AAFR Book (Publish) - 2023

ABOUT THE AUTHOR
Revision Notes &

Past Papers
CFAP-01
AAFR
2023 EDITION
By: Ammar Ahmed
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ABOUT THE AUTHOR
• Ammar Ahmed is a Chartered Accountant (Pakistan), Qualified in 2012, Member since 2013
(Articles from AFF)
• He obtained Gold Medals & Merit Certificates in 9 CA subjects including an overall

distinction
• He is a CFA Level 3 and obtained above 90th percentile score in L3 (highest grade in CFA)
• He graduated On-campus Leadership Program (equivalent to Executive MBA) from Harvard

Business School
• He is an MS candidate at University College London (# 8 ranked University in the World)
• He has been teaching CA Final, CFAP & MSA subjects since 2012 with an excellent (>63%
passing ratio) and his students have achieved six distinctions in his subjects
• He is a member of the Technical Advisory Group of Pakistan’s Accounting Standard’s Board

and is a former member of ICAP’s Accounting Standard’s Committee
• He has a work experience of 13 years across 2 MNCs having worked in Senior Management
& leadership roles in the Marketing, Strategy & Finance functions
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TABLE OF CONTENTS
Title Pg #
Income Taxes – IAS 12, SIC 25, IFRIC 23 4
Revenues – IFRS 15 11
Leases – IFRS 16 24
Fair value measurements – IFRS 13 36
Earnings per share – IAS 33 40
Interim financial reporting – IAS 34, IFRIC 10 44
Related parties – IAS 24 46
Financial instruments – IFRS 9, IFRS 7, IAS 32, IFRIC 16, IFRIC 19 47
Share based payments – IFRS 2 57
Employee benefits – IAS 19, IFRIC 14 63
Group financial statements – IFRS 3, IFRS 10, IFRS 11, IFRS 12, IAS 1, IAS 7, IAS 27, IAS 28,
66
IAS 21, IFRIC 22
Investment property – IAS 40 88
Assets held for sale, discountinued operations etc. – IFRS 5, IFRIC 17 90
Impairment – IAS 36 93
First time adoption of IFRS – IFRS 1 98
Regulatory deferrals – IFRS 14 100
Hyper inflationary economies – IAS 29, IFRIC 7 101
Insurance contracts – IFRS 17 103
Exploration for and evaluation of Mineral Resources – IFRS 6 105
Inventories – IAS 2 108
Rectification of errors, Changes in estimates, Changes in acc. policies – IAS 8 111
Events after reporting date – IAS 10 113
Provisions, Contingent liabilities & Contingent assets – IAS 37 114
Property, plant and equipment – IAS 16 117
Government grants – IAS 20 119
Borrowing costs – IAS 23 121
Intangible assets – IAS 38, SIC 32 124
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TABLE OF CONTENTS
Agriculture – IAS 41 129

Provision for decommissioning – IFRIC 1 131
Segment reporting – IFRS 8 133
IAS 21 135
IPSAS 137
IFAS 1 – Murabaha 139
IFAS 2 – Ijarah 142
IFAS 3 – Profit Loss sharing accounts 145
IFRS for SMEs 149
Code of Ethics & Professional misconduct 150
IFRS Practice Statement: Materiality 165
Note: Notes for Specialized financial statements (Banks, Mutual Funds, Insurance companies,
Employee benefit Trusts) as well as Past paper analysis is shared in soft with registered students.
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IAS 12
Current Tax:
▪ Taxable income x Tax rate.
▪ Computed based on rules of IT 2001.
▪ Common add backs: Provisions, Accounting depreciation, Interest on lease liability etc.
▪ Common deductions: Write-offs, Tax depreciation, Lease payments etc.
▪ Brought forward tax losses are adjusted against income before computation of current tax.
▪ Tax credits are adjusted after computation of taxable income and tax liability.
Deferred tax concept:

▪ Deferred tax represents the increase or decrease in taxes of the future.
▪ It is simply the impact of current events / transactions on the current tax of the future.
▪ It is accrued today to under the accrual concept to match taxes with the incomes/expenses recorded now.
Deferred tax computation:

▪ Temporary difference x Tax rate in periods of reversal
▪ Temporary difference = Carrying amount – Tax base
▪ Tax base is based on 3 rules.
o Depreciable assets = WDV
o Cash / Actual basis taxation = Nil
o No tax consequences = Carrying amount
Change in tax rates:

▪ If tax rates are changed by govt. year over year, the deferred tax balances are adjusted to new tax rates
▪ Analysis of the change is encouraged to be presented in notes
Underlying reason:
▪ Double entry of deferred tax asset / liability is completed by recording the contra in the same place where the
underlying transaction responsible for creation / adjustment of that deferred tax balance is recorded.
Minimum taxes:
▪ For Companies in losses or having low taxable income, Minimum taxes are applicable @ 1% of Revenue or
17% of Accounting Profit.
▪ These minimum taxes are adjustable in the next following years; therefore DTA is recorded against them.
Tax losses:
▪ Unused business losses are adjustable in 6 years
▪ Unused depreciation losses are adjustable without limitation of time.
▪ Projection of taxable profits should be created after taking into account tax planning.
▪ Deferred tax should not be discounted.
Deferred tax exemption:

Deferred tax is not recognized when:
▪ The temporary differences arises from the initial recognition of an asset or liability; and
▪ The underlying transaction is not a business combination; and
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▪ The underlying transaction affects neither accounting profit nor tax profit at the time of the transaction
Tax rate / expense reconciliation:

▪ Provided to reconcile the tax expense “as should be” versus tax expense “as is”.
▪ Includes:
o Add backs / deductions in current tax working not covered in deferred tax
o Changes in deferred tax not due to change in temporary differences
o Tax chargeable at FTR (different rates)
Differing tax rates applicable to different manner of asset recoveries:

▪ Review if different tax rates / treatments apply if asset is:
o Used versus sold
o Used for one purpose versus another purpose
▪ Review the proportion of utilization of carrying amount of the asset from usage versus sale.
▪ Apportion temporary difference between usage and sale based on this proportion and calculate deferred tax.
Taxation of Land and Buildings in Pakistan:

▪ Land for own is PPE in accounting and has no tax consequences.
▪ Building for own use is PPE in accounting and a depreciable asset for tax purposes. Gain on sale of such building
is exempt to the extent sale proceeds exceed the initial cost.
▪ Land or building for sale is investment property in accounting and taxed at different rates as gain on sale of
immovable property
▪ Land or building for rent is investment property in accounting and their rental income is taxed at different
rates
Tax implications of dividend distribution:

▪ For some companies lower taxation applies if they declare high dividends.
▪ Also different tax rates may apply to distribute versus undistributed profits.
▪ Effect of lower tax rates are recorded when a liability to pay the dividend is recognised.
SIC 25:
▪ A change in the tax status of an entity may increase or decrease tax e.g. a change in status from small company
to normal company.
▪ The current and deferred tax consequences of a change in tax status are recorded in the year of change as a
change in accounting estimate.
Other areas of tax implications to be studied later:

▪ Business combinations and consolidation (IFRS 3)
▪ Translation differences (IAS 21)
▪ Leases (IFRS 16)
▪ Investment Property (IAS 40)
▪ Financial instruments and Compound financial instruments (IFRS 9)
▪ Share based payments (IFRS 2)
▪ Borrowing costs (IAS 23)
▪ Government grants (IAS 20)
▪ Provision for abandonment / dismantling (IFRIC 1)
▪ Employee benefits (IAS 19)
▪ Hyperinflationary economies (IAS 29)
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Example 1: Current tax calculation
ABC Limited is preparing its draft financial statements for the year ended 31-Dec-2017. Following information is
relevant.
▪ Accounting profit before tax amounts to Rs 410 million.
▪ Provision for bad debts recorded during the year amounted to Rs 15 million whereas bad debts written off
amounted to Rs 12 million.
▪ Accounting depreciation relating to owned and leased fixed assets amounts to Rs 150 million and Rs 70 million
respectively. Tax depreciation for owned assets amounts to Rs 180 million.
▪ Donations not allowable for tax purposes amount to Rs 5 million.
▪ Financial charges include interest expense recorded on lease liabilities amounting to Rs 27 million. This
interest along-with principal of 55 million was repaid during the year.
▪ Dividend income amounts to Rs 15 million. Final tax @ 10% was deducted at source from Dividend.
▪ Accounting Gain on sale of machines amounts to Rs 30 million. Accounting and Tax WDV of the machines was
Rs 50 million and Rs 35 million respectively.
▪ During the year, the tax authorities passed assessment orders relating to the years 2014 and 2015. The
company filed appeals against these orders with the below results.
Tax impact
Rs in millions
Disallowances decided against the Company by CIRA – Appealed at ATIR as the 40
company is confident that these disallowances will be overturned
Disallowances decided against the Company by CIRA – Not appealed at ATIR 50

90
▪ Up to the year ended 31-Dec-2016, the company’s brought forward losses amounted to Rs 45 million.
▪ Applicable tax rate is 30%.
Required: Compute current tax expense for the year 2017 and current tax asset or liability as at the end of the
year.
Example 2: Deferred tax basic concept

On 1-Jan-2016, ABC Limited purchased a building costing Rs 100 million with a useful life of 5 years. Accounting
depreciation is provided on straight line basis.
Tax authorities allow the depreciation as follows: Year 1 = 40% of cost, Year 2 = 30% of cost, Year 3 = 20% of cost,
Year 4 = 10% of cost.
You are required to compute current tax expense for the years 2016 to 2020 assuming that ABC’s Accounting
Profit before tax and depreciation in each of those year amounts to Rs 50 million and there are no differences
between accounting and tax rules other than those specified above. Tax rate is 30%.
Example 3: Tax base

Compute the tax base in the following cases.
▪ Provision for doubtful debts with a carrying amount of Rs 50 million.
▪ Lease liability with a carrying amount of Rs 30 million.
▪ Plant and machinery with a cost of Rs 50 million. Accounting and tax depreciation allowed till date amount to
Rs 10 million and Rs 15 million respectively.
▪ Receivable from exempt export income with a carrying amount of Rs 20 million.
▪ Agricultural produce with a carrying amount of Rs 35 million.
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Example 4: Tax rate for deferred tax computation
On 1-Jan-2016, ABC limited acquired a plant costing Rs 100 million with a useful life of 5 years. Accounting
depreciation is provided on straight line basis. Tax authorities allow the depreciation as follows: Year 1 = 40% of
cost, Year 2 = 30% of cost, Year 3 = 20% of cost, Year 4 = 10% of cost.
On 25-Dec-2016, the government has enacted a law that lays down the tax rate applicable for next 5 years as
follows.
Year Tax rate

2016 40%
2017 30%
2018 30%
2019 25%
2020 45%
Required: Calculate deferred tax liability as the end of and deferred tax expense / income for the years 2016 to
2020.
Example 5: Change in tax rates

Opening and closing net taxable temporary differences amounted to Rs 25 million and Rs 45 million respectively.
Applicable tax rate was increased from 30% to 35% during the year. Compute and analyse deferred tax expense
for the year.
Example 6: Underlying reason

ABC Limited has a building with a carrying amount and tax base of Rs 100 million on 31-Dec-2016. On the same
date the building was revalued for the first time to Rs 150 million. Tax and accounting depreciation are provided
at 20% on reducing balance basis. Applicable tax rate is 30%. In respect of the foregoing, prepare journal entries
for the year 2016 and 2017, assuming that the asset is revalued to Rs 60 million at the end of 2017.
Example 7: Deferred tax on tax credits

ABC Limited is taxed at higher of 30% of taxable income or 1% of revenue. However, any additional tax paid on
basis of revenue is adjustable in 5 years. Provide journal entries for the years 2016 and 2017 using the following
relevant information.
Year 2016 2017

Taxable Income Rs 20 million Rs 50 million
Revenue Rs 1000 million Rs 1000 million
Example 8: Deferred tax on tax losses

ABC Limited sustained a tax loss in the year 2010 amounting to Rs 100 million. Expected tax profits before
considering impacts of tax planning are as follows:
Year 2011 2012 2013 2014 2015 2016 2017 2018

Rs in millions 10 5 6 4 15 10 45 25
Other relevant information is as follows:

▪ In 2011, the company plans to defer claims of expense amounting to Rs 5 million to next year.
▪ Appropriate discount rate is 10%. Applicable tax rate is 30%.
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Required: Calculate the Deferred tax asset to be recognised.
Example 9: Exemptions on initial recognition of Deferred tax

On 1-Jan-2015, ABC limited purchased a car worth Rs 3 million. As per tax rules, the authorities will allow tax
depreciation on amount restricted to Rs 2 million only. The car is depreciated over 5 years for accounting
purposes, whereas tax depreciation is provided at 20% reducing balance basis. Ignoring the taxation arising on
disposal of car, compute the deferred tax to be calculated at initial recognition.
Example 10: Exemptions on initial recognition of Deferred tax

On 1-Jan-2015, ABC limited capitalised development costs of Rs 150 million as an intangible asset. In accounting
records, it is being amortised over 10 years on straight line basis. As per tax rules, the authorities will accept
Development costs of only Rs 100 million and will allow this cost as tax amortization on straight line basis over 5
years. Tax rate is 30%. Calculate deferred tax for the year 2015 and 2016.
Example 11: Tax expense calculation and effective to actual tax expense reconciliation
The Profit before tax of ABC limited for the current year is Rs 100 million. Other relevant details are given below.
▪ Expenses inadmissible for tax purposes amount to Rs 10 million.
▪ Exempt incomes amounted to Rs 5 million.
▪ Previously unrecognised tax losses are now deemed recoverable and should be recognised amounting to Rs
30 million. These losses are not adjustable against current year’s taxable income.
▪ The carrying amount of fixed assets amounts to Rs 100 million (previous year: 120 million). The tax base of
fixed assets amounts to Rs 120 million (previous year: 150 million). There were no additions or disposals of
fixed assets during the year.
▪ Deferred tax asset at the beginning of the year amounted to Rs 12 million.
▪ Applicable tax rate is 30% (previous year: 40%)
Required: Compute tax expense / income for the year and prepare effective to actual tax expense reconciliation
for the current year.
Example 12: Differing rates on asset recovery

On 1-Jan-2015, ABC limited acquired a building for Rs 125 million. The residual value of the building after 4 years
is estimated to be Rs 25 million. Depreciation is provided on straight line basis. Tax authorities also allow same
amount of depreciation as calculated in accounting based on original cost of the asset.
On 31-Dec-2015, the building was revalued to Rs 150 million and the residual value was revised upwards to Rs 50
million. On 31-Dec-2016, the building was revalued to Rs 130 million with no change in estimate of residual value.
Calculate deferred tax for the year 2015 and 2016 assuming that income from use of building is taxable at 30%;
however gain on sale of immovable property is exempt for tax purposes.
Example 13: Differing tax implication of dividend distribution

ABC Limited is taxed at 30%. However, the tax rate on distributed profits is 20%. The taxable income for 2016 was
Rs 100 million. The net taxable temporary differences for the year 2016 amounted to Rs 40 million. No dividends
were paid or recognised in the year 2016. In 2017, however, ABC Limited paid dividends amount to Rs 50 million.
Compute current and deferred tax implications of the above.
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Example 14 - Deferred tax calculation & disclosures (Summer ‘13 Q7 adapted): Financial statements of NCL for
the year ended 31 December 2012 are in the process of finalisation. In this respect, the following information has
been gathered from the company’s accounting and tax records.
(i) Property, plant and equipment (PPE)

31-12-2012 31-12-2011
--------Rs. in million--------
Accounting WDV (at revalued amount) 2,700 2,000
Tax WDV 2,400 1,600
Details of the revaluation are as under:

Revaluation of freehold land and buildings on 31 December 2005 resulted in a revaluation surplus of Rs. 15 million
and Rs. 20 million respectively. The remaining useful life of building at that time was 10 years. Plant and machinery
costing Rs. 150 million was commissioned on 1 January 2010 with an expected useful life of 10 years. It was
revalued at Rs. 145 million on 31 December 2012.
(ii) Provision for retirement benefits (plan not approved by Commissioner) and doubtful debts
Rs. in million
Balance on 31 December 2011 50
Write offs during the year 05
Provision for the year, net of payments of Rs. 3 million 06
(iii) Liabilities outstanding for more than three years

NCL’s tax assessment for the year ended 31 December 2010 was finalized on 30 April 2012 in which liabilities
outstanding for more than three years and amounting to Rs. 8 million were added back to income. A sum of Rs. 2
million included in the above liabilities was paid while a liability of Rs. 3 million was written back by NCL in 2012.
(iv) Applicable tax rate is 35%.
Required:
Prepare a note related to deferred tax liability/asset for inclusion in NCL’s financial statements for the year ended
31 December 2012, in accordance with the International Financial Reporting Standards. (12)
Example 15 - Tax expense calculation & disclosures (Summer ‘14 Q4 adapted): Following information pertaining
to Moon Light Limited (MLL) is available for computing tax charge/liability for inclusion in the financial
statements for the year ended 31 December 2013.
Other relevant information is as under:

(i) MLL’s tax assessment for the year ended 31 December 2011 was finalized in May 2013 raising an
additional tax liability of Rs 4.2 million. The assessment was not contested and the liability was paid by MLL.
(ii) Following details are available in respect of provision for doubtful debts:
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Balance as at 31 December 2012 amounted to Rs. 90 million
Write offs against provision amounted to Rs. 25 million
Balance as at 31 December 2013 amounted to Rs. 125 million
(iii) Property, plant and equipment:
(iv) Applicable tax rates for 2012 and 2013 are 35% and 10% for business and dividend income respectively for
both years.
Required: Prepare notes on taxation for inclusion in the financial statements of MLL for the year ended 31
December 2013, in accordance with the International Financial Reporting Standards. (16)
Example 16 - Deferred tax calculation & disclosures (Winter ‘15 Q3 adapted):Financial statements of Waseem
Industries Limited (WIL) for the year ended 30 June 2015 are in the process of finalization. In this respect, the
following information has been gathered from WIL’s accounting and tax records:
(ii) A building costing Rs 200 million was purchased on 1 July 2011 with an expected useful life of 10 years. It was
revalued at Rs. 230 million on 1 July 2013.
(iii) 25% of WIL's income and expenses for both years fall under the Final Tax Regime (FTR) and this trend is
expected to continue in future also.
(v) Applicable tax rate is 32%.
Required: Prepare a note related to deferred tax liability /asset along with the reconciliation that may be included
in WIL's financial statements for the year ended 30 June 2015, in accordance with the International Financial
Reporting Standards and the Companies Ordinance, 1984, as applicable. (Comparative figures are not required)
(15)
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IFRS 15
SCOPE
Applies to all contracts with customers, except:
• Lease contracts (refer to IFRS 16)
• Insurance contracts (refer to IFRS 4)
• Financial instruments and other contractual rights or obligations (refer to IFRS 9, IFRS 10, IFRS 11, IAS 27, and
IAS 28)
• Certain non-monetary exchanges
DEFINITIONS
Contract: An agreement between two or more parties that creates enforceable rights and obligations.
Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.
Revenue: Income arising in the course of an entity’s ordinary activities.
Income: Increases in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities
that result in an increase in equity (other than those from equity participants).
Stand-alone selling price: The price at which a good or service would be sold separately to a customer.
Performance obligation: A promise to transfer to the customer either:

(i) A distinct (bundle of) good(s) or service(s)
(ii) A series of substantially the same distinct goods or services that have the same pattern of transfer to the
customer, and the pattern of transfer is both over time and represents the progress towards complete satisfaction
of the performance obligation.
STEP 1 – IDENTIFY THE CONTRACT
Features of a ‘contract’ under IFRS 15

Contracts, and approval of contracts, can be written, oral or implied by an entity’s customary business practices.
IFRS 15 requires contracts to have all of the following attributes:

• The contract has been approved
• Rights and payment terms regarding goods and services transferred can be identified
• The contract has commercial substance
• It is probable that the consideration will be received (considering only the customer’s ability and intention to
pay)
If each party to the contract has a unilateral enforceable right to terminate a wholly unperformed contract without
compensating the other party (or parties), no contract exists under IFRS 15.
Combining multiple contracts

Contracts are combined if they are entered into at (or near) the same time, with the same customer, if either:
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• The contracts are negotiated as a package with a single commercial objective
• The consideration for each contract is interdependent on the other, or
• The overall goods or services of the contracts represent a single performance obligation.
Contract modifications
A change in enforceable rights and obligations (i.e. scope and/or price) is only accounted for as a contract
modification if it has been approved, and creates new or changes existing enforceable rights and obligations.
Contract modifications are accounted for as a separate contract if, and only if:
• The contract scope changes due to the addition of distinct goods or services, and
• The change in contract price reflects standalone selling price of distinct good or service.
Contract modifications that are not accounted for as a separate contract are accounted for as either:
(i) Replacement of the original contract with a new contract (if the remaining goods or services under the original
contract are distinct from those already transferred to the customer)
(ii) Continuation of the original contract (if the remaining goods or services under the original contract are distinct
from those already transferred to the customer, and the performance obligation is partially satisfied at
modification date).
(iii) Mixture of (i) and (ii) (if elements of both exist).
STEP 2 – IDENTIFY THE PERFORMANCE OBLIGATIONS

Performance obligations are the contractual promise by an entity, to transfer to a customer, distinct goods or
services, either individually, in a bundle, or as a series over time.
Activities of the entity that do not result in a transfer of goods or services to the customer (e.g. certain internal
administrative ‘set-up activities’) are not performance obligations of the contract with the customer and do not
give rise to revenue.
Definition of ‘distinct’ (two criteria to be met)

(i) The customer can ‘benefit’ from the good or service. Benefit from the good or service can be through either:
• Use, consumption, or sale (but not as scrap)
• Held in a way to generate economic benefits.
Benefit from the good or service can be either:

• On its own
• Together with other readily available resources (i.e. those which can be acquired by the customer from the
entity or other parties).
(ii) The promise to transfer a good or service is separable from other promises in the contract. The assessment
requires judgment, and consideration of all relevant facts and circumstances. A good or service may not be
separable from other promised goods or services in the contract, if:
• There are significant integration services with other promised goods or services
• It modifies / customizes other promised goods or services
• It is highly dependent / interrelated with other promised goods or services.
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STEP 3 – DETERMINE THE TRANSACTION PRICE
The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring
the promised goods or services (not amounts collected on behalf of third parties, e.g. sales taxes or value added
taxes).
The transaction price may be affected by the nature, timing, and amount of consideration, and includes
consideration of significant financing components, variable components, amounts payable to the customer (e.g.
refunds and rebates), and non-cash amounts.
Accounting for a significant financing component

If the timing of payments specified in the contract provides either the customer or the entity with a significant
benefit of financing the transfer of goods or services.
The transaction price is adjusted to reflect the cash selling price at the point in time control of the goods or services
is transferred.
A significant financing component can either be explicit or implicit. Factors to consider include:
• Difference between the consideration and cash selling price
• Combined effect of interest rates and length of time between transfer of control of the goods or services and
payment.
A significant financing component does not exist when

• Timing of the transfer of control of the goods or services is at the customer’s discretion
• The consideration is variable with the amount or timing based on factors outside of the control of the parties
• The difference between the consideration and cash selling price arises for other non-financing reasons (i.e.
performance protection).
Discount rate to be used

Must reflect credit characteristics of the party receiving the financing and any collateral / security provided.
Practical expedient – period between transfer and payment is 12 months or less

Do not account for any significant financing component.
Accounting for variable consideration

Variable consideration includes discounts, rebates, refunds, credits, concessions, incentives, performance
bonuses, penalties, and contingent payments.
Variable consideration must be estimated using either:

(i) Expected value method: based on probability weighted amounts within a range (i.e. for large number of similar
contracts)
(ii) Single most likely amount: the amount within a range that is most likely to eventuate (i.e. where there are few
amounts to consider).
Constraining (limiting) the estimates of variable consideration

Variable consideration is only recognised if it is highly probable that a subsequent change in its estimate would
not result in a significant revenue reversal (i.e. a significant reduction in cumulative revenue recognised).
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Accounting for consideration payable to the customer
Includes cash paid (or expected to be paid) to the customer (or the customer’s customers) as well as credits or
other items such as coupons and vouchers.
Accounted for as a reduction in the transaction price, unless payment is in exchange for a good or service received
from the customer in which case no adjustment is made – except where:
• The consideration paid exceeds the fair value of the goods or services received (the difference is set against
the transaction price)
• The fair value of the goods or services cannot be reliably determined (full amount taken against the
transaction price).
Accounting for non-cash consideration

Accounted for at fair value (if not reliably determinable, it is measured indirectly by reference to stand-alone
selling price of the goods or services)
STEP 4 – ALLOCATE THE TRANSACTION PRICE TO EACH PERFORMANCE OBLIGATION

The transaction price (determined in Step 3) is allocated to each performance obligation (determined in Step 2)
based on stand-alone selling price of each performance obligation.
If the stand-alone selling price(s) are not observable, they are estimated. Approaches to estimate may include:
(i) Adjusted market assessment approach
(ii) Expected cost plus a margin approach
(iii) Residual approach (i.e. residual after observable stand-alone selling prices of other performance obligations
have been deducted). This approach is used if a certain criteria is met.
Allocating a ‘discount’
A discount exists where the sum of the stand-alone selling price of each performance obligation exceeds the
consideration payable.
Discounts are allocated on a proportionate basis, unless there is observable evidence that the discount relates to
one or more specific performance obligation(s) after meeting all of the following criteria:
• The goods or services (or bundle thereof) in the performance obligation are regularly sold on a stand-alone
basis, and at a discount
• The discount is substantially the same in amount to the discount that would be given on a stand-alone basis.
Allocating variable consideration

Variable consideration is allocated entirely to a performance obligation (or a distinct good or service within a
performance obligation), if both:
• The terms of the variable consideration relate specifically to satisfying the performance obligation (or
transferring the distinct good or service within the performance obligation)
• The allocation of the variable consideration is consistent with the principle that the transaction price is
allocated based on what the entity expects to receive for satisfying the performance obligation (or transferring
the distinct good or service within the performance obligation).
STEP 5 – RECOGNISE REVENUE AS EACH PERFORMANCE OBLIGATION IS SATISFIED

The transaction price allocated to each performance obligation (determined in Step 4) is recognised as/when the
performance obligation is satisfied, either
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(i) Over time, or
(ii) At a point in time.
Satisfaction occurs when control of promised good or service is transferred to the customer:
• Ability to direct the use of the asset
• Ability to obtain substantially all the remaining benefits from the asset.
Factors to consider when assessing transfer of control:

• Entity has present right to payment for the asset
• Entity has physically transferred the asset
• Legal title of the asset
• Risks and rewards of ownership
• Acceptance of the asset by the customer
Recognizing revenue over time

Revenue that is recognised over time is recognised in a way that depicts the entity’s performance in transferring
control of goods or services to customers. Methods include:
• Output methods: (e.g. Surveys of performance completed to date, appraisals of results achieved, milestones
reached, units produced/delivered etc.)
• Input methods: (e.g. Resources consumed, labour hours, costs incurred, time lapsed, machine hours etc.),
excluding costs that do not represent the seller’s performance.
Revenue is recognised over time if any of following three criteria are met:
(a) Customer simultaneously receives and consumes all of the benefits e.g. many recurring service contracts (such
as cleaning services). If another entity would not need to substantially re-perform the work already performed by
the entity to satisfy the performance obligation, the customer is considered to be simultaneously receiving and
consuming benefits.
(b) The entity’s work creates or enhances an asset controlled by the customer. The asset being created or
enhanced (e.g. a work in progress asset) could be tangible or intangible.
(c) The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an
enforceable right to payment for performance completed to date.
Alternate use
Assessment requires judgment and consideration of all facts and circumstances. An asset does not have an
alternate use if the entity cannot practically or contractually redirect the asset to another customer, such as:
• Significant economic loss, i.e. through rework, or reduced sale price (practical)
• Enforceable rights held by the customer to prohibit redirection of the asset (contractual).
Whether or not the asset is largely interchangeable with other assets produced by the entity should also be
considered in determining whether practical or contractual limitations occur.
Enforceable right to payment

• Consider both the specific contractual terms and any applicable laws or regulations.
• Ultimately, other than due to its own failure to perform as promised, an entity must be entitled to
compensation that approximates the selling price of the goods or services transferred to date.
• The profit margin does not need to equal the profit margin expected if the contract was fulfilled as promised.
For example, it could be a proportion of the expected profit margin that reflects performance to date.
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Recognizing revenue at a point in time
Revenue is recognised at a point in time if the criteria for recognizing revenue over time are not met. Revenue is
recognised at the point in time at which the entity transfers control of the asset to the customer.
CONTRACT COSTS
Only incremental costs of obtaining a contract that are incremental and expected to be recovered can be
recognised as an asset.
If costs to fulfil a contract are within the scope of other IFRSs (e.g. IAS 2, IAS 16, IAS 38 etc.) apply those IFRSs. If
not, a contract asset is recognised under IFRS 15 if the costs:
• Are specifically identifiable and directly relate to the contract (e.g. direct labour, materials, overhead
allocations, explicitly on-charged costs, other unavoidable costs (e.g. sub-contractors)
• Create (or enhance) resources of the entity that will be used to satisfy performance obligation(s) in the future,
and
• Are expected to be recovered.
Costs that are recognised as an expense as incurred

• General and administrative expenses
• Wastage, scrap and other (unanticipated) costs not incorporated into pricing the contract
• Costs related to (or can’t be distinguished from) past performance obligations.
Amortization and impairment of contract assets

• Amortization is based on a systematic basis consistent with the pattern of transfer of the goods or services to
which the asset relates
• Impairment exists where the contract carrying amount is greater than the remaining consideration receivable,
less directly related costs to be incurred.
LICENSING (OF AN ENTITY’S INTELLECTUAL PROPERTY (IP))

If the license is not distinct from other goods or services
• It is accounted for together with other promised goods or services as a single performance obligation
• A license is not distinct if either:
• It is an integral component to the functionality of a tangible good, or
• The customer can only benefit from the license in conjunction with a related service.
If the license is distinct from other goods or services it is accounted for as a single performance obligation.
Revenue from a distinct license is recognised over time (refer Step 5) if, and only if:
(a) The entity (is reasonably expected to) undertakes activities that will significantly affect the IP to which the
customer has rights
(b) The customer’s rights to the IP expose it to the positive/negative effects of the activities that the entity
undertakes in (a).
(c) No goods or services are transferred to customer as the entity undertakes the activities in (a).
Revenue from a distinct license is recognised at a point in time (refer to Step 5) if the criteria for recognition over
time (above) are not met. The right is over the IP in its form and functionality at the point at which the license is
granted to the customer. Revenue is recognised at the point in time at which control of the license is transferred
to the customer.
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WARRANTIES (FALL INTO EITHER ONE OF THE TWO CATEGORIES)
(i) Assurance type (apply IAS 37):
• An assurance to the customer that the good or service will function as specified
• The customer cannot purchase this warranty separately from the entity.
(ii) Service type (accounted for separately in accordance with IFRS 15):
• A service is provided in addition to an assurance to the customer that the good or service will function as
specified
• This applies regardless of whether the customer is able to purchase this warranty separately from the entity.
In determining the classification (or part thereof) of a warranty, an entity considers:

• Legal requirements: (warranties required by law are usually assurance type)
• Length: (longer the length of coverage, more likely additional services are being provided)
• Nature of tasks: (do they provide a service or are they related to assurance (e.g. return shipping for defective
goods)).
NON-REFUNDABLE UPFRONT FEES

Includes additional fees charged at (or near) the inception of the contract (e.g. joining fees, activation fees, set-up
fees etc.).
Treatment dependents on whether the fee relates to the transfer of goods or services to the customer (i.e. a
performance obligation under the contract):
• If Yes: Recognise revenue in accordance with IFRS 15 (as or when goods or services transferred)
• If No: Treated as an advance payment for the performance obligations to be fulfilled. Revenue recognition
period may in some cases be longer than the contractual period if the customer has a right to, and is
reasonably expected to, extend/renew the contract.
PRESENTATION
Statement of financial position
• Contract assets and contract liabilities from customers are presented separately
• Unconditional rights to consideration are presented separately as a receivable.
Statement of profit or loss and other comprehensive income

Line items (revenue and impairment) are presented separately in accordance with IAS 1.
DISCLOSURE
Overall objective is to disclose sufficient information to enable users to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers.
Contracts with customers (information regarding):

• Disaggregation of revenue
• Contract assets and contract liabilities
• Performance obligations (incl. remaining).
Use of practical expedients (related to):

• Significant financing component (12 month)
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• Contract costs (12 month amortization).
Significant judgments:
• Performance obligation satisfaction
• Transaction price (incl. allocation)
• Determining contract costs capitalized.
Contract costs capitalized:

• Method of amortization
• Closing balances by asset type
• Amortization and impairment
TRANSITION
Retrospective application (either)
• For each prior period presented in accordance with IAS 8; or
• Cumulative effect taken to the opening balance of retained earnings in the period of initial application.
For full retrospective application, practical expedients (for)

• Restatement of completed contracts
• Determining variable consideration of completed contracts
• Disclosures regarding transaction price allocation to performance obligations still to be satisfied.
Example 1: Sale with a right to return

During June 2018, Aay Limited sold 10,000 units of goods costing Rs 70 each for a sale price Rs 100 each. The
customers have a right to return within 90 days of sale (the right to return is not dependent on defect / issue
with the product).
Aay Limited estimates that historically 3% of these goods are returned, and when returned, have a market value
that is 10% lower versus their sale price. In addition, Aay Limited will have to incur costs of Rs 5 each to off-load
the goods returned from the vehicles and place them back into the warehouse.
Required: Provide journals for sale and return of goods.
Example 2: Sale & Repurchase (Forward)

Aay Limited sold goods worth Rs 100,000 to Bee Limited and entered into a forward agreement to repurchase
those goods after 2 years. Discount rate is 10%.
Required: Provide journal entries assuming that:

(a) Repurchase price is Rs 130,000
(b) Repurchase price is Rs 110,000
Example 3: Sale & Repurchase (Put option)

Aay Limited sold goods worth Rs 100,000 to Bee Limited and also issued a put option exercisable by Bee Limited
to sell these goods back to Aay Limited after 2 years. Discount rate is 10%.
Required: Provide journal entries assuming that:
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(c) Repurchase price is Rs 130,000 and MV of goods at that date is estimated to be Rs 150,000
(d) Repurchase price is Rs 130,000 and MV of goods at that date is estimated to be Rs 115,000
(e) Repurchase price is Rs 110,000 and MV of goods at that date is estimated to be Rs 120,000
(f) Repurchase price is Rs 110,000 and MV of goods at that date is estimated to be Rs 95,000
Example 4: Five steps complete example

ABC Limited is a telecom company and sold a package to Mr. A on the following terms on 1 st January 2020.
a) He will be provided with a handset upfront without any cost and the package will have a term of 3 years.
Under normal sale conditions such handset is sold for Rs 8000.
b) Mr. A will pay activation charges amounting to Rs 3000 paid up-front and also pay yearly fixed fee of Rs 5000
for 3 years.
c) Costs and payment for other services will be as follows on a monthly basis:
Service Standard Charging under the package
charges
Voice Rs 3 per If he uses upto 5000 minutes per year he will be charged at Rs
minute 10,000 for voice per year. If he uses more than 5000 minutes per
year he will be charged Rs 15,000 per year.
There is 40% chance that Mr. A will use 4000 minutes per year
and 60% chance that he will use 11,000 minutes per year.
SMS Rs 0.1 per He will be charged Rs 2000 per year for unlimited number of SMS.
SMS However, subject to timely payment of periodic instalments ABC
limited has historically waived charges for SMS services.
It is expected that Mr. A will use 10,000 SMS per year and will
apply for and successfully obtain the waiver.
Data Rs 10 per If he uses upto 1000 GB per year he will be charged at Rs 5000 per
GB year for data. If he uses more than 1000 GB per year he will be
charged Rs 8000 per year.
There is 70% chance that Mr. A will use 800 GBs per year and 30%
chance that he will consume 2500 GBs per year.
d) Appropriate discount rate is 10% per annum.

e) ABC Limited has incurred the following costs on acquisition of this customer:
i. Handset cost of Rs 5000.
ii. Regulatory taxes paid on activation of Rs 600.
iii. Variable Sales commissions paid of Rs 3000.
iv. Regular administration / marketing department having fixed cost allocated to this contract amounting
to Rs 1000.
Required: Calculate the amount of revenue and costs to be recognized in 2020, 2021 and 2022 respectively.
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Warranties:
On 1-January-2017, ABC Limited sold an equipment costing Rs 500 million for Rs 850 million received in cash at
the time of sale. The sale contract provides warranty coverage for a 3-year period allowing free of cost repair &
maintenance during the period of warranty. Similar equipment is generally sold in the market for Rs 800 million
together with a 1-year warranty by ABC and its competitors. ABC Limited expects to incur yearly costs of Rs 30
million for each year in relation to free of cost repair & maintenance under warranty. If not provided with the
equipment, annual repair & maintenance contracts are usually sold at Rs 40 million yearly price. ABC’s cost of
capital is 10%.
Required: Provide journal entries for the years 2017 to 2019 assuming that yearly actual costs incurred for the
services amounted to Rs 28 million, Rs 26 million and Rs 29 million respectively.
Customer loyalty programs:

ABC introduced a customer loyalty scheme on 1 August 2013 which was based on the following conditions:
• Customers were granted one loyalty point for every purchase of Rs 10
• These points could be exchanged for goods within two months from the date the points were granted
• For every 500 points, goods having a retail price of Rs. 200 were to be given.
The scheme continued till year end i.e. 30-Sep-2013 and was discontinued from 1 October 2013. During the period
covered by the scheme, the customers were granted 1.5 million points out of which 0.5 million points were
redeemed till year end. It was initially expected that 30% of the points granted would lapse unutilized, however,
actual results showed that finally 470,000 points lapsed unutilized. ABC sells goods at a margin of 40%. No entries
in respect of grant of points have been recorded so far.
Required: Prepare accounting entries to record the above transactions in accordance with IFRS 15.
Standard IE 5—Modification of a contract for goods

An entity promises to sell 120 products to a customer for Rs 12,000 (Rs 100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in
time. After the entity has transferred control of 60 products to the customer, the contract is modified to require
the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30
products were not included in the initial contract.
Case A—Additional products for a price that reflects the stand-alone selling price
When the contract is modified, the price of the contract modification for the additional 30 products is an additional
CU2,850 or CU95 per product. The pricing for the additional products reflects the stand-alone selling price of the
products at the time of the contract modification and the additional products are distinct from the original
products.
Case B—Additional products for a price that does not reflect the stand-alone selling price
During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price
of Rs 80 per product. However, the customer discovers that the initial 60 products transferred to the customer
contained minor defects that were unique to those delivered products. The entity promises a partial credit of Rs
15 per product to compensate the customer for the poor quality of those products. The entity and the customer
agree to incorporate the credit of Rs 900 (Rs 15 credit × 60 products) into the price that the entity charges for the
additional 30 products. Consequently, the contract modification specifies that the price of the additional 30
products is Rs 1,500 or Rs 50 per product. That price comprises the agreed-upon price for the additional 30
products of Rs 2,400, or Rs 80 per product, less the credit of Rs 900.
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Required: Compute the revenue to be recorded and provide journal in respect of the above.
Standard IE 6—Change in the transaction price after a contract modification

On 1 July 2017, an entity promises to transfer two distinct products to a customer. Product X transfers to the
customer at contract inception and Product Y transfers on 31 March 2018. The consideration promised by the
customer includes fixed consideration of Rs 1,000 and variable consideration that is estimated to be Rs 200. Both
products have the same stand-alone selling prices.
On 30 November 2017, the scope of the contract is modified to include Product Z (in addition to the undelivered
Product Y) on 30 June 2018 and the price of the contract is increased by Rs 300 (fixed consideration), which does
not represent the stand-alone selling price of Product Z. The stand-alone selling price of Product Z is the same as
the stand-alone selling prices of Products X and Y.
After the modification but before the delivery of Products Y and Z, on 31-Dec-2017, the entity also revises its
estimate of the amount of variable consideration to which it expects to be entitled to Rs 240 (rather than the
previous estimate of Rs 200). Product Y is transferred to the customer on 31 March 2018, and Product Z is
transferred to the customer on 30 June 2018.
Standard IE 7—Modification of a services contract
An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises
to pay Rs 100,000 per year. The stand-alone selling price of the services at contract inception is Rs 100,000 per
year. At the end of the second year, the contract is modified and the fee for the third year is reduced to Rs 80,000.
In addition, the customer agrees to extend the contract for three additional years for consideration of Rs 200,000
payable in three equal annual instalments of Rs 66,667 at the beginning of years 4, 5 and 6. The stand-alone selling
price of the services at the beginning of the third year is Rs 80,000 per year.
Standard IE 8—Modification resulting in a cumulative catch-up adjustment to revenue

An entity, a construction company, enters into a contract to construct a commercial building for a customer on
customer-owned land for promised consideration of Rs 1 million and a bonus of Rs 200,000 if the building is
completed within 24 months. The customer controls the building during construction. At the inception of the
contract, the entity expects the transaction price of Rs 1,000,000 and expected costs of Rs 700,000.
By the end of the first year, the costs incurred to date are Rs 420,000 and total expected costs of Rs 700,000.
In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the
floor plan of the building. As a result, the fixed consideration and expected costs increase by Rs 150,000 and Rs
120,000, respectively. In addition, the allowable time for achieving the CU200,000 bonuses is extended by 6
months to 30 months from the original contract inception date. At the date of the modification, the entity expects
that it is highly probable to obtain the bonus in revised circumstances.
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Standard IE 32—Consideration payable to a customer

An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that is a
large global chain of retail stores. The customer commits to buy at least Rs 15 million of products during the year.
The contract also requires the entity to make a non-refundable payment of Rs 1.5 million to the customer to
compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products.
Standard IE 44—Warranties
An entity, a manufacturer, provides its customer with a warranty with the purchase of a product. The warranty
provides assurance that the product complies with agreed-upon specifications and will operate as promised for
one year from the date of purchase. The contract also provides the customer with the right to receive up to 20
hours of training services on how to operate the product at no additional cost. The customer can benefit from the
product on its own without the training services. The entity regularly sells the product separately without the
training services.
Standard IE 55 — License of intellectual property

An entity enters into a contract with a customer to license (for a period of three years) intellectual property related
to the design and production processes for a good. The contract also specifies that the customer will obtain any
updates to that intellectual property for new designs or production processes that may be developed by the entity.
The updates are essential to the customer’s ability to use the license, because the customer operates in an
industry in which technologies change rapidly. The entity does not sell the updates separately and the customer
does not have the option to purchase the license without the updates.
Standard IE 56 — Identifying a distinct license

An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for
10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore,
the entity will not undertake any activities to support the drug, which is consistent with its customary business
practices.
Case A: In this case, no other entity can manufacture this drug because of the highly specialized nature of the
manufacturing process. As a result, the license cannot be purchased separately from the manufacturing services.
Case B: In this case, the manufacturing process used to produce the drug is not unique or specialized and several
other entities can also manufacture the drug for the customer.
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Standard IE 58—Access to intellectual property
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three
of its comic strips to a customer for a four-year term. There are main characters involved in each of the comic
strips. However, newly created characters appear regularly and the images of the characters evolve over time.
The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or
parades, within reasonable guidelines. The contract requires the customer to use the latest images of the
characters. In exchange for granting the license, the entity receives a fixed payment of CU1 million in each year of
the four-year term.
Standard IE 59—Right to use intellectual property

An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted
orchestra. The customer, a consumer products company, has the right to use the recorded symphony in all
commercials, including television, radio and online advertisements for two years in Country A. In exchange for
providing the license, the entity receives fixed consideration of CU10,000 per month. The contract does not
include any other goods or services to be provided by the entity. The contract is non-cancellable.
Standard IE 60—Sales-based royalty for a license of intellectual property

An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas,
has the right to show the movie in its cinemas for six weeks. In exchange for providing the license, the entity will
receive a portion of the operator’s ticket sales for Movie XYZ (i.e. variable consideration in the form of a sales-
based royalty). The entity concludes that its only performance obligation is the promise to grant the license.
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IFRS 16
Important definitions
Inception of lease
Date of commitment by the parties to the principal terms of the lease
Commencement of lease
The date on which a lessor makes an underlying asset available for use by a lessee
Date of modification
Date when both parties agree to a lease modification
Fixed payments
Payments made by a lessee to a lessor for the right to use asset, excluding variable lease payments
Lease incentives
Payments made by lessor to lessee or reimbursement of lessee’s costs by the lessor
Lease modification
A change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and
conditions of the lease
Lease payments
Payments made by lessee to lessor for use of asset comprising:
• Fixed payments (less lease incentives).
• Variable lease payments that depend on an index or a rate (other variable payments are excluded)
• Exercise price of a purchase option if the lessee is reasonably certain to exercise it
• Payments of penalties for terminating the lease
• Residual value guarantees
Optional lease payments

Payments to be made by a lessee for right to use asset during periods covered by an option to extend or terminate
a lease that are not included in the lease term
Short-term lease
Lease with term of 12 months or less. A lease with a purchase option is not a short-term lease.
Sublease
A transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party, and the
lease (‘head lease’) between the head lessor and lessee remains in effect.
Residual value guarantee (RVG)

For lessee, RV guaranteed by the lessee or its RP
For lessor, the RV guaranteed by the lessee or by a third party unrelated to the lessor.
UGRV
Portion of the RV not assured or guaranteed solely by a party related to the lessor
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IRIL is the discount rate that equates the following:
PV of MLP + PV of UGRV = FV of leased asset + IDC of lessor
(IRIL is basically the discount rate used to calculate the PV of MLP and UGRV)
Whether an arrangement contains a lease?
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Lessee accounting
Short term leases or Low value assets

Asset / Liability are not recognized for leases with a term of 12 months or less or where the underlying asset is of
low value.
Examples:
• Tablet and personal computers for individual employees use
• Small items of office furniture
• Water dispensers
• Telephones
Low value assets:

• Underlying asset is neither highly dependent on other asset nor highly interrelated with other assets.
• Asset is typically not of low value. For example, leases of cars.
• If a lessee expects to sublease an asset, the head lease is not a lease of a low-value asset.
All other leases

For all other leases the lessee recognizes asset and liability as follows.
Dr. Asset
Cr. Liability (PV of lease payments)
Cr. IDC payable (For initial direct costs)
Cr. Provision for dismantle (If any)
Dr. Depreciation
Cr. Asset / Acc. Dep. (Useful is lower of lease term and economic life of asset)
Dr. Interest expense

Cr. Liability (@ IRIL)
Dr. Liability
Cr. Bank
Variable lease payments not linked to index

Variable lease payments not linked to index or rate (previously called contingent rent) are expensed in the period
in which the event or condition that triggers those payments occurs.
Re-assessment of lease estimates

Category of re-assessment Measurement Accounting journal
Change in lease term or Discount revised lease payments at Adjusted to carrying amount of leased
purchase option revised IRIL for remaining lease term asset and excess if any recognized in P&L
assessment
Change in RGV or variable Discount revised lease payments at
lease payment linked to original IRIL
index
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Modification of lease
Category of modification Measurement Accounting journal
Addition in scope of lease A separate lease with a new IRIL New asset recorded with a corresponding
by adding assets for new liability
additional payment
Other modifications e.g. Re-allocate consideration to lease Adjusted to carrying amount of leased
change in fixed payments or and non-lease components. asset and excess if any recognized in P&L.
change in non-lease
components Re-measure lease liability by Record in P&L any gain or loss relating to
discounting the revised lease the partial or full termination of the lease.
payments using revised IRIL for
remainder lease term.
Lease and non-lease components

• Allocate the total payments between lease and non-lease components (e.g. maintenance services) on the
basis of the relative stand-alone prices.
• A lessee may elect not to separate non-lease components from lease components, and account for everything
as a single lease.
• Where more than one asset is leased and each can be used independently you should allocate lease
consideration between different assets and account for each lease separately.
Disclosures
• Items of P&L relating to lease assets and lease liabilities
• Expense relating to short-term leases and low-value assets
• Expense relating to variable lease payments not related to index
• Income from subleasing right-of-use assets
• Gains or losses arising from sale and leaseback transactions
• Commitments for short-term leases
• Information about leasing activities including extension options, termination options and residual value
guarantees
• Maturity analysis of lease liabilities applying under IFRS 7. Only undiscounted cashflows are presented here.
No time bands are suggested under IFRS 7 you can choose your own. (See details below)
Per IFRS 7, an entity uses its judgement to determine an appropriate number of time bands for presentation of
maturity analysis. For example:
(a) not later than one month
(b) later than one month and not later than three months
(c) later than three months and not later than one year
(d) later than one year and not later than five years.
The contractual amounts disclosed in the maturity analyses as required by are the contractual undiscounted cash
flows, that is, gross lease liabilities (before deducting finance charges)
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Such undiscounted cash flows differ from the amount included in the statement of financial position because the
amount in that statement is based on discounted cash flows
Costs of design / construction incurred by lessee

If a lessee incurs costs relating to the construction or design of an asset (that are not payments of lease) the lessee
shall account for those costs applying other standards e.g. IAS 16.
Legal title obtained before transfer

A lessee may obtain legal title to an underlying asset before that legal title is transferred to the lessor and the
asset is leased to the lessee. Obtaining legal title does not in itself determine how to account for the transaction.
FINANCE LEASE - LESSOR ACCOUNTING
Finance lease – Normal lessor
Dr. Receivable
Cr. Asset
Cr. IDC payable
Dr. Receivable
Cr. Interest income
Dr. Bank
Cr. Receivable
Finance lease – Manufacturer / Dealer lessor
Dr. Receivable
Cr. Revenue (PV of lease payments except UGRV)
Cr. Cost of sales (PV of UGRV)
Dr. COS
Cr. Inventory
Dr. Expense
Cr. IDC payable
Dr. Receivable
Cr. Interest income
Dr. Bank
Cr. Receivable
Lease of land and buildings

• Lease of land is operating unless a bargain purchase option is present
• Lease of building may be a finance lease per above criteria
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• If land and building are inseparable the whole lease would be classified as finance lease if the lease of building
is finance
• If the lease of building is finance but land is operating, the PV of LP would be separated on the basis of FV of
building versus FV of leasehold interest in land
Review of UGRV
If there is a reduction in the estimated UGRV, the lessor shall revise the income allocation over the lease term and
recognise immediately any reduction in respect of amounts accrued.
This means that the revised lease payments with changed UGRV are discounted at original discount rate and
increase or decrease is recognized in P&L.
Modifications to finance lease

Category of modification Accounting
Addition in scope of lease by Recognize new lease with a new IRIL
adding assets for additional
payment
Other modifications such that the Account for as a new from the effective date of the modification
revised lease becomes an The lease receivable under finance lease at the effective date
operating lease and is not a finance lease modification would be transferred to PPE
lease anymore
Other modifications and the Apply the requirements of IFRS 9.

revised lease is still a finance lease
IFRS 9 requires that an entity shall recalculate the carrying amount of the
financial asset using original effective interest rate and shall recognise a
modification gain or loss in profit or loss.
You can use revised effective interest rate instead of original effective
interest only when:
a) Transaction costs occur after initial recognition
b) There is floating rate and the rate changes
c) Where the financial asset is a hedged item and the hedging gain or
loss adjusts its carrying amount.
Lease and non-lease components

Allocate the total payments between lease and non-lease components (e.g. maintenance services) on the basis of
the relative stand-alone prices applying IFRS 15. No option to not do it.
OPERATING LEASE – LESSOR ACCOUNTING
Dr. Receivable
Cr. Rental income
Add initial direct costs incurred to the asset and depreciate over lease term.
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Modification to an operating lease is accounted for as a new lease from the effective date of the modification.
Any prepaid or accrued lease payments relating to the original lease is considered part of the lease payments for
the new lease.
LESSOR DISCLOSURES
Finance leases (in tabular format):
• Selling profit or loss
• Finance income on the net investment in the lease
• Income relating to variable lease payments not included in lease receivable
• Explanation of significant changes in the carrying amount of the lease receivable
• Maturity analysis of the undiscounted lease payments receivable. Show amounts on an annual basis for first
five years and a single total for the remaining years. Reconcile the undiscounted lease payments to the
discounted lease receivable balances and identify the reconciling items: (a) UFI (b) UGRV.
Operating leases:
• Lease income. Show separately, the income relating to variable lease payments that do not depend on an
index or a rate
• In IAS 16 disclosures, assets given an operating lease are separated from assets held for own use.
• Maturity analysis of the undiscounted lease payments receivable. Show amounts on an annual basis for first
five years and a single total for the remaining years.
Additional qualitative and quantitative information about its leasing activities:

(a) the nature of the lessor’s leasing activities
(b) how the lessor manages the risk associated with any rights it retains in underlying assets e.g. through residual
value guarantees or variable lease payments for use in excess of specified limits.
SALE AND LEASE BACK

Transfer of the asset is a sale under IFRS 15
• Seller-lessee measures the leased back asset at the proportion of the previous carrying amount of the asset
that relates to the right of use retained by the seller-lessee.
• It recognises only the gain or loss that relates to the rights transferred to the buyer-lessor.
• Buyer-lessor shall account for the purchase of the asset applying IAS 16 / 38, and for the lease applying the
lessor accounting requirements in this Standard.
Sale and lease-back not at market terms:

Situation Treatment by Seller-lessee (Opposite treatment by buyer-lessor)
Consideration is less than FV of Record asset for prepayment of lease payments (Diff between
asset consideration and FV of asset)
Consideration is higher than FV Record liability for additional financing (Diff between consideration and
of asset FV of asset)
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Transfer of the asset is not a sale
• Asset remains in the books of seller-lessee and it recognises a financial liability for the amount received under
IFRS 9.
• Buyer-lessor recognises a financial asset equal to the transfer proceeds under IFRS 9.
If the lessee controls (or obtains control of) the underlying asset before that asset is transferred to the lessor, the
transaction is a sale and leaseback transaction
SUB-LEASE CLASSIFICATION
An intermediate lessor shall classify the sublease as follows:
(a) if the head lease is a short-term lease, the sublease shall be classified as an operating lease.
(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head lease,
rather than by reference to the underlying asset.
Example 1 – Lessee Accounting

ABC Limited obtained a car on lease with the following key terms.
• Lease term: 5 years
• Annual rental payable in arrears: Rs 130,000
• Fair value of asset: Rs 500,000
• Initial direct costs incurred by lessee: Rs 10,000
• Initial direct costs incurred by lessor: Nil
• Residual value of asset at end of lease term fully guaranteed by lessee: Rs 12,000
• Residual value accrues to lessor.
• Interest rate implicit in lease: 10% p.a.
Required: Prepare Journal entries for recording in the books of ABC Limited.
Example 2 – Finance lease (Normal Lessor)

ABC Limited does not sell or lease cars in its routine business. However, it leased a car to D Limited on the following
key terms.
• Useful life of car: 5 years
• Initial direct costs incurred by lessor: Rs 20,000
• Residual value of asset at end of lease term: Rs 22,000
• Residual value guaranteed by lessee: Rs 12,000
• Interest rate implicit in lease: 9% p.a.
Example 3 – Finance lease (Manufacturer or Dealer Lessor)

ABC leased leases cars in its ordinary course of business. It leased a car to E Limited on the following key terms.
• Useful life of car: 5 years
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• Cost of car to ABC Limited: Rs 400,000
• Initial direct costs incurred by lessor: Rs 20,000
• Residual value of asset at end of lease term: Rs 22,000
• Residual value guaranteed by lessee: Rs 12,000
• Interest rate implicit in lease: 10.5% p.a.
Example 4 – Reassessment of lease term (Standard IE 5) [Non-routine change in estimate]

ABC Limited obtained a building floor on 5-year with an option to extend for 2 years. Lease payments are Rs 50,000
per year during the initial term and Rs 55,000 per year during the optional period, all payable at the beginning of
each year.
To obtain the lease, ABC incurs initial direct costs of Rs 20,000 of which Rs 15,000 relates to a payment to a former
tenant occupying that floor of the building and Rs 5,000 relates to a commission paid to the real estate agent that
arranged the lease. As an incentive to ABC for entering into the lease, the Lessor agrees to reimburse to ABC the
real estate commission of Rs 5,000 and ABC’s leasehold improvements of Rs 7,000.
At the commencement date, ABC is not certain to exercise the option to extend the lease and its incremental
borrowing rate is 5% p.a.
In the 2nd year of the lease, ABC acquires Entity A. Following the acquisition of Entity A, ABC now needs two floors
in a building for the increased workforce. Consequently, at the end of Year 2, ABC is now reasonably certain to
exercise the option to extend its original lease. ABC’s incremental borrowing rate at the end of Year 2 is 6% p.a.
Required: Provide Journals for Years 1 to 3 in accordance with IFRS 16.
Example 5 – Variable payments linked to index [Routine change in estimate] (Standard IE 6)

ABC Limited enters into a 10-year lease of property with annual lease payments of Rs 50,000 payable at the
beginning of each year. The contract specifies that lease payments will increase every two years on the basis of
the increase in the Consumer Price Index for the preceding 24 months. The Consumer Price Index at the
commencement date is 125. ABC’s incremental borrowing rate is 5% p.a. At the beginning of the third year of the
lease the Consumer Price Index is 135.
Example 6 – Modification of lease term (Standard IE 7)

ABC Limited enters into a 10-year lease for 5000 square meters of office space. The annual lease payments are Rs
100,000 payable at the end of each year. ABC’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 2, ABC and the Lessor agree to amend the original lease by extending the contractual
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lease term by four years. The annual lease payments are unchanged (Rs 100,000 payable annually in arrears).
ABC’s incremental borrowing rate at the beginning of Year 2 is 7% p.a.
Example 7 – Reduction in scope of lease (Standard IE 7)

ABC enters into a 10-year lease for 5000 square meters of office space. The annual lease payments are Rs 50,000
payable at the end of each year. ABC’s incremental borrowing rate at the commencement date is 6% p.a. At the
beginning of Year 2, ABC and the Lessor agree to amend the original lease to reduce the space to only 2500 square
meters of the original space. The annual fixed lease payments (from Year 2 to Year 10) are Rs 30,000. Lessee’s
incremental borrowing rate at the beginning of Year 2 is 5%.
Example 8 – Sale and lease back (Standard IE 11)

A Limited sells a building to B Limited for Rs 2,000,000 paid in cash. Immediately before the transaction, the
building is carried at Rs 1,000,000. At the same time, A enters into a contract with B for the right to use the
building, with annual payments of Rs 120,000 payable at the end of each year. The useful life of the building is 50
years and there are no additional performance obligations pending for A limited under the transaction.
The fair value of the building at the date of sale is Rs 1,800,000 and the interest rate implicit in the lease is 4.5%.
Required: Prepare Journal entries for Year 1 in the books of A limited and B limited, assuming that:
a) The term of lease is 18 years
b) The term of lease is 31 years
Example 9 – W 2016 Q3
On 1 July 2014 Track Limited (TL) sold its property to Strong Bank Limited (SBL) for Rs. 600 million. The net carrying
amount and market value of the property on 1 July 2014 were Rs. 240 million and Rs. 800 million respectively. The
remaining useful economic life of the property was 15 years. Under the terms of agreement, TL continues to
occupy the property and is also responsible for its maintenance. As consideration of occupation rights, TL pays
rent of Rs. 90 million per annum, payable in arrears.
TL has the option to repurchase the property on 30 June 2016 at Rs. 550 million. TL charges depreciation on
straight-line basis. TL’s cost of equity is 10% whereas incremental borrowing rate is 11.052% per annum.
Applicable income tax rate is 30%.
Required:
(a) Prepare accounting entries to record the above transaction for the year ended 30 June 2015 and give brief
explanation of the accounting treatment worked out by you with reference to the relevant International Financial
Reporting Standards. (11)
(b) Prepare accounting entries to record the transactions for the year ended 30 June 2016 if TL does not exercise
the option to repurchase the property on 30 June 2016. (06)
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Example 10 – Lessor Accounting – Change from Finance lease to Operating lease
Aay Limited leased an asset for 8 years to Bee Limited. The useful life of the asset is also 8 years and annual lease
payments are Rs 100,000 payable at the end of each year. Interest rate implicit in the lease is 5% p.a. At the
beginning of Year 2, Aay Limited and the lessee agreed to amend the original lease by reducing the total
contractual lease term to only 3 years. The annual lease payments are unchanged (Rs 100,000 payable annually
in arrears).
Example 11 – Lessor Accounting – Change from Operating lease to Finance lease

Aay Limited leased an asset for 3 years to Bee Limited. The useful life of the asset is 10 years and annual lease
beginning of Year 2, Aay Limited and the lessee agreed to amend the original lease by increasing the total
contractual lease term to 9 years. The annual lease payments are unchanged (Rs 100,000 payable annually in
arrears).
Example 12: Lessor Accounting - Modification to Operating lease without changing lease type
payments are Rs 60,000, Rs 70,000 and Rs 80,000 respectively payable at the end of each year. At the beginning
of Year 2, Aay Limited and the lessee agreed to amend the original lease by increasing the total contractual lease
term to 4 years. The remaining annual lease payments are fixed at Rs 75,000 per annum.
Example 13: Lessor Accounting - Modification to finance lease without changing lease type
Aay Limited leased an asset for 8 years to Bee Limited. The useful life of the asset is also 8 years and annual lease
beginning of Year 2, Aay Limited and the lessee agreed to change the lease payments to Rs 105,000 per annum
for the remaining years (payable annually in arrears).
Example 14 – Variable lease payments not linked to index

payments are Rs 100,000 payable at the end of each year. Interest rate implicit in the lease is 5% p.a. It was
decided that if any year, the production from the asset exceeds 12,000 units, an additional Rs 20,000 would be
paid by lessee to lessor in that year. During year 1 and 2, the production from the asset was 9000 units and 13000
units respectively.
Required: Provide Journals for Years 1 to 2 for both the lessor and the lessee in accordance with IFRS 16.
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Example 15: Whether an arrangement contains a lease?
A limited gave B limited the right to use a Plant for 5 years.
a) B limited obtains the economic benefits of the plant and directs how the plant will be used during the term
of 5 years.
b) B limited does not enjoy substantial economic benefits from the plant during the term of 5 years since A
limited also uses the same plant to make its own production for selling to other customers.
c) B limited enjoys the substantial economic benefits from the plant. However, it can only make production
from the plant as per the instruction given by A. That is the nature and extent of production is decided by A
limited and B limited has no contractual jurisdiction in this regard.
d) B limited enjoys the substantial economic benefits from the plant. The plant was designed in a way that it
can produce only Chemical X in fixed batches of 5000 gallons. Therefore, neither A nor B can direct what to
produce using the plant.
Example 16: Sub-lease

Aay Limited obtained a building on leased for 5 years. The useful life of the asset is 10 years and annual lease
beginning of Year 2, Aay Limited sub-leased the building for 4 years to Bee Limited for annual lease payments
amounting to Rs 105,000 payable annually in arrears.
Example 17: Short term lease

Aay Limited obtained a car on lease for 10 months. The useful life of the car is 5 years and monthly lease payments
are Rs 50,000. Interest rate is 5% p.a.
Required: Provide Journals in accordance with IFRS 16.
Example 18: Low value asset

Aay Limited obtained 3 water dispenser on lease for 3 years. The useful life of the dispenser is 3 years and annual
lease payments are Rs 10,000 per dispenser payable in arrears. Interest rate is 5% p.a.
Required: Provide Journals in accordance with IFRS 16.
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IFRS 13
Objective
• Defines FV and sets out a framework for measuring FV
• Prescribes disclosures about FV measurements
• Applies when another IFRS requires or permits FV measurements or disclosures
• Does not apply to share-based payments (IFRS 2), leases (IFRS 16), inventories (IAS 2) and value in use (IAS 36)
Important definitions
Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Active market: A market in which transactions for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis
Exit price: The price that would be received to sell an asset or paid to transfer a liability
Highest and best use: The use of a non-financial asset by market participants that would maximize the value of
the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used
Most advantageous market: The market that maximizes the amount that would be received to sell the asset or
minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and
transport costs
Principal market: The market with the greatest volume and level of activity for the asset or liability
FV hierarchy
The FV hierarchy categorizes the inputs used in valuation techniques into three levels. If the inputs used to
measure FV belong to different levels of the FV hierarchy, the FV measurement is categorized in its entirety in the
level of the lowest level significant input.
Level 1 inputs
• Level 1 inputs are unadjusted quoted prices in active markets for identical asset or liability. It is the preferred
FV choice with limited exceptions.
• If an entity holds an asset or liability that is traded in an active market, its FV is measured at Level 1 even if
the market's normal trading volume is not sufficient to absorb the quantity held and placing orders to sell the
asset or liability in a single transaction might affect the quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include:
a) quoted prices for identical or similar asset or liability in markets that are not active
b) inputs other than quoted prices that are observable, for example interest rates and yield curves observable
at commonly quoted intervals
c) inputs that are derived from or corroborated by observable market data by correlation or other means (called
market-corroborated inputs)
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Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure FV if
relevant observable inputs are not available. This is therefore applicable for situations in which there is little
market activity for the asset or liability at the measurement date.
FV measurement approach
• Objective is to estimate the price at which an orderly transaction to sell the asset or transfer the liability would
take place between market participants under current market conditions.
• A FV measurement requires an entity to determine all of the following:
a) the particular asset or liability that is the subject of the measurement (the unit of account)
b) for a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with
its highest and best use)
c) the principal (or most advantageous) market for the asset or liability
d) the appropriate valuation technique considering availability of data
e) the level of the FV hierarchy within which the inputs are categorized
• Take into account those characteristics of the asset or liability that a market participant would take into
account when pricing the asset or liability at measurement date (e.g. the condition and location of the asset
and any restrictions on the sale and use of the asset)
• FV measurement assumes a transaction taking place in the principal market, or in the absence of a principal
market, the most advantageous market for the asset or liability
• FV measurement of a non-financial asset takes into account its highest and best use
• FV measurement of a financial or non-financial liability or own equity instruments assumes transfer to a
market participant without settlement, extinguishment, or cancellation at the measurement date
• The FV of a liability reflects non-performance risk (the risk the entity will not fulfil the obligation) and the
entity's own credit risk
Valuation techniques
• Use appropriate valuation techniques for which sufficient data are available, maximizing the use of observable
inputs and minimizing the use of unobservable inputs
• Objective of using a valuation technique is to estimate the price at which an orderly transaction would take
place between market participants under current market conditions.
• Three widely used valuation techniques are:
a) Market approach: Uses prices and other information generated by market transactions involving identical
or comparable assets / liabilities
b) Cost approach: Reflects the amount that would be required currently to replace the service capacity of an
asset (current replacement cost)
c) Income approach: Converts future amounts (cash flows or income and expenses) to a single current
(discounted) amount, reflecting current market expectations about those future amounts.
• In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation
techniques will be appropriate.
Disclosure
Disclosure objective
Disclose information that helps users of its financial statements assess both of the following:
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a) for assets and liabilities that are measured at FV after initial recognition, the valuation techniques and inputs
used to develop those FVs
b) For FV measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit
or loss or other comprehensive income for the period.
Disclosure exemptions
The disclosure requirements are not required for:
a) plan assets measured at FV under IAS 19
b) retirement benefit plan investments measured at FV under IAS 26
c) assets for which recoverable amount is FV less costs to sell under IAS 36
Identifying classes of assets / liabilities for disclosure

• For disclosure, determine appropriate classes on the basis of the nature, characteristics and risks of the asset
or liability, and the level of its FV hierarchy.
• A class of assets and liabilities will often require greater disaggregation than the line items presented in the
statement of financial position.
• The number of classes may need to be greater for FV measurements categorised within Level 3.
Some disclosures are differentiated on whether the measurements are:

Recurring FV measurements: FV measurements recognised at each year end
Non-recurring FV measurements: FV measurements measured in the statement of financial position in particular
circumstances.
Specific disclosures required

Following minimum disclosures are required for each class of assets and liabilities measured at FV:
a) the FV at year end
b) for non-recurring FV measurements, the reasons for measuring FV at this year end
c) the level of the FV hierarchy in which the FV is categorized
d) for recurring FV, the transfers between Level 1 and Level 2 and the reasons thereof
e) for Level 2 and Level 3 FVs, description of the valuation technique and the inputs used in the measurement
and any change from last year end alongwith reasons for change
f) for Level 3 FVs, quantitative information about the significant unobservable inputs used in the FV
measurement
g) for recurring Level 3 FVs, a reconciliation from the opening balances to the closing balances, disclosing
separately following changes:
o purchases
o sales
o issues
o settlements
o total gains or losses recognised in P&L and their line items stating separately the unrealized amounts
o total gains or losses recognised in OCI and their line items
o the amounts of any transfers into or out of Level 3 and reasons thereof
h) for recurring Level 3 FVs:
o a description of the sensitivity of measurement to changes in unobservable inputs
o a description of interrelationships between unobservable inputs and how they might magnify or mitigate
the effect on FV measurement
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o for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect
reasonably possible alternative assumptions would change FV significantly, state that fact and disclose
the effect of those changes.
i) if the highest and best use of a non-financial asset differs from its current use, disclose the fact and why the
non-financial asset is being used in a different manner
Quantitative disclosures are required to be presented in a tabular format unless another format is more
appropriate
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IAS 33
Basic EPS
Basic Earnings / Basic number of shares
Basic Earnings
Profit after tax attributable to owners of the parent – Cumulative preference dividend (full) – Declared preference
dividend – Participating Preference dividend
Basic number of shares

Weighted average number of shares outstanding for Basic EPS is calculated by making a working containing actual
column for current year and weighted average column for current year and prior year.
Opening shares outstanding

➢ These shares are taken at full in weighted average shares since they are outstanding for whole year.
Shares issued at market value

➢ These shares are taken at weighted average for the period they are outstanding.
Right issue
➢ This issue is divided into for value and not for value portions based on issue price of right shares and market
price of shares immediately before exercise of rights.
➢ The ‘for value shares’ are taken at weighted average for the period they are outstanding.
➢ The ‘not for value shares’ = not for value shares x total of weighted average shares / total of actual shares
➢ The not for value adjustment is made in both current and prior year
Bonus issue
➢ Bonus shares = bonus shares x total of weighted average shares / total of actual shares
➢ This adjustment is made in both current and prior year
Shares bought back at market value

➢ These shares are reduced at weighted average for the period they are bought back.
Share splits / consolidation

➢ Splits / Consolidation = Effect on actual shares x total of weighted average shares / total of actual shares
➢ This adjustment is made in both current and prior year
Diluted EPS
Basic Earnings + After tax effect of dilutive instruments
Basic number of shares + Effect of dilutive instruments
For calculation of diluted EPS

➢ First, determine the ranking of dilutiveness of instrument
➢ Start adding effect of most dilutive instrument and then the next into basic EPS
➢ Stop further calculations when the EPS starts to become anti-dilutive
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Instrument Effect on earnings Effect on number of shares
Options Nil No of options x (MV – ex price) / MV x m / 12
(Note that the above MV is the average MV of

shares for the period the options were outstanding
during the year)
Convertible debt + After tax interest No of potential shares x m / 12
Convertible preference shares + Preference dividend No of potential shares x m / 12
Disclosures
➢ Reconciliation of profit after tax with Earning used for Basic EPS and Earning used for Diluted EPS
➢ Reconciliation of weighted average number of shares used for Basic EPS with those for Diluted EPS
➢ Description of any restatement / anti-dilutive instrument
Continuing and Discontinued operations

➢ The following EPS would be determined:
Basic earnings per share:
Profit from continuing operations x
Loss from discontinued operations x
x
Diluted earnings per share:
Profit from continuing operations x
Loss from discontinued operations x
x
➢ In diluted EPS, for determining whether an instrument is anti-dilutive only Diluted EPS for current year from
continuing operations is considered.
Partly paid shares

Basic EPS
➢ In number of shares calculation, partly paid shares are treated as issued to the extent paid up (i.e. entitled for
dividend)
Diluted EPS
➢ In number of shares calculation, partly paid shares are treated as share options to the extent not paid up.
Contingent shares
Basic EPS
➢ Taken into account in the number of shares calculation from the time the conditions are totally met and the
time for meeting the conditions is also complete.
Diluted EPS
➢ Taken into account in the number of shares calculation if the conditions would be met assuming the end of
current year is the end of the period for meeting the conditions.
Share options under a Service Condition SBP
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Similar treatment as normal share options with the exception only that future expense per unvested option is
added to the exercise price.
Consolidated EPS
Basic EPS: Consolidated Profits attributable to ordinary shareholders

Weighted average no. of shares of Parent
Diluted EPS: Diluted Consolidated Profits attributable to ordinary shareholders (See Note below)
Weighted average no. of diluted shares of Parent
Note: Where subsidiary has dilutive instruments owned by Parent, diluted earnings are computed as follows:
a) Parent’s Diluted earnings; plus
b) Subsidiary’s total diluted earnings x No. of diluted shares of subsidiary owned by Parent
No. of diluted shares of subsidiary
Example 1: Basic EPS
Following is an excerpt from the balance sheet of Aay limited as at December 31, 2012:
Rupees
Ordinary shares of Rs 10 each 100,000
10% Preference shares of Rs 10 each
(classified as equity) 60,000
The Company earned a profit after tax of Rs 300,000 for the year ended December 31, 2013 (2012: Rs 250,000)
and undertook the following share transactions after December 31, 2012:
Date Transaction
March 31, 2013 Issued 5000 shares at market value of Rs 18 per share
April 30, 2013 Issued 3000 right shares at Rs 15 per share. The market value at the
time of issue was Rs 20 per share
June 30, 2013 Bought back 2000 shares at market value

Splitted up the share capital by splitting each 2 shares held into 3
August 31, 2013 shares
January 31, 2014 Issued bonus shares at 1 share for every 4 shares held
February 28, 2014 Issued 3000 shares at market value
Calculate Basic EPS (including comparative figures) of Aay limited for the year ended December 31, 2013
assuming that the financial statements for 2013 were authorised for issue on March 10, 2014.
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Example 2: Diluted EPS
The profit after tax of Aay limited for the year ended December 31, 2013 was Rs 200,000. There were 100,000
shares outstanding at the beginning of the year. During the year following transactions took place:
a) On March 31, 2013 the Company issued 10,000 share options with an exercise price of Rs 8 per share. The
market value per share between April 1 and December 31 was Rs 20.
b) On April 30, 2013 the Company issued 5,000 10% cumulative preference shares of Rs 10 each. These shares
were classified as equity and are convertible into ordinary shares at a ratio of one ordinary share for each
preference share at any time after 2014.
c) On September 30, 2013 the Company issued debentures amounting to Rs 500,000 of Rs 100 each. These
debentures carry interest at 12% per annum and are convertible into ordinary shares at the rate of 2 ordinary
shares for each debenture.
d) Applicable tax rate is 35%.
Required: Calculate Basic and Diluted EPS for the year 2013.
Example 3: Diluted EPS

The profit after tax of Aay limited for the year ended December 31, 2013 was Rs 200,000. There were 100,000
shares outstanding at the beginning of the year. During the year following transactions took place:
a) On March 31, 2013 the Company agreed to issue 10,000 shares to its CEO on the condition that the
cumulative profits for the years 2013 and 2014 would be atleast Rs 100,000. It may be assumed that profits
accrue evenly over the year.
b) On April 30, 2013 the Company issued 10,000 shares at market value of Rs 20 per share. Rs 15 per share were
paid up at the time of issue while the remaining amount would be paid in 2014. Average market price per share
between May 1 and December 31 was Rs 25 per share.
c) On June 30, 2013 the Company granted 500 share options to each of its 100 employees conditional upon the
employees' working for the Company for 2 years. They have an exercise price of Rs 5 per share and the fair value
per option at grant date was Rs 20. Average market price between July 1 and December 31 was Rs 25 per share.
Required: Calculate Basic and Diluted EPS for the year 2013.
Example 4: EPS in consolidated financial statements

PL holds 80% shareholding in SL. Following information is relevant for the year ended December 31, 2013:
- Profits of PL and SL per their separate financial statements was Rs 120,000 and Rs 54,000 respectively
- There were 100,000 shares of PL and 10,000 shares of SL outstanding throughout 2013
- Details of dilutive instruments issued by SL are as follows:
Total Held by PL
Share options with an exercise price of Rs 10 per share 1,500 options 300 options
10% Convertible preference shares of Rs 10 each
(Each Preference share is convertible into one ordinary share) 4,000 shares 3,000 shares
- Average market price of one ordinary share of SL during 2013 was Rs 20.
- No inter-company eliminations or adjustments are necessary except for dividends.
- Ignore income taxes.
Required: Calculate Basic and Diluted EPS to be reflected in consolidated financial statements of PL for 2013.
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IAS 34 + IFRIC 10
Definitions
1. Interim period is a financial reporting period shorter than a full financial year.
2. Interim financial report means a financial report containing either a complete set of FS or a set of condensed
FS for an interim period.
Statements and period of Interim FS

1. An interim financial report shall include the following components:
a) a condensed statement of financial position
b) a condensed statement of comprehensive income
c) a condensed statement of changes in equity
d) a condensed statement of cash flows; and
e) Selected explanatory notes.
2. Periods for which interim FS are required to be presented

a) SFP: as at interim period end; comparative as at preceding financial year end.
b) SCI: for the current interim period; cumulatively for the current financial year to date; comparative for the
comparable interim periods of last year.
c) SOCIE & SCF: cumulatively for the current financial year to date; comparative for the comparable period
of last year.
Content and disclosures of interim FS

1. Include each of the headings / subtotals that were included in its most recent annual FS.
2. Listed entities present EPS. Consolidated Interim FS is also required for Groups.
3. Include the events and transactions that are significant to an understanding of the changes in financial position
and performance of the entity since the end of the last annual FS. Such as:
a) write-down of inventories or reversal of a write-down;
b) impairment loss or reversal of an impairment loss;
c) the reversal of any provision for restructuring;
d) acquisitions and disposals of PPE;
e) commitments for the purchase of PPE;
f) litigation settlements;
g) corrections of prior period errors;
h) changes in the business or economic circumstances that affect the FV of FA and FL
i) any loan default or breach of a loan agreement that has not been remedied;
j) related party transactions;
k) transfers between levels of the fair value hierarchy used in measuring the fair value of FI
l) changes in the classification of financial assets
m) changes in contingent liabilities or contingent assets.
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4. Include following information in notes to interim FS on a financial year-to-date basis.
a) statement that same accounting policies as most recent annual FS were used and the nature and effect
of any changes therein.
b) nature and amount of items that are unusual because of their nature, size or incidence.
c) nature and amount of changes in estimates.
d) issues, repurchases and repayments of debt and equity securities.
e) dividends paid (aggregate or per share) separately for ordinary shares and other shares.
f) if IFRS 8 applies to annual FS then the segment info note
g) events after the interim period that have not been reflected in the interim FS.
h) the effect of changes in the composition of the entity during the interim period.
Recognition and measurement principles in Interim FS

1. Apply same accounting policies as for latest Annual FS except for changes made after last year end.
2. For forex gains / losses, the actual average and closing rates for the interim period are used. Do not anticipate
future changes in foreign exchange rates in the remainder of the financial year
3. Contractual rebates and discounts are anticipated but discretionary rebates and discounts are not anticipated.
4. Employee benefits, contributions and pension costs: Expense is recognized using an effective annual rate,
regardless of when the payments are made. Year-end bonuses are anticipated if there is a legal obligation or past
practice.
5. Income tax expense is recorded on the basis of weighted average annual tax rate applicable to expected total
annual earnings. Where there is a difference in accounting year and tax year, the tax rat applied to the interim
period year is the rate for the tax year (not the accounting year) in which the interim period falls.
Example 1
Entity reporting quarterly expects to earn 10,000 pre-tax each quarter. Tax rate is 20% for the first 20,000 of
annual earnings and 30% on all additional earnings. Tax expense is as follows:
Tax rate for each quarter = (20,000 x 30%) + (20,000 x 20%) / 40,000 = 25%
Quarter 1st 2nd 3rd 4th Total
Tax expense 2,500 2,500 2,500 2,500 10,000
Example 2
Entity’s accounting year ends 30 June tax year ends on 31 December. Quarterly pre-tax profits are 10,000. Income
tax rate is 30% in Year 1 and 40% in Year 2.
Period July-Sep Oct-Dec Jan-Mar Apr-June Total

Tax expense 3,000 3,000 4,000 4,000 14,000
IFRIC 10 - Interim Financial Reporting and Impairment loss on Goodwill

1. Assess impairment of goodwill at end of each interim period
2. Do not reverse goodwill impairment recognized in a previous interim period.
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IAS 24
Definition
(a) A person or a close member of that person’s family is related to a reporting entity if he:
✓ has control or joint control over the reporting entity;
✓ has significant influence over the reporting entity; or
✓ is a KMP of the reporting entity or its parent company.
(b) An entity is related to a reporting entity if any of the following conditions applies:
✓ Both are members of the same group
✓ One is an associate or joint venture of the other entity
✓ One is an associate or joint venture of a member of a group of the other entity
✓ Both entities are joint ventures of the same third party
✓ One entity is a joint venture and the other is an associate of a same third party.
✓ The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity
or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity.
✓ The entity is controlled or jointly controlled by a person identified in (a).
✓ A person identified in (a)(i) has significant influence over the entity or is a KMP of the entity or its parent.
✓ In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture
includes subsidiaries of the joint venture.
Exceptions
Following are not related parties:
(a) two entities simply because they have a director or other KMP in common
(b) two entities simply because a KMP of one entity has significant influence over the other entity.
(c) two venturers simply because they share joint control over a joint venture.
(d) The following simply by virtue of their normal dealings with an entity:
✓ providers of finance,
✓ trade unions,
✓ public utilities, and
✓ departments and agencies of a government that does not control, jointly control or significantly influence
the reporting entity,
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant
volume of business, simply by virtue of the resulting economic dependence.
Government-related entities
1. A reporting entity is exempt from the disclosure requirements in relation to related party transactions and
outstanding balances, including commitments, with:
✓ government that has control, joint control or significant influence over the reporting entity; and
✓ another entity that is a related party because the same government has control, joint control or significant
influence over both the reporting entity and the other entity.
2. If a reporting entity applies the government exemption it shall disclose the following about:
✓ name of the government and nature of relationship (e.g. having control by 70% shareholding)
✓ nature and amount of each individually significant transaction (e.g. sale of an item that is 50% of revenue)
✓ for other transactions that are collectively significant, a qualitative or quantitative indication of extent.
We also refer to notes of FS where the transaction related items are accounted for.
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Financial instruments
Basic concepts
Financial instrument: Any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.
Financial asset: Any asset that is:

(a) cash
(b) an equity instrument of another entity
(c) a contract to receive cash or other financial asset
(d) a contract to receive variable number of entity’s own equity instruments against fixed amount of cash
(e) a contract to receive variable amount of cash for a fixed number of entity’s own equity instruments
Financial liability: Inverse of a financial asset.
Equity instrument: A residual interest in the assets of an entity after deducting all of its liabilities.
Example
Which of the following is a financial instrument?
(a) Intangible assets (b) Investment in subsidiary
(c) Inventory (d) Trade receivables
(e) Income tax payable (f) Deferred revenue
(g) Prepaid expenses (h) Provision for constructive obligation
Offsetting a financial asset and a financial liability

A financial asset and a financial liability shall be offset when there is legal right to offset and intention to settle on
net or simultaneous basis.
Classes of financial assets
Class Nature of asset Initial Subsequent measurement

measurement
Amortised cost Held to collect contractual cash FV + transaction At EIR

flows costs
FVTOCI Irrevocable election for equity FV + transaction At FV with changes in FV recorded
investments. costs in OCI.
FVTOCI Held to collect contractual cash FV + transaction At EIR

flows and to sale. costs FV difference recorded in OCI at
year end.
FVTPL All others or specifically FV At FV with changes in P&L.

designated. On disposal any Gain / loss is
recorded in P&L
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Trade receivables are recognized at transaction price unless there is a significant financing component.
Lease receivables are subject to life time credit losses and not subject to stages of impairment.
Reclassification of financial assets

FVTOCI Equity Investments have an irrevocable election therefore they cannot be reclassified. However all other
categories can be reclassified upon change of business model with prospective change in accounting
Impairment of Financial Assets – Amortised Cost and FVTOCI Debt Investments

Stage 1: 12 month ECLs recorded
Stage 2: Life time ECLs recorded – Interest income on gross carrying amount
Stage 3: Life time ECLs recorded – Interest income on net carrying amount
Reversal of impairment: Measure the loss allowance at 12-month expected credit losses.
Recognition: Impairment loss or reversal is recorded in P&L
Approach: Use either the ECL or the PV approach
Example – Financial asset at amortized cost

Aay limited purchased a bond for Rs 1000. Coupon rate of the bond is 10% and the bond has a term of 3 years
after which it is redeemable for Rs 1000 (Par value). Transaction costs incurred on acquiring the bond amount to
Rs 20. Effective interest rate is 9.2%. Show accounting entries from year 1 to 3 assuming:
a) The bond completed its term and was redeemed at Rs 1000
b) At the end of year 2, the terms of the bond were renegotiated by the issuer. As a result the life of the bond
was set as 4 years and coupon rate was increased to 13%. The redemption amount was kept the same as Rs
1000.
c) Same as scenario b above, but adding the fact that, additional transaction costs of Rs 10 were incurred by Aay
Limited on the renegotiation and the revised Effective interest rate is 8.6%.
Example (ACCA P2)

Aron granted interest free loans to its employees on 1 June 2018 of $10 million. The loans will be paid back on 31
May 2020 as a single payment by the employees. The market rate of interest for a two-year loan on both of the
above dates is 6% per annum. The company is unsure how to account for the loan but wishes to classify the loans
as ‘at amortised cost’ under IFRS 9. (4 marks)
Required: Discuss, with relevant computations, how the above financial instruments should be accounted for in
the financial statements for the year ended 31 May 2019.
Example
ABC Limited purchased a 1 million bond for Rs 1000 each (Par value). The bond was not determined as credit
impaired at initial recognition. It is redeemable after 5 years at Rs 1030 and bears interest @ 10%. Effective
interest rate is 10.5%. The company is holding the bond to collect contractual cashflows but may sell it if the return
on sale is very high. The fair value of the bond at end of year 1 was Rs 1100. During year 2, the credit risk of the
bond increased significantly and consequently cumulative life time expected credit losses of Rs 100 and Rs 200
per bond were anticipated at the end of Year 2 and 3 respectively. The fair value of the bond at the end of Year 2
and 3 was Rs 950 and Rs 900 per bond respectively. The company sold the bond at the end of Year 3 for Rs 910
per bond incurring a transaction cost Rs 5 per bond. Prepare journals for Years 1 to 4.
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Example
ABC Limited purchased a 1 million bond for Rs 1000 each (Par value). The bond was not determined as credit
impaired at initial recognition. It is redeemable after 5 years at Rs 1030 and bears interest @ 10%. Effective
interest rate is 10.5%. The company is holding the bond to collect contractual cashflows until redemption.
Following events took place after purchase:
Time Cash received Assessment

End of Full interest The credit risk has not increased significantly since initial recognition.
Year 1 12 month credit losses: Rs 10 per bond
Life time credit losses: Rs 15 per bond
End of Full interest The credit risk has increased significantly since initial recognition.
End of 50% interest The credit risk has not increased significantly since initial recognition.
End of 50% interest The credit risk has increased significantly since initial recognition and bonds are
Year 4 credit impaired
12 month credit losses: Rs 70 per bond
End of No interest and The credit risk has increased significantly since initial recognition and bonds are
Year 5 reduced principal credit impaired
at Rs 950 per 12 month credit losses: Rs 100 per bond
bond Life time credit losses: Rs 284 per bond
Required: Prepare journal entries for Years 1 to 5.
Example
ABC Limited reclassified following financial assets during the year. Prepare Journals.
Bond Name Original class Reclassified to CA at change FV at change Balance in OCI reserve
A Amortized Cost FVTOCI Debt Rs 1000 Rs 1200 Nil
investment
B Amortized Cost FVTPL Rs 1000 Rs 1100 Nil
C FVTOCI Debt Amortized Rs 1200 Rs 1200 Rs 150
investment Cost
D FVTOCI Debt FVTPL Rs 1200 Rs 1200 Rs 200
investment
E FVTPL FVTOCI Debt Rs 1000 Rs 1000 Nil
investment
F FVTPL Amortized Rs 1100 Rs 1100 Nil
Cost
Accounting for Financial Liabilities

Amortised cost FVTPL
Classification All except FVTPL Derivatives, financial guarantees and
specifically designated
Page | 49
Initial measurement FV minus transaction costs FV
Subsequent At effective interest rate method At FV with changes in fair value (whether
measurement with interest recognised in P&L gain or loss):
- for change in credit risk (to OCI)
- for other reason (P&L)
Derecognition Gain/loss to P&L Gain/loss to P&L
Reclassification Cannot be reclassified Cannot be reclassified
Modification in terms of a liability

Carrying amount of FL before change in terms xxx
PV of FL after change in terms discounted at original EIR before change in terms (xxx)
Change xxx
If change is 10% or more recognise new liability at FV less issue costs. If change is less 10%, continue the same
liability and recognize gain / loss in P&L.
Example – Financial Liability at amortized cost

Aay limited issued a bond for Rs 1000. Coupon rate of the bond is 10% and the bond has a term of 3 years after
which it is redeemable for Rs 1000. Transaction costs incurred on issuing the bond amounts to Rs 20. Effective
interest rate is 10.8%. Show accounting entries from year 1 to 3 assuming:
a) The bond completed its term and was redeemed at Rs 1000
b) At the end of year 2, the terms of the bond were renegotiated. As a result only 8% interest alongwith principal
would be repaid next year. Transaction costs incurred on the renegotiation amount to Rs 10. Fair value of the
liability at that time is Rs 950. Effective interests at that date are as follows.
Based on existing liability 10.8%
Based on existing liability adjusted for additional transaction costs 11.9%
Based on new liability adjusted for additional transaction costs 14.9%
c) At the end of year 2, the terms of the bond were renegotiated. As a result, no interest would be paid next
year and the principal amount of only Rs 900 would be repaid. Transaction costs incurred on the renegotiation
amount to Rs 10. Fair value of the liability at that time was Rs 800. Effective interests at that date are as
follows.
Based on existing liability 10.8%
Based on existing liability adjusted for additional transaction costs 12.2%
Based on new liability adjusted for additional transaction costs 13.9%
Example – FVTPL Financial liability

ABC has designated debentures of Rs 100,000 issued at 1-Jan-2021 as at fair value through profit or loss. On Dec
31, 2021 the fair value of the debentures was Rs 105,000. During 2022, ABC’s liquidity deteriorated and the fair
value of the debentures was reduced to Rs 90,000. Rs 10,000 thereof being due to credit risk. Journalise.
Accounting for equity

Treasury shares
Dr. Equity
Dr./Cr. Retained earnings
Cr. Cash
Page | 50
Transaction costs
Transaction costs (e.g. issue costs) of an equity transaction shall be debited to equity
Choosing between liability and equity
1. A puttable instrument (e.g. redeemable pref. shares) is classified as equity if it has all the following features:
(a) It entitles the holder to a pro rata share of net assets upon liquidation
(b) It has no priority over other claims on liquidation
(c) Its expected cash flows are based substantially on profit or loss
2. If you can avoid a transfer of cash only by giving a non-financial asset, it is a financial liability
3. A financial instrument that requires delivery of cash on the occurrence of uncertain future events is a financial
liability
Reclassifications
• FL to Equity: Fair value of FL at reclassification becomes carrying amount of equity
• Equity to FL: FL is recognised at fair value. The adjustment is recognised in retained earnings.
Derecognition of Financial assets

Example
Aay Limited has an amortized cost loan receivable with 3 years to maturity. Annual instalment is Rs 400,000. Aay
sold the loan for Rs 900,000 but at the same time undertook to collect all instalments and bear all related credit
risks. At the date of sale, the carrying amount of the financial asset is Rs 950,000 and the effective rate of interest
in 12.7%. At that date, Aay Limited estimates that the market rate of interest on an independent loan amounting
to Rs 900,000 would be 15.9%. Show journal entries for the sale of loan and subsequent accounting upto the end
of loan term.
Example
Bee Bank Limited (BBL) has investment in Government securities amounting that are carried as FVTPL. On 1-
December-2016, BBL sold these securities to another bank at Rs 101 million and agreed to repurchase them at Rs
102 million on 31-January-2017. The fair value and acarian amount of these securities at the date of sale was Rs
100 million. Show journal entries for the sale and subsequent accounting upto 31-January-2017.
Derivatives
Example - Options
On 1-Jan-2012, ABC limited acquired an option to buy 100,000 shares of X limited at Rs 15 per share when the
market value per share was also Rs 15. On 1 Feb 2014, the option was exercised when the share price was Rs 20
per share. Show accounting entries for the years 2012 to 2014 if the share price of X limited’s shares was as
follows: 31 Dec 2012 = Rs 25, 31 Dec 2013 = Rs 28.
Example - Forwards
ABC limited wanted to speculate on the increasing prices of cars. Accordingly, on 1-Jan-2016, ABC limited entered
into a forward contract to buy a car for Rs 500,000 on 31-Dec-2016. The market value of the Car and the Forward
price were as follows.
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Date Spot value of Car Pricing of 31 Dec Forward
January 1 Rs 450k Rs 500k
June 30 (Year-end) Rs 520k Rs 550k
December 31 Rs 600k Rs 600k
Required: Show accounting entries for the above transactions
Example - Futures
ABC limited wanted to speculate on the decreasing prices of Oil. Accordingly, on 1-Jan-2016, ABC limited entered
into a future contract to sell 200 barrels of Oil on 31-Dec-2016. The market value of Oil and the Future price were
as follows.
Date Spot value of Oil Pricing of 31 Dec Future

January 1 Rs 15k / barrel Rs 13k / barrel
June 30 (Year-end) Rs 13k / barrel Rs 11k / barrel
December 31 Rs 10k / barrel Rs 10k / barrel
Required: Show accounting entries for the above transactions
Embedded Derivatives
Example
Aay Limited issued 1 million TFCs at Rs 100 per TFC. These TFCs have a coupon rate of 10% and are accounted for
as Financial liability at amortized cost. Show journals for initial recognition of the TFCs if:
a) The TFCs have an inflation linkage feature. This means that if the avergae general rate of inflation in the
economony is more than 10% per annum in any year, the coupon rate of the TFCs would be increased to 12%
in that year to compensate the holders for high inflation. Similar TFCs without the inflation linkage feature
have a fair value of Rs 97 per TFC.
b) The TFCs have an equity indexing feature. This means that if the avergae market value of shares of Aay Limited
falls below Rs 100 per share in any year, the coupon rate of the TFCs would be increased to 12% in that year
to compensate the holders for higher financial gearing risk. Similar TFCs without the equity indexing feature
have a fair value of Rs 98 per TFC.
Compound financial instruments
Example – Basic
The following information pertains to Crow Textile Mills Limited (CTML) for the year ended 30 June 2012:
On 1 July 2011, 2 million convertible debentures of Rs. 100 each were issued. Each debenture is convertible into
25 ordinary shares of Rs. 10 each on 30 June 2014. Interest is payable annually in arrears @ 8% per annum. On
the date of issue, market interest rate for similar debt without conversion option was 11% per annum. However,
on account of expenditure of Rs. 4 million, incurred on issuance of shares, the effective interest rate increased to
11.81%. (08)
Required: Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.
Example – Abnormal conversion of compound financial instruments

On 1-Jan-2018, ABC Limited issued convertible TFCs amounting Rs 1000 million at face value (Rs 100 per TFC) on
the following terms.
Page | 52
• Coupon rate of the TFCs is 8%. Coupon rate on similar non-convertible TFC is 12%.
• These TFCs have a term of 3 years. After that period, they can either be converted at a ratio of 4 ordinary
shares for each TFC or redeemed at Rs 105 per TFC.
Show accounting entries for the year 2018, in each of the independent scenarios below, assuming that, on 31
December 2018:
a) ABC allowed the TFC holders to early convert the TFCs at the originally agreed ratio and all TFCs were
converted into ordinary shares at that date. Transaction costs of Rs 10 million were incurred on the
conversion.
b) ABC repurchased the bonds at Rs 110 per bond and all holders sold back their bonds at that rate. Transaction
costs of Rs 20 million were incurred for the repurchase.
c) ABC induced early conversion of the bonds by allowing the holders to convert the bonds at the ratio of 5
ordinary shares for each bond. All bonds were converted into ordinary shares at that date. Transaction costs
of Rs 15 million were incurred on the conversion.
Note: You may assume that on 31 December 2018:

• Fair value of the convertible bond is Rs 110
• Fair value of ordinary share of ABC Limited is Rs 27
• Market rate of interest for similar non-convertible is 13%.
Regular way purchase or sale of financial assets

Delivery of FA is to be made within a time frame established by regulation. Trade date is the commitment date
and settlement date is the delivery date.
Example (CA Winter 2011)

Global Investment Limited (GIL) is listed in Pakistan. During the year ended 30 September 2011, GIL entered into
the following contracts with a UAE based company:
(i) On 28 September 2011 GIL committed to buy certain financial assets on 3 October 2011 for AED 20,000. The
fair value of these assets on balance sheet date and settlement date was AED 21,000 and AED 21,500
respectively.
(ii) On 29 September 2011 GIL agreed to sell certain financial assets on 4 October 2011 having a carrying value of
AED 34,000 (Rs. 809,200) for AED 35,000. The fair value of these assets on the balance sheet date and
settlement date was AED 35,200 and AED 34,800 respectively. The above types of financial assets are classified
by GIL as held for trading. Exchange rates on the relevant dates were as under:
Date 1 AED = Rs.
28 September 2011 24.00
29 September 2011 23.00
30 September 2011 23.50
03 October 2011 25.00
04 October 2011 26.00
Required:
Prepare accounting entries to record the above transactions on the relevant dates in accordance with
International Financial Reporting Standards, using: (a) Trade date accounting (b) Settlement date accounting (16
marks)
Hedging
What is a hedge?
Page | 53
Taking a position in a FI that would counter any change in:
• FV (FV hedge e.g. of a fixed rate investment)
• Cash flows (CF hedge e.g. for repayment of a forex loan)
Time periods and dates of hedge transaction

Forecast Transaction is highly probable Transaction date Settlement date
|---------------------------------|-----------------------------------------|----------------------------------|--------------------------------
No hedge Only CF hedge CF/FV hedge No hedge
Accounting for hedges

STEP 1 - Check Hedge Effectiveness
STEP 2 - Calculate the ineffective portion of hedge
STEP 3 – Accounting for effective portion
Other points
• Hedge becomes ineffective: Balance in OCI is eliminated through basis / reclassification adjustment when the
transaction occurs.
• Forecast transaction no longer expected to occur: Balance in OCI recognized in profit or loss.
• Hedge of a Net investment in Foreign Operation: Treated in the same manner as cash flow hedge. With the
difference only that a reclassification adjustment is applied on disposal of the Investment.
• Hedge of an FVTOCI Investment or Any Other Asset whose gain / loss is recorded in OCI:
o It’s usually a fair value hedge
o Nevertheless, in case of FV or Cashflow hedge, since the gain / loss on hedged item goes to OCI, the
gain / loss on the hedging instrument is also presented in OCI.
• Derivative asset / liability: ‘Derivative value at purchase date’ minus ‘Value at which derivative can be bought
today’
• Date of remeasurement (a) each year end (b) date of change of estimate (c) date of settlement
Example 1
ABC limited entered into an agreement with a US vendor to import machinery on January 1 for USD 1 million when
the exchange rate was Rs 170 per USD. To hedge the related foreign exchange risk, ABC also entered into a 3
months forward exchange contract on the same day. The machinery arrived CIF in Pakistan on February 28 and
the payment was made on March 31. Relevant exchange rates are as follows:
Date Spot rate Forward rate
Jan 1 Rs 170 Rs 168
Feb 28 Rs 175 Rs 174
Mar 31 Rs 180 Rs 180
Required: Journalise the above assuming that the OCI is treated using Basis adjustment
Example 2
On March 1 Bee limited committed to import machinery from England for £ 1 million. It entered into a 5 months
forward exchange contract on the same day. Machine was imported and payment was made at July 31. The useful
life of the machine is 3 years. Relevant exchange rates are as follows:
Spot Forward
1 March Rs 225 Rs 231
30 June (Year end) Rs 229 Rs 236
31 July Rs 240 Rs 240
Page | 54
Required: Journalise the above assuming that the OCI is treated using Reclassification adjustment
Example 3
On January 1 Cee limited invested Rs 100,000 in fixed rate bonds carried as FVTPL investments. To hedge the risk
of change in value, it purchased put options to sell these bonds for Rs 100,000 at any time upto Dec 31. The option
cost was Rs 1000. Journalise the above if the FV of the bonds on relevant dates was as follows:
Date Jan 1 June 30 (Year end) Dec 31
Fair value of bond Rs 100,000 Rs 95,000 Rs 85,000
Fair value of option Nil + Rs 6,000 + Rs 15,000
Example 4 (CA Winter 2012)

The following information pertains to Crow Textile Mills Limited (CTML) for the year ended 30 June 2012:
Stocks include 4,000 maunds of cotton which was purchased on 1 April 2012 at a cost of Rs. 6,200 per maund. In
order to protect against the impact of adverse fluctuations in the price of cotton, on the price of its products,
CTML entered into a six months futures contract on the same day to deliver 4,000 maunds of cotton at a price of
Rs. 6,300 per maund. At year end i.e. 30 June 2012, the market price of cotton (spot) was Rs. 5,500 per maund
and the futures price for September delivery was Rs. 5,550 per maund. All necessary conditions for hedge
accounting have been complied with.
Required: Prepare Journal entries for the year ended 30 June 2012 to record the above transactions.
Disclosure requirements of IFRS 7

The two main categories of disclosures required by IFRS 7 are:
• information about the significance of financial instruments
• information about the nature and extent of risks arising from financial instruments
A) Information about the significance of financial instruments

• Statement of financial position: Significance of financial instruments for an entity's financial position and
performance. This includes disclosures for each category.
• Statement of comprehensive income: Items of income, expense, gains, and losses, with separate disclosure
of gains and losses for all categories. Interest income and total interest expense, fee income and expense,
impairment losses by class and interest income on impaired financial assets
• Special disclosures: Reclassifications, collaterals, reconciliation of allowance account for credit losses by class,
information about compound financial instruments, breaches of terms of loan agreements, accounting
policies, information about hedge accounting.
• Fair values disclosures by each class:
o comparable carrying amounts
o description of how fair value was determined
o the level of inputs used in determining fair value
o reconciliations of movements between levels of fair value measurement hierarchy
o additional disclosures for level 3 including impacts on P&L, OCI and sensitivity analysis information
B) Nature and extent of exposure to risks arising from financial instruments

Qualitative disclosures
• Risk exposures for each type of financial instrument
• Management's objectives, policies, and processes for managing those risks
• Changes from the prior period
Page | 55
Credit risk
• maximum amount of exposure (before deducting the value of collateral)
• description of collateral
• information about credit quality of financial assets that are neither past due nor impaired
• information about credit quality of financial assets whose terms have been renegotiated
• for financial assets that are past due or impaired, analytical disclosures
Liquidity risk
• Maturity analysis of financial liabilities
• Description of approach to risk management
Market risk
• Sensitivity analysis of each type of market risk to which the entity is exposed
Transferred financial assets that are not derecognized in their entirety

Nature of the transferred assets, nature of risk and rewards and quantitative disclosure depicting relationship
between transferred financial assets and the associated liabilities.
Transferred financial assets that are derecognized in their entirety

Carrying amount of the assets and liabilities recognised
Fair value of the assets and liabilities that represent continuing involvement
Maximum exposure to loss from the continuing involvement
Maturity analysis of the undiscounted cash flows to repurchase financial assets.
IFRIC 19
On 1-Jan-17, ABC Limited obtained a loan of Rs 1000 million from DEF Bank. This loan is repayable after 5 years
with coupon rate and effective interest rate of 10%. On 31-Dec-18, ABC went into financial difficulty and it was
decided that the loan would be converted into 40 million shares of ABC Limited. At that date, the fair value of
ABC's share was Rs 30 each. Prepare Journal entry for conversion.
Example: Compound financial instruments with deferred tax implications
On January 1, 2010, Bee limited issued convertible debentures with total fair value of Rs 10,000. The amount of
the debt component was computed as Rs 7,500 and the equity component was recorded at Rs 2,500. The effective
interest rate of the debt component is 10% while the coupon rate on the debentures is 5%. Applicable tax rate is
30% and the tax authorities treat the whole debenture as a liability.
Required: Show deferred tax adjustments for the year ended December 31, 2010.
Page | 56
IFRS 2
Concepts
Cash settled SBP
Delivery of cash based on price of equity instruments (of the company or its group) to obtain goods or services
Equity settled SBP

Delivery of equity instruments (of the company or its group) to obtain goods or services
Grant date
Date at which all parties agree and approve SBP arrangement
Service vesting conditions

Specific period of service to be completed for SBP to vest.
Performance vesting conditions

Specific performance target to be achieved for SBP to vest.
Market vesting conditions

Specific market price of equity instrument to be reached for SBP to vest.
Equity settled SBP

Entry
Dr Expense/Asset
Cr Equity (reserve for issue of shares)
Measurement
For employees: At FV of equity instruments at grant date
For others: At FV of goods / services at date of receipt of goods / services
Method of recognition
If no condition: Recognise immediately
If service condition: Recognise over required period of service. If originally specified conditions are not met,
reverse the recognised amounts.
If performance condition: Recognise if originally specified performance target is achieved
If market condition: Recognise even if market condition is not met
IG Example 1A (Amended)
An entity grants 100 share options to each of its 500 employees. It is conditional upon the employee working for
the entity over the next 3 years. The fair value of each share option at grant date is Rs 15. The entity estimates
that 20% of employees will leave during the 3-year period. Calculate the amounts to be recognised in each year.
IG Example 2 (Amended)
An entity grants 100 shares each to 500 employees, conditional upon the employees’ remaining in the entity’s
employ during the vesting period. The shares have a fair value of Rs 30 per share at the start of year 1. The shares
will vest per the following conditions:
Page | 57
Earnings increase at an avg. by more than 18% After 1 year
Earnings increase at an avg. by more than 13% After 2 years
Earnings increase at an avg. by more than 10% After 3 years
Calculate the amounts to be recognised in each year if the actual position after each year is as follows:
After end of Increase in earnings Employees left during the year Further employees expected to leave
1 14% 30 30
2 10% 28 25
3 8% 23 -
An entity grants to a senior executive 10,000 share options, conditional upon the executive’s remaining in the
entity’s employ for 3 years. The exercise price is Rs 40. However, the exercise price drops to Rs 30 if the entity’s
earnings increase by at least an average of 10% per year over the three-year period. On grant date, the fair value
of the share options, with an exercise price of Rs 30, is Rs16 per option. If the exercise price is Rs 40, the fair value
is Rs 12 per option. Calculate the amounts to be recognised if increase in earnings was as follows:
Year 1 2 3
Increase in earnings 12% 13% 3%
Intrinsic value method

Usage
Used when FV of equity instruments granted to employees cannot be measured reliably
Measurement
• Measure initially at intrinsic value (‘FV of share’ minus ‘exercise price of option’) at the date of receipt of
goods/services
• Measure subsequently at intrinsic value at each year end upto the end of the life of the options (i.e. the last
date to exercise the options)
• Take changes in intrinsic value to P&L
• Reverse amount recognised if share options are forfeited, not exercised or lapse
An entity grants 1,000 share options to 50 employees. The share options will vest after 3 years. However, the
options have a life of 10 years. The exercise price is Rs 60 and the share price is also Rs 60 at the date of grant. At
the date of grant, the fair value of the share options cannot be estimated reliably. At end of year 1, it’s estimated
that a total of 20% employees will leave. After year 2, it’s estimated that a total of 14% employees will leave.
However after year 3 only a total of 7 employees have left. Calculate the amounts to recognised from year 1 to 10
if other relevant information is as follows:
Year 1 2 3 4 5 6 7 8 9 10
Share 63 65 75 88 100 90 96 105 108 115
price(Rs)
Options - - - 6000 8000 5000 9000 8000 5000 2000
exercised
Page | 58
Modification of conditions for SBP
An entity grants 1,000 share options to each of its 12 members sales team, conditional upon the employee’s
remaining in employment for 3 years, and the team selling more than 50,000 units of product X over 3 the years.
The FV of the share option is Rs 15 at the date of grant. By end of year 3, 55,000 units have been sold. All 12
members of the sales team have remained in service for the 3-year period. Calculate amounts to be recognised,
assuming that at the start of year 2:
(a) The entity increased the sales target to 100,000 units.
(b) The entity increased the count of share options to 1100 per employee and the fair value of each option at
that date was Rs 20.
(c) The entity decreased the sales target to 40,000 units.
(d) The exercise price of the share options is reduced. At that date, the fair value of each option with the
original and reduced exercise price is Rs 20 and Rs 26 respectively.
(e) The exercise price of the share options is increased. At that date, the fair value of each option with the
original and increased exercise price is Rs 20 and Rs 18 respectively.
(f) The number of share options is increased to 1200 and the target is revised upwards to 55,000 units. At that
date, the fair value of each option is Rs 20.
(g) The number of shares options to be granted were reduced to 800 options per employee.
(h) The number of shares options to be granted were reduced to 700 options per employee, and in replacement
of 300 options, the employees were paid Rs 7000 in cash. At that date, the fair value of each option is Rs 20.
An entity grants 100 share options to each of its 500 employees conditional upon the employee remaining in
service over the next three years. The share options have an exercise price and fair value of Rs 30 and Rs 15
respectively at grant date. At the start of year 2, due to drop in share price, the entity reduced the exercise price
to Rs 10. 15% employees were correctly estimated to leave during the vesting period. At the start of year 2, the
fair value of each of the original share options granted is Rs 5 and the fair value of each repriced share option is
Rs 8. Calculate the amounts to be recognized in each year.
Cancellation or settlement of SBP

• Recognise all amounts relating to current and future periods immediately
• Any payment made at cancellation/settlement is debited to equity upto the fair value of equity instruments
at the date of cancellation/settlement. The amount over and above is debited to P&L.
Example
service over the next 4 years. 10% employees are expected to leave before the completion of the vesting period.
Fair value of a share option is Rs 20. At the start of year 2, the entity cancelled the share based payment and
negotiated a one-time payment with the labour union to settle the matter. Calculate the amounts to be recognized
in each year, assuming that:
(a) Fair value of each option at start of year 2 is Rs 25 and the settlement payment is Rs 1.2 million
(b) Fair value of each option at start of year 2 is Rs 25 and the settlement payment is Rs 1.0 million
(c) Fair value of each option at start of year 2 is Rs 15 and the settlement payment is Rs 0.8 million
(d) Fair value of each option at start of year 2 is Rs 15 and the settlement payment is Rs 0.6 million
Page | 59
Cash settled SBP
Entry
Dr Expense/Asset
Cr Liability
Measurement
• Measure at FV of liability when the goods/services are received.
• Remeasure subsequently at each year end and on settlement. Take differences to P&L
IG Example 12
An entity grants 100 cash share appreciation rights to each of its 500 employees, on condition that the employees
remain in employment for next 3 years. During year 1, 35 employees leave and its estimated that a further 60 will
leave. During year 2, 40 employees leave its estimated that a further 25 will leave. During year 3, 22 employees
leave. Calculate the amounts to be recognised if the actual information is as follows:
Year Fair value Intrinsic value (Cash paid) Number of employees who have exercised the SARs
1 Rs 14.4
2 Rs 15.5
3 Rs 18.2 Rs 15 150
4 Rs 21.4 Rs 20 140
5 Rs 25 113
SBP with choice between equity or cash settlement

Choice of settlement with counterparty
• The entity has in effect granted a compound financial instrument.
• Measure debt component at FV and the residual is equity component (as in residual value method)
• Subsequently account for debt component as cash settled SBP and equity component as equity settled SBP
• At settlement:
▪ If equity is issued: Dr Liability Cr Equity
▪ If cash is paid: Dr Liability Cr Cash; Dr Equity Cr Retained earnings
Choice of settlement with the entity

Obligation to pay cash No obligation to pay cash
Applicable when? If there are restriction on issue of equity or there If LHS conditions do not exist
is a stated policy or past practice to settle in cash.
Accounting Account for as a cash settled SBP Account for as equity settled SBP
Upon settlement Upon payment Dr Liability Cr Cash If payment is made: Dr Equity Cr
Cash and Dr/Cr difference to P&L
If equity is issued: Dr Equity Cr
Share capital
An entity grants to an employee the right to choose either 1,000 phantom shares, i.e. a right to a cash payment
equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’
service. At grant date, the entity’s share price is Rs 50 per share. At the end of years 1, 2 and 3, the share price is
Rs 52, Rs 55 and Rs 60 respectively. If the share alternative is taken, the vested shares have a restriction that they
cannot be sold for 2 years. The entity estimates that the grant date fair value of the share alternative is Rs 48 per
share. Calculate the amounts to be recognised if at the end of year 3, the employee chooses:
Page | 60
(a) The cash alternative (b) The equity alternative
An entity grants 10,000 shares with a fair value of Rs 33 per share to a senior executive, conditional upon the
completion of three years’ service. By the end of year 2, the share price dropped to Rs 25 per share. At that date,
the entity added a cash alternative to the grant, whereby the executive can choose whether to receive 10,000
shares or cash equal to the value of 10,000 shares. At the end of the 3 rd year, the share price is Rs 22. Calculate
the amounts to be recognized in each year.
An entity offers its 1,000 employees the opportunity to participate in an employee share purchase plan. Under
the terms of the plan, the employees are entitled to purchase a maximum of 100 shares each. The purchase price
will be 20% less than the market price. All shares purchased cannot be sold for 5 years. Any dividends paid during
the 5-year period will be held in trust for the employees until the end of the 5-year period. 800 employees
accepted the offer and each employee purchased 80 shares on average. The average market price of the
purchased shares was Rs 30 and the average fair value was Rs 28. Calculate the amounts to be recognized in each
year.
Parent company grants 200 share options to each of 100 employees of its subsidiary company, conditional upon
the completion of 2 years’ service with the subsidiary. The FV of the share options on grant date is Rs 30 each. At
grant date, the subsidiary estimated that 80% of the employees will complete the 2-year service period. At the
end of year 2, 81 employees complete the required 2 years of service. The parent does not require the subsidiary
to pay for the shares needed to settle the grant of share options.
Required: Provide Journal entries in the books of Parent and Subsidiary.
Reload Feature
service over the next 2 years. The fair value and exercise price per option is Rs 20 and Rs 50 respectively. After 2
years, an additional 50 share options would be granted to each employee, if the respective employee pays the
exercise price in the form of entities’ shares (rather than cash). These share options would vest subject to a further
1 year of service.
At the end of year 2, 450 employees remained in service, and 50% of these employees exercised the options using
entities shares. The fair value of additional share options granted at this date was Rs 30 per option.
Calculate the amounts to be recognized in each year.
Group share based payments

In the following circumstances, determine how the transactions should be accounted for in Subsidiary Limited’s
financial statements.
(a) Subsidiary Limited grants its own shares to its employees and is required to buy shares (i.e. treasury shares)
from Parent Limited, to satisfy its obligations to its employees.
(b) Subsidiary Limited grants its own shares to its employees and Parent Limited to provide the shares.
(c) Parent Limited grants its shares directly to the employees of Subsidiary Limited
(d) Subsidiary Limited grants shares of Parent Limited to its employees.
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Example: Share based payments with deferred tax implications
On January 1, 2010, Aay limited granted 100 share options to each of its 500 employees conditional upon the
employees working for Aay over the next 3 years. The fair value of each share option at the grant date is Rs 15.
Aay limited correctly estimated that 20% of employees will leave during the 3 year period. Remainder 80%
employees exercised their options at an exercise price of Rs 10 per share on January 1, 2013.
Applicable tax rate is 30%. The tax authorities allow a deduction equal to the intrinsic value of the options at the
exercise date of options. Calculate the current and deferred tax adjustments to be recognised in years 2010
through 2012, if the fair value of the entity’s shares was as under:
Date: December 31, 2010 December 31, 2011 December 31, 2012
Fair value: Rs 20 Rs 30 Rs 35
Page | 62
IAS 19 + IFRIC 14
Identifying the type of employee benefits (EBs)
Short term EBs Post employment EBs Other long term EBs Termination benefits
Payable within 12 Payable on completion of Payable after 12 months Payable when employee
months of year end employment (accrues of year end accepts employer’s
over employment period) redundancy offer
Short term EBs

Short term compensated absences
• Non accumulating leaves cannot be carried forward and hence no separate provision is required.
• Accumulating leaves can be carried forward and are accounted for as follows:
▪ Vesting (i.e. can be converted to cash): Provision = Average salary per day x no of days unused
▪ Non-vesting (cannot be converted to cash): Average salary per day x no of days expected to be used
▪ In the year of provision = Dr. Salary Expense & Cr. Provision
▪ In the year of utilization of leaves = Dr. Provision & Cr. Salary Expense
Profit sharing or bonus plans

• Not treated as dividend.
• Dr Expense (Profit x %) Cr. Liability
Post employment benefit plans - Defined contribution plan

• Obligation is limited to contribution and no obligation afterwards e.g. provident
• Recognise asset for prepaid contribution and liability for contribution payable
Post employment benefit plans - Defined benefit plan

Concept
Obligation is not limited to contribution, whether or not a separate fund exists e.g. gratuity, pension etc.
Plan obligation
PV at the beginning of the year xxx
Interest cost xxx
Current service cost xxx
Past service cost raised during the year xxx
Remeasurement loss / (gain) xxx
Benefits paid (xxx)
PV at end of the year xxx
Plan assets
FV at beginning of the year xxx
Interest income xxx
Remeasurement gain / (loss) xxx
Contributions xxx
Benefits paid (xxx)
FV at end of the year xxx
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Net asset/liability = ‘PV of obligation at year end’ minus ‘FV of plan assets at year end’
Statement of comprehensive income

P&L = Net interest cost (interest cost less interest income) + Current service cost + Past service cost raised during
the year
OCI = Actuarial gain/loss + Diff. between actual and expected return on plan asset + asset ceiling adjustment
Interest costs
• Discount rate at start of year x Net asset/liability
• This discount rate reflects interest rate on high quality government bonds
Current service costs

The current service cost is accrued on straight line basis during the years of service rendered by employee
Past service costs

• Arise due to changes in terms of plan by management (not actuary) that have an effect on past costs
• Increase in past service cost is added to PV of obligation and is expensed in P&L immediately
Actuarial gains/losses
• The calculation of PV and FV is based on some assumptions e.g. discount rate, expected salary, years of service
etc. These assumptions may change from time to time. Actuarial gain/losses arise due to these changes.
• Actuarial gains/losses are recognised in OCI and this OCI is taken to Retained earnings in SOCIE
Curtailments and settlements

• Reduction in future (not past) benefits is a curtailment
• Extinguishment of obligation is a settlement
• Compare the net asset/liability before the curtailment/settlement and take difference to P&L
Benefits paid
Dr. Obligation Cr. Plan assets
Asset ceiling
• If there is net asset it should not be greater than: ‘PV of reduction in future contributions’ + ‘PV of refunds’.
• Take any write down to OCI
Exam Disclosures
• Description of plan and principal actuarial assumptions
• Reconciliation of PV of obligation and FV of plan
• Reconciliation of net asset/liability
• Breakup of amounts reflected in P&L and OCI
• Contribution expected to be paid next year
Other long term employee benefits

Accounting treatment is same as defined benefit plans, except only that all changes are recorded in P&L.
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Termination benefits
Dr Expense and Cr Liability when the offer of termination is made to employee or related restructuring is
recognised.
Example: LEL operates an approved pension scheme (defined benefit plan) for all its permanent employees who
have completed one year’s service. The details for the year ended 30 June 2012 relating to the pension scheme
are as follows:
During the year, LEL had amended the scheme whereby the employees’ pension entitlement had been increased.
According to actuarial valuation the present value of the cost of additional benefits was Rs. 15 million. The
discount rate is 13%.
Required:
Prepare the relevant extracts from the statement of financial position and the related notes to the financial
statements for the year ended 30 June 2012, assuming that:
a) There were no changes to the plan (except for those mentioned above) as of 30 June 2012.
b) As of 30 June 2012, as a result of a golden handshake severance scheme, the number of employees covered
by the plan has been reduced by 50% and accordingly the revised present value of pension scheme obligation
was computed as Rs 60 million. Since the employees were entitled to pension, the severance payments had
to be increased by Rs 55 million on account of this entitlement. However, these payments were not made out
of pension scheme assets.
c) Same scenario as (b) above. In addition, the local law does not allow LEL to reduce contribution to the fund or
to obtain any refund out of the fund due to surplus assets.
d) As of 30 June 2012, LEL agreed with all members of the fund to discontinue the pension scheme plan. In
consideration for their agreement, LEL paid an amount of Rs 100 million to the fund members. All pension
scheme assets were liquidated for the payment and the remainder amount was paid out of cash available
with LEL.
Page | 65
Group Financial Statements
Accounting in separate financial statements (Includes IAS 27 knowledge)
Investee Individual / Separate FS Consolidated

FS
Subsidiary Carry at: Consolidate
• Cost; or
• FV under IFRS 9
• Equity accounted under IAS 28
Associate / Joint venture a) If you have investment only in associates or JVs, you apply Equity
Equity accounting in Individual FS. accounting
b) If you have investment in subsidiary also and therefore are
required to prepare consolidated FS, carry at “Cost” or “FV
under IFRS 9” or “Equity accounted under IAS 28” in separate FS.
Joint operation Proportionately consolidate Proportionately

consolidate
Equity accounting for associate and JVs (Includes IAS 28 knowledge)
Associate
An entity over which the investor has significant influence (i.e. voting rights between 20% and 50%). Potential
voting rights that are presently exercisable are also considered, however, % share for P&L/OCI is based solely on
existing voting rights.
Joint venture
• An arrangement over which two or more parties have joint control and have rights to its net assets.
• The accounting treatment for investment in JVs is absolutely same as associate.

1. Recognise initially at cost of investment as investment in associate
2. If % share of FV of net assets is greater than cost of investment, the difference is credited to share of profit of
associate and debited to cost of investment
3. Share in post investment profits/losses and Share in OCI is added/reduced from investment in associate.
4. Any dividends received are reduced from investment in associate
5. The investment is tested for impairment and the recoverable amount is computed by discounting the future
streams of expected dividends or taking % share of total cashflows of associate

• Share of profit of associate and share of OCI of associate appear in statement of comprehensive income.
• Share of profit of associate (SOPA) = adjusted profit of associate x % share
• Share of OCI of associate = adjusted OCI of associate x % share
Page | 66
Adjustments
Intragroup sale of inventory: Eliminate share % of unrealised profits of unsold stocks.
• If the seller is the Investor: Dr. Investor’s profit and Cr. Investment in associate.
• If the seller is the associate: Dr. SOPA and Cr. Investor’s inventory.
Intragroup sale of PPE @ gain: Eliminate investor’s share % of unrealised gain on sale of PPE.
• If the seller is the Investor: Dr. Investor’s profit and Cr. Investment in associate.
• If the seller is the associate: Dr. SOPA and Cr. Investor’s PPE.
• Reduce investor’s share % of extra depreciation from buyer’s profit or share of profit.
Intragroup sale of PPE @ loss: If the loss is indicative of impairment, no adjustment is required. If loss is not
indicative of impairment, reverse the share % of loss on sale of PPE.
• If the seller is the Investor: Dr. Investment in associate and Cr. Investor’s profit.
• If the seller is the associate: Dr. Investor’s PPE and Cr. SOPA.
• Add investor’s share % of under charged depreciation to buyer’s profit or share of profit.
Additional depreciation for FV adjustments: If the FV of assets acquired is more than their carrying amount,
additional share % depreciation for this extra amount is charged. Dr. SOPA and Cr. Investment in associate.
Deferred tax affects: Any change to CA amount of asset will give rise to DT. The DT exp/income is recognised in
books of seller and the asset/liability is recorded in books of buyer.
General: If any adjustments are required to be made to associate’s income/expense, it is made to share of profit.
If any adjustments are required to be made to associate’s asset/liability, it is made to investment in associate.
Loss making associates

• Loss is allocated in the following orders:
o Investment in associates’ ordinary shares
o Investment in associate’s preference shares
o Long-term loans
• No loss is allocated to trade receivables/payables.
• If any loss remains unrecognised, subsequent profits are not recognised to extent of unrecognised losses.
Preference shares of associate

If an associate has preference shares classified as equity, the share of profit of associate is computed as:
[Adjusted profit of associate – total preference dividend] x % ownership + preference dividend receivable by
investor from associate
Classification as held for sale

• Apply IFRS 5 to an investment in associate or a joint venture that meets the criteria of held for sale.
• Any retained portion of the investment that has not been classified as held for sale shall be accounted for
using the equity method until disposal.
Disposal of interest in associate (loss of significant influence)

1. Fair value the amount of investment retained after disposal. Take the difference on fair value adj. to P&L.
2. Calculate gain/loss on disposal of associate as follows:
Consideration received on disposal xxx
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FV of investment retained xxx
CA of investment in associate under equity method on date of disposal (xxx)
Gain / (loss) xxx .
In addition, OCI Reserves relating to Associate appearing in the Statement of Financial Position are reclassified to
Retained Earnings upon disposal. Only Exchange Translation OCI reserve and Cash Flow Hedge OCI reserve are
reclassified to P&L.
Changes in ownership interest of associate (without loss of significant influence)

If ownership interest in an associate or a joint venture is reduced, but still the equity method is applied, reclassify
to profit or loss the % of the OCI relating to reduction and reduce the carrying amount of Investment in associate
on pro-rata basis.
Contribution of non-monetary asset to associate/JV

If such a contribution lacks commercial substance, full amount of the gain or loss is regarded as unrealised and is
reversed.
Consolidation of subsidiaries (Includes IFRS 10 knowledge)
Control
• An investor controls an investee when it is exposed to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee.
• An investor is exposed to variable returns when its returns vary as a result of the investee’s performance.
• An investor has power over an investee when
✓ it has the ability to direct the activities that significantly affect the investee’s returns; and
✓ it has the ability to use its power to affect the investor’s returns from such direction.
• Franchise arrangements generally do not give the franchisor control over franchisee.
• Potential voting rights (e.g. derivatives) should also be considered in assessing control.
• Post acquisition changes in equity shall be allocated to the parent and NCI in ratio of existing ownership.
Transition from separate FS to consolidated FS

The basic journal for transition is as follows:
Dr. Share capital of subsidiary at acquisition
Dr. Retained earnings and reserves of subsidiary at acquisition
Dr. Goodwill (Balancing)
Cr. Investment in subsidiary (At cost of investment)
Cr. Non-controlling interests (At % share or FV)
Consolidated statement of financial position:

Line by line addition: Add all assets and liabilities line by line after elimination of all intra-group balances
Goodwill (W1):
Cost of investment xxx
FV of net asset:
Share capital xxx
Share premium xxx
Retained earnings of subsidiary at acquisition date xxx
Page | 68
Other reserves xxx
Fair value adjustments xxx
(xxx)
Non-controlling interest (at fair value or proportionate of net assets) xxx
Goodwill xxx
Cost of investment:
• If the payment of cash is deferred, take PV.
• If there is a share to share exchange, take market value of shares given.
Deferred tax effects of fair value adjustment:

• Due to FV adjustment, there is creation of a revaluation surplus in subsidiary’s FS.
• This revaluation surplus is eliminated as part of subsidiary’s equity on transition to consolidated FS.
• A deferred tax liability is created which reduces the FV of net assets acquired and increases the GW.
Non-controlling interests (W2):

Initial amount [(At % of NAs (partial goodwill) or Fair value (full goodwill)] xxx
NCI raised during the year xxx
Share of post-acquisition changes in equity (P&L or OCI) xxx
Dividend paid to NCI (xxx)
Carrying amount at year end xxx
Consolidated retained earnings (W3):

Parent’s retained earnings at year end xxx
Subsidiary’s retained earnings at year end xxx

Subsidiary’s retained earnings at acquisition date (xxx)
Adjustments to subsidiary’s profits xxx
xxx (@ % ownership) xxx
Adjustments to parent’s profits xxx

xxx
Dividend by subsidiary: Dividend payable by a subsidiary is payable to both parent and NCI. The dividend
receivable appearing parent’s SFS is only its share. Thus, in consolidated FS dividend payable = dividend payable
by Parent + dividend payable by subsidiary to NCI.
Consolidated statement of comprehensive income:

Line by line addition: Add all incomes and expenses line by line after elimination of intra-group transactions.
Dividend by subsidiary: It should not appear in consolidated SCI.
Impairment of GW: Show impairment of GW in consolidated SCI.
Profit attributable to non-controlling interests: Adjusted profits of subsidiary x % not owned by parent.
Adjustments:
Page | 69
Intra-group sale of inventory: Eliminate unrealised profits on unsold stocks.
• If the seller is parent: Dr. Parent’s profits and Cr. Inventory
• If the seller is subsidiary: Dr. Subsidiary’s profits and Cr. Inventory
NRV adjustment of inventory: If the inventory sold intra-group has been written down to NRV, this write down
may be artificial since cost of inventory is already overvalued. Therefore, reverse the NRV adjustment and then
proceed to eliminate unrealised profit on unsold stocks.
Intra-group sale of PPE @ gain: Eliminate unrealised gain on sale of PPE.

• If the seller is parent: Dr. Parent’s profit and Cr. PPE.
• If the seller is subsidiary: Dr. Subsidiary’s profit and Cr. PPE
• Reverse extra depreciation from buyer’s profits.
Intra-group sale of PPE @ loss: If the loss is indicative of impairment, no adjustment is required. If loss is not
indicative of impairment, reverse the loss on sale of PPE.
• If the seller is parent: Dr. PPE and Cr. Parent’s profit.
• If the seller is subsidiary: Dr. PPE and Cr. Subsidiary’s profit
• Charge reduced depreciation to buyer’s profits.
Additional depreciation for FV adjustments: If the FV of assets acquired is more than their carrying amount to the
subsidiary, additional depreciation for this extra amount is charged in consolidated financial statements in
subsidiary’s profits. Dr. Subsidiary’s profits and Cr. PPE.
Deferred tax affects: Any change to CA amount of asset will give rise to DT. The DT exp/income is recognised in
books of seller and the asset/liability is recorded in books of buyer.
Investment of Parent in Preference shares of a subsidiary
Preference of the subsidiary may be classified as:

Equity Liability
Preference shares are not taken as part of net assets Preference shares are already deducted from net
in GW working. assets in GW working since they are a liability.
Parent’s investment in preference shares is eliminated Parent’s investment in preference shares is eliminated
against outstanding preference shares of subsidiary. against outstanding liability of subsidiary.
Preference shares not owned by parent are Preference shares not owned by parent are shown as
attributable to NCI and are therefore added to NCI. liability in consolidated FS
Profit attributable to NCI is calculated as: [(Adjusted Profit attributable to NCI is unaffected.
profit of subsidiary – Preference dividend) x % owned
by NCI] + preference dividend payable to NCI.
Page | 70
Consolidated statement of changes in equity:
Attributable to owners of the Parent Non-
Share Retained Controlling Total
Total
capital earnings Interests
Opening balance xx xx xx xx xx
Profit for the year xx xx xx xx
Dividend paid by Parent (xx) (xx) xx
Dividend paid by Subsidiary to NCI (xx) xx
Acquisition / disposal of subsidiary xx xx
Closing balance xx xx xx xx xx
Retained Earnings portion:

B/F Consolidated RE [B/F RE of parent + (B/F post acq. adjusted RE of S x % owned)] xxx
Profit for the year (Attributable to parent only) xxx
Dividends (Parent’s only) (xxx)
C/F Consolidated RE xxx
Changes in Holdings (Includes IFRS 10 Knowledge)
Acquisition of further interest

With change in control:
1. E.g. before acquisition of further interest parent held 40% and after acquisition it holds 60%.
2. Remeasure previous interest at FV and take difference to P&L
3. Begin consolidation
4. Calculate GW as follows:
Cost of investment xxx
FV of previously held interest xxx
FV on net assets (xxx)
Non-controlling interest (at fair value or proportionate of net assets) xxx
Goodwill xxx
Without change in control

1. E.g. before acquisition of further interest, parent held 60% and after acquisition it holds 80%.
2. 20% is a treasury shares transaction, you are buying your own shares and therefore any gain or loss is
recorded in Retained Earnings
3. The gain or loss on further acquisition is computed as follows:
Consideration paid xxx
Reduction in NCI:
NCI at date of further acquisition per NCI working x NCI percentage acquired xxx
Total NCI percentage
(Gain) / Loss to Retained Earnings xxx
4. Dr. NCI (Reduced)

Cr. Cash (amount paid for acquisition of additional interest)
Dr. / Cr. Retained earnings (Balancing)
Page | 71
Disposal of interest
With loss of control:
1. E.g. before disposal of interest, parent held 60% and after disposal it holds 40%.
2. Remeasure retained interest at FV
3. Reverse any gain on disposal recorded in separate FS
4. Calculate gain / (loss) on disposal for consolidated FS as follows:
FV of consideration received (May be zero for deemed disposal) xxx
FV of investment retained xxx
Less:
Carrying amount of Goodwill at Disposal Date (DD) xxx
Net assets of Subsidiary as per Consolidated FS at DD xxx
Carrying amount of Non-controlling interests at DD (xxx)
(xxx)
Gain / (loss) to consolidated P&L xxx
In addition, OCI Reserves relating to Subsidiary (Attributable to Parent’s Share) appearing in the Consolidated
Statement of Financial Position are reclassified to Retained earnings upon disposal. Only Exchange Translation
OCI reserve and Cash Flow Hedge OCI reserve are reclassified to P&L.
Deemed disposal
It occurs when a Subsidiary issues further shares to parties other than the parent. The interest of parent is
diluted and hence control is lost without receipt of any consideration. Account for as above.
Without loss of control

1. E.g. before disposal of interest, parent held 80% and after disposal it holds 60%.
2. 20% is a treasury shares transaction
Dr. Cash (amount received for disposal of 20% interest)
Cr. NCI (Increased)
Dr. / Cr. Retained earnings (Balancing)
3. Calculate gain / (loss) on disposal for consolidated FS as follows:
Consideration received xxx
Increase in NCI:
Net assets of Subsidiary as per Consolidated FS at disposal xxx
GW (If full GW method is used) xxx
xxx
@ % disposed (xxx)
Gain / (loss) to Retained Earnings xxx
Accounting for Joint arrangements (Includes IFRS 11 knowledge)
Joint arrangements
A joint arrangement is an arrangement in which two or more parties have joint control. It is of two types:
• Joint operation: parties have rights to the assets, and obligations for liabilities. Parties are “joint operators”.
• Joint venture: parties have rights to the net assets of the arrangement. Parties are “joint venturers”.
Page | 72
Classifying the arrangement
Whether the arrangement is a joint operation or a joint venture depends on its structure:
• If it is not structured through a separate vehicle (i.e. a separately incorporated entity), it is a joint operation.
• If the assets and liabilities are held in a separate vehicle, it can be either a joint venture or a joint operation.
Assessing the terms of the contractual arrangement

Joint operation Joint venture
The terms of the The parties have rights to assets, and The parties have rights to the net assets of
contractual obligations for the liabilities. the arrangement (i.e. it is the separate
arrangement vehicle, not the parties, that has rights to the
assets, and obligations for the liabilities).
Rights to assets The parties share all title/ownership in the The assets are the arrangement’s assets. The
assets in a specified proportion parties have no title/ownership in the assets.
Obligations for (a) The parties share all liabilities and (a) The joint arrangement is liable for the
liabilities expenses in a specified proportion. debts of the arrangement.
(b) The parties are liable for claims raised (b) The creditors of the joint arrangement do
by third parties. not have rights of recourse against any party.
Revenues, The allocation of revenues and expenses The party’s share in the profit or loss is based
expenses, profit or between parties is based on a specified on activities of the arrangement.
loss proportion.
Guarantees The parties may be required to provide guarantees on behalf of a joint arrangement. The
provision of such guarantees does not constitute the arrangement as a joint operation.
Financial statements of Joint operators

A joint operator shall proportionately consolidate the joint operation
It should recognise its % share of assets, liabilities, revenue and expenses.
Absolutely same accounting and adjustments as a subsidiary (explained above), but only that % share is applied
to each FSLI/adjustment.
Complex Groups (Includes IFRS 10 Knowledge)
Vertical Groups
• In this arrangement the Parent (P) holds control over a subsidiary (S) and the subsidiary in turn has control
over another entity (Sub-subsidiary – SS).
• Assess control by actual %. E.g. if P controls 60% of S and S controls 70% of SS, P actually controls 70% of SS.
• For calculation of goodwill, consolidated retained earnings and non-controlling interests, check effective %.
In above case the effective holding of P in SS is 42% (70% x 60%).
• Cost of investment in SS is taken as % of investment in S. The remaining cost of investment is reduced from
NCI.
• Dividend is eliminated on actual %.
• Goodwill and Gain on bargain purchase on two companies is not offset
Example
Page | 73
P holds 80% in S which holds 60% in SS. Cost of investment of P in S is Rs 100,000 and of S in SS is Rs 50,000.
Dividend payable by SS is Rs 1000. Show amounts to be reflected in consolidated FS.
• Goodwill for SS is calculated as follows:
Cost of investment in SS (investment of S in SS x % of P in S) xxx
FV of net asset (xxx)
Non-controlling interest (at fair value or effective % of net assets) xxx
Goodwill xxx
Triangular groups
• In this arrangement, P holds control over S and the S has some investment in another entity (Sub-subsidiary
– SS). P also has some investment in it and in total, controls SS. E.g. P holds 60% in S. S holds 25% in SS. P
holds 40% in SS.
• Assess control by actual % i.e. add the % ownership of P and S in SS. Thus P has actual % in SS of 65% (25% +
40%).
• For calculation of goodwill, consolidated retained earnings and non-controlling interests, check effective %.
In above case the effective holding of P in SS is 55%. [40% + (25% x 60%)].
• Cost of investment is taken at total. Add cost of investment of P in SS and S in SS (taken as % of investment
in S). The remaining cost of investment is reduced from NCI.
• Dividend is eliminated on actual %.
• Goodwill for SS is calculated as follows:
Investment in SS – Direct xxx
Investment in SS - Indirect (Investment of S in SS x % of P in S) xxx
NCI (at fair value or effective % of net assets) xxx
FV of net assets (xxx)
Goodwill xxx
Consolidation of Foreign subsidiary (Includes IAS 21 knowledge)

Functional currency (FC)
In case of a foreign subsidiary, the FC of the subsidiary is the same as its parent if:
(a) the foreign operation has low degree of autonomy
(b) the foreign operation has a high proportion of transactions with parent
(c) the foreign operation’s cashflows are readily available for remittance to parent
(d) the foreign operation obtains all its finance from parent
Translation of foreign operation (FO)

FC of FO is not hyperinflationary: Assets/Liabilities: Closing rate; Income/Expense/OCI: Average rate; Pre-
acquisition reserves: acquisition date rate; Post acquisition reserves: Average rate
FC of FO is hyperinflationary: Assets, liabilities, income, expense and OCI: Closing rate after IAS 29 adjustment.
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Translation schedule
Foreign currency Rate Functional currency
Assets of S (except GW) xxx CR xxx
Share capital xxx Acq. date rate xxx

Reserves at acquisition xxx Acq. date rate xxx
Fair value adjustments xxx Acq. date rate xxx
Post-acquisition reserves xxx Avg. Rate xxx
Liabilities xxx CR xxx
Translation reserve (Balancing) xxx
xxx
Points to note
• Only those adjustments are made in the schedule whose Dr. and Cr. affects (both) can be made within
translation schedule itself.
• The totals of foreign currency must balance.
• Translation reserve is recognised in OCI and is reclassified to P&L on disposal of the operation.
• NCI also gets % share of the translation reserve
Goodwill
• It is treated as subsidiary’s asset and is re-measured at CR each year.
• The difference is routed through OCI and is added to translation reserve
• The amount is attributed to NCI only if NCI is initially recognised at FV.
• The amount attributed is determined on basis of profit sharing %.
• If GW is subsequently impaired the effect of impairment does not affect translation reserve.
Example: Consideration paid for acquisition of 80% interest is $ 980. FV of net assets is $ 1000. Exchange rate at
acquisition was Rs.90/$1 and at year end is Rs.100/$1. Calculate initial GW and GW at year end assuming:
(a) NCI is at FV and its FV is 220 (b) NCI is measured on proportionate basis.
Intra-group monetary asset/liability: Cannot be eliminated against the corresponding intragroup liability (or
asset) without showing the results of currency fluctuations in the consolidated financial statements.
Disposal of a foreign operation

If control is lost: Translation reserve attributable to parent is reclassified to P&L
If control is not lost: Re-attribute translation reserve to NCI in new ratio
Impairment of foreign operation or goodwill: It is not treated as disposal. Therefore, no change occurs to
translation reserve.
Consolidated statement of cash flows Includes (IAS 7 knowledge)

Cash and cash equivalents include cash in hand, cash at bank, and short-term highly liquid investments.
Operating activities Investing activities Financing activities

Cash flows from principal revenue- Cashflows from acquisition/sale of Cash payments for finance lease
producing activities of the entity PPE, intangibles, long-term assets and dividends paid etc.
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Ways of presenting operating activities
Direct method
Cash received from customers (from debtors T-account) xxx
Cash paid to suppliers and employee (from combined T-account of all expenses) xxx
Cash generated from operations xxx
Interest paid (xxx)
Income tax paid (xxx)
Other major operating payments (xxx)
Cash flows from/ used in operating activities xxx
Indirect method
Profit before tax xxx
Non-cash expenses xxx
Non-operating items xxx
Dividend income (xxx)
Finance costs xxx
xxx
Adjustments for working capital changes +/- xxx
Cash generated from operations xxx
Consolidation of statement of cashflows

• Simply prepare consolidated SCF from consolidated SFP and SCI.
• If a subsidiary is acquired during the year:
(a) show payment for acquisition of subsidiary as outflow. This outflow = cash paid for acquisition – cash and
cash equivalents acquired as part of subsidiary
(b) for working capital changes, deduct acquisition date working capital balances of subsidiary from year-end
figures of working capital in consolidated SFP
• If a subsidiary is disposed during the year:
(a) show receipt for disposal of subsidiary as inflow. This inflow = cash received for disposal – cash and cash
equivalents disposed as part of subsidiary
(b) for working capital changes, deduct disposal date working capital balances of subsidiary from year-
opening figures of working capital in consolidated SFP
• For dividend paid to NCI, make NCI T-account
• For impairment of goodwill, make goodwill T-account
• For dividend from associate or impairment of associate, make investment in associate T-account.
Foreign currency cash flows

Apply average exchange rate to translate foreign exchange cashflows to local currency.
Disclosures
• Components of cash and cash equivalents
• Significant cash and cash equivalent balances held by the entity that are not available for use by the group.
• In respect of acquisition of disposal of subsidiary:
(a) total consideration paid or received in cash and non-cash
(b) amount of cash and cash equivalents in the subsidiaries acquired
(c) amount of the assets and liabilities other than cash or cash equivalents acquired in the subsidiary
• Non-cash transactions, e.g. acquisition of assets by finance lease, acquisition of a subsidiary by equity issue
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IFRS 3
Scope exclusion
• Joint ventures
• BC where before and after the BC the controlling parties remain the same
Identifying a BC
➢ The assets acquired should constitute a business. The business should have inputs and processes. Outputs
are not necessary.
➢ Control over the business should be acquired through voting rights or potential voting rights.
Assets, liabilities and non-controlling interests in a BC

➢ Recognise all assets/liabilities at their fair values at the date of acquisition.
➢ Assets recognised should (a) be identifiable (b) arise as a result of BC and not a separate transaction
➢ Liabilities recognised should be arise as a result of BC and not a separate transaction
Important exceptions to the general fair value principle

Contingent liability: A contingent liability should be recognised as provision even if FV is determinable even if
outflow is not probable.
Tax balances and Defined benefit plan balances: Their FV is not relevant and carrying amount per IAS 12 / 19 is
brought into Consolidated financial statements.
Indemnification asset: It is recognised on the same time and measured on the same basis as indemnified item.
For example, the acquiree agrees with the acquirer that an investment (at fair value through profit & loss) sold
as part of BC will have a market value of atleast Rs. 100,000. In case, it is realised at below Rs 100,000, the
acquiree will make good the difference. Thus the acquiree is indemnifying the acquirer. This right to be
indemnified is indemnification asset and the investment is the indemnified item. The indemnification asset is
measured in the same way as indemnified item i.e. at FVTPL.
Leases in which acquiree is a lessee: The acquirer is not required to recognise ROU assets and lease liabilities for
leases for which the lease term ends within 12 months of the acquisition date, or, if the underlying asset is of
low value. The acquirer shall measure the lease liability at the PV of remaining lease payments as if the acquired
lease were a new lease at the acquisition date using fair value rentals. The differential adjustment would be
recorded as fair value adjustment in goodwill.
Settlement of Pre-existing relationship (PER): PER is for example the acquirer granted a license to acquiree
before BC. The license was favourable or unfavourable to acquirer as compared to market terms. Under the BC
the license comes back to acquirer and the PER is settled. Thus at BC a gain/loss is recognised. The gain/loss is
recognised at lower of:
➢ Difference b/w terms of contract and market terms
➢ Repudiation penalty in contract
Contingent consideration in a BC
Consideration that is contingent on some uncertain event is recognised at its acquisition date FV as:
(i) Asset: if acquirer has right to receive back some consideration
(ii) Liability: if cash, any financial asset or variable number of equity instruments are to be delivered
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(iii) Equity: if fixed number of acquirer’s own equity instruments are to be delivered
Subsequent adjustments to contingent consideration
Changes resulting from clarification Changes resulting from additional
of events (measurement period events after acquisition date
adjustments)
Within 12 months of Adjust goodwill in Consolidated FS; Asset/Liability: P&L
acquisition Adjust invest in Separate FS Equity: Retained earnings
After 12 months of P&L Asset/Liability: P&L
acquisition Equity: Retained earnings
Acquisition related costs

• Include expenses such as legal, advisory, finder’s fee, due diligence etc.
• Expenses when incurred
IFRS 12
Key definitions
• Interest in another entity: Mainly: Control or jointly control or significantly influence another entity.
• Structured entity: An entity designed in a way that voting rights are not the dominant factor in deciding who
controls the entity
Significant judgements and assumptions

An entity discloses information about significant judgements and assumptions it has made (and changes in those
judgements and assumptions) in determining:
• that it controls another entity
• that it has joint control of an arrangement or significant influence over another entity
• the type of joint arrangement (i.e. JO or JV) when the arrangement was structured through a SPV
Interests in subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements to:
• understand the composition of the group
• understand the interest that non-controlling interests have in the group's activities and cash flows
• evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle
liabilities, of the group
• evaluate the nature of, and changes in, risks associated with its interests in consolidated structured entities
• evaluate consequences of changes in ownership interest in a subsidiary that do not result in a loss of control
• evaluate the consequences of losing control of a subsidiary during the reporting period
Interests in unconsolidated subsidiaries

In accordance with IFRS 10, an investment entity is required to apply the exception to consolidation and instead
account for its investment in a subsidiary as FVTPL.
Where an entity is an investment entity, IFRS 12 requires additional disclosure, including:

• the fact the entity is an investment entity
• information about significant judgements & assumptions it has made in determining that it is an investment
entity
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• details of subsidiaries that have not been consolidated (name, place of business, ownership interests)
• details of the relationship and certain transactions between the investment entity and the subsidiary (e.g.
restrictions on transfer of funds, commitments, support arrangements, contracts)
• information where an entity becomes, or ceases to be, an investment entity
Interests in joint arrangements and associates

An entity shall disclose information that enables users of its financial statements to evaluate:
• the nature, extent and financial effects of its interests in joint arrangements and associates
• the nature of, and changes in, the risks associated with its interests in joint ventures and associates
Entity also discloses its shares of the contingent liabilities of the Joint venture or Associate accounted for using
equity method.
Interests in unconsolidated structured entities

An entity shall disclose information that enables users of its financial statements to:
• understand the nature and extent of its interests in unconsolidated structured entities
• evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured
entities
Example 1: Basic consolidation of subsidiary
Given below is the statement of financial position of P and S at December 31, 2010:
P S
Rupees Rupees
Assets
Property, plant and equipment 1,000 800
Investment in S 800 -
Inventory 500 200
2,300 1,000
Equity and liabilities
Share capital 1,000 300
Retained earnings at 1/1/2010 500 300
Profit for the year 2010 200 100
Retained earnings at 31/12/2010 700 400
Liabilities 600 300
2,300 1,000
On 1/1/2010, P acquired 75% share capital of S at a cost of Rs 800. The FV of net assets of S at that time was
the same as their book value except for inventory and an equipment having an excess of Rs 40 and Rs 100
over their book values respectively. The remaining life of equipment at acquisition date was 5 years, whereas
the said inventory was sold by S during the year 2010.
Required: Prepare consolidated statement of financial position as at December 31, 2010.
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Example 2: Consolidated SOCIE
P Limited acquired 80% ordinary shares of S Limited on 1-January-2013 when its net assets were as follows:
Rs in 'M'
Share Capital (Rs 10 each) 100
Retained earnings 50
The fair value of net assets at acquisition can be assumed to be the same as their book value. Following financial
information is relevant to P Limited and S Limited as for the year ended 2014:
P S
Rs in 'M'
Share Capital (Rs 10 each) 300 100
Retained earnings as of January 1, 2014 150 80
Profit for the year 2014 100 60
Dividend paid during 2014 30 20
There are no other adjustments.
Required: Prepare Consolidated Statement of Changes in Equity of P Limited for the year ended 2014.
Example 3: Basic Equity Accounting

Parent limited acquired 25% share capital of Associate limited at a cost of Rs 450,000 on 1 January 2011. The fair
value of net assets of Associate limited at that time was Rs 2 million. The excess of fair value is due to plant and
machinery of Associate limited which is depreciated on straight line basis and has 5 years remaining useful life.
During the year ended December 31, 2011:

• Profit after tax of Associate limited was Rs 200,000 and OCI was Rs 40,000.
• Associate limited declared ordinary dividends of Rs 60,000
• Parent limited sold inventory costing Rs 100,000 to Associate limited at 20% mark-up. 50% of this
inventory was unsold at year end.
• On 1/1/ 2011, Parent limited sold a building with a carrying amount of Rs 150,000 to Associate limited for
200,000. The remaining useful life of the building at time of sale was 10 years

• All unsold inventory kept by Associate limited as at December 31, 2011 was sold during the year.
• On 1/1/2012, Parent limited sold a plant with a carrying amount of Rs 100,000 to Associate limited for
80,000. The remaining useful life of the plant at time of sale was 5 years

• During the year, Associate limited also issued 10% preference shares with a face value of Rs 500,000. None
of these preference shares were subscribed by parent limited. These preference shares are non-
redeemable and were classified as equity. However, they don’t carry any voting rights.
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• Profit after tax of Associate limited was Rs 210,000 and OCI was Nil.
• As at December 31, 2014 the investment in Associate limited was tested for impairment and the
recoverable amount was computed at Rs 400,000.

• As at December 31, 2015, Parent limited disposed of 80% of its interest in Associate limited (i.e. 20% of
Associate Limited’s shares) for Rs 400,000. The fair value of the interest retained was Rs 80,000. After the
said disposal of interest, Parent limited is no longer able to exercise significant influence over Associate
limited.
Required: Provide Journals to account for the above transactions and determine the share of profit of associate
for, and carrying of amount of investment in Associate limited as at the end of, each year using the equity method
of accounting. Also compute the gain / loss on disposal of interest at December 31, 2015.
Example 4: Basic Equity Accounting

Investor limited acquired 25% share capital of Associate limited at a cost of Rs 500,000 on January 1, 2012.
➢ Profit after tax of Associate limited was Rs 200,000.
➢ Associate limited declared dividends of Rs 60,000
➢ On 1/1/2012 Associate limited sold land with a carrying amount of Rs 100,000 to Investor limited for Rs
200,000.
➢ Investor limited sold inventory costing Rs 200,000 to Associate limited at 30% mark-up above cost. 40% of
this inventory was unsold by Associate Limited at year end.
➢ Applicable income tax rate is 30% whereas dividend income is taxable at 10%. Investor limited does not
intend to dispose the investment in the foreseeable future.
Required: Provide journals to account for the above transactions and determine the share of profit of associate
for the year ended December 31, 2012. Also compute the carrying amount of investment and deferred tax asset
/ liability as at December 31, 2012.
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Example 5: Foreign subsidiary
Following are the draft statements of financial position of P and S as at December 31, 2012:
P S
PKR "m" USD "m"
Property, plant and equipment 2,400.0 10.0
Investment in S 900.0 -
Current assets 700.0 6.0
4,000.0 16.0
Share capital 1,800.0 5.0

Retained earnings 650.0 5.0
Non current liabilities 750.0 2.0
Current liabilities 800.0 4.0
4,000.0 16.0
(i) P acquired 70% ordinary shares of S for USD 10 million on 1 Jan 2012 when retained earnings of S were USD 4 million.
(ii) The fair value of net assets of S was USD 12 million, the excess of FV over carrying amount being attributable to land.
(iii) Following exchange rates are relevant:
1-Jan-12 31-Dec-12 Avg for 2012
Rs 90 / USD Rs 95 / USD Rs 100 / USD
Required: Prepare consolidated statement of financial position of P at December 31, 2012.
Example 6: Foreign subsidiary – more than 1 year
Following are the draft statements of financial position of P and S as at December 31, 2016.
P Limited S Limited
31-Dec-16 31-Dec-15 31-Dec-16 31-Dec-15
PKR "m" PKR "m" FC "m" FC "m"
Property, plant and equipment 2,400 2,000 20 15
Investment in S 800 800 - -
Current assets 800 600 8 5
4,000 3,400 28 20
Share capital 1,800 1,800 10 10

Retained earnings 950 500 8 5
Non current liabilities 500 500 3 2
Current liabilities 750 600 7 3
4,000 3,400 28 20
(i) P acquired 60% ordinary shares of S for FC 10 million on 1 Jan 2012 when retained earnings of S were FC 3 million.
(ii) The fair value of net assets of S was the same as their book value. There are no other adjustments.
(iii) Following exchange rates are relevant:
1-Jan-12 31-Dec-15 31-Dec-16 Avg for 2016
Rs 80 / FC Rs 95 / FC Rs 105 / FC Rs 100 / FC
Required: Prepare consolidated statement of comprehensive income (Total Profit and OCI portion only along with allocation) of
P Limited for the year ended 2016.
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Example 7: Deferred Tax in consolidation
Given below is the statement of financial position of P and S at December 31, 2016.
P S P S
Rupees in millions Rupees in millions
Assets Equity and liabilities
Property, plant and equipment 1,000 800 Share capital 1,000 300
Investment in S 800 - Retained earnings 700 400
Inventory 500 200 Liabilities 600 300
2,300 1,000 2,300 1,000
On 1/1/2016, P acquired 80% share capital of S at a cost of Rs 800 million when the retained earnings of S were Rs 300 million. The
FV of net assets of S at that time was the same as their book value except for equipment having a fair value excess amounting to
Rs 100 million. The remaining life of equipment at acquisition was 5 years. During the year, P sold inventory costing Rs 50 million
to S for Rs 60 million, whole of this inventory was unsold at year end. Tax rate is 30%.
Required: Prepare consolidated statement of financial position as at December 31, 2016.
Example 8: Foreign associate
Aay limited acquired 30% share capital of Bee limited at a cost of USD 500,000 on 1-Jan-2016. Bee Limited is located in USA and its
functional currency is the USD. During the year 2016, Profit after tax of Bee limited was USD 200,000. On 31-Oct-2016, Aay limited
sold inventory at a profit of Rs 2 million to Bee limited. Whole of this inventory was unsold by Bee Limited at year end. On 30-Nov-
2016, Bee limited paid dividends of USD 80,000. Relevant exchange rates were as follows.
Date Exchg rate Date Exchg rate

1-Jan-16 Rs 90 / USD 31-Oct-16 Rs 95 / USD
31-Dec-16 Rs 110 / USD 30-Nov-16 Rs 105 / USD
Average rate for 2016 Rs 100 / USD
Required: Compute the carrying amount of investment as at the end of 2016 and share of profit of associate for the 2016.
Example 9: Sale of ownership interests between group companies

PL has 100% interest in SL. On 31-Dec-2017, PL sold its interest in SL to AL against a cash consideration of Rs 210m.
Percentage of interest sold is given in requirement below. On that date, the carrying amount of Net Assets of SL
as appearing in Consolidated financial statements of PL amounted to Rs 100m. PL holds 20% interest in AL since
2014. The fair value of investment retained in SL amounts to Rs 90m.
Required: Show Journal entries to account for the above disposal assuming:
(a) SL contains a business. 70% interest in SL is sold.
(b) SL does not contain a business. 70% interest in SL is sold.
(c) SL does not contain a business. 90% interest in SL is sold.
Example 10: Contribution of non-monetary assets

On 30-Dec-2017, PL held 30% interest in AL (30m shares out of total 100m shares of AL). On 31-Dec-2017, PL
contributed an item of Property, Plant and Equipment to AL, against which AL issued 10 million shares to PL. The
carrying amount and fair value of the contributed asset amounted to Rs 100m and Rs 130m respectively.
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Required: Show Journal entries to account for the above assuming:
(a) The transfer has commercial substance
(b) The transfer lacks commercial substance
Example 11: Re-acquired right

Aay Limited issued a franchise right to Bee Limited under a 5-year agreement at a franchise lower than market
fee. After 5 years, the agreement can be extended for a further 3 years. With 3 years remaining under the franchise
contract, Aay Limited paid Rs 1000 million to acquire 100% interest in Bee Limited. At that date, the book value
and fair value of the net assets excluding franchise right were Rs 700 million. The book value of franchise right was
Rs 50 million whereas its fair value was as follows.
Assumption Fair value of franchise right Fair value of similar franchise rights
based on existing franchise fee with market based franchise fee
Assuming potential renewals Rs 200 million Rs 160 million
Without assuming renewals Rs 100 million Rs 80 million
Required: Prepare Goodwill working and show the amount of gain or loss to be recorded in consolidated financial
statements.
Example 12: Contingent consideration

On 1- Jan-2012, Aay limited acquired 100% equity interest in Bee limited, Cee limited and Dee limited for Rs
100,000 each. Aay limited also promised further payments to the previous owners of the acquiree companies per
the following performance standards:
▪ Bee limited – The previous owners of Bee Limited claimed that the plant of Bee Limited currently produces
atleast 10,000 unites per annum. Aay Limited agreed that it would check for one year and if the plant really is
capable of producing 10,000 units by 31-Dec-2012, an additional sum of Rs 50,000 would be paid. The fair
value of this consideration at 1-Jan-2012 was Rs 40,000.
▪ Cee limited – The previous owners of Cee Limited did not make any claims with regard to its profitability at
the time of acquisition. However, Aay Limited agreed with them that if the profits of Cee limited are atleast
Rs 50,000 per year for 2012 and 2013, an additional sum of Rs 10,000 would be paid for each year. The fair
value of this consideration at 1-Jan-2012 was Rs 12,000. (Does not fall within the definition of contingent
consideration but is instead royalty).
▪ Dee limited – The previous owners of Dee Limited asserted that its plant and machinery meet the ISO quality
requirements. Aay Limited agreed that if the plant and machinery of Dee meet ISO quality requirements 5000
shares of Aay limited would be issued to the previous owners. Fair value per share at the of issue shares
(where relevant) may assumed as Rs 10 per share. The fair value of this consideration at 1-Jan-2012 was Rs
15,000.
Required: Compute the amount of investment (consideration paid) that would be used to calculate Goodwill in
each of the following cases.
a) The performance condition was met and the assessment was completed within 12 months
b) The performance condition was not met and the assessment was completed within 12 months
c) The performance condition was met but the assessment was completed after 12 months
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d) The performance condition was not met and the assessment was completed after 12 months
Example 13: Replacement Awards
AC issues replacement awards of Rs 110m market value at the acquisition date for TC awards of Rs 100m market
value at the acquisition date. No post-combination services are required for the replacement awards and TC’s
employees had rendered all of the required service for the acquiree awards as of the acquisition date.
Required: Compute the amounts to be recognized in consolidated financial statements of P.

AC exchanges replacement awards that require 1 year of post-combination service for share-based payment
awards of TC, for which employees had completed the vesting period before the business combination. The
market-value of both awards is Rs 100m at the acquisition date. When originally granted, TC’s awards had a vesting
period of four years. As of the acquisition date, the TC employees holding unexercised awards had rendered a
total of seven years of service since the grant date.

AC exchanges replacement awards that require 1 year of post-combination service for share-based payment
awards of TC, for which employees had not yet rendered all of the service as of the acquisition date. The market-
value of both awards is Rs 100m at the acquisition date. When originally granted, the awards of TC had a vesting
period of 4 years. As of the acquisition date, the TC employees had rendered 2 years’ service, and they would have
been required to render 2 additional years of service after the acquisition date for their awards to vest.
Accordingly, only a portion of the TC awards is attributable to pre-combination service.

Assume the same facts as in Example 5 above, except that AC’s replacement require no post-combination service.

AC issues replacement awards of Rs 100m market value at the acquisition date for TC awards of Rs 100m market
value at the acquisition date. However, AC was not obliged to replace the awards (neither under the terms of the
acquisition agreement nor the terms of the awards nor by applicable law). No post-combination services are
required for the replacement awards.
Example 18: Merger
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Given below is the statement of financial position of Aay Limited and Bee Limited at December 31, 2016.
Aay Bee Aay Bee
Property, plant and equipment 1,200 800 Share capital 1,000 300
Investment in Bee 600 - Retained earnings 700 400
Inventory 500 200 Liabilities 600 300
2,300 1,000 2,300 1,000
Bee Limited is 100% owned by Aay Limited and the Companies obtained Court approval to merge as at 31 December 2016.
Example 19: Simple cashflow statements
Given below is the statement of financial position of Aay Limited at December 31, 2016.
2016 2015 2016 2015
Property, plant and equipment 1,200 900 Share capital 1,000 1,000
Cash and Bank 600 400 Retained earnings 700 400
Inventory 500 400 Trade payables 900 500
Trade receivables 300 200
2,600 1,900 2,600 1,900
Profit for the year comprises of Sales amounting to Rs 800 million and Expenses amounting to Rs 500 million.
Required: Prepare statement of cash flows of Aay Limited (using Direct & Indirect Method) for the year 2016.
Example 20: Preference shares of subsidiary
P Limited acquired 9 million ordinary shares of S Limited for Rs 200 million paid in cash on 1-January-2014. P
Limited also acquired 1 million of the 10% cumulative non-voting preference shares of S Limited on the same date
when following line items appeared on the balance sheet of S Limited.
Rs in 'M'
Share Capital (Rs 10 each) 100
Reserves 60
Preference shares (Rs 10 each) 50
The fair value of net assets at acquisition can be assumed to be the same as their book value. During the year
2014, P made a profit of Rs 30 million while S made a profit of Rs 15 million.
Required: Calculate (a) Goodwill at acquisition (b) Profit attributable to Parent and NCI for the year 2014 (c)
Carrying amount of NCI as at December 31, 2014 assuming that:
(i) Preference shares are classified as equity; and
(ii) Preference shares are classified as liability.
Example 21: Loss making associate

P Limited made the following investments in A Limited on 1-Jan-2018.
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(a) 40% Ordinary Shares purchased for Rs 200m.
(b) Non-cumulative preference shares purchased for Rs 100m. This investment is measured as FVTPL.
(c) LT Loan amounting to Rs 100m. This investment is measured at amortized cost with a Coupon rate & EIR of 5%.
Following information is available for the years 2018 to 2024.
Year FV of Ordinary shares Amortized cost of LT Loan Profit / (Loss) of Associate

Rs in millions Rs in millions Rs in millions
2018 110 90 50
2019 90 70 (200)
2020 50 50 (500)
2021 40 50 (150)
2022 60 60 -
2023 80 70 500
2024 110 90 500
During the above years, the associate did not declare any dividends (ordinary & preference). Interest is being paid
in full on time on the LT loan.
Required: Provide Journal entries to account for the above from the year 2018 to 2024. Journals for loans are not
required.
Example 22: Change in holding of associate without change in significant influence

Aay Limited acquired 25% interest of Bee Limited for Rs 100 million on 1-Jan-2015. The fair value of net asset of
Bee on that date was Rs 360 million. During 2015, Bee earned Profit and OCI of Rs 40 million and Rs 20 million
respectively. On 1-Jan-2016, Aay acquired a further 15% interest in Bee by payment in cash amounting to Rs 60
million. On that date, the fair value of net asset of Bee was Rs 500 million. During 2016, Bee earned Profit and
OCI of Rs 50 million and Rs 20 million respectively.
Required: Calculate the carrying amount of investment as at the end of and share of profit of associate for the
years 2015 and 2016 to be reflected in Equity accounted financial statements of Aay Limited.
Example 23: Change in holding of associate without change in significant influence

Aay Limited acquired 40% interest of Bee Limited for Rs 110 million on 1-Jan-2015. The fair value of net asset of
Bee on that date was Rs 300 million. During 2015, Bee earned Profit and OCI of Rs 50 million and Rs 20 million
respectively. On 1-Jan-2016, Aay disposed 10% interest in Bee against Rs 30 million received in cash. On that
date, the fair value of net asset of Bee was Rs 400 million. During 2016, Bee earned Profit and OCI of Rs 40
million and Rs 10 million respectively. The OCI in both years relates to surplus generated on revaluation of
Associate's Land.
Required: Calculate the carrying amount of investment as at the end of and share of profit of associate for the
years 2015 and 2016 to be reflected in Equity accounted financial statements of Aay Limited. Also prepare
journals necessary to account for the disposal of 10% interest.
Page | 87
IAS 40
Investment property
Investment property means land or building held to earn rentals or for capital appreciation. Examples include:
• building that is vacant but is held to be leased out under one or more operating leases.
• property that is being constructed or developed for future use as investment property.
Owner-occupied property
Property held for use in the production of goods or services or for administrative purposes. Examples include:
• property intended for sale in the ordinary course of business (Apply IAS 2)
• property occupied by employees (Apply IAS 16)
• property that is leased to another entity under a finance lease (Apply IFRS 16)
Special cases for classification

Circumstances Yes No
If some building portions are owner occupied and other are Investment PPE
rented, check whether owner occupied portions are insignificant? property
If owner of building also provides some services to tenant, check Investment PPE
whether services provided are insignificant? property
Example 1
AL leased a hotel building to BL on operating lease. Determine whether AL should classify the building as
investment property assuming:
(a) AL provides security services for the building to BL (b) AL provided hotel management services to BL
Accounting
Measure initially at purchase price or construction cost, plus transaction costs. Account for subsequently under:
Cost model Fair value model
a) If you choose the cost model, apply it to all IPs. a) If you choose fair value model, apply it to all IPs
b) Apply requirement of IAS 16 for cost model b) Recognise FV gain/loss in P&L
c) If you choose this model, but FV of any one or
more IP is not reliably measurable, measure that IP
using the cost model in IAS 16.
d) Fair value:
➢ includes value of lifts or air-conditioning etc. that
is an integral part of a building
➢ includes value of furniture for furnished buildings
➢ excludes prepaid or accrued operating lease
rentals, because they are recognised as a
separate asset or liability
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Transfers
IAS 16 to IAS 40 IAS 2 to IAS 40 IAS 40 to IAS 16 IAS 40 to IAS 2
End of owner-occupation Inception of an commencement of owner- Commencement of
operating lease occupation, or of development with a view to
to another party development with a view to sale
owner-occupation,
FV adjustment at transfer is FV adjustment FV at time of transfer FV at time of transfer
treated in exactly same at transfer is becomes cost of PPE. becomes cost of inventory.
way as Revaluation surplus taken to P&L.
or loss under IAS 16.
Example 2
Provide Journals for the following scenarios:
(a) AL has leased a building that it previously utilised as head office. Its carrying amount at the date of lease was
Rs 100 million and fair value at that time was Rs 180 million.
(b) BL has constructed a building for earning rental income by leasing it. The costs of construction were Rs 500
million. At the time of completion of construction the fair value of the building was determined as Rs 800 million.
(c) CL is a dealer of property. Due to recent downfall in real estate market it has developed its 3 buildings costing
Rs 500,000 each (previously held for sale in the ordinary course of business) for leasing them to earn rental
income. Fair value of each building is Rs 400,000.
All investment properties are carried at fair value.
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IFRS 5, IFRIC 17
Scope
The measurement requirements (not disclosure requirements) of IFRS 5 do not apply to the following assets:
(a) deferred tax assets (IAS 12). (b) assets arising from employee benefits (IAS 19).
(c) financial assets (IFRS 9). (d) investment property under fair value model of IAS 40
(e) agricultural assets under IAS 41. (f) insurance contracts under IFRS 4.
Conditions for classification as held for sale

• Carrying amount of asset will be recovered principally through sale
• Asset is available for immediate sale in its present condition
• Sale is highly probable within one year (Delay is acceptable if caused by events beyond entity’s control)
• Appropriate level of management is committed to a plan to sell
• The asset is actively marketed for sale at a reasonable price
Accounting for assets classified as held for sale assets

Non-current assets Disposal groups
What it is? An asset not to be realised within normal A group of assets & directly associated
operating cycle (normally 12 months) liabilities to be disposed of together in a single
that meets the criteria of held for sale. transaction.
Before Re-measure in accordance with Re-measure all assets and liabilities in
classification applicable IFRSs accordance with applicable IFRSs
Upon Measure at lower of: Measure the whole group at lower of its total:
classification (a) Carrying amount (a) Carrying amount
(b) FV – CTS (b) FV – CTS
After 1. Recompute “FV – CTS” at each year 1. Re-measure assets/liabilities outside scope
classification end, and: of IFRS 5 in accordance with applicable IFRS.
(a) Recognise gain for increase, but not in
excess of the cumulative impairment 2. Recompute “FV – CTS” of the whole
from inception to date; or disposal group at each year end, and:
(b) Recognise impairment. (a) Recognise a gain for increase, but not in
excess of the total cumulative impairment on
2. Do not depreciate/amortise the non- assets within the scope of IFRS 5 from
current asset held for sale inception to date; or
(b) Recognise impairment. Allocate
impairment only to non-current assets within
scope of IFRS 5 in the order given by IAS 36.
3. Do not depreciate/amortise the non-

current assets
4. Interest/expenses attributable to liabilities
of the group shall continue to be recognised.
Presentation SFP SFP
• Present separately from other assets.
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• Present separately any OCI relating to • Present the assets/liabilities of disposal
a non-current asset held for sale. group separately from other
assets/liabilities.
• Do not offset these assets and liabilities.
• Disclose major classes of assets and
liabilities in notes
• Present separately any OCI relating to
disposal group.
Reclassification 1. Re-measure at the lower of: Same as L.H.S
as not held for (a) its carrying amount before it was
sale classified as held for sale plus/minus
depreciation, amortisation or revaluation
that would have been recognised had the
asset not been classified as held for sale;
(b) its recoverable amount.
2. Do not restate prior period

amounts/disclosures.
Discontinued operations
Definition
A discontinued operation is a component that either has been disposed of, or is classified as held for sale, and:
(a) represents a major line of business or geographical area of operations
(b) is part of a single co-ordinated plan to dispose of a major line of business or geographical area of operations
(c) is a subsidiary acquired exclusively with a view to resale.
[A component of an entity comprises operations and cash flows that can be clearly distinguished from the rest of
the entity.]
Disclosures in SCI
After, profit after tax from continuing operations write this:
Post-tax profit/loss of discontinued operations xxx
Post-tax gain/loss on the re-measurement or on the disposal of the assets xxx
Profit from discontinued operations (Analysis of this amount is given in notes) xxx
Attributable to:
Owners of the parent
Profit for the period from continuing operations xxx
Profit for the period from discontinued operations xxx
Profit for the period attributable to owners of the parent xxx
Non-controlling interests
Profit for the period from continuing operations xxx
Profit for the period from discontinued operations xxx
Profit for the period attributable to non-controlling interests xxx
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Disclosures in SCF
Present separately the net cash flows attributable to the operating, investing and financing activities of
discontinued operations.
Discontinued operations reclassified as continuing operations

If a discontinued operation now becomes continuing, the P&L of the operation for prior periods shall also be now
classified as income from continuing operations.
IFRIC 17
Measurement of a dividend payable: Measure the liability at the FV of the assets to be distributed.
Presentation and disclosures

Present the difference stated above as a separate line item in profit or loss.
Carrying amount of the dividend payable at the beginning and end of the period
Increase/decrease in the carrying amount recognised in the period as result of a change in FV of the assets to be
distributed.
For dividend proposed but not declared at year end:
• the nature of the asset to be distributed;
• the carrying amount of the asset to be distributed as of the end of the reporting period; and
• the estimated fair value of the asset to be distributed as of the end of the reporting period
Example:
On 1 December 2018, ABC Limited marked 100 vehicles as held for distribution to its 100 shareholders. These
vehicles would be given to the shareholders in lieu of cash dividend. Dividend was declared and vehicles were
handed over to the shareholder on 1-Feb-2019. The book value of each vehicle on 1-Dec-18 was Rs 700,000
(Cost less Depreciation).
Required: Prepare journal entries for the year 2018 & 2019, assuming that the fair value of each vehicle was:
Date 1-Dec-18 31-Dec-18 1-Feb-19
Fair value 680,000 750,000 720,000
Cost to distribute 5,000 10,000 10,000
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IAS 36
Scope
1. Does not apply to:
(a) inventories (b) construction contracts (c) deferred tax assets
(d) employee benefits s (e) financial assets (f) investment property measured at FV
(g) biological assets (h) non-current assets held for sale
2. Applies to:
(a) subsidiaries (b) associates (c) joint arrangement.
Timing of Impairment Review

1. Make an assessment for indicators of impairment at each year end.
2. For Intangibles with indefinite life/not available for use and GW (and CGUs having such assets) test for
impairment at each year end
Indicators of Impairment
External sources of information
• Asset’s market value has declined significantly.
• Significant technological, market, economic or legal changes with an adverse effect on the entity.
• Increase in market interest rates and that increase is likely to affect the discount rate used in VIU.
• Carrying amount of the net assets of the entity is more than total FV of its equity.
Internal sources of information

• Obsolescence or physical damage of an asset.
• Plan to make asset idle etc.
• Cash needs for operating or maintaining asset are significantly higher than budgeted.
• Actual net cash flows or operating P/L flowing from the asset is significantly worse than budgeted
Indicators for a subsidiary, jointly controlled entity or associate

• CA of investment in the SFS > (CA of the investee’s net assets in the CFS + GW)
• Dividend received from S, A or JA > TCI (not profit for year) of such S, A or JA for the year
Measuring RA
It is the higher of:
• FV – CTS
• Value in use
Fair value
1. Best evidence of an asset’s FV is a price in a binding sale agreement in an arm’s length transaction.
2. FV does not reflect a forced sale price, unless management is compelled to sell immediately.
Costs of disposal
1. Costs of disposal are incremental costs directly attributable to the disposal of an asset or CGU.
2. Costs that have already been recognised as liabilities are not CTS (e.g. provision for abandonment).
3. Costs of disposal include: legal costs, stamp duty, transaction taxes, costs of removing the asset etc.
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4. Costs of disposal don’t include: Employee termination benefits; finance costs and income tax expense.
Estimate of Future Cash Flows

Growth rate
1. Beyond the period covered by budget use a steady or declining growth rate
2. Growth rate shall not exceed the average growth rate for the industry
Estimate of future cash flows exclude:

1. Cash inflows from other assets (e.g. another machine)
2. Cash outflows that relate to liabilities recognised separately (e.g. pensions or provisions)
3. Cash flows from a future restructuring to which an entity is not yet committed. Once the entity is committed
to the restructuring, estimate of cash flows includes only cash inflows i.e. cost savings. Cash outflows for the
restructuring are included in provision for restructuring under IAS 37.
4. Cash flows from improving or enhancing the asset’s performance
5. Cash flows from financing activities (because time value of money will be considered in discounting)
6. Income tax receipts or payments (because the discount rate is also determined on a pre-tax basis)
Foreign currency future cash flows

1. Estimate future cash flows in the foreign currency itself
2. Discount them using a discount rate appropriate for foreign currency
3. Translate the PV obtained in point 2 using the spot rate at date of the VIU calculation (i.e. B/S date)
Discounting
1. Use pre-tax rate discount rate
2. Use the expected cash flow approach for discounting
Example 1
An asset has a remaining useful life of 3 years. Net cash flows of Rs 10,000 (probability 60%) or Rs 15,000
(probability 40%) are expected to inflow each year. The carrying amount of the asset is Rs 40,000 and post-tax
discount rate is 5%. Compute impairment, if any. Pre-tax discount rate
Example 2
A machine has the following future cash flows, based on management’s most recently approved budgets:
20X4 20X5 20X6
Outflows: - - - - - - - - - - - Rs’000 - - - - - - - - - -
Maintenance costs 100 120 80
Operational costs (electricity, water, labour etc) 200 220 240
Interest on finance lease 60 50 40
Tax payments on profits 16 20 28
Cost of increasing the machine’s capacity 0 220 0
Depreciation 80 80 80
Expenses to be paid in respect of 20X3 accruals 30 0 0
Inflows:
Basic inflows: see note 1 1,000 1,200 1,400
Extra profits resulting from the upgrade 0 20 50
Note 1: Cash inflows stem from: Machine - 40% Plant - 60%
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The useful life of the machine is expected to last for 5 years. The growth rate in the business in 20X3 was an
unusual 15% whereas the average growth rate over the last 7 years is: (a) in industry 10% (b) in business 8%.
Calculate the future net cash flows to be used in the calculation of the value in use of the machine at 31 December
20X3 assuming that a 5-year projection is considered to be appropriate.
Impairment of a revalued asset

Asset’s FV is its market value Asset’s FV is determined on a basis other than its
Disposal costs are Disposal costs are not market value
negligible negligible
No need to calculate Calculate Impairment Calculate Impairment
impairment
CGUs
1. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of
the cash inflows from other assets or groups of assets.
2. To identify a CGU consider:

• how management monitors operations (e.g. by product line or by regions)
• how management makes decisions about continuing or disposing of assets and operations
• whether active market exists for output produced by CGU
• whether cashflows generated are independent
3. The carrying amount of a CGU includes:

• Only those assets that can be attributed directly, or reasonably allocated to the CGU
• Only those liabilities without which RA of CGU can’t be determined. e.g. provision for abandonment.
Example 3
A company operates a mine (with individual carrying amount of Rs 1000) and has a provision for abandonment
recognised as part of the cost of the mine. The carrying amount of the provision for restoration costs is Rs 500.
The entity has received offers to buy the mine at a price of Rs 800 and the buyer will assume the obligation to
restore. The VIU of the mine is Rs 1,200, excluding restoration costs. Identify the CGU and compute carrying
amount and recoverable amount of CGU.
Corporate assets
1. Corporate assets are assets other than GW that contribute to the future cash flows of more than one CGU.
2. If a corporate asset can be allocated to a CGU, it is done on basis of relative carrying amounts of CGUs.
3. If the remaining useful life of the CGUs to which a corporate asset is allocated is different from remaining
useful of the corporate asset, the corporate asset is allocated on the basis of weighted average relative carrying
amounts of CGUs.
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Example 4
If remaining useful life of CGU A is 10 years and of CGU B, CGU C and the corporate asset is 20 years each. How
the corporate asset should be allocated if the following information is available:
A B C Total
Carrying amount 100 150 200 450
Useful life 10 years 20 years 20 years
4. If a corporate asset cannot be allocated to a single CGU, you should:

(i) test the single CGU for impairment excluding corporate asset and reduce CA of CGU in the 1 st round
(ii) identify the smallest group of CGUs to which that corporate asset can be allocated. Test that group of CGUs,
including the corporate asset for impairment. This is the 2nd round. Recognise any further impairment
Example 5
There are 3 CGUs (toothpaste, brushes and tyres production lines) and 3 corporate assets (a building, phone
system and a computer platform). The building and phone system support all CGUs whereas the computer
platform supports the toothpaste and wire-brush units only.
At the 31 December 20X5 the following values were determined: CA RA
Cash-generating units excluding corporate assets: - - - - Rs 000 - - - -
Cash-generating unit: toothpaste 1000 600
Cash-generating unit: wire-brushes 2000 1500
Cash-generating unit: rubber tyres 4000 3200
Corporate assets
Corporate asset: building 700
Corporate asset: phone system 350
Corporate asset: computer platform 1050
Determine the amount of the impairment to be allocated to the entity’s assets, assuming that:
A. the corporate assets can be allocated to the relevant cash-generating units. The appropriate method of
allocation is based on the carrying amount of the cash-generating unit’s individual assets as a percentage of cash-
generating unit’s total assets excluding corporate assets to be allocated.
B. the corporate assets cannot be allocated to the relevant cash-generating units.
Allocation of Impairment loss

1. Impairment loss shall be allocated in the following order:
(a) first to any asset already found impaired separately
(b) then to GW; and
(c) then, to other assets of the unit pro rata on the basis of their carrying amount.
2. In allocating impairment loss, do not reduce the carrying amount of an asset below the highest of:
(a) its own FV less CTS (if determinable);
(b) its VIU (if determinable); and
(c) zero. [However after 1st round of impairment a 2nd round may be started if necessary]
3. If entity does not intend to dispose of an asset, no impairment loss is recognised for the asset if the asset’s FV
less CTS is less than its carrying amount, provided that the related CGU is not impaired.
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4. If entity intends to dispose of an asset, an impairment loss is recognised for the asset if the FV less CTS is less
than its carrying amount even if the related CGU is not impaired.
Example 6
A machine has suffered physical damage. The machine’s FV less CTS is Rs 50,000 and its carrying amount is Rs
70,000. The CGU that the machine forms part of has a carrying amount of Rs 500,000 and recoverable amount of
Rs 800,000. Determine impairment (if any) assuming:
(a) management wishes to replace the machine (b) management doesn’t wish to replace machine
Recognizing impairment
1. Impairment loss shall be recognised in profit or loss
2. Impairment loss of an asset for which revaluation surplus exists is taken to OCI
Impairment testing of CGUs with GW and NCI

Covered in consolidation
Reversal of an impairment loss

1. Reversal of an impairment loss for a CGU shall be allocated to all assets, except for GW, pro rata with the
carrying amounts of the assets.
2. Impairment loss for GW shall never be reversed.
3. Impairment loss is not reversed due to ‘unwinding’ of the discount even if the RA > carrying amount.
4. Reversal of an impairment loss is recognised in profit or loss.
5. Reversal of an impairment loss on a revalued asset is recognised in OCI
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IFRS 1
Scope
Applies to the first IFRS FS and to each interim FS for part of the period covered by the first IFRS FS.
First IFRS FS
The first annual general purpose public FS in which the entity adopts IFRSs, by an explicit and unreserved
statement of compliance with IFRSs. This entity is called first time adopter.
Date of transition to IFRS

Beginning of the earliest comparative period in the first IFRS FS.
Opening IFRS SFP

SFP at the date of transition to IFRS.
First IFRS reporting period

The latest reporting period covered by first IFRS FS
Comparative information
First IFRS FS shall include at least 3 statements of financial position and two of the other statements.
Accounting in first IFRS FS

• recognise all assets and liabilities whose recognition is required by IFRSs;
• do not recognise items as assets or liabilities if IFRSs do not permit such recognition;
• reclassify items that are different types of asset/liability in accordance with IFRSs; and
• apply IFRSs in measuring all recognised assets and liabilities.
Accounting policies in first IFRS FS

• Accounting policies shall comply with IFRS effective at the end of first IFRS reporting period.
• The transitional provisions in IFRS to do not apply to first time adopter
• The resulting adjustments are recognised in retained earnings at the date of transition to IFRSs.
Example:
The end of entity A’s first IFRS reporting period is 31 December 2005. Its date of transition to IFRSs is 1 January
2004. Entity A is required to apply the IFRSs effective for periods ending on 31 December 20X5.
Reconciliations in first IFRS FS

(a) Equity reported under GAAP to equity under IFRSs
➢ at the date of transition; and
➢ and at the end of comparative period
(b) TCI per previous GAAP to TCI in accordance with IFRSs for the comparative period.
Exceptions to the retrospective application of other IFRSs

No exemptions from presentation or disclosure requirements. Important exemptions from recognition and
measurement requirements are as follows:
a) Estimates: Shall be consistent with estimates made for date of transition
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b) Business combinations: May elect not to apply IFRS 3 retrospectively to business combinations that occurred
before the date of transition to IFRSs. However, if a first-time adopter restates any business combination to
comply with IFRS 3, it shall restate all later business combinations.
c) Share-based payment transactions
d) Compound financial instruments
e) Hedging
f) May use FV as deemed cost for PPE, intangibles or IP.
g) May use FV or previous GAAP carrying amount as deemed cost for investment in subsidiaries, associates and
joint arrangements.
Example:
Aay Limited is preparing its financial statements for the year 2013 under IFRS for the first time. Extracts from its
SFP prepared under previous GAAP are as follows:
2013 2012 2011

Assets 100,000 80,000 95,000
Equity 60,000 50,000 55,000

Liabilities 40,000 30,000 40,000
100,000 80,000 95,000
TCI 12,000 10,000 11,000
Other relevant information is as follows:

a) Assets as at Dec-31-2011 include Goodwill of Rs 10,000. This Goodwill is being amortized Rs 2,000 each year.
Original amount of Goodwill was Rs 20,000.
b) Assets as at Dec-31-2011 include Research expenditure of Rs 5,000. It is being amortized Rs 1,000 each year.
c) PPE was not depreciated under previous GAAP. The FV and Carrying amount of PPE as at Dec-31-2011 was Rs
50,000 and 65,000 respectively. Its remaining useful life at that date was 10 years.
d) Contingent liabilities have been recorded under previous GAAP and amount to Rs 15,000 as at Dec-31-2011.
Required: Prepare disclosures required under IFRS 1.
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IFRS 14
Rate regulation
Prices charged for goods or services are subject to oversight / approval by regulator e.g. OGRA.
Regulatory deferral account balance

Any asset or a liability that would not be recognized under other IFRS, but qualifies can be recognized as its
effect is expected to be included by the rate regulator in future prices.
Recognition and measurement

• Standard does not provide for any change in accounting policies.
• Previous GAAP accounting may be continued.
• Accounting policies may only be changed if they result in more relevant / reliable FS.
Presentation
SFP: Separate line items for deferral debits and credits. They are shown at end of SFP and shown neither as current
nor non-current.
OCI: Separate line items for movement in deferrals. Separate those that cannot be reclassified to P&L and those
that can be reclassified subsequently to P&L.
P&L: Separate line items for movement in deferrals. It is shown at end of P&L. Related tax expense is also shown
separately. Deferrals relating to disposal groups or discontinued operations are disclosed under IFRS 14 as above
and not as part of IFRS 5. EPS is calculated excluding the movements in deferrals.
Disclosure
• Basis of accounting of regulatory deferrals
• Reconciliation of opening and closing deferrals
• Impact of rate regulation on current and deferred tax
• Impairment / reversal of deferrals alongwith reason
• Description of the rate-regulated activity, rate-setting process and identity of regulator
• Future recovery of deferrals and related uncertainty / risks
Example:
Aay Limited operates in the regulated petroleum sector. The Regulator allows Aay, 15% mark-up on cost per
Litre, however the sale price of Petroleum is fixed by Govt. Aay Limited is entitled to adjust any excess / short-
fall in subsequent years. The details of Cost and Prescribed Sale price is as follows.
Year 2016 2017 2018 2019

Cost plus 15% mark-up per Liter 72.00 85.00 80.00 75.00
Notified Sale price per Liter 70.00 80.00 85.00 80.00
Liters sold (millions) 200 210 220 250
Required: Compute Regulatory deferrals.
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IAS 29 + IFRIC 7
Scope
Applies when the economy of the functional currency of an entity exhibits following features:
• Cumulative inflation over 3 years is approaching or exceeds 100% (most critical feature)
• General population prefers to keep its wealth in non-monetary assets
• Interest rates, wages and prices are linked to a price index
• Normal credit terms also reflect compensation for time value of money

• Monetary items: Not restated
• Assets/liabilities linked by agreement to changes in prices: adjusted in accordance with the agreement
• Non-monetary items: restated at current GPI => Historic amount x GPI at year end
GPI at acq. date
• Revalued non-monetary items => Fair value x GPI at year end .
GPI at FV determination date
Income/expense/OCI = Amount x GPI at year end .
Avg. GPI during year
Gain or loss on the net monetary position is recorded in profit or loss and is separately disclosed.
Example: ABC limited started its operations on 1-Jan-2012 and operates in Zimbabwe, a hyperinflationary
economy. Given below are extracts from its draft statement of financial position at Dec 31, 2012.
Assets Zim $
Property, plant and equipment (PPE) 10,000
Trade debts 5,000
Investments at fair value 15,000
30,000
Share capital 5,000

Retained earnings 15,000
Trade payables 10,000
30,000
PPE and Investments were acquired on 1-Jan-2012 when the Share capital was also invested in business. Trade
debts, trade payables and retained earnings can be assumed to have been accrued evenly over the year. Fair
value of the investments was remeasured as at December 31, 2012. Relevant GPIs are as follows:
GPI
1-Jan-2012 170
31-Dec-2012 300
Average for the year 250
Required: Prepare the statement of financial position of ABC limited as at December 31, 2012.
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Statement of cash flows
Cashflow = Amount x GPI at year end .
Avg. GPI during year
First year application

At the beginning of the first period:
1. Restate equity except retained earnings and any revaluation surplus as => Amount x GPI at year start .
GPI when equity arose
2. Eliminate revaluation surplus
3. Take Retained earnings as balancing in SFP
Economies ceasing to be hyperinflationary

When an economy ceases to be hyperinflationary, treat the amounts expressed at closing GPI as the basis for
the carrying amounts in its subsequent financial statements.
Taxes
The restatement of financial statements increases the temporary differences between the carrying amount of
individual assets and liabilities in the statement of financial position and their tax bases. Deferred tax for these
differences is recorded under IAS 12.
IFRIC 7
In the reporting period in which an entity identifies the existence of hyperinflation in the economy of its
functional currency, not having been hyperinflationary in the prior period, the entity shall apply the
requirements of IAS 29 as if the economy had always been hyperinflationary.
Three statements of financial position are presented and at the beginning of the earliest period presented in the
financial statements, the entity shall restate all non-monetary items to reflect the effect of inflation from the
date the assets were acquired and the liabilities were incurred or assumed until the end of the reporting period.
For non‑monetary items carried in the opening statement of financial position at FV / RV / NRV, the restatement
shall reflect the effect of inflation from the dates those carrying amounts were determined until the end of the
reporting period.
After an entity has restated its financial statements, all corresponding figures in the financial statements for a
subsequent reporting period, including deferred tax items, are restated by applying the change in the measuring
unit for that subsequent reporting period only to the restated financial statements for the previous reporting
period.
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IFRS 17
Scope
• Insurance contracts, including reinsurance contracts
• Investment contracts with discretionary participation features
Separating components from an insurance contract

(a) Apply IFRS 9 to any embedded derivative.
(b) Apply IFRS 9 to account for the separated investment component.
(c) Apply IFRS 15 to the portion under which any goods or services are to be transferred.
Recognition
An entity shall recognize a group of insurance contracts it issues from the earliest of the following:
(a) the beginning of the coverage period of the group of contracts
(b) the date when the first payment from a policyholder in the group becomes due
Measurement
On initial recognition, an entity shall measure a group of insurance contracts at the total of:
(a) PV of insurance fulfilment cash flows (FCF) – Probability-weighted estimate of the PV of the future cash
outflows less the PV of the future cash inflows that will arise under insurance contracts
(b) Contractual service margin (CSM) – Unearned profit the entity will recognize as it provides insurance
Discount rate
Discount rate shall reflect characteristics of the cash flows and observable current market prices for such insurance
contracts
Risk adjustment for non-financial risk

PV of the future cash flows is adjusted to reflect the compensation that the entity requires for bearing the
uncertainty about the amount and timing of future cash flows that arises from non-financial risk
Subsequent measurement
At end year end, the insurance liability shall be the sum of:
(a) the liability for remaining coverage comprising PV of FCF plus CSM
(b) the liability for incurred claims.
Onerous contracts
An insurance contract is onerous at initial recognition if the total of the FCF, CSM and contract acquisition
cashflows is negative. An entity shall recognize a loss in P&L for the net outflow.
Premium allocation approach (PAA)

• May simplify the measurement of insurance liability using PAA.
• Using PAA, the liability for remaining coverage shall be initially recognised as the premiums received at initial
recognition, minus any insurance acquisition cash flows.
• Subsequently carrying amount of the liability is the carrying amount at the start of the reporting period plus
the premiums received in the period, minus insurance acquisition cash flows, plus amortisation of acquisition
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cash flows, minus the amount recognised as insurance revenue for coverage provided in that period, and
minus any investment component paid or transferred to the liability for incurred claims.
Reinsurance contracts held

• For PV of future expected cash flows for reinsurance contracts, entities use assumptions consistent with those
used for related direct insurance contracts.
• Additionally, estimates include the risk of reinsurer’s non-performance.
• Reinsurance contracts held are accounted similarly to insurance contracts under the general model.
• Changes in reinsurer’s risk of non-performance are reflected in P&L, and do not adjust the CSM.
Modification of an insurance contract

If the terms of an insurance contract are modified, an entity shall derecognize the original contract and recognize
the modified contract as a new contract if there is a substantive modification.
Derecognition
An entity shall derecognize an insurance contract when it is extinguished.
Presentation in the statement of financial position

An entity shall present separately in the statement of financial position the carrying amount of groups of:
(a) insurance contracts issued that are assets
(b) insurance contracts issued that are liabilities
(c) reinsurance contracts held that are assets
(d) reinsurance contracts held that are liabilities
Recognition and presentation in the statement(s) of financial performance

An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into:
(a) Insurance service result = Insurance revenue and Insurance service expenses, excluding any investment
component. Do not present premiums in P&L, if that information is inconsistent with revenue presented.
(b) Insurance finance income or expenses – change in balances due to unwinding of discount.
Income or expenses from reinsurance contracts held shall be presented separately from the expenses or income
from insurance contracts issued.
Disclosures
An entity shall disclose qualitative and quantitative information about:
(a) the amounts recognised in its financial statements that arise from insurance contracts
(b) the significant judgements, and changes in those judgements
(c) the nature and extent of the risks that arise from insurance contracts
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IFRS 6
Scope
1. Apply to Exploration & Evaluation (E&E) expenditures. The IFRS does not address other aspects of accounting
by E&E entities.
2. An entity shall not apply the IFRS to expenditures incurred:
(a) before the E&E of mineral resources, such as expenditures incurred before the entity has obtained the legal
rights to explore a specific area.
(b) after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.
Defined terms
1. E&E assets
E&E expenditures are recognised as assets in accordance with the entity’s accounting policy.
2. E&E expenditures
Expenditures incurred by an entity in connection with the E&E of mineral resources before the technical feasibility
and commercial viability of extracting a mineral resource are demonstrable.
3. Exploration for and evaluation of mineral resources
• The search for mineral resources after entity has obtained legal rights to explore in a specific area
• The determination of the technical feasibility and commercial viability of extracting the minerals
Recognition of E&E assets
When developing its E&E asset accounting policy, entity shall apply Para 10 of IAS 8 and is exempt from applying
Para 11 and 12, summarized below:
10- In the absence of an IFRS that specifically applies to a transaction management shall use its judgement in
developing an accounting policy that results in information that is relevant, reliable, reflect economic substance,
free from bias, prudent and complete.
11, 12- In making the judgement described in paragraph 10, management shall refer to IFRS dealing with similar
issues and the Framework, recent pronouncements of other standard-setting bodies, other accounting literature
and accepted industry practices.
Initial Measurement at recognition
E&E assets shall be measured at cost.
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Elements of cost of E&E assets
1. Examples of expenditures that might be included in the initial measurement of E&E assets (the list is not
exhaustive):
(a) acquisition of rights to explore;

(b) topographical, geological, geochemical and geophysical studies;
(c) exploratory drilling;
(d) trenching;
(e) sampling; and
(f) activities in relation to evaluating the technical feasibility and commercial viability.
2. Expenditures related to the development of mineral resources shall not be recognised as E&E assets.
3. Under IAS 37 recognise any obligations for removal and restoration that are incurred during a particular period
as a consequence of having undertaken the E&E.
Subsequent Measurement after recognition
After recognition, apply either the cost model or the revaluation model to the E&E assets. If the revaluation model
is applied it should be that of IAS 16 if the assets are tangible and that of IAS 38 if they are intangible.
Changes in accounting policies
An entity may change its accounting policy for E&E expenditure if the change makes the financial statements more
relevant and/or reliable and the change brings its FS closer to criteria in IAS 8.
Classification of E&E assets
1. Classify E&E assets consistently as tangible or intangible according to nature.
2. Using a tangible asset to develop an intangible asset does not change a tangible asset into an intangible asset.
Reclassification of E&E assets
1. An E&E asset shall no longer be classified as such when the technical feasibility and commercial viability of
extracting a mineral resource are demonstrable.
2. E&E assets shall be assessed for impairment, and any impairment loss shall be recognised, before
reclassification.
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Impairment
1. Measure, present and disclose any resulting impairment loss in accordance with IAS 36 except for impairment
indicators and determination of CGU requirements.
2. Following are impairment indicators for E&E assets (the list is not exhaustive):
(a) period for which the entity has the right to explore in the specific area has expired or will expire in the near
future, and is not expected to be renewed.
(b) substantive expenditure on further E&E of mineral resources in the specific area is neither budgeted nor
planned.
(c) E&E of mineral resources in an area have not led to discovery of commercially viable quantities of mineral
resources and entity has decided to discontinue such activities in the area.
(d) sufficient data exist to indicate that, although a development in the area is likely to proceed, CA of E&E asset
is unlikely to be recovered in full from successful development/sale.
3. An entity shall determine an accounting policy for allocating E&E assets to CGUs or groups of CGUs for the
purpose of assessing such assets for impairment.
4. Each CGU or group to which an E&E asset is allocated shall not be larger than an operating segment determined
in accordance with IFRS 8.
Disclosure
1. Accounting policies for E&E expenditures including the recognition of E&E assets.
2. Amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the E&E
of mineral resources.
3. Treat E&E assets as a separate class of assets and make the disclosures required by either IAS 16 or IAS 38
consistent with how the assets are classified.
Example
Aay Limited is an Oil & Gas Company. During the year 2017, it incurred the following expenses in relation to
Oil & Gas exploration.
Rs 'millions
Acquisition of rights to explore from 1-Jan-2017 to 31-Dec-2036 300
Topographical, geological, geochemical and geophysical studies 100
Exploratory drilling 150
Trenching 100
650
On 1-January-18, the commercial viability of extracting mineral resources was declared. Show Journals for
the year 2017 and 2018.
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IAS 2
Scope
Standard does not apply to:
✓ work in progress under IFRS 15
✓ financial instruments
✓ biological assets
Definition
Inventories are assets:
✓ held for sale in the ordinary course of business;
✓ in the process of production for such sale; or
✓ in the form of materials or supplies to be consumed in the production process
Measurement of inventories
Inventories shall be measured at the lower of cost and NRV.
Cost of inventories
The cost of inventories shall comprise:
✓ Costs of purchase. Trade discounts and rebates are deducted in determining the costs of purchase
✓ Costs of conversion. Fixed production overheads are allocated on basis of normal capacity
✓ Costs incurred in bringing the inventories to their present location and condition
Costs excluded from the cost of inventories are:

✓ abnormal amounts of wasted materials
✓ storage costs
✓ administrative overheads
✓ selling costs
For purchases on deferred settlement terms, difference between purchase price for normal credit terms and the
amount paid, is recognised as interest expense over the period of the financing.
Methods for measurement of cost

✓ Standard cost method
✓ Retail method
✓ Specific identification of cost
Methods for identifying cost of inventories sold and held at year-end

✓ First-in, first-out (FIFO)
✓ Weighted average cost
Net Realisable Value

NRV is:
✓ the estimated selling price in the ordinary course of business
✓ less estimated costs of completion
✓ less estimated costs necessary to make the sale.
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Inventories are written down to NRV item by item. You can group similar items.
NRV of inventory held to satisfy firm contracts is based on the contract price
Raw materials are not written down if the finished product in which it will be used is not written down.
A new assessment of NRV is made in each subsequent period. When the circumstances reverse, write back
inventories upto cost. The amount of reversal of write-down of is recorded as a reduction from Cost of Sales.
Ex 1: Scope of IAS 2
Identify the standards applicable to the following assets:
a) Grocery held by a Departmental store
b) Raw materials held by a Manufacturer
c) Work in process held by a Manufacturer
d) Packing bags held by a Manufacturer
e) Catalysts consumed in the production process held by a Manufacturer
f) Machinery spare parts with a life of more than 1 year held by a Manufacturer
g) Machinery spare parts with a life of less than 1 year held by a Manufacturer
h) Generators held for sale by a Generator seller
i) Generators held for sale by a Company that does not sell Generators
j) Generator held to be given on rent by a Company that rents Generator
k) Cars held for sale a Car dealer
l) Cars held to be given on rent by a Car dealer
m) Land & Buildings held for sale by a Real estate company
n) Building held to be given on rent by a Company that rents buildings
Ex 2: Measuring cost of inventories

Determine the cost of Finished goods “Item X” produced during January 2022. Following details are relevant.
a) 100 tons of Raw material were purchased at Rs 120 million inclusive of 16% Sales Tax.
b) Freight charges of Rs 3 million were paid for transport of Raw material from Supplier to the warehouse. A
further Rs 2 million were paid for transport from Warehouse to Production facilities.
c) Subsequently, the supplier allowed a rebate of Rs 3 million based on total yearly purchase quantity.
d) Raw material is stored in a building having Rs 2 million monthly rent.
e) Labour costs of Rs 20 million & Variable Overheads of Rs 10 million were incurred to convert the purchased
Raw material into Finished goods.
f) Fixed overheads of Rs 30 million were incurred during the month. These overheads were incurred for
production of “Item X” and “Item Y”. Normal monthly capacity of X is 100 tons and of Y is 50 tons.
g) 3 tons of Raw material were lost at 50% completion. Normal production losses are 2%.
h) Inventory records are maintained, monitored and reported by Finance & Administration teams. These teams
have a monthly cost of Rs 10 million which can be allocated equally to Item X & Y.
i) Finished goods stock of X will be sold & delivered to customers at a direct selling costs of Rs 5 million.
Ex 4: Methods to identify cost of inventories sold and cost of inventories held at year end
8000 units were held in opening inventory having a cost of Rs 100 per unit. 50,000 units were produced during
the year at a cost of Rs 110 per unit. 52,000 units were sold. Determine the cost of units sold and the cost of
inventories held at year end using (a) FIFO method (b) Weighted average method
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Ex 5: Estimating NRV
Following information is relevant to X limited at year end.
• Raw materials held at cost of Rs 100 million. These can be currently sold for Rs 92 million. If similar materials
are required to be bought from the market, they can be purchased at Rs 95 million.
• Work in process held at cost of Rs 170 million. It can be currently sold for Rs 150 million. Alternatively, it can
be converted into finished goods at a further cost of Rs 100 million and sold for Rs 300 million incurring a
selling cost of Rs 10 million.
• Finished goods held at cost of Rs 200 million. These can be currently sold for Rs 250 million but the following
selling costs would have to be incurred:
o Sales commission of Rs 7 million
o Delivery costs of Rs 3 million
o Selling & delivery expenditures are financed using company’s overdraft facility bearing 10% interest
o Income tax applicable on gross margin resulting from sale of Rs 30 million
o Fixed personnel costs of Sales & Finance departments of Rs 20 million
Ex 7: Estimating NRV
Following information is relevant to Y limited at year end.
• Raw materials (200 tons) held at cost of Rs 80 million. These can be currently sold for Rs 76 million. If similar
materials are required to be bought from the market, they can be purchased at Rs 79 million.
• Work in process (60 tons) held at cost of Rs 120 million. It can be currently sold for Rs 70 million.
Alternatively, it can be converted into finished goods at a further cost of Rs 80 million and sold for Rs 200
million incurring a selling cost of Rs 10 million.
• Finished goods (50 tons) held at cost of Rs 150 million. Y limited currently has 2 fixed contracts under which
10 tons are each required to be delivered in the next month. Sale price of Rs 2.5 million and Rs 4 million will
be charged under each contract. There are no costs to sell involved for these contracts. Remaining output
can be sold in the following markets.
o Market 1: Sale price of Rs 3 million per ton at Cost to Sell of Rs 0.5 million per ton
o Market 2: Sale price of Rs 2.9 million per ton at Cost to Sell of Rs 0.45 million per ton
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IAS 8
Definitions
Accounting policies are the specific principles and practices applied by an entity in preparing and presenting
financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability that results from
the assessment of the present status of the expected future benefits and obligations associated with assets and
liabilities.
Prior period errors are omissions and misstatements in financial statements for one or more prior periods arising
from a failure to use of reliable information that:
(a) was available when financial statements for those periods were authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into account
Changes in accounting policies

An entity shall change an accounting policy only if the change:
(a) is required by an IFRS; or
(b) results in the financial statements providing reliable and more relevant information
Following are not changes in accounting policies:

(a) the application of an accounting policy to transactions that differ in substance from previously occurring;
(b) the application of a new accounting policy to transactions that did not occur previously or were immaterial.
(c) the initial application of a policy to revalue assets in accordance with IAS 16 or IAS 38
Entity shall apply change retrospectively and shall disclose:

(a) the title of the IFRS
(b) the fact that the change in accounting policy is made in accordance with its transitional provisions
(c) the nature of the change in accounting policy
(d) description of the transitional provisions
(e) when applicable, the transitional provisions that might have an effect on future periods
(f) for the current period and each prior period presented the amount of the adjustment
(i) for each financial statement line item affected
(ii) if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share
Financial statements of subsequent periods need not repeat these disclosures.
Changes in accounting estimates

Adjust prospectively from the month/year of change.
Entity shall disclose the nature and amount of a change in an accounting estimate
• in the current period
• in future periods
Errors
Correct material prior period errors retrospectively by:
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(a) restating the comparative amounts for the prior periods presented
(b) restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
Hindsight should not be used when applying a new accounting policy or correcting errors for a prior period. For
example, if you correct a prior period error in calculating its liability for employees’ accumulated sick leave in you
should disregard information about an unusually severe influenza season during the next period that became
available after the financial statements for the prior period were authorised for issue.
Example 1
Aay Limited purchased an asset costing Rs 100,000 on 1-1-2012. The useful life was estimated as 5 years. On 1-1-
2014 they revised the estimate of overall useful life to 4 years. Show adjustments to be incorporated in the
financial statements for the year ended 2014 including comparatives.
Example 2
Bee Limited purchased an asset costing Rs 100,000 on 1-1-2012. However it was erroneously valued at Rs 10,000
in the books. The error was identified on 1-1-2013. Show adjustments to be incorporated in the financial
statements for the year ended 2013 including comparatives.
Example 3
Cee Limited purchased an asset costing Rs 100,000 on 1-1-2012. It was the policy of the company to provide
depreciation at 20% on reducing balance method. Later on 1-1-2014, the company changed its policy to provide
for depreciation on such assets at 20% straight line method. Show adjustments to be incorporated in the financial
statements for the year ended 2014 including comparatives.
Example 4
Dee Limited estimates the cost of its inventory using FIFO basis. It changes its method of estimation to weighted
average effective 1-1-2014. The value of its inventory using either method was as follows.
Date First in First out Weighted average

31-12-2013 Rs 150,000 Rs 170,000
31-12-2014 Rs 120,000 Rs 130,000
There is minor difference in inventory values for period preceding 31-12-2013 using either method.
Show adjustments to be incorporated in the financial statements for the year ended 2014 including comparatives.
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IAS 10
Definitions
Events after the reporting period are those events that occur between the end of the reporting period and the
date when the financial statements are authorised for issue. Two types of events exist:
(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events)
(b) those that are indicative of conditions that arose after the reporting period (non-adjusting events)
Date of authorisation for issue is date of approval by Board and NOT the date of approval by AGM.
Adjusting events after the reporting period

Adjust the amounts recognised in the financial statements to reflect adjusting events.
Examples of adjusting events after the reporting period:

(a) the settlement of a court case that confirms that the entity had a present obligation at year end.
(b) the receipt of information indicating that an asset was impaired at year end e.g. the bankruptcy of a customer
or the sale of inventories
(c) the determination of the cost of assets purchased, or the proceeds from assets sold
(d) the determination of the amount of profit-sharing or bonus payments
(e) the discovery of fraud or errors that show that the financial statements are incorrect.
Non-adjusting events after the reporting period

An entity shall not adjust the amounts recognised in its financial statements. Examples include:
Disclose the following for each material category of non-adjusting event after the reporting period:
(a) the nature of the event
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
Examples of non-adjusting events after the reporting period that would generally result in disclosure:
(a) decline in market value of investments
(b) dividend declaration
(c) a major business combination
(d) announcing a plan to discontinue an operation
(e) major purchases of assets or classification of assets as held for sale
(f) destruction of a major asset by fire
(g) announcing, or commencing the implementation of, a major restructuring
(h) major ordinary share transactions and potential ordinary share transactions
(i) changes in tax rates or laws that have a significant effect on current and deferred tax
(j) entering into significant commitments or contingent liabilities
Going concern
An entity shall not prepare its financial statements on a going concern basis if it determines after the reporting
period that it intends to liquidate the entity or cease trading, or it has no realistic alternative but to do so.
Disclosures
• Date of authorisation for issue.
• Update disclosures that relate to adjusting events in the light of the new information e.g. a contingent liability.
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IAS 37
Scope
Provision for depreciation and doubtful debts are not addressed in IAS 37.
Definitions
A provision is a liability of uncertain timing or amount.
A liability is a present obligation arising from past events, to be settled in outflow of economic benefits.
An obligating event is an event that creates a legal or constructive obligation and the entity has no realistic
alternative but to settle that obligation. Thus the entity must settle the obligation even if it closes down business
today.
A constructive obligation is created through past practice, published policies or a sufficiently specific current
statement that has created a valid expectation on the part of others.
A contingent liability is:

(a) a possible obligation that arises from past events, the existence of which will be confirmed by future events
outside control of the entity, that is the definition of liability is not fulfilled; or
(b) a present obligation that arises from past events but either outflow is not probable or the amount cannot be
measured with sufficient reliability, that is the recognition criteria is not met.
A contingent asset is a possible asset that arises from past events, the existence of which will be confirmed by
future events not wholly within the control of the entity.
An onerous contract is a contract in which: Unavoidable costs of meeting the obligations > Economic benefits
expected to be received under it.
A restructuring is a program planned and controlled by management that materially changes either scope or
manner of business.
Difference b/w liabilities, provisions and contingent liabilities

Criterion Value Status
Obligation Present Obligation Provision, Liability or Contingent Liability
Possible Obligation Contingent liability
Outflow of economic benefits Probable Provision, Liability

Possible Contingent Liability
Remote Nothing
Degree of Reliability of estimate High Liability

Normal Provision
Low Contingent liability
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Contingent liabilities
Where an entity is jointly and severally liable for an obligation:
✓ Part of obligation expected to be met by other parties is treated as a contingent liability.
✓ Part of obligation expected to be met by the entity is treated as provision.
Contingent assets
a. If inflow is probable (i.e. probability of inflow > 50%) disclose the contingent asset. An example is a claim that
an entity is pursuing through legal processes, where the outcome is uncertain.
b. If probability of inflow is virtually certain (i.e. > 90%), then the related asset is not a contingent asset and it’s
recognized as a normal asset.
Provisions
A provision is recognized when the both the definition of a liability and the recognition criteria are met:
(a) there is a present obligation (legal or constructive) as a result of a past event (definition) Entity may be required
by law to carry out expenditure to operate (for example, by fitting smoke filters in a certain type of factory).
Because the entity can avoid the future expenditure by its future actions, for example by closing down the factory,
it has no present obligation.
(b) outflow of economic benefits is probable (recognition criteria no. 1); and
(c) reliable estimate of the amount of the obligation can be made (recognition criteria no. 2).
Provisions - Best estimate

1. Expected value method is used to measure provisions.
2. Provision is measured before tax, because the tax consequences are dealt with under IAS 12.
Example: Under a warranty if minor defects were detected in all products sold, repair costs would be 1 million. If
major defects were detected in all products sold, repair costs would be 4 million. The entity’s past experience
indicates that 75% of goods will have no defects, 20% of goods will have minor defects and 5% of goods will have
major defects.
The expected value of the cost of repairs is: (75% of nil) + (20% of 1m) + (5% of 4m) = 400,000
Provisions - Present value

✓ Provisions are discounted if the effect of the time value of money is material.
✓ The discount rate shall be a pre-tax rate.
Provisions - Future events

Future events shall be reflected in the amount of a provision only where there is sufficient objective evidence that
they will occur.
Provisions - Expected disposal of assets

Gains from the expected disposal of assets (e.g. during restructuring) shall not be taken into account in measuring
a provision.
Provisions - Unwinding of discount

Where discounting is used, unwinding of discount is recognised as borrowing cost.
Provisions - Use of provisions

A provision shall be used only for expenditures for which the provision was originally recognised.
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Provisions - Reimbursements
1. Where expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement asset is recognized when it is virtually certain to be received.
2. The amount of reimbursement asset shall not exceed the amount of the provision.
3. In the statement of comprehensive income, the expense may be offset.
Provisions - Replacement of parts of PPE

The cost of replacing part of PPE in the future is not recognized as a provision even if there is a legal requirement
to replace because no obligation to replace exists independently of the company’s future actions.
Provisions - Onerous contracts

The amount provided for shall be the lower of
✓ Cost of fulfilling contract
✓ Compensation or penalties arising from failure to fulfill it.
It is also an indicator for impairment on assets dedicated to that contract.
Provisions - Restructuring
1. A constructive obligation to restructure arises only when an entity:
(a) has a detailed formal plan for the restructuring identifying:
✓ the business concerned
✓ the principal locations affected
✓ the employees terminated
✓ the expenditures that will be undertaken
✓ date of implementation of plan (which should not be too distant in the future)
(b) has started to implement that plan or has announced its main features to those affected by it.
2. Measurement of restructuring the provision:

i) Include only the direct expenditures arising from the restructuring, which are both:
(a) necessary for restructuring; and
(b) not associated with the ongoing activities of the entity,
ii) Do not include

a. Costs associated with ongoing activities such as:
✓ retraining or relocating continuing staff
✓ marketing
b. Gains on the expected disposal of assets are not taken into account in measuring the provision
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IAS 16
Scope
This Standard does not apply to:
(a) PPE classified as held for sale (b) biological assets
(c) exploration and evaluation assets (d) mineral rights and reserves
Definitions
PPE are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental, or for administrative purposes
(b) are expected to be used during more than one period.
Subsequent costs
The cost of an item of PPE comprises:
(a) its purchase price, including import duties after deducting trade discounts and rebates
(b) directly attributable costs e.g. costs of employee benefits, site preparation, installation and assembly costs
(c) the initial estimate of the costs of dismantling the item and restoring the site on which it is located
Examples of costs that are not costs of an item of PPE are:

(a) costs of opening a new facility
(b) costs of introducing a new product or service (including costs of advertising and promotional activities)
(c) costs of conducting business in a new location or with a new class of customer and costs of staff training
(d) administration and other general overhead costs
(e) initial operating losses, such as those incurred while demand for the item’s output builds up
(f) costs of relocating or reorganising part or all of an entity’s operations
Recognise in the carrying amount of PPE the cost of replacing parts and derecognise the replacement.
Separately capitalise inspection costs.
The income and related expenses of incidental operations are recognised in profit or loss.
If payment is deferred beyond normal credit terms, the difference between the cash price and the total payment
is recognised as interest over the period of credit unless such interest is capitalised in accordance with IAS 23.
Exchange of PPE
The cost of an exchanged an item of PPE is measured at fair value unless
(a) the exchange transaction lacks commercial substance
(b) the fair value of neither the asset received nor the asset given up is reliably measurable.
The fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the
asset received is more clearly evident.
Measurement after recognition (Class wise)

✓ Cost model
✓ Revaluation model (Proportionate restatement method and netting method)
Compensation for impairment: Compensation from third parties for items of PPE that were impaired shall be
included in profit or loss when the compensation becomes receivable.
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Ex 1: Measuring Cost of PPE
Determine the cost of a plant imported and installed during 2022 . Following details are relevant.
(a) Plant was imported at invoice price of Rs 500 million. Custom duty & Sales tax of Rs 100m & Rs 50m were
paid at import stage respectively. Since the Plant was kept on the port for longer than usual, an extra
ordinary penalty of Rs 10m was paid to the port authorities. Shipping charges of Rs 20m were also paid.
(b) Freight charges of Rs 5 million were paid for transport of Plant from Port to the Production Facilities.
(c) Plant was commissioned at a further cost of Rs 10 million. In addition, company owned vehicles were used
to manoeuvre the Plant for 15 days, whose depreciation for relevant days was Rs 1 million.
(d) Plant records were managed by Finance dept. whose annual cost is Rs 2 million.
(e) Once the plant was installed, a celebration party of the direct labour force was held at a cost of Rs 1 million.
Ex 2: Cost model
A machine was initially recorded at a cost of Rs 800 million. It has a useful life of 5 years. After 5 years, it can be
sold for Rs 80 million. Similar 5 year old machines are sold today for Rs 50 million. You are required to compute
the carrying amount after Year 1.
Ex 3: Revaluation model
A machine has an initial cost of Rs 1000m. It has a useful life of 5 years. It was revalued subsequently as follows.
End of Year 2: Rs 1000m ; End of Year 3: Rs 500m ; End of Year 4: Rs 300m
Show the impacts on the financial statements of the above including deferred tax implications assuming tax rate
is 30%. Revaluation surplus is transferred to Retained earnings over life of the asset.
Ex 4: Exchange of assets
X Limited exchanged the following machines during 2022. Show journal entries to record these transactions.
• Machine A was given and a Plant was received. X Limited also made a payment of Rs 100m in Cash. Carrying
amount & fair value of Machine A at the date of exchange was Rs 300m & Rs 350m respectively. Fair value
of the Plant received was Rs 430m.
• Machine B was given and a Vehicle was received. X Limited also made received of Rs 50m in Cash. Carrying
amount of Machine B at the date of exchange was Rs 200m. Its fair value was not known. Fair value of the
Vehicle received was Rs 300m.
• Machine C was given and a similar Machine of the same make & model was received. This machine was
exchanged with a sister company. Carrying amount of Machine C at the date of exchange was Rs 100m . Its
determined that the transaction does not have any commercial substance.
• Machine D was given and a Plant was received. X Limited will also make a payment of Rs 150m in Cash after
2 years. Carrying amount & fair value of Machine D at the date of exchange was Rs 400m & Rs 450m
respectively. Fair value of the Plant received was Rs 500m. Appropriate discount rate is 10%.
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IAS 20
Government grants
Resources provided by government upon compliance with certain conditions relating to operating activities of an
entity. It excludes:
• Provision of free technical or marketing advice by the Government
• Tax rebates (Should be accounted for under IAS 12)
• Provision of guarantees by the Government
• Agricultural grants (Should be accounted for under IAS 41)
• Provision of infrastructure by improvement to the general transport / communication network
Accounting for government grants

Recognise a government grant upon reasonable assurance that:
(a) the entity will comply with the conditions; and
(b) the grants will be received.
Subsequent accounting for different types of grants is as under:

Grants related to assets Grants related to income
Treat as deferred income Net from cost of asset Grants related to past Grants related to future
expenses expense
Treatment for receipt and subsequent amortisation of grant:
Dr. Cash Dr. Cash Dr. Cash Dr. Cash
Cr. Deferred income Cr. Asset cost Cr. Grant income Cr. Deferred income
(Initial recognition) (Initial recognition) (Initial recognition)
Dr. Deferred income Consequently, Dr. Deferred income

Cr. Grant income subsequent Cr. Grant income / related
(Subsequent amortisation depreciation of asset is expense
over useful life of asset) reduced. (Subsequent amortisation
when expenses are
incurred)
Treatment if there is repayment of Government grant:
Dr. Deferred income Dr. Asset cost Not applicable Dr. Deferred income
Dr. P & L Cr. Cash Dr. P & L
Cr. Cash Cr. Cash
Immediately record the
under-charged
depreciation from
inception to date.
Example 1
The government granted Rs 100 million to a telecommunication company on the condition that it carries out
repairs amounting to atleast Rs 300 million on telecommunication infrastructures in underdeveloped areas under
different contracts. The required expenditure was made in 2 years amounting to Rs 100 million and Rs 200 million
in years 1 and 2 respectively. Show accounting entries for years 1 and 2
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Example 2
On 1-Jan-2010, the Government of Pakistan granted Rs 200 million to ABC Limited to construct an electricity
production unit in a remote area, subject to the condition that the Company maintains employment levels at 2000
employees each year. The construction of the unit costed Rs 500 million and the useful life thereof is 10 years. On
1-Jan-2012 the employment level fell below 2000 employees and consequently ABC limited had to repay the grant.
Show accounting entries for year the years ended Dec 31, 2010 to 2012, assuming:
(a) the company treats the grant as deferred income (b) the company nets the grant from cost of asset
Loans from Government at below market rate of interest:

• The benefit of a government loan at a below-market rate of interest is treated as a government grant.
• The loan shall be recognised initially at present value calculated at effective interest rate.
• In this case Government grant = Cash received – PV of loan (as calculated above)
Example 3
On 1-Jan-2011 the Government of Pakistan provided a loan of Rs 100 million to ABC limited for the purposes of
constructing an electricity production unit in an underdeveloped area. Useful life of the asset is 8 years. The loan
is to be repaid after 10 years and carries no interest. The prevailing market rate of interest is 10%. The construction
of the unit was completed on 30-June-2011 and costed Rs 200 million.
Required: Show accounting entries for year ended 31-Dec-2011 assuming that ABC limited:
(a) treats grant related to assets as deferred income (b) nets grant related to assets from cost of asset
Forgivable Loans
Forgivable loans are loans which the lender undertakes to waive repayment of under certain prescribed
conditions.
A forgivable loan from government is treated as a government grant when there is reasonable assurance that the
entity will meet the terms for forgiveness of the loan. In which case the following entry is passed:
Dr. Loan Payable
Cr. Government Grant [i.e. Cr. P&L or Deferred income or Asset according to the nature of the conditions]
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IAS 23
What is borrowing costs?
➢ Interest expense using the EIR
➢ Finance charges paid under finance lease
➢ Exchange loss on forex loan to the extent difference is caused by interest rates
Less:
➢ Investment income on specific loans
For which assets borrowing costs can be capitalised?

➢ Assets taking a long time to get ready for available use including intangibles and inventory (Qualifying assets)
➢ Financial assets are not qualifying assets
Commencement of capitalisation
Expense is incurred + borrowing costs is incurred + activities to prepare asset for use have begun
Suspension of capitalisation
Period is long + Suspension is not normal or necessary
Cessation of capitalisation
When the asset or a part thereof is substantially complete even in minor administrative work is outstanding.
Expenditure taken for borrowing cost capitalisation

Outflow of cash + Transfer of assets – Govt Grants – Progress payments
Hyperinflationary economy
➢ Some part of interest rate compensates for inflation
➢ Under IAS 29 assets to which borrowing cost is capitalised is already restated for impact of inflation
➢ If you capitalize the part of borrowing costs compensating for inflation to such inflation adjusted asset, you
are double counting
➢ So capitalise real interest instead of nominal interest to assets already restated under IAS 29
Format of answer
Paid from
Date of Amount of Specific General Months
Equity Borrowing cost
payment payment loan loan outstanding
C = A x WACR %
A B (W1) x B / 12
xxx xxx xxx xxx xxx xxx xxx
Borrowing costs on general loans xxx
Borrowing costs on specific loan (full amount) xxx
Investment income on investments out of specific loan (xxx)
Exchange loss attributable to interest rate differential xxx
Total borrowing costs to be capitalised xxx
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Calculation tips
➢ When general loan is utilised first and then specific loan is obtained, reimburse the general loan utilised out
of the specific loan
➢ Repayment of specific loan is made from general loan
➢ It is always considered that specific loan is reserved for usage only on assets
Weighted average capitalisation rate

Rate = Interest during period of construction .
Weighted average of borrowings outstanding during period of construction
Disclosure
➢ Amount of borrowing costs capitalised
➢ Weighted average capitalisation rate
Reporting in financial statements
SCI
Interest expense => uncapitalised amount
Interest income => Total interest income (without netting from borrowing cost)
SCF
Interest expense (reversed in indirect method) => P&L figure
Interest paid (uncapitalised) => operating activities / financing activities
Interest paid (capitalised) => investing activities (separate line item)
Capitalization of Exchange Losses

➢ The change in exchange rate is bifurcated into change due to interest rate and change due to other factors.
➢ The difference to the extent of change caused due to interest rates is capitalized. Remainder is expensed.
➢ In exam, just capitalize the portion of total expense (interest + exchange loss) as if the loan was taken locally.
Example 1 – Specific Loan

Construction of a qualifying asset cost Rs 1000 million. Work began on 1st March and ended on 30th November.
On 1st January, a specific loan of Rs 900 million was taken @ 10% p.a. Remaining amount was funded out of an
equity issue. Surplus funds were invested @ 4% p.a. Payments for the construction were made in two instalments
of Rs 500 million each on June 30 and November 30 respectively.
Required: Calculate the interest to be capitalized for the year ended December 31st.
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Example 2 – General loans
Construction of a qualifying asset cost Rs 1000 million. Work began on 1st March and ended on 30th November.
There were no funds available for the project and hence the project was funded out of the following general loans.
Bank Amount Interest

Bank A Rs 800 million 12% p.a.
Bank B Rs 700 million 14% p.a.
Bank C Rs 500 million 15% p.a.
Surplus funds were invested @ 4% p.a. Payments for the construction were made in two instalments of Rs 500
million each on June 30 and October 31 respectively.
Example 3 – Specific loan obtained after using General loan

Construction of a qualifying asset cost Rs 1000 million. Work began on 1st January and continued throughout the
year. The contractor required whole of the cost to be paid in advance on 1st January. The company applied for a
specific loan but its approval got delayed. Hence payment of PKR 1000 million was paid out of a pool of general
loans on 1st January. The weighted average capitalization rate of general loans is 15%. The specific loan of Rs 1000
million @ 10% p.a. was approved and taken on 31st March.
Example 4 – Forex loan and exchange loss capitalization

On 1st January 2014, ABC Limited obtained a loan of USD 1000 for constructing an asset. Interest is payable
annually on 31 December at the rate of 5% p.a. Interest rate on similar PKR loan is 12% p.a. The construction of
asset began on 1st January and continued throughout the year. Relevant exchange rates were as follows.
Date Exchange rate

1-Jan-2014 PKR 90 = USD 1
31-Dec-2014 PKR 110 = USD 1
Required: Calculate the interest expense and exchange loss to be capitalized for the year ended 31-Dec-2014.
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IAS 38, SIC 32
Dual nature assets
In determining whether asset should be treated under IAS 16 or IAS 38, assess which element is more significant.
• Software without which the computer can’t operate e.g. operating system is treated as PPE.
• When software is not an integral part of a hardware it is treated as an intangible asset.
Definitions
1. Development is the application of research findings or other knowledge to a plan or design for the production
of new or substantially improved products before the start of commercial production or use.
2. Intangible asset is an identifiable non-monetary asset without physical substance.
3. Monetary assets are money held and assets to be received in fixed or determinable amounts of money.
4. Research is original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
Recognition and measurement

1. The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
(a) the definition of an intangible asset; and
(b) the recognition criteria
This requirement applies to costs incurred initially to acquire or internally generate an intangible asset and those
incurred subsequently to add to, replace part of, or service it. But for internally generated intangible assets the
requirements of research and development phases also apply in addition to this.
2. Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of
the cost of an intangible asset at a later date.
Definition of Intangible assets - Identifiable

It is identifiable to distinguish it from goodwill. An asset is identifiable if it either:
(a) is separable, i.e. is capable of being separated from the entity and sold; or
(b) arises from contractual or other legal rights.
Definition of Intangible assets - Control

An entity controls an asset if the entity has the power (which would normally stem from legal rights)
• to obtain the future economic benefits flowing from the asset; and
• to restrict the access of others to those benefits
Under this principle we can generalize that:
• Market and technical knowledge protected by copyrights etc. is an intangible asset
• Skilled/trained staff (unless bounded by legal rights) is not an intangible asset
• Unless protected by legal rights or having exchange transactions in the market, customer lists/market
share etc. is not intangible asset.
The recognition criteria - Probability of future economic benefits

This criterion is always considered to be satisfied for separately acquired intangibles or intangibles acquired in
business combinations
The recognition criteria - Cost of the asset can be measured reliably

1. An intangible asset shall be measured initially at cost.
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2. Reliable measurement criterion is always considered to be satisfied for intangible assets acquired in business
combinations.
3. The cost of intangible asset includes:
(a) Purchase price + import duties + non-refundable purchase taxes Less trade discounts and rebates
(b) Plus directly attributable cost of preparing the asset for its intended use such as:
• professional fees arising directly from bringing the asset to its working condition
• costs of testing whether the asset is functioning properly
3. The cost of intangible asset does not include:
• costs of introducing a new product or service (including advertising and promotional activities)
• costs of conducting business in a new location or with a new customers (including staff training)
• administration and other general overhead costs
• initial operating losses
• expenses/income from incidental operations
4. If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent.
The difference is recognised as interest expense unless it is capitalised under IAS 23.
5. If intangible asset is acquired in a business combination, its cost is its fair value at the acquisition date
Acquired in-process research and development project

1. Recognise an in-process research and development project of the acquiree as an asset if the project:
• meets the definition of an asset
• is separable or arises from legal rights
• has a fair value
2. Subsequent expenditure on such an in-process research or development project is:
• expensed if it is research or development expenditure that does not satisfy the criteria for recognition as
an intangible asset;
• added to the carrying amount of the asset if it is development expenditure that satisfies the recognition
criteria.
Exchanges of assets
Commercial FV of both the asset given up FV of only the asset acquired FV of neither the asset given up
substance and acquired is measurable is measurable (more clearly nor acquired is measurable
evident)
Yes *Use FV of asset given up *Use FV of asset acquired *Use NBV of asset given up
No *Use NBV of asset given up *Use NBV of asset given up *Use NBV of asset given up
* +/- Cash paid/received
Internally generated intangible assets

1. Internally generated goodwill shall not be recognised as an asset, because it is not identifiable and its cost
cannot be measured reliably.
2. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not
be recognised as intangible assets.
3. In addition to satisfying the definition of intangible asset and recognition criteria, the following requirements
concerning research and development phase also apply to internally generated intangible assets. Therefore you
classify the generation of the asset into:
• a research phase; and
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• a development phase.
4. If you cannot distinguish the research phase from the development phase of an internal project to create an
intangible asset, expense all the expenditure on that project.
Research phase
1. Expense all expenditures during research phase.
2. The term research phase is broader than the term research. Examples of research activities are:
(a) activities aimed at obtaining new knowledge;
(b) evaluation and final selection of knowledge;
(c) search for alternatives for materials, products, processes, systems or services; and
(d) the formulation, design, evaluation and final selection of possible alternatives.
Development phase
1. An intangible shall be recognised during development phase if entity can demonstrate all of the following:
(a) technical feasibility
(b) its intention to complete the intangible asset and use or sell it
(c) its ability to use or sell the intangible asset
(d) existence of a market for the output of the intangible asset or the intangible asset itself
(e) adequate technical, financial and other resources to complete and use/sell the intangible asset. This can be
demonstrated by a business plan or obtaining lender’s willingness to fund the plan
(f) ability to measure reliably the expenditure attributable to the intangible asset (costing system)
2. The term development phase is broader than the term development. Examples of development activities are:
(a) design, construction and testing of pre-production prototypes
(b) design of tools, moulds and dies
(c) design, construction and operation of a pilot plant not for commercial production; and
(d) design, construction and testing of a chosen alternative
Cost of an internally generated intangible asset

The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the
intangible asset first meets the recognition criteria.
Includes:
(a) costs of materials and services
(b) costs of employee benefits
(c) fees to register a legal right
(d) amortisation of patents and licenses used to generate the intangible asset
(e) borrowing cost if criteria for IAS 23 are met
Does not include:

(a) selling & administrative overhead unless it can be directly attributed to asset
(b) identified inefficiencies and initial operating losses
(c) expenditure on training staff to operate the asset
Recognition of an expense
Expense out:
• Expenditure on research
• Start-up costs e.g. legal and secretarial costs incurred in establishing a legal entity
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• Expenditure to open a new facility or business (i.e. pre-opening costs)
• Expenditures for launching new products (i.e. pre-operating costs)
• Expenditure on training activities
• Expenditure on advertising and promotional activities (including mail order catalogues)
• Expenditure on relocating or reorganising part or all of an entity.
Cost model - Same as IAS 16
Revaluation model - Maximum same as IAS 16 but following are important noteworthy points:
1. FV shall be determined by reference to an active market.
2. If an intangible asset of the class has no active market, the asset shall be carried at cost model.
3. The revaluation model is applied only after an asset has been initially recognised at cost.
4. If the asset did not meet the criteria for recognition until part of the way through the process the revaluation
model may be applied to the whole of that asset.
5. You cannot revalue an intangible assets that was previously expensed out (not recognized as asset)
6. Revaluation model may be applied to an intangible that was received by way of a government grant and
recognised at a nominal amount.
7. If FV of intangible asset can no longer be determined by reference to active market, keep carrying it at the
amount of last revaluation.
Useful life
If legal rights are conveyed for a limited term that can be renewed, the useful life of the intangible asset shall
include the renewal period only if the renewal can occur without significant cost
Residual value
The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful life; or
(b) there is a residual value for the asset in an active market which will still be in existence at the end of asset’s
useful life.
Intangible assets with indefinite useful lives

1. An intangible asset shall be regarded as having an indefinite useful life when there is no foreseeable limit to the
period over which the asset is expected to generate net cash inflows for the entity. The term ‘indefinite’ does not
mean ‘infinite’.
2. A conclusion that the useful life of an intangible asset is indefinite should not depend on planned future
expenditure in excess of that required to maintain the asset at that standard of performance.
3. An intangible asset with an indefinite useful life shall not be amortised.
4. Under IAS 36, intangible asset with an indefinite useful life shall be tested for impairment:
• annually, and
whenever there is an indication that the intangible asset may be impaired.
SIC 32
Issue
1. The stages of a web site’s development can be described as follows:
a) Planning – includes, feasibility study; defining objectives; defining specifications; evaluating alternatives;
selecting preferences.
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b) Application and Infrastructure Development – includes, obtaining domain name; purchasing and developing
hardware and operating software; installing developed applications; stress testing.
c) Graphical Design Development – includes designing the appearance of web pages.
d) Content Development – includes uploading information on the web site before the completion of
development. This information may also be stored in separate databases integrated into the site.
e) Operating stage - During this stage, an entity maintains and enhances the applications, infrastructure,
graphical design and content.
2. This Interpretation does not apply to expenditure on hardware. It is accounted for under IAS 16.
3. When an entity pays an ISP for hosting the entity’s web site, it is recognised as an expense.
4. This Interpretation does not apply to web site software for sale to others. IAS 2 applies to it.
Consensus
1. Firstly see the purpose of website. All expenditure on a website developed for advertising products is
expensed.
2. Then check the nature of expenditure. Expenditure on training employees and maintaining the web site is also
expensed.
3. Finally check the web site’s stage of development:

a) Planning stage - Expenditure is expensed.
b) Application and Infrastructure Development; Graphical design and Content Development stage - Capitalized if
IAS 38 criteria are met.
c) Operating stage - Expenditure is expensed unless it meets IAS 38 criteria for replacement/addition.
4. The web site’s useful life should be short.
Accounting for Cryptographic assets

Investments by entities in Crypto-graphic assets (e.g. Bit Coin) are accounted for in accordance with IAS 38, if this
entity is not a broker-trader of such assets. Accordingly, these investments are carried at Cost or Revaluation
model. They are not amortized since the life is indefinite and tested for impairment with reference to their active
market value at each year end.
If the entity having Crypto-graphic assets is a broker-trader dealing in such assets, the entity accounts for such
investments as inventories under IAS 2. IAS 2 allows inventories held by broker traders to be carried at Fair value
less Cost to sell, hence these investments are carried at Fair value less transactional costs of disposal.
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IAS 41
Scope covers the accounting treatment and disclosures related to agricultural activity.
Agricultural activity is the management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological assets.
Biological transformation comprises the processes of growth, degeneration, production, and procreation that
cause qualitative or quantitative changes in a biological asset.
Biological asset is a living animal or plant.
Agricultural produce is the harvested product of the entity’s biological assets.
Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Costs to sell
• Include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and
transfer taxes and duties.
• Exclude transport and other costs to take assets to market. Such transport and other costs are deducted in
determining FV (that is, FV is a market price less transport and other costs necessary to get an asset to a
market).
Accounting treatment for biological assets

• Measure biological assets at FV – CTS
• If FV cannot be measured reliably on initial recognition, the biological asset is measured at its cost less any
accumulated depreciation and any accumulated impairment losses
• Biological assets that are physically attached to land (for example, trees in a plantation forest) are measured
at their fair value less costs to sell separately from the land.
• Change in FV – CTS is recorded in P&L. These changes include changes due to reproduction, change in
physical attributes or otherwise.
Accounting treatment for bearer plants

• 'Bearer plants' are living plant that is used in the production or supply of agricultural produce, is expected to
bear produce for more than one period and has a remote likelihood of being sold as agricultural produce,
except for incidental scrap sales.
• They are included the scope of IAS 16 and accounted for as property, plant and equipment.
• Produce growing on bearer plants remains within the scope of IAS 41.
Accounting treatment for agricultural produce

• Measure at FV – CTS at the point of harvest
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• Thereafter, apply IAS 2 to the produced. Thus for example IAS 41 does not deal with the processing of apples
into juice by a juice company who has grown the apples for preparation of juice.
Accounting for land related to agricultural activity

• IAS 41 does not establish any new principles for land related to agricultural activity.
• Instead, either IAS 16 or IAS 40 is applied depending on the intent of land usage
Government grants related to biological assets measured at FV – CTS

• An unconditional grant related to such biological asset is recorded in P&L when the grant becomes
receivable.
• A conditional grant is recognized in P&L when the conditions attaching to the grant are fully met (instead of
reasonable assurance that they would be met as under IAS 20).
Government grants related to biological assets measured at Cost

Apply IAS 20.
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IFRIC 1
Changes during life of asset - cost model:
• Changes in the liability shall be added to, or deducted from, the cost of the related asset. Dr/Cr
Decommissioning liability; Cr/Dr Cost of asset
• If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognised in profit
or loss.
• If the adjustment results in an addition to the cost of an asset, the entity shall consider whether this is an
indication that the new carrying amount of the asset may be impaired.
Changes during life of asset - revaluation model:

• Decrease in liability (i.e. Dr. liability and Cr. RS/P&L) shall be recognised in OCI/P&L by the same rules as
revaluation surplus / loss.
• Increase in liability (i.e. Dr. RS/P&L and Cr. Liability) shall reduce the balance of revaluation surplus and if RS
becomes zero it shall be recognised in profit or loss.
Changes after end of life of the asset

Regardless of cost or revaluation model, once the asset has reached the end of its useful life, all subsequent
changes in the liability shall be recognized in profit or loss as they occur.
Unwinding of discount
Periodic unwinding of discount is recognised in profit or loss. Capitalisation of this unwinding under IAS 23 is not
permitted.
Example: Cost Model

On 1-Jan-2014, Aay Limited has installed a plant at a cost of Rs 100 million. The plant has life of 3 years and is
carried at cost. The plant would be decommissioned at the end of 3rd year at a cost of Rs 15 million. Show
accounting entries for years 2014 to 2016 if the relevant estimates are as follows:
Decommissioning expenditure Discount rate

1-Jan-2014 Rs 15 million 10%
31-Dec-2014 Rs 20 million 10%
Example: Revaluation model (Summer ‘11 Q3 Adapted)

Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from garbage
collected by the civic agencies. WML had signed an agreement with the government for allotment of a plot of
land, free of cost, for 10 years. However, WML has agreed to restore the site, at the end of the agreement.

(i) Initial cost of the plant was Rs. 80 million. It is estimated that the site restoration cost would amount to Rs. 10
million.
(ii) It is the policy of the company to measure its plant and machinery using the revaluation model. Revaluation
surplus is transferred to retained earnings over life of the asset.
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(iii) When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based discount rate was
10%.
(iv) On March 31, 2007 the plant was revalued at Rs. 66 million
(v) On March 31, 2011 estimate of site restoration cost was revised to Rs. 14 million.
(vi) Useful life of the plant is 10 years and WML follows straight line method of depreciation.
(vii) Appropriate adjustments have been recorded in the prior years i.e. up to March 31, 2010.
Required (Ignore taxation) (17 marks):

Prepare accounting entries for the year ended March 31, 2011 based on the above information, in accordance
with International Financial Reporting Standards, assuming that:
a) The revaluation was based on discounted cashflow model, wherein the outflows related to provision were
reduced from total cashflows. Present value of outflows related provision amounted to Rs 4 million (Rs 10
million discounted at prevailing market based discount rate of 12%).
b) The revaluation was based on a depreciated replacement cost approach.
Example 3: Revaluation model with deferred tax implications (Summer ‘16 Q5 Adapted)
On 1 January 2014, Zalay Limited (ZL) acquired a plant for Rs 3,000 million. ZL has a legal obligation to dismantle
the plant at the end of its four years useful life. On the date of acquisition it was estimated that the cost of
dismantling would amount to Rs. 400 million. ZL uses the revaluation model for subsequent measurement of
its property, plant and equipment and accounts for revaluation on the net replacement method.
Depreciation is provided on straight line basis.
The details of revaluation carried out by the Professional Valuer and the revision in the estimated cost of
dismantling as at 31 December 2014 and 2015 are as follows:
* after deducting / without including decommissioning cost
Tax and discount rates applicable to ZL are 30% and 10% respectively. The tax authorities allow initial and normal
depreciation at the rate of 50% and 10% respectively under the reducing balance method.
Required:
Prepare journal entries to record the above transactions for the year ended 31 December 2015, in accordance
with International Financial Reporting Standards. You may assume that revaluation surplus is transferred to
retained earnings over life of the asset. Also specify what would happen if in the question it was said that revalued
amount was computed using (a) discounted cashflow method of revaluation; (b) depreciated replacement cost
method of revaluation. (20)
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IFRS 8
Scope
Applies to the separate or consolidated FS of an entity that is listed or to be listed
What is an Operating segments

An operating segment is a component of an entity:
(a) that earns own revenues and incurs own expenses (including intersegment revenues and expenses)
(b) whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM); and
(c) for which discrete financial information is available.
Examples:
• Start-up operations, Joint ventures and R&D function may be operating segments
• Corporate HQ, post-employment benefit plans or functional departments are not operating segments
CODM
• The term CODM means a function and not necessarily a manager with a specific title.
• This function is to allocate resources to and assess the performance of the operating segments of an entity.
Reportable segments
Reportable segment is an operating segment to be included in operating segments note.
Aggregation
Aggregate different reportable segments when they have similar economic characteristics e.g. products,
production process, customers, regulatory environment.
Quantitative thresholds
a) Revenue (internal and external) of an operating segment is 10% of the total revenue (internal and external) of
all operating segments.
b) Profit or loss of an operating segment is 10% or more of the greater of:
▪ total profit of all profitable operating segments
▪ total loss of all loss making operating segment
c) Assets are 10% of total assets of all operating segments
d) Atleast 75% of the external revenue should be included in reportable segments (except “all other segments” if
disclosed)
e) Restate prior year disclosures upon a segment becoming reportable in the current year
Measurement of segment information

The same measurement standards as reported to CODM
Disclosures
General
• Factors used to identify reportable segment
• Types of products and services
Reconciliations
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• Total segment’s revenue to entity’s revenue
• Total segment’s P&L to entity’s P&L
• Total segment’s assets to entity’s assets
• Total segment’s liabilities to entity’s liabilities
Basis of measurement
• Measurement basis and basis of accounting for inter-segment transactions
• Changes from last year
Numerical information
• External revenue and intersegment revenue
• Interest income and expense
• Depreciation and amortisation
• Share of profit of associate and investment in associate
• Income tax expense
Example:
Aay Limited is a listed company and has different business segments producing different types of automobiles and
their equipment. Following information is relevant in this respect.
Jets Ships Cars Scooters Tires Tubes Maintenance Total

Internal Revenue - - - - 5,000 2,000 5,000 12,000
External Revenue 300,000 200,000 35,000 25,000 30,000 30,000 60,000 680,000
Assets 500,000 400,000 50,000 40,000 35,000 40,000 50,000 1,115,000
Profit / (loss) 60,000 (15,000) 5,000 2,000 (5,000) (2,000) 6,000 51,000
Liabilities 300,000 240,000 30,000 24,000 21,000 24,000 30,000 669,000
Interest expense 15,000 12,000 1,500 1,200 1,050 1,200 1,500 33,450
Tax exp. / (income) 18,000 (4,500) 1,500 600 (1,500) (600) 1,800 15,300
Depreciation 25,000 20,000 2,500 2,000 1,750 2,000 2,500 55,750
Other information:
a) The Board of Directors do not consider cars & scooters as separate segments and review their combined results
as one segment.
b) The customers, systems and production processes of Tires & Tubes segments are very similar.
c) The reports provided to the BOD in respect of above segments are measured on the basis of principles contained
in the IFRS.
Requirement: Prepare operating segments note for inclusion in financial statements of Aay Limited.
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IAS 21
Scope exclusions
• Derivative transactions and balances within the scope of IFRS 9
• Hedge accounting for foreign currency items under IAS 39.
Presentation currency (PC)

Presentation currency is the currency in which the financial statements are presented.
Functional currency (FC)

Functional currency is the currency of the primary economic environment in which the entity operates. It is:
• the currency in which sales prices for its goods and services are denominated and settled
• the currency of the country whose competitive forces determine the sales prices
• the currency in which input costs are denominated and settled)
In case of a foreign subsidiary, the FC of the subsidiary is the same as its parent if:
(a) the foreign operation has low degree of autonomy
(b) the foreign operation has a high proportion of transactions with parent
(c) the foreign operation’s cashflows are readily available for remittance to parent
(d) the foreign operation obtains all its finance from parent
Foreign currency (FRC)

Any currency other than FC.
Monetary items
1. Monetary items are:
• units of currency held
• assets and liabilities to be received or paid in money
2. Monetary items will always be a receivable of one party and a payable of the other.
3. Examples of non-monetary items include: prepayments; goodwill; inventory; PPE; and provisions to be settled
by delivery of a non-monetary asset.
Reporting foreign currency transactions in the functional currency

For transactions: Apply transaction date rate or average rate
For balances:
• Monetary item: Apply closing rate;
• Non-monetary item: Apply historic rate (rate at the date of the transaction i.e. do not re-measure at closing)
• Non-monetary item measured at FV in a foreign currency: Apply rate at the date when the FV is measured.
• NRV/RA of inventory/PPE denominated in foreign currency: Apply rate at date of determination of NRV/FV
(usually closing)
Example 1
ABC limited is a Pakistani Company. It exported various agricultural products amounting to USD 100 million during
the year ended 31-Dec-2022. No cash was received against any sale and whole of the amount was recorded as
trade debt. Relevant exchange rates are as follows:
Average for the year 2022: Rs 160 = USD 1 ; As at 31-Dec-2022: Rs 170 = USD 1
Required: Prepare journals to reflect the above transactions.
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Example 2
ABC limited acquired a land site and a factory in England at 1-Jan-2021 for Sterling 10 million and 30 million
respectively. Land is carried under the cost model whereas the Factory is carried under the revaluation model.
Factory is depreciated on straight line basis over 10 years. The relevant exchange rates and fair values are as
follows:
Date FV of land FV of factory Exchange rate

1-Jan-2021 Sterling 10m Sterling 30m Rs 200 = Sterling 1
31-Dec-2021 Sterling 14m Sterling 29m Rs 210 = Sterling 1
31-Dec-2022 Sterling 15m Sterling 30m Rs 220 = Sterling 1
Required: Calculate the carrying amount of the assets at 31-Dec-2021 and 31-Dec-2022.
Example 3
ABC limited purchased a plot of land in the UAE for AED 10 million on 1-Jan-2022 when the exchange rate was Rs
40 / AED 1. At year end, the recoverable amount of the plot had reduced to AED 9 million and the exchange rate
was Rs 50 / AED 1. Calculate impairment (if any).
Treatment of exchange differences

• Arising on Monetary items (other than Net Investment in Foreign Operation): Recognised in P&L.
• Arising on Non-monetary items: Recognised in P&L. However, it is recognised in OCI if related gain/loss is
recognised in OCI e.g. revaluation surplus.
• Arising on Net investment in a foreign operation (NIFO): Recognised in profit or loss in the separate financial
statements of parent. In consolidated financial statements it is recognised initially in OCI and reclassified to
P&L on disposal of the net investment.
NIFO is a monetary item receivable/payable from/to a foreign operation for which settlement is not likely to occur
in the foreseeable future. May include long-term loans, but do not include trade receivables/payables.
Change in functional currency

• Treated prospectively.
• Translate all items into the new functional currency using the exchange rate at the date of the change.
• The resulting translated amounts for non-monetary items are treated as their historical cost.
Change in presentation currency

• Treated retrospectively as a change in accounting policy.
• Translate all functional currency amount of the current and comparative periods into presentation currency
as if the new presentation currency had always been applied.
Use of a presentation currency other than the functional currency and Translation of a foreign operation
Dealt with under Consolidation.
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IPSAS
Overview of the IPSAS
• IPSAS were developed to improve the transparency and accountability of governments and their agencies by
improving and standardizing financial reporting.
• The International Public Sector Accounting Standards Board (IPSASB) is an independent standard setting board
supported by the International Federation of Accountants (IFAC).
• The IPSASB issues IPSAS, guidance, and other resources for use by the public sector around the world.
• As a general rule, the IPSAS maintain the accounting treatment and original text of the IFRS, unless there is a
significant public sector issue that warrants a departure.
• IPSAS are aimed for application to the general-purpose financial reporting of all public sector entities other
than Government Business Enterprises (GBEs). GBEs are expected to apply IFRS.
• The IPSASB standard-setting activities follow a public due process.
• Some information on the current status of IPSAS adoption by governments and intergovernmental
organizations can be found on the IPSAS page on Wikipedia.
Main differences with IFRS

IPSAS have generally been based on IFRSs. Some of the key differences between the two sets of accounting
standards include:
• Basis of accounting: Cash basis is allowed as alternative
• Recognition and measurement differences:
o Non-exchange transactions
o Impairment
• Presentation and disclosures:
o Information about the general government sector (GGS),
o Revenue from non-exchange transactions
o Presentation of budget information.
IPSAS 1 Presentation of Financial Statements
Summary
• Fundamental principles same as IFRS
• A complete set of financial statements comprises:
o Statement of financial position
o Statement of financial performance
o Statement of changes in net assets/equity
o Cash flow statement
o When the entity makes it approved budget publicly available, a comparison of budget and accrual
amounts
o Notes, comprising a summary of significant accounting policies and other explanatory notes
• Assets and liabilities, and revenue and expenses, are generally not offset
• Comparative prior-period information is presented
• Financial statements generally to be prepared annually
• Current/noncurrent distinction for assets and liabilities is normally required
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Cash-Basis IPSAS — Financial Reporting under the Cash-Basis of Accounting
• The IPSAS Board encourages governments to progress to the accruals basis

• If a government uses the cash basis, IPSAS Board suggests the cash-basis IPSAS.
• Financial statements under the cash basis show the sources of cash raised, the purposes for which cash was
used, and the cash balances at the reporting date.
• The Standard consists of two parts. Part 1 sets out the requirements for reporting under the cash basis. Part
2 is not mandatory. It sets out encouraged additional disclosures.
• Financial statements under the cash basis consist of the following components:
o Statement of cash receipts and payments
o Accounting policies and explanatory notes
o Comparison of original budget, revised budget, and actual amounts on a comparable basis (only when the
entity makes publicly available its approved budget)
• When an entity elects to disclose information prepared on a different basis (e.g., modified cash, modified
accrual, or full accrual) such information should be disclosed in the notes to the financial statements.
• Where a third party (e.g., a donor of external assistance or a higher level of government) directly settles the
obligations of an entity or purchases goods and services for the benefit of the entity, the entity should disclose
in a separate column on the face of the statement of cash receipts and payments total payments made by
third parties in a sub classification appropriate to the entity’s operations.
• Transactions should generally be accounted on a gross basis.
• Accounting on a net basis is allowed for special types of transactions, like administered and agency
transactions, and items in which the turnover is quick, the amounts are large, and the maturities are short.
• The standard requires disclosure of any cash balances held by the government at reporting date that are not
available for use by the government or are subject to external restrictions.
• The standard requires disclosure of any undrawn borrowing and loan facilities that may be available for future
operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities.
• The entity should disclose external assistance received in cash during the period
• An entity should disclose the amount of external assistance debt rescheduled or cancelled during the period,
together with any related terms and conditions.
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IFAS 1
1. Definitions
a) Murabaha: Murabaha is a type of sale where seller expressly mentions the cost he has incurred on the item to
be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer.
Mutually agreed profit can be either in lump-sum or through an agreed ratio of profit to be charged over the
cost.
b) Inventories: Inventories are assets held for sale under Murabaha transactions in the ordinary course of
business.
2. Scope Accounting for Murabaha transactions undertaken by an Islamic bank.
3. Accounting for inventories

a) Cost of inventories should comprise costs of purchases and other costs incurred in bringing the inventories to
their present location and condition (Same as IAS 2).
b) Inventories unsold at year-end shall be valued under IAS 2 and shown in “Other Assets”.
c) In case the client has eventually defaulted on his promise to purchase the inventories, it shall be reduced to
NRV in accordance with IAS 2.
d) Disclosures as per IAS 2 shall be provided in financials.
4. Accounting for Murabaha Receivable

Murabaha receivable shall be recorded by the bank at the invoiced amount.
5. Accounting for Profit

Sale and resultant profit should be recorded on culmination of Murabaha transaction. Profit on the portion of sale
not due for payment should be deferred and shown in balance sheet.
Dr. Unearned Murabaha income

Cr. Deferred Murabaha income
6. Basic Shariah Principles and Features of Murabaha

Basic principles governing Murabaha can be divided into three categories.
➢ Sale
➢ Deferred payment
➢ Other principles relating to imported commodities
Principles regarding sale

Sale under Murabaha is valid only if the following conditions are met:
a) The subject matter of sale is in existence, is owned by the seller and is in the physical or constructive
possession of the seller.
b) The sale must be prompt and absolute. A sale attributed to future or contingent on a future event is void.
c) The subject matter of sale must be a property of value.
d) The subject matter of sale must be specifically known and identified to the buyer.
e) The subject matter of sale must not be a thing which is Haram under Shariah.
f) The delivery of the sold commodity to the buyer must be certain and not depend on contingency or
chance.
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g) The price is absolutely certain.
h) The sale is unconditional unless the condition is according to custom of trade.
Example 1: A sells the unborn calf of his cow to B. The sale is void.
Example 2: A sells to B a car which is presently owned by C, but A is hopeful that he will buy it from C and shall
deliver it to B subsequently. The sale is void.
Examples 3: A has purchased a car from B. B has not yet delivered it to A or to his agent. A cannot sell the car to
C. If he sells it before taking its delivery real or constructive from B, the sale is void.
Example 4: A has purchased a car from B. B has placed the car in a garage where A has free access and B has
allowed him to take the delivery real or constructive from that place whenever he wishes. The car is in the
constructive possession of A. If A sells the car to C without acquiring physical possession, the sale is valid.
Example 5: There is a building comprising of a number of apartments built on the same pattern. A, the owner of
the building says to B "I sell one of these apartments to you”. B accepts it. The sale is void unless the apartment
intended to be sold is specifically identified or pointed out to the buyer.
Example 6: A sells his car stolen by an anonymous person and the buyer purchases it under the hope that he
will manage to recover it. The sale is void.
Example 7: A says to B, “if you pay within a month, the price is Rs.50/. But if you pay after two months, the
price is Rs.55/- B agrees without absolutely determining one of the two prices. In this case as the price
remains uncertain the sale is void, unless anyone of the two alternatives is settled by the parties at the time of
concluding the transaction.
Example 8: A buys a car from B, with a condition that B will employ his son in his firm. The sale is conditional,
hence invalid.
Example 9: A buys a refrigerator from B, with a condition that B undertake its free service for 2 years. The
condition, being recognized as a part of the transaction, is valid and the sale is lawful.
Principles regarding deferred payment

a) A sale with deferred payment is called a "Bai'Mu'ajjal".
b) The time of payment must be fixed in an unambiguous manner with reference to a date or period but not
with reference to an uncertain future event.
c) The deferred price may be more than the cash price, but must be fixed at time of sale.
d) Once price is fixed, it cannot be decreased in case of earlier payment, nor can it be increased in case of default.
e) To ensure buyer pays installments promptly, he may be asked to promise that in case of default, he will pay
certain amount of penalty for a charitable purpose. Such penalty shall not be bank’s income and shall be
utilized for charitable purposes only.
f) The seller may put that if buyer fails to pay installment on due date, remaining installments will become due
immediately.
g) The seller may ask the buyer to furnish a security in the form of a mortgage or lien.
h) The buyer can be asked to sign a promissory note or a bill of exchange but such note / bill cannot be assigned
/ sold to a third party at price different from its face value.
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Other Principles relating to imported commodity
a) Cost of commodity may be unknown but the bank importing the commodity and the eventual buyer (client)
should agree some profit or margin over FOB or C&F cost.
b) The elements of cost to be included in the calculation of costs must be agreed beforehand.
c) Duties, levies and importation charges may be borne by the client.
d) The FOB or C&F cost may be fixed beforehand with reference to a fixed or forward exchange rate or only the
foreign currency cost may be agreed initially and conversion to local currency may be left to actual rate
prevailing on the date of payment.
e) The issuance of bill of lading in favour of bank would be considered constructive possession.
7. Modalities of Murabaha
a) The client and the bank sign an “agreement to sell” whereby bank promises to sell and client promises to buy
commodity at a profit margin of X percentage or amount over cost. This is not an actual sale and is just a
promise to affect a sale in future. The relationship between bank and client is of a promisor and promisee.
b) The bank appoints client as agent for purchasing the commodity and an agency agreement is signed. The
relationship is now of a principal and agent.
c) The client purchases commodity on behalf of bank and takes possession as agent of bank. Purchase Order,
Receiving Report, Delivery Challan etc. should be in the name of the bank. The payment for commodity may
be made directly by bank or through the client (agent).
d) The client informs the bank that he has purchased the commodity and makes an offer to purchase it from the
bank.
e) The bank accepts the offer and the sale is concluded whereby the ownership as well as the risk of the
commodity is transferred to the client.
f) An invoice is raised by the bank. Now the relationship between bank and client is that of a creditor and debtor.
g) The purchase of the commodity from the client himself on "buy back" agreement is not allowed in Shariah.
IFAS 1
An Islamic bank sold a Machine under a Murabaha transaction for Rs 400 million. The amount is receivable
in annual instalments of Rs 100 million each over 4 years. Cost of the Machine is Rs 240 million. Prepare
Journals.
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IFAS 2
Simple Understanding
Ijarah transaction has similar accounting and disclosure requirement as operating leases under for a lessor under
IFRS 16.
Scope
Applies to financials of both lessors and lessees. But shall not apply to:
a) Leases of minerals, oil, natural gas and similar non-regenerative resources;
b) Licensing of films, video recordings, plays, manuscripts, patents and copyrights etc.
c) Lessors of investment property leased out under operating leases (IAS 40)
d) Lessors of biological assets leased out under operating leases (IAS 41).
e) Contracts for services that do not transfer the right to use from one party to the other.
Definitions
Ijarah is a contract whereby the owner of a capital asset transfers its usufruct (right of use) to another person for
an agreed period and an agreed consideration. It includes a sub-lease executed by the lessee with the express
permission of the lessor (being the owner).
Inception of the Ijarah is from the date the asset leased out is put into lessee’s possession.
Term of Ijarah is the period for which the asset is leased plus any further period for which the lessee has the option
to extend the lease and it is reasonably certain that lessee will exercise it.
Ujrah (lease) payments are the payments over the Ijarah term that the lessee is contractually required to pay.
Ijarah in the Financial Statements of Musta’jir (Lessees)

Lease expense
Lease payments are recognized as expense on a straight-line basis unless another basis is better representative of
benefit consumption.
Disclosures
Lessees should meet the Financial Instruments disclosures requirements under IFRS. And in addition should make
following disclosures:
a) Description of the significant terms.
b) Total of future sub-lease receipts at balance sheet date.
c) Lease and sub-lease income / expense (show separately) recognized in P&L for the year.
d) Breakup of Future lease payments:
Not later than 1 year Rs ----
Later than one and not later than 5 years Rs ----
Later than 5 years Rs -----
Total Rs -----
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Ijarah in the Financial Statements of Muj’ir (Lessors)
Assets Acquired for Ijarah but not yet leased
Recognized at cost, which includes all expenditures necessary to bring the asset to its intended use
Assets Subject to Ijarah

a) Present in balance sheet distinguished from assets in own use.
b) Depreciated over lease term. However, if they will be available for re-ijarah, depreciation is charged over
economic life.
c) IAS 36 is applied for impairment.
Lease income & costs

a) Ijarah income is recognized on accrual basis (as and when the rentals are due) unless another basis is more
representative of benefit consumption.
b) Costs, including depreciation, are recognized as expense.
c) Initial direct costs can be:
▪ Deferred and allocated to income over the lease term; or
▪ Recognized as expense when they are incurred.
Disclosures
Meet disclosure requirement for Financial Instruments under IFRS. And in addition should make following
disclosures:
a) Description of the significant terms.
b) Breakup of Future lease receipts:
Not later than 1 year Rs ----
Later than one and not later than 5 years Rs ----
Later than 5 years Rs -----
Total Rs -----
Sale and Leaseback (Ijarah) Transactions
Scenario Recognise immediately in P&L Defer over lease term

CA > FV FV – CA -
SP = FV SP – CA -
SP < FV SP – CA -
SP < FV (Loss is compensated by rentals FV – CA SP – FV (deferred loss)
lower than market rental)
SP > FV FV – CA SP – FV (deferred gain)
CA = Carrying amount ; Sale Price = SP ; Fair value = FV
Islamic Essentials for Ijarah
a) Leased asset remains in the ownership of lessor and only its right of use is transferred.
b) Things which cannot be used without consuming cannot be leased out like money, edibles, fuel, etc.
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c) Only assets owned by the lessor can be leased except that a sub-lease is affected by the lessee with the express
permission of the lessor.
d) Lease rentals can only become due once the assets is delivered to the lessee.
e) During the lease, the lessor must retain title to the assets and bear all risks / rewards. But if damage is caused
due to the fault of the lessee, the consequences shall be borne by the lessee.
f) Insurance of the leased asset should be in the name of the lessor and the cost of such insurance borne by him.
(Hoped that arrangement shall be made for Islamic Takaful).
g) Lease can be terminated before expiry of term but with mutual consent of the parties.
h) Either party can make a unilateral promise to buy / sell the asset upon expiry of lease, or earlier at an agreed
price but the lease shall not be conditional upon such sale.
i) The lessor may also make a promise to gift the asset to the lessee upon termination. However, lease
agreement should not stipulate for transfer of ownership of the leased asset at a future date.
j) The rentals must be agreed in advance in an unambiguous manner.
k) Assignment of lease rentals is not permissible except at par value.
l) Contract of lease is considered terminated if the leased asset ceases to give the service for which it was rented.
However, if the asset is capable of being repaired the contract will remain valid.
m) A penalty can be agreed for delay in rental payments at an agreed percentage or amount. However, that
penalty shall be used by the lessor for the purposes of charity.
n) The banks can approach courts for damages in case of default. Further, security or collateral can also be sold
by the bank.
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IFAS 3
Scope of the Standard
This Standard applies to Institutions offering Islamic Financial Services (IIFS) and addresses the accounting and
disclosure in books of IIFS in respect of:
a) Investment in its capacity as a Mudarib
b) Export refinance from SBP
c) Unrestricted investment accounts
d) Funds obtained based on Musharaka
e) PLS deposit accounts
This Standard does not address the following:

a) Funds received by IIFS on a basis other than the Mudaraba / Musharaka, for example agency investments,
non-remunerative deposits and current accounts.
b) Bases of calculation of Zakat on funds of unrestricted investment / PLS deposit account holders.
Definitions
Unrestricted investment accounts / PLS deposits accounts
• Under this type of account, the account holder authorizes the IIFS to invest the funds on the basis of Mudaraba
or Musharaka without laying down any restrictions as to where, how and for what purpose the funds should
be invested.
• The IIFS can combine the investment account holder’s funds with its own equity or with other funds the IIFS
has the right to use.
• Certificates of investment, term deposit receipts, redeemable capital are equivalent to unrestricted
investment / PLS deposit accounts.
• Profits are allocated between account holders and the IIFS, based on the relative amount of funds invested or
pre-agreed distribution ratios, after the IIFS has received its share of profits as a Mudarib.
• Losses are allocated between the IIFS and holders based on the relative amount of funds invested by each.
• In balance sheet these accounts are carried at: original funds +/– share in the profit or loss – withdrawals or
transfers.
• These funds are considered redeemable capital for accounting purposes because the IIFS is not obligated to
return the original funds in case of unless the loss is due to negligence, misconduct or breach of contract.
Agency based contract for investments

Account holders appoint IIFS to invest their funds as an agent in return for a fee and share of the profit if the
realized profit exceeds a certain level.
Mudaraba
Mudaraba is a partnership in profit whereby one party provides capital (Rab al maal) and the other party provides
labour (mudarib). Mudarib may also contribute capital with the consent of the rab al maal.
Musharaka
Relationship established under a contract by the mutual consent of the parties for sharing of profits and losses
arising from a joint enterprise or venture.
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Return on unrestricted investment accounts / PLS deposit accounts
Share allocated to the account holders out of investment profits as a result of their participation in the investment
transactions during the period covered by income statement.
Profit / loss sharing period (the period)

Profit / loss sharing period (the period) of IIFS shall be the period for which an IIFS computes, distributes / allocates
profits / losses to its unrestricted investment / PLS deposit account holders and the IIFS.
Redeemable Capital
Funds or deposits received from unrestricted investment account holders / PLS deposit account holders by IIFS on
profit / loss sharing basis.
Profit equalization reserve (PER)

The amount appropriated by the IIFS out of income, before allocating the Mudarib’s share, in order to maintain
a certain level of return on investment.
Investment risk reserve

The amount appropriated by the IIFS out of income, after allocating the Mudarib’s share, in order to cushion
against future investment losses for IAH.
Accounting for unrestricted investment / PLS deposit accounts
Funds of unrestricted investment / PLS deposit account holders
Funds shall be recognised when received.
In case there is a condition that funds will not be invested before a certain date, the funds received shall be
recorded in a current account until their date of investment is due.
Funds shall be measured by the amount received at the time of contracting.
At the end of the period, funds shall be computed as follows:

Balance of investment account at the beginning of the period
Add: Any further deposits
Less: Any withdrawals
Add: Any share of profits allocated and reinvested
Less: Any share of losses allocated
Add / less: Any other necessary adjustment.
Allocation and accounting treatment of profit / loss
Allocated but unpaid profits which are not reinvested shall be recorded as a liability.
Loss resulting from transactions in a jointly financed investment should, in the first instance, be deducted from
any unallocated profits / Profit Equalization Reserve on the investment.
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Any loss remaining should be deducted from provisions for investment losses / Investment Risk Reserve set aside
for this purpose.
The remaining loss, if any, should be deducted from the respective equity shares in the joint investment of the
IIFS and the account holders, according to each party’s investment (determined by the IIFS under its policy for
allocation of profit / loss)
Loss due to negligence, misconduct or breach of contract on the part of the IIFS, shall be deducted from the IIFS’s
share in the profits.
In case the loss exceeds the IIFS's share of profits, the difference should be deducted from its equity share if any,
or recognized as due from the IIFS.
Disclosures of Unrestricted investment accounts / PLS deposits accounts
Funds of UI / PLS deposit account holders shall be presented as redeemable capital.
Disclose the following significant policies of:

a) the bases applied in the allocation of profits
b) the bases applied for charging expenses to accounts
c) the bases applied for charging provisions / impairment and the parties to whom they revert when they are
reversed.
Disclose the significant categories of UI / PLS deposit accounts and the percentage IIFS has agreed with them to
invest.
Disclose in the notes or in a separate statement:

a) Total administrative expenses charged to UI / PLS deposit accounts along with a brief description of their
major components;
b) Minimum and maximum percentages / weightages for profit allocation between owner's equity and account
holders which the IIFS has applied in the current financial period [for material accounts only].
c) The % of profit charged by the IIFS as a Mudarib during the financial period
d) Whether the profit resulting from any funds other than deposit accounts have been included or not for
determining allocation of profit to account holders. In the event of allocation, disclosure should also be made
of the bases for such allocation;
e) Whether the IIFS is sharing revenue from banking operations with accounts. If so, the types of such revenue
and the bases applied should be disclosed; and
f) In cases where the IIFS is unable to utilize all funds available for investment, the two parties (owners' equity
or account holders funds) given priority therein.
Disclosure of Incentive profits, such as Hiba

Disclose the aggregate amounts and the bases for determining:
a) Incentive profits which IIFS receives from the profits of UI / PLS deposit accounts; and
b) Incentive profits which IIFS pays from its profits to UI / PLS deposit accounts.
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Disclosure of concentration of sources of UI / PLS deposit accounts
Disclose the aggregate balances of all UI / PLS deposit accounts classified as to type and also in terms of local and
foreign currency.
Disclosure of maturity profile

Disclose the aggregate unrestricted investment / PLS deposit accounts by type, in accordance with their
contractual periods of maturity remaining as of year-end.
Classification of assets on the basis of sources of finance

Disclose the sources of financing of material classes of assets showing separately those:
a) exclusively financed by unrestricted investments / PLS deposit account holders
b) exclusively financed by IIFS
c) jointly financed by IIFS and unrestricted investments / PLS deposit account holders.
The rights, conditions and obligations of each class of UI / PLS accounts in the balance sheet should be disclosed.
Disclose all material items of revenues, expenses, gains and losses attributable to:
a) UI / PLS deposit accounts
b) IIFS
c) IIFS and unrestricted investments / PLS deposit account holders jointly
IFAS 3
An Islamic bank maintains two different Investment Accounts / PLS Deposit Accounts of Customer A & B. Compute the
closing balance of Customer Accounts assuming the following information is available for the year 2018.
Customer A Customer B
Opening Bal. 500,000 300,000
Deposits 300,000 100,000
Withdrawals 100,000 50,000
Profit 70,000
Loss 70,000
Profit equalization reserve 25,000
Investment risk reserve 25,000
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IFRS FOR SMEs
Differences between IFRSs & IFRS for SMEs
1. Financial instruments are measured at amortised cost or FVTPL.

2. Derecognition of financial assets is simpler. Does not include the ‘continuing involvement’ requirements.
3. Derivative financial instruments: Does not require separate accounting for ‘embedded derivatives’.
4. Simpler requirements for impairment of financial assets (full life impairment upon objective evidence)
5. Financial instruments disclosures: Relaxes IFRS 7 requirements.
6. Charge all development costs to expense.
7. Cost method allowed for associates and jointly operations.
8. Borrowing costs charged to expense.
9. An exchange difference on foreign operation that is recognised initially in OCI is not reclassified to P&L on
disposal of the investment.
10. Agriculture: Allowed to use cost if undue cost or effort is involved in measuring fair value.
11. Employee benefit plans: If information based on the projected unit credit method is not available without
undue cost or effort, alternative method can be adopted.
12. Government grants: All grants are recognised in income when the performance conditions are met or earlier
if there are no performance conditions.
13. No annual review of useful life, residual value and depreciation / amortisation method
14. Investment property is carried at FV if this FV can be measured without undue cost or effort.
15. Following topics are not included:
a) Earnings per share.
b) Interim financial reporting.
c) Segment reporting.
d) Special accounting for assets held for sale.
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Code of Ethics & Professional Misconduct
Code of Ethics for Chartered Accountants in Business (CAIB)
SECTION 200
General: CAs are expected to encourage and promote an ethics-based culture in the organization (e.g. Ethics
education and training programs, whistle-blowing policies, procedures to prevent non-compliance with laws and
regulations).
Identifying Threats
• Examples threats for a CA when undertaking a professional activity:
Self-interest Threats: Holding a financial interest or receiving a loan/guarantee, Participating in incentive

compensation arrangements, personal use of corporate assets, gift or special treatment.
Self-review Threats: Determining appropriate accounting treatment and simultaneously performing

feasibility study for same business combination.
Advocacy Threats: Manipulating information to obtain favourable financing.
Familiarity Threats: Long association with individuals, financial reporting to immediate or close family
member for taking financial decisions.
Intimidation Threats: CA or family member facing the threat of dismissal or replacement over a
disagreement
Evaluating Threats
• CAs may obtain legal advice where they believe that unethical behaviour or actions by others have occurred,
or will continue to occur.
Communicating with Those Charged with Governance
• CA shall determine the appropriate individual(s) to communicate. If the CA communicates with a subgroup
of TCWG, determine whether communication with all TCWG is also necessary.
• In determining with whom to communicate, a CA might consider:
❖ The nature and importance of the circumstances; and
❖ The matter to be communicated.
• During communication with individuals who have management as well as governance responsibilities, the
accountant shall be satisfied that such communication adequately informs all TCWG.
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SECTION 210
CONFLICTS OF INTEREST
Introduction
• Conflict of interest creates threats to objectivity.
Requirements and Application Material
General
• A CA shall not allow a conflict of interest to compromise professional or business judgment.

• Examples of circumstances that might create a conflict of interest include:
❖ Acquiring confidential information from one organization to use for the advantage or disadvantage of the
other organization.
❖ Undertaking a professional activity for each of two parties in a partnership, where both parties intend to
dissolve their partnership.
❖ Preparing financial information for certain members of management who are seeking to undertake a
management buy-out.
❖ Selecting a vendor when an immediate family member might benefit financially from the transaction.
❖ Approving certain investments where one of those investments will increase the value of the investment
portfolio of the accountant or an immediate family member.
Conflict Identification
• A CA shall take reasonable steps to identify circumstances that might create a conflict of interest, this
includes identifying:
❖ The nature of the relevant interests and relationships between the parties; and
❖ The activity and its implication for parties.
Threats Created by Conflicts of Interest
• Action to eliminate this threat may include withdrawing from the decision-making process.
• Safeguards to address threats created by conflicts of interest include:
❖ Restructuring or segregating certain responsibilities and duties.
❖ Obtaining appropriate oversight.
Disclosure and Consent
General
• It is generally necessary to:

❖ Disclose the nature and safeguards applied to the relevant parties; and
❖ Obtain consent from the relevant parties.
Page | 151
Consent might be implied by a party’s conduct.
• If consent is implied, the CA is encouraged to document:

❖ The nature of the circumstances giving rise to the conflict of interest;
❖ The safeguards applied to address the threats when applicable; and
❖ The consent obtained.
SECTION 220
PREPARATION AND PRESENTATION OF INFORMATION
Introduction
• Preparing or presenting information might create a self-interest, intimidation or other threats.
General
• Stakeholders of such information include:

❖ Management and those charged with governance.
❖ Investors and lenders or other creditors.
❖ Regulatory bodies.
• This information is used to understand and evaluate organization’s affairs and decisions making.
Information can include financial and non-financial information.
• Examples include:
❖ Operating and performance reports.
❖ Decision support analyses.
❖ Information provided to the internal and external auditors.
❖ Risk analyses.
❖ General and special purpose financial statements.
❖ Tax returns.
❖ Reports filed with regulatory bodies.
• When preparing or presenting information, a CA shall:
Prepare or present information:

❖ In accordance with a relevant framework;
❖ Neither to mislead nor to influence contractual or regulatory outcomes inappropriately;
Exercise professional judgment to:

❖ Represent the facts accurately and completely;
❖ Describe the true nature of business transactions or activities; and
❖ Classify and record information in a timely and proper manner; and
Page | 152
Not omit anything which misleads or influences contractual or regulatory outcomes inappropriately.
• Example: Using an unrealistic estimate with the intention of avoiding violation of a contractual requirement
such as a debt covenant or capital requirement for a FI.
Use of Discretion in Preparing or Presenting Information
• CA shall not exercise discretion with the intention of misleading or influencing outcomes or others.
• Examples include:
❖ Determining estimates.
❖ Selecting or changing an accounting policy or method among alternatives.
❖ Determining the timing of transactions.
❖ Determining the structuring of transactions.
❖ Selecting disclosures in order to mislead.
• For activities that do not require compliance with framework, CA shall exercise professional judgment in:
(a) The purpose;
(b) The context; and
(c) The audience.
Relying on the Work of Others
• Factors to consider while putting reliance on others include:

❖ Their reputation and expertise.
❖ Applicable professional and ethics standards on them.
• Such information might be gained from prior association with other individual or organization.
Addressing Information that Is or Might be Misleading
• Actions that might be appropriate include:

• Discussing concerns with the CA’s superior and/or the appropriate level(s) of management or TCWG, and
requesting such individuals to resolve the matter by:
❖ Correcting the information.
❖ Informing them of the correct information, if it is already disclosed.
• Consulting the policies and procedures.
• If CAs continues to have reason to believe that the information is misleading, the following further actions
might be taken:
Consulting with:
❖ Relevant professional body.
❖ Internal or external auditor
❖ Legal counsel.
Determining whether any requirements exist to communicate to:

❖ Third parties.
Page | 153
❖ Regulatory and oversight authorities.
• If CA determines that appropriate action has not been taken, the accountant shall refuse to be associated
with the information.
• It might be appropriate for a CA to resign from the company.
Documentation
• The CA is encouraged to document:

❖ The facts.
❖ The accounting principles or standards involved.
❖ The communications and parties with whom matters were discussed.
❖ The courses of action considered.
❖ How the accountant attempted to address the matter(s).
SECTION 230
ACTING WITH SUFFICIENT EXPERTISE
Introduction
• Acting without sufficient expertise creates a self-interest threat to compliance with the principle of
professional competence and due care.
General
• A self-interest threat to principle of professional competence and due care might be created if a CA has:
❖ Insufficient time for his duties.
❖ Incomplete, restricted or otherwise inadequate information.
❖ Insufficient experience, training and/or education.
❖ Inadequate resources for the performance of the duties.
• Examples of safeguards to address this threat include:
❖ Obtaining assistance or training.
❖ Ensuring that adequate time is available for performing the duties.
Page | 154
SECTION 240
FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL REPORTING AND DECISION
MAKING
Introduction
• Having a financial interest, or knowing of a financial interest held by an immediate or close family member
might create a self-interest threat to compliance with principles of objectivity or confidentiality.
General
• Examples of self-interest threat include:

❖ Motive/opportunity to manipulate price-sensitive information to gain financially.
❖ Holds direct or indirect financial interest and the value of that financial interest is affected by decisions of
the CA.
❖ Is eligible for a profit-related bonus and the value of that bonus is affected by decisions of CA.
❖ Holds, directly or indirectly, deferred bonus share rights or share options and the value of which is affected
by decisions of CA.
❖ Participates in compensation arrangements to maximize the value of the company’s shares.
• Factors for evaluating the level of such a threat include:

❖ The significance of the financial interest.
❖ Policies and procedures for determining the level or form of senior management remuneration.
❖ Disclosure to those charged with governance of:
o All relevant interests.
o Any plans to exercise entitlements or trade in relevant shares.
SECTION 250
INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY
Introduction
• Offering or accepting inducements might create a self-interest, familiarity or intimidation threat to

compliance with the fundamental principles, particularly the principles of integrity, objectivity and
professional behavior.
General
• An inducement is an object, situation, or action that is used as a means to influence another individual’s
behavior, but not necessarily with the intent to improperly influence that individual’s behaviour, for
example:
Page | 155
❖ Gifts.
❖ Hospitality.
❖ Entertainment.
❖ Political or charitable donations.
❖ Appeals to friendship and loyalty.
❖ Employment or other commercial opportunities.
❖ Preferential treatment, rights or privileges.
Inducements Prohibited by Laws and Regulations
• The CA shall obtain an understanding of relevant laws and regulations and comply with them.
Inducements Not Prohibited by Laws and Regulations
Inducements with Intent to Improperly Influence Behaviour
• A CA shall not offer, or encourage others to offer, any inducement that is made, or which the accountant
considers a reasonable and informed third party would be likely to conclude is made, with the intent to
improperly influence the behaviour of the recipient or of another individual.
• A CA shall not accept, or encourage others to accept, any inducement which is intended to improperly
influence the behaviour of the recipient or of another individual.
• An inducement is considered as improperly influencing an individual’s behaviour if it causes the individual
to act in an unethical manner.
• A breach of the fundamental principle of integrity arises when a CA offers or accepts, or encourages others
to offer or accept, an inducement.
• The determination of whether there is actual or perceived intent to improperly influence behaviour
requires the exercise of professional judgment. Relevant factors to consider might include:
❖ The nature, frequency, value and cumulative effect of the inducement.
❖ Timing.
❖ Customary or cultural practice.
❖ Ancillary part of a professional activity.
❖ Offer is limited to an individual recipient or to a broader group.
❖ The roles and positions of the individuals offering or being offered.
❖ CA knows or believes that accepting the inducement would breach the policies and procedures of the
company.
❖ The degree of transparency.
❖ Inducement was required or requested by the recipient.
❖ Previous behaviour or reputation of the offeror.
• Examples of safeguards include:
❖ Informing senior management or TCWG.
❖ Amending or terminating the business relationship.
Inducements with No Intent to Improperly Influence Behaviour
• If inducement is trivial and inconsequential, any threats created will be at an acceptable level.
• Examples of circumstances where inducement might create threats even if CA has concluded it as trivial
and inconsequential:
Page | 156
Self-interest threats: A CA is offered part-time employment by a vendor.
Familiarity threats: A CA regularly takes a customer or supplier to sporting events.
Intimidation threats: A CA accepts hospitality, the nature of which could be perceived to be inappropriate
if publicly disclosed.
• Examples of actions that might eliminate threats created by inducement include:

❖ Declining or not offering the inducement.
❖ Transferring responsibility to another individual who the CA has influenced in making the decision.
• Examples of safeguards include:
❖ Being transparent with senior management or TCWG.
❖ Registering the inducement in a log.
❖ Having an appropriate reviewer to review any work performed or decisions made by the CA.
❖ Donating the inducement to charity after receipt and disclosing the donation.
❖ Reimbursing the cost of the inducement.
❖ Returning the inducement.
Immediate or Close Family Members
• A CA shall remain alert to potential threats caused by the offering of an inducement:

❖ By an immediate or close family member of the CA; or
❖ To an immediate or close family member of the CA.
• Where the CAs becomes that inducement to or made by an immediate or close family member influence
the CAs then they shall advise the immediate or close family member not to offer or accept the inducement.
• Factor that is relevant is the nature or closeness of the relationship, between:
❖ The accountant and the immediate or close family member;
❖ The immediate or close family member and the counterparty; and
❖ The accountant and the counterparty.
SECTION 260
RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS
Introduction
• A self-interest or intimidation threat to compliance with the principles of integrity and professional
behaviour is created due to non- compliance with laws and regulations.
General
• Examples of laws and regulations includes:

❖ Fraud, corruption and bribery.
❖ Money laundering, terrorist financing and proceeds of crime.
❖ Securities markets and trading.
Page | 157
❖ Banking and other financial products and services.
❖ Data protection.
❖ Tax and pension liabilities and payments.
❖ Environmental protection.
❖ Public health and safety.
Responsibilities of All CAs
• If protocols and procedures to address non-compliances, CA shall consider them in determining how to
respond to such non-compliance.
• Steps that CA takes to comply with this section shall be taken on a timely basis.
Responsibilities of Senior CAs in Business
• There is a greater expectation from Senior CAs to take whatever action is appropriate in the public interest
to respond to non-compliances.
Obtaining an Understanding of the Matter
• Senior CA shall obtain an understanding of the non-compliance which include:

❖ The nature of the non-compliance;
❖ The application of the relevant laws and regulations; and
❖ An assessment of the potential consequences to stakeholders.
Addressing the Matter
• The senior CA shall also take appropriate steps to:

❖ Have the matter communicated to TCWG;
❖ Comply with applicable laws and regulations;
❖ Have the consequences of the non-compliance rectified, remediated or mitigated;
❖ Reduce the risk of re-occurrence; and
❖ Seek to deter the commission of the non-compliance.
• Senior CA shall determine whether disclosure of the matter to the external auditor, is needed.
Determining Whether Further Action Is Needed
• Factors to consider in assessing the appropriateness of the response of the senior CA’s superiors, and TCWG
includes:
❖ The response is timely.
❖ They have taken or authorized action to rectify, remediate or mitigate the non-compliance.
❖ The matter has been disclosed to an appropriate authority.
• Examples of circumstances that might cause the senior CA no longer to have confidence in the integrity of
his superiors are:
❖ The accountant suspects or has evidence of their involvement or intended involvement in any non-
compliance.
Page | 158
❖ Contrary to legal or regulatory requirements, they have not reported, or authorized the reporting of, the
matter to an appropriate authority within a reasonable period.
• Further action that the senior CA might take includes:
❖ Informing the management of the parent entity.
❖ Disclosing the matter to an appropriate authority.
❖ Resigning from the company.
Seeking Advice
• As assessment of the matter might involve complex analysis and judgments, the senior CA might consider:
❖ Consulting internally.
❖ Obtaining legal advice.
❖ Consulting on a confidential basis with a regulatory or professional body.
• Determining Whether to Disclose the Matter to an Appropriate Authority
• The determination of whether to make such a disclosure depends on the nature and extent of the harm to
stakeholders.
Imminent Breach
• In exceptional circumstances, if senior CA constitute an imminent breach of a law, it would be appropriate

to discuss the matter with management or TCWG, the CA shall disclose the matter immediately to an
appropriate authority.
Responsibilities of CAs Other than Senior CAs
• If a CA becomes aware of information concerning non-compliance he shall seek to obtain an understanding

of the matter.
• The CA is expected to apply knowledge and expertise, and exercise professional judgment. However, non-
compliance is determined by a court or adjudicative body.
• If CA identifies non-compliance has occurred, the accountant shall inform an immediate superior or the
next higher level of authority.
SECTION 270
PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES
Introduction
• Pressure exerted on, or by, a CA might create an intimidation or other threat to compliance with one or
more of the fundamental principles.
Page | 159
General
• CA might face pressure that creates intimidation threat. Pressure might be explicit or implicit and might
come from:
❖ Within the company.
❖ An external individual or organization.
❖ Internal or external targets and expectations.
• Examples of pressure that result in threats include:
❖ Pressure related to conflicts of interest: Pressure from a family member bidding to act as a vendor to the
company.
❖ Pressure to influence preparation or presentation of information to:
o Report misleading financial results.
o Misrepresent programs or projects to voters.
o Misstate financial results to bias decision-making.
o Approve or process expenditures that are not legitimate business expenses.
o Suppress internal audit reports containing adverse findings.
❖ Pressure to act without sufficient expertise or due care by:

o Inappropriately reduce the extent of work performed.
o Perform a task without sufficient skills or training or unrealistic deadlines.
❖ Pressure related to financial interests: Benefit from participation in compensation or incentive

arrangements to manipulate performance indicators.
❖ Pressure related to inducements to:
o Offer inducements to influence inappropriately the judgment or decision.
o Accept a bribe or other inducement.
❖ Pressure related to non-compliance with laws and regulations: Structure a transaction to evade tax.
• Discussing the circumstances creating the pressure and consulting with others. Such discussion and
consultation, which require confidentiality, include:
❖ Discussing with individual exerting the pressure to seek to resolve it.
❖ Discussing the matter with the accountant’s superior.
❖ Escalating the matter within the company, with:
o Higher levels of management.
o Internal or external auditors.
o TCWG.
❖ Disclosing the matter in line with the company’s policies, including ethics and whistleblowing policies.
❖ Consulting with:
o A colleague, superior, HR personnel, or another CA;
o Professional or regulatory bodies or industry associations; or
o Legal counsel.
• Action that might eliminate threats created by pressure is the CA’s request for a restructure of, or
segregation of, certain responsibilities and duties.
Page | 160
Professional misconduct in relation to chartered accountants in practice
A CA in practice shall be deemed to be guilty of professional misconduct, if he-
• Allows any person to practice in his name as a chartered accountant, unless such person is also a chartered
accountant in practice and is in partnership with, or employed by, him;
• Pays or allows or agrees to pay any share, commission or brokerage in the fees or profits of his professional
business to any person other than a member of the Institute or a partner or a retired partner or the legal
representative of a deceased partner
• Accepts or agrees to accept any part of the profits of the professional work of a lawyer, auctioneer, broker,
or other agent who is not a member of the institute.
• Places his professional service at the disposal of, or enters into partnership with, an unqualified person in a
position to obtain business of the nature in which chartered accountants engage by means which are not
open to a member of the Institute
• Solicits clients for professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means;
• Advertises his professional attainments or services, or uses any designation or expression other than
chartered accountant on professional documents. Visiting cards, letter head or sign boards, unless it be a
degree of a University established by law in Pakistan or recognized by the Federal Government or the
Council;
• Accepts a position as auditor previously held by another member of the Institute without first
communicating with him in writing;
• Charges or offers to charge, accepts or offers to accept in respect of any professional employment fees
which are based on a percentage of profits or which are contingent upon the findings or results of such
employment except in cases which are permitted under any law for the time being in force or by an order
of the Government;
• Engages in any business or occupation other than the profession of chartered accountants unless permitted
by the Council so to engage;
• Accepts a position as auditor previously held by some other chartered accountant in such conditions as to
constitute undercutting;
• Allows a person not being a member of the Institute or a member not being his partner to sign on his behalf
or on behalf of his firm; any balance sheet, profit and loss account, report or financial statement
• Gives estimates of future profits for publication in a prospectus or otherwise or certifies for publication the
statements of average profits over a period of two years or more without, at the same time, stating the
profits or losses for each year separately.
Page | 161
Professional misconduct in relation to members engaged in management consultancy
Deemed to be guilty of professional misconduct, if he-
• Advertises or solicits for work or issues any circular, calendar or publicity material;
• Issues brochures, except to existing clients or in response to an unsolicited request;
• Uses designatory letters indicating qualifications of the directors and members of the company on letter
head, note-papers, or professional cards excepts as allowed
• Refers to associate firms of Chartered Accountants on his letter head or professional cards or
announcements;
• Adopts a name or associates himself as a partner or director of a firm or a company whose name is indicative
of its activities;
• Uses the term chartered accountants for his management consultancy firm or company;
• Shares profits of remuneration in a manner contrary to law
• His partner in any firm accepts auditing, taxation, or other conventional accounting work from any client
introduced to him for management consultancy services by the client’s own professional accountant;
• Uses the term “Management Consultant (s) “except in respect of a company engaged in management
consultancy field;
• Associates with non-members for the rendering of various management services except as long as such
non-member observes the bye-laws and code of ethics of the Institute
• Does not communicate with the existing professional accountant or consultant, if a member of the Institute,
informing him of the special work he has been asked to undertake
• Under the guise or through the medium of a company or firm does anything which he is not allowed to do
as an individual
Professional misconduct in relation to members of the Institute in service

A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional
misconduct, if he, being an employee of any company, firm or person,
• pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the
employment undertaken by the member;
• accepts or agrees to accept any part of fees, profits or gains from a lawyer, chartered accountant or broker
engaged by such company, firm or person or agent or customer of such company, firm or person by way of
commission or gratification; or
• discloses confidential information acquired in the course of his employment except as and when required
by law or except as permitted by the employer
Page | 162
Professional misconduct in relation to members of the Institute generally
• Includes in any statement, return or form to be submitted to the Institute any particulars knowing them to
be false
• Not being a fellow styles himself as a fellow
• Does not supply the information called for by the Institute or does not comply with the requirements asked
to be complied with or does not comply with any of the directives issued or pronouncements made by the
Council or any of its Standing Committees
• Generally, willfully maligns the Institute, the Council or its Committee to lower their prestige, or to interfere
with performance of their duties in relation to himself or others
• Has been guilty of any act or default discreditable to a member of the Institute
• Contravenes any of the provisions of the Ordinance or the bye-laws made there under
Professional misconduct in relation to chartered accountants in practice requiring action by a High Court
Deemed to be guilty of Professional misconduct, if he-
• discloses information acquired in the course of his professional engagement to any person other than his
client, without the consent of his client or otherwise than as required by any law for the time being in force;
• certifies or submits in his name or in the name of his firm a report of an examination of financial statement
unless the examination of such statements and the related records has been made by him or by a partner
or an employee in his firm or by another chartered accountant in practice.
• Permits his name or the name of his firm to be used in connection with any estimates of earnings contingent
upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the
forecast;
• Expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a
partner in his firm has a substantial interest, unless he discloses his interest in his report.
• Fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure
of which is necessary to ensure that the financial statement is not misleading;
• Fails to report a material mis-statement known to him to appear in a financial statement with which he is
concerned in a professional capacity;
• Is grossly negligent in the conduct of his professional duties;
• Fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are
sufficiently material to negate the expression of an opinion; or
• Fails to keep moneys of his client in a separate banking account or fails to use such moneys for purposes
for which they are intended.
Page | 163
Professional misconduct in relation to members engaged in management consultancy requiring action by a
High Court
• discloses information acquired in the course of his professional engagements to any person other than his
client, without the consent of his client or otherwise than as required by any law for the time being in force;
• is grossly negligent in the conduct of his professional duties; or
fails to keep moneys of his client in a separate banking account or fails to use such moneys for purposes
to which they are intended
Page | 164
IFRS PRACTICE STATEMENT: MATERIALITY
Scope: It is not intended for entities applying the IFRS for SMEs.
Definition of material: Information is material if omitting it or misstating it could influence decisions that users
make on the basis of financial information about a specific reporting entity.
Pervasiveness of materiality judgements: An entity is only required to apply IFRS when the effect of applying
them is material and need not provide a disclosure specified by an IFRS if it is not material.
Judgement: Considers the needs of the primary users of financial statements.
Primary users and their information needs: Primary users of an entity's financial statements are existing and
potential investors, lenders and other creditors. General purpose financial statements are not intended to address
specialized information needs; they focus on common information needs.
Impact of publicly available information: Financial statements are required to be comprehensive documents and
an entity assesses materiality regardless of whether some of the information may be also available from other
sources.
Four-step process
Step 1
The entity identifies information that has the potential to be material.
Step 2
Assess whether the information identified in Step 1 is material. In making this assessment, the entity needs to
consider quantitative (size) and qualitative (nature) factors.
Step 3
Organize financial statements in a manner that supports clear and concise communication.
• Emphasize material matters
• Keep it simple and direct
• Highlight relationships between different pieces of information
• Provide information in a format that is appropriate for its type
• Provide information in a way that maximizes comparability
• Avoid or minimize duplication
• Ensure material information is not obscured by immaterial information.
Step 4
Assess the draft financial statements as a whole. Consider whether information is material both individually and
in combination with other information. This final assessment may lead to adding additional information or
removing information that is now considered immaterial, aggregating, disaggregating or reorganizing information
or even to begin the process again from Step 2.
Page | 165

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ABOUT THE AUTHOR

Revision Notes &

By: Ammar Ahmed

• He obtained Gold Medals & Merit Certificates in 9 CA subjects including an overall

• He graduated On-campus Leadership Program (equivalent to Executive MBA) from Harvard

• He is an MS candidate at University College London (# 8 ranked University in the World)

• He is a member of the Technical Advisory Group of Pakistan’s Accounting Standard’s Board

Agriculture – IAS 41 129

Deferred tax concept:

Deferred tax computation:

Change in tax rates:

Deferred tax exemption:

Tax rate / expense reconciliation:

Differing tax rates applicable to different manner of asset recoveries:

Taxation of Land and Buildings in Pakistan:

Tax implications of dividend distribution:

Other areas of tax implications to be studied later:

Disallowances decided against the Company by CIRA – Not appealed at ATIR 50

Example 2: Deferred tax basic concept

Example 3: Tax base

Year Tax rate

Example 5: Change in tax rates

Example 6: Underlying reason

Example 7: Deferred tax on tax credits

Year 2016 2017

Example 8: Deferred tax on tax losses

Year 2011 2012 2013 2014 2015 2016 2017 2018

Other relevant information is as follows:

Example 9: Exemptions on initial recognition of Deferred tax

Example 10: Exemptions on initial recognition of Deferred tax

Example 12: Differing rates on asset recovery

Example 13: Differing tax implication of dividend distribution

(i) Property, plant and equipment (PPE)

Details of the revaluation are as under:

(iii) Liabilities outstanding for more than three years

(iv) Applicable tax rate is 35%.

Other relevant information is as under:

(iii) Property, plant and equipment:

(v) Applicable tax rate is 32%.

Revenue: Income arising in the course of an entity’s ordinary activities.

Performance obligation: A promise to transfer to the customer either:

STEP 1 – IDENTIFY THE CONTRACT

Features of a ‘contract’ under IFRS 15

IFRS 15 requires contracts to have all of the following attributes:

Combining multiple contracts

STEP 2 – IDENTIFY THE PERFORMANCE OBLIGATIONS

Definition of ‘distinct’ (two criteria to be met)

Benefit from the good or service can be either:

Accounting for a significant financing component

A significant financing component does not exist when

Discount rate to be used

Practical expedient – period between transfer and payment is 12 months or less

Accounting for variable consideration

Variable consideration must be estimated using either:

Constraining (limiting) the estimates of variable consideration

Accounting for non-cash consideration

STEP 4 – ALLOCATE THE TRANSACTION PRICE TO EACH PERFORMANCE OBLIGATION

Allocating variable consideration

STEP 5 – RECOGNISE REVENUE AS EACH PERFORMANCE OBLIGATION IS SATISFIED

Factors to consider when assessing transfer of control:

Recognizing revenue over time

Enforceable right to payment

Costs that are recognised as an expense as incurred