BACC304

Bachelor of Commerce
in Accounting (Honours)
Company Accounting
Module BACC304
Author: Ephraim Hudson Mazvidza Matavire
Doctor of Philosophy (ZOU)
Master of Business Administration (ZOU)
Bachelor of Accounting Science (UNISA)
Fellow Member of the Institute of Administration and Commerce
(FIAC)
Content Reviewer: Cuthbert Muza

Master in Commerce in Accounting (MSU)
Bachelor of Business Administration in Accounting (Solusi University)
Certified Public Accountant (CPAZ) (ICPAZ)
Certified Professional Forensic Accountant (PFAcct) (ICFA –Canada)
Public Accountants and Auditors Board (PAAB) Registration
Certificate
Editor: Betty K Mutambanengwe

Master in Educational Administration Planning and Policy Studies
(ZOU)
Bachelor of Education (Home Economics) (UZ)
Secondary Teachers’ Certificate (Gweru Teachers’ College)
Published by: The Zimbabwe Open University
P.O. Box MP1119
Mount Pleasant
Harare, ZIMBABWE
The Zimbabwe Open University is a distance teaching and open

learning institution.
Year: 2015
Cover design: T. Ndhlovu
Layout : S. Mushore/S. Mapfumo/ C. Nhari
Printers : 978-0-7974-6408-7
I.S.B.N:
Typeset in Times New Roman, 12 point on auto leading
© Zimbabwe Open University. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior permission of
the Zimbabwe Open University.
Foreword To the student
The demand for skills and knowledge
and the requirement to adjust and
administrators of varied backgrounds,
training, skills, experiences and personal
change with changing technology, interests. The combination of all these
places on us a need to learn continually qualities inevitably facilitates the
throughout life. As all people need an production of learning materials that
education of one form or another, it has teach successfully any student, anywhere
been found that conventional education and far removed from the tutor in space
institutions cannot cope with the and time. We emphasize that our
demand for education of this magnitude. learning materials should enable you to
It has, however, been discovered that solve both work-related problems and
distance education and open learning, other life challenges.
now also exploiting e-learning
technology, itself an offshoot of e- To avoid stereotyping and professional
commerce, has become the most narrowness, our teams of learning
effective way of transmitting these materials producers come from different
appropriate skills and knowledge universities in and outside Zimbabwe,
required for national and international and from Commerce and Industry.
development. This openness enables ZOU to produce
materials that have a long shelf life and
Since attainment of independence in are sufficiently comprehensive to cater
1980, the Zimbabwe Government has for the needs of all of you, our learners
spearheaded the development of in different walks of life. You, the
distance education and open learning at learner, have a large number of optional
tertiary level, resulting in the courses to choose from so that the
establishment of the Zimbabwe Open
knowledge and skills developed suit the
University (ZOU) on 1 March, 1999.
career path that you choose. Thus, we
strive to tailor-make the learning
ZOU is the first, leading, and currently
materials so that they can suit your
the only university in Zimbabwe entirely
personal and professional needs. In
dedicated to teaching by distance
education and open learning. We are developing ZOU learning materials, we
determined to maintain our leading are guided by the desire to provide you,
position by both satisfying our clients the learner, with all the knowledge and
and maintaining high academic skill that will make you a better
standards. To achieve the leading performer all round, be this at certificate,
position, we have adopted the course diploma, undergraduate or postgraduate
team approach to producing the varied level. We aim for products that will
learning materials that will holistically settle comfortably in the global village
shape you, the learner to be an all-round and competing successfully with anyone.
performer in the field of your own Our target is, therefore, to satisfy your
choice. Our course teams comprise quest for knowledge and skills through
academics, technologists and distance education and open learning.
Any course or programme launched by ZOU you may never meet in life. It is our intention
is conceived from the cross-pollination of ideas to bring the computer, email, internet chat-
from consumers of the product, chief among rooms, whiteboards and other modern methods
whom are you, the students and your employers. of delivering learning to all the doorsteps of our
We consult you and listen to your critical learners, wherever they may be. For all these
analysis of the concepts and how they are developments and for the latest information on
presented. We also consult other academics what is taking place at ZOU, visit ZOU website
from universities the world over and other at www.zou.ac.zw
international bodies whose reputation in distance
education and open learning is of a very high Having worked as best we can to prepare your
calibre. We carry out pilot studies of the course learning path, hopefully like John the Baptist
outlines, the content and the programme prepared for the coming of Jesus Christ, it is
component. We are only too glad to subject my hope as your Vice Chancellor that all of you,
our learning materials to academic and will experience unimpeded success in your
professional criticism with the hope of educational endeavours. We, on our part, shall
improving them all the time. We are continually strive to improve the learning
determined to continue improving by changing materials through evaluation, transformation of
the learning materials to suit the idiosyncratic delivery methodologies, adjustments and
needs of our learners, their employers, research, sometimes complete overhauls of both the
economic circumstances, technological materials and organizational structures and
development, changing times and geographic culture that are central to providing you with
location, in order to maintain our leading the high quality education that you deserve. Note
position. We aim at giving you an education that your needs, the learner ‘s needs, occupy a
that will work for you at any time anywhere and central position within ZOU’s core activities.
in varying circumstances and that your
performance should be second to none. Best wishes and success in your studies.
As a progressive university that is forward

looking and determined to be a successful part
of the twenty-first century, ZOU has started to
introduce e-learning materials that will enable
you, our students, to access any source of
information, anywhere in the world through
internet and to communicate, converse, discuss _____________________
and collaborate synchronously and Prof. Primrose Kurasha
asynchronously, with peers and tutors whom Vice Chancellor
The Six Hour Tutorial Session At
The Zimbabwe Open University
A s you embark on your studies with the
Zimbabwe Open University (ZOU) by open
and distance learning, we need to advise you so
This is where the six hour tutorial comes in. For
it to work, you need to know that:
· There is insufficient time for the tutor
that you can make the best use of the learning
to lecture you
materials, your time and the tutors who are based
· Any ideas that you discuss in the
at your regional office.
tutorial, originate from your experience
as you work on the materials. All the
The most important point that you need to note is
issues raised above are a good source
that in distance education and open learning, there
of topics (as they pertain to your
are no lectures like those found in conventional
learning) for discussion during the
universities. Instead, you have learning packages
tutorial
that may comprise written modules, tapes, CDs,
· The answers come from you while the
DVDs and other referral materials for extra reading.
tutor’s task is to confirm, spur further
All these including radio, television, telephone, fax
discussion, clarify, explain, give
and email can be used to deliver learning to you.
additional information, guide the
As such, at ZOU, we do not expect the tutor to
discussion and help you put together
lecture you when you meet him/her. We believe
full answers for each question that you
that that task is accomplished by the learning
bring
package that you receive at registration. What
· You must prepare for the tutorial by
then is the purpose of the six hour tutorial for each
bringing all the questions and answers
course on offer?
that you have found out on the topics
to the discussion
At ZOU, as at any other distance and open learning
· For the tutor to help you effectively, give
university, you the student are at the centre of
him/her the topics beforehand so that
learning. After you receive the learning package,
in cases where information has to be
you study the tutorial letter and other guiding
gathered, there is sufficient time to do
documents before using the learning materials.
so. If the questions can get to the tutor
During the study, it is obvious that you will come
at least two weeks before the tutorial,
across concepts/ideas that may not be that easy
that will create enough time for
to understand or that are not so clearly explained.
thorough preparation.
You may also come across issues that you do not
agree with, that actually conflict with the practice
In the tutorial, you are expected and required to
that you are familiar with. In your discussion
take part all the time through contributing in
groups, your friends can bring ideas that are totally
every way possible. You can give your views,
different from yours and arguments may begin. You
even if they are wrong, (many students may hold
may also find that an idea is not clearly explained
the same wrong views and the discussion will
and you remain with more questions than answers.
help correct the errors), they still help you learn
You need someone to help you in such matters.
the correct thing as much as the correct ideas.
The Six Hour Tutorial Session At The Zimbabwe Open University
You also need to be open-minded, frank, inquisitive learning package together with the sources to
and should leave no stone unturned as you analyze which you are referred. Fully-fledged lectures
ideas and seek clarification on any issues. It has can, therefore, be misleading as the tutor may
been found that those who take part in tutorials dwell on matters irrelevant to the ZOU course.
actively, do better in assignments and examinations
because their ideas are streamlined. Taking part Distance education, by its nature, keeps the tutor
properly means that you prepare for the tutorial and student separate. By introducing the six hour
beforehand by putting together relevant questions tutorial, ZOU hopes to help you come in touch
and their possible answers and those areas that with the physical being, who marks your
cause you confusion. assignments, assesses them, guides you on
preparing for writing examinations and
Only in cases where the information being assignments and who runs your general academic
discussed is not found in the learning package can affairs. This helps you to settle down in your
the tutor provide extra learning materials, but this course having been advised on how to go about
should not be the dominant feature of the six hour your learning. Personal human contact is,
tutorial. As stated, it should be rare because the therefore, upheld by ZOU.
information needed for the course is found in the
The six hour tutorials should be so structured that the

tasks for each session are very clear. Work for each
session, as much as possible, follows the structure given
below.
Session I (Two Hours)

Session I should be held at the beginning of the semester. The
main aim of this session is to guide you, the student, on how
you are going to approach the course. During the session, you
will be given the overview of the course, how to tackle the
assignments, how to organize the logistics of the course and
formation of study groups that you will belong to. It is also during
this session that you will be advised on how to use your learning
materials effectively.
The Six Hour Tutorial Session At The Zimbabwe Open University
Session II (Two Hours)

This session comes in the middle of the semester to respond
to the challenges, queries, experiences, uncertainties, and
ideas that you are facing as you go through the course. In this
session, difficult areas in the module are explained through the
combined effort of the students and the tutor. It should also give
direction and feedback where you have not done well in the
first assignment as well as reinforce those areas where
performance in the first assignment is good.
Session III (Two Hours)

The final session, Session III, comes towards the end of the
semester. In this session, you polish up any areas that you still
need clarification on. Your tutor gives you feedback on the
assignments so that you can use the experience for preparation
for the end of semester examination.
Note that in all the three sessions, you identify the areas
that your tutor should give help. You also take a very
important part in finding answers to the problems posed.
You are the most important part of the solutions to your
learning challenges.
Conclusion urge you not only to attend the six hour tutorials
for this course, but also to prepare yourself to
contribute in the best way possible so that you
In conclusion, we should be very clear that six can maximally benefit from it. We also urge
hours is too little for lectures and it is not you to avoid forcing the tutor to lecture you.
necessary, in view of the provision of fully self-
contained learning materials in the package, to BEST WISHES IN YOUR STUDIES.
turn the little time into lectures. We, therefore,
ZOU
Contents
Overview __________________________________________________ 1
Unit One: The Regulatory Framework
1.0 _______ Introduction ________________________________________________ 5

1.1 _______ Unit Objectives ______________________________________________ 6
1.2 _______ The Objectives of the IASC Foundation __________________________ 6
1.3 _______ The Structure of the IASC Foundation ___________________________ 6
_________ 1.3.1 The International Accounting Standards Board (IASB) ________ 8
_________ Activity1.1 __________________________________________________ 8
_________ 1.3.2 The International Financial Reporting Interpretations __________
_________ Committee (IFRIC) __________________________________________ 8
1.4 _______ The Process of Issuing An Interpretation _______________________ 10
1.5 _______ The Standard Setting Process _________________________________ 10
_________ Activity 1.2 ________________________________________________ 11
1.6 _______ Summary __________________________________________________ 11
_________ References _________________________________________________ 13
Unit Two: The Conceptual Framework for Financial Reporting
2.0 _______ Introduction _______________________________________________ 15

2.1 _______ Unit Objectives _____________________________________________ 16
2.2 _______ The Purpose of the Conceptual Framework ______________________ 16
2.3 _______ Scope of the Conceptual Framework ____________________________ 16
2.4 _______ Objectives of General Purpose Financial Reporting ________________ 17
_________ Activity 2.1 ________________________________________________ 17
2.5 _______ Accrual Accounting _________________________________________ 17
2.6 _______ Qualitative Characteristics of Useful Financial Information ________ 18
_________ 2.6.1 Relevance _____________________________________________ 18
_________ 2.6.2 Faithfull representation _________________________________ 18
_________ 2.6.3 Enhancing qualitative characteristics_______________________ 19
_________ Activity 2.2 ________________________________________________ 20
2.7 _______ Underlying Assumption ______________________________________ 20
2.8 _______ The Elements of Financial Statements __________________________ 20
_________ 2.8.1 Assets ________________________________________________ 20
_________ 2.8.2 Liabilities _____________________________________________ 21
_________ 2.8.3 Equity ________________________________________________ 21
_________ 2.8.4 Performance ___________________________________________ 21
_________ 2.8.5 Capital maintenance adjustments __________________________ 22
2.9 _______ Recognition of Elements of Financial Statements _________________ 22
2.10 ______ Measurement of Elements of Financial Statements _______________ 22
_________ 2.10.1 Historical cost ________________________________________ 22
_________ 2.10.2 Current cost __________________________________________ 23
_________ 2.10.3 Realisable (Settlement) value ____________________________ 23
_________ 2.10.4 Present value _________________________________________ 23
2.11 ______ Concepts of Capital Maintenance _______________________________ 23
_________ 2.11.1 Financial concept of capital _____________________________ 23
_________ 2.11.2 Physical concept of capital ______________________________ 24
_________ Activity 2.3 ________________________________________________ 24
2.12 ______ Summary __________________________________________________ 24
_________ References _________________________________________________ 25
Unit Three: Company Formation
3.0 _______ Introduction _______________________________________________ 27

3.1 _______ Unit Objectives _____________________________________________ 28
3.2 _______ Formation of a Company _____________________________________ 28
3.3 _______ Company Limited by Shares or by Guarantee _____________________ 28
3.4 _______ The Memorandum of Association _____________________________ 28
_________ Activity 3.1 ________________________________________________ 29
3.5 _______ Capacity of a Company _______________________________________ 29
3.6 _______ Articles of Association _______________________________________ 30
3.7 _______ Registration of Memorandum and Articles of Association _________ 30
_________ 3.7.1 Effect of registration ___________________________________ 30
3.8 _______ Commencement of Business __________________________________ 31
_________ Activity 3.2 ________________________________________________ 31
3.9 _______ Types of Companies Limited by Shares __________________________ 31
_________ 3.9.1 A public company ______________________________________ 31
_________ 3.9.2 A private company ______________________________________ 32
_________ Activity 3.3 ________________________________________________ 32
3.10 ______ Summary __________________________________________________ 32
_________ References _________________________________________________ 33
Unit Four: Presentation of Financial Statements (IAS 1)
4.0 _______ Introduction _______________________________________________ 35

4.1 _______ Unit Objectives _____________________________________________ 36
4.2 _______ Change of Terminology ______________________________________ 36
4.3 _______ The Reporting Period ________________________________________ 36
_________ 4.3.1 A complete set of financial statements _____________________ 36
4.4 _______ General Features of Financial Statements _______________________ 37
_________ 4.4.1 Fair presentation _______________________________________ 37
_________ 4.4.2 Going concern _________________________________________ 37
_________ 4.4.3 Accrual basis of accounting ______________________________ 38
_________ 4.4.4 Materiality and aggregation ______________________________ 38
_________ 4.4.5 Comparative information ________________________________ 38
_________ 4.4.6 Offsetting _____________________________________________ 38
_________ 4.4.7 Consistency of presentation ______________________________ 38
_________ Activity 4.1 ________________________________________________ 38
4.5 _______ Identification of Financial Statements __________________________ 39
4.6 _______ The Statement of Financial Position ____________________________ 39
_________ 4.6.1 Assets ________________________________________________ 39
_________ 4.6.2 Liabilities _____________________________________________ 39
_________ 4.6.3 Equity ________________________________________________ 40
4.7 _______ Current/Non-current Distinction _______________________________ 40
_________ 4.7.1 Current assets _________________________________________ 40
_________ 4.7.2 Current liabilities _______________________________________ 40
_________ Activity 4.2 ________________________________________________ 41
_________ 4.7.3 Share capital and reserves ________________________________ 41
4.8 _______ Example of a Statement of Financial Position ____________________ 41
4.9 _______ Statement Of Comprehensive Income ___________________________ 42
_________ Activity 4.3 ________________________________________________ 43
_________ 4.9.1 Material items of income and expense to be disclosed ____________
_________ separately _________________________________________________ 43
_________ 4.9.2 Analysis of expenses recognised in profit or loss ______________ 44
4.10 ______ Example: A Statement of Comprehensive Income ___________________
_________ (Classification By Function) __________________________________ 44
4.11 ______ Example of Statement of Comprehensive Income ___________________
_________ (Analysis by Nature of Expense) ______________________________ 45
_________ Activity 4.4 ________________________________________________ 46
4.12 ______ Statement of Changes in Equity _______________________________ 46
_________ 4.12.1 Components of equity __________________________________ 46
_________ 4.12.2 Example of Statement of Changes in Equity ________________ 47
_________ Activity 4.4 ________________________________________________ 48
4.13 ______ Statement of Cash Flows _____________________________________ 50
_________ 4.13.1 Presentation of the statement of cash flows ________________ 51
_________ 4.13.2 Presentation of the operations section _____________________ 51
_________ Activity 4.5 ________________________________________________ 57
4.14 ______ Summary __________________________________________________ 60
_________ References _________________________________________________ 62
Unit Five: Accounting Policies, Changes in Accounting Estimates
and Errors (IAS 8)
5.0 _______ Introduction _______________________________________________ 63

5.1 _______ Unit Objectives _____________________________________________ 64
5.2 _______ Accounting Policies __________________________________________ 64
_________ 5.2.1 Changes in accounting policies ____________________________ 64
_________ 5.2.2 Selection of accounting policies ___________________________ 64
5.3 _______ Change due to an initial adoption of a standard ___________________ 65
_________ 5.3.1 Retrospective application of a change in accounting policy _____ 65
_________ Activity 5.1 ________________________________________________ 67
_________ 5.3.2 Disclosure of a change in policy ___________________________ 68
5.4 _______ Changes in Accounting Estimates ______________________________ 68
_________ 5.4.1 Disclosure _____________________________________________ 69
_________ Activity 5.2 ________________________________________________ 69
5.5 _______ Errors ____________________________________________________ 70
_________ 5.5.1 Prior period errors ______________________________________ 70
_________ 5.5.2 Correction of prior period errors __________________________ 70
_________ Example 5.3 _______________________________________________ 71
_________ Activity 5.3 ________________________________________________ 74
_________ 5.5.3 Disclosure _____________________________________________ 75
5.6 _______ Summary __________________________________________________ 75
_________ References _________________________________________________ 76
Unit Six: Investments in Associates and Joint Ventures (IAS28)

6.0 _______ Introduction _______________________________________________ 77
6.1 _______ Unit Objectives _____________________________________________ 78
6.2 _______ Definition of Terms _________________________________________ 78
6.3 _______ Significant Influence_________________________________________ 79
6.4 _______ Accounting for Investments ___________________________________ 79
_________ 6.4.1 The cost method _______________________________________ 79
_________ Activity 6.1 ________________________________________________ 80
_________ 6.4.2 Equity method _________________________________________ 81
_________ Activity 6.2 ________________________________________________ 82
6.5 _______ Unrealised Profit in Closing Inventory when Trading with an Associate 83
_________ Activity 6.3 ________________________________________________ 84
6.6 _______ Summary __________________________________________________ 84
_________ References _________________________________________________ 85
Unit Seven: Business Combinations (IFRS 3)

7.0 _______ Introduction _______________________________________________ 87
7.1 _______ Unit Objectives _____________________________________________ 88
7.2 _______ Definitions _________________________________________________ 88
7.3 _______ Scope of the Standard ________________________________________ 88
_________ Activity 7.1 ________________________________________________ 88
7.4 _______ Accounting Treatment in Business Combinations _________________ 89
7.5 _______ The Purchase Method ________________________________________ 89
_________ 7.5.1 Identifying the acquirer __________________________________ 89
_________ 7.5.2 Determining the date of acquisition ________________________ 89
_________ 7.5.3 Measuring costs of the business combination ________________ 89
_________ 7.5.4 Recognising and measuring identifiable assets acquired and liabilities
_________ assumed and any non-controlling interest _______________________ 90
_________ 7.5.5 Recognising and measuring goodwill or a gain from a bargain ____
_________ purchase __________________________________________________ 90
_________ Activity 7.2 ________________________________________________ 91
_________ 7.5.6 Bargain purchase price gain (negative goodwill) ______________ 92
7.6 _______ Disclosure Requirements _____________________________________ 94
_________ Activity 7.3 ________________________________________________ 95
7.7 _______ Summary __________________________________________________ 95
_________ References _________________________________________________ 96
Unit Eight: Accounting for Government Grants and Disclosure of

Government Assistance ( IAS 20)
8.0 _______ Introduction _______________________________________________ 97
8.1 _______ Unit Objectives _____________________________________________ 98
8.2 _______ Definitions _________________________________________________ 98
8.3 _______ Types of Grants ____________________________________________ 98
8.4 _______ Recognition Criteria for Government Grants _____________________ 98
_________ Activity 8.1 ________________________________________________ 99
8.5 _______ Accounting Treatment _______________________________________ 99
_________ 8.5.1 Grants related to assets __________________________________ 99
_________ Activity 8.2 _______________________________________________ 101
_________ 8.5.2 Grants related to income ________________________________ 102
8.6 _______ Repayment of Government Grant _____________________________ 103
8.7 _______ Disclosures _______________________________________________ 104
_________ Activity 8.3 _______________________________________________ 104
8.8 _______ Summary _________________________________________________ 104
_________ References ________________________________________________ 105
Unit Nine: Property Plant and Equipment (IAS 16)

9.0 _______ Introduction ______________________________________________ 107
9.1 _______ Unit Objectives ___________________________________________ 108
9.2 _______ Definitions _______________________________________________ 108
_________ Activity 9.1 _______________________________________________ 109
9.3 _______ Scope of IAS 16 ___________________________________________ 109
9.4 _______ Recognition of PPE _______________________________________ 109
_________ Activity 9.2 _______________________________________________ 110
_________ 9.4.1 Directly attributable costs ______________________________ 110
_________ Example 9.1 ______________________________________________ 111
_________ Solution 9.1 _______________________________________________ 111
_________ Activity 9.3 _______________________________________________ 112
_________ 9.4.2 Subsequent costs _____________________________________ 113
_________ Activity 9.4 _______________________________________________ 113
9.5 _______ Measurement after Recognition _____________________________ 113
_________ 9.5.1 The cost model _______________________________________ 113
_________ 9.5.2 The revaluation model _________________________________ 113
_________ Example 9.2 ______________________________________________ 114
_________ Solution 9.2 ______________________________________________ 115
_________ Activity 9.4 _______________________________________________ 115
_________ Example 9.3 ______________________________________________ 116
_________ Solution 9.3 ______________________________________________ 116
_________ Example 9.4 ______________________________________________ 117
_________ Solution 9.4 ______________________________________________ 117
9.6 _______ Depreciation______________________________________________ 118
_________ 9.6.1 Depreciation methods _________________________________ 119
9.7 _______ Impairment ______________________________________________ 119
9.8 _______ Compensation for Impairment_______________________________ 119
9.9 _______ Derecognition of Non-current Assets ________________________ 119
_________ Activity 9.5 _______________________________________________ 120
9.10 ______ Disclosure ________________________________________________ 120
9.11 ______ Other Disclosures _________________________________________ 121
9.12 ______ Summary_________________________________________________ 121
_________ References _______________________________________________ 122
Unit Ten: Impairment of Assets (IAS 36)

10.0 ______ Introduction ______________________________________________ 123
10.1 ______ Unit Objectives ___________________________________________ 124
10.2 ______ Definitions _______________________________________________ 124
10.3 ______ Scope of IAS 36 ___________________________________________ 124
_________ Activity 10.1 ______________________________________________ 125
10.4 ______ Identifying Assets that may be Impaired ______________________ 125
10.5 ______ Key Stages in the Process of Accounting for Impairment of Assets 126
_________ Example 10.1 _____________________________________________ 126
_________ Solution 10.1 ______________________________________________ 127
_________ Activity 10.2 ______________________________________________ 128
10.6 ______ Indicators of Impairment ___________________________________ 128
_________ Activity 10.3 ______________________________________________ 129
10.7 ______ Measuring the Recoverable Amount __________________________ 129
_________ 10.7.1 Calculating value in use _______________________________ 129
_________ Activity 10.4 ______________________________________________ 129
10.8 ______ Recognising an Impairment Loss ____________________________ 129
_________ Example 10.1 _____________________________________________ 130
_________ Solution 10.1 ______________________________________________ 130
10.9 ______ Depreciation for Future Periods Following Recognition of an
_________ Impairment Loss __________________________________________ 130
_________ Example 10.2 _____________________________________________ 131
_________ Solution 10.2 ______________________________________________ 131
10.10 _____ Cash Generating Units (CGU) _______________________________ 132
_________ Example 10.3 _____________________________________________ 132
_________ Solution 10.3 ______________________________________________ 133
10.11 _____ Reversal of an Impairment Loss _____________________________ 133
_________ 10.11.1 Recognition of a reversal _____________________________ 133
_________ Activity 10.5 ______________________________________________ 134
_________ 10.12 Disclosure Requirements_______________________________ 134
_________ Activity 10.6 ______________________________________________ 135
_________ 10.12 Summary ____________________________________________ 135
_________ References _______________________________________________ 137
Unit Eleven: Provisions, Contingent Liabilities and Contingent Assets

(IAS 37)
11.0 ______ Introduction ______________________________________________ 139
11.1 ______ Unit Objectives ___________________________________________ 140
11.2 ______ Definitions _______________________________________________ 140
11.3 ______ Scope of IAS 37 ___________________________________________ 141
_________ Activity 11.1 ______________________________________________ 141
11.4 ______ Provisions ________________________________________________ 142
_________ 11.4.1 Recognition _________________________________________ 142
_________ Example 11.1 _____________________________________________ 143
_________ Solution 11.1 ______________________________________________ 144
_________ Activity 11.2 ______________________________________________ 144
_________ 11.4.2 Changes in provisions _________________________________ 146
_________ Activity 11.3 ______________________________________________ 146
_________ 11.4.3 Use of provisions ____________________________________ 146
_________ Example 11.2 _____________________________________________ 146
_________ Solution 11.2 ______________________________________________ 147
_________ 11.4.4 Application of recognition and measurement rules ________ 148
11.5 ______ Disclosure Requirements ___________________________________ 149
11.6 ______ Contingent Liabilities and Contingent Assets __________________ 149
_________ 11.6.1 Disclosure of contingent liabilities/assets ________________ 149
_________ Activity 11.4 ______________________________________________ 150
11.7 ______ Decision Tree – Accounting for Provisions and Contingent _________
_________ Liabilities ________________________________________________ 150
11.8 ______ Summary_________________________________________________ 151
_________ References _______________________________________________ 152
Unit Twelve: Tax (IAS 12)

12.0 ______ Introduction ______________________________________________ 153
12.1 ______ Unit Objectives ___________________________________________ 154
12.2 ______ Deferred Tax _____________________________________________ 154
_________ 12.2.1 Steps in the recognition and measurement of deferred tax __ 154
_________ Activity 12.1 ______________________________________________ 154
12.3 ______ Calculation of a Temporary Difference (TD) __________________ 154
_________ Example 12.1 - Tax base of an asset - When future economic benefits
_________ are taxable _______________________________________________ 155
_________ Example 12.2 - Tax base of an asset - when future economic
_________ benefits are not taxable _____________________________________ 155
12.4 ______ The Tax Base of a Liability _________________________________ 155
_________ Example 12.3 - Tax base of a liability – future settlement ___________
_________ deductible ________________________________________________ 155
_________ Example 12.4 - Tax base of a liability –future settlement not d ______
_________ eductible _________________________________________________ 156
12.5 ______ Tax Base of Revenue Received in Advance ____________________ 156
_________ Example 12.5 - TB of revenue received in advance – not taxable in __
_________ future____________________________________________________ 156
12.6 ______ Determining Whether Temporary Differences are Taxable or ________
_________ Deductible ______________________________________________ 157
_________ Example 12.6 _____________________________________________ 157
_________ Solution 12.6 ______________________________________________ 157
_________ Example 12.7 _____________________________________________ 157
_________ Solution 12.7 ______________________________________________ 157
_________ Activity 12.2 ______________________________________________ 158
12.7 ______ Exemption from Recognition of Deferred Tax for Certain
_________ Temporary Differences _____________________________________ 158
_________ Activity 12.3 ______________________________________________ 159
12.8 ______ Limitations f Recognition of Deferred Tax Assets for Deductible
_________ TDs, Unused Tax Losses or Credits __________________________ 159
_________ Example 12.8 _____________________________________________ 160
_________ Solution 12.8 ______________________________________________ 160
12.9 ______ The Appropriate Tax Rates _________________________________ 160
12.10 _____ Changes in Tax Rates ______________________________________ 160
_________ Example 12.9 _____________________________________________ 161
_________ Solution 12.9 ______________________________________________ 161
12.11 _____ Recognition of the Deferred Tax Income or Expense ___________ 161
12.12 _____ Presentation of Deferred Tax Assets/Liabilities ________________ 161
12.13 _____ Disclosure ________________________________________________ 162
12.14 _____ Summary_________________________________________________ 162
_________ References _______________________________________________ 163
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Module Overview
T his module has been prepared to cover the syllabus of Company

Accounting (BACC304). Knowledge of Financial Accounting 3 is
assumed, and examination questions may include materials covered in Financial
Accounting 3. The module comprises of the following 12 units:
Unit 1 – Regulatory framework - We cover the structure and duties of the
international accounting standards setting bodies. We also discuss standard
setting procedures.
Unit 2- The conceptual framework - We explain the concepts that underlie

the preparation and presentation of financial statements. We also discuss
qualitative characteristics, assumptions underlying the preparation of financial
statements and elements of financial statements.
Unit 3 – Company formation – In this unit we deal with procedures to be

followed in the formation of companies. Registration procedures for different
types of companies are explained.
Unit 4 – Presentation of financial statements – We discuss the prescribed

requirements for the preparation and presentation of general purpose financial
statements. Requirements relating to all financial statements, namely, the
statement of comprehensive income, the statement of financial position, the
statement of changes in equity, the statement of cash flows and notes to the
financial statements are explained.
Company Accounting Module BACC304
Unit 5 - Accounting policies, changes in accounting estimates and errors

– In this unit we deal with the accounting treatment of changes in estimates,
and the correction of errors including prior period errors. We examine both
voluntary and compulsory policy changes as well as how estimates and errors
affect both the current and prior periods.
Unit 6 – Investments in associates and joint ventures – We cover the

equity method of accounting for investments in associates. We examine how
significant influence of the investor is determined and how the initial investment
and subsequent transactions are accounted for.
Unit 7 – Business combinations – In this unit we cover financial reporting

by an entity when it combines with one or more entities. We discuss how the
acquirer and acquire are determined. We further examine how the assets and
liabilities acquired are identified, recognised and measured using the purchase
method. The calculation of goodwill or a gain form a bargain purchase price is
explained.
Unit 8 – Accounting for government grants and disclosure of

government assistance – In this unit we examine the accounting treatment
of government grants relating to both assets and income. Disclosure
requirements in respect of government grants are also discussed.
Unit 9 - Property, plant and equipment (PPE) – We cover the prescribed

treatment of property, plant and equipment and addresses recognition of assets
and determination of their carrying amounts. The cost and revaluation methods
of accounting for property plant and equipment are discussed. We explain
different methods of depreciating PPE as well as how and when PPE are
derecognised.
Unit 10 – Impairment of assets – In this unit we examine procedures applied

to ensure that assets are carried at amounts no more than their recoverable
amounts. We explain both internal and external indicators of impairment. We
go on to discuss the measurement of the recoverable amount of PPE and
calculation of an impairment loss. Reversal of an impairment loss is also covered.
Unit 11 – Provisions, contingent liabilities and contingent assets – We

cover the proper measurement, recognition and disclosure of provisions,
contingent liabilities and contingent assets.
Unit 12 – Tax – In this final unit we examine the accounting treatment of both
current and deferred tax. We set out steps to be taken in the recognition and
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2 Zimbabwe Open University
Modle Overview
measurement of deferred tax, as well as disclosure requirements for both

current and deferred tax.
Important concepts are explained with the aid of examples. Activities are
included to enable you to check how much you have understood the materials
presented. It is important to emphasise that you should work out more
questions, other than those in the module so that you can gain confidence and
attain sufficient speed and accuracy to succeed in the examinations and the
corporate world at large
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Zimbabwe Open University 3
Unit One
The Regulatory Framework
1.0 Introduction
T he International Accounting Standards Committee (IASC) was

established in 1973 to develop and harmonise international accounting
standards (IAS) throughout the world. In 2001, this body was replaced by
the IASC Foundation, that has 22 trustees, which became responsible for
governance of the foundation and the bodies within it. In this unit we cover the
structures of the IASC Foundation and the standards setting procedures.
1.1 Unit Objectives

By the end of this unit, you should be able to:
 state the objectives of the International Accounting

Standards Board (IASB)
 explain the standard setting procedure of the IASB
 discuss the responsibilities of the International
Financial Reporting Standards Interpretations
Committee (IFRIC)
1.2 The Objectives of the IASC Foundation

The following are the objectives of the IASC Foundation: To
 provide in the public interest, a single set of high quality global accounting
standards and to promote rigorous application of the standards
 bring about convergence of national accounting standards and
International Financial Reporting Standards (IFRS) /International
Accounting Standards (IAS)
 take account of special needs of small and medium sized entities and
emerging economies
1.3 The Structure of the IASC Foundation

The following figure depicts the structure of the IASC Foundation:

Unit 1 The Regulatory Framework
Figure 1.1: The Structure of the IASC Foundation
Source: The IFRS Foundation
Briefly, the functions of these bodies are as follows:
IFRS Foundation Monitoring Board – Appoints IFRS Foundation trustees

and monitors the activities of this board of trustees.
IFRS Foundation trustees - Oversees the activities of and reviews the

effectiveness of the IASB. It also appoints IFRS Advisory Board and IASB
members.
IASB – Is responsible for standard setting. Issues IFRSs and IFRS for SMEs.
IFRS Advisory Council - Provides strategic advice to the IASB.

IFRIC – Offers advice where there are differences in accounting practices.
1.3.1 The International Accounting Standards Board (IASB)

The standard setting body for the IASC Foundation is the International
Accounting Standards Board (IASB).
The objective of the IASB is to develop a single set of high quality,

understandable, enforceable and globally accepted financial reporting
standards, based upon clearly articulated principles.
It is overseen by a geographically and professionally diverse body of trustees.
IASB is supported by an external IFRS Advisory Council and an International

Financial Reporting Interpretations Committee IFRIC), to offer guidance where
divergence in practices occurs.
It employs a thorough, open, participatory and transparent due process, and

engages with investors, regulators, business leaders and the global accountancy
profession at every stage of the process.
It engages in collaborative efforts with worldwide standard-setting bodies.
Activity1.1
? 1.
2.
Explain the objectives of the IASB.
Give a brief account of the structures within which
the IASB operates.
1.3.2 The International Financial Reporting Interpretations

Committee (IFRIC)
The role of IFRIC is to give guidance on the interpretation of international
accounting standards, and is responsible for:
 Interpreting international accounting standards.
 Issuing guidance on issues not covered by IASs or IFRSs, within the
context of the IASB framework.
 Publishing draft interpretations for public comment, and after studying
the comments, obtaining approval for a final interpretation.
The table below shows the formal advisory bodies and their responsibilities:

Table 1.1: Advisory Bodies

Advisory Body Comment
Accounting Standards Advisory Forum An advisory group to the IASB consisting of

national accounting standard-setters and
regional bodies with an interest in financial
reporting. The principal purpose of the new
advisory group is to provide technical advice
and feedback to the IASB.
IFRS Advisory Council The formal advisory body to the IASB and
the Trustees; consisting of representatives
from preparers of financial statements,
financial analysts, academics, auditors,
regulators, professional accounting bodies
and investor groups.
Capital Markets Advisory Committee External advisory group to the IASB,

consisting of investors and other users of
financial statements.
Emerging Economies Group Consultative groups give the IASB access to

additional practical experience and expertise.
The IASB normally establishes consultative
groups for its major projects.
Global Preparers Forum External advisory group to the IASB,

consisting of organisations that prepare
financial statements in accordance with
IFRS.
SME Implementation Group Supports the international adoption of the

IFRS for Small and Medium-sized Entities
and monitors its implementation.
Consultative groups Consultative groups give the IASB access to

additional practical experience and expertise.
The IASB normally establishes consultative
groups for its major projects.
Source: IFRS Foundation

1.4 The Process of Issuing An Interpretation

The process of issuing an interpretation involves the following steps:
 A standard that that requires interpretation is referred to IFRIC by the
IASB.
 IFRIC publishes a draft interpretation for public comment.
 After considering all comments IFRIC approves an interpretation and
submits it to the IASB for approval.
 After IASB approval, the interpretation is published.
1.5 The Standard Setting Process

IFRSs are developed through due process as depicted by figure1.2 below:
Figure 1.2: The Standard Setting Process
 The IASB and staff set an agenda of issues to be addressed by IFRSs.

 A project is planned, and this includes a decision whether it will be a
joint project with other accounting bodies such as, FASB.
 After research and discussion, a discussion paper is prepared for public
comment.
 After considering all comments, the board issues an exposure draft for
public consideration
 A final IFRS is published after considering all further comments.
 A post-implementation review of the IFRS is conducted by the board
after two years.
The interaction of the various bodies in the issuing of standards is depicted
on the figure1.3 below.

Figure 1.3: Interaction of Various Bodies in Standard Setting
Activity 1.2
? 1.
2.
Explain the standard setting process of the IASB.
What are the responsibilities of the IFRIC?
1.6 Summary
In this unit, we described the institutions and structures which are responsible
for issuing IFRS. We discussed that the IASB is the standard setting body of
the IFRS Foundation. The IFRS board of trustees oversees the work of the
IASB. Other important bodies include the Standards advisory council which
gives advice to the IASB and the board of trustees, and the IFRIC which is
responsible for interpreting the application of the IFRSs. Its interpretations
are approved by the IASB before publication.

The standard setting procedure involves research, the issue of a discussion

paper, the subsequent issue of an exposure draft, for public comment, and the
issue of an IFRS, after due consideration of feedback from public comments.

References
ICAEW (2008). International Financial Reporting Standards: Certificate

Learning Materials. ICAEW.
Kirk, R.J. (2005). International Financial Reporting Standards in Depth
vol.1: Theory and Practice. Oxford: CIMA publishing.
Lewis, R. and Pendrill, D. (2004) Advanced Financial Accounting. London:
Prentice Hall.
Oppermann, H.R.B., Booysen, S.F., Binnekade, C.S. and Oberholster J.G.I.
(2003). Accounting Standards. Johannesburg: Juta and Company.
Van Greuning, H. (2006). International Financial Reporting Standards –
A Practical Guide. Washington DC: The World Bank.

Unit Two
The Conceptual Framework for

Financial Reporting
2.0 Introduction
T he International Accounting Standards Board (IASB) is in the process

of updating its conceptual framework that was published in 1989 under
the title “Framework for the preparation and presentation of financial
statements”. In the first phase, Chapters 1, The objective of financial reporting
and Chapter 3, Qualitative characteristics of useful financial information, have
been completed. As a chapter is finalised, the relevant paragraphs of the 1989
framework are replaced. On completion, there will be a single document
called the Conceptual framework for financial reporting. In September 2012,
the IASB agreed to restart the project and to focus on the remaining parts,
namely, elements of financial statement, measurement, the reporting entity,
presentation and disclosure. All these will be included in a single discussion
paper and then a single exposure draft. The project is scheduled for completion
by September 2015. In this unit we cover both the updated parts and those
which are still to be updated.
2.1 Unit Objectives

 explain the purpose of the conceptual framework

 describe the objectives of financial statements
 discuss the qualitative elements of financial statements
 analyse the recognition and measurement of elements of
financial statements
 examine the concepts of capital and capital maintenance
2.2 The Purpose of the Conceptual Framework

The conceptual framework sets out concepts that underlie the preparation
and presentation of financial statements for external users. Such concepts
should be consistent with one another. Its purpose is to:
 assist the Board in the development of future IFRSs and in its review of
existing IFRSs.
 assist the board in harmonising regulations, accounting standards and
procedures relating to the presentation of financial statements, by
providing a basis for reducing the number of alternative treatments
permitted by IFRS
 assist users of financial statements in interpreting information contained
in financial statements prepared in compliance with IFRSs
 provide information regarding IASB’s approach to the formulation of
IFRSs.
2.3 Scope of the Conceptual Framework

The conceptual framework deals with:
 The objective of financial reporting
 Qualitative characteristics of useful financial information
 The definition, recognition, and measurement of the elements from which
financial statements are constructed and
 Concepts of capital and capital maintenance.

Unit 2 The Conceptual Framework for Financial Reporting
2.4 Objectives of General Purpose Financial Reporting

The main objective is to provide financial information that is useful to existing
and potential investors, lenders and other creditors in making decisions about
providing resources to the entity. The decisions may involve buying, selling or
holding equity and debt instruments, and providing or settling loans and other
forms of credit.
However, financial statements cannot show all information that existing and
potential investors, lenders and other creditors need. They provide information
to enable these parties to estimate the value of the reporting entity.
To a large extent, financial reports are based on estimates, judgements and

models, rather than exact depictions and the conceptual framework establishes
the concepts that underlie these estimates, judgements and models.
Financial reports provide information about the financial position of the entity,
that is, its economic resources and claims against it. Such information helps
users determine strengths and weaknesses of the entity as well as its liquidity
and solvency. Changes in economic resources and claims result from the entity’s
financial performance and other events, such as, issuing debt or equity
instruments. Information on the entity’s financial performance helps users
understand the return on economic resources employed.
Activity 2.1
? 1.
2.
What is the purpose of a conceptual framework?
What are the objectives of general purpose financial
statements?
2.5 Accrual Accounting

Information on financial performance of the entity is reported on an accrual
basis and this facilitates a better basis for assessment of its past and future
performance. Financial performance information also helps to assess the
entity’s capacity to generate net cash inflows from operations rather than from
investors or creditors.

2.6 Qualitative Characteristics of Useful Financial

Information
Attributes which make financial information useful to users of financial
statements in making economic decisions are termed “qualitative
characteristics”. Relevance and faithful representation are the fundamental
qualitative characteristics. Additionally, the attributes that increase the
usefulness of financial information (when the financial information is already
relevant and faithfully represented) are termed enhancing qualitative
characteristics. These characteristics are discussed below.
2.6.1 Relevance
Means that the information must be capable of making a difference in decisions
made by users, that is, it should have predictive value or confirmatory value
or both.
Predictive value
It has predictive value if it can be used as input to processes employed by

users to predict future outcomes.
Confirmatory value
It has confirmatory value if it provides feedback about previous evaluations.
Materiality
Information is material if omitting it or misstating it could influence decisions

by users on the basis of financial information about a reporting entity. It is an
entity-specific aspect of relevance based on the nature or amount or both of
items in the entity’s financial report.
2.6.2 Faithfull representation

Financial reports present economic phenomena in words and numbers. Useful
financial information faithfully represents the economic phenomena it purports
to represent. It should have three characteristics, that is, it should be complete,
neutral and free from error.
Completeness
To be complete, a user must understand the phenomena depicted, including

all the descriptions and explanations.
Neutrality
To be neutral, financial information must be without bias in its selection and

presentation, that is, not in any way manipulated to influence decisions of
users.
Free from error
This means there are no errors or omissions in the description of the phenomena
and that the process used to produce the information has been selected and
applied with no errors in the process.
2.6.3 Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability enhance usefulness
of information that is relevant and faithfully represented.
Comparability
Information is useful if it can be compared with similar information about other

entities or about the same entity but for a different period. Consistency helps
to achieve comparability.
Verifiability
Means that different knowledgeable and independent observers could reach

consensus though not necessarily in complete agreement that a particular
depiction is a faithful representation.
Timeliness
Means having information available to decision-makers in time to be capable

of influencing their decisions. Generally, the older the information the less useful
it is.
Understandability
Classifying, characterising and presenting information clearly and concisely

makes it understandable.

Activity 2.2
? 1. Explain what you understand by fundamental qualitative
characteristics of financial statements.
2. What are the enhancing qualitative characteristics of
financial statements?
(Remaining text – Not yet updated by IASB)
2.7 Underlying Assumption

Going Concern
Financial statements are prepared on the assumption that the entity is a going
concern and will continue in operation for the foreseeable future, that is, the
entity has no intention to liquidate or curtail materially the scale of its operations.
2.8 The Elements of Financial Statements

Elements directly related to the measurement of the financial position are assets,
liabilities and equity.
Elements directly related to the measurement of performance are income and

expenses.
2.8.1 Assets
An asset is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity. The
future economic benefit embodied in an asset is its potential to contribute
directly or indirectly to the flow of cash and cash equivalents to the entity, as
part of the operation activities or its convertibility to cash or its capability to
reduce cash outflows. Some assets have physical form, others, like patents
do not have physical form and many are associated with legal rights. The
ultimate test is whether the entity controls the asset and expects benefits to
flow from the asset. Assets result from past events, and events expected to
occur in future do not give rise to assets.

2.8.2 Liabilities
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits. An essential characteristic of a liability
is an obligation by the entity, that is, a duty or responsibility to act or perform
in a certain way. Obligations may be legally enforceable in terms of a contract
or statutory requirement or arise from normal business practice or custom.
Settlement of a present obligation may occur by – payment of cash, transfer
of other assets, provision of services, replacement of an obligation with another
one, conversion of the obligation into equity or extinguished by a waiver by
the creditor. Liabilities result from past transactions or other past events. Some
liabilities can only be measured by using a substantial degree of estimation, for
example, provisions for payments under existing warrantees or to cover pension
obligation.
2.8.3 Equity
Equity is the residual interest in the assets of the entity after deducting all its
liabilities. It is usually sub-classified in the balance sheet into: funds contributed
by shareholders, retained earnings and reserves. Such classifications may
indicate legal or other restrictions on distributions on the amounts, different
rights to dividends or repayment of capital. The amount of equity is dependent
on the measurement of assets and liabilities, and does not necessarily coincide
with disposal value of net assets or market value of the shares of the entity.
2.8.4 Performance
Profit is frequently used as a measure of performance and elements directly
related to the measurement of profit are income and expenses.
Income
Income is increase in economic benefits during the accounting period in the

form of inflows or enhancements of assets or decreases of liabilities that result
in increases in equity, other than those relating to contributions from equity
participants. It includes both revenue, which arises in the ordinary activities of
the entity (also referred to as sales, royalties and so forth.) and gains, which
may not arise in the ordinary activities of the entity (for example, gains on
disposal of non-current assets).

Expenses
Expenses are decreases in economic benefits during the accounting period in

the form of outflows or depletion of assets (e.g. cash, plant and equipment,
cash and cash equivalents) or incurrences of liabilities that result in decreases
in equity, other than those relating to distributions to equity participants. Losses
decrease economic benefits and are no different from expenses.
2.8.5 Capital maintenance adjustments

Revaluation or restatement of assets and liabilities give rise to increases or
decreases in equity which are not included in the income statement but included
in equity as capital maintenance adjustments or revaluation reserves.
2.9 Recognition of Elements of Financial Statements

Recognition is inclusion of an element in the financial statements, if it meets the
definition of an element and satisfies criteria for recognition.
An item that meets the definition of an element is recognised if:

 It is probable that any future economic benefits associated with the
item will flow to or from the entity and
 The item has a cost or value that can be measured with reliability.
2.10 Measurement of Elements of Financial Statements

Measurement is the process of determining the monetary amounts at which
elements are recognised in the financial statements. A number of measurement
bases are employed and these include historical cost, current cost, realisable
value and present value. These are discussed below.
2.10.1 Historical cost

Assets are recorded as the amount of cash or cash equivalents paid or the fair
value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for
the obligation or in some instances (for example, taxes) at the amount of cash
or cash equivalents expected to be paid to satisfy the liability in the normal
course of business.

2.10.2 Current cost

Assets are carried at an amount of cash or cash equivalents that would have
to be paid if the same or an equivalent asset was currently acquired. Liabilities
are carried at the undiscounted amount of cash or cash equivalents that would
be required to settle the obligation currently.
2.10.3 Realisable (Settlement) value

Assets are carried at an amount of cash or cash equivalents that could be
obtained by selling the asset in an orderly disposal. Liabilities are carried at
their settlement values, that is, undiscounted amounts expected to be paid to
satisfy the liabilities in the normal course of business.
2.10.4 Present value

Assets are carried at the present discounted value of future net cash inflows
that the item is expected to generate in the normal course of business. Liabilities
are carried at the present discounted value of future net cash outflows expected
to be required to settle the liabilities in the normal course of business.
Most businesses use historical cost, in combination with other bases.
2.11 Concepts of Capital Maintenance

The two concepts of capital and capital maintenance, namely, financial capital
(defined in terms of monetary units) and physical capital (defined in terms of
productive capacity) are discussed below.
2.11.1 Financial concept of capital

Under a financial concept of capital, such as invested money or invested
purchasing power, capital is synonymous with net assets or equity of the entity.
This concept is selected if users are concerned with maintenance of invested
nominal capital or purchasing power of invested capital.
Maintenance of financial capital
Profit is earned if net asset at the end of the period exceeds net assets at the
beginning, after excluding any distributions to and contributions from owners
during the period, measured in nominal monetary units at constant purchasing
power.

2.11.2 Physical concept of capital

Under physical concept of capital, such as operating capability, capital is
regarded as the productive capacity of the entity, based on, for example,
units of output per day. If the concern of users is with operating capacity of
the entity, this concept is selected.
Maintenance of physical capital
Profit is earned if the physical productive capacity of the entity at the end of
the period exceeds that at the beginning, after excluding any distribution to
and contributions from owners during the period.
The physical capital maintenance concept requires adoption of the current

cost measurement.
Activity 2.3
? 1.
2.
Explain the recognition criteria for assets and liabilities.
Discuss the different ways in which the monetary values
of items on the statement of financial position are
determined.
2.12 Summary
In this unit we covered the concepts that underlie the preparation and
presentation of financial statements. The conceptual framework assists in the
harmonisation of procedures for the preparation and presentation of financial
statements. Qualitative characteristics are those attributes that make financial
information useful to users in making economic decisions. Fundamental
qualitative characteristics are relevance and faithful representation, while
enhancing qualitative characteristics are comparability, verifiability, timeliness
and understandability. The underlying assumptions on which financial
statements are based are accrual (transactions are recorded when they occur,
and not when the related cash flows occur) and going concern (the assumption
that the entity will continue in operation into the foreseeable future). Elements
of financial statements, namely, assets, liabilities, equit, income and expenses,
as well as their recognition and measurement were explained. Finally, concepts
of capital maintenance were discussed.

References

LearningMaterials. ICAEW.
Vol.1: Theory and Practice. Oxford: CIMA Publishing.
Lewis, R. and Pendrill, D. (2004). Advanced Financial Accounting. London:
Prentice Hall

Unit Three
Company Formation
3.0 Introduction
I n Zimbabwe, companies are regulated by the Companies Act 24:03. In

this unit we cover the procedures to be followed in the formation of differ-
ent types of companies. Documents to be filed with the registrar of compa-
nies, and conditions to be satisfied before a company can commence busi-
ness are also discussed.
3.1 Unit Objectives

 define a private company

 outline procedures to be followed in the registration of a
company, in terms of the Companies Act
 distinguish between a company limited by shares and a
company limited by guarantee
 describe the contents of the memorandum of association
and the articles of association
3.2 Formation of a Company

One or more persons coming together to pursue any lawful purpose may
form a company by subscribing their names to a memorandum of association
and complying with the requirements of the Act in respect of the registration
of the company. There are basically two types of companies, namely, a com-
pany limited by guarantee and a company limited by shares, and these are
discussed below.
3.3 Company Limited by Shares or by Guarantee

The company may:
 Have liability of its members limited by the memorandum of association
to the amount, if any, unpaid on shares held by them (termed limited by
shares).
 Have no share capital, but with liability of its members limited by the
memorandum to such an amount as the members may undertake to
contribute to the assets of the company in the event of it being wound
up (termed limited by guarantee).
3.4 The Memorandum of Association

In the case of a company limited by shares, the memorandum must state:
The name of the company which must have limited as the last word and in-
clude

Unit 3 Company Formation
 The word “Private” in the case of a private company, and the word
“Co-operative” or abbreviation “Co-op” in the case of a cooperative
company
 The objects of the company, describing the main business to be con-
ducted by the company and any ancillary objects thereto.
 That the liability of its members is limited to the amounts remaining
unpaid on the shares that they have taken up
 The amount of share capital with which the company proposes to be
registered and its division into shares of different classes and fixed
amounts.
In the case of a company limited by guarantee, the memorandum must state:
 The name of the company.
 The objects of the company. That liability of members is limited.
 That in the event of the company winding up while he or she is a mem-
ber or within one year after ceasing to be a member, each member
undertakes to contribute to assets of the company such amount as my
be required, not exceeding a specified amount.
Every subscriber to the memorandum of a company limited by shares must
take at least one share and must in his own handwriting state in words, oppo-
site his/her name the number of shares he/she takes.
Activity 3.1
? What are the differences between a company limited by shares
and one limited by guarantee?
3.5 Capacity of a Company

Upon registration, a company acquires a legal personality. This means that in
the eyes of the law, it is regarded as a legal person, (separate from the mem-
bers of the company or shareholders) with the capacity to acquire rights and
duties, as well as sue and be sued. However, in practice, it cannot take part in
legal transactions on its own and has to be represented by its agents or or-
gans.

3.6 Articles of Association

The articles prescribe the regulations of the company and the following are
some of the matters included in this document:
 Share capital and its division into various classes
 the rights of each class of shareholders
 The transfer, transmission, forfeiture and conversion of shares. Proce-
dures for the alteration of share capital
 General meetings- convening, proceedings and voting
 Directors – remuneration, shareholding, borrowing powers, powers
and duties, disqualification, rotation and meetings
 Accounts – the keeping of books of account, preparation and presen-
tation of annual financial statements, auditing of financial statements and
compliance with generally accepted accounting practices
 Dividends - recommendations by directors, declaration in a general
meeting, entitlement to dividends
 Winding up.- procedures for members’ voluntary winding up of the
company
3.7 Registration of Memorandum and Articles of

Association
The memorandum and articles, together with a duplicate original or printed
notarial copy are submitted to the registrar of companies. Upon payment of
the prescribed fee, if the Memorandum and Articles comply with requirement
of the Act, the registrar will return to the company a duplicate original or one
notarial copy of the Memorandum and Articles, with the date of registration
endorsed thereon.
3.7.1 Effect of registration

The company becomes a body corporate with perpetual succession and li-
ability of the members limited in terms of the memorandum.
A certificate of incorporation is conclusive evidence that all registration pro-

cedures have been complied with.

3.8 Commencement of Business

The registrar will issue a certificate to commence business when the following
requirements have been met:
 shares subject to payment of the whole amount in cash have been allot-
ted to a total amount not less than the minimum subscription
 all directors have paid the amounts due on each share taken by them
 an affidavit has been delivered to the registrar that these conditions
have been complied with
 the registrar has certified that the company is entitled to commence
business
Activity 3.2
? 1. What act governs the formation of companies in Zimba-
bwe?
2. Explain what is meant by “limited liability” in relation to
companies.
3. Give an explanation of the information contained in the
following documents:
(a) a Memorandum of Association
(b) Articles of Association.
4. What requirements must be met for the registrar of com-
panies to issue a certificate to commence business?
3.9 Types of Companies Limited by Shares

Two types of companies can be formed, namely, public companies and pri-
vate companies. A public company can offer its shares to the public for sub-
scription, and is, therefore, capable of raising huge amounts of capital, while
on the other hand the private company is prohibited from issuing its shares to
the public. These types of companies are discussed in the ensuing paragraphs.
3.9.1 A public company

At least seven members are require to form a company. Its name should end
with the word “Limited”. It can raise capital by issuing shares to the public.
These shares are transferable in that they can be traded (bought and sold)
between parties without withdrawing the relevant capital from the company.

Because of their public nature, public companies are required to make certain
disclosures of information to the public. An example is the publication of an-
nual financial statements, copies of which should be filed with the Registrar of
Companies, where they are available for public inspection. Upon complying
with listing requirements, shares of a public company can be listed on a stock
exchange.
3.9.2 A private company

This is defined in the act as a company other than a cooperative company,
which by its articles, restricts the right to transfer shares, limits the number of
its members to fifty and prohibits any invitation to the public to subscribe for
any shares or debentures of the company. The name of the of the company
should end with the words “Private Limited”.
Activity 3.3
? What are the differences between a private company and a
public company?
3.10 Summary
In this unit we dealt with procedures to be followed in the formation of a
company. We explained that companies have to register a Memorandum of
Association and Articles of Association with the Registrar of Companies. The
contents of these two documents were outlined. Requirements to be met be-
fore a certificate to commence business were also explained. Finally, the defi-
nition of a private company was given.

References
Botha,D.H., Oosthuizen, M.J. and De la Rey, E.M. (1987). Corporate
Law. Durban: Butterworths.
Government of Zimbabwe (1993). Chapter 24:03 Companies Act Harare:
Government printers.

Unit Four
Presentation of Financial
Statements (IAS 1)
4.0 Introduction
T he standard prescribes the basis for presentation of general purpose

financial statements in accordance with IFRSs, to ensure comparability
with those of the entity’s previous periods and those of similar entities. In this
unit we deal with the preparation and presentation of financial statements,
namely, the statement of comprehensive income, the statement of financial
position, the statement of changes in equity and the statement of cash flows.
4.1 Unit Objectives

 state what constitutes a complete set of financial

statements
 explain the general features of financial statements.
 compile annual financial statements in compliance with
IAS 1
4.2 Change of Terminology

Please note that the new term for balance sheet is statement of financial position
and the balance sheet date is now referred to as the end of the reporting
period. Keep abreast of all these changes in terminology.
4.3 The Reporting Period

This should be at least annually, if not the financial statements should disclose:
 The period covered by the financial statements
 The reason why it is not a year
 That comparative figures for the previous year are not comparable
4.3.1 A complete set of financial statements

Figure 4.1 below depicts a complete set of financial statements.

Unit 4 Presentation of Financial Statements (IAS 1)
Figure 4.1: Complete set of financial statements
All the financial statements should be presented with equal prominence.
4.4 General Features of Financial Statements

The general features of financial statements are discussed in the ensuing
paragraphs.
4.4.1 Fair presentation

Financial statements should present fairly the financial position, financial
performance and cash flows of an entity. The application of IFRSs, with
additional disclosures where necessary is presumed to achieve a fair
presentation.
4.4.2 Going concern

The entity should prepare financial statements on a going concern basis unless
management either intends to liquidate the entity or cease trading or has no
realistic alternative but to do so. When an entity does not prepare financial
statements on a going concern basis, it should disclose that fact, the basis on
which the statements are prepared and reasons why the entity is not regarded
as a going concern.

4.4.3 Accrual basis of accounting

Financial statements, except for cash flow information should be prepared
using the accrual basis of accounting. Simply stated, this means assets are
recognised when they are receivable rather than when they are received, and
liabilities are recognised when they are payable rather than when they are
paid.
4.4.4 Materiality and aggregation

Aggregation of immaterial items of a similar nature is allowed. Material items
should not be aggregated. In assessing materiality of an item, both the size
and nature of the item should be considered.
4.4.5 Comparative information

Comparative information for previous periods for all amounts reported in the
current period should be disclosed unless a particular standard does not require
such information.
4.4.6 Offsetting
The offsetting of assets and liabilities or income and expenses is prohibited,
unless it is required by an IFRS.
4.4.7 Consistency of presentation

An entity is required to retain presentation and classification of items over
periods unless it is apparent that another presentation or classification is more
appropriate in the circumstances or an IFRS requires a change in presentation.
Activity 4.1
? Discuss the following in relation to IAS1:
a) Fair presentation
b) Going concern
c) Accrual basis
d) Comparative basis
e) Offsetting

4.5 Identification of Financial Statements

Financial statements should be identified and distinguished from other infor-
mation in the same published document. The following information and the
notes should be displayed prominently for each financial statement:
 The name of the reporting entity
 Whether financial statements cover an individual entity or group
 Date of the end of the reporting period or period covered by the
statements
 The currency in which the figures are reported
 The level of rounding used in presenting the amounts in the financial
statements
4.6 The Statement of Financial Position

Minimum information required to be presented is as follows:
4.6.1 Assets
The following list shows some of the headings under which assets are shown
in the financial statements:
 Property, Plant and Equipment (PPE)
 Investment property
 Intangible assets
 Financial assets
 Investments accounted for using the equity method
 Biological assets
 Inventories
 Trade and other receivables
 Cash and cash equivalents
4.6.2 Liabilities
The following are some of the headings under which liabilities are shown:
 Trade and other payables
 Provisions
 Financial liabilities
 Income Taxes, deferred tax liabilities and deferred tax assets

4.6.3 Equity
The following are headings under which equity is shown in the financial state-
ments
 Issued capital and reserves attributed to owners of the entity
 Non-controlling interest or minority interest presented within equity
The standard requires presentation of additional line items, headings and
subtotals in the statement if such presentation is relevant to an understanding
of the entity’s financial position. The classification of deferred tax assets
(liabilities) as current assets (liabilities) is prohibited.
4.7 Current/Non-current Distinction

Current and non-current assets or liabilities are required to be presented as
separate classifications in the statement of financial position.
4.7.1 Current assets

An asset should be classified as current when:
 It is expected to realise it in the normal operating cycle or 12 months
after the reporting period
 The asset is held primarily for trading purposes
 The asset is cash or cash equivalents.
All other assets should be classified as non-current.
4.7.2 Current liabilities

A liability should be classified as current when:
 The entity expects to settle the liability in its normal cycle or within 12
months after the reporting period
 It is held primarily for trading purposes
All other liabilities should be classified as non-current.

Activity 4.2
? Explain how assets and liabilities are classified as either current
or non-current.
4.10.3 Share capital and reserves

Disclosure of the following in the statement of financial position or statement
of changes in equity or notes is required for each class of shares:
 The number of shares authorised
 The number of shares issued and fully paid, and issued but not fully
paid
 Par value per share or that the shares have no par value
 Shares in the entity held by the entity or its subsidiaries or associates
 Shares reserved for issue under options and contracts for sale of shares,
including terms and amounts.
The nature and purpose of each reserve within equity.
4.8 Example of a Statement of Financial Position

Table 4.1 Statement of Financial Position as at 31 December 2012
2012 2011
$ $
Assets
Non-current assets
Property plant and equipment xxx xxx
Goodwill xxx xxx
Investment in associates xxx xxx
Other financial assets xxx xxx
Current assets
Inventories xxx xxx

Inventories xxx xxx
Trade and other receivables xxx xxx
Prepayments xxx xxx
Cash and cash equivalents xxx xxx
Total assets xxx xxx
Equity and liabilities
Capital and reserves
Issued capital xxx xxx
Reserves xxx xxx
Retained income xxx xxx
Non current liabilities
Interest bearing borrowings xxx xxx
Deferred tax xxx xxx
Retirement benefit obligation xxx xxx
Current liabilities
Trade and other payables xxx xxx
Short-term borrowings xxx xxx
Current portion of interest bearing borrowings xxx xxx
Warranty provision xxx xxx
Total equity and liabilities xxx xxx
4.9 Statement Of Comprehensive Income

The standard requires presentation of all items of income and expense recog-
nised in a period either:
 In a simple statement of comprehensive income or
 In two statements – one displaying components of profit or loss, and a
second beginning with profit or loss and displaying components of
other comprehensive income
Information to be presented in the statement of comprehensive income
As a minimum, the statement of comprehensive income should include line

items that present the following amounts for the period:

 Revenue
 Finance costs
 Share of profit or loss in associates and joint ventures accounted for
using the equity method
 Tax expense
 A single amount comprising the total of:
 The post-tax gain or loss recognised on the measurement to fair value
less costs to sell groups constituting the discontinued operation
 The post-tax profit or loss of discontinued operations
 Profit or loss
 Each component of other comprehensive income classified by nature
 Share of other comprehensive income of associates and joint ventures
accounted for using the equity method and
 Total comprehensive income
Disclosure of the following items as allocations of profit or loss for period is

required:
 Profit or loss for the period attributed to
 Non-controlling interest
 Owners of the parent
 Total comprehensive income attributable to:
 Non-controlling interest
 Owners of the parent
Activity 4.3
? When reporting income, IAS 1 allows the presentation of a
simple statement of comprehensive income, or two statements.
Discuss.
4.9.1 Material items of income and expense to be disclosed

separately
Circumstances that may give rise to separate disclosure include:
 Write downs of inventory to net realisable value or PPE to recoverable
amount, as well as reversals of such write downs
 Restructuring activities, and reversals of any provisions for costs of
restructuring
 Disposal of items of PPE

 Disposal of investments
 Discontinued operations
 Litigation settlements
 Other reversals of provisions
4.12.2 Analysis of expenses recognised in profit or loss

The standard allows classification of expenses based on either their nature or
their function. Whichever provides information that is reliable and more
relevant.
Because the analysis by function method does not show the amounts of some
important expenses, IAS 1 requires additional information to be included in
the notes to the accounts, showing:
 Depreciation and amortisation expense
 Employee benefits expense
4.10 Example: A Statement of Comprehensive

Income (Classification By Function)
Table 4.2: Statement of Comprehensive Income for the Year Ended
31 December 2012
2012 2011
$ $
Revenue xxx xxx
Cost of sales (xxx) (xxx)
Gross profit xxx xxx
Other operating income xxx xxx
xxx xxx
Distribution costs (xxx) (xxx)
Administrative expenses (xxx) (xxx)
Other operating expenses (xxx) (xxx)

Profit from ope`rations xxx xxx

Finance costs (xxx) (xxx)
Income from associates xxx xxx
Profit before tax xxx xxx
Income tax (xxx) (xxx)
Profit after tax xxx xxx
Net profit xxx xxx
4.11 Example of Statement of Comprehensive Income

(Analysis by Nature of Expense)
Table 4.3: Statement of Comprehensive Income for the Year Ended 31
December 2012
2012 2011
$ $
Revenue xxx xxx
Other income xxx xxx
xxx xxx
Changes in inventories of finished goods and work in (xxx) (xxx)
progress
Raw materials consumed (xxx) (xxx)
Staff costs (xxx) (xxx)
Depreciation and amortisation (xxx) (xxx)
Other expenses (xxx) (xxx)
Finance costs (xxx) (xxx)
Profit before tax xxx xxx
Tax (xxx) (xxx)
Net profit xxx Xxx

Activity 4.4
? Explain two methods that are allowed by IAS 1 for the
classification of expenses recognised in profit or loss.
4.12 Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity showing
in the statement:
 Total comprehensive income for the period showing separately total
amounts attributable to owners of the parent and to non-controlling
interest
 For each component of equity, the effects of retrospective application
of retrospective restatement recognised in accordance with IAS 8
 For each component of equity, a reconciliation between the carrying
amount at the beginning and the end of the period separately disclosed
resulting from:
 profit or loss;
 each item of comprehensive income and;
 transactions with owners in their capacity as owners showing separate
contributions by and distributions to owners and changes in ownership
interests in subsidiaries that do not result in loss of control.
The standard also requires presentation either in the statement of changes in
equity or notes, the amount of dividends recognised as distributions to owners
during the period, and the related amount per share
4.12.1 Components of equity

Components of equity include:
 share capital;
 share premium;
 retained income; and
 revaluation reserve.
Transactions with owners in their capacity as owners include:
 issues of new shares;
 repurchase / cancellation of shares by the company; and
 dividend payments.

4.12.2 Example of Statement of Changes in Equity

Table 4.4: Statement of changes in equity for the year ended 31 De-
cember 2012
Share Share Revaluation Retained Total

capital premium reserve earnings
$ $ $ $ $
Balance at 31 Dec. 2011 xxx xxx xxx xxx xxx
Changes in accounting policy (xxx) (xxx)

Restated balance xxx xxx xxx xxx xxx
Changes in equity for 2012
Issue of share capital xxx xxx xxx
Dividends (xxx) (xxx)
Profit for the year xxx xxx
Other comprehensive income xxx xxx
Balance at 31 Dec. 2012 xxx xxx xxx xxx xxx

Activity 4.4
?
The following is a list of balances taken from the books of
ABC Ltd on 30 September 2012.
$000 $000
Sales 473 300
Purchases 310 500
Operating expenses 18 400
Loan interest 5 000
Dividends paid 15 500
Leasehold building at cost 200 000
Plant and equipment at cost 124 800
Deferred development expenditure 75 000
Joint venture 62 000
Depreciation
- Leasehold 56 000
- Plant and equipment 48 800
- Development expenditure 15 000
Trade receivables 49 200
Inventory 1 October 2011 27 500
Bank 12 100
Trade payables 82 200
Ordinary shares of 25 cents each 100 000
10% convertible loan stock 100 000
Deferred tax at 1 October 2011 11 400
Retained earnings at 1 October 2011 13 300
900 000 900 000

The following notes are relevant:

(i) The cost of the inventory at 30 September 2012 was $37.7 million
(excluding joint venture inventory – see note (iv)).
(ii) Non-current assets:
On 1 October 2011 ABC Ltd’s leasehold building was revalued at $270
million by an independent surveyor. The lease was for a 25-year period when
ABC Ltd acquired it. The directors wish to incorporate the revalued amount
in ABC Ltd’s financial statements. The revaluation reserve will be deemed to
be realised in line with the remaining life of the lease.
Plant is depreciated at 20% per annum on the reducing balance basis.

(iii) The deferred development expenditure relates to a new product. The
project was successfully completed on 1 October 2010, and sales of
the new product commenced on that date. The development costs are
being depreciated on a straight-line basis over the expected product
life of 5 years. Early in the current year, a review of the sales figures for
the new product showed that they were disappointing. In view of this,
ABC Ltd has estimated that the present value of the expected net future
cash flows from sales of the new product is $30 million; however, ABC
Ltd has been approached by a rival company with an offer of $40
million for the rights to the product. At this stage, ABC Ltd intends to
continue to market and sell the product.
(iv) On 1 October 2011 ABC Ltd entered into a joint venture with two
other companies. Each venturer contributes its own assets and pays its
own expenses, The agreement stipulates that the joint venture will be
terminated on 30 September 2015. ABC Ltd is entitled to 30% of the
joint venture’s total revenues. The joint venture is not a separate
entity. Details of ABC Ltd’s joint venture transactions are:
$000
Plant and equipment at cost 70,000
Share of joint venture sales revenues (30% of total sales revenues) (18,000)
Inventory 2,500
Related cost of sales excluding depreciation 8,000
Accounts receivable 30 September 2012 3,500
Accounts payable 30 September 2012 , (4,000)
Net balance included in the above list of balances 62,000
Plant should be depreciated on a straight-line basis. It is not expected to have any residual
value at the end of joint venture.

(v) The directors have estimated the required provision for income tax for
the year to 30 September 2012 is $15 million. The deferred tax provision
at 30 September 2012 is to be adjusted to reflect the tax base of the
company’s assets being $70 million less than their carrying values.
$28.8 million of this $70 million is attributable to the revaluation of the
leasehold. ABC Ltd’s rate of income tax is 25%.
(vi) The convertible loan stock is redeemable at par on 31 March 2014, or

at the option of the stockholders, it can be exchanged for ordinary
shares on the basis of 60 new shares in ABC Ltd for each $100 of loan
stock.
(vii) In June 2010 the directors and senior staff of ABC Ltd. were given
options to purchase 50 million ordinary shares (in total) in the company.
The options are exercisable on 1 July 2014 at a price of $2.40 per
share. The stock market price of ABC Ltd.’s ordinary shares over the
current year has been $4.00.
(viii) The directors have proposed a final ordinary dividend of 6 cents per
share.
Required
(a) Prepare for ABC Ltd, in accordance with International Accounting
Standards as far as the information permits:
(i) the statement of comprehensive income
(ii) the statement of changes in equity for the year to 30 September 2012,
and
(iii) a statement of financial position as at 30 September 2012.
4.13 Statement of Cash Flows

The statement of cash flows is prepared to provide information on cash gen-
erated by an entity and how it was utilised in the reporting period. It focuses
on cash and liquidity, highlighting movements in liquidity, thereby allowing users
of financial statements to see how cash was generated and utilised. By analysing
trends over a period of time, users are able to assess the ability of the entity to
generate and maintain sufficient levels of liquidity to pay obligations as they
fall due. This trend analysis can also give indications of financial distress.

4.13.1 Presentation of the statement of cash flows

IAS 7: Statement of cash flows, requires cash flows to be reported under
three headings, indicating the source as follows:
Cash flows from operating activities - relating to the main income generating
activities of the entity.
Cash flows from investing activities – involving the purchase and disposal
of non-current assets.
Cash flows from financing activities – regarding how the business finances
its expansion through shares and non-current liabilities.
4.13.2 Presentation of the operations section

There are two methods of presenting the operations section of the statement
of cash flows. These are the direct method and the indirect method.
The direct method
Under this method, cash flows are reported under major classes of gross
receipts and gross payments. The section would look like this:
Cash flows from operating activities xxxxxx

Cash receipts from customers (xxxxx)
Cash payments to suppliers (xxxxx)
Cash payments to employees (xxxxx)
Cash payment for other expenses (xxxxx)
Interest payments (xxxxx)
Tax payment (xxxxx)
Net cash flows from operating activities xxxxx
The indirect method
Under this method, cash flows are calculated by adjusting the net profit before
interest and tax for non-cash items and movements in working capital during
the reporting period. The section would look like this:

Cash flows from operating activities

Profit before interest and tax xxxxx
Add/Less non-cash items (such as depreciation; profit on sale of non-current assets) xxxxx
Working capital adjustments

Increase in current assets (xxxxx)
Decrease in current assets xxxxx
Increase in current liabilities xxxxx
Decrease in current liabilities (xxxxx)
Interest paid (xxxxx)
Tax paid (xxxxx)
Net cash from operating activities xxxxx
However, you should bear in mind that whichever method is used, the end
result is the same, that is, you should get the same figure for the net cash from
operating activities, whether you use the direct or the indirect method.
Example 4.1
The following are financial statements of Kuchi Ltd for the year ended 31
December 2012

Table 4.5: Statement of Comprehensive Income for the Year Ended 31

December 2012
Revenue 900 000
Cost of sales 475 000
Gross profit 425 000
Less
Operating expenses 220 000
Interest 13 000
Loss on sale of equipment 2 000
(235 000)
Net profit before tax 190 000
Tax 65 000
Net profit after tax 125 000
Table 4.6: Statement of Financial Position as at 31 December 2012

2012 2011
Non current assets
Land 55 000 80 000
Buildings 200 000 200 000
Less depreciation 20 000 10 000
180 000 190 000
Equipment 183 000 58 000
Less depreciation 28 000 10 000
155 000 48 000
390 000 318 000
Current assets
Stock 50 000 0

Prepaid expenses 3 000 5 000
Debtors 67 000 25 000
Cash 55 000 38 000
175 000 68 000
565 000 386 000
Ordinary share capital 230 000 70 000
Retained income 196 000 126 000
426 000 196 000
Non current liabilities
Debentures 106 000 150 000
Current liabilities
Creditors 33 000 40 000
565 000 386 000
You are given the following additional information:

1. Depreciation amounting to $33 000 and amortisation of prepaid
expenses of $2 000 are included in operating expenses.
2. Equipment that cost $41 000, with a book value of $36000 was sold
for $34 000
3. Dividends of $55 000 were declared and paid during the year .
Required: Prepare the statement of cash flows for Kuchi Ltd for the year
ended 31 December 2012.
Solution 4.1
The first part of the solution shows the operating activities section only, (there
is no change in the other two sections, whatever method is being used) using
the direct method. The second part shows the full statement of cash flows for
the year.
Using the direct method - operating activities section only

Table 4.7: Statement of Cash Flows for the Year Ended 31 December
2012
Note $ $
Operating activities
Cash received from customers 1 858 000
Payments to suppliers of goods 2 (532 000)
Payments to other creditors 3 (185 000)
Interest paid 4 (13 000)
Tax paid 5 (65 000)
(795 000)
Cash flow from operating activities 63 000
Workings
Note 1
Cash received from customers = opening debtors + sales – closing debtors.
= 25 000 + 900 000 – 67 000 = 858 000
Note 2
Payments to suppliers of goods = opening creditors + purchases – closing

creditors
= 40 000 + 525 000 – 33 000 = 532 000
NB. Use the following formula to calculate the purchases figure
Cost of sales = opening stock + purchases - closing stock
Therefore: purchases = cost of sales + closing stock – opening stock
= 475 000 + 50 000 – 0 = 525 000
Note 3
Payments to other creditors and suppliers = operating expenses – depreciation

– decrease in prepaid expenses

= 220 000 - 33 000 – 2 000 = 185 000
Notes 4 and 5
For these two items, there is nothing outstanding at the beginning of the year,
as well as at the end of the year. So it means that the amounts provided during
the year were all paid out.
Using the indirect method – all sections
Table 4.8: Statement of Cash Flows for the Year Ended 31 December
2012
$ $
Operating activities
Net profit before tax 190 000
Add
Depreciation (given) 33 000
Loss on sale of equipment (given) 2 000
Decrease in prepaid expenses (5 000 – 3 000) 2 000
Less
Increase in stock (50 000 – 0) (50 000)
Increase in debtors (67 000 – 25 000) (42 000)
Decrease in creditors (40 000 – 33 000) (7 000)
(62 000)
128 000
Less tax paid (given) (65 000)
Cash flow from operating activities 63 000
Investment activities
Sale of land – cash proceeds (80 000 – 55 000) 25 000
Sale of equipment – cash proceeds (given) 34 000

Purchase of equipment (note 6) (166 000)
Net cash flow from investment activities (107 000)
Financing activities
Issue of shares (230 000 – 70 000) 160 000
Redemption of debentures (150 000 – 106 000) (44 000)
Dividends paid (given) (55 000)
Net cash flow from financing activities 61 000
Net cash flow for the year 17 000
Cash at the beginning of the year (2011 statement of financial 38 000

position)
Cash at the end of the year (2012 statement of financial 55 000
Workings
Note 6
Equipment account
Balance b/d (SOFP 2011) 58 000 Asset disposal (given) 41 000
Cash (balancing figure) 166 000 Balance c/d (SOFP 2012) 183 000
224 000 224 000
Balance b/d 183 000
Activity 4.5
? The condensed trial balances of B Ltd at 31 December 2012
and 2013 are as follows:

2013 2012
$ $
Debits
Property 1 750 000 1 400 000
Motor vehicles 436 000 410 000
Machinery 385 000 370 000
Inventory 178 000 154 000
Trade and other receivables 214 000 220 000
Cash in bank - 76 000
Other financial assets: investments at fair value 20 000 40 000
2 983 000 2 670 000
Credits
Ordinary share capital 400 000 300 000
Share premium 40 000 30 000
Revaluation of property 200 000 -
Reserve for asset replacement 20 000 10 000
Retained earnings 991 000 870 000
Interest free loan 900 000 1 100 000
Accumulated depreciation – motor vehicles 76 000 54 000
Machinery 141 000 120 000
Trade and other payables 139 000 142 000
Bank overdraft 8 000 -
Tax payable 44 000 28 000
Dividends payable (ordinary) 24 000 16 000
2 983 000 2 670 000

Additional information
1. The following information was obtained from the statement of
comprehensive income for the year ended 31 December 2013
$
Revenue 750 000
Cost of sales (300 000)
Gross profit 450 000
Other income 4 000
Administrative and selling expenses (208 000)
Other expenses (6 000)
Profit before tax 240 000
Income tax expense (85 000)
Profit for the year 155 000
Other comprehensive income -
Profit on revaluation of land 204 000
Total comprehensive income for the year 359 000
2. Extract from the statement of changes in equity for the year ended 31
December 2013.
Reserve for Retained Total
asset earnings
replacement
Profit for the year 155 000 155 000
Dividends declared (24 000) (24 000)
Transfer to reserve 10 000 (10 000) -

3. A new motor car was purchased for $54 000. An old vehicle was sold
at its carrying amount on 31 December 2013.
4. A machine with a carrying amount of $60 000 and on which $51 000
had already been written off in depreciation was traded in for $54 000
and replaced with a new machine.
5. Depreciation for the current year is : Vehicles $48 000, and Machinery
$72 000
6. The investment was sold on 28 February 2013 for $24 000.
Required
Prepare the statement of cash flows for B Ltd for the year ended 31 December
2013 using the direct method.
4.14 Summary
In this unit we discussed the presentation of financial statements in accordance
with IAS 1. The financial statements to be prepared in terms of the standard
are: The statement of financial position, the statement of comprehensive income,
the statement of changes in equity, the statement of cash flows as well as
notes to the financial statements. These statements must be prepared at least
annually. General provisions regarding their preparation include: using the
accrual basis of accounting and the going concern concept; each material
class of items to be shown separately; no offsetting of items unless permitted
by another standard; inclusion of comparative information in respect of the
preceding period; and consistency in the classification and presentation of
items from one period to another. The statement of financial position has two
main section, that is, assets and liabilities, which should be classified as either
current or noncurrent. In respect of the statement of comprehensive income,
the entity has a choice of either presenting it as a single statement of
comprehensive income or a separate income statement and a reduced
statement of comprehensive income. Expenses should be presented either by
nature or by function. The statement of changes in equity reflects changes in
owners’ equity during the accounting period as measured by the increase or
decrease in the entity’s net assets. A reconciliation between opening and closing
balances of each item is required. The statement of cash flows shows cash
flows during the reporting period classified under operating, investing and
financing activities. Either the direct or indirect method can be used. Notes to
financial statements further expand on information given on the face of the
financial statements, and include a description of measurement bases used,

accounting policies used, disclosure of information required by IFRSs, and

other supporting information necessary for understanding the financial
statements.

References
Learning Materials. ICAEW.
Lewis, R., and Pendrill, D (2004). Advanced Financial Accounting. London:
Prentice Hall.
Wingard, C.,Von Well, R., Pretorius, D., Ferreira, P.H., Badenhorst, W.M.
and Van der Merwe, D. (2009). GAAP Handbook (2009) Lexis Nexis.

Unit Five
Accounting Policies, Changes

in Accounting Estimates and
Errors (IAS 8)
5.0 Introduction
T he purpose of the standard is to prescribe criteria for the selection of an

accounting policy, as well as to prescribe accounting treatment and dis-
closure of changes in accounting policies, changes in accounting estimates
and correction of errors to ensure consistent preparation and presentation of
financial statements. This enhances comparability of financial statements with
prior periods and other entities. In this unit we deal with the accounting treat-
ment of changes in accounting policies, changes in accounting estimates and
correction of errors.
Company Accounting BACC 304
5.1 Unit Objectives

 define the term accounting policies

 apply provisions of IAS8 in respect of changes in policies
 correct errors as prescribed in IAS8
 account for changes in estimates in accordance with provisions of IAS8
 apply disclosure requirements in respect of changes in policy and cor-
rection of errors
5.2 Accounting Policies

These are the specific principles, bases, conventions, rules and practices ap-
plied by an entity in preparing and presenting financial statements.
5.2.1 Changes in accounting policies

May only be made if:
Required by an IFRS/IAS or
It results in financial statements providing more reliable and relevant informa-

tion about the effects of and transactions on the entity’s financial position,
financial performance or cash flows.
Consistent accounting policies are to be adopted for similar transactions un-

less an IFRS/IAS requires a more specific policy to be adopted.
5.2.2 Selection of accounting policies

In the absence of an IFRS/IAS/SIC, management should select policies that
result in information that is:
 relevant to the economic decision-making of the users; and

 reliable, as it purports to faithfully represent the financial statements,
reflect their substance, is neutral and complete in all aspects.

Unit 5 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8)
5.3 Change due to an initial adoption of a standard

This is accounted for in accordance with transitional arrangements. If there
are no transitional arrangements, then it is applied retrospectively. A voluntary
change is accounted for retrospectively.
The following decision tree depicts steps to be taken when there is a change
in policy:
Figure 5.1: Decision tree for change in policy
Source : GAAP Handbook (2009)
5.3.1 Retrospective application of a change in accounting

policy
Opening balances of each affected component of equity for the earliest pre-
sented period should be adjusted and comparative figures restated. The re-
sult is that financial statements reflect the position as if the accounting policy
had always been adopted.
Example 5.1
Management has decided to change the inventory valuation method to FIFO.

The original values of closing inventory were as follows:
2013 $300 000
2012 $150 000
2011 $320 000
The new inventory values using the FIFO method are as follows:
2013 $420 000
2012 $170 000
2011 $435 000
The net profit for the respective years was:
2013 $600 000; 2012 $500 000; 2011 $300 000.
Required
Show the amounts that will appear in the statement of financial position in
respect of inventory, and in the statement of comprehensive income in respect
of profit for the respective years, after the change in policy.
Solution 5.1
Increase (decrease) in value of inventory per year
Year 2013 2012 2011
New valuation 420 000 170 000 435 000
Less Old valuation 300 000 150 000 320 000
Increase (decrease) in closing inventory value 120 000 20 000 115 000
Effect of change on profit per year
Year 2013 2012 2011

Increase in the year 120 000 20 000 115 000
Less increase in the previous year 20 000 115 000 -
Increase (decrease) in profit 100 000 (95 000) 115 000

Inventory values on the statement of financial position after the change
Year 2013 2012 2011
Current assets
Inventory 420 000 170 000 435 000
Net profit in the statement of comprehensive income
Year 2013 2012 2011
Original net profit figure 600 000 500 000 300 000
Adjustment as a result of change in policy 100 000 (95 000) 115 000
New net profit figure 700 000 405 000 415 000
Activity 5.1
?
The following information relates to ABC Ltd.
Revenue for 2012 amounted to $564 000 (2011- $315 000)
Purchases of inventory for the two years were as follows:
2012 - $303 000
2011 - $182 500
Operating expenses were :
2012 $100 000
2011 $78 000
Profit before tax at the end of 2012 was $27 500. No dividends had been
paid in the last few years.
Taking into account the above information, the directors decided to change
the basis for valuing inventories to weighted average cost as it will result in a
more appropriate presentation of events/ transaction in the financial state-
ments of the company.

A summary of the closing inventories is provided below:
2009 ($) 2010 ($) 2011 ($) 2012 ($)

On the first in, first out method 18 000 19 500 27 000 48 000
On the weighted average cost method 19 000 22 900 34 800 51 000
Required
Prepare the statement of comprehensive income for ABC Ltd for the year
ended 31 December 2012, applying the new inventory valuation method.
5.3.2 Disclosure of a change in policy

A note in the financial statement disclosing the following information:
 If due to a new standard /interpretation, the title of the standard /inter-

pretation, the nature of the change in accounting policy, a description of
transitional arrangements if applicable.
 For the current year and prior periods, the amount of the adjustment
and its impact on basic and fully diluted EPS.
 If retrospective application is impracticable, an explanation of the cir-
cumstances, and how the policy change has been applied.
 If due to a voluntary change, the nature of the change, reasons why the
new policy provides more reliable and relevant information should be
disclosed.
The rest of the disclosures are the same as those required for a new standard
as explained above.
5.4 Changes in Accounting Estimates

Because many items on the financial statements cannot be measured with
precision, estimates based on the latest available information are made. These
estimates are revised in the face of new information or developments.
The effect of a change in estimates is recognised prospectively in the income

statement in current and future periods affected by the change. Any related
asset/ liability is also adjusted in the period of change.

5.4.1 Disclosure
The nature and amount of a change in accounting estimate and its effect on
both the current and future periods – if this cannot be disclosed due to an
impracticality this should be disclosed.
Example 5.2
A machine was bought at a cost of $200 000. Its useful life was estimated at
10 years, with no residual value. Depreciation was charged on a straight line
basis. After 4 years, it was decided that because of changes in the market,
the remaining useful life was 3 years.
What is the annual depreciation to be charged in the remaining 3 years?
Solution 5.2
Carrying amount of machine in year 4 = 200 000 – (200 000/10 x 4) = 120

000
Annual depreciation for the next three years = 120 000/3 = $40 000
NB. Because this is a change in an estimate, it affects only the current and
subsequent years affected by the change.
Activity 5.2
? 1. After the financial statements for the year ended 31 December 2011
had been prepared, ABC Ltd changed its method of depreciation of
machinery in order to align depreciation with the actual economic
benefits derived from the depreciation of assets. Machinery will from
2011 be depreciated at 20% per annum, using the reducing balance
method.
At 31 December 2010 the machinery account was as follows:

$
Cost 100 000
Accumulated depreciation 50 000
Carrying amount 50 000
No machinery was bought or sold in 2010.

Required
(a) Calculate deprecation for the year ended 31 December 2011.
(b) Calculate depreciation for the years 2012 and 2013.
5.5. Errors
Errors include mathematical mistakes, mistakes in applying accounting poli-
cies, oversight or misinterpretation of facts or fraud.
5.5.1 Prior period errors

These are omissions from and misstatements in the entity’s financial state-
ments for one or more periods arising from a failure to use or a misuse of
reliable information that:
 was available when prior period financial statements were authorised

for issue or
 could reasonably have been obtained or taken into account in the prepa-
ration of those financial statements.
Such errors include:
 mathematical mistakes;
 mistakes in applying accounting policies;
 oversight or misinterpretation of facts; or
 fraud.
Omissions and misstatements are material if they could individually or collec-
tively influence users’ economic decisions taken or made on the basis of the
financial statements.
5.5.2 Correction of prior period errors

The following procedures should be followed in the correction of prior period
errors:
 They should be corrected retrospectively in the first financial state-

ments following their discovery

 Comparative amounts from previous periods should be restated at their

correct amount
 If error occurred before the earliest period presented, adjust the open-
ing balances of assets, liabilities and equity for the earliest period for
which retrospective restatement is practicable
 If impracticable to determine cumulative impact of all prior periods
restate comparative information to correct error prospectively from
the earliest date practicable.
Example 5.3
The following are ABC Ltd’s abridged financial statements for the year ended
31 December 2012.
ABC Ltd
Statement of Comprehensive Income for the Year Ended 31 Decem-

ber 2012.
$ 000
Revenue 2 700
Costs and expenses (1 400)
Net profit for the year 1 300

Statement of Financial Position for the Year Ended 31 December 2012
$ 000
Assets
Non-current assets 2 200
Current assets 600
2 800
Equity and Liabilities
Share capital 600
Retained income 2 000
2 600
Current liabilities 200
2 800
During 2013, it was discovered that some non-current assets had been in-
cluded in the records at 31 December at $500 000 in excess of their recov-
erable amounts, and this situation was unlikely to change. Before any adjust-
ment in respect of this error , the entity’s abridged financial statements for
2013 were as follows:
Statement of Comprehensive Income
Revenue 2 800
Costs and expenses (2 600)
Profit for the year 1 200

Statement of Financial Position for the Year Ended 31 December 2013
Non-current assets 2 200
Current assets 600
2 800
Share capital 600
Retained income 2 000
2 600
Current liabilities 200
2 800
Required
Prepare the annual financial statements of ABC Ltd for the year ended 31
December 2013, after correction of the error.
Solution 5.4
Abridged Statement of Comprehensive Income for the Year Ended 31

December 2013
Abridged Statement of Comprehensive Income for the Year Ended 31 December 2013
2013 2012
Revenue 2 800 2 700
Costs and expenses (1 600) (1 400)
Profit for the year 1 200 1 300
Correction of error - (500)
Net income 1 200 800
Abridged Statement of Financial Position as at 31 December 2013

Abridged Statement of Financial Position as at 31 December 2013
2013 2012
Non-current assets 2 000 1 700
Current assets 1 700 600
3 700 2 300
Share capital 600 600
3 300 2 100
Current liabilities 400 200
3 700 2 300
Activity 5.3
The following is the abridged statement of financial position f OPQ Ltd.
$ $
2012 2011
Assets
Current assets 820 000 800 000
1 110 000 1 050 000
Equity and Liabilities

Share capital 200 000 200 000
Liabilities 800 000 800 000
1 110 000 1 050 000

After the financial statements for 2012 had been prepared, it was discovered
that the accountant incorrectly did not capitalise borrowing costs amounting
to $90 000 in 2011, and $50 000 in 2012.
Required
(a) State the effect of the error on the retained earnings for 2011.
(b) Prepare journal entries to correct the errors.
(c) Show the abridged statement of financial position for 2012 after cor-
rection of the errors.
5.5.3 Disclosure
The following should be disclosed:
 In the year of correction, the nature of the prior period error, and for
each period presented, the amount of the correction for each line item
affected and the basic and fully diluted EPS.
 The amount of correction at the start of the earliest period presented
(start of the previous year)
 If retrospective restatement is not practicable, for a period, the circum-
stance of that condition and an explanation of how and from when the
error has been corrected
These disclosures are only required in the year the error is discovered and not
in future periods.
5.6 Summary
In this unit we covered the accounting treatment of changes in accounting
policy, changes in estimates, and prior period errors. Where there is a com-
pulsory change in policy as a result of a new statement, transitional arrange-
ments, if any, are followed. Where there is a voluntary change in order to
provide more relevant or reliable information, the change is applied retro-
spectively, from the earliest date practicable. In respect of changes in esti-
mates, these are done by adjusting the amount of the asset liability or equity
item in the period of change. Other changes in estimates are recognised pro-
spectively in the current and future periods as applicable. Prior period errors
are corrected retrospectively, and where it is impossible to determine period
specific effects, the earliest date practicable is used.

References
ICAEW (2008). International Financial Reporting Standards: Certifi-
cate Learning Materials. ICAEW.
Vol.1: Theory and Practice. Oxford: CIMA publishing.
Lewis, R., and Pendrill, D (2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
A Practical Guide.Washington DC: The World Bank.
and Vander Merwe, D. (2009). GAAP Handbook (2009) Lexis Nexis.

Unit Six
Investments in Associates and

Joint Ventures (IAS28)
6.0 Introduction
T he objective of IAS 28 is to prescribe the accounting for investments in

associates and to set out the requirements for the application of the
equity method when accounting for investments in associates and joint ven-
tures. In this unit we cover the accounting treatment of investments in associ-
ates, using both the cost method and the equity method.
6.1 Unit Objectives

 state instances when an investor is presumed to have significant influ-

ence over an investee
 apply the equity method of accounting for investments in associates
 discuss disclosure requirements stipulated in IAS 28
6.2 Definition of Terms

The following definitions are given:
An associate is an entity over which the investor has significant influence.
Consolidated financial statements are the financial statements of a group in

which assets, liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic entity.
The equity method is a method of accounting whereby the investment is

initially recognised at cost and adjusted thereafter for the post-acquisition
change in the investor’s share of the investee’s net assets. The investor’s profit
or loss includes its share of the investee’s profit or loss and the investor’s
other comprehensive income includes its share of the investee’s other com-
prehensive income.
A joint arrangement is an arrangement of which two or more parties have

joint control.
Joint control is the contractually agreed sharing of control of an arrange-

ment, which exists only when decisions about the relevant activities require
the unanimous consent of the parties sharing control.
A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement.
A joint venturer is a party to a joint venture that has joint control of that joint
venture.
Significant influence is the power to participate in the financial and operat-

ing policy decisions of the investee but is not control or joint control of those
policies.

Unit 6 Investments in Associates and Joint Ventures (IAS28)
6.3 Significant Influence

An investor is presumed to have significant influence over an investee if it
directly or indirectly holds 20% or more of the voting power of the investee.
The existence of a significant influence is also evidenced by one or more of
the following:
 representation on the board of directors or equivalent governing body

of the investee;
 participation in policy making processes, including decisions about divi-
dends and other distributions;
 material transactions between the entity and its investee; and
 interchange of managerial personnel or provision of essential technical
information.
6.4 Accounting for Investments

This can be done using either the cost method or the equity method. These
methods are explained below.
6.4.1 The cost method

The investment is initially recorded at cost. Thereafter, dividends received
from the associate’s post acquisition profits are recognised in the income state-
ment or the statement of comprehensive income.
Example 6.1
On 1 January 2013, XYZ Ltd acquired a 15% interest in ABC Ltd for $100
000. For the year ended 31 December 2013, ABC Ltd reported a net in-
come of $60 000. On 31 December 2013, ABC Ltd declared and paid a
dividend of $5 000
Required
Prepare journal entries for the above transactions in the books of XYZ Ltd,
using the cost method of accounting for investments.

Solution 6.1
2013 $ $
Jan 1 Investment in ABC Ltd 100 000
Cash 100 000
Being payment for a 15% interest in ABC Ltd
Dec 31 Cash (5 000 x 15%) 750
Investment income 750
Being dividends received from ABC Ltd
Notes
The first journal entry records the payment made for the investment. The net
income reported by ABC Ltd does not in any way affect the accounts of the
investor. The dividend received is recognised as income in the books of the
investor and does not affect the carrying amount of the Investment in ABC
Ltd.
Activity 6.1
?
1. When is an investor presumed to have a significant influence over an
investee?
2. Discuss the differences between the cost method and the equity method
of accounting for investments.
3. On 1 January 2013, XL Ltd acquired a 16% interest in PS Ltd for
$150 000 when PS Ltd’s retained earnings were $70 000. On 31
December 2013, PS Ltd reported a net income of $40 000, and de-
clared and paid a dividend of $5 000.
Required
Prepare journal entries to record these transactions in the books of XL
Ltd.

6.4.2 Equity method

The investment is initially recorded at cost. Thereafter, its carrying amount is
increased (decreased) by the investor’s share of profits (losses) after the date
of acquisition. Dividends received from the associate reduce the carrying
amount of the investment. The investor recognises losses of an associate until
the investment is reduced to zero. Thereafter, losses are only provided to the
extent of any guarantees given by the investor.
Example 6.2
On 1 January 2013, A Ltd acquired a 30% interest in B Ltd at a cost of $500

000. B Ltd reported a profit after tax of $120 000 for the year ended 31
December 2012. On 31 December 2012, B Ltd declared and paid a divi-
dend of $30 000.
Required
Prepare journal entries to record these transactions in the books of A Ltd.

Solution 6.2
2012 $ $
Jan 1 Investment in B Ltd 500 000
Cash 500 000
Being purchase of shares in B Ltd
Dec 31 Investment in B Ltd (120 000 x 30%) 36 000
Investment income 36 000
Being share of B Ltd’s reported income
Dec 31 Cash (30 000 x 30%) 9 000
Investment in B Ltd 9 000
Being receipt of a dividend from B Ltd

Notes
The first journal entry is for payment made for the shares. The second journal
entry is made to record the investor’s share in the reported income of the
investee, and has the effect of increasing the carrying amount of the invest-
ment. The third and last journal entry records receipt of the dividend from the
investee, and has the effect of reducing the carrying amount of the investment.
Activity 6.2
C Ltd has a 40% interest in the share capital of D Ltd. These shares were
acquired on 31 December 2010 when the balance on D Ltd’s retained earn-
ings was $100 000. The abridged statements of financial position of the two
companies as at 31 December 2013 were as follows:
follows:
C Ltd D Ltd
$ 000 $ 000
Assets
Investment in D Ltd 120 ---
Other assets 1 080 650
1 200 650

Share capital 300 100
Retained earnings 700 400
1 000 500
Liabilities 200 150
1 200 650

Required
Using the equity method, show the statement of financial position of C Ltd as
at 31 December 2013.
6.5 Unrealised Profit in Closing Inventory when

Trading with an Associate
The accounting treatment is as follows:
 If the inventory is held by the investor, its value is reduced by the inves-
tor’s share of the unrealised profit.
 If the inventory is held by the associate, the investment in the associate
is reduced by the investor’s share of the unrealised profit.
Example 6.3
A Ltd acquired a 40% interest in the ordinary shares of B Ltd at a cost of

$300 000 in 2006, thereby exercising a significant influence over B Ltd. At
31 December 2012, A Ltd’s share of post acquisition profits in B LTD was
$60 000. On 31 December 2013, B Ltd’s reported profits after tax amounted
to $80 000.
In the year ending 31 December 2013, A Ltd sold goods costing $100 000
to B Ltd at $150 000. Part of these goods worth $30 000 were still in B Ltd’s
inventory at 31 December 2013.
Required
Calculate the value of the investment in B Ltd.

Solution 6.3
Cost of investment 300 000
Post acquisition profits [60 000 + (80 000 x 40%)] 92 000
Less share of unrealised profit in inventory (30 000 x 50/150) x 40% (4 000)
Investment in B Ltd 388 000

Notes
Post acquisition profits $
Share of post acquisition profits for period 2006 – 2012 (given) 60 000
Share of 2013 profit = 40% of profit after tax = 80 000 x 40% 32 000
92 000
Unrealised profit in inventory
Inventory still on hand at the end of 2013 was worth $30 000. The total profit
made by A Ltd on this inventory was (30 000 x 50/150) $18 000. Of this
amount, the unrealised profit relating to A Ltd is (18 000 x 40%) $4 000.
An investment in an associate is normally classified as a non-current asset.
Use of the equity method ceases from the date the significant influence ceases.
Activity 6.3
? 1. On 1 January 2008, A Ltd acquired a 40% interest in B Ltd for $300

000. On this date, the retained earnings of B Ltd were $250 000. At
the end of 2011, the retained earnings of B Ltd stood at $350 000. B
Ltd has also declared an ordinary dividend of $50 000 in 2011.
Required
Calculate at what amount the investment in B Ltd will be shown in the finan-
cial statements of A Ltd for the period ending 31 December 2011.
6.6 Summary
In this unit we dealt with the accounting for investments, using both the cost
and equity methods. The equity method is used in cases where the investor
has significant influence over the investee. Significant influence was defined,
and ways of determining if there was significant influence were outlined. Ac-
counting entries relating to the initial investment and subsequent transactions
were explained. The treatment of unrealised profits resulting from transac-
tions between the investor and the associate were described.

References
Lewis, R., and Pendrill, D,.(2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
and Van der Merwe, D. (2009). GAAP Handbook (2009) Lexis
Nexis.

Unit Seven
Business Combinations (IFRS3)
7.0 Introduction
T he objective of the IFRS 3 is to specify the financial reporting by an-

entity when it combines with one or more entities. The aspects covered
in this unit include the recognition and measurement of assets acquired and
liabilities assumed in the business combination, the calculation of goodwill or
a gain from a bargain purchase, and disclosure requirements stipulated in
IFRS3.
7.1 Unit Objectives

 identify the acquirer and acquire in a business combination

 measure the cost of a business combination
 calculate goodwill or a gain in a bargain purchase price
 discuss the disclosure requirements stipulated in IFRS3
7.2 Definitions
Acquiree – the business that the acquirer obtains control of in a business
combination.
Acquirer – the business that obtains control of the acquire.
Business combination – a transaction or other events in which an acquirer

obtains control of one or more businesses.
Control – the power to govern the financial and operation policies of an

entity so as to obtain benefits from its activities.
Fair value – an amount for which an asset could be exchanged or a liability

settled between knowledgeable, willing parties in an arm’s length transaction.
7.3 Scope of the Standard

It applies to all business combinations except joint ventures, separate entities
under common control, and business combinations involving two or more
mutual entities.
Activity 7.1
? Define the following terms

a)
b)
Business combination
Acquirer
c) Acquire
d) Fair value
e) Control

Unit 7 Business Combinations (IFRS3)
7.4 Accounting Treatment in Business Combinations

All business combinations must be accounted for under the purchase method.
This method views the business combination from the perspective of the ac-
quirer, who purchases and recognises assets acquired and liabilities assumed
at the acquisition date. The measurement of the identifiable assets acquired
and liabilities and contingent liabilities assumed should be at fair values.
7.5 The Purchase Method

This method involves the following steps:
 Identifying the acquirer

 Determining the date of acquisition
 Measuring the cost of the business combination
 Allocating, at acquisition date the cost to net assets acquired (that is,
assets – liabilities and contingent liabilities)
 Recognising and measuring goodwill
These steps are explained below.
7.5.1 Identifying the acquirer

Guidance in IAS 27 Consolidated and Separate Financial Statements, is used
to identify the acquirer – the entity that obtains control of the acquiree. Con-
trol is the power to govern the financial and operating of the entity and this is
normally by having more than 50% of the voting rights.
7.5.2 Determining the date of acquisition

The acquirer identifies the date on which it obtains control of the acquiree.
7.5.3 Measuring costs of the business combination

The cost of the business combination is the aggregate of:
 The fair value of assets given, liabilities incurred and equity issued by
the acquirer in exchange for control of the acquire and
 Any costs directly attributable to the business combination.

7.5.4 Recognising and measuring identifiable assets

acquired and liabilities assumed and any non-controlling
interest
To qualify for recognition, assets and liabilities must:
 Meet the definitions of assets and liabilities contained in the “frame-

work for the preparation and presentation of financial statements” at
acquisition date,
 Be part of what the acquirer and acquire exchanged in the business
combination, rather than as a result of separate transactions.
7.5.5 Recognising and measuring goodwill or a gain from a

bargain purchase
The recognition and measurement of goodwill or a gain from a bargain pur-
chase are discussed below.
Goodwill
This is measured at cost, being the excess of cost over the acquirer’s interest
in the fair value of identifiable net assets. (Goodwill = purchase price – fair
market value of acquiree’s net assets in the case of a 100% acquisition). It
should not be amortised, but shown at cost less accumulated impairment losses
and should be tested annually for impairment.
Example 7.1
XYZ acquired a 75% interest in LKJ for $800 000. The carrying amounts
and fair values of
LKJ’s identifiable assets and liabilities were:

Carrying Fair value
amount $
$
Current liabilities (200 000) (200 000)
Net assets 650 000 550 000

Required
Calculate goodwill
Solution 7.1
Calculation of goodwill
Carrying Fair value
amount $
$
Current liabilities (200 000) (200 000)
Net assets 650 000 550 000
Goodwill, therefore, is equal to the consideration paid plus non-controlling

interests less the fair value of the net assets.
Goodwill = consideration paid + non-controlling interest – fair value of net

assets
Activity 7.2
1. P Ltd acquired 80% of the shares of A Ltd at a price of $8 per share. The
abridged statement of financial position of A Ltd at the date of acquisition was
as follows:
$
Consideration paid 800 000
Non-controlling interest (25% of $550 000) 137 500
937 500
Fair value of net assets (550 000)
Goodwill 387 500

Required
(a) Calculate the goodwill
(b) Calculate the non-controlling interest
2.How are the costs of a business combination measured?
7.5.6 Bargain purchase price gain (negative goodwill)

This occurs when the fair value of net assets acquired exceeds the cost. The
acquirer must:
 Reassess the cost of acquisition and the fair values attributed to the
acquiree’s identifiable assets, liabilities and contingent liabilities.
 Recognise immediately in profit or loss any excess remaining after that
reassessment.
Example 7.2
Assume the same facts as in example 7.1 above, with the exception that the
price paid was $300 000.
Required
Calculate the goodwill or gain from a bargain purchase price.
Solution 7.2
Consideration paid 300 000
Non-controlling interest (25% of $550 000) 137 500
437 500
Fair value of net assets (550 000)
Goodwill /(bargain purchase price gain) (112 500)
Example 7.3
D Ltd acquired a 75% interest in E Ltd for $800 when the abridged state-
ments of financial position of the two entities were as follows:

D Ltd E Ltd
Identifiable assets 8 000 2 000
Investment in E Ltd 800 -
8 800 2 000
Equity 6 000 1 200
Identifiable liabilities 2 800 800
8 800 2 000
At that time, the fair value of E Ltd’s the identifiable assets was $3 000 and
the fair value of its identifiable liabilities was $900.
Required
(a) Calculate the goodwill or gain from bargain purchase price

(b) Show D Ltd’s abridged statement of financial position after the combi-
nation.
Solution 7.3
$
Net assets acquired (3 000 – 900) 2 100
Minority interest (2 100 x 25%) (525)
1575
Price paid (800)
Gain from a bargain purchase 775
D Ltd’s abridged statement of financial position ( after the combination)

Assets (8 000 + 3 000) 11 000
Equity (6000 + 775 gain included in profit or loss) 6 775
Minority interests 525
Liabilities (2 800 + 900) 3 700
11 000
7.6 Disclosure Requirements

The following information should be provided for each business combination
effected during the reporting period:
 Names and descriptions of the combining entities

 The date of acquisition
 The percentage of voting equity instruments acquired
 The cost of the combination and a description of the components of
that cost, and when equity instruments are issued, the number so is-
sued, and their fair value and the basis for determining that fair value
 Details of any operations the entity has decided to dispose of as a
result of the combination
 Amount of any excess (negative goodwill) recognised in profit or loss
 A description of factors contributing to goodwill
 The amount of the acquiree’s profit or loss since the acquisition date
included in the acquirer’s profit or loss for the period

Activity 7.3
? 1.
2.
How are costs of business combination measured?
Explain the disclosure requirements in relation to business combina-
tions effected during each reporting period.
7.7 Summary
In this unit we explained the objectives of IFRS 3 and discussed the purchase
method of accounting for business combinations. These included identifying
the acquirer /acquiree in a business combination, recognising and measuring
identifiable assets and liabilities acquired and the non-controlling interest, as
well as measuring and recognising goodwill or a gain from a bargain pur-
chase. Finally we explained.the disclosure requirements of IFRS 3.

References
Kirk R.J. (2005). International Financial Reporting Standards in Depth
Lewis, R., and Pendrill, D. (2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
Nexis.

Unit Eight
Accounting for Government

Grants and Disclosure of
Government Assistance (IAS20)
8.0 Introduction
T he objective of IAS 20 is to prescribe the accounting for and disclosure

of government grants and other forms of government assistance. In this
unit we deal with the accounting treatment of grants related to assets as well
as grants related to income.
8.1 Unit Objectives

 apply the prescribed recognition criteria in relation to government grants

related to assets and income
 account for government grants related to assets and income in terms of
IAS 20
 make appropriate disclosures in relation to government grants in the
financial statements
8.2 Definitions
Government grant – assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain
conditions relating to the operating activities of the entity.
Government assistance – action by government to provide an economic

benefit specific to an entity or range of entities qualifying under certain criteria.
It does not include benefits provided only indirectly through action affecting
general trading conditions, such as, the provision of infrastructure in develop-
ment areas or the imposition of trading constraints on competitors.
8.3 Types of Grants

The standard identifies two types of grants, namely, grants related to assets
and grants related to income.
1. Grants related to assets – are for the purchase or construction of long-
term assets.
2. Grants related to income are any other government, that is, other than
those related to assets.
8.4 Recognition Criteria for Government Grants

Government grants should not be recognised until there is reasonable assur-
ance that:

Unit 8 Accounting for Government Grants and Disclosure of Government Assistance ( IAS 20)
 the entity will comply with any conditions attaching to the grant
 the grant will be received
Activity 8.1
? 1. Explain the criteria for recognition of government grants.
8.5 Accounting Treatment

As soon as recognition criteria are met, government grants should be recog-
nised as income on a systematic basis over the periods necessary to match
them with related costs that they should compensate.
8.5.1 Grants related to assets

Two methods are allowed as follows:
Method 1 – Netting method
Deduct the grant from the related asset. The asset will then be shown in the
statement of financial position at cost, minus the grant and the net amount will
be depreciated over its useful life.
Example 8.1
On January 1, 2013, ABC Ltd purchased plant and machinery with a cost of
$400 000 and received a grant of $100 000 in relation to this asset. The asset
is depreciated over five years using the straight line method.
Required
Show the amounts that will be shown in the financial statements for the year
ending 31 December 2013
Solution 8.1
Method 1
The grant is set off against the cost of plant and machinery

Statement of Financial Position for the Year Ended 31 December 2013 (Ex-
tract)
Statement of Financial Position for the Year Ended 31 December 2013 (Extract)
Non-current assets $
Plant and machinery (400 000 – 100 000) 300 000
Accumulated depreciation (300 000/5) 60 000
240 000
Statement of Comprehensive Income for the Year Ended 31 December 2013 (Extract)
$
Depreciation : Plant and machinery (300 000/5) 60 000
Method 2 – Deferred income method
The asset is recorded at cost and depreciated over its useful life. The grant is
treated as deferred income, and recognised in income in a systematic basis
over the useful life of the asset.
Example 8.2
The information in example 8.1 is used in this example.
The plant and machinery is shown at cost. The grant shown as deferred in-
come and released over the life of the asset.

Table 8.3 Statement of Financial Position as at 31 December 2013

(Extracts)
Non-current assets $
Plant and machinery (cost) 400 000
Accumulated depreciation (400 000/5) 80 000
320 000
Liabilities
Deferred income – government grant (100 000 – 20 000) 80 000
Table 8.4 Statement of Comprehensive Income for the Year Ended

31 December 2013 (Extracts)
Expenses $
Depreciation (400 000/5) 80 000
Income
Release of deferred government grant (100 000/5) 20 000
Activity 8.2
?
1. On January 1, 2013, a company purchased equipment for $100 000.
It has a useful life of 5 years, with no residual value and is depreciated
on a straight line basis. The company also received a grant of $40 000
towards the purchase of the equipment on 1 January 2013.
Required
Prepare journal entries for the grant, using the
(a) netting off method.
(b) deferred income method.

8.5.2 Grants related to income

Two method are allowed.
Method 1
Include the grant as other income for inclusion in profit or loss for the period.
Method 2
Deduct the grant for the period from the related expense.
Example 8.3
On 1 January 2012, a company received a grant of $60 000 for training
which is expected to last 18 months. On 31 December 2012, the actual costs
of training amounting to $50 000 had been incurred.
Required
Show how these costs could be presented in the financial statements for the
year ended 31 December 2012.
Solution 8.3
Method 1
Grant treated as other income
Table 8.4 Statement of Comprehensive Income for The Year Ended

31 December 2012 (Extract)
Expenses $
Training costs 50 000
Income
Grant received (60 000 x 12/18) Note 1 40 000
Statement of Financial Position as at 31 December 2012 (Extract)
Liabilities $
Deferred income - Grant (60 000 x 6/18) Note 2 20 000

Explanation
Note 1 The amount relating to the 12 months (January to December 2012) is

recognised as income at the end of the year, which is only 12/18 of the total
grant.
Note 2 The remaining amount which is applicable to the next year is shown as
deferred income on the statement of financial position, and this is 6/18 of the
total grant.
Method 2
Grant deducted from related expense
Table 8.5 Statement of Comprehensive Income for the Year Ended

$
Training costs (50 000 – 40 000) 10 000
Table 8.6 Statement of Financial Position for the Year Ended

Liabilities $
Grant (60 000 x 6/18) 20 000
8.6 Repayment of Government Grant

A government grant that becomes repayable shall be accounted for as a revi-
sion of an accounting estimate as follows:
 repayment related to income is first applied against unamortised de-

ferred grant credit.
 repayment in excess of deferred grant credit is recognised as an ex-
pense.
 repayment relating to an asset is recorded by increasing the carrying
amount of the asset or reducing the deferred income balance. Cumula-
tive additional depreciation that would have been recognised to date in
the absence of a grant is recognised immediately.

8.7 Disclosures
The following information should be disclosed in notes to the financial state-
ment when accounting for government grants:
 The accounting policy adopted for governments grants, including the

methods of presentation adopted in the financial statements.
 The nature and extent of the government grants recognised in the finan-
cial statements and an indication of other forms of government assist-
ance from which the entity has directly benefited.
 Any unfulfilled conditions and other contingencies attaching to govern-
ment assistance that has been recognised.
Activity 8.3
? 1. What information should be disclosed in notes to financial statements

in relation to government grants?
8.8 Summary
In this unit we dealt with the accounting treatment of government grants in
terms of IAS 20. The recognition criteria for both grants relating to assets and
grants relating to income were discussed. The accounting treatment for both
types of government grants was explained with the aid of examples. Finally,
the disclosure requirements stipulated in IAS 20 were stated.

References
Lewis, R. and Pendrill, D. (2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
Nexis.

Unit Nine
Property Plant and Equipment

(IAS 16)
9.0 Introduction
I
AS 16 sets out the accounting treatment for Property, Plant and Equip
ment (PPE) and addresses the recognition of assets, determination of their
carrying amounts and the charging of depreciation. These issues are cov-
ered in this unit.
9.1 Unit Objectives

By the end of this unit you, should be able to :
 discuss the criteria for initial recognition of PPE

 calculate depreciation using different and appropriate methods
 explain the measurement criteria for determining the carrying amounts
of PPE after initial recognition
 apply disclosure requirements stipulated in IAS16
9.2 Definitions
Carrying amount is the amount at which an asset is recognised after deduct-
ing any accumulated depreciation and accumulated impairment losses.
Cost is the amount of cash or cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its acquisition or
construction.
Depreciable amount is the cost of an asset or other amount substituted for

cost, less its residual value.
Depreciation is the systematic allocation of the depreciable amount of an

asset over its useful life.
Fair value is the price that would be received to sell or paid to transfer a
liability in an orderly transaction between market participants at the measure-
ment date.
Impairment loss is the amount by which the carrying amount of an asset

exceeds recoverable amount.
PPE are tangible items that:

 Are held for use in the production or supply of goods and services, for
rental to others or for administrative purposes and
 Are expected to be used during more than one period.
Recoverable amount is the higher of an asset’s fair value less costs to sell
and its value in use.
The residual value of an asset is its estimated amount an entity would cur-
rently obtain from disposal of the asset, after deducting the estimated cost of

Unit 9 Property Plant and Equipment (IAS 16)
disposal, if the asset were already of age and in the condition expected at the
end of its useful life.
Useful life is
 The period over which an asset is expected to be available for use by
an entity or
 The number of production or similar units expected to be obtained
from the asset by an entity.
Activity 9.1
?
Define the following terms in relation to PPE:
a) Useful life
b) Depreciation
c) Residual value
d) Recoverable amount
e) Carrying amount
9.3 Scope of IAS 16

The standard is to be applied in accounting for PPE except when another
standard requires or permits a different accounting treatment. The standard
does not apply to:
 PPE classified as held for sale (IFRS 5)
 Biological assets related to agricultural activity (IAS41)
 Exploration and evaluation assets (IFRS 6)
 Mineral rights and mineral reserves, such as, oil, natural gas and similar
non-generative resources
9.4 Recognition of PPE

The cost of an item of PPE should be recognised as an asset if and only if:
 it is probable that future economic benefits associated with the item will
flow to the entity; and
 the cost of the item can be measured.
Measurement at Recognition

An item of PPE that qualifies for recognition as an asset should be measured

at cost
Activity 9.2
? Discuss the recognition criteria for the cost of an item of PPE.
Elements of cost
 The cost of PPE comprises its purchase price, including import duties
and non refundable purchase taxes, after deducting trade discounts
and rebates
 Any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management
 The initial estimate of the costs of dismantling and removing the item
and restoring the site on which it is located, the obligation for which an
entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than
to produce inventories during that period.
9.4.1 Directly attributable costs

Directly attributable costs are:-
 Costs of employee benefits arising directly from the construction or
acquisition of the item of PPE
 Costs of site preparation
 Initial delivery and handling costs
 Installation and assembly costs
 Costs of testing whether the asset is functioning properly, after deduct-
ing the net proceeds from selling any items produced while bringing the
asset to that location and condition (for example, samples produced
while testing equipment) and
 Professional fees

Example 9.1
An entity bought a machine at a cost of $600 000 (before taking into account
a trade discount of 10%). Transportation costs to the premises amounted to
$4 000. Installation took 10 hours at a rate of $200 per hour. After installa-
tion, the machine was tested at a cost of $10 000. Samples manufactured
during the testing were sold at $5 000. Thereafter, $4 000 was spent on
advertising the product produced by the machine. Initial demand was very
low, resulting in operating losses of $20 000 in the first 3 months of operation.
Thereafter the machine operated at a profit.
Required
Show the amounts that will be included in the cost of the machine.
Solution 9.1
$
Purchase price (600 000-60 000) 540 000
Transport costs 4 000
Installation costs ($200 x 100) 2 000
Testing machine (10 000 - 5 000) 5 000
Total cost of machine 661 000
NB advertising costs and the initial loss are not regarded as costs of the ma-
chine and are therefore not included.

Activity 9.3
? ABC Ltd has purchased an item of plant whose details are as follows:
$ $
Basic list price of the plant 250 000
Trade discount applicable to ABC Ltd 15% on list price
Ancillary costs:
Shipping and handling 2 500
Pre-production testing 10 000
Maintenance contract for 2 years 18 000
Site preparation costs:
Electrical cable installation 12 000
Concrete reinforcement 5 000
Own labour costs 3 000
20 000
ABC Ltd paid for the plant (excluding ancillary costs) within 30 days,
obtaining an early settlement discount of 20%.
ABC Ltd had incorrectly specified the power loading of the electrical cable
to be installed by the contractor. The cost of rectifying this error of $5
000 is included in the figure of $12 000 above. The plant has an
estimated useful life of 10 years, at the end of which there will be
compulsory costs of $10 000 to dismantle the plant and $4 000 to
restore the site to its original condition.
Required
Calculate the amount at which the initial cost of the plant should be
shown.

9.4.2 Subsequent costs

These costs should be capitalised if they meet the criteria for recognising the
asset. Repairs and maintenance and servicing costs are revenue and should
be recognised in profit or loss.
Activity 9.4
? Explain how the initial cost of PPE should be measured and

circumstances in which subsequent expenditure should be capitalised.
9.5 Measurement after Recognition

An entity should choose either the cost model or the revaluation model as its
policy and should apply that policy to the entire class of PPE.
9.5.1 The cost model

After recognition as an asset, an item of PPE is carried at its cost less accu-
mulated depreciation and any accumulated impairment loss.
9.5.2 The revaluation model

An item of PPE is carried at a revalued amount, being its fair value at the date
of the valuation less any subsequent accumulated depreciation and subse-
quent accumulated impairment losses. It is necessary to carry out revaluations
sufficiently regularly to ensure that valuations remain up to date.
Fair value is normally the open market value and is usually assessed by a
professionally qualified valuer. However, for specialised assets where there
is no ready market, (for example, an oil rig) fair value is estimated using the
depreciated replacement cost method, that is, it looks at the replacement cost
of the asset and then depreciates that value for the current age of the asset.
If an item of PPE is revalued, the entire class of PPE to which it belongs

should be revalued. The accounting treatment of upward and downward
revaluations is discussed below.

Upward revaluation
If the carrying amount of an asset is increased as a result of a revaluation:
 The increase should be recognised in other comprehensive income and
accumulated in equity under the heading Revaluation surplus.
 However, the increase should be recognised in profit or loss to the
extent it reverses a revaluation decrease of the same asset previously
recognised in profit or loss.
Downward valuation
The decrease in the carrying amount is generally recognised in profit or loss,
however, it should be recognised in other comprehensive income to the ex-
tent of a credit balance existing in the revaluation surplus in respect of that
asset, reducing the amount accumulated in the revaluation surplus.
Calculating the gain or loss on revaluation

Depreciation of the revalued asset should be calculated and recognised in
profit or loss. The resultant carrying amount is then compared with the new
valuation to get the gain or loss.
Example 9.2
A company had plant and machinery on its statement of financial position of
31 December 2012 as follows:
$
Cost 500 000
Accumulated depreciation (200 000)
Carrying amount 300 000
On 31 December 2012, the plant and machinery was revalued at its fair value
of $600 000.
Compute the amount to be taken to the revaluation surplus. Ignore tax.

Solution 9.2
$
Revalued amount 600 000
Carrying amount (300 000)
Revaluation surplus 300 000
Activity 9.4
? 1) Explain requirements of IAS16 in relation to revaluation of PPE and

the treatment of surpluses and deficits on revaluation.
2) “K” is reviewing the file relating to a sophisticated oven that is used to
heat cell cultures to a precisely controlled temperature:
$
(i) List price paid to supplier 50 000
(ii) Wages and materials costs associated with testing
and calibrating oven, up to start of operations 800
(iii) Ongoing wages and materials costs associated with
calibrating oven since start of operations 2 000
(iv) Expected costs of disposing of oven at the end
of its useful life 16 000
The oven is used to heat cell cultures to a temperature range that must be
closely controlled.
The oven’s controls will have to be regularly checked and calibrated
throughout its working life. The oven will have to be dismantled and
sterilised by an expert contractor at the end of its life and then disposed
of at a special facility. “K” has already provided $16,000 against these
costs
.The machine’s expected useful life is 5 years. “K” is planning to adopt the
straight-line basis of depreciation. The market value/value in use of the
machine at the year end is $28 000. This decrease in value from new is
partly because the oven has been used to culture dangerous organisms,
and so it is much less valuable. “K” is unsure whether to value equipment
at cost less depreciation or at valuation. This decision will be based on
an analysis of the resulting figures in terms of two of the qualitative
characteristics of accounting statements (those of relevance and
reliability).

Required
(a) Calculate the cost of the oven, applying the requirements of IAS 16.
Explain your treatment of items (ii), (iii) and (iv).
(b) Calculate the figures that will appear in respect of the oven in the
statement of comprehensive income for the enterprise’s first year and
the statement of financial position at the year end under both the historical
cost and valuation bases, then discuss the relevance and reliability of
both sets of figures you have calculated in the answer.
Deferred tax implications on revaluations

The majority of depreciable PPE are recovered through use. When an asset
is revalued, its carrying amount increases/decreases, with the tax base re-
maining unchanged. The temporary difference between the carrying amount
and the tax base will change, resulting in an adjustment to the deferred tax
balance.
Example 9.3
A machine is revalued by $100 000. The tax rate is 30%. What is the effect
on deferred tax?
Solution 9.3
Deferred tax will increase by (100 000 x 30%) = $30 000
This tax is deducted from the revaluation surplus on the other comprehensive
income section of the statement of comprehensive income, to get to the net
amount which will be reflected on the statement of financial position as fol-
lows:
Revaluation surplus (gross amount) 100 000
Tax thereon 30 000
Revaluation surplus (net amount) 70 000
Revaluation surplus and the treatment of accumulated depreciation at revalua-

tion date

When an asset is revalued, the net increase is recognised in the comprehen-

sive income and accumulated in equity under the heading, revaluation surplus.
The IAS allows 2 methods of treating accumulated depreciation at the re-

valuation date, as explained below:
Method 1
The gross replacement cost of the asset is regarded as its gross carrying
amount and depreciation is calculated on the gross carrying amount.
Method 2
The net replacement cost becomes the gross carrying amount on which de-
preciation is calculated. Accumulated depreciation includes depreciation rec-
ognised after revaluation date only.
Example 9.4
A company purchased plant and equipment 4 years ago for $100 000. De-
preciation is provided using the straight line method over 10 years. The com-
pany decided to revalue at the end of the fourth year. The carrying amount
was $60 000 (100 000 - 40 000). The net replacement cost of the plant and
equipment was considered to be $75 000 at that date.
Solution 9.4
Method 1
Calculate the gross replacement cost = 75 000/6 x10 = $125 000
Calculate accumulated depreciation on gross replacement cost =125 000/

10 x 4 = $50 000
Therefore, the carrying amount is 125 000 – 50 000 = $75 000

The journal entry for this will be

DR CR
Plant and equipment 25 000
Accumulated depreciation (50 000 – 40 000) 10 000
Method 2
The net replacement cost of $75 000 is regarded as its gross carrying amount.
The journal entry will be as follows:

DR CR
Plant and equipment (net replacement cost) 75 000
Accumulated depreciation 40 000
Plant and equipment as cost 100 000
NB. The net effect of the two approaches is identical. (for example, annual
depreciation from year 5 onwards will be $ 12 500 using either approach.)
the only difference relates to disclosure (for example, gross carrying amount
is 125 000 for method 1 and $75 000 for method 2).
9.6 Depreciation
Each part of an item of PPE with a cost that is significant in relation to the total
cost of the item should be depreciated.
The depreciable amount of an asset should be allocated on a systematic basis

over its useful life.
The residual value and the useful life should be reviewed at least at each
financial year-end, and any changes should be accounted for as a change in
accounting estimates in accordance with IAS8.

The depreciation method used should reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity. It should
be reviewed at least at each financial year-end, and any changes should be
accounted for as a change in an accounting estimate in accordance with IAS8.
9.6.1 Depreciation methods

The following are the most common methods, used to depreciated PPE :
 The straight line method
 The reducing balance method and
 The units of production method
These methods will not be discussed here as they are adequately covered in
a prior module.
9.7 Impairment
IAS 36 is applied to determine if an item of PPE is impaired
9.8 Compensation for Impairment

Compensation from third parties (for example, insurance companies) of PPE
impaired, lost or given up is included in profit or loss when the compensation
becomes receivable.
9.9 Derecognition of Non-current Assets

The carrying amount of an item of PPE should be derecognised (removed
from the statement of financial position):
 on disposal; or
 when no economic benefits are expected from its use or disposal.
The gain or loss should be recognised in profit or loss. This is calculated by
comparing the carrying amount with the net disposal proceeds after deduct-
ing selling costs. Any gain is not classified as part of sales revenue.
Any balance remaining on the revaluation surplus relating to the disposed

asset should be transferred to retained earnings. This transfer is shown as a

movement between reserves and does not form part of any profit or loss on
disposal of the item.
Activity 9.5
? 1) Describe five methods of providing for depreciation of PPE.

2) Explain the deferred tax implications of revaluations of PPE.
9.10 Disclosure
The financial statements should disclose, for each class of PPE:
 The measurement bases used for determining the gross carrying amount
 The depreciation methods used
 The useful lives or depreciation rates used
 The gross carrying amount and accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the
period
 A reconciliation of the carrying amount at the beginning and end of the
period showing:
> additions;
> assets classified as held for sale or included in a disposal group classi-
fied as held for sale in accordance with IFRS 5 and other disposals;
> acquisitions through business combinations;
> increases or decreases resulting from revaluations and impairment losses
recognised or reversed in other comprehensive income in accordance
with IAS36;
> impairment losses recognised in profit or loss in accordance with IAS
36;
> depreciation; and
> the net exchange differences arising on translation of the financial state-
ments from the functional currency into a different currency, including
the translation of a foreign operation into the presentation currency of
the reporting entity and any other changes.

9.11 Other Disclosures

Other disclosures include:
 The existence and amounts of restrictions on title and PPE pledged as
security
 The amount of expenditures recognised in the carrying amount of an
item of PPE in the course of its construction
 The amount of contractual commitments for the acquisition of PPE and
 If not disclosed separately in the statement of comprehensive income,
the amount of compensation from third parties for items of PPE that
were impaired, lost or given up that is included in profit or loss
If items of PPE are stated at revalued amounts the following additional disclo-
sures should be made:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 for each revalued class of PPE, the carrying amount that would have
been recognised had the asset been carried under the cost model; and
 the revaluation surplus, indicating the charge for the period and any
restrictions on the distribution of the balance to shareholders.
9.12 Summary
In this unit we covered the accounting treatment of PPE. PPE items are only
recognised if it is probable that economic benefits will flow to the entity and
the cost can be measured reliably. Amounts to be included in the cost are the
purchase price and costs directly attributable to the asset, including disman-
tling and restoration costs. After initial recognition, PPE can be accounted for
using either the cost model (cost less accumulated depreciation and impair-
ment), or the revaluation method (fair value less accumulated depreciation
and impairment). PPE items are depreciated over their useful lives using
appropriate depreciation methods, which include the straight line, the reduc-
ing balance, the sum of digits, and the production methods. PPE items are
derecognised on disposal or when no economic benefits are expected from
their use or disposal. The unit ended with disclosure requirements in relation
to PPE.

References
Kirk, R.J. (2005). International Financial Reporting Standards In Depth
don: Prentice Hall.
Nexis.

Unit Ten
Impairment of Assets (IAS 36)
10.0 Introduction
T
he objective IAS 36 is to prescribe procedures to be applied to en
sure that assets are carried at no more than their recoverable amount.
In this unit we deal with the accounting treatment of impairment of
assets.
10.1 Unit Objectives

By the end of this unit you should be able to:
 apply principles for the measurement of impairment losses

 account for impairment losses
 explain the reversal of impairment losses
 discuss impairment losses relating to cash generating units
10.2 Definitions
The following terms are defined:
 A cash generating unit is the smallest identifiable group of assets that
generates cash inflows that are largely independent of cash flows from
other assets or group of assets.
 Costs of disposal are incremental costs directly attributable to the dis-
posal of an asset or cash generating unit, excluding finance costs and
income tax expense.
 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 partici-
pants at the measurement date.
 Impairment loss is the amount by which the carrying amount of an
asset or a cash generating unit exceeds its recoverable amount.
 The recoverable amount of an asset or cash generating unit is the
higher of its fair value less costs to sell and its value in use.
 Useful life is either the period of time over which an asset is expected
to be used in the entity or the number of production or similar units
expected to be obtained from the asset by the entity.
 Value in use is the present value of future cash flows expected to be
derived from an asset or cash generating unit.
10.3 Scope of IAS 36

The standard applies to all assets other than:
 Inventories (IAS 2)
 Assets arising from construction contracts (IAS11)
 Deferred tax assets (IAS 12)
 Assets arising from employee benefits (IAS 19)
 Financial assets within the scope of IFRS9

Unit 10 Impairment of Assets (IAS 36)
 Investment property that is measured at fair value (IAS 40)

 Biological assets related to agricultural activity that are measured at fair
value less costs of disposal (IAS 41)
 Deferred acquisition costs, and intangible assets, arising from an insur-
er’s contractual rights under insurance contracts within the scope of
IFRS 4 and
 Non-current assets (or disposal groups classified as held for sale in
accordance with IFRS 5
Activity 10.1
?
Define the following terms;
a) Cash generating unit
b) Cost of disposal
c) Value in use
d) Recoverable amount
e) Fair value
10.4 Identifying Assets that may be Impaired

At the end of each reporting period, an entity must assess whether there is
any indication that an asset may be impaired. If such indication is identified,
the asset’s recoverable amount must be calculated and compared with its
carrying amount.
Additionally, the following assets must be tested for impairment annually, even
when there is no indication of impairment:
 An intangible asset with an indefinite useful life
 An intangible asset not yet available for use
 Goodwill acquired in a business combination
This test may be performed at any time during the annual period provided it is
performed at the same time every year.

10.5 Key Stages in the Process of Accounting for

Impairment of Assets
The following are the key stages in accounting for impairment of assets:
 Assess if there is an indication of impairment
 If there is an indication of impairment, measure the asset’s recoverable
amount
 Reduce the asset’s carrying amount to its recoverable amount
Example 10.1
An asset was originally purchased at a cost of $200 000, and its useful life
was estimated at 10 years, with no residual value. Depreciation was provided
on a straight line basis over its useful life. On 1 January 2013, after the asset
had been in use for 4 years, its remaining useful life was estimated at 4 years,
with a residual value of $4 000. At this point, if the asset were sold to a
knowledgeable buyer it would fetch $102 000. The broker involved in the
sale of the asset would charge a fee of $2 000, and the cost of removing the
asset would be $3 000. Just before determining the remaining useful life of the
asset, it had been repaired at a cost of $2 500.
The directors of the company are of the opinion that this asset will generate
cash flows of $40 000 per annum over the next 4 years after which it would
be disposed of at $4 000. The appropriate rate of discount for this type of
asset is 22%.
Required
Calculate:
a) The net selling price of the asset
b) The value in use of the asset
c) Recoverable amount
d) The impairment loss

Solution 10.1
a) Net selling price of the asset
$
Market price 102 000
Less brokerage (2 000)
Less dismantling costs (3 000)
Net selling price of asset 97 000
b) Value in use
$ $
Net cash inflows per annum 40 000
Discount rate 22%
PV of cash flows for 4 years (consult annuity tables) 99 746
Cash generated at disposal 4 000
FV of 4 000 i = 22% n = 4yrs. 1 806
Value in use of the asset 101 552
c) Recoverable amount
The grater of $97 000 and $101 552 $ 101 552

d) Impairment loss
$
Carrying amount of asset 200 000 - (200 000/10 x 4) 120 000
Less recoverable amount (the greater of 97 000 and 101 552) 101 552
Impairment loss 18 448
Activity 10.2
? 1. Define impairment loss.

2. When should a review for impairment of assets be done?
10.6 Indicators of Impairment

Possible indicators given by the standard are:
External sources
 A significant decline in the asset’s market value
 Significant changes in the technological, economic, market or legal en-
vironment in which the entity operates
 Increases in market interest rates that change the calculation of the
asset’s value in use
 The carrying amount of net assets of the entity being more than its
market capitalisation
Internal issues
 Evidence of obsolescence or physical damage to an asset or poor per-
formance
 Significant changes in how the asset is used, including the asset being or
becoming idle and plans to restructure the division in which the asset is
used.

Activity 10.3
? What are the possible indicators that an asset may be impaired?
10.7 Measuring the Recoverable Amount

The recoverable amount is the higher of fair value less costs to sell and value
in use.
If either of these amounts is higher than the carrying amount, there is no im-
pairment.
Fair value is the amount obtainable from a sale in an arm’s length transaction
between a willing seller and willing buyer.
10.7.1 Calculating value in use

The calculation involves the following steps:
 Estimating future cash inflows and outflows to be derived from con-
tinuing use of the asset and from its ultimate disposal.
 Applying the appropriate discount rate to those future cash flows. The
discount rate to be applied should be the risk-free interest rate ad-
justed to reflect risk associated with the particular asset or industry.
Activity 10.4
? What circumstances may indicate that a company’s assets are impaired?
10.8 Recognising an Impairment Loss

If the recoverable amount is less than the carrying amount of the asset, the
difference is an impairment loss. The asset is reduced to its recoverable amount.
An impairment loss is recognised in profit or loss unless it is in relation to a

revalued asset.

For a revalued asset, where there is a revaluation surplus, the impairment loss
is recognised in other comprehensive income and reduces the revaluation
surplus. The excess over the revaluation surplus is recognised in profit or loss
for the period.
Example 10.1
On 31 December 2012, a company had plant and equipment with a carrying
amount of $500 000. On this date this asset was revalued to $800 000, and
its remaining useful life was estimated at 10 years. Depreciation is charged
using the straight line method.
At 31 December 2013, the fair value of the asset was estimated at $300 000,
and its value in use was calculated at $400 000.
Required
(a) What is the recoverable amount of the plant and equipment?
(b) Show the accounting treatment of the impairment loss.
Solution 10.1
(a) Recoverable amount is the higher of the fair value and value in use
= $400 000
(b) Impairment loss
$
Carrying amount of asset at 31/12/13 (800 000 – 80 000) 720 000
Recoverable amount 400 000
10.9 Depreciation for Future Periods Following

Recognition of an Impairment Loss
This will be based on the revised carrying amount, less any residual value,
over its remaining useful life.

Example 10.2
On 1 January 2010, a company purchased a machine at a cost of $200 000.
Its useful life was estimated at 20 years with no residual value. Depreciation is
charged on a straight line basis.
On 1 January, 2013, the recoverable amount of the machine was estimated at

$100 000 and its remaining useful life at 10 years.
Required
Calculate amounts to be included in the statement of comprehensive income
for the year ended 31 December 2013.
Solution 10.2
$
Cost of machinery 200 000
Depreciation (200 000/20 x 3) (30 000)
Carrying amount on 1 January 2013 170 000
Recoverable amount (100 000)
Depreciation for 2013 (100 000/10) 10 000
Statement of comprehensive income for the year ended 31 December

2013 (extracts)
Depreciation on machinery 10 000

10.10 Cash Generating Units (CGU)

If there is an indication that an asset may be impaired, but it is not possible to
estimate the recoverable amount of that individual asset, the recoverable amount
of the cash generating unit to which it belongs should be determined.
The impairment loss is then allocated to reduce the carrying amounts of the
assets in the cash generating unit in the following order:
 First to goodwill
 Then to other assets on a pro-rata of carrying amount of each asset in
the cash generating unit
However, the carrying amount of an asset cannot be reduced below the high-
est of:
 Its fair value less costs to sell
 Its value in use
 Zero
Example 10.3
A cash generating unit has the following assets:
Property plant and equipment 60 000
Patents 40 000
Goodwill 20 000
120 000
The recoverable amount of the CGU has been assessed at $90 000.
Show how the impairment loss would be allocated among the CGU’s assets.

Solution 10.3
$
Impairment loss (120 000 – 90 000) $30 000
Allocation of impairment loss
First to goodwill 20 000
Then PPE (10 000/10 x 6) 6 000
And Patents (10 000/10 x 4) 4 000
30 000
10.11 Reversal of an Impairment Loss

An impairment loss recognised in prior periods for an asset other than good-
will should be reversed if and only if there has been a change in the estimates
used to determine the asset’s recoverable amount since the last impairment
loss was recognised.
The carrying amount of the asset is increased to its recoverable amount. This
increase is a reversal of an impairment loss. However, the reversal should not
result in a carrying amount that is more than what the carrying amount of the
asset would have been if the original impairment had not been recognised.
10.11.1 Recognition of a reversal

The reversal is recognised consistent with the original recognition of the im-
pairment loss:
 Normally recognised to profit or loss
 If the original impairment was charged to a revaluation reserve, the
reversal should be credited to the revaluation reserve and reported in
other comprehensive income for the period
 If the reversal refers to a cash generating unit, it is recognised on a pro-
rata basis with the carrying amount of the assets excluding goodwill
 An impairment of goodwill should not be reversed
Depreciation for future periods will be based on the revised carrying amount
minus the residual value, over the asset’s remaining useful life.

Activity 10.5
? Accompany owns a specific machine with a carrying amount of $106 667

at 31 December 2004, for which there is an active market. The machine
can, at this stage, be disposed of to a knowledgeable and willing buyer
for $107 000.
This machine initially cost $200 000 and is depreciated straight line over
7,5 years. A total of 3,5 years of the useful life of the machine has
already expired as at 31 December 2004.
Any broker involved in such a transaction will charge a fee of $2 000 and
the cost to dismantle and remove the asset will be $3 000. Just before
considering the recoverable amount of the asset, the asset was serviced
to ensure that it is in good condition. The technician charged $2 000
but has not yet been paid.
The company is of the opinion that this asset will generate net cash inflows
of $40 000 per annum over the next 4 years. The asset will be disposed
of for a net amount of $4 000 at the end of its useful life.
An appropriate after tax discount for this type of asset is 15,4% per annum
and the tax rate is 30%.
Required
Calculate the following:
i. The net selling price of the asset
ii. The value in use of the asset
iii. The impairment loss that result from the above information
iv. Depreciation for the year 2004 and
v. Depreciation for the next year and the years thereafter

The following disclosures should be made for each class of assets:
 The amount of impairment losses recognised in profit or loss during the
period and the line items of the statement of comprehensive income in
which impairment losses are included.
 The amount of reversals of impairment losses recognised in profit or
loss during the period and the line items of the statement of compre-
hensive income in which those impairment losses are reversed.
 The amount of impairment losses on revalued assets recognised in
other comprehensive income during the period.

 The amount of reversals of impairment losses on revalued assets rec-

ognised in other comprehensive income during the period.
 For each material impairment loss recognised or reversed during the
period for an individual asset including goodwill or a cash generating
unit, the following information should be disclosed:
> The events and circumstances that led to the recognition or reversal of
the impairment loss
> The amount of the impairment loss recognised or reversed
> The nature of the asset
> Whether the recoverable amount is fair value less costs to sell or value
in use, and how the figure of the recoverable amount was calculated
Activity 10.6
? A property was purchased at a cost of $600 000 in 2010. At the end of

2011, the property was revalued to $900 000.
At the beginning of 2013, the carrying amount of the property was $800
000. An impairment review was carried out at the end of 2013 and
the fair value of the property was estimated at $300 000, and its value
in use was calculated at $400 000.
Required
1. Calculate the impairment loss.
2. Prepare journal entries for the revaluation.
3. Briefly explain the accounting treatment of the impairment loss.
10.12 Summary
In this unit we dealt with the treatment of impairment of assets, as prescribed
by IAS 36. We discussed that impairment loss is the amount by which the
carrying amount of an asset exceeds its recoverable amount. The recoverable
amount of an asset is the higher of its fair value less costs to sell and its value
in use. Internal as well as external sources of information provide indicators
that impairment has occurred. Once there is an indication of impairment, the
recoverable amount (that is, value in use versus fair value less costs to sell) is
measured. The resultant impairment is then recognised immediately in profit
or loss, unless it is in relation to a revalued asset.

We also discussed that reversal of an impairment loss due to changed circum-

stances is recognised to the extent that it increases the carrying amount of the
asset to its original pre-impaired value less subsequent depreciation. In the
case of a cash generating unit, the impairment loss is allocated to goodwill
first, and then to the other assets on a pro rata basis (that is, in proportion to
the carrying amounts of the assets). Disclosure requirements were the last
item discussed in the unit.

References
don: Prentice Hall.
Nexis.


Unit Eleven
Provisions, Contingent
Liabilities and Contingent
Assets (IAS 37)
11.0 Introduction
T
he objective of IAS 37 is to ensure proper measurement, recognition
and disclosure of provisions, contingent liabilities and contingent assets.
These aspects will be discussed in this unit.

 explain circumstances in which a provision should be recognised

 apply requirements of IAS 37 in respect of the measurement of a
provision, contingent liability or contingent asset
 apply disclosure requirements in connection with provisions, contingent
liabilities/assets
11.2 Definitions
The following definitions are given in the standard:
A provision is a liability of uncertain timing or amount
A liability is a present obligation arising from past events, the settlement of

which is expected to result in an outflow of resources embodying economic
benefits
An obligating event is an event that creates a legal or constructive obligation

that results in an entity having no realistic alternative to settling that obligation
A legal obligation is an obligation that derives from:

 a contract
 legislation or other operative law
A constructive obligation is an obligation that derives from an entity’s action
where:
 by an established pattern of past practice, published policies or a suf-
ficiently specific current statement, the entity has indicated to other par-
ties that it will accept certain responsibilities and
 as a result, the entity has created a valid expectation on the part of the
other parties that it will discharge those responsibilities.
A contingent liability is :
 a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity
or
 a present obligation that arises from past events but is not recognised
because:

Unit 11 Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
> it is not probable that an outflow of resources embodying economic

benefits will be required to settle, or
> the amount of the obligation cannot be measured with sufficient reliabil-
ity.
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the entity.
An onerous contract is a contract in which the unavoidable costs of meeting

the obligations under the contract exceed the economic benefits expected to
be received under it.
A restructuring is a programme that is planned and controlled by manage-

ment and materially changes either:
 the scope of a business undertaken by an entity or
 the manner in which that business is conducted.
11.3 Scope of IAS 37

The standard prescribes the accounting and disclosure for all provisions, con-
tingent liabilities and contingent assets, except:
 those resulting from financial instruments that are carried at fair value;
 those resulting from executory contracts, except where the contract is
onerous. Executory contracts are contracts under which neither party
has performed any of its obligations or both parties have partially per-
formed their obligations to an equal extent;
 those arising in insurance entities from contracts with policyholders; or
 those covered by another Standard.
Activity 11.1
Define the following terms:
? a) A constructive obligation
b) A contingent liability
c) An onerous contract
d) An obligating event

11.4 Provisions
The recognition and measurement of provisions are discussed below.
11.4.1 Recognition
A provision is recognised when:
 there is a present obligation as a result of a past event,
 it is probable that an outflow of resources embodying economic ben-
efits will be required to settle the obligation, and
 a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision can be made.
Present obligation
There must be a legal or constructive obligation. In rare cases, where it is not
clear if there is a present obligation, all available evidence should be examined
to determine if a present obligation exists at the end of the reporting period.
Past event
The past event that leads to a present obligation is called an obligating event.
For an event to be obligating, the entity would have no realistic alternative to
settling the obligation created by the event, and this is the case only:
 Where the settlement of the obligation can be enforced by law, or
 In the case of a constructive obligation, where the event creates a valid
expectation in other parties that the entity will discharge the obligation.
Probable outflow of resources embodying economic benefits
Probable is interpreted as more likely than not to occur, that is, the probability
that the event will occur is greater than the probability that it will not.
Reliable estimate of the obligation

The entity should make the best estimate of the expenditure required to settle
the present obligation at the end of the reporting period, from a range of
possible outcomes, taking into account the risks and uncertainties involved.
Judgement and experience with other similar transactions, as well as reports
of independent experts, and events after the reporting period will be used to
arrive at a reliable estimate.

Where the provision being measured involves a large population of items, the
obligation is estimated by weighting all possible outcomes by their probabili-
ties (the expected value method).
Where the effect of the time value of money is material, the amount of a
provision should be the present value of the expenditures expected to be
required to settle the obligation. The discount rates used should be the pre-
tax rates that reflect market assessments of the time value of money and the
risks specific to the liability.
Future events that may affect the amount required to settle an obligation (for
example, an increase in site cleaning up costs at the end of an asset’s life)
should be reflected in the amount of the provision where there is sufficient
objective evidence that they will occur.
Gains from the expected disposal of assets should not be taken into account
in measuring the provision.
Where some or all of the expenditure required to settle the provision is ex-
pected to be reimbursed by another party, the reimbursement should be rec-
ognised when it is virtually certain that the reimbursement will be received.
The reimbursement should be treated as a separate asset. The recognised
reimbursement should not exceed the amount of the provision. In the state-
ment of comprehensive income, the expense relating to a provision may be
presented net of the amount recognised for a reimbursement. However, the
two amounts should not be netted off in the statement of financial position.
Example 11.1
A company sells goods which carry a one year repair warranty. It is estimated
that if minor repairs were to be required on all goods sold in 2012, repair
costs would amount to $80 000. If major repairs were required on all goods
sold, the repair costs would amount of $400 000.
It is estimated that 75% of the goods sold in 2012 will have no defects, 20%
will require minor repairs and 5% will require major repairs.
Required
Calculate the amount of the provision required at 31 December 2012.

Solution 11.1
$
75% are free of defects
20% require minor repairs (80 000 x 20%) 16 000
5% require major repairs (400 000 x 5%) 20 000
Amount of provision required 36 000
The accounting entries are

DR CR
SOCI 36 000
Provision 36 000
Creation of a provision for repair warranty on goods sold
Activity 11.2
? “ L” is an enterprise which sells gaming cards to retailers, who then resell

them to the general
public. Customers who buy these cards scratch off a panel to reveal whether
they have won a cash prize. There are several different ranges of cards,
each of which offers a different assortment of prices.
Prize winners send their winning cards to “L” and are paid by cheque. If
the prize is major, then the prize-winner is required to telephone “L” to
register the claim and then send the winning card to a special address
for separate handling.
All cards are printed and packaged under conditions of high security. Special
printing techniques make it easy for “L” to identify forged claims, and
it is unusual for customers to make false claims. Large claims are,
however, checked, using a special chemical process that takes several
days to take effect.
The directors are currently finalising their financial statements for the year
ended 31 March 2012. They are unsure about how to deal with the
following items:

? (i) A packaging error on a batch of ‘Chance’ cards meant that there were
too many major prize cards in several boxes. “L” recalled the batch
from retailers, but was too late to prevent many of the defective cards
being sold. The enterprise is being flooded with claims. “L”’s lawyers
have advised that the claims are valid and must be paid. It has proved
impossible to determine the likely level of claims that will be made in
respect of this error because it will take several weeks to establish the
success of the recall and the number of defective cards.
(ii) A prize-winner has registered a claim for a $200 000 prize from a
‘Lotto’ card. The financial statements will be finalised before the card
can be processed and checked.
(iii) A claim has been received for $100 000 from a ‘Winner’ card. The
maximum prize offered for this game is $90 000, and so the most likely
explanation is that the card has been forged. The police are investigating
the claim, but this will not be resolved before the financial statements
are finalised. Once the police investigation has concluded, “L” will make
a final check to ensure that the card is not the result of a printing error.
(iv) The enterprise received claims totalling $300 000 during the year from
a batch of bogus ‘Happy’ cards that had been forged by a retailer in
Newtown. The police have prosecuted the retailer and he has recently
been sent to prison. The directors of “L” have decided to pay customers
who bought these cards 50% of the amount claimed as a goodwill
gesture. They have not, however, informed the lucky prize winners of
this yet.
Required
1. Identify the appropriate accounting treatment of each of the claims
against “L” in respect of items (i) to (iv) above. Your answer should
have due regard to the requirements of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
2. It has been suggested that readers of financial statements do not always
pay sufficient attention to contingent liabilities even though they may
have serious implications for the future of the enterprise.
(i) Explain why insufficient attention might be paid to contingent liabilities.
(ii) Explain how IAS 37 prevents enterprises from treating as contingent
liabilities those liabilities that should be recognised in the balance sheet.

11.4.2 Changes in provisions

Provisions should be reviewed at the end of each reporting period and ad-
justed to reflect the current best estimate.
Where discounting is used, the carrying amount increases in each period to

reflect the passage of time, and this increase is recognised as borrowing costs.
Activity 11.3
? What conditions should be met before a provision can be recognised?
11.4.3 Use of provisions

A provision should be used only for expenditures for which the provision was
originally recognised.
Example 11.2
In 2010, a company has received a claim for damaged goods from a cus-
tomer. The company’s legal advisors have advised that about $50 000 will be
needed to settle the claim.
In 2011, the claim is still not settled and the lawyers advise that $45 000
could be needed to settle the claim.
In 2012 the dispute is still not finalised, and the lawyers estimate that $60 000
would be require to settle the claim.
The claim is finally settled in 2013 by payment of $70 000.
Required
Show the journal entries for these transactions.

Solution 11.2
Year 20 10
DR CR
SOCI 50 000
Provision 50 000
Creation of provision
Year 2011
DR CR
Provision 5 000
SOCI 5 000
Reduction of provision from $50 000 to $45000
Year 2012
DR CR
SOCI 15 000
Provision 15 000
Increase of provision from $45 000 to $60 000
Year 2013
DR CR
SOCI 10 000
Provision 60 000
Cash 70 000
Settlement of claim

11.4.4 Application of recognition and measurement rules

In the following paragraphs, recognition and measurement rules in respect of
provisions are discussed.
Future operating losses

Provision should not be recognised for future operating losses, such an ex-
pectation is an indication that certain assets may be impaired. The entity should,
therefore, test these assets for impairment.
Onerous contracts
Onerous contracts are where the unavoidable costs of meeting the obliga-
tions under the contract exceed the economic benefits expected to be re-
ceived. A provision should be made for the amount by which unavoidable
costs exceed expected benefits.
Before a provision for an onerous contract is made, any impairment loss that
has occurred on the assets dedicated to that contract is recognised.
Restructuring
The following are examples of events that may fall under the definition of
restructuring:
 Sale or termination of a line of business
 The closure of business locations in a country or region or the reloca-
tion of business activities from one country or region to another
 Changes in management structure, for example, eliminating a layer of
management
 Fundamental reorganisations that have a material effect on the nature
and focus of the entity’s operations
A constructive obligation to restructure arises only when and entity has a
detailed formal plan for the restructuring and has raised a valid expectation in
those affected that it will carry out the restructuring by starting to implement
that plan or announcing its main features to those affected by it.
A restructuring provision should include only the direct expenditures arising

from the restructuring, which are both:
 Necessarily entailed by the restructuring and
 Not associated with the ongoing activities of the entity.

A restructuring provision does not include such costs as:

 Retraining and relocating continuing staff
 Marketing or
 Investment in new systems and distribution networks.

For each class of provision, the following should be disclosed:
 The carrying amount at the beginning and end of the period
 Additional provisions made in the period, including increases to exist-
ing provisions
 Amounts used (that is, the incurred and charged against the provision)
during the period
 Unused amounts reversed during the period, and
 The increase during the period in the discounted amount arising from
the passage of time and the effect of any change in the discount rate.
Comparative information is not required.

An explanation should be provided for each class of provision, detailing the
nature of the provision, the expected timing of outflows, an indication of un-
certainties over timing or amount of expected outflows and whether any reim-
bursement has been recognised.
11.6 Contingent Liabilities and Contingent Assets

Contingent liabilities/assets should not be recognised in the financial state-
ments.
11.6.1 Disclosure of contingent liabilities/assets

Unless settlement is remote, an entity should disclose, for each class of con-
tingent liability, a brief description of the nature of the liability, and where
practicable, an estimate of its financial effect, an indication of the uncertainties
relating to the amount or timing of any outflow and the possibility of reim-
bursement, in notes to financial statements.
Where an inflow of economic benefits is probable, an entity should disclose a

brief description of the nature of the contingent assets at the end of the report-

ing period, and, where practicable, an estimate of their financial effect, in

notes to the financial statements.
Activity 11.4
? A manufacturer of sports vehicles completed and sold 100 motor vehicles

during the current year. During testing, it was discovered that there
was a serious defect on the gear box of the cars. The 100 clients were
asked to bring the cars so that the defect could be attended to, at no
charge. The cost of the repairs is estimated at $500 000.
The manufacturer of the gear box undertook to reimburse the manufacturer
of all costs incurred in this exercise.
Required
Explain the accounting treatment of these events.
11.7 Decision Tree – Accounting for Provisions and

Contingent Liabilities
The following decision tree summarises the main provisions of IAS 37
Figure 11.1: Accounting treatment for provisions, contingent liabilities

11.8 Summary
In this unit we discussed circumstances in which provisions, contingent liabili-
ties/assets are measured, recognised and disclosed. A provision is recognised
when an entity has a present obligation as a result of a past event, when there
is a probable outflow of resources to settle the obligation, and when a reli-
able estimate of the obligation can be made. Provisions should be reviewed
at each reporting date and adjusted to reflect the current best estimate of the
obligation. They should also be used only for the purpose for which they were
originally recognised. A contingent liability on the other hand is a possible
obligation, arising from past events, whose existence will be confirmed by the
occurrence or non-occurrence of an uncertain future event, or a present ob-
ligation from past events, which is not recognised because it is not probable
that there would be an outflow of resources to settle it or the obligation can-
not be reliably measured. Contingent liabilities are not recognised, but shown
as notes on the financial statements.

References
Lewis, R. and Pendrill, D. (2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
Wingard, C., Von Well, R., Pretorius, D., Ferreira, P.H., Badenhorst, W.M.

Unit Twelve
Tax (IAS 12)
12.0 Introduction
I
n this unit we highlight that the objective of IAS 12 is to prescribe the
accounting treatment for income taxes, for both current and future tax
consequences.

By the end of this unit you should be able to:
 explain the difference between current and deferred tax

 calculate temporary differences and calculate deferred tax
 disclose deferred tax in financial statements
12.2 Deferred Tax

A deferred tax liability should be recognised whenever recovery of the carry-
ing amount of the asset/settlement of a liability would result in larger future tax
payments. Alternatively, a deferred tax asset should be recognised when the
settlement of the carrying amount of a liability/ recovery of the carrying amount
of the asset would result in smaller future tax payments.
12.2.1 Steps in the recognition and measurement of deferred

tax
The following steps are followed in the recognition and measurement of de-
ferred tax:
1. Calculate temporary differences.
2. Consider exemption from recognition of deferred tax for certain tem-
porary differences.
3. Consider limitations for the recognition of a deferred tax asset for de-
ductible temporary differences and unused tax losses and credits.
4. Consider the appropriate tax rates.
5. Recognise deferred tax income or expense.
Activity 12.1
? When should deferred tax be recognised?
12.3 Calculation of a Temporary Difference (TD)

TDs are differences between the carrying amount of an asset/liability in the
Statement of Financial Position (SOFP) and its tax base. The tax base is the
amount attributed to the asset /liability for tax purposes.

Unit 12 Tax (IAS 12)
Example 12.1 - Tax base of an asset - When future economic

benefits are taxable
A machine is purchased for $1 000 000 in year 1, and wear and tear is
allowed at 25% on cost. Show the tax base of the asset in the first 4 years.
Year 1 Year 2 Year 3 Year 4
Cost 1 000 000 1 000 000 1 000 000 1 000 000
Accumulated wear and tear 250 000 500 000 750 000 1 000 000
Tax base 750 000 500 000 250 000 nil
Example 12.2 - Tax base of an asset - when future economic

benefits are not taxable
Trade receivables amount to $80 000. What is their tax base?
The tax base is also $80 000 as the related revenue was taxed when the
amount accrued to the entity. Cash from debtors has no tax consequences.
12.4 The Tax Base of a Liability

The tax base of a liability is its carrying amount (CA), less any amount that
will be deducted for tax purposes in respect of that liability in future when the
liability is settled.
Example 12.3 - Tax base of a liability – future settlement

deductible
A provision for warranty costs has a carrying amount of $2 000 000. The
warrant costs will be deductible for tax purposes when paid in future.
The tax base is:

$
Carrying amount 2 000 000
Amount deductible in future 2 000 000
Tax base nil

Example 12.4 - Tax base of a liability –future settlement not

deductible
A loan has a carrying amount of $1 000 000. What is the tax base?
The repayment of the loan will have no tax consequences. So the tax base is
$1 000 000, being :
$
Carrying amount 1 000 000
Amount deductible in future Nil
Tax base 1 000 000
12.5 Tax Base of Revenue Received in Advance

The tax base of the resulting liability is its carrying amount less any amount
that will not be taxable in future periods.
Example 12.5 - TB of revenue received in advance – not

taxable in future
Rental amounting to $15 000 was received in advance. The total was taxed
on receipt. What is the tax base of this item?
The tax base is nil, being carrying amount of $15 000 less $15 000 (not
taxable in future, as it was taxed on receipt).
TB of revenue received in advance – taxable in future

A deposit of $100 000 was received for goods still to be manufactured. The
deposit will be taxed in future when the goods are manufactured.
The TB is $100 000, being carrying amount $100 000 less $0 (the $100 000
will be taxed in future).

12.6 Determining Whether Temporary Differences are

Taxable or Deductible
 Taxable TDs are TDs that will result in taxable amounts in determining
taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled.
 Deductible TDs are TDs that will result in amounts that are deductible
in determining taxable profits (tax loss) of future periods when the car-
rying amount of the asset is recovered or settled.
Example 12.6
On 1 January 2011 machinery was purchased at a cost of $180 000. Depre-
ciation is calculated at 25% of cost , and wear and tear at 33.33%. What is
the temporary difference?
Solution 12.6
$
Carrying amount (180 000 – 45 000) 135 000
Tax base (180 000 – 60 000) 120 000
Taxable TD (CA ˃ TB for assets) 15 000
Example 12.7
Research expenditure in 2011 amounted to $200 000, which was all written
off during the year. The allowance for tax purposes is 25% per annum.
Solution 12.7
$
Carrying amount (200 000 – 200 000 depreciation) nil
Tax base (200 000 - 50 000 tax allowance) 150 000
Deductible TD (CA˂ TB for assets) 150 000

Activity 12.2
? A company buys a computer for $2 000 on 1 January 2013. The computer

has a useful life of 5 years after which it has no residual value.
Depreciation is on a straight line basis. In terms of a government
incentive, the full cost of computers is allowed in the year of purchase.
Required
For the first 2 years, calculate:
a) The carrying amount of the computer as well as its tax base.
b) The temporary differences.
12.7 Exemption from Recognition of Deferred Tax for

Certain Temporary Differences
Deferred tax liabilities should be recognised for all temporary differences
unless the liability arises from:
 The initial recognition of goodwill or
 The initial recognition of an asset or liability in a transaction which is
not a business combination and at the time of the transaction, affected
neither accounting profit nor taxable profit
A deferred tax asset should be recognised for all deductible TDs to the extent
that it is probable that taxable income will be available against which the de-
ductible TDs can be utilised, unless the deferred tax arises from the initial
recognition of an asset or liability in a transaction that is not a business combi-
nation and at the time of the transaction affects neither accounting nor taxable
profit.

Activity 12.3
? On 1 January 2008, a company bought plant at a price of $500 000. The

plant was to be depreciated using the straight line method over its
useful life of 5 years (after which it was estimated that it would have no
residual value).
For tax purposes, wear and tear is allowed on the following basis:
50% in the first year
30% in the second year
20% in the third year
On 31 December 2011 the plant was sold for $100 000. The profit before
tax for 2010 was $120 000 and for 2011 $150 000. The tax rate was
30% from 2008 to 2011.
Required
a) Calculate temporary differences and deferred tax asset/ liability for the
years 2008 to 2011, clearly indicating the debits/credits to the deferred
tax account.
b) Calculate the taxable income and current income for 2010 and 2011.
12.8 Limitations of Recognition of Deferred Tax

Assets for Deductible TDs, Unused Tax Losses or
Credits
A deferred tax asset should be recognised only to the extent that it is probable
that taxable income will be available against which they will be utilised.
The following criteria can be used to determine if taxable income will be avail-
able:
 Whether the entity has sufficient taxable TDs which will result in tax-
able amounts.
 Whether the entity will have taxable profits before unused tax losses/
credits expire.
 Whether the unused tax losses result from identifiable causes which are
unlikely to recur.
 Whether tax planning opportunities are available which will create tax-
able profit.

Example 12.8
A company has cumulative taxable TDs of $20 000 before taking into ac-
count unutilised cumulative assessed loss of $30 000. It is uncertain if future
taxable profit will be available. Assume a tax rate of 29%.
Required
a) How much will be recognised as a deferred tax asset?
b) What will be the net deferred tax balance in that year?
c) Calculate the amount to be recognised as a tax asset in the next year, if
the taxable TDs increase by $15 000 and the loss remains at $30 000.
Solution 12.8
a) The deferred tax asset is limited to $5 800 (20 000 x 29%).
b) The net deferred tax balance will be $nil (a deferred tax liability of $5
800 in respect of the accumulated taxable TDs less the deferred tax
asset in a) above of $5 800.
c) If in the next year, taxable TDs of $15 000 arise, and the loss remains
at $30 000, the cumulated taxable TDs are now more than the loss and
are recognised in full. The net balance in the deferred tax account will
be a credit of $1 450 (5 000 x 29%)
12.9 The Appropriate Tax Rates

The tax rates to be used are those that are expected to apply in future when
the asset is realised or the liability settled, provided they have been enacted or
substantially enacted by the reporting date. The aim is to reflect the tax con-
sequences that would follow from the manner in which the entity expects at
the reporting date to recover or settle the carrying amount of its assets and
liabilities.
12.10 Changes in Tax Rates

When tax rates change from one year to another, appropriate adjustments
should be made to the deferred tax balances so that they reflect amounts at
which the assets will be realised or liabilities settled.
The following example shows adjustments that are necessary when there are
changes in tax rates from one year to the next.

Example 12.9
D Ltd had a deferred tax balance of $60 000 (credit) at the end of 2010
(temporary differences of $200 000 and a tax rate of 30%). At the beginning
of 2011, the tax rate was reduced to 29%.
Required
What is the effect of the reduction in tax on the deferred tax balance?
Solution 12.9
The deferred tax balance will be reduced by $2 000 calculated as follows:
60 000 x 1% / 30% = $2 000 or
200 000 x 1% = $2 000
12.11 Recognition of the Deferred Tax Income or

Expense
Deferred tax should be recognised as income or expense and included in
profit or loss for the period, except to the extent that the tax arises from:
 a transaction or event that is recognised outside profit or loss or di-
rectly in other comprehensive income or in equity or
 a business combination.
12.12 Presentation of Deferred Tax Assets/Liabilities

Deferred tax assets/liabilities as well as current tax assets/ liabilities should be
presented on the face of the statement of financial position. Deferred assets/
liabilities should not be classified under current assets/ liabilities. The tax
expense must be presented in the statement of comprehensive income.
Offsetting of current tax assets and current tax liabilities is permitted if the
entity:
 has a legally enforceable right to offset the recognised amounts, and
 intends either to settle on a net basis, or to realise the asset and settle
the liability simultaneously.

12.13 Disclosure
Some of the major disclosure requirements include the following:
 the amount of tax relating to each of the components of other compre-
hensive income.
 an explanation of the relationship between the tax expense and the
accounting profit. This can be done through a numerical reconciliation
of the tax expense with the accounting profit multiplied by the tax rate,
or between the average effective tax rate and the applicable tax rate
 an explanation of any changes in the applicable tax rates, compared
to the previous accounting period
 the amount of deferred tax which has not been recognised because of
uncertainty over its recoverability
 an analysis of the tax according to the type of temporary difference
 where a deferred tax asset has been recognised, disclosure of the na-
ture of evidence of its future recoverability is required
12.14 Summary
In this unit we covered the accounting treatment of both current and deferred
tax. Steps to be taken in the recognition and measurement of deferred tax
were set out. The calculation of temporary differences was explained with the
aid of examples. This was followed by illustrations of the calculation of de-
ferred tax assets/liabilities. Situations where there are exemptions from rec-
ognition of deferred tax for certain temporary differences were also discussed.
Limitations relating to recognition of deferred tax assets were discussed with
the aid of an example. Finally, disclosure requirements in respect of both
current and deferred tax were discussed.

References
ICAEW. (2008). International Financial Reporting Standards: Certifi-
Lewis, R., and Pendrill, D. (2004). Advanced Financial Accounting. Lon-
don: Prentice Hall.
(2003).Accounting Standards. Johannesburg: Juta and Company.


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Bachelor of Commerce

Content Reviewer: Cuthbert Muza

Editor: Betty K Mutambanengwe

P.O. Box MP1119

The Zimbabwe Open University is a distance teaching and open

Cover design: T. Ndhlovu

Layout : S. Mushore/S. Mapfumo/ C. Nhari

Typeset in Times New Roman, 12 point on auto leading

© Zimbabwe Open University. All rights reserved. No part of this

As a progressive university that is forward

The six hour tutorials should be so structured that the

Session I (Two Hours)

Session II (Two Hours)

Session III (Two Hours)

Unit One: The Regulatory Framework

1.0 _______ Introduction ________________________________________________ 5

Unit Two: The Conceptual Framework for Financial Reporting

2.0 _______ Introduction _______________________________________________ 15

Unit Three: Company Formation

3.0 _______ Introduction _______________________________________________ 27

4.0 _______ Introduction _______________________________________________ 35

5.0 _______ Introduction _______________________________________________ 63

Unit Six: Investments in Associates and Joint Ventures (IAS28)

Unit Seven: Business Combinations (IFRS 3)

Unit Eight: Accounting for Government Grants and Disclosure of

Unit Nine: Property Plant and Equipment (IAS 16)

Unit Ten: Impairment of Assets (IAS 36)

Unit Eleven: Provisions, Contingent Liabilities and Contingent Assets

Unit Twelve: Tax (IAS 12)

T his module has been prepared to cover the syllabus of Company

Unit 2- The conceptual framework - We explain the concepts that underlie

Unit 3 – Company formation – In this unit we deal with procedures to be

Unit 4 – Presentation of financial statements – We discuss the prescribed

Unit 5 - Accounting policies, changes in accounting estimates and errors

Unit 6 – Investments in associates and joint ventures – We cover the

Unit 7 – Business combinations – In this unit we cover financial reporting

Unit 8 – Accounting for government grants and disclosure of

Unit 9 - Property, plant and equipment (PPE) – We cover the prescribed

Unit 10 – Impairment of assets – In this unit we examine procedures applied

Unit 11 – Provisions, contingent liabilities and contingent assets – We

measurement of deferred tax, as well as disclosure requirements for both

The Regulatory Framework

T he International Accounting Standards Committee (IASC) was

1.1 Unit Objectives

 state the objectives of the International Accounting

1.2 The Objectives of the IASC Foundation

1.3 The Structure of the IASC Foundation

6 Zimbabwe Open University

Figure 1.1: The Structure of the IASC Foundation

Source: The IFRS Foundation

Briefly, the functions of these bodies are as follows:

IFRS Foundation Monitoring Board – Appoints IFRS Foundation trustees

IFRS Foundation trustees - Oversees the activities of and reviews the

IFRS Advisory Council - Provides strategic advice to the IASB.

Zimbabwe Open University 7

IFRIC – Offers advice where there are differences in accounting practices.

1.3.1 The International Accounting Standards Board (IASB)

The objective of the IASB is to develop a single set of high quality,

It is overseen by a geographically and professionally diverse body of trustees.

IASB is supported by an external IFRS Advisory Council and an International

It employs a thorough, open, participatory and transparent due process, and

It engages in collaborative efforts with worldwide standard-setting bodies.

1.3.2 The International Financial Reporting Interpretations

1.0 _ Introduction __________________________________________ 5

2.0 _ Introduction _________________________________________ 15

3.0 _ Introduction _________________________________________ 27

4.0 _ Introduction _________________________________________ 35

5.0 _ Introduction _________________________________________ 63