12,600,000 for inventory items whose net realizable value was
estimated (31st December 2016) at TZS.12,000,000 and cost was TZS.12,500,000.
ii. Proposed dividend made by the director’s board meeting on 31st January 2017, for a total of TZS.160,000,000.
iii. Enactment in February 2017 of a new customer protection law that requires the company to enhance
disclosures in labels on its products (including translating them to Kiswahili language). This, apart from
increasing labelling costs, makes labels costing the company TZS.14,000,000 useless.
iv. The declaration of bankruptcy for a debtor. An allowance of TZS.15,000,000 was set against his doubtful debt
at 31st December 2016. The total amount of receivable before the allowance was TZS.42,000,000 and as a
result of the bankruptcy declaration directors estimate that only TZS.12,000,000 will be recovered.
v. The chairman of the board of directors got appointed on 1st January 2017 as a member of parliament (by the
president). The appointment automatically requires him to relinquish her position as board member and chair.
Processes to fill her position in the board are estimated to cost TZS.15,000,000.
Your answer should be in the following format:
Item Classification Treatment

(i)
(ii)
(iii)
(iv)
(v)

IAS 10 Events After the Reporting Period sets out guidance for dealing with events which occur after the reporting date
but which may have implications for the financial statements up to the reporting date. Its provisions are consistent with
the Conceptual Framework for Financial Reporting and with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. It sets out some clear principles to assist preparers to determine when an event needs to be
accounted for in the period ending on the reporting date (adjusting event), and when it should be accounted for in the
subsequent period (non-adjusting event). In some cases detailed application guidance is also provided.
REQUIREMENT:
(a) Explain the term ‘Events after the Reporting Period’, defining clearly the period of time within which IAS 10 requires
events to occur in order to be considered as such (4 marks)
(b) Distinguish clearly between “adjusting” and “non-adjusting” events, and explain the accounting treatment and
disclosures required in each case. (4 marks)
(c) Henderson plc is in the process of finalising its financial statements for year ended 31 July 2014. The draft
statements were completed on 15 August 2014, and the audit is currently ongoing. The financial statements are
expected to be approved by the board of directors on 15 September 2014, and published on 20 September 2014. The
matters (i) to (iv) below have come to light during the audit and you are required to explain the accounting treatment
and/or disclosures required as a result of the event after the reporting date.
i. The directors of Henderson plc wish to propose a dividend to be paid in November 2014. No decision has yet
been taken on this proposal. (3 marks)
ii. Some investments held by Henderson plc at the reporting date have fallen significantly in value since the
reporting date due to a shock increase in interest rates by the Central Bank on 10 August 2014. The effect of
the fall in value is material to the company’s financial position.(3 marks)
iii. Henderson plc has been sued by a client claiming breach of contract. The suit was filed early in 2014, but the
case was heard in August 2014. No provision had been made, as the directors expected they would win the
case. As required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets disclosure was made of
the contingent liability in the draft financial statements. The outcome of the case, decided on 25 August, was
a judgement against Henderson plc for a material sum in damages.
(3 marks)
iv. On 5 August 2014, Henderson plc entered into an agreement to acquire another entity. The acquisition is
planned to close on 15 October 2014. (3 marks)
[Total: 20 MARKS]

IAS37 and IAS10 provides guidance on the accounting treatment of Provisions, Contingent Liabilities and
Contingent Assets and Events After the Reporting Period.
(a) In accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets, define a contingent asset and
explain how they should be treated in the financial statements. (4 marks)
(b) In accordance with IAS10 Events After the Reporting Period, distinguish between an ‘adjusting event’ and a ‘non-
adjusting event’. (4 marks)
(c) You have been approached by the Financial Controller of Severn PLC. You have been asked to provide some
advice in relation to the company’s draft financial statements for the year ended 31 March 2010. You should
assume that the Directors had agreed to sign the company’s financial statements on 2 June 2010.
1. At a board meeting of Severn PLC in March 2010, a decision was taken in principle to dispose of a subsidiary
company, Trent Ltd. This investment was valued in the statement of financial position of Severn PLC, at 31
March 2010, at €1,500,000. On 25 April, the management of Trent Ltd decided to buy the company for
€2,200,000.
2. Five hundred customers are bringing an action against Severn PLC for the supply of faulty goods. Severn
PLC’s solicitors have confirmed that in their opinion, 20% of the claims are defendable at no cost. The average
level of damages per successful claim is estimated at €2,000. A similar provision, amounting to €600,000 was
in place at 31 March 2009, and was disclosed in the statement of financial position at that date. €400,000 was
paid out for such claims during the year ended 31 March 2010.
3. On 28 April 2010, €150,000 was paid to John Waldon as compensation for his removal as HR Director. Mr.
Waldon had been dismissed by a majority vote at a board meeting in March 2010. The reasons for his
dismissal were in relation to professional misconduct.
4. Severn PLC has renewed the unlimited guarantee given in respect of the bank overdraft of a company in
which it holds significant investment. The company’s overdraft amounted to €450,000 at 31 March 2010 and
it has net assets of €1.5 million.
5. Materials used in the production of one of the company’s key products were included in year-end inventory at
a cost of €105,000. In May 2010, the auditor’s indicated that the materials could have been purchased for
€60,000 in April 2010, due to a fall in world commodity prices.
REQUIREMENTS:
You are required to prepare a memorandum to the Board of Directors of Severn PLC in which you explain how each
of the above items should be reflected in the company’s financial statements for the year ended 31 March 2010.
(You may assume that each of the items is material). (12 marks)
[Total: 20 marks]
Question 5 (ACCA JUNE 2009 Qn. 4)

(a) The objective of IAS 10 Events after the Reporting Period is to prescribe the treatment of events that occur after an
entity’s reporting period has ended.
Required:
Define the period to which IAS 10 relates and distinguish between adjusting and non-adjusting events. (5 marks)
(b) Waxwork’s current year end is 31 March 2009. Its financial statements were authorised for issue by its directors on
6 May 2009 and the AGM (annual general meeting) will be held on 3 June 2009. The following matters have been
brought to your attention:
(i) On 12 April 2009 a fire completely destroyed the company’s largest warehouse and the inventory it
contained. The carrying amounts of the warehouse and the inventory were $10 million and $6 million
respectively. It appears that the company has not updated the value of its insurance cover and only
expects to be able to recover a maximum of $9 million from its insurers. Waxwork’s trading operations
have been severely disrupted since the fire and it expects large trading losses for some time to come.
(4 marks)
(ii) A single class of inventory held at another warehouse was valued at its cost of $460,000 at 31
March2009. In April 2009 70% of this inventory was sold for $280,000 on which Waxworks’ sales staff
earned a commission of 15% of the selling price. (3 marks)
(iii) On 18 May 2009 the government announced tax changes which have the effect of increasing Waxwork’s
deferred tax liability by $650,000 as at 31 March 2009. (3 marks)
Required:
Explain the required treatment of the items (i) to (iii) by Waxwork in its financial statements for the year ended 31 March
2009.
Note: assume all items are material and are independent of each other. (10 marks as indicated)
(15 marks)
Question 6 (NBAA Nov 2015 Qn. 5 – C1)

a) IAS 10 postulate about events after reporting date.
REQUIRED:
Define “event after reporting date”
b) In the following scenarios, identify after reporting date events/transactions, indicating whether they are adjusting
or non-adjusting and give the reasons.
i. Entity A exports a certain component to a manufacturer based in a foreign country. The foreign
manufacturer uses this component supplied by Entity A in order to produce widgets. At the end of its
reporting period (June 2014), entity A has unusual high levels of stock due lower-than-expected orders
from its foreign manufacturer. On August 15, 2014, before the financial statements of an entity A are
authorized for issue, the government of the country where the manufacture is based announces that the
components supplied by entity A will only be procured within the country of the manufacturer (that is, the
components will not be imported but instead will be acquired locally). Entity A not have any alternative
markets for the components.
ii. A corporation with financial year end of June 30 has an amount of TZS.20,000 million that is due from
Debtor A as of June 30 2014. The corporation provided for impairment in June of TZS.5,000 million
against the gross value of TZS.20,000 million due from Debtor A. on July 31 2014 before the financial
statements were authorized for issue. Debtor A goes bankrupt and files for protections from its creditors.
iii. Shortly after its financial year end of June 30, 2014, but before the financial statements are authorized
for issue, entity B’s inventory was destroyed by a fire which resulted in a loss of TZS.2,000 million.
iv. A corporation with a financial year end of December 31, 2014 has a foreign long terms liability that is not
covered by a foreign exchange contract. The foreign currency amount was converted at the closing rate
on December 31, 2014, and is shown in the accounting records at the Local Currency (LC) 2.0 million.
The local currency dropped significantly against the TZS on February 27, 2015, resulting in a loss of LC
4.0 million. On this date, management decided to hedge further exposure by taking out a foreign currency
forward-exchange contract, which limited the eventually liability to LC 6.0 million. If this situation were to
apply at the end of the reporting period, it would result in the corporation’s liabilities exceeding the fair
value of its assets.
Question 7 (NBAA Nov 2015 Qn. 4 – C1)

You are the audit manager in Ruto, a Certified Public Accountant in Public Practice. During the audit of Rambo ltd
(‘Rambo’), you are approached by the financial accountant who is having difficulty understanding on how to account
for several matters. He has asked you to provide him with some notes in respect of the following items, so that he can
discuss them with finance director. The company’s year end is 31st arch and the annual general meeting is held in July
each year.
i. At 31st March 2013 a provision of TZS.100,000,000 was made for the cost of court case against the company.
During April 2013 an ‘out of court’ settlement of TZS.125,000,000 was agreed. Legal fees of TZS.10,000,000
not provided for, were incurred.
ii. On 3rd March 2013 the finance director and production director signed a contract for the purchase of new
machinery costing TZS.1,000,000 to be delivered and paid for on 30th June 2013. The machinery will be put
into operation immediately on delivery.
iii. During March 2013 Rambo began legal proceedings against another company whose website was using
domain name registered by Rambo. On 28th March 2013 Rambo’s solicitors filed a claim for damages,
amounting TZS.100,000,000. The case is expected to take several months to settle and the outcome is
uncertain at this stage. Legal fees of TZS.20,000,000 are expected. No provision has been made for these
fees.
iv. On 30th April 2013 the board of directors proposed a final dividend of TZS.1000 per ordinary share paid for
the year ended 31st March 2013, subject to approval at the shareholders’ annual general meeting.
v. At the shareholders’ annual general meeting the board of directors will announce the amalgamation of the
two sites on 31st October 2013. This will result in redundancy costs of TZS.250,000,000 and annual savings
of TZS.500,000,000.
vi. During the year Rambo, sold goods with a warranty under which customers are covered for the cost of repairs
of any defects that become apparent within 12 months after purchase. At 31st March 2013 TZS.1,000,000 of
the goods had been sold and none had been returned for repair.
REQUIRED:
Prepare notes for the financial accountant settling out and explaining how each of the above matters should
be accounted for and disclosed in the financial statements of Rambo for the year ended 31st March 2013.
Question 8 (NBAA May 2016 Qn. 4 – C1)

UTANI ltd is a regional brewer in East Africa. Suppose it is August 2015 and the accounts for the year to 30th June
2015 are being finalized. The following items are outstanding:
a) A customer bought a bottle of UTANI Best beer in his local pub during March 2015 and become ill. He is suing
the pub and UTANI. The case has not yet come to court although the company’s lawyers believe that they
will win the case, the directors offered an out of court settlement of TZS.100,000,000 as a goodwill gesture.
Under the terms of the offer each side would meet their own costs which in the case of UTANI the cost is TZS.
15,000,000 up to 30th June 2015 all of which had been paid by the year end. The customer has not yet formally
accepted the offer.
b) A consignment of hops costing TZS.95,000,000 was delivered to the brewery on 24th June 2015. The supplier
has not issued an invoice to date.
c) A board meeting last week the directors approved a proposed dividend of 10 TZS per ordinary share as the
final dividend for the year to 30th June 2015. The company has 5,000,000 ordinary shares in issue.
d) Bottles for the company’s beers are supplied by Chupa Ltd. Five years ago, in order to secure supplies, UTANI
gave a guarantee over a TZS.300,000,000; a 10 years bank loan taken out by Chupa Ltd. The guarantee is
still in force. Chupa Ltd’s latest accounts indicate net assets of TZS. 680,000,000 and it has not breached any
of the terms and conditions of the loan.
e) During April 2015 the company took a delivery of Malt from Maltings Ltd (“Malting”) at cost of
TZS.140,000,000. The malt turned out to be bad leading to the loss of three batches of beer which cost
TZS.410,000,000 in total.
In addition UTANI estimates a lost profit of TZS.125,000,000 on the beer business.
Maltings issued a credit note for TZS.140,000,000 to UTANI in June 2015 which was duly processed. UTANI
raised an insurance claim for the remaining costs and loss of profit in May 2015. At today’s date no amount
has been paid by the insurance company although it has accepted in writing the claim for costs. The
company’s insurance broker is confident, but not certain, that the loss of profits claim will be settled.
f) Due to a faulty valve, a batch of beer was inadvertently discharged into a river instead of the bottling plant in
November 2014. The company paid a fine of TZS.20,000,000 in March 2015 for an illegal discharge. The
company is also responsible for rectifying any environmental damage. Up to 30th June 2015 TZS.200,000,000
had been paid. The extent of further expenditure is uncertain although it is estimated to be between
TZS.100,000,000 and TZS.140,000,000.
REQUIRED:
Assess and advice how each of the above scenarios should be treated in the accounts of UTANI for the year
to 30th June 2015.
Question 9. (CPA IRELAND August 2017 Qn. 3 – Financial Accounting)

The financial controller of Octwon Limited, (a technology company) has asked you, a trainee financial accountant within
the company, for advice on how to account for various transactions that occurred after the financial year end date of
31 December 2016.
REQUIREMENT:
Octwon Limited has asked you to prepare a report which addresses the following:
Part A:
(a) Outline the possible reasons why a company would not prepare its financial statements on a going concern basis.
(3 marks)
(b) In accordance with IAS 10 – Events after the Reporting Period, describe what is meant by ‘event after the reporting
period’. (3 marks)
(c) If a company receives information after the reporting period about conditions that existed at the end of the reporting
period, explain how this information should be dealt with in the financial statements. (2 marks)
Part B:
The following issues have arisen in Octwon Limited during the financial year ended 31 December 2016
(i) The company had an investment valued at €200,000 in its financial statements for the year ended 31 December
2016. Due to fears over Brexit, the investment reduced in value to €180,000 by 10 January 2017.
(ii) It purchased a motor vehicle on 30 December 2016 and paid a non-refundable deposit of €5,000 on that date. It
also wrote a cheque on that date for the balance of €20,000 which it posted to the seller. The seller received and
cashed the cheque on 3 January 2017.
(iii) Octwon Limited was sued by a customer who was unhappy with the quality of product delivered to it in June 2016.
The court case was heard in late October 2016 but it was not until 8 January 2017 that the judge ruled in favour
of Octwon Limited and awarded it legal costs of €20,000 to cover its solicitor’s fees. The legal costs were paid by
its customer to Octwon Limited on 12 January 2017. Octwon Limited was unsure of winning the case and it had
previously included a provision in its financial statements for the year ended 31 December 2016 for compensation
and legal costs as follows:
€ €
Dr Legal Fees – Administrative Expenses 25,000
Dr Cost of Sales 35,000
Cr Provisions – Current Liabilities 60,000
(iv) One of Octwon’s Limited customers was declared bankrupt on 5 January 2017, owing €4,000 to Octwon Limited.
REQUIREMENT:
Advise the management of Octwon Limited on the proper accounting treatment of each of the above issues so as to
ensure that the financial statements are prepared in accordance with IFRS. (12 marks)
[Total: 20 Marks]
Question (CPA Ireland April 2017 Qn.4)

IAS 10 Events After the Reporting Period sets out guidance for dealing with events which occur after the reporting date
but which may have implications for the financial statements up to the reporting date. It distinguishes between adjusting
events and non-adjusting events.
Geordie Plc is in the process of finalising its financial statements for year ended 31 March 2017. The draft statements
were completed on 14 April 2017, and the audit is currently in progress. The financial statements are expected to be
approved by the board of directors on 15 May 2017, and published on 20 May 2017. The following matters have come
to light during the audit and your advice is requested. No adjustment has yet been made for any of the following.
(i) Closing inventory at 31 March 2017 includes 100 items carried at cost €5,000 each. New safety regulations were
announced on 5 April 2017 with immediate effect. The items of inventory do not comply with these regulations. As
a result, the net realisable value of the inventory is only €4,500 each.
(ii) An investment in unquoted equity instruments was held by Geordie Plc at 31 March 2017 at an amount of €3.5
million. This was its fair value on 30 September 2016, the most recent reporting date. Due to the unavailability of
professional valuers, an updated fair value was not available until 15 April 2017. On this date, the valuer provided
an estimate of fair value of €2.8 million.
(iii) Geordie Plc was being sued on 31 March 2017. At that date the case had been heard, but the judgment was only
handed down on 20 April 2017. The outcome was that Geordie was found liable for damages and costs totalling
€3.1 million. On 21 April 2017, Geordie filed a claim with its insurers and on 28 April 2017, was notified that the
insurer would cover €2.6 million of the loss.
(iv) On 30 March 2017, Geordie paid €500 for a raffle ticket to support a local charity. On 3 April 2017, the company
was notified that it had won first prize of €100,000. The draw took place on 31 March 2017.
REQUIREMENT:
(a) Discuss the concepts of “adjusting” and “non-adjusting” events as defined by IAS 10 Events After the Reporting
Period, and explain the accounting treatment and disclosures required in each case. (8 marks)
(b) In each case (i) to (iv) above, prepare a briefing note advising on the accounting treatment and / or disclosures
required as a result of the event(s) after the reporting date. (12 marks)
[Total: 20 Marks]
IAS 17 – Leases
 What is lease?
Lease is an agreement whereby the lessor conveys to the lessee in return for rent the right to use an asset for an
agreed period of time.
 Essential characteristics of a lease.

1. The existence of a lessor: the lessor is the person who transfers the right to use the asset for an agreed period of
time to another person.
2. The existence of a lessee: the lessee is the person who acquires the right to use the asset for an agreed period
of time from another person.
3. Transfer of the right to use an asset: the lessor transfers the right to use an asset to the lessee. Normally the
possession of the leased asset is handed over to the lessee. However, handing over the asset physically is not
compulsory, what is handed over is the right to use an asset.
4. Lease payments are the instalments which the lessee pays to the lessor in return for the right to use an asset.
5. Minimum lease payments: This are payments over the lease term that the lessee is or can be required to make,
excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:
i. For a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
ii. For a lessor, any residual value guaranteed to the lessor by:
a) The lessee;
b) A party related to the lessee; or
c) A third party unrelated to the lessor that is financially capable of discharging the obligations under the
guarantee.
 Other important related terms

 The economic life of an asset
Economic life is either:
(a) The period over which an asset is expected to be economically usable by one or more users; or
(b) The number of production or similar units expected to be obtained from the asset by one or more users.
 The degree / extent of transfer of risks and rewards which are incidental to the ownership of leased
asset by the lessor to the lessee.
(a) Risks incidental to ownership include
(i) The possibilities of losses from idle capacity or technological obsolescence
(ii) Variations in return because of changing economic conditions
(b) Rewards incidental to ownership include:

(i) The expectation of profitable operation over the asset’s economic life
(ii) Gain from appreciation in value
(iii) Realisation of residual value
When the indicators are mixed the management of the reporting company has to use its discretion in deciding the
degree / extent of transfer of risks and rewards which are incidental to the ownership of leased asset by the lessor to
the lessee.
 The lease term

The lease term is the non-cancellable period for which the lessee has contracted to lease the asset, together with any
further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when
at the inception of the lease it is reasonably certain that the lessee will exercise the option.
 Interest rate implicit in the lease.
The discount rate that, at the inception of the lease, causes the aggregate present value of:
(a) The minimum lease payments, and
(b) The unguaranteed residual value
To be equal to the sum of:
(a) The fair value of the leased asset, and
(b) Any initial direct costs.
 Classification of lease
i. Finance lese: A lease that transfers substantially all the risks and rewards incident to ownership of an asset.
Title may or may not eventually be transferred.
ii. Operating lease: A lease other than a finance lease.
 Determining a lease type

Determining a lease type requires determining whether the risks and rewards incidental to ownership of the leased
asset remain with the lessor or are transferred to the lessee. Determining a lease type is important because the
accounting treatment required are different for each lease type.
While determining a lease type, it becomes essential to consider the substance of the transaction rather than the form
of the contract. A similar-sounding lease gets classified differently when we consider the substance of the transaction
rather than the strict legal form of the contract.
 A lease is normally classified as a finance lease when any one or all of the following situations arise:
i. The lease transfers ownership of the asset to the lessee by the end of the lease term.
ii. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the
fair value of the asset, at the date the option becomes exercisable. It has to be reasonably certain at the
inception of the lease that the option will be exercised.
iii. The lease term is for the major part of the economic life of the asset, even if the title is not transferred.
iv. At the inception of the lease the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset. The standard does not define the term ‘substantial’.
However, if the minimum lease payment is more than 90% of the fair value of the leased asset, it can be said
to be substantial.
v. The leased assets are of such a specialised nature that only the lessee can use them without major
modifications.
vi. If the lessee can cancel the lease, then the lessor’s losses associated with the cancellation are borne by the
lessee.
vii. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee.
viii. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than
market rent.
Note: If none of the above conditions are fulfilled then it is an operating lease.
Example 1.
1. Alpha Co takes on lease a special camera from Beta Co at an annual lease rent of Tshs6 million. Alpha Co is to
make minimum lease payments for 5 years. The present value of annual lease rents is Tshs23.956 million. The
fair value of the camera is Tshs25 million.
2. Fair Co acquired a building from Deal Co on lease for 20 years. In the lease agreement itself, it is decided that the
sale proceeds of the building at the end of the lease period will remain with Deal Co.
Required:
Determine whether this lease is a finance lease or an operating lease.
 Land and buildings

Under IAS 17 the land and buildings elements of a lease of land and buildings are considered separately for the
purposes of lease classification.
As land has an indefinite economic life, the practice up to 2009 was to treat it as an operating lease unless title was
expected to pass at the end of the lease term. The IASB reconsidered this and decided that in substance, for instance
in a long lease of land and buildings, the risks and rewards of ownership of the land do pass to the lessee even if there
is no transfer of title. So a lease of land can be treated as a finance lease if it meets the existing criteria, specifically if
the risks and rewards of ownership can be considered to have been transferred. This would be the case if the present
value of the minimum lease payments in respect of the land element amounts to 'substantially all' of the fair value of
the land.
A lease of buildings will be treated as a finance lease if it satisfies the requirements above. The minimum lease
payments are allocated between the land and buildings elements in proportion to the relative fair values of the leasehold
interests in the land and the buildings. If the value of the land is immaterial, classification will be according to the
buildings.
If payments cannot be reliably allocated, the entire lease is classified as a finance lease, unless both elements are
operating leases, in which case the entire lease is classified as an operating lease.
 Accounting treatment of operating leases in the books of the lessor and the lessee.
i. In the book of lessee
The standard (IAS 17) states that lease rental payments under an operating lease shall be recognised as an
expense on a straight line basis over the lease term unless another systematic basis is more representative of the
time pattern of the user’s benefit.
Journal entry.
Dr Lease rents paid X
Cr Bank X
Being lease rental paid
ii. In the book of lessor

The leased asset continues to be reflected as a non-current asset in the financial statements of the lessor and is
depreciated in the normal manner. The rentals received are credited in the statement of profit or loss of lessor
Journal entry
Dr Bank X
Cr Lease rents received X
Being lease rental received
 Accounting treatment of financing leases in the books of the lessor and the lessee.
i. In the books of lessee
IAS 17 states that assets acquired by way of finance leases are to be accounted for in the books of the lessee in the
same manner as credit purchases are recorded.
1. Recognition of an asset and a liability
The journal entry to capitalise the asset is:
Dr Asset X
Cr Lessor X
Being asset acquired by a finance lease
The amount to be recorded is the lower of the fair value of the asset and the present value of the minimum lease
payments.
2. Depreciating an asset
The depreciation policy for depreciable leased assets should be consistent with the normal depreciation policy
of the lessee for similar assets (according to the requirements of IAS 16 and IAS 38).
Note: If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset
shall be fully depreciated over the shorter of:
i. The life of the lease; and
ii. The useful life of the asset.
3. Accounting for repayment

The journal entries to record the lease rental payment are
For the lease rental repayment (inclusive of both the interest and capital repayment portion):
Dr Lessor X
Cr Cash/bank X
Being the total rental payment paid to the lessor
For recording the interest

Dr Lease interest X
Cr Lessor X
Being the interest accrued outstanding on the total lease amount
In the books of lessor

IAS 17 requires the leased asset to be recognised in the lessor’s statement of financial position as a receivable and
not as a non-current asset. The lessor will recognise receivables and derecognise the leased asset.
The journal entry for recording this transaction is:

Dr Receivable (lessee) X
Cr Non-current asset X
Being asset transferred by a finance lease
The amount to be recognised is the present value of minimum lease payments. The journal entries to record the
lease instalments received are:
For the lease instalment received (inclusive of both the interest and capital repayment portion)
Dr Cash/bank X
Cr Lessee X
Being the total lease instalment received from the lessee
For recording the interest
Dr Lessee X
Cr Lease interests received X
Being the interest received on the total lease amount outstanding
(The lease rental payment is split into the capital portion and the interest portion)
 Determination of the interest portion and the capital portion of the lease instalment
In order to account for the finance lease the lease rental has to be split into
 The interest portion; and
 The capital portion
The two methods which can be used for apportioning the lease rental payments are:
i. The actuarial method; and
ii. The sum-of-digits method
i. The actuarial method

Steps.
i. At the inception of the lease (when the lease starts), the lessor is credited with an amount equal to the fair
value of the asset.
ii. Any deposit paid to the lessor is then deducted from this amount.
iii. The amount of capital repaid is deducted from the credit balance of the lessor’s account every time a lease
rental is paid.
iv. The interest portion is calculated by applying the rate of interest to the balance in lessor’s account each year
(reducing balance method).
The interest rate used is called the interest rate implicit in the lease. This rate spreads income derived from the lease
over the period of the lease. This interest rate will be mentioned in the question.
As the reducing balance method is followed to calculate the amount of interest, the interest is highest in the early part
of the lease term, and gradually reduces as capital is repaid.
ii. The sum-of-digits method

i. A digit is assigned to each interest bearing instalment.
If there is a down payment followed by 3 instalments then the number of interest bearing instalments is 3. The
number of interest bearing instalments is not 4 - there is no interest inherent in a down payment.
ii. The last instalment is assigned the digit 1, the second last one 2, and so on.
iii. Add all the digits, using the formula:
Sum of digits = n (n+1) / 2,
Where n is the number assigned to the interest bearing instalments
iv. Calculate the interest portion included in each interest bearing instalment by using the formula:
Interest portion = Total interest (to be paid or received) over lease term x digit applicable to the instalment
Sum of digits
Example 2.
Right Ltd leases an item of a plant from Left Ltd on 1 January 20X5. Tshs12.5 million is payable immediately, followed
by four annual payments starting on 1 January 20X6. The agreed fair value of the plant is Tshs44.868 million and the
interest rate implicit in the lease is 20% per annum.
Right Ltd has the right to continue to use the plant after the end of the five-year period for as long as it wishes to without
further payment. The expected useful life of the plant is ten years, at the end of which the residual value is estimated
to be nil.
Required:
Split the lease rental payments into the interest and capital portions by using both the actuarial method and sum-of-
digit method.
Example 3
Play Inc has leased land and buildings to Clay Inc. The terms of the lease say that:
The title of land will not be transferred to Clay Inc.
Clay Inc has to pay an annual lease rent of Tshs50 million for a minimum number of 10 years. The fair value of the
building is Tshs480 million.
Required:
Determine the lease type.
Example 4
Fox Enterprises bought four helicopters at a price of Tshs20 million each as a part of business expansion. Fox
Enterprises entered into a finance lease agreement with Monk Flights Co for the same on 1 January 20X5. The
agreement stated that Fox Enterprises would pay a deposit of Tshs10 million on 1 January 20X5, annual instalments
on 31 December 20X5 and 31 December 20X6 of Tshs25 million each and a final instalment on 31
December 20X7 of Tshs79.04 million.
Interest was charged at 30% on the outstanding balance at 1 January and paid on 31 December each year. Fox
Enterprises writes off its vehicles over a period of three years using the straight-line method. The value of scrap of the
vehicle is assumed to be Tshs1.5 million each.
Required: Prepare
(i) The relevant accounts to show how the above transactions would be recorded in the books of Fox
Enterprises and;
(ii) Extracts from the statement of profit or loss and statement of financial position for the years ending 31
December 20X5, 20X6, 20X7.
Example 5.
On 1 October, 20X5 Red Inc leased one of its machines to White Inc for 3 years, at an annual lease rental of Tshs4
million. The estimated economic life of the machine was 10 years. Show the accounting entries in the books of White
Inc for these transactions.
REVIEW QUESTIONS.
IAS 17 Leases sets out the accounting treatment and the disclosure requirements for leases.
REQUIREMENTS:
(a) Distinguish between the characteristics of a finance and an operating lease. (5 Marks)
(b) Patrick PLC prepares its financial statements for the year ended 31 October 2008. On 1st November 2005, they
entered into a lease agreement for an item of plant on the following terms:
Term of lease 5 years
Rental The rental is €4,000 per annum payable at the start of the year.
Original cost price of plant €14,800
The interest rate implicit in the agreement is 18% per annum. Patrick PLC has the option to acquire the plant for €5 at
the end of the contract. Patrick PLC is responsible for all the repairs and maintenance of the plant. The useful economic
life of the plant is expected to be six years with a nil residual value and the present value of the minimum lease
payments is €15,000.
i. Show the entries that should be made in the income statement and the Balance Sheet for the year ended 31
October 2008 using the actuarial method. (7 Marks)
ii. Show the relevant notes to the financial statements for the year ended 31 October 2008 (5 Marks)
(c) Mile PLC is a manufacturing company and has entered a lease agreement on 1 January 2008 under the following
terms:
Term of lease 3 years
Estimated useful life of machine 9 years
Age of machine at start of lease 2 years
Purchase price of new machine €86,000
Annual payments €8,000
How would the above lease be accounted for and disclosed in the financial statements for the year ending 31 December
2008? (3 Marks)
[TOTAL: 20 MARKS]

IAS 17 Leases sets out the accounting treatment for leases.
Blakemore Ltd., which uses the straight line method for depreciating assets, entered into a three-year leasing contract
for a new machine on 1 January 2010 with Holborn Finance Company. The lease contract includes the following
information:
Fair value of leased machine €25,390
Present value of minimum lease payments €25,380
Lease rentals payable six monthly in arrears €5,000
Six monthly implicit rate of interest 5%
The machine has an expected useful life of four years and a residual value of nil.
Blakemore Ltd. is responsible for the insurance and maintenance of the machine.
In addition to the above lease contract, Blakemore Ltd. also entered into a contract on 1 January 2010, to lease a piece
of equipment from Angel Ltd. at a cost of €250 per month payable in advance and terminable by either party. The cash
price of this type of office equipment is €8,000 and its estimated useful life is four years.
REQUIRED:
Prepare a memorandum for the finance director of Blakemore Ltd. which:
(a) With reference to IAS17 Leases: explains the difference between a finance lease and an operating lease; describes
the accounting treatments; and discusses briefly the merits of capitalising a finance lease in the financial statements.
(5 marks)
(b) Shows the effect of both leases on the Statement of Comprehensive Income and Statement of Financial Position
for each of the years 31 December 2010 to 31 December 2012. (15 marks)
[Total: 20 marks]

You are employed as the financial accountant for Moore plc, an Irish manufacturing company located in Donegal. The
financial controller, Paul Clancy, has asked you to advise him on matters relating to the reporting and disclosure of
lease transactions in the financial statements for the year ending 31 March 2013. You have recently returned from a
one-day training course on IAS 17 Leases, and are keen to show Paul how much you have earned. Moore plc has
entered into the following lease contracts:
i. Moore plc leased a new piece of equipment from Sinnott plc for three years commencing on 30 September
2012. The fair value of the equipment is €70,000. A deposit of €4,000 was payable on 30 September 2012
followed by six half-yearly payments of €13,500, payable in arrears, and commencing on 31 March 2013.
Moore plc allocates finance charges on a sum of the digits basis.
ii. On 30 September 2012, Moore plc entered into a two-year agreement to lease a new high-performance
machine for a lease payment of €1,500 per month in arrears. A non-refundable deposit of €5,000 has to be
paid on order. The machine has an expected useful life of five years, and the lessor remains liable for
maintenance.
iii. Moore plc entered into a 50-year lease for land and buildings on 30 September 2012. Moore plc will have to
make lease payments of €60,000 per annum in advance. The fair value of the land and buildings is €800,000
of which €80,000 relates to land. The building has a 50-year useful economic life.
REQUIREMENT:
Prepare a memorandum for the financial controller in which you:
(a) Describe how IAS 17 defines a finance lease and list the main characteristics which would normally lead to a lease
being classified as a finance lease. (4 marks)
(b) Prepare the financial statement extracts and supporting disclosure notes that show how the lease transaction in (i)
above should be presented in the financial statements of Moore plc for the year ended 31 December 2012.
(10 Marks)
(c) Advise, with reasons, how leases (ii) and (iii) above should be dealt with in the financial statements for the year
ended 31 December 2012. Disclosure notes are not required. (6 marks)
[Total: 20 MARKS]
Question 4
Sugar Co leased a machine from Spice Co. The terms of the lease are as follows:
Inception of lease 1 January 20X1

Lease term 4 years at $78,864 per annum payable in arrears
Present value of minimum lease payments $250,000
Useful life of asset 4 years
Required
(a) Calculate the interest rate implicit in the lease, using the table below.
This table shows the present value of $1 per annum, receivable or payable at the end of each year for n years.
Years
Interest rates
(n)
6% 8% 10%
1 0.943 0.926 0.909
2 1.833 1.783 1.736
3 2.673 2.577 2.487
4 3.465 3.312 3.170
5 4.212 3.993 3.791
(b) Prepare the extracts from the financial statements of Sugar Co for the year ended 31 December 20X1. Notes to
the accounts are not required.
IAS 37 - Provisions, contingent liabilities and contingent assets

 Objective
IAS 37 Provisions, contingent liabilities and contingent assets aims to ensure that appropriate recognition criteria and
measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and
amount.
1. Provisions.
 Definition of key terms
A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in
an outflow from the entity of resources embodying economic benefits.
 Under IAS 37 a provision should be recognised when:

i. An entity has a present obligation, legal or constructive
ii. It is probable that a transfer of resources embodying economic benefits will be required to settle it.
iii. A reliable estimate can be made of its amount
 When provisions may not be made?

If there is a situation where even one condition of the recognition criteria is not fulfilled, then it does not constitute
a liability which has to be provided for.
Example 1.
Skylark Cosmetics manufactures a brand of fairness creams. It promotes its sales by guaranteeing that if the benefits
of the cream are not evident within seven days of use then the money paid for the purchase will be returned to the
buyer, no questions asked, provided the customer returns the goods within one month of purchase.
Required:
Determine whether this liability has to be provided for or not.
 Accounting for provisions

1. The journal entry to account for a provision is:
Dr Expense (Statement of profit or loss) X
Cr Provision for expense (Statement of financial position) X
Being expense provided for
2. The journal entry to be made when actual payment is made is:

Dr Provision for expense (Statement of financial position) X
Cr Bank X
Being payment made for an expense provided for earlier
Example 2.
Samson Electronics needs to make a provision for warranty claims in the following way:
At the end of financial year one Tshs 5,000,000
At the end of financial year two Tshs 6,000,000
It settles warranty claims worth Tshs 4,400,000 in year two.

Required:
Set out the journal entries that it should make in respect of these transactions
 Measurement of provisions
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present
obligation at the end of the reporting period.
The best estimate of the expenditure required to settle the present obligation is determined by any or all of the following
ways together:
i. The judgement of the management of the entity;
ii. Experience of similar transactions;
iii. Reports from independent experts.
The standard provides guidance relating to measurement of provisions which are on account of uncertainties.
The best estimate of the provisions can be determined as follows:
(i) Expected value: for the measurement of a large population of items
(ii) Most likely outcome: for the measurement of a single obligation
Example 3
Parker Co sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing
defect that becomes apparent within the first six months of purchase. The company's past experience and future
expectations indicate the following pattern of likely repairs.
Cost of repairs if all items suffered
from this defects $m
% of goods sold Defects
75 None 0
20 Minor 1.0
5 Major 4.0
Required:
What is the provision required?
 Future events
Future events which are reasonably expected to occur (eg new legislation, changes in technology) may affect the
amount required to settle the entity's obligation and should be taken into account.
 Expected disposal of assets

Gains from the expected disposal of assets should not be taken into account in measuring a provision.
 Reimbursements
Some or all of the expenditure needed to settle a provision may be expected to be recovered from a third party. If so,
the reimbursement should be recognised only when it is virtually certain that reimbursement will be received if the entity
settles the obligation.
− The reimbursement should be treated as a separate asset, and the amount recognised should not be greater
than the provision itself.
− The provision and the amount recognised for reimbursement may be netted off in profit or loss.
 Changes in provisions
Provisions should be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If
it is no longer probable that a transfer of resources will be required to settle the obligation, the provision should be
reversed.
 Use of provisions
A provision should be used only for expenditures for which the provision was originally recognised.
Setting expenditures against a provision that was originally recognised for another purpose would conceal the impact
of two different events.
 Future operating losses

Provisions should not be recognised for future operating losses. They do not meet the definition of a liability and
the general recognition criteria set out in the standard.
 Onerous contracts
If an entity has a contract that is onerous, the present obligation under the contract should be recognized and measured
as a provision. An example might be vacant leasehold property. The entity holding the lease is under an obligation to
maintain the property but is receiving no income or benefit from it.
 Examples of possible provisions

(a) Warranties. These are argued to be genuine provisions as on past experience it is probable, ie more likely than
not, that some claims will emerge. The provision must be estimated, however, on the basis of the class as a whole and
not on individual claims. There is a clear legal obligation in this case.
(b) Major repairs. In the past it has been quite popular for companies to provide for expenditure on a major overhaul
to be accrued gradually over the intervening years between overhauls. Under IAS 37 this is no longer possible as IAS
37 would argue that this is a mere intention to carry out repairs, not an obligation. The entity can always sell the asset
in the meantime. The only solution is to treat major assets such as aircraft, ships, furnaces etc as a series of smaller
assets where each part is depreciated over shorter lives. Thus any major overhaul may be argued to be replacement
and therefore capital rather than revenue expenditure.
(c) Self insurance. A number of companies have created a provision for self insurance based on the expected cost of
making good fire damage etc instead of paying premiums to an insurance company. Under IAS 37 this provision is no
longer justifiable as the entity has no obligation until a fire or accident occurs. No obligation exists until that time.
(d) Environmental contamination. If the company has an environmental policy such that other parties would expect
the company to clean up any contamination or if the company has broken current environmental legislation then a
provision for environmental damage must be made.
(e) Decommissioning or abandonment costs. When an oil company initially purchases an oilfield it is put under a
legal obligation to decommission the site at the end of its life. Prior to IAS 37 most oil companies set up the provision
gradually over the life of the field so that no one year would be unduly burdened with the cost.
IAS 37, however, insists that a legal obligation exists on the initial expenditure on the field and therefore a liability exists
immediately. This would appear to result in a large charge to profit and loss in the first year of operation of the field.
However, the IAS takes the view that the cost of purchasing the field in the first place is not only the cost of the field
itself but also the costs of putting it right again. Thus all the costs of decommissioning may be capitalised.
(f) Restructuring.
 Provisions for restructuring

IAS 37 defines a restructuring as:
A programme that is planned and is controlled by management and materially changes one of two things.
− The scope of a business undertaken by an entity
− The manner in which that business is conducted
Examples of events that may fall under the definition of restructuring.

 The sale or termination of a line of business
 The closure of business locations in a country or region or the relocation of business activities from one
country region to another
 Changes in management structure, for example, the elimination of a layer of management
 Fundamental reorganisations that have a material effect on the nature and focus of the entity's operations
The question is whether or not an entity has an obligation – legal or constructive – at the end of the reporting period.
For this to be the case:
 An entity must have a detailed formal plan for the restructuring
 It must have raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan or announcing its main features to those affected by it
Note: A mere management decision is not normally sufficient. Management decisions may sometimes trigger
recognition, but only if earlier events such as negotiations with employee representatives and other interested parties
have been concluded subject only to management approval.
Where the restructuring involves the sale of an operation then IAS 37 states that no obligation arises until the entity
has entered into a binding sale agreement. This is because until this has occurred the entity will be able to change
its mind and withdraw from the sale even if its intentions have been announced publicly.
Costs to be included within a restructuring provision

The IAS states that a restructuring provision should include only the direct expenditures arising from the restructuring,
which are those that are both:
− Necessarily entailed by the restructuring; and
− Not associated with the ongoing activities of the entity.
The following costs should specifically not be included within a restructuring provision.
− Retraining or relocating continuing staff
− Marketing
− Investment in new systems and distribution networks
 Disclosure
Disclosures for provisions fall into two parts.
− Disclosure of details of the change in carrying value of a provision from the beginning to the end of the
year
− Disclosure of the background to the making of the provision and the uncertainties affecting its outcome
2. Contingent liability
An entity should not recognise a contingent asset or liability, but they should be disclosed.
IAS 37 defines a contingent liability as:

 A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity;
or
 A present obligation that arises from past events but is not recognised because:
− It is not probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; or
− The amount of the obligation cannot be measured with sufficient reliability.
Situations for contingent liability to occur

a) A possible obligation arises from past events and its existence will be confirmed only by the occurrence or
non-occurrence of one or more uncertain future events not wholly within the control of the entity.
b) A present obligation exists that arises from past events, but it cannot be recognised because:
i. It is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation or
ii. The amount of the obligation cannot be measured with sufficient reliability.
Example 4.
During the screening of a new movie, the theatre building collapsed. The theatre owners believed that the material
used for the construction was below the required standard, which resulted in poor construction quality. Therefore, they
sued Star Construction Co, the company that had constructed the building.
Star’s lawyers presented certain evidence contradicting this contention in the court and on that basis advised Star that
the probability of losing the case is only 25%.
Required:
Determine whether this is a contingent liability for Star Construction.
 Treatment of contingent liabilities

Contingent liabilities should not be recognised in financial statements but they should be disclosed. The required
disclosures are:
 A brief description of the nature of the contingent liability
 An estimate of its financial effect
 An indication of the uncertainties that exist
 The possibility of any reimbursement
3. Contingent asset
IAS 37 defines a contingent asset as:
A possible asset that arises from past events and whose existence will be confirmed by the occurrence or non-
occurrence of one or more uncertain future events not wholly within control of the entity.
When an inflow of economic benefits is probable, an entity shall disclose:

a) A brief description of the nature of the contingent assets on the end of the reporting period; and
b) If possible, an estimate of their financial effect on the financial statements of the entity.
REVIEW QUESTIONS.
a) IAS 37 Provision, Contingent Liabilities and Contingent Assets is an important standard regulating the
recognition of liabilities and the use of provisions. It has been especially useful in controlling the abuse of
provisions to manager reported earnings.
REQUIRED:
Define a provision and discuss in details the three conditions that must be satisfied in order for a provision to
be recognized under IAS 37. (4 marks)
b) The following transactions and events should be recorded/reported by Hamisa plc in compliance with the
requirements of IAS 37:
i. A decision was taken by the board of Hamisa plc shortly before the year end to close down a division.
The costs of the closure are estimated to tatal TZS.30 billion. The decision was announced in principle,
but detailed implementation plans have not been made yet.
ii. Hamisa plc has traditionally repainted its premises every five years. The next painting is due in a years’
time. The entity proposes to accrue TZS.22,000,000 as a provision the expected cost of repainting the
premises.
iii. Hamisa plc has sold 5,000 units of product to customers during the past 12 months with a year’s warranty
attended. Past experience has shown that 3% of goods sold require repair within the warranty period at
an average cost of TZS.200,000 per unit.
iv. Hamisa plc has guaranteed the debts of its associate company up to a maximum amount of TZS. 3 billion.
The associate is in excellent financial health and the directors are of the opinion that it is unlikely the
guarantee will ever be called in.
REQUIRED:
Discuss briefly how each of the above transactions and events should be recorded/reported as per IAS 37. Show
journal entries where relevant, and State the reason (s) for the proposed treatment. (16 marks)
Question 2. (NBAA MAY 2017 Qn.5 (b)

Gambini Company is preparing its financial statements for the year ended 31st December 2016.
The following matters are all outstanding at the year end.
i. Gambini is facing litigation for damages from customer for the supply of faulty goods on 1 st December
2016. The claim which is for TZS.500,000,000, was received on 15th January 2017. Gambini’s legal
advisors consider that Gambini is liable and it is likely that this claim will succeed. On 25th January 2017,
Gambini sent a customer – claim to its suppliers for TZS.400,000,000. Gambini’s legal advisors are
unsure whether or not this claim will succeed.
ii. Gambini’s sales director, who was dismissed on 15th December 2016, has lodged a claim for
TZS.100,000,000 for unfair dismissal. Gambini’s legal advisors believe that there is no case to answer
and therefore think it is unlikely that this claim will succeed.
iii. Although Gambini has no legal obligation to do so, it has habitually operated a policy of allowing
customers to return goods within 28 days, even where those goods are not faulty. Gambini estimates that
such returns usually amount to 1% of sales. Sales in December 2016 were TZS.400,000,000. By the end
of January 2017, prior to the drafting of the financial statements, goods sold in December for
TZS.3,500,000 had been returned.
iv. On 15th Decemebr 2016 Gambini announced in the press that it is to close one of its divisions in April
2017. A detailed closure plan is in place and the costs of closure are reliably estimated at
TZS.300,000,000, including TZS.50,000,000 for staff relocation.
REQUIRED:
State, with reasons, how the above matters should be treated in Gambini’s financial statements for the year endend
31st December 2016.
Question 3. (ACCA DEC 2008 Qn. 4)

(a) The definition of a liability forms an important element of the International Accounting Standards Board’s
Framework for the Preparation and Presentation of Financial Statements which, in turn, forms the basis for IAS
37 Provisions, Contingent Liabilities and Contingent Assets.
Required:
Define a liability and describe the circumstances under which provisions should be recognised. Give two examples
of how the definition of liabilities enhances the reliability of financial statements. (5 marks)
(b) On 1 October 2007, Promoil acquired a newly constructed oil platform at a cost of $30 million together with the
right to extract oil from an offshore oilfield under a government licence. The terms of the licence are that Promoil
will have to remove the platform (which will then have no value) and restore the sea bed to an environmentally
satisfactory condition in 10 years’ time when the oil reserves have been exhausted. The estimated cost of this on
30 September 2017 will be $15 million. The present value of $1 receivable in 10 years at the appropriate discount
rate for Promoil of 8% is $0·46.
Required:
(i) Explain and quantify how the oil platform should be treated in the financial statements of Promoil
for the year ended 30 September 2008; (7 marks)
(ii) Describe how your answer to (b)(i) would change if the government licence did not require an
environmental clean up. (3 marks)
(15 marks)
Question 4. (ACCA DEC 2011 Qn. 4)
(a) IAS 37 Provisions, contingent liabilities and contingent assets prescribes the accounting and disclosure for
those items named in its title.
Required:
Define provisions and contingent liabilities and briefly explain how IAS 37 improves consistency in financial
reporting. (6 marks)
(b) The following items have arisen during the preparation of Borough’s draft financial statements for the year
ended 30 September 2011:
i. On 1 October 2010, Borough commenced the extraction of crude oil from a new well on the seabed. The
cost of a 10-year licence to extract the oil was $50 million. At the end of the extraction, although not legally
bound to do so, Borough intends to make good the damage the extraction has caused to the seabed
environment. This intention has been communicated to parties external to Borough. The cost of this will
be in two parts: a fixed amount of $20 million and a variable amount of 2 cents per barrel extracted. Both
of these amounts are based on their present values as at 1 October 2010 (discounted at 8%) of the
estimated costs in 10 years’ time. In the year to 30 September 2011 Borough extracted 150 million barrels
of oil.
ii. Borough owns the whole of the equity share capital of its subsidiary Hamlet. Hamlet’s statement of
financial position includes a loan of $25 million that is repayable in five years’ time. $15 million of this loan
is secured on Hamlet’s property and the remaining $10 million is guaranteed by Borough in the event of
a default by Hamlet. The economy in which Hamlet operates is currently experiencing a deep recession,
the effects of which are that the current value of its property is estimated at $12 million and there are
concerns over whether Hamlet can survive the recession and therefore repay the loan.
Required:
Describe, and quantify where possible, how items (i) and (ii) above should be treated in Borough’s statement of
financial position for the year ended 30 September 2011.
In the case of item (ii) only, distinguish between Borough’s entity and consolidated financial statements and refer
to any disclosure notes. Your answer should only refer to the treatment of the loan and should not consider any
impairment of Hamlet’s property or Borough’s investment in Hamlet.
Question 5. (CPA IRELAND APRIL 2009 Qn. 5)

IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the principles for accounting for provisions
and contingences.
REQUIREMENTS:
a) Explain the objectives of IAS 37 Provisions, Contingent Liabilities and Contingent Assets concerning the
recognition of provisions and outline the recognition criteria. (5 Marks)
b) Set out the circumstances in which a company would recognise a contingent liability. (2 Marks)
c) Albertstones PLC, a manufacturer of moulding products, prepares its financial statements to 31 December
2008. The Board of Directors are finalising the financial statements and need assistance on the treatment
of the following issues:
i. The company manufactures and sells Product X with a one year repair warranty. It is estimated that 70%
of the goods sold in 2008 will have no defects, 22% will have minor defects and 8% will have major
defects. It is estimated that it would cost the company €150,000 if all the goods sold had minor defects.
This figure would rise to a €1m if all the goods had major defects. The warranty provision at 1 January
2008 was €102,000 with a claim of €96,000 settled during the year. (4 marks)
ii. Smith PLC purchased and used a batch of Product Y in its production in August 2008, which Smith PLC
is claiming caused major damage to its production equipment. Albertstones PLC is being sued for
damages. Lawyers have advised that there is a 40% chance of successfully defending the claim.
If the claim is successful, damages are estimated at €2m with a present value of €1.8m. The investigative
team of accident consultants have concluded that part of the reason for the defective product produced
by Albertstones was the supply of faulty parts by a supply company, Glen Ltd. The legal team estimate
Glen Ltd’s contributory negligence amounts to 10% of the damages and they believe a claim against Glen
Ltd is likely to succeed. (4 marks)
iii. The Directors decided in October 2008 to restructure the production division to reduce costs and improve
efficiencies. This plan was initiated in November 2008 with full staff consultation.
At 31 December 2008 the anticipated costs are:
€
Redundancy costs 400,000
Lease cancellations 75,000
Retraining 60,000
Investment in new systems 25,000
Prepare a memorandum to the Board of Directors of Albertstones PLC stating how the above issues should be
reflected in the company’s published financial statements for the year ended 31 December 2008.
Assume all items are material and ignore taxation. (4 Marks)

IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the accounting treatment and disclosures
for these transactions and events. The standard discusses general principles of recognition, measurement and
presentation as well as specific application guidance for certain issues. This guidance aims to assist preparers of
financial statements in applying IAS 37.
The following situations have arisen during the preparation of the draft financial statements of Haywood Plc for
year ended 31 July 2017:
(i) On 1 August 2016, Haywood Plc acquired a nuclear power plant at a cost of €200 million. Part of the
arrangement was that the plant be dismantled and the site restored after its useful economic life of 20 years
had passed. The cost of restoration was estimated on 1 August 2016, after discounting to present value, to
be €40 million. This amount reflected an appropriate discount rate of 6%, (75% of this estimate related to the
dismantling of the plant, and 25% to the removal of waste fuel). At 31 July 2017, due to regulatory and other
obstacles, no power had yet been produced, hence no waste fuel had been generated.
(ii) During the year ended 31 July 2017, Haywood Plc decided to close both its coal burning power generating
plants in October 2017. This decision has been announced publicly, and a detailed formal plan prepared. The
plan proposes to make 75 employees redundant, retrain 25 other staff to work in the nuclear plant, and sell
the coal-fired plants in their current condition. It is anticipated that the redundancy costs will amount to €7.5
million, and the retraining will cost €1 million. The coal plants will be disposed of for zero consideration as the
new owner will be expected to dismantle the plants and clean up the sites. The carrying value of these plants
is €12 million at 31 July 2017.
REQUIREMENT:
(a) Discuss the accounting treatment in relation to provisions, contingent liabilities and contingent assets required
by IAS 37. (8 marks)
(b) In the case of (i) and (ii) above, set out the appropriate accounting treatment as at 31 July 2017, applying IAS
37 and other relevant standards. (12 marks)
[Total: 20 Marks]
IAS 1 - Presentation of Financial Statements.
A complete set of financial statements (also called components of financial statements) comprises:
1. A statement of financial position
2. Either
— A statement of profit or loss and other comprehensive income, or
— A statement of profit or loss plus a statement showing other comprehensive income
3. A statement of changes in equity
4. A statement of cash flows
5. Accounting policies and explanatory notes.
IAS 1 (revised) does not require the above titles to be used by companies. It is likely in practice that many
companies will continue to use the previous terms of balance sheet rather than statement of financial position,
income statement instead of statement of profit or loss, and cash flow statement rather than statement of cash
flows.
Exceptional items
Exceptional items is the name often given to material items of income and expense of such size, nature or incidence
that disclosure is necessary in order to explain the performance of the entity.
The accounting treatment is to:

In some cases it may be more appropriate to show the item separately on the face of the statement of profit or
loss.
Examples include:
 Include the item in the standard statement of profit or loss line
 Disclose the nature and amount in notes.
 Write down of inventories to net realisable value (NRV)
 Write down of property, plant and equipment to recoverable amount
 Restructuring
 Gains/losses on disposal of non-current assets
 Discontinued operations
 Litigation settlements
 Reversals of provisions.
General features
 Accrual basis of accounting
An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of
accounting. When the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity,
income and expenses (the elements of financial statements) when they satisfy the definitions and recognition
criteria for those elements in the Framework.
 Going concern
When preparing financial statements, management shall make an assessment of an entity’s ability to
continue as a going concern. An entity shall prepare financial statements on a going concern basis unless
management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to
do so.
 Materiality and Aggregation
An entity shall present separately each material class of similar items, i.e. all sales can be reported under
the heading 'turnover'. An entity shall present separately items of a dissimilar nature or function unless
they are immaterial.
 Offsetting
An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by
an IFRS.
 Comparatives
Except when IFRSs permit or require otherwise, an entity shall disclose comparative information in
respect of the previous period for all amounts reported in the current period’s financial statements. An
entity shall include comparative information for narrative and descriptive information when it is relevant
to an understanding of the current period’s financial statements.
 Assumptions/judgements
An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements
that management has made in the process of applying the entity’s accounting policies and that have the
most significant effect on the amounts recognised in the financial statements.
An entity shall disclose information about the assumptions it makes about the future, and other major
sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities within the next financial year
 Fair presentation and compliance with IFRSs

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity.
Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
 Frequency of reporting
An entity shall present a complete set of financial statements (including comparative information) at least annually.
When an entity changes the end of its reporting period and presents financial statements for a period longer or
shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements:
(a) The reason for using a longer or shorter period, and
(b) The fact that amounts presented in the financial statements are not entirely comparable.
 Consistency of presentation
An entity shall retain the presentation and classification of items in the financial statements from one period to
the next unless:
(a) It is apparent, following a significant change in the nature of the entity’s operations or a review of its financial
statements, that another presentation or classification would be more appropriate having regard to the
criteria for the selection and application of accounting policies in IAS 8; or
(b) An IFRS requires a change in presentation.
1. The statement of financial position
A recommended format is as follows:
XYZ Statement of Financial Position as at 31 December 20X2
Assets $ $
Non-current Assets:
Property, Plant and Equipment X
Investments X
Intangible X
X
Current Assets:
Inventories X
Trade receivables X
Cash and cash equivalents X
X
Total Assets X
Equity and Liabilities
Capital and Reserves:
Share capital X
Retained earnings X
Other component of equity X
Total equity X
Non-current liabilities:
Long-term borrowings X
Deferred tax X
X
Current liabilities:
Trade and other payables X
Short-term borrowings X
Current tax payable X
Short-term provisions X
X
Total equity and liabilities X
Note: IAS 1 requires an asset or liability to be classified as current or non-current.
(a) Current Asset

An asset should be classified as a current asset when it:
 Is expected to be realised in, or is held for sale or consumption in, the normal course of the entity's
operating cycle; or
 Is held primarily for trading purposes or for the short-term and expected to be realised within twelve
months of the end of the reporting period; or
 Is cash or a cash equivalent asset which is not restricted in its use.
All other assets should be classified as non-current assets.
Non-current assets includes tangible, intangible, operating and financial assets of a long-term nature.
Other terms with the same meaning can be used (eg 'fixed', 'long-term').
Current assets therefore include inventories and trade receivables that are sold, consumed and realised as part
of the normal operating cycle. This is the case even where they are not expected to be realised within
twelve months.
Note: The operating cycle of an entity is the time between the acquisition of assets for processing and their
realisation in cash or cash equivalents.
(b) Current liability

A liability should be classified as a current liability when it:
 Is expected to be settled in the normal course of the entity's operating cycle; or
 Is held primarily for the purpose of trading; or
 Is due to be settled within twelve months after the end of the reporting period; or when
 The entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the end of the reporting period.
All other liabilities should be classified as non-current liabilities or long term liabilities.
Also, within the equity section of the statement of financial position, other components of equity include:
• Revaluation surplus
• Investment reserve (see financial instruments)
2. Statement of changes in equity (SOCIE)

The statement of changes in equity provides a summary of all changes in equity arising from transactions with
owners in their capacity as owners.
This includes the effect of share issues and dividends.
Other non-owner changes in equity are disclosed in aggregate only.

XYZ Group
Statement of changes in equity for the year ended 31 December 20X2
Share Share Revaluatio Retained Total

capital premium n surplus earnings equity
$ $ $ $ $
Balance as at 31 December 20X1 X X X X X
Change in accounting policy/Prior year
error (IAS 8) (X) (X)
Restated balance X X X X X
Dividends (X) (X)
Issue of share capital X X X
Total comprehensive income X X X
Transfer to retained earnings (X) X -
Balance as at 31 December 20X2 X X X X X
3. Statement of profit or loss and other comprehensive income

The statement of profit or loss and other comprehensive income is the most significant indicator of a company's
financial performance. So it is important to ensure that it is not misleading.
IAS 1 stipulates that all items of income and expense recognised in a period shall be included in profit or loss
unless a Standard or an Interpretation requires otherwise.
IAS 1 Presentation of financial statements requires that you prepare either:

1. A statement of profit or loss and other comprehensive income showing total comprehensive income; or
2. A statement of profit or loss showing the realised profit or loss for the period PLUS a statement showing other
comprehensive income.
Total comprehensive income is the realised profit or loss for the period, plus other comprehensive income.
Other comprehensive income is income and expenses that are not recognised in profit or loss (i.e. they are
recorded in reserves rather than as an element of the realised profit for the period). Examples of other
comprehensive income it includes any change in the revaluation of noncurrent assets (IAS 16), and fair value
through other comprehensive income financial assets (IFRS 9) etc.
XYZ: Statement of profit or loss and other comprehensive income for the year ended 31 December 20X2
$
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administrative expenses (X)
Profit from operations X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
Profit for the year X
Other comprehensive income
Gain/(loss) on revaluation (IAS 16) X
Gain/(loss) on fair value through other
X
comprehensive income financial asset (IFRS 9)
Total comprehensive income for the year X
ALTERNATIVE PRESENTATION:
A recommended format for the statement of profit or loss is as follows:
XYZ
Statement of profit or loss for the year ended 31 December 20X2
$
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administrative expenses (X)
Profit from operations X
Finance costs (X)
Investment income X
Profit before tax X
Income tax expense (X)
A recommended format for the presentation of other comprehensive income is:

XYZ
Statement of other comprehensive income for the year ended 31 December 20X2
Other comprehensive income
Gain/(loss) on revaluation (IAS 16) X
Gain/(loss) on fair value through other
X
comprehensive income financial asset (IFRS 9)
Total comprehensive income for the year X
4. Statement of cash flow

This is covered in IAS 7.
5. Notes to the financial statements

The notes to the financial statements will amplify the information given in the statement of financial position,
statement of profit or loss and other comprehensive income and statement of changes in equity. We have already
noted above the information which the IAS allows to be shown by note rather than in the statements. To some
extent, then, the contents of the notes will be determined by the level of detail shown on the face of the
statements.
The notes to the financial statements should perform the following functions.
(a) Provide information about the basis on which the financial statements were prepared and which specific
accounting policies were chosen and applied to significant transactions/events
(b) Disclose any information, not shown elsewhere in the financial statements, which is required by
IFRSs
(c) Show any additional information that is relevant to understanding which is not shown elsewhere in the
financial statements
REVIEW QUESTIONS.
Question 1 (NBAA May, 2018 Qn. 5)
(a) Discuss the following principles in the context of IAS 1, Presentation of Financial Statements;
(i) Accruals
(ii) Going Concern
(iii) Materiality and aggregation
(iv) Consistency (8 marks)
(b) The “Conceptual Framework” identifies “comparability”, “verifiability”, “timeliness” and “understandability” as
attributes that enhance the qualitative characteristics of useful financial information. Write a brief note on any
two of these attributes. (8 marks)
(c) According to the “Conceptual Framework”, which users should the preparers of financial reports, aim to
provide useful information for? (4 marks)
(Total: 20 marks)
Question 2.
The trial balance of Mercury at 30 June 2013 was as follows:
Dr Cr
$'000' $'000'
7% Preferred shares of $1 500
Ordinary shares of 50 cents 250
Share premium account 180
Retained earnings, at 1 July 2012 70
Inventory, 1 July 2012 450
Land at cost 300
Building at cost 900
Buildings, accumulated depreciation, 1 July 2012 135
Plant at cost 1020
Plant, accumulated depreciation, 1 July 2012 370
Trade payables 900
Trade receivables 600
Allowance for doubtful debts, at 1 July 2012 25
Purchases 2030
Administrative expenses 205
Revenue 3000
Distribution costs 240
Other expenses 50
Bank balance 110
ordinary dividend paid 25
10% loan note 500
5930 5930
You are provided with the following additional information:

(i) Depreciation on building is to be provided at 5% per year on cost and allocated to administrative
expenses.
(ii) Plant is to be depreciated at 20% per year using reducing balance method and included in distribution
costs.
(iii) Closing inventory is valued at $500,000.
(iv) The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable balances.
(v) An accrual for distribution wages of $30,000 is required.
(vi) Interest on the loan notes has not been paid during the year.
(vii) During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This has not
been entered into the books. The bonus shares do not rank for dividend for the current financial year.
(viii) Provisions are to be made for the following:
− The preferred dividend for the year;
− An income tax charge of $55,000 for the year.
Required:
Prepare for Mercury for the year ended 30 June 2013, in accordance with IAS 1 Presentation of Financial
Statements:
(a) A statement of profit or loss; and
(b) A statement of changes in equity; and
(c) A statement of financial position.
Question 3.
Cayman prepares annual financial statements to 30 September. At 30 September 2012 the company’s list of
account balances was as follows:
$'000' $'000'
Revenue 7,400
Production costs 4,140
Inventory at 1 October 2011 695
Distribution costs 540
Administrative expenses 730
Loan interest expense 120
Land at valuation 5,250
Building - cost 4,000
- accumulated depreciation at 1 October 2011 1,065
Plant and equipment
- cost 6,400
-accumulated depreciation at 1 October 2011 1,240
Trade accounts receivable 2,060
Trade accounts payable 1,120
Bank overdraft 40
Issued shares (50 cent ordinary) at 30 September 2012 7,000
Share premium account at 30 September 2012 2,000
Revaluation surplus 1,500
Retained earnings 1,570
12% loan (payable 2019) 1,000
23,935 23,935
The following matters are relevant to the preparation of the financial statements for the year ended 30
September 2012:
(1) Inventory at 30 September 2012 amounted to $780,000 at cost before adjusting for the following:
(i) Items which had cost $40,000 and which would normally sell for $60,000 were found to be faulty. $10,000
needs to be spent on these items in order to sell them for $45,000.
(ii) Goods sent to a customer on sale or return basis have been omitted from inventory and included as sales
in September 2012. The cost of these items was $8,000 and they were included in revenue at $112,000.
The goods were returned by the customer in October 2012.
(2) Depreciation is to be provided on cost as follows
Building 2% per year
Plant and equipment 20% per year
80% of the depreciation is to be charged depreciation is to be charged to cost of sales and 10% to each of
distribution costs and administrative expenses.
(3) Land is to be revalued to $5,000,000.
(4) Accrued expenses and prepayments were
Accrued expenses Prepayments
$000 $000
Distribution costs 95 60
Administrative expenses 35 30
(5) During the year 4 million ordinary shares were issued at 75 cents each. The directors of Cayman declared in
interim dividend of 2 cents per share in September 2012. No dividends were paid during the year.
(6) Loan interest is paid annually in arrears, on 30 September each year.
Required:
Prepare for Cayman for the year ended 30 September 2012:
(i) A statement of total comprehensive income;
(ii) A statement of financial position; and
(iii) A statement of changes in equity,
In accordance with IAS 1 Presentation of Financial Statements.
Question 4. (NBAA May 2018 Qn.2)

The following trial balance was extracted from the books of Mpagile Limited, a manufacturing company, as at 31st
December 2016:
Debit Credit
TZS."000" TZS."000"
Trade Receivables 425,600
Trade Payables 314,526
Share Capital - 100,000 at TZS 1,000 each 100,000
Revenue 2,458,752
Revaluation Surplus 10,000
Retained Earnings 1,716,925
Purchases 1,457,823
Premises 1,624,000
Office equipment 186,000
Motor vehicles 240,000
Long Term Loan 350,000
Inventory at 31.12.15 235,800
Distribution Costs 457,820
Bank 521,450
Allowance for Bad Debts 18,600
Administrative Expenses 489,610
Accumulated Depreciation - Premises at 31.12.15 458,700
Accumulated Depreciation - Motor Vehicles at 31.12.15 86,000
Accumulated Depreciation - Office Equipment at 31.12.15 124,600
5,638,103 5,638,103
The following information, based on your investigations, has also come to light:
(i) Mpagile Limited’s inventory was counted on 29th December 2016 and amounted to TZS.246,200,000 at cost.
On 31st December 2016, there were credit sales of TZS.40,000,000 that is still needed to be accounted for in
its financial statements. Mpagile Limited typically makes margin of 25% on its sales.
(ii) Mpagile Limited sold a motor vehicles on 1st April 2016 for TZS.10,000,000. It purchased the motor vehicles
on 1st January 2014 for TZS.24,000,000.
(iii) Depreciation is to be charged as follows:
− Premises 2% straight line on cost
− Office equipment 25% reducing balance
− Motor vehicles 20% straight line on cost
Depreciation is charged from the date of purchase to the date of sale.
(iv) Mpagile Limited received a government grant of TZS.100,000,000 during the year. This was in relation to an
extension completed on 1st July 2016 to its premises that cost TZS.400,000,000 and was paid in full. The grant
should be amortized on the same basis as the premises is to be depreciated.
(v) Mpagile Limited purchased goods on credit on 30th November 2016 that costs £45,000,000. On that date, it
mistakenly entered this amount as TZS.45,000,000 in its records. Mpagile Limited made a payment of
£30,000,000 to the trade payable on 15th December 2016 which has not yet been recorded in its accounts.
The exchange rates on the relevant dates were as follows:
30th November 2016 TZS 1 = £ 0.90
15th December 2016 TZS 1 = £ 0.80
31st December 2016 TZS 1 = £ 0.85
(vi) During the year Mpagile Limited wrote off a bad debt of TZS.3,600,000. This is not included in its financial
statements. In addition, the closing balance for the allowance for bad debts should be at 5% of trade
receivables.
(vii) There were accruals to administrative expenses and distribution costs of TZS.2,400,000 and TZS.1,600,000
respectively at the year end.
(viii) All of the relevant expenses in the trial balance are to be split evenly between administrative expenses and
distribution costs. Losses on disposal of Property, Plant and Equipment and exchange losses on foreign
exchange are to be included as separate line items on the face of the Statement of Profit or Loss and Other
Comprehensive Income.
REQUIRED:
Prepare, in a form suitable for publication, based on International Financial Reporting Standard (IFRS), a
Statement of Profit or Loss and Other Comprehensive Income and Statement of Financial Position for Mpagile
Limited for the year ended on 31st December 2016. (20 marks)
Note: All workings should be shown.
Question 5. (ACCA June 2016 Qn.3)
The following trial balance relates to Downing Co as at 31 March 2016:
$’000 $’000
Equity shares of $1 each 25,000
Other equity 11,800
Retained earnings at 1 April 2015 8,000
5% convertible loan notes (note (iii)) 30,000
Land and buildings at cost (land element $14 million) (note (iv)) 64,000
Plant and equipment at cost (note (iv)) 82,700
Patent at cost (ten-year life) (note (iv)) 7,500
Accumulated depreciation/amortisation at 1 April 2015:
buildings 5,000
plant and equipment 36,700
patent 3,000
Inventory at 31 March 2016 32,100
Trade receivables 38,500
Bank 2,700
Current tax (note (v)) 1,550
Deferred tax (note (v)) 4,800
Revenue (note (i)) 267,900
Cost of sales 166,600
Distribution costs 20,000
Administrative expenses 22,000
Contract asset (note (ii)) 5,000
Loan note interest paid (note (iii)) 1,500
Bank interest 150
Other operating income from royalties 300
Trade payables 46,400
441,600 441,600
The following notes are relevant:

(i) Revenue includes an amount of $16 million for a sale made on 1 April 2015. The sale relates to a single
product and includes ongoing servicing from Downing Co for four years. The normal selling price of the product
and the servicing would be $18 million and $500,000 per annum ($2 million in total) respectively.
(ii) The contract asset is comprised of contract costs incurred at 31 March 2016 of $15 million less a payment of
$10 million from the customer. The agreed transaction price for the total contract is $30 million and the total
expected costs are $24 million. Downing Co uses an input method based on costs incurred to date relative to
the total expected costs to determine the progress towards completion of its contracts.
(iii) Downing Co issued 300,000 $100 5% convertible loan notes on 1 April 2015. The loan notes can be converted
to equity shares on the basis of 25 shares for each $100 loan note on 31 March 2018 or redeemed at par for
cash on the same date. An equivalent loan note without the conversion rights would have required an interest
rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are:
5% 8%
End of year: 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
(iv) Non-current assets:
Due to rising property prices, Downing Co decided to revalue its land and buildings on 1 April 2015 to their
market value. The values were confirmed at that date as land $16 million and buildings $52·2 million with the
buildings having an estimated remaining life of 18 years at the date of revaluation. Downing Co intends to
make a transfer from the revaluation surplus to retained earnings in respect of the annual realisation of the
revaluation surplus. Ignore deferred tax on the revaluation.
Plant and equipment is depreciated at 15% per annum using the reducing balance method.
During the current year, the income from royalties relating to the patent had declined considerably and the
directors are concerned that the value of the patent may be impaired. A study at the year end concluded that
the present value of the future estimated net cash flows from the patent at 31 March 2016 is $3·25 million;
however, Downing Co also has a confirmed offer of $3·4 million to sell the patent immediately at that date.
No depreciation/amortisation has yet been charged on any non-current asset for the year ended 31 March
2016. All depreciation/amortisation is charged to cost of sales.
There were no acquisitions or disposals of non-current assets during the year.

(v) The directors estimate a provision for income tax for the year ended 31 March 2016 of $11·4 million is required.
The balance on current tax in the trial balance represents the under/over provision of the tax liability for the
year ended 31 March 2015. At 31 March 2016, Downing Co had taxable temporary differences of $18·5 million
requiring a provision for deferred tax. Any deferred tax movement should be reported in profit or loss. The
income tax rate applicable to Downing Co is 20%.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Downing Co for the year ended
31 March 2016.
(b) Prepare the statement of changes in equity for Downing Co for the year ended 31 March 2016.
(c) Prepare the statement of financial position of Downing Co as at 31 March 2016.
Notes to the financial statements are not required. Work to the nearest $1,000.
Question 6. (ACCA June 2018)

Below is the trial balance for Haverford Co at 31 December 20X7:
$'000 $'000
Property – carrying amount 1 January 20X7 (note (iv)) 18,000
Ordinary shares $1 at 1 January 20X7 (note (iii)) 20,000
Other components of equity (Share premium) at 1 January 20X7 (note (iii)) 3,000
Revaluation surplus at 1 January 20X7 (note (iv)) 800
Retained earnings at 1 January 20X7 6,270
Draft profit for the year ended 31 December 20X7 2,250
4% Convertible loan notes (note (i)) 8,000
Dividends paid 3,620
Cash received from contract customer (note (ii)) 1,400
Cost incurred on contract to date (note (ii)) 1,900
Inventories (note (v)) 4,310
Trade receivables 5,510
Cash 10,320
Current liabilities 1,940
43,660 43,660
The following notes are relevant:

(i) On 1 January 20X7, Haverford Co issued 80,000 $100 4% convertible loan notes. The loan notes can be
converted to equity shares on 31 December 20X9 or redeemed at par on the same date. An equivalent loan
without the conversion rights would have required interest of 6%. Interest is payable annually in arrears on 31
December each year. The annual payment has been included in finance costs for the year. The present value
of $1 receivable at the end of each year, based on discount rates of 4% and 6%, are:
4% 6%
End of year 1 0.962 0.943
End of year 2 0.925 0.890
End of year 3 0.889 0.840
(ii) During the year, Haverford Co entered into a contract to construct an asset for a customer, satisfying the
performance obligation over time. The contract had a total price of $14m. The costs to date of $1·9m are
included in the above trial balance. Costs to complete the contract are estimated at $7·1m. At 31 December
20X7, the contract is estimated to be 40% complete. To date, Haverford Co has received $1·4m from the
customer and this is shown in the above trial balance.
(iii) Haverford Co made a 1 for 5 bonus issue on 31 December 20X7, which has not yet been recorded in the
above trial balance. Haverford Co intends to utilise the share premium as far as possible in recording the
bonus issue.
(iv) Haverford Co’s property had previously been revalued upwards, leading to the balance on the revaluation
surplus at 1 January 20X7. The property had a remaining life of 25 years at 1 January 20X7.
(v) At 31 December 20X7, the property was valued at $16m. No entries have yet been made to account for the
current year’s depreciation charge or the property valuation at 31 December 20X7. Haverford Co does not
make an annual transfer from the revaluation surplus in respect of excess depreciation.
(vi) It has been discovered that inventory totalling $0·39m had been omitted from the final inventory count in the
above trial balance.
Required:
(a) Calculate the adjusted profit for Haverford Co for the year ended 31 December 20X7. (6 marks)
(b) Prepare the statement of changes in equity for Haverford Co for the year ended 31 December 20X7. (6 marks)
(c) Prepare the statement of financial position for Haverford Co as at 31 December 20X7. (8 marks)
(20 marks)

B2 Idiana Manual (Secured)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

B2 Idiana Manual (Secured)

Uploaded by

Copyright:

Available Formats

IDIANA CONSULTANCY & CPA (T) REVIEW CLASSES

Purpose of the Conceptual framework

Scope of Conceptual Framework.

Users of financial information and their information need.

The objective of general purpose financial reporting

Fundamental qualitative characteristics

b) Faithfull representation (True and Fair view)

Enhancing qualitative characteristics

The elements of financial statements

An entity shall classify an asset as current when:

Breaking down this definition

Recognition of the elements of financial statements

i. Evaluate the reasons why do we need regulatory framework. (6 marks)

Question 2. (CPA IRELAND August 2012 Qn. 4)

The tangible assets can be non – current assets or current assets.

 Definition of Property, plant and equipment

 Measurement of Property, plant and equipment

Example 1 (NBAA May 2015 Qn. 5)

Example 2 (NBAA MAY 2017 Qn.5 (a)

The following costs have occurred on a wind farm site:

a) Discuss what is meant by the term ‘fair value’

 Measurement subsequent to initial recognition

Example 3. (Revaluation surplus)

Example 4 (Decrease in value)

 Depreciation (see the next part)

The financial statements should also disclose the following.

Revalued assets require further disclosures.

Revaluation on 1 April 2012:

Question 3. (NBAA NOV 2016 Qn.4)

Cost Depreciation Carrying Amount

Cost Depreciation Proceeds

Buildings 2% per year straight line

Question 4. (NBAA MAY 2017 Qn.5 (b)

Question 5. (CPA IRELAND August 2010 Qn. 4)

Question 6. (CPA IRELAND April 2011 Qn. 4)

The company paid after eighteen days.

IAS 16 – Property, Plant and Equipment (Depreciation)

Complex assets: Significant parts to be depreciated separately

Not significant parts (remainder)

Recognition of the depreciation charge

When does depreciation begin and cease?

Estimation of useful life

The factors are considered in determining the useful life of an asset:

Land and buildings

Depreciation calculation and accounting after revaluation

Impairment of asset values

IAS 40 – Investment Property

 If entity provides ancillary services

 If there is intracompany rentals

 Recognition of Investment Property

 Measurement subsequent to initial recognition

i. Fair value model.

 Treatment of gain on change in fair value

ii. Cost model.

Transfer type Manner of transfer

Disclosure (Both Fair Value Model and Cost Model)

 The amounts recognised in profit or loss for:

Additional Disclosures for the Fair Value Model

Additional Disclosures for the Cost Model

Question 2. (ACCA JUNE 2013 Qn. 5)

Question 3. (CPA IRELAND April 2015 Qn. 5)

Question 4. (CPA IRELAND August 2014 Qn. 5)

 Inventories are assets:

 Inventories can include any of the following.