Ifra Book Sept 23

International Financial
Reporting & Analysis

Lecture Notes
Lecturer: Deirdre Cogan

PAGE
1. IAS 1 PUBLISHED ACCOUNTS INTRODUCTION ...................................................................... 1

2. THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING .......................................................... 4
3. IAS 16 PROPERTY, PLANT & EQUIPMENT .................................................................................. 17
4. IAS 40 INVESTMENT PROPERTY .............................................................................................. 27
5. IAS 38 INTANGIBLE ASSETS .............................................................................................. 35
6. IAS 36 IMPAIRMENT OF ASSETS ............................................................................................... 44
7. IAS 20 GOVERNMENT GRANTS .............................................................................................. 53
8. IAS 23 BORROWING COSTS .............................................................................................. 59
9. IAS 37 PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS................................................ 61
10. IAS 10 EVENTS AFTER THE REPORTING PERIOD.............................................................................. 76
11. IFRS 5 ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS ................................................... 83
12. IFRS 15 CONTRACTS WITH CUSTOMERS …………………………………………………………………………….. 88
13. IAS 8 ACCOUNTING POLICIES & CHANGE IN ACCOUNTING ESTIMATE ………………………………………….. 95
14. IAS 2 INVENTORIES …………................................................................................... 105
15. IAS 41 AGRICULTURE .............................................................................................. 107
16. IFRS 16 LEASES ............................................................................................. 109
17. IAS 12 INCOME TAXES (DEFERRED TAX) ………………………………….............................................. 115
18. FINANCIAL INSTRUMENTS ................................................................................... 119
19. BASIC GROUPS ............................................................................................. 122
20. IAS 24 RELATED PARTIES ………………………………….............................................. 145
21. SHORT QUESTION BANK …………………………………………………………………………………………… 146
22. SOLUTIONS TO QUESTIONS ................................................................................................... 187
23. PAST PAPER PACK …………………………………………………………………………………………… 208
All Copyright reserved © Griffith College

IAS 1 applies to the preparation and presentation of general
purpose financial statements in accordance with IFRSs and states
Introduction to Published accounts that a complete set of financial statements comprises:
• A statement of financial position at the end of the period
• A statement of profit or loss and other comprehensive income
IAS 1 for the period
• A statement of changes in equity for the period
• A statement of cash flows for the period
• Notes to the financial statements including a summary of
significant accounting policies an other explanatory information
XYZ GROUP – STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 20X2
• Financial statements should also disclose: 20X2 20X1
$'000 $'000
– The name of the reporting entity ASSETS
Non-current assets
– Whether the accounts relate to the single entity only or a group Property, plant and equipment X X
of entities Goodwill X X
– The date of the end of the reporting period or the period Other intangible assets X X
Investments in associates X X
covered by the financial statements Investments in equity instruments X X
– The presentation currency X X
Current assets
– The level of rounding used in presenting amounts in the financial Inventories X X
statements Trade receivables X X
Other current assets X X
• Financial statements must be prepared on a timely basis in order to Cash and cash equivalents X X
provide useful information to users. X X
Total assets X X
$'000 $'000 $'000 $'000

EQUITY AND LIABILITIES Non-current liabilities
Equity Long-term borrowings X X
Share capital X X Deferred tax X X
Retained earnings X X Long-term provisions X X
Other components of equity X X Total non-current liabilities X X
X X
Total equity X X Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current portions of long-term borrowings X X
Current tax payable X X
Short-term provisions X X
Total current liabilities X X
Total liabilities X X
Total equity and liabilities X X
1
IAS 1 (revised) allows income and expense items to be presented XYZ GROUP – STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20X2
either: 20X2 20X1
In a single statement of profit or loss and other comprehensive $'000 $'000
Revenue X X
income; or Cost of sales (X) (X)
In two statements: a separate statement of profit or loss and a Gross profit X X
Other income X X
statement of other comprehensive income Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Profit before tax X X
Income tax expense (X) (X)
PROFIT FOR THE YEAR X X
Other comprehensive income:
Gains on property revaluation X X
Investments in equity instruments (X) X
Income tax relating to components of other comprehensive
income (X) X
Other comprehensive income for the year, net of tax X (X)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
Statement of Changes in Equity

Share Ret'd Revaluation Total
capital earnings surplus equity
$'000 $'000 $'000 $'000
Balance at 1 January 20X1 X X X X
Changes in accounting policy – (X) – (X)
Restated balance X X X X
Changes in equity for 20X1
Dividends – (X) – (X)
Total comprehensive income – X (X) X
Balance at 31 December 20X1 X X X X
Changes in equity for 20X2
Issue of share capital X – – X
Dividends (X) (X)
Total comprehensive income – X X X
Transfer to retained earnings – X (X) –
Balance at 31 December 20X2 X X X X
2
3
The Conceptual Framework
The Conceptual Framework • A framework is a real or conceptual structure
intended to act as a support or guide
For
• Conceptual framework is not a Financial
Financial Reporting Reporting Standard & does not override
specific standards
All Copyright reserved © Griffith College All Copyright reserved © Griffith College
IASB framework: key headings

The Conceptual framework is a framework that 1. Objective of financial reporting
prescribes:
2. The reporting entity (not yet published)
1. Nature,
3. Qualitative characteristics
2. Function, and
3. Limits 4. Elements of financial statements
5. Recognition of elements
of financial accounting and financial statements
6. Measurement of elements
7. Concepts of capital maintenance
Objective of financial reporting Objective of financial reporting

Provide financial information about the reporting • Financial reports provide information about the:
entity that is: – financial position
– economic resources; and
• useful to existing and potential investors, lenders and – claims
other creditors of a reporting entity
• in making economic decisions about
• providing resources to the entity • They also provide information about the effects
of transactions and other events that change an
entity’s financial position
4
Financial Reports limitations Financial Reports limitations
• They cannot provide all of the information that • These are not designed to show the value of the
users need reporting entity
• Users need pertinent information from other • Financial reports are based on estimates,
sources, for example, judgements and models rather than exact
depictions
– general economic conditions and expectations
– political events and political climate i • Main constraint to providing useful information
– industry and company outlooks is cost
Accrual accounting Qualitative characteristics

• Financial performance reflected by accrual
accounting • Attributes that make information provided in
financial statements useful to others:
• Accrual accounting depicts the effects of
transactions, other events and circumstances on • Fundamental characteristics:
a reporting entity’s economic resources and – relevance and
claims in the periods in which those effects – faithful representation ( previously reliability)
occur, even if the resulting cash receipts and
payments occur in a different period
Qualitative characteristics Relevance

Relevant financial information is capable of
• Enhancing characteristics: making a difference in the decisions made by
– Comparability users, if it has
– Verifiability 1. Predictive value or
– Timeliness 2. Confirmatory value or
– Understandability 3. Both
5
Relevance Relevance
1. Predictive value: Predictive value and confirmatory value are
– if it can be used as an input to processes interrelated, for example
employed by users to predict future outcomes
• revenue for current year can be used to predict
2. Confirmatory value revenue for future years and can be compared with
– provides feedback about previous evaluations (it revenue predictions that were made in the past
confirms or changes these)
Materiality Faithful representation

• Information is material if omitting it or misstating
it could influence decisions that users make on • Financial reports represent economic
the basis of financial information about a specific phenomena/events in words and numbers
reporting entity
• Financial information must faithfully represent
• It is an entity-specific aspect of relevance, based the phenomena that it purports to represent
on the nature or magnitude or both of items
• No uniform quantitative threshold
Faithful representation Faithful representation

A complete depiction of a group of assets would include:
Three characteristics: 1. The nature of the assets in the group
2. A numerical description of all the assets in the
1.Complete group
2.Neutral; and 3. A description of what the numerical depiction
3.Free from error represents;
• original cost
• Objective is to maximise these qualities • adjusted cost or
• fair value
6
Complete and Neutral Free from error
• A complete depiction includes all information • Free from error means there are no errors or
necessary for a user to understand the omissions in the description of the phenomenon,
phenomenon being depicted, including all and the process used to produce the reported
necessary descriptions and explanations information has been selected and applied with
no errors in the process
• Neutral: A neutral depiction is without bias in the
selection or presentation of financial information • Does not mean perfectly accurate in all respects
Free from error Applying the fundamental qualitative

characteristics
A representation of an estimate can be faithful if:
1. Identify an economic phenomenon that has the
1. The amount is described clearly and accurately as
being an estimate potential to be useful to users
2. The nature and limitations of the estimating process 2. Identify the type of information about the
are explained phenomenon that would be most relevant if it is
available and can be faithfully represented
3. No errors have been made in selecting and applying
a process for developing the estimate, consider 3. Determine whether that information is available
impairment of an asset and can be faithfully represented
Enhancing qualitative characteristics Verifiability

Comparability • Verifiability helps assure users that information
• Information about a reporting entity is more useful faithfully represents the economic phenomenon
if it can be compared with similar information
about other entities; and it purports to represent.
• With similar information about the same entity for • Verifiability means that different knowledgeable
another period or date and independent observers could reach
• Consistency not the same as comparability. It refers consensus that a particular depiction is a faithful
to the same methods for the same items representation
7
Verifiability Timeliness and understandability
• To help users decide whether they want to use
information, it would normally be necessary to • Timeliness: having the information available to
disclose: decision makers in time to be capable of
influencing their decisions (the older the
1.The underlying assumptions, information the less useful)
2.The methods of compiling the information and
3.Other factors that support the information • Understandability: classifying, characterising and
presenting information clearly and concisely
• Verification can be direct or indirect makes it understandable
Characteristics Elements of financial statements

Fundamental Faithful Representation • Financial transactions are grouped into broad
• Relevant • Complete classes called elements according to their
• Predictive value • Neutral economic characteristics
• Confirmatory value • Free from Error
• Materiality • The elements directly related to the
measurement of financial position are
Enhancing 1. Assets
• Comparable…consistency
• Verifiable 2. Liabilities
• Timeliness 3. Equity (the residual interest in the assets of
• Understandability
the entity after deducting all its liabilities)
Asset and liability Asset and liability

• An asset is: • Liability is:
1. a resource controlled by the entity 1. a present obligation of the entity arising from
2. as a result of past events past events
3. from which future economic benefits are expected 2. the settlement of which is expected to result
to flow to the entity in an outflow from the entity of resources
embodying economic benefits
8
Assets and liabilities Assets and liabilities
• Attention needs to be given to its underlying
• Physical form is not essential to the existence of
substance and economic reality and not merely
an asset,
its legal form
• Hence, patents and copyrights are assets if future
• Example finance lease where lessee acquires the
economic benefits are expected to flow to the
economic benefits of the use of the leased asset
entity and if they are controlled by the entity
for the major part of its useful life
Assets and liabilities Assets and liabilities

• Liabilities result from past transactions or other past
• An obligation normally arises only when the asset events.
is delivered or the entity enters into an
irrevocable agreement to acquire the asset • An entity may recognise future rebates based on
annual purchases by customers as liabilities (the sale
• The irrevocable nature of the agreement means of the goods in the past is the transaction that gives
that the economic consequences of failing to rise to the liability)
honour the obligation, for example a substantial • Some liabilities can be measured only by using a
penalty, entity cannot avoid the outflow of substantial degree of estimation, referred to as
resources provisions (warranties and pensions)
Elements of financial statements Elements of financial statements

Income is
• The elements directly related to the
1.increases in economic benefits during the
measurement of profit are:
accounting period in the form of inflows or
1. Income enhancements of assets or decreases in
2. Expenses
liabilities
2.that result in increases in equity, other than
those relating to contributions from equity
participants
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Elements of financial statements Elements of financial statements
Capital maintenance adjustments
Expenses are
• Revaluation or restatement of assets or
1.decreases in economic benefits during the liabilities gives rise to increase or decreases in
accounting period in the form of outflows or equity
depletions of assets or incurrence of liabilities
• Not included in income statement, under
2.that result in increases in equity, other than certain concepts of capital maintenance
those relating to distributions to equity
participants • Included in equity, as capital maintenance
adjustments or revaluation reserves
Underlying assumption Recognition 1

• Show element, an asset, by words and by a
monetary amount and include that amount in the
• The financial statements are normally prepared financial statements
on the assumption that an entity is a going
concern and will continue in operation for the For asset / liability, recognise if it
1. meets the definition of an asset/liability and
foreseeable future
2. probable that any future economic benefit
associated with the item will flow to or from the
• The entity has neither the intention nor the need entity
to liquidate or curtail materially the scale of its 3. The item has a cost or value that can be measured
operations with reliability
Measurement Measurement
• Historical cost
Current cost
• Assets are recorded at the amount of cash paid or
the fair value of the consideration given at the time • assets are carried at the amount of cash that
of their acquisition
would have to be paid if the same or
• Liabilities are recorded at the amount of the equivalent asset was acquired currently
proceeds received in exchange for the obligation or
at the amount of cash expected to be paid to satisfy
the liability
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Measurement Measurement
Present value
Realisable value,
• assets are carried at the present discounted value
• assets are carried at the amount of cash that of the future net cash inflows that the item is
could currently be obtained by selling the asset in expected to generate
an orderly disposal
• Liabilities are carried at the present discounted
value of the future net cash outflows that are
expected to be required to settle the liabilities
Concepts of capital and capital Reasons for framework

maintenance
Financial capital maintenance 1. Enables accounting standards to be developed
• maintain share capital in monetary terms in accordance with agreed principles
Physical capital maintenance 2. Avoids standards being developed in response

to specific problems
• maintain the ability of the business to continue
its activities, often referred to as maintaining 3. Ensures consistency between standards
the operating capability of the entity
Reasons for framework Reasons for framework

6. Standard setting process less likely to be
4. Helps to deal with transactions that are not influenced by vested interests , very large
the subject of an accounting standard companies cannot influence standards
5. Critical issues such as the definition of an 7. Strengthens credibility of accounting
asset may not be addressed without a profession
framework
8. Standards based on principles are harder
to abuse
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• Substance over form is a very important
concept in accounting
Substance Over Form • Financial statements must reflect the

substance of a transaction over its legal form,
i.e. the economic reality of a transaction or
event
• Failure to do so may result in the financial
statements being misleading
griffith.ie griffith.ie
Examples of substance over form • IAS 1 requires the application of substance over
form
• IFRS 16 (treatment of a lease)
• The IASB has yet to issue a specific IFRS dealing
with the matter
• IAS 24 (identification of related parties)
• The IASB has stated that FRS 5 (UK and Irish
GAAP) is consistent with the spirit of the IASB
• IAS 32 (presentation of financial “Framework Document” and with the IFRS’s
instruments)
generally
Off-SOFP Financing Why?

• Desire for a low gearing ratio.
The main aim of the concept of substance over companies with high debt are exposed to greater
form is to ensure that the commercial effect of a risk, which can have a negative effect on the
business transaction is shown in the financial value of a company. Schemes have been devised
to conceal the amount of debt finance raised by
statements
the company
The real target is Off-SOFP Finance; many • Borrowing capacity linked with existing debt
companies want to keep liabilities off the SOFP. the lower the debt, the greater the potential for
further borrowing
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• Borrowing costs are linked to risk
Higher debt means higher borrowing costs Some finance arrangements may be genuinely
• High debt increases risk of rights issue undertaken to reduce risks, and might be kept
This will have a negative effect on share price off the SOFP.
• ROCE may be improved
By reducing long term liabilities, the return (PBIT) Thus, the intention is not to mislead the users
on capital employed (Capital + Reserves + Long of the accounts, but to reflect the true nature
Term Liabilities) will increase of the agreement
What is an asset? • Risk arises because there is a possibility that

future economic benefits may be different to
what was expected
Control & Risk are two key features of an asset • The company that has access to those benefits
• Control is necessary to ensure that future will usually be the one to lose or gain if
economic benefits do not accrue to others variations occur
• If a company is exposed to risks, this provides
• The company must be in a position to secure its additional evidence that the company should
access to those benefits treat the source of the benefits as an asset
Substance over form requires that where a

What is a liability? transaction results in an asset or liability, that item
should be recognised in the SOFP if:
A liability requires an obligation to transfer (i) There is sufficient evidence of the existence of
economic benefits the item
(i) The item can be measured reliably
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Continued Recognition Cease Recognition
Where a transaction involving a previously
recognised asset results in no significant change Where a transaction involving a previously
in: recognised asset transfers to others:
(i) The entity’s rights or other access to the benefits of (i) All significant rights or other access to benefits
that asset; or relating to that asset; and
(ii) Its exposure to the risks inherent in those benefits
(ii) All significant exposure to the risks inherent in
Then, the entire asset should be continued to be those benefits
recognised
Then, the entire asset should cease to be recognised
1. Sale and Leaseback arrangement

Transactions should be accounted for according to Assets and liabilities on a sale and leaseback
their substance arrangement should remain in the SOFP if:
(i) The sale is clearly a financing and not a trading
transaction
The following are common examples of recognising (ii) There is an option to repurchase, but only if
substance over legal form • The option to repurchase is almost certain to be exercised
• The seller is given an option to purchase and the buyer an
option to sell
• Repurchase is linked to the original sale price rather than the
market price
3. Factored debts
2. Securitised Assets
This is a well established method of financing.
This means certain collectible debts, such as a mortgage,
are transferred from the originator to a specially formed In order to determine the appropriate accounting
company treatment, it may be necessary to ask:
(i) Has the seller access to benefits of the factored debtor (e.g.
This company raises money by the issue of debentures future cash flows from payments by debtors?)
to pay for these debts (ii) Has the seller a liability to repay amounts received from the
factor because of bad debts?
If the originator company retains benefits or risks linked
to the securitised assets, it is considered a form of off If the answer to either of these questions is yes, then it is
SOFP finance and should be shown as a financing deal probably a financing scheme and the asset and the liability
should be shown in full in the accounts
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4. Consignment Stock
Of particular importance in the motor industry It is necessary to identify whether the dealer has
For example access to the benefits of the stocks and
exposure to the risks inherent in the benefits
• The dealer may take a new car physically onto
his premises on a sale or return basis.
• An off SOFP scheme could be devised whereby
the dealer is borrowing the goods from the
supplier to generate benefits to the dealership
6. Quasi Subsidiaries
5.Loan Transfers
• A quasi subsidiary is an organisation which,
These are the rights to receive payments of a while not being strictly a subsidiary within the
loan. legal definition of the term, is nevertheless
controlled by the reporting entity
Like securitised assets, it is necessary to see who
• If the reporting entity will enjoy benefits from
receives the benefits and takes the risks to check
the quasi subsidiary to the same extent as if
whether this is a form of off SOFP finance
the organisation was a subsidiary, then such
an organisation should be consolidated.
Example
Again, the crucial question is whether the
controlling company will be exposed to risks and • A hotel group H sells some of its hotels to B. B
benefits from the organisation is a subsidiary of a bank and is financed by
loans from the bank.
Control may be exercised through a contract, • H and B enter into a management contract
debt or other capital instrument or even by whereby H manages the hotels.
preventing others from exercising control (e.g. in
• It is paid a management fee which is equal to
an equal joint venture)
the profits of the hotels after interest
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• It is clear from the circumstances that the
banks legal ownership is of little relevance.
• B will be regarded as a quasi subsidiary of H
and will be consolidated by it.
• The group SOFP will show the hotels as an
asset and the bank loans as a liability
griffith.ie
16
• The standard indicates that the main issues to
be dealt with are:
Property, Plant
& Equipment 1. Recognition of assets
2. Determination of their carrying amount
3. Depreciation and impairment losses
IAS 16 4. Disclosure requirements
• Property, plant and equipment are tangible

• The standard does not apply to: items that:
(a) Property, plant and equipment classified as (a) Are held for use in the production or supply of
held for sale under IFRS 5 goods or services, for rental to others or for
(b) Mineral rights and reserves administration purposes
And
(c) Biological assets (b) Are expected to be used during more than
one period
• Recognition
• Initial measurement
An item of property, plant and equipment should be
recognized in the SOFP if, and only if,: • If an asset qualifies for recognition, it should be
measured at cost, initially
(a) It is probable that future economic benefits
asSPLOCIated with the item will flow to the entity • Cost = amount of cash or cash
equivalents paid or the fair value of other
And
consideration given to acquire an asset
(b) The cost of the item can be measured reliably
17
• Cost of an asset comprises
Purchase price less trade discounts / rebates, but not early payment discounts • Administration and other general overheads
PLUS
Import duties and non-refundable purchase taxes
are not included in the cost of the asset
PLUS
Any costs that are directly attributable to bringing the asset to the location and
condition necessary for the asset to be used as intended, for example
• In the case of self-constructed assets, the
• Site preparation costs following are excluded from the cost of the
• Initial delivery and handling costs
• Installation and assembly costs asset
• Professional fees
• Costs of testing asset (a)Internal profits
PLUS
Costs of dismantling and removing the asset and restoring the site, if such an
(b)Abnormal amounts of wasted material,
obligation is placed on the entity (legally or constructively) labour and other resources
PLUS
In certain circumstances, IAS 23 allows part of the borrowing costs to be capitalized
Subsequent expenditure
• If part of an asset is replaced, e.g. a new engine
• Costs of “day-to-day” servicing of the asset not in a plane, then the cost of the replacement can
capitalized. This is charged to the Profit or Loss be capitalized ( if it meets normal recognition
in the period it is incurred. criteria).
• The part of the asset that is replaced must then

• If the expenditure improves the asset beyond its be de-recognized.
original state, capitalise the expenditure as part
of the asset
• Measurement after initial recognition 1. Cost Model
IAS 16 provides two options After recognition the asset should be carried in the
SOFP at:
1. Cost Model
Cost
1. Revaluation Model
Less Accumulated Depreciation
Less Accumulated Impairment Losses
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2. Revaluation Model Fair Value
After recognition, an asset whose fair value can be • Fair value is determined as the price that would
measured reliably, should be carried at a be received to sell an asset or paid to transfer a
revalued amount, i.e. liability in an orderly transaction between market
participants at the measurement date (IFRS 13)
Fair value of the asset at the date of revaluation • Fair Value is based on the highest and best use of
Less subsequent accumulated depreciation that asset that would maximise its value based on
Less subsequent impairment losses uses that are physically possible, legally
permissible and financially feasible
Fair Value Fair Value Example

• Fair value is considered from the perspective • A company has land currently developed for
of market participants (buyers and sellers), industrial use as a site for a factory
even if they may use the asset differently
• Alternatively, the site could be developed into
• Current use of a non-financial asset is a block of residential flats which, based on
presumed to be its highest and best use, evidence relating to adjoining plots of similar
unless there are factors that would suggest size, appears to be a practical use of the site
otherwise.
Fair Value Example Fair Value Example

• The highest and best use of the land is 2. Value of the land as a vacant site for
determined by taking the higher measurement residential use , taking into account the costs
from the two possible outcomes, i.e. of demolishing the factory and other costs
(including the uncertainty over legal and
1. Value of the land as currently developed for planning issues) necessary to convert the land
industrial use to a vacant site (i.e. the land is to be used by
market participants on a stand-alone basis)
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• Revaluation upwards
Debit Asset
• All revaluations made with such frequency so
that carrying amount does not differ materially Credit Revaluation surplus (reserve)
from the fair value at the SOFP date With the amount of the increase
But
If the revaluation gain reverses a previous revaluation loss which was
• If an item of PPE is revalued, then all items in recognized in the Profit or Loss, then the gain should be recognized in the
Profit or Loss
that class must be revalued But
Only to the extent of the previous loss on the same asset
Any excess over the original amount of the original loss goes to the revaluation
surplus
• Example
Company X has land in its books with a carrying value of • Revaluation downwards
$14m. Two years ago, the land was worth $16m. The loss
was recorded in the Profit or Loss. Debit Profit or Loss
Credit Asset
This year the land has been valued at $20m
with amount of the decrease
BUT
$m $m
Debit Land 6 The decrease should be debited directly to the revaluation surplus to the
extent of any credit balance existing in the revaluation in respect of that
Credit Profit or Loss 2 asset
Credit Revaluation surplus 4

• Example • If the asset is subject to depreciation, the treatment of

revaluation surpluses becomes a little more complicated.
Company Y Ltd has land in its books with a carrying value
of $20m. Two years ago, the land was worth $15m. The • If the asset is revalued up, the annual depreciation charge will
gain was credited to the Revaluation surplus. This year, be greater
the land has been revalued to $13m.
• This will reduce profits to lower than if no revaluation occurred.
$m $m Thus, accumulated reserves will be lower
Debit Revaluation Surplus 5 • The revaluation reserve will be realized if and when the asset is
Debit Profit or Loss 2 sold or disposed of in the future
Credit Land 7 • But, it can be argued that the surplus is also being realized when
the asset is being used, i.e. over its remaining useful life
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• Thus the revaluation surplus being used is the
difference between: • Company A bought an item of machinery at
the start of 2009 for $100,000
• The new depreciation charge on the revalued
amount • Estimated useful life was 5 years, no residual /
scrap value
and
• At the start of 2011, the assets was revalued
• The old depreciation charge on the old amount to $120,000. No change in life.
• New annual depreciation charge:

• At 1st January 2011: 120,000 = $40,000 per annum
3 years
Carrying value of asset 60,000 To compensate for this, the company can “release” from the revaluation
reserve to the accumulated reserves an amount to reflect the realization of the
Revalue to 120,000 revaluation reserve
The revaluation reserve is released on a straight-line basis over the remaining
Revaluation Surplus 60,000 life of the machine, i.e.
60,000 = $20,000
Debit Machinery 60,000 3 years
Debit Revaluation reserves 20,000
Credit Revaluation surplus 60,000 Credit Accumulated reserves 20,000
(In the statement of changes in equity, not the Profit or Loss)

Example Method 1 : All the surplus is transferred when the

asset is sold
Stuey Ltd purchased property for $400,000 on the 1st of Extract of the SPLOCI for the year ended 31st December ‘07
January 1998. Profit before tax X
Income tax expense X
The property was depreciated at 2% straight line.
Profit after tax X
The carrying value at the 31st December 2007 was $320,000 at
which date it was revalued to $600,000. Other comprehensive income
Gain on Revaluation 280,000
The property was sold for $700,000 on the 31st December 2010.
Total comprehensive income X .
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Statement of changes in equity for the year ended 31 st Dec. 2010
Statement of changes in equity for the year ended 31st December 2007 Share Revaluation Retained Total
Capital Reserve Earnings
Share Revaluation Retained Total
Capital Reserve Earnings $ $ $ $
$ $ $ $
At 1 January 2007 X X X X At I January 2010 X 280,000 X X
TCI for the year 280,000 X X TCI for the year X X X X
Realisation of reval. gain (280,000) 280,000 0
Method 2 Statement of changes in equity (each year)

Transfer a part of the gain each year for 31st December
2008 and 2009 (i.e. the difference between depreciation Share Revaluation Retained
based on the revalued amount and what the charge would Capital Reserve Earnings
have been based on original cost) and then transfer the At 1 January 2008 X 280,000 X
remainder of the surplus when the asset is sold. Realisation of part of
Revaluation surplus (7,000) 7,000
For the year ends 31 Dec. 2008 & 31st Dec. 2009
Depreciation on revalued amount 600,000/40years Year ended 31 December 2010.
= $15,000 pa. Sale proceeds 700,000
Depreciation on original cost 400,000/50 years Carrying value (600k – (2x15k)) 570,000
= $8,000 pa Profit on disposal 130,000
The profit on sale $130,000 will be included in arriving at profit for the year.
Difference = $7,000
Statement of changes in equity (in year of disposal) • Example

Share Revaluation
Retained Company B had the following in its SOFP at 31st
Capital Reserve December 2010:
Earnings
$ Buildings $
$ $
Cost 5,000,000
At 1 January 2010 X 266,000* X
Realisation of revaluation Accumulated depreciation 1,000,000
surplus (266,000) 266,000 Carrying amount 4,000,000
* 280,000 – (2 x 7,000) Depreciation has been charged at 2% per annum
22
The building is revalued to $5,925,000 on the 30th June 2011. No
change in life • At the date of the revaluation:
Solution
$
Depreciation charge for 2011 $ Carrying amount 3,950,000
$5,000,000 x 2% x 6/12 = 50,000 Revalued amount 5,925,000
+ Revaluation Surplus 1,975,000
$5,925,000 x 6/12 = 75,000
39.5 years _______ This is released to accumulated reserves as follows:
125,000 1,975,000 = $50,000 per annum
The asset is depreciated as normal up to the date of the 39.5 years
revaluation. In 2011 $50,000 x 6/12 = $25,000 would be released
After that, the revalued amount is written off over the remaining
life of the asset From 2012, the annual depreciation charge would be $150,000
Profit or Loss
Revaluation Surplus Account
Accum. Reserves 25,000 Asset 1,975,000 $
Depreciation 125,000
Balance c/d 1,950,000
SOFP
Valuation at 30th June 5,925,000
Depreciation 75,000
Carrying amount 5,850,000
Revaluation surplus 1,950,000
• De-recognition
• As an alternative to releasing the revaluation If an asset is:
• Sold
reserve over the assets remaining useful life, the • Scrapped
• Withdrawn from use
surplus could instead be transferred in its
Then the asset must be removed from the SOFP
entirety to retained earnings, when the asset is
Any gain or loss on disposal must be calculated and included as part of the
eventually de-recognized profit or loss for the period
The gain or loss on disposal is the difference between:
(a) The carrying amount of the asset (NBV)
And
(b) The net sales (disposal) proceeds
(any consideration receivable on disposal of PPE is measured at fair value)
23
• Depreciation • Each part of an item of PPE that has a cost that is significant in
relation to the total cost of the item should be separately
depreciated
• Allocation of the cost of the asset over its useful life • Example
• It is not a valuation method A company acquires a property at a cost of $100 million. For
depreciation purposes, the asset has been separated into the
• The depreciation charge for a period should be following elements:
recognized in the profit or loss for the period. Separate asset Cost Life
• It is usually an expense item. If the asset is used in the Land $25m freehold
production of goods for sale, then include depreciation Buildings $50m 50 years
of that asset in the cost of sales Elevators $15m 15 years
Heating system $10m 10 years
Each asset is depreciated accordingly
• Depreciable amount of asset is allocated on a

• Because an asset is being maintained or
systematic basis over its useful life
repaired does not mean it should avoid
• Method chosen should reflect use of asset depreciation
• Method chosen should be applied consistently
from period to period ( unless a change in the • Depreciation begins when the asset is
way the asset will be used in future) available for use and ceases when the asset is
• Review annually both residual value of asset de-recognized (or classified as held for sale
and expected useful life. Change if necessary IFRS 5, if earlier)
(this would be a change in estimate IAS 8)
• Example
• Land, with some exceptions, has an unlimited useful life
and is not depreciated. Company A purchased an asset on 1st January 2009, for
$500,000. It had a useful life of 5 years. No residual value.
• Buildings have a useful life (usually 50 years) and are At 31st December 2011, the remaining life is revised to 7
depreciated years
• If an asset is revalued, the revalued amount should be The depreciation charge for 2011 will be as follows:
depreciated over its remaining useful life, starting at the NBV at 31st December 2010 $300,000
date of its revaluation
Remaining useful life at the start of the year 2011 8 years
• If the useful life is revised, the carrying amount of the
(i.e. 7 years from the end of this year + this year)
asset should be written off over the remaining life,
starting with the period in which the change is made Depreciation charge
$37,500
24
• Disclosure • If they arise, disclose
For each class of PPE:
(a) Measurement bases for calculating the gross carrying amount (a) Restrictions on title and whether assets have
(b) Depreciation method been pledged as security and for how much
(c) Useful lives or depreciation rates used
(d) Gross carrying amount and accumulated at the beginning of the period (b) Amount recognized in the course of assets
(e) Reconciliation of carrying amount at beginning and end of period, showing
(i) additions
construction
(ii) assets held for sale (IFRS 5) (c) Contractual commitments to acquire PPE
(iii) acquisitions through business combinations
(iv) revaluations (d) Amount of compensation from third parties
(v) Impairment losses and reversals of losses for assets that were impaired, lost or given
(vi) depreciation
(vii) other changes, e.g. foreign currency exchange differences up included in the profit or loss
• If assets have been revalued, disclose: • IAS 16 encourages disclosure of:

(a) Date of revaluation (a) Carrying amount of idle PPE
(b) Whether independent valuer was used (b) Gross carrying amount of fully depreciated assets
(c) Methods and assumptions made still in use
(d) Extent to which estimates were based on active (c) Carrying amount of assets retired from active use
markets or other techniques and not classified as held for sale
(e) Carrying amount of asset if cost model had been used (d) If the cost model is used, then disclose the Fair
Value, if materially different
(f) Revaluation surplus
25
IAS 16
Elite Leisure Question
Elite Leisure is a private limited liability company that operates a single cruise ship. The ship was
acquired on 1 October 1996. Details of the cost of the ship’s components and their estimated useful
lives are:
Component original cost ($million) depreciation basis
Ship’s fabric (hull, decks etc) 300 25 years straight-line
Cabins and entertainment area fittings 150 12 years straight-line
Propulsion system 100 useful life of 40,000 hours
At 30 September 2004 no further capital expenditure had been incurred on the ship.
In the year ended 30 September 2004 the ship had experienced a high level of engine trouble which
had cost the company considerable lost revenue and compensation costs. The measured expired life
of the propulsion system at 30 September 2004 was 30,000 hours. Due to the unreliability of the
engines, a decision was taken in early October 2004 to replace the whole of the propulsion system at
a cost of $140 million. The expected life of the new propulsion system was 50,000 hours and in the
year ended 30 September 2005 the ship had used its engines for 5,000 hours.
At the same time as the propulsion system replacement, the company took the opportunity to do a
limited upgrade to the cabin and entertainment facilities at a cost of $60 million and repaint the
ship’s fabric at a cost of $20 million. After the upgrade of the cabin and entertainment area fittings it
was estimated that their remaining life was five years (from the date of the upgrade). For the
purpose of calculating depreciation, all the work on the ship can be assumed to have been
completed on 1 October 2004. All residual values can be taken as nil.
Required:
Calculate the carrying amount of Elite Leisure’s cruise ship at 30 September 2005 and its related
expenditure in the income statement for the year ended 30 September 2005. Your answer should
explain the treatment of each item. (12 marks)
26
Definition
“property (land or buildings or part of a building) held
to earn rental income or for capital appreciation or
Investment Properties both, rather than for
IAS 40 (a) use in production / supply of goods or

services or administration purposes
or
(b) sale in the ordinary course of business”
• Definition says property “held”. This means • Nature of investment properties is different to
company does not have to own the property. other types of land and buildings and
Property held under a finance lease is included consequently, the accounting treatment will
in the definition. differ also
• Investment properties generate cash flows that
• Possible to treat property held under an are mostly independent of other assets held by
operating lease as an investment property (if it the entity
otherwise meets the definition of the
investment property)
The following are examples of investment property:

• land held for long term capital appreciation rather than for short The following are examples of items that are not investment property
term sale in the ordinary course of business • property intended for sale in the ordinary course of business or in
• land held for a currently, undetermined future use (if any entity has the process of construction or development for such sale (IAS 2 –
not determined that it will use the land as owner occupied Inventories)
property or for short term sale in the ordinary course of business,
the land is regarded as held for capital appreciation) • property being constructed or developed on behalf of third
parties (IAS 11 – Construction Contracts)
• a building owned by the entity (or held by the entity under a
finance lease) and leased out under one or more operating leases. • owner occupied property (IAS 16 – PPE)
• a building that is vacant but is held to be leased out under one or
more operating leases. • property that is leased to another entity under a finance lease
• property that is being constructed or developed for future use as
investment property
27
Recognition Initial Measurement
Recognise Investment Property when: • Investment property should initially be measured

at cost
1. It is probable that future economic benefits
will flow to the company from the property • Transaction costs should be included in the cost
of the property
2. Cost of the property can be measured reliably
Initial Measurement
• The cost of a self constructed investment
Cost is property is its cost at the date when
1. Purchase price PLUS construction is completed.
2. Any other directly attributable expenditure, e.g.
(i) legal fees • (Up to the date of completion, the property
(ii) property transfer taxes (stamp duty) would be accounted for using IAS 16)
(iii) other transaction costs
But, exclude items such as indirect overhead costs.
• If the property is held under a lease, it should

Subsequent Measurement
be measured initially at the lower of
• Two alternatives allowed
(i) The fair value of the property
And 1. Cost Model
(ii) Present value of minimum lease payments
(including any premium paid for the lease) 2. Fair Value Model
28
Cost Model
• When a property interest held under an operating
lease is classified as an investment property there is no All investment properties are treated like other
choice of accounting policy - the fair value model must properties under IAS 16 PPE, i.e.
be applied.
Cost
• When a property is being constructed or developed for Less Accumulated Depreciation
future use as an investment property then it should be
valued at cost until it is completed or arrives at a stage Less Accumulated Impairment Losses
where there are fair market values available.
(If held for sale, inv. prop. measured in
accordance with IFRS 5)
Fair Value Model Fair Value Model

• All investment properties are revalued to their • Fair value = fair value is determined as the price
fair value. that would be received to sell an asset or paid to
transfer a liability in an orderly transaction
• Any gain / loss on revaluation should be between market participants at the measurement
treated as part of the profit / loss for the date (IFRS 13)
period (i.e. in the Profit or Loss )
• Thus, fair value should reflect market conditions at
• Note the difference between the fair value the reporting date
model and the revaluation of PPE in IAS 16
Fair Value Model Fair Value Model

(a) Current prices in an active market for
• Fair value is usually calculated by comparing properties of a different nature, condition or
current prices for similar properties in an active location, adjusted to reflect those differences
market
(b) Recent prices of similar properties on less
• In estimating fair value, entity should also active markets, adjusted to reflect these
consider: changes
(c) Discounted cash flow projections based on
reliable estimates of future cash flows
29
Fair Value V Cost Model Fair Value V Cost Model
Example 1. Cost Model
• Company X purchased an investment property
The asset is depreciated annually.
for $10m on 1st June 2011. It has a useful life of
50 years $10m = $200,000 annually
• Estimates of the market value on 31st May 2012 50 years
show a value of $12m
Fair Value V Cost Model Fair Value V Cost Model

• In the Profit or Loss, there is a depreciation 2. Fair Value Model
charge of $200,000, decreasing profit
$
• In the SOFP, the investment property will have a Debit Investment Property 2m
carrying amount of $9,800,000
Credit Profit or Loss 2m
Fair Value V Cost Model Miscellaneous

• Once an entity chooses a method of accounting for
• In the Profit or Loss, there is a gain of investment properties, it must apply that method
$2,000,000, increasing profit consistently
• In the SOFP, the investment property is shown • A change in method should only occur if it would result
at $12,000,000 in more appropriate presentation in the financial
statements
30
Miscellaneous Miscellaneous
• Company is “encouraged but not required” to
• Such a change would be a change in accounting
use the services of an experienced independent
policy, per IAS 8
valuer with recognized professional qualifications
when determining fair value
• Change from fair value model to cost model
resulting in better financial statements is • All entities must determine fair value of
considered “highly unlikely” investment property. If cost model is used, must
still disclose fair value of the property in the
notes to the financial statements
Owner-Occupied Property Disposals

Owner occupied property is not normally an investment property
• Gains or losses on disposal are calculated in the
• But, some properties comprise a portion that is held for rentals
and/or capital appreciation and another property that is owner usual way:
occupied
Net disposal proceeds
• If these portions could be sold separately (or leased out separately
under a finance lease), the entity accounts for the portions Less: Carrying amount of the asset
separately
• If they cannot be sold separately, the property is an investment • Gains or losses are recognized in the Profit or
property only if an insignificant portion is held for use in the Loss, in the period of disposal
business
Transfers Transfers
Some of the more common possibilities are:
Transfers to and from investment property can
only be made when there is a change in use
(a) Transfer from investment property to
owner-occupied property
Where an entity uses the cost model in
accounting for investment properties, the
carrying amount of property transferred does not The fair value of the property at the date of
change. change is determined and used for
subsequent accounting under IAS 16
31
Transfers Transfers
(b) Transfer from owner-occupied property to investment (c) Transfer from investment properties to inventories
property i.e. commencement of a development with a view
If the investment property is to be carried at fair value, to sale
the entity should apply IAS 16 up to the date of change in
use
The fair value of the property at the date of change is
Any difference at that date between the carrying amount determined and used for subsequent accounting under
of the property under IAS 16 and its fair value is treated IAS 2 Inventories
in the same way as a revaluation under IAS 16.
Disclosure
There are extensive disclosure requirements, (including, (d) The amounts recognised in profit and loss for:
but not limited to):
(i) rental income from investment property
(a) Whether the fair value or the cost model has been
applied (ii) direct expenses arising from investment property
that generated rental income in the period
(a) If fair model used, methods and assumptions applied
in determining fair value (iii) direct expenses arising from investment property
that did not generate rental income in the period
(a) Extent to which the fair value is based on a valuation
by an independent, qualified, experienced valuer. If
not, this fact must be disclosed
• Fair Value Model

(e) Restrictions on realisability of property or As well as the disclosures just mentioned:
remittance of income and proceeds of disposal Reconcile opening and closing balance of the carrying
amount of the property, showing fro example
(f) Future contractual commitments ( purchase / (a) Additions
construct / develop) (b) Assets classified as held for sale
(c) Net gains or losses from fair value adjustments
(d) Transfers to and from inventories and owner-occupied
properties
(e) Other changes
32
Cost Model
If the cost model is being applied, in addition to other (d) The fair value of the investment property. If fair
disclosures previously mentioned, disclose the following: value cannot be determined reliably, disclose:
(a) Depreciation method
(b) Useful lives or depreciation rates description of investment property
(i)
(c) Reconciliation of opening and closing carrying amounts (ii) explanation of why fair value cannot
for the period, showing:
(i) Additions be calculated
(ii) Disposals (iii) if possible, a range of estimates within
(iii) Depreciation which fair value is highly likely
(iv) Impairment losses
(v) Transfers to and from inventories and owner-
to lie
occupied properties
(vi) Other changes
• The company had all the above properties valued by an independent

Example professional valuer on 31 May 2011. The following is a summary of the
valuations and original costs of the properties:-
STABLE LTD Cost Cost Valuation Valuation
STABLE Ltd a company manufacturing riding equipment and accessories, owns a Title Land Buildings Land Buildings
number of properties which are listed below. $ $ $ $
1. Graymare Lane: a freehold factory and office block used entirely by Freehold
STABLE plc for its own manufacturing and administration.
2. Blackhorse Road: a freehold office block, let at commercial rates to a large Graymare lane 10,000 24,000 40,000 90,000
insurance company.
Blackhorse road 25,000 60,000 30,000 80,000
3. Stallion Way: a property held by Stable Ltd under a finance lease and
leased out to Pony Ltd under an operating lease. Shetland street 4,000 8,000 16,000 24,000
4. Numbers 2, 4, 6 and 8 Shetland Street: four freehold cottages, originally
purchased to provide assistance to employees, but which are now let Leasehold
commercially to tenants who have no other connection with the company. Stallion way 72,000 120,000
Graymare Lane
The company adopts a straight line depreciation
method, where appropriate. Graymare Lane is not an investment property under IAS
40 because it is owner occupied.
REQUIREMENT: The building should be depreciated under IAS 16.
Prepare the necessary journal entries to

DR Land 30,000
incorporate the above revaluations in the books
of STABLE Plc DR Buildings 66,000
CR Revaluation Reserve (OCI) 96,000
33
Blackhorse Road Stallion Way
Blackhorse Road qualifies as an investment property as it
is held to earn rentals for Stable Ltd. Stallion Way qualifies as an investment property as it is
held by Stable Ltd under a finance lease and leased out
under an operating lease.
DR Land 5,000
DR Buildings 20,000
DR Property 48,000
CR SPLOCI 25,000
CR SPLOCI 48,000
Shetland Street
Shetland Street qualifies as an investment property as it is

a property owned by Stable Ltd and held to earn rentals.
DR Land 12,000
DR Buildings 16,000
CR SPLOCI 28,000
34
• Intangible Asset
“An identifiable non-monetary asset without

physical substance”
Intangible Assets Examples:
IAS 38 •
•
Brand Names
Mastheads and Publishing Titles
• Computer Software
• Licences and Franchises
• Copyrights and Patents
When Is An Intangible Asset Identifiable? • Recognition

Recognise intangible asset at cost if:
When it is capable of being separated or divided
from the entity and sold, transferred, licensed, (a) It is probable that future economic benefits
rented or exchanged, attributable to the asset will flow to the
or company; and
when it arises from contractual or other legal (b) The cost can be measured reliably
rights, regardless of whether the rights can be The assessment of the probable future economic benefits should be based on
reasonable assumptions – preferably supported by external sources.
transferred or separated from the entity.
• Cost refers to • Fair Value

“fair value is determined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
Amount of cash or cash equivalents paid transaction between market participants at the
measurement date ” (IFRS 13)
or
Fair value is easy to determine if there is an active market
Fair Value of other consideration given (e.g. for the asset type
equity shares) to acquire the asset Active market exists where
• Items traded in market are homogenous
• Willing buyers and sellers can easily be found
• Prices are available to the public
35
• Exchange of Assets
• If active market does not exist, fair value must An intangible asset may be acquired for a non-
be estimated monetary asset (or a combination of monetary and
non-monetary assets)
• Consider outcome of recent transactions for The cost of the non-monetary asset is measured at fair
similar assets value unless:
(a) The exchange lacks commercial substance; or
(b) The fair value of neither the asset given or received
can be measured reliably
• Acquisition by Government Grant

Intangible asset may be acquired free of charge through
If the acquired asset is not measured at fair a government grant
value, its cost is measured at the carrying
e.g. licence for radio / television station
amount of the asset given in exchange
Company can;
(a) Recognise both the intangible asset and grant initially at
fair value (IAS 20); or
(b) Recognise the asset initially at a nominal amount plus
any expenditure that is directly attributable to preparing
the asset for use
• Internally Generated Goodwill • Internally Generated Intangible Assets
Should not be recognised in the financial Recognition may be problematic because:

statements
(a) Difficult to determine whether and when
future economic benefits will arise; and
That is because it cannot be measured reliably
at cost (b) Difficult to measure the cost of the asset
reliably
36
IAS 38 does not prohibit the recognition of internally
generated assets, per se, but it does specifically state • To determine whether an internally generated
that the following must not be recognised: intangible asset should be recognised, classify
Internally generated: the generation of the asset into
• Brands (a) A research phase
• Mastheads
• Publishing titles Or
• Customer lists
• Items similar in substance (b) A development phase
(These cannot be distinguished from the cost of
developing the business as a whole)
Research and Development.

At the research stage entities gather new scientific or technical
• Research
information.
“original and planned investigation undertaken with
At the research stage it is considered to be too early to have
reasonable certainty that a particular project will result in an the prospect of gaining new scientific or technical
inflow of economic benefits which exceed the total costs to be knowledge and understanding”
incurred.
At the development stage those entities use the information Research expenditure must be recognised as an
gathered at the research stage to produce new or improved
products, devices etc. expense in the Profit or Loss as it is incurred
At the development stage the inflow of economic benefits is (because ability to generate future economic
much closer and reasonable certainty is possible under strict
conditions. benefits is in doubt)
Examples of research activities • Development
• Activities aimed at obtaining new knowledge “Application of research findings or other

knowledge to a plan or design for the
• Search for alternatives for materials, devices, production of new or substantially improved
products, processes, systems materials, devices, products, systems or services
before the start of commercial production or
use”
37
Development expenditure must be capitalised if all
the following conditions are met: Unlike research expenditure, development costs
are incurred much later in a project.
1. Probable future economic benefits
2. Intention to complete and use / sell asset For this reason it is more appropriate to have
3. Resources exist to complete development reasonable certainty as to probable future
4. Ability to use / sell asset economic benefits relating to development costs.
5. Technically feasible Note: If all the above conditions for capitalising
6. Expenditure attributable to the asset can be development costs are not met, such costs should be
measured reliably recognised as an expense in the year in which incurred.
(PIRATE)
Cost of Internally Generated Intangible Asset Property, plant and equipment purchased or constructed
for R&D purposes.
The total expenditure incurred from the date when the
intangible asset first meets the recognition criteria • All such property, plant and equipment should be
Cost includes all directly attributable costs necessary to capitalised and written off to the SOCI over their useful
create, produce and prepare the asset for use intended, lives.
including
• IAS 16 states that depreciation of property, plant and
• Costs of materials / services equipment used for development activities may be
• Fees to register a legal right capitalised as part of the cost of the intangible asset
• Amortisation of patents / licences used to generate the recognised, in accordance with the 6 conditions
asset outlined previously.
Property, plant and equipment purchased or constructed • Note

for R&D purposes.
Expenditure initially recognised as an expense cannot
• All such property, plant and equipment should be be recognised as part of the cost of the intangible asset
capitalised and written off to the SOCI over their useful at a later date
lives.
Such an expense cannot be re-instated as an asset at a
• IAS 16 states that depreciation of property, plant and later date
equipment used for development activities may be
capitalised as part of the cost of the intangible asset Development expenditure initially capitalised and
recognised, in accordance with the 6 conditions written down to recoverable amount (impairment)
outlined previously. under IAS 36 can be reinstated.
38
Examples of Development Activities Measurement of Intangible Assets after Recognition
• Design, construction and testing of prototypes

After recognition, an intangible asset should be valued
and models
using either
• Design of tools and moulds involving new 1. Cost Model
technology
Or
• Design, construction and testing of a chosen
2. Revaluation Model
alternative for new or improved materials,
devices, products, processes etc.
1. Cost Model 2. Revaluation Model

The intangible asset should be carried at:
The intangible asset should be carried at: Revalued amount (fair value at date of revaluation)
Cost Less Any subsequent accumulated

amortisation
Less Accumulated Amortisation
Less Any subsequent accumulated
Less Accumulated Impairment Losses impairment losses
• If active market exists, revaluation should be

• “Fair Value” should be determined by reference
carried out regularly so the fair value does not
to an active market
differ materially from its carrying amount at the
• If no active market exists, asset cannot be balance sheet date
revalued
• Frequency of revaluation depends on volatility
• Thus, cannot use “revaluation model” of asset
• Some assets will be revalued annually, some less

often
39
• Revaluation gain • Revaluation Loss
Credit to reserves Loss is recognised in the Profit or Loss
But But
If gain reverses previous loss on same asset, If loss reverses a previous gain on the same asset,
which was recognised in the Profit or Loss: which was credited to reserves:
Then
Then
The loss is debited to reserves to the extent of any
Present gain shall be credited to Profit or Loss, credit balance in the revaluation surplus, in respect of
with any excess going to reserves that asset. Any excess loss goes to the Profit or Loss
• Any revaluation surplus may: • Cowes Limited purchased a 10 year milk quota
1. Be transferred directly to retained earnings on for $200,000 in 2010.
disposal or retirement of the asset • The fair value of the milk quota at 31st December
Or 2013 was $370,000, when the NBV of the quota
was $120,000
2. Some of the surplus may be realised as the
asset is used by the entity • Cowes Limited uses the revaluation model for
this class of intangible asset.
(not done through the Profit or Loss)
On Purchase of the Quota

• Revaluation increases are credited to revaluation
$’000 $’000 surplus, except to the extent that they reverse a
Dr. Product Quota (Intangible Asset) 200 revaluation decrease previously recognised in
Cr. Bank 200 profit and loss.
On Revaluation of the Quota

Dr. Product Quota (Intangible Asset) 250
Cr. Revaluation Reserve 250
40
Finite Life
• Useful Life
• Asset with a finite life is amortised over its estimated
Must assess the useful life of the intangible asset useful life
Useful life is: • Usually, straight line and no residual value, unless:
(a) There is a commitment by a third party to purchase
(a) Finite the asset at end of its useful life; or
Or (b) There is an active market for the asset and the residual
value can be determined by reference to that market
(b) Indefinite and it is probable that such a market will exist at end
of the assets useful life
• Amortisation commences when asset is available Example:

for use • Briar Limited spent $20,000 on a product patent during
2010. The patent will run for 15 years, commencing from
• Amortisation will cease when the asset is 1st January 2011.
derecognised ( or classified as held for sale, if
earlier) • It is probable however that Briar Limited will only obtain
economic benefits from the patent for an 11 year period.
• Amortisation is recognised in the Profit or Loss
• It is expected that the economic benefits of the patent
• Amortisation period and method should be will be consumed at a rate of 20% straight line per
reviewed annually and changed if necessary annum, over the first three years, and 5% straight line
over the next eight years.
• The patent is an intangible asset, with a zero residual • Indefinite Life

value. The depreciable amount of $20,000 should be
depreciated according to how its future economic “No foreseeable limit to the periods over which
benefits are consumed by Briar Limited. the asset is expected to generate net cash
inflows”
$’000 $’000
• No amortisation
Dr. Amortisation of patent – P/L 4
Cr. Patent 4 • Test annually for impairment (and more often if
(Being amortisation of patent for year ending 31st there is an indication that impairment might
December 2011) have occurred)
41
• Acquisition of an Intangible Asset as part of a
• Change from an indefinite life to a finite life is a business combination
change in estimate (IAS 8)
If an intangible asset is acquired in a business
combination, the cost of the asset is its fair value
at the date of acquisition
The acquirer recognises at acquisition date,
separately from goodwill, any intangible asset of
the acquiree if its fair value can be measured
reliably
• Derecognition Disclosure
The disclosure requirements of IAS 38 are extensive. The
An intangible asset should be derecognised: main points are:
(a) On disposal 1. For each class of Intangible Asset
• Gross carrying amount at beginning and end of the
Or period
(b) When no future economic benefits are • Accumulated amortisation at beginning and end of period
expected • All movements in gross carrying amount and
accumulated amortisation in period
Any gain or loss on derecognition should be • Whether useful lives are finite or infinite and the
included in the profit or loss for the period amortisation rate and method, if finite
2. Intangible Assets accounted for under 3. Research and Development Expenditure

Revaluation Model
• Date of the revaluation • The aggregate amount expensed to the Profit
or Loss for the period
• Assumptions used in estimating fair value
• Carrying amount if revaluation did not occur,
i.e. amortised historical cost
42
• Purchased Goodwill
The accounting treatment is outlined in IFRS 3

Business Combinations
43
• Assets should not be carried in the SOFP at more
than their recoverable amount
Impairment of Assets • If the asset’s book value is greater than the

amount that could be recovered through use or
IAS 36 sale of asset, the asset is “impaired”
• Then, an impairment loss must be recognised
IAS 36 does not apply to:

• Inventories • At SOFP date, directors should determine
• Investment property measured at fair value whether there is an indication that an asset may
be impaired
• Biological assets
• Non-current assets held for resale (IFRS 5)
• Construction contracts • If this appears to be the case, estimate the
• Deferred tax assets “recoverable amount” of the asset
• Financial assets covered by IFRS 9 /IAS 39
• Assets arising from employee benefits
• Example 1
• Recoverable amount of asset
Asset values at year end:
The HIGHER of: $

Carrying value 20,000
(a) Fair value less costs to sell Fair value less costs to sell 24,000 take
Value in use 26,000 higher
(b) Value In Use Therefore, recoverable amount is $26,000
No impairment as carrying amount is less than
recoverable amount
44
• Example 2
Asset values at year end: • Impairment is a sudden reduction in the value of
non-current assets over and above the expected
$ wear and tear or depreciation
Carrying value 20,000
Fair value less costs to sell 16,000 take • It arises because something happens to the asset
Value in use 18,000 higher itself and / or the environment in which it
Therefore, recoverable amount is $18,000 operates
Recognise impairment loss of $2,000 because
recoverable amount is less than carrying value
Indicators of Impairment (examples) Internal

External: • Evidence of obsolescence or physical damage
• Market value of asset has fallen, more than • Changes in the way an asset is to be used e.g.
expected asset will become idle
• Technological, market, economic, legal change • Evidence from internal reporting that indicates
that the economic performance of an asset is,
• Changes in interest rates (VIU)
or will be, worse than expected
• Fair Value less costs to sell Best evidence of this amount is price quoted in a
binding sale agreement, adjusted for selling costs
Amount obtainable from sale of asset
If no agreement exists, then
(a) In an arms length transaction
(a) Current market price less selling costs, if an
(b) Between knowledgeable willing parties active market exists; or
Less the costs of disposal (a) Best information available, if no active
market. Consider outcome of similar
transactions in the industry
45
“Costs to sell” includes: • Value In Use
• Legal costs Present Value of future cash flows from the asset
• Stamp duty 1. Calculate estimated future cash flows expected
• Costs of removing the asset from use of the asset, including its ultimate
disposal
• Direct costs in bringing the asset into condition
for its sale 2. Discount using an appropriate cost of capital
Future cash flows must exclude:

• Treatment of Impairment Loss:
• Income tax payments or receipts
If impairment loss arises:
• Interest payments
DebitProfit or Loss
Cash flows must be:
Credit Asset Account
• Reasonable and supportable
with the amount of the loss
• Based on most recent budgets / forecasts
But • Subsequent Depreciation

If the asset has previously been revalued (e.g. IAS 16), the
impairment should be treated as a revaluation decrease After adjusting for the impairment loss;
That is;
• The loss is first set against any revaluation surplus for The new carrying amount is written off over
that asset
the remaining life of the asset
• Any excess goes to the Profit or Loss
46
• Example 1 • Depreciation is 25% per annum straight line
Abramovich Jetskis Ltd. is based on a island and hires • In December 2008, the only airline bringing tourists to
out jet skis to tourists, based on a hourly rate. the island withdraws from the route. Tourist market
faces collapse
The financial statement for the year ended 31st
December 2008 (draft) includes the following jet ski: Projections made by directors for the jet ski:
$ $ • Expected revenue of $2,400 pa in 2009 and 2010. Jet ski
Cost 10,000 will then be scrapped.
Depreciation: b/fwd 2,500 • Jet ski could be sold for $2,800 (less $250 selling costs)
Charge for year 2,500 immediately
5,000
Carrying amount 5,000 • Interest rate is 10%
Calculate the “recoverable amount”
• Fair value less selling costs: $

Recoverable amount is 4,164
2,800 – 250 = $2,550
• Value In Use Carrying amount 5,000
2009 2,400 x .909 = 2,182 Impairment loss 836

2010 2,400 x .826 = 1,982
$4,164
• In the Accounts for 2008 • The depreciation charge over the remaining 2
years of the assets life will be:
$ $ $4,164 = $2,082
Cost 10,000
2 years
Depreciation: b/fwd 2,500
Charge for year 2,500 In 2008, there will be an impairment loss of
Impairment loss 836 $836 charged to the Profit or Loss
5,836
Carrying amount 4,164
47
• Cash Generating Units (CGU) Not always possible to test an individual asset
In reality, many assets do not generate cash for impairment. It might be impossible to
flows on their own. Cash flows are usually calculate its recoverable amount.
generated by groups of assets
It may be part of a larger group of assets that
A CGU is the smallest identifiable group of
together form a CGU
assets that generate cash flows, that are largely
independent of the cash inflows from other
assets or groups of assets Test the entire CGU for impairment
• If an active market exists for the output of the Impairment Loss for a CGU
group of assets, then that group of assets
constitutes a CGU (even if some or all of the Same principles for dealing with CGU as for
output is used internally) individual assets
Impairment loss arises if:
• The carrying amount of the GCU includes only
• The recoverable Amount of CGU is less than
those assets that can be attributed to the CGU
the carrying amount
and generate cash flows
Note the following in relation to CGU: • The impairment loss must be allocated to
• Any goodwill acquired in a business reduce the carrying value of the assets of the
combination must be allocated to each CGU CGU, in the following order
• A CGU to which goodwill has been allocated 1. Reduce the carrying value of any asset that is
must be tested for impairment annually specifically impaired
• Corporate assets, e.g. headquarters buildings, 2. Reduce the carrying value of any goodwill
do not belong to any particular CGU. They allocated to the CGU
should be allocated on a reasonable and 3. Allocate the remaining loss to the other assets
consistent basis to the various CGU of the CGU, usually on a pro rata basis
48
• Example
• BUT
Bookillbo identified an impairment loss of $60 million
The carrying value of an asset cannot be in one of its CGUs. The CGU had a carrying amount of
$160 million and a recoverable amount of $100 million
reduced to below the highest of: at 31st December 2009
(a) Its fair value less costs to sell Details of the carrying amount $m
Goodwill 20
(b) Its Value In Use Property 60
Machinery 40
(c) Zero Motor Vehicles 20
Other Assets 20
160
• Allocation of Impairment Loss

The fair value less costs to sell of the unit assets Carrying Impairment
Revised
do not differ significantly from their carrying Amount Loss Carrying
values except for the property which had a $m $m $m
market value of $70 million. Goodwill 20 (20)1 -
Property 60 -2 60
Machinery 40 (20)3 20
Motor Vehicles 20 (10)3 10
Other Assets 20 (10)3 10
160 (60) 100
1. Loss is firstly allocated to goodwill Reversing an Impairment Loss

2. No loss is allocated to property, because its fair • At each reporting date, the company must assess
value less cost to sell is greater than its carrying whether there is any indication that an
amount impairment loss recognised in previous periods
for an asset may no longer exist or has decreased
3. The balance of the loss ($40m) is allocated:
• Reversing an impairment loss for goodwill is not
Machinery 40 40m x 40/80 = 20 allowed
Motor Vehicles 20 40m x 20/80 = 10
Other assets 20 40m x 20/80 = 10
80 40
49
Indicators of reversal
External
Internal
• Assets market value has increased
• Evidence suggests economic performance of
asset is, or will be, better than expected • Interest rates have decreased (VIU)
• Significant changes in the way the asset is, or will • Favourable technological, market, economic or
be, used legal changes
• A previous impairment loss can only be reversed

if there has been a change in the estimates used • BUT
to calculate the recoverable amount since the The new carrying amount of the asset must not
last impairment loss was recognised
exceed the carrying amount that would have
• If this has happened, the assets carrying amount existed if no impairment loss has been
should be increased to its recoverable amount, recognised in previous years
reversing the impairment loss
• The reversal should be recognised in the Profit
or Loss immediately
• Depreciation after the reversal

Note
Revised carrying amount - residual value • If there is a reversal of an impairment loss on

a revalued asset, the reversal should be
remaining useful life
treated as a revaluation increase
50
Disclosure For each material impairment loss or reversal:
The disclosure requirements are extensive for IAS 36. The • Circumstances that led to the impairment or reversal
main points are: • The amount of the loss or reversal
For each class of asset • The nature of the individual asset
• Any impairment loss recognised in Profit or Loss • A description of the CGU, if applicable
• Any reversal of an impairment loss recognised in • Whether the recoverable amount is “fair value less costs
reserves to sell” or “value in use”
• Any impairment loss or reversal recognised in reserves • The discount rate used in calculating value in use
51
IAS 36 Question
52
• Government assistance can come in a variety of forms, e.g.
Cash transfers
Accounting for Government Grants Forgivable loans
and Disclosure of Government Interest-free loans
Assistance Transfer of other assets e.g. buildings
Technical advice
Marketing advice
Provision of guarantees
IAS 20
• It might be motivated by different government objectives
• Some or all of the grant may become repayable if certain
conditions are not met
“Government” refers to Govt. grants are

government “assistance by government in the form of transfer
govt. agencies of resources in return for compliance (past or
similar bodies (local, national, international) future) with certain conditions relation to activity
Govt. assistance is designed to provide an economic of the company”
benefit specific to a qualifying entity or range of Grants related to assets (Capital grants) are grants
entities
to assist in the acquisition of long term assets
IAS 20 does not apply in indirect benefits such as providing
infrastructure in developing areas or imposing trading Grants related to income (Revenue grants) are
restrictions on competitors grants other than capital grants. Assist with day-
to-day expenses
• If the grant takes the form of a non-monetary asset (e.g. buildings or

• Recognition machinery), the fair value of the asset is assessed and both the asset and the
grant are treated at this value
• Example
Do not recognise in the financial statements until A government agency transfers title of a building to X limited. The fair value of
there is reasonable assurance that the building is $1,000,000
(a) The company will comply with the conditions of Debit Buildings 1,000,000
the grant Credit Grant Account 1,000,000

(b) The grants will be received In the case of non-monetary assets, an alternative sometimes used is to record
both the assets an the grant at a nominal amount
53
• Accounting Treatment 2. Capital Grants
Govt. grants should be recognised, on a systematic basis, as income
over the period necessary to match them with the related costs to There are two allowable accounting treatments:
which they relate
A. Deduct the grant in arriving at the carrying amount of the
1. Revenue Grants asset (its book value). The net amount is depreciated over
the useful life of the asset; OR
(a) show as a credit in the Profit or Loss, either separately or
under a general heading such as “other income”; or
B. Show the grant as a deferred credit in the SOFP,
(b) they are deducted from the related expense, e.g. a labour amortising the grant to the Profit or Loss over the life of
cost subsidy could be deducted from the cost of labour in the the asset to which it relates
Profit or Loss
• Example • Option 1
On acquiring the asset
Company X receives a 50% grant toward the cost of
a machine, which has a list price of $100,000 Dr. Machine account 100,000
The machine has an estimated useful life of 5 years Cr. Cash / Payables 100,000
and its residual value is expected to be nil On recognising the grant
Thus, the net cost to the company is $50,000 Dr. Cash / receivables 50,000
Cr. Machine Account 50,000
• Option 2
The asset thus has an initial carrying amount of
$50,000 and the annual depreciation charge will On acquiring the asset
be Dr. Machine account 100,000
Cr. Cash / Payables 100,000
$50,000 = $10,000
On recognising the grant
5 years
Dr. Cash / Receivables 50,000
Cr. Govt. Grant Account 50,000
54
Government Grant Account
The asset thus has an initial carrying amount of $100,000 and the annual $
depreciation charge will be: $
Profit or Loss 10,000 Cash
$100,000 = $20,000 50,000
5 years
The grant is credited to the Profit or Loss annually as follows: Balance c/d 40,000
______
$50,000 = $10,000 ______
5 years
50,000
50,000
Thus, the net impact in the Profit or Loss is $10,000
______
(Note that both options have the same impact on the profit or loss for the
_______
period)
The balance carried down is shown as a liability in the SOFP. It will be
All Copyright reserved © Griffith College split into its current and non-current elements
Current liability (amount to be amortised next year) 10,000

Non current liability (balancing figure) 30,000
• Repayment of Govt. Grants

If the grant becomes repayable, for example the entity does not meet • On repayment of the grant, the total extra
the conditions of the grant, it is treated as a revision of an
accounting estimate (IAS 8), therefore not a prior year adjustment depreciation that would have been recognised if
Repayment of a capital grant should be recorded by: the grant had not been received, should be
recognised as an expense immediately
(a) Increasing the carrying amount of the related asset by the
amount repayable
OR • Repayment of a revenue based grant should be
(b) Reducing the government grant account (deferred credit) by the treated as an expense
amount repayable
(This depends on how the grant was first recorded)
Repayment of grants related to income Repayment of capital based grants

Either:
Dr. Any unamortised credit first
Dr. SPLOCI with any excess (a) Dr. Carrying value of asset; OR
Cr. Bank (b) Dr. Deferred income balance
and
Cr. Bank
NOTE: Additional depreciation (if (a) adopted).
55
Option 1
Example of Repayment SOFP at end of year 2, before the repayment of the grant:
Non Current Asset
Cost 50,000
Less Accumulated Depreciation ( 20,000)
Carrying Amount 30,000
• Same example as before but at the end of the
Thus, to record the repayment in full of the Grant
second year the company discovers that they Dr. Non-current asset– Cost 50,000
have not complied with the conditions of the Cr. Bank 50,000
grant and will have to repay it in full.
Dr. SPLOCI – Repayment of Grant 20,000
Cr. Accumulated Depreciation 20,000
Option 2 • Disclosure
SOFP at end of year 2, before the repayment of the grant:
Non Current Asset
Cost 100,000 (a) The accounting policy adopted (including the
Less Accumulated Depreciation ( 40,000) methods of presentation in the accounts)
Carrying Amount 60,000
Non Current Liabilities (b) Nature and extent of government grants (and any
Deferred Income 20,000
Current Liabilities
other form of govt. assistance received)
Deferred Income 10,000
Thus, to record the repayment of the grant in full: (c) Unfulfilled conditions and other contingencies
Dr. Deferred Income 30,000 related to the grant
Dr. SPLOCI – Repayment of Grant 20,000
Cr. Bank 50,000
Sundry / miscellaneous matters • Entities might receive government assistance which

is not specifically related to their operation
Some government assistance cannot reasonably
activities.
have a value placed on them, for example:
• For example, transfers of resources to companies
• Free technical advice
operating in an under-developed area
• Free marketing advice
• Provision of guarantees • SIC 20 states that such forms of assistance do
constitute grants and should be accounted for (this
Thus, these are excluded from the definition of govt. is because the grants re conditional on the company
grants and cannot be treated as such operating in a particular industry or area)
56
• If a grant is received in relation to an asset that is
not depreciated, then the grant should be
amortized over the period in which meeting the
conditions of the grant occurs
57
IAS 20 QUESTION
ACCA P2
Example 1
On 1 June 2011 Epsilon opened a new factory in an area designated by the government as an economic
development area. On that day the government provided Epsilon with a grant of $30 million to assist it in the
development of the factory.
This grant was in three parts:
(i) $6 million of the grant was a payment by the government as an inducement to Epsilon to begin
developing the factory. No conditions were attached to this part of the grant.
(ii) $15 million of the grant related to the construction of the factory at a cost of $60 million. The land
was leased so the whole of the $60 million is depreciable over the estimated 40 year useful life of the
factory.
(iii) The remaining $9 million was received subject to keeping at least 200 employees working at the
factory for a period of at least five years. If the number drops below 200 at any time in any financial
year in this five year period then 20% of the grant is repayable in that year. From 1 June 2011 220
workers were employed at the factory and estimates are that this number is unlikely to fall below 200
over the relevant five year period.
Required:
Explain how the grant of $30 million should be reported in the financial statements of Epsilon for the year
ended 30 September 2011.
Where International Financial Reporting Standards allow alternative treatments of any part of the grant
you should explain both treatments.
58
IAS 23 Borrowing Costs 1 IAS 23 Borrowing Costs 2
Definition Types of borrowing costs
• Borrowing costs: • Funds borrowed specifically:
– Interest and other costs incurred by an entity in connection – Capitalise actual borrowing costs incurred less investment
with the borrowing of funds income on temporary investment of funds
• Qualifying asset: • Funds borrowed generally:
– An asset that necessarily takes a substantial period of time – Capitalise borrowing costs calculated as the weighted
to get ready for its intended use or sale average cost of borrowings for the period multiplied by the
Accounting treatment expenditure on the qualifying asset
• Borrowing costs that directly relate to the acquisition, – Note that the amount capitalised should not exceed total
construction or production of a qualifying asset must be borrowing costs incurred in the period
capitalised as part of the cost of that asset.
IAS 23 Borrowing Costs 3 IAS 23 Borrowing Costs 4

Commencement of capitalisation Suspension and cessation of capitalisation
• Capitalisation of borrowing costs should begin when: • Capitalisation of borrowing costs should be suspended
– Expenditures for the asset are being incurred during extended periods when development is interrupted.
– Borrowing costs are being incurred For example due to workforce strikes or inclement weather.
– Activities that are necessary to prepare the asset for its • Capitalisation of borrowing costs should cease when
intended use or sale are in progress substantially all of the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.
• This is likely to be when the asset is ready for use (even if it is
not being used).
59
IAS 23 QUESTION
60
• IASB recognised the need for detailing specific rules
regarding the creation of provisions
Provisions, Contingent Liabilities • Without such rules, it might be possible for companies
to mislead the users of accounts, either accidentally or
& Contingent Assets deliberately
IAS 37 • For example, “profit-smoothing”; create a provision

when profits are high (artificially reducing profits) and
reversing those provisions when profits are low
(artificially increasing profits
• IAS 37 states that provisions can only be made Provisions differ from other liabilities because of their
when there are valid grounds for their creation uncertainty
• Provision • In order to recognise a provision in the accounts, all

the following conditions must be met:
A liability of uncertain timing and / or amount 1. There is a present obligation as a result of a past
• Liability event
2. It is probable that a transfer of economic benefits will
Present obligation arising from past events, the be required to settle the obligation
settlement of which is expected to result in an 3. A reliable estimate can be made of the obligation
outflow of economic benefits
• If all three conditions are met, then a provision • Note that sometimes the provision may be included in
can be created. This is normally done as follows: the cost of an asset, rather than as an expense in the
Profit or Loss
Debit Expense (P/L) e.g.
Credit Provision (liability in SOFP) The cost of dismantling / decommissioning an asset at
the end of its useful life is included as part of the cost of
When the obligation is discharged in the the asset (IAS 16)
future, the liability is removed from the SOFP Debit Asset account (SOFP)
Or, more information may become available Credit Provision account (SOFP)
requiring the provision to be adjusted.
61
1. An obligation is a past event that creates a legal • Legal obligation
or a constructive obligation that results in an
enterprise having no realistic alternative to Derives from either:
settling that obligation (a) A contract; or
(b) Legislation; or
The absence of a realistic alternative is critical
in determining whether a provision is valid (c) Other operation of law
• Constructive Obligation 2. Probable transfer of economic benefits

Obligation that derives from a company’s actions where: such a transfer is probable if it is more likely
(a) The company has indicated to other parties that it than not to occur
will accept certain responsibilities (pattern of past
practice, published policies or a current statement); i.e.
and
there is a greater than 50% chance that such a
(b) as a result, the company has created a “valid
expectation” that it will discharge those transfer will arise
responsibilities
3. Reliable Estimate • Example

Amount recognised as a provision should be the A company sells goods with an after-sales warranty for
best estimate of the expenditure required to parts and labour, for any manufacturing defects that
arise 12 months after purchase
settle the present obligation at the SOFP date
Past experience indicates the following:
Determined by judgment of Management 75% of goods had no defect
20% of goods had a minor defect (average cost of repair $30)
Use “Expected Value” when there is a range of 5% of goods had a major defect (average cost of repair $150)
possible outcomes
Management expects past trends and costs to continue.
100,000 units were sold in the period
62
1. Present obligation?
$
Yes. Event is the sale of good with a warranty. Legal 100,000 units x 75% x $0 =
contract, because of warranty given to customers 0
2. Probable transfer of economic benefits? 100,000 units x 20% x $30 = 600,000
Yes. Repairing the items involves a cost that must be 100,000 units x 5% x $150 = 750,000
met
3. Reliable estimate? 1,350,000
Yes. Using expected value it could be calculated as The company should create a provision for
follows: $1,350,000, for the estimated future cost of
repairing items
• If the effect of the time value of money is

• The provision must represent the best material, the provision should be the present
estimate of the likely expenditure and not the value (PV) of the expenditure required to settle
worst possible outcome the obligation
• The discount rate used to calculate the PV
should be appropriate to the company
• Gains from the expected disposal of assets
should not be taken into account when
measuring a provision
Reimbursement • Revision of Provisions

• If some or all of the expenditure is expected to
be reimbursed (e.g. insurance, suppliers Provisions should be reviewed at each SOFP date
warranties), this reimbursement is recognised and adjusted if necessary
when and only when it is virtually certain to be If it is no longer appropriate for the provision to
received
continue, then it should be reversed
• Reimbursement should be treated as a separate
asset in the SOFP ( but may be netted against the
related provision expense in the Profit or Loss
63
• Future Operating Losses • Restructuring
Provisions should not be made for future Expected future costs of restructuring can be
operating losses provided for if, at the SOFP date,
This is because they do not meet the definition (a) The company has a detailed formal plan; and
of a liability, as defined earlier
(b) The plan has been communicated to those
(However, expected future losses might suggest affected by it ( thus creating a valid
that assets are impaired, and so the assets expectation that the plan will be carried out)
should be tested for impairment under IAS 36)
• Restructuring provision should only include • The provision for restructuring must not
the direct expenditure arising from the include:
restructuring. (a) Retraining or relocating continuing staff
• This expenditure must be: (b) Marketing
(a) Necessarily entailed by the restructuring; and (c) Investments in new systems and distribution
networks
(b) Not associated with the ongoing activities of
the entity These expenditures relate to the future conduct
of the business and are not liabilities for
restructuring at the SOFP date
• Onerous Contract
• Example
This is a contract in which the unavoidable cost of
meeting the obligations of the contract are greater A company operates from a factory that it has
that the expected benefits to be received leased under an operating lease.
Unavoidable costs:
The lower of:
During the year , it moves to a new factory. The
lease of the old factory continues for the next 4
(a) Costs of fulfilling the terms of the contract; and
years.
(b) Penalties arising from failure to fulfil it
Onerous contracts should be recognised and treated It cannot be cancelled and the factory cannot be
as a provision sub-let to another user
64
Present obligation from a past event? • Disclosures
Yes. The event is the signing of the lease. It is a legal obligation
For each class of provision, disclose
Probable transfer of economic benefits?
The carrying amount at the beginning and end of the period
Yes. When the lease becomes onerous, an outflow of economic (a) Additional provisions made in the period
benefits is likely.
(b) Amounts used (i.e. incurred and charged against the
Reliable Estimate?
provision) during the period
Yes. The lower of the cost of the contract and the penalties for
breaking it. (c) Unused amounts reversed in period
Conclusion
(d) The increase during the period in the discounted
amount arising from the passage of time and the effect
A provision is required for the unavoidable costs of the contract of any change in the discount rate
• Also, for each class of provision, Contingent Liabilities

(a) A brief description of the nature of the A contingent liability is:
obligation and the expected timing of any (a) A possible obligation arising from past events and
resulting outflows of economic benefits whose existence will be confirmed only by the
occurrence or non-occurrence of one or more future
(b) An indication of the uncertainties about the events not wholly in the control of the company; or
amount or timing of these outflows (b) A present obligation that arises from past events but
is not recognised because it is not probable that a
(c) The amount of any expected reimbursement transfer of economic benefits will be required or a
reliable estimate of the obligation cannot be made
• Thus, a contingent liability is a possible (a) Description of the contingent liability

obligation, but much uncertainty surrounds its
existence (b) An estimate of its financial effect
Do not recognise contingent liabilities in the (c) An indication of the uncertainties relating to
financial statements the amount or timing of the potential liability
But (d) The possibility of any reimbursement
Disclose the following in the notes to the
If the chances of a contingent liability
accounts:
occurring are remote, the contingent liabilities
can be ignored completely
65
• The position of a contingent liability is often fluid. Contingent Assets
• Contingent liabilities should be continually A possible asset that arises from past events and
assessed to determine if the status of the whose existence will be confirmed only by the
contingency should be changed occurrence or non-occurrence of one or more
i.e. uncertain future events, not wholly within the
control of the company
Change to a provision or remove altogether from e.g.
the notes to the financial statements
A claim being taken to court, where the
outcome is uncertain
Do not recognise contingent assets in the • If the contingent asset is to be disclosed in the
financial statements. notes, show the following
• In addition, disclose them only if an inflow of
benefits is probable (a) Brief description
• If the realisation of income is virtually certain,
the asset is not a contingent asset and should be (b) Estimate of the likely financial effect
recognised
• Constantly review status and change if necessary
Start
Decision Tree
• In rare cases, it is not clear whether there is a
Present obligation Possible present obligation
from a past event? Obligation
• In these cases, a past event is deemed to give

Probable
Outflow? Remote rise to a present obligation if, taking account of
all available evidence, it is more likely than not
Reliable that a present obligation exists at the SOFP date
Estimate?
Provide Disclose Do Nothing

Contingent Liability
66
Example No provision has been made in the 2013 financial
statements for this future expenditure, but
1st
On January 2013, MOORE entered into a 6
management intend to disclose in the notes to
year contract with the government to dispose of
the financial statements their obligation to
nuclear waste in the North sea.
restore the sea bed.
Under the terms of the contract, MOORE is
A cost of capital of 5% is considered to be
responsible for restoring the sea bed at the end
appropriate for discounting purposes.
of the contract. It is estimated that this will cost
$3 million. The discount factor for 5% for 6 years is 0.7462
Solution Solution
Step 1
MOORE Ltd has to recognise the cost due at the
Recognise the liability to be paid at the end of the
end of the contract to restore the sea bed.
contract in today’s monetary value.
Accounting is based on matching revenues with
the costs incurred in generating that income. This expenditure will have to be paid as a result of
being granted the 6 year contract.
The steps involved in accounting for these Accounting requires that we match the costs with
particular circumstances are as follows: the revenue generated.
This means that part of the cost of restoring the

sea bed should be recognised each year that $3m X 0.7462 = 2,238,655
revenue is generated and not at the end of the (as at date contract granted)
contract when the revenue has ceased.
DR Non Current Asset 2,238,655

Moore must recognise the cost to be paid at the
end of the contract in today’s monetary value. CR Non Current Liability 2,238,655
67
Solution
STEP 2 • By taking a portion of the restoration costs to the
The non current asset is released over the life of SPLOCI each year we are matching the cost with
the contract to the SPLOCI the revenue.
Operating Costs: 2,238,655 / 6 yrs = 373,109 • In this example, the revenue relating to the
contract is earned evenly over the life of the
contract.
Solution Solution
STEP 3
Opening SPLOCI – depreciation Closing Balance –
Year End Balance (2,238,655 / 6 yrs) NCA @ NBV
The Liability for the future costs as calculated above is
not sufficient to meet the obligation at the end of the
31/12/13 2,238,655 373,109 1,865,546
contract.
31/12/14 1,865,546 373,109 1,492,437
We increase the liability each year by charging a finance
31/12/15 1,492,437 373,109 1,119,328
cost and we effectively restate the liability to its present
31/12/16 1,119,328 373,109 746,219
value at the end of each reporting period (i.e. “unwind
31/12/17 746,219 373,109 373,110 the discount’)
31/12/18 373,110 373,109 Nil Dr P&L Finance Cost
Cr Liability- Provision
Note: The Asset value never changes again
Solution FURTHER EXAMPLES

Opening SPLOCI – Finance Cost Closing Balance -
Year End Balance (5% of Opening Balance) Liability
• The following examples are outlined in
31/12/13 2,238,655 111,927 2,350,582
Appendix A of IAS 37
31/12/14 2,350,582 117,529 2,468,111
31/12/15 2,468,111 123,405 2,591,516
31/12/16 2,591,516 129,576 2,721,092
31/12/17 2,721,092 136,054 2,857,147
31/12/18 2,857,147 142,857 3,000,004
68
• Warranties • Contaminated Land
A manufacturer gives warranties at the time of sale to purchasers of Oil company contaminates land but only cleans up when required to
its product, to repair or replace defective goods. Based on past do so under law. Operating in a country with no such law at present,
experience, there will be some claims under the warranties but is virtually certain to pass law shortly after the year end
Present obligation from a past event
Present obligation from a past event Event is the contaminating of land, because of virtual certainty of law
Event is the sale of a product with warranty (legal) being passed requiring clean up
Outflow of economic benefits Outflow of economic benefits
Probable for the warranties as a whole Probable
Reliable estimate Reliable estimate
Based on management’s estimate Based on management’s estimate
Conclusion Conclusion
Provision made for the best estimate of costs Provision made for the best estimate of costs
• Contaminated Land (2)

Oil company contaminates land. Operating in a country with no • Refunds Policy
environmental legislation. But company has a widely-published Present obligation from a past event
environmental policy in which it promises to clean up all
contamination it causes. It has a record of honouring this Event is the sale of the product; gives rise to a constructive
commitment obligation. Valid expectation created that refunds will be made
Present obligation from a past event Outflow of economic benefits
Event is the contaminating of land; gives rise to a constructive
obligation. Valid expectation created that clean up will occur Probable, a proportion of goods are returned for refund
Outflow of economic benefits Reliable estimate
Probable Based on management’s estimate
Reliable estimate Conclusion
Based on management’s estimate Provision made for the best estimate of costs of refunds
Conclusion
Provision made for the best estimate of costs
• Closure of a Division (1) • Closure of a Division (2)

On 12th December 2013, directors decide to close a division. On 20th
• On 12th December 2013, the directors decide to close December, a detailed plan is agreed by the board. Letters were sent
down a division. No other steps were taken to to customers warning them to seek new suppliers and notices of
redundancy were sent to the staff
implement the decision and no announcement has been Present obligation from a past event
made before the year end 31st December 2013 Event is the communication of the decision to the customers and
workers. Constructive obligation, creates a valid expectation that
Present obligation from a past event closure will occur
There has been no obligating event and so there is no Outflow of economic benefits
obligation Probable
Reliable estimate
Conclusion
Based on management’s estimate
No provision is recognised Conclusion
Provision made for the best estimate of costs closing the division
69
• Legal requirement to fit smoke filters (b) At the SOFP date 31st December 2014
Under new legislation, an entity is required to fit smoke filters to its Present obligation from a past event
factories by 30 June 2014 Still no obligation for the costs of fitting the smoke filters, because
no obligating event has not occurred (the fitting of the filters). But
(a) At the SOFP date of 31st December 2013
an obligation might arise to pay penalties under the law because
Present obligation from a past event an obligating event has occurred (the non-compliance of the
There is no obligation because there is no obligating event, either for company)
the costs of fitting smoke filters or for fines under the legislation Outflow of economic benefits
Probability depends on the legislation and the stringency of
Conclusion enforcement
No provision is recognised for the cost of fitting the smoke filters
Conclusion
No provision for the costs of fitting the filters. But a provision is
recognised for the best estimate of any penalties that are likely to
be imposed
• Refurbishment Costs
An airline is required to overhaul its aircraft once every
3 years
Present obligation from a past event
There is no present obligation
Conclusion
No provision is recognised
(even a legal requirement to overhaul does not make the costs of
overhaul a liability, because no obligation exists to overhaul the
aircraft independently of the company’s future actions….the
company could avoid the future expenditure by its future actions,
for example, selling the aircraft)
70
IAS 37
QUESTION 1
Kappa is an entity that prepares consolidated financial statements to 30 September each year. The financial
statements are due to be authorised for issue on 20 December 2013.
On 31 July 2013, the directors decided to discontinue the business of one of Kappa’s wholly owned
subsidiaries, Lambda. They decided to cease production on 31 October 2013, with a view to disposing of the
property, plant and equipment soon after 30 November 2013, the date scheduled for the completion of the
sale of all Lambda’s inventory and the settlement of all liabilities due to its suppliers and employees. Any
amounts still owing by Lambda’s customers at 30 November 2013 would be collected by other group
companies on Lambda’s behalf.
On 15 August 2013, the directors made a public announcement of their intentions and offered the
employees of Lambda termination payments or alternative employment opportunities elsewhere in the
group. Relevant financial details are as follows:
 On 31 July 2013, the directors estimated that termination payments to employees would total $10
million and, although full details are not yet available, the costs of re-training employees who would
remain employed by other group companies is expected total $1 million. Actual termination costs
paid out on 30 November 2013 were $10·5 million and the latest estimate of total re-training costs is
$800,000.
 Lambda was leasing a property under an operating lease that expires on 31 December 2020. On
30 September 2013 the present value of the future lease rentals (using an appropriate discount rate)
was $4 million. On 30 November 2013 Lambda made a payment to the lessor of $3·8 million in return
for early termination of the lease. There were no rental payments made in October or November
2013.
 The loss after tax of Lambda for the year ended 30 September 2013 was $12 million. Lambda made
further operating losses totalling $5 million for the two month period 1 October 2013 to 30
November 2013.
 At 30 September 2013, the property, plant and equipment of Lambda had a carrying amount of $20
million ($12 million for its owned property and $8 million for its plant and equipment) and a
recoverable amount of $22 million ($17 million for its owned property and $5 million for its plant and
equipment). The carrying amount of $20 million is after deducting a full year’s depreciation.
A number of questions have arisen from the decision to discontinue.
Required:
(i) Is any provision for closure costs necessary and if so for what amount?
(ii) How should the decision to discontinue the business of Lambda be presented on the consolidated
statement of profit or loss and other comprehensive income?
(iii) What is the correct carrying amount for the property, plant and equipment? Should it be presented
as non-current assets held for sale given that we know it was sold after the year end?
71
IAS 37
SOLUTION 1
By announcing the closure plan on 15 August, the directors have created a valid expectation that the closure
will go ahead. In such circumstances, IAS 37 Provisions, contingent liabilities and contingent assets requires
that a provision should be made.
The provision should be for the direct costs associated with the closure. This includes the costs of
terminating the employment of workers who accept termination. The amount provided in respect of this
should be $10·5 million, the actual amount paid. IAS 10 Events after the reporting date requires that events
providing additional evidence of conditions existing at the reporting date should be reflected in the financial
statements.
The re-training costs are associated with the on-going business and should not form any part of the
provision.
The lease would be regarded as an onerous contract. A provision should be made for the lower of the cost of
fulfilling the contract and the cost of early termination. In this case a provision of $3·8 million should be
made.
Future operating losses relate to future events and do not form part of any closure provision.
Therefore the total provision should be $14·3 million ($10·5 million + $3·8 million).
A discontinued operation is one that is discontinued in the period or classified as held for sale at the year
end. In this case Lambda was discontinued on 30 November 2013, the following period. Although the
decision was made before the year end, this is an abandonment, not a sale, so the held for sale criteria are
not relevant for the operation.
Given the above, the results of Lambda will be included on a line-by-line basis in the consolidated SPLOCI as
part of the profit from continuing operations.
For the property, plant and equipment to be classified as held for sale it has to be available for immediate
sale in its current condition before the year end. In this case the assets cannot be sold until 30 November
2013 and reclassification as held for sale cannot be made retrospectively. The authority for this treatment is
IFRS 5 Non-current assets held for sale and discontinued operations.
The recoverable amount of the plant and equipment ($5 million) is lower than its carrying amount
($8 million). Therefore, under the provisions of IAS 36 Impairment of assets, an impairment loss of $3 million
has occurred and the plant and equipment should be carried at $5 million.
The carrying amount of the property remains at $12 million.
72
IAS 37
QUESTION 2
During the year ended 31 March 2012 Delta sold goods to the value of $20 million under warranty. The
terms of the warranty were that if the goods were defective within 12 months of the date of sale, Delta
would repair or replace them. The warranty was not offered by Delta in respect of goods sold in previous
periods.
The directors of Delta estimate that, for each product sold, there is an 80% chance no defects will occur in
that product. Therefore they have not made a provision for the cost of any future warranty claims on the
grounds that, for each item sold, the most likely outcome is that no additional costs will be incurred.
Any warranty costs that were incurred were included in the production costs for the year. Where warranty
costs were incurred, on average they amounted to 50% of the revenue received from the initial sale of the
product. Warranty costs of $800,000 were incurred before the year end and included within production costs
in the trial balance.
What provision if any should Delta record in its financial statements for the year ended 31 March 2012?
SOLUTION 2
The warranty meets the recognition criteria set out in IAS 37. Therefore a provision must be recognised at
year end.
Warranty provision required

$’000
Sales subject to provision 20,000
Relevant proportion (20%) 4,000
Total expected outlays (50%) 2,000
Less already incurred (800)
So extra provision needed under IAS 37 1,200
73
IAS 37
QUESTION 3
On 1 October 2011 Epsilon purchased an aircraft for use by its executives on business trips. The purchase
price paid was $15 million plus recoverable sales taxes of $1·5 million. The expected useful economic life of
the aircraft is 15 years. Every five years the aircraft needs a major overhaul in order to renew its safety
certificate. The current cost of such overhauls is $1·8 million.
Your assistant has included $16·5 million ($15 million + $1·5 million) in property, plant and equipment and
has charged depreciation of $1·1 million ($16·5 million x 1/15) to the profit or loss. He has charged $360,000
($1·8 million x 1/5) to the profit or loss in respect of the overhaul, intending to build up a provision of $1·8
million over the next five years in order to cover the cost of the first overhaul.
Required:
Evaluate the proposed accounting treatments and (where incorrect) explain the appropriate accounting
treatment (preparing relevant calculations where necessary) of the three transactions in the financial
statements for the year ended 30 September 2012.
SOLUTION 3
It is incorrect to show the recoverable sales taxes as part of the cost of property, plant and equipment. IAS
16 property, plant and equipment states that only irrecoverable sales taxes should be treated in this way.
Recoverable sales taxes may well have been recovered by the reporting date, either by repayment or by
deduction from an amount payable to the tax authorities. If they have not been recovered by the year end
they should be included as a receivable or as a deduction from a payable as appropriate.
It is also incorrect to make a provision of $360,000 in respect of the future overhaul. IAS 37 Provisions,
contingent liabilities and contingent assets states that a provision is only appropriate where there is an
obligation to incur the expenditure at the reporting date. In this case, the expenditure could be avoided, for
example by withdrawing the aircraft from service. IAS 16 states that the correct treatment of this issue is to
regard the future overhaul as part of the expected cost of gaining access to the economic benefits from the
aircraft.
Therefore the cost is regarded as a separate component of property, plant and equipment for depreciation
purposes. This means that the depreciation charged in the current period is in two parts:
 $360,000 ($1·8 million x 1/5) relating to the ‘overhaul component’.

 $880,000 (($15 million – $1·8 million) x 1/15) relating to the balance.
Therefore $1,240,000 ($360,000 + $880,000) will be charged to the profit or loss in the form of
depreciation and $13,760,000 ($15 million – $1,240,000) shown in the SOFP as property, plant and
equipment.
74
IAS 37
QUESTION 4
Delta is an entity that prepares financial statements to 31 March each year.
At 31 March 2012, Delta was engaged in a legal dispute with a customer who alleged that Delta had supplied
faulty products that caused the customer actual financial loss. The directors of Delta consider that the
customer has a 75% chance of succeeding in this action and that the likely outcome should the customer
succeed is that the customer would be awarded damages of $1 million.
The directors of Delta further believe that the fault in the products was caused by the supply of defective
components by one of Delta’s suppliers. Delta has initiated legal action against the Supplier and considers
there is a 70% chance Delta will receive damages of $800,000 from the supplier. Ignore discounting in this
part of the question.
SOLUTION 4
Under the principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be
made for the probable damages payable to the customer.
The amount provided should be the amount Delta would rationally pay to settle the obligation at the
reporting date. Ignoring discounting, this is $1 million.
This amount should be credited to liabilities and debited to profit or loss.
Under the principles of IAS 37 the potential amount receivable from the supplier is a contingent asset.
Contingent assets should not be recognised but should be disclosed where there is a probable future receipt
of economic benefits – this is the case for the $800,000 potentially receivable from the supplier.
75
• Events after the reporting period
Events, favourable and unfavourable, that
Events After the Reporting occur between the reporting period and the
Period date when the financial statements are
authorised for issue
IAS 10 Events which occur between these dates may
provide information which may help in the
preparation of the statements
EXAMPLE
Date of Authorisation for Issue Kettle Limited prepares its financial statements for the year ended
31 December 2013. Relevant dates are:
If an entity submits its financial statements to Completion of draft accounts 28th February 2014
shareholders for approval after the financial Board of directors reviews and
authorises for issue
18th March 2014
statements have been issued, the Profit announcement 19th March 2014
authorisation date is the date of original Available to shareholders 1st April 2014
Approved at AGM 15th May 2014
issuance.
Filed with regulatory body 17th May 2014
The financial statements are authorised for issue on 18th March 2014.
The relevant post-SOFP period is 1st January 2014 to 18th March 2014
1. Adjusting Events
• The standard distinguishes between two
types of events These are events that provide evidence of
conditions that existed at the reporting
1. Adjusting Events
date.
And
Financial statements should be adjusted to
2. Non-adjusting Events reflect these events
76
IAS 10 gives examples of adjusting events: • The determination after the reporting period of the
cost of assets purchased, or proceeds of assets sold,
• The settlement of a court case, after the before the reporting period
reporting period, that confirms that the • The receipt of information after the reporting
company had a present obligation at the period indicating that an asset was impaired at the
reporting period ( company will adjust any reporting period, e.g.
previously recognised provision or create a new (i) bankruptcy of a customer after the balance
one) sheet date
(ii) sale of inventories after the SOFP date may give
• The discovery of fraud or errors that show the evidence about their NRV at the reporting
financial statements are incorrect period
2. Non Adjusting Events But

These are events that are indicative of events These events may be relevant to users of the
that arose after the reporting period accounts (might influence decisions)
Financial statements should not be adjusted Thus
to reflect these events
If the events are material, they should be
disclosed in the notes to the accounts
• Disclose IAS 10 gives examples of Non-Adjusting Events
(a) Nature of the event • The acquisition or disposal of a subsidiary after the
reporting period
(b) An estimate of its financial effect, or a
• Major purchases and disposals of assets after the
statement that such an estimate cannot be reporting period
made
• Destruction of major production plant by fire
• Announcing or commencing a major restructuring
77
• Major ordinary share transactions after the • Dividends
year end ( other than bonus issues, share splits
If the company declares dividends to the
or reverse splits, which must be adjusted for)
holders of equity share after the reporting
• Changes in tax rates / laws period, these dividends cannot be included as
a liability at the reporting period
• Commencing major litigation arising solely out
of events that occurred after the year end This is because the dividends do not meet the
criteria of a present obligation in IAS 37
• However, • Going Concern

The dividends are disclosed in the notes in If events after the reporting period suggest
accordance with IAS 1 that the going concern assumption no longer
applies, then the accounts should not be
prepared on the going concern basis
• Updating Disclosures
If management determines that it will liquidate
the company or cease trading or that it has no If a company receives information after the
reporting period about conditions that existed at the
other realistic alternative, then the financial reporting period, then these disclosures should be
statements should not be prepared on a going updated to reflect the new information
concern basis
e.g.
Instead, the SOFP should be adjusted to a If further information is received concerning a
“break-up” basis contingent liability that existed at the reporting
date, the disclosures regarding that item, per IAS 37,
will have to be updated
78
• Disclosure
(i) Date when the accounts were authorised
for issue and who gave the authorisation
(ii) If the financial statements can be amended
after issue, this fact must be disclosed
79
Example 1
Frugal Ltd prepares its financial statement to

IAS 10 year end 31st December 2011 and estimates
Examples profit for the year of $1,800,000.
Financial Statements were approved for issue
on 28th Feb 2012.
The following issues arose after the year end:
Issue 1 : Issue 3 :
A fire on 10th January 2012 destroying non current A bonus issue of shares was made on 12th February
assets with a carrying value of $2,540,000. The assets 2012
were insured for $2,450,000.
Issue 4 :
Inventory included in the financial statements at cost
Issue 2 : of $430,000 were sold on 10th March 2012 for
A trade receivable outstanding at year end with a $190,000.
balance of $140,000 has been declared bankrupt and Explain how these items will be treated in the
it is expected that only 25c in each $ will be financial statements for 31st December 2010.
recovered. A further $30,000 of credit sales were
made to the customer in January 2012.
Solution 1 Solution 1
Issue 1 Paragraph 22 of IAS 10 specifically identifies
The reporting date is the 31st December 2011 this type of event as a non adjusting event. No
and the date the financial statements are adjustment is required to the financial statements.
authorised for issue is 28th February 2012. The carrying amount of the assets at the reporting
date was $2,540,000 but the asset was only insured
Transactions that occur after the 28th February for $2,450,000. Therefore there is an uninsured
are not dealt with under IAS 10. element of $90,000. This is material in light of the
profit of $1,800,000.
80
When the non adjusting event is material a disclosure
note should be prepared. The disclosure note should Solution 1
detail: Issue 2
•The nature of the event, and Paragraph 9(b) of IAS 10 specifically identifies
•The financial impact. information in relation to the recoverability of trade
receivables as an adjusting event.
The draft disclosure note would be:
A fire occurred on the 10th January 2012 destroying non current
The amount of the adjustment can only relate to the
assets with a carrying amount of $2,540,000. The asset was only write off in relation to the balance outstanding at the
insured for $2,450,000.
reporting date. The subsequent credit sales are not
Therefore there is an uninsured element of $90,000 ($2,540,000 adjusted for in the financial statements for the
and $2,450,000).
reporting date 31st December 2011.
The adjustment to be made to the financial Solution 1

statements is as follows:
Issue 3
Paragraph 22 of IAS 10 states that an issue of shares
Dr SPLOCI – S&D Expenses 105,000
after the reporting date is a non adjusting event. No
Cr SOFP – Trade Receivables 105,000 adjustment should be made to the financial
statements in relation to this event.
To record the bad debt associated with bankrupt
However, in line with paragraph 64 of IAS 33 when
customer.
calculating the earnings per share for the year ended
31st December 2011 the impact of the bonus issue is
included.
Solution 1 Solution 1
Issue 4
Therefore, the sales were made after the
Paragraph 9(b) of IAS 10 specifically identifies evidence
period for consideration under IAS 10 and does
of net realisable value as an adjusting event.
not qualify as either an adjusting or non-
adjusting event.
However, the evidence in this case is based on the sales
made on 10th March 2012, which is after the financial No changes to the financial statements or
statements are authorised for issue. disclosures need to be made in regard to this
transaction.
81
Example 2 Example 2
• Delta’s year end is 31st March 2012
• Because of the damage Delta was required to
• On 10 April 2012, a water leak at one of Delta’s spend a further $150,000 on repairing and re-
warehouses damaged a consignment of packaging the inventory.
inventory.
• The inventory was sold on 15 May 2012 for
• This inventory had been manufactured prior to proceeds of $900,000.
31 March 2012 at a total cost of $800,000.
• Any adjustment in respect of this event would
• The net realisable value of the inventory prior be regarded by Delta as material.
to the damage was estimated at $960,000.
Solution 2
• The event causing the damage to the inventory
occurred after the reporting date.
• Under the principles of IAS 10 Events After the
Reporting Date, this is a non-adjusting event as it
does not affect conditions at the reporting date.
• Non-adjusting events are not recognised in the
financial statements, but are disclosed where
their effect is material.
82
IFRS 5 has two objectives:
Non-Current Assets Held for Sale
& 1. Specify the accounting treatment of assets held
for sale
Discontinued Operations
2. Outline the presentation and disclosure
IFRS 5 requirements of discontinued operations
Scope 1. Assets held for sale

Measure such assets at the lower of
The standard applies to all non-current assets and to all disposal
groups of an entity with the exception of: (a) their carrying amount; and
•deferred tax assets (IAS 12) (b) their fair value less costs to sell
•assets arising from employee benefits (IAS 19)
•contractual rights under insurance contracts (IFRS 4) Depreciation of such assets must cease
•investment properties valued under fair value model (IAS 40)
The assets are shown separately on the face of
•financial assets included within the scope of IAS 39/IFRS 9
the SOFP
•agricultural non-current assets measured at fair value under IAS 41
• IFRS 5 also introduces the concept of a “disposal • The company should classify a non current assets
group” as “held for sale” if:
• This is a group of assets to be disposed of together its carrying amount will be recovered mainly
in a single transaction through a sale transaction
• Liabilities directly associated with those assets will rather than
be transferred in the transaction
through continuing use
Note: the asset and / or the disposal group will be
[This will include a subsidiary acquired in a business combination but which the
simply called “the asset” in these notes entity intends to dispose of immediately – must be within one year]
83
The asset must be: For the sale to be considered “highly probable”:
(i) Management must be committed to a plan to sell the
asset
• Available for immediate sale in its present (ii) An active programme to locate a buyer and complete
condition; and the plan must be initiated
• Subject to usual terms, customary for sale of (iii) The assets must be actively marketed for sale at a
price that is reasonable
such assets; and
(iv) Sale is expected to be completed within one year
• Sale must be “highly probable” from the date of the classification (more than one
year is permitted if the delay is beyond the control of
management)
(v) Unlikely that significant changes to the plan • If the conditions necessary to classify as asset as
will be made or that the plan will be withdrawn held for sale are met after the SOFP date, the
asset should not be classified as held for sale in
NOTE
those financial statements
If an asset is acquired with the intention to
dispose of it, then the asset should only be • If the conditions are met after the SOFP date but
classified as “held for sale” if the asset will before the date of authorisation for issue, it
should be disclosed in the notes (non-adjusting
disposed of within 1 year ( or longer if outside event)
the control of management) and the other
conditions will be met shortly after acquisition
Measurement
Non-Current Assets to be abandoned:
If the asset qualifies as held for sale, it should be
If the asset is to be abandoned, it should not be
measured at the lower of it’s:
classified as held for sale
• Carrying amount
An asset temporarily taken out of use should not
be treated as if it had been abandoned And
• Fair value less costs to sell
84
If an asset has been classified as held for sale, but the
• If the sale is expected to occur beyond one year, required conditions no longer apply, then the asset must
the costs to sell should be measured at their no longer be shown as held for sale
Present Value
The asset must be measured at the lower of:
• Non-Current Assets are not depreciated while (a) Carrying amount if the asset had not been classified
classified as held for sale as held for sale
And
(b) Its recoverable amount at the date of the
subsequent decision not to sell
Presentation:
2. Discontinued Operations
• Show separately from other assets in the SOFP.
• Do not offset assets and related liabilities The results of discontinued operations must
Disclosure be presented separately in the SPLOCI
• Description of asset and the circumstances surrounding its
classification as held for sale
• Any impairment loss in writing the asset down to its fair
value less costs to sell
• The segment in which the asset is presented (IFRS 8)
A discontinued operation is a component of an Disclosure

entity that has been disposed of or is classified Must disclose:
as held for sale
(a) A single amount on the face of the SPLOCI,
And comprising:
• Represents a major line of business or (i) post tax profit or loss of discontinued
geographical are of operations; operations; and
• Is part of a plan to dispose of a separate major (ii) post tax gain or loss on the measurement
line of business; or to fair value less costs to sell or on the
• Is a subsidiary acquired exclusively with a view to disposal of the assets of the discontinued
resale operation
85
(b) An analysis of this single amount into: • Note
(i) The revenue, expenses and pre-tax profit or loss if a component is no longer to be classified as
(ii) The related tax expense held for sale, the results previously presented in
(iii) Gain or loss on measurement to fair value less discontinued operations must be reclassified and
costs to sell or on disposal of assets included in income from continuing operations,
(iv) The related tax expense of the gain or loss for all periods presented
This analysis can be shown on the face of the SPLOCI. If
so, show separately from continuing operations
Example €’000
Sales revenue 50,000
1st
On the July 2014, Cooculin Ltd closed its Cost of sales 27,000
software division. The software divisions
operating results from the start of the financial 23,000
year to the date of closure are as follows: Operating expenses (34,000)
Operating loss (11,000)
The tax relief attributable to the operating loss is
€3,500,000
In addition, the net assets of the division were Solution

sold off at a profit of €7,300,000. The tax First, make sure the figures have not been included
attributable to this profit is €2,300,000 as part of other figures.
For example, if the sales have been included in the
Show the extract from the SPLOCI in relation to
sales from all divisions for the year, sales from the
the discontinued operation
software division must be deducted from total
sales to avoid double-counting
86
Then, calculate the overall gain / loss of the software In the SPLOCI:
division:
€’000
€’000 Profit before tax X
Operating loss Income tax (X)
(11,000)
Profit for the period from
Tax relief
3,500 . continuing operations X
Discontinued operations
( 7,500) loss for the period from
Profit on disposal of assets discontinued operations (2,500)
7,300
Profit / (loss) for the period X .
Tax on profit on disposal
All Copyright reserved © Griffith College ( All Copyright reserved © Griffith College
2,300)
Loss for the period from (
2,500)
discontinued operations
87
IFRS 15
• Replaces:
– IAS 11 Construction Contracts
IFRS 15 – IAS 18 Revenue
Revenue From Contracts With as well as various interpretations

Customers
1 2
IFRS 15
IFRS 15 Revenue Recognition
• The core principle of IFRS 15 is that an entity • 5 steps
will recognise revenue to depict the transfer 1. Identify the contract with a customer
of promised goods or services to customers in 2. Identify the separate performance obligations
an amount that reflects the consideration to 3. Determine the transaction price/consideration
which the entity expects to be entitled in
4. Allocate the transaction price to the separate
exchange for those goods or services. performance obligations
5. Recognise revenue when the entity satisfies
each performance obligation, control obtained
3 4
Identifying the contract Identifying performance obligations

• A contract with a customer will be within IFRS 15 scope if At inception of the contract, assess the goods or services
all the following conditions are met: that have been promised to the customer:
1. the contract has been approved by the parties to the • A good or service ( or a bundle of goods or services)
contract; that is distinct; or
2. each party’s rights in relation to the goods or services to
be transferred can be identified; • A series of goods or services that are substantially the
same and have the same pattern of transfer to the
3. the payment terms for the goods or services to be customer
transferred can be identified;
4. the contract has commercial substance; and
5. it is probable that the consideration to which the entity is Example: a contract to provide asset management
entitled to in exchange for the goods or services will be services to a client for three years
collected.
5 6
88
Distinct Distinct
A good or service is distinct if 2 conditions are met: 2. The entity’s promise to transfer the goods
or services is separately identifiable from
1. The customer can benefit from the good or other promises in the contract
service either on its own or together with
other resources that are readily available* to
the customer
*Good/service that is sold separately by the entity

or another entity or that the customer has already
obtained
7 8
Distinct
Distinct
• When determining whether a promise to transfer Customer can benefit from goods/services
the good/service to the customer is separately
identifiable, consider:
+
Entity does not provide a significant service of Separately identifiable from other contract
integrating the good or service with other
goods/services promises
Does not significantly modify another good/service
promised in the contract
Good or service not highly dependent on or highly
=
interrelated with other goods/services Distinct
9 10
Determining the transaction price Determining the transaction price

The transaction price is the amount to which the Consider
entity expects to be entitled to in exchange for
the transfer of goods and services • Collectability
• Variable consideration
When making this determination, look at past • Time value of money
business practices
• Non-cash consideration
• Consideration payable to customer
11 12
89
Variable
• Examples: consideration Significant financing component
The transaction price should be adjusted for any
– Discounts, rebates, price concessions, incentives, significant financing component in the
performance bonuses, penalties arrangement.
Consider various factors, including:
– The length of time between when the entity transfers
• Estimate the transaction price: the goods or services to the customer and when the
– The expected value or
customer pays for them;
– The most likely amount of consideration to be received – Whether the amount of consideration would
substantially differ if the customer paid cash when
Only include variable consideration to the extent that it is highly probable the goods or services were transferred; and
that there will not be a significant reversal/downward adjustment in the – The interest rate in the contract and prevailing
future when the uncertainty has been subsequently resolved interest rates in the relevant market.
13 14
Allocating transaction price to

Allocating transaction price to performance obligations
performance obligations • If stand alone selling price is not directly
observable estimate it based on various
• Allocate in proportion to the stand-alone selling
price of the goods or service underlying each
methods, e.g.
performance obligation at contract inception.
– Adjusted market assessment approach, price
customers in market would pay
• Best evidence of a stand-alone price is the
observable price of a good/service when entity – Expected cost plus a margin
sells good/service separately – Residual approach, total transaction price less the
sum of the observable stand alone selling prices
•
15 16
Recognise revenue when performance Satisfied over time criteria

obligations satisfied • Customer simultaneously receives and consumes
the benefits as the entity performs (e.g. provision
Determine at contract inception whether it of a monthly payroll service)
satisfies the performance obligation:
– over time; or • Entity’s performance creates or enhances an
– at a point in time asset that the customer controls as the asset is
created or enhanced (e.g. a contract to develop
an IT system on the customer’s premises, the
If not satisfied over time, then satisfied at a customer controls the system while it is being
point in time developed)
17 18
90
Measuring progress toward satisfying a
performance obligation
Control transferred at a point in time :
• If entity does not satisfy its performance
• Apply one revenue recognition method that obligation over time, it satisfies it at appoint in
bests depicts the transfer of goods or services time
to the customer.
• Revenue will be recognised when control is

• Suitable methods:
passed at a certain point in time
– Output methods (based on units produced or
delivered, contract milestones)
– Input methods (costs of resources consumed)
– Passage of time (licence)
19 20
Control transferred at a point in time : Costs to fulfil a contract

• Factors that may indicate the point in time • The incremental costs of obtaining a contract
when control passes include: must be recognised as an asset if the entity
expects to recover those costs
– Entity has present right to payment for asset • These costs are limited to the costs that the
– Customer has legal title to the asset entity would not have incurred if the contract had
– Entity has transferred physical possession not been obtained (e.g. “success fees” paid to
– The customer has the significant risks and rewards
agents)
of ownership
– The customer has accepted the asset • Expense is associated amortisation period would
be 12 months or less
21 22
Costs to fulfil a contract Sale with a right of return

• If costs incurred in fulfilling a contract are not • Recognise revenue for sold products reduced
within the scope of another standard an entity for estimated returns
shall recognise an asset only if those costs: • For the estimated returns, an asset initially
measured at the carrying amount of the
inventory less costs of recovery and a credit to
1. Relate directly to a contract; and cost of sales
2. Generate or enhance resources that will be • For the estimated returns, a refund liability
used in satisfying performance obligation; and • Adjust asset and refund liability at end of each
3. Are expected to be recovered reporting period
23 24
91
Bill and hold arrangements
For a customer to have obtained control in a bill
and hold arrangement the following criteria must
all be met:
EXAMPLES - The reason for the bill and hold arrangement must be
substantive
- Product separately identified as belonging to the
customer
- Product ready for physical transfer
- Entity cannot have the ability to use or sell the
product
25 26
Repurchase agreements Repurchase agreements

• Entity has a right or obligation to repurchase • Entity has an obligation to repurchase the asset
the asset at the customers request
• Repurchase price < original selling price and
customer has a significant economic incentive to
• Repurchase price = or > original selling price, exercise its right*, contract accounted for as a
contract accounted for as a financing lease
arrangement
• *repurchase price expected to significantly
exceed market value
• Repurchase price < original selling price, • If no significant economic incentive account for as
contract accounted for as a lease a sale with a right of return
27 28
Construction Contracts Construction Contracts

• Contract revenue is the initial amount agreed Calculate the overall profit or loss
in the contract and any additional amounts
due to variations in price in the contract work – Compare contract price with cost to date plus
estimated future costs
• Contract costs are the costs that relate directly
to the specific contract – If loss, provide for immediately in accordance with
the prudence concept
29 30
92
Determining the progress Progress cannot be determined
• Input methods, based on inputs used • Recognise revenue only to extent of contract
– For example: contract costs to date/total costs costs to date
• Output methods, based on performance

completed to date
– For example: Value of work completed
(work certified) / contract price
31 32
Statement of financial position

• Revenue less cash received = contract asset
• Contract costs to date – costs transferred to

cost of sales = work in progress
• Cash received exceeds revenue = contract

liability
33
93
IFRS 15 QUESTIONS
94
• Definitions
IAS 8 Accounting Policies :

Accounting Policies, The specific principles, bases, conventions, rules
Changes in Accounting and practices adopted by an entity in preparing
Estimates and and presenting financial statements.
Errors
• Errors
Omissions from, and other misstatements of, the entity’s financial
statements for one or more prior periods that are discovered in the
• Change in an Accounting Estimate
current period and arise from a failure to use, or involve the misuse
of, reliable information that: This is an adjustment of the carrying amount
a) Was available when the prior periods financial statements were
prepared; and of an asset or liability, or a related expense,
b) Could reasonably be expected to have been obtained and taken into resulting from re-assessing the expected
account in the preparation and presentation of those financial
statements future benefits and obligations associated
These errors include:
with that asset or liability
Effects of mathematical mistakes
• Mistakes in applying accounting policies
• Misinterpretation of facts
• Fraud
ACCOUNTING POLICIES • When no Accounting Standard (or Interpretation)

• When an IAS/IFRS applies to an item in the financial applies to a transaction or event , management must
statement, the accounting policy to be applied to that item exercise judgement in developing an appropriate
must be determined by applying the standard ( or
Interpretation i.e. SIC ) accounting policy.
• Consider also any implementation guidance issued by the • The chosen policy must provide information which is :
IASB • Relevant to the needs of users
• In the absence of an IFRS that specifically applies to a • Reliable or Faithfully Represented
transaction/event/condition, management should use its own
judgment in selecting and applying an accounting policy that • Free from bias or Neutral
results in financial information that is both relevant and • Prudent
reliable • Complete
95
ACCOUNTING POLICIES ACCOUNTING POLICIES
IAS 8 specifies the order in which management should approach the
selection of an accounting policy in these cases:
• Once an accounting policy has been selected by an entity, it
must be applied consistently
1. Examine requirements of standards / interpretations dealing with
similar matters
• Consistency in treating items from period to period is important
in order that financial statements may be compared over time
2. If inappropriate, use the definitions, recognition criteria and
measurement concepts provided in the “Conceptual Framework”
• Thus, same policies are adopted in each period unless a change
is merited
3. Failing this, consult the most recent pronouncements of other
• The IAS restricts the instances in which a change in accounting
standard setting bodies that use a similar conceptual framework,
other accounting literature and accepted industry practices to the policy is permissible
extent that these do not conflict with IFRS’s and the Framework

An entity can only change an accounting policy if such a change:
• If the application of an IFRS for the first time results
1. Is required by a standard or interpretation of a standard in a change in accounting policy, then such a change
should be accounted for in accordance with any
Or specific transitional provisions outlined in that IFRS
• Otherwise, a change in accounting policy is applied
2. Results in a more relevant and reliable presentation in the
financial statements of the effects of transactions or other Retrospectively to all periods presented in the
events on the entity’s financial position, performance or cash financial statements as if the new accounting policy
flows has always been applied
Thus, there are 3 important situations:

Retrospective Application of Changes in
1. A change in accounting policy which results from the initial application
of a Standard (or Interpretation) shall be accounted for using the
Accounting Policies
specific transitional provisions of that standard if any e.g. Goodwill
under IFRS 3
• The reporting entity must adjust the opening balance of
each affected component of equity for the earliest prior
2. When a change in accounting policy results from the initial application period presented and any other relevant comparative
of a Standard (or Interpretation) which does not contain specific amounts as if the new accounting policy had always
transitional provisions, the effect of the change in policy must be
applied retrospectively; i.e. prior period adjustment been applied.
3. IAS 8 requires retrospective application of voluntary changes in • The total prior period adjustment is the cumulative
accounting policies unless it is impracticable to determine the effect on opening reserves as if the new policy had
cumulative effect of the change. In such cases prospective always been applied.
application is allowed.
96
• Disclosure requirements for a change in policy
• The standard highlights two types of event that do not result
in a change of an accounting policy: 1. Reason for change
2. Amount of the adjustment for the current
1. Adopting an accounting policy for a new type of period and for each period presented
transaction 3. Amount of the adjustments required for the
2. Adopting a new policy for a transaction that has not periods prior to those disclosed in the financial
occurred in the past statements
4. The fact that comparative information has been
In the case of a tangible non-current asset, a move to restated
revaluation accounting will not result in a change of
accounting policy under IAS 8, but a revaluation as per IAS 16 Entity should also disclose the impact of new IFRS
that have not yet come into force
CHANGE IN ACCOUNTING ESTIMATE CHANGE IN ACCOUNTING ESTIMATE

Many items contained in financial statements cannot be The effect of a change in accounting estimate is recognised
measured precisely. Estimates used for these items prospectively in the profit and loss in the period of change and
Examples also in the profit and loss in future periods if the change affects
• Provision for bad and doubtful debts both periods.
• Inventory obsolescence
• Useful lives of depreciable non-current assets Any corresponding change in assets or liabilities, or to an item of
• Fair value of investments equity, are recognised by adjusting the carrying amount of the
asset, liability or equity item in the period of change.
Reasonable estimates do not undermine reliability of accounts
Estimates may have to be revised periodically if circumstances Prospective recognition means that the change is applied from the
change or new information comes to light date of the change in estimate. Previous financial statements
Revision of an estimate is not an error nor does it relate to prior remain unaltered.
periods
CHANGE IN ACCOUNTING ESTIMATE • Example 2

Petal Ltd. made a provision for corporation tax of $150,000
• Example 1 for the year ended 31 Dec 2010. In March 2011 this
A change in the estimate of bad debts affects only provision was agreed by the Revenue and paid at
the current period and therefore is recognised in the $170,000.
current period. Solution.
This is the correction of an accounting estimate and not an
But a change in the estimated useful life of a error. The correction will be made by increasing the tax
depreciable asset affects the remainder of the charge for the year ended 31 December 2011 by $ 20,000.
current period and for the future period during the The effect of the correction on the 2011 profits needs to
assets remaining useful life be disclosed.
97
CHANGE IN ACCOUNTING ESTIMATE Errors
• It is also important to recognize the difference between the
• Disclose correction of an error and a change in accounting estimate.
1. Nature and amount of change in estimate, unless it would • Current period errors are corrected before the financial
involve undue cost or effort. If this is the case, then this fact statements are authorised for issue.
should be disclosed.
• Sometimes material errors are not discovered until a later
2. It can be difficult to distinguish between a change in period..... A material prior period error is corrected
accounting policy and a change in accounting estimate. In a retrospectively in the first set of financial statements
case where such a distinction is problematical, then the authorised for issue after its discovery.
change is treated as a change in accounting estimate, with
appropriate disclosure. • The comparative amounts for the prior period(s) presented, in
which the error occurred, are restated or if the error occurred
before the earliest period presented.
Errors • Only when it is impracticable to determine the

• The opening balances of assets, liabilities and equity for cumulative effect of an error on prior periods can an
the earliest period are restated. entity correct an error prospectively.
• The correction of an error is excluded from the

determination of the profit or loss for the period in • The total prior period adjustment is the cumulative error
which the error is discovered. to the start of the period when the error is discovered
net, if any, of attributable tax.
• The result of this is that the financial statements for the
current period are presented as if the error had never
occurred, since the error is corrected in the comparative
information for the period in which it occurred
ERRORS
• Disclosure Requirements
1. Nature of prior period error
2. For each period, the amount of the correction
3. The amount of the error at the beginning of the earliest
period presented
4. If retrospective restatement is impracticable for a
particular prior period, the circumstances that led to the
existence of that condition and a description of how and
from when the error has been corrected.
Subsequent period need not repeat these disclosures
98
Change in Accounting Policy
Example:
The following are the statements of profit or loss and other comprehensive income (SPLOCI) of True Ltd. for
the years ended 31st March 2009 and 31st March 2010.
Statements of Profit or Loss and Other Comprehensive Income

31/3/10 31/3/09
Revenue 860,000 220,000
Cost of sales 520,000 130,000
Gross profit 340,000 90,000
Administrative expenses (90,000) (30,000)
Distribution costs (80,000) (10,000)
Finance costs (30,000) (5,000)
Profit before tax 140,000 45,000
Income tax expense (50,000) (18,000)
Profit after tax 90,000 27,000
Other comprehensive income 90000 nil
Total Comprehensive Income 180,000 27,000
Additional Information:
1. True Ltd. has been valuing its inventories using the FIFO method. In the year ended 31st March 2010
the directors have decided to change to the weighted average method of valuation in order to give a
fairer presentation of its results and financial position.
2. Inventory valuations 31/3/2010 31/3/2009 31/3/2008

FIFO Method 180,000 160,000 140,000
Weighted Average Method 240,000 195,000 160,000
3. The retained earnings of True Ltd. at 31 st March 2008 amounted to$1,160,000.
4. The cost of sales for year ended 31st March 2010 includes the closing inventory valued using the FIFO
method.
5. Other comprehensive income for the year ended 31 March 2010 represents a revaluation surplus on
the company’s property, plant and equipment.
6. Ignore taxation.
Required:
Prepare statement of comprehensive income of True Ltd. for the year ending 31 st March 2010 to include
comparative figures and the statement of changes in equity for the year ended 31 st March 2010
99 All Copyright reserved © Griffith College

Solution
Statements of Profit or Loss and Other Comprehensive Income
31/3/10 31/3/09
Revenue 860,000 220,000
Cost of sales 495,000 115,000
Gross profit 365,000 105,000
Finance costs (30,000) (5,000)
Income tax expense 50,000 18,000
Other comprehensive income 90,000 nil
Total comprehensive income 205,000 42,000
STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2010
Share Revaluation Retained Total

Capital Reserve Earnings
Balance at 1st April 2009 X 1,187,000*

Change in Accounting Policy 35,000
Restated Balance 1,222,000
1,222,000 1,222,222
90,000 115,000 205,000

TCI 115,000
Balance at 31/3/2010 1,337,000
1,337,000 1,427,222
*As originally reported. At 1st April 2008 $1,160,000 plus as originally reported for y/e 31/3/2009 $27,000
The cumulative change in accounting policy for the periods up to the start of April 2009 (€20,000 in 2008 and
a further$ 15,000 for the year ended 31 March 2009).
Note to financial statements.

During the reporting period the directors changed the accounting policy with respect to inventory valuation
from first in first out to weighted average cost. The reason for the change is to give a fairer presentation of
the company’s results and financial position. The change in accounting policy has been accounted for
retrospectively. The comparative financial statements have been restated.

The effect of the change is to decrease cost of sales for the reporting period by$ 25,000 (2009$15,000) and
to increase profit for 2010 by$ 25,000 (2009$ 15,000).The retained earnings as at 1 April 2008 have been
increased by$ 20,000.

Errors
The following are the draft summarised statements of profit or loss and other comprehensive income of
Root Limited for the year ended 31 May 2010
2010 2009
$ $
Income tax expense 328,000 256,000
Other comprehensive income nil nil
The retained earnings of Root Ltd (as previously reported) at the 31 st May 2008 were $1,174,000. The issued
capital of the company is $500,000.
During the audit of the financial statements for the year ended 31 May 2010 it was discovered that
advertising expenditure was omitted from financial statements as follows:
$
Y/E 31 May 2010 110000
31 May 2009 80000
31 May 2008 60000
The corrections of these errors are not included in the above draft income statements.
The company's profits are taxable at 40%.
Required
Re-draft the statement of profit or loss and other comprehensive income of Root Ltd. for the year ended 31
May 2010 and show the statement of changes in equity for the same period.

Solution
The total prior period adjustment is the cumulative error to the start of the period when the error is
discovered, net (if any) of attributable tax.
The total prior period adjustment in the cumulative error up to 31 May 2009
i.e. Y/E 31/05/09 80,000
Y/E 31/05/08 60,000
140,000
Less attributable tax 40% (56,000)
84,000
Analyse the total into
1. The amount affecting the immediate past year i.e. 31/05/09: $48,000
2. The amount affecting the retained profit up to 31/05/08: $36,000
Re Drafted SPLOCI
2010 2009
$ $
Other comprehensive income nil nil

Statement of Changes in Equity Year Ending 31st May 2010

Ordinary Retained Total
Shares Earnings
As at 1st June 2009 500,000 1,558,000 2,058,000
Prior year adjustment:
correction of error - (84,000) (84,000)
As restated 500,000 1,474,000 1,974,000

TCI for the year - 426,000 426,000
At 31st May 2010 500,000 1,900,000 2,400,000
Note to financial statements

During the audit of the financial statements for the current period it was discovered that advertising
expenditure was omitted as follows: 2009$ 80,000; 2008$ 60,000. The comparative figures have been
restated retrospectively.

The profit after tax for 2009 has been decreased by$ 48,000, while the retained earnings as at 1 June 2008
have been decreased by$ 36,000.
Changes in Accounting Estimates

(a) Many items in financial statements cannot be measured precisely – so best estimates are often used
e.g. the useful life of a non-current asset, warranty obligations, inventory obsolescence. Very often
financial statements could not be prepared without some use of estimates;
(b) Estimates are revised because of new circumstances or information. This does not constitute a
correction of an error and cannot relate to prior periods. Changes in accounting estimates must be
recognised prospectively by including them in profit or loss:
(i) in the period of change if the change affects that period only e.g. a bad debts estimate
or
(ii) in the period of change and future periods, if the change affects both e.g. revising the useful
life of a tangible asset.

• Inventories and short- Chapter summary diagram
term WIP (IAS 2) Inventories and biological
Inventories and • Biological assets (IAS assets
41)
biological assets Inventories Biological assets
Interchangeable Accounting
Valuation
items treatment
Inventories and short-term WIP (IAS 2) Inventories and short-term WIP (IAS 2)2
• Inventories are assets: • Inventories must be measured at the lower of:

– Held for sale in the ordinary course of business; or – Cost
– Used in the production of goods for resale or the – Net realisable value
rendering of services • The lower of cost and net realisable value should be
• Inventories include: calculated on a line by line basis (ie taking each item
– Goods purchased and held for resale separately).
– Finished goods produced
– Work in progress being produced
– Materials and supplies awaiting use in the production
process
Inventories and short-term WIP (IAS 2) Inventories and short-term WIP (IAS 2)
• The cost of inventory comprises: • Costs of purchase

– Costs of purchase – Purchase price
– Costs of conversion – Import duties and other taxes
– Other costs incurred in bringing inventories to their – Transport, handling and any other costs directly attributable to
the acquisition of finished goods, materials and services
present location and condition
– Less trade discounts, rebates and other similar items
• Costs of conversion
– Direct materials and labour
– Variable production overheads
– Fixed production overheads (these must be allocated to items
of inventory based on the entity's normal level of activity)
105
• Other costs incurred in bringing inventories to their present • An approximation to the cost of inventories may also be
location and condition. calculated using one of two techniques:
For example: the non-production overheads of designing a – Standard costs: here a cost card is produced to value the
product for a specific customer normal production values in an item of inventory (raw
But not: materials used, labour hours incurred).
– Abnormal wastage (materials, labour or overheads) Standard costs should be reviewed regularly to ensure
– Storage costs that they approximate to current costs.
– Administrative overheads – Retail method: here the cost of inventories is calculated
by taking the selling price of the inventories less the
– Selling costs average profit margin realised on the sale of the
inventories.
Interchangeable items
• Where inventories comprise interchangeable items it may not be possible to
• Inventories must be measured at the lower of cost and net
determine which items of inventories are held at the year end and therefore their realisable value.
associated cost. • Net realisable value:
• IAS 2 allows their cost to be determined by reference to one of two estimation
techniques: Estimated selling price X
– First in, first out (FIFO): Less estimated costs of completion (X)
The cost of inventories is calculated on the basis that the inventories held at the
end of the reporting period represent the latest purchases or production.
Less estimated selling costs* (X)
– Weighted average cost: X
The cost of inventories is calculated by using a weighted average price which is *Marketing, selling and distribution costs
calculated by dividing the total cost of items by the total number of such items.
The price is recalculated on a periodic basis or as each additional shipment is
received and items taken out of inventory are removed at the prevailing weighted
average cost.
• Measuring inventories at the lower of cost and net

Inventory item Cost NRV Lower realisable value will result in any loss being recognised in
$ $ $ the financial statements as soon as it is foreseen.
• Net realisable value may be lower than cost due to:
1 27 32 27
– An increase in costs or fall in sales price
2 14 8 8
– Physical deterioration of inventories
3 43 55 43 – Obsolescence of products
4 29 40 29 – A management decision to sell products at a loss
113 135 107 – Errors in production or purchasing
The inventories figure is $107 not $113.
106
Biological assets (IAS 41) 1 Biological assets (IAS 41)
IAS 41 distinguishes between two broad categories of agricultural
production system:
• IAS 41 Agriculture applies the requirements of IFRS to the (a) Consumable: animals and plants themselves are harvested
treatment of biological assets. (such as beef cattle and wheat).
• Biological assets are living animals or plants. (b) Bearer: animals and plants bear produce for harvest (such as
dairy cows and apple trees).
• Harvest is the detachment of produce from a biological asset or
the cessation of a biological asset's life process (as in Note.
slaughter). An amendment to IAS 41 in May 2014 transferred the treatment
• Agricultural produce is the harvested product of an entity's of bearer plants (such as apple trees) to IAS 16, so they are now
biological assets (such as apples or carcasses). accounted for in the same way as items of plant and equipment.
Biological assets (IAS 41) Biological assets (IAS 41)

Recognition Measurement
Animals and plants are recognised as assets when: IAS 41 requires all biological assets to be measured at the year end
(a) The entity controls the asset as a result of past events at fair value less estimated point-of-sale costs.
(b) It is probable that future economic benefits associated with Fair value can usually be taken to be market value.
the asset will flow to the entity Any gain or loss arising from changes to fair value is recognised in
(c) The fair value of the asset or its cost to the entity can be profit or loss.
measured reliably Bearer plants are measured at cost or revalued amount less
accumulated depreciation.
Biological assets (IAS 41)

• Agricultural produce is recognised prior to harvest at fair value
less estimated point of sale costs.
• Following harvest agricultural produce is classified as inventory
and accounted for in accordance with IAS 2.
107
IAS 41 Question
On 1 January 20X1, a farmer had a herd of 100 cows, all of which were 2 years old. At this
date, the fair value less point of sale costs of the herd was $10,000. On 1 July 20X1, the
farmer purchased 20 cows (each two and half years old) for $60 each.
As at 31 December 20X1, three year old cows sell at market for $90
each. Market auctioneers have charged a sales levy of 2% for many years.
Required:
Discuss the accounting treatment of the above in the financial
statements for the year ended 31 December 20X1.
108
IFRS 16 Was issued by the IASB in Jan 2016
IFRS 16 • Replaces IAS 17
LEASES
IFRS 16 Definition
• Under IAS 17 There were operating • A lease is a ‘contract that conveys the right
and Finance Leases to use an underlying asset for a period of
• Operating leases gave rise to off SOFP time in exchange for consideration
financing as no asset or Liability were • A right-of-use asset ‘represents a lessee's
shown on the SOFP. right to use an underlying asset for the lease
• IFRS 16 Shows and asset and Liability for term’.
all leases with some exemptions. • If no Asset exists it is a service contract
under IFRS 15
The lessor is the ‘entity that provides the right

to use an underlying asset in exchange for
consideration’.
The lessee is the ‘entity that obtains the right

to use an underlying asset in exchange for
consideration’.
109
Lessee Accounting To calculate the lease liability and right-of-use asset entities
must establish the length of the lease term.
At inception of
lease recognise The lease term comprises:
• Non-cancellable periods
Lease liability Right-of-use asset
Credit Debit • Periods covered by an option to extend the lease
if reasonably certain to be exercised
Recognise at present value of Recognise at cost, which equals:
payments not yet made: • Initial value of lease liability • Periods covered by an option to terminate the lease
• Fixed payments
• Amounts expected to be paid
• Payments made at or before if reasonably certain not to be exercised
under residual value guarantees commencement
• Options to purchase that are • Initial direct costs The lease liability is in fact all payments not paid at the
reasonably certain to be • Estimated costs of asset
exercised removal or dismantling as
commencement date discounted to present value using
• Termination penalties if lease per lease conditions (IAS 37) the interest rate implicit in the lease .
term reflects expectation that
they will be incurred.
IFRS 16 Journal Entries Subsequent measurement

After commencement date, lessee needs to take care about both elements recognized initially:
Lessee takes an asset under the lease:
Debit Right-of-use asset Right-of-use asset
Credit Lease liability (in the amount of the lease liability) Normally, a lessee needs to measure the right-of-use asset using a
cost model under IAS 16 Property, Plant and Equipment.
Lessee pays the legal fees for negotiating the contract: It basically means to depreciate the asset
Debit Right-of-use asset • if ownership transfer to the lessee at the end of the lease, over the remaining
Credit Suppliers (Bank account, Cash, whatever is applicable) useful economic life of the asset
• if ownership does not transfer to the lessee at the end of the lease, over the
The estimated cost of removal, discounted to present shorter of the lease term and the useful economic life of the asset
value (lessee will need to remove an asset and restore the site Debit Profit or loss – Depreciation charge
after the end of the lease term): Credit Accumulated depreciation of right-of-use asset
Debit Right-of-use asset
Credit Provision for asset removal (under IAS 37)
However, the lessee can apply also IAS 40 Investment Property

(if the right-of –use asset is an investment property and fair value model is applied), Lease liability
or A lessee needs to recognize an interest on the lease liability:
using revaluation model under IAS 16 Debit Profit or loss – Interest expense
(if right-of-use asset relates to the class of PPE accounted for by revaluation model). Credit Lease liability
Also, the lease payments are recognized as a reduction of the lease liability:
Debit Lease liability
Credit Bank account (cash)
If there is a change in the lease term, lease payments, discount rate or

anything else, then the lease liability must be re-measured to reflect all the
changes.
110
Exemptions IFRS 16 Example
IFRS 16 permits two exemptions (IFRS 16, par. 5 and following):
On 1 April 20X7, Sima entered into an agreement to lease an
• Leases with the lease term of 12 months or less with no purchase item of equipment. The lease required four annual payments in
option (applied to the whole class of assets)
advance of $215,000 each commencing on 1 April 20X7. The
• Leases where underlying asset has a low value when new (applied on one- equipment has a useful life of four years and will be scrapped
by-one basis) at the end of the lease period. The present value of the total
lease payments is $750,000 and the interest rate implicit in the
So, if you enter into the contract for the lease of PC, or you rent a car for 4
lease is 10%.
months, then you don’t need to bother with accounting for the right-of-use asset
and the lease liability.
How will this be reflected within the financial statements of
You can simply account for all payments made Sima for the year ended 31 March 20X8?
directly in profit or loss on a straight-line (or other systematic) basis.
At 01/04/X7 ASSET
1. Recognise an Asset in SOFP DR entry 750,000/4 = 187,000 depreciation
2. Recognise a Lease Liability in SOFP Cr Entry Dr P&L Depreciation
3. Measure at PV of lease payments Cr SOFP Accumulated Depreciation on asset
Dr Right of use Asset $750,000 Cv for SOFP = $562,500

Cr Lease Liability $750,000
2 items to deal with

• Asset will depreciate
• Lease Liability will amortise
Extract from Statement of Profit or Loss for year ended 31 March 20X8
Liability $
Use Amortisation Table for the lease

Depreciation ($750,000/4) (187,500)
Finance cost (W1) (53,500)
• Is lease payments made in Advance or in Arrears?
• In advance payment first then add interest
• In arrears Interest first then payment
Balance Paid Net Interest Balance
b/f @ 10% c/f Extract from Statement of Financial Position 31 March 20X8
31 March 20X8 750,000 (215,000) 535,000 53,500 588,500 $
31 March 20X9 588,500 (215,000) 373,500 Non-current assets
(CL) (NCL) Property, plant and equipment ($750,000 – $187,500) 562,500
Non-current liabilities
Lease payable 373,500
Interest or finance charge goes to P&L Current liabilities
Balance is split in SOFP between Current & Non Current Liabilities Lease payable 215,000
111
A sale and leaseback transaction involves the
sale of an asset and the leasing the same asset back.
SALE & LEASEBACK In this situation, a seller becomes a lessee and a buyer
IFRS 16 becomes a lessor.
Is the transfer a ‘sale’?

If an entity (the seller-lessee) transfers an asset to another entity
(the buyer-lessor) and then leases it back, the seller-lessee must
IFRS 16 Sale and leaseback Example
assess whether the transfer should be accounted for as a sale. • S sold a building to B for $800,000
Entities must apply IFRS 15 Revenue from Contracts with Customers • Carrying amount $600,000
to decide whether a performance obligation has been satisfied. • S leases it back for 5 years at $120,000 per
Transfer is not a sale Transfer is a sale annum payable at end of each year, remaining
Continue to recognise asset De-recognise an asset
life of building 15 years
Recognise a financial liability equal to Recognise a right-of-use asset as the
proceeds received. proportion of the previous carrying amount
that relates to the rights retained.
• Fair value of building $800,000
Recognise a Lease Liability
• Implicit rate of interest is 4.5%
The seller/lessee only recognises the amount
of any gain or loss on the sale that related to
• PV of Lease Payments = 526,797
the rights transferred .
IFRS 16 Sale and leaseback

Right of use asset = proportion of previous carrying Overall gain 200,000
amount that relates to right of use retained
Relating to rights retained x 526,797/800,000 =
$600,000 x 526,797/800,000 = $395,098
$131,699 therefore gain on rights transferred is
$200,000 – 131,699 = $68,301
Proceeds $800,000 – 526,797 = 273,203
Carrying amount $600,000 – 395,098 = 204,902
Gain on sale for rights transferred 68,301
112
IFRS 16 Sale and leaseback IFRS 16 Sale and leaseback
Initial accounting entries The financial liability will be measured at
Dr Bank 800,000 $526,797 + finance cost $526,797 x 4.5%,
Dr Right of use asset 395,098 $23,706 less repayment $120,000 = $430,503
Balance Int Payment Balance

Cr Building 600,000 4.5%
b/f c/f
Cr Financial liability 526,797 Year 1 526,797 23,706 (120,000) 430,503
Cr P/L 68,301 Year 2 430,503 19,373 (120,000) 329,876
Liability at end of year 1 = 430,503

Non Current Liability = 329,876
Current Liability = 100,627
113
1. During the Year ended 30 September 2017 H Ltd entered into a
new lease
On 1 Oct 2016 H made a payment of €90,000 being the first of

5 equal annual payments under a lease for an item of plant.
The interest rate implicit is 10% and the present value of the
total lease payments on 1 Oct 2016 was €340,000.
Required: Show the accounting entries at year end 30 Sept
2017
2. Z entered into a lease on 01 Nov 2016. The lease was for 5

years. The present value of the total lease payments was
€45,000 and the interest rate implicit in the lease was 7% The
annual payment was €10975 in arrears.
Required: Show the accounting entries at year end 31 October

2017
3. On 1 Jan 2017 O Ltd entered into a sale and lease back

agreement for an item of property.
When it was sold the asset had a carrying value of €6 million
and a remaining life of 12 years.
Stark sold the asset for €7 million this was its fair value at the
date of sale. It was leased back for a period of 10 years. The
payments of 1 million per year are in arrears. The interest rate
implicit in the lease are 7% and the present value of the Lease
payments are €5,083,450
114
• Current tax
• Deferred tax: basic
Chapter summary diagram
principles
• Temporary differences
Income taxes • Group financial statements
Current tax Income taxes
• Other P2 level temporary

differences Deferred tax Recognition
• Recognition
• Measurement
Measurement
• Presentation
Basic principles Group Other
(Revision of financial temporary
Paper F7) statements differences
Presentation
Current tax Deferred tax: basic principles

Current tax is the amount of income taxes payable or recoverable The carrying value and tax base of an asset or a liability (ie period
in respect of taxable profit or loss for a period. and manner in which a transaction is recognised in IFRS accounts
and tax computation) may be quite different. Where the tax base
materially differs from accounting treatment, that tax charge in
the statement of comprehensive income may be misleading
without some form of adjustment.
Question: Tax base Answer: Tax base

What is the tax base of each of the following assets/liabilities? (a) The tax base of the asset is the amount that will be
(a) An asset cost $4,000 and has had tax depreciation of $2,000 deductible for tax in future periods which is the $2,000
deducted, and the remaining cost will be deductible in future carrying value for tax.
periods. (b) The tax base of the accruals is $nil as they are not deductible
(b) Accrued expenses of $5,000 are deductible for tax when the for tax until the cash is paid.
cash is paid. (c) The cash hasn't been received so the interest is not yet
(c) Interest receivable of $200 is included in receivables and taxable and therefore the tax base is $nil.
interest received is taxable when the cash is received. (d) The tax base is the same as the carrying value as there are no
(d) A loan of $6,600 is included in non current liabilities. There tax consequences of the transaction, ie $6,600.
are no tax consequences of repaying the loan.
115
Temporary differences Question: Deferred tax (1)
• Deferred tax is the tax attributable to temporary differences, Chrysalis Co has estimated that the current tax for the year ended
which are differences between the carrying amount of an asset 30 September 20X8 is $120,000. In the year ended 30 September
or liability in the statement of financial position and its tax base. 20X7, $95,000 was provided for current tax and the liability was
settled during the year at $98,000.
• Taxable temporary differences (amounts taxable in the future)
generate a deferred tax liability. Chrysalis Co also has a deferred tax provision of $112,000 at the
beginning of the financial year. At 30 September 20X8 the carrying
• Deductible temporary differences (amounts tax deductible in value of assets is $3,500,000 and their tax base is $3,100,000.
the future) generate a deferred tax asset.
The tax rate is 30%.
Required
Show how these items would be recorded in the financial
statements for the year ended 30 September 20X8.
Answer: Deferred tax (1) Answer: Deferred tax (1) (cont'd)
The tax expense in profit or loss is: Current tax of $120,000 will be included in current liabilities in the
statement of financial position.
$'000
Current tax 120 The deferred tax provision is: $'000
Underprovision from prior year (98-95) 3 Opening provision 112
Transfer to deferred tax 8 Movement (to income statement) 8
131 Closing provision (400  30%) 120
Taxable temporary differences: $'000

Carrying value of assets 3,500
Tax base (3,100)
400
Group financial statements Other P2 level temporary differences
• Fair value adjustments on consolidation • Development costs

• Undistributed profits of subsidiaries, branches, associates and • Impairment losses (and inventory losses)
joint ventures • Financial assets
• Unrealised profits on intragroup trading • Unused tax losses and unused tax credits
• Share-based payment
• Leases
116
Recognition Measurement
Under IAS 12 Income Taxes, a deferred tax liability • Deferred tax assets and liabilities are measured at the tax rates
or asset is recognised for all taxable and expected to apply to the period when the asset is realised or
liability settled, based on tax rates (and tax laws) that have
deductible temporary differences, unless they been enacted (or substantively enacted) by the end of the
arise from: reporting period.
• The initial recognition of goodwill; or • Deferred tax assets and liabilities cannot be discounted.
• The initial recognition of an asset or liability in a transaction • Deferred tax assets are only recognised to the extent that it is
which: probable that taxable profit will be available against which the
(i) Is not a business combination deductible temporary difference can be utilised.
(ii) At the time of the transaction, affects
neither accounting profit nor
taxable profit
Presentation Chapter summary 1

• Deferred tax assets and liabilities can only be 1 Current tax
 Current tax is the tax charged by the tax authority.
offset if:  Unpaid amounts are shown as a liability. Any tax losses that can be carried
(a) The entity has a legally enforceable right to back are shown as an asset.
set off current tax assets against 2 Deferred tax

current tax liabilities  Deferred tax is the tax attributable to temporary differences, ie temporary
differences in timing of recognition of income and expense between IFRS
(b) The deferred tax assets and liabilities relate accounting and tax calculations.
to income taxes levied by the same  They are measured as the difference between the accounting carrying
value of an asset or liability and its tax base (ie tax value).
taxation authority  Temporary differences are used to measure deferred tax from a statement
of financial position angle (consistent with the Framework).
Chapter summary 2 Chapter summary 3

 Taxable temporary differences arise where the accounting carrying value
3 Recognition
exceeds the tax base. They result in deferred tax liabilities, representing
the fact that current tax will not be charged until the future, and so an  Deferred tax is provided for under IAS 12 for all temporary differences
accrual is made. (with limited exceptions).
 Deductible temporary differences arise when the accounting carrying
4 Measurement
value is less than the tax base. They result in deferred tax assets,
representing the fact that the tax authorities will only give a tax deduction  Deferred tax is measured at the tax rates expected to apply when the
in the future (eg when a provision is paid). A deferred tax credit reduces asset is realised or liability settled (based on rates enacted/substantively
the tax charge as the item has already been deducted for accounting enacted by the end of the reporting period).
purposes.
5 Presentation
 In group financial statements, deferred tax may arise on fair value
adjustments, undistributed profits of subsidiaries and unrealised profits.  Deferred tax assets and liabilities are shown separately from each other
(consistent with the IAS 1 'no offset' principle) unless the entity has a
 A deferred tax asset is created for unused tax losses and credits, providing
legally enforceable right to offset current tax assets and liabilities and the
it is probable that there will be future taxable profit against which they
deferred tax assets and liabilities relate to the same taxation authority.
can be used.
117
ACCA P2 Class Questions Deirdre Cogan
Deferred taxation
A company's financial statements show profit before tax of $1,000 in
each of years 1, 2 and 3. This profit is stated after charging
depreciation of $200 per annum. This is due to the purchase of an asset
costing $600 in year 1 which is being depreciated over its 3-year useful
economic life on a straight line basis.
The tax allowances granted for the related asset are:
Year 1 $240
Year2 $210
Year3 $150
Income tax is calculated as 30% of taxable profits.

Apart from the above depreciation and tax allowances there are no other
differences between the accounting and taxable profits.
Required:
(a) Ignoring deferred tax, prepare statement of profit or
loss extracts for each of years 1, 2 and 3.
(b) Accounting for deferred tax, prepare statement of profit
or loss and statement of financial position extracts for each
of years 1, 2 and 3.
118
Financial Instruments
• IAS 32 Presentation Definitions
• IFRS 7 Disclosure A financial instrument is:
– A contract that gives rise to both a financial asset of one
• IFRS 9 Measurement entity and a financial liability or equity instrument of
another
For example a loan agreement from a bank signed by a company
would be a financial instrument because the bank would show
a financial asset in its financial statements (in the form of a
receivable) and the company would show a financial liability (in
the form of a loan).
Definitions:
A financial asset is: Definitions
(a) Cash A financial liability is:
(b) An equity instrument of another entity (for example shares, (a) A contractual obligation to deliver cash or another financial
share options or share warrants) asset to another entity (for example a trade payable,
(c) A contractual right to receive cash or another financial asset debenture loan and redeemable preference shares)
from another entity (for example a trade receivable) (b) A derivative standing at a loss
(d) A derivative standing at a gain An equity instrument is any contract that gives the holder a
residual interest in the assets of an entity after deducting all of
its liabilities.
Compound financial instruments

This term describes financial instruments which contain both a
IAS 32 deals with the classification of financial instruments liability and an equity element.
between liabilities and equity and the presentation of certain IAS 32 states that each component part of the instrument should
compound instruments such as convertible debt. be classified and valued separately according to the substance of
It states that financial instruments should be classified as debt the arrangement.
(financial asset or liability) or equity depending on their substance The most common type of compound instrument is convertible
rather than their legal form. debt.
The compound instrument should be separated as follows.
Debt instruments – Firstly determine the carrying amount of the debt
Debt instruments are those which meet the definition of a component by reference to a similar liability that does not
financial asset or a financial liability. have conversion rights
– Then value the equity component as the balancing figure
119
IFRS 7 requires specific monetary disclosures of financial IFRS 9 states that a financial asset or financial liability should
instruments and also encourages the preparers of financial initially be recognised in the statement of financial position when
statements to include a narrative commentary on the entity's the reporting entity becomes a party to the contractual provisions
financial instruments. of the instrument.
This commentary would help users understand management's A financial asset should be derecognised when:
attitude to risk. – The contractual right to the cash flows from the financial
IFRS 7 does not however prescribe the format or location of these asset expire; or
disclosures thus allowing management to exercise judgement. – The entity transfers substantially all the risks and rewards of
Common sense should also be applied and where there are a large ownership of the financial asset to another party.
number of similar financial instrument transactions they may be A financial liability should be derecognised when it is
grouped together. Similarly where a single significant transaction extinguished, namely when the obligation specified in the
requires full disclosure this should also be made. contract is discharged, cancelled or expires.
The examiner has stated that he will not set questions relating to
the risks of financial instruments.
Classification of financial assets:

On recognition IFRS 9 requires that financial assets are classified
as measured in one of three ways:
(a) At amortised cost Classification of financial assets (continued):
This is determined on the basis that the entity's business (c) At fair value through profit or loss
model for managing financial assets is that they are held to This is used where the financial assets are held for trading,
collect interest and principal cash flows. comprise derivatives and all other financial assets.
(b) At fair value through other comprehensive income Therefore if the entity has an investment in the equity
This is used where the financial asset is an investment in the instruments of another entity which is not held for trading
equity instruments of another entity and such investments but the election was not made on purchase of the
are not held for trading. investment then the investment will be held at fair value
This treatment is optional and an irrevocable election must be with any movements in fair value being shown in profit or
made on purchase of the investment to be able to carry loss.
them at fair value through other comprehensive income.
Financial assets at amortised cost Financial assets at amortised cost (continued)

The amortised cost of a debt instrument (financial asset or The difference between these two values is amortised using the
financial liability) is: effective interest rate of the debt instrument, namely the internal
– The amount at which the debt was initially recorded rate of return of the debt.
– Less any principal repayments This is essentially the way a mortgage on a property works from
– Plus the cumulative amortisation of the difference between the lender's perspective.
the initial and maturity values Transaction costs are added to the cost of the asset acquired.
The initial value may include a discount on inception and the
maturity value could include a premium on redemption.
120
FINANCIAL INSTRUMENT QUESTIONS
(1) A company invests $5,000 in 10% loan notes. The loan notes are
repayable at a premium after 3 years. The effective rate of interest is 12%. The company intends to
collect the contractual cash flows which consist solely of repayments of interest and capital and have
therefore chosen to record the financial asset at amortised cost.
What amounts will be shown in the statement of profit or loss and statement of
financialposition for the financial asset for years 1-3?
(2) A company invested in 10,000 shares of a listed company in
November 20X7 at a cost of $4.20 per share. At 31 December
20X7 the shares have a market value of $4.90.
` Prepare extracts from the statement of profit or loss for the year ended 31December 2007
and a statement of financial position as at that date.
(3) A company invested in 20,000 shares of a listed company in October 20X7 at a cost of $3.80 per
share. At 31 December 20X7 the shares have a market value of $3.40. The company are not planning
on selling these shares in the short term and elect to hold them as fair value through other
comprehensive income.
Prepare extracts from the statement of profit or loss for the year ended 31December 20x7
a nd a statement of financial position as at that date.
121
Group Accounts Or Consolidated accounts
use the following Standards
Introduction to Group Accounts
• IFRS3 Business Combinations
• IFRS 10 Consolidated Financial Statements
• IAS 28 Associates
Definitions (continued)
Definitions • Parent: an entity that controls one or more subsidiaries.
• Group: a parent and all its subsidiaries.
• Subsidiary: an entity that is controlled by another entity.
• Associate: an entity over which an investor has significant
• Control: an investor controls an investee if and only if the influence and which is neither a subsidiary nor an interest in
investor has all of the following. a joint venture.
• Power over the investee • Significant influence: the power to participate in the financial
• Exposure, or has rights, to variable returns from its and operating policy decisions of an investee but not control
involvement with the investee or joint control over those policies.
• The ability to affect those returns through its power
over the investee
•The different types of investment and the required accounting

treatment in both the parent's individual (separate) financial
• When a parent entity acquires control of a subsidiary it
statements and the group financial statements is explained and
acquires the company's shares rather than its individual
summarised as follows
assets and liabilities.
• Both the parent and the subsidiary continue to exist as
Investment Criteria Required treatment in group accounts separate legal entities and are required to produce financial
Subsidiary Control (>50% rule) Full consolidation (IFRS 10) statements at the end of each reporting period.
Associate Significant influence Equity accounting (IAS 28)
(20% + rule)
Investment Asset held for As for single company accounts (IFRS 9)
which is none of accretion of wealth
the above
122
Requirement to produce group accounts Exemption from producing group accounts
• This does not provide the parent's shareholders with A parent does not need to present group accounts if and only if
complete information about the parent and so the parent is all of the following are present.
required to produce an additional set of financial statements
The parent is itself a wholly-owned subsidiary or a partially
called group or consolidated financial statements.
owned subsidiary of another entity and the owners do not
• These:
object to the parent not presenting consolidated financial
 Present the results and financial position of the group as
statements.
if it were a single entity
 Are issued to the shareholders of the parent Its securities are not publically traded.
 Provide information about all companies controlled by It is not in the process of issuing securities in public securities
the parent markets.
• This is an example of recording the substance of a The ultimate or intermediate parent publishes consolidated
relationship rather than its strict legal form financial statements that comply with IFRSs.
• All group companies should have the same reporting date.

•Group accounts show the results and financial position of
The financial statements of a subsidiary with a different
all companies controlled by the parent.
year end may be consolidated provided that the gap
between reporting dates is three months or less and •In simple terms consolidated accounts are produced by
adjustments are made for the effects of significant adding together the assets and liabilities of the parent
transactions or events that occur between the two company and each subsidiary.
reporting periods •If the parent company has control, all of the assets and
liabilities are added together even if the parent does not
• The consolidated financial statements should be prepared own 100% of the subsidiary.
using uniform accounting policies (the parent's policies).
• The results of subsidiaries should be consolidated for all
periods when the parent has control.
•The 'equity' section of the statement of financial position

P Co
indicates the actual equity (share capital and reserves)
P Co controls S Co
owned by the parent's shareholders. because it has > 50% of
•Where a subsidiary is not 100% owned by the parent voting power although it
does not own all of S Co 80%
there will be an account within the equity section
showing how much of the subsidiary's net assets are Non Controlling Interest
owned by outside investors. =20%
•These outside investors are called the 'non-controlling

S Co
interest'.
Eg if S Co pays a $100 dividend:
•Definition: non-controlling interest is the equity in a • P Co receives $80
subsidiary not attributable, directly or indirectly, to a • The non-controlling interest receive $20
parent.
123
Consolidated financial statements
Overview
• Consolidated Statement of Financial Position • Consolidation means presenting the results, assets and
• Preparation Of Consolidated accounts liabilities of a group of companies as if they were one
company.
• Calculation of Goodwill
Basic principles
• Eliminating Intercompany Items • Consolidation means adding together.
• Consolidation means cancellation of like items internal to
the group.
• Consolidate as if you owned everything then show the
extent to which you do not own everything.
Consolidated statement of financial

position - method
Consolidated financial statements
1. Establish the group structure (W1)
• A group comprises a parent company and the 1. Carry out all other workings & Adjustments
undertakings (usually companies) under its control,
which are called subsidiaries 2. Calculate the net assets of subsidiary At Acquisition (W2)
3. Calculate the goodwill on acquisition (W3)

• A parent has control of a another company if it holds
more than 50% of that company’s voting shares 4. Calculate the net assets of subsidiary At Reporting Date (W4)
5. Calculate the non-controlling interests (NCI) (W5)

• A parent company is required to produce group
accounts which show a true and fair view of the group 6. Calculate the group retained earnings (W6)
to the parent’s shareholders
7. Calculate Associate (If Applicable)
Establish the group structure Working 1 – Establish the group

• The first step is to establish percentage ownership and
control. structure
P
Percentage ownership
• The percentage ownership is calculated by dividing the Date of
number of shares owned by the parent in the Acquisition 80%
subsidiary by the total number of shares the subsidiary
has in issue and multiplying by 100. Parent owns 80% of s = Subsidiary
Control Non Controlling Interest = 20%
S
• Unless otherwise told it is assumed that a parent has
control over another company if it owns more than
50% of the ordinary shares in issue. 2. Carry out all other Adjustments as per the Question
124
Working 2 – Net assets of subsidiary Calculate Goodwill
Acquisition date
• Goodwill is the difference between the fair value of
$
consideration paid to acquire control of a subsidiary and the
fair value of the net assets acquired
Share capital X
• It represents the premium paid over and above the value of
Share premium X the assets in the business and represents factors such as the
Revaluation reserve X company reputation
Retained earnings X • IFRS 3 Business Combinations requires that goodwill is
Fair value adjustment – land capitalised as a non-current asset in the consolidated
and buildings X statement of financial position and is subject to an annual
X impairment review
Working 3 – Goodwill Method 1 Fair Value of Full Good will

Calculate Goodwill Goodwill $
2 Methods of Calculating Good will
FV of consideration paid by Parent
1. Full Goodwill Method or Fair value Method
Cash paid X
FV of shares issued by parent X
2. Partial Good will method or Proportion of Net assets Method Deferred Consideration X
FV of NCI at acquisition X
X
Less: FV of net assets at acquisition (W2) (X)
Goodwill on acquisition X
Les any Goodwill Impairment* (X)
CV of Goodwill for SOFP X
*Any Impairments have to be shared with Group & NCI
Working 3 – Goodwill Method 2 Proportion of Net Assets Method Working 4 – Net assets of subsidiary At
Reporting Date
Goodwill $
Reporting date
FV of consideration paid by Parent $
Cash paid X
FV of shares issued by parent X Share capital X
Deferred Consideration X Share premium X
Less: Parents % of net assets Revaluation reserve X
at acquisition (W2) (X) Retained earnings X
Parents Goodwill on acquisition X Fair value adjustment – land and buildings *
watch Any extra Depreciation X
Less Any Impairments* (X) URP if S is Seller (X)
CV of Good Will For SOFP X
X
* All impairment Belong to Parent
125
Working 5- Non-controlling interests Working 5 – Non-controlling interest
(NCI)
Non-controlling interest - SOFP $
• The non-controlling interest represents the shareholders
that are not part of the group: e.g. parent owns 80% of a
FV of NCI at acquisition (W3) X
subsidiary’s shares and therefore 20% is owned by NCI’s
NCI share of post-acquisition
• For the purpose of consolidation you must add 100% of reserves (W4) X
the subsidiary’s revenues, expenses, assets and liabilities Less NCI Share of Good Will impairment (X)
in the consolidated statement of comprehensive income X
and statement of financial position
• If the parent owns less than 100% of the shares then an
amount is calculated for both the SOPorL and SOFP as
attributable to the NCI’s
Working 6 - Group retained earnings

Working 6 – Group retained earnings
Retained earnings $
• In order to calculate group retained earnings you
cannot add together the retained earning of the parent 100% of the parent’s retained earnings
and the subsidiary. Some of the retained earnings of X
the subsidiary may have been earned before it was Parent’s share of the subsidiary’s post acq
retained earnings X
acquired by the parent company – they are referred to
Less Group Share of Good will Impairment (X)
as pre-acquisition reserves Less URP if Parent is the seller (X)
• Therefore a working is required to calculate retained Less Unwinding of deferred Consideration Liability (X)
earnings attributable to the parent from the date X
control was acquired
Accounting for reserves – pre and post

acquisition reserves Fair values
• IFRS 3 Business Combinations requires that, if the fair
• These are reserves that exist in a subsidiary company at values of the subsidiary's net assets at the date of
the date that it is acquired, these reserves are
acquisition is different from their carrying value, the
capitalised and included in the goodwill calculation.
book amounts should be adjusted to fair value on
consolidation
• Profits earned by the subsidiary after the date of
acquisition are called ‘post-acquisition’ reserves, these • The fair value is the amount the asset could be
are included in the group retained earnings calculation exchanged or sold for in an arm’s length transaction.
126
Intra-group balances Intra group balances
• Intra group balances occur when the parent and Cash in transit Goods in transit
subsidiary trade with each other or there are intra Goods have been sent by one
Cash has been sent by one group
group loans between the two companies company, but have not been
company, but has not been
received and so are not
received and so is not
recorded in the books of the
recorded in the books of the
• If this is the case adjust the face of the SOFP to remove other group company. Adjust
other group company. Adjust
both the loan asset and loan liability as follows:
as follows:
DR Inventory
CR Receivables
CR Payables
• If the current account balances disagree, it is most DR Bank
DR Payables
likely to be due to cash in transit or goods in transit. DR Payables
CR Receivables
Provisions for unrealised profits

• The parent or subsidiary may sell goods to each other,
resulting in a profit being as recorded in the selling
company’s financial statements
• If these goods are still held by the purchasing company
at the year-end, the goods have not been sold outside
the group
• The profit is therefore unrealised and from the group’s
perspective should be removed from the consolidated
financial statements
• An adjustment is also required to ensure that inventory
is stated at the cost to the group
127
Kye test question 1
The following information relates to the Kye Ltd group of companies:
Statement of Financial Position as at 31 December 2012
Kye Rye
$'000 $'000
Property, plant and equipment 2,160 950
Investment in 700,000 ordinary shares in Rye 800 0
Current assets 660 400

3,620 1350
Equity shares 2,000 1,000

Retained earnings 1,400 200
3,400 1,200
Current liabilities 220 150
3,620 1,350
Kye Ltd acquired 70% of Rye Ltd on 1 January 2008, when the retained earnings had a credit
balance of $50,000.
The goodwill of Rye has not suffered any impairment.
Requirement: prepare the Kye Ltd group of companies the consolidated statement of
financial position as at 31 December 2012.
This acquisition was accounted for using the partial goodwill method in accordance with
IFRS 3 (Revised) Business Combinations.
128
Kye Limited solution 1
Step 1 Group structure
Kye owns 70% of Rye
Step 2 Net assets of subsidiary at acquisition

$'000
Share capital 1,000
Retained earnings 50
1,050
Step 3 Goodwill - parent only

Cost 800
Share of net assets
at acquisition
1,050 x 70% 735
Partial goodwill 65
Step 4 Net assets of subsidiary at year end

$'000
Share capital 1,000
Retained earnings 200
1,200
Step 5 Non controlling interest
Share of net assets at year end
1,200 x 30% 360
Step 6 Retained earnings

Parent company 1,400
Group's share of post acquisition retained earnings
of subsidiary
(1,200 - 1,050) x 70% 105
1,505
Step 7 Consolidated statement of financial position $'000
Property, plant and equipment

2,160 + 950 3,110
Goodwill 65
Current assets 660 + 400 1,060
Total assets 4,235
Share capital (parent only) 2,000

Retained earnings 1,505
3,505
Non controlling interest 360
3,865
Current liabilities 220 + 150 370
Total equity and liabilities 4,235
129
Kye test question 2
The following information relates to the Kye Ltd group of companies:
Statement of Financial Position as at 31 December 2012
Kye Rye
$'000 $'000
Property, plant and equipment 42,500 24,700
Investment in 6,000,000 ordinary shares in Rye 41,500 0
Current assets 20,750 13,500

104,750 38,200
Equity shares 35,000 8,000

Share premium 15,000 0
Retained earnings 26,400 18,500
76,400 26,500
10 % loan notes 14,650 3,450
Current liabilities 13,700 8,250
104,750 38,200
1.Kye Ltd acquired 75% of Rye Ltd on 1 January 2012, when the retained earnings had a credit
balance of $10,000,000.
2.At the date of acquisition the fair value of Rye's property plant and equipment were equal
to their carrying amounts with the exception of a factory which had a fair value of $2m above
its carrying amount. This requires extra depreciation of $80,000 in the consolidated
financial statements in the post acquisition period.
3. At 31 December 2012 Kye's current account with Rye was $3.5m
4. Kye's policy is to value the non-controlling interest of Rye at the date of acquisition at its
fair value which the directors determined to be $12,500,000
5. Inventory invoiced to Rye at $2.4m was sent by Kye on 23 December 2012. All of these
goods remained in the closing inventory of Rye at 31 December 2012. Kye invoiced these
goods at a mark up of 50% on cost.
Requirement: prepare the Kye Ltd group of companies the consolidated statement of
financial position as at 31 December 2012. Kye wishes to use the' full goodwill' method.
130
Kye Limited solution 2
Step 1 Group structure
Kye owns 75% of Rye
Step 2 Net assets of subsidiary at acquisition

$'000
Share capital 8,000
Fair value adjustment 2,000
20,000
Step 3 Goodwill - full
Cost 41,500
NCI 12,500
54,000
Net assets 20,000
34,000
Step 4 Net assets of subsidiary at year end

$'000
Share capital 8,000
Fair value adjustment 2,000
Extra depreciation -80
28,420
Step 5 Non controlling interest

At acquisition 12,500
share of increase in net assets
( 28,420 - 20,000 ) x 25% 2,105
14,605
Step 6 Retained earnings

Parent company 26,400
Group's share of post acquisition retained earnings
of subsidiary
( 28,420 - 20,000 ) x 75% 6,315
Inventory profit 2,400 x 50/150 -800
31,915
Step 7 Consolidated statement of financial position $'000
Property, plant and equipment

42,500 + 24,700 + 2,000 - 80 69,120
Goodwill 34,000
Current assets 20,750 + 13,500 - 800 - 3,500 29,950
Total assets 133,070
131
$'000
Share capital (parent only) 35,000
Share premium 15,000
81,915
Non controlling interest 14,605
96,520
Non current liabilities 14,650 + 3,450 18,100
Current liabilities 13,700 + 8,250 - 3,500 18,450
132
BUSINESS COMBINATIONS
32 HEDRA
Hedra, a public listed company, acquired the following investments:
(i) On 1 October 20X4, 72 million shares in Salvador for an immediate cash payment of
$195 million. Hedra agreed to pay further consideration on 30 September 20X5 of
$54 million if the post acquisition profits of Salvador exceeded an agreed figure at
that date. Hedra has not accounted for this deferred payment (ignore discounting).
Salvador also received a $50 million 8% loan from Hedra at the date of its acquisition.
(ii) On 1 April 20X5, 40 million shares in Aragon by way of a share exchange of two
shares in Hedra for each acquired share in Aragon. The stock market value of Hedra’s
shares at the date of this share exchange was $2.50. Hedra has not yet recorded the
acquisition of the investment in Aragon.
The summarized statements of financial position of the three companies as at
30 September 20X5 are:
Hedra Salvador Aragon
Non-current assets $m $m $m $m $m $m
Property, plant and equipment 358 240 270
Investments – in Salvador 245 nil nil
– other 45 nil nil
–––– –––– ––––
648 240 270
Current assets
Inventories 130 80 110
Trade receivables 142 97 70
Cash and bank nil 272 4 181 20 200
–––– –––– –––– –––– –––– ––––
920 421 470
–––– –––– ––––
Equity and liabilities
Ordinary share capital ($1 each) 400 120 100
Reserves:
Share premium 40 50 nil
Revaluation 15 nil nil
Retained earnings 240 295 60 110 300 300
–––– –––– –––– –––– –––– ––––
695 230 400
8% loan note Nil 50 Nil
Deferred tax 45 45 Nil 50 Nil Nil
–––– –––– ––––
Current liabilities
Trade payables 118 141 40
Bank overdraft 12 nil nil
Current tax payable 50 180 nil 141 30 70
–––– –––– –––– –––– –––– ––––
920 421 470
–––– –––– ––––
133
The following information is relevant:
(a) Fair value adjustments and revaluations:
(i) Hedra’s accounting policy for land and buildings is that they should be carried
at their fair values. The fair value of Salvador’s land at the date of acquisition
was $20 million in excess of its carrying value. By 30 September 20X5 this
excess had increased by a further $5 million. Salvador’s buildings did not
require any fair value adjustments. The fair value of Hedra’s own land and
buildings at 30 September 20X5 was $12 million in excess of its carrying value
in the above statement of financial position.
(ii) The fair value of some of Salvador’s plant at the date of acquisition was $20
million in excess of its carrying value and had a remaining life of four years
(straight-line depreciation is used).
(iii) At the date of acquisition Salvador had unrelieved tax losses of $40 million
from previous years. Salvador had not accounted for these as a deferred tax
asset as its directors did not believe the company would be sufficiently
profitable in the near future. However, the directors of Hedra were confident
that these losses would be utilized and accordingly they should be recognized
as a deferred tax asset. By 30 September 20X5 the group had not yet utilized
any of these losses. The income tax rate is 25%.
(b) The retained earnings of Salvador and Aragon at 1 October 20X4, as reported in their
separate financial statements, were $20 million and $200 million respectively. All
profits are deemed to accrue evenly throughout the year.
(c) Hedra’s policy is to value the non-controlling interest using the fair value at the date
of acquisition. On this date the fair value of the non-controlling interests was $132
million.
An impairment test on 30 September 20X5 showed that goodwill had impaired by
$30 million.
(d) The investment in Aragon has not suffered any impairment.
Required:
Prepare the consolidated statement of financial position of Hedra as at 30 September
20X5.
(Total: 30 marks)
134
• The purpose of consolidated financial statements is to show
Consolidated the parent and its subsidiaries as if they were one single
entity.
Statement of Profit & Loss • In the consolidated statement of financial position this
& means that the assets and liabilities (net assets) controlled
by the parent are combined with those of the parent on a
Other Comprehensive Income line by line basis.
• The equity section shows who owns the net assets and
presents the amounts owned by the parent's shareholders
separately from those owned by the non-controlling interest.
• The consolidated statement of profit or loss (and the • The consolidated statement of profit or loss shows an
consolidated statement of profit or loss and other entity's revenue earned less costs incurred from the
comprehensive income) follows the exact same process. revenue down to the profit for the year line.
• The income, expenses and other comprehensive income • The consolidated statement of profit or loss and other
controlled by the parent are combined with those of the comprehensive income shows the revenue down to profit
parent on a line by line basis. for the year plus other comprehensive income for the year.
• There is there an additional section at the bottom of the • The item of other comprehensive income is revaluation
statement showing who owns the profits and other gains and losses and so producing the consolidated
comprehensive income consolidated for the period. This is statement of profit or loss and other comprehensive income
disclosed as the amounts owned by the parent's is no more onerous than producing the consolidated
shareholders and the amounts owned by the non- statement of profit or loss.
controlling interest.
Revenue
Add 100% P + 100% S as this Mid year acquisitions
represents what is controlled • Consolidate subsidiaries in the normal way but only from
Profit for year (PFY) by P the date that control is achieved.
Other comprehensive income • Assume that revenue and expenses accrue evenly unless
specified otherwise in the question.
Profit attributable to:
Owners of P β Impairment losses
Non-controlling interest S's PFY × NCI% • The consolidated statement of financial position is at a point
Total comprehensive income attributable
in time and so shows the cumulative impairment losses.
to: • The current year impairment loss is shown in the
Owners of P β consolidated statement of profit or loss.
NCI S's TCI × NCI%
NB: Exclude dividend income from S
135
1
Fair Value Adjustments Intra-group trading
• If a depreciating noncurrent asset of the subsidiary has been • It is likely that the parent and subsidiary will trade with each
revalued as part of a fair value exercise when calculating goodwill, other.
this will result in an adjustment to the consolidated statement of • The consolidated SPLOCI shows the results of the group as if
profit or loss. it were a single entity and so to be consistent with the
• The subsidiary's own statement of profit or loss will include consolidated statement of financial position, the effects of
depreciation based on the value the asset is held at in the intra-group trading need to be stripped out.
subsidiary's own SFP.
• The consolidated statement of profit or loss must include a • There are two possible adjustments.
depreciation charge based on the fair value of the asset, included in
the consolidated SFP.
• Extra depreciation must therefore be calculated and charged to an
appropriate cost category ( Usually COS)
Intra-group trading (cont'd) Intra-group trading (continued)

• Always eliminate intra-group transactions from the revenue • Where inventories at the year end include inventories
and cost of sales figures: transferred between group companies a second adjustment
– DEBIT Group revenue is also required:
– CREDIT Group cost of sales – DEBIT Cost of sales/retained earnings(seller)
– This will reduce both revenue and cost of sales so that the – CREDIT Inventories
revenue and cost of sales reported in the consolidated – This is the same adjustment as in the consolidated
SPLOCI relate solely to those earned and incurred from statement of financial position and aims to eliminate the
third parties. unrealised profit on inventories at the year end.
Intra-group loans and interest NCI Working For Consolidated P&L

Often a parent may advance a loan at a preferential interest rate to a
subsidiary or similarly, a cash-rich subsidiary may make a loan to its parent. Non-controlling interest
These items are intra-group borrowings which do not represent additional This is calculated as:
finance or finance costs from the group point of view, and must therefore NCI % × subsidiary’s profit after tax X
be eliminated on consolidation. Less:
Adjustments are required to: NCI % × fair value depreciation (X)
– Cancel the intra-group loan balances in the consolidated SOFP: NCI % × PURP (sub = seller only) (X)
DEBIT Loan payable, CREDIT Loan receivable
NCI % × impairment (fair value method) (X)
– Cancel the intra-group interest payable by one party to the other in
the consolidated SPLOCI:
–––
DEBIT Group finance income, CREDIT Group finance costs X
–––
136
2
Approach to Consolidated P&L
Step 1 Work out the group structure
Step 2 Net assets of the Subsidiary ( Only If Asked for Good Will )
Step 3 Good Will Calculation ( Only If Asked for Good Will )
Step 4 Calculate the required adjustments and eliminate all

Intercompany items
Step 5 Non-controlling interest working
Step 6 Share of profit of associate working
137
3
Kye Ltd 1 Statement of profit or loss
On 1 October 2010 Kye acquired 100% of Rye. Set out below are the statements of profit or
loss of both entities for the year ended 30 September 2011.
Kye Rye
€'000 €'000
Revenue 390 325
Cost of sales 200 170

Gross profit 190 155
Operating expenses 110 90
Profit before tax 80 65

Income tax 20 25
Profit after tax 60 40
Prepare the Consolidated Statement of profit or loss for the year ended 30 September 2011
Columnar workings
Kye Rye Total
€'000 €'000 €'000
Revenue 390 325 715
Cost of sales 200 170 370

Gross profit 190 155 345
Operating expenses 110 90 200
Profit before tax 80 65 145

Income tax 20 25 45
Profit after tax 60 40 100
138
Kye Rye
$'000 $'000
Revenue 390 325


Income tax 20 25
1. During the year ended 30 September 2011 Kye sold goods at invoice price to Rye of $8,000.
All of these goods were sold by Rye.
Columnar workings
Kye Rye Adj Total
$'000 $'000 $'000
Revenue 390 325 8 707
Cost of sales 200 170 8 362

Operating expenses 110 90 200

Income tax 20 25 45
Non controlling interest x 20%

8 8
92
139
Kye Rye
€'000 €'000
Revenue 390 325

Finance cost 10 6
Income tax 20 25
Kye charges Rye a management fee of €20,000 each year. The charge is included in revenue
in Kye and in operating expenses in Rye.
Columnar workings
Kye Rye Adj Total
€'000 €'000 €'000
Revenue 390 325 -20 695
Cost of sales 200 170 370
Operating expenses 110 90 -20 180
Finance cost 10 6 16

Income tax 20 25 45
Non controlling interest x 20%

6.8 6.8
77.2
The inter company management fee must be eliminated.
140
Definition (IAS 28)
• An associate is an entity over which the investor has
significant influence.
Associate • Where significant influence is the power to participate in
the financial and operating decisions of the investee but is
IAS 28 not control or joint control over those policies.
• For Exam Purposes you should apply the '20% rule'. • IAS 28 also states that significant influence can be shown by:
• If an investor holds, directly or indirectly, ≥ 20% of the voting – Representation on the board of directors
power it is presumed that the investor has significant influence. – Participation in policy making processes
Therefore the investment is presumed to be an associate unless
it can be demonstrated otherwise. – Material transactions between the investor and the
• Conversely, if an investor holds, directly or indirectly investee
< 20% of the voting power it is presumed that the investor does – Interchange of managerial personnel
not have significant influence. Therefore the investment is not – Provision of essential technical information
presumed to be an associate unless it can be demonstrated
otherwise.
An investment in an associate is accounted for in the consolidated CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
financial statements using the equity method INCOME
That means that we DO NOT Consolidate the accounts of an associate Profit or loss
CONSOLIDATED STATEMENT OF FINANCIAL POSITION A's Profit for the year × Group % X
Non-current assets
Shown before group profit before tax
Investment in associate (Working 7) X
Working Other comprehensive income

Cost of associate X A's OCI x Group % X
Share of post-acquisition retained reserves X/(X)
Less impairment losses on associate to date (X) Note. In order to be able to account for an associate using the equity method a parent
must already be producing consolidated accounts, ie it must have at least one subsidiary.
Less URP (P Seller) (X)
X
141
Points to note Points to note (continued)
The associate is not a group company and so no cancellation of The adjustments are (if the sale is by the parent):
'intra-group' transactions is performed. – DEBIT Cost of sales of P/group retained earnings (P's column)
However, to avoid double counting, the investor's share of – CREDIT Investment in associate*
unrealised profits and losses on transactions between the investor *Here, we credit the investment in associate rather than group
and the associate are eliminated in the same way as for group inventories because A holds the inventories
accounts. The value of the adjustment at all times is the group percentage of
The adjustments are (if the sale is by the associate): the unrealised profit amount.
– DEBIT Share of profits A*/group retained earnings (P's So if there was a 30% associate and the unrealised profit was $100
column) the adjustment would be:
– CREDIT Group inventories – PUP × A%, ie $100 × 30% = $30
*The convention is to increase (Dr) the cost of sales of the seller
and so when we DEBIT Cost of sales of A we actually debit the
share of associate's profit line.
142
33 HOLDRITE, STAYBRITE AND ALLBRITE
Holdrite purchased 75% of the issued share capital of Staybrite and 40% of the issued share
capital of Allbrite on 1 April 20X4.
Details of the purchase consideration given at the date of purchase are:
Staybrite: a share exchange of 2 shares in Holdrite for every 3 shares in Staybrite plus
an issue to the shareholders of Staybrite of 8% loan notes redeemable at
par on 30 June 20X6 on the basis of $100 loan note for every 250 shares
held in Staybrite.
Allbrite: a share exchange of 3 shares in Holdrite for every 4 shares in Allbrite plus
$1 per share acquired in cash.
The market price of Holdrite’s shares at 1 April 20X4 was $6 per share.
The summarised statement of profit or loss for the three companies for the year to
30 September 20X4 are:
Holdrite Staybrite Allbrite
$000 $000 $000
Revenue 75,000 40,700 31,000
Cost of sales (47,400) (19,700) (15,300)
––––––– ––––––– –––––––
Gross profit 27,600 21,000 15,700
Operating expenses (10,480) (9,000) (9,700)
––––––– ––––––– –––––––
Operating profit 17,120 12,000 6,000
Finance cost (170) – –
––––––– ––––––– –––––––
Profit before tax 16,950 12,000 6,000
Income tax expense (4,800) (3,000) (2,000)
––––––– ––––––– –––––––
Profit for period 12,150 9,000 4,000
––––––– ––––––– –––––––

(i) A fair value exercise was carried out for Staybrite at the date of its acquisition with
the following results:
Book value Fair value
$000 $000
Land 20,000 23,000
Plant 25,000 30,000
The fair values have not been reflected in Staybrite’s financial statements. The
increase in the fair value of the plant would create additional depreciation of
$500,000 in the post acquisition period in the consolidated financial statements to
30 September 20X4.
Depreciation of plant is charged to cost of sales.
143
(ii) The details of each company’s share capital and reserves at 1 October 20X3 are:
Holdrite Staybrite Allbrite
$000 $000 $000
Equity shares of $1 each 20,000 10,000 5,000
Share premium 5,000 4,000 2,000
Retained earnings 18,000 7,500 6,000
(iii) In the post acquisition period Holdrite sold goods to Staybrite for $10 million.
Holdrite made a profit of $4 million on these sales. One-quarter of these goods were
still in the inventory of Staybrite at 30 September 20X4.
(iv) Holdrite’s policy is to value the non-controlling interest at fair value at the date of
acquisition. As a result, the goodwill attributable to the non-controlling interest was
$500,000.
An impairment test on the goodwill of Staybrite at 30 September 20X4 indicated it
was overstated by $1 million. The investment in Allbrite was not impaired.
(v) Holdrite paid a dividend of $5 million on 20 September 20X4.
Required:
(a) Calculate the goodwill arising on the purchase of the shares in both Staybrite and
Allbrite at 1 April 20X4. (9 marks)
(b) Prepare a consolidated statement of profit or loss for the Holdrite Group for the
year to 30 September 20X4. (16 marks)
(c) Show the movement on the consoli dated retained earnings attributable to Holdrite
for the year to 30 September 20X4. (5 marks)
(Total: 30 marks)
Note: The additional disclosures in IFRS 3 Business Combinations relating to a newly
acquired subsidiary are not required.
144
• Who is a related Chapter summary diagram
party?
Related parties
Related parties • Not necessarily
related parties
Related parties Disclosure
• Disclosure
Not related parties
Who is a related party? Not necessarily related parties

(a) Parties with control, joint control or
significant influence (or under common
control with or controlled by entity)
(a) Two entities with director/key management in common
(b) Two venturers since they share joint control
(b) Associates
(c) (i) Providers of finance
(c) Joint ventures (ii) Trade unions
(iii) Public utilities
Related parties (d) Key management personnel (iv) Government depts and agencies
(e) Close family of (a) or (d) (d) Customer, supplier etc due to economic dependence
(f) Entities in which (d) or (e) has control,
joint control or significant influence
(g) Post-employment benefit plans
Disclosure Chapter summary

1 Related parties
• Name of parent/ultimate controlling party  IAS 24 identifies parties as related where there is a close personal
relationship to the entity or a control, joint control or significant influence
• For transactions: relationship.
─ Nature of related party relationship  In any case, the substance of the relationship is considered when deciding
whether parties are related.
─ Information about transactions and outstanding balances
2 Not necessarily related parties
• Key management personnel compensation
 IAS 24 identifies parties which are not automatically related in their
─ Broken down by IAS 19/IFRS 2 categories normal dealings with the entity.
3 Disclosure
 Disclosure is important so the user can estimate the effects of related
party transactions. IAS 24 requires disclosure of the entity's
parent/ultimate parent, transactions with related parties and benefits
earned by key management personnel.
145
IFRS
MULTIPLE CHOICE QUESTIONS
Deirdre Cogan
146
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS QUESTIONS
1.
According to IAS 1 Presentation of Financial Statements, which of the following statements are correct?
(i) The accounting policies adopted by a company must be disclosed in the notes to the financial
statements.
(ii) Inappropriate accounting policies can be rectified by disclosure of the policies used or by the
inclusion of explanatory material.
(iii) Companies may choose to prepare their financial statements (except for the cash flow statement)
on either the accruals or the cash basis.
(a) All of the above

(b) (i) and (ii)
(c) (ii) and (iii)
(d) (i) only
2.
Marian Ltd prepares financial statements to 28 February each year. There was an overprovision of
$125,000 tax for the year ended 28 February 2014. During the year to 28 February 2015, $750,000 was
paid in respect of tax for 2015. The tax due for the year ended 28 February 2010 is $940,000.
What is the current tax expense that should be shown in the Statement of Comprehensive Income and the
current tax liability to be included in the Statement of Financial Position for the year to 28 February 2015?
Tax Charge Liability

(a) $940,000 $65,000
(b) $815,000 $65,000
(c) $1,065,000 $190,000
(d) $ 815,000 $190,000
3.
According to IAS 1 (revised) Presentation of Financial Statements, identify which of the following must be
recognised in the statement of comprehensive income (using the two statement approach):
(a) Equity dividends paid

(b) Depreciation
(c) Revaluation gains
(d) Effects of a change in accounting policy
147
4.
Which of the following must be disclosed on the face of the statement of profit or loss and other
comprehensive income?
(i) Tax charge

(ii) Dividends
(iii) Depreciation
(iv) Finance charges
(a) (i) and (iv)

(b) (ii) and (iii)
(c) (i) and (iv)
(d) None of the above
5.
Ming plc has estimated its corporation tax liability for year ended 29 February 2015 at $79,000. The
provision for year ended 28 February 2014 was $91,000 of which only $87,000 was required to meet the
actual tax liability for that year.
The journal entry required to incorporate the 2015 provision into the accounts is which of the following?
Debit Credit
(a) Profit or loss (tax expense) $75,000 Tax provision $75,000
(b) Profit or loss (tax expense) $79,000 Tax provision $79,000
(c) Profit or loss (tax expense) $83,000 Tax provision $83,000
(d) Profit or loss (tax expense) $79,000 Tax provision $4,000
6.
During the financial year ended 31 July 2014, RealTrust plc paid corporation tax of $30,000 in respect of
profits earned during the year ended 31 July 2013. It had provided for an amount of $28,500 in the 2013
financial statements for this purpose. The directors expect the corporation tax liability in respect of 2014
profits to be $32,500.
How much should be charged to the Statement of Profit or Loss and Other Comprehensive Income
(SPLOCI) for year ended 31 July 2014, in respect of the corporation tax expense and how much should be
reported as a liability in the Statement of Financial Position (SOFP) as at that date?
SPLOCI Expense SOFP Liability

(a) $31,000 $31,000
(b) $31,000 $32,500
(c) $34,000 $32,500
(d) $34,000 $34,000
148
IAS 16 PROPERTY, PLANT & EQUIPMENT QUESTIONS
1.
During the year ended 31 December 2008, Noel Ltd revalued its buildings by $150,000, giving rise to an
increase in the annual depreciation charge of $5,000. In accordance with IAS16 Property, Plant and
Equipment which of the following statements on the disclosure of these items is true?
(a) The statement of changes in equity will show an increase in the revaluation reserve of $150,000
and a reserves transfer of $5,000.
(b) The revaluation reserve in the statement of changes in equity will only disclose $150,000 in respect
of the revaluation.
(c) The income statement will only disclose an amount of $150,000 in respect of the revaluation.
(d) The income statement will disclose an amount of $150,000 in respect of the revaluation and an
additional depreciation expense of $5,000.
2.
Margo Ltd purchased a specialist piece of equipment on 1 March 2003 for $800,000. The equipment has a
useful life of 8 years with an expected residual value of $220,000. On 1 March 2007, the equipment was
revalued to its fair value of $650,000 with no revision to its remaining useful life. On 1 March 2008 the
equipment was sold for $750,000.
In accordance with IAS 16 Property, Plant and Equipment, what was the profit on disposal to be included in
Margo Ltd’s statement of profit or loss and other comprehensive income for the year ended 28 February
2009?
(a) $240,000
(b) $262,500
(c) $207,500
(d) $100,000
3.
On 1 July 2007, Michael Ltd. bought a machine for $160,000. The machine was depreciated at 20% per
annum on a straight line basis. On 1 July 2009, the machine was revalued to $105,000 with an estimated
remaining life of three years. The directors of Michael Ltd. have elected to transfer the additional
depreciation from revaluation surplus.
According to IAS 16 Property, Plant and Equipment, the depreciation charge for the year ended 30 June
2010 and the balance on the revaluation surplus are:
Depreciation charge Revaluation surplus

(a) $32,000 $9,000
(b) $32,000 $6,000
(c) $35,000 $9,000
(d) $35,000 $6,000
149
4.
Mike plc purchased a piece of equipment for $930,000 on 1 April 2008. Depreciation was charged at
12.50% per annum on a straight-line basis from the date of purchase until 1 April 2012. The equipment was
revalued under IAS 16 Property, Plant and Equipment on 1 April 2012 to its fair value of $415,000 and the
remaining useful life is assessed at four years from that date. The residual value is estimated to be zero.
What is the amount charged to profit or loss in respect of the above transactions for the year ended 31
March 2013?
(a) Expense $50,000

(b) Expense $103,750
(c) Expense $153,750
(d) None of the above
150
IAS 23 BORROWING COSTS QUESTIONS
QUESTION 1
Texet PLC has commissioned a new piece of equipment to be constructed at a cost of €640,000. It is expected that
the work will commence on 1 October 2010 and be completed by the year ended 31 May 2011. The cost will be met
from the company’s existing borrowings which are as follows:
Loan A of €500,000 with an interest rate of 6%

Loan B of €900,000 with an interest rate of 4%
Loan C of €600,000 with an interest rate of 8%
Calculate the amount of borrowing costs that Texet PLC can capitalise, for the year ended 31 May 2011, as per
IAS 23 Borrowing Costs
(a) €38,400
(b) €36,480
(c) €30,400
(d) €24,320
QUESTION 2
During 2011, Freedom Plc constructed a new office building for its own use. Construction was carried out from 1 July
to 31 December 2011. €10 million was borrowed on 1 July 2011 at 10% per annum specifically to finance the
construction. €5 million of this was spent on 1 July, €3 million on 30 September, and €2 million on completion on 31
December. Unused funds were deposited at a 5% annual interest rate until needed.
How should the interest income and expense be recorded under IAS 23?
(a) €500,000 may be capitalised as part of the cost of construction.

(b) €500,000 must be capitalised as part of the cost of construction.
(c) €412,500 may be capitalised as part of the cost of construction.
(d) €412,500 must be capitalised as part of the cost of construction.
QUESTION 3
Moon plc bought a new, fully fitted, office building on 1 April 2013 for €20 million. On the same date it issued a €25
million bond at an annual yield of 7.5%, primarily to pay for the new building. The building remained idle for 4 months
as the directors of Moon plc decided not to move offices until the summer. On 1 August 2013 the company occupied
the building, and remained in occupation for the balance of the financial year. The reporting date is 31 March 2014.
Under IAS 23 Borrowing Costs, how much interest should be capitalised to the buildings account?
(a) nil
(b) €500,000
(c) €625,000
(d) €1,875,000
151
IAS 20 GOVERNMENT GRANTS QUESTIONS
QUESTION 1
Trent plc sometimes receives grants from the government in order to support certain investments. During financial
year ended 30 April 2012 it bought equipment for €100,000 and received a grant of €30,000 to assist with this
purchase. The following proposals are made to record this transaction:
(i) Record the equipment at its gross cost of €100,000 and depreciate over its useful economic life whilst
simultaneously recording the grant as deferred income, releasing it to profit or loss over the life of the
equipment to which it relates.
(ii) Record the equipment at its cost net of grant €70,000 and depreciate over its useful economic life.
How should Trent plc record this transaction under IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance?
(a) (i) only is correct.

(b) (ii) only is correct.
(c) The entity may choose either (i) or (ii).
(d) Neither (i) nor (ii) is correct.
QUESTION 2
George plc received a government grant of €200,000 on 1 July 2013 to assist with the purchase of an asset on the
same date. The asset had a 5-year useful economic life from that date. George plc adopts a policy of recognising
government grants within deferred income until recognised in profit or loss.
At the reporting date 31 March 2014 what figures should appear in the statement of financial position of George plc
with respect to the grant?
Current Liabilities Non-current Liabilities

(a) €200,000 Nil
(b) €40,000 €160,000
(c) €40,000 €130,000
(d) €10,000 €160,000
152
IAS 40 INVESTMENT PROPERTY QUESTIONS
QUESTION 1
Carmichael PLC, a large widget manufacturer acquired a multi-storey car park in Limerick for €6m in 2007. An
independent valuation at 31 December 2008 placed a fair value of €5.2m on the car park. The valuer estimates the
car park to have a useful life of 14 years with a residual value of €1.2m.
What figure should be included in the income statement for the year ended 31 December 2008, if the Directors
decided to treat the multi-storey car park using the fair value model under IAS 40 Investment Properties?
(a) nil
(b) €800,000 loss
(c) €400,000 gain
(d) €1,200,000 loss
QUESTION 2
A company, Huden plc, has the following properties:
(i) A building that is vacant but is held with the intention of being leased out under an operating lease to an
unconnected party;
(ii) A building being constructed by Huden plc on behalf of third parties;
(iii) Land that is held for a currently undetermined future use;
(iv) Property that is leased out under a finance lease.
According to IAS 40 Investment Property, which of the above should be classified as investment property?
(a) (i), (iii) and (iv)

(b) (i) only
(c) all of the above
(d) (i) and (iii)
QUESTION 3
An entity that is the parent of a group has the following properties:
(i) A property that is leased to a non-group company.

(ii) A property that is leased to a subsidiary for its operations.
(iii) A property that is used by the parent as its Head Office but is located in an area where a substantial capital
appreciation might be expected.
(iv) Land that has been purchased by the parent but whose future use has not yet been determined.
The properties that would be classified as investment properties under IAS 40 are:
(a) (i) and (iii) only

(b) (ii) (iii) and (iv) only
(c) (i) (ii) (iii) and (iv)
(d) (i) and (iv) only
153
QUESTION 4
On 1 July 2012, Murrin plc had a property in its books carried under the fair value model of IAS 16 Property, Plant &
Equipment at an amount of €400,000. It was being used by Murrin plc as an office building. The property is estimated
on 1 July 2012 to have a 20-year useful economic life with no residual value.
On 1 January 2013, it was decided to vacate the property and rent it out immediately to an unconnected party. The
sole purpose of holding the property became, at that date, the collection of rental income and accrual of capital gains.
The fair value of the property was €425,000 at 1 January 2013 and €440,000 on 30 June 2013.
What is the effect of the above events on profit or loss and on other comprehensive income for the year ended 30
June 2013?
Profit or Loss Other Comprehensive Income

(a) €15,000 gain €25,000 gain
(b) €25,000 gain €15,000 gain
(c) €5,000 gain €35,000 gain
(d) €15,000 gain €35,000 gain
154
IAS 38 INTANGIBLE ASSETS QUESTIONS
QUESTION 1
Under IAS 38 Intangible Assets which of the following criteria must be met for an asset to be recognised as an
intangible asset?
(i) The asset must be identifiable.

(ii) The asset must be separable.
(iii) The cost of the asset must be able to be measured reliably.
(iv) It must be possible that future benefits from the asset will flow to the entity.
(a) (i), (ii) and (iv)

(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (i) and (iii)
QUESTION 2
During the current accounting period Ryan PLC incurred the following costs:
(i) €8,000 legal costs in connection with registering a patent

(ii) €14,000 on commissioning a research report on future product design
iii) €80,000 on acquiring a brand name
(iv) €60,000 on developing a brand internally
Under IAS 38 Intangible Assets what amount can be recognised as intangible assets?
(a) €148,000
(b) €154,000
(c) €88,000
(d) €82,000
QUESTION 3
A company’s research & development department incurred the following items of expenditure during the year to 30
June 2013:
(i) Wages & salaries €350,000.

(ii) New equipment with a 6 year useful economic life €750,000 (bought on 1 July 2012).
(iii) Overheads specific to the R&D department €140,000. These are allocated in proportion to the activity of the
department.
(iv) Materials for laboratory use €420,000. There was a closing inventory of these materials amounting to
€60,000. No opening inventory existed.
The R&D department is working on several projects. The directors estimate the department’s time and resources can
be allocated reasonably as follows:
• Research activities 30%;

• Development activities (projects not meeting the IAS 38 criteria for capitalisation) 25%;
• Development activities (projects meeting the IAS 38 criteria for capitalisation) 45%.
How much of the above expenditure should be capitalised under IAS 38 to intangible assets (development costs) in
the year ended 30 June 2013?
(a) €438,750
(b) €465,750
(c) €720,000
(d) €747,000.
155
IAS 2 INVENTORIES QUESTIONS
QUESTION 1
During the year ended 31 January 2009, Waterbottle Ltd produced 120,000 plastic waterbottles, compared to a
normal production level of 150,000 waterbottles. 10,000 finished waterbottles were in stock at the end of the year.
Production costs for the year were as follows:
 Raw materials €420,000

 Direct labour €210,000
 Variable overheads €140,000
 Fixed overheads €260,000
In accordance with IAS 2 Inventories the value of Waterbottle Ltd’s finished inventory at 31 January 2009 is:
(a) 81,500
(b) 84,200
(c) 68,666
(d) 79,200
QUESTION 2
Peter Ltd has the following products in inventory at the end of 2009:
Units Cost per unit

€
Bentub (completed) 8,400 22
Jontub (part complete) 2,800 16
Each product normally sells at €34 per unit. Due to the difficult trading conditions Peter Ltd intends to offer a discount
of 15% per unit and expects to incur €4 per unit in selling costs. €10 per unit is expected to be incurred to complete
each unit of Jontub.
In accordance with IAS 2 Inventories, at what amount should inventory be stated in the financial statements of Peter
Ltd at 31 December 2009?
(a) €257,600
(b) €278,900
(c) €254,520
(d) €281,820
QUESTION 3
Parkside Ltd sells three different products and you have been provided with the following information at the companyʼs
year end.
Product X Y Z
€ € €
Cost price of inventory 10,000 6,000 14,000
Estimated selling price of inventory 9,800 8,200 14,600
Further selling and distribution costs to be incurred to sell 1,000 600 400
In accordance with IAS 2 Inventories, at what amount should inventories be stated in the Statement of Financial
Position at the end of the year?
(a) €28,800
(b) €30,600
(c) €30,000
(d) €29,600
156
QUESTION 4
Macroly plc prepared draft financial statements to year ended 31 December 2011 showing inventory at cost price
€760,000. Following investigations the auditors found this inventory included the following two items:
(1) A batch of electric guitars was carried at €60,000 but, due to obsolescence, these were expected to fetch only
€36,000 on sale. Costs of selling and delivery are expected to be €1,500.
(2) A batch of pianos was carried at €70,000, but sold during January and February 2012 for a total of €17,500
net of all selling costs. The reason for the low price was damage caused by a flood which took place in the
warehouse in early January 2012.
What is the correct inventory figure for inclusion in Macroly’s 2011 year-end accounts in the light of the above
information?
(a) €736,000
(b) €734,500
(c) €683,500
(d) €682,000
QUESTION 5
A company has 2 lines of goods in its inventory at 31 March 2013. Details are as follows:
A B
Cost €500 €800
Net realisable value €460 €960
What figure should appear as closing inventory in the financial statements drawn up to 31 March 2013?
(a) €1,260
(b) €1,300
(c) €1,420
(d) €1,460
157
IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
QUESTION 1
Due to the current economic environment, the board of Greenberg Ltd made the decision to close a major division on
31 October 2008. The actual closure took place on 12 January 2009. In the year ended 31 December 2008 the
division reported a loss of €250,000. Costs of redundancy to be incurred in 2009 are expected to be €45,000.
Which of the following will be included as the loss in the financial statements for Greenberg Ltd for the year ended 31
December 2008, in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations?
(a) €250,000 loss from discontinued operations

(b) €295,000 loss from discontinued operations
(c) €295,000 loss from continuing operations
(d) €250,000 loss from continuing operations
QUESTION 2
At a board meeting held on 1 November 2009, Marcus PLC made the decision to sell a major division. The actual
closure took place on 10 February 2010. In the year ended 31 December 2009 the division reported a loss of
€150,000. Costs of redundancies relating to the division to be incurred in 2010 are expected to amount to €40,000.
In accordance with IFRS5 Non-current Assets Held for Sale and Discontinued Operations, what will be reported in Marcus
PLC’s statement of comprehensive income for the year ended 31 December 2009 in respect of the division?
(a) €150,000 loss from continuing operations

(b) €190,000 loss from continuing operations
(c) €150,000 loss from discontinued operations
(d) €190,000 loss from discontinued operations
158
IAS 10 EVENTS AFTER THE REPORTING PERIOD QUESTIONS
QUESTION 1
The financial statements of Y PLC were approved by the Board of Directors on 1 March 2009. According to IAS 10
Events after the Balance Sheet date, which of the following would be a non-adjusting item in the financial statements at 31
December 2008?
(i) A debtor owing €52,000 at the year end was declared bankrupt in January 2009.
(ii) Stock realising €110,000 in February, was disclosed at a cost of €125,000 on 31 December 2008.
(iii) On 1 February 2009, a fraud carried out by the Trade Receivables Clerk was discovered. The Trade
Receivables were overstated by €30,000 at 31 December 2008.
(iv) A fall in market value of investments after the year end.
(a) All of the above

(b) (i) and (iv) only
(c) (iii) and (iv) only
(d) (iv) only
QUESTION 2
The financial statements of Pot PLC were approved by the Board of Directors on 1 February 2010. As per IAS 10
Events after the Reporting Period, which of the following would be a non-adjusting item in the financial statements at 31
December 2009?
(i) Identification of a material error in the valuation of inventory.

(ii) An increase in the market value of investments.
(iii) The disposal of equipment, which was surplus to the business’s requirements.
(iv) Receipt of notification of bankruptcy of a customer with a balance outstanding at year end.
(a) (ii) and (iii)

(b) (i) and (iii)
(c) (i) and (iv)
(d) All of the above.
QUESTION 3
Jonathon Ltdʼs Statement of Comprehensive Income for the year ended 31 December 2010 showed a profit before tax
of €840,000. In early 2011, before the financial statements were authorised for issue, the following events arose:
(i) An insurance claim by Jonathon Ltd for €40,000 was agreed on 14 January 2011 for compensation for a flood
in May 2010 which damaged part of the inventory.
(ii) The Directors declare a dividend of 15 cents per ordinary share on 9 February 2011. Jonathon Ltd has 2m
ordinary €1 shares in issue.
(iii) Inventory valued at €85,000 in the Statement of Financial Position was sold for €60,000.
(iv) A customer, with an outstanding balance of €12,000 was declared bankrupt.
In accordance with IAS 10 Events After the Reporting Period, what is Jonathon Ltdʼs profit for 2010 after making
appropriate adjustments for the above events?
(a) €880,000
(b) €843,000
(c) €855,000
(d) €870,000
159
QUESTION 4
At the reporting date 31 December 2011, Jay plc carried a receivable from Kay Ltd, a major customer, at €10million.
The signing date of the financial statements was 16 February 2012. Kay Ltd declared bankruptcy on 14 February
2012.
What should Jay plc do in respect of its 2011 financial statements?
(a) Disclose the fact that Kay Ltd has declared bankruptcy in the notes.
(b) Make a provision for this event in its financial statements (as opposed to disclosure in footnotes).
(c) Ignore the event and wait for the outcome of the bankruptcy because the event took place after the yearend.
(d) Reverse the sale pertaining to this receivable in the comparatives for the prior period and treat this as an
“error” under IAS 8.
QUESTION 5
Margertate plc produces financial statements for the year ended 31 March 2013 which are expected to be approved
for publication on 30 April 2013.
According to IAS 10 Events After the Reporting Period, which of the following would normally be treated as an adjusting
event in the financial statements for the year ended 31 March 2013?
(i) Communication from a customer (owing an amount of €22,000 to Margertate) received on 15 April 2013 that
they have been placed into liquidation.
(ii) The directors declare a dividend of 8 cents per ordinary share on 24 April 2013 in respect of the year ended
31 March 2013.
(iii) An insurance claim is agreed in April 2013 relating to a fire in February 2013.
(iv) Investments held by the company at 31 March 2013 had fallen by 8% by 30 April 2013.
(a) (i), (ii) and (iii)

(b) (i) and (iii)
(c) (ii) and (iv)
(d) (i) and (iv)
QUESTION 6
The following events occurred after the reporting date but prior to the date the directors signed the annual report:
(i) A flood took place in one of the company’s premises, causing €100,000 worth of irrecoverable damage.
(ii) A customer declared bankruptcy, causing the company to write off €56,000 in bad debts. Of this, €48,000 was
outstanding at the reporting date.
How much of the above losses should be recognised at the reporting date in compliance with IAS 10 Events After the
Reporting Date?
(a) €156,000
(b) €148,000
(c) €56,000
(d) €48,000.
160
IAS 37 PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS QUESTIONS
QUESTION 1
In which of the following, should a provision be recognised under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets in the financial statement for the year ended 30 November 2008?
(i) The company’s legal team have advised that there is a 30% chance of receiving €25,000 from a trade
receivable that was previously written off in full.
(ii) The Board of Directors decided, on 28 November 2008, to cease operations in their Polish plant. The decision
has not been made public and no further action was taken.
(iii) The company relocated in May 2008 to a larger factory in Cork. The lease on the old factory in Limerick
cannot be cancelled or re-let.
(iv) The company has been fined €300,000 in January 2009 by the Environmental Agency for pollution of the local
river from a plant malfunction that occurred in August 2008.
(a) (i), (ii) and (iv)

(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (ii), (iii) and (iv)
QUESTION 2
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements are
correct?
(i) A legal claim for compensation filed against the business should be recognised when legal advice states that
there is a high probability of a successful claim.
(ii) Provisions should be made for legal obligations only.
(iii) A contingent asset should be disclosed as a note, if it is probable that it will arise.
(iv) A provision for restructuring assets should not include retraining costs for existing staff.
(a) All statements are correct.

(b) (i), (iii) and (iv) are correct.
(c) (i), (ii) and (iii) are correct.
(d) (i), (ii) and (iv) are correct.
QUESTION 3
Smasher plc has an unfortunate history of causing serious environmental pollution. It addresses environmental issues
or pollution it has caused only when compelled to do so by law. At its reporting date 31 March 2012, Smasher plc has
caused environmental damage through its actions which would cost €2 million to rectify. €1.5 million of this is in
Ireland, where strict anti-pollution laws require it to clean up. €0.5 million is in Hallyland, a developing country which
has no laws requiring the clean-up of pollution damage.
What provision should Smasher plc make in its accounts for year ended 31 March 2012 in order to comply with IAS 37
Provisions, Contingent Liabilities and Contingent Assets?
(a) None, as no expenditure has yet been incurred.

(b) None, but make disclosure of the expected cost as a result of damage caused.
(c) €1.5 million, as this is the expected cost to Smasher plc of rectifying the damage caused by its actions to date
and it is probable that Smasher plc will have to pay this amount.
(d) €2 million, as this is the amount of damage caused by Smasher plc to date.
161
QUESTION 4
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which one of the following should be
recognised as a provision in the accounts for the year ended 31 March 2013?
(a) The board decided to close down a division in January 2013, agreed a detailed closure plan on 15 March
2013 and details were given to customers and employees immediately afterwards. Redundancy and other
relevant costs were expected to be €2 million.
(b) Under new legislation, smoke filters must be fitted in its operating plants by 30 July 2013. The expected cost
of complying with this law is €1 million. No action has yet been taken to implement it.
(c) The directors have received a letter from a former employee claiming unfair dismissal. Legal advice received
is of the opinion that the employee would not be successful in the claim.
(d) Inventory with a cost value of €340,000 is expected to sell for €400,000.
QUESTION 5
Which of the following is NOT a condition that must be met in order to recognise a provision under IAS 37 Provisions,
Contingent Liabilities and Contingent Assets?
(a) There must be a present obligation at the reporting date.

(b) An outflow of economic benefit as a result of the obligation must be probable.
(c) It must be possible to estimate reliably the amount of the expected outflow of economic benefit.
(d) Any outflow of economic benefit must be expected to occur within twelve months of the reporting date.
162
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors QUESTIONS
QUESTION 1
According to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors which of the following items would
qualify for treatment as a change in accounting estimate?
(i) Provision for obsolescence inventory.

(ii) A change as a result of the adoption of a new International Accounting Standard.
(iii) A correction necessitated by a material error.
(iv) A change in the useful life of a non-current asset.
(a) All the above

(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (i) and (iv)
QUESTION 2
According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which of the following would qualify
as a change in accounting estimate?
(i) Provision for obsolescence of inventory

(ii) Correction necessitated by a material error
(iii) A change as a result of adoption of a new International Accounting Standard
(iv) A change in the useful life of a non-current asset.
(a) All the above

(b) (ii) and (iii)
(c) (i) and (ii)
(d) (i) and (iv)
QUESTION 3
During the year ended 31 March 2014, it was discovered that the published financial statements for year ended 31
March 2013 included €25,000 of goods in closing inventory, which had in fact been sold during March 2013. Assume
this is a material amount in the context of the financial statements.
In compliance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how should this matter be dealt
with during the preparation of the financial statements for year ended 31 March 2014?
(a) Treat the matter as a current period error, and correct in the 2014 financial statements;
(b) Treat the matter as a prior period error, and correct by adjustments to the 2013 comparatives;
(c) Treat the matter as a change of estimate, and correct in the 2014 financial statements;
(d) Recall all copies of the 2013 annual report and reissue a corrected version.
163
FINANCIAL INSTRUMENTS QUESTIONS
QUESTION 1
ORAN Plc issued an 8% €15 million bond on 1 March 2011 at a 10% discount to par value. Expenses of issue were
€200,000. The bond is due for redemption on 28 February 2021 at par. The effective annual interest rate to maturity
can be assumed to be 9.8%.
How much should be charged to finance costs in the Statement of Comprehensive Income for the year ended 29
February 2012?
(a) €1,200,000.
(b) €1,470,000.
(c) €1,064,000.
(d) €1,303,400.
QUESTION 2
Clonboy Plc controls the following financial assets at its reporting date of 31 January 2012:
(i) An investment in the equity shares of another Plc purchased during April 2011 for €3.6 million. The fair
value of this investment at 31 January 2012 was €3.8 million. An election was made at the date of purchase to
recognise any fair value gains and losses through other comprehensive income.
(ii) An investment in a bond issued by another Plc on 1 February 2011. This bond cost €10 million (equal to its
par value) and entitles Clonboy Plc to 8% interest per annum on the anniversary of the bond’s issue. The
principal is to be returned on 31 January 2016. It is the intention of Clonboy Plc to retain the bond in order to
collect the contracted cash flows on the due dates.
(iii) An investment in a bond (par value €10 million) issued by another Plc purchased in the secondary market at a
discounted price of €7.6 million. The discount was due to the deteriorating financial health of the issuing
company. The bond carries a 7% interest rate on its par value, and will mature in 2018. It is the intention of
Clonboy Plc to sell this bond in the future as soon as its price recovers. The fair value of the bond on 31
January 2012 is €7.2 million.
REQUIREMENT:
Explain, showing relevant journal entries, how the above financial assets should be accounted for at 31
January 2012 in accordance with the requirements of IFRS 9.
QUESTION 3
Phantom plc purchased a 10% €30 million bond on 1 July 2012 at a 10% premium to par value. Expenses of purchase
were €500,000. The bond is due for redemption on 30 June 2027 at par. The effective annual interest rate to maturity
can be assumed to be 8.6%.
How much should be recognised as finance income in the statement of profit or loss and other comprehensive income
for year ended 30 June 2013?
(a) €3,000,000
(b) €2,881,000
(c) €2,795,000
(d) €2,338,000.
164
QUESTION 4
Under IAS 32 Financial Instruments: Presentation, how are preference shares in issue classified in the Statement of
Financial Position?
(a) Equity in all cases;

(b) Liabilities in all cases;
(c) Equity if redeemable or cumulative, liabilities in all other cases;
(d) Liabilities if redeemable or cumulative, equity in all other cases.
165
CONCEPTUAL FRAMEWORK QUESTIONS
QUESTION 1
The IASB’s Conceptual Framework for Financial Reporting, faithful representation is considered a
fundamental qualitative characteristic.
To be a perfectly faithful representation, financial information would have to possess the following
characteristics:
(a) Completeness, neutrality, freedom from error

(b) Consistency timeliness, relevance
(c) Materiality, comparability, understandability
(d) Neutrality, materiality, timeliness
QUESTION 2
Under the IASB’s revised conceptual framework, issued in 2010, qualitative characteristics of financial
information are divided into those considered “fundamental” and “enhancing”. The following is a list of
some qualitative characteristics the framework identifies:
(i) Relevance.
(ii) Comparability.
(iii) Understandability.
(iv) Timeliness.
(v) Faithful representation.
(vi) Verifiability.
Which of the above are identified by the conceptual framework as “fundamental”?
(a) (ii) and (iv).

(b) All of the above.
(c) (i) and (vi).
(d) (i) and (v).
QUESTION 3
Under the IASB’s revised conceptual framework, issued in 2010, which of the following best describes the
primary objective of general-purpose financial statements?
(a) Report on the performance of the entity

(b) Provide information to assist economic decision makers allocate resources
(c) Assist in the calculation of tax liability
(d) Help predict future performance.
166
QUESTION 4
Under the IASB’s revised Conceptual Framework for Financial Reporting (Conceptual Framework), issued
in 2010, qualitative characteristics of financial information are divided into those considered “fundamental”
and “enhancing”. The following is a list of some qualitative characteristics which the framework identifies:
(i) Relevance;
(ii) Comparability;
(iii) Understandability;
(iv) Timeliness;
(v) Faithful representation;
(vi) Verifiability.
Which of the above are identified by the Conceptual Framework as “enhancing” characteristics?
(a) None of the above;

(b) All of the above;
(c) (ii), (iii), (iv) and (vi);
(d) (i) and (v).
167
GROUP ACCOUNTS QUESTIONS
QUESTION 1
In 2008, Patrick PLC invoiced €90,000 of goods to its 65% subsidiary Vanessa Ltd at a cost plus 30% basis. Vanessa Ltd
had 50% of this inventory at the year end. At the start of the year, Vanessa Ltd had €15,000 worth of inventory
invoiced from Patrick PLC, on the same pricing basis, all of which was sold in 2008.
What is the consolidation adjustment to the group gross profit in respect of the inventory?
(a) €3,462 Dr
(b) €6,922 Dr
(c) €3,750 Dr
(d) €10,384 Dr
QUESTION 2
Ciaran Plc owns 80% of the issued share capital of Noel Ltd. For the year ended 31 December 2010, Noel Ltd.
reported a net profit after tax of €25 million. During 2010, Noel Ltd. sold goods to Ciaran Plc for €7.5 million at cost
plus 25%. At the year end 75% of these goods are still held by Ciaran Plc.
The amount of profit attributable to the non-controlling interest in the Consolidated Statement of Comprehensive
Income for the year ended 31 December 2010 is:
(a) €3.5 million

(b) €4.78 million
(c) €5 million
(d) €6 million
QUESTION 3
On 1 April 2011, Hare Plc purchased an 80% holding in Brush Plc for a cash payment of €100 million. On that date the
net assets of Brush Plc had a fair value of €110 million. Consolidated goodwill was calculated at €14 million using the
full “fair value” method permitted by IFRS 3 - Business Combinations.
What was the fair value of the non-controlling interest at the date of acquisition?
(a) €10 million.

(b) €14 million.
(c) €22 million.
(d) €24 million.
168
QUESTION 4
Pat plc has owned 70% of the issued share capital of Joe Ltd for several years. Joe Ltd’s profit for the year ended 30
June 2013 was €42m. During that year, Joe Ltd sold goods to Pat plc for €18m at cost plus 25%. At the end of the
year 40% of these goods are still held by Pat plc.
What will be the amount of profit for the year attributable to the non-controlling interest in Joe Ltd for the year
ended 30 June 2013?
(a) €10,440,000
(b) €12,060,000
(c) €12,168,000
(d) €12,600,000
QUESTION 5
IFRS 10 Consolidated Financial Statements requires an entity to judge whether or not another entity is a subsidiary
by assessing whether it controls the other entity.
Which of the following statements is NOT consistent with the IFRS 10 definition of control?
(a) The investor must have exposure to variable returns from its involvement with the investee;
(b) The investor must have sufficient power over the investee to affect the returns it generates from the
investee;
(c) Power exists when the investor has the ability to direct relevant activities to affect its returns;
(d) The investor must own over 50% of the voting shares.
169
Solutions
170
IAS 1 SOLUTIONS
1. D
2. D
Tax charge: 940,000 - 125,000 = 815,000

Liability: 940,000 – 750,000 = 190,000
3. B
4. A
5. A
The over provision of $4,000 from the previous year means that the amount required to be provided for
the current year is lower by that amount.
6. C
The provision for 2013 was insufficient to meet the actual liability. Hence we must add the amount
underprovided to the 2014 provision of $32,500. This requires a total charge to P/L of $34,000.
As the $1,500 in respect of 2013 is actually paid, this does not form part of the SOFP liability. The
amount actually payable at 31 July 2014 is $32,500.
171
IAS 16 PROPERTY, PLANT & EQUIPMENT SOLUTIONS
1. A
The revaluation gain is taken direct to reserves. The additional deprecation is transferred from retained
earnings to the revaluation reserve.
2. C
Revalued on 1 March 2007 650,000

Accumulated depreciation at 28 February 2007
(650,000-220,000 / 4 years remaining life) 107,500
Carrying value at 1 March 2008 542,500
Sale proceeds 750,000
Profit on disposal 207,500
3. D
160,000 * 20% = 32,000 2007/08

= 32,000 2008/09
64,000
160,000- 64,000 = 96,000 – 105,000 = 9,000
105,000/3= 35,000
Additional depreciation 35,000-32,000 = 3,000

Revaluation surplus = 9,000 – 3,000 = 6,000
4. C
Carrying value 1 April 2012: = 930,000 – (930,000*12.5%*4)

= 465,000
Revaluation loss 2012-13 = 465,000 - 415,000

= 50,000 loss to P/L
Depreciation 2012-13: = 415,000 /4 years remaining

= 103,750 loss to P/L
Total charge to P/L = 153,750
172
IAS 23 BORROWING COSTS SOLUTIONS
SOLUTION 1
(d)
(500,000* .06) + (900,000* .04) + (600,000 *.08) *100 = 5.7%

500,000+900,000+600,000
€640,000 * 5.7% * 8/12 = 24,320
SOLUTION 2
Answer (d)
IAS 23 requires capitalisation of interest specifically incurred for the construction of a new piece of PPE. If funds
borrowed are temporarily invested pending application to the asset, then any investment income earned is deducted
from the amount to be capitalised.
Interest cost incurred: €10 million * 10% * 6/12 = 500,000

Interest earned: €5 million * 5% * 3/12 PLUS €2 million * 5% * 3/12 = 87,500
Net cost incurred: 500,000 – 87,500 = 412,500
SOLUTION 3
Answer (a)
IAS 23 requires capitalisation of borrowing costs to cease when the asset is substantially ready for use. The fact
that the entity chooses not to use the asset does not change the fact that it is ready for use.
173
IAS 20 GOVERNMENT GRANTS SOLUTIONS
SOLUTION 1
Answer (c)
IAS 20 allows a choice between the two treatments outlined.
SOLUTION 2
Answer (c)
Under IAS 20, government grants held in deferred income are amortised to profit or loss over the useful
economic life of the underlying asset. Unamortised balances are held in current liabilities if they are expected to
be amortised within 12 months of the reporting date, and in non-current liabilities otherwise.
Here, the annual amortisation is €40,000 (200,000 / 5 years).
In the year ended 31 March 2014, 9 months have passed since the asset was acquired, hence €30,000 should
have been amortised during the year. This leaves a total unamortised balance of €170,000, of which €40,000 will
be amortised over the following 12 months.
Hence, €130,000 will remain to be amortised after 12 months.
174
IAS 40 INVESTMENT PROPERTIES SOLUTIONS
SOLUTION 1
Answer b (€6m – €5.2m)
SOLUTION 2
Answer (d)
(i) It is the purpose of holding the asset that determines its status under IAS 40. As the intention is to lease
out the property to an unconnected party it is deemed an investment property even though the lease has
not yet commenced.
(ii) This in held within inventory as work in progress. It is not an investment property.
(iii) IAS 40 provides that an asset whose use has yet to be determined is held as investment property.
(iv) Any asset leased out under a finance lease is not recognised in the books of the lessor as by definition
the risks and rewards relating to the asset have been transferred to the lessee.
SOLUTION 3
Answer (d)
SOLUTION 4
Answer (c)
During the period from 1 July 2012 to 1 January 2013, the property was being used by Murrin plc. Therefore
depreciation should be charged for the 6 months – amount €10,000 (400,000 * 1/20 * 6/12).
The building is revalued at that date to its fair value of €425,000. This creates a revaluation gain of €35,000 (425 –
390) which is taken to OCI in accordance with IAS 16.
On 1 January 2013 the property becomes an investment property under IAS 40. No depreciation is charged for this
period. The increase in fair value of €15,000 is recognised in profit or loss in accordance with IAS 40.
Hence for the year as a whole, a gain of €15,000 less depreciation of €10,000 is recognised in profit or loss. A gain of
€35,000 is recognised in OCI.
175
IAS 38 INTANGIBLE ASSETS SOLUTIONS
SOLUTION 1
SOLUTION 2
(c) €8,000+ €80,000 = €88,000
SOLUTION 3
Answer (a)
R&D expenditure for the year totals:
• Wages & salaries €350,000

• Depreciation on equipment €125,000 (750,000 / 6 years)
• Overheads €140,000
• Materials USED €360,000
45% of this total should be capitalized as 45% of the department’s time was spent on projects meeting the IAS 38
criteria for capitalisation.
Hence capitalise 45% of €975,000 or €438,750.
176
IAS 2 INVENTORIES SOLUTIONS
SOLUTION 1
€
Raw materials 420,000 / 120,000 = 3.50
Direct materials 210,000 / 120,000 = 1.75
Variable overheads 140,000/ 120,000 = 1.17
Fixed overheads 260,000 / 150,000 = 1.73
8.15
8.15 * 10,000 = €81,500
SOLUTION 2
(c)
No. Cost NRV €

Bentub 8,400 22 34*.85 = 28.90-4 = 24.90 184,800
Jontub 2,800 26 34*.85 =28.90-4 = 24.90 69,720
254,520
SOLUTION 3
(a)
SOLUTION 4
Answer (b)
Batch (1) should be included at its net realisable value €34,500, for a reduction of €25,500
Batch (2) should be included at cost €70,000 as the event causing the damage had not existed at the
reporting date.
SOLUTION 5
Answer (a)
Line A 460
Line B 800
Total 1,260
177
IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
SOLUTION 1
As the sale was completed within 1 year of classifying this as a discontinued operation the original loss should
be increased by the expected redundancy costs to €295,000.
SOLUTION 2
178
IAS 10 EVENTS AFTER THE REPORTING PERIOD SOLUTIONS
SOLUTION 1
SOLUTION 2
(a) (ii) and (iii)
SOLUTION 3
(b) 840,000 – 25,000 + 40,000 – 12,000 = 843,000
SOLUTION 4
Answer (b)
IAS 10 specifically provides that the bankruptcy of a debtor in the period after the reporting date should be
treated as an adjusting event.
SOLUTION 5
Answer (b)
(i) IAS 10 clearly indicates that a bankruptcy after the reporting date is normally regarded as an adjusting
event.
(ii) only dividends declared and approved before the year-end are recognised as liabilities.
(iii) The fire happened during the reporting period. The outcome agreed in the period after the reporting date
is an adjusting event resolving the uncertainty which existed at the reporting date.
(iv) A fall in investments occurring after the year end is normally a non-adjusting event. The only exception
would be if the valuation at the reporting date was erroneous due to an information deficit at the reporting
date.
SOLUTION 6
Answer (d)
(i) This is a non-adjusting event. Therefore it is recognised in the period it occurred.

(ii) This is an adjusting event. However the amount recognised is limited to the amount outstanding on the
reporting date €48,000. The balance is an expense of the following period.
179
IAS 37 PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS SOLUTIONS
SOLUTION 1
1: Remote possibility of receiving income : not included as a contingent asset

2: Decision was not made public therefore not an obligation event
3. Onerous contract
4. Need to provide for this liability.
SOLUTION 2
(b)
incorrect as provisions for constructive obligations are also required.
SOLUTION 3
Answer (c)
IAS 37 requires that a provision be made
(1) when an obligating event has occurred which causes a present obligation,
(2) it is probable that a cash outflow will be required to settle this obligation, and
(3) a reliable estimate can be made of the amount require to settle.
This is the case in respect of the €1.5 million. However in the case of the €0.5 million there is no probability that
an outflow of economic benefits will be required to settle.
Hence no provision will be made for this.
SOLUTION 4
Answer (a)
(a) In order for a redundancy plan to be considered an obligating event, IAS 37 requires that a detailed plan
be agreed AND the affected parties be notified. Both of these have occurred by the reporting date,
therefore a provision should be made for the expected costs of €2m.
(b) As no action has been taken to implement the legislation, no obligating event has occurred, therefore no
obligation exists.
(c) The advice given to the directors seems to indicate the likelihood of a transfer of economic benefits as a
result of this obligation is not probable. Therefore no provision is made. Disclosure in the notes would be
appropriate.
(d) The net realisable value is likely to be greater than cost, therefore no adjustment should be made.
SOLUTION 5
Answer (d)
IAS 37 sets no time limit on the expected payment date.
180
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors SOLUTIONS
SOLUTION 1
SOLUTION 2
(d)
SOLUTION 3
Answer (b)
IAS 8 requires that all material errors occurring in a prior period are corrected by adjusting prior year figures as
soon as possible following discovery of the error.
181
FINANCIAL INSTRUMENTS SOLUTIONS
SOLUTION 1
Answer (d)
This is a financial liability and should be accounted for under the amortised cost method. The finance cost is based on
the carrying value times the effective rate. For year 1, the initial carrying amount is €15m less 10% discount, less issue
costs, or €13.3 million. Finance cost is therefore 9.8% of €13.3 million = €1,303,400.
SOLUTION 2
(i) The investment is revalued to fair value at the reporting date. A gain of €200,000 results. This is recognised in
other comprehensive income, as the entity made an election to do so at the date of purchase.
31 Jan 2012
Dr Financial assets €200,000
Cr Other comprehensive income / reserves €200,000
(fair value gain on investment in shares of another entity)
(ii) As the cash flows due to Clonboy under the terms of the bond consist solely of interest and principal, the
amortised cost method should be applied. Interest earned during the year ended 31 January 2012 is €800,000
(8% of €10m).
As this is not payable until the anniversary of the bond’s issue (1 February 2012), an accrual must be made for
this amount. The fair value of the bond at 31 January 2012 is therefore irrelevant.
31 Jan 2012
Dr Interest receivable (current asset) €800,000
Cr Profit or loss €800,000
(interest accrued to Clonboy plc on bond investment)
(iii) In this case, the cash flows deriving from the bond are not solely interest and principal. The entity hopes to
profit from improving financial health of the issuing company, and therefore increased market value. Hence,
amortised cost is not appropriate. Clonboy plc must use the fair value method to account for this bond. As it is
not an investment in another entity’s equity instruments, an election to take gains and losses to OCI cannot be
made.
Therefore the loss of €400,000 must be recognised in profit or loss.
31 Jan 2012
Dr profit or loss €400,000
Cr Financial investments €400,000
(reduction in fair value of bond investment)
SOLUTION 3
Answer (b)
This is a financial asset and should be accounted for under the amortised cost method. It was purchased at the
beginning of the current financial year. The finance cost is based on the carrying value times the effective rate.
For year 1, the initial carrying amount is cost €30m plus 10% premium (€33m), plus we add issue costs, €0.5m.
Finance income for year 1 is therefore 8.6% of €33.5 million = €2,881,000.
182
SOLUTION 4
Answer (d)
IAS 32 requires a financial instrument be classified as a liability if there is an obligation to transfer economic benefits
under its terms and conditions. A redemption clause creates a contractual obligation to repay the amount stated in the
clause. Cumulative dividends likewise represent an obligation on the entity as they must be discharged before any
distribution can be made to equity holders.
183
CONCEPTUAL FRAMEWORK SOLUTIONS
SOLUTION 1
(a)
SOLUTION 2
Answer (d)
SOLUTION 3
Answer (b)
Whilst all of the answers could be considered to be valid objectives of financial statements, only (b) is
suggested by the conceptual framework to be the primary objective.
SOLUTION 4
Answer (c)
Relevance and Faithful Representation are fundamental characteristics.
184
GROUP ACCOUNTS SOLUTIONS
SOLUTION 1
Closing PURP € 90,000 * 50% * 30/130 = 10,384

Opening PURP 15,000 * 30/130 = (3,462)
6,922
SOLUTION 2
(b)
€’000
Noel Ltd 25,000

Less PURP (7,500 x 25/125 x 0.75) (1,125)
23,875
NCI share (x 20%) 4,775
SOLUTION 3
Answer (d)
€m
Cost of investment 100
+FV of NCI (bal fig) 24
-FV of net assets at acquisition (110)
=Goodwill 14
SOLUTION 4
Answer (c)
The non-controlling interest in the profit of Joe will be based on:

€m
Profit for year 42
Less unrealised profit (as goods sold by Joe) [€18 * 25/125 * 40%] (1.44)
Profit for consolidation 40.56
NCI share 30% 12.168
SOLUTION 5
Answer (d)
185
It is not required that the shareholding be over 50%. The existence of a majority shareholding will act as evidence to
support a conclusion that control exists, but is not a necessary condition for control to exist. The other three answers
are consistent with IFRS 10’s definition of control.
SUNDRY ISSUES SOLUTIONS
SOLUTION 1
Answer (a)
Biological assets are those that increase in value as time passes due to natural growth. Land is not a biological asset,
merely the produce that grows on it.
SOLUTION 2
Answer (c)
This is directly from IFRS 13. Level 1 inputs are those directly and independently observable and relate to identical
assets. An example is the quoted share price for an equity investment.
186
SOLUTIONS
187
IAS 16
Elite Leisure Solution
The cruise ship is an example of what can be called a complex asset. This is a single asset that should be
treated as if it was a collection of separate assets, each of which may require a different depreciation method/life.
In this case the question identifies three components to the cruise ship.
The carrying amount of the asset at 30 September 2004 (eight years after
acquisition) would be:
Component cost depreciation carrying value

$m $m $m
Ship’s fabric 300 96 (300/25 x 8) 204
Cabins and entertainment area fittings 150 100 (150/12 x 8) 50
Propulsion system 100 75 (100/40,000 x 30,000) 25
–––– –––– ––––
550 271 279
–––– –––– ––––
Ship’s fabric
This is the most straightforward component. It is being depreciated over a 25 year life and depreciation of $12
million (300/25 years) would be required in the year ended 30 September 2005. The repainting of the ship’s fabric
does not meet the recognition criteria of an asset and should be treated as repairs and maintenance.
Cabins and entertainment area and fittings
During the year these have had a limited upgrade at a cost of $60 million. This has extended the remaining useful
life from four to five years. The costs of the upgrade meet the criteria for recognition as an asset. The original
fittings have not been replaced thus the additional $60 million would be added to the cost of the fittings and the
new carrying amount of $110 million will be depreciated over the remaining life of five years to give a charge for
the year of $22 million.
Propulsion system
This has been replaced by a new system so the carrying value of the system ($25 million) must be written off and
depreciation of the new system for the year ended 30 September 2005 (based on use) would be $14 million (140
million/50,000 x 5,000).
Elite Leisure – statement of comprehensive income extract – year ended 30 September 2005:
$m
Depreciation – ship’s fabric 12
– cabin and entertainment fittings 22
– propulsion system 14
Disposal loss – propulsion system 25
Repainting ship’s fabric 20
–––
93
–––
Elite Leisure – statement of financial position extract – as at 30 September 2005

Non-current assets
Cruise ship (see working) 406
Workings (in $ million):
Component Cost Depreciation Carrying value
$m $m $m
Ship’s fabric 300 108 (300/25 x 9) 192
Cabins and entertainment area fittings 210 122 (110/5 x 100) 88
Propulsion system 140 14 (140/50,000 x 5,000) 126
–––– –––– ––––
650 244 406
–––– –––– ––––
188
IAS 36 Solution
189
IAS 20 QUESTION
ACCA P2
SOLUTION 1
Accounting for government grants is dealt with by IAS 20 Accounting for government grants and disclosure of
government assistance. The basic principle of IAS 20 is that grants should be recognised as income over the
periods necessary to match them with the related costs for which they are intended to compensate, on a
systematic basis.
That part of the grant relating to an inducement to begin developing the factory (6,000) was received
without any conditions and so can be recognised immediately in the Profit or Loss.
The 15,000 grant in respect of the plant and equipment should be recognised over the 40 year life of the
factory. IAS 20 allows this to be done in two ways:
 The first way is to net the grant off against the cost of the asset and depreciate the net figure over its
useful economic life. In this case only four months depreciation would be charged because the factory
was not brought into use until 1 June 2008. Therefore the depreciation would be 375 (45,000 (60,000
– 15,000) x 1/40 x 4/12). PPE of 44,625 (45,000 – 375) would be shown in the statement of financial
position.
 The second way is to show the grant as a deferred credit and leave the initial carrying value of the
property at 60,000. Therefore the depreciation in the current year would be 500 (60,000 x 1/40 x
4/12). PPE of 59,500 (60,000 – 500) would be shown in the statement of financial position. The
deferred credit would be released to the Profit or Loss over the same 40 year period as the asset is
depreciated so the amount included in the Profit or Loss for the current year would be 125 (15,000 x
1/40 x 4/12). The remaining deferred credit of 14,875 (15,000 – 125) would be shown in the
statement of financial position as deferred income under liabilities. 375 (15,000 x 1/40) would be in
current liabilities and the balance of 14,500 (14,875 – 375) would be in non-current liabilities.
The basic recognition principle for the 9,000 employment grant is as for the building grant. This means that
600 (9,000 x 1/5 x 4/12) would be recognised in the Profit or Loss for the current period, with the balance of
8,400 (9,000 – 600) shown as deferred income. 1,800 (9,000 x 1/5) would be shown under current liabilities,
with the balance of 6,600 (8,400 – 1,800) under non-current liabilities.
The issue of possible repayment hinges on how likely, or otherwise, it is that repayment will occur. If, as
seems to be the case here, repayment is possible, but unlikely, then the possibility of repayment would be
disclosed as a contingent liability. If repayment were considered probable then a liability would need to be
recognised. Any amount repayable would create a separate liability, with an equal and opposite transfer
from deferred income. If the deferred income balance is insufficient, then any excess would be
recognised as a cost in the Profit or Loss.
190
IAS 23 QUESTION
Build Tim
01/2 ---- 31/12 =11 months
10,000 x 6% x 11/12 = 550 (int can be capitalised)
-investment income
200 x3% x5/12 = (25)
525 Interest to be capitalised
Asset = 10,525
191
IAS 41 Question
On 1 January 20X1, a farmer had a herd of 100 cows, all of which were 2 years old. At this
date, the fair value less point of sale costs of the herd was $10,000. On 1 July 20X1, the
farmer purchased 20 cows (each two and half years old) for $60 each.
As at 31 December 20X1, three year old cows sell at market for $90
each. Market auctioneers have charged a sales levy of 2% for many years.
Required:
Discuss the accounting treatment of the above in the financial
statements for the year ended 31 December 20X1.
Cows are biological assets and should be initially recognised at fair value less costs to
sell.
The cows purchased in the year should be initially recognised at
$1,176 ((20 × $60) × 98%).
This will give rise to an immediate loss of $24 ((20 × $60) – $1,176) in the statement of
profit or loss.
At year end, the whole herd should be revalued to fair value less costs to
sell. Any gain or loss will be recorded in the statement of profit or loss.
The herd of cows will be held at $10,584 ((120 × $90) × 98%) on the
statement of financial position.
This will give rise to a further loss of $592 (W1) in the statement of profit
or loss.
(W1) Loss on revaluation
$
Value at 1 January 20X1 10,000
New purchase 1,176
Loss (bal. fig) (592)
––––––
Value at 31 December 20X1 10,584
––––––
192
IAS 12 Tax Solution
193
194
IFRS 15 QUESTIONS
1.
195
2.
196
197
FINANCIAL INSTRUMENT QUESTIONS
(1) A company invests $5,000 in 10% loan notes. The loan notes are
repayable at a premium after 3 years. The effective rate of interest is 12%. The company intends to
collect the contractual cash flows which consist solely of repayments of interest and capital and have
therefore chosen to record the financial asset at amortised cost.
What amounts will be shown in the statement of profit or loss and statement of
financialposition for the financial asset for years 1-3?
(2) A company invested in 10,000 shares of a listed company in
November 20X7 at a cost of $4.20 per share. At 31 December
20X7 the shares have a market value of $4.90.
` Prepare extracts from the statement of profit or loss for the year ended 31December 2007
and a statement of financial position as at that date.
(3) A company invested in 20,000 shares of a listed company in October 20X7 at a cost of $3.80 per
share. At 31 December 20X7 the shares have a market value of $3.40. The company are not planning
on selling these shares in the short term and elect to hold them as fair value through other
comprehensive income.
Prepare extracts from the statement of profit or loss for the year ended 31December 20x7
a nd a statement of financial position as at that date.
198
199
200
P AP E R F 7 : FINAN CIAL RE POR TIN G
BUSINESS COMBINATIONS
32 HEDRA
Key answer tips

Take care with the deferred consideration and the tax losses. Not only is the deferred
consideration part of the cost of Salvador but it is also a liability. The tax losses are a deferred
tax asset of the group but this asset is only the tax losses at the tax rate not the full amount of
tax losses. Remember also that Hedra has not yet recorded the acquisition of Aragon, therefore
Hedra’s share capital and share premium must be adjusted.
Consolidated statement of financial position of Hedra as at 30 September 20X5:

$m $m
Non-current assets
Property, plant and equipment (358 + 240 + 12 + 25 +15 (W2)) 650
Goodwill (W3) 111
Investment in associate (W6) 220
Other investments 45
–––––
1,026
Current assets
Inventories (130 + 80) 210
Trade receivables (142 + 97) 239
Cash and bank 4 453
––––– –––––
Total assets 1,479
–––––
Equity attributable to the parent
Ordinary share capital (400 + 80 ) (W3) 480
Reserves:
Share premium (40 + 120) (W3) 160
Revaluation (15 + 12 + (5 × 60%)) (W2) 30
Retained earnings (W5) 263 453
––––– –––––
933
Non-controlling interest (W4) 136
–––––
1,069
Deferred tax (45 – 10) 35
Current liabilities
Bank overdraft 12
Trade payables (118 + 141) 259
Deferred consideration (W3) 54
Current tax payable 50 375
––––– –––––
201 –––––
144 K A P LA N P UB L I S H I N G
L EC TURER RESO UR CE PAC K : ANSWER S
Workings
(W1) Group structure
Investment in Salvador = 72m/120m = 60% – consolidate
Investment held since 1 October 20X4 i.e. 1 year
Investment in Aragon = 40m/100m = 40% – equity account
Investment held since 1 April 20X5 i.e. 6 mths
(W2) Net assets in Salvador
A net asset working really helps
At At reporting
acquisition period end
$m $m
Share capital 120 120
Share premium 50 50
Retained earnings 20 60
Fair value adjustments:
Land and buildings 20 20
Revaluation of land 5
Plant 20 20
Dep’n on plant (20 × ¼) (5)
Deferred tax asset (40 × 25%) 10 10
––– –––
240 280
––– –––
(W3) Goodwill – Salvador
$m $m
Cost of investment – cash 195
Cost of investment – deferred 54
–––––
249
Fair value of non-controlling interests 132
–––––
381
Net assets (240)
–––––
Goodwill at acquisition 141
Impairment (30)
–––––
Goodwill in statement of financial position 111
–––––
202
KAPLAN PUBLI S H I N G 145

Alternative presentation:
$m $m
Cost of investment – cash 195
Cost of investment – deferred 54
–––––
249
Net assets acquired (60% × 240 (W1)) 144
–––––
Goodwill at acquisition 105
Fair value of non-controlling interest 132
Net assets (40% × 240) (96)
–––– 36
–––––
141
Impairment (30)
–––––
Goodwill in statement of financial position 111
–––––
The shares issued in respect of acquisition of Aragon have not been recorded by Hedra.
Therefore, share capital needs increasing by 40m × 2/1 × $1 = $80m and share premium
needs increasing by 40m × 2/1 × $1.50 = $120m.
(W4) Non-controlling interest
Fair value of non-controlling interests 132
NCI share of post-acquisition reserves 16
(40% × (280 – 240))
Impairment (30 × 40%) (12)
––––
136
––––
Alternative presentation
Non-controlling share of net assets at reporting
period end (40% × 280 (W2)) $112m
Goodwill non-controlling interest share 36
Impairment (30 × 40%) (12)
––––
136
––––
(W5) Consolidated retained earnings
$m
Hedra 240
Salvador – post acquisition profits (60% × ((280 – 5) – 240)) 21
Aragon – post acquisition (40% × (400 – 350)) 20
Impairment of goodwill (30 × 60%) (18)
–––
203 263
–––
(W6) Investment in associate

Investment in associate $m
Cost 200
Group share of post acquisition profit
(40% × (400 – 350)) 20
–––
220
–––
204

33 HOLDRITE, STAYBRITE AND ALLBRITE

(a) Goodwill in Staybrite – at 1 April 20X4:
Consideration $000 $000
Shares (10,000 × 75% × 2/3 × $6) 30,000
8% loan notes (10,000 × 75% × $100/250) 3,000
––––––
33,000
Less
Equity shares 10,000
Share premium 4,000
Pre acq reserves (7,500 + (9,000 × 6/12)) 12,000
Fair value adjustment (3,000 + 5,000) 8,000
––––––
34,000 × 75% (25,500)
–––––– ––––––
Goodwill attributable to parent 7,500
Goodwill attributable to non-controlling interests 500

––––––
Full goodwill 8,000
––––––
Goodwill on the purchase of shares in Allbrite – at 1 April 20X4:

Consideration
Shares (5,000 × 40% × 3/4 × $6) 9,000
Cash (5,000 × 40% × $1) 2,000
––––––
11,000
Less
Equity shares 5,000
Share premium 2,000
Pre acq reserves (6,000 + (4,000 × 6/12)) 8,000
––––––
15,000 × 40% (6,000)
–––––– ––––––
Goodwill 5,000
––––––
205
(b) Holdrite Group Consolidated statement of profit or loss for the year ended
30 September 20X4
$000
Revenue (75,000 + (40,700 × 6/12) – 10,000) 85,350
Cost of sales (W1) (48,750)
––––––
Gross profit 36,600
Operating expenses (W2) (15,980)
––––––
Profit from operations 20,620
Income from associate (4,000 × 6/12 × 40%) 800
––––––
21,420
Finance cost (170)
––––––
Profit before tax 21,250
Income tax expense (4,800 + (3,000 × 6/12)) (6,300)
––––––
Profit for the period 14,950
––––––
Attributable to:
Owners of the parent 14,200
Non-controlling interest (W3) 750
––––––
14,950
––––––
(c) Holdrite Group Movement on consolidated retained earnings attributable to Holdrite
for the year ended 30 September 20X4
$000
Profit for the period 14,200
Dividend paid (5,000)
––––––
9,200
Retained earnings b/f 18,000
––––––
Retained earnings c/f 27,200
––––––
206

Workings
(W1) Cost of sales
$000
Holdrite 47,400
Staybrite (19,700 × 6/12) 9,850
Additional depreciation of plant 500
Intra group purchases (10,000)
Unrealized profit in inventory (4,000 × 25%) 1,000
––––––
48,750
––––––
(W2) Operating expenses
$000
Holdrite 10,480
Staybrite (9,000 × 6/12) 4,500
Impairment of Staybrite’s recognized goodwill 1,000
––––––
15,980
––––––
(W3) Non-controlling Interest
$000
9,000 × 6/12 4,500
Less additional depreciation (500)
Less impairment (1,000)
––––––
3,000
––––––
× 25% 750
––––––
Tutorial note
The retained profits carried forward can be proved as:
$000
Holdrite (18,000 + 12,150 – 5,000) 25,150
Staybrite (75% × 9,000 × 6/12) 3,375
Allbrite (40% × 4,000 × 6/12) 800
Additional depreciation of plant (75% × 500) (375)
Unrealized profit in inventory (W1) (1,000)
Impairment of goodwill (W2) (75% × 1,000) (750)
–––––––
27,200
207 –––––––
MASTER OF SCIENCE IN ACCOUNTING &
FINANCE MANAGEMENT
INTERNATIONAL FINANCIAL REPORTING

AND ANALYSIS
PAST PAPER PACK
208
GRIFFITH COLLEGE DUBLIN
QUALITY AND QUALIFICATIONS IRELAND

EXAMINATIONS
POST GRADUATE DIPLOMA IN SCIENCE IN ACCOUNTING AND

FINANCE MANAGEMENT
INTERNATIONAL FINANCIAL REPORTING AND ANALYSIS

Module Code: PDAFM-IFR
MASTER OF SCIENCE IN ACCOUNTING & FINANCE MANAGEMENT

Module Code: MSCAF-IFR
ONLINE EXAMINATION
Lecturer(s): Deirdre Cogan

External Examiner(s): James Fitzgerald
Date: 25th January 2022 Time: 2.15-5.45
THIS PAPER CONSISTS OF FOUR QUESTIONS

THREE QUESTIONS TO BE ATTEMPTED
SECTION A – COMPULSORY
SECTION B – TWO QUESTIONS TO BE ATTEMPTED
NON PROGRAMMABLE CALCULATORS ARE PERMITTED DURING THIS

EXAMINATION
ALL WORKINGS MUST BE SHOWN WHERE RELEVANT
Page209
1 of 9
HONOUR CODE
By submitting my exam script, I certify that my answers contained in this Examination Script
document are entirely composed of my own original work.
During the exam period, which began when I received the exam paper document, I did not work
with anyone else on the exam or discuss the examination with anyone else.
I did not access any unauthorised material or copy and hold out as my own any material belonging
to or produced by another person.
I understand that failure to adhere to these instructions shall be an Honour Code violation.
Violation of the Honour Code will result in being charged with academic misconduct.
Page210
2 of 9
QUESTION 1
Rose holds investments in three entities, Lily, Daisy and Iris. The statements of financial position of
Rose, Lily and Daisy at 30 September 2021 were as follows:
Rose Lily Daisy

Non-Current Assets $’000 $000 $’000
Property, plant and equipment (Note 1) 165,000 100,000 100,000
Intangible assets (Note 1) 0 12,000 0
Investments (Notes 1–3) 143,000 0 0
308,000 112,000 100,000
Current Assets:
Inventories (Note 4) 65,000 37,000 30,000
Trade receivables 35,000 32,000 32,000
Cash and cash equivalents 10,000 7,000 8,000
110,000 76,000 70,000
Total Assets 418,000 188,000 170,000
Equity & Liabilities

Share capital ($1 shares) 80,000 60,000 60,000
Retained earnings 140,000 56,000 54,000
Total equity 220,000 116,000 114,000
Non-Current liabilities:
Long-term borrowings 128,000 30,000 20,000
Contingent consideration (Note 1) 20,000 Nil Nil
Deferred tax 15,000 10,000 10,000
Total non-current liabilities 163,000 40,000 30,000
Current liabilities:
Trade and Other Payables 30,000 24,000 20,000
Short-term borrowings 5,000 8,000 6,000
Total current liabilities 35,000 32,000 26,000
Total Equity and Liabilities 418,000 188,000 170,000
Page211
3 of 9
The Following information is relevant:
1. Rose’s investment in Lily:
On 1 October 2020 Rose acquired 45 million shares in Lily. The terms of the business
combination were that: Rose issued three new shares in Rose to the previous shareholders of
Lily for every five acquired in Lily. On 1 October 2020 the market value of a share in Rose
was $3·60 and the market value of a share in Lily was $1·90. The share issue was not recorded
in the financial statements of Rose.
A further payment of $1·00 per share acquired will be made to the previous shareholders of
Lily on 1 January 2023 provided the profits of Lily in the two years immediately after the
acquisition exceed a target level. On 1 October 2020 the fair value of this potential additional
payment was $20 million. By 30 September 2021 the fair value had risen to $24 million due
to changes in circumstances since the date of acquisition. The investments of Rose include
$20 million in respect of this potential further payment. The retained earnings of Lily on 1
October 2020, were $44 m.
2. The directors of Rose carried out a fair value exercise to measure the identifiable assets and
liabilities of Lily on 1 October 2020. The following matters emerged:
` Plant and equipment having a carrying value of $38 million had an estimated market value of
$42 million. The estimated future economic life of the plant and equipment at 1 October 2020
was two years.
Intangible Assets with a carrying value of $12 million had a market value of $13 million. The
useful life of the intangible assets were 5 years at 1 October 2020. The fair value adjustments
have not been reflected in the individual financial statements of Lily.
3. Rose’s investment in Daisy:
On 1 October 2020 Rose acquired 36 million shares in Daisy for a cash payment of $3 per
share. Retained Earnings in Daisy were $30 million on this date. This investment is included
in Rose’s investment figure in the Statement of Financial Position. No fair value adjustments
were required on the acquisition of Daisy.
4. Rose’s investment in Iris
Rose’s investment in Iris is an available for sale investment measured at fair value through
Profit and Loss account and has a fair value of $12 million at 30 September 2021. The carrying
value at 01 Oct 2020 is included in Roses investments in the Statement of Financial Position.
5. Inter-company sale of inventories
The inventories of Lily and Daisy on 30 September 2021 included components purchased
from Rose during the year at a cost of $8 million to Lily and $6·4 million to Daisy. In arriving
at the selling price Rose marked up these components by 1/3 of their total production cost.
There were no outstanding amounts payable by Lily or Daisy in respect of these purchases on
30 September 2021.
6. Trade receivables
On 30 September 2021 Rose sold trade receivables with a carrying value of $25 million to a
finance company. The finance company paid $20 million to Rose and will pay the remaining
balance, less a collection charge that is based on the time taken to collect the cash from the
relevant customers, when the customers pay. If the customers do not pay by 31 March 2022,
then any amounts advanced to Rose are fully refundable. There is currently no indication that
any of the customers will not pay in full by that date. When accounting for this receipt Rose
debited cash with $20 million, credited trade receivables with $25 million, and charged $5
million as a finance cost in its statement of comprehensive income.
Page212
4 of 9
7. Deferred Tax
In the consolidated financial statements, the accounting policy adjustment and fair value
adjustments arising on the acquisition of Lily will be regarded as temporary differences for
the purposes of computing deferred tax. All other deferred tax can be ignored. The rate of tax
to apply to temporary differences is 25%.
8. It is the group policy to value the non-controlling interest in the subsidiary Lily at the date of
acquisition at fair value. The fair value of an equity share in Lily at 1 October 2020 should be
used for this purpose. The Non-Controlling Interest in Daisy will be measured using the
proportion of net assets method.
9. The goodwill arising on the acquisition of Lily has not suffered any impairment since 1
October 2020, but the goodwill in Daisy has been impaired by $5 million.
Required:
(a) Calculate the Goodwill arising on the acquisition of both Lily & Daisy.
(10 marks)
(b) In a form suitable for publication, prepare the Consolidated Statement of Financial Position
of the Rose Group for year ended 30 September 2021.
(35 marks)
(c) Briefly discuss the various methods of accounting for an investment in equity shares in
consolidated financial statements.
(5 marks)
Total (50 marks)
Page213
5 of 9
QUESTION 2
IMPAIRMENT LOSS
International Accounting Standard (IAS) 36 Impairment of Assets was issued by the International
Accounting Standards Board in order to provide guidance on identifying, measuring and recognising
impairment losses.
Required:
(a)
(i) Evaluate the recognition criteria and measurement basis for impaired assets according
to IAS 36.
(5 marks)
(ii) Discuss the circumstances which indicate that an impairment loss relating to an asset
may have occurred.
(5 marks)
(b) ZENA PLC, a listed entity, needs to ensure that it complies with IAS 36 Impairment of Assets.
The following information is relevant to the impairment review at 31/12/2021
(i) Certain items of machinery appear to have suffered a loss in value. The inventory
produced by the machines was being sold below its cost and this occurrence had
affected the value of the productive machinery. The carrying value at historical cost of
these machines is $290,000 and their net selling price is estimated at $120,000. The
anticipated net cash inflow from the machines is now $100,000 per annum for the next
three years. A market discount rate of 10% per annum is to be used in any present
value computations.
The Following are the discount factors for 10%
Year 1 =0.909
Year 2 =0.826
Year 3 =0.751
(5 marks)
(ii) ZENA Plc purchased a non-current asset on 1 January 2016 at a cost of $50,000. At
that date, the asset had an estimated useful life of ten years. ZENA does not revalue
this type of asset, but accounts for it on the basis of depreciated historical cost. At 31
December 2017, the asset was subject to an impairment review and had a recoverable
amount of $25,000.
At 31 December 2021, the circumstances which caused the original impairment to be
recognised have reversed and are no longer applicable; with the result that recoverable
amount is now $40,000.
(5 marks)
(iii) ZENA Plc also has a cash generating unit (CGU) that suffered a large drop in income
due to reduced demand for its products. An impairment review was carried out and the
recoverable amount of the CGU was determined at $100m.The assets of the CGU had
the following carrying amounts immediately prior to the impairment. The Inventory
and Trade receivables are at their realisable value.
Page214
6 of 9
$m
Goodwill 25
Intangibles 60
Property, plant and equipment 30
Inventory 15
Trade receivables 10
–––––
140
–––––
(5 marks)
Required:
Evaluate, with supporting computations, the impact on the financial statements for year end
31/12/2021 of the items in (i) to (iii). Marks are outlined above.
Total (25 marks)
Page215
7 of 9
QUESTION 3
Linus Ltd entered into the following 3 lease agreements
1. On 1 January 2020 Linus acquired plant under a four-year lease agreement. The present value
of the future lease payments on 1 January 2020 was $2,852,879. Rentals of $900,000 are
payable annually in arrears. The interest rate implicit in the lease is 10%. Linus paid a delivery
and installation cost of $147,121 for the plant.
(6 marks)
2. On 1 July 2021 Linus entered into a one-year lease for a set of thirty tablet computers. The
lease agreement specifies that $7,500 is payable in advance for the year.
(4 marks)
3. On 1 January 2021 Linus sold its head office to Wise Money for $5 million. At this date, the
head office had a carrying amount of $3.5 million. Linus entered into a contract with Wise
Money for the right to use the asset for the next three years making the first annual payment
of $1.5 million on 31 December 2021. The present value of the future lease payments under
this agreement on 1 January 2021 is $3,729,000. The interest rate implicit in the lease is 10%.
The Fair Value of the Office was $5m and it had a remaining useful life of 10 years at the date
of sale.
(9 marks)
Required:
Making reference to the rules of International Financial Reporting Standard (IFRS) 16 Leases:
(a) Analyse how accounting for a lease under IFRS 16 faithfully represents an asset not legally
owned by an entity in the financial statements in accordance with the 2018 conceptual
framework.
(6 marks)
(b) Evaluate the accounting treatment of the 3 leases and illustrate the effect on the financial
statements of Linus at the year-end 31 December 2021.
(marks are allocated to each lease above)
Total (25 marks)
Page216
8 of 9
QUESTION 4
You are the accountant for Sunflower Plc. The managing director has sent an email with the following
queries on the financial statements for year ended 31 December 2021.
1. Sunflower sold plant & equipment to a customer Pigeon ltd on 1 July 2021. The plant and
equipment were manufactured to Pigeon’s specification.
The price agreed was $4 million but Pigeon is not required to settle the invoice until 30 June
2025. Pigeon can borrow money at a rate of 5%. One dollar in 4 years’ time has a value of
$0.823 on 1 July 2021 based on a 5% cost of capital.
(7 marks)
2. During 2021 Sunflower sold 100,000 machines that are covered by a warranty agreement as
at 31 December 2021.
If a machine develops a major fault, then the average cost to Sunflower of repairing it is $150.
If a machine develops a minor fault, then the average cost to Sunflower of repairing it is $45.
It is believed that 8% of the machines under warranty will develop major faults and that 10%
will develop minor faults.
(4 marks)
3. On 1 February 2021 Sunflower began a project to investigate the possibility of producing a
foundation make-up suitable for all skin types. $0.75 million expenses relating to the research
were charged in the Statement of Comprehensive Income in the year ended 31st December
2021. Further costs of $1·1 million were incurred between April and June 30th, 2021. On that
date it became apparent that the project was technically feasible and commercially viable.
Further expenditure of $0.65 million was incurred in the period from 1st July 2021 to 31st
December 2021. The new product will be ready for market in January 2022 and is considered
to have a five-year shelf life.
(6 marks)
4. Sunflower Ltd have included within property, plant and equipment, a building with a carrying
value of $9 million. On 1 January 2021 it was revalued at $12 million. The building had an
estimated life of twenty-five years when it was purchased ten years prior to the revaluation
date. This has not changed as a result of the revaluation. The directors of Sunflower Ltd have
elected to transfer from the revaluation reserve for the additional depreciation.
(6 marks)
Required:
Write a report to the managing director, analysing how the items 1-4 will be accounted for in the
financial statements for year ended 31 December 2021. Make detailed reference to the relevant
accounting standards as part of your analysis.
Report format (2 marks)
Total (25 marks)
Page217
9 of 9

EXAMINATIONS
POST GRADUATE DIPLOMA IN ACCOUNTING AND FINANCE

MANAGEMENT

MASTER OF SCIENCE IN ACCOUNTING & FINANCE

MANAGEMENT

ONLINE EXAMINATION
External Examiner(s): Dr James Fitzgerald
Date: May 2022 PC Time:


EXAMINATION
Page 1 of 7
218
HONOUR CODE
By submitting my exam script, I certify that my answers contained in this Examination Script
document are entirely composed of my own original work.
During the exam period, which began when I received the exam paper document, I did not
work with anyone else on the exam or discuss the examination with anyone else.
I did not copy and hold out as my own any material belonging to or produced by another
person.
Page 2 of 7
219
QUESTION 1
Beth, a listed entity, has produced the following draft statements of financial position as at 30
November 2021. Lisa and Gail are both listed entities:
Beth Lisa Gail

$m $m $m
Non-current assets
Property, plant and equipment 1,600 150 240
Intangible assets 300
Financial Assets 200 50 60
Investment in Lisa 100
Investment in Gail 180
2,380 200 300
Current assets
Cash and cash equivalents 500 40 20
Total assets 4,280 400 550
Equity capital of $1 1,500 100 200

Other components of equity 300 0
Retained earnings 400 200 300
Total equity 2,200 300 500
Non-current liabilities 700
Current liabilities 1,380 100 50
Total equity and liabilities 4,280 400 550
The following information is relevant to the preparation of the group financial statements of
the Beth Group:
• On 1 December 2019 Beth purchased 80% of Lisa’s Share capital, when the retained
earnings in Lisa were $150 million. The investment was funded by an immediate
payment of $100 million in cash and a share exchange of 2 shares in Beth for every 4
shares acquired in Lisa. The market value of the shares in Beth were $4 and in Lisa were
$3 at the date of acquisition. Only the cash consideration has been accounted for by
Beth to date.
• The fair value of the identifiable net assets of Lisa on 1 December 2019 was $265
million. The excess of the fair value over the carrying amount of the net assets was
due to non-depreciable land. All fair value adjustments are treated as temporary
differences for deferred tax purposes. The tax rate is 20%.
• On 1 December 2020 Beth purchased 60% of Gail’s share capital, when the retained
earnings in Gail were $60 million. This was funded by a cash payment of $180 million.
Page 3 of 7
220
• The fair value of the identifiable net assets of Gail on 1 December 2020 was $280
million. The excess of the fair value over the carrying amount of the net assets was
due to an item of plant with a remaining useful life of 4 years at the acquisition date.
All fair value adjustments are treated as temporary differences for deferred tax
purposes. The tax rate is 20%
• Lisa and Gail have not issued any equity capital since the acquisition of the
shareholdings by Beth. Lisa and Gail had no other components of equity at the date of
the above share purchases.
• The non-controlling interest in Lisa is to be measured at fair value. On 1 December
2020, the fair value of the non-controlling interest in Lisa was $60 million. On 30
November 2021, it was deemed that goodwill arising on the acquisition of Lisa was
impaired by $5 million. The non-controlling interest in Gail is to be measured at the
proportion of net assets method. There are no impairments to Gail’s goodwill at the
reporting date.
• The financial assets are equity shares measured at fair value through profit or loss. The
fair value of the financial assets on 30 November 2021 are, Beth $180 million, Lisa
$55million and Gail $70 million.
• On 1 October 2021, Beth sold inventory costing $18 million to Gail for $28 million. On
30 November 2021, half of the inventory was still held by Gail.
• On 30 November 2021 the current accounts of Beth and Gail did not match. Beth had a
receivable balance of $5million but Gail had sent a payment of $2million to Beth on 29
November 2021 which was not received by Beth until December 1 2021.
• On 1 December 2020 Beth completed construction of a new factory premises at a cost
of $500 million. Part of the planning licence requires Beth to remove the factory and
restore the site to its original condition in 20 years’ time. Beth have correctly accounted
for the $500 million but have not accounted for any future costs. The estimated cost of
removal is $100 million. The appropriate cost of capital of Beth is 8% and the relevant
discount factor for $1 in 20 years’ time is 0.20
Required:
(a) Prepare the Consolidated Statement of Financial Position of The Beth group as at 30
November 2021 for presentation to the shareholders;
(42 marks)
(b) Discuss how provisions in financial statements comply with the fundamental
characteristic of useful information in accordance with the Conceptual Framework
2018.
(8 marks)
Total (50 marks)
Page 4 of 7
221
QUESTION 2
(a) The accounting treatment of investment properties is prescribed by International
Accounting Standard (IAS) 40 Investment Property.
Required:
(i) Define “Investment Property” under IAS 40 and explain the measurement basis
permitted under IAS 40 for Investment Property.
(5 marks)
(ii) Analyse how the treatment of an investment property carried under the fair value
model differs from an owner-occupied property carried under the revaluation
model.
(4 marks)
(iii) Sandra Company decided to take advantage of depressed property prices and
purchased a new office building. This was purchased with the intention of the
building being resold at a profit within three years. Currently, the company is
using the property to house the administrative staff from the factory until such
time as their own offices can be repaired. It is anticipated that this will take at
least nine months. The managing director has suggested that the building should
not be depreciated.
Required:
Explain how this matter should be dealt with in the published accounts for the
year ended 31 December 2021 of Sandra’s company taking into account the
requirements of the relevant accounting standards.
(4 marks)
(b) On the 1 July 2017 Sandra Company constructed a factory for use in the business at a
total construction cost of $2,500,000. The estimated useful economic life of the factory
at that date was 20 years and was being depreciated over this time period on a time
apportioned basis. On the 31 December 2021 Sandra Company made a decision to sell
the factory and moved operations to another site. At that date the factory had a market
value of $1,900,000 and was being advertised for sale at this price. Sandra Company
has estimated the selling costs at $100,000. There had been some interest from
prospective buyers, and at the year-end management were very confident the factory
would be sold within the next year. The directors of Sandra Company are unsure how
to account for the asset in the financial statements at 31 December 2021.
Required:
(i) Discuss the recognition criteria and correct accounting treatment for assets
which are “Held for Sale”, according to International Financial Reporting
Standard 5 Assets Held for Sale and Discontinued Operations
(6 marks)
Page 5 of 7
222
(ii) Outline the correct accounting treatment for the above transaction, making
reference to the requirements of International Financial Reporting Standard 5
Assets Held for Sale and Discontinued Operations. You are also required to
calculate and show the correct amounts in the financial statements of Sandra
Company for the year ending 31st December 2021
(6 marks)
Total (25 marks)
QUESTION 3
(a) Define the term Lease as outlined in International Financial Reporting Standard
(IFRS) 16 Leases and detail the initial recognition criteria.
(4 marks)
(b) On 1st January 2020 Delta Ltd entered into a 5-year lease of an item of plant, with an
option to extend for a further 2 years. Lease payments are $120,000 per year during the
initial term and $100,000 per year during the optional period, all payable at the end of
each year. To obtain the lease, the Delta had to pay a delivery cost of $75,000.
On 1st January 2020 Delta Ltd concluded that it is not reasonably certain to exercise the
option to extend the lease and, therefore, determined that the lease term is 5 years. The
interest rate implicit in the lease is 8% per annum. The present value of the lease
payments is $479,125.
Required:
In accordance with IFRS 16 Leases, evaluate how the lease will be accounted for and
show the entries for the financial statements at year end 31 December 2021.
(9 marks)
(c) On 1 January 2021, Delta sells a building to Anna Ltd for cash of $6 million which is
the fair value of the building. Immediately before the transaction, the carrying amount
of the building in the financial statements of Delta was $4 million. At the same time,
Delta enters a contract with Anna for the right to use the building for 20 years, with
annual payments of $400,000 payable at the end of each year. The useful life of the
asset at the date of sale is 30 years.
The annual interest rate implicit in the lease is 5%. The present value of the annual lease
payments are $4,984,880 on 1 January 2021.
Required:
Giving detailed reference to IFRS 16 Leases, detail how Delta will account for this
transaction on 1 January 2021 and the impact on the financial statement’s at year end
31 December 2021.
(9 marks)
(d) Explain, using examples, the exemption criteria of IFRS 16 Leases.
(3 marks)
Total (25 marks)
Page 6 of 7
223
QUESTION 4
You are the financial accountant of the George group. The CEO has recently attended a seminar
where it was advised that the CEO of a group should take an interest in the financial statement
preparation. The CEO has sent the following email with various queries.
1. When reading the accounting policies note in the consolidated financial statements, I
notice that we measure all our freehold properties using a fair value model but that we measure
our plant and equipment using a cost model. I further notice that both of these asset types are
shown in the ‘property, plant and equipment’ figure which is a single component of non-current
assets in the consolidated statement of financial position. It makes no sense to me that assets
which are shown as property, plant and equipment are measured inconsistently. If it’s OK to
measure different parts of property, plant and equipment using two different measurement
models, why not use the fair value model for the more readily accessible properties and use the
cost model for the properties in remote locations to save on time and cost?
(6 marks)
2. When I read the disclosure note relating to intangible non-current assets in the
consolidated financial statements, I notice that this figure includes brand names associated with
subsidiaries which we’ve acquired in recent years. However, the brand names which are
associated directly with products sold by Omega (the parent entity) are not included within the
non-current assets figure. This is another inconsistency that I don’t understand. Please explain
how this practice can be in line with IFRS requirements. One final question: would I be right
in thinking that, as with property, plant and equipment, we can use the fair value model to
measure intangible assets?
(6 marks)
3. At the seminar I recently attended the keynote speaker spoke about using “substance
over from” in the compilation of financial statements. She also stated that the financial
statement should faithfully represent the events that occur in an entity. This is very confusing.
If we are not acting on the legal basis of transactions, surely, we are doing the accounts wrong?
Please explain this and provide me with an example that we could see in the consolidated
accounts of the group.
(6 marks)
4. In our construction division we carry out a large number of construction contracts each
year. Many of these are long term infrastructural contracts that run over many years, others are
houses that are completed within a year. I fear we have inconsistencies in the way these are
accounted for. We appear to recognise revenue for some as we progress and others we don’t
recognise until completion. Do we not have to be consistent in our approach to these contracts?
(5 marks)
Required:
Draft a report to the CEO of The George group and, with detailed reference to the relevant
accounting standards, answer the queries raised.
Marks are allocated above
Total (25 marks)
Page 7 of 7
224

EXAMINATIONS
POST GRADUATE DIPLOMA IN BUSINESS IN ACCOUNTING AND

FINANCE MANAGEMENT


ONLINE EXAMINATION

Date: February 2022 P2 Time: 2.15-5.45


EXAMINATION
ALL WORKINGS MUST BE SHOWN WHERE RELEVANT
Page225
1 of 7
HONOUR CODE
By submitting my exam script via Moodle, I certify that my answers contained in this Examination
Script document are entirely composed of my own original work.
During the exam period, which began when I received the exam paper document, I did not work
with anyone else on the exam or discuss the examination with anyone else.
I did not copy and hold out as my own any material belonging to or produced by another person.
Page226
2 of 7
QUESTION 1
On 1 January 2021, Platinum Co acquired 90% of the 16 million $1 equity share capital of Copper
Co. Platinum Co issued three new shares in exchange for every five shares it acquired in Copper Co.
Additionally Platinum Co will pay further consideration on 31 December 2021 of $2.42 per share
acquired. Platinum Co's cost of capital is 10% per annum and the discount factor at 10% for one year
is 0.9091. At the date of acquisition, shares in Platinum Co and Copper Co had fair values of $8.00
and $3.50 respectively.
Statement of profit or loss for the year ended 30 September 2021:
Platinum Co Copper Co
$'000 $'000
Revenue 103,360 60,800
Cost of sales (81,920) (41,600)
Gross profit 21,440 19,200
Investment income 800 -
Finance costs (672) -
Profit for the year 8,448 9,920
1. On 1 October 2021, the retained earnings of Copper Co were $56m.
2. At the date of acquisition, the fair value of Copper Co's assets were equal to their carrying
amounts with the exception of two items:
i. An item of plant had a fair value of $2.6m above its carrying amount. The remaining
life of the plant at the date of acquisition was three years. Depreciation is charged to
cost of sales.
Page227
3 of 7
ii. Copper Co had a contingent liability which Platinum Co estimated to have a fair value
of $850,000. This has not changed as on 30 September 2021. Copper Co has not
incorporated the fair values into their financial statements.
3. Platinum Co's policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Copper Co's share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
4. Sales from Platinum Co to Copper Co in the post-acquisition period had consistently been
$600,000 per month. Platinum Co made a mark-up on cost of 25% on these sales. Copper Co
had $1,200,000 of these goods in inventory as at 30 September 2021.
5. Platinum Co's investment income is a dividend received from its investment in a 40% owned
associate which it has held for several years. The associate made a profit of $3m for the year
6. On 1 October 2020 Platinum Co received a licence to erect a wind turbine for 5 years. At the
end of the 5 years the turbine must be dismantled, and the site returned to its original state.
The estimated cost of this is $25,000,000 in 5 years’ time. Platinum’s cost of capital is 8%
and $1 in five years’ time has a present value of 0.681 on 1 October 2020. Platinum have
correctly accounted for the cost of construction but have not accounted for the future
dismantling costs in the financial statements.
7. At 30 September 2021 no impairment to goodwill is required.
8. Profits accrue evenly throughout the year unless otherwise stated.
Required:
(a) Calculate the goodwill arising on the acquisition of Copper Co.
(10 marks)
(b) Prepare the Consolidated Statement of Profit or Loss for the Platinum group for the year
Note: All workings should be done to the nearest $'000.
(30 marks)
(c) Platinum is considering an investment to purchase 25% of another company, Raremetal,
which operates in the same industry sector as Platinum. One director insists this will be an
investment in financial instruments, another director says it gives them significant influence
which requires different accounting treatment for the financial statements.
Analyse the potential investment for the director’s offering information on the possible
accounting treatment of a 25% equity stake in a company.
(10 marks)
Total (50 marks)
Page228
4 of 7
QUESTION 2
In accordance with the requirements of International Financial Reporting Standard (IFRS) 15
Revenue from Contracts with Customers
(a) Outline the 5-step approach for the recognition of revenue.
(5 marks)
(b) Ronny Ltd sells a machine with 3 year’s maintenance for $750,000 on 1 May 2020. The
customer paid in full on 1 May 2020. Ronny Ltd. usually sells the machine for $700,000 but
does not sell maintenance contracts for this machine as a standalone product. Other
maintenance services offered by Ronny attract a mark-up of 50%. It is expected that the
maintenance contract will cost Ronny $50,000.
(7 marks)
(c) Ronny Ltd also carry out construction contracts. The projects are completed over time. The
company has three contracts in progress at the year ended 30 April 2021
X Y Z
$000 $000 $000
Costs incurred to date 960 1,620 60
Costs to complete 120 270 660
Contract price 1,248 1,800 900
Work certified to date 936 1,368 0
Progress payments received 750 1,440 0
Ronny accrues profit on its construction contracts using the percentage of completion derived
from the sales earned as is work certified compared to the total contract price (output method).
(6 marks)
(d) Ronny sold plant and equipment to a customer Pluto ltd on 1 May 2020. The plant and
equipment were manufactured to Pluto’s specification. The price agreed was $4 million but
Pluto is not required to settle the invoice until 30 April 2024.
Pluto can borrow money at a rate of 8%. One dollar in 4 years’ time has a value of $0.735 on
1 May 2020 based on a 8% cost of capital.
Required:
Making detailed reference to IFRS 15 Revenue from Contracts with Customers, evaluate how
each of the item’s b) to d) above will be accounted for in the financial statements of Ronny
Ltd at year end 30 April 2021.
Note: All calculation should be to the nearest dollar.
(7 marks)
Total (25 marks)
Page229
5 of 7
QUESTION 3
International Accounting Standard (IAS) 16 Property, Plant and Equipment is the international
accounting standard for accounting for tangible non- current assets.
Required:
(a) Evaluate the recognition criteria and measurement techniques in accordance with IAS 16
Property, Plant and Equipment.
(5 marks)
(b) Fallon Ltd bought a building on 1 October 2016. The purchase price was $2.9m, associated
legal fees were $0.1m and general administrative costs allocated to the purchase were $0.2m.
Fallon also paid sales tax of $0.5m, which was recovered from the tax authorities. The building
was attributed a useful economic life of 50 years. It was revalued to $4.6m on 30 September
2020 and was sold for $5m on 30 September 2021.
(7 marks)
(c) During the year, Fallon built a new mining facility to take advantage of new laws regarding
onshore gas extraction. The construction of the facility cost $10 million, and to fund this
Fallon took out a $10 million 6% loan, which will not be repaid until 2030. The 6% interest
was paid on 30 September 2021. Construction work began on 1 October 2020, and the work
was completed on 31 August 2021. As not all the funds were required immediately, Fallon
invested $3 million of the loan in 4% bonds from 1 May 2021 until 31 August 2021.
Mining commenced on 1 September 2021 and is expected to continue for 10 years.
As a condition of being allowed to construct the facility on 1 October 2020, Fallon is required
by law to dismantle the mining equipment by 1 October 2031. Fallon estimated that this would
cost a further $3 million. The discount factor for $1 in 11 years’ time is 0.527. Fallon has a
cost of capital of 6%.
Required:
In accordance with IAS 16, analyse how the 2 items in b) & c) should be reported in the
financial statements for year end 30 September 2021. Marks are outlined above.
(8 marks)
(d) The principle of recording the substance of transactions rather than the legal form lies at the
heart of the IASB’s Framework for Preparation and Presentation of Financial Statements as
well as numerous International Accounting Standards.
Required:
Assess the importance of recording the substance rather than the legal form of transactions
and describe features that may indicate that the substance of a transaction is different to its
legal form. Provide examples as part of your assessment.
(5 marks)
Total (25 marks)
Page230
6 of 7
QUESTION 4
You are the accountant for Jackson Ltd. You have been asked for your professional opinion on how
the following four items would impact the financial statements at the year-end 31 December 2021:
(a) On 1 January 2021, Jackson sold a property, used as offices by the business for many years,
for its fair value of $10 million, transferring title to the property on that date. Jackson leased
the building back under a 10-year lease, paying $1,000,000 per annum on 31 December each
year. The present value of lease payments was $6,144,600 and the interest rate implicit in the
lease was 10%. The carrying amount of the property on 1 January 2021 was $8 million and it
had a remaining useful life of 20 years.
(9 marks)
(b) Jackson Ltd decided to take advantage of depressed property prices and purchased a new
office building on 1 January 2021. This was purchased with the intention of the building being
resold at a profit within five years. Since 1 July 2021 the company is using the property to
house the administrative staff from the factory until such time as their own offices can be
repaired after a fire in the main administration building. The managing director has suggested
that the building should not be depreciated.
(6 marks)
(c) On 1 January 2021 Jackson Ltd sold maturing inventory that had a carrying value of $4 million
(at cost) to Funder’s Plc, a finance house, for $6.5 million. The fair value of the inventory on
1 January 2020 was considered to be $9 million and this will rise significantly over the next
4 years. The inventory will not be ready for sale until 31 December 2024 and will remain on
Jackson’s premises until this date.
The sale contract includes a clause allowing Jackson Ltd to repurchase the inventory at any
time up to 31 December 2024 at a price of $6.5 million plus interest at 10% per annum
compounded from 1 January 2020. The proceeds of the sale have been debited to the bank
and the sale has been included in Jackson Ltd.’s revenue on 1 January 2021.
(8 marks)
Required:
Making detailed reference to the relevant accounting standards, write a report to the finance
director and evaluate how the 3 items would be accounted for by Jackson Limited for the
financial year end 31 December 2021.
Total (25 marks)
Page231
7 of 7

EXAMINATIONS
POSTGRADUATE DIPLOMA IN SCIENCE IN ACCOUNTING AND

FINANCE MANAGEMENT


Date: 30th May 2023 Time: 9.45-1.15


EXAMINATION
Page232
1 of 7
QUESTION 1
On 1 April 2022 Patsy purchased 80% of the equity shares in Sandra. The acquisition was through a
share exchange of three shares in Patsy for every five shares in Sandra. The market prices of Patsy’s
and Sandra’s shares at 1 April 2022 were $6 per share and $3.20 respectively.
On the same date Patsy acquired 40% of the equity shares in Angie paying $1 per share immediately
and $1 per share payable on 1 April 2024. The cost of capital for Patsy is 10% and appropriate
discount factor for 2 years is 0.826.
The summarised statement of profit or loss for the three companies for the year ended 30
September 2022 are:
Patsy Sandra Angie
$000 $000 $000
Revenue 210,000 150,000 50,000
Cost of sales (126,000) (100,000) (40,000)
Gross profit 84,000 50,000 10,000
Distribution costs (11,200) (7,000) (5,000)
Administrative expenses (18,300) (9,000) (11,000)
Investment income (interest and dividends) 9,500
Finance costs (1,800) (3,000) Nil
Profit (loss) before tax 62,200 31,000 (6,000)
Income tax (expense) relief (15,000) (10,000) 1,000
Profit (loss) for the year 47,200 21,000 (5,000)
The following information for the equity of the companies at 30 September 2022 is
available:
Patsy Sandra Angie
$000 $000 $000
Equity shares of $1 each 200,000 120,000 40,000
Share premium 300,000 Nil Nil
Retained earnings 1 October 2021 40,000 152,000 15,000
Profit (loss) for the year ended 30 September 47,200 21,000 (5,000)
2022
Dividends paid (26 September 2022) Nil 8,000 Nil
The following information is also relevant.
1. The fair values of the net assets of Sandra at the date of acquisition were equal to their
carrying amounts with the exception of an item of plant which had a carrying amount of $12
million and a fair value of $17 million. This plant had a remaining life of five years (straight-
line depreciation) at the date of acquisition of Sandra. All depreciation is charged to cost of
sales. In addition, Sandra owns the registration of a popular internet domain name. The
registration, which had a negligible cost, is renewable indefinitely at a nominal cost. At the
date of acquisition, the domain name was valued by a specialist company at $20 million. The
fair values of the plant and the domain name have not been reflected in Sandra’s financial
statements.
Page233
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2. No fair value adjustments were required on the acquisition of the investment in Angie.
Patsy has not yet accounted for the deferred consideration on the acquisition of Angie as it
will not be paid until 2024.
3. Immediately after its acquisition of Sandra, Patsy loaned Sandra $50 million in the form of
an 8% loan note. All interest accruing to 30 September 2022 had been accounted for by both
companies. Sandra also has other loans in issue at 30 September 2022.
4. Patsy has credited the whole of the dividend it received from Sandra to investment income.
5. After the acquisition, Patsy sold goods to Sandra for $15 million on which Patsy made a
gross profit of 20%. Sandra had one third of these goods still in its inventory at 30 September
2022. There are no intra-group current account balances at 30 September 2022.
6. The non-controlling interest in Sandra is to be valued at its (full) fair value at the date of
acquisition. For this purpose, Sandra’s share price at that date can be taken to be indicative
of the fair value of the shareholding of the non-controlling interest.
7. The goodwill of Sandra has not suffered any impairment; however, due to its losses, the
value of Patsy’s investment in Angie has been impaired by $3 million o n 30 September
2022.
8. All items in the above statement of profit or loss are deemed to accrue evenly over the year
unless otherwise indicated.
Required:
(a) Calculate the Goodwill arising on the investments in Sandra and Angie.
(12 marks)
(b) Prepare the Consolidated Profit & Loss account for the Patsy Group for year ended 30
September 2022.
(25 marks)
(c) Explain, giving reference to the correct accounting standards, how Patsy should account for
the deferred consideration on the acquisition of Angie.
(5 marks)
(d) Outline the different accounting treatment of a subsidiary and an associate in consolidated
financial statements. Give reference to the relevant accounting standards in your answer.
(8 marks)
Total (50 marks)
Page234
3 of 7
QUESTION 2
You are the new financial accountant of Tamsin Ltd. The managing director has sent a memo to you
with queries on transactions that took place during the year and asked your professional opinion on
how they should be accounted for in the year end accounts on 31 December 2022.
1. On 1 January 2022, Tamsin supplied goods on credit to a customer. The goods had a list price
of $900,000. Due to the size of the order, the contract price agreed with the customer was
$800,000. The terms of sale allowed the customer a prompt payment discount of $40,000
provided payment was made before 31 January 2022. On 30 January 2022, the customer paid
$760,000 in full and final settlement of the amount payable.
(4 marks)
2. On 1 July 2022, Tamsin delivered a machine to a customer that had been manufactured to that
customer’s requirements. The machine cost Tamsin $1,2000,000 to manufacture and the
agreed selling price was $2,015,113. Tamsin agreed to accept payment on 1 July 2025.
Tamsin would expect an annual rate of return of 8% on loan investments. The present value
of $1 receivable in three years’ time at an annual discount rate of 8% is approximately 79·4
cents.
(7 marks)
3. On 1 July 2022, Tamsin sold maturing inventory to a bank for $6,000,000. The carrying
amount of the inventory at the date of sale was $4,500,000 and its market value was
$10,500,000. Inventory prices are expected to rise at an annual rate of 5% for the foreseeable
future. Tamsin continued to mature this inventory but made no payments to the new owners.
Tamsin has the option to repurchase the inventory on 31 December 2023 for $7,986,000.
Tamsin’s credit rating is such that financial institutions would require an annual interest rate
of 10% on loan finance.
(8 marks)
Required:
(a) Outline the 5 steps to Revenue Recognition according to International Financial Reporting
Standard (IFRS) 15 Revenue from contracts with customers.
(5 marks)
(b) Write a report to the managing director of Tamsin Ltd outlining the accounting treatment of
items 1-3 above in accordance with IFRS 15.
Marks are shown beside each item above.
Round all figures to the nearest $.
(19 marks)
Report format (1 mark)
Total (25 marks)
Page235
4 of 7
QUESTION 3
International Financial Reporting Standard (IFRS) 16 Leases outlines the accounting treatment for
Leases.
Required:
(a) Define a lease and outline the initial recognition and measurement criteria for leases in
financial statements.
(4 marks)
(b) Discuss how leases conform to the concept of substance over form in financial reporting.
(4 marks)
(c) Oscar Plc has the following 2 leases in place at year end 31 December 2022.
1. On 1 January 2021, Oscar entered into a contract to lease a specialised machine for
three years. The contract contains an option to extend the lease term for a further year.
Oscar believes that it is reasonably certain to exercise this option. The machine has a
useful life of ten years. Oscar will make lease payments of $1,000,000 per year for the
initial term and $800,000 per year for the option period. All payments are due at the
end of the year. To obtain the lease, Oscar incurs initial direct costs of $100,000 which
it paid on 1 January 2021. The present value of the future lease payments is $3,040,000
and the implicit interest cost on the lease is 10%.
(8 marks)
2. On 01 January 2022 Oscar sold its head office to Oak Finance for its fair value of
$7,000,000. On this date, the head office had a carrying amount of $3,500,000. Oscar
entered into a lease contract with Oak for the right to use the asset for the next five
years. Payments of $1,500,000 will be made starting on 31 December 2022. The
present value of the future lease payments under this agreement on 01 January 2022
is €5,989,065. The interest rate implicit in the lease is 8%. The office had a remaining
useful life of ten years at the date of sale.
(9 marks)
Required:
Making reference to IFRS 16 Leases, analyse how both of the leases should be accounted for the
financial statement on 31 December 2022. Marks are outlined above.
Total (25 marks)
Page236
5 of 7
QUESTION 4
The directors of Sawyer Ltd are unsure how to deal with a number of items in its financial statements
for the year ended 31 December 2022.
(a) Sawyer is being sued by one of its customers following the failure of machinery sold during
the year.
Legal advice states there is a 30% chance of Sawyer successfully defending the claim. If
Sawyer loses, there is an 80% chance that the pay-out will be $1 million and a 20% chance it
will be $1.5 million.
Sawyer is counter-suing a supplier that it blames for the incident. Legal advisors state that it
is possible that Sawyer will win $400,000.
(5 marks)
(b) On 31 December 2022 Sawyer announced the closure of its electrical retail division following
a collapse in the market. All staff and customers were informed of the plan. The anticipated
costs are detailed below.
$000
Redundancy costs 300
Relocation costs for staff remaining with Sawyer 100
Impairment losses on assets 70
Contract termination costs 150
620
(5 marks)
(c) On 1 July 2022, Sawyer completed the construction of a power generating facility. The total
construction cost was $20,000,000. The facility was capable of being used from 1 July 2022,
but Sawyer did not bring the facility into use until 1 October 2022. The estimated useful life
of the facility on 1 July 2022 was 40 years. Under legal regulations in the jurisdiction in which
Sawyer operates, there are no requirements to restore the land on which power generating
facilities stand to its original state at the end of the useful life of the facility. However, Sawyer
has a reputation for conducting its business in an environmentally friendly way and has
previously chosen to restore similar land even in the absence of such legal requirements. The
directors of Sawyer estimated that the cost of restoring the land in 40 years’ time (based on
prices prevailing at that time) would be $10,000,000. A relevant annual discount rate to use
in any discounting calculations is 5%. When the annual discount rate is 5%, the present value
of $1 receivable in 40 years’ time is approximately 14·2 cents.
(8 marks)
(d) Sawyer has items of machinery that appear to have suffered a loss in value during year ended
31 December 2022. The inventory produced by the machines was being sold below its cost
and this occurrence had affected the value of the productive machinery. The carrying value at
historical cost of these machines is $290,000 and their net selling price is estimated at
$120,000. The anticipated net cash inflow from the machines is now $100,000 per annum for
the next three years. A market discount rate of 10% per annum is to be used in any present
value computations.
The following are the discount factors for 10%
Year 1 =0.909
Year 2 =0.826
Year 3 =0.751
(6 marks)
Page237
6 of 7
Required:
Write a report to the directors of Sawyer Ltd; making detailed reference to the relevant International
Financial Reporting Standards information, analyse how the four events would be reported in the
financial statements of Sawyer for the year ended 31 December 2022.
(Report format 1 mark)
Total (25 marks)
Page238
7 of 7

EXAMINATIONS
POST GRADUATE DIPLOMA IN BUSINESS IN ACCOUNTING AND

FINANCE MANAGEMENT



Date: 23rd January 2023 Time: 2.15-5.45


EXAMINATION
Page239
1 of 6
QUESTION 1
Below are statements of financial position for three companies as at 31 July 2022.
Statement of Financial Position as at 31 July 2022
Milly Polly Dandy

Plc. Plc. Plc.
$ million $ million $ million
Non-current assets
Property, plant and equipment 4,860 2,100 1,530
Investments 4,450 750 250
9,310 2,850 1,780
Current assets:
Inventories 1,350 460 375
Trade receivables 1,720 520 125
Cash & bank 460 130 80
3,530 1,110 580
Total assets 12,840 3,960 2,360

Equity share capital of $1 each 5,000 1,500 800
Other components of equity 3,000 1,200 500
Retained earnings 1,790 1,000 950
9,790 3,700 2,250
Non current liabilities
Debenture loans 680 40 0
Current liabilities
Trade payables 1,430 100 70
Taxation 940 120 40
3,050 260 110
Total equity and liabilities 12,840 3,960 2,360
Page240
2 of 6
The following additional information is provided:
1. Milly Plc purchased 900 million shares in Polly Plc on 1 August 2020, at a cost of $2.50 per
share paid in cash and a share exchange of 1 share in Milly for every 10 shares acquired in
Molly. The fair value of Milly’s shares was $3.00 on 1 August 2020. On that date, the balance
on the retained earnings reserve of Polly stood at $600 million, and the other components of
equity were zero. At the date of acquisition, the net assets of Polly were equal to their carrying
value except for certain items of property, plant and equipment, which had a fair value $400
million in excess of their carrying value. Milly has a policy of carrying property, plant and
equipment at fair values. The remaining life of the asset on 1 August 2020 was 10 years. The
share exchange and the fair value adjustments have not been accounted for by Milly.
2. Milly purchased 640 million shares in Dandy Plc on 1 August 2021. The consideration for the
purchase was $3 per share in cash. In addition, it was agreed that a further payment of $1 per
share would be made on 31 July 2023 provided certain profit targets were met. The fair value
of this component of the consideration was $400 million on 1 August 2021, and $520
million on 31 July 2022. The cash payment was recorded in the books of Milly, but no entry
was made to record the contingent element of the purchase price. On 1 August 2021, the
retained earnings reserve of Dandy stood at $830 million, and the revaluation surplus at $450
million. Dandy has always had a policy of measuring property, plant and equipment at fair
value, hence the carrying values of these assets were equal to their fair values at the acquisition
date. However, Dandy controls a famous brand name, not recognised in its books, which had
a fair value of $50 million on 1 August 2021. This brand was estimated to have a useful
economic life of 5 years from that date.
3. Milly wishes to use the fair value method to measure the non-controlling interests of Polly at
the acquisition date. The share price of $2.50 should be used for this purpose. Milly wishes to
use the proportion of net assets method to measure the non-controlling interests of Dandy at
the acquisition date.
4. On 31 July 2022, goodwill was assessed for impairment, and the calculation showed that an
impairment loss of $200 million would be recognised in the case of Polly, and $150 million
in the case of Dandy. No impairment losses had been recognised in the year to 31 July 2021.
5. During the year, Polly bought goods from Dandy for a total sum of $20 million. These goods
cost Dandy $15 million. 60% of the goods remained unsold by Polly at the reporting date.
6. The fair value adjustments on acquisition of subsidiaries will give rise to deferred taxation
implications, the current tax rate is 20%.
All workings and solutions should be completed to the nearest $0.1 million.
Required:
(a) Prepare a Consolidated Statement of Financial Position for the Milly Group for year ended
31 July 2022 in accordance with IFRS.
(45 marks)
(b) Making reference to the relevant accounting standard briefly outline the correct accounting
treatment of the brand in note 2, in the financial statements of Dandy Plc and the consolidated
financial statements.
(5 marks)
Total (50 marks)
Page241
3 of 6
QUESTION 2
You are the new financial accountant of Moby Ltd. The managing director has sent a memo to you
with queries on transactions that took place during the year and asked your professional opinion on
how they should be accounted for in the year end accounts on 31 December 2022.
1. On 1 January 2022, Moby supplied goods on credit to a customer. The goods had a list price
of $450,000. Due to the size of the order, the contract price agreed with the customer was
$400,000. The terms of sale allowed the customer a prompt payment discount of $20,000
provided payment was made before 31 January 2022. On 30 January 2022, the customer paid
$380,000 in full and final settlement of the amount payable.
(4 marks)
2. On 1 July 2022, Moby delivered a machine to a customer that had been manufactured to that
customer’s requirements. The machine cost Moby $600,000 to manufacture and the agreed
selling price was $1,007,557. Moby agreed to accept payment on 1 July 2025. Moby would
expect an annual rate of return of 8% on loan investments. The present value of $1 receivable
in three years’ time at an annual discount rate of 8% is approximately 79·4 cents.
(7 marks)
3. On 1 July 2022, Moby sold maturing inventory to a bank for $2 million. The carrying amount
of the inventory at the date of sale was $1·5 million and its market value was $3·5 million.
Inventory prices are expected to rise at an annual rate of 5% for the foreseeable future. Moby
continued to mature this inventory but made no payments to the new owners. Moby has the
option to repurchase the inventory on 31 December 2023 for $3·221 million. Moby’s credit
rating is such that financial institutions would require an annual interest rate of 10% on loan
finance.
(8 marks)
Required:
(a) Outline the 5 steps to Revenue Recognition according to International Financial Reporting
Standard (IFRS) 15 Revenue from contracts with customers.
(5 marks)
(b) Write a report to the managing director of Moby Ltd outlining the accounting treatment of
items 1-3 above in accordance with IFRS 15.
Marks are allocated above (1.-3.) - (19 marks)
Total (25 marks)
Page242
4 of 6
QUESTION 3
(a) International Accounting Standard (IAS) 38 Intangible Assets deals with the recognition and
subsequent measurement of intangible assets.
Required:
In accordance with the requirements of IAS 38, define the term ‘intangible asset’ and discuss
the recognition and measurement criteria of the standard.
(5 marks)
(b) Wilrob Co has the following research projects on 31 March 2022:
Project 324 – The project commenced on 1 April 2021 and incurred total costs of $15million
during the period to 31 December 2021 on a pro‐rata basis. On 30 June 2021, the directors
were confident that the project met the capitalisation criteria of IAS 38 Intangible Assets. The
project was completed and began to generate revenue from 1 January 2022. It is estimated
that the project will generate revenue for five years.
Project 325 – The project commenced on 1 September 2021. Costs of $20,000 per month were
incurred until 31 January 2022 when the project was abandoned. The specialist equipment
that had been purchased for Project 325 was transferred for use in another of Wilrob Co's
research projects.
Project 326 – The project commenced on 1 April 2021. Costs of $40,000 per month were
incurred until 31 January 2022 when the directors increased the spend to $60,000 per month
to complete the project quickly as a potential buyer had been identified on 01 February 2022.
The directors had not been confident of the success of the project until this point. The project
is planned to be completed on 30 April 2022.
Required:
Discuss how the three projects should be accounted for in the financial statements of Wilrob
for the year ended 31 March 2022. Provide the extracts from the financial statements as part
of your discussion.
(12 marks)
(c) Wilrob has two brands in the business. Wilrob has recently purchased a well-known brand
name in the fast-food industry. The brand “Pizza Supreme” has been in existence for many
years, is very successful and has a reputation as a premium pizza. The other brand “Pizza
Tofu” was developed internally by Wilrob in response to market trends. It has only been on
the market for a short time and is not well known on the market. Wilrob is using a social
media influencer to promote the new product.
Wilrob wants to recognise both brands as intangible assets but is finding it difficult to estimate
the useful life of the brands and therefore intends to treat both brands as having indefinite
lives.
Required:
Discuss how the above should be dealt with in accordance with International Accounting
Standard (IAS) 38 in the financial statements of Wilrob Plc for year ended 31 March 2022.
(8 marks)
Total (25 marks)
Page243
5 of 6
QUESTION 4
You are the accountant for Astra Ltd. You have been asked for your professional opinion on how the
following four items would impact the financial statements at the year-end 31 December 2022.
(a) On 1 January 2022, Astra sold a property, used as offices by the business for many years, for
its fair value of $4 million, transferring title to the property on that date. Astra then leased it
back under a 5-year lease, paying $300,000 per annum on 31 December each year. The present
value of lease payments was $1,198,000 and the interest rate implicit in the lease was 8%.
The carrying amount of the property on 1 January 2022 was $3.2 million and it had a
remaining useful life of 20 years.
(9 marks)
(b) Astra has sold 200,000 machines that are covered by a warranty agreement as at 31 December
2022.
If a machine develops a major fault, then the average cost to Astra of repairing it is $100. If a
machine develops a minor fault, then the average cost to Astra of repairing it is $30. It is
believed that 8% of the machines under warranty will develop major faults and that 12% will
develop minor faults.
(5 marks)
(c) On 15 December 2022, the directors of Astra decided to restructure the business and created
a detailed and formal plan. On that date, an announcement was made to the employees who
were informed that they would be made redundant in March 2022. The directors estimate that
the restructuring exercise will involve the following costs:
Type of cost $m
Redundancy payments 2.5
Staff relocation 0.7
Investment in new systems 3.0
(4 marks)
(d) On 1 July 2022 Astra entered into a contract to construct a bridge over a river. The
performance obligation will be satisfied over time. The agreed price of the bridge is $100
million, and construction was expected to be completed on 30 September 2023. The costs
incurred to date are €40 million, a payment of $30 million has been received from the
customer.
The value of the work certified on 31 December 2022 has been agreed at $45 million and the
estimated cost to complete is $20 million. Astra recognises progress towards satisfaction of
the performance obligation on the outputs basis as determined by the work certified to date
compared to the total contract price.
(6 marks)
Required:
Write a report to the directors of Astra Ltd, making reference to the relevant accounting standards,
outline the accounting treatment of each of the items a-d above in the financial statements 31
December 2022.
Marks are allocated to the items above
Total (25 marks)
Page244
6 of 6

EXAMINATIONS
POSTGRADUATE DIPLOMA IN SCIENCE IN ACCOUNTING AND

FINANCE MANAGEMENT



Date: 11th August 2023 Time: 9.45-1.15


EXAMINATION
Page 1 of 8
245
QUESTION 1
Grey Plc has 2 subsidiaries and an associated company. The draft statements of financial position are
as follows as at 31st December 2022, (the accounting year-end for all three):
Grey Yellow White
$m $m $m
Non current assets
Property, plant and equipment 509 454 186
Investment in subsidiary 640
Investment in associate – Blue 25
Financial assets 36 18 10
1,210 472 196
Current assets
Cash 79 35 39
517 210 139
Total assets 1,727 682 335
Share capital 1000 200 100
Retained earnings 305 355 49
Other components of equity 15 8 8
1,320 563 157
Non current liabilities
Long term borrowings 150 50 35
Deferred tax 23 18 11
173 68 46
Page 2 of 8
246
Current liabilities
Trade payables 144 33 97
Current tax payable 90 18 35
234 51 132
Total equity and liabilities 1,727 682 335
The following information is relevant to the preparation of the group financial statements:
1. On 1 January 2021 Grey acquired 75% of the equity interests of Yellow. The purchase price
comprised of cash of $400m. The fair value of the identifiable net assets of Yellow was $362m
excluding any deferred tax arising on the acquisition. A valuation shows that the fair value of
the non-controlling interest in Yellow was $92m on 1st January 2021. The retained earnings of
Yellow were $137m and other components of equity were $5m at the date of acquisition. The
excess of the fair value of the net assets at acquisition is due to an increase in the value of
property, which is deemed to have a remaining useful life on 1 January 2021 of 10 years.
2. On 1 January 2022 Grey acquired 80% of White for $240m cash payment. The fair value of the
identifiable net assets of White was $180m excluding any deferred tax arising on the acquisition.
A valuation shows that the fair value of the non-controlling interest at that date was $149m.
White owns several brand names and has spent a significant amount in marketing these brand
names and has expensed the costs. A firm of valuation experts has valued the brand names at
$20m at the date of acquisition. The valuation of the brand names is not included in the fair
value of the identifiable net assets of White as mentioned above. Group policy is to amortise
intangible assets other than goodwill over five years.
The retained earnings of White were $44m and other equity components were $6m at the date
of acquisition. The excess of the fair value of the net assets at acquisition is due to an increase
in the value of land.
3. Grey acquired 25% of Blue on 1 January 2022 for $25m plus a further $20m payable on 1
January 2023. The deferred consideration has not yet been accounted for by Grey. The effective
rate of interest is 8% and the relevant discount factor is 0.735. Blue made profits after dividends
of $10m for the year ended 31 December 2022.
4. The financial assets are investments held for trading purposes and their year-end values are
Grey $45m, Yellow $15m and White $12m.
5. Grey sold inventory during the year ended 31st December 2022 to Yellow of which $6m is still
unsold, Grey makes a mark-up on cost price of 20% on goods sold to Yellow.
6. Inter-company debts outstanding at the year-end show Grey is owed $2m from Yellow.
7. Deferred tax can be ignored except deferred tax implications on the acquisition of subsidiaries.
The tax rate applicable is 25%.
8. There is no impairment of goodwill arising on the acquisitions of Yellow, but the Goodwill of
White is impaired by $10m.
Required:
(a) Prepare a consolidated statement of financial position as at 31st December 2022 for the Grey
Group.
(45 marks)
Page 3 of 8
247
(b) The terms “Control” and “Significant Influence” are used in group accounts. Explain both
terms giving reference to the relevant accounting standards
(5 marks)
Total (50 marks)
Page 4 of 8
248
QUESTION 2
(a) Define the term Lease and outline the initial recognition criteria for leases in International
Financial Reporting Standard (IFRS) 16 Leases
(4 marks)
(b) Explain, using examples, the “Exemption Criteria” in IFRS 16 Leases.
(3 marks)
(i) On 1 January 2021, Dunne Ltd entered into a 20-year lease of a building, with an
option to extend for a further five years. Lease payments are $80,000 per year during
the initial term and $100,000 per year during the optional period, all payable at the end
of each year. To obtain the lease, Dunne had to pay a deposit of $25,000.
On 1 January 2021, Dunne Ltd concluded that it is not reasonably certain to exercise
the option to extend the lease and, therefore, determined that the lease term is 20 years.
The interest rate implicit in the lease is 6% per annum. The present value of the lease
payments on 1 January 2021 was $917,600.
(8 marks)
(ii) On 1 January 2022 Dunne sold a building to Alpha Ltd for its fair value of $3 million.
Immediately before the transaction, the carrying amount of the building in the financial
statements of Dunne was $2.0 million. At the same time, Dunne entered into a lease
with Alpha for the right to use the building for 20 years, with annual payments of
$200,000 payable at the end of each year. The useful life of the asset at the date of sale
is 30 years.
The annual interest rate implicit in the lease is 5%. The present value of the annual
payments (20 payments of $200,000, discounted at 5%) amounts to $2,492,400.
(10 marks)
Required:
Making detailed reference to IFRS 16 Leases, explain how both transactions will be accounted
for in the financial statements for year ending 31 December 2022.
marks are outlined above
Total (25 marks)
Page 5 of 8
249
QUESTION 3
International Accounting Standard (IAS) 36 Impairment of Assets was issued by the International
Accounting Standards Board to provide guidance on identifying, measuring and recognising
impairment losses.
Required:
(a)
(i) Explain how IAS 36 deals with the recognition and measurement of the
impairment of assets.
(5 marks)
(ii) Describe the circumstances which indicate that an impairment loss relating to an
asset may have occurred.
(5 marks)
(b) Triage Plc., a listed entity, needs to ensure that it complies with IAS 36 Impairment of Assets.
The following information is relevant to the impairment review at 31/12/2022
(i) Certain items of machinery appeared to have suffered a loss in value. The inventory
produced by the machines was being sold below its cost and this occurrence has
affected the value of the productive machinery. The carrying value at historical cost of
these machines is $290,000 and their net selling price is estimated at $120,000. The
anticipated net cash inflow from the machines is now $100,000 per annum for the next
three years. A market discount rate of 10% per annum is to be used in any present
value computations.
The following are the discount factors for 10%
Year 1 =0.909
Year 2 =0.826
Year 3 =0.751
(5 marks)
(ii) Triage purchased a non-current asset on 1 January 2018 at a cost of $30,000. At that
date, the asset had an estimated useful life of ten years. Triage does not revalue this
type of asset, but accounts for it on the basis of depreciated historical cost. At 31
December 2019, the asset was subject to an impairment review and had a recoverable
amount of $16,000.
At 31 December 2022, the circumstances which caused the original impairment to be
recognised have reversed and are no longer applicable; with the result that recoverable
amount is now $40,000.
(5 marks)
(iii) Triage also has a cash generating unit (CGU) that suffered a large drop in income due
to reduced demand for its products. An impairment review was carried out and the
recoverable amount of the cash generating unit was determined at $100m.The assets
of the CGU had the following carrying amounts immediately prior to the impairment:
The inventory and Trade receivables are at their recoverable amount.
Page 6 of 8
250
$m
Goodwill 25
Intangibles 60
Property, plant and equipment 30
Inventory 15
Trade receivables 10
–––––
140
–––––
(5 marks)
Required:
With detailed reference to IAS 36, show the impact on items (i) - (iii) on the financial statements of
Triage Plc. for the financial year ended 31/12/2022.
marks are outlined above
Total (25 marks)
Page 7 of 8
251
QUESTION 4
You are the accountant for Mims Ltd. The director is not a trained accountant and has asked you to
answer the following queries regarding the draft accounts for year end 30 September 2022.
(a) The notes to the financial statements say that plant and equipment is held under the ‘cost
model’. However, property which is owner occupied is revalued annually to fair value.
Changes in fair value are sometimes reported in profit or loss but usually in ‘other
comprehensive income’. Also, the amount of depreciation charged on plant and equipment as
a percentage of the carrying amount is much higher than for owner occupied property. Another
note says that property we own but rent out to others is not depreciated at all but is revalued
annually to fair value. Changes in value of these properties are always reported in profit or
loss. I thought we had to be consistent in our treatment of items in the accounts.
Please explain how all these treatments comply with relevant reporting standards.
(8 marks)
(b) In the year to 30 September 2022, we spent considerable sums of money designing a new
product. We spent the six months from October 2021 to March 2022 researching into the
feasibility of the product. We charged these research costs to the profit and loss account. From
April 2022, we were confident that the product would be commercially successful, and we
fully committed ourselves to financing its future development. We spent most of the rest of
the year developing the product, which we will begin to sell in the next few months. These
development costs have been recognised as intangible assets in our statement of financial
position. How can this be right when all these research and development costs are design
costs?
(8 marks)
(c) On 1 October 2021, we completed the construction of a factory at a total construction cost of
$40 million. The factory was constructed on land we own.
The expected useful economic life of the factory at 1 October 2021 was 40 years. Under the
terms of building rules, the company is required to dismantle the factory in 40 years and return
the land to its original state. The latest estimated cost of this process, in 40 years, is $55
million. An appropriate discount rate to use in any relevant calculations is 5% per annum. At
this discount rate, the present value of $1 receivable in 40 years is 14·2 cents.
Why would we have to account for this now when it will not happen for 40 years?
(8 marks)
Required:
Write a report to the Director answering the questions he has asked giving reference to the relevant
accounting standards where appropriate.
(Report format 1 mark)

Total (25 marks)
Page 8 of 8
252

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International Financial

Reporting & Analysis

Lecturer: Deirdre Cogan

1. IAS 1 PUBLISHED ACCOUNTS INTRODUCTION ...................................................................... 1

All Copyright reserved © Griffith College

$'000 $'000 $'000 $'000

Statement of Changes in Equity

Balance at 31 December 20X2 X X X X

IASB framework: key headings

Objective of financial reporting Objective of financial reporting

Accrual accounting Qualitative characteristics

Qualitative characteristics Relevance

Materiality Faithful representation

Faithful representation Faithful representation

Free from error Applying the fundamental qualitative

Enhancing qualitative characteristics Verifiability

Characteristics Elements of financial statements

Asset and liability Asset and liability

Assets and liabilities Assets and liabilities

Elements of financial statements Elements of financial statements

Underlying assumption Recognition 1

Concepts of capital and capital Reasons for framework

Physical capital maintenance 2. Avoids standards being developed in response

Reasons for framework Reasons for framework

Substance Over Form • Financial statements must reflect the

Off-SOFP Financing Why?

What is an asset? • Risk arises because there is a possibility that

Substance over form requires that where a

(i) The item can be measured reliably

1. Sale and Leaseback arrangement

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• Property, plant and equipment are tangible

• The part of the asset that is replaced must then

• Measurement after initial recognition 1. Cost Model

Fair Value Fair Value Example

Fair Value Example Fair Value Example

Credit Revaluation surplus 4

• Example • If the asset is subject to depreciation, the treatment of

• New annual depreciation charge:

(In the statement of changes in equity, not the Profit or Loss)

Example Method 1 : All the surplus is transferred when the

Method 2 Statement of changes in equity (each year)

Statement of changes in equity (in year of disposal) • Example

* 280,000 – (2 x 7,000) Depreciation has been charged at 2% per annum

(any consideration receivable on disposal of PPE is measured at fair value)

• Depreciable amount of asset is allocated on a

• If assets have been revalued, disclose: • IAS 16 encourages disclosure of:

IAS 40 (a) use in production / supply of goods or

The following are examples of investment property:

Recognise Investment Property when: • Investment property should initially be measured

• If the property is held under a lease, it should

Fair Value Model Fair Value Model

Fair Value Model Fair Value Model

Fair Value V Cost Model Fair Value V Cost Model

Fair Value V Cost Model Miscellaneous

Owner-Occupied Property Disposals

• Fair Value Model

• The company had all the above properties valued by an independent

REQUIREMENT: The building should be depreciated under IAS 16.

Prepare the necessary journal entries to

Shetland Street qualifies as an investment property as it is

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“An identifiable non-monetary asset without

When Is An Intangible Asset Identifiable? • Recognition