Strategic Business Reporting

IAS 1 Presentation of Financial statements

The content of the general purpose financial statements to ensure

comparability with entity own’s financial statements of prior years and it
should be comparable with other entity’s financial statements of same
industry

To achieve this objective IAS 1 provide overall consideration for the

preparation of financial statements, guidelines for the structure and
minimum requirements for the preparations of financial statements.

General purpose financial statements:

General purpose financial statements are those intended to meet the needs
of users who are not in position to demand reports tailored to specific
information needs
The financial statements may be presented separately or in another public
document. For example annual report
Application:

All types of entities with profit objective are required to prepare

Financial statements Individual as well as consolidated financial
statements if they are in group.

Objective:

The objective of financial statement is to provide useful information

regarding entity so that users can take economic decisions.

- Financial position
- Performance
- Cash flows

- to show the results of management accountability, financial

statement provide information about entity’s :
 Assets
 Liabilities
 Equity
 Income
 Expenses
 Cash flows

The set of financial statements includes:

 Statement of financial statement

 Statement of profit or loss and other comprehensive income
 Statement of cash flows
 Statement of changes in equity
 Notes to the accounts ( Explanatory notes)

On voluntary basis Organisation can also include

 Environmental report
 Integrated report ( Value added report)
Faithfull presentation and Compliance report:

Financial statements should present the information fairly and it

should be prepared according to relevant regulations and
applicable reporting framework (IFRS)

Departure from IFRS:

Although organisations are required to comply with IAS,IFRS but in
few cases organisations can depart from IAS/IFRS on the grounds of
fair presentation. But management need to conclude that
organization has prepared whole Financial statements according to
applicable reporting framework except for the matter in which they
depart from the IFRS on the grounds of fair presentation giving
detailed explaination on the matter.
Going concern:
It is management responsibility to prepare the financial statements on
going concern assumption after assessing the organization’s ability to
continue as going concern assumption.
If management conclude that going concern is not there they then require
to prepare the financial statements on peace meal basis

Accrual accounting:

Assets , liabilities, income, expenses should be recorded when they occur

and not on cash basis

Matching concept:

Expenses are recognized on basis of direct association between cost

incurred and earning of specific items of income.
Consistency of presentation:

Financial statements estimations and policies should be consistent. One

method which is applied earlier should be apply in future as well. It is not
allow to change it again and again
However basis of estimations and policies can be change on the grounds of
fair presentation only.

Materiality:

Information is material when its inclussion and exclusion can effect the
decision of the user of financial statements.
Offsetting:

Assets, liabilities, income and expenses can not be offset until or unless
standards allow or requires to do so. Offsetting is allow in following
conditions and in these situations:

Conditions

- It should be between two parties

- The dates should be same
- There should be a written agreement between them

Situation:
- Gains/Losses on the sale of non current assets are reported after
deducting the carrying amount from the amount from the consideration
of disposal
- Gain/Losses relating to group of similar transactions will be reported on
a net basis for example foreign exchange gains and losses. Any Material
gain or loss should be reported separately

- Expenditure related to recognized provision, where reimbursement

occurs from a third party. May be netted off against the reimbursement

Comparative Information:

For the users of financial statements up to five year prior financial

statements should be included in the financial statements of the
organisation so that user of the financial statements can compare the
financial statement information.
Disclosure:
It is the broad term used in financial reporting, explaining the items
presented in financial statements is disclosures

Identification of financial statements:

Financial statements should be clearly identified and distinguished

from other information in the same published document for
example annual report

Information to be displayed:

 Name of reporting entity

 Presentation currency
 Level of precision used for example 000, millions etc
 End of reporting period or period covered by financial statements
 Whether financial statement covered single entity or group
Reporting date and Period:

Financial statements of the company normally prepared for the twelve

month period which normally starts from when company starts trading
or after the completion of twelve months.
However there are circumstances when financial statements are
prepared for longer or shorter then 12 months though organisation
should disclose the reason for shorter or longer period.
Distinction between current and non current:

Current and non current assets, current and non current liabilities
should be separately classified in the financial statements. Until or
unless there is liquidity issues and management concludes that going
concern is uncertain.

Current assets:

Current assets are those assets which will release within 12 months.

Current liabilities:

Liabilities which will be paid off with in twelve months

Presentation of Assets, Liabilities and Equity:

Following items must be shown in Statement of financial position:

 Property plant and equipment

 Investment property
 Intangible assets
 Cash
 Receivables
 Inventory
 Biological assets
 Trade and other payables
 Current tax
 Defer tax
 Provisions
 Bank overdraft
 Consolidated reserve
 NCI
Statement of profit and loss and other comprehensive Income:

Revenues and expenses need to record in statement of profit and loss while
in part of Other comprehensive income:
Part attributable to Parent and NCI need to record and components of
equity such as:

 Revaluation surplus
 Changes in fair value of financial assets and liabilities
 Changes in exchange differences
Statement of changes in equity:
Organisation should present separate statement showing :
o Total Income
o Equity reserve
o Revaluation reserve
o Share of parent
o Share of NCI
o For each component of equity effect of Policies and estimates
retrospectively
o For each component of equity a reconciliation between the carrying
amount at beginning and at the end of the period.
Notes to the Financial Statements:

Notes to the financial statements are required to show:

 The details of the transactions
 The effects of the transactions on financial statements
 The details related to the transaction
 The details related to the event
 To disclose the other information which is relevant for the users
 To disclose the information required by the IFRS which is not shown
else where.
IAS 2 Inventories

Inventories:
Assets which are held for sale in the ordinary course of
business for example goods purchased for resale

Net realisable value:

The estimated selling price in the ordinary course of business
less the estimated cost of completion and the necessary cost
to make the sale.

Inventories are measured at lower of cost or NRV

Cost:
Costs include all the costs which are necessary to bring the asset into
working condition and at present location.

 Purchase cost
 Cost of conversion
 Other costs
Purchase cost Conversion cost Other cost
Purchase price Production cost Non production
Import duties Overhead costs overheads… such
Taxes Joint production as delivery cost
Trade cost
discounts(deductab Borrowing cost
le)
The following expenditures are excluded from the cost of inventory:

- Abnormal cost such as wasted material, labor, overhead costs

- Administrative overheads
- Selling cost
- Storage cost unless necessary for production process

Techniques for measurement of cost:

There are two techniques which can be use for measuring of cost

Standard cost Retail Method

-standards must be regularly
reviewed and revised
- Takes in to account normal
level of material , labour,
capacity and efficiency
Reduces sales value by by
appropriate percentage gross
margin
- For inventories of large
number of rapidly changing
items wih similar margins
Formulae:
Formulae are permitted where specific identification of individual costs to
individual items are not practiceable

There are two formulae which are allowed

- FIFO
- Weighted average
FIFO Formulae
It assumes iventory which
purchased first is sold first
Therefore the inventory which
is unsold at period end is the
latest one
Weighted Average Formulae
Determined from weighted
average cost of:
Items at beginning of period
And cost of similar items
purchased/ produced during
the period
- It may be calculated on
periodic basis or on each
additional shipment
EXAMPLE: MOIZ

Moiz Sets up in business on 1st november by buying and selling toys. These
were purchased during the month:

On 25th November, Moiz sold consignment of 250 toys for $ 50,000

Calculate gross profit and value of closing inventory using

1) FIFO
2) Weighted average
Solution:
FIFO weighted Average
Sale: 50000 50000
Cost(w) ( 39250) (40000)
___________ _____________
10750 10000
____________ ______________

Working:

200 units x 150s.p = $30000 200units x 150 u.p= 30000

50 Units x 185s.p = $9250 80units x 185 u.p=14800
----------- ________
39250 44800
------------ __________
Closing Inventory
FIFO 30 x 185= $5550
Weighted average = 30 x 160= 4800
Net realisable Value:

Cost of inventories may not be recoverable due to

- Damage
- Obsolence
- An increase in estimation cost to be incurred in completion
- Decline in selling price

Estimations of net realisable value take into account due to :

- The purpose for which inventory is held
- Fluctuations of price or cost relating to events after the period end.

The inventory valuation should be assessed in every accounting period and

should be updated in financial statements
Example:

Cheeema is trying to calculate year end inventories figure for inclusion

in his accounts. Details of his three stock lines are as follows:

Product Cost Realisable Value Selling exp

A $100 $120 $25

B $50 $60 $5

C $75 $85 $15

Calculate the value of closing inventories which cheema should use for
his accounts.
Solution:

A 120- 25 = 95
B cost 50
C 85-15= 70
_________
215
__________
 IAS 8 Accounting Policies, changes in accounting estimates and errors

The objective of the financial statement is to provide information about

the financial position, performance and cash flows of an entity which is
useful to an wide range of users is making economic decisions.

Users are better able to evaluate this ability to generate cash and cash
equivalents if they are provided with information which focuses on
financial position, performance and cash flows of an entity.

Information about organisation is required in order to :

 Predict the capacity of the organisation to generate cash flows from

its existing resources
 Assess potential changes in the economic resources it is likely to
control in the future
 Form judgment about the effectiveness with which the entity might
employ addition resources.
In order to make economic decision users of the financial statements
require the details of the composition of figures in as much detail as
possible
Example:
o Segmental reporting
o Information on discontinued operations
o Disclosure of material and unusual items which are part of ordinary
activities

Scope:

IAS 8 is applied in:

 Selecting and applying accounting policies

 Accounting for changes in accounting policies and estimates
 Correction of prior period errors
Accounting Policies:

Specific principles, conventions, bases, rules and practices applied in

preparing and presenting financial statements

Change in accounting estimate:

An adjustment to the carrying amount of an asset or liability which

include:

 Results from the current assessment of expected future benefits and

obligations
 These changes arise due to new information or developments
for example:
 A recievable balance that becomes irrecoverable
 Change in estimated useful life of an asset of depreciable asset.
Prior Period Error:

Omissions, or misstatements, relating to the financial statements of the

previous period which arose from the failure to use or miss use of the
information.
If any prior period found in the financial statement it need to be correctified
retrospectively.
Accounting Policy:

When an IFRS applies to a transaction the accounting policy or policies

applied to that transaction is determined by applying the relevant IFRS
and any relevant implementation guidance issued by the IASB.

Where tthere is no applicable IFRS for transaction management must

use its judgement in developing and applying an accounting policy
which will provide information that:

1. It is relevant to economic decision making of users

2. It represents faithfully
3. It reflects the economic substance of the transaction
4. It is neutral
5. It is complete in all material aspects.
Management should consider the following:

1. Requirements of accounting standards dealing with similar

transactions
2. Definition and recognition criteria in the framework
3. Any other accounting treatment denoting best practice in
particular industry.
4. Recent pronouncements of other standard setting bodies which
use similar framework.
Changes in accounting policy:

An organization can change accounting policy if:

o It is required by IFRS to do that means it is mandatory to do

so
o Or It can be change if it would result in financial statements
provide more reliable information.

Example:
If organization change from Cost model to revaluation model its
change in accounting policy.
Retrospective:

Retrospective change means account balances should be

change from earlier years.
The changes need to make from opening balances to latest
financial statements.
However if it is not possible from opening balances then IAS 8
allows that change should be made from the earliest period
from the change is possible.
Change due to new IAS/IFRS:

1. Tittle of new IAS/IFRS and nature of change in policy

2. When applicable when the change is made in accordance
with the IFRS transitional provisions, a description of those
provisions and the effects that the provisions may have on
future periods.
3. For the current period and each period presented, the
amount of the adjustment for each line item affected in
the financial statements.
4. The amount of the adjustment relating to periods before
those presented.
5. If retrospective restatement is not practicable, that led to
the existence of the condition and a description of how
and from when the change has been applied.
Voluntary Change in Policy:
1. Nature of the change in policy
2. Reasons why the new policy provides more reliable and relevant
information
3. For the current period and each prior period presented, the
amount of the adjustment for each line item affected in financial
statements.
4. The amount of the adjustment relating to periods before those
presented
5. If retrospective re statement is not possible, the circumstances that
led to the existence of the condition a description of how and from
when the change has been applied.
Changes in Accounting Estimate:

Many items in the financial statements must be measured with an

element of estimation attached to them:

1. Non current assets are depreciated the charge takes into account
the expected pattern of consumption of the asset and its expected
useful life. Both depreciation method reflect consumption pattern
and useful life are estimates.
2. As per IAS 37 “Provisions” is often a Best estimate of future
economic benefits which need to be paid out.
3. Inventory is measured at lower of cost or NRV with allowance
made for obsolence etc
4. Trade receivables are measured after allowing for estimated
irrecoverable amounts.
Accounting Treatment:

When the change in estimates occurs which effects the estimates

previously made the effect of that change is recognized prospectively in
the current and future where relevant periods profits and loss.

A change is estimate is not error or change in accounting policy and

therefore does not effect prior period statements.

If the change in estimate affects the measurement of assets or liabilities

then the change is recognized by adjusting the carrying amount of asset
or liability.

Organization should disclose about the nature and amount of change in

estimate which has an effect in the current period or is expected to have
an effect in future periods.

If it is not possible to estimate the effects on future periods, then that fact
must be disclosed.
Prior period Errors:

Omissions from organisations financial statements and miss

statements in the organisations financial statements for one or more
prior periods arising from the failure to use miss use of, reliable
information that was available and could reasonably be effected to
have been obtained when those prior period financial statements
were authorized for issue.

Accounting treatment:

The amount of the correction of an error which relates to prior

periods is reported by:
 Adjust the opening balance of retain earning
 Restate comparative information
 IAS 16 Property Plant and equipment

Property, Plant and equipment are tangible assets that are held for use in the
production or supply of the goods, for administrative purposes or for rental to
others and are expected to use for more then one accounting period

IAS will not be apply to Biological assets and mineral rights and reserves

Recognition:
Property Plant and equipment will be recognised in the financial statements
if:

 It is probable future economic benefits will flow to the organisation and

 Cost can be measured reliably

For recognition:

Asset Dr xxx
Cash Cr xxx
Which cost to capitalise in the Initial cost of recognition?

List Price xxx

Less: Trade Discount (xxx)
Add: Freight charges xxx
Add: Import duties xxx
Add: Dismentaling cost xxx
Add: Installation cost xxx
Add: Pre production testing xxx
Add: Handling cost xxxx

And all the costs which are necessary to bring asset into present
location where it has to operate and necessary to bring it in working
condition.
Which cost not to capitalise ?

Following cost of asset will not be capitalise while bringing it into working
condition:

o Start up and similar pre production cost

o Administrative and other general overheads
o Initial operating losses before the asset reaches planned performance

All of these costs will be recognised as an expense in Profit and loss

statement.
Subsequent Expenditure:
Such costs which incurred during the life of the asset and due to
them:

1. It increases the efficiency of the asset

2. It increases the useful life of the asset or
3. It decreases the operating cost of the asset.

These costs need to capitalise in the cost of the asset and such
expenditures are known as subsequent expenditure.

Example:
Aircrafts interiors require replacement at regular intervals.
Revaluations:
The market value of land and building usually represent their fair
value.
According to IAS 16 revaluation test should be carried out annually.
And if there is any revaluation indication asset should be revalued
immediately

Revaluation model is available only if the fair value of the item can be
measured reliabely
Where there is no market value is not available, depreciated
replacement amount should be used
Example:

On 1st january 2010 Land was bought for $1000 and at 31st Dec 2010 it
upward revalued to 1500

Answer

1st january 2010 31st December 2010

Asset Dr 1000 Asset Dr 500

Cash Cr 1000 Revaluation reserve Cr 500

Revaluation reserve is
equity component
Example 2

Land was bought on 1st January 2010 for $1000 and on 31st
December it downward valued to $750

Answer

1st January 2010 31st December 2010

Asset Dr 1000 P&L Dr 250

Cash Cr 1000 Asset Cr 250
Example:
On 1st january 2010 Land was bought for $1000 on 31 December
2010 it was got revalued to $1500 and on 31st December 2011 it
got revalued to 750

Answer

1st january 2010 31 December 2010 31st Dec 2011

P&L Dr 250
Asset dr 1000 Asset Dr 500
Rev Res Dr 500
Cash cr 1000 Rev Res Cr 500
Asset Cr 750
Example:
Land was bought for $1000 on 1st january 2010 it revalued downward on
31st December 2010 to $750 and on 31 December 2011 it got upward
revalued to 31st December 2011

Answer

1st Jan 2010 31st Dec 2010 31st Dec 2011

Asset Dr 750
Asset Dr 1000 P&L dr 250
P&L Cr 250
Cash Cr 1000 Asset Cr 250
Rev.Res Cr 500
Example: Revaluation and Depreciation

CoCo company bought an asset for $10000 at the beginning of 2005. it had
a useful life of five years. On 1st January 2007 the asset was revalued to
$12000. the asset life is remain unchanged i.e three years remain.

Account for revaluation and state treatment for depreciation from 2008
onwards.

Answer

On 1st January 2007 the carrying value of the asset is:

10000/5=2000 per year depreciation

Two year depreciation 2000 x 2= 4000
Asset carrying value = 6000
 Acc. Depreciation Dr 4000
Asset Dr 2000
Revaluation Reserve Cr 6000

Depreciation for next three years will be 12000/3=4000, compared to

depreciation on cost extra $2000 can be trated as part of surplus

Revaluation Surplus Dr 2000

Retain earning Cr 2000
Review of Useful Life:
As per IAS 16 the asset useful life should be reviewed each year and any
changes should be recognised immediately

Impairment:

Assets should be reviewed for impairment losses annually and if there is any
hint of impairment loss it should be recognised immediately.
Complex Asset:
Asset which has more then one component and every component has
different useful life. For example assets like Aircraft, Ships, Train etc has
different components and their life is different such assets are known as
complex Asset.
 IAS 20 Government Grant

IAS 20 applies to government grants and all forms of the assistance provided
by the government aimed at providing an economic benefit to the
organisation or group of organisations qualifying under certain criteria.

These grants can be of any time some of the examples are as follows:

 Grants
 Forgivable loans
 Capital grants
 Revenue grants

When government grants can be capitalised?

Government grants can only be capitalised when there is a resonable

assurance that
 The organisation will comply with any conditions that are attached to
the grant
 The grant will be received.

Capital grants:

These are non monetory grants such as land or building in remote area or
money towards purchase of the asset and usually account for at the fair
value.

It can be presented in the financial statements in either of two ways

- As deffered income liability and transfer a portion of revenue each year

- By deducting the grant in arriving the at the asset carrying amount.
Depreciate the asset at reduced cost.

At initial recognition of asset, It will be recorded as

 Bank Dr xxx
Deffered Income cr At recognition of grant
xxx

Deffered Income dr
xxx
To recognise revenue for the
P&L cr Xxx
year

Revenue for the year will be recognise on straight line basis for each
year
Illustration 1

Machine cost $100000 Amortisation of grant/

Revenue for the year
Life 4 years
Grant received 20% of cost 20000
______
Solution 4 years = 5000 per year

Asset recognition
Machine Dr 100000
Cash Cr 100000 P&L extract

Grant: Dep expense $25000

Amortisation of grant $5000
Bank Dr 20000
Deffered Income cr 20000
Revenue Grant:

Revenue grants which is also known as grant related to income. Grant related
to income needed to be recognised in profit and loss statement as “ other
income” or deduct from the related expense

Illustration 2:
Salary Expense: $300000
Grant is 30% of labour cost

Solution:

Salary expense Dr 300000

Bank Cr 300000

Grant:

Deffered income Dr 90000

P&L cr 90000
Repayment of grant:

When organisation breach the condition which are related to

government grants organisations often has to back. In this condition it
should be treated as a change in estimate under IAS 8 and accounted
for prospectively

When the grant is related to income, the repayment should be dealt

as an expense

When the grant is related to asset, the repayment should be treated

as increasing the carrying amount of the asset or reducing the
deffered income balance.
Illustration 3:

Cost of the asset $10000

Life2 years
Grant received 40% of cost = $4000

Solution:

Bank Dr 4000 Amoritsation of grant= 4000

Deffered income Cr 4000 ______
2
= 2000 x 6/12 = 1000

Condition: if asset is sold with in two years then full payment need to be
paid and in this scenario. Repayment will be recognised as follows

Deffered Income Dr 1000

P&L Dr 3000
Bank Cr 4000
 IAS 23 Borrowing Cost

Borrowing cost:

As per IAS 23, borrowing cost are directly incurred on qualifying asset
and such cost must be capitalised as part of the asset.

What is qualifying Asset?

A qualifying asset can be tangible or intangible asset that takes

substantial period of time to get ready for its intended use or eventual
sale. Intangible asset during development period or construction
property are the example for it.
What is borrowing cost?

Borrowing cost include interest based on its effective interest which

includes the premiums, amortisation of discounts and certain
expenses on loans, overdrafts and some financial interests, It also
includes financial charges on Leased assets.

If organisation has borrowed funds specially for the construction of the

asset, then the amount to be capitalised is actual finance cost
incurred. Where borrowing includes general borrowing of the
organisation. Then the capitalisation rate that represents the weighted
average borrowing rate of the organisation should be used.
Illustration 1:

Mobango has $500000 of borrowings. All are outstanding for the full financial
year. The borrowings are from following sources:

Loan from bank - $100000 @ 5% P.A

Bonds 200000 @ 6%
Shareholders loan 200000 @ 3%

The capitalisation rate =

(100000 X 5%) + (200000 X 6%) + (200000 X 3%) = 23000/500000 X100= 4.6%

When to start capitalisation of Borrowing cost ?

An organisation should start capitalisation of borrowing cost when

following conditions meet:

1. Expenses has been incurred

2. Borrowing cost are being incurred
3. Activities to prepare the asset are in progress

When to suspend capitalisation of borrowing cost ?

Capitalisation of borrowing cost should be suspended during the period in

which active development is interrupted

When to stop capitalisation of borrowing cost?

Capitalisation of borrowing cost need to be stopped when substantially all

activities needed to complete the asset are complete.
 When suspending the work is normal process of the work, capitalisation of
borrowing cost will not be suspended

Any borrowing cost that are not eligible for capitalisation must be expensed and
costs can not be capitalised for assets measured at fair value.

Illustration 2

On 1.1.2011 Zoii Ltd borrowed $1 million at rate of 10% per annum to finance the
Football stadium construction. Which is expected one year to complete. Whole 1
million was drawn on 1.1.2011. but only $500000 of this 1million was used
immediately on 1.1.2011. the remaining $500000 was utilised on 1.7.2011. As
A result $500000 d been invested temporarily at the rate of 8% per annum.

Calculate the borrowing cost which may be capitalised and cost of the asset as
at 31.12.2011
Solution:

Borrowing costs
1m X 10%=100000

Investment income

500000 X 8% X 6/12= 20000

Net borrowing cost

100000-20000 = 80000

Cost of Asset 1 Million + borrowing cost 80000 = 1080000

Capital items:

Capital items are those which are brought into business for long term usage
such as machinery, computers, shop fittings costs, productive equipment etc.

Revenue items:

Revenue items are the normal day to day running cost of the business such as
material cost, labour cost and wages cost etc.
Bang Bang Co has three sources of borrowing in the period.

outstanding liability Interest Charge

7 year loan 8000 1000

25 year loan 12000 1000
Bank overdraft (avg) 4000 avg 600

Required:

a. Calculate the appropriate capitalisation rate if all of the borrowings are

Used to finance the production of qualifying assets but none of the
borrowings relate to specific qualifying asset.

b. If the seven year loan is the amount which can be specifically identified
with a qualifying asset, calculate the rate which should be used on the
other assets.
Solution:

Capitalisation rate:

a. 1000 + 1000 + 600

________________
8000 + 12000+4000 = 10.8%

b. 1000 + 600
__________
12000 + 4000 = 10%
 IAS 40 Investment Property

Investment Property:
It is a property ( land or building) held by the owner or lessee under finance to
earn rentals or for capital appreciation or for both.

For Investment Property IAS 40 allows choice between two models:

Fair Value
Cost Model Model
Fair Value:

Is the price that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between market participants at the
measurement date.

Cost:
Cost is the amount of cash or cash equivalents paid or the fair value of
other consideration given to acquire an asset at the time of its
acquisition or construction.
Recognition:

1. It is probable that the future economic benefits will flow to the entity
2. Cost can be measured reliably

Measurement:

For Measurement IAS 40 Allows to choose between two models

1. Cost Model
2. Fair Value Model
Cost Model:

In cost model we will record at Asset at carrying value i.e. is cost –

residual value – depreciation – less any Impairment Losses

Fair Value:

In Fair Value Model asset will be record at Current Market Value of

the Asset and changes will be recognised in the Profit and Loss
statement.

Example

Mojia Ltd Bought an asset for 1000 on 1st January 2010 and on 31st
December 2010 Asset value is 1500 .

Req: Prepare the extracts

Answer
1st January 2010 31st December 2010

Asset Dr 1000 Asset Dr 500

Cash Cr 1000 P&L Cr 500

The gain related to the Asset will be recognised in Profit and loss
statement as an income
Example:
Mojia company bought an asset for $1000 on 1st January 2010 and on 31st
December its value is $750.
Required: Prepare the extracts

1st Januaar 2010 31st December 2010

Asset Dr 1000 P&L Dr 250

Cash Cr 1000 Asset Cr 250

The Loss related to the asset will be recognised to Profit and loss
statement as an expense
Asset for own use and Rental:

If organisation has asset which it is using for own use and as well
for rental purposes then the question is which standard we
should apply?
IAS 16 or
IAS 40 ?

First we will look at that either we can sell these two parts
separately? If yes ! Then we will apply IAS 16 to the part which
we are using for our own use and
We will apply IAS 40 to the part which we will use for Rental
purposes.
And If we cant sell it separately then

We will look at the significance, Significance can be seen in terms

of revenue as well as in terms of Area as well
Example:

I Have a building of AccountanSea where I do teach from

morning 9:00 am to Night 10:00 PM. And student came to me
and asked Sir ! After the end of the classes in night can I sleep in
this building. As where ever I went for rent space rent is $200. I
said ok! You do give only rent of $50.

Now in this scenario, My main activity is providing teaching

services to the students as I do earn my major part of income
from teaching. So I will apply IAS 16 on this building.
Group Scenario:

Let us suppose parent company give building to Subsidiary

company on rent. In parent company individual financial
statements. Parent company will recognise Asset under IAS 40
as an investment property. But in Consolidated financial
statements Asset will be recognise as an asset.
Change from Fair Value model to Cost Model:

F.V

1st Jan 2010 F.V F.V C.M

1jan 2013

From first January 2010 since start we were using fair value model and on
1st January 2013 we r switching from fair value model to Cost Model. 1st
January 2013 fair Value will be the carrying value of Cost model and
onwards Cost of the asset and from 1st January onwards cost model
treatment will be followed.
 Cost Model to Fair Value Model:

C.M
C.M

C.M
F.V
1 Jan 10

1st Jan 2013

Since January 2010 organisation was applying cost model on its asset, On 1
january 31st December 2013 organisation decided to switch from cost
model to fair value model. On 1st January 2013 Cost model carrying value
will become asset fair value and then onwards fair value model rules will
be apply.
 IAS 41 Biological Assets

IAS 41 explains the accounting treatment , presentation and

disclosures related to the agriculture activity including:

 Agriculture produce at the time of harvest

 Related government grants
 Biological assets except for bearer plants

Biological Asset: A living plant or animal

Biological transformation: includes the processes of growth,
degeneration , production and procreation that give rise to qualitive
and quantitive changes in biological asset.
Agriculture produce: the product harvest from a biological asset
Harvest: the detachment of produce from a biological asset or the
cessation of biological assets life.
Fair Value: The price that would be received to sell an asset or paid to
transfer a liability in transaction between market participants at the
measurement date.

Bearer Plants: Bearer plants, which are used solely to grow produce for
example apple trees or grapes vines are accounted for under IAS 16
Property, Plant and equipment

Recognition:

A biological Asset should be recognised when, and only when:

When assets are controlled as a result of past event and it is probable

that future economic benefits will flow the entity

Cost of the asset can be measured reliabely.

Measurement:

A biological asset should be measured at its fair value less cost to sell

- On initial recognition and at end of each reporting period.

Example:

A Farmer owns a Diary Herd at 1st January 2015. the number of cows in
the herd is $5000. the fair value of 2 year old animals and 31 December
2014 and 3 year old animals at 31 December 2015 are $60 and 75
respectively:

Separating out the value increase of the herd into those relating to price
change and those relating to the physical change gives the following
valuation:

Fair value a 1 January 2015 $5,000

Increase due to price change
(100 x ($60-$50)) 1000
Increase due to physical change
(100x(($75-$60)) $1500
Fair value at 31st December 2015
7,500
Gains and Losses:

A gain or loss arise on the initial recognition of biological asset is

included in profit or loss for the period in which it is arises

Any change in fair value less cost to sell at the end of each
reporting peirod are similarly recognised in profit or loss for the
period.
As at 31 december 2015, a plantation consists of 100 Insignis pine trees
that were planted 10 years earlier. Insignis Pine take 30 years to mature
and will ultimately be processed into building material for house or
furniture.

Only mature trees have established fair values by reference to quoted

price in an active market. The fair value is inclusive of transport cost to
deliver 100 logs to market. For mature trees for same type as in market is

As at 31 december 2015= 171

As at 31 december 2016= 165

The organisation weighted average cost of capital is 6% per annum.

Require:
Calculate the fair value of the plantation as at:
1. 31 December 2015 and
2. 31 December 2016
Calculate the gain between the two period ends:

1. A change in price
2. A physical Change
Solution:

Fair Value computation

The mature plantation would have been valued at $17100

The estimation for the immature plantation is
17100/1.06^20=5332

31 december 2016
The mature plantation would have been valued at 16500.
The estimate for the immature plantation is 16500/1.06^19=5453

Analyses of gain:
The gain identified in part a is analysed as follows:
Price change:
Reflects the change in price on biological asset over the period
Prior period asset restated at current price 16500/1.06^20 = 5145
Less: prior year estimate at previous price =(5332)
__________
Loss (187)
___________

2. Physical Change

Reflects the change in state of maturity of biological asset at current price

Current year estimate as per current year price from (a) 5453
Prior year estimate re stated at current price from b 5145
____________
Gain 308
_____________
 IFRS 5 Held for Sale and Discontinued Operations

Component Of an entity:

A portion of an organization with operations and cash flows clearly distinguishable from the remainder of the organization for
both operational and financial reporting purposes.

Discontinued operation:

A component which has either been disposed off or is classified as held for sale

 Represent a separate major line of business or geographical area of operations

 Is a part of single co ordinated plan for its disposal
 Is a subsidiary acquired with a view of re sale.

Disposal Group:

A group of assets to be disposed of collectively in single transaction and directly associated liabilities which will be transferred
in the transaction.

The asset in disposal group include goodwill acquired in a business combination if the group is:
- A cash generating unit in which goodwill has been allocated or an operation with such cash generating unit.
Definition Criteria:

Distinguishable:

A discontinued operation is distinguishable operationally and for reporting purposed if:

1. Its assets and liabilities is directly attributable to it

2. Its income can be directly attributable to it
3. Its expenses can be directly attributable to it

Separate:

A discontinued operation must be a separate:

 Major line of business for example major product or service line

 Geographical area of operations.

Business organizations frequently close operations, abandon products or service line due to certain circumstances. These
changes are not usually discontinued operations but they can occur along with discontinued operations for example:

o Discontinuance of several products in ongoing line of business

o Moving some production or marketing activities for a particular line of business from location to another
o Closing of facility to achieve productivity improvement or other cost saving
o Sale of a subsidiary whose activities are similar to those of the parent or other subsidiaries or associates within a
consolidation group.

A single co ordinated plan:

A discontinued operation may be disposed of in its interity or peacemeal, but always pursuant to an overall coordinated plan
to discontinue the entire component.
Example:

Identify which of the following is a disposal group at 31st December 2015:

1. On 21st December 20015 Saba company announced the board intention to sell its shares in Emo company, upon the
approval of Emo other shareholders. It seems unlikely that approval will be granted in near future and no specific potential
buyer has been identified.
2. On 31st December 2015 the Bobi management decided to sell its 50 supermarkets in Singapore. The shareholders approved
the decision at an extraordinary general meeting on 20th January 2016.
3. On 15 October 2015 Shazee management and shareholders approved a plan to sell its retail business in New Zealand and a
working party was set up to manage the sale as at 31st December 2015 heads of agreement had been signed although due
diligence and the negotiation of final terms are still in process. Completion of the transaction is expected sometime in 2015.
4. Dhoondoo has entered into contract to sell the entire delivery fleet of cars operated from its warehouse in Karachi to a
competitor Bingo on 17 December 2015. the assets will be transferred on 28 January 2016 from which date the group will
outsource its delivery activities to another company Kaka.
Answer:

The retail business and the car fleet disposal groups because each of them is collection of assets to be disposed of by sales
together as a group in single transaction.

The sale of the supermarkets is not classified as disposal group as there is no indication that the supermarkets are to be sold
as a package each could be sold as separate item

In emo company scenario it is not clear how much shares they are intent to sell, also it is unlikely that they get the approval
therefore it cant be recognize as disposal group.
Held for Sale classification

Definitions:

Non current Asset:

Resources controlled by organization for more then one accounting period and it is expected that economic benefits will flow to
the entity
For example, Building, Plant, Land etc.

Current Assets:
Resources controlled by the organization for equal to or less then 12 months and it is expected that economic benefits will flow
to the entity. These are the assets which satisfies any of the following criteria

- Expected realization sale or consumption in normal operating cycle that is 12 months after the end of reporting period.
- Cash or cash equivalent
- Held for trading purposes.
Held for Sale non current Asset:

The asset must be available for immediate sale in its present condition
In addition to above following conditions need to be meet:

1. The sale of the asset must be highly probable

2. Management must be committed to plan to sale the asset
3. An active program to locate a buyer and complete the plan must have been initiated.
4. The asset must be actively marketed for sale at a reasonable price relative to its current fair value
5. The asset will be sell within one year from the date of classification.
6. The actions required to complete the plan should indicate that significant changes to the plan or withdrawl from the
plan are unlikely.

Assets acquired with view of Disposal:

Non current assets acquired with view to subsequent disposal are classified as held for disposal at acquisition date if:

- One year criteria is met

- It is highly probable that any other criteria not met at that date will be met within three months.
Events after the reporting period:

 Assets are not classified as held for sale if held for criteria not met at the end of reporting period
 However, if the criteria are met before the financial statements are authorized for issue, the notes to the account should
disclose the facts and circumstances.

Example 2:

Assume all criteria are met, explain which of the events and transactions in example one give rise to the classification of
non current assets held for sale as at 31 December 2015.
Answer:

Dhoondoo fleet classified as held for sale because it constitutes as group of assets to be sold in their present condition
and sale is highly probable at reporting date.

Bobee sale of retail business will not be completed until the final terms are agreed, however the business is ready for
immediate sale and the sale is highly probable unless other evidence after the reporting date, before the financial
statements are authorized for issue comes to light to indicate the contrary.

Emo shares are not available for immediate sale as shareholders approval is required, taking this into account sale is not
highly probable there fore it can not be classified as held for sale.

Shazee supermarkets are not available for immediate sale at the reporting date. As the shareholders approval was
required. The held for sale criteria not met therefore it can not be recorded as held for sale.
Abandon Non current Assets:

An asset which is to be abandoned can not be classified as held for sale. However a disposal group which is to be
abandoned is treated as discontinued operation. When it ceases to be used. Provided that definition of discontinued
operation is met.

Non current assets or disposal groups to be abandoned include those which are to be:

- Closed rather then used and

- Used to the end of their economic life.

An organization does not account for a non current asset which has been temporarily taken out of use as it had been
abandoned.

Measurement:

Held for sale non current asset are carried at lower of

1.Carrying amount and

2.Fair value less cost to sell
Time Value:

If sale is expected to occur beyond one year, costs to sell are discounted to their present value

Subsequent measurement:

Assets and liabilities in disposal group are measured in accordance with applicable IFRSs before the fair value less cost to sell of
the disposal group is re measured.

Impairment Losses:

Impairment losses for initial or subsequent fair value less cost to sell must be recognized.

Depreciation:

Held for sell non current assets are not depreciated.

IFRS 15 Revenue Recognition from Contract with customers

IFRS 15 revenue from contracts with customer outline the five steps to
recognise the revenue which are as follows:

 Identify the contract with customer

 Identify the separate performance obligation
 Determine the transaction price
 Allocate the transaction price to the performance obligation
 Recognize revenue when or as a performance obligation is satisfied.
Identify contract with customers:

Contract:
An agreement between two or more parties that creates enforceable
rights and obligations, contracts can be written, verbal or implied based on
an organisation’s customary business practices.

The revenue recognisation principle of IFRS 15 apply only when a contract

meet all of the following criteria:

1. The parties to contract approved the contract

2. The organisation can identify each party rights and obligation regarding
the goods or services in the contract.
3. The payment terms are identified
4. The contract has commercial substance
5. It is probable that entity will get the economic inflows from the
contract
Identify performance Obligation:

Performance obligation: it’s a promise to transfer to customer

 A goods or service
 A series of goods or service that are substantially the same and are
transferred in same way

However if promise to transfer good or service is can not be differentiate

from each other in the contract, then the goods or service will be combined
in to single performance obligation.

A good or service is same if both of the following criteria are met:

 The customer can benefit from good or service on its own or with
combined with customer available resources.
 The promise to transfer good or service is separately identifiable from
other good or service in the contract.
A good or service is not separately identifiable if:

o Goods or service is not integrated with other goods or service in the

contract
o Does not modify or customise another good or service in the contract.
o Does notdepend on other goods or services promised in the contract
Determine the transaction price:

Transaction Price: the amount of consideration to which an organisation is

entitled in exchange for transferring goods or services.

 The transaction price does not include the price collected for third
parties for example Sales tax or VAT.
 The effects of the following must be considered when determing the
transaction price:
o The time value of money
o The fair value of any non cash considerations
o Estimates of variable consideration
o Consideration payable to the customer.

Consideration payable to the customer is treated as reduction in

transaction price unless the payment is for good or services received from
the customer.
Example:

On 1 january 2015, Benzee sold car to a customer for $ 4000 with three years interest free
credit. The customer took delivery of the car on 1st january 2015. the amount $4000 is
payable to Benzee on 31st december 2017. Benzee’s cost of capital is 8%
Required:
Determine the transaction price for the sale of the furniture and calculate interest income
to be recognized over three years
Solution:

($4000 x 1/1.08^3)=3175$

Interest income will be recognised as follows:

2015: $3175 x 8%= 254

2016: 3175+254 x 8%= 274
2017: ( $3175+$254+$274)x8%= 297
Allocation of Transaction Price:
The transaction price is allocated to the all separate performance
obligations in proportion to the stand alone selling price of the goods or
services.

Stand alone selling price:

The prce at which organisation would sell promised good or service

separately to customer.

The best evidence of the stand alone selling price is the observable price
of good or service when it is sold separately

The stand alone selling price should be estimated if it is not observable

The allocation is made at the start of the contract and there will be no
adjustment need to be made for subsequent changes made in the stand
alone selling price of the good or service
Example:

Mayoo enter into contract with customer to transfer software licens, perform
installation and provide software update and technical support for five years in
exchange for $240000.
Mayoo has determined that each good or service is seprate performance
obligation. Mayoo sells the license, installation, updates and technical support
separately, so each has a directly observable stand alone selling price
Software installation $150000
Installation service $60000
Software update $40000
Technical update $50000
========
$300000
=========

Required:
Allocate the $240,000 transaction price to the four performance obligations.
Solution:

Software solution 240000 x 150/300 = 120000

Installation service 240000 x 60/300= 48000
Software updates 240000x 40/300= 32000
Technical support 240000x 50/300= 40000
========
Total 240
========
Revenue Recognition:
 Recognise revenue when or a performance obligation is satisfied
transfering performance a promised good or service (an asset) to the
customer
 A asset is trandferred when customer gets the control of the asset
 The organisation must determine that performance obligation is
determine at point in time or overtime.
Performance obligations

Satisfied over time:

A performance obligation is satisfied over time if one of the following criteria
is met:
 The customer recieves and consumes the benefits from the organisation ‘s
performance as organisation’s performs for example monthly payroll
processing service
 The organisation’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced for example work in
progress asset.
 The organisation’s performance doesnot create asset with alternative use
to the organisation and the organisation has an enfoceable right to
payment for performance completed to date for example construction
contract
 Revenue is recognised over time by measuring progress towards complete
satisfaction of the performance obligation.
 Output and input can be used towards measuring progress
 Revenue for performance obligation satisfied over time can only be
recognised if the organisation can make reasonable estimate of progress
 Revenue is recognised to the extent of the costs incurred if there is no
reasonable estimate of progress, but organisation expects to cover its
cost.

Satisfied at point in time:

o A performance obligation which is not satisfied over time is satisfied

point in time
o Revenue should be recognised point in time when customer posses the
control of the goods
o Indicator of transfer of goods include:
 The customer has obligation to pay for an asset
 The customer has legal tittle to the assset
 The organisation has legally transferred the asset to customer
 The customer has significant risk and rewards of the asset
 The customer has accepted the asset.
Presentation of statement of financial position:

A contract asset or contract liability should be presented in sofp when either

party is performed in the contract.

Contract liability: An obligation to transfer goods or

services to a customer for which the entity has received
consideration from the customer or consideration is due
from customer that is consideration pays or owes from the
customer before organisation performs

Contract Asset: an organization right to receive consideration

in exchange for the goods or services provided that means
organization has complete the task before consideration
received.
In addition any unconditional right to consideration should be presented
separately in recievable according to IFRS 9

Example:

On 1st april Mika entered into non cancellable contract with Charlie for the
sale of an machinery for $350,000. the machinery will be delivered to
Charlie on 1st June. The contract requires Charlie to make payment on 1st
may but Charlie makes the payment on 1st June.
Required:
Prepare the journal entries make by the Mike to account for this contract
Solution:

On 1st May Mika recognise a recievable as it has an non cancellable right to

consideration

Receivable Dr 350,000
Contract Liability Cr $350,000

On 1st June Charlie Make a payment , Mika recognise the cash collection:

Cash Dr $350000
recievable Cr 350000

On 1st July Mike will recognise the revenue when machinery is delivered to
Mika

Contract liability Dr $350000

Revenue Cr $350000
Example ( Contract Asset and recievable)

On 1st April Mika enters into contract with Charlie for the sale of two
machinery for $350000 each. The contract requires 1st machinery to be
delivered on 1st May and payment of the first machinery is conditional on the
delivery of second machinery. The second machinery is delivered on 1st
September.
Required:
Prepare the journal entries that would be require by Mika to account for this
contract.
Solution:

On 1st may , Mika recognises a contract asset and revenue when it

satisfied the performance obligation to deliver first machinery:

Contract Asset Dr $350000

revenue Cr $350000

A receivable is not recognised on 1st may as it has no unconditional

right.

On 1st September when it satisfies the condition receivable will is

recognised:

Receivable Dr 700000
Contract asset Cr 350000
Revenue Cr 350000
Measuring Progress towards completion:

Output method recognise revenue on the basis of the value to the

customer of goods or services transfers to date relative to the remaing
goods and services promised.

Example:
 Units produced or delivered
 Milestone achieved
 Appraisals of result achieved
 Surverys of performance completed to date
 Time elapsed.

The value of the work certify is use to measure of the degree of

completion so that revenue can be recognised in profit or loss.
Input methods:

Input method recognise revenue on the basis of the organisation’s efforts

or inputs to the satisfaction of the performance obligation relative to the
total expected output.

Examples:
o Cost incurred
o Resources consumed
o Time elapsed
o Labor hours worked

Revenues can be recognised on straight line basis if inputs are used evenly
throughout the performance period.
Example:

Samba Beauty center enters into a contract with a customer for unlimited
Beautician services through out the year for $5000the beauty center
determine that as customer receive and consume the services throughout
the year the contract performance obligation satisfies over time.

So now revenue will be recognised $5000/12= $416.67 per month.

Cost recognition:
Cost recognise in the same way proportion was applied to the
revenue recognition. Except for the following:

1. Abnormal cost for example rectification process in the

production of goods or providing services. It will be expensed in
P&L simple and easy
2. Input cost that are not proportionate to the construction
process

If incurred cost is not proportionate to the progress in the

satisfaction to the of the performance obligation that cost shall not
be excluded in the when measuring progress of the contract. Such
cost should be excluded from the measuring progress of the
contract
Cheeko building a residential apartments building , last year
cheeko entered into contract with a customer for specific unit
which is under construction. Cheeko has determined that the
contract is single performance obligation satisfied over time.
Cheeko gathered following information related to the contract for
the year:

Cheeko Company year ended 31 December

Cost to date $1500

Future expected cost $1000
Work certified to date $1800
Expected sales value $3200

Revenue taken in earlier periods $1200

Cost incurred in earlier date $950

Requuired:
Calculate the figures to be included in statement of profit or loss
related to revenue or cost for the year ended 31 dec on both:
1. A sale basis ( input method)
2. A cost basis (output method)
Solution: Measure of progress towards completion
Total expected profit
Sale Basis
$ 1800/3200=56.25%
Revenue 3200
Less: contract cost to
Date (1500)
Cost Basis
Less: Future expected
Cost (1000) 1500/2500=60%
Profit 700

Sale basis cost basis

Revenue to date 3200x.56.25%= 1800 3200x60%= 1920
Revenue last year 1800-1200= 600 last year 1920-1200= 720

Cost of sales
to date 2500x56.25%= 1406 2500x60%=1500
Cost of sales
Last year 1406-950= (456) 1500-950= (550)
Profit cocccccccc
144 170
Recognition of Contract Costs

Incremental cost of obtaining contract: costs to obtain a contract

that would have not been incurred if contract was not obtained

 The incremental cost of obtaining a contract, such as sales

commissions, are recognised as an asset if the entity expects to
recover them.
 Costs to obtain the contract that would have been incurred
regardless of whether the contract was obtained are charge to
expense when incurred
Example:

Pepper enters into a contract with customer to transfer a

computer software license, perform installation and provide
software updates and technical support for three years for
$240000

Pepper Incurred the following cost:

Legal fees $10000

Comission to sales employee $12000
Cost to deliver proposal $20000
Total
42

Determine which cost should be recognised as an asset and which should

be expensed.
Answer

Assuming developer will recover the cost of legal fees and sales
commission it would be recognissed as an Asset.
While the traveling cost will be expensed as it would have been
incurred if contract was not obtained.
Cost to fulfill a Contract:

Cost incurred to fulfill a contract that are not within the scope of any
other standard should be recognised as an asset if they meet all of the
following criteria:

 Cost will increase the economic benefits for the organisation

 Cost are expected to recovered
 Costs are directly to contract

Costs that must be expensed when incurred include:

o Cost of wasted material, labor and other resources

o Costs that related to satisfied performance obligations
o General and administrative costs
CoCo enters in to contract with a customer to transfer a computer
software license, perform installation and provide software updates and
technical support for three years in $300000. in order to fulfill the
technical portion of the project, Coco purchases an additional work
station for the technical support team. For $8000 and assigns one
employee to be primarily responsible for providing customer a technical
support. This employee also provide services to other customers. The
employee is paid an annual salary of $ 30000 and is expected to spend
10% of his time supporting this customer.

Req:
Determine which cost should be recognised as an asset and which
should be expensed.
The work station cost should be recognised as an asset Under IAS 16
PPE.
While employee cost will be recognised as an expense in P&L. as
employee is already working for Coco and not specific to contract
also Coco have no control over employee.
Principle Vs Agent:
When organisation use another party to provide goods or services to
a customer, the organisation need to determine whether it is acting
as principal or agent.

Prinicipal:
The organisation controls the good or service before it is transferred
to customer and their revenue is gross consideration

Agent:
The organisation arranges for another to provide good or services
and their revenue is sales commission.

Following are the indicators organisation is an agent and does not

control the good or service before it is provided to customer include:
 The organisation is not exposed to credit risk
 The consideration is in the form of comission
 The organisation does not have inventory risk
 The organisation does not have the discreation in establishing for
the other party ‘s good or services
 Another party is responsible for fullfilling the contract.

Repurchase agreement:

A contract in which entity sells an asset and also promises or has

option to repurchase the asset

There are three types of repurchase agreement:

1. An organisation’s obligation to repurchase the asset at the

customer request (put option)
2. An organisation’s right to repurchase the asset (call option)
3. An organisation obligation to purchase the asset ( a forward)
Forward Or Call Option:

When an organisation has an option or right to re purchase an asset, the

customer does not obtain control of the asset and organisation account
for the contract as either:

 A lease if entity or must have to repurchase the asset lower then its
selling price
 A financing agreement if organisation can or must have to repurchase
asset equal to or higher than it original selling price.
 If repurchase agreement is financing agreement then organisation
will
 Continue to recognise asset
 Recognise as interest expense, which increases the financial liability,
equal to the difference between amount of consideration received
from the customer and the amount of the consideration to be paid to
the customer
 Recoginse financial liability for any consideration received from the
customer.
At the time of recognising the liability it will be:

Cash Dr xxx
Financial liability cr xxx

at the time of recognising interest expense it will be:

Interest expense Dr xxx
Fiancial liability Cr xxx

At the time of derecognising the liability it will be:

Financial liability Dr xxx

Revenue Cr xxx
Put option:

If any entity has the option to repurchase the asset at the customer’s
request for less than the original price, the entity account for the
contract as either:

 A sale with the right of return if the customer does not have
significant economic incentive to exercise the right
 A lease, if the customer has the significant economic incentive to
exercise the right.

If the re purchase right is equal to or greater than the original selling

price, the organisation account for the contract as either:

o A fiancing agreement if the re purchase price is more than the

expected market value of the asset.
o A sale with right of return, if the repurchase price is less than or
equal to the expected market value of the asset and the customer
does not have the significant economic incentive to exercise the
right.
Bill and hold arrangement:

A contract in which organisation bills a customer for a product that has

not yet delivered to a customer

 Revenue can not be recognised in a bill an hold arrangement until

control is transferred to organisation
 Generally, control is transferred to a customer when product is
delivered to customer
 In bill and hold arrangement, customer considered to obtain the
control when all of the conditions will be met.
 There must be strong reason for bill and hold arrangement for
example customer asked to hold the product because of storage issue
 The product has been separately identified as belonging to the
customer
 The product is currently ready for the transfer to the customer
 The organisation can not use the product or send it to another
customer.
Consignments:
When an entity delivers it products to a dealer or distributor for sale to
end customers, the entity needs to determine whether contract is a sale
or consignment arrangement

Sale:
The dealer or distributor obtained the control of the product

Recognise the revenue when the product is shipped or dilevered to the

dealer or distributor (depends on the terms and conditions of contract)

Consignments:
When the dealer or distributor does not obtained the control of the
product
Recognise the revenue when the dealer or distributor sells the
product to customer , or when dealer or distributor obtains the
control of product.
Following are the indicators of consignment arrangement:

 The organisation controls the product until the a specified event

occurs, for example sale of product or specified period expires
 The organisation can require the return of the product or transfer
the product to another party.
 The dealer does not have the unconditional obligation to pay the
entity for the product. ( though it might be required to pay the
deposit.
 IFRS 16 Leases

Lease

Definition:

A contract that gives the right to use an asset for a period of time in exchange for consideration

IFRS 16 gets rid of the operating lease, so now every lease shows the liability.

Now let’s see more detail.

To find out either transaction is lease or not there is 3 tests to see.

1. The asset must be identifiable

This can be explicity – Its in the contract

Or Implicitly – the contract only makes sense by using only particular asset
There is no Identifiable asset if the supplier can substitute the asset and would benefit from doing
so

2. The customer must be able to get substantially all the benefits while it uses it

3. The customer must be able to direct how and for what asset is used

Example:

A contract gives Mr A exclusive use of a specific car

MR A can decide when to use it and for what
The car supplier can not substitute / change the car

So does the contract contain a lease?

Does it pass the 3 tests?

Yes the car is explicitly reffered to and the supplier can not substitute the car
2. Does the customer have substantially all the benefits during the period?

Yes

3. Does the customer direct the use ?

Yes he can use it for whatever and whenever he choose

So this contract contains a lease because………

A contract that give right to use an asset for period of time in exchange for consideration

Example:

A contract Give Miss S exclusive use of Airoplane

She can decide when it flies and what she fly (passenger or cargo)

The airplane supplier though operates it using its own staff

he airplane supplier can substitute the airplane for another but it must meet specific conditions and
would, in practice, cost a lot to do so

So does the contract contain a lease?

Does it pass the # tests?

he airplane supplier can substitute the airplane for another but it must meet specific conditions and
would, in practice, cost a lot to do so
So does the contract contain a lease?

Is there an Identifiable asset?

Yes the airplane is explicitly referred to and the substitution right is not substantive as they would
incur significant costs

Does the customer have substantially all benefits during the period?
Yes it has exclusive use
Does the customer direct the use?

Yes the customer decides where and when the airplane will fly

So, yes this contract contains a lease because it's...

A contract that gives the right to use an asset for a period of time in exchange for consideration

Lessee Accounting

Basic Rule:

Lessees Recognise a right to use asset and associated liability on its sofp for most leases
How to Value the Liability
Present value of the lease payments

where the lease payments are:

1.Fixed Payments
2.Variable Payments (if they depend on an index / rate)
3.Residual Value Guarantees
4.Probable purchase Options
5.Termination Penalties

How to Value the Right of Use asset?

Includes the following:

1.The Lease Liability (PV of payments)

2.Any lease payments made before the lease started
3.Any Restoration costs (Dr Asset Cr Provision)
4.All initial direct costs
After the initial Measurement – Asset

Cost - depreciation (normally straight line) less any impairments

Any subsequent remeasurements of the liability

After the initial Measurement – Liability

Effective interest rate method (amortised cost)

Any remeasurements (e.g. residual value guarantee changes)

Example

Abc co. Enters into 3 years lease term

Annual lease rentals in Arrears $5000
Rate Implicit in Lease 12.04%
P.V of lease payments 12000
Solution:

The lease liability is initially the PV of future lease payments - given here to be 12,000
Double entry: Dr Asset 12,000 Cr Lease Liability 12,000
The Asset is then depreciated by 4,000pa (12,000 / 3)
The lease liability uses amortised cost:

Opening Interest 12.04% Payment Closing

12000 1445 (5000) 8445
8445 1017 (5000) 4463
4463 537 (5000) 0
Example - Variable lease payments (included in Lease Liability)
(Remember only include those linked to a rate or index)
So the lease contract says you have to pay more lease payments of 5% of the sales in the shop you're
leasing - should you include this potential variable lease payment in your lease liability?
Answer
No - because it is not based on a rate or index
(They are just put to the Income statement when they occur)

Example

ABC company enters into 10 year Lease contract:

500 payable at the start of every year
Increased payments every 2 years to reflect the change in the consumer price index
The consumer price index was 125 at the start of year 1
The consumer price index was 130 at the start of year 2
The consumer price index was 135 at the start of year 3
(so these are variable payments based upon an index / rate)
Solution:

Start of year 1

Asset Dr 500 Cash Cr 500

Asset Dr 4500 Lease liability Cr 4500 (9 x 500)

End of year 2

Asset will be 5000 – 1000 straight line depteciation =$4000

Lease liability will be 8 x 500 = $4000

End of year 3:

Lease payments are now different – 500 x 135/125 = 540

So the lease liability will be 7 x 540 = 3,780
Asset will be 4,000 - 500 (depreciation) + 280 (remeasurement of Liability) = 3,780
(Please note that this example ignored discounting - which would normally happen as the liability
is measured as the PV of future payments)
Variable payments that are really fixed payments
These are included into the liability as they're pretty much fixed and not variable
e.g. Payments made if the asset actually operates (well it will operate of course and so this is
effectively a fixed payment and not a variable one)

Exemptions to Leases treatment

So now we know that all lease contracts mean we have to show
1.A right to use Asset
2.A Liability
So remember we said there was no longer a concept of operating leases - all lease contracts
mean we need to show a right to use asset and its associated liability
Well.. there are some exemptions..

Exemption 1 - Short Term Leases

These are less than 12 months contracts (unless there's an option to extend that you'll probably
take or an option to purchase)
Treat them like operating leases
Just expense to the Income Statement (on a straight line / systematic basis)
Each class of asset must have the same treatment
This exemption ONLY applies to Lessees
Exemption 2: Low Value Assets
e.g. IT equipment, office furniture with a value of less than $5,000
Treat them like operating leases
Just expense to the Income Statement (on a straight line basis)
Choice is made on a lease by lease basis
This exemption ONLY applies to Lessees

Measurement Exemptions:

Exemption 1: Investment property

If it uses the fair value model in IAS 40

Measure the property each year at Fair value

Exemption 2: PPE

If revaluation model is used

Use revalued amount for asset

Exemption 3: Portfolio Approach

Portfolio of leases with Similar characteristics

Use same treatment for all leases in the portfolio

Sale and Lease Back:

Let’s have a little ponder over this before we dive into the details…
So - the seller makes a sale (easy) BUT remember also leases it back - so the seller becomes the
lessee always, and the buyer becomes the lessor always
Seller = Lessee (after)
Buyer = Lessor (after)
However, If we sell an item and lease it back - have we actually sold it? Have we got rid of the risk and
rewards?
So the first question is..
Have we sold it according to IFRS 15? (revenue from contracts with customers)

Option 1: Yes - we have sold it under IFRS 15

This means the control has passed to the buyer (lessor now)
But remember we (the seller / lessee) have a lease - and so need to show a right to use asset and a lease
liability
Step 1: Take the asset (PPE) out
Dr Cash
Cr Asset
Cr Initial Gain on sale
Step 2: Bring the right to use asset in
Dr Right to use asset
Cr Finance Lease / Liability
Dr/Cr Gain on sale (balancing figure)
How much do we show the Right to Use asset at?
The proportion (how much right of use we keep) of our old carrying amount
The PV of lease payments / FV of the asset x Carrying amount before sale
How much do we show the finance liability at?
The PV of lease payments

A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000 and FV
1,800
The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears.
The interest rate implicit in the lease is 4.5%, which results in a present value of the annual
payments of 1,459
The transfer of the asset to the buyer-lessor has been assessed as meeting the definition of a
sale under IFRS 15.
Notice first that the seller received 200 more than its FV - this is treated as a financing
transaction:
Dr Cash 200
Cr Financial Liability 200
Now onto the sale and leaseback..
Step1: Recognise the right-of-use asset - at the proportion (how much right of use we keep)
of our old carrying amount
Old carrying amount = 1,000
How much right we keep = 1,259 / 1,800 (The 1,259 is the 1,459 we actually pay - 200 which
was for the financing)
So, 1,259 / 1,800 x 1,000 = 699
Step 2: Calculate Finance Liability - PV of the lease payments
Given - 1,259
So the full double entry is:
Dr Cash 2,000
Cr Asset 1,000
Cr Finance Liability 200
Cr Gain On Sale 800
Dr Right to use asset 699
Cr Finance lease / liability 1,259
Dr Gain on sale 560 (balance)
Option 2: It's not a sale under IFRS 15
So the buyer-lessor does not get control of the asset
Therefore the seller-lessee leaves the asset in their accounts and accounts for the cash
received as a financial liability.
The buyer-lessor simply accounts for the cash paid as a financial asset (receivable).
 IAS 21 Foreign Currency Transactions

A company may engage in foreign currency operations in two ways:

1. Entering directly into transactions which are denominated in foreign currencies.
2. Conducting foreign operations through a foreign entity (subsidiary or associate).
Resultant transactions and balances must be translated into the presentation currency of the entity for
inclusion in financial statements.

Issues:

-Exchange rate to be used for translation.

- Treatment of exchange differences (which arise because exchange rates vary over time).

Scope:

- IAS 21 The Effects of Changes in Foreign Exchange Rates

is applied:
- to account for transactions in foreign currencies; and
- to translate the financial statements of foreign operations that are included in the financial
statements of the entity by consolidation or by the equity method.
Functional currency: the currency of the primary economic environment in which the entity operates.
Presentation currency: the currency in which the financial statements are presented.
Foreign currency: a currency other than the functional currency of the entity.
Closing rate: the spot exchange rate at the end of the reporting period.
Monetary items: money held and assets and liabilities to be received or paid in fixed or determinable number of units
of currency.
Spot exchange rate: the exchange rate for immediate delivery.

Functional Currency:

The functional currency of an entity is dictated by the primary economic environment in which the entity operates.

- An entity should consider the following in determining its functional currency:

- The currency that mainly influences the selling price of goods or services and the currency of the country whose
regulations mainly determine the selling price of goods and services.
-The currency that affects labour, material and other costs of providing goods and services.
- Secondary factors to consider in determining the functional currency are:
- the currency in which funds from financing activities are generated; and
- the currency in which monies from operating activities are kept.
- The following factors are also to be considered in determining the functional currency of a foreign operation and whether
that currency is the same as the reporting entity:
-Are transactions carried out as an extension of the reporting entity or does the foreign operation carry out its activities
with a significant degree of autonomy?
-Are transactions between the reporting entity and foreign operation a high percentage of total transactions?
Once a functional currency has been identified, it should only be changed if there is a change to the economic climate in
which it was initially identified.

Presentation company:

-The functional currency of most entities will also be the presentation currency.
- However, an entity may choose to present its financial statements in a currency other than its functional currency.
- If an entity chooses to present in a different currency it will need to translate its financial statements each year in
accordance with IAS 21.

Initial Recognition
- A foreign currency transaction is initially recorded in an entity's functional currency using the spot exchange rate
on the date of the transaction

Exchange differences arising on settlement of a foreign currency transaction in the same reporting period must be
recognised in profit or loss for the period

Subsequent Recognition:

At the end of each reporting period, any foreign currency monetary item must be retranslated using the closing exchange
rate.
- Exchange differences arising on retranslation of a foreign currency balance are recognised in profit or loss for the period.
- Non-monetary items measured at historical cost are translated at the exchange rate at the date of the transaction.
- Non-monetary items measured at fair value are translated using the exchange rate when the fair value was measured.
 Transaction during the year

Actual rate at the transaction took place (Historical rate)

Balances at the year end Transaction during the year

Monetory Non
items monetory
Items
Re translate
at year end No re
translation so
using no exchange
closing rate rate
differences
 Exchange
differnce arise Exchange difference
at the year end will arise during year

All exchange differences on settled and un settled transactions go through profit or

loss with some exceptions
Example:

Moiz has a year end of 31 December. On 25 October, Aston bought goods from a Mexican supplier for 286,000 pesos.
The goods were still in inventory at the year end.
Exchange rates Pesos to $
25 October 11.16
16 November 10.87
31 December 11.02
Required:
Show the accounting entries for the transactions in each of the following situations:
(a) on 16 November, Aston pays the Mexican supplier in full;
(b) the supplier remains unpaid at the year end.
Solution
(a) Supplier Paid
$ $
25 October Dr Purchases (W1) 25,627
Cr Trade payables 25,627
16 November Dr Trade payables 25,627
Dr Profit or loss –
other operating expense 684
Cr Cash (W2) 26,311
The goods will remain in inventory at the year end at $25,627.
Workings
(1) peso 286,000 ÷ 11.16 = $25,627
(2) peso 286,000 ÷ 10.87 = $26,311
(b) Supplier Unpaid
$$
25 October Dr Purchases (W1) 25,627
Cr Trade payables 25,627
31 December Dr Profit or loss
– other operating expense 326
Cr Trade payables (W2) 326
The goods will remain in inventory at the year end at $25,627.
Workings
$
(1) peso 286,000 ÷ 11.16 25,627
(2) peso 286,000 ÷ 11.02 25,953
326
Example:

On 30 October, Bunny, a company with the dollar ($) as its functional currency, buys goods from Rubble for £60,000. The
contract requires Bunny to pay for the goods in sterling, in three equal instalments on 30 November, 31 December and 31
January.
Bunny's end of reporting period is 31 December.
Exchange rates
30 October $1.90 = £1
30 November $1.98 = £1
31 December $2.03 = £1
31 January $1.95 = £1
Required:
Prepare the journal entries that would appear in Barney's books in respect
of the purchase of the goods and the settlement made.
Solution:
US $000 US $000
30 October Dr Purchases 114,000
Cr Payables 114,000
Being purchase of goods from UK supplier for £60,000 translated at $1.90 = £1.
30 November Dr Payables 38,000
Dr Profit or loss 1,600
Cr Cash 39,600
Being settlement of £20,000 of balance outstanding translated at $1.98 = £1.
One third of the original payable balance has been settled (114,000/3).
31 December Dr Payables 38,000
Dr Profit or loss 2,600
Cr Cash 40,600
Being settlement of £20,000 of balance outstanding translated at $2.03 = £1.
A further one third of the original payable balance has been settled (114,000/3).
31 December Dr Profit or loss 2,600
Cr Payables 2,600
Being restatement of outstanding balance of £20,000 at $2.03 = £1.
31 January Dr Payables 40,600
Cr Cash 39,000
Cr Profit or loss 1,600
Being settlement of £20,000 of balance outstanding translated at $1.95 = £1.
 IAS 33 Earning per Share

Earnings Performance:
- Earnings per share (EPS) shows the trend of earnings performance for a company over the years.
- It is felt to be more useful than an absolute profit figure, which will not contain information about the increase in investment
which has been made in the period.
- Absolute earnings is not useful in comparing companies.

Scope:

IAS 33 applies to the separate financial statements of entities whose debt or equity instruments are publicly traded (or are in
the process of being issued in a public market).
- IAS 33 also applies to the consolidated financial statements of a group whose parent is required to apply IAS 33 to its
separate financial statements.
- An entity which discloses EPS must calculate and present it in accordance with IAS 33.

Definitions:

Ordinary share: an equity instrument which is subordinate to all other classes of equity instruments.
Equity instrument: any contract which evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Potential ordinary share: a financial instrument or other contract which may entitle its holder to ordinary shares. For
example:
- convertible instruments;
- share options and warrants;
- share purchase plans; or
- shares which will be issued subject to certain conditions being met.

Options, warrants and their equivalents: financial

instruments which give the holder the right to purchase ordinary shares.
Dilution: the reduction in EPS (or an increase in loss per share) resulting from the assumption that convertible instruments
are converted and that warrants/options are exercised (or that ordinary shares are issued) on the satisfaction of specified
conditions.
Anti-dilution: the increase in EPS (or a reduction in loss per share) resulting from the assumption that convertible
instruments are converted and options are exercised.
Contingently issuable ordinary shares: ordinary shares issuable for little or no cash or other consideration on the
satisfaction of specified conditions.

Earnings per Share (EPS)

Basic EPS
- An entity is required to present basic earnings per share for:
- profit or loss attributable to ordinary shareholders; and
- profit or loss relating to continuing operations attributable to those ordinary shareholders.
The basic EPS calculation is made by dividing the profit (or loss) relating to the ordinary shareholders by the weighted average
number of ordinary shares outstanding in the period.

Which Earnings?
- Basic earnings should be:
- the profit or loss attributable to ordinary shareholders; and
- the profit or loss relating to continuing operations attributable to the ordinary shareholders
- Adjusted for:
- post-tax effect of preference dividends (and other items relating to preference shares); and
- non-controlling interest.

Weighted Average Number of Shares

Rule
- The number of ordinary shares will be the weighted average number of ordinary shares outstanding during the period.
-The number in existence at the beginning of the period should be adjusted for shares which have been issued for
consideration during the period.
- Consideration may be received in a number of ways:
- issue for cash;
- issue to acquire a controlling interest in another entity; or
- redemption of debt.

In each case, earnings will be boosted from the date of issue. To ensure consistency between the numerator and denominator
of the basic EPS calculation, the shares are also included from the date of issue.
Therefore weight the number of shares:
Pro forma
Number

No before x 3/12 x

No after x 9/12 x
______
x
_______

Issues of Shares Where No Consideration

Is Received
- The weighted average number of ordinary shares outstanding during the period and for all periods presented should be
adjusted for events which have changed the number of ordinary shares outstanding, without a corresponding change
in resources. For example:
- bonus issues;
- bonus elements in another issue (e.g. a rights issue);
- share splits; and
- reverse share splits.

Treat as if the new shares have been in issue for the whole of the period.

-Multiply the number of shares in issue by the bonus fraction.

Bonus Issue:

Illustration:

Bonus Issue of 1 For 10:

Bonus fraction: 10 + 1
______ = 11/10
10

-The EPS will fall (all other things being equal) because the earnings are being spread over a larger number of shares.
This would mislead users when they compare this year's figure to those from previous periods.

The comparative figure and any other figures from earlier periods which are being used in an analysis must be adjusted. This
is done by multiplying the comparative by the inverse of the bonus fraction.

Illustration

Last year EPS x 10/11

Rights Issues
A rights issue has features in common with a bonus issue and with an issue at full market price. A rights issue gives a
shareholder the right to buy shares from the company at a price set below the market value. Thus:
- the company will receive a consideration which is available to boost earnings (like an issue at full price); and
-the shareholder receives part of the share for no consideration (like a bonus issue).
- The method of calculating the number of shares in periods when there has been a rights issue reflects the above.

A bonus fraction is applied to the number of shares in issue before the date of the rights issue and the new shares issued are
prorated as for issues for consideration.

-The bonus fraction is the cum-rights price per share divided by the theoretical ex-rights price per share ("TERP").

Illustration:

1 January Shares in issue 1,000,000

31 March — Rights issue 1 for 5 at 90c
— MV of shares $1 (cum-rights price)
Required:
Calculate the number of shares for use in the EPS
calculation. 1 January Shares in issue 1,000,000
31 March — Rights issue 1 for 5 at 90c
— MV of shares $1 (cum-rights price)
Required: Calculate the number of shares for use in the EPS
calculation.
Solution:

Shares

1 January – 31 March

1,000,000 x 3/12 x 1/0.9833 254237 Bonus Fraction = cum right price/TERP

1/0.9833

1st April – 31st December

1,200,000 x 9/12 900,000

_________
1,154,237
_________

Right Issue from Fraction

Shares @$ $
CUM 5 1 5
Rights 1 0.9 0.9
____ _____
Ex 6 5.9
____ _____
TERP 5.9/6 = 0.9833
For presentational purposes, in order to ensure consistency then comparative figure for EPS must be restated to account for
the bonus element of the issue. This is achieved by multiplying last year's EPS by the inverse of the bonus fraction.

Diluted Earnings per Share

Purpose
- Potential ordinary shares may exist whose owners may become shareholders in the future.
- If these parties become ordinary shareholders the earnings will be spread over a larger number of shares (i.e. they will
become diluted).
- Potential ordinary shares should be treated as dilutive only if their conversion to ordinary shares would decrease earnings
per share from continuing operations.

Convertible Instruments

Adjust the profit attributable to ordinary shareholders and the weighted average number of shares outstanding for the effects
of all dilutive potential ordinary shares.
- A new EPS is calculated using:
- a new number of shares;
- a new earnings figure.

New Number of Ordinary Shares

-This should be the weighted average number of ordinary shares used in the basic EPS calculation plus the weighted average
number of ordinary shares which would be issued onthe conversion of all the dilutive potential ordinary shares into
ordinary shares.
IAS 33 always presumes that the maximum number of ordinary shares is issued on conversion, so if conversion rights differ
over time always take the maximum number of shares which could be issued.
-Dilutive potential ordinary shares should be deemed to have been converted into ordinary shares at the beginning of
the period or, if later, the date of the issue of the potential ordinary shares.
- New number of shares:

Basic number x
No of shares which could exist in the future:
from the later of
— first day of accounting period
— date of issue x
____
x
______

New Earnings Figure

- This means adding back:
- any dividends on dilutive potential ordinary shares, which have been deducted in arriving at the profit or loss for the period,
attributed to ordinary shareholders;
- interest after tax recognised in the period for the dilutive potential ordinary shares; and
- any other changes in income or expense which would result from the conversion of the dilutive potential ordinary shares.
Example:

Convertible bonds
1 January Shares in issue 1,000,000 Profit for the year ended 31 December $200,000
31 March Company issues $200,000 6% convertible bonds
Terms of conversion:
100 shares/$100 if within five years
110 shares/$100 if after five years
Tax rate 33%
Basic EPS 200 000
1 000 000

= $0.20
Required:
Calculate diluted EPS.

Solution:
number of shares Profit
$
Basic Dilution 1,000,000 200000
Shares: 200000/100 x 9/12 165000
Interest $200000 x 6% x 9/12
X 0.67 6030
1165000 206030 EPS $0.1768
-When there has been an actual conversion of the dilutive potential ordinary shares into ordinary shares in the period, a
further adjustment has to be made.
- The new shares will have been included in the basic EPS from the date of conversion. These shares must then be included in
the diluted EPS calculation up to the date of conversion.

Options
- An entity should assume the exercise of dilutive options and other dilutive potential ordinary shares of the entity:
- the assumed proceeds from these issues should be considered to be received from the issue of shares at fair
value;
- the difference between the number of shares issued and the number of shares which would have been issued at fair
value should be treated as an issue of ordinary shares for no consideration.

Options will be dilutive only when they result in the entity issuing shares at below fair value; this usually will be when the
exercise
price is lower than the market price of the share.
- Each issue of shares under an option is deemed to consist of
two elements:
1. A contract to issue a number of shares at a fair value. (This is taken to be the average fair value during the
period.)
2. A contract to issue the remaining ordinary shares granted under the option for no consideration (a bonus issue).
Example:
1 January Shares in issue 1,000,000
Profit for the year ended 31 December $100,000
Average fair value $8
The company has in issue options to purchase 200000 ordinary shares
Exercise price $6
Required:
Calculate the diluted EPS for the period.

Solution:

Diluted EPS:
Number of shares Profit EPS
Basic 1,000,000 $100,000 $0.10
Dilution (W) 50,000
_________ _______ ______
1,050,000 100,000 $0.095
_________ _______ _______
Working
Proceeds of issue 200,000 × $6 1,200,000
Number that would have been issued at FV ÷ $8 = 150,000
Number actually issued 200,000
Number for "free" 50,000
EPS v Earnings
- Prior to 1960, the decision to report EPS, the manner in which it was calculated and where it was reported was left solely to
the discretion of company management.
- As expected, management chose to report performance in whole dollar earnings only, which tended to favour large
corporations over small companies. EPS became a reporting necessity to create a "level playing field" in performance
measurement comparability.
- EPS allows comparison between different-sized companies whereas, if only actual earnings were being compared, the
relative size of the company could not be taken into account.

Performance Measure
- The EPS figure is used by market analysts in the calculation of a company's price/earnings ( P/E) ratio. Great emphasis is
placed on this measure, which can have a significant effect on the way a company's share price moves.

The P/E ratio is also used by investors in assisting in their decisions to buy/hold or sell shares in a company.

Problems With EPS

-EPS is affected by a company's choice of accounting policy, so can be manipulated. It also means that comparisons with
other companies are not possible if different policies are being used.
EPS is a historical figure and should not be used as a prediction of future earnings. A high EPS figure could be
achieved through a lack of investment in new assets, but this will have a detrimental effect on future profits as lack
of investment will lead to companies falling behind their competitors.
EPS is a measure of profitability, but profitability is only one measure of performance.
- Many companies now place much higher significance on other
performance measures such as:
- customer satisfaction;
- cash flow;
- manufacturing effectiveness; and
- innovation.

Presentation
- Basic and diluted earnings per share (or loss per share, if negative) should be presented in the statement of profit or
loss and other comprehensive income for:
- profit or loss from continuing operations;
- profit or loss for the period; and
- each class of ordinary shares which has a different right to
share in the profit for the period.
- Basic and diluted earnings per share should be presented with equal prominence for all periods presented.
Additional EPS
- If an additional EPS figure using a reported component of profit other than profit or loss for the period attributable to
ordinary shareholders is disclosed, such amounts should be calculated using the weighted average number of ordinary
shares determined in accordance with IAS 33.
- A non-standard profit figure can be used to calculate an EPS in addition to that required by IAS 33 but the standard number
of shares must be used in the calculation.
- If a profit figure is used which is not reported as a line item in the statement of profit or loss, reconciliation should be
provided between the figure and a line item, which is reported in the statement of profit or loss.

Retrospective Adjustments
- If an EPS figure includes the effects of:
- a capitalisation or bonus issue;
- share split; or
- decreases as a result of a reverse share split;
then the calculation of basic and diluted earnings per share for all periods presented should be adjusted retrospectively.
- For changes after the end of the reporting period but before issue of the financial statements, the per-share calculations
for those and any prior-period financial statements presented should be based on the new number of shares.
- Basic and diluted EPS of all periods presented should be adjusted for the effects of errors and for adjustments resulting
from changes in accounting policies.
 IAS 36 Impairment

Impairment:

Sudden fall in the value of asset is known as Impairment

Impairment Loss:

The amount by which carrying amount of an asset exceeds its recoverable amount

Fair value:

The price which would be received to sell an asset or to transfer a liability in an orderly transaction between market
participants at the measurement date.

Recoverable amount:

The higher of fair value less cost to sell and value in use

Value in Use:

The present value of future cash flows expected to be derieved from an asset or cash generating unit
Cash generating unit:

The smallest identifiable group of assets which generate cash inflows that are largely independent of the cash inflows from
other assets or group of assets.

Basic rules for all assets:

At the end of reporting period an organization should assess whether there is any indication that an asset or cash generating
unit may be impaired. If there is any such indication, the organization should estimate the recoverable amount of asset.

If there is no indicators for impairment there is no need for organization to estimate a recoverable amount of asset.

Intangible assets:

In case of intangible assets, whether there is indication for impairment or not following intangible assets must be reviewed for
impairment annually:

o Goodwill acquired in business combination

o Those not yet available for use
o Those with an indefinite useful life.

The impairment test for these types of assets can be performed at any time in the financial year provided they are performed
at same time every year. The point to note here is that intangible assets which are amortised are tested at the end of reporting
period only.
Intangible assets with an indefinite life forms part of cash generating unit and can not be separated, that cash generated unit
must be tested for impairment at least once in year or whenever there is indication that cash generating unit may be impaired.

Indicators of impairment loss:

There are two types of indicators of impairment loss

- External indicators
- Internal indicators

External Indicators

 Increase in interest rates

 Increase in industry tax rates
 Recession
 Sudden fall in value of asset
 Technological change
 Change in fashion
 Adverse change in legal environment.
Internal Indicators:

 Physical damage to the asset

 Change in use of asset
 Cash flows for acquiring the asset is more then the budgeted
 Cash flows for maintaining the asset is more then the budgeted
Measurement of recoverable amount:

Recoverable amount

Higher of
Fair value less cost to sell Value in use

Recoverable amount is determined for an individual asset, unless

the asset does not generate cash inflows from continuing use which
are largely independent of those from other assets or group of
assets. If this is the case, recoverable amount is determined for the
cash generating unit for which the asset belongs.
Example

Recoverable amount is the greater of

Value in use Fair value less recoverable Carrying amount Comments

cost to sell amount is:
900 1050 1050 1000 No comments

900 980 980 1000 Impairment loss of $20 need

recognize and carrying value
to $980

960 925 960 1000 An impairment loss of $40

must be recognized and
asset carrying value to $960
It is not always necessary to determine both fair value less cost to sell and value in use
to determine asset recoverable amount.

- If any of these value exceeds carrying value that means there is no impairment and in
that case there is no need to calculate other value.
Fair value less cost to sell:

Fair value is assessed using the fair value hierarchy in IFRS 13 Fair value measurement

Definition:

Active Market:

A market in which transactions of the asset or liability take place with sufficient frequency and volume to provide pricing
information on an ongoing basis.

Cost of disposal:

Incremental costs directly attributable to the disposal of an asset, excluding finance cost income tax expense and cost
which has already been included as an liability for example:

- Cost of removing the asset

- Stamp duty
- Legal costs.
Example:

Meez operates in leased primises. It owns a glass plant which is situated in a single factory unit. Glass plants are sold
periodically as complete assets.

Professional valuers has estimated that the plant might be sold for $100000. they have charged fee of $1000 to providing these
services.

Meez would need to dismantle the asset and ship it to any buyer. Dismetaling and shiping would cost $5000. specialist
packaging would cost $4000 and legal fees of $1500

Fair value less cost to sell

$
Sale price 100000
Dismantling and shipping (5000)
Packaging (4000)
Legal fees (1500)
___________
89500
____________
Value in Use:

Value in use is the present value of future cash flows expected to be derived from an asset. Estimating the value in use
includes:

o Estimating the future cash inflows and outflows to be derieved from continuing use of the asset and from its ultimate
disposal
o And applying the appropriate discount rate

Fair value would not reflect the following factors:

o Additional values derived from the grouping of assets

o Legal rights or restrictions specific to the current owner of the asset
o Synergies between the asset being measured and other assets.
o Tax benefits or burdens specific to the current owner of the asset.
Example:

Rcg holds a patent on medicine drug. The patent expires in five years. During this period demand for the drug is
forecast to grow at 5% per annum.
Experience shows that competitors flood the market with generic versions of profitable drug as soon as it is no
longer protected by patent to generate significant cash flows after five years.

Net revenues from the sale of the drug were $100 million last year.

The organization has decided that 15.5% is the appropriate discount rate for the appraisal of cash flows
associated with this product:

Time Cash flow Discount factor Present Value ($m)

m @15.5%

1 100 x 1.05 = 105 0.865 91

2 100 x 1.052 = 110.3 0.749 83
3 100 x 1.053 = 115.8 0.649 75
4 100 x 1.054 = 121.6 0.561 68
5 100 x 1.055 = 127.6 0.486 62
Value In use _______
379
__________
Cash flow projections:
Projections should be based on reasonable and supportable assumptions which represent management’s best estimate of
the set of economic conditions which will exist over the remaining useful. Greater weight should be given to external
evidence.

They should be based on most recent financial budgets/ forecast approved by management.

Projection based on these budgets should cover maximum period of five years, unless longer period can be justified.

The growth rate should not exceed the long term average growth rate for the products, industry or countries or countries in
which the organgisation operates or for the market in which asset is used, unless a higher rate is justified.

Estimate of future cash flows should include:

- Projected cash flows including disposal proceeds

- Projected cash outflows which are necessarily incurred to generate the cash inflows from continuing use of the asset.

Estimate of future cash flows should not include:

o Cash flows relating to imporovement or enhancement of assets performance

o Cash inflows and outflows from financing activities
o Cash outflows required to settle obligations which have already been recognized as liabilities
o Cash flows which are expected to occur due to future restructuring which are not yet confirmed.
Discount Rate:

The discount rate is pre tax rate which reflects current market assessment of:

- The time value of money

- The risk specific to the asset

Example:

ZeeSha is testing a machine, which makes a product called CASA, for impairment Zeesha has gathered the following information
in respect of the machine

$
Selling price of CASA 100
Variable cost of production 70
Fixed overhead 10
Packing cost per unit 1

All costs and revenue expected to inflate at 3% per annum

Volume growth is expected to be 4% per annum. Last year 1000 units were sold. This is in excess of the long term growth in the
industry ZeeSha’s management has valid reasons for projecting this level of growth.
The machine originally cost $400000 and was supplied on credit terms from another group organization Zeesha is charged
$15000 interest per annum on this loan.
Further expenditure:
In two years time, the machine will subject to major servicing to maintain its operating capacity. This will cost $10000

In three years time the machine will be modified to improve its efficiency. This improvement will cost $20000 and will
reduce unit variable cost by 15%.

The asset will be sold in eight years time. Currently the scrap value of machines of similar type is $10000.

All values are given in real terms to exclude inflation.

Required:

Identify which cash flows should be included and excluded in the calculation of value in use of the machine and explain
why?
Answer:

Net revenue will be included as this is a variable cash flow 100 – 70 – 1 = 29 in the first year will be inflated by 3%

Fixed overhead will be excluded as this is the sunk cost and not relevant to the cash flows. It will be incurred if company use
machine or not that’s why its irrelevant.

Management expects to increase the volume by 4% each year and this volume should be incorporated in the calculation for five
years after this IAS 36 prohibit the use of management growth rate that exceeds the industry average. Inn the above of further
information zero growth will be assumed.

Capital cost of machine will be excluded as this is sunk cost and therefore it is irrelevant.

Depreciation will be excluded as it is notional and not a cash flow.

Loan interest will be excluded as IAS 36 states that cash flows ignore financing costs.

Major servicing will be included as this is necessary to maintain operating capacity. This current value need to inflated for two
years inflation adjustment.

Machine Modification will be excluded as this is a enhancement cost and its not related to the present condition of the asset.
The resulting savings in variable cost will also be exclude.

Scrap proceeds will be included as this is future cash flow relating to the asset as this amount is a current value and it will need
And it will need to be inflated to a future value reflecting the expected cash flow in eight years time.
Cash Generating Unit:

When asset has more then one component and every small component of organization helps organization to generate the
revenue this is known as cash generating unit for example restaurant.

Basic concept:

If there is any indication that asset is impaired the recoverable amount must be estimated for individual asset.

However it may not be possible to estimate the recoverable amount of an individual asset because:

- Its value in use can not be estimated to close to its fair value less cost to sell for example when the future cash flows from
continuing use of the asset can not be estimated to be negligible.
- It does not generate cash inflows which are largely independent of those from other assets
- In this case recoverable amount of the cash generating unit to which asset belong must be determined.
- Identify the lowest aggregation of assets which generate largely independent cash inflows may be a matter of considerable
judgement
- Management should consider various factors including how to monitor organisations operations for example product lines,
individual locations etc or how to make decisions about continuing or disposing of the organisations assets and operations.
- Some times it is possible to identify the cash flows from the main part of specific asset but these can not be earned
independently from other assets. In such cases assets can not be reviewed independently and must be reviewed as part of
cash generating unit.
- If an active market exists for the output produced by an asset or group of assets this asset or group of asset should be
identified as cash generating unit if some or all of output is used internally.

- Cash generated unit must be identified consistently from period to period for same asset or group of asset, unless change
is identified.

Example
Airport: Cash generating Unit

An organization operates an airport which provides services under contract with a government which requires a minimum
level of service on domestic routes in return for licence to operate in international routes.
Assets devoted to each route and the cash flows from each route can be identified separately. The domestic service operates
a significant loss.
Because the organization does not have the option to abandon the domestic service, the lowest level of identifiable cash
inflows are largely independent of the cash inflows from other assets or groups of assets are cash inflows generated by the
airport as a whole. This is therefore is a cash generating unit
Accounting for Impairment Loss:

If the recoverable amount is less then the carrying value of asset then impairment loss need to be recognized in statement of
profit and loss

After the impairement the carrying amount of the asset less any residual value is depreciated over its remaining expected
useful life

Allocation of impairment within cash generating unit:

The impairment loss should be allocated between all assets of cash generated unit into the following order:

 Write off good will allocated to cash generated unit if any

 Write off the asset completely which is completely damaged.
 Then remaining impairment should be allocated between other assets of the unit on pro rata basis, based on the carrying
value of each asset in the unit.
 While allocating the impairment loss the carrying value of the asset should not be reduced below the higher of

Fair value less cost to sell or Value in Use. In this scenario remaining impairment loss should be allocated to remaining
assets of the unit. On pro rata basis
Example:

At January Panda co paid $2800 for a company whose main activity consist of refuse collection. The acquired company owns
four refuse collection vehicles and a government license without which it could not operate

At January the fair value less cost to sell of each lorry and license is $500. the company has no insurance cover.

At 1st February one lorry crashed because of its reduced capacity the organization estimates the value in use of the business
at $2220

Required:

Show how the impairment loss is allocated to the assets of the business.
Answer:

Impairment loss

1 January Immpairment Loss 1st February

Goodwill 300 (80) 220

Intangible Business 500 - 500

Lorries 2000 (500) 1500

Reversal of Impairment:

In case of Goodwill impairment can never be impaired

In case of the assets if indicators of impairment not apply any longer impairment can be reversed.

In case of revaluation model. Impairment can be reversed up to the maximum to carrying value which asset had the time of
first time impairment.
 IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Before IAS 37 there was no standard which govern Provisions. And What companies use to recognize Provision is companies
good economy times and used to reverse them in bad economy times. As un settled liabilities are Income. This practice was
carried on by many companies Just to book Profits in bad economy time. This practice is exercise of creative accounting and
which is also known as cherry picking.

To stop this Practice IASB issued the standard IAS 37.

The objective of IAS 37 to ensure the appropriate recognition criteria and measurement basis applies to

o Provisions
o Contingent Liabilities
o Contingent Assets

To ensure sufficient information is disclosed in the notes to the financial statements in respect of each of these items

Definitions:

Provisions:

Provision is the liability of uncertain timing and amount

Liability:

A present obligation of the entity arising from the past events, the settlement of which is expected to result in an outflow from
the entity of resources embodying economic benefits

Obligating event:

An event which creates a legal or constructive obligation which results in an entity having no realistic alternative to settle down
that obligation.

Legal obligation:

An obligation which derives from:

- Contract
- Legislation
- Other operation of law

Constructive obligation:

An obligation which derives from an entity's action where:

- By an established pattern of past practice published statement, or suffieciently specific current statement. The organisations
has indicated to other parties that it will discharge those responsibilities
Contingent Liabilities:

A possible obligation which arises from an past events and whose existence will be confirmed only on the occurance or non
occurrence of one or more uncertain future events which are not wholly in the control of organization.

Contingent Asset:

A possible asset which arises from an past events and whose existence will be confirmed only on the occurance or non
occurrence of one or more uncertain future events which are not wholly in the control of organization

Onerous Contract:

A contract in which unavoidable cost of meeting the obligations under the contract exceed the economic benefits expected to
be received from it

Restructuring:

A plan which is planned and controlled by management and materially changes either:

- The scope of business undertaken by an organization

- The manner in which that business is conducted
Provisions:

provision must be recognized when following conditions have been met:

1. Present Obligation
2. Probable outflow
3. Reliable estimate

Example: A organization give warranties to the buyers of its product. Under the terms for
the contract of sale. The organization undertakes to make goods by repair or replacement,
manufacturing defects which apparent within five years of purchase from the date of sale.
Based on past experience it is probable that there will be some claims

In this scenario sale under warranties give rise to present obligation.

It provide for the best estimate of the cost of making goods under the warranty of goods
Sold by the end of reporting period
Example In wedding of 2015 20 guests got ill due to food poisoning from fppd catering of Duba cattering. After few
legal proceeding the Lawer told to Duba cattering it is likely that you have to pay damages of $50000

So in this scenario there is Present obligation , there is probable outflow and reliable estimate as well so Provision
need to be recognize

Example: A super market has policy of refund of goods by dissatisfied customers.

Though it is no under legal obligation to do so. Its policy of making refunds is
generally known.

In this scenario present obligation occurs when sales has been made which gives
rise to constructive obligation as valid expectations has been created
It is also probable that portions of goods will be return and reliable estimate can
be made so provision need to be recognized
 Example: An organization operates in a oil industry in which contamination occurs and it operates in
a country where there is no environmental policy. However organization has published policy in
which it clearly states it is the responsibility of the organization that they will clean up the
contamination that it causes

In this scenario present obligation occurs when contamination occurs. Therefore it’s a constructive
obligation because entity’s past practice creates a valid expectation
Also there is a probable outflow and reliable estimate as well so Provision need to be recognized

Contingent Liabilities and Assets:

In case of Contingent Liabilities these should not be recognized but disclosures related to then should be provided in the
statement of financial position

In case of contingent Asset These should not be recognized also there is no need to provide disclosures as well

Measurement:

The amount provided should be the best estimate at the end of the reporting period of the
expenditure required to settle the obligation. The amount is often expressed as:
 The amount which could be spent to settle the obligation
 To pay to a third party

It may be derived from management judgment which has been gathered by:

- Experience of similar transaction

- In some cases experts evidence

Uncertainty:

An organization should take account of any uncertainty surrounding the transaction which may include:

 The use of the most likely outcomes in the situations in which single obligation is measured
 An expected value calculation in which there is a large population.

Factors:

The following factors should be considered when estimating the amount of the obligation:

 The present value of future expected cash flows

 Evidence of future expected events such as
- Improve or new technology
- Changes in law
Changes in provisions:

The provisions should be reviewed regularly and if there is any change in the estimation of provisions. Provision should be
revised immediately.

Self Insurance:

The cost of business become prohibited for many businesses that why they choose to self insure rather than take out insurance
policies against various risks that they face

Instead of paying insurance payments they may keep cash a side to meet those future expenses. IAS 37 does not allow such
provisions to be recognizes. Such expenses can only be expense in profit and loss statement when they actually occur.

Onerous contract:

If an organization has onerous thee present obligation under that contract should be recognize as provision.

Restructuring:

Examples:
 Closure of business location in region
 Changes in management structure
 Sale or termination of line of business
 Relocation from one region to another

Application of recognition criteria:

A constructive obligation to restructuring only arises when :

1. When entity has detailed formal plan for restructuring

2. Entity has create a valid expectation that it will carry out the restructuring

A detail formal plan must identify the following:

- The business or part of the business concerned

- The principal locations affected
- When the plan will be implemented
- The expenditure which will be undertaken
- The location, function and approximate number of employees who will be compensated for terminating their services

A management decision to restructuring does not create the constructive obligation until or less entity start to implement the
restructuring plan

Announced the main feature of the plan to those affected in a sufficiently specic manner to raise a valid expectation that
restructuring will incur
Decommissioning cost:

Sometimes organizations has to spend money when they has to close down or dispose of the asset. According to IAS 37 when
organization has to incur such costs provisions are required and such provisions should be made using present value of future
cash flows

Such provisions should be made at the initial recognition of the asset

Example:

Ben Plc is committed to dismantle the asset in 10 years and the estimated cost to dismantle the asset is 10 million. The
obligation satisfies the recognition criteria of IAS 37.

The interest rate is 8%

1 January 2015

Initial recognition

$10m x 1/(1 + 0.08)^10 = 4631935

Asset Dr 4631935
Provision Cr 4631935
At 31 December 2015 Measurement of the provision:

$10 million x 1/(1 + 0.08)^9 = 5002490

Which will be presented as follows

Balance brought forward 4631935

Borrowing cost (8% x 4631935) 370555
__________
5002490
___________
 IAS 38 Intangible Asset

This standard applies to all intangible assets except for IAS 2, IFRS 5,
IFRS 3, IAS 12, IAS 19, IAS 32 and IFRS 15.

Intangible Assets:

These are identifiable non monetary assets without physical

substance

Following are the examples of Intangible Assets:

 Licenses
 Copyrights
 Intellectual property
 Trademarks
 Patents
Example:

Classify each of the following as either tangible asset or Intangible asset:

Asset:

1. Specialised software embedded in computer controlled machine tools

2. The operating system of personal computer
3. A firewall controlling access to restricted sections of an internet
website
4. An of the shelf integrated publishing software package.
Answer:

1. Specialised software integerated to the production line “robots” is an

integral part of the related hardware and should be accounted for
under IAS 16 property plant and equipment and it’s a tangible asset.

2. The operating is a integral part of the related hardware and should be

accounted for under IAS 16 property plant and equipment and its an
tangible asset.
3. Companies developing firewall software to protect their own website
may also sell the technology to other companies therefore it is an
intangible asset.
4. Such computer software is not an integral part of the hardware on
which it is used there it is an intangible asset.
Recognition:

An intangible asset should be recognise when it complies with the

definition of intangible asset and meets recognition criteria sets out by
the standard:

Recognition criteria:

- It is probable future economic benefits will flow to the entity

- Cost can be measured reliably.

Goodwill Vs other Intangible Assets:

Goodwill as an general terms describes such things as brand name,

patents, competitive advantage. It is generated over many years with
expenditure on promotion, the creation and maintenance of good
customer and supplier relations

The provision of high quality goods and services, skilled workforce and
experienced management.
Goodwill accounting treatment:

Expenditure can be recognised in only two ways:

It can be either recognised as an asset or as an expense.

A business does not incur cost specific to build goodwill but to the related
activities such as promotion, client services, quality control etc.

An entity can not recognise internally generated goodwill as an in its

financial statement because it does not meet the definition of
Intangible asset as it is not Identifiable, In particular it is clearly
inseparable. It only can be disposed of with the business as a whole.
However when business is acquired as a whole, the buyer will usually pay a
price in excess of the fair value of all the assets. (net of liabilities) which can be
separately identified including other intangible assets such as intellectual
property.

This premium not only represents the future economic benefits expected to
arise from the intangible asset which is goodwill in the acquired company but
also those which arise from expected synergies for example cost savings and
other benefits of acquications.

Here are the accounting treatment for goodwill as purchased asset in the
consolidated financial statements of an acquirer are:

 Immediate write off

 Carry at cost( with or without annual impairment review)
 Carry at cost with annual amortisation
 Carry at revalued amount.
Measurement:

The cost of the intangible asset usually can be measured reliably when it has been
separately acquired for example purchase of computer software.

The price paid normally will reflect expectations of future economic benefits, the
probability recognition criteria is always considered to be satisfied for separately
acquired intangible asset.

Every cost of the asset will be capitalise which is necessary to bring asset into
working condition or to sell

Following expenditures will not be capitalised and need to expensed in profit and
Loss statement:

- Advertising and promotion cost

- Administration and other general overheads
- Cost incurred in redeploying the asset
- Initial opperating cost and losses
Example:

Sallo Company on 31st December 2005 it was successful to bid to acquire

exclusive rights of patent which was developed by another organisation.

The amount payable for the rights are $60000 immediately and $400000 in
one year time. Sallo has incurred legal fees of $87000 inn respect of the bid. In
jurisdication where sallo company operates the government charges stamp
duty of $1000 for the registration of patent rights. Sallo co cost of capital is
10%

Required: Calculate the initial cost of patent right on initial recognition of

patent rights.
Solution:

$
Cash paid 600000
Deffered consideration (400000 x 1/1.1) 363636
Legal fees 87000
Stamp duty 1000
________

Cost of initial recognition 1051636

__________
Business combination:

The cost of an intangible asset acquired in a business combination is its fair

value at the date of acquisation, irrespective of whether the intangible asset
had been recognised by the acquiree before the business combination

The fair value of itangible assets acquired in business combinations normally

can be measured with sufficient reliability to be recognised separately from
goodwill

The fair value will reflect market participants expectations at the acquisation
date about the probability that the expected future economic benefits
embodied in the asset will flow to the organisation.
Example:
Mogambo Plc on 31st December it paid 10000000 for 100% interest in Balanca
Co.
At the date of acquisition the net of the Balanca as shown on its statement of
financial position had a fair value of 6000000. In addition, balanca had the
following rights:

1.The brand name Nimma, a middle of the range fragrance. Balanca. Balanca
had been considering the sale of his brand just prior to its acquisation by
Mogambo. The brand had been valued at $300000 by brand Moja a reputable
firm of valuation specialist which had used a discounted cash flow technique.

2. Sole distribution rights to a product called xoxo. It is estimated that the

future estimated that the future cash flows generated by this right will be
$250000 per annum for the next 6 years. Mobango has determined that the
appropriate discount rate for this right is 10% for 6 year and 10 year annuity
factor is 4.36

Required: Calculate goodwill arising on acquisition.

Answer:

‘000
Cost 10000
Net asset recognised in Balanca:

Statement of financial position 6000

Brand acquired 300
Distribution right (250000 x 4.36) 1090
_______
(7390)
________
Goodwill 2610
________
Subsequent expenditure:
In case of subsequent expenditure need to be expensed in research
cost cases. In Development cost it will be expensed as well.
However if it meets Development cost criteria it will be capitalised.

Internally Generated Goodwill:

Internally generated good will not be capitalised because it is not an

identifiable resource i.e. it is not separable also it is not arise from
contractual or other legal rights.

Other Internally generated Goodwill:

Sometimes it is difficult to assess whether an internally generated

intangible asset qualifies for recognition specifically if is often difficult
to:
Identify whether there is an identifiable asset which will generate
probable future economic benefits
And cost of the asset can be measured reliabely.
Specific recognition criteria:

In addition to general recognition criteria Intangible asset are required to meet

specific criteria as well which is divided into two components

1. Research Cost:

Research cost will always be expensed in Statemet of profit and loss

Examples of research cost are as follows:

- Activities aimed at obtain new knowledge

- The search for alternatives such as material, product design, specification etc
- The formulation such as design, evaluation and final selection of possible
Alternatives.
Accounting treatment In Development Phase:

An intangible asset arising from development phase can be capitalized if it

meets the following criteria:

1. Probable that the future economic benefits will flow to the entity
2. Resources are available to complete the asset
3. Intention to complete the asset
4. valuable for the organisation to complete and sell the asset
5. Availability of resources to complete the asset for sell and use
6. Technical feasibility to complete the asset so that it can be use or sell.
7. Economic outflow can be reliably measured.

Example

- Design, construction and testing pre production

- New or improved material, devices, products.
- Processes, systems or services.
Illustration

ABC co developing a production process the amount of expenditure in the year to

31 December 2016 was as follows:

$
1 january to 30 November 2160
1 december to 31 December 240

On 1st December the organisation was able to demonstrate that the production
process met the criteria for recognition as an intangible asset. The amount
estimated to be recoverable from the process including future cash outflows to
complete the process before it is available for use is $1200

At 31st December, the production process is recognised as an intangible asset at a

cost of $240. the intangible asset carried at this cost is less than the amount
expected to be recoverable
The 2017 expenditure incurred before 1st December is recognised as an
expense because the recognition criteria were not met until that date. This
expenditure will never form part of the cost of the production process
recognised in statement of financial position.

Expenditure in 2017 is $4800 at 31 december 2017 , the amount estimated to

be recoverable from the process including future cashflows to complete the
process before it is available for use is $4500.

At 31st December the cost of the production process is $5040 ( 240 + 4800)
The organisation recognises an impairment loss of $540 to adjust the carrying
amount before impairment loss. $5040 to its recoverable amount which is
$4500

This impairment loss must be reversed subsequently it the requirement of IAS

36 are met.
Measurement after recognition:

Cost Model
Revaluation Model

Cost Model:

Cost less accumulated depreciation less Impairment losses

Revaluation Model:

Fair value at the date of revaluation less any amortisation less impairment

Fair Value must be measured by reference of market value

Revaluations of the asset can be review annually and if there is any material
difference then it should be recognized in the financial statements immediately.

The accounting treatment for revaluations of intangible assets is same as other assets.
Useful Life:

The useful life of an intangible asset should be assessed as finite or indefinite.

A finite useful life is assessed as period of years or number of production or similar

units. An intangible asset with a finite life is amortized

Useful life is regarded as indefinite when there is no foreseeable limit to the period
over which asset is expected to generate net cash flows.

Factors to include in determining cash flows include:

- Typical product life cycle by the organisation

- Expected usage of asset by the organisation
- Public information on estimates of useful lives of similar types of assets
- Legal limits on the use of assets
- Technical, technological, commercial or other obsolescence;
- Stability of the industry in which the asset operate.
Amortisation:

The depreciable amount of an intangible asset should be allocated on systematic

basis over the best estimate of its useful life

The amortisation of the asset begins when asset is available for use and it will be
cease as soon as asset is derecognise or it is held for sale under IFRS 5.

The amortisation charge for each period will be include in statement of profit or
loss

Residual value:

The residual value of an asset is assumed to be zero until or less it is committed

by some one to purchase asset at the end of its useful life

Or there is active market of the asset.

Review:
Amortisation method and period should be reviewed at each year end.

Example:
Mishi Co on 1st january established a new research and development unit to
acquire specific knowledge about the use of chemicals for pain relief.

The following expenses were incurred during the year ended 31 December:

1. Purchase of building for $400000. the building is to be depreciated on

straight line basis at the rate of 4% per annum.
2. Wages and salaries of research staff are 2355000
3. Scientific equipment costing $60000 is to be depreciated using a reducing
balance rate of 50% per annum.

Required: Calculate the amount of research and development expenditure to

be recognised as an expense in the year ended 31 December
Answer:

The following cost should be written off:

$
Building depreciation (400000 x 4%) 16000
Wages and salaries of research staff 2355000
Equipment depreciation (60000 x 50%) 30000
____________
2401000
_____________
Example:

Panda Co in its first year of trading to 31 December they have incurred

the following expenditure on research and development, none of which
related to purchase of property plant and equipment

1. $12000 on successfully devising processes the sap extracted from

mangroves into chemical x , y and z.
2. $60000 on developing an analgesic medication based on chemical z.
3. No chemical uses yet has been discovered for X and Y.

Commercial production and sales of analgestic commenced on 1

september and are expected to produce steady profitable income during
a five year period before being replaced. Adequate resources exist for
the company to achieve this.

Required:
Assuming no impairment, determine the maximum amount of
development expenditure which may be carried forward at 31
December under IAS 38.
Answer:
Cost:
1.This is research cost which can not be capitalised under any circumstances
and must therefore be expensed to profit or loss.
2. Initially recognised cost is $60000. residual value presumed to be zero.

Amortization:

Amortisation from 1 September for period of 5 years

4 month amortisaion is 4/60 x $60000 = $4000

Carrying amount

$60000 - $4000 = $56000

 IAS 10 Events after the reporting period

Events after the reporting period:

Events both favorable and unfavorable which occur between the end of reporting period and the date on
which financial statements are authorized for issue.

There are two types of events which can be identified after the reporting period:

- Adjusting events: those which provide further evidence of conditions which existed at the end of reporting
period
- Non adjusting events: those which are indicative of conditions which arose after the end of reporting
period

Measurement:

Adjusting events:

An entity should adjust its financial statements for adjusting events after the end of reporting period

Following are the examples of adjusting event:

1. The discovery of fraud and error which shows that financial statements were incorrect
2. The bankcruptcy of a customer which occurs after the end of reporting period and which confirms that a loss already existed
at the end of the reporting period on trade recievable account
3. The sale of a inventories after the year end at an amount below their cost
4. The resolution after the end of the reporting period of a court case which tit confirms that entity already had a present
obligation at the end of the reporting period , requires entity to recognize a provision instead of merely disclosing
contingent liability or adjusting the provision already recognized

Non adjusting events:

No adjustment is made in the financial statements for non adjusting events after the end of the reporting period

However non adjusting events should be disclosed if they are of such importance that non disclosure coulf effect the decision of
the users of the financial statements

Examples:

1. The destruction of major production plant by a fire after the end of reporting period
2. A major business combination after the end of reporting period
3. A decline in market value of investments between the end of the reporting period and the date on which financial
statements are authorize for issue
4. Abnormally large changes after the end of the reporting period in asset prices or foreign exchange rates
Going concern:

Financial statement should not be prepared on going concern basis if management determines after the end of the reporting
period that

o It intends to liquidate the organization or cease trading

o It has realistic alternative but to do so

Deterioration in operating results and financial position after the reporting period may require reconsideration of going
concern assumption

Dividends:

Dividends proposed or declare after the end of the reporting period can not be recognized as liabilities. IAS 1 requires an entity
to disclose the amount of dividends which were proposed or declare after the end of reporting period but before the financial
statement are authorize for issue. The disclosure must be made in notes to the account and not in financial statements
Example:

Which of the following events after the reporting period provide evidence of the conditions existed at the end of the reporting
period

1. Discovery of fraud
2. Sales of inventory at less then cost
3. Earthquake
4. Strike by workers
5. Announcing a plan discontinue a operation
6. Closure of one of 20 retail outlets
7. Right issue of equity shares
8. Exchange rate fluctuation
9. Out of court settlement of legal claim
10. Privatisation by government
Answer

1. Adjusting event
2. Adjusting event
3. non adjusting event
4. Non adjusting event
5. non adjusting event
6. Non adjusting event
7. Non adjusting event
8. non adjusting event
9. Adjusting event
10. Non adjusting event
 IAS 12 Income Taxes

In financial reporting, the financial statements need to reflect the effects of taxation on a company. Guidance is provided
by the fundamental accounting concepts of accruals and prudence. Tax rules determine the cash flows; these must be
matched to the revenues which gave rise to the tax and tax liabilities must be recognised as they are incurred, not merely
when they are paid.
The consistency must be applied in the presentation of income and expenditure.

Scope
IAS 12 should be applied in accounting for income taxes
including:
current tax
tax on distributions (withholding tax)
deferred tax

Accounting profit: profit or loss for a period before deducting

tax expense.
Taxable profit (tax loss): the profit (loss) for a period,
determined in accordance with the rules established by the
taxation authorities, on which income taxes are payable
(recoverable).
Tax expense (tax income): the aggregate amount included
in the determination of profit or loss for the period in respect of
current tax and deferred tax.
Current tax: the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
Deferred tax liabilities: the amounts of income taxes payable in future period in respect of taxable temporary differences.
Deferred tax assets: the amounts of income taxes recoverable in future periods in respect of:
- deductible temporary differences
- the carry forward of unused tax losses; and
- the carry forward of unused tax credits.
Temporary differences: differences between the carrying amount of an asset or liability and its tax base. Temporary
differences may be either:

taxable temporary differences: temporary differences 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 or

deductible temporary differences: temporary differences that will result in amounts that are deductible in determining
taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or
settled.
Tax base of an asset or liability: the amount attributed to that asset or liability for tax purposes.

Recognition of Current Tax Liabilities

and Current Tax Assets
Current tax for current and prior periods should, to the extent unpaid, be recognised as a liability. If the amount
already paid in respect of current and prior periods exceeds the amounts due for those periods, the excess should be
recognised as an asset.
- The benefit relating to a tax loss that can be carried back to recover current tax of a previous period should be recognised
as an asset.
- A company is a separate legal entity and is therefore liable to income tax.

The income tax charged in the statement of comprehensive income is an estimate. Any over/under provisions are cleared in
the following period's statement of comprehensive income and do not give rise to a prior period adjustment.

Accounting for Withholding Tax:

- Companies make payments net of tax (e.g. dividends). Income tax is deducted at the source and paid to the tax
authorities according to specified local rules.
- Companies themselves are taxed on their taxable profit. If they have received interest net of a deduction, then they will
have already incurred taxation on this piece of income which will then be taxed again in the tax computation for the year.
Therefore, they need to account for the fact that they have been taxed in order to reduce the future liability.
- If a company has an income tax payable at year end, include it in payable.
- If a company has income tax recoverable (i.e. the company has net income tax incurred for the year):
- deduct from income tax payable
- include any excess debit balance in receivables.

Underlying Problem – Deferred Taxation:

- In most jurisdictions, accounting profit and taxable profit differ, meaning that the tax charge may bear little relation to
profits in a period.
- Transactions which are recognised in the accounts in a particular period may have their tax effect deferred until a
later period.
Differences arise due to the fact that tax authorities follow rules which differ from IFRS rules in arriving at taxable profit.

-Transactions which are recognised in the accounts in a particular period may have their tax effect deferred until a
later period.

It is convenient to envisage two separate sets of accounts:

- one set constructed following IFRS rules; and
- a second set following the tax rules of the jurisdiction in which the company operates.

The differences between the two sets of rules will result in different numbers in the financial statements and in the tax
computations. These differences may be viewed from the perspective of:
- the statement of financial position (balance sheet); or
- the statement of profit or loss.
- The current tax charge for the period will be based on the tax authority's view of the profit, not the accounting view. This
will mean that the relationship between the accounting profit before tax and the tax charge will be distorted. It will not be
the tax rate applied to the accounting profit figure, but the tax rate applied to a tax computation figure.

Accounting For Deferred Taxation Basics:

A "Balance Sheet" Perspective:

IAS 12 takes a "balance sheet" perspective. Accounting for deferred taxation involves the recognition of a liability (or an
asset) in the statement of financial position. The difference between the liabilities at each year end is taken to the
statement of comprehensive income.
Example:
$
Deferred taxation balance at the start of the year 1,000
Transfer to the statement of comprehensive income
(as a balancing figure) 500
_______
Deferred taxation balance at the end of the year 1,500
________

Asset or Liability Amounts:

The calculation of the balance to be included in the statement of financial position is, in essence, very simple. It involves
the comparison of the carrying values of items in the accounts to the tax authority's view of the amount (known as the tax
base of the item). The difference generated in each case is called a temporary difference.

Deferred taxation is provided on all taxable temporary differences.

 Carrying amount Tax base Temporary difference
$ $ $ $

Non current assets 20000 14000 6000 1800

Other transactions

Tee (Accrued Income) 1000 - 1000 300

Lee(Accrued Expense) (2000) - (2000) (600)
_______ ________
5000 1500
________ ________

Transactions Tee and Lee are taxed on a cash basis; therefore, the tax authority's statement of financial position would not
recognise accrued amounts in respect of these items.
Definition:
Tax base of an asset or liability:the amount attributed to that asset or liability for tax purposes.
The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic
benefit that will flow to an entity when it recovers the carrying amount of the asset
Temporary difference:a difference between the carrying amount of an asset or liability in the statement of financial position
and its tax base.
Temporary differences may be either:
- debit balances in the financial statements compared to the tax computations. These will lead to deferred tax credit
balances, known as taxable temporary differences or
- credit balances in the financial statements compared to the tax computations. These will lead to deferred tax debit
balances, known as deductible temporary differences.
- The difference between the carrying amount of the asset and the tax authority's value is described as a temporary
difference because it is temporary in nature it will disappear in time.

As an examination rule, if the carrying amount of an asset is greater than the tax base of an asset, then a taxable temporary
difference arises leading to a deferred tax liability.

Example:

$
Carrying amount of asset 6,000
Tax base of the asset (5,000)
Temporary difference 1,000
______
Deferred tax balance required (@30%) 300
_______
-The IAS 12 justification is that ownership of this asset will lead to income of $6,000 in the future. The company will only have
$5,000 as an expense to charge against this for tax purposes.The $1,000 that is not covered will be taxed and should be
provided for now.
- Temporary differences may lead to deferred tax credits or debits; IAS 12 imposes tougher recognition criteria for debit
balances.
- Deferred tax accounting is about accounting for items where the tax effect is deferred to a later period. Circumstances
under which temporary differences arise include:
- When income or expense is included in accounting profit in one period but included in the taxable profit in a different
period. For example:
- items which are taxed on a cash basis but which will be accounted for on an accruals basis

Example:

The accounts of Fady show interest receivable of $10,000. No cash has yet been received and interest is taxed on a cash basis.
The interest receivable has a tax base of nil. Deferred tax will be provided on the temporary difference of $10,000.

situations where the accounting depreciation does not equal tax allowable depreciation

Example:
Fady has non-current assets at 31 December with a cost of $4,000,000. Aggregate depreciation for accounting purposes is
$750,000. For tax purposes, depreciation of $1,000,000 has been deducted to date. The noncurrent assets have a tax base of
$3,000,000. The provision for deferred tax will be provided on the taxable temporary difference of $250,000.
finance leases recognised in accordance with the provisions of IAS 17 but which fall to be treated as operating leases under local
tax legislation.
- Revaluation of assets where the tax authorities do not amend the tax base when the asset is revalued.
- Unfortunately, the definition of temporary difference captures other items which should not result in deferred taxation
accounting (e.g. accruals for items which are not taxed or do not attract tax relief).
- IAS 12 therefore includes rules to exclude such items. For example, "If those economic benefits will not be taxable, the
tax base of the asset is equal to its carrying amount".
- The wording seems a little strange, but the effect is to exclude such items from the deferred taxation calculations.

Example:
Fady provided a loan of $250,000 to John. At 31 December, Bill's accounts show a loan payable of $200,000. The repayment of
the loan has no tax consequences. Therefore, the loan payable has a tax base of $200,000. No temporary taxable difference
arises.
The following information relates to the Dhoondo Co as at 31 December 2015:

Note Carrying amount Tax Base

$ $
Non Current Assets:
Plant and Machinery 200000 175000
Receivables:
Trade receiveables 1 50000
Interest receiveables 1000

Payables:
Fine 10000
Interest payable 2000

Note 1
The trade receivables balance in the accounts is made up of the following amounts:
$
Balances 55,000
Doubtful debt allowance (5,000)
________
50,000
_________
Further information:
(1) The deferred tax liability as at 1 January 2014 was $1,200.
(2) Interest is taxed on a cash basis.
(3) Allowances for doubtful debts are not deductible for tax purposes. Amounts are
only deductible on application of a court order to a specific amount.
(4) Fines are not tax deductible.
(5) Deferred tax is charged at 30%.
Required:
Calculate the deferred tax provision which is required at 31 December 2014 and the charge to the profit or loss for the
period.
Solution:

Carrying amount tax base Temporary difference

$ $
Non current assets:
Plant and Machinery 200000 175000 25000
Receivables:
Trade recievables 50000 55000 (5000)
Interest Receievables 1000 0 1000
Payables:
Fine 10000 10000 0
Interest payable 2000 0 (2000)

Temporary Deferred tax

Difference @ 30%
Deferred tax liabilities 26,000 7,800
Deferred tax assets (7,000) (2,100)
__________
5,700
____________
Detailed Rules of Deferred Taxation:

Recognition of Deferred Tax Liabilities

Rule
- A deferred tax liability is recognised for all taxable temporary differences, unless the deferred tax 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, affects neither accounting profit nor taxable profit.
- If the economic benefits are not taxable the tax base of the asset is equal to its carrying amount.

Issues
-"all taxable temporary differences"
- Temporary differences include all differences between accounting rules and tax rules, not just those which are
temporary. IAS 12 contains other provisions to correct this anomaly and excludes items where the tax effect is not
deferred, but rather, is "permanent" in nature.
- "initial recognition—not a business combination"
- If the initial recognition is a business combination, deferred tax may arise.
- "affects neither accounting profit nor taxable profit (tax loss)"
- This rule is an application of the idea that if an item is not taxable, it should be excluded from the calculations.
- Taxable temporary differences also arise in the following situations:
- Certain IFRSs permit assets to be carried at a fair value or to be revalued.
- if the revaluation of the asset is also reflected in the tax base, then no temporary difference arises.
- if the revaluation does not affect the tax base, then a temporary difference does arise and deferred tax must be provided.
- When the cost of acquiring a business is allocated by reference to fair value of the assets and liabilities acquired, but no
equivalent adjustment has been made for tax purposes.

Example:

The following information relates to Moti:

Carrying Tax
amount Base
$ $
At 1 January 2014 1,000 800
Depreciation (100) (150)
At 31 December 2014 900 650
At the year end, the company decided to revalue the asset to $1,250. The tax base is not affected by this revaluation.

Calculate the deferred tax provision required in respect of this asset as at 31 December 2014.
Solution:

Carrying amount Tax base Temporary difference

$ $ $
1250 650 600
Deferred tax at 30% 180

Recognition of Deferred Tax Assets

The Rule
A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax
asset arises from:
the initial recognition of an asset or liability in a transaction which:
- is not a business combination; and
- at the time of transaction, affects neither accounting profit nor taxable profit (tax loss).
- The carrying amount of a deferred tax asset is reviewed at the end of each reporting period. The carrying amount of a
deferred tax asset is reduced to the extent that it is no longer probable that sufficient taxable profit will be available to utilise
the asset.

Issues:
-Most of the comments made about deferred tax liabilities also apply to deferred tax assets.
- Major difference between the recognition of deferred tax assets and liabilities is in the use of the phrase "to the extent
that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised".
- An asset should only be recognised when the company expects to receive a benefit from its existence. The existence
of deferred tax liability (to the same jurisdiction) is strong evidence that the asset will be recoverable.

Debt Instruments Measured at Fair Value:

- In August 2014 the IASB issued an ED to clarify that unrealised losses on debt instruments measured at fair value
give rise to deductible temporary differences.
- The amendment to IAS 12 is proposed to deal with situations in which the value of such instruments falls below cost but the
tax base remains cost.
- The ED further clarifies that recognition of a deferred tax asset should be based on the existing principles of IAS 12 (i.e. on
the availability of taxable temporary differences, future taxable profits and tax planning opportunities).

Deferred tax is charged or credited to other comprehensive income or directly to equity if the tax relates to items that are
credited or charged, in the same or different period, to other comprehensive income or directly to equity.

- Deferred tax should be debited to goodwill in respect of the difference in the fair value and the carrying value of the
subsidiaries net assets acquired. This will only relate to the year of acquisition of the subsidiary.
Example:
Continue from previous example

Carrying Tax
amount base
$ $
At 1 January 2014 1,000 800
Depreciation (100) (150)
At 31 December 2014 900 650
At the year end, the company decided to revalue the asset to $1,250. The tax base is not affected by this revaluation.
Carrying Tax Temporary
amount base difference
$ $
1,250 650 600
Deferred tax at 30% 180
Required:
Assuming that the only temporary difference that the company has relates to this asset, construct a note showing the
movement on the deferred taxation and identify the charge to profit or loss in respect of deferred taxation for the
year ended 31 December 2014.
Tax rates:

The tax rate used is the rate that is expected to apply to the period when the asset is realised or the liability is settled, based on
tax rates that have been enacted by the end of the reporting period.

Example:

The following information relates to Semi at 31 December 2014:

Carrying Tax
amount base
$ $
Non-current assets 460,000 320,000
Tax losses 90,000
Further information:
1. Tax rates (enacted by the 2014 year end)
2014 2015 2016 2017
36% 34% 32% 31%
2. The loss above is the tax loss incurred in 2014. The company is very confident
about the trading prospects in 2015.
3. The temporary difference in respect of non-current assets is expected to grow each
year until beyond 2017.
4. Losses may be carried forward for offset, one-third into each of the next three years
Required:
Calculate the deferred tax provision that is required at 31 December 2014.
 Temporary
difference
$
Non-current assets (460,000 - 320,000) 140,000
Losses (90,000)
Deferred tax liability (31% × 140,000) 43,400
Deferred tax asset
Reversal in 2015 (30,000 × 34%) (10,200)
Reversal in 2016 (30,000 × 32%) (9,600)
Reversal in 2017 (30,000 × 31%) (9,300)
________
Deferred tax 14,300
_________

The tax rate used should reflect the tax consequences of the manner in which the entity expects to recover or settle the
carrying amount of its assets and liabilities.

Change in Tax Rates:

Companies are required to disclose the amount of deferred taxation in the tax expense that relates to change in the
tax rates.
Example:
Continue from example 2:

Carrying Tax
amount base
$ $
Non-current assets 460,000 320,000
Accrued interest:
Receivable 18,000 –
Payable (15,000) –
The balance on the deferred tax account on 1 January 2014 was $10,000. This was calculated at a tax rate of 30%. During
2014, the government announced an unexpected increase in the level of corporate income tax up to 35%.
Required:
Set out the note showing the movement on the deferred tax account showing the charge to profit or loss and clearly
identify that part of the charge that is due to an increase in the rate of taxation.
Solution:

Deferred tax
$
Deferred tax as at 1 January 2014 10000
Profit or loss – rate change 1667
_______
Opening balance re stated (10000 x 35 / 30) 11667
Profit or loss – origination of temporary
Difference (balancing figure) 38383
________
Deferred tax as at 31st December 2014(w) 50050
_________
Working
Carrying amount tax base temporary difference
$ $
Non-current assets 460,000 320,000 140,000
Accrued interest:
Receivable 18,000 0 18,000
Payable (15,000) 0 (15,000)
Deferred tax liability 143,000
_________
Deferred tax at 35% 50,050
__________
Business Combination:
Acquisition accounting and equity accounting share certain features which are relevant to an understanding
of the deferred taxation consequences of employing these techniques.

Each involves the replacement of cost with a share of net assets and goodwill arising on acquisition. The subsequent
impairment of the goodwill and the crediting of postacquisition growth in equity balances to the equivalent equity
balances of the group.

Example:
P. co financial statement P group Financial statements
Cost Share of net assets Goodwill
At the date of
Acquisation = 450 + 150

Cost Share of net assets Goodwill

At subsequent statement of 520 + 150

Financial statement 600 Also (30)
________
120
__________
Through profit or loss to equity = 70 (30)

= a net debit = $600

This is effectively what takes place under each of the techniques. They differ in the way that the share of net assets
is reflected in the "group" financial statements.
Note that the carrying amount of the investment inexample is $640 (520+120).

Sources of Temporary Differences:

Temporary differences may arise due to the following reasons:
- The calculation of goodwill requires a fair valuation exercise. This exercise may change the carrying amounts of assets
and liabilities, but not their tax bases. The resulting deferred tax amounts will affect the value of goodwill.
- Retained earnings of subsidiaries, branches, associates and joint ventures are included in consolidated retained
earnings, but income taxes will be payable if the profits are distributed to the reporting parent.

Temporary Differences Arising:

on Calculation of Goodwill
- The cost of the acquisition is allocated to the identifiable assets and liabilities acquired by reference to their fair values
at the date of the exchange transaction.
- Temporary differences arise when the tax bases of the identifiable assets and liabilities acquired are not affected by
the business combination or are affected differently.
- Deferred tax must be recognised for the temporary differences. This will affect the share of net assets and thus
the goodwill (one of the identifiable liabilities of S in illustration 11 is the deferred tax balance).
- The goodwill itself is also a temporary difference, but IAS 12 prohibits the recognition of deferred tax on this item.
Example:
Entity P paid $600 for 100% of Soni on 1 January.
S had not accounted for deferred taxation up to the date of its acquisition.
The following information is relevant to Soni:
Fair value at the Tax base Temporary difference
date of acquisition
Property plant and equipment 270 155 115
Accounts receivable 210 210 –
Inventory 174 124 50
Retirement benefit obligations (30) – (30)
Accounts payable (120) (120) –
________ ________
504 135
_________ _________
Goodwill $
Cost of investment 600
Fair value of net assets acquired
Per examole 504
Deferred tax liability arising
in the fair valuation exercise
(40%× 135) (54) (450)
______ _______
Goodwill 150
________
Temporary Differences Arising Due to the Carrying Amount of the Investment and the Tax Base:
- Temporary differences arise when the carrying amount of investments in subsidiaries (branches and associates or joint
arrangements) becomes different from the tax base (which is often cost) of the investment or interest.
- The carrying amount is the parent or investor's share of the net assets plus the carrying amount of goodwill. Such
differences may arise in a number of different circumstances.

Example:

Entity P paid $600 for 100% of S on 1 January 2014. At this date, the carrying amount in P's consolidated financial statements,
of its investment in S was made up as follows:
Fair value of the identifiable net assets of Subway
(including deferred taxation) 450
Goodwill 150
__________
Carrying amount 600
___________
The carrying amount at the date of acquisition equals cost. This must be the case as the cost figure has been allocated to
the net assets to leave goodwill as a residue.
The tax base in P's jurisdiction is the cost of the investment. Therefore, there is no temporary difference at the date of
acquisition. During the year ended 31 December 2014, S traded profitably and accumulated earnings of $70. This was
reflected in the net assets of the entity and in its equity. Since acquisition, goodwill has been impaired by 30. At 31 December
2014, the carrying amount in P's consolidated financial statements, of its investment in S was made up as follows:

Fair value of the identifiable net assets of S (450 + 70) 520

Goodwill (150 - 30) 120
________
Carrying amount 640
________
This means that there is a temporary difference of $40 (640 - 600).

An entity should recognise a deferred tax liability for all taxable temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following
conditions are satisfied:
- the parent, investor, joint venture (or operator) is able to control the timing of the reversal of the temporary
difference; and
- it is probable that the temporary difference will not reverse in the foreseeable future.

Subsidiaries and Branches:

A parent controls the dividend policy of its subsidiary (and branches). It is able to control the timing of the reversal
of temporary differences associated with that investment. When the parent has determined that those profits will not
be distributed in the foreseeable future, the parent does not recognise a deferred tax liability.
Associates
- An investor in an associate does not control that entity and is usually not in a position to determine its dividend policy.
- Therefore, in the absence of an agreement requiring that the profits of the associate will not be distributed in th
foreseeable future, an investor recognises a deferred tax liability arising from taxable temporary differences associate with
its investment in the associate.

Joint Arrangements
- The arrangement between the parties to a joint arrangement usually deals with the distribution of the profits and identifies
whether decisions on such matters require the consent of all the parties or a group of the parties. When the joint venture (or
operator) can control the timing of the distribution of its share of the profits of the joint arrangement and it is
probable that its share of profits will not be distributed in the foreseeable future, a deferred tax liability is not recognised.

Presentation and Disclosure:

Tax assets and tax liabilities are presented separately from other assets and liabilities in the statement of financial position.
Deferred tax assets and liabilities are distinguished from current tax assets and liabilities.

When an entity makes a distinction between current and non-current assets and liabilities in its financial statements, it
should not classify deferred tax assets (liabilities) as current
assets (liabilities).
An entity offsets current tax assets and current tax liabilities if,
and only if, the entity:
- has a legally enforceable right to set off the recognised amounts and
- intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
- An entity offsets deferred tax assets and deferred tax liabilities if, and only if:
- the entity has a legally enforceable right to set off current tax assets against current tax liabilities and
- the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on
either:
- the same taxable entity or
- different taxable entities which intend either to settle current tax liabilities and assets on a net basis,
or to realise the assets and settle the liabilities simultaneously, in each future period in which
significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
- The tax expense (income) related to profit or loss is presented in the statement of comprehensive income.

An entity discloses the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:
- The utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from
the reversal of existing taxable temporary differences and
- The entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred
tax asset relates.
Deferred Taxation Calculations:
(a) Debits in the financial statements compared to the taxman's view give rise to deferred tax credits.
Credits in the financial statements compared to the taxman's view give rise to deferred tax debits.
(b) Full provision accounting is easy. DT = TAX RATE x TEMPORARY DIFFERENCE = DEFERRED TAX ASSET/ LIABILITY
(c) Steps
Step 1: Summarise the accounting carrying amounts and the
tax base for every asset and liability.
Step 2: Calculate the temporary difference by deducting the
tax base from the carrying amount using the following
pro forma:
Asset/Liability Carrying Amount Tax Base Temporary Difference
$ $ $

Step 3: Calculate the deferred tax liability and asset. To calculate the deferred tax liabilities, sum all positive
temporary differences and apply the tax rate. To calculate the deferred tax asset, sum all negative temporary differences and
apply the tax rate.
Step 4: Calculate the net deferred tax liability or asset by summing the two amounts in Step 3. This will be the
asset or liability carried in the statement of financial position.
Step 5: Deduct the opening deferred tax liability or asset. The difference will be this year's charge/credit to profit
or loss (or other comprehensive income) or directly to equity
Gogo master operates in a country in which the tax regime is as follows:
- Transactions are only deductible for tax purposes when they are "booked", (i.e. double entered into statutory accounting
records). This means that there is often little difference between accounting profit under local GAAP and the taxable profit. It
is common practice, however, for large companies to maintain a parallel set of records and accounts for reporting according to
IFRS rules. These are notably different from the rules in the domestic tax code and, as a result, the accounting profit under
IFRS can be very different from the taxable profit.
- The tax code allows for the general application of accrual accounting but it states the following:
- tax allowable depreciation is computed according to rules set out in the tax code
- expected irrecoverable debts are only deductible under very strict and limited circumstances and
- interest is taxable/allowable on a cash basis.
- The government operates a system of incentive through the tax system known as "Investment Relief". Under this system, a
company is able to claim a proportion of the costs of qualifying non-current assets as being deductible in excess of the normal
depreciation rates which would result from the adoption of IFRSs.
- The tax rate is 30%.
The following balances and information are relevant as follows

Carrying amount Tax base Notes

$ $

Non-current assets
Assets subject to investment relief 63,000 1
Land 200,000 2
Plant and machinery 100,000 90,000 3
Receivables
Trade receivables 73,000 4
Interest receivable 1,000
Payables
Fine 10,000
Interest payable 3,300

Note 1: This asset cost the company $70,000 at the start of the year. It is being depreciated on a 10% straight-line basis for
accounting purposes. The company's tax advisers have said that the company can claim $42,000 as a taxable expense in
this years' tax computation.
Note 2: The land has been revalued during the year in accordance with IAS 16. It originally cost $150,000. Land is not subject to
depreciation under IFRS nor under local tax rules.
Note 3: The balances in respect of plant and machinery are after providing for accounting depreciation of $12,000 and tax
allowable depreciation of $10,000,respectively.
Note 4: Trade receivables is made up of the following amounts:
 $
Balances 80,000
Expected irrecoverable debt (7,000)
________
73,000
_________
Note 5: The liability balance on the deferred taxation account at the beginning of the year, on 1 January, was $3,600.
Required:
(i) Identify the tax base of each item listed and then identify the temporary difference.
(ii) Calculate the deferred tax provision required at 31 December and the charge to profit or loss and other comprehensive
income in respect of deferred taxation for the year.
Solution:
Deferred
tax
$
Deferred tax as at 1 January 2014 10,000
Profit or loss—rate change 1,667
_________
Opening balance restated (10,000 × 35⁄30) 11,667

Profit or loss—origination of temporary differences (Balancing figure) 38,383

Deferred tax as at 31 December 2014 (W) 50,050
 Carrying amount Tax Base Temporary difference
$ $
Non-current assets 460,000 320,000 140,000
Accrued interest:
Receivable 18,000 0 18,000
Payable (15,000) 0 (15,000)
Deferred tax liability 143,000
__________
Deferred tax at 35% 50,050
___________
 Financial Instruments

Financial instrument: any contract which gives rise to both a financial asset of one entity and a financial liability or equity
instrument of another entity.
Example:
- primary instruments (e.g. receivables, payables and equity securities)
- derivative instruments (e.g. financial options, futures and forwards, interest rate swaps and currency swaps).

IAS 32 Presentation:

Application
- Classification of financial instruments between:
- financial assets
- financial liabilities
- equity instruments.
- Presentation and offset of financial instruments and the related interest, dividends, losses and gains.

Scope
IAS 32 should be applied in presenting information about all types of financial instruments, both recognised and unrecognised,
except for financial instruments that are dealt with by other standards. Namely:
- interests in subsidiaries, associates and joint ventures accounted for under IFRS 10 and IAS 28
- contracts for contingent consideration in a business combination under IFRS 3 (only applies to the acquirer)
- employers' rights and obligations under employee benefit plans (IAS 19 applies)
- certain insurance contracts accounted for under IFRS 4
- financial instruments, contracts and obligations under sharebased payment transactions to which IFRS 2 applies (unless
relating to treasury shares).

IFRS 7 Financial Instruments: Disclosure

Application
- IFRS 7 applies to the disclosure of:
- factors affecting the amount, timing and certainty of cash flows
- the use of financial instruments and the business purpose they serve
- the associated risks and management's policies for controlling those risks.

Scope
IFRS 7 should be applied in presenting and disclosing information about all types of financial instruments, both recognised and
unrecognised, except for financial instruments that are dealt with by other standards:
- interests in subsidiaries, associates and joint ventures accounted for under IFRS 10 and IAS 28
- contracts for contingent consideration in a business combination under IFRS 3 (only applies to the acquirer)
- employers' rights and obligations under employee benefit plans, to which IAS 19 applies;
- certain insurance contracts accounted for under IFRS 4
- financial instruments, contracts and obligations under share based payment transactions to which IFRS 2 applies (unless
relating to treasury shares).
IFRS 9 Financial Instruments:
- This standard applies to all financial instruments except those that are specifically scoped out by the standard.
- Specific exclusions include:
- Rights and obligations under leases to which IAS 17 applies;
- Employer's rights and obligations under employee benefit plans to which IAS 19 applies;
- Interests in subsidiaries, associates and joint ventures which are accounted for under IFRS 3 and IAS 28 respectively
- Rights and obligations within the scope of IFRS 15 that are financial instruments.

Definitions:

Financial asset: any asset that is:

- cash
- a contractual right to receive cash or another financial asset from another entity;
- a contractual right to exchange financial instruments with another entity under conditions that are potentially
favourable
- an equity instrument of another entity
- certain contracts that will (or may) be settled in the entity's own equity instruments.
Financial liability: any liability that is a contractual obligation:
- to deliver cash or another financial asset to another entity
- to exchange financial instruments with another entity under conditions that are potentially unfavourable
- certain contracts that will (or may) be settled in the entity's own equity instruments.
Equity instrument: any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.

Derivative: a financial instrument:

- whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index, or other variable (sometimes called the "underlying")
- which requires little or no initial net investment relative to other types of contracts that would be expected to have a similar
response to changes in market conditions
- that is settled at a future date

Amortised cost of a financial asset or financial liability:

- the amount at which it was measured at initial recognition minus
- principal repayments plus or minus
- the cumulative amortisation of any difference between that initial amount and the maturity amount; and
- for financial assets, adjusted for any loss allowance.
Effective interest method: a method of calculating the amortised cost of a financial asset or a financial liability, using the
effective interest rate and of allocating the interest.
Effective interest rate: the rate that exactly discounts estimated future cash payments or receipts through the expected life of
the financial instrument to the gross carrying amount of a financial asset (or amortised cost of a financial liability). The
computation includes all cash flows (e.g. fees, transaction costs, premiums or discounts) between the parties to the contract.
The effective interest rate is sometimes termed the "level yield to maturity" (or to the next re-pricing date) and is the internal
rate of return of the financial asset (or liability) for that period.
Example:
A company issues a $100,000 zero coupon bond redeemable in five years at $150,000. The internal rate of return (the yield) on
these flows is 8.45%. This should be used to allocate the expense.

Solution:

Year Opening balance Intereset @8.45% Closing balance

1 100000 8450 108450
2 108450 9164 117614
3 117614 9938 127552
4 127552 10778 138330
5 138330 11689 150019

Transaction costs: incremental costs that are directly attributable to the acquisition, issue or disposal of a financial
asset (or financial liability).

Liabilities and Equity:

-On issue, financial instruments should be classified as liabilities or equity in accordance with the substance of the contractual
arrangement on initial recognition.
- Some financial instruments may take the legal form of equity, but are in substance liabilities.
- An equity instrument is any contract which evidences a residual interest in the assets of an entity after deducting all of its
liabilities.
Example:
Redeemable preference shares are not classified as equity under IAS 32, as there is a contractual obligation to transfer financial
assets (e.g. cash) to the holder of the shares. They are therefore a financial liability.
If such shares are redeemable at the option of the issuer, they would not meet the definition of a financial liability as there is no
present obligation to transfer a financial asset to the holder of the shares. When the issuer becomes obliged to redeem the
shares, the shares become a financial liability and will then be transferred out of equity. For non-redeemable preference shares,
the substance of the contract would need to be studied. For example, if distributions to the holders of the instrument are at the
discretion of the issuer, the shares are equity instruments.

Settlement in Own Equity Instruments:

-A contract is not an equity instrument solely because it may result in the receipt or delivery of the entity's own equity
instruments.
- A financial liability will arise when:
- there is a contractual obligation to deliver cash or another financial asset, to exchange financial assets or financial
liabilities, under conditions that are potentially unfavourable to the issuer
- there is a non-derivative contract to deliver, or th requirement to deliver, a variable number of the entity's
own equity instruments
- there is a derivative that will or may be settled other than by issuing a fixed number of the entity's own equity
instruments.
- An equity instrument will arise when:
- there is a non-derivative contract to deliver, or the requirement to deliver, a fixed number of the entity's own
equity instruments
- there is a derivative that will or may be settled by issuing a fixed number of the entity's own equity instruments
Example:

(a) A company enters into a contract to deliver 1,000 of its own ordinary shares to a third party in settlement of an obligation.
As the number of shares is fixed in the contract to meet the obligation, it is an equity instrument. There is no obligation to
transfer cash, another financial asset or an equivalent value.
(b) The same company enters into another contract that requires it to settle a contractual obligation using its own shares in
an amount that equals the contractual obligation. In this case, the number of shares to be issued will vary depending on, for
example, the market price of the shares at the date of the contract or settlement. If the contract was agreed at a different
date, a different number of shares may be issued. Although cash will not be paid, the equivalent value in shares will be
transferred. The contract is a financial liability.
(c) Company G has an option contract to buy gold. If exercised, it will be settled, on a net basis, in the company's shares based
on the share price at the date of settlement. As the company will deliver as many shares (i.e. variable) as are equal to the
value of the option contract, the contract is a financial asset or a financial liability.
This will be so even if the amount to be paid was fixed or based on the value of the gold at the date of exercising the option.
In both cases, the number of shares issued would be variable.

Offset:

Financial assets and liabilities must be offset where the entity:

- has a legal right of offset
- intends to settle on a net basis or to realise the asset and settle the liability simultaneously.
Treasury Shares:

The entity's own equity instruments acquired by the entity itself

("treasury shares") are deducted from equity.
- No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of treasury shares.
- Treasury shares may be acquired and held by the entity or by other members of the consolidated group.
- Consideration paid or received is recognised directly in equity.
- The amount of treasury shares held is disclosed separately either in the statement of financial position or in the notes, in
accordance with IAS 1.
- If treasury shares are acquired from related parties, IAS 24 disclosure requirements apply

Financial Assets
Initial Measurement
- On initial recognition, financial assets (except trade receivables) are measured at fair value. If the financial asset
is not classified as fair value through profit or loss, any directly attributable transaction costs are adjusted against the fair value.
- Trade receivables, which do not have a major financing element, are measured at their transaction price in accordance
with IFRS 15.

Example:
An entity purchases a financial asset for $1,000 which is classified as a financial asset at fair value through other comprehensive
income.Transaction costs of $20 were incurred on the purchase.The asset is initially measured at $980.
If the asset had been classified as fair value through profit or loss it would be measured at $1,000 and the $20 would be
expensed to profit or loss immediately.
Subsequent Measurement
- Once recognised, a financial asset is subsequently measured
at either:
- amortised cost
- fair value through other comprehensive income; or
- fair value through profit or loss.
- Classification requires consideration of:
- the entity's business model. This refers to how the entity manages its financial assets to generate cash flows. (Does
it intend to collect contractual cash flows (i.e. interest and principal repayments), sell financial assets or both?)
- the contractual cash flow characteristics of the financial asset.

Amortised Cost
- A financial asset is subsequently measured at amortised cost if it meets two conditions:
1. It is held within a business model whose objective is achieved through holding financial assets to collect
contractual cash flows
2. Its contractual terms give rise to cash flows on specified dates which are solely payments of principal and interest
(on the outstanding principal).

Example:
An entity purchased a debt instrument for $1,000. The instrument pays interest of $60 annually and had 10 years to maturity
when purchased. The business model test was met and the instrument was classified as a financial asset at amortised cost.
Nine years have passed and the entity is suffering a liquidity crisis and needs to sell the asset to raise funds. The sale was not
expected on initial classification and does not affect the classification (i.e. there is no retrospective reclassification).
Fair Value Through Other Comprehensive Income:
- A financial asset is subsequently measured at fair value through other comprehensive income if it meets two
conditions:
1. It is held within a business model whose objective is achieved through collect contractual cash flows and sell
financial assets
2. Its contractual terms give rise to cash flows on specified dates, which are solely payments of principal and interest.
Example:
An entity anticipates the purchase of a large property in eight years‘ time. The entity invests cash surpluses in short- and long-
term financial assets. Many of the financial assets purchased have a maturity in excess of eight years. The entity holds the
financial assets for their contractual cash flows but will sell them and reinvest the cash for a higher return as and
when an opportunity arises. The objective of the business model is achieved by collecting contractual cash flows and selling the
financial assets. The entity's decisions to hold or sell aim to maximise returns from the portfolio of financial assets.

- The asset is measured at fair value in the statement of financial position, and interest income, based on the amortised
cost of the asset, is recognised in the statement of profit or loss. Any difference, after allowing for impairment,
is recognised in other comprehensive income.

An entity purchases a debt instrument for $2,000. The entity's business model is to hold financial assets for contractual cash
flows and sell them when conditions are favourable. The asset has a coupon rate of 5%, which is also the effective interest rate.
At the end of the first year the fair value of the asset has fallen to $1,920; part of the fall in value is due to 12-month expected
credit losses on the asset of $60. Of the fall in value $60 will be expensed to profit or loss as an impairment loss and $20 will be
debited to other comprehensive income.
Fair Value Through Profit or Loss:
- All other financial assets are measured at fair value through profit or loss, with one possible exception:
On initial recognition an entity may elect to designate an equity instrument in another entity at fair value through
other comprehensive income.
- Also, an entity can opt to designate any financial asset at fair value through profit or loss in order to eliminate an accounting
mismatch (i.e. where a linked financial liability is measured at fair value through profit or loss).

Gains and Losses:

- Interest income is recognised in profit or loss using the instrument's effective interest rate.
- Dividend income is recognised in profit or loss when the entity's right to the dividend has been established.
- Gains and losses on financial assets measured at amortised cost are recognised in profit or loss.
Generally, gains and losses on financial assets that are measured at fair value are recognised in profit or loss with
the following exceptions:
- If it is part of a hedging relationship.
- If it is an equity investment measured at fair value through other comprehensive income.
- If it is a debt instrument measured at fair value through other comprehensive income some fair value changes will
be recognised in other comprehensive income:
- impairment gains and losses and foreign exchange gains and losses are recognised in profit or loss; but
- changes due to the movement in fair value of the instrument are recognised in other comprehensive income.
Example:
An entity purchased a debt instrument at its fair value, $1,000. The entity classified the asset at fair value through other
comprehensive income as its business model is to collect contractual cash flows and sell financial assets. The instrument had
five years to maturity and a contractual par value of $1,250. It pays fixed interest of 4.7% and its effective interest rate is 10%.
At the end of the first year the fair value of the instrument is $1,020. The entity has calculated the impairment loss on the asset
to be $8.
Dr Cash – interest received ($1,250 x 4.7%) $ 59
Dr Financial asset (increase in fair value) $ 20
Dr Profit or loss – impairment (as given) $ 8
Dr Other comprehensive income (fair value change) $ 13
Cr Profit or loss – interest income ($1,000 x 10%) $ 100
The change in fair value recognised in other comprehensive income (in this case a balancing loss of $13) will be reclassified
through profit or loss on derecognition.

Example:

Bravo acquired 20,000 equity shares in Chester on 1 January paying $7.20 per share. Brewster incurred transaction costs of
$1,600 on the purchase of the shares In November, Chester paid a dividend of 4 cents per share. On 31 December, the share
price of Chester had risen to $7.47.
Required:
Explain how the investment in Chester should be accounted if:
(a) Brewster intends to hold the shares for a maximum of two years.
(b) Brewster has stated that it wants to recognise the investment at
fair value through other comprehensive income.
Solution:
a) Held for Short Term
The equity investment is measured at fair value in the statement of financial position with the increase in fair value being
credited to profit or loss. The transaction costs are expensed immediately to profit or loss and the dividend received in the
period is credited to profit or loss.
Statement of financial position
Equity investments (20,000 × $7.47) = $149,400
Profit or loss
Increase in fair value (20,000 ×( $7.47 – $7.20)) = $5,400
Dividend income (20,000 × 4 cents) = $800
Transaction costs ($1,600)
(b) Fair Value Through Other Comprehensive Income
The equity investment is initially measured in the statement of financial position at fair value plus the transaction costs on initial
measurement, $145,600 ((20,000 x $7.20) + $1,600). At the end of the year, it is Re measured at fair value of $149,400 and the
increase of $3,800 is credited to other comprehensive income. Dividend income of $800 is
credited to profit or loss.
Embedded Derivatives:

An embedded derivative is a component of a combined instrument which includes a non-derivative host contract.
- The effect will be that some of the cash flows of the combined instrument will vary in a manner that is similar to that of a
stand-alone derivative.
- A derivative that is attached to a financial instrument but can be transferred separately from that instrument (e.g.
a warrant) is not an embedded derivative, but a separate financial instrument.
- If the instrument contains a host contract that falls within the scope of IFRS 9 then the entire contract will be accounted for
in accordance with IFRS 9; it is not separated.
- If the host contract is not a financial instrument under IFRS 9 then the embedded derivative will have to be separated, and
accounted for as a separate derivative, if:
- the economic characteristics and risks of the derivative are not closely related to the host
- a separate instrument with the same terms as the embedded derivative would meet the definition of a
derivative
- the hybrid contract is not measured at fair value with changes recognised in profit or loss.

Example:

A company with $ as its functional currency buys raw materials for use in production from a UK company that has £ as its
functional currency. The transaction is denominated in €, not the functional currency of either party to the
transaction, and so an embedded derivative has been included in the purchase contract.
There are now two elements to the contract:
(1) Contract to buy/sell goods; and
(2) Movement on the $/€ and £/€ exchange rates.
Reclassification
-If an entity changes its business model for managing financial assets it must reclassify all affected financial assets
prospectively, from the date of the change.
- Amounts previously recognised based on the financial assets original classification are not restated.

Derecognition:

Derecognition Criteria:

- An entity derecognises a financial asset (or a part of it) when, and only when:
- the contractual rights to the cash flows from the financial asset expire
- it transfers the financial asset and the transfer qualifies for derecognition.
- In many cases, derecognition of a financial asset is straightforward—if there are no longer any contractual rights,
the asset is derecognised. If contractual rights remain, the standard requires three further steps to be considered
(i.e. transfer, risks and rewards, control).

Transfer of a Financial Asset:

- An entity transfers a financial asset if, and only if, it either:
- gives the contractual rights to receive the cash flows to a third party
- retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash to a third
party.
Transfer of Risks and Rewards of Ownership:
- When the entity establishes that a transfer has taken place, it must then consider risks and rewards of ownership.
- If substantially all the risks and rewards of ownership of the financial asset have been transferred, the financial asset is
derecognised.
- However, if the entity neither transfers nor retains substantially all the risks and rewards of ownership, the entity
determines whether it has retained control.

Control:
- If control has not been retained, the financial asset is derecognised.
- If the third party is able to use the asset as if it owned it (e.g. sell the asset without attaching conditions such as a
repurchase option), the entity has not retained control.
- In all other cases, the entity has retained control.
Example:
(a) As part of a contract, Eminem is required to transfer to Floyd a financial asset comprising 5,000 shares in a listed entity.
Under the terms of the contract, Floyd is required to return the same number of shares to Eminem on demand. As the shares
are listed and are therefore freely traded in an active market, Floyd can sell the shares when received and repurchase 5,000
shares when required to return them to Eminem
Eminem should derecognise the shares when transferred to Floyd as it has lost control.
(b) The same situation, except that the "shares" transferred are rare collector's items of shares issued by a Russian railroad
entity in the late 1800s. In this situation, the shares are not freely available on an active market and, if sold, could not be
repurchased (without attaching a repurchase option). Control has not been passed and the financial asset would not be
derecognised.
- Where a financial asset is transferred to another entity but control has not been lost, the transferor accounts for the
transaction as a collateralised borrowing. If control passes, the asset may be treated as sold.
Dr Cash
Cr Disposals
If control does not pass, then the asset has not been sold but rather it has been used as collateral (security) for borrowing.
Dr Cash
Cr Loan

Profit or Loss on Derecognition:

- On derecognition, the gain or loss included in profit or loss for the period is the difference between:
- the carrying amount of an asset (or portion of an asset) transferred to another party; and
- the consideration received, adjusted for any new asset received or new liability assumed.

Impairment:

Definitions:

Past due: a financial asset is past due when the debtor has failed to make a payment that was contractually due.
- Impairment gain or loss: gains or losses recognised in profit or loss that arise from the impairment requirements of IFRS 9.
- Credit loss: the present value of the difference between all contractual cash flows due to be received and those expected
to be received (i.e. all cash shortfalls).
- Lifetime expected credit losses: losses that result from all possible default events over the expected life of a financial
instrument.
Loss allowance: the allowance for expected credit losses on:
- financial assets measured at amortised cost or fair value through other comprehensive income
- lease receivables
- contract assets (under IFRS 15), loan commitments and financial guarantee contracts.

General Approach
- Financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income
according to the entity's business model are subject to impairment testing.
- A loss allowance for any expected credit losses must be recognised in profit or loss.
- The loss allowance is measured at each reporting date. The amount depends on whether or not the instrument's credit risk
has increased significantly since initial recognition:
- If significant, the loss allowance is the amount of the lifetime expected credit losses.
- If not significant, the loss allowance is 12-month expected credit losses.

Practical methods may be used to measure expected credit losses as long as they are consistent with the principles
prescribed by the standard
Credit Risk:
- The credit risk associated with a financial asset must be assessed at each reporting date:
-If it has increased significantly the loss is measured based on the lifetime of the asset.
- If it has not increased significantly the loss is measured based on the 12-month expected credit losses.
- The probability of a significant increase in credit risk will be higher for assets with a low credit risk on initial recognition than
for those with a high credit risk on initial recognition.
- Factors that could significantly increase credit risk include:
- An actual or forecast deterioration in the economic environment which is expected to have a negative effect on
the debtor's ability to generate cash flows.
- The debtor is close to breaching covenants which may require restructuring of the loan.
- A decrease in the trading price of the debtor's bonds and/ or significant increases in credit risk on other bonds of the
same debtor.

- The fair value of an asset has been below its amortised cost for some time.
- A reassessment of the entity's own internal risk grading of loans given.
- An actual or expected decline in the debtor's operating results.
- There is a rebuttable presumption that any asset that is more than 30 days past due is an indicator that lifetime expected
credit losses should be recognised.

Trade Receivables:
- The standard allows a simplified impairment approach to an entity's trade receivables. The simplification allows the entity
to measure the loss allowance as an amount equal to lifetime expected credit losses for trade receivables or contract assets
resulting from transactions under IFRS 15 Revenue from Contracts with Customers.
A provision matrix is a practical method of calculating expected credit losses on trade receivables. This is based
on percentages (using appropriately adjusted historical experience) of the number of days past due. (For example,
1% if not past due, 2% if less than 30 days past due, 5% if more than 30 but less than 90, etc.)

Financial Liabilities (IFRS 9)

Initial Recognition
A financial liability is recognised only when an entity becomes a party to the contractual provisions of the instrument.
Measurement
Initial Measurement
If the liability is classified at fair value through profit or loss, any relevant transaction costs will be charged immediately to
profit or loss.

Most financial liabilities will subsequently be measured at amortised cost using the effective interest method, with the interest
expense being charged to profit or loss.

The groups of financial liabilities which are not measured at

amortised cost will include:
Those at fair value through profit or loss (to include derivatives) which are measured at fair value.
Commitment to provide a loan at below-market interest rate these liabilities will be measured at the higher of the
amount determined under IAS 37 or the initial amount recognised less any cumulative amortisation
Derecognition:
-An entity removes a financial liability from the statement of financial position when, and only when, it is extinguished—that
is, when the obligation specified in the contract is discharged, cancelled or expires.
- This condition is met when either:
- the debtor discharges the liability by paying the creditor, normally with cash, other financial assets, goods or
services
- the debtor is legally released from primary responsibility for the liability (or part thereof) either by process of law or by
the creditor.
- If the liability is renegotiated with the original lender at substantially different contractual terms, then the original liability
will be derecognised and a new liability will be recognised.
- The difference between:
- the carrying amount of a liability (or portion) extinguished or transferred to another party (including related
unamortised costs)
- the amount paid for it, including any non-cash assets transferred or liabilities assumed, is included in profit or loss
for the period.

Hedging:

Definitions:
Hedging: for accounting purposes, means designating one or more hedging instruments so that their change in fair value is an
offset, in whole or in part, to the change in fair value or cash flows of a hedged item.
A hedged item─ an asset, liability, firm commitment or highly probable
forecast transaction which:
- exposes the entity to the risk of changes in fair value or changes in future
cash flows
- is designated as being hedged.

A hedging instrument:a designated derivative (or, in limited circumstances, another financial asset or liability) whose fair
value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.
Hedge effectiveness: the degree to which changes in the fair value or cash flows of the hedged item which are attributable to
a hedged risk are offset by changes in the fair value or cash flows of the hedging instrument.
Hedge ratio: the quantity of the hedging instrument and the quantity of the hedged item in terms of their relative weighting.

Objective of Hedge Accounting:

- Most entities are exposed to risks that could affect profit or loss or other comprehensive income. Hedging is just one
of the strategies that management may adopt to reduce exposure to risk.
- IFRS 9 allows an entity to account for an economic hedge using hedge accounting; this will eliminate some of the
volatility in the movement in value of the hedged item or hedging instrument that would otherwise be reflected in profit
or loss.

Hedge accounting is voluntary. If hedge accounting is not used hedged items and hedging instruments are accounted for in
the same manner as other financial asset and liabilities.
Hedging Instruments:
All derivatives (except written options, because the writer has accepted risk rather than reducing risk) may be designated as
a hedging instrument.
Non-derivative financial instruments (e.g. foreign currency loans) may be designated as a hedging instrument.

Hedged Items:
A hedged item can be:
- a recognised asset or liability;
- an unrecognised firm commitment
- a highly probable forecast transaction.
The hedged item can be
- a single asset, liability, firm commitment or forecast transaction
- a group of assets, liabilities, firm commitments or forecast transactions with similar risk characteristics.

Hedge Accounting:
Hedging Relationships
There are three types of hedging relationships:
1. Fair value hedge: a hedge of the exposure to changes in the fair value of a recognised asset (or liability or an identified
portion of such an asset or liability) which:
- is attributable to a particular risk; and
- will affect reported profit or loss.
2. Cash flow hedge: a hedge of the exposure to variability in cash flows which:
- is attributable to a particular risk associated with a recognised asset or liability (e.g. all or some future interest
payments on variable rate debt) or a highly probable forecast transaction (e.g. an anticipated purchase or sale); and
- will affect reported profit or loss.
3. Hedge of a net investment in a foreign operation as
defined in IAS 21.
-Hedge Accounting Criteria:
A hedge relationship qualifies for hedge accounting if all the following criteria are met:
- The relationship consists only of eligible hedging instrument and hedged items.
- At inception, there is a formal designation of the relationship and of the entity's risk management objective.
The relationship meets all the hedge effectiveness requirements:
- there is an economic relationship between the hedged item and hedging instrument
- the effect of credit risk does not dominate the value changes that result from the economic relationship
- the hedge ratio of the relationship is the same as the hedge ratio of the actual quantity of the hedging instrument used
to the actual quantity of the hedged item.

Fair Value Hedges

- The gain or loss on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is
recognised immediately in profit or loss.

- If the hedged item is required to be measured at fair value through other comprehensive income, any gain or loss on the
hedged item will be recognised in profit or loss.
- If the hedged item is an equity instrument that is voluntarily classified at fair value through other comprehensive income,
the gain or loss on the item will be recognised in other comprehensive income.
Cashflow Hedges:
-The portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised in other
comprehensive income.
- Any ineffective portion should be reported immediately in profit or loss if the hedging instrument is a derivative.
- If the hedge transaction results in the recognition of a financial asset or liability, the amount previously recognised in other
comprehensive income will be reclassified to profit or loss to match the interest income or expense from the financial asset
or liability.
- If the hedge transaction results in the recognition of a nonfinancial asset or liability the hedge reserve will be included in
the initial cost of that asset or liability.

Example:

30 September
Semo contracted to buy a plane for Swiss Francs (SwFr)1,000,000 (a future
transaction). The spot rate at this date was 2.5 SwFr = $1.
Semo is worried about changes in the rate, so on the same day it enters into a
forward exchange contract to buy SwFr/sell $ at a rate of 2.5 SwFr = $1.
Year end 31 December
• The spot rate is 2.4 SwFr = $1.
The fair value of the forward is given as:
 $
1,000,000 @ 2.4 = 416,667
1,000,000 @ 2.5 = 400,000
________
16,667
_________

31 March
• The plane is purchased. The rate is 2.3 SwFr = $1.
The fair value of the forward is given as:

$
1,000,000 @ 2.3 = 434,783
1,000,000 @ 2.5 = 400,000
_________
34,783
__________
Solution:

Forward Reserve Cash

16,667
16667 434783
18116
18116 34783
34783 34783

Notes:
Plane Asset 1. Spot rate is 2.5, which is the same as the forward, therefore the fair
value of the forward is zero.
434783 2. Fair value of forward (based on the difference between the spot rate
and contracted rate) at the year end.
34783 3. Increase in fair value of the forward to the date of purchase of the
asset.
400000 4. Purchase of asset at spot rate.
434783 5. Recognising the amount by which the forward reduces the cash flow.
434783 6. "Basis adjustment". Recognises that the asset's real cost was just
$400,000.
400000
Disclosure:
Rules
The purpose of disclosure is to:
- enhance understanding of the significance of financial instruments to an entity's financial position, performance
and cash flows
- assist in assessing the factors affecting the amount, timing and certainty of future cash flows associated with those
instruments
- provide information to assist users of financial statements in assessing the extent of related risks.
- Information sufficient to allow reconciliation to the line items in the statement of financial position must be provided.
- The information disclosed should facilitate users evaluating the significance of financial instruments on an entity's financial
position and performance.

Assets and Liabilities

Categories of Financial Assets and Liabilities
An entity must disclose the carrying amounts analysed into the following categories:
- financial assets at fair value through profit or loss, showing separately:
- those designated on initial recognition,
- those which must be measured at fair value;
- financial liabilities at fair value through profit or loss, showing separately:
- those designated on initial recognition,
those which meet the definition of held for trading;
- financial assets measured at amortised cost;
- financial liabilities measured at amortised cost; and
- financial assets measured at fair value through other
comprehensive income.
- Disclosure may be on the face of the statement of financial position or in the notes.

Financial Assets or Liabilities at Fair Value Through

Profit or Loss
- If an entity has measured a financial asset at fair value which otherwise would be measured at amortised cost, it should
disclose:
- the maximum exposure to credit risk at the end of the period
- the amount by which any credit derivatives or similar instruments cancel out the exposure to credit risk;
- the amount of change in the period (and cumulatively) in the fair value of the asset which is attributable to changes
in credit risk
- the amount of change in fair value of any related credit derivatives, or similar instruments, both during the period
and cumulatively.
- If a financial liability is designated at fair value through profit or loss, an entity should disclose:
- the amount of change, both in the period and cumulatively, in the fair value of the instrument that is attributable to any
change in credit risk
- the difference between the carrying amount of the instrument and the amount contractually required to settle
the instrument at maturity.
Financial Assets Measured at Fair Value Through Other
Comprehensive Income
- If an entity has designated investments in equity instruments at fair value through other comprehensive income, it must
disclose:
- which investments it has so designated;
- the reason for presenting in this way;
- the fair value of each investment at the end of the period;
- dividends recognised in the period, separated into dividends received from investments which have been disposed of
during the period and those which remain at the end of the period
- any transfers of cumulative gain or loss between equity components during the period and the reason for the transfer.
- If an entity disposed of investments which had been designated at fair value through other comprehensive income,
it must disclose:
- the reason for the disposal
- the fair value of the instrument at the disposal date; and
- any cumulative gain or loss on disposal.

Reclassification
- If an entity reclassifies a financial asset during the current orprevious period, it must disclose:
- the date of reclassification
- a detailed explanation of the change in business model leading to the reclassification and a qualitative description
of the effect on the entity's financial statements
- the amount reclassified into and out of each category.
- For subsequent reporting periods an entity must disclose, inrespect of assets reclassified to be measured at amortised cost:
- the effective interest rate on the date of reclassification; and
- the interest income or expense recognised.
- If an entity has reclassified financial assets to be measured at amortised cost since the last reporting date, it must disclose:
- the fair value of the asset at the end of the reporting period
- the fair value gain or loss which would have been recognised in profit or loss during the reporting period if the
asset had not been reclassified.

Derecognition:
If an entity transfers financial assets which do not meet the derecognition criteria, partially or wholly, it must disclose:
- the nature of the assets
- any risks and rewards to which the entity is still exposed;
- the carrying amount of the asset and any associated liability
- which remains wholly or partially recognised
- for those assets which are partially derecognised, the carrying amount of the original asset.

Collateral:
- An entity must disclose:
- the carrying amount of financial assets pledged as collateral for liabilities; and
- the terms and conditions of the pledge.

Allowances for Credit Losses:

Impairment of financial assets which are accounted for by recording the loss in a separate account (rather than against
the asset) will require an entity to disclose a reconciliation of the movement in the account for the period.
Gains and Losses:
Items of Income, Expense, Gains or Losses
The following will be disclosed, on the face of the statement of comprehensive income or in the notes:
- net gains or losses on:
- financial assets or liabilities at fair value through profit or loss
- financial assets and liabilities measured at amortised cost
- financial assets measured at fair value through other comprehensive income.
- total interest income and expense on financial assets measured at amortised cost and liabilities not at fair value
through profit or loss
- interest income on impaired financial assets
- amount of impairment loss for each class of financial asset.

Other Disclosures:
Hedge Accounting
- An entity discloses the following for each category of hedge:
- a description of each type of hedge;
- a description of the designated hedging instruments along with their fair values
- the nature of the risks being hedged.
- The following require separate disclosure:
- gains and losses in respect of fair value hedges:
- on the hedging instrument
- the hedged item
- the ineffectiveness included in profit or loss for cash flow hedges and hedges of net investments in foreign operations.
Fair Value:
- Subject to certain exceptions, an entity discloses the fair value of each class of financial asset and liability to allow comparison
with the instruments' carrying values.
An entity must disclose
- methods used and assumptions made in arriving at fair value
- whether fair values have been arrived at using published price quotations in active markets or are estimations.

Nature and Extent of Risks:

- An entity discloses information about the nature and extent of risks arising from financial instruments.
- Credit risk, liquidity risk and market risk should be disclosed as a minimum.
Qualitative Disclosures
For each type of risk:
- the exposure to risk and how it arises
- management's objectives, policies and processes for managing the risk and methods used to measure the risk
and
- any changes in the above occurring since the previous period.
Quantitative Disclosures
For each type of risk:
- summary quantitative data about exposure to risk at the reporting date;
- any concentrations of risk.
 IFRS 8 Operating Segment

Scope:
IFRS 8 applies to the separate financial statements of entities whose debt or equity instruments are publicly traded (or are in the
process of being issued in a public market).
- IFRS 8 also applies to the consolidated financial statements of a group whose parent is required to apply IFRS 8 to its
separate financial statements.
- Where an entity is not required to apply IFRS 8, but chooses to do so, it must not describe information about segments as
"segment information" unless it complies with IFRS 8.
- Where a parent's separate financial statements are presented with consolidated financial statements, segment information is
required only in the consolidated financial statements.

Operating Segment:
This is a component that meets the following three criteria:
1. It engages in business activities from which it may earn revenues and incur expenses (including intersegment
revenues and expenses arising from transactions with other components of the same entity)
2. its operating results are regularly reviewed by the entity's "chief operating decision-maker" to make decisions (about
resources to be allocated) and to assess its performance.
3. Discrete financial information is available:
- An entity's post-employment benefit plans are not operating segments.
- Corporate headquarters or other departments that do not earn revenues (or only incidental revenues) are not operating
segments.
Chief Operating Decision-Maker:
Chief operating decision-maker (CODM): describes the function which allocates resources to and assesses the performance of
operating segments (e.g. a CEO or board of directors).

Reportable Segments :
Separate Information:

Separate information must be reported for each operating segment that:

- meets the definition criteria or aggregation criteria for two or more segments
- exceeds the quantitative thresholds.

Aggregation Criteria:
Two or more operating segments may be aggregated into a single operating segment if:*
- aggregation is consistent with the core principle of this IFRS
- the segments have similar economic characteristics; and
- the segments are similar in respect of:
- the nature of products and services (e.g. domestic or industrial)
- the nature of the production process (e.g. maturing or production line)
- types or class of customer (e.g. corporate or individual)
- distribution method (e.g. door-to-door or Web Sale)
- the regulatory environment (e.g. in shipping, banking, etc).
Quantitative Thresholds:
- Separate information must be reported for an operating segment that meets any one of the following quantitative
thresholds:
- reported revenue (including both external and intersegment) is 10% or more of the combined revenue
(internal and external) of all operating segments
- profit or loss is 10% or more, in absolute amount, of the
greater of:
(i) the combined profit of all operating segments that did not report a loss; and
(ii) the combined loss of all operating segments that reported a loss;
- assets are 10% or more of the combined assets of all operating segments.
- At least 75% of the entity's revenue must be included in reportable segments. Thus operating segments that fall
below the quantitative thresholds may need to be identified as reportable.
- Information about other business activities and operating segments that are not reportable are combined and disclosed
in an "all other segments" category.
- When an operating segment is first identified as a reportable segment according to the quantitative thresholds, comparative
data is presented, unless the necessary information is not available and the cost to develop it would be excessive.

Example:
Faree group has:
- three significant business lines which make up about 70% of combined revenue; and
- five small business lines, each of them contributing about 6% to the combined revenue.
Required:
Explain how many segments Fireball group should report.
Solution:
The issue is whether or not it is acceptable to report the three major business lines separately and to include the rest for
reconciliation purposes as "all other segments".
- Since the reported revenues attributable to the three business lines that meet the separate reporting criteria constitute less
than 75% of the combined revenue, additional segments must be identified as reportable, even though they are below the 10%
threshold, until at least 75% of the combined revenue is included in reportable segments.
- If at least one of the small segments meets the aggregation criteria to be aggregated with one of the three reportable
segments, there will be four reportable segments (including "all other segments").
- Alternatively, two or more of the smaller segments may be aggregated, if they meet the aggregation criteria. In this case,
there will be five reportable segments.
- If none of the small segments meets the criteria to be aggregated with any of the other business lines, one of them
must be identified as reportable, though it does not meet the 10% threshold. In this case, there will be five reportable
segments also.

Disclosure:

An entity must disclose information to enable users of financial statements to evaluate:

- the nature and financial effects of its business activities and
- the economic environments in which it operates.
This includes:
- general information;
- information about reported segment profit or loss, segment assets, segment liabilities and the basis of measurement and
- reconciliations.

General Information:
- The factors used to identify reportable segments, including:
- the basis of organisation (e.g. around products and services, geographical areas, regulatory environments, or
a combination of factors and whether segments have been aggregated) and
- types of products and services from which each reportable segment derives its revenues.

Information About Profit or Loss, Assets and Liabilities:

The following must be reported for each reportable segment:
- A measure of profit or loss and total assets and liabilities.
- Disclosure is only required if such information is regularly reported to the chief operating decision-maker.

Profit or Loss
The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision-maker
(even if not included in the measure of segment profit or loss):
- revenues from external customers;
- intersegment revenues;
- interest revenue
- interest expense
- depreciation and amortisation
- other material items of income and expense required by IAS 1 (i.e. write-downs, restructurings, disposals,
discontinued operations, litigation settlements and reversals of provisions)
- entity's interest in the profit or loss of associates and joint ventures accounted for by the equity method;
- income tax expense or income and
- material non-cash items other than depreciation and amortisation.
Assets:
The following must also be disclosed if the specified amounts are regularly provided to the chief operating decision-maker
(even if not included in the measure of segment assets):
- the investment in associates and joint ventures accounted for by the equity method; and
- additions to non-current assets (other than financial instruments, deferred tax assets and post-employment
benefit assets).
Example:

Machine Light Bulb Fan Finance all other Total

$ $ $ $ $ $ $

Revenue from external customer 7200 12000 22800 28800 12000 2400 85200
Intersegment revenue - - 7200 3600 - - 10800
Interest revenue 1080 1920 2400 3600 - - 9000
Interest expense 840 1440 1680 2640 - - 6600
Net interest revenue - - - - 2400 - 2400
Depreciation and amortization 480 240 120 3600 2640 - 7080
Reportable segment profit 480 168 2160 5520 1200 240 9768
Impairment of assets - 480 - - - - 480
Reportable segment assets 4800 12000 7200 28800 136800 4800 194400
Expenditure for reportable
Segment non current assets 720 1680 1200 1920 1440 - 6960
Reportable segment liabilities 2520 7200 4320 19200 72000 - 105240

(a) Revenues from segments below the quantitative thresholds are attributable to three operating segments of Eparts. Those
segments include a small warehouse leasing business, a car rental business and a design consulting practice. None of those
segments has ever met any of the quantitative thresholds for determining reportable segments.
(b) The finance segment derives a majority of its revenue from interest. Management primarily relies on net interest revenue,
not the gross revenue and expense amounts, in managing that segment. Therefore only the net amount is disclosed.
The amount of each segment item reported is the measure reported to the chief operating decision-maker.
- Segment information is no longer required to conform to the accounting policies adopted for preparing and presenting the
consolidated financial statements.
- If the chief operating decision-maker uses more than one measure of an operating segment's profit or loss, the
segment's assets or the segment's liabilities, the reported measures should be those that are most consistent with those
used in the entity's financial statements.

An explanation of the measurements of segment profit or loss, segment assets and segment liabilities must disclose, as a
minimum:
- the basis of accounting for intersegment transactions
- the nature of any differences between the measurements of the reportable segments and the entity's financial statements (if
not apparent from the reconciliations required)
- the nature of any changes from prior periods in the measurement methods used and the effect, if any, of those
changes on the measure of segment profit or loss and
- the nature and effect of any asymmetrical allocations to reportable segments.
Reconciliations:
Reconciliations of the total of the reportable segments with the entity are required for all of the following:
- revenue
- profit or loss (before tax and discontinued operations);
- assets
- liabilities (if applicable) and
- every other material item.
- All material reconciling items must be separately identified and described (e.g. arising from different accounting policies).

Restatement of Previously:
Reported Information
- Where changes in the internal organisation structure of an entity result in a change in the composition of reportable
segments, corresponding information must be restated unless the information is not available and the cost to develop it
would be excessive.
- An entity discloses whether corresponding items have been restated.
- If not restated, the entity must disclose the current period segment information on both the old and new bases of
segmentation, unless the necessary information is not available and the cost to develop it would be excessive.
Entity-wide Disclosures:
- All entities subject to this IFRS are required to disclose information about the following, if it is not provided as part of
the required reportable segment information:
- products and services
- geographical areas; and
- major customers.
- The only exemption for not providing information about products and services and geographical areas is if the
necessary information is not available and the cost to develop it would be excessive, in which case that fact must be disclosed.

By Product and Service:

Revenues from external customers for each product and service (or each group of similar products and service) based
on the financial information used to produce the entity's financial statements.

By Geographical Area:
- Revenues from external customers attributed to:
- the entity's country of domicile;
- all foreign countries in total; and
- individual foreign countries, if material.
- Similarly, non-current assets (other than financial instruments,deferred tax assets and post-employment benefit assets).

Major Customers:
- An entity discloses the extent of its reliance on major customers by stating:
For the purposes of this IFRS, a group of entities known to be under common control (including entities under the control of
a government) is a single customer.
- if revenues from a single external customer amount to 10% or more of the entity's total:
- the total revenues from each such customer and
- the segment(s) reporting the revenues.
- An entity need not disclose the identity of a major customer or the amount of revenues that each segment reports from
that customer.
Reason for Issue of IFRS 8:
The IASB saw the subject of segmental reporting as one that would fit into its short-term convergence project with FASB.
It considered that the project was stand-alone and could be completed in a relatively short time frame.

US GAAP:
- The US standard is based on components of business which management uses to make their decisions on operating
matters.
- Research seems to show that using this approach will
- increase the number of reported segments;
- provide greater quantity of information;
- enable users to see through the eyes of management;
- allow timely reporting at relatively low incremental cost;
- enhance consistency with management discussions and analysis and
- provide various measures of segment performance.
- The IASB supports the principles of a management-based approach and therefore used the text of SFAS 131 as the
basis for IFRS 8. There are some minor differences, but these relate to the terminology being used.
Advantages:

- The IASB counters this argument by pointing out that information requested by the CODM should also be useful to
the external users of the financial statements.
- The disclosure requirements of the standard should be cost effective. As the information is already being provided to the
CODM there should be very little extra cost in incorporating this in the financial statements.

Disadvantages:

- The standard does not define segment profit. This will again lead to a lack of comparability between entities if there are
variations in how they determine profit
- Many argue that the disclosures required are commercially sensitive and therefore could give competitors an unfair
advantage. This may be true.
- Many accountants have criticised the move to a management based approach from the more objective segments-based
approach on products and geographical regions.
-The management approach means that the identification of a segment is a subjective internal decision that leads to a lack of
comparability between entities. The approach may also give rise to inconsistency from one reporting period to the next
if internal reporting is changed the information for segment reporting will also change
IASB Review:
- The IASB post-implementation review of IFRS was completed in 2013. The review found that the benefits of applying the
standard were mainly as expected and concluded that the standard has improved the quality of segment reporting in
financial statements.
Areas in which improvements could be made relate to:
- The concept of the CODM this is seen as confusing and outdated and difficult to identify in some entities.
The presentation of reconciliations there is some uncertainty about presentation and some investors find the reconciliations
confusing.
 IAS 19 Employment Benefit
Companies remunerate their staff by means of a wide range of benefits. These include wages and salaries, and retirement
benefits.
The cost to the employer needs to be matched with benefits derived from employees' services.
Objective:
-The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits.
An entity must recognise:
-a liability when an employee has provided service in exchange for employee benefits to be paid in the
future and
-an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange
for employee benefits
Scope:
IAS 19 applies to all employee benefits except those which relate to share-based payments to which IFRS 2 applies.
Employee benefits include:
-short-term employee benefits which are expected to be settled within 12 months of the reporting date (e.g. wages,
salaries and social security contributions, paid annual leave and paid sick leave, etc)
-post-employment benefits (e.g. pensions, other retirement benefits, post-employment life insurance and postemployment
medical care)
-other long-term employee benefits (e.g. long-service leave or sabbatical leave)and
-termination benefits.
Definition:
Employee benefits: all forms of consideration given by an entity in exchange for service rendered by employees, or for the
termination of employment.
Short-term employee benefits: employee benefits (other than termination benefits) that are expected to be settled within 12
months after the end of the period in which the employees render
the related service.
Other long-term employee benefits: all employee benefits other than short-term employee benefits, post-employment
benefits and termination benefits.
Post-employment benefits: employee benefits (other than termination benefits) which are payable after the completion of
employment.
Post-employment benefit plans: formal or informal arrangements under which an entity provides post-employment
benefits for one or more employees.
Defined contribution plans: post-employment benefit plans under which an entity pays fixed contributions into a separate
entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the current and prior periods.
Defined benefit plans: post-employment benefit plans other than defined contribution plans.
Present value of a defined benefit obligation: the present value, without deducting any plan assets, of expected future
payments required to settle the obligation resulting fro employee service in the current and prior periods.
Current service cost: the increase in the present value of the defined benefit obligation resulting from employee service in the
current period.
Past service cost: the change in present value of the defined benefit obligation for employee service in prior periods, resulting
from a plan amendment or a curtailment
Net interest in the net defined liability (asset): the change
during the period in the net defined benefit liability (asset) that arises from the passage of time.
Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting from:
-experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually
occurred) and
-the effects of changes in actuarial assumptions.

Employee Benefits
Short-Term Employee Benefits
-Wages, salaries and social security contributions.
-Short-term compensated absences (e.g. paid annual leave and paid sick leave) where the absences are expected to occur
within 12 months after the end of the period in which the employees render the related employee service.
-Profit sharing and bonuses payable within 12 months after the end of the period in which the employees render the related
service.
-Non-monetary benefits (e.g. medical care, housing, cars and free or subsidised goods or services) for current employees.
Accounting for Short-Term Benefits:
-When an employee has rendered service to an entity during an accounting period, the entity recognises the amount of short
term employee benefits expected to be paid in exchange for that service:
-as a liability (accrued expense), after deducting any amount already paid; and
-as an expense (unless another IFRS requires or permits the inclusion of the benefits in the cost of an asset).
Long-Term Employee Benefits:
Other types of long-term employee benefits are those which are not expected to be settled in full before 12 months after
the end of the reporting period in which the service was given by the employee. The types of benefit will include:
-long-term paid absences (e.g. long-service and sabbatical leave)
-jubilee awards
-long-term disability benefits
-profit sharing and bonuses and
-deferred remuneration.
Accounting for Long-Term Benefits:
-There is not as much uncertainty about the measurement of other long-term employee benefits as there is with
post-employment benefits and so the standard requires a much simpler accounting model for these other long-term
benefits. As an example, there is no need to recognise any remeasurementin other comprehensive income (unlike postretirement
benefits).
-The principle to be applied in accounting for long-term benefits is similar to the accounting model for post-retirement benefits in that
there may still be deficits or surpluses arising.

Termination Benefits:
This term does not cover any benefits if the employee terminates the employment other than in response to an offer of termination.
Types
-Typically lump sum payments;
-Enhanced post-employment benefits (e.g. pensions);
-Salary to the end of a notice period during which the employee renders no service (e.g. “gardening leave”).
Recognition and Measurement:
A liability and expense is recognised:
-when the entity cannot withdraw the offer of benefits (e.g. because it is accepted by the employee) or
-on recognising a restructuring under IAS 37 involving termination payments, if earlier.
-A termination benefit to be settled wholly within 12 months after the end of the reporting period is treated as a
short-term
benefit.
-Otherwise it is treated as a long-term benefit (i.e. with remeasurementat the end of each reporting period).
Post Employment Benefits:
Benefit Plans:
-Arrangements whereby an entity provides post-employment benefits are post-employment benefit plans.
-An entity may, or may not, establish a separate entity to receive contributions and to pay benefits, although it is
convenient to think of the plan as a separate entity.
Classification:
Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, according
to the
economic substance of the plan.
Defined Contribution Plans
Introduction
-The entity must make a contribution into a separate fund for it to meet the definition of a defined
contribution plan. If no
contribution is made, then it is automatically classed as a defined benefit plan.
-The entity's obligation is limited to the amount it agrees to contribute to the fund.
-Thus, the amount of the post-employment benefits received by the employee is determined by the
amount of contributions
paid to the plan, together with investment returns arising from the contributions.
-In consequence, any risks with regard to the size of the pension paid fall on the employee.
Accounting for defined contribution plans is straightforward because the reporting entity's obligation for
each period is determined by the amounts to be contributed for that period.
Recognition and Measurement:
The accruals concept is applied:
-Charge contributions payable in respect of period to the statement of profit or loss.
-The statement of financial position will reflect any outstanding or prepaid contributions.
-An expense will be recognised for the contribution, unless another standard allows the cost to be
included as part of
an asset.
Defined Benefit Plan:
The entity's obligation is to provide the agreed benefits to current
employees.
-There is a risk that the fund will be insufficient to pay the agreed pension. If this happens then the entity will have to
provide for any shortfall (e.g. plans in which an employee is guaranteed a specified return).
-The entity will set cash aside which is invested to earn a return; this will grow and hopefully enable the entity to meet
its future obligations.
-Clearly, the estimation of the amount to set aside is very difficult. Usually companies will use the services of an actuary (an
expert in post-retirement benefits). The actuary will perform a calculation which includes estimates of all the
variables that could affect the growth of assets and liabilities.
These include:
-required post-retirement benefits
-rate of return on the stock market
-interest rate
-inflation
-rate of leavers and
-death in service probability.
-The actuary will then tell the company how much it needs to set aside to meet the obligation. This is usually stated as
a percentage of salary and is usually paid to the plan on a monthly basis.
-The actuary will never be absolutely accurate in the estimates. This means that the value of the plan assets and liabilities at
each year end will be different from that forecast at the last actuarial valuation. The standard gives rules on how (or
whether) to account for such differences.
Accounting Principles:
-An entity makes payments to a fund (a separate legal entity).This cash is invested and used to pay retirement benefits
when they fall due for payment. The fund is an entity with assets and liabilities (to the pensioners).
-At the end of each reporting period the assets and liabilities of the fund are valued and the entity recognises the net
liability (or, more rarely, the net asset) in the statement of financial position.
Example:
The following information relates to the assets and liabilities of the retirement benefit plan of Limo Co. (This is not a
summary of Limo’s statement of financial position but that of the plan.)
2014 2015
$m $m
Market value of plan assets 100 110
Present value of plan obligations (120) (135)
Net liability of the plan (20) (25)
The basic rule (simplified for this illustration) is that:
In 2014 Limo must recognise a liability of $20m
In 2015 Limo must recognise a liability of $25m
If Limo had made a payment of $1m to the fund in 2015 the full
Journal entry would be:
DrProfit or loss 6
Cr Liability (25 –20) 5
Cr Cash 1
Detailed Accounting:
-Prior to IAS 19 being revised in 2011 there were several ways of accounting for the costs and net
position of the defined
benefit plan. Actuarial gains or losses could be recognised immediately or over a period of time and
either in profit or
loss or in other comprehensive income.
-This meant that it was very difficult to compare different entities, especially if they used different
accounting models for
the same type of fund.
-IASB amended IAS 19 in 2011 to allow only one model of recognition and measurement for the net
defined benefit
liability (or asset) and one model of accounting for any actuarial gains or losses.
Statement of Financial Position:
-The statement of financial position must recognise the net
defined benefit liability or asset.
-If the net position results in an asset, then the amount of asset that can be recognised is limited to
the lower of:
-the surplus in the plan; and
-the asset ceiling.
Asset ceiling:
the present value of any economic benefits available to the entity in the form of refunds from the plan or future reductions
in contributions to the plan.
-If a fund is "in surplus", assets exceed liabilities. A degree of prudence is attached to the recognition of this net asset
position.
-A net asset position can arise due to:
-actuarial assumptions being over pessimistic; or
-asset returns being higher than expected.
-The asset meets the Framework definition of an asset, as the entity controls a resource that is expected to generate future
economic benefits.
-The maximum amount that can be recognised for this asset is the lower of:
-the fund surplus; and
-the asset ceiling.

Example:
A defined benefit fund has obligations of $720,000 and plan assets of $868,000 leading to a surplus of $148,000. The terms
of the fund state that any surplus must be split 50:50 between the fund and the entity. The present value of $148,000 using
an appropriate discount rate is $84,000. The asset ceiling restricts the amount of the surplus of $148,000
that can be recognised. As only 50% of the surplus can be refunded, the entity recognises only 50% of the present value (i.e.
$42,000).
Statement of Comprehensive Income:
-The statement of comprehensive income will recognise components of defined benefit cost, unless another standard
requires the cost be included as part of the cost of an asset.
-The defined benefit cost is made up of three components:
-service cost, which itself will comprise current service cost, past service cost and any gains or losses on settlement.
Service cost will be expensed to profit or loss.
-net interest on the net defined benefit liability, or asset.This cost is calculated by taking the net liability, or asset, at
the start of the period and applying the respective discount rate. The interest is expensed, credited, to profit or loss.
-remeasurementsof the net defined liability or asset. This includes actuarial gains and losses on the defined benefit
liability, the return on plan assets excluding the amount included in the net interest calculation, and any change in
the asset ceiling. This element of cost is included in other comprehensive income.
Actuarial Assumptions:
-It is likely that an entity will use the services of an actuary in calculating the defined benefit obligation and current
service cost.
-An actuary is a statistician who computes insurance risks and premiums, and will have expertise in the area of
pension issues.
-When calculating the defined benefit liability and current service cost the actuary uses the projected unit credit method.
-This model assumes each period of service gives rise to an additional benefit and measures each additional benefit
separately working towards the final obligation.
-The actuary is trying to predict the future and will need to make assumptions about what he expects to happen in
the future. Any assumptions made must be unbiased and mutually compatible.
The assumptions fall into two broad categories:
-demographic assumptions about employees, to include:
mortality
-employee turnover;
-dependants of employees who will be eligible for benefits.
financial assumptions, to include:
-discount rate
-benefit levels and future salary
-future medical costs for any medical benefits.

Past Service Cost:

-A past service cost arises when there is a change in the present value of the defined benefit liability caused by an
amendment to the plan or a curtailment.
-An amendment arises when an entity changes the benefits payable under a defined benefit plan. For example,
increasing
the plan's payout from 1% to 1.2% of final salary for each year of service including past service (i.e. back-dated)
would
increase the liability. The increase in the liability is charged to profit or loss in the year of change.
-A curtailment occurs when the number of employees covered by a plan is significantly reduced (e.g. if part of the
business
was terminated and the employees made redundant). This will usually lead to some settlement of the obligation to
the
employees.
-Any gain or loss on settlement is included in profit or loss in the year of settlement.
Past service cost should be recognised as an expense on the earlier of:
-the date when the plan amendment or curtailment occurs and
-the date when the entity recognises any related restructuring costs or termination benefits.
Example:
An entity is making redundant 100 employees who have pension entitlements under the entity's defined benefit scheme. As
a result of the redundancy, an obligation of $1.2 million is to be settled with immediate payouts amounting to $0.9 million.
The gain on the settlement of $0.3 million is recognised in profit or loss immediately.
Fair Value of Plan Assets:
-In a funded scheme the trustees of the fund will invest any contributions into various forms of assets. These assets will
include property, shares, debt assets and cash.
-IFRS 13 applies to the measurement of the fair value of the plan assets. If no market price exists for a particular
asset then the fair value should be estimated by discounting expected future cash flows.
-The fair value of the plan assets will then be deducted from the defined benefit liability to identify the net liability, or asset,
that will be recognised by the entity.
-The plan assets exclude any unpaid contributions due from the entity as well as any non-transferable financial instruments
issued by the entity and held by the fund.
Example:
benefit plan of EVofor three years:
2013 2014 2015
$000 $000 $000
Current service cost 125 140 155
Benefits paid 130 150 170
Contributions paid 80 90 100
Present value of the obligation
at 31 December 1,215 1,386 1,400
Fair value of the plan assets
at 31 December 1,147 1,137 1,200
Discount rate at the start of the year 9% 8% 8%
The present value of the obligation and the fair value of the plan assets were
both $1 million at 1 January 2013. In December 2014, a segment of the entity was sold and this resulted in a number of employees
being made redundant and the pension scheme for these employees was curtailed. Most of the employees found new jobs and
took the option to transfer their benefits to their new employers. As a
result of this, Evo transferred assets with a value of $27,000 to the new employers' pension schemes in full settlement of the
employees' pension entitlements; this settlement reduced the pension obligation of Evoby $31,000. The settlement has not yet
been reflected in the 2014 balances given above.
Required:
(a) Reconcile the present values of the obligation to determine the
actuarial loss or gain for each year.
(b) Reconcile the fair values of the plan assets to determine the
Remeasurement gain or loss for each year.
(c) Calculate the net liability (or asset) that should be recognised in
the statement of financial position at the end of each year.
(d) Calculate the amounts to be included in the statement of
comprehensive income for each year.
(e) Present a journal summarising the accounting entries for each
year.
(a) Present Value of Obligation
2013 2014 2015
$000 $000 $000
Present value 1,000 1,215 1,355
Interest (9%/8%/8%) 90 97 108
Current service cost 125 140 155
Benefits paid (130) (150) (170)
Settlement — (31) —
_____ ______ _______
Expected value 1,085 1,271 1,448
Actuarial loss/gain (to balance) 130 84 (48)
______ _______ ________
Present value at 31 December 1,215 1,355 1,400
______ _______ ________
b) Fair Value of Asset
2013 2014 2015
$000 $000 $000
Fair value 1,000 1,147 1,110
Interest (9%/8%/8%) 90 92 89
Contributions 80 90 100
Benefits paid (130) (150) (170)
Settlement — (27) —
_______ _______ _______
Expected value 1,040 1,152 1,129
Gain/(loss) on remeasurementto
other comprehensive income (to
balance) 107 (42) 71
_______ ________ ________
Fair value at 31 December 1,147 1,110 1,200
_______ ________ _________
(c) Net Liability
2013 2014 2015
$ $ $
Present value of the obligation 1,215 1,355 1,400
Fair value of the plan assets 1,147 1,110 1,200
______ _______ _______
Net liability 68 245 200
______ _______ ________
(d) Statement of Comprehensive Income
Profit or loss 2013 2014 2015
$000 $000 $000
Current service costs 125 140 155
Net interest on opening net
liability — 5 19
Gain on settlement (31 − 27) — (4) —
____ ____ _____
Profit or loss expense 125 141 174
_____ ______ _____
Other comprehensive income
Remeasurement
Actuarial loss/(gain) on
obligation 130 84 (48)
Actual (gain)/loss on asset (107) 42 (71)
______ ______ _______
23 126 (119)
_______ _______ ________
Net other comprehensive income
Total other comprehensive
income 148 267 55
(e) Accounting Entries
2013
Drcomprehensive income 148
Cr liability (w) 68
Cr Cash 80
2014
Drcomprehensive income 267
Cr liability (w) 177
Cr cash 90
2015
Drcomprehensive income 55
DrLiability (w) 45
Cr Cash 100
Working:
2013 2014 2015
Movements on net liability: $ $ $
Opening net liability — 68 245
Net movement 68 177 (45)
_____ _____ _____
Closing net liability 68 245 200
_____ ______ ______
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Overview
IFRS 10 Consolidated Financial Statements outlines the requirements for the preparation and presentation of consolidated
financial statements, requiring entities to consolidate entities it controls. Control requires exposure or rights to variable
returns and the ability to affect those returns through power over an investee.

Objective
The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements
when an entity controls one or more other entities.

The standard:
- Requires parent company to prepare consolidated financial statements of the companies it controlled
- Defines the principle of control
- Defines the principal of control to determine whether investor has control over the organisation or not
- Sets out the accounting requirement for preparation of consolidated financial statements
- Defines an exception to consolidation
 IFRS 11 Joint Venture and Joint Arrangements

Relationship:
Where one company has a controlling investment in another company, a parent-subsidiary relationship is formed and
accounted for as a group. Companies also may have substantial investments in other entities without actually
having control. Thus, a parent-subsidiary relationship does not exist between the two.

An investing company which can exert significant influence over the financial and operating policies of the investee company
will have an active interest in its net assets and results.

Including the investment at cost in the company's accounts would not fairly present the investing interest.

So that the investing entity (which may be a single company or a group) fairly reflects the nature of the interest in its
accounts, the entity's interest in the net assets and results of the company, the associate, should be reflected in the
entity's accounts. This is achieved through the use of equity accounting.

- A third relationship exists where an entity shares control with one or more other entities. This shared or joint control does
not give any dominant or significant influence and all parties that share control must agree on how the shared entity is to
be run.
- Prior to 2011, associates were accounted for under the equity accounting model and for joint ventures an entity could
choose to use either equity accounting or proportionate consolidation.

- The use of proportional consolidation never had the support of the accounting profession, and in 2011 the IASB withdrew
IAS 31, which allowed its use, and replaced it with IFRS 11 Joint Arrangements. This standard only allows joint ventures to be
accounted for using equity accounting.

Definitions:

Associate: an entity over which the investor has significant influence.

Joint arrangement: an arrangement in which two or more parties have joint control.

Joint control: the contractually agreed sharing of control of an arrangement, which exists only when the decisions about the
relevant activities require the unanimous consent of the parties sharing control.
Joint venture: a joint arrangement whereby the parties which have joint control of the arrangement have rights to the net
assets of the arrangement.

Significant influence: the power to participate in the financial and operating policy decisions of the investee but is not control
or joint control of those policies.

Equity accounting: 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 likewise with other comprehensive income.

Example:

AB, CD, EF and GH each hold a 25% stake in another entity, XYZ.Any decisions relating to XYZ need to be approved by 75% of
the voting members.
Required:
Solution:

XYZ is not jointly controlled by the four parties; any combination of three of the four parties is required to vote through any
decisions relating to XYZ. The relationship is that of "collective control" as defined in IFRS 11.
Each of the four parties will recognise their share of XYZ as an associated undertaking as each has significant influence over
XYZ. Therefore, each party will apply equity accounting measurement principles to its investment in XYZ.

Significant Influence
- The term significant influence means that an investor is involved, or has the right to be involved, in the financial and
operating policy decisions of the investee.
- The existence of significant influence by an investor is usually evidenced in one or more of the following ways:

Representation on the board of directors or equivalent governing body

- Participation in policymaking
- Material transactions between the investor and the investee;
- Interchange of managerial personnel;
- Provision of essential technical information.
A holding of 20% or more of the voting rights of the investee indicates significant influence, unless it can be demonstrated
otherwise.
- Conversely, a holding of less than 20% presumes that the holder does not have significant influence, unless such
influence can be clearly demonstrated (e.g. representation on the board).
- The existence and effect of potential voting rights that are currently exercisable or convertible by the investor should be
considered.
- When significant influence is lost, any remaining investment will be measured at fair value. Any difference between the
carrying amount of the investment in associate and the remeasured amount will be included within profit or loss.
From that point on, the investment will be accounted for in accordance with IFRS 9.

Separate Financial Statements

- In the separate financial statements, an investment in an associate or a joint venture is accounted for in accordance
with IAS 27 Separate Financial Statements.
- In the separate financial statements, the investment is accounted for:
- under IFRS 5 if classified as held for sale
- at cost or in accordance with IFRS 9.
- The emphasis in the separate financial statements will be on the performance of the assets as investments.
IAS 28 Investments in Associates and Joint Ventures
- The objective of IAS 28 is to prescribe the accounting for associates and to describe the use of the equity method for
both associates and joint ventures.
- The standard identifies when significant influence exists and the practical issues around the use of equity accounting.

IFRS 11 Joint Arrangements

The objective of IFRS 11 is to establish principles for financial reporting by entities which have an interest in arrangements that
are controlled jointly (i.e. joint arrangements).
- A joint arrangement must be classified as either:
- a joint operation or
- a joint venture.
- The classification between a joint operation and a joint venture is dependent on the rights and obligations of parties within
the arrangement.
- A joint operation exists if the parties have rights to assets and obligations for liabilities, relating to the arrangement.
- A joint venture exists where the parties have rights to the net assets of the arrangement.
Illustration:

Titto shares the use, in equal measure, of an oil pipeline with four other oil companies. The joint operation states that the
maintenance of the pipeline will also be shared on an equal basis by all five parties. The pipeline will be treated as a joint
operation in accordance with IFRS 11, and therefore Titto will recognise 20% of the pipeline asset in its statement of financial
position. It will also include 20% of the maintenance costs as an expense in its statement of profit or loss for the period.

Illustration 2:

Continuing from Illustration 1, Titto also has a joint arrangement with two other companies to share control of bo Oil Co. The
arrangement states that all three companies have an equal say in the running of Bo Oil. None of the three parties is able to
dominate the strategic and operation activities of Bo Oil. This arrangement would be treated as a joint venture in accordance
with IFRS 11. Texon would then apply the equity method of IAS 28 when accounting for Bo Oil:
- a single asset representing the cost of the investment in Bo Oil adjusted for the post-acquisition changes in PB Oil's net assets
- a single amount of income from joint ventures would be included in Titto profit or loss for the period.
IFRS 12 Disclosure of Interests in Other Entities
- The objective of IFRS 12 is to require an entity to disclose information enabling users to evaluate:
- the nature of, and risks associated with, interests in other entities and
- the effects of those interests on the financial statements.

Equity Accounting:

An investment in an associate should be accounted for using the equity method.

- Associates must be accounted for using the equity method regardless of the fact that the investor may not have
investments in subsidiaries and does not therefore prepare consolidated financial statements.
Accounting Treatment:

- The investment in an associate is initially recognised at cost.

- The carrying amount is increased or decreased to recognise the investor's share of the profit or loss of the investee after the
date of acquisition.
- This is equivalent to taking the investor's share of the net assets of the associate at the date of the financial statements
plus goodwill.
- Distributions received from the associate reduce the carrying amount of the investment.
- Adjustments to the carrying amount also may be necessary for changes in the investor's proportionate interest in the
associate arising from changes in the associate's equity which have not been recognised in the profit or loss.
- Such changes include those arising from the revaluation of property, plant and equipment and from foreign exchange
translation differences.
- The investor's share of the current year's profit or loss of the associate is recognised in the investor's profit or loss.
- The associate is not consolidated line-by-line. Instead, the group's share of the associate's net assets is included in the
consolidated statement of financial position in one line and share of profits (after tax) in the consolidated statement of
comprehensive income in one line.
Treatment in a Consolidated Statement of Financial Position

- The methods described next apply equally to the financial statements of a non-group company which has an investment
in an associate and to group accounts.

- In group investments, replace the investment as shown in the individual company statement of financial position with:

- the group's share of the associate's net assets at the end of the reporting period plus
- the goodwill arising on acquisition, less any impairment losses.
- As for business combinations under IFRS 3, IAS 28 does not
permit the amortisation of goodwill.
- Do not consolidate line-by-line the associate's net assets. The
associate is not a subsidiary; therefore, the net assets are not controlled as they are for a subsidiary.
- In group reserves, include the parent's share of the associate's post-acquisition reserves (the same as for subsidiary).
- Cancel the investment in associate in the individual company's books against the share of the associate's net assets acquired
at fair value. The difference is goodwill.
- The fair values of the associate's assets and liabilities must be used in calculating goodwill. Any change in reserves,
depreciation charges, etc due to fair value adjustments must be taken into account (as they are when dealing with
subsidiaries).
- Where the share of the associate's net assets acquired at fair value is in excess of the cost of investment, the difference is
included as income in determining the investor's share of the associate's profits or losses.

- To calculate amounts for net assets and post-acquisition reserves, use a net assets working for the associate (the same
as for the subsidiary).

- The amount to be placed in the statement of financial position at the end of the reporting period will be:

$
Cost of investment X
Share of post acquisation profits
Of A X
Less any Impairment loss (x)
_____
x
______
Treatment in a Consolidated Statement of Comprehensive Income

- Treatment is consistent with consolidated statement of financial position and applies equally to a non-group company
with an associate:

- Include group share of the associate's profits after tax in the consolidated statement of comprehensive income. This
replaces dividend income shown in the investing company's own statement of comprehensive income.

- Do not add in the associate's revenue and expenses line byline

as this is not a consolidation and the associate is not a subsidiary.

- Time-apportion the associate's results if acquired mid-year.

- Note that the associate statement of financial position is not time apportioned as the statement of financial position reflects
the net assets at the period end to be equity accounted.
Recognition of Losses

- If an investor's share of losses of an associate equals or exceeds its interest in the associate, the investor discontinues
recognising its share of further losses.

- The interest in the associate is its value under the equity method plus any long-term interest which forms part of the
investor's net investment.

- Such interests may include preference shares and long-term receivables or loans but do not include trade receivables, trade
payables or any long-term receivables for which adequate collateral exists (e.g. secured loans).

- After the investor's interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to
the extent that the investor has incurred legal or constructive obligations or made payments on behalf of the associate.

- If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its
share of the profits equals the share of losses not recognised.

- The investment in the associate can be reduced to nil but no further (i.e. the investment in associate cannot be negative,
even if there are post-acquisition losses of the associate).
Example:

A pogo company has a 40% associate, which was acquired a number of years ago for $1m. A long-term loan also was made to
the associate of $250,000.
Since the acquisition, the associate's losses have totalled $5m.The pogo's share of those losses would be $2m.
The parent would only be required to recognise the losses to the extent of the investment of $1m plus $250,000; the
remaining share of losses ($750,000) would not be recognised unless the parent had a present obligation to make good those
losses.
If the associate then became profitable, the parent would not be able to recognise those profits until its share of
unrecognised losses had been eliminated.

-However, the investor continues to recognise losses to the extent of any guarantees made to satisfy the obligation of
the associate. This may require recognition of a provision in accordance with IAS 37.

- Continuing losses of an associate is objective evidence that financial interests in the associate other than those included in
the carrying amount may be impaired.
Accounting Policies and Year Ends:

Accounting Policies
If an associate uses accounting policies other than those of the investor, adjustments must be made to conform the
associate's accounting policies to those of the investor in applying the equity method.

Year Ends
-The most recent available financial statements of the associate are used by the investor.

- When the reporting dates of the investor and the associate are different, the associate prepares, for the use of the investor,
financial statements as of the same date as the financial statements of the investor.

- When it is not practicable to produce statements as at the same date, adjustments must be made for the effects of
significant transactions or events which occur between that date and the date of the investor's financial statements.

- In any case, the difference between the reporting date of the associate and that of the investor must not be more than
three months.
- The length of the reporting periods and any difference in the reporting dates must be the same from period to period.
Impairment:

The entire carrying amount of the investment is tested for impairment by comparing it with its recoverable amount.

-After application of the equity method, including recognising the associate's losses, the investor applies the requirements of
IFRS 9 to determine whether it is necessary to recognise any additional impairment loss.

- Because goodwill that is included in the carrying amount of an investment in an associate is not separately recognised, it is
not tested for impairment separately.
- In determining the value in use of the investment, an entity estimates:

- its share of the present value of the estimated future cash flows expected to be generated by the associate, including
the cash flows from the operations of the associate and the proceeds on the ultimate disposal of the investment; or

- the present value of the estimated future cash flows expected from dividends to be received from the investment
and from its ultimate disposal.

- If the associate is profitable, it is unlikely there will be any impairment in its value.
Exemptions to Equity Accounting:
- An associate which is classified as held for sale is accounted for under IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.

- Under IFRS 5, if an associate is acquired and held with a view to disposal within 12 months, it will be measured at the lower
of its carrying amount (e.g. cost) or fair value less costs of disposal.

- If the investor is also a parent company which has elected not to present consolidated financial statements, the investment
in the associate will be measured at cost or in accordance with IFRS 9.

< The investment in the associate will be measured at cost or in accordance with IFRS 9 if all of the following apply:

-the investor is a wholly-owned subsidiary (or partially owned and other owners do not object);

- the investor's debt or equity instruments are not traded in a public market

- the investor does not file its financial statements with a securities regulator; and

- the ultimate (or any intermediate) parent of the investor produces consolidated financial statements available for
public use under IFRS.
- This allows investors who do not have investments in a subsidiary, but only have an investment in an associate, to
be exempt from the requirement to account for equity on the same basis as parents under IFRS 10.

Intra-group Trading
- Members of the group can sell to or make purchases from the associate. This trading will result in the recognition of
receivables and payables in the individual company accounts.

- Do not cancel intra-group balances on the statement of financial position and do not adjust sales and cost of sales for
trading with the associate.

- In consolidated statement of financial position, show balances with the associate separately from other receivables and
payables.
- The associate is not part of the group. It is, therefore, appropriate to show amounts owed to the group by the
associate as assets and amounts owed to the associate by the group as liabilities.
Dividends
Consolidated statement of financial position:

- Ensure that dividends payable/receivable are fully accounted for in an individual company's books.

- Include receivable in the consolidated statement of financial position for dividends owed to the group from the
associates.

- Do not cancel intra-group balance for dividends.

- Consolidated statement of comprehensive income:

- Do not include dividends from the associate in theconsolidated statement of comprehensive income. The
parent's share of the associate's profit after tax (hence before dividends) is included under equity accounting in the
income from the associate.
Unrealised Profit

- If the parent sells goods to the associate and the associate still has these goods in stock at the year end, their carrying
value will include the profit made by the parent and recorded in its books. Hence, profit is included in inventory value in the
associate's net assets (profit is unrealised) and the parent's revenue.

- If the associate sells to the parent, a similar situation arises, with the profit being included in the associate's revenue and
the parent's inventory.

- To avoid double counting when equity accounting for the

associate, this unrealised profit is eliminated.

- Unrealised losses are not eliminated if the transaction provides evidence of an impairment in the value of the asset which
has been transferred.

- To eliminate unrealised profit, deduct the profit from the associate's profit before tax and retained earnings in the net
assets working before equity accounting for the associate, irrespective of whether the sale is from the associate to the
parent or vice versa.
Example:

The paro has a 40% associate.The paro sells the goods to the associate for $150. the goods originally cost the parent $100. The
goods are still in the associate's inventory at year end.
Required:

State how the unrealised profit will be dealt with in the consolidated accounts.

Solution
To eliminate unrealised profit:
Deduct $50 from associate's profit before tax in the statement of comprehensive income, thus dealing with the profit or loss
effect. Deduct $50 from retained earnings at the end of the reporting period
in the net assets working for the associate, thus dealing with the effect of the statement of financial position.
Joint Operations

Relationship
- A joint operation exists when the entity only has a share in the individual assets or liabilities of the joint arrangement (e.g. an
oil company sharing the control of a pipeline).

It is the rights to individual assets (or obligations for liabilities) that drive a joint operations relationship rather than rights to the
net asset position of the joint arrangement.
Accounting
For joint operation, the joint operator recognises:

- its assets, to include a share of any jointly held assets;

- its liabilities, to include a share of any liabilities jointly incurred

- its revenue from the sale of its share of any output from the joint operation

- its expenses, to include a share of any jointly incurred expenses.

- The accounting for any assets, liabilities, revenue and expenses will be in accordance with the relevant standard.
When accounting for property, IAS 16 will be the relevant standard.
- IFRS 11 is also applicable to an entity which participates in a joint operation but does not have joint control, as long
as that entity has rights to the assets or obligations for the liabilities of the joint operation.

Sales or Contributions of Assets to Joint Operation:

- If a joint operator sells goods to the joint operation at a profit or loss then the joint operator will only recognise the profit
or loss to the extent of the other parties' interests in the joint operation.
Purchases of Assets From a Joint Operation:
- If a joint operator purchases goods from a joint operation to which it is a party, it must not recognise its share of any gains
or losses until it resells the assets to an external party.
 IFRS 13 Fair Value Measurement

Definitions:

Fair Value:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
Participant at the measurement date

Active market:

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing
information on an ongoing basis

Most advantageous market:

The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to
transfer the liability, after taking into account transaction costs and transport costs
Principal Market:

The market with the greatest volume and level of activity for the asset or liability

To increase the consistency and comparability in fair value measurements and related disclosures through fair value hierarcy.
The hierarchy categorize inputs into three levels

Level 1: inputs are unadjusted quoted prices in active markets for items identical to the asset or liability being measured. As
with current IFRS, if there is a quoted price in an active market, an entity uses that price without adjustment when measuring
fair value. An example of this would be prices quoted on a stock exchange. The entity needs to be able to access the market
at the measurement date. Active markets are ones where transactions take place with sufficient frequency and volume for
pricing information to be provided. An alternative method may be used where it is expedient. The standard sets out certain
criteria where this may be applicable. For example where the price quoted in an active market does not represent fair value
at the measurement date. An example of this may be where a significant event takes place after the close of the market such
as a business reorganisation or combination.

The determination of whether a fair value measurement is based on level 2 or level 3 inputs depends on (i) whether the
inputs are observable inputs or unobservable and (ii) their significance.
Level 2 inputs are inputs other than the quoted prices in determined in level 1 that are directly or indirectly observable for
that asset or liability. They are likely to be quoted assets or liabilities for similar items in active markets or supported by
market data. For example interest rates, credit spreads or yields curves. Adjustments may be needed to level 2 inputs and, if
this adjustment is significant, then it may require the fair value to be classified as level 3.

Level 3 inputs are unobservable inputs. These inputs should be used only when it is not possible to use Level 1 or 2 inputs.
The entity should maximise the use of relevant observable inputs and minimise the use of unobservable inputs. However,
situations may occur where relevant inputs are not observable and therefore these inputs must be developed to reflect the
assumptions that market participants would use when determining an appropriate price for the asset or liability. The general
principle of using an exit price remains and IFRS 13 does not preclude an entity from using its own data. For example cash
flow forecasts may be used to value an entity that is not listed. Each fair value measurement is categorised based on the
lowest level input that is significant to it.
IFRS 13 also sets out certain valuation concepts to assist in the determination of fair value. For non-financial assets only, fair
value is determined based on the highest and best use of the asset as determined by a market participant. Highest and best
use is a valuation concept that considers how market participants would use a non-financial asset to maximise its benefit or
value. The maximum value of a non-financial asset to market participants may come from its use in combination with other
assets and liabilities or on a standalone basis. In determining the highest and best use of a non-financial asset, IFRS 13
indicates that all uses that are physically possible, legally permissible and financially feasible should be considered. As such,
when assessing alternative uses, entities should consider the physical characteristics of the asset, any legal restrictions on its
use and whether the value generated provides an adequate investment return for market participants.
The fair value measurement of a liability, or the entity’s own equity, assumes that it is transferred to a market participant at
the measurement date. In many cases there is no observable market to provide pricing information and the highest and best
use is not applicable. In this case, the fair value is based on the perspective of a market participant who holds the identical
instrument as an asset. If there is no corresponding asset, then a corresponding valuation technique may be used. This would
be the case with a decommissioning activity. The fair value of a liability reflects the non performance risk based on the entity’s
own credit standing plus any compensation for risk and profit margin that a market participant might require to undertake the
activity. Transaction price is not always the best indicator of fair value at recognition because entry and exit prices are
conceptually different.
The guidance includes enhanced disclosure requirements that include:
Information about the hierarchy level into which fair value measurements fall
Transfers between levels 1 and 2
Methods and inputs to the fair value measurements and changes in valuation techniques, and
Additional disclosures for level 3 measurements that include a reconciliation of opening and closing balances, and quantitative
information about unobservable inputs and assumptions used.
 IFRS 1 First time adoption

Background
The European Union's requirement that all listed companies in the European Economic Area publish their consolidated
financial statements in accordance with IFRS by 2005 meant that entities with a financial year end of 31 December needed
to have an IFRS statement of financial position as at 1 January 2004 (for comparative purposes).

IFRS 1 First-time Adoption of International Financial Reporting Standards permits certain exemptions from recognition
and measurement requirements where compliance would otherwise cause undue cost or effort in application.

However, there are no exemptions from IFRS 1's enhanced disclosure requirements detailing how the change to IFRSs has
affected financial position, performance and cash flows.

Objective:
To ensure that an entity's first IFRS contain high-quality information which is:
- transparent for users;
- comparable over all periods presented;
- a starting point for accounting under IFRS; and
- generated at a cost which does not exceed the benefit (to users).
 A first-time adopter uses the provisions of IFRS 1 and not the transitional provisions of other standards unless IFRS 1
specifies otherwise.

Scope
This standard applies to:
first IFRS financial statements; and
any interim financial statements presented under IAS 34 for any part of the period covered by the first IFRS
financial statements.
It may be reapplied where an entity has previously applied IFRS 1 but then stopped applying IFRS.

Definitions:

First IFRS financial statements: the first annual financial statements in which IFRSs are adopted by an explicit and
unreserved statement of compliance.

First-time adopter: an entity which presents its first IFRS financial statements. If an explicit and unreserved statement
of compliance has already been made an entity is not a first time adopter.

Opening IFRS statement of financial position: an entity's statement of financial position at the date of transition to IFRSs.
This may be published or unpublished.
Previous GAAP: the basis of accounting used immediately before the adoption of IFRS.

Reporting date: the end of the latest period covered by financial statements (or by an interim financial report).

Date of transition: the beginning of the earliest period for which an entity presents full comparative information under IFRSs in
its first IFRS financial statements.

Deemed cost: an amount used as a surrogate for cost or depreciated cost at a given date.

Stages in transition to IFRS:

Accounting Policies
-Select accounting policies which will comply with IFRSs.
- The same accounting policies are used for all periods presented including the opening IFRS statement of
financial position.
- The version of an IFRS which is extant at the reporting date (i.e. 31 December 2015 in Illustration 1) is used subject to
the exemptions permitted under IFRS 1. Different versions effective at earlier dates must not be applied.

- If a new IFRS permits early application then a first-time adopter may adopt that standard early, but it is not required
to do so.
- The transitional arrangements in other IFRSs apply to entities which already use IFRSs. They do not apply to first-time
adopters except in relation to the derecognition of financial assets and financial liabilities and hedge accounting in
accordance with IFRS 9.

Opening IFRS Statement of Financial Position

- Prepare an opening IFRS statement of financial position (i.e. at the date of transition). This is the starting point to accounting
under IFRS.

Estimates
- Make estimates in accordance with IFRSs for the opening statement of financial position and all other periods covered by
the financial statements.

Estimates must be made consistent with estimates made as at the same date under previous GAAP, after adjustments to reflect
different accounting policies, unless there is objective evidence that those estimates were in error.

- Information received after the date of transition relevant to estimates made under previous GAAP is treated as for non
adjusting events (IAS 10).

-An entity may need to make estimates under IFRSs at the date of transition which were not required at that date under
previous GAAP (e.g. if there was no requirement to state inventory at the lower of cost and net realisable value). Such
estimates must reflect conditions which existed at the date of transition to IFRSs.
 Estimates required by Yes No Calculation consistent with
Evidence of Error ? IFRSs?
previous GAAP

Yes No
NO yes
Make
estimate
reflecting Use previous Use previous
relevant date estmiate estimate and
adjust to reflect
IFRSs

- These same principles apply to estimates made for any comparative period presented in first IFRS
financial statements.
Presentation and Disclosure
- Make presentation and disclosure requirements in accordance with IFRS 1.
- At least three statements of financial position and two of each other statement must be included for comparison
purposes (IAS 1).
- Historical summaries of selected data need not comply with recognition and measurement requirements of IFRS 1.

However, such summaries and comparative information under previous GAAP must be clearly labelled as not being prepared
under IFRS and the nature of the main adjustments to comply with IFRS disclosed. The adjustments are not required to
be quantified.

The financial statements to 31 December 2014 are published under previous GAAP. The financial statements
to 31 December 2015 will be prepared under IFRS with the comparatives information restated.
Opening IFRS Statement of Financial Position
Recognition and Measurement Principles
Recognise all assets and liabilities required by IFRSs (e.g. assets held under finance leases and lease obligations).

- Do not recognise assets and liabilities that are not allowed to be recognised under IFRSs (e.g. "provisions" which do not
meet the definition of a liability).
- Reclassify items as current/non-current, liability/equity in accordance with IFRSs as necessary (e.g. preferred shares
with fixed maturity as debt rather than equity).

- Measure all recognised assets and liabilities in accordance with IFRSs (e.g. at cost, "fair value" or a discounted amount).

- Because the adjustments which result from changes in accounting policy on transition arise from events and
transactions before the date of transition they are recognised directly in retained earnings (or, if appropriate, elsewhere in
equity) at the date of transition.
Exemptions From Other IFRSs
IFRS 1 essentially requires full retrospective application of all extant IFRSs on first-time adoption with limited
exemptions that include:
- property, plant and equipment
- business combinations
- cumulative translation differences
- compound financial instruments
- assets and liabilities of subsidiaries, associates and joint ventures
-designation of previously recognised financial instruments
- share-based payment transactions
- insurance contracts
- decommissioning liabilities
- leases-
- fair value measurement of financial assets or liabilities at initial recognition; and
- borrowing costs.
Property, Plant and Equipment
- Cost-based measurement of some items of property, plant and equipment may involve undue cost or effort, especially if the
entity has not kept up-to-date fixed-asset registers.
- Items of property, plant and equipment can therefore be measured at their fair value at the date of transition, and that
value deemed to be cost (i.e. "deemed cost").
- If an entity has revalued assets under its previous GAAP and the revaluation is broadly in line with IFRSs, then that
revalued amount can be taken to be the deemed cost.
- If an entity has carried out a fair value exercise of all (or some) of its assets and liabilities for a particular event (e.g.
an IPO or privatisation), then that fair value may be as the deemed cost at the event date.
- Comparing revaluation under IFRS 1 with that under IAS 16:
- for IFRS 1 it is a "one-off" exercise—under IAS 16,revaluations must be kept up to date
- any revaluation to deemed cost under IFRS 1 is taken to retained earnings whereas revaluation under IAS 16 is
credited to a revaluation surplus and
- the IFRS 1 exemption can be applied to any item(s) under IAS 16, all items in the same class must be revalued.
- Any borrowing costs capitalised in accordance with previous GAAP before the date of transition may be carried forward in
the opening statement of financial position.
Business Combinations
Electing Not to Apply IFRS 3
- A first-time adopter does not have to apply IFRS 3 Business Combinations retrospectively to past business combinations
(i.e. business combinations which occurred before the date of transition to IFRSs).
- If, however, a first-time adopter restates any business combination to comply with IFRS 3, all later business
combinations must be restated and IAS 36 (Revised) and IAS 38 (Revised) applied.

- This exemption also applies to past acquisitions of investments in associates and of interests in joint ventures.
Goodwill Adjustments:
- The carrying amount of goodwill in the opening IFRS statement of financial position is the same as under previous
GAAP at the date of transition after the following adjustments (if applicable):
- Increasing the carrying amount of goodwill for an item previously recognised as an intangible asset which does not
meet IFRS criteria.
- Decreasing the carrying amount of goodwill if an intangible asset previously subsumed in recognised goodwill meets
IFRS criteria for recognition.
- Adjustment for the amount of a contingency affecting the purchase consideration for a past business combination
which is resolved before the date of transition to IFRS. A reliable estimate of the contingent amount is needed and
its payment must be probable.
- The carrying amount should similarly be adjusted if a previously recognised contingent adjustment can no longer
be measured reliably or its payment is no longer probable.
- An impairment test at the date of transition. Any impairment loss is adjusted in retained earnings (or revaluation surplus
if required by IAS 36).
- No other adjustments are made to the carrying amount of goodwill at the date of transition.
Deferred Tax and Non-controlling Interest
- The measurement of deferred tax and non-controlling interest follows from the measurement of other assets and liabilities.
- All these adjustments to recognised assets and liabilities therefore affect non-controlling interest and deferred tax.

Cumulative Translation Differences

- All translation adjustments arising on the translation of the financial statements of foreign entities can be recognised
in accumulated profits at the date of transition (i.e. any translation reserve included in equity under previous GAAP
is reset to zero).
- The gain or loss on subsequent disposal of the foreign entity will then be adjusted only by those accumulated translation
adjustments arising after the date of transition.
- If this exemption is not used, an entity must restate the translation reserve for all foreign entities since they were
acquired or created.

Government Loans Below Market Rates of Interest

- An entity may use a previous GAAP valuation for a government loan on first-time adoption. Subsequent
measurement is based on the requirements of IFRS 9 Financial Instruments.
Mandatory Exceptions
to Retrospective Application
As well as the optional exemptions, there are seven mandatory exceptions, concerning:
1. derecognition of financial assets and financial liabilities;
2. hedge accounting;
3. non-controlling interest;
4. classification and measurement of financial assets;
5. impairment of financial assets;
6. embedded derivatives; and
7. government loans

Derecognition of Financial Assets and Financial Liabilities

- A first-time adopter must apply the derecognition requirements in IFRS 9 Financial Instruments for any transactions
occurring on or after the date of transition to IFRS.
- Financial assets or financial liabilities derecognised under previous GAAP cannot be recognised on the adoption date of
IFRS.
Hedge Accounting
- The hedging requirements of IFRS 9 must be applied prospectively from the date of transition. This means that
the hedge accounting practices, if any, used in periods prior to the date of transition may not be retrospectively changed.

- An entity cannot designate a transaction as a hedge if it was not designated as such under previous GAAP and any
designated hedges under previous GAAP will be recognised and measured under IFRS 9 (irrespective of whether there is
hedge documentation or hedge effectiveness).

Non-controlling Interest
- Total comprehensive income must be split between owners of the parent and non-controlling interest, even if this results in a
deficit balance for non-controlling interest.
- Any change in control status between the owners of the parent and non-controlling interest is accounted for from the date
of transition unless the adopter has elected to apply IFRS 3 retrospectively to past business combinations.

Classification and Measurement of Financial Assets

- An entity must assess whether a financial asset meets the conditions of IFRS 9 on the basis of facts and circumstances
existing at the date of transition.
Classification and Measurement of Financial Assets
- An entity must assess whether a financial asset meets the conditions of IFRS 9 on the basis of facts and circumstances
existing at the date of transition.

Impairment of Financial Assets

- The impairment requirements of IFRS 9 are applied retrospectively on adoption of IFRSs.

- On transition, an entity uses reasonable and supportable information to determine the credit risk of financial
instruments when they were first recognised.

Embedded Derivatives
An embedded derivative will be separated from its host based on the conditions which existed at the later of the date it first
became a party to the contract and the date a reassessment is required by IFRS 9.
Government Loans
A first-time adopter must classify all government loans as either financial liability or equity instrument, in accordance
with IAS 32.
IFRS 1 allows IAS 20 and IFRS 9 to be applied retrospectively to the loan as long as the relevant information had been
obtained when the loan was received.

Explanation of Transition

An entity must explain how the transition to IFRSs has affected its reported financial position, performance and cash flows.
This is achieved through reconciliations and disclosure and there are no exemptions to the requirements for these.
Reconciliations
The following are required to enable users to understand the material adjustments to the statement of financial position and
statement of comprehensive income:
- A reconciliation of equity under IFRSs and previous GAAP as at:
- the transition date; and
-the end of the latest period presented under previous GAAP.
- A reconciliation of profit or loss reported under previous GAAP to that under IFRS for the latest period's statement of
comprehensive income presented under previous GAAP.
- These reconciliations must distinguish between changes in accounting policies and errors. IAS 8 disclosure requirements
do not apply.
- Similar reconciliations are required for interim financial reports for part of the period covered by the first IFRS
financial statements.

Other Disclosures
- If a statement of cash flows was presented under previous GAAP, material adjustments must be explained.
- If an entity uses fair value as deemed cost for any items of property, plant and equipment (or investment property
or intangible asset) as an alternative to cost-based measurement, the following must be disclosed for each
line item:
- the aggregate of those fair values and
- the aggregate adjustment to carrying amounts reported under previous GAAP.
Practical Matters:

-The finance director is most likely to be responsible for the conversion process. In large entities, a steering committee
may be formed to manage the process across the business.
- Key stakeholders in the entity need to be made aware how staff may be affected—particularly with regard to training.
- Matters to be considered when making a preliminary assessment of the effect of conversion will include:
- the level of readily available IFRS competence of staff, internal audit and non-executive directors;
- whether specialist help may be needed and, if so, who can provide it
- identifying agreements, contracts and reports affected by the change in the financial reporting framework
- making an initial estimate of the financial effect of changes in key accounting policies;
- assessing the significance of fair values (e.g. for IAS 40 and IFRS 9); reviewing any existing weaknesses in internal
financial reporting systems and
- deciding the extent to which the previous year's financial information (prior to the date of transition) is to be restated.

Making the transition:

Accounting policies should be selected after a detailed review of the choices available (especially on transition).
- Changes may need to be made to the accounting system to collect the information necessary to meet disclosure
requirements (e.g. of segment reporting).
- The group accounting manual should be updated to reflect changes in terminology as well as changes in accounting
policies, measurement bases, etc.
- Accounting policies used for internal reporting (e.g. in budgeting systems) may need to be standardised or made
compatible with those used for external financial reporting.

Treasury
- Treasury managers will need to review treasury policy and how they hedge risk.
- Some entities may not be able to hedge account in accordance with IFRS 9 even if they change their hedging strategy.
- Loan agreements may need to be renegotiated to avoid breaching covenant limits.

IT and Systems
- Accounting system changes may be required as a direct result of the change to IFRS.
- Changes in IT and systems also may be required in response to the identification of business improvement opportunities.
Human Resources
Resource planning should take account of:
- the effect of the change on long-term recruitment plans;
- how day-to-day responsibilities of seconded staff will becovered and
- temporary specialist assistance needed.
- Remuneration schemes will need to be reviewed and renegotiated.
- Staff will need to be trained.

Training
- Internal experts with specialist IFRS knowledge will need to be involved in the training of others in the organisation. This
may require that they be trained as trainers.
- Subsidiary finance managers will need a broad understanding of the effect of IFRS on the entity and changes in policy
and procedure.
- General business managers will need to be made aware of the effect of IFRS on the business, its reporting and
planning processes.
Communication
The financial effects of the change must be communicated to shareholders, analysts, employees, lenders, etc. This
may require a public relations plan to advertise the adoption of IFRS.
 Related Parties
Scope:
IAS 24 is applied in:
-Identifying related party relationships and related party transactions.
-Identifying any outstanding balances between an entity and its related party.
-Determining the disclosures to be made relating to these transactions and outstanding balances.
Related party: a person or entity that is related to the entity that is preparing its financial statements.
Person (or a close family member): related party to a reporting entity if that person:
-has control or joint control over the reporting entity
-has significant influence over the reporting entity or
-is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
b. Entity: related party to a reporting entity if any of the following conditions applies:
-The entity and the reporting entity are members of the same group; this means a parent, subsidiary and fellow
subsidiaries are related to each other.
-One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a
group of which the other entity is a member).
-Both parties are joint ventures of the same third party.
-One entity is a joint venture of a third party and the other entity is an associate of the third entity.
-The entity is a post-employment benefit plan for the employees of the reporting entity (or an entity related to
the reporting entity).
-The entity is controlled or jointly controlled by a person
-A person having control or joint control of the reporting entity has significant influence over the entity or is a
key management personnel of the entity.
Related party transactions: a transfer of resources, services or obligations between a reporting entity and
a related party,
regardless of whether a price is charged.
Government: government, government agencies and similar bodies whether local, national or
international.
Government related entity: an entity that is controlled, jointly controlled or significantly influenced by a
government.
Parties which are not related:
The following parties are deemed not to be related:
-Two companies, simply because they have a director or other member of key management personnel in
common,
or because a member of key management personnel of one entity has significant influence over the other
entity.
-Two venturers, simply because they share joint control over a joint venture.
-Providers of finance, trade unions, public utilities,
government departments and agencies, in the course of their normal dealings with an entity (even though
they may
restrict business activities).
-A customer, supplier, franchisor, distributor, etcwith whom a significant volume of business is transacted
as a result of
economic dependence.
Effect on Reporting Entity:
-Related party relationships are a normal feature of commerce and business.
-A related party relationship could have an effect on financial position and operating results:
-Entering into transactions which unrelated parties would not.
-Transactions not at the same amounts as for unrelated parties.
-Even if related party transactions do not occur, mere existence of the relationship may affect transactions
with
other parties.
Methods for Pricing Related
Party Transactions
-Comparable uncontrolled price—price of comparable goods sold in an economically comparable market
to a buyer
unrelated to the seller.
-Resale price reduced by a margin to arrive at a transfer price.
-Cost-plus method—supplier's cost plus an appropriate markup.
-No price (e.g. free provision of management services and interest-free credit).
Related Party Examples:
 Z
Company A
Company C

-Z controls or has joint control over entity A and has control, joint control or significant influence over entity C.
-In terms of the financial statements of entity A, entity C is a related party and the same would be true of
entity A in entity
C's financial statements.
-If Z only had significant influence over both entities A and
entity C, then the two entities would not be related parties in each other's financial statements.
Key Management Personal Investments:
 E company
Bee company
Tee company

-Entity Teewouldbe a related party of entity I within E's financial statements because A has control
(or joint control) of entity E and is a key management personnel in entity Tee.
-The same would be true in entity Tee's financial statements entity I would be a related party.
-If Awere a member of the key management personnel of entity Bee, the outcome in both Eand
Tee's financial statements
would be the same.
Close Family members:
Z
A
Company M
Company W
Husband and Wife
-Both entity M and entity N would be related parties under IAS 24.
-If Z and A only have significant influence over entity L and M respectively, then entity L and M would
not be related parties.
Situations in Which Related Party Transactions May Lead to Disclosures:
-Purchases or sales of goods, property and other assets
-Rendering or receiving of services
-Agency arrangements
-Leasing arrangements
-Transfer of research and development
-Licence agreements
-Finance (including loans and equity contributions)
-Guarantees and collaterals
-Management contracts.

Disclosures:
Relationships between a parent and its subsidiaries are disclosed even if there have been no transactions between them.
-The name of the entity's parent must be disclosed and the ultimate parent, if different.
-Related party relationships where control exists (irrespective of whether there have been transactions between them) must
be disclosed so a reader can form a view about the effects of related party relationships.
An entity also must disclose compensation to key management personnel, in total and for each of the following headings:
-Short-term employee benefits
-Post-employment benefits
-Other long-term benefits
-Termination benefits
-Equity compensation benefits.
Disclosure of transactions between related parties is required, along with any outstanding balances and
commitments.
-As a minimum, these disclosures will include:
-the amount of the transaction;
-the amount of any outstanding balances, including terms and conditions; whether they are secured; the nature and
means of settlement; and whether any guarantees have been given or received
-any allowances for irrecoverable debts relating to the outstanding balances and
-any expense recognised in the period in respect of irrecoverable debts due from related parties.
Disclosures are made separately for each of the following classifications of related parties:
-Parent
-Subsidiaries
-Associates
-Joint ventures
-Key management personnel
-Parties with joint control or significant influence over the entity
-Other

Examples of Transactions:
The following are examples of transactions which would be disclosed if they were made with a related party:
-Purchases or sales of property or other assets
-Purchases or sale of goods, or rendering or receiving of services
-Leases
-Transfer of research and development knowledge
-Provision of guarantees or collateral.
 Share Based Payment

Share-based payment has become increasingly common. Share-based payment occurs when
an entity buys goods or services from other parties (such as employees or suppliers) and: •
settles the amounts payable by issuing shares or share options, or • incurs liabilities for cash
payments based on its share price

The problem If a company pays for goods or services in cash, an expense is recognised in
profit or loss. If a company ‘pays’ for goods or services in share options, there is no cash
outflow and therefore, under traditional accounting, no expense would be recognised. If a
company issues shares to employees, a transaction has occurred. The employees have
provided a valuable service to the entity, in exchange for the shares/options. It is
inconsistent not to recognise this transaction in the financial statements. IFRS 2 Share-based
Payment was issued to deal with this accounting anomaly. IFRS 2 requires that all share-
based payment transactions must be recognised in the financial statements when the
transaction takes place.
There are a number of arguments against recognising share-based payments. IFRS 2
rejects them all.
No cost therefore no charge
A charge for shares or options should not be recognised because the entity does not have
to sacrifice cash or other assets. There is no cost to the entity. This argument ignores the
fact that a transaction has occurred. The employees have provided valuable services to
the entity in return for valuable shares or options. If this argument were accepted, the
financial statements would fail to reflect the economic transactions that had occurred.

Earnings per share would be hit twice The charge to profit for the employee services
consumed reduces the entity’s earnings. At the same time there is an increase in the
number of shares issued. However, the double impact on earnings per share simply
reflects the two economic events that have occurred: the entity has issued shares, thus
increasing the denominator of the EPS calculation, and it has also consumed the
resources it received for those shares, thus reducing the numerator. Issuing shares to
employees, instead of paying them in cash, requires a greater increase in the entity’s
earnings in order to maintain its earnings per share. Recognising the transaction ensures
that its economic consequences are reported.
Adverse economic consequences Recognition of employee share-based payment might
discourage entities from introducing or continuing employee share plans. However,
accounting for share-based payments avoids the economic distortion created when entities
consume resources without having to account for such transactions.

Types of transaction
IFRS 2 applies to all share-based payment transactions. There are two main types. The most
common type of share-based payment transaction is where share options are granted to
employees or directors as part of their remuneration.
• Equity-settled share-based payments: the entity acquires goods or services in exchange
for equity instruments of the entity (e.g. shares or share options)
• Cash-settled share-based payments: the entity acquires goods or services in exchange for
amounts of cash measured by reference to the entity’s share price.
2 Equity-settled share-based payment transactions Accounting treatment
When an entity receives goods or services as a result of an equity-settled share-based
payment transaction, it posts the following double entry: Dr Expense/asset Cr Equity The
entry to equity is normally reported in 'other components of equity'. Share capital is not
affected until the share-based payment has 'vested'

The basic principle is that all transactions are measured at fair value. How fair value is
determined:

Is the transaction with employees or others providing similar services if the answer is yes ?
Measuere at the fair value of the equity instruments granted at grant date

Can the fair value of the goods and services received be measured reliabley?
If the answer is yes measure at the fair value of goods and services received at the date they
were receieved if the anser is no measure the fair value of equity instruments granted at grant
date

The grant date is the date at which the entity and other party agreed to the agreement
Determining fair Value:

Where a share-based payment transaction is with parties other than employees, it is

assumed that the fair value of the goods and services received can be measured reliably, at
their cash price for example. Where shares or share options are granted to employees as
part of their remuneration, it is not usually possible to arrive at a reliable value for the
services received in return. For this reason, the entity measures the transaction by
reference to the fair value of the equity instruments granted. The fair value of equity
instruments is market value, if this is available. Where no market price is available (for
example, if the instruments are unquoted), a valuation technique or model is used. The fair
value of share options is harder to determine. In rare cases there may be publicly quoted
traded options with similar terms, whose market value can be used as the fair value of the
options we are considering. Otherwise, the fair value of options must be estimated using a
recognised option-pricing model. IFRS 2 does not require any specific model to be used.
The most commonly used is the Black-Scholes model.
Allocating the expense to reporting periods:
Some equity instruments vest immediately. In other words, the holder is unconditionally
entitled to the instruments. In this case, the transaction should be accounted for in full on
the grant date. However, when share options are granted to employees, there are normally
conditions attached. For example, a service condition may exist that requires employees to
complete a specified period of service. IFRS 2 states that an entity should account for services
as they are rendered during the vesting period (the period between the grant date and the
vesting date).

The vesting date is the date on which the counterparty (e.g. the employee) becomes entitled
to receive the cash or equity instruments under the arrangement. The expense recognised at
each reporting date should be based on the best estimate of the number of equity
instruments expected to vest. On the vesting date, the entity shall revise the estimate to
equal the number of equity instruments that ultimately vest.
Example:

An entity has a reporting date of 31 December. On 1 January 20X1 it grants 100 share
options to each of its 500 employees. Each grant is conditional upon the employee working
for the entity until 31 December 20X3. At the grant date the fair value of each share option
is $15. During 20X1, 20 employees leave and the entity estimates that a total of 20% of the
500 employees will leave during the three-year period. During 20X2, a further 20 employees
leave and the entity now estimates that only 15% of the original 500 employees will leave
during the three-year period. During 20X3, a further 10 employees leave. Required:
Calculate the remuneration expense that will be recognised in each of the three years of
the share-based payment scheme.
Solution:

The total expense recognised is based on the fair value of the share options granted at the
grant date (1 January 20X1). The entity recognises the remuneration expense as the
employees’ services are received during the three-year vesting period. Year ended 31
December 20X1 At 31 December 20X1, the entity must estimate the number of options
expected to vest by predicting how many employees will remain in employment until the
vesting date. It believes that 80% of the employees will stay for the full three years and
therefore calculates an expense based on this assumption: (500 employees × 80%) × 100
options × $15 FV × 1/3 = $200,000 Therefore, an expense is recognised for $200,000
together with a corresponding increase in equity.

Year ended 31 December 20X2 The estimate of the number of employees staying for the full
three years is revised at each year end. At 31 December 20X2, it is estimated that 85% of the
500 employees will stay for the full three years. The calculation of the share based payment
expense is therefore as follows:
The estimate of the number of employees staying for the full three years is revised at
each year end. At 31 December 20X2, it is estimated that 85% of the 500 employees will
stay for the full three years. The calculation of the share based payment expense is
therefore as follows:

(500 employees X 85%) X 100 options X $15 FV X 2/3 425000

Less presviously recognized expense (200000)

__________
225000
___________

Equity will be increased by $225,000 to $425,000 ($200,000 + $225,000).

Year ended 31 December 20X3 A total of 50 (20 + 20 + 10) employees left during the
vesting period. The expense recognised in the final year of the scheme is as follows:
(500 – 50 employees) x 100 options x $15 FV 675000
Less previously recognised expense (425000)
_________
Expene in year ended 2003 250000
___________
The financial statements will include the following amounts

Statement of profit or loss:

2001 2002 2003

Staff cost 200000 225000 250000
Statement of financial position 2001 2002 2003
Other component of equity 200000 425000 675000
Performance conditions
In addition to service conditions, some share based payment schemes have performance
conditions that must be satisfied before they vest, such as: Performance conditions can be
classified as either market conditions or non-market conditions. • achieving a specified
increase in the entity's profit • the completion of a research project • achieving a specified
increase in the entity's share price.
• A market condition is defined by IFRS 2 as one that is related to the market price of the
entity’s equity instruments. An example of a market condition is that the entity must attain
a minimum share price by the vesting date for scheme members to be eligible to
participate in the share-based payment scheme.
• Non-market performance conditions are not related to the market price of the entity's
equity instruments. Examples of non-market performance conditions include EPS or profit
targets.
The impact of performance conditions
• Market based conditions have already been factored into the fair value of the equity
instrument at the grant date. Therefore, an expense is recognised irrespective of whether
market conditions are satisfied.
• Non-market based conditions must be taken into account in determining whether an
expense should be recognised in a reporting period.
Example:

On 1 January 20X1, one hundred employees were given 50 share options each. These
will vest if the employees still work for the entity on 31 December 20X2 and if the share
price on that date is more than $5. On 1 January 20X1, the fair value of the options was
$1. The share price on 31 December 20X1 was $3 and it was considered unlikely that the
share price would rise to $5 by 31 December 20X2. Ten employees left during the year
ended 31 December 20X1 and a further ten are expected to leave in the following year.
Required: How should the above transaction be accounted for in the year ended 31
December 20X1?
The expense recognised is based on the fair value of the options at the grant date. This
should be spread over the vesting period. There are two types of conditions attached to the
share based payment scheme: Although it looks unlikely that the share price target will be
hit, this condition has already been factored into the fair value of the options at the grant
date. Therefore, this condition can be ignored when determining the charge to the
statement of profit or loss.
• A service condition (employees must complete a minimum service period)
• A market based performance condition (the share price must be $5 at 31 December
20X2).

The expense to be recognised should therefore be based on how many employees are
expected to satisfy the service condition only. The calculation is as follows:

(100 employees – 10 – 10) × 50 options × $1 FV × 1/2 = $2,000. The entry to recognise this
is:
Dr Profit or loss $2,000
Cr Equity $2,000
Accounting after the vesting date IFRS 2 states that no further adjustments to total equity
should be made after the vesting date. This applies even if some of the equity instruments
do not vest (for example, because a market based condition was not met). Entities may,
however, transfer any balance from 'other components of equity' to retained earnings.
Example:
Ben offered directors a option scheme conditional on three year service. The number of
options granted to each of the ten directors at the inception of the scheme was 1
million. The options were exerciseable shortly after the end of three years. Upon
exercise of the share options, those directors eligible would be required to pay $2 for
each share options, those directors would be eligible would be required to pay $2 for
each share of $1 nominal value

The fair value of the options and the estimates of the number of options expected to
vest at various points in time were as follows:

Year Rights expected to vest FV of the option

Start of year one 8m 0.30
End of year one 7m 0.33
End of year two 8m 0.37
At the end of year three, 9 million rights actually vested.
Required:
(a) Show how the option scheme will affect the financial statements for each of
the three years of the vesting period. (b) Show the accounting treatment at the
vesting date for each of the following situations: (i) The fair value of a share was
$5 and all eligible directors exercised their share options immediately. (ii) The fair
value of a share was $1.50 and all eligible directors allowed their share options to
lapse.
Solution

Year Equity Expense

Year 1 (7m x $0.3 x 1/3) 700 700

Year 2 (8m x $0.3 x 2/3) 1600 900
Year 3 (9m x 0.3) 2700 1100

Note: Equity-settled share-based payments are measured using the fair value of the
instrument at the grant date (the start of year one). The amount recognised in equity
($2.7m) remains. The entity can choose to transfer this to retained earnings.
(i) All eligible directors exercised their options:
The entity will post the following entry:
Dr Cash (9m × $2) $18.0m
Dr Equity reserve $2.7m
Cr Share capital (9m × $1) $9.0m
Cr Share premium (bal. fig.) $11.7m
(ii) No options are exercised:

The amount recognised in equity ($2.7m) remains. The entity can choose to transfer this
to retained earnings.
Modifications to the terms on which equity instruments are granted
An entity may alter the terms and conditions of share option schemes during the
vesting period. For example: • it might increase or reduce the exercise price of the
options (the price that the holder of the options has to pay for shares when the options
are exercised). This makes the scheme less favourable or more favourable to
employees. • it might change the vesting conditions, to make it more likely or less likely
that the options will vest.

If a modification to an equity-settled share-based payment scheme occurs, the entity

must continue to recognise the grant date fair value of the equity instruments in profit
or loss, unless the instruments do not vest because of a failure to meet a non-market
based vesting condition. If the modification increases the fair value of the equity
instruments, then an extra expense must be recognised: • The difference between the
fair value of the new arrangement and the fair value of the original arrangement (the
incremental fair value) at the date of the modification must be recognised as a charge
to profit or loss. The extra expense is spread over the period from the date of the
change to the vesting date.
Example:

An entity grants 100 share options to each of its 500 employees, provided that they
remain in service over the next three years. The fair value of each option is $20. During
year one, 50 employees leave. The entity estimates that a further 60 employees will
leave during years two and three. At the end of year one the entity reprices its share
options because the share price has fallen. The other vesting conditions remain
unchanged. At the date of repricing, the fair value of each of the original share options
granted (before taking the repricing into account) was $10. The fair value of each
repriced share option is $15. During year two, a further 30 employees leave. The entity
estimates that a further 30 employees will leave during year three. During year three, a
further 30 employees leave. Required: Calculate the amounts to be recognised in the
financial statements for each of the three years of the scheme.
Solution:

The repricing means that the total fair value of the arrangement has increased and this will
benefit the employees. This in turn means that the entity must account for an increased
remuneration expense. The increased cost is based upon the difference in the fair value of
the option, immediately before and after the repricing. Under the original arrangement,
the fair value of the option at the date of repricing was $10, which increased to $15
following the repricing of the options, for each share estimated to vest. The additional cost
is recognised over the remainder of the vesting period (years two and three). The amounts
recognised in the financial statements for each of the three years are as follows:
 Equity Expense
$ $
Year one original
(500 – 50 – 60) x 100 x$20 x 1/3 260000 260000
________ _________
Year two original
(500- 30 -30) x 100 x $20 x 2/3 520000 260000
Incremental
(500 – 50 – 30 – 30) x 100 x $5 x ½ 97500 97500
________ _________
617500 357500
_______ _________
Year three original
(500 – 50 -30 -30) x 100 x $20 780000 260000
Incremental
(500 – 50 – 30 – 30) x 100 x $5 195000 97500
__________ _______
975000 357500
Cancellations and settlements
An entity may cancel or settle a share option scheme before the vesting date. • If the
cancellation or settlement occurs during the vesting period, the entity immediately
recognises the amount that would otherwise have been recognised for services received
over the vesting period ('an acceleration of vesting' (IFRS 2, para 28a)).

• Any payment made to employees up to the fair value of the equity instruments granted
at cancellation or settlement date is accounted for as a deduction from equity.
• Any payment made to employees in excess of the fair value of the equity instruments
granted at the cancellation or settlement date is accounted for as an expense in profit or
loss.
Example

An entity introduced an equity-settled share-based payment scheme on 1 January 20X0

for its 5 directors. Under the terms of the scheme, the entity will grant 1,000 options to
each director if they remain in employment for the next three years. All five directors are
expected to stay for the full three years. The fair value of each option at the grant date
was $8. On 30 June 20X1, the entity decided to base its share-based payment schemes
on profit targets instead. It therefore cancelled the existing scheme. On 30 June 20X1, it
paid compensation of $10 per option to each of the 5 directors. The fair value of the
options at 30 June 20X1 was $9.
Required: Explain, with calculations, how the cancellation and settlement of the share-
based payment scheme should be accounted for in the year ended 31 December 20X1.
Solution:

The share option scheme has been cancelled. This means that all the expense not yet
charged through profit or loss must now be recognised in the year ended 31 December
20X1:

$
Total expense 40000
(5 directors x 1000 options x $8)
Less expense recognised in year ended
31 December 2000 (13333)
________
26667
_________
To recognise the remaining expense, the following entry must be posted:
Dr Profit or loss $26,667
Cr Equity $26,667
Any payment made in compensation for the cancellation that is up to the fair value of
the options is recognised as a deduction to equity. Any payment in excess of the fair
value is recognised as an expense. The compensation paid to the director for each
option exceeded the fair value by $1 ($10 – $9). Therefore, an expense of $1 per
option should be recognised in profit or loss. The following accounting entry is
required:

Dr Equity (5 directors × 1,000 options × $9) $45,000

Dr Profit or loss (5 directors × 1,000 options × $1) $5,000
Cr Cash (5 directors × 1,000 options × $10) $50,000
Cash-settled share-based payment transactions
Examples of cash-settled share-based payment transactions include:
• share appreciation rights (SARs), where employees become entitled to a future cash
payment based on the increase in the entity’s share price from a specified level over a
specified period of time
• the right to shares that are redeemable, thus entitling the holder to a future payment
of cash.
Accounting treatment The double entry for a cash-settled share-based payment
transaction is:
Dr Profit or loss/Asset
Cr Liabilities

Measurement The entity remeasures the fair value of the liability arising under a cash-
settled scheme at each reporting date. This is different from accounting for equity-
settled share-based payments, where the fair value is fixed at the grant date.
Allocating the expense to reporting periods Where services are received in exchange
for cash-settled share-based payments, the expense is recognised over the period that
the services are rendered (the vesting period). This is the same principle as for equity-
settled transactions.
An entity has a reporting date of 31 December. On 1 January 20X1 the entity grants 100
share appreciation rights (SARs) to each of its 300 employees, on the condition that they
continue to work for the entity until 31 December 20X3. During 20X1, 20 employees leave.
The entity estimates that a further 40 will leave during 20X2 and 20X3. During 20X2, 10
employees leave. The entity estimates that a further 20 will leave during 20X3. During
20X3, 10 employees leave. The fair value of a SAR at each reporting date is shown below:

$
2001 10
2002 12
2003 15

Required: Calculate the expense for each of the three years of the scheme, and the
liability to be recognised in the statement of financial position as at 31 December for
each of the three years.
Solution:

Year Liability at year end Expense for the year

2001 (300-20-40)x100x1/3 80 80
2002 (300-20-10-20)x100x2/3 200 120
2003 (300-20-10-10)x100x15 390 190

Note that the fair value of the liability is remeasured at each reporting date. This is then
spread over the vesting period.
The value of share appreciation rights (SARs) SARs may be exercisable over a period of
time. The fair value of each SAR comprises the intrinsic value (the cash amount payable
based upon the share price at that date) together with its time value (based upon the
fact that the share price will vary over time). When SARs are exercised, they are
accounted for at their intrinsic value at the exercise date. The fair value of a SAR could
exceed its intrinsic value at this date. This is because SAR holders who do not exercise
their rights at that time have the ability to benefit from future share price rises. At the
end of the exercise period, the intrinsic value of a SAR will equal its fair value. The
liability will be cleared and any remaining balance taken to profit or loss.
Example:
On 1 January 20X4 Goga granted 200 share appreciation rights (SARs) to each of its 500
employees on the condition that they continue to work for the entity for two years. At 1
January 20X4, the entity expects that 25 of those employees will leave each year. During 20X4,
20 employees leave Goga. The entity expects that the same number will leave in the second
year. During 20X5, 24 employees leave. The SARs vest on 31 December 20X5 and can be
exercised during 20X6 and 20X7. On 31 December 20X6, 257 of the eligible employees
exercised their SARs in full. The remaining eligible employees exercised their SARs in full on 31
December 20X7.

The fair value and intrinsic value of each SAR was as follows:

Reporting date FV Per SAR Intrensic Value per SAR

31 December 2004 $5
31 December 2005 $7
31 December 2006 $8 $7
31 December 2007 $10 $10
Required:
Reporting date FV per SAR Intrinsic value per SAR 31 December 20X4 $5 31
December 20X5 $7 31 December 20X6 $8 $7 31 December 20X7 $10 $10

(a) Calculate the amount to be recognised as a remuneration expense in the

statement of profit or loss, together with the liability to be recognised in the
statement of financial position, for each of the two years to the vesting date.

(b) Calculate the amount to be recognised as a remuneration expense and reported

as a liability in the financial statements for each of the two years ended 31 December
20X6 and 20X7.
(a) The liability is remeasured at each reporting date, based upon the current information
available relating to known and expected leavers, together with the fair value of the
SAR at each date. The remuneration expense recognised is the movement in the
liability from one reporting date to the next as summarised below:

Rep Date workings Liability (SOFP) Expense(P&L)

31/12/x4 (500-20-20)x200x5x1/2 230000 230000
31/12/x5 (500-20-24)x200x7x2/2 638400 408400

(b) The number of employees eligible for a cash payment is 456 (500 – 20 – 24). Of these,
257 exercise their SARs at 31/12/X6 and the remaining 199 exercise their SARs at
31/12/X7.

The liability is measured at each reporting date, based upon the current information
available at that date, together with the fair value of each SAR at that date. Any SARs
exercised are reflected at their intrinsic value at the date of exercise.
Year ended 31/12/2006

Liaibility B/F 638400

Cash payment( 257x200x$7) (359800)
________
318400
________

Year ended 31/12/2007

Liability B/F 318400

Cash Payment (199x200x$10) (398000)
Profit or loss(bal.fig) (79800)
___________
Liability C/F Nil
___________
Replacing an equity scheme with Cash Scheme

An entity may modify the terms of an equity-settled share-based payment scheme

so that it becomes classified as a cash-settled scheme. If this is the case, IFRS 2
requires the entity to:
• Measure the transaction by reference to the modification fair value of the equity
instruments granted
• Derecognise the liability and recognise equity to the extent of the services
rendered by the modification date
• Recognise a profit or loss for the difference between the liability derecognised
and the equity recognised. chapter 9
 IFRS 1 First time adoption

Background
The European Union's requirement that all listed companies in the European Economic Area publish their consolidated
financial statements in accordance with IFRS by 2005 meant that entities with a financial year end of 31 December needed
to have an IFRS statement of financial position as at 1 January 2004 (for comparative purposes).

IFRS 1 First-time Adoption of International Financial Reporting Standards permits certain exemptions from recognition
and measurement requirements where compliance would otherwise cause undue cost or effort in application.

However, there are no exemptions from IFRS 1's enhanced disclosure requirements detailing how the change to IFRSs has
affected financial position, performance and cash flows.

Objective:
To ensure that an entity's first IFRS contain high-quality information which is:
- transparent for users;
- comparable over all periods presented;
- a starting point for accounting under IFRS; and
- generated at a cost which does not exceed the benefit (to users).
 A first-time adopter uses the provisions of IFRS 1 and not the transitional provisions of other standards unless IFRS 1
specifies otherwise.

Scope
This standard applies to:
first IFRS financial statements; and
any interim financial statements presented under IAS 34 for any part of the period covered by the first IFRS
financial statements.
It may be reapplied where an entity has previously applied IFRS 1 but then stopped applying IFRS.

Definitions:

First IFRS financial statements: the first annual financial statements in which IFRSs are adopted by an explicit and
unreserved statement of compliance.

First-time adopter: an entity which presents its first IFRS financial statements. If an explicit and unreserved statement
of compliance has already been made an entity is not a first time adopter.

Opening IFRS statement of financial position: an entity's statement of financial position at the date of transition to IFRSs.
This may be published or unpublished.
Previous GAAP: the basis of accounting used immediately before the adoption of IFRS.

Reporting date: the end of the latest period covered by financial statements (or by an interim financial report).

Date of transition: the beginning of the earliest period for which an entity presents full comparative information under IFRSs in
its first IFRS financial statements.

Deemed cost: an amount used as a surrogate for cost or depreciated cost at a given date.

Stages in transition to IFRS:

Accounting Policies
-Select accounting policies which will comply with IFRSs.
- The same accounting policies are used for all periods presented including the opening IFRS statement of
financial position.
- The version of an IFRS which is extant at the reporting date (i.e. 31 December 2015 in Illustration 1) is used subject to
the exemptions permitted under IFRS 1. Different versions effective at earlier dates must not be applied.

- If a new IFRS permits early application then a first-time adopter may adopt that standard early, but it is not required
to do so.
- The transitional arrangements in other IFRSs apply to entities which already use IFRSs. They do not apply to first-time
adopters except in relation to the derecognition of financial assets and financial liabilities and hedge accounting in
accordance with IFRS 9.

Opening IFRS Statement of Financial Position

- Prepare an opening IFRS statement of financial position (i.e. at the date of transition). This is the starting point to accounting
under IFRS.

Estimates
- Make estimates in accordance with IFRSs for the opening statement of financial position and all other periods covered by
the financial statements.

Estimates must be made consistent with estimates made as at the same date under previous GAAP, after adjustments to reflect
different accounting policies, unless there is objective evidence that those estimates were in error.

- Information received after the date of transition relevant to estimates made under previous GAAP is treated as for non
adjusting events (IAS 10).

-An entity may need to make estimates under IFRSs at the date of transition which were not required at that date under
previous GAAP (e.g. if there was no requirement to state inventory at the lower of cost and net realisable value). Such
estimates must reflect conditions which existed at the date of transition to IFRSs.
 Estimates required by Yes No Calculation consistent with
Evidence of Error ? IFRSs?
previous GAAP

Yes No
NO yes
Make
estimate
reflecting Use previous Use previous
relevant date estmiate estimate and
adjust to reflect
IFRSs

- These same principles apply to estimates made for any comparative period presented in first IFRS
financial statements.
Presentation and Disclosure
- Make presentation and disclosure requirements in accordance with IFRS 1.
- At least three statements of financial position and two of each other statement must be included for comparison
purposes (IAS 1).
- Historical summaries of selected data need not comply with recognition and measurement requirements of IFRS 1.

However, such summaries and comparative information under previous GAAP must be clearly labelled as not being prepared
under IFRS and the nature of the main adjustments to comply with IFRS disclosed. The adjustments are not required to
be quantified.

The financial statements to 31 December 2014 are published under previous GAAP. The financial statements
to 31 December 2015 will be prepared under IFRS with the comparatives information restated.
Opening IFRS Statement of Financial Position
Recognition and Measurement Principles
Recognise all assets and liabilities required by IFRSs (e.g. assets held under finance leases and lease obligations).

- Do not recognise assets and liabilities that are not allowed to be recognised under IFRSs (e.g. "provisions" which do not
meet the definition of a liability).
- Reclassify items as current/non-current, liability/equity in accordance with IFRSs as necessary (e.g. preferred shares
with fixed maturity as debt rather than equity).

- Measure all recognised assets and liabilities in accordance with IFRSs (e.g. at cost, "fair value" or a discounted amount).

- Because the adjustments which result from changes in accounting policy on transition arise from events and
transactions before the date of transition they are recognised directly in retained earnings (or, if appropriate, elsewhere in
equity) at the date of transition.
Exemptions From Other IFRSs
IFRS 1 essentially requires full retrospective application of all extant IFRSs on first-time adoption with limited
exemptions that include:
- property, plant and equipment
- business combinations
- cumulative translation differences
- compound financial instruments
- assets and liabilities of subsidiaries, associates and joint ventures
-designation of previously recognised financial instruments
- share-based payment transactions
- insurance contracts
- decommissioning liabilities
- leases-
- fair value measurement of financial assets or liabilities at initial recognition; and
- borrowing costs.
Property, Plant and Equipment
- Cost-based measurement of some items of property, plant and equipment may involve undue cost or effort, especially if the
entity has not kept up-to-date fixed-asset registers.
- Items of property, plant and equipment can therefore be measured at their fair value at the date of transition, and that
value deemed to be cost (i.e. "deemed cost").
- If an entity has revalued assets under its previous GAAP and the revaluation is broadly in line with IFRSs, then that
revalued amount can be taken to be the deemed cost.
- If an entity has carried out a fair value exercise of all (or some) of its assets and liabilities for a particular event (e.g.
an IPO or privatisation), then that fair value may be as the deemed cost at the event date.
- Comparing revaluation under IFRS 1 with that under IAS 16:
- for IFRS 1 it is a "one-off" exercise—under IAS 16,revaluations must be kept up to date
- any revaluation to deemed cost under IFRS 1 is taken to retained earnings whereas revaluation under IAS 16 is
credited to a revaluation surplus and
- the IFRS 1 exemption can be applied to any item(s) under IAS 16, all items in the same class must be revalued.
- Any borrowing costs capitalised in accordance with previous GAAP before the date of transition may be carried forward in
the opening statement of financial position.
Business Combinations
Electing Not to Apply IFRS 3
- A first-time adopter does not have to apply IFRS 3 Business Combinations retrospectively to past business combinations
(i.e. business combinations which occurred before the date of transition to IFRSs).
- If, however, a first-time adopter restates any business combination to comply with IFRS 3, all later business
combinations must be restated and IAS 36 (Revised) and IAS 38 (Revised) applied.

- This exemption also applies to past acquisitions of investments in associates and of interests in joint ventures.
Goodwill Adjustments:
- The carrying amount of goodwill in the opening IFRS statement of financial position is the same as under previous
GAAP at the date of transition after the following adjustments (if applicable):
- Increasing the carrying amount of goodwill for an item previously recognised as an intangible asset which does not
meet IFRS criteria.
- Decreasing the carrying amount of goodwill if an intangible asset previously subsumed in recognised goodwill meets
IFRS criteria for recognition.
- Adjustment for the amount of a contingency affecting the purchase consideration for a past business combination
which is resolved before the date of transition to IFRS. A reliable estimate of the contingent amount is needed and
its payment must be probable.
- The carrying amount should similarly be adjusted if a previously recognised contingent adjustment can no longer
be measured reliably or its payment is no longer probable.
- An impairment test at the date of transition. Any impairment loss is adjusted in retained earnings (or revaluation surplus
if required by IAS 36).
- No other adjustments are made to the carrying amount of goodwill at the date of transition.
Deferred Tax and Non-controlling Interest
- The measurement of deferred tax and non-controlling interest follows from the measurement of other assets and liabilities.
- All these adjustments to recognised assets and liabilities therefore affect non-controlling interest and deferred tax.

Cumulative Translation Differences

- All translation adjustments arising on the translation of the financial statements of foreign entities can be recognised
in accumulated profits at the date of transition (i.e. any translation reserve included in equity under previous GAAP
is reset to zero).
- The gain or loss on subsequent disposal of the foreign entity will then be adjusted only by those accumulated translation
adjustments arising after the date of transition.
- If this exemption is not used, an entity must restate the translation reserve for all foreign entities since they were
acquired or created.

Government Loans Below Market Rates of Interest

- An entity may use a previous GAAP valuation for a government loan on first-time adoption. Subsequent
measurement is based on the requirements of IFRS 9 Financial Instruments.
Mandatory Exceptions
to Retrospective Application
As well as the optional exemptions, there are seven mandatory exceptions, concerning:
1. derecognition of financial assets and financial liabilities;
2. hedge accounting;
3. non-controlling interest;
4. classification and measurement of financial assets;
5. impairment of financial assets;
6. embedded derivatives; and
7. government loans

Derecognition of Financial Assets and Financial Liabilities

- A first-time adopter must apply the derecognition requirements in IFRS 9 Financial Instruments for any transactions
occurring on or after the date of transition to IFRS.
- Financial assets or financial liabilities derecognised under previous GAAP cannot be recognised on the adoption date of
IFRS.
Hedge Accounting
- The hedging requirements of IFRS 9 must be applied prospectively from the date of transition. This means that
the hedge accounting practices, if any, used in periods prior to the date of transition may not be retrospectively changed.

- An entity cannot designate a transaction as a hedge if it was not designated as such under previous GAAP and any
designated hedges under previous GAAP will be recognised and measured under IFRS 9 (irrespective of whether there is
hedge documentation or hedge effectiveness).

Non-controlling Interest
- Total comprehensive income must be split between owners of the parent and non-controlling interest, even if this results in a
deficit balance for non-controlling interest.
- Any change in control status between the owners of the parent and non-controlling interest is accounted for from the date
of transition unless the adopter has elected to apply IFRS 3 retrospectively to past business combinations.

Classification and Measurement of Financial Assets

- An entity must assess whether a financial asset meets the conditions of IFRS 9 on the basis of facts and circumstances
existing at the date of transition.
Classification and Measurement of Financial Assets
- An entity must assess whether a financial asset meets the conditions of IFRS 9 on the basis of facts and circumstances
existing at the date of transition.

Impairment of Financial Assets

- The impairment requirements of IFRS 9 are applied retrospectively on adoption of IFRSs.

- On transition, an entity uses reasonable and supportable information to determine the credit risk of financial
instruments when they were first recognised.

Embedded Derivatives
An embedded derivative will be separated from its host based on the conditions which existed at the later of the date it first
became a party to the contract and the date a reassessment is required by IFRS 9.
Government Loans
A first-time adopter must classify all government loans as either financial liability or equity instrument, in accordance
with IAS 32.
IFRS 1 allows IAS 20 and IFRS 9 to be applied retrospectively to the loan as long as the relevant information had been
obtained when the loan was received.

Explanation of Transition

An entity must explain how the transition to IFRSs has affected its reported financial position, performance and cash flows.
This is achieved through reconciliations and disclosure and there are no exemptions to the requirements for these.
Reconciliations
The following are required to enable users to understand the material adjustments to the statement of financial position and
statement of comprehensive income:
- A reconciliation of equity under IFRSs and previous GAAP as at:
- the transition date; and
-the end of the latest period presented under previous GAAP.
- A reconciliation of profit or loss reported under previous GAAP to that under IFRS for the latest period's statement of
comprehensive income presented under previous GAAP.
- These reconciliations must distinguish between changes in accounting policies and errors. IAS 8 disclosure requirements
do not apply.
- Similar reconciliations are required for interim financial reports for part of the period covered by the first IFRS
financial statements.

Other Disclosures
- If a statement of cash flows was presented under previous GAAP, material adjustments must be explained.
- If an entity uses fair value as deemed cost for any items of property, plant and equipment (or investment property
or intangible asset) as an alternative to cost-based measurement, the following must be disclosed for each
line item:
- the aggregate of those fair values and
- the aggregate adjustment to carrying amounts reported under previous GAAP.
Practical Matters:

-The finance director is most likely to be responsible for the conversion process. In large entities, a steering committee
may be formed to manage the process across the business.
- Key stakeholders in the entity need to be made aware how staff may be affected—particularly with regard to training.
- Matters to be considered when making a preliminary assessment of the effect of conversion will include:
- the level of readily available IFRS competence of staff, internal audit and non-executive directors;
- whether specialist help may be needed and, if so, who can provide it
- identifying agreements, contracts and reports affected by the change in the financial reporting framework
- making an initial estimate of the financial effect of changes in key accounting policies;
- assessing the significance of fair values (e.g. for IAS 40 and IFRS 9); reviewing any existing weaknesses in internal
financial reporting systems and
- deciding the extent to which the previous year's financial information (prior to the date of transition) is to be restated.

Making the transition:

Accounting policies should be selected after a detailed review of the choices available (especially on transition).
- Changes may need to be made to the accounting system to collect the information necessary to meet disclosure
requirements (e.g. of segment reporting).
- The group accounting manual should be updated to reflect changes in terminology as well as changes in accounting
policies, measurement bases, etc.
- Accounting policies used for internal reporting (e.g. in budgeting systems) may need to be standardised or made
compatible with those used for external financial reporting.

Treasury
- Treasury managers will need to review treasury policy and how they hedge risk.
- Some entities may not be able to hedge account in accordance with IFRS 9 even if they change their hedging strategy.
- Loan agreements may need to be renegotiated to avoid breaching covenant limits.

IT and Systems
- Accounting system changes may be required as a direct result of the change to IFRS.
- Changes in IT and systems also may be required in response to the identification of business improvement opportunities.
Human Resources
Resource planning should take account of:
- the effect of the change on long-term recruitment plans;
- how day-to-day responsibilities of seconded staff will becovered and
- temporary specialist assistance needed.
- Remuneration schemes will need to be reviewed and renegotiated.
- Staff will need to be trained.

Training
- Internal experts with specialist IFRS knowledge will need to be involved in the training of others in the organisation. This
may require that they be trained as trainers.
- Subsidiary finance managers will need a broad understanding of the effect of IFRS on the entity and changes in policy
and procedure.
- General business managers will need to be made aware of the effect of IFRS on the business, its reporting and
planning processes.
Communication
The financial effects of the change must be communicated to shareholders, analysts, employees, lenders, etc. This
may require a public relations plan to advertise the adoption of IFRS.
 Goodwill

Acquisition Method:
- A combination that is an acquisition should be accounted for in the consolidated accounts using the acquisition method.
-As at the date of the acquisition the acquirer should:
-incorporate the results of the acquiree into the statement of comprehensive income
- recognise the identifiable assets and liabilities of the acquiree and any goodwill arising (positive or negative) into
the statement of financial position.
What Is Goodwill?
- In essence it is the difference between the cost of the acquisition and the acquirer's interest in the fair value of its
identifiable assets and liabilities at the date of the exchange transaction. This can be reflected in consolidation workings as:

Cost (the value of the part of the business owned) X

Acquirer's share of the fair value of the identifiable
assets and liabilities of the subsidiary as at the date
of acquisition (X)
Goodwill X

- As a result of the revisions to IFRS 3 (2008) the non controlling interest's share of goodwill may be recognised as
part of the acquisition process. The choice for measuring non controlling interests is allowed on a transaction-by-transaction
basis.
- IFRS 3 specifies the goodwill calculation as:
Acquisition date fair value of consideration
transferred X
Amount of any non-controlling interest in the entity
Acquired X
Fair value (at acquisition date) of any previous
shareholding X
Less: Acquisition date amounts of identifiable
assets acquired and liabilities assumed measured in
accordance with IFRS (X)
Goodwill X

Non-controlling interest should be valued at fair value on acquisition in the consolidation question. You may also be required to
calculate it as a proportion of identifiable net assets to make a comparison
Example:

Parsa acquires 80% of Saba for $120,000. The fair value of the non-controlling interest's share in Subsidiary is $28,000, while
the value of non-controlling interest based on the proportionate share of identifiable net assets acquired would give a value of
$25,000. The fair value of the subsidiary's net assets on acquisition has been determined as $125,000.
Goodwill can be calculated as either: (a) (b)
$ $

Cost of investment 120,000 120,000

Non-controlling interests 28,000 25,000
__________ ___________
148,000 145,000
Fair value of net assets acquired (125,000) (125,000)
__________ __________
Goodwill 23,000 20,000
___________ __________

If non-controlling interest is valued at fair value (a), then the value of goodwill and non-controlling interest will be higher to the
extent of the non-controlling interest's share of the fair value of the subsidiary.
The non-controlling interest's share of goodwill is $3,000 of the total of $23,000; this represents 13% of total goodwill. It is
highly likely that the percentage of goodwill owned by the non-controlling interest will be in a different proportion to the
actual shareholding (20% in this illustration). This would be due to the parent paying a premium to acquire control.
 Therefore there are several issues to address:
- What is included in the cost of acquisition?
- The meaning of the term "identifiability".
- Calculation of the fair value.
- Accounting for the revaluation in the accounts of the subsidiary.
- Accounting for the goodwill arising on consolidation.

Features of Goodwill
- It cannot be realised separately.
- Its value has no reliable relationship to cost.
- Its value may fluctuate widely over time.
- Valuation can be highly subjective.
- It exists because of factors which are difficult to identify with precision.
- Goodwill may be internally-generated or it may arise on acquisition.

Fair value of Purchase consideration:

An acquisition should be accounted for at its cost. Cost is:

- amount of cash or cash equivalents paid; and
- the fair value of the other purchase consideration given.
Deferred Consideration:

Any deferred consideration is measured at its present value, taking into account any premium or discount likely to be incurred
in settlement (and not the nominal value of the payable).
- If cash is to be paid sometime in the future, then the amount will need to be discounted to present value and that amount
included as the fair value in the cost calculation.
- The increase in present value, through the passage of time, will be a finance cost charged to profit or loss.

Harry acquired 60% of Sejal on 1 January 2014 for $100,000 cash payable immediately and $121,000 after two years. The fair
value of Sejal's net assets at acquisition amounted to $300,000. Harry cost of capital is 10%. The deferred consideration
was completely ignored when preparing group accounts as at 31 December 2014.
Required:
Calculate the goodwill arising on acquisition and show how the deferred consideration should be accounted for in Parent's
consolidated financial statements.
Solution:
Cost of investment in Subsidiary at acquisition:
$100,000 + $121,000/1.21 = $200,000
Goodwill $000
Cost 200
Share of net assets acquired (60% × 300,000) (180)
________
20
__________
Deferred consideration Double entry at 1 January:

Dr Cost of Investment in Subsidiary $100,000

Cr Deferred consideration $100,000

On 31 December, due to unwinding of discount, the deferred

consideration will equal $121,000/1.1 = 110,000
Dr Parent retained earnings $10,000
Cr Deferred consideration $10,000
- In the consolidated statement of financial position, the cost of investment in Subsidiary will be replaced by the goodwill
of $20,000, and the deferred consideration will be $110,000.
Contingent Consideration:

When a business combination agreement provides for an adjustment to the cost, contingent on future events, the acquirer
includes the acquisition date fair value of the contingent consideration in the
calculation of the consideration paid.

- If the contingent settlement is to be in cash, then a liability will be recognised.

- If settlement is to be through the issue of additional equity instruments, then the credit entry will be to equity.
- Any changes to the contingent consideration recognised, after the measurement period, will be accounted for in accordance
with the relevant IFRS and will not affect the original calculation of goodwill.
- If settlement will be in cash, then the consideration will be remeasured at each reporting date and any changes invalue will
be recognised in profit or loss. If settlement will be through an equity issue, then the consideration is not
remeasured and any change in value on eventual issue will be included within equity.

Share Exchange:
- It is quite common for a parent to acquire shares in the subsidiary by issuing its own shares to the previous
shareholders in a share exchange.
- The cost of acquisition is determined multiplying the number of shares issued by the parent by the market price of the
parent's shares at the date of acquisition.
Example:

Parent acquired 80% of Subsidiary's 100,000 shares in a three for five exchange. The market price of one share in P on
acquisition was $4.00 and that of S was $2.20. Cost of investment = 100,000 × 80% × 3⁄5 × $4.00 = $192,000
The value of S's share is irrelevant.

Transaction costs
(e.g. legal fees, advisory costs or valuation fees)
incurred in the acquisition of a subsidiary are expensed in the period
they are incurred.
- Costs related to the issue of shares or debt in respect of the acquisition are treated in accordance with IAS 32 or IFRS 9.
This will generally mean that they are recognised within equity.

Identifiable Assets and Liabilities:

Recognition
Introduction
- The identifiable assets and liabilities acquired are recognised separately at the date of acquisition (and therefore featured in
the calculation of goodwill).
- This may mean that some assets, especially intangible assets, will be recognised in the consolidated statement of financial
position that were not recognised in the subsidiary's single entity statement of financial position.
- Any future costs that the acquirer expects to incur in respect of plans to restructure the subsidiary must not be recognised
as a provision at the acquisition date. They will be treated as a post-acquisition costs.
Expected restructuring costs of an acquisition are not liabilities of the acquiree at the date of acquisition. Therefore, they are
not relevant in allocating the cost of acquisition. Historically, companies recognised large provisions on acquisition,
and this had the effect of reducing net assets and thereby increasing goodwill. Goodwill was then charged against profits
(through amortisation) over a much longer period than through immediate recognition as an expense. IFRS 3 and IAS 37 have
virtually eliminated these so-called big bath provisions.

Contingent Liabilities of the Acquiree

- IAS 37 Provisions, Contingent Liabilities and Contingent Assets does not allow contingent liabilities to be recognised in the
financial statements of a single entity.
- However, if a contingent liability of the subsidiary has arisen due to a present obligation that has not been recognised
(because an outflow of economic benefits is not probable),IFRS 3 requires this present obligation to be recognised in the
consolidated financial statements as long as fair value can be measured reliably.

Measurement:

All assets and liabilities of the subsidiary which are recognised in the consolidated statement of financial position are measured
at their acquisition date fair values.

- Each asset (and liability) is measured as if it was separately acquired on the date of acquisition. This reduces the amount
of goodwill that would otherwise be recognised (e.g. if book values were used instead).
- The non-controlling interest in the subsidiary is measured at either:
- fair value or
- the non-controlling interest's proportionate share of the subsidiary's identifiable net assets.
Example:

On 1 October 2014 Hmoer purchased 8 million of simpsonsTexas's 12 million equity shares. The acquisition was financed as
follows:
A cash payment of $2.00 per share; $1.20 per share being payable on 1 October 2014 and $0.80 being payable on 30 September
2015. Any discounting calculations should be performed using a cost of capital of 8% per annum. A share exchange of 1 equity
share in Homdf for every 2 shares acquired in Simpson.

The market value of a Simpson’s share was $3.90 on 1 October 2014. The market values of a Hawaii share were $4 on 1 October
2014 and $4.20 on 31 March 2015. A further share issue by Homer on 30 September 2015 of 1 share for every 8 shares acquired
in Texas provided the profits after tax of Texas exceeded a given figure.
Estimates indicate that this share issue is likely to be made. The fair value of this contingent consideration on 1 October 2014 was
$4 million; this has increased to $4.2 million at 31 March 2015. Homer incurred acquisition costs of $600,000. $350,000 of these
costs were external due diligence costs, $100,000 were Homers's best estimate of management time spent in negotiating the
acquisition, and $150,000 were costs incurred in connection with the issue of Homer's shares. The directors of Hawaii carried out
a fair value exercise on 1 October 2014 and the following matters emerged:

The net assets of Texas that were recognised in Homer’s own financial statements were $30 million based on their carrying
amounts in the individual financial statements of Homer’s.

On 1 October 2014 the carrying amount of Homer's freehold property was $15 million. The property had been purchased on 1
October 2004 for $17.5 million and the buildings element of the property (allocated cost $10 million) was being depreciated
over its estimated useful economic life of 40 years. On 1 October 2014 the market value of the property was $22 million, of
which $12 million related to the buildings element. The original estimate of the useful
economic life of the buildings is still considered valid.

On 1 October 2014 Simpspn’s was engaged in contracts with three different customers under which it supplied each
customer for a five-year-period from 1 October 2014. The directors of Homer believe that this creates an intangible asset
with a fair value of $7.5 million. In addition the directors of Homer believe that the fair value of the assembled workforce of
Simpson creates an intangible asset with a fair value of $15 million. The average remaining working life of the employees of
Simpson at 1 October 2014 is 15 years. Neither of these intangible assets has been recognised in the individual financial
statements of Texas. At 1 October 2014 Simpson was engaged in a legal dispute with a customer. The directors of Simpson
consider that the case can be successfully defended and have made no provision for legal costs in its financial statements.
The directors of Simpson estimated that the fair value of the claim at 1 October 2014 was $600,000. Events since 1 October
2014 have reduced this estimate to $500,000 by 31 March 2015 (these events do not affect the fair value of the claim at 1
October 2014). Due to the acquisition of Simpson the directors of Simpson intend to reorganise the group, starting in June
2016. The estimated cost of this reorganisation is $20 million.

In the year ended 31 March 2015 Simpson reported a post-tax profit of $6 million (accruing evenly over the period) and paid
a dividend of $1.5 million on 31 December 2014 out of post-acquisition profits. The retained earnings of Homer at 31 March
2015 were $18 million. This figure includes the dividend received from Simpson but does not include any other adjustments
to its own earnings that are required as a result of the acquisition of Simpson. The acquisition costs of $600,000 referred to
above have been charged to retained earnings by Homer. Homer has no subsidiaries other than Simpson and no associates
or joint venture entities. The non-controlling interest in Simpson was valued at $17.5 million on acquisition by
Homer.
Required:
Compute the goodwill on acquisition of Texas as initially measured at 1 October 2014.
Solution:

Workings
(1) Fair value of consideration given

$000
Immediate cash payment 9,600
(8m × $0.80/1.08).
Deferred Cash Payment 5926
Share exchange 16000
Contigent consideration 4000
Acquisation costs Nil
______
35,526
_______

Explanation:
Actual amount paid. Present value of actual amount payable (8m × $0.80/1.08). 4m shares issued at market value of $4 each.
Include at fair value on acquisition date.
Any change in fair value does not affect the original cost of investment.
IFRS 3 requires any transaction costs related to the acquisition to be expensed immediately. Actual amount paid.
Present value of actual amount payable (8m × $0.80/1.08). 4m shares issued at market value of $4 each. Include at fair value on
acquisition date. Any change in fair value does not affect the original cost of investment. IFRS 3 requires any transaction costs
related to the acquisition to be expensed immediately.
Fair value of net assets acquired:

$000
As per financial statements of
Tazoo 30000
Adjustment for property 7000
Adjustment for customer
Relationships 7500
Adjustment for workforce Nil
Adjustment for re- organisation Nil
Adjustment for Contigency Nil
________
44500
________

Explanation:

Market value exceeds carrying amount

by 7,000. An identifiable intangible asset with a
measurable fair value.
Per IAS 38 Intangible Assets assembled
workforce fails the "control test". Per IFRS 3 Business Combinations must treat
as post-acquisition items. IFRS 3 only requires contingent liabilities that
are a present obligation to be recognised.
Exceptions to Principles
Exceptions to Both Recognition and Measurement Principles
- Deferred taxes are recognised and measured in accordance with IAS 12.
- Employee benefits are recognised and measured in accordance with IAS 19.
- Any indemnification assets (e.g. a guarantee given by the seller against a future event or contingency) are recognised
and measured using the same principles of recognition and measurement as for the item that is being indemnified.

Exceptions to Measurement Principles

- A reacquired right (i.e. a right to use an asset of the parent granted previously to the subsidiary) is recognised as an
intangible asset and measured according to the remaining contractual term of the related contract.

An example of a reacquired right is a right to use the trade name of the parent under a franchise agreement, or the right to use
the parent's technology under a technology licensing agreement.

- Any share-based payment awards of the subsidiary that are to be replaced with share-based payment awards of the parent
are measured in accordance with IFRS 2.

- Any non-current assets classified as held for sale are measured in accordance with IFRS 5.
Provisional Accounting
Estimates
- If accurate figures cannot be assigned to elements of the business combination then estimated and provisional amounts
are assigned to those elements at the date of acquisition.

- Any new information that becomes available, relating to acquisition date assets and liabilities, is retrospectively adjusted
against the initial provisional amounts recognised as long as the information is known within the "measurement period".

Measurement Period
- The measurement period cannot exceed one year after the acquisition date.

Subsequent Adjustments

Any other adjustments are treated in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors:
- an error in acquisition values is treated retrospectively
- a change in estimate is treated prospectively.
Example:

Parent acquires 80% of Subsidiary for $60,000. The subsidiary's net assets at date of acquisition were $62,500. At the end of the
first year, goodwill has been impaired by $1,000.

In the year following acquisition, but within 12 months of the acquisition date, it was identified that the value of land was
$2,500 greater than that recognised on acquisition. The value of goodwill at the end of Year 2 was valued at $7,400.

Year 1:
Cost of investment 60,000
Net assets on acquisition (62,500 × 80%) ( 50,000)
_________
Goodwill 10,000
_________
Goodwill charge to profit or loss 1,000
Year 2:
Cost of investment 60,000
Net assets on acquisition (65,500 × 80%) (52,000)
________
Goodwill on acquisition 8,000
Goodwill at year end 7,400
________
Goodwill charge to profit or loss 600
________

Accounting entry:

Dr Land 2,500
Dr Profit or loss (goodwill) 600
Cr Goodwill (9,000 – 7,400) 1,600
Cr Non-controlling interest (2,500 × 20%) 500
Cr Opening retained earnings 1,000
(prior year charge for goodwill reversed)
Fair Value in Accounts of Subsidiary:

Exam Complication
- The fair value adjustments may or may not have been reflected in the financial statements of S at the date of
acquisition. In the exam they will not have been.

- If S has not reflected fair values in its accounts, this must be done before consolidating.

- For an adjustment upwards create a fair value reserve in net assets working (fair value less carrying value of net assets at
acquisition) at acquisition and the end of the reporting period.

- For an adjustment downwards create a provision against retained earnings in net assets working (carrying value less
fair value of net assets at acquisition) at acquisition and end of the reporting period.

- Goodwill in S's statement of financial position is not part of identifiable assets and liabilities acquired. If S's own
statement of financial position at acquisition includes goodwill, this must be written off:

- reduce retained earnings at acquisition and the end of the reporting period by goodwill in S's statement of financial
position at acquisition. Do this in the net assets working.
Accounting for Fair Value:
- IFRS 3 requires the fair value to be reflected in the consolidated group accounts. The non-controlling interest
balance will reflect their share of the adjusted value.
Results:
- Goodwill calculation is based on fair value
- Non-controlling interest at the date of acquisition is based on fair value
- Non-controlling interest subsequent to acquisition is based on fair value at the date of acquisition plus the noncontrolling
interest's share in the post-acquisition growth in the assets (reserves).
Example:

Following is the Information related to Pazeela & co

Pazella Sazeela

$ $
Non-current assets:
Tangibles 1,800 1,000
Cost of investment in Subsidiary 1,000
Current assets 400 300
_________ ________
3,200 1,300
__________ __________
Share capital ($1 nominal value) 100 100
Retained earnings 2,900 1,000
Current liabilities 200 200
_________ _________
3,200 1,300
___________ __________
Further information:
Pazeela bought 80% of Suzeela on the 31 December 2012. At the date of acquisition Subsidiary's retained earnings stood at
$600 and the fair value of its net assets was $1,000. The fair value difference was due to an asset that had a remaining useful
economic life of 10 years as at the date of acquisition. Non-controlling interest is valued at fair value on acquisition. The
market price of Subsidiary's shares on acquisition was $12.40 a share. Goodwill has been impaired by $40 since acquisition.
Required:
Prepare the consolidated statement of financial position of Parent as at 31 December 2014.
Solution:

Workings
(1) Net assets summary
At consolidation At acquisition
$ $
Share capital 100 100
Retained earnings 1,000 600
Fair value adjustments (300 × 8/10) 240 300
_______ ______
Net assets 1,340 1,000
________ _______

Goodwill
Cost 1,000
Fair value of non-controlling interest (100 x 20% x $12.40) 248
Net assets acquired (1,000)
_______
Goodwill 248
_______
Asset 208
Impaired 40
Non-controlling interest
Fair value on acquisition 248
Share of post-acquisition profits (340 × 20%) 68
Share of goodwill impairment (40 × 20%) (8)
______
308
________
Consolidated retained earnings
Pazeela 2,900
Share of S run on calculation (80% ...)
80% (1,340 − 1,000) 272
Goodwill impairment (80% × 40) (32)
_______
3,140
_______
Non-current assets: $
Goodwill (W2) 208
Tangibles
(1,800 + (1,000 + 300 – [2/10 × 300])) 3,040
Current assets (400 + 300) 700
_________
3,948
__________
Share capital 100
Retained earnings (W4) 3,140
Non-controlling interest (W3) 308
Current liabilities (200 + 200) 400
_______
3,948
________
Positive Goodwill:
- Goodwill reflects the future economic benefits arising from assets that are not capable of being identified individually or
recognised separately.
- It is initially measured at cost, being the excess of the cost of the acquisition over the acquirer's interest in the fair value of
the identifiable assets and liabilities acquired as at the date of the acquisition. It is recognised as an asset.
- Goodwill on acquisition must be allocated to a cash generating unit (CGU) that benefits from the acquisition. A CGU need not
necessarily be a unit of the subsidiary acquired; it could be a unit of the parent or another subsidiary in the group.
- The unit must be at least that of an operating segment as defined by IFRS 8 Operating Segments.
- Subsequent to initial recognition goodwill is carried at cost less any accumulated impairment losses.

Partially-Owned Subsidiary
Non-controlling Interest Valued at Proportionate Share of Identifiable Net Assets
- Any impairment will firstly be allocated against this grossed up goodwill figure.
- Any impairment in excess of this grossed up goodwill will then be allocated against the remaining assets of the CGU on a pro
rata basis.
Non-controlling Interest Valued at Fair Value
- There will be no need to gross up goodwill for the impairment test as the non-controlling interest's share of goodwill has
already been recognised and included in the total goodwill figure.
- Any impairment of goodwill is shared amongst the owners of the subsidiary in the same proportion in which the profits of
the subsidiary are shared.
- An 80% owned subsidiary will reflect 80% of the impairment loss against consolidated retained earnings and 20% against
non-controlling interest.

Bargain Purchase
- If on initial measurement the fair value of the acquiree's net assets exceeds the cost of acquisition (excess), then the
acquirer reassesses:
- the value of net assets acquired
- that all relevant assets and liabilities have been identified and
- that the cost of the combination has been correctly measured.
- If there still remains an excess after the reassessment then that excess is recognised immediately in profit or loss. This
excess (gain) could have arisen due to:
- future costs not being reflected in the acquisition process
- measurement of items not at fair value, if required by another standard (e.g. deferred tax being undiscounted);
- bargain purchase.
 Basic Principal of Groups

Definitions:

Business combinations:

A transaction or other events in which the acquirer obtains control of one or more businesses. Transactions sometimes
referred to as true mergers or mergers of equals are also business combinations as that term used in this standard.

Acquisition Date:

The date the acquirer obtains control of the acquire

Control of an Investee:

Arises when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power to the investee

Subsidiary: An entity controlled by the another entity known as Parent

Parent: An entity which controls one or more than one entities

Group: A parent and its subsidiaries

Consolidated Financial statements:

The financial statements of a group in which the assets, liabilities, equity, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity.

Non controlling Interest:

The equity in a subsidiary which is not directly or indirectly attributable to parent company

Goodwill:

The asset represent the future economic benefits arising from other assets acquired in business combination which are not
individually identified and separately recognised.

Parent and Control:

Inclusions:

A parent which issues consolidated financial statements must consolidate financial statements must consolidate all
subsidiaries, foreign and domestic, other than those exclude for the reasons specified in IFRS 10 consolidated financial
statements

IFRS Defines the meaning of control as:

Control exists when the investor is exposed or has rights to variable return from its involvement with the investee and has the
ability to affect those returns through its power over the investee.

The standard considers the substance of the transaction, being the ability to control, rather than the legal ownership of shares
as the driving force when considering whether control exists

Power:

 The investor has power over the investee if the investor has rights giving it the ability to direct activities which which
significantly affect returns from the investee
 In many situations power is gained by holding more than 50% of the voting rights in the investee
 But power is not always that straightforward and can result from one or more contractual arrangements without holding
majority of voting rights
 An investor can have power over an investee even if other entities have rights allowing them to participate in the activities
of the investee for example another investor has significant influence.
 The right could be in form of voting rights or right to appoint, remove key management personal of the investee
 The assessment of right should taken into account any potential voting rights it holds in the investee for example share
option or convertible instruments

Variable returns:

 An investor is exposed to variable returns from the investee when there is potential for variable performance from the
investee
 In other words, the returns, dividends and profits from the investee will depend on the performance of the subsidiary
There will be no fixed right to a specific return.

Link between Power and Return:

To have control over the investee, the investor will have power and exposure to variable returns but must have also the ability
to use that power to affect the returns from the investee

So an investor with decision making rights determines if it is acting either a principal or agent. The investor will only control its
investee if it is acting either as principal or agent. The investor will only control its investee if it is acting as principal. An agent
would need powers delegated to it by its controlling body.
Identify the entities to be included in the group as defined by IFRS 10 in each of the following situations:

a)
A A hold’s 10% shares in C but controls it through a contract with C ‘s
B
owners.

b)
60% 45% C
A B

The holders of another 30% of the equity in C have a contract under which
they vote according to B’s direction.
 A

c) 60% 60%

B D

30
30%
%
C

Shareholders in common
d)
100% 100%
A
B
Solution:
a) Even though A only holds 10% of the equity in C, it is highly likely that C will be a subsidiary because A has
contractual arrangements with the owners of C to control the entity.
b) A is parent of B. A is also the parent of C as it has control of 75% of the voting rights of C
c) A is the parent of B and D. A may therefore to control C through a 60% Indirect shareholding, in which case A would
be the parent. However, A effectively owns only a 36% interest in C. the substance of this relationship would
therefore require scruitney
d) There is no group in this situation, as A and B are shareholders in common. Which are scoped out of consolidation.

Exclusions:

A subsidiary which has been acquired eclusively with the intention to resell it is not consolidated provided that it meets
the IFRS 5 criteria of a disposal group on acquisition. In this case it is carried at fair value less cost to sell and disclosed
separately.

 Previously, and still in some countries, grounds for excluding individual subsidiaries from consolidation have included:

 Long term restrictions over the parent’s rights to control a subsidiary

 A subsidiary sufficiently have different activities from the parent
 Temporary control of subsidiary
 Subsidiaries being immaterial
 Dis appropriate expense or undue time and effort in obtaining information required
 Clearly, management might want to exclude any subsidiary which reflects poorly on the economic performance and
financial position of the group
 Under IFRS 10 there are no exclusions from the consolidation of individual subsidiaries which meet the control criteria.

Exemption:

A parent company do not need to present consolidated financial statements if:

 It is a wholly owned or partially owned subsidiary in this case non controlling shareholders must give their concern
 The parent’s debt or equity instruments are not traded on a public market
 The parent has not filed its financial statements with a recognised stock market.
 The ultimate or intermediate parent presents consolidated financials in accordance with IFRSs

Accounting for Subsidiaries in Separate financial statements:

When the IASB issued IFRS 10 it amended IAS 27 to deal only with accounting for subsidiaries in the parent’s separate
financial statements. At the same time The IASB issued IFRS 12 Disclosure of interests in other Entities, which moved
disclosure requirement from IAS 27 to IFRS 12

Separate Financial statements:

Statements presented by a parent or an investor with joint control or significant influence over an investee in which the
investments are accounted for at cost or in accordance with IFRS 9

IAS 27 therefore required that investments in subsidiaries, associates or joint ventures are carried either at cost or fair value
in separate financial statements.
 If the investment is carried at cost and subsequently the investment is classified as held for sale then IFRS 5 held for sale
becomes the relevant standard. If the investment is carried at fair value and subsequently classified as held for sale then it
will be accounted for under IFRS 9

Any dividends received from the investment will be included in profit or loss once the investor’s right to receive the dividend is
established.

Acquisition Method:

IFRS 3 requires that all business combinations be accounted for using the acquisition method of accounting

This Involves:

o Identifying an acquirer
o Determing acquisition date
o Recognising and measuring the identifiable assets acquired, the liabilities assumed and any NCI in the acquire
o Recognising and measuring goodwill or a gain from a bargain purchase
Provisions of IFRS 10:

Results of Intra group Trading:

Intra group balances and Intra group transactions and resulting un reaslised profits must be eliminated in full on the
consolidation of subsidiary

Accounting year ends

- The financial statements of the parent and its subsidiaries used in the preparation of consolidated financial statements
are usually drawn up to the same date
- If there is different reporting date either the subsidiary must prepare special statements as at the same date as the
group
- Or if it is impractibale to do this, financial statements drawn up to different reporting dates may be used if:

- If the difference is not more than 3 months

- Adjustments are made for the effects of significant transactions or other events which occur between those dates and
the date of parent financial statements

Accounting Policies:

 Consolidated financial statements should be prepared using uniform accounting policies for similar transactions and
events
 If a member of a group uses different accounting policies in its individual financial statements, perhaps it is a foreign
subsidiary using a different GAAP- than the results must be adjusted to reflect the group policy before incorporating the
subsidiary’s results into the group.

Date of Acquisition or Disposal:

 The results of operations of subsidiary are included in the consolidated financial statements as from the date the parent
gains control of the subsidiary
 The date of acquisition and the date of disposal are based on when control passes, not necessarily the legal date of
acquisition or date of disposal.
 The results of operation of subsidiary disposed of are included in the consolidated statement of profit or loss and other
comprehensive income until the date of disposal, which is the date on which parent ceases to have control of the
subsidiary.
 Consolidated Statement of Comprehensive Income

The statement of profit or loss and other comprehensive income shows the income generated by resources
- The parent's own statement of profit or loss and other comprehensive income includes dividend income from
its subsidiary.
- The consolidated statement of profit or loss and other comprehensive income shows the income generated by the
group's resources

The consolidated statement of profit or loss and other comprehensive income is prepared on a basis consistent with that
used in the preparation of the consolidated statement of financial position

Control and Ownership

Consolidated Statement of Profit or Loss
$
Revenue x
[Parent + Subsidiary (100%) − intra-group items]
Profit after tax (CONTROL) x
Ownership
Equity shareholders of the parent x
Non-controlling interests
(% × subsidiary's profit after tax) x
Profit for the period x
-This reflects the profit or loss section of the statement of profit or loss and other comprehensive income; any other
gains or losses for the period will be included within other comprehensive income. This session focuses on the profit or
loss component of the statement of profit or loss and other comprehensive income.
- The profit or loss shows the income generated from the net assets under the parent's control.

In the profit or loss, dividends from the subsidiary are replaced by the parent's share of the subsidiary's income and expenses
(100%) line by line, as far as profit after tax.

Reflect ownership by identifying the non-controlling interest's share of the subsidiary's profit after tax of the group profit
after tax in profit or loss, leaving profit attributable to the parent's shareholders.
-Eliminate the effects of transactions between group members (single-entity concept).

Dividends
- Dividends from a subsidiary to its parent are intra-group
items:
- Cancel the parent's dividend income from the subsidiary against the subsidiary's dividends paid and payable.
-This "leaves" the non-controlling interest's share of the subsidiary's dividends.
-Non-controlling interest in the subsidiary in profit or loss is calculated on profit after tax (before dividends), and therefore
includes the non-controlling interest's share of the subsidiary's dividends and retained profits.
- In profit or loss, dividend income is from trade investments only. Any dividends paid or payable will be dealt with in the
statement of changes in equity.
Other Items
Trading:
- Intra-group trading will be included in the revenue of one
group company and the purchases of another. Such intercompany
items must be cancelled on consolidation (single
entity concept) by taking the following steps:
- add across parent and subsidiary revenue and cost of
sales; and
- deduct the value of intra-group sales from revenue and cost
of sales.

Unrealised Profits in Closing Inventory:

If any items sold by one group company to another are included in inventories (i.e. have not been sold outside the group by the
year end), their value must be adjusted to the lower of cost and net realisable value to the group.

The adjustment will be made as a consolidation adjustment against the profits of the selling company.
- Steps to set up the provision for unrealised profit:
- Calculate the amount of inventory remaining at the year end.
- Calculate the intra-group profit included in it.
- Make an adjustment against the inventory to reduce it to
cost to the group (or net realisable value if lower).
Zem owns 75% of Tisha. The trading account for each company for the year ended
31 March is as follows:
Zem Tisha
$ $
Revenue 120,000 70,000
Cost of sales (80,000) (50,000)
Gross profit 40,000 20,000
During the year, Porpoise made sales to Whales amounting to $30,000. Of these sales, $15,000 was in inventory at the year end.
Profit made on the year-end inventory items amounted to $2,000.
Required:
Calculate group revenue, cost of sales and gross profit.

Solution:

Zem Tisha Adjustment Consolidated

$ $ $ $
Revenue 120,000 70,000 (30,000) 160,000
Cost of sales — per question (80,000) (50,000) 30,000
— unrealised profit (2,000) (102,000)
Gross profit 40,000 18,000 58,000
Non-controlling interest (25% × 18,000) (4,500)
Unrealised Profit in Opening Inventory:
- Last year's closing inventory will become this year's opening inventory, so any adjustments made in the previous year in
terms of the unrealised profit will be reversed in the current year on the presumption that the inventory has been sold in
the current period.

Any unrealised profit in the opening inventory will be deducted from the costs of the original selling company, thereby
increasing the profits for the current year

All we are doing with unrealised profit is shifting the period in which the profit is recognised, delaying the recognition of the
profit by the group until the goods have been sold outside of the group.
-This adjustment only ever affects the gross profit calculation, never the statement of financial position.

Illustration:
In year 1, Parent sells goods to Subsidiary for $100; the cost of these goods was $80. At the end of the year, the goods are still
held by the Subsidiary. In year 2, the Subsidiary sells the goods for $110.
P S Group
Year 1 Profit $20 0
Year 2 Profit $10 $30
The profit recognised by the Parent and the Subsidiary over the two years is $30 and the group also recognises profit of $30.
The adjustment for unrealised profit merely changes the period of recognition of profit, in this example slipping by one year
the recognition of the initial $20 profit.
Non-current Asset Transfers:
- The consolidated profit or loss should include depreciation of non-current assets based on cost to the group and should
exclude profit/loss on non-current asset transfers between group members. This is consistent with treatment in the
consolidated statement of financial position.
-Eliminate profit or loss on transfer and adjust depreciation in full (control).
- These adjustments are made in full against the consolidated figures.

Illustration:

Parent owns 80% of Subsidiary. Parent transferred a non-current asset to Subsidiary on 1 January 2016 at a value of $15,000.
The asset originally cost Parent $20,000 and depreciation to the date of transfer was $8,000. The asset had a useful life of five
years when originally acquired, with a residual value of zero. The useful life at the date of transfer remains at three years. Both
companies depreciate their assets at 20% per annum on cost, making a full year's depreciation charge in the year of acquisition
and none in the year of disposal. Total depreciation for 2016 was $700,000 for Parent and$500,000 for Subsidiary.
Required:
Show the adjustments required for the above transaction in the consolidated
statement of profit or loss for the year ended 31 December 2016.
Solution
Parent Subsidiary Adjustment Consolidated
$ $ $
Per question 700,000 500,000 1,200,000
Asset unrealised profit
[15,000 − (20,000 − 8,000)] 3,000 3,000
Depreciation adjustment
(15,000 ÷ 3 years) − 4,000 (1,000) (1,000)
_________
1,202,000

Interest and Other Charges:

- Where a group company lends money to another group company the loan asset is cancelled against the loan liability in
the consolidated statement of financial position.
- Where the loan carries interest payments there will be interest income in one company and interest expense in the other;
this interest will also need to be eliminated.
-Many companies also make a form of management charge against other group companies, normally from the parent to
the subsidiary. The parent will reflect other income in its profit or loss while the subsidiary will include the charge as part
of operating expenses. On consolidation, these intra-group charges must also be cancelled against each other.
Illustration:
A Parent has made an 8% $100,000 loan to its Subsidiary. The Parent's single entity accounts include interest income of
$8,000. The Subsidiary's single entity accounts show interest expense of $8,000. These two figures will be cancelled against
each other in the consolidated accounts and no interest income or interest expense will be recognised.

Non controlling Interest:

The non-controlling interests' share of subsidiary's profit after tax must be shown, leaving the remaining profit as attributable
to shareholders of the parent.

Goodwill Treatment:

If non-controlling interest is valued at fair value (i.e. credited with its share of goodwill) any impairment loss relating to
goodwill must be allocated between the parent and non-controlling interest in the proportion of their respective share
ownerships.

Any excess of the fair value of the assets and liabilities acquired over the cost of the acquisition is credited to profit
or loss immediately.
Peeta owns 75% of Sumaira . Statements of profit or loss for the two companies for the year
ending 30 June are as follows:
Peeta Sumaira
$ $
Revenue 100,000 50,000
Cost of sales (60,000) (30,000)
Gross profit 40,000 20,000
Expenses (20,000) (10,000)
Profit for the period 20,000 10,000
During the year, Peeta sold goods to Sumaira for $20,000, at a gross profit margin of 40%.
Half of the goods remained in inventory at the year end.
Non-controlling interest is valued at fair value on acquisition. Goodwill has been impaired by
$4,000 in the year ended 30 June.
Required:
Prepare the consolidated statement of profit or loss of the group for the year ended
30 June.
Solution:

Workings:

Group structure:

Peeta

sumaira

Consolidation schedule
Peeta Sumaira Adjustment Consolidated
$ $ $ $
Revenue 100,000 50,000 (20,000) 130,000
Cost of sales per question (60,000) (30,000) 20,000
unrealised profit (W4) (4,000) (74,000)
Expenses (20,000) (10,000) (30,000)
Goodwill (4,000) (4,000)
Profit 22,000
Non-controlling interest:
$
Sumaira (W2) 6,000 × 25% = 1,500

Unrealised profit
% $
Selling price 100 20,000
Cost (60) (12,000) $
Gross profit 40 8,000 × ½ = 4,000

Consolidated statement of comprehensive profit or loss for year ended 30th June
$

Revenue 130,000
Cost of sales (74,000)
Gross profit 56,000
Expenses (30,000)
Goodwill (4,000)
Profit 22,000
Non-controlling interest (W3) (1,500)
Profit for the period 20,500
Mid year Acquisition:

A parent may not acquire a subsidiary only at the start or end of a year. If a subsidiary is acquired mid-year, it is necessary
to calculate the net assets at date of acquisition.

Inclusion of Subsidiary results:

Consolidated financial statements only include the results of the subsidiary from the date of acquisition, (i.e. when control
is gained). If the subsidiary is acquired mid-year:
- consolidate subsidiary from the date of acquisition;
- identify net assets at the date of acquisition—opening net assets (equity) plus profit to date of acquisition (see
consolidated statement of financial position notes); and
- assume revenue and expenses accrue evenly over the year (unless the contrary is indicated). Therefore time-apportion
totals for revenue and costs, only including the postacquisition share, then deduct intra-group items.
Example:
Pakeeza acquired 80% of Subor on 31 May 2016 for $20,000. Subsidiary's net assets at 31 December 2015 were:
$
Issued capital 1,000
Retained earnings: 15,000
16,000
During the year to 31 December 2016, Subsidiary made a profit after tax of $600.
Non-controlling interest is valued at the proportionate share of the identifiable net assets; it is not credited with goodwill.
Required:
(1) Calculate Subsidiary's net assets at acquisition.
(2) Calculate goodwill on acquisition.
(3) Show the profits from Subsidiary to be included in the
consolidated retained earnings.
Solution:
(1) Net assets of Subsidiary at acquisition
At acquisition
$ $
Issued capital 1,000
Retained earnings:
At 31 December 2015
1 January – May 2016 (600 × 5⁄12)
15,000
250 15,250
________
16,250
_________

Goodwill:

$
Cost of investment 20,000
Less: Share of net assets acquired
80% × 16,250 (W1) (13,000)
________
7,000
________
Profit from Subsidiary included in consolidation retained earnings
$
Share of post-acquisition reserve of Subsidiary
80% (15,600 - 15,250) 280
Inclusion of subsidiary results:

Consolidated financial statements only include the results of the subsidiary from the date of acquisition, (i.e. when control
is gained). If the subsidiary is acquired mid-year:
- consolidate subsidiary from the date of acquisition;
- identify net assets at the date of acquisition—opening net assets (equity) plus profit to date of acquisition (see
consolidated statement of financial position notes); and
- assume revenue and expenses accrue evenly over the year (unless the contrary is indicated). Therefore time-apportion
totals for revenue and costs, only including the post acquisition share, then deduct intra-group items.
Polka acquired 75% of Sufii during the year on 1 April. Extracts from the companies'
statements of profit or loss for the year ended 31 December are:
Polka Sunny
$ $
Revenue 100,000 75,000
Cost of sales (70,000) (60,000)
Gross profit 30,000 15,000
Since acquisition, the Polka has made sales to the Sunny of $15,000. None of these goods
remain in inventories at the year end.
Required:
Calculate revenue, cost of sales and gross profit for the group for the year ending
31 December.
Solution:

Consolidated statement of profit or loss for the year ending 31 December

9/12
Polka Sunny Adjustment Consolidated
$ $ $ $
Revenue 100,000 56,250 (15,000) 141,250
Cost of sales (70,000) (45,000) 15,000 (100,000)
_______ _______ _______ ________
Gross Profit 30,000 11,250 0 41,250
_______ ________ ________ ________
Disposal:
When a group disposes of all or part of its interest in a subsidiary, the disposal needs to be reflected in the parent's
books and, more importantly, in the consolidated financial statements.
- Consolidated financial statements reflect:
- inclusion of results and cash flows of the entity disposed of;
- calculation and presentation of profit or loss on disposal;
and
- any remaining interest in the company after a part-disposal.
- In dealing with these matters in consolidated financial
statements, the single entity concept is applied and the effect
on the group as a whole is considered.
-Disposal may be:
-full disposal (i.e. sell entire holding);* or
-part disposal, retaining some interest in the undertaking.

Treatment in Parent's Own Accounts:

- Parent will carry its investment in a subsidiary in its own statement of financial position as a non-current asset
investment, usually at cost.

The sale of all or part of an investment is recorded as a disposal in the parent's own accounts and will usually give rise to a
profit or loss on disposal (i.e. proceeds less cost of investment sold). An accrual may be required for tax on any gain on disposal.
How to recognise disposal:

$ $
Dr Cash/receivables (proceeds) X
Cr Investment in S (cost of investment sold) X
Dr P or L loss on disposal (or Cr profit on disposal) X X
If required
$ $
Dr P or L tax charge (tax on gain on disposal) X
Cr Tax payable X

Treatment in Consolidated Accounts:

Consolidated Statement of Financial Position

The consolidated statement of financial position should simply reflect the closing position.
- If at year end the parent has sold its shares in the subsidiary, there will be no reference to the subsidiary in the
statement of financial position (even if the subsidiary was sold on the last day of the year).
Consolidated Statement of Profit or Loss and Other
Comprehensive Income

The consolidated statement of profit or loss and other comprehensive income must reflect the pattern of ownership in the
period.
- Profit or loss on disposal must be calculated from the group's perspective. This will be different to that recognised by the
parent because:
-The group recognises 100% of subsidiary profit (or loss)
during the term of ownership whereas the parent recognises
only dividends received from the subsidiary; and
-The group will recognise impairment of goodwill (the parent
does not).

Pattern of Ownership Treatment in statement of Treatment in statement of Financial

Before Disposal After disposal Profit or loss and other Comprehensive Position
Income
For example its subsidiary Consolidate until the date of disposal Nothing need to do
90% to O%
Group Profit or Loss on Disposal

Any disposal of a shareholding that results in the loss of control will give rise to profit or loss on disposal being recognised in
profit or loss.

On the date that control is lost the following adjustments must

be made:
- Derecognise the carrying amount of assets, including goodwill, liabilities and non-controlling interest from the
consolidated statement of financial position.
- Recognise the fair value of the consideration received on the disposal of the shareholding.
- Reclassify to profit or loss any amounts that relate to the subsidiary's net assets previously recognised in other
comprehensive income, where required.
- Recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.

Example:
Plum purchased 80% of the shares in Sink a number of years ago for $125 million. On the acquisition date, the non-controlling
interest was valued at a fair value of $25 million, the fair value of System's net assets was $140 million, and goodwill of $10
million was recognised.Since the acquisition, Sink has made profits of $20 million and goodwillhas been impaired by $4 million.
Today, Plum sells all of its shares in System for $160 million.
Parent and group profit or loss on disposal are calculated as follows:
Parent
$ million
Proceeds on disposal 160
Cost of investment (125)
Profit on disposal 35
This profit would be included in Plumber's profit or loss in the year of disposal. Tax would be applied to this figure where
relevant.
Group
$ million
Proceeds on disposal 160
System net assets on disposal (140 + 20) (160)
Goodwill remaining (10 − 4) (6)
Non-controlling interest on disposal (25 + ((20 − 4) x 20%)) (28.2)
Profit on disposal 22.2
This profit would be included in the consolidated profit or loss in the year of disposal.
Difference in profit
The $12.8-million difference in the two profit figures is System's post acquisition profit of $20 million less goodwill impaired of
$4 million times
Plum's percentage holding of 80%:
($20 − $4) x 80% = $12.8 million
This difference exists because the consolidated statement of profit or loss included Plumber's share of System's profits (less
goodwill impaired) during the period of control, while Plumber's own (single entity) statement of profit
or loss only included dividends received from System. The higher profit recognised in the consolidated statement of profit or
loss during the term of ownership results in less profit recognised on disposal
Discontinued Operations
- It is highly likely that the disposal of a subsidiary will be classified as a discontinued operation.

In this case, the results for the subsidiary to the date of disposal will be presented separately from the results of the
continuing operations.

IFRS 5 requires that the revenue and costs to the date of disposal and any profit or loss on the actual disposal of the
operation are presented as a single item in the profit or loss, and then analysed further either in the profit or loss or in the
disclosure notes.
 Consolidated Statement of Financial Position

Many companies carry on part of their businesses through the ownership of other companies they control. Such companies are
known as subsidiaries.

Controlling interest in subsidiaries generally appear at cost in the statement of financial position of the investing company.

Such interests may result in the control of assets of a very different value to the cost of investment.

Separate financial statements can not provide the shareholders of the parent with a true and fair view of what their investment
actually represents

Illustration

Parent subsidiary
Investment in 80% of subsidiary $100
Other net assets i.e. Assets less liabilities 900 1800
_________ ________
1000 1800
__________ __________
- The investment of $100 in parents account is in substance, the cost of owning assets of 80% of $1800 in subsidiary i.e.$1140
- Parents shareholders can not see this from looking at the accounts
- The solution is prepare the group accounts to show the substance of the transaction.
- The type of group accounts required by the IFRS is called Consolidated financial statements

Rules:

A company with a subsidiary on the last day of its reporting period i.e. a parent must prepare consolidated financial
statements in addition to its own individual accounts

 In practice parent usually prepare and publish:

- Its own statement of financial position with relevant notes and
- Consolidated version of financial statements, statement of profit or loss and other comprehensive income and statement
of cash flows, all with relevant notes

Substance:

o Consolidation involves the replacement of cost of investment in the parents accounts by what its actually represents,
namely:
o The net assets of the subsidiary at the end of the reporting period and
o The carring value of goodwill for which parent paid at the date of acquisition.
o This amount is than adjusted for the net assets that are not owned by the parent i.e. the non controlling interest
o In addition, the consolidated reserves must be credited with the parent’s share of subsidiary’s post acquisition reserves
representing the portion of profit or loss accuring to parent since acquisition.
Overview of technique for consolidation:

 The approach broadly may be represented as follows:

Individual Company accounts

Consolidated statement of
Parent Subsidiary
financial position

Net assets xxx + xxx = xxx

Issued capital xxx xxx Parent only

Reserves xxx xxx To be calculated

_______ ________ __________________

xxx xxx xxx

________ _________ _____________________
Individual Company Accounts:

 There is no such thing as separate set of consolidated accounts; the group does not maintain double entry accounting
system
 The individual member of the group maintain their own financial statements and at the period end, after year end
adjustments, the individual members of the group are merged to form the basis of consolidated financial statements
 It is important that the financial statements of the individual companies are finalised in accordance with IFRS before the
consolidation financial adjustments are made.

Adjustments of Consolidation:

Two types

Intra group Adjustments

Major adjustments:
Those which drive - Intra group balances
the double entry - Unrealised profit
- Goodwill - Inventory
- Consolidated - Non current Asset
reserves transfers
- Non controlling - Non controlling
interest Interest
Consolidated statement of Financial Position:

Now in this section will build a understanding of consolidations through series of examples with increase in complexity in each
case it is assumed that individual company adjustments has already been made.

Example 1:

As at 31 December 2015

Parent Subsidiary
Non current Assets:

Tangibles 2000 500

Investment in Subsidiary 1000
Net current Assets 2000 500
______ _______
5000 1000
_______ ________

Issued Capital 500 1000

Retain Earning 4500
_______ ________
5000 1000
________ __________
More Information:

Picacho bought 100% of subsidiary on 31st December 2015

Notes:

1. The issued capital of the group is the issued capital of Picacho. This is always the case
2. The cost of investment is to disappear. It is replaced
3. The assets and liabilities of the group are simply a line by line cross cast of Picachoo and subsidiary. Picacho controls 100%
of subsidiary net assets

Required:

Prepare the consolidated financial statements.

Solution:

Workings:

Subsidiary’s net Assets

Reporting date Acquisation
Issued capital $1000 $1000
Retained earning 0 0
_______ _______
1000 1000
________ ________

Goodwill

$
Cost of investment 1000
Non controlling Interest -
Less: Net Assets of subsidiary (w1) (1000)
_______
Goodwill -
________
Retained Earning:

$
Picacho 4500
Subsidiary 0
______
4500
_______

Consolidated Statement of Financial Position

Non Current Assets

Tangible Asset (2000 + 500) 2500

Net current Assets ( 2000 + 500) 2500

__________
5000
__________
Parent only
Issued Capital 500
Retain earning 4500
________
5000
Goodwill:

An asset representing the future economic benefits arising from other assets acquired in business combination which are not
individually identified and separately recognised

Goodwill is the difference between the value of business taken as a whole and the fair value of its separate net assets.
It can be calculated as:

Cost of Investment xxx

Add: Value of Non controlling Interest xxx
Less: Fair value of Net assets of
Subsidiary (xxx)
______
Goodwill xxx
________

Goodwill once recognised must be tested annualy for the impairement annualy and if there is any fall in value it must be
recognised as an expense in Statement of profit or loss
Example:

At 31 December 2015
Pasta Subsidiary

Non current assets:

Tangibles 1000 800

Investment in subsidiary 1200
Net current Assets 400 200
______ ______
2600 1000
_______ ______

Issued capital 100 900

Retain earning 2500 100
_________ ________
2600 1000
__________ _________

More Points:
1. Pasta bought 100% of subsidiary on 31st December 2015
2. Subsidiary reserves are $100 at the date of acquisition
3. Part of the cost is goodwill. This must be separately identified as debit to help replace the cost of asset
4.Pasta share of post acquisition profit of subsidiary is included in consolidated retain earning. In this case it is Zero

Required:
Prepare consolidated statement of Financial Position.

Solution:

Workings

Subsidiary’s net assets

Reporting date Acquisation date
Issued Capital 900 900
Retained earning 100 100
______ ______
1000 1000
_______ _______

Goodwill

Cost of investment 1200

Add f.v of NCI -
Less: F.v of Net assets of subsidiary (1000)
Goodwill 200
Retain earning:
Pasta (given) 2500
Share of subsidiary
100% x (100-100) 0
_______
2500
_________

Consolidated statement of financial position

Non Current Assets

Goodwill (w2) 200
Tangibles 1800
Net current assets 600
________
2600
_________

Issued capital 100

Retain earning 2500
_______
2600
________
Post Acquisition Growth In reserves:

- In the period after acquisition i.e. in post acquisition the subsidiary will either make profit or losses
- The group will include its share of those post acquisition profit or losses in the consolidated retain earnings also known as
known as consolidated reserves
- It is therefore necessary for the parent company to identify the profit or losses of the subsidiary in the post acquisition
period. Which can be achieved used subsidiary net assets schedule

Example:

As at December
PK Subsidiary
$ $
Non current Assets
Tangible 1400 1000
Investment in subsidiary 1200
Net current assets 700 600
_______ _______
3300 1600
_______ _________
Issued capital 100 900
Retained earning 3200 700
_______ _________
3300 1600
More Points:

1. PK bought subsidiary two years ago

2. Subsidiary reserves were $100 at the date of acquisition
3. Goodwill has been impaired by $80 since the date of acquisition
4. As before part of the cost is goodwill. This must be separately identified as an asset to help replace cost of investment
5. PK share of post acquisition profit of subsidiary in included in consolidated retain earnings.

Required:
Prepare consolidated statement of financial position.

Solution:

Working:

Subsidiary net assets:

Reporting date Acquisition
$ $
Issued capital 900 900
Retain earning 700 100
________ _________
1600 1000
__________ __________
Goodwill:

$ $
Cost of Investment 1200
NCI -
Less: F.v of Net assets of subsidiary company (1000)
________
200
__________

Impaired 80
As an Asset 120

Retain earning

$
Pk 3200
Share of subsidiary (Gw1)
100%(700-100) 600
Goodwill written off (w2) (80)
________
3720
_________
Consolidated statement of financial position:

$
Non current Assets:
Goodwill (w2) 120
Tangibles 2400
Net current assets 1300
_______
3820
_________

Issued capital 100

Retain earning (w3) 3720
_________
3820
__________
Non controlling Interest:

Non controlling interest represent the portion of subsidiary net assets which are not owned by the parent company. IFRS 3
allows to value NCI at the date of acquisition in one of following two ways:

1. Proportionate method
2. Fair value method
o Valuing Net controlling interest at the proportionate share of the subsidiary identifiable net assets means that is not credited
with any goodwill, valuing at fair value on acquisition means non controlling interest is credited with its share of goodwill
o The amount of goodwill credited to non controlling interest is not necessarily in the same proportion as the shareholding
o The increase in value of NCI will be debited to goodwill

Example:
Pakii Subsidiary
$ $
Non current Assets
Tangible 1000 600
Investment in subsidiary 1200
Net current assets 500 600
_____ _____
2700 1200
______ _____
Issued capital 100 50
Retained earning 2600 1150
______ ______
2700 1200
_______ _______
More Points:
1. Pakii bought 80% of subsidiary two years ago
2. Subsidiary reserves are $150 at date of acquisition
3. Goodwill has been impaired by $200 since date of acquisition
4. Non controlling interest is valued at the proportionate share of subsidiary identifiable net assets, it is not credited with its
Share of goodwill.
5. The assets and liabilities of the group are simply a cross cast of those of Pakii and Subsidiary. Pakii share of subsdiary net
assets is 100% on line by line basis
The part which does not belong to Pakii(parent) is known as NCI. It is shown as credit balance in equity in sofp. This examples
values NCI without including any value for goodwill.
6. This time goodwill is impaired by $200
7.Pakii’s share of post acquisition profit of subsidiary is included in the consolidated reserves.

Required:

Prepare consolidated statement of financial position.

Workings:

Subsidiary’s net Assets

Reporting date Acquisation date
Issued Capital 50 50
Retain earning 1150 150
_________ _________
1200 200
_________ __________
Goodwill:
$
Cost of investment 1200
Share of net assets (80% x 200) (160)
________
1040
________

Impairment to retain earnings 200

Asset to recognised 840

Non controlling Interest:

Share of net assets (20% x 1200) (w1) 240

Consolidated reserve:

Pakii (given) 2600

Share of subsidiary
(1150-150) x 80% w1 800
Goodwill impairment (200)
________
3200
________
Consolidates Statement of financial Position

$
Non current Assets
Goodwill 840
Tangibles 1600
Net current assets 1100
_______
3540
_______

Issued capital 100

Retain earning w4 3200
NCI w3 240
___________
3540
____________
Example:
Picassa Subsidiary
$ $
Non current Assets
Tangibles 1000 600
Investment in subsidiary 1200 -
Net current Assets 500 600
________ _________
2700 1200
_________ __________

Issued capital 100 50

Retained earning 2600 1150
______ _______
2700 1200
_______ _______

More Points:
1. Picassa bought 80% of subsidiary two years a go
2. Subsidiary reserves are $150 at date of acquisition
3. Goodwill has been impaired by $200 since the date of acquisition
4. NCI is value at fair value on acquisition. It is credited it with share of its share of goodwill. The market price of a share in
the subsidiary at the date of acquisition was 29.60
5. Assets and liabilities of the group are simply a cross cast of those of parent and subsidiary. Parent’s share of subsidiary net
Net assets is 100% on a line by line basis. This example measures NCI at fair value and so includes its share of goodwill. The
fair value of NCI is calculated by applying market value of share to the number of shares hold by NCI.

4.NCI is valued based on the fair value on acquisition. Plus its share of any post acquisation profits less its share of goodwill
written off.

5. Picassa share of post acquisation profit of subsidiary is included in consolidated retained earnings.

Required:

Prepare Consolidated Financial statements:

Subsidiary’s net Assets:

Workings

1. Reporting date Acquisation date

$ $
Issued capital 50 50
Retained earning 1150 150
______ _______
1200 200
_______ ________
Goodwill:

$
Cost of investment 1200
F.V of NCI ( 10 x 29.6) 296
Less: Net assets on Acquisition (100%) (200)
_______
1296
________
Impairment 200
Goodwill recognised 1096

Non controlling Interest:

Fair value on acquisition (w2) 296

Share of post acquisition profit
(1000 x 20%) 200
Less: share of goodwill impaired
(200 x 20%) (40)
_________
456
__________
Retained Earning:

$
Picassa (given) 2600
Share of subsidiary
(80% x (1150-150) (w1) 800
Goodwill impairment
(200 x 80%) (160)
__________
3240
____________

Consolidated statement of financial position

Non current Assets: $
Tangibles 1600
Goodwill (w2) 1096
Net Current Assets 1100
________
3796
__________
Issued capital 100
Retained earning (w4) 3240
NCI (w3) 456
3796
Intra group transactions:

 Consolidation represents the position and performance of a group of companies as if they were a single entity
 If the group members trade with each other the recivables of one will be cancel out with the payables of other
 Intra group balances are recorded in ledger accounts described as current accounts and included in recievables/payables of
individual accounts (sofp). For individual company’s financial statements it is correct to record those transactions which will
be paid or received to separate entities.
Parent owns 80% of Subsidiary. Parent sells goods to Subsidiary. At the year end the accounts
of the two entities include the following balances:
Parent Subsidiary
Receivables
Amount receivable from
Subsidiary
1,000
Payables
Amount payable to Parent 1,000

Usually, the assets and the liabilities of the group are a straightforward summation of the
individual items in the accounts of the parent and its subsidiaries. If these include intra-group
balances, the financial statements of the group would show owed from and to itself. This would
clearly be misleading.
To avoid this, the intra-group amounts are cancelled on consolidation.
 Parent Subsidiary
Consolidation
adjustment
Consolidated
Statement of
financial position
Dr Cr

Receivables
Amount receivable from
Subsidiary 1,000 1,000
Payables
Amount payable to Parent 1,000 1,000

 All intra group transactions in sofp i.e. recievables and payables and statement of profit or loss and other comprehensive
income i.e. income and expenses are cancelled on consolidation.
 At the end of the reporting period intra group trading. Intra group trading may result in group company owning inventory
which it purchased from another group company.
Intra group trading:

Intra-group Trading
 The main reason for intra-group balances arising is intra-group
trading.
 If a member of a group sells inventory, at a profit, to another
member of the group and that inventory is still held by the
buying company at the year end, the company which made:
 the seller will show profit in its own accounts; and
 the purchaser will record the inventory at cost to itself. Intra-group Trading

Both of these points are correct from the individual company view. With respect to the sale, however, this profit will not
have been realised from the group's perspective and with respect to the purchase, consolidation of this value will result in
the inclusion in the financial statements of a figure which is not at cost to the group.

resulting unrealised profits shall be eliminated in full.

 This implies that the unrealised profit is eliminated from the inventory value. However, the standard does not rule on
the
other side of the entry. There are two possibilities:
1. The entire profit adjustment against the parent's shareholders.
2. Apportion between parent's shareholders and non controlling interest.
Inventory:
Inventory Sold at a Profit Between Group Companies
 Inventories in the statement of financial position are valued at lower of cost and net realisable value. In the
consolidated statement of financial position, where the group is reflected as a single entity, inventories must be at lower
of cost and net realisable value to the group.

 The group needs to eliminate profit made by the selling company if inventory is still held by the group at the year end,
as the group has not yet realised this profit.

Applying the single entity concept, the group has bought and is holding inventory.

Inventory Adjustment
Adjustments from seller perspective:
 Inventory in the statement of financial position.
 Closing inventory in the statement of profit or loss/retained earnings of the selling company.

In the consolidated financial statements adjust inventory to reflect cost to the group by eliminating any profit that has not
yet been realised to the group.

 Reduce (credit) inventory in the consolidated statement of financial position.

 As each entity's inventory amounts are totalled, it does not matter
which amount is reduced.
 In the statement of profit or loss reduce the closing inventory of the selling company, thereby increasing its cost
of sales.
Example:
Panda owns 80% of Subsidiary. During the current accounting period, Panda transferred goods to Subsidiary for $4,000, which
gave Parent a profit of $1,000. These goods were included in the inventory of Subsidiary at the end of the reporting period.
Required:
Calculate the adjustment in the consolidated statement of financial position.

Solution:

Retain earning Dr 1000

Inventory Cr 1000

Example:

Parent owns 80% of Subsidiary. During the current accounting period, Subsidiary sold goods to Parent for $18,000, which gave
Subsidiary a profit of $6,000. At the end of the reporting period, half of these goods are included in Parent's inventory.
At the end of the reporting period, Parent's accounts showed retained profits of $100,000, and Subsidiary's accounts showed
net assets of $75,000, including retained profits of $65,000. Subsidiary had retained profits of $20,000 at acquisition.
Ignore goodwill

Required:
Show the adjustment to eliminate unrealised profits in the
consolidation workings for Parent.
Solution:

Unrealised profit

(6000 x ½) = 3000

Retained earning Dr 3000

Inventory Cr 3000

Subsidiary Net Asset

Reporting Date Acquisation Date

Issued capital 10000 10000

Retain earning given 65000 20000
Unrealised profit (3000) 62000
_______ __________
72000 30000
_________ ___________

Non controlling Interest:

Share of net assets including
Unrealised profit (72000 x 20%) = 14400
Solution:

Consolidated Retained earning:

$
Parent 100000
Share of subsidiary ( including URP)
(62000-20000) x 80% 33600
_________
133600
___________

 If the subsidiary has sold the goods, the adjustment is made in the subsidiary's net asset schedule working.
 If the parent has sold the goods, the adjustment is made in the consolidated retained earnings working.
 The examiner requires that the adjustment be made against the selling company

Non current Asset Intra group Transfers:

- In some situations the asset being acquired may be treated as a non-current asset by the purchasing company; it is for
use in the entity rather than being sold onwards
- In accordance with the single entity concept, the consolidated financial statements should reflect the non-current assets
at the amount at which they would have been stated had the transfer not been made
-On an intra-group transfer, a profit/loss may have been recognised by the selling company. This must be removed on
Consolidation
- The buying company will include the asset at cost (which is different from cost to the group) and will depreciate the asset.
The expense for the year will be different from what it would have been had no transfer occurred.
Summary of adjustments needed:
 eliminate profit; and
 adjust the depreciation charge.
- Again, the adjustments may be carried out in the consolidated accounts or as individual company adjustments. Note that if
they are processed as individual company adjustments:
 the unrealised profit will be in the accounts of the selling company; and
 the depreciation adjustment will be in the accounts of the
buying company.
 Approach—Construct a working which shows the figures in the accounts ("with transfer") and shows what would have
been in the accounts if no transfer had been made ("without transfer").

Example:
Parent owns 80% of Subsidiary. Parent transferred an asset to Subsidiary at a value of $15,000
on 1 January 2016. The original cost to Parent was $20,000 and the accumulated depreciation at
the date of transfer was $8,000. The asset had a useful life of five years when originally acquired,
with a residual value of zero. The useful life at the date of transfer remains at three years. Full
allowance is made for depreciation in the year of purchase and none in the year of sale.
Required:
Calculate the adjustments for the consolidated financial statements at
31 December 2016.
 Amounts in Accounts no transfer had occurred Adjustments
$ $ $

Cost 15000 20000

Accumulated depreciation (15000/3yrs) (5000) (12000)
________ __________
15000 8000 2000
_________ ___________
Charge for the year 5000 4000 1000

Profit on disposal

Proceeds 15000
NBX(20-8) (12000)
_______
Profit on disposal 3000 - 3000

Dr profit on disposal 3000

Cr Non current Asset 3000
And
Non current asset Dr 1000
P&L- depreciation Cr 1000
Accumulated depreciation of $12,000 is calculated as 3 years @ 20% per annum based on the original cost of $20,000.
Dividends
 An exam question may present draft statements of financial position of group companies and a note that dividends have
been declared before the year end but have not yet been recognised in the financial statements.
 The final statements of financial position of individual companies need to be consolidated after closing adjustments.
Process adjustments to finalise the individual statement of financial position before consolidating

 In the books of the company declaring the dividend:

Dr Equity (in statement of changes in equity) x
Cr Curent liabilities (dividendes payable) x
 If the subsidiary is declaring the dividend, the parent will receive its share. This dividend now represents reservesin-
transit. The parent must record its share of the dividend
receivable:
Dr Dividend receivable x
Cr Profit or loss x

 The dividend receivable and liability are intra-group balances

and must be cancelled.
 Consolidated statement of financial position will reflect in
liabilities:
 the parent's dividends payable; and
 the non-controlling interest's share of the subsidiary's dividends payable.
 Changes in group structure

Disposal:

When a group disposes of all or part of its interest in a subsidiary undertaking, this needs to be reflected in
the parent's books as an individual company and, more importantly, in group accounts.
Group accounts reflect:
- inclusion of results and cash flows of entity disposed of;
- calculation and presentation of profit or loss on disposal and
- inclusion in group accounts of any remaining interest in the company after a part disposal.
- In dealing with these matters in group accounts, the single entity concept is applied and the effect on the group as a whole
considered.
Disposal may be:
- full disposal (i.e. sell entire holding); or
- part disposal, retaining some interest in the undertaking.
- Part disposal possibilities are:
- retention of control (i.e. undertaking remains a subsidiary) and
- retention of significant influence (i.e. undertaking becomes an associate).
Treatment in Parent's Own Accounts
Parent will carry its investment in a subsidiary in its own statement of financial position as a non-current asset
investment, usually at cost.
The sale of all or part of an investment is recorded as a disposal in the parent's own accounts and will usually give rise to a
profit or loss on disposal (i.e. proceeds less cost of investment sold). An accrual may be required for tax on any gain on
disposal.

Recording of Disposal:

$ $
Dr Cash/receivables (proceeds) X
Cr Investment in S (cost of investment sold) X
Dr P or L loss on disposal (or Cr profit on disposal) X X
If required
$ $
Dr P or L tax charge (tax on gain on disposal) X
Cr Tax payable X
Treatment in group accounts:

The consolidated statement of financial position should simply reflect the closing position.
- There is one potential problem area. This is when the parent has not yet accounted for the disposal in its own accounts.
In this case, profit or loss on disposal must be calculated from the parent's viewpoint and processed into the parent's
accounts as an individual company adjustment.

$
Proceeds X
Cost of investment disposed of X
______
Profit or loss X
_______

Also note that in most jurisdictions, it is this view of profit that will be taxed, and you may need to provide for the tax liability.
Consolidate Statement of Comprehensive Income:

The consolidated statement of comprehensive income must reflect the pattern of ownership in the period.
- Profit or loss on disposal must be calculated from the group's perspective. This will be different to that
recognised by the parent because:
- The group recognises 100% of profit (or loss) whereas the parent recognises only dividends received; and
-The group will recognise impairment of goodwill (the parent does not).
 Pattern of Ownership:

Status of Investment Treatment is statement Treatment in statement

Before ---------- After of comprehensive of financial position
Disposal Disposal Income
Subsidary 90% to Zero Consolidate till the date No action needed
of disposal
Subdidary 90% to Sub - Consolidate for the Consolidate as normal
60% whole year with closing NCI based on
- Calculate NCI in two year end holding
parts
- Eg x/12profit x 10%
- 12-x/12profit x 40%
Subsidary 90% to Prorate S’s results and Equity account as at the
Associate 40% consolidate upto the date year end, based on the
of disposal year end holding
After disposal equity
amount
Profit or Loss on Disposal
The amount of profit or loss to be recognised, and where, is dependent on whether or not control is lost.

Disposal With No Loss of Control:

Any disposal without loss of control (e.g. 80% holding to 60% holding) is accounted for as a transaction
within equity between the shareholders of the group, the shareholders of the parent and the
non-controlling shareholders of the subsidiary.
- No profit or loss is recognised in profit or loss in this situation.
- The carrying amounts of the controlling and non-controlling interests are adjusted to reflect their relative
interests in the subsidiary.
- Any difference between the adjustment to non-controlling interest and the fair value of consideration
paid is recognised directly in equity, probably retained earnings, and attributed to
the owners of the parent.
- The carrying amount of goodwill is not adjusted to reflect the change in shareholding.
Illustration:
Movement in Equity
Disposal—Sub to Sub
Papa acquired 100% of Mama a number of years ago for $125,000.
Fair value of Mama's net assets on acquisition was $100,000, giving goodwill of $25,000.
Since acquisition, Mama's net assets have increased in value by $20,000.
Papa then disposed of 30% of its shareholding for $40,000.

Solution:

Solution—Movement in Equity
$
Fair value of consideration received 40,000
Movement in non-controlling interest (120,000 × 30%) (36,000)
________
Cr to equity 4,000
_________
Ignoring the issue of impairment, the value of goodwill remains
unchanged at $25,000.
Disposal with Loss of control:

Any disposal of a shareholding that results in the loss of control will give rise to profit or loss on disposal being recognised in
profit or loss.

On the date that control is lost the following adjustments must be made:
- Derecognise the carrying amount of assets, including goodwill, liabilities and non-controlling interest from the
consolidated statement of financial position.
- Recognise the fair value of the consideration received on the disposal of the shareholding.
- Recognise any distribution of shares to owners.
- Recognise the fair value of any residual interest held after disposal; this will become the valuation going forward in
respect of the remaining holding.
- If the remaining investment results in the parent having significant influence over the entity then an associate
relationship will now exist. The fair value of the remaining holding at the date of disposal will become the cost of
investment in associate going forward.
- Reclassify to profit or loss any amounts that relate to the subsidiary's net assets previously recognised in other
comprehensive income, where required.
- Recognise any resulting difference as a gain or loss in profit or loss attributable to the parent.
Disposal—Subsidary to Associate
- Sultan acquired 100% of Hajra a number of years ago for $125,000.
- Fair value of Hajra's net assets on acquisition was $100,000, giving goodwill of $25,000.
- Since the acquisition, Hajra's net assets have increased in value by $20,000, of which $3,000 represents an
increase in a financial asset classified at fair value through other comprehensive income.
- Sultan then disposed of 75% of its shareholding for $115,000.
- The fair value of the remaining 25% was identified as $38,000.

Solution—Profit or Loss
$
Fair value of consideration received 115,000
Fair value of remaining 25% 38,000
Fair value of net assets and goodwill derecognised (145,000)
_________
Profit on disposal 8,000
_________
- As a result of the issue of IFRS 9, the gain on the financial asset classified at fair value through other comprehensive
income is not reclassified through profit or loss.
- If the disposal results in a remaining holding that would be covered by IFRS 9 (e.g. a 15% holding), then the remaining
investment will be valued at fair value at the disposal date and accounted for under IFRS 9 from that point onwards.

Discontinued Operation
- It is highly likely that the disposal of a subsidiary will be classified as a discontinued operation.

In this case, the results for the subsidiary to the date of disposal will be presented separately from the results of the
continuing operations.
- IFRS 5 requires that the revenue and costs to the date of disposal and any profit or loss on the actual disposal of the
operation are presented as a single item in the profit or loss, and then analysed further either in the profit or loss or in the
disclosure notes.
Example:

The Draft accounts of two companies as at 31 march 2015 are as follows:

Statements of financial position

Mocha Moosha
$ $
Investment in Jemima at cost 3,440 –
Sundry assets 36,450 6,500
________ ________
39,890 6,500
________ ________
Share capital ($1 ordinary shares) 20,000 3,000
Retained earnings 11,000 3,500
_______ _______
31,000 6,500
_______ ________
Sale proceeds of disposal (suspense a/c) 8,890 –
39,890 6,500
Statements of comprehensive income
Mocha Moosha
$ $
Profit before tax 12,950 3,800
Tax (5,400) (2,150)
______ _______
Profit after tax 7,550 1,650
Retained earnings b/d 3,450 1,850
______ ______
Retained earnings c/f 11,000 3,500
_______ ______

Mocha and Moosha are both incorporated enterprises. Mocha had acquired 90% of Moosha when the reserves of Jemima were
$700. Goodwill of $110 arose on the acquisition. This had been fully impaired by 31 March 2014. Non-controlling interest is
valued at its percentage of the identifiable net assets of Moosha. The carrying value of Moosha's net assets on disposal and at
the year end closely equates to its fair value. On 31 December 2014, Hamble sold shares in Moosha.
Required:
Prepare extracts from the Hamble Group statement of financial position and Hamble
Group statement of comprehensive income on the basis that Hamble sold the following
shares in Jemima:
(a) Its entire holding;
(b) A 15% holding (75% remaining);
(c) A 50% holding (40% remaining with significant influence).
Note: Ignore tax on the disposal.

Solution:

Workings:

(1) Net assets

Reporting date Disposal Acquisation
$ $ $
Share capital 3,000 3,000 3,000
Retained earnings 3,500 3,088 700
________ ________ _______
6,500 6,088 3,700
________ ________ _______
(2) Retained earnings at date of disposal
$
B/fwd 1,850
Profit for year to disposal (1,650 × 9⁄12) 1,238
_______
3,088
_______

(3) Retained earnings b/f

$
Hamble Group 3,450
Jemima 90% (1,850 − 700) 1,035
Less: Goodwill written off (110)
________
4,375
________
(4) Profit on disposal of Jemima (individual company view)
a b c
$ $ $
Sale proceeds 8,890 8,890 8,890
Less: Cost of investment
3,440 (3,440)
3,440 × 15⁄90 (573)
3,440 × 50⁄90 (1,911)
_______ _________ _________
Profit on disposal 5,450 8,317 6,979
_______ __________ _________
(5) Consolidated retained earnings
a b c
$$$
Retained earnings of Hamble
Per the question 11,000 11,000 11,000
Profit on disposal (W4) 5,450 8,317 6,979
_________ _______ ________
16,450 19,317 17,979
___________ ________ _________
Share of Jemima
75% × (3,500 − 700) 2,100
40% × (3,500 − 700) 1,120
Goodwill 110 × 75⁄90 (92)
110 × 40⁄90 (49)
________ _________ _________
16,450 21,325 19,050
________ __________ ________
(6) Profit on disposal of Jemima (group view)
a b c
$ $ $
Sale proceeds 8,890 8,890 8,890
Less: Net assets at disposal (W1)
6,088 × 90% (5,479)
6,088 × 15% (913)
6,088 × 50% (3,044)
______ ______ ______
Profit on disposal 3,411 7,977 5,846
_______ _______ _______

(7) Operating profit

Hamble Group 12,950 12,950 12,950
Jemima 2,850 3,800 2,850
_______ ______ _______
15,800 16,750 15,800
________ _______ ________
(9) Non-controlling interest in Jemima
Operating profit (W7) 2,850 3,800 2,850
Tax (W8) (1,612) (2,150) (1,612)
______ _______ _______
1,238 1,650 1,238
______ _______ _______
× 10% 124 124
× 10% × 9/12
124
× 25% ×3/12
103
_____ ______ ______
124 227 124
______ ______ _______
Consolidated statement of financial position as at 31st march 2015

a b c
$ $ $
Investment in associate (6,500 × 40%) — — 2,600
Sundry assets 36,450 42,950 36,450
________ _______ _______
36,450 42,950 39,050
________ _______ ________
Share capital 20,000 20,000 20,000
Retained earnings 16,450 21,325 19,050
_______ _______ ________
36,450 41,325 39,050
Non-controlling interest (6,500 × 25%) — 1,625 —
_______ _______ ________-
36,450 42,950 39,050
________ ________ _________
Consolidated statement of comprehensive Income for the year ended 31st March 2015

a b c
$ $ $
Operating profit (W7) 15,800 16,750 15,800
Income from interests in associate
(40% × 3⁄12 × 1,650) — — 165
Profit on disposal of operations (W6) 3,411 5,846
______ ______ ________
Profit before taxation 19,211 16,750 21,811
Taxation—group (W8) (7,012) (7,550) (7,012)
_______ ______ ________
Profit after taxation 12,199 9,200 14,799
Non-controlling interest (W9) (124) (227) (124)
________ _________ ________
Profit for the year 12,075 8,973 14,675
Retained earnings b/f (W3) 4,375 4,375 4,375
Movement in equity (W6) 7,977
Retained earnings c/f 16,450 21,325 19,050
Piecemeal Acquisitions
Introduction
- A step or piecemeal acquisition occurs where the investment in a subsidiary (or an associate) is acquired in several stages,
rather than in one go.
- Investments may be carried at cost or this may be replaced by a share of net assets and goodwill when appropriate. This is
when the investing company has a holding which gives it:
-control: when consolidation is used; or
- significant influence—when equity accounting is used.
- In order to calculate goodwill and reserves at acquisition, net assets acquired need to be established. Hence, the date on
which to identify the net assets of the subsidiary at acquisition is needed.

IFRS 3 requires that any previous shareholding is remeasured to fair value at the date the parent acquires either:
- significant influence in an associate; or
- control of a subsidiary.
-As a result of this, goodwill is only calculated once a significant event occurs (e.g. on obtaining control).
- Any increase in a company that is already a subsidiary will only affect the equity of the group. No profit or loss is
recognised and there will be no change to the amount of goodwill calculated on the original controlling event.
- Thus, there are several piecemeal acquisition possibilities, depending on the size of the stake purchased at each stage.
Those relevant to this session are summarised in the following sections, with example percentages of control shown in the
illustrations.

Investment to Subsidiary:
-Any previous shareholding which qualified as a financial asset under IFRS 9 is treated as if it were disposed and then
reacquired, at the acquisition date, at fair value.
- Any resulting gain or loss on the remeasurement will be included in profit or loss.
- Any changes in value of the instrument that had been reported previously in other comprehensive income will not be
reported in profit or loss under IFRS 9.
Illustration:
Investment to Subsidiary
- Aqsa acquires 75% control of Beeba in two stages.
- 15% of Beeba was acquired a number of years ago, for $10,000.
- The investment was classed as at fair value through other comprehensive income. A fair value gain has been reported in
other comprehensive income of $2,000.
- During the current year, a further 60% was acquired for $60,000.
- Net assets of B on acquisition date were $80,000.
- Non-controlling interest is to be measured at A's share of B's net assets. On the acquisition date, the fair value of the 15%
holding was $12,500.

Solution:
Other Comprehensive Income
- On acquisition, A will recognise a further gain of $500 in other comprehensive income.
- This is the increase in fair value from previous value to date of acquisition.
- The $2,000 previously recognised in other comprehensive income is not reclassified to profit or loss.
Solution
Goodwill
$
Fair value of consideration given 60,000
Non-controlling interest ($80,000 × 25%) 20,000
Fair value of previous 15% 12,500
Fair value of net assets of B (80,000)
_______
Goodwill 12,500
________
Associate to Subsidiary:
- A previous investment that was accounted for as an associate under IAS 28, or a joint venture under IFRS 11, is treated in a
similar manner to that of a simple investment.
- It is presumed that the previous investment was disposed of and then reacquired at acquisition date fair value.
- Any difference between the previous carrying value and the reacquired fair value will be recognised in profit or loss at the
acquisition date.
Goodwill will be calculated as:
- consideration given to obtain control; plus
- value of non-controlling interest (using either valuation model); plus
- fair value, at acquisition date, of previous shareholding; less
- fair value of the identifiable net assets of the subsidiary at the acquisition date (100%).
Illustration 4:

- A acquires 75% control of B in two stages.

- 40% was acquired a number of years ago for $40,000, and the fair value of B's net assets was $80,000.
- Since acquisition, A has recognised $5,000 of post-acquisition profits in respect of B and $3,000 of revaluation gain relating to
IAS 16 property.
- The carrying amount of the investment was therefore $48,000.
- During the current year, a further 35% was acquired for $55,000.
- Net assets of B on the acquisition date were $110,000.
- Non-controlling interest is to be measured at its fair value of $30,000.
- On the acquisition date, the fair value of the 40% holding was $50,000.

Solution Profit or Loss

- On acquisition, A will recognise a gain of $2,000 in profit or loss, being the difference between:
- the fair value of the previously held 40% stake of $50,000; and
- the previous carrying value of the investment in associate of $48,000.
- The revaluation gain of $3,000 is not reclassified, as this gain would never be reclassified on disposal
Solution:
Goodwill
$000
Fair value of consideration given 55
Non-controlling interest @ fair value 30
Fair value of previous 40% 50
Fair value of net assets of B (110)
_______
Goodwill 25
________
Subsidiary to Subsidiary
- Once control has been obtained, any further acquisition of shares are accounted for within equity and no profit or loss will
be recognised.
- The carrying amount of non-controlling interest is adjusted to reflect its new percentage holding, if any, in the subsidiary.
- Any difference between the amount paid and the amount of adjustment to non-controlling interest will be recognised
directly within equity, probably retained earnings.
- There will be no recalculation of goodwill; this will still be valued based on the original calculation of when control was
achieved.
- The adjustment within equity following an increase in the percentage held will be affected by the choice of measurement
basis for the non-controlling interest at the measurement date.
- If the fair value model has been chosen, then the amount of adjustment within equity will be lower than if the percentage
of identifiable net assets valuation model has been chosen.
Illustration:

A acquires 75% control of B, a number of years ago, for $90,000.

On acquisition, the fair value of B's net assets was $100,000.
Fair value of non-controlling interest on acquisition was $28,000.
Since the initial acquisition, the fair value of B's net assets has increased by $20,000.
A further 15% of shares were then acquired for $21,000.

Solution:
Goodwill
$
Fair value of consideration given 90,000
Non-controlling interest @ fair value 28,000
Fair value of B's net assets (100,000)
___________
Goodwill 18,000
_____________
Non-controlling Interest
$
Non-controlling interest (28,000 + (20,000 × 25%)) 33,000
Transfer to A (15⁄25) (19,800)
_________
Remaining non-controlling interest 13,200
__________

Investment Becoming an Associate or Joint Venture

- The standard does not detail how to deal with an equity investment, accounted for under IFRS 9 that is increased and
leads to an associate or joint control status.
- IAS 28 states that many of the procedures relevant to equity accounting are similar to the consolidation procedures
described in IFRS 10. Furthermore, the underlying concepts used in equity accounting are the same as those used in
acquisition accounting.
- However, IAS 28 also states that an investment in an associate is initially recognised at cost, which may be taken to mean
that any remeasurement under IFRS 9 should be reversed when equity accounting is used for the first time.
- This issue was considered by the IASB during the drafting process of the revised standard, but no definitive answers
were given.
Example:
Following are the statement of financial position of Pan and its subsidiary Sauce at 31 December 2015 are as follows:

Pan Sauce
‘000 ‘000
$000 $000
Investment in Slice 410 –
Sundry assets 590 550
_______ ________
1,000 550
________ _________
Share capital: $1 ordinary shares 200 100
Retained earnings 800 450
_______ _______
1,000 550
________ ________

Pan acquired its holding in Sauce as follows:

Date Portion acquired Cost of Investment Sauce Retain earning
% $000 $000

30th September 2014 30 150 300

1st July 2015 50 260 400

The fair value of non-controlling interest on acquisition was $100,000. The fair value of the previous 30% shareholding on the
acquisition date was $180,000. The value of the investment in associate immediately prior to the increase in shareholding was
$176,000. Goodwill has not been impaired since acquisition.
Required:
Prepare the consolidated statement of financial position of Portion at 31 December 2015.
Net Assets working:

30th September

Acquisation Post Acquisation

$000 $000
Share capital 100
Retained earning 300 $150
_______ _______
400 150

1 july 2015 Acquisation Post Acquisation

$000 $000
Share capital 100 100
Retain earning 400 450 ------------- Post acquisation
_______ _______
500 550
________ _______
Goodwill:

$000
Cost of investment 260
Fair value of previous holding 180
Fair value of non-controlling interest 100
Less: Fair value of net assets on acquisition (500)
_______
40
_______

(3) Non-controlling interest

$000
Fair value on acquisition 100
Share of post-acquisition profits (20% × 50) 10
Share of goodwill impaired (nil)
_______
110
________
(4) Retained earnings
$000
Pan 800
Share of Sauce 30% × 100 (400 − 300) 30
80% × 50 (450 − 400) 40
______
70
_______
870
________
Pan Consolidated statement of financial position as at 31 December 2015

$000
Goodwill 40
Sundry assets (590 + 550) 1,140
_______
1,180
________
Share capital: $1 ordinary shares 200
Retained earnings (W4) 870
1,070
Non-controlling interest (W3) 110
___________
1,180
____________
Reorganisations:

Group reorganisations can take many forms:

- The transfer of shares in a subsidiary between companies
within the group
- Creation of a new ultimate parent company;
- Combining two or more companies that share the same shareholders or
- A reverse acquisition through which the legal subsidiary becomes the parent and the legal parent becomes the
subsidiary.

Reasons
There are many reasons for reorganisations:
- A private company may acquire a listed company as a short cut to obtaining a listing.
- Tax benefits or incentives may be available to the new organisation.
- As a result of a decision to sell a subsidiary.
- To simplify or rationalise the group structure by transferring assets or trade between companies.
- A demerger of a company (i.e. splitting it into parts) may increase shareholder value (i.e. the sum of the
parts exceeds the value of the whole company before the demerger).
Types
Demerger
- Before the demerger, the Parent (P) controls Subsidiary (S).
- The Parent pays a dividend to shareholders in the form of shares in S instead of cash (i.e. such a dividend in specie
is also called a scrip dividend). The Parent accounts for this dividend in the normal way except that the credit is to
"Investment in S" (rather than cash).
- The shareholders of P are now also the shareholders of S.
- This creates two companies. If the sum of the value of the two companies is greater than that of the group, shareholder
value is increased.
Example:
Before
After same
shareholders
shareholders

P
P S

S
Subsidiary Moved Along
- This may be a desirable outcome when a Parent (P) is trying to sell a Subsidiary (S), but wishes to retain control of one or
more sub-subsidiaries (Z).
- This is effected by another subsidiary (T) exchanging assets with S (normally cash) for the investment in Z. This leaves S
to be sold off separately.

P P

T S T
S

Z
Z
Subsidiary Moved Down
A subsidiary (T) may be moved down the chain for tax purposes or to create a smaller group based on geographical
location (e.g. where two subsidiaries, S and T, operate in the same country, which is different to that of the ultimate
parent).
The form of the transaction could be:
a share exchange (i.e. S issues shares to P in return for the shares in T); or for cash.
The end result is that Investment in T moves from P's books to S's books.
P
P

S T

T
The reverse situation could also be engineered so that T moves up the chain to become a direct subsidiary of P. This
may again be effected through S paying a dividend in specie.

Divisionalisation
- When the assets and/or trade of a subsidiary are transferred to another group company, the defunct subsidiary becomes a
dormant company
- The amount for which one company acquires the assets or trade of the other company is typically unpaid (to avoid
leaving a cash balance in the dormant company). This give rise to a liability in the buying company and an amount
receivable in the selling company. Such balances must be cancelled on consolidation.
- The sale of the assets will lead to the write down of the value of the investment in P's books (i.e. recognise as an
impairment loss) if the value of the dormant company falls below the cost of the investment.
Forms of Reconstruction
- For all forms of reconstruction, it is important that all stakeholders are consulted and treated in a fair and equitable
manner. However, the ordinary shareholders bear the major risk and so will suffer the greater proportion of any losses,
compared with secured creditors (for example).
- In all reconstructions, the protection of the creditors is crucial. Although this stakeholder group will be required to share in
any losses this will be proportionately less than that of the equity shareholders.

Internal Reconstruction
- In this situation, management identifies the need to reconstruct the company (e.g. to effect economies or make
the company financially viable). In order to get stakeholders on board there must be some indications that the company
has a future.
- Creditors will probably have to accept a loss on the amount due to them. This may be compensated with shares in the
company.
- Current shareholders will have to accept a dilution in their shareholdings.
- This could be to such an extent that they no longer have any say in the running of the company.
- Unwillingness to accept the dilution may force the company into liquidation.
- Shareholders may be required to inject additional cash into the business.
- All assets will be written down to their recoverable amount and any debit balances on retained earnings will be eliminated.
- It is likely that the share capital will be revised and old shares will be replaced with new shares (possibly with a lower,
nominal value). The ownership structure will change, with the former creditors having a much greater say in the ownership
and the running of the company.

Exam Approach
There are two types of scheme that may be examined:
- Internal reorganisation—a restructuring of the statement of financial position and
External reorganisation:
- winding up of a company;
- setting up of a new company to take over trade/assets.
You may be required to:
- Prepare the financial statements after the reorganisation has taken place:
- this may involve a bookkeeping exercise
- i.e. process the scheme of reorganisation.
- Appraise the scheme, either in general or for a specified stakeholder:
- For this there will be no single correct answer
- It is more important to apply principles.
The following scheme has been proposed:
1. Assets are to be revalued:
Tangibles 980
Goodwill –
Receivables 290
Inventory 350
2. Ordinary share capital to be surrendered and reissued as 25c ordinary shares on
a 1-for-1 basis.
3. Existing ordinary shareholders are to subscribe for 1,000 25c ordinary shares
at 75c.
4. Preference share capital is to be reduced by 25% through surrender and reissue.
5. Debenture holders are to exchange debs with a value of $250 for 500 25c
ordinary shares.
Required:
Execute the scheme of reconstruction.
 Reconstruction Account

Write offs $

Tangibles 20
Goodwill 500
Recievables 10
Inventory 50
Retain earnings 300
Issue of: Surrender of:
New ordinary shares 375 old ordinary shares 1500
New preference shares 150 old preference shares 200
Ordinary share to debenture holder 125 Debenters 250
Balance C/d as capital reserve 420

_________ ______
1950 1950
________ _______
Solution:

$000 $000
Non-current assets
Tangibles 1,000 980
Goodwill 500 –
______ ______
1,500 980
Current assets
Cash – 450
Receivables 300 290
Inventory 400 350
________ ________
2,200 2,070
_______ _________
Share capital
Ordinary shares ($1) 1,500 750
Reserves
Share premium – 500
Capital reserve – 420
Retained earnings (300) –
Liabilities
10% debenture
(secured on the tangible non-current assets) 500 250
4% Preference shares 200 150
Bank overdraft 300 –
 Foreign Subsidiary

Identifying the Functional Currency

The functional currency of an entity is dictated by the primary economic environment in which the entity operates.

- An entity should consider the following in determining its functional currency:

- The currency that mainly influences the selling price of goods or services and the currency of the country whose
regulations mainly determine the selling price of goods and services.

- The currency that affects labour, material and other costs of providing goods and services.

- Secondary factors to consider in determining the functional currency are:

- the currency in which funds from financing activities are generated and

- the currency in which monies from operating activities are kept.

 The following factors are also to be considered in determining the functional currency of a foreign operation and whether
that currency is the same as the reporting entity:

- Are transactions carried out as an extension of the reporting entity or does the foreign operation carry out its activities
with a significant degree of autonomy?

- Are transactions between the reporting entity and foreign operation a high percentage of total transactions?

- Do cash flows of the foreign operation directly affect the cash flows of the reporting entity and is cash available for
remittance to the reporting entity?

- Is the foreign operation dependent upon the reporting entity to help service debt obligations, both existing and those of
the future?

- If the functional currency is not obvious, management must use its judgement in identifying the currency that most
faithfully represents the economic effects of the underlying transactions.
Illustration:

€ Rate $
Net assets at start of the year 1,000 2 500
Retained profit 500 1.9 263
Net assets at year-end 1,500 1.85 811
*This column does not add up
The closing net assets figure comes from two sources:
- last year's net assets
- profit for the period.
- The closing figure has been translated at a different rate to its component figures.
Exchange difference on consolidation comes from two sources:
- Restatement of opening net assets;
- Translating retained profit at one rate and the net assets (the other side of the double entry) at another rate
Foreign Operation

Presentation Currency
-The financial statements of a foreign operation are translated into the presentation currency of the parent entity.

- Income and expenses are translated using exchange rates when the transaction occurred. An average exchange rate
that approximates actual exchange rates may be used.

- The parent's share of any exchange difference is included in other comprehensive income and reclassified through profit
or loss when the foreign operation is disposed of. The non controlling share is included within non-controlling interest in
the consolidated statement of financial position.
Supplementary Information
- The standard does not prohibit an entity providing additional supplementary information translated using a different
currency, prepared in a manner other than that required by the standard.

- If an entity does present additional information, it should be clearly identified as supplementary and the fact that
translation is not in accordance with the standard.
IAS 21 The Effects of Changes in Foreign Exchange Rates

Translation rules are summarised as follows:

€ $
Non-current assets x x
Inventory x x
Monetary items x closing rate x
_____ Total based ______ Total is
x on goodwill x based on Nci
______ calculation ______ calculation
Share capital x x
Pre-acquisition reserves x Historical rate
Post-acquisition reserves x Balancing figure x
________ ______
x Based on x
________ CRE _______
calculation
Statement of comprehensive Income:

All items in the statement of comprehensive income are translated at the actual rate ruling at the date of the transaction. For
practical reasons, a rate that approximates the rate ruling (e.g. an average
rate) may be used.

- If, however, the foreign entity operates in a hyper-inflationary economy, the closing rate should be used.

Exchange difference:

Recognise in other comprehensive income and allocate betwee shareholders of parent and non-controlling interest.

Reclassify through profit or loss on disposal of the related asset.

Calculation of exchange difference:

Either:
$
Net assets of S:
Closing at (closing rate) x
Opening at (opening rate) x
_____
x
Retained profit (average rate) (x)
______
Exchange difference x Take P’s Share
_______
Goodwill
Goodwill arising on the acquisition of a foreign entity and any fair value adjustments to the carrying amounts of assets and
liabilities arising on that acquisition are treated as assets and liabilities of the foreign operation and translated at the closing
rate. This requires the recognition of goodwill in the investee's own accounts. This may mean that the level to which goodwill
is allocated for foreign currency purposes is different from that which is annually tested for impairment purposes.

Recognising goodwill in the investee's own accounts gives rise to a further exchange difference, which will be reported in
other comprehensive income.
Illustration:

P acquired 100% of S on 30 September at a cost of €4m. The fair value of the net assets of S at that date was €3m. The
exchange rate at the date of acquisition was €2 = $1. At 31 December (P's accounting year end) the exchange rate was
€ 2.1=$1.
Goodwill is an asset denominated in a foreign currency that is subject to retranslation as follows:
€ Rate $
On acquisition 1,000,000 2 500,000
31 December 1,000,000 2.1 476,190
Goodwill has fallen in value by $23,810. This amount is credited to goodwill and debited directly to a separate component of
equity.
Example:

Gabba bought 80% of Sen three years ago for €6,000 when the exchange rate was €4 to $1. The reserves of Sen at that date
were €2,000. Non-controlling interest is valued at the proportionate share of the identifiable net assets. Since acquisition
there has been no impairment of goodwill. On 31 December 2015 the statements of financial position were as follows:

Closing rate method

G S Rate S Consolidated financial position
$ € $ $
Non-current assets
Goodwill
Tangible 9,000 12,000
Investment in Sly 1,500 —
Current assets
Inventory 1,000 1,914
Other 500 4,986
______ _______
12000 18900
 G S Rate S Consolidated financial Position
$ € $ $
Long term loans — (6,000)
_____ ________
12,000 12,900
______ ________
Share capital 2,000 4,000
Retained earnings 10,000 8,900
Pre-acquisition
Post-acquisition
Exchange loss reserve
Non-controlling interest
_______ _________
12,000 12,900
________ _________

The statements of comprehensive income for the year ended 31 December 2015 were as follows:
 Closing Rate Method
G S Rate S Consolidated Comprehensive Income
$ € $ $

Revenue 35,250 28,215

Cost of sales and
other expenses (28,200) (19,515)
Depreciation (1,350) (1,500)
_______ _______
Profit before tax 5,700 7,200
Tax (2,700) (3,600)
________ ________
Profit after tax 3,000 3,600
________ ________
Non-controlling
interest
Retained profit
Exchange rates € to $
31 December 2015 3.00
31 December 2014 2.50
Average for 2015 2.85

Required:
Prepare the consolidated statement of financial position and consolidated statement of comprehensive income.
Solution:

(1) Exchange difference

$
Closing net assets 4,300
Opening net assets
(12,900 – 3,600) @ 2.5 (3,720)
________
580
Retained profit (1,264)
_______
Exchange difference (684)
________

OR
 $ $
Retranslation of opening net assets
9,300 @ Closing rate (3.00) 3,100
@ Opening rate (2.50) (3,720)
_______
(620)
Retranslation of retained profit
3,600 @ Closing rate (3.00) 1,200
@ Average rate (2.85) (1,264)
_______
(64)
_______
(684)
________
(2) Consolidated retained earnings
$
G 10,000
S post-acquisition (2,800 x 80%) 2,240
Restatement of goodwill (300 x 4/3) – 300 100
Exchange loss to separate equity component (684 x 80%) 547
_______
12,887
_______
Solution:

Statement of financial position as at 31 December 2015

Closing Rate

G S Rate S statement of financial position

$ €$ $ $
Non-current assets
Goodwill 1,200 3.0 400
Tangible 9,000 12,000 3.0 4,000 13,000
Investment in Sen 1,500 — —
Current assets
Inventories 1,000 1,914 3.0 638 1,638
Other 500 4,986 3.0 1,662 2,162
_____ ______ ____ _______ _______
12000 18900 6300 17200
 G S Rate S statement of financial position
$ € $ $

Long term loans — (6,000) 3.0 (2,000) (2,000)

12,000 12,900 4,300 15,200

Share capital 2,000 4,000 2,000
Retained earnings 4.0 1,500 12,887
Pre-acquisition 2,000 2,000
Post-acquisition 10,000 6,900 2,800
Exchange loss reserve (547)
Non-controlling interest 860
______ _____ ______ ______
12,000 12,900 4,300 15,200
_____ ______ ______ _______
 Statement of comprehensive Income for the year ended 31st December 2015

G S Rate S Consolidated Comprehensive Income

Revenue 35,250 28,215 2.85 9,900 45,150

Cost of sales and
other expenses (28,200) (19,515) 2.85 (6,847) (35,047)
Depreciation (1,350) (1,500) 2.85 (526) (1,876)
________ ______ ______ ________
Profit before tax 5,700 7,200 2,527 8,227
Tax (2,700) (3,600) 2.85 (1,263) (3,963)
________ ______ ______ ________
Profit after tax 3,000 3,600 1,264 4,264
________ ______ _______ ________
Non-controlling
Interest (253)
_______
Retained profit 4,011
Disposal of foreign Operation:

Cumulative Exchange Differences

On the disposal of a foreign operation, the cumulative amount of the exchange differences which have been deferred and
which relate to that foreign entity are recognised as income or as expenses in the same period in which the gain or loss on
disposal is recognised.

Partial Disposal
In the case of a partial disposal, only the proportionate share of the related accumulated exchange differences is included in
the gain or loss.
 Consolidated statement of Cash Flows

Application
Users of financial statements are interested in cash generation regardless of the nature of the entity's activities. IAS 7
Statement of Cash Flows therefore applies to all entities.

Entities need cash for essentially the same reasons:

- to conduct operations;
- to pay obligations;
- to provide returns to investors.

Importance of Cash Flow

To show that profits are being realised (e.g. that trade
receivables are being recovered).
To pay dividends.
To finance further investment (which will generate more cash).
Benefits of Cash Flow Information
< Provides information that enables users to evaluate
changes in:
- net assets
- financial structure (including its liquidity and solvency);
- ability to affect amounts and timing of cash flows (to adapt to changing circumstances and opportunities).
- Useful in assessing ability to generate cash and cash equivalents.
- Users can develop models to assess and compare the present value of future cash flows of different entities.
- Enhances comparability of reporting operating performance by different entities (by eliminating effects of alternative
accounting treatments).

Historical cash flow information may provide an indicator of the amount, timing and certainty of future cash flows.

Definitions:
Cash: comprises cash on hand and demand deposits.

Cash equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash subject to an
insignificant risk of changes in value (e.g. overnight deposits and government bonds)
Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents (e.g. preferred shares
acquired within a short period of their maturity and a specified redemption date).

Included in cash and cash equivalents are bank overdrafts which are repayable on demand and form an integral part of cash
management. Cash balances characteristically fluctuate between debit and credit.

Cash flows: inflows and outflows of cash and cash equivalents.

Cash flows excludes movements between cash or cash equivalents (an aspect of cash management rather than part of
operating, investing and financing activities).

Operating activities: the principal revenue-producing activities of the entity and other activities that are not investing or
financing activities.

Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing activities: activities that result in changes in the size and composition of equity capital and borrowings.
Classification of Activities
The statement of cash flows classifies cash flows into three categories of activities:

Cashflow Activities

Operating Activities Investing Activities Financing Activities

Cash Flow From Operating Activities (CFO)

CFO, without recourse to external sources of finance, is a key indicator of the sufficiency of cash flows to:
- repay loans;
- maintain operating capability;
- pay dividends; and
- make new investments.
It is useful in forecasting future operating cash flows. Since it is primarily derived from principal revenue-
producing activities, it generally results from transactions and events that generate profit or loss.
Investing Activities or Cash Flow From Investing Activities(CFI):
Separate disclosure is important—as investing cash flows represent the amount spent on resources that are intended to
generate future income and cash flows.

Financing Activities or Cash Flow From Financing Actitvities (CFF)

Separate disclosure is useful in predicting the claims which providers of capital and long-term finance may make on future
cash flows.

Examples:

Examples of all three activities are methioned below:

TRANSACTIONS CFO CFI CFF
Cash Flows From Operations
1. Cash receipts from sale of goods/
rendering services x
2. Cash receipts from royalties, fees and
commissions x
3. Cash payments to suppliers for goods/
services x
4. Cash payments to and on behalf of
employees (e.g. pension contributions) x
Investing Cash Flows
5. Payments to acquire/receipts from
sales of property, plant and equipment,
intangibles
x
6. Payments to acquire/receipts from
sales of shares, loan notes, etc of other
entities
x
Transaction CFO CFI CFF

7. Cash advances and loans made to other

parties and repayments there of x
Financing Cash Flows
8. Cash proceeds from issuing shares x
9. Cash proceeds from debentures, loans,
notes, bonds, and other borrowings x
10. Cash payments to owners to acquire or
redeem own (i.e. the entity's) shares x
11. Cash repayments of borrowings x

Dividends and Interest*

12. Interest paid
• when recognised as an expense
or capitalised (e.g. in the cost of
constructing an asset)
x
• when it is a cost of obtaining financial
resources x
Transaction CFO CFI CFF

13. Interest and dividends received

• when taken into account of in the
determination of profit or loss x
• when they are returns on investments x
14. Dividends paid
• when they are a cost of obtaining
financial resources x
• when they assist users in determining
the company's ability to pay dividends
out of operating cash flow
x
Operating Activities
Direct Method

- Discloses major classes of gross cash receipts and gross cash payments.
Information is obtained either from accounting records or by
adjusting sales, cost of sales for:

- changes in inventories, operating receivables and payables during the period;

- other non-cash items and
- other items for which cash effects are investing or financing cash flows.
Technique
1. Cash receipts from customers.
2. Deduct cash paid to suppliers
and employees.
- Cash generated from operations
3. Payments for interest and income
taxes.
- Net cash from operating activities
Calculation
Cash receipts from customers
– cash paid to suppliers
– cash paid to employees
- Cash generated from operations
– payments for interest
– income taxes paid
- Net cash from operating activities
Advantages of the Direct Method
-Reporting the major classes of operating cash receipts and payments better reveals an entity's ability to generate
sufficient cash from operations to pay debts, reinvest in operations and make distributions to owners. Thus it better
fulfils information needs for decision-making purposes.

-The format is simpler to understand.

Disadvantages of the Direct Method
Many entities do not collect information that would allow them to determine the information necessary to prepare the direct
method.
It effectively presents statement of comprehensive income information on a cash basis rather than an accrual basis. This
may suggest, incorrectly, that net cash flow from operations is a better measure of performance than profit per the statement
of comprehensive income.
It requires supplemental disclosure of a reconciliation of net income and net cash. (However, the incremental cost of
providing the additional information disclosed in the direct method is not significant.)
Indirect Method
Adjusts profit or loss for effects of:
-non-cash transactions (e.g. depreciation)
- any deferrals or accruals of past or future operating cash receipts or payments; and
- items of income or expense associated with investing or financing cash flows.

Technique Calculation
1. Start with profit before tax. Profit before tax
2. Adjust for non-cash items, investing items, and financing
items accounted for on the accruals basis (e.g. interest). + non-cash expenses/losses
– non-cash income/gains
- Operating profit before working
capital changes - Operating profit before working
capital changes
3. Make working capital changes. + increases (decreases) in
operating liabilities (assets)
– increases (decreases) in
operating assets (liabilities)
Cash generated from operations Cash generated from operations
Advantages of the Indirect Method
-It focuses on the difference between profit per the statement of comprehensive income and net cash flow from operations.

-It provides a useful link between cash flows, the statement of comprehensive income and the statement of financial
position.

Investing and Financing Activities

Separate Reporting
Major classes of gross cash receipts and gross cash payments arising from investing and financing activities are reported
separately.
Investing Activities
- Purchase of property plant and equipment—this must represent actual amounts paid. (Any trade-in/part-exchange
will reduce amount paid.)
-Proceeds from sales of tangible assets (excludes trade-in allowance).
- Only expenditure that results in the recognition of an asset,capital expenditure, can be classified under investing
activities.

Illustration:
A new car is acquired at full list price of $50,000. $10,000 is allowed by way of part-exchange against the cost of the car
when an old car is traded in.
Solution
Payment to acquire tangible asset $40,000
Receipts from sale of tangible asset Nil
Financing Activities
Proceeds from issuance of share capital

Illustration:

Issue 100,000 $1 ordinary shares at $1.50 per share.

Solution
Dr Cash $150,000 (figure in cash flow)
Cr Share capital $100,000
Cr Share premium $50,000

Proceeds from long-term borrowings

Dividends paid
Pro forma:
Direct Method:

$ $
Cash flow from operating activities:

Cash receipt from customers x

Cash paid to suppliers and employyes (x)
_____
Cash generated from operations x
Interest paid (x)
Income tax paid (x)
Net cash from operating activities x
Cash flow from investing activities
Purchase of Property plant equipment (x)
Proceeds from sale of equipment x
Interest received x
Dividends received x
____
Net cash used in investing activities x
Cash flow from financing activities:

Proceeds from issuance of share capital x

Proceeds from long-term borrowings x
Dividends paid (x)
_______
Net cash used in financing activities x
Net increase in cash and cash equivalents x
Cash and cash equivalents at beginning
of period x
_______
Cash and cash equivalents at end of period x
Indirect Method:
$
Cash flows from operating activities
Profit before taxation x
Adjustments for
Depreciation x
Investment income (x)
Interest expense x
_____
Operating profit before working capital changes x
Increase in trade and other receivables (x)
Decrease in inventories x
Decrease in trade payables (x)
______
Cash generated from operations x

Remaining is same as direct method

Notes to the Statement of Cash Flows
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks and investments in money market instruments.
Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position
amounts.
Group statement of cash flows:

The group statement of cash flows is prepared from the consolidated financial statements and therefore reflects the cash flows
of the group (i.e. the parent and its subsidiaries).

The method of preparation is the same as for the individual company statement but additional cash flows may arise:
- dividends paid to the non-controlling interest
- dividends received from associates (and other equity accounted entities)
- cash consequences of acquisition or disposal of subsidiaries.

Non-controlling Interest
Use a T account to calculate dividends paid to non-controlling interest.
 Non controlling Interest

$ $

% of Foreign exchange losses x B/D NCI X

Dividends paid to Dividends payable
Non controlling interest (B) x
C/D NCI X % of Profit after tax x
Dividends payable x
_________ % of revaluation surplus x
X ______
_________ x
_______
Associates and Joint Ventures
Use a T account to calculate dividends from associate/joint venture.

Investment in Associate/Joint Venture

$ $
B/D investment x
Dividends debtor from A x
% of profit after tax x Dividend receieved from A (B) x
Cost of new shares x C/D – FA Investment
___ - Dividends debtor from A x
x ___
___ x
___
Extracts from group accounts
Statements of financial position
2015 2014
$000 $000
Investments
Interests in associated undertakings 280 271
(share of net assets only)
Current liabilities
Dividends payable to members of parent 66 68
Dividends payable to non-controlling interest 5 7
Non-controlling interest 55 35
Statement of comprehensive income 2015
$000
Income from interests in associate 29
Non-controlling interest (43)
Statement of changes in equity
Ordinary dividends (98)
Required:
Show how the above would be reflected in the statement of cash flows of the company.
Group statement of cash flows (extracts)
$000
Dividends from associate 20
Dividends paid to non-controlling shareholders (25)
in subsidiary undertaking (W2)
Equity dividends paid (W3) (100)

Investment in Associate

$
b/d 271
Share of profit 29
____
300
____
 Non controlling interest

$ $
Dividends paid (B) 25 b/d 7
c/d 5 - 35
- 55 Profit or loss 43
____ ___
85 85
____ ___

Dividends

Dividends paid to b/d 68

Group 100 Final dividend
c/d 66 Declared 98
_____ ___
166 166
Acquisition and Disposal of a Subsidiary
-Show separately the cash flow arising on the acquisition or disposal as an investing activity.
- Disclose, as a summary, the effect of the acquisition or disposal, indicating how much of the consideration was cash.

Each of the individual net assets of a subsidiary acquired/disposed of during the period must be excluded when comparing
group statements of financial position for cash flow calculations. Their net cash effect is already dealt with (as purchase of
subsidiary and net cash/overdraft acquired) in the statement.

Subsidiary acquired in the period:

subtract inventory, receivables, payables, etc at date of acquisition from movement on these items when
calculating the operating cash flow

Subsidiary sold in the period:

add inventory, receivables, payables, etc at date of acquisition from movement on these items when
calculating the operating cash flow
Example:

Mo acquired Cobra for $22,224,000 during 2015. The consideration comprised 3,173,000 25c shares with a market value of
$3 each with the balance in cash.
The net assets of Cobra on acquisition were as follows:

Statements of financial position

$000
Tangible non-current assets 12,194
Inventories 9,385
Receivables 15,165
Cash at bank and in hand 1,439
Payables (25,697)
Bank overdrafts (6,955)
Non-controlling interest (9)
_______
5,522
________
Required:
Show how the acquisition should be reflected in the group statement of cash flows and notes.
Solution:
Group statement of cash flows (extracts)
$000
Acquisitions and disposals
Purchase of subsidiary (12,705)
Net overdrafts acquired with subsidiary
(6,955 − 1,439) (5,516)
Notes to the group statement of cash flows:
 Purchase of subsidiary undertakings
Net assets acquired
Tangible fixed assets 12,194
Inventories 9,385
Receivables 15,165
Cash at bank and in hand 1,439
Creditors (25,697)
Bank overdrafts (6,955)
Non-controlling interest (9)
______
5,522
Goodwill (β) 16,702
_______
22,224
Satisfied by
Shares allotted (3,173 × 3) 9,519
Cash (β) 12,705
________
22,224
The subsidiary acquired during the year contributed $x to the group's net operating cash flows, paid $x in respect of net
returns on investments and servicing of finance, paid $x in respect of taxation and utilised $x for capital expenditure.
Continuing from previous example, Mo, the following additional information is supplied. The profit before tax of the Mo group
for the year (including the post-acquisition profit of Cobra) was $20,199,000. Depreciation for the year was $3,158,000. Plant
and machinery with a carrying amount of $1,002,000 was disposed of for $1,052,000.

Extracts from consolidated statements of financial position

2015 2014
$000 $000
Tangible non-current assets 160,064 148,518
Inventory 99,481 77,834
Receivables 42,874 25,264
Trade payables 80,326 48,939

Required:
Show how the above information would affect the statement of cash flows of the company
Solution:

Group statement of cash flows (extracts)

$000 $000
Profit before tax 20,199
Gain or loss on disposal (1,052 − 1,002) (50)
Depreciation charges 3,158
Increase in inventories (99,481 − (77,834 + 9,385)) (12,262)
Increase in receivables (42,874 − (25,264 + 15,165)) (2,445)
Increase in payables (80,326 − (48,939 + 25,697)) 5,690
Net cash inflow from operating activities 14,290
Capital expenditure
Purchase of tangible fixed assets (3,512)
Sale of plant and machinery 1,052
(2,460)
Acquisitions and disposals
Purchase of subsidiary undertaking (12,705)
Net overdrafts acquired with subsidiary (5,516)
(18,221)
 Non Current Asset

$ $
b/d 148518 Depreciation 3154
Subsidiary acquired 12194 Disposals 1002
Additions (b) 3512 c/d 160064
_______ ________
164224 164224
________ ________
Disclosures:

There are a number of disclosures which should be made in most cases to support the statement of cash flows. These
are:
- Analysis of cash and cash equivalents;
- Major non-cash transactions;
- Cash and cash equivalents held by the group;
- Reporting futures, options and swaps;
- Voluntary disclosures.

-The first two of these are discussed briefly in this section.

Major Non Cash Transactions:
Non-cash transactions should be excluded from the statement of cash flows. However some of these do have a major
effect on investing and financing activities and should be disclosed in a note.
Examples of such transactions include:
- the issue of shares in order to acquire assets;
- the conversion of debt to equity;
- the inception of significant lease arrangements.
- In each case a brief description of the nature and purpose of the transaction should be given.
 Environmental Accounting

Accounting:

Environmental accounting can be considered a subset of accounting, as it aims to incorporate both economic and
environmental information into corporate reporting.

- An environmental accounting system identifies measures and communicates costs from a company's actual or potential
impact on the environment. Costs can include clean-up costs, environmental fines and taxes, purchase of pollution
prevention technologies and waste management costs.

- The system not only measures effects on the environment In monetary terms, but would also consider ecological accounting
measures and their impact on the environment. These measures would include levels of waste products and the
amount of energy consumed

Environmental Management Accounting

-This is used by companies to make internal business strategy decisions.

-It involves the identification, collection, analysis and use of two types of information for internal decision-making:
-physical information on the use, flows and fates of energy, water and materials, including waste; and
- monetary information on environmentally related costs, earnings and savings.

Environmental Financial Accounting

- This is used to provide information needed by external stakeholders on a company's financial status and how it is
interacting with the environment.

Reasons for Environmental Accounting

- There are a number of reasons why an entity may adopt environmental accounting within its accounting systems:
- a reduction of environmental costs
- the identification of environmental costs or benefits that previously may have been overlooked
- possible revenue generation opportunities
- improved environmental performance may have a positive effect on employees health and enhance the success of the
business
- it may lead to more accurate costing and pricing of products
- it could give competitive advantages as customers may prefer environmentally-friendly products
- it can support the development and running of an environment management system, which may be required
by regulation for some types of businesses.
Global reporting Initiative:

GRI is a long-term, multi-stakeholder, international undertaking whose mission is to develop and disseminate
globally applicable sustainability reporting guidelines for voluntary use by organisations reporting on the economic,
environmental and social dimensions of their activities, products and services.

Report Content
To ensure a balanced and reasonable presentation of the company's performance, it is important to identify what the
content of the report should cover. Consideration should be given to the purpose and experience of the company and
should also take into account the expectations and interests of the stakeholders of the company

Materiality
The information in a report should cover topics and indicators that reflect the company's significant economic, environmental
and social impacts or that would substantively influence the assessments and decisions of stakeholders.

Stakeholder Inclusiveness
- The reporting entity should identify its stakeholders and explain in the report how it has responded to their reasonable
expectations and interests.
Sustainability Context
- The report should present the entity's performance in the wider context of sustainability.

Completeness
Coverage of the material topics and indicators, and definition of the report boundary, should be sufficient to reflect
significant economic, environmental and social impacts and enable stakeholders to assess the reporting entity's
performance in the reporting period.

Performance Indicators
The GRI guidelines identify numerous performance indicators that an entity can use to show how it has performed over
the period. These indicators are broken down into three categories.

Economic
This category includes protocols covering:
- economic performance;
- market presence; and
- indirect economic impacts.
Environmental
This category covers protocols that include:
-materials
- energy
- biodiversity
- emissions, effluents and waste;
- compliance; and
- transport.

Social
The social category is sub-divided into four categories that deal with the following:
Labour practices and decent work:
employment
labour relations
occupational health and safety
training and education and
diversity and equal opportunity.
Human rights:
investment and procurement
practices
child labour
forced and compulsory labour and
indigenous rights.
Society:
community
corruption
anticompetitive
behaviour and
compliance.
Product responsibility:
customer health and safety
product and service labelling
marketing communications and
customer privacy.
- The list is very extensive, and detailed information needs to be provided to the stakeholders. The production of a GRI-based
report is therefore costly and time-consuming, but it is hoped that in the long-term, it will benefit the company.
Corporate Social responsibility:

The concept of CSR has been around since the early 20th century. Many individuals and organisations have tried to
define what CSR is.
- "Growth in harmony with our environment, preserving our resource base for our economic well-being, and planning for
our children's future." —Gary Filmon
- "Sustainable development requires environmental health, economic prosperity and social equity." —Earth Council
- "Sustainable development is the achievement of continued economic and social development without detriment to the
environment and natural resources. The quality of future human activity and development is increasingly seen as
being dependent on maintaining this balance." —European Foundation for the Improvement of Living and working
Conditions
- These statements highlight that CSR is about the environment, economy and social responsibility. This is what the GRI
has taken forward in its mission to try to get some form of corporate responsibility amongst organisations.
Criticisms of CSR
- Some would argue that CSR hinders the workings of a free
marketplace.
- They argue that any improvements in health, longevity or infant mortality have been created by economic growth, which
they attribute to free enterprise.
- This group would say that an entity pays its taxes to government to ensure that society and the environment are
not adversely affected by business activities.
- There is another group who argue that the only reason companies follow any form of CSR is for purely cynical reasons
(e.g. as a public relations exercise).
- They would quote examples of where companies have spent a lot of time and money on promoting CSR policies and their
commitment to sustainable development on the one hand, while damaging revelations about business practices emerge
on the other.
- MacDonald's, Shell and The Body Shop have all been involved in incidences of possible unethical business practices while
trying to promote themselves as good corporate citizens.
Integrated Reporting:

charged with governance and the ability of management to monitor, manage and communicate the full complexity of the
value-creation process and how this contributes to the success of the organisation
over time.
- The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard
setters, the accounting profession and non-government organisations. It has a vision of a business environment in
which integrated thinking is ingrained in mainstream business practice, in both public and private sectors. This would be
facilitated by integrated reporting.
- The IIRC launched a new international framework for integrated reporting in December 2013. The document can be
downloaded from the IIRC’s website, www.theiirc.org.
- A primary motivation behind the progress towards integrated reporting is that financial information alone is insufficient as
an indicator of the long-term sustainability of a business.
- Integrated reporting combines financial and non-financial information in one report with the goal of maximising the
value of information provided to stakeholders with a variety of interests in an organisation.
- Accounting for the sustainability of an organisation is important for the organisation and for those who provide
financial capital to an organisation, as:
- An organisation needs a reporting environment that is conducive to comprehending and articulating its strategy
to provide focus and drive internally and attract financial capital for investment.
-Investors need to understand how the strategy being pursued creates value over time.
- The goals of integrated reporting are:
- to improve the quality of information available to providers of financial capital;
- to promote a more cohesive and efficient approach to corporate reporting that better reflects all of the factors
that materially affect the ability of an organisation to create value over time;
- to enhance accountability and stewardship for all forms of capital;
- to promote the understanding of the interdependencies among the various capitals; and
- to support integrated thinking in decision-making and actions which create value over the short, medium and
long term.
The International <IR> Framework
The purpose of the framework is to provide principles and content elements that help:
- to shape the information provided; and
- to explain why the inclusion of the information provided is important.
- Although the framework is written to be specifically applicable to for-profit companies of any size in the private sector, it can
be adapted by not-for-profit and public sector organisations.
- Any communication which claims to be an integrated report written in conjunction with the international framework should
- reliable information is not available or
- specific legal requirements prohibit inclusion of information; or
- disclosure of information would cause significant competitive harm.
- An integrated report should include eight content elements. The content elements are provided in the form of questions
which can be categorised
Alternative Definitions of Capital
Integrated reporting results in a more expansive coverage of information than does traditional financial reporting. Integrated
reporting more clearly demonstrates an organisation's use of and dependence on different resources and relationships or
"capitals“ and the organisation's access to and effect on them.*
Financial: The pool of funds that is:
available for use in the production of goods or provision of services; or
- obtained through financing.
- Manufactured: Manufactured physical objects that are distinct from natural physical objects (e.g. buildings,
equipment and infrastructure).
- Intellectual: Organisational, knowledge-based intangibles.
- Human: People's competencies, capabilities and experience and their motivations to innovate.
- Social and Relationship: The institutions and the relationship within and between communities, groups of
stakeholders and other networks, and the ability to share information to enhance individual and collective well-being.
Natural: All renewable and non-renewable environmental resources and processes that provide goods or services
that support the past, current or future prosperity of an organisation.
Guiding Principles
The guiding principles provide the foundation for how an organisation should consider information to be included in
the report and how information should be presented. These principles are:
A. Strategic focus and future orientation: The report should provide insight into the organisation's strategy and how it
relates to:
- the organisation's ability to create value over time; and
- its use and effect on the identified capitals.
B. Connectivity of information: The report should demonstrate connectivity between the factors that affect the organisation's
ability to create value over time.
C. Stakeholder relationships: The report should provide insight into the nature and quality of the organisation's relationships
with its key stakeholders.
D Materiality: The report should disclose information about items which significantly affect the organisation's ability to
create value over time.
E. Conciseness: The report should be focused and avoid superfluous information that would not be relevant to
stakeholders.
F. Reliability and completeness: The report should reflect all material items (both positive and negative) affecting the
organisation and be free from material error.
G. Consistency and comparability: Information contained in an integrated report should be consistent over time and
presented in a way which can be compared to other organisations.
Content Elements
The content elements are fundamentally linked to each other and not mutually exclusive.

The goal of the integrated report is not to necessarily address each content element (as a "checklist") but to ensure that the
content elements are addressed in a way that demonstrates that the connections between them are logical when
considering the circumstances of the organisation. The content element categories and the question to be addressed in the
integrated report when considering each
category are as follows:
A. Organisational overview and external environment:
What does the organisation do and what are the circumstances under which it operates?
B. Governance: How does the organisation's governance or leadership structure support its ability to create value
over time?
C. Business model: What is the organisation's business model?
D. Risks and opportunities: What are the specific risks and opportunities that affect the organisation's ability to create
value over time, and how is the organisation dealing with these risks and opportunities?
E. Strategy and resource allocation: Where does the organisation want to go, and how does it intend to get
there?
F. Performance: To what extent has the organisation achieved its strategic objectives for the period, and what
are its outcomes in terms of effects on the capitals?
G. Outlook: What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy,
and what are the potential implications for its business model and future performance?integrated report, and how are such i
issues quantified or evaluated?

H. Basis of preparation and presentation: How does the organisation determine the issues to include in the
 Environmental Accounting

Accounting:

Environmental accounting can be considered a subset of accounting, as it aims to incorporate both economic and
environmental information into corporate reporting.

- An environmental accounting system identifies measures and communicates costs from a company's actual or potential
impact on the environment. Costs can include clean-up costs, environmental fines and taxes, purchase of pollution
prevention technologies and waste management costs.

- The system not only measures effects on the environment In monetary terms, but would also consider ecological accounting
measures and their impact on the environment. These measures would include levels of waste products and the
amount of energy consumed

Environmental Management Accounting

-This is used by companies to make internal business strategy decisions.

-It involves the identification, collection, analysis and use of two types of information for internal decision-making:
-physical information on the use, flows and fates of energy, water and materials, including waste; and
- monetary information on environmentally related costs, earnings and savings.

Environmental Financial Accounting

- This is used to provide information needed by external stakeholders on a company's financial status and how it is
interacting with the environment.

Reasons for Environmental Accounting

- There are a number of reasons why an entity may adopt environmental accounting within its accounting systems:
- a reduction of environmental costs
- the identification of environmental costs or benefits that previously may have been overlooked
- possible revenue generation opportunities
- improved environmental performance may have a positive effect on employees health and enhance the success of the
business
- it may lead to more accurate costing and pricing of products
- it could give competitive advantages as customers may prefer environmentally-friendly products
- it can support the development and running of an environment management system, which may be required
by regulation for some types of businesses.
Global reporting Initiative:

GRI is a long-term, multi-stakeholder, international undertaking whose mission is to develop and disseminate
globally applicable sustainability reporting guidelines for voluntary use by organisations reporting on the economic,
environmental and social dimensions of their activities, products and services.

Report Content
To ensure a balanced and reasonable presentation of the company's performance, it is important to identify what the
content of the report should cover. Consideration should be given to the purpose and experience of the company and
should also take into account the expectations and interests of the stakeholders of the company

Materiality
The information in a report should cover topics and indicators that reflect the company's significant economic, environmental
and social impacts or that would substantively influence the assessments and decisions of stakeholders.

Stakeholder Inclusiveness
- The reporting entity should identify its stakeholders and explain in the report how it has responded to their reasonable
expectations and interests.
Sustainability Context
- The report should present the entity's performance in the wider context of sustainability.

Completeness
Coverage of the material topics and indicators, and definition of the report boundary, should be sufficient to reflect
significant economic, environmental and social impacts and enable stakeholders to assess the reporting entity's
performance in the reporting period.

Performance Indicators
The GRI guidelines identify numerous performance indicators that an entity can use to show how it has performed over
the period. These indicators are broken down into three categories.

Economic
This category includes protocols covering:
- economic performance;
- market presence; and
- indirect economic impacts.
Environmental
This category covers protocols that include:
-materials
- energy
- biodiversity
- emissions, effluents and waste;
- compliance; and
- transport.

Social
The social category is sub-divided into four categories that deal with the following:
Labour practices and decent work:
employment
labour relations
occupational health and safety
training and education and
diversity and equal opportunity.
Human rights:
investment and procurement
practices
child labour
forced and compulsory labour and
indigenous rights.
Society:
community
corruption
anticompetitive
behaviour and
compliance.
Product responsibility:
customer health and safety
product and service labelling
marketing communications and
customer privacy.
- The list is very extensive, and detailed information needs to be provided to the stakeholders. The production of a GRI-based
report is therefore costly and time-consuming, but it is hoped that in the long-term, it will benefit the company.
Corporate Social responsibility:

The concept of CSR has been around since the early 20th century. Many individuals and organisations have tried to
define what CSR is.
- "Growth in harmony with our environment, preserving our resource base for our economic well-being, and planning for
our children's future." —Gary Filmon
- "Sustainable development requires environmental health, economic prosperity and social equity." —Earth Council
- "Sustainable development is the achievement of continued economic and social development without detriment to the
environment and natural resources. The quality of future human activity and development is increasingly seen as
being dependent on maintaining this balance." —European Foundation for the Improvement of Living and working
Conditions
- These statements highlight that CSR is about the environment, economy and social responsibility. This is what the GRI
has taken forward in its mission to try to get some form of corporate responsibility amongst organisations.
Criticisms of CSR
- Some would argue that CSR hinders the workings of a free
marketplace.
- They argue that any improvements in health, longevity or infant mortality have been created by economic growth, which
they attribute to free enterprise.
- This group would say that an entity pays its taxes to government to ensure that society and the environment are
not adversely affected by business activities.
- There is another group who argue that the only reason companies follow any form of CSR is for purely cynical reasons
(e.g. as a public relations exercise).
- They would quote examples of where companies have spent a lot of time and money on promoting CSR policies and their
commitment to sustainable development on the one hand, while damaging revelations about business practices emerge
on the other.
- MacDonald's, Shell and The Body Shop have all been involved in incidences of possible unethical business practices while
trying to promote themselves as good corporate citizens.
Integrated Reporting:

charged with governance and the ability of management to monitor, manage and communicate the full complexity of the
value-creation process and how this contributes to the success of the organisation
over time.
- The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard
setters, the accounting profession and non-government organisations. It has a vision of a business environment in
which integrated thinking is ingrained in mainstream business practice, in both public and private sectors. This would be
facilitated by integrated reporting.
- The IIRC launched a new international framework for integrated reporting in December 2013. The document can be
downloaded from the IIRC’s website, www.theiirc.org.
- A primary motivation behind the progress towards integrated reporting is that financial information alone is insufficient as
an indicator of the long-term sustainability of a business.
- Integrated reporting combines financial and non-financial information in one report with the goal of maximising the
value of information provided to stakeholders with a variety of interests in an organisation.
- Accounting for the sustainability of an organisation is important for the organisation and for those who provide
financial capital to an organisation, as:
- An organisation needs a reporting environment that is conducive to comprehending and articulating its strategy
to provide focus and drive internally and attract financial capital for investment.
-Investors need to understand how the strategy being pursued creates value over time.
- The goals of integrated reporting are:
- to improve the quality of information available to providers of financial capital;
- to promote a more cohesive and efficient approach to corporate reporting that better reflects all of the factors
that materially affect the ability of an organisation to create value over time;
- to enhance accountability and stewardship for all forms of capital;
- to promote the understanding of the interdependencies among the various capitals; and
- to support integrated thinking in decision-making and actions which create value over the short, medium and
long term.
The International <IR> Framework
The purpose of the framework is to provide principles and content elements that help:
- to shape the information provided; and
- to explain why the inclusion of the information provided is important.
- Although the framework is written to be specifically applicable to for-profit companies of any size in the private sector, it can
be adapted by not-for-profit and public sector organisations.
- Any communication which claims to be an integrated report written in conjunction with the international framework should
- reliable information is not available or
- specific legal requirements prohibit inclusion of information; or
- disclosure of information would cause significant competitive harm.
- An integrated report should include eight content elements. The content elements are provided in the form of questions
which can be categorised
Alternative Definitions of Capital
Integrated reporting results in a more expansive coverage of information than does traditional financial reporting. Integrated
reporting more clearly demonstrates an organisation's use of and dependence on different resources and relationships or
"capitals“ and the organisation's access to and effect on them.*
Financial: The pool of funds that is:
available for use in the production of goods or provision of services; or
- obtained through financing.
- Manufactured: Manufactured physical objects that are distinct from natural physical objects (e.g. buildings,
equipment and infrastructure).
- Intellectual: Organisational, knowledge-based intangibles.
- Human: People's competencies, capabilities and experience and their motivations to innovate.
- Social and Relationship: The institutions and the relationship within and between communities, groups of
stakeholders and other networks, and the ability to share information to enhance individual and collective well-being.
Natural: All renewable and non-renewable environmental resources and processes that provide goods or services
that support the past, current or future prosperity of an organisation.
Guiding Principles
The guiding principles provide the foundation for how an organisation should consider information to be included in
the report and how information should be presented. These principles are:
A. Strategic focus and future orientation: The report should provide insight into the organisation's strategy and how it
relates to:
- the organisation's ability to create value over time; and
- its use and effect on the identified capitals.
B. Connectivity of information: The report should demonstrate connectivity between the factors that affect the organisation's
ability to create value over time.
C. Stakeholder relationships: The report should provide insight into the nature and quality of the organisation's relationships
with its key stakeholders.
D Materiality: The report should disclose information about items which significantly affect the organisation's ability to
create value over time.
E. Conciseness: The report should be focused and avoid superfluous information that would not be relevant to
stakeholders.
F. Reliability and completeness: The report should reflect all material items (both positive and negative) affecting the
organisation and be free from material error.
G. Consistency and comparability: Information contained in an integrated report should be consistent over time and
presented in a way which can be compared to other organisations.
Content Elements
The content elements are fundamentally linked to each other and not mutually exclusive.

The goal of the integrated report is not to necessarily address each content element (as a "checklist") but to ensure that the
content elements are addressed in a way that demonstrates that the connections between them are logical when
considering the circumstances of the organisation. The content element categories and the question to be addressed in the
integrated report when considering each
category are as follows:
A. Organisational overview and external environment:
What does the organisation do and what are the circumstances under which it operates?
B. Governance: How does the organisation's governance or leadership structure support its ability to create value
over time?
C. Business model: What is the organisation's business model?
D. Risks and opportunities: What are the specific risks and opportunities that affect the organisation's ability to create
value over time, and how is the organisation dealing with these risks and opportunities?
E. Strategy and resource allocation: Where does the organisation want to go, and how does it intend to get
there?
F. Performance: To what extent has the organisation achieved its strategic objectives for the period, and what
are its outcomes in terms of effects on the capitals?
G. Outlook: What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy,
and what are the potential implications for its business model and future performance?integrated report, and how are such i
issues quantified or evaluated?

H. Basis of preparation and presentation: How does the organisation determine the issues to include in the
 Indicators of Non financial Performance

So remember this is not a baby paper now so...

Explaining the ratio is just not enough
1. You need to compare (eg to prior periods or industry averages)
2.Then say what the movement/difference is telling you - by using the scenario
- and what this may mean for the company and its stakeholders
3. Now also consider any non-financial consequences? (quality, ethics etc)
4. Any transactions/events in the year that had a significant impact on ratios
5. Any impact of different accounting policies on ratios? (particularly if
comparing to other entities)
A Ratio Analysis Technique
Always see if the ratio has improved or deteriorated (Not 'increased' or 'decreased')
The say why the ratio has improved or deteriorated - here is where you use the scenario
not a textbook!
Finally explain the longer term impact on the company and make a recommendation for
action where appropriate.
EPS
PAT / NO. OF SHARES
EPS means nothing on its own
It always needs to be compared over time
Remuneration packages might be linked to EPS growth, so increasing the pressure on
management to improve EPS, and be an inherent ethical risk
Example:

A company changes its depreciation policy (longer UEL) - in order to reduce depreciation -
and thus increase EPS
Answer
Step 1: State the IFRS knowledge:
An entity should review UEL every year - and any change is a change in accounting
estimate
Changes in accounting estimates only allowed if a result of new information
Step 2: Apply the rule or principle to the scenario
So in the scenario you'd look for things like:
1) Large profits on disposals - a result of too short a useful life previously
2) Other evidence of longer UELs on similar assets
3) Buying periods matching the new UEL
1.Step 3: Explain the ethical issues (if you think this is solely to manipulate the
earnings figure)
2.Threat to objectivity
3.Also non-compliance with IAS 16 and therefore, contravene the fundamental
principle of professional competence.
Ethics note
So far we only looked at the manipulation of earnings
Other examples could include:
Significant sales to related parties and the directors not wanting to disclose details of
the transactions
Directors trying to window dress revenue by offering large incentives to make sales to
un-creditworthy customers or Manipulating estimates to achieve required results.
Step 3: Explain the ethical issues (if you think this is solely to manipulate the earnings
figure)
Threat to objectivity
Also non-compliance with IAS 16 and therefore, contravene the fundamental principle
of professional competence.
Ethics note
So far we only looked at the manipulation of earnings
Other examples could include:
Significant sales to related parties and the directors not wanting to disclose details of
the transactions
Directors trying to window dress revenue by offering large incentives to make sales to
un-creditworthy customers or Manipulating estimates to achieve required results.
Interpret NFPIs
The use of non-financial performance indicators are an additional tool to monitor
performance in not-for-profit organisations.

For example, if the case of a secondary school, some non-financial performance indicators
about the performance of the school would be:
The number of pupils taught
The number of subjects taught per pupil
How many examination papers are taken
The pass rate
The proportion of students which go on to further education
Let’s take a bus service which is non-profit seeking
In fact, its mission is to provide reliable and affordable public transport to the citizens.
It often involves operating services that would be considered uneconomic by the private
sector bus companies.
Let’s have a look at some non-financial performance indicators for the public bus service:
Non-financial performance indicator Importance
% of buses on time Punctuality is important to passengers
% of buses cancelled Reliability is important to passengers
Customer rating of cleanliness of facilities Passengers require good quality service
% of new customers New customers are vital for sustained growth
Employee morale Happy employees are vital for success in a
service business
Example:

Mia’s sville is a town with a population of 100,000 people. The town council of Mia’sville
operates a bus service which links all parts of the town with the town centre. The service is
non-profit seeking and its mission statement is ‘to provide efficient, reliable and affordable
public transport to all the citizens of Mia’sville.’ Attempting to achieve this mission often
involves operating services that would be considered uneconomic by private sector bus
companies, due either to the small number of passengers travelling on some routes or the
low fares charged. The majority of the town council members are happy with this situation
as they wish to reduce traffic congestion and air pollution on Miasville’s roads by
encouraging people to travel by bus rather than by car.
However, one member of the council has recently criticised the performance of the
Miasville bus service as compared to those operated by private sector bus companies in
other towns.
She has produced the following information:
Miasville Bus Service
Summarised Income and
Expenditure Account
Year ending 31 March
2016

$’000 $’000
Passenger fares 1,200
Staff wages 600
Fuel 300
Depreciation 280
1,180
Surplus 20
Summarised Balance Sheet as
at 31 March 2016.
$’000 $’000
Fixed assets (net) 2,000
Current assets
Stock 240
Cash 30
270
Less creditors due within one (60)
year
Net current assets 210
Total assets less liabilities 2,210
Ordinary share capital (£1 2,000
shares)
Reserves 210
2,210
Operating Statistics for the year ended 31 March 2016
Total passengers carried = 2,400,000 passengers
Total passenger miles travelled = 4,320,000 passenger miles
Private sector bus companies Industry average ratios Year ended 31 March 2016.
Return on capital employed = 10%
Return on sales (net margin) = 30%
Asset turnover =0·33 times
Average cost per passenger mile = 37·4p
Required:
(a) Calculate the following ratios for the Cowsville bus service
(i) Return on capital employed (based upon opening investment);
(ii) Return on sales (net margin);
(iii) Asset turnover;
(iv) Average cost per passenger mile.
(b) Explain the meaning of each ratio you have calculated. Discuss the performance
of the Cowsville bus service using the four ratios.
Solution:
(a) Ratios
Return on Capital employed
Operating Profit / Capital employed x 100 = 20 / 2,210 x 100 = 0.9%

Return on sales (net margin)

Operating profit / Sales x 100 = 20 / 1,200 x 100 = 1.7%
Asset Turnover
Sales / Capital employed = 1,200 / 2,210 = 0.54 times
Average cost per passenger mile
Operating cost / Passenger miles = 1,180,000 / 4,320,000 = 27.3p

Tutorial Note: the term profit is used throughout this answer; in the public sector it
would normally be referred to as surplus.
(b) Meaning of each ratio
Return on Capital employed.
This ratio measures the profits earned on the long-term finance invested in the
business. The Cowsville bus service is only generating an annual profit of 0.9p for every
£1 invested. The equivalent figure for private bus companies is 10p.
Return on sales.
This ratio measures the profitability of sales. For the Cowsville bus services 1.7p of
every £1 of sales is profit. The equivalent figure for private bus companies is 30p.
Asset turnover.
This ratio measures a firm’s ability to generate sales from its capital employed. The
Cowsville bus service generates sale of 54p for every £1 of capital employed. The
equivalent figure for private bus companies is only 33p.
Average cost per passenger mile.
This measures the cost of transporting passengers per mile travelled. The Cowsville bus
service incurs a cost of 27.3p per passenger mile as compared to 37.4p for private bus
companies.
Performance of the bus service
On first sight the Cowsville bus service appears to have performed poorly as compared
to private sector bus companies.
It has a low return on capital employed, largely due to a poor return on sales.
This could be explained by the low fares charged.
On the positive side its ability to generate sales is good and its buses to be more
intensively used than private sector equivalents.
However, if we take into account the objectives of the council and the mission
statement of the bus service it is possible to draw a different conclusion.
Private sector companies usually seek to maximise investor wealth.
The council appears to be trying to encourage usage of public transport in an attempt to
reduce traffic congestion.
To do this it charges low fares, resulting in a poor return on sales and a low return on
capital employed.
However, the low fares, and willingness to operate uneconomic routes has led to a
high asset turnover, implying above industry average usage of the bus service.
In turn this greater usage of the service leads to a lower cost per passenger mile as
fixed costs are spread more thinly over a larger number of passenger miles.
Before drawing any firm conclusions it would be sensible to compare the
performance of the Cowsville bus service with that of bus operators pursuing similar
objectives.

(Tutorial Note: If we compare average fare per passenger mile we can see that the
Cowsville bus service charges lower fares than the private sector.
Cowsville fare per passenger mile = passenger fares ÷ passenger miles
= £1,200,000 ÷ 4,320,000 = 27.8p
Private sector = Average cost ÷ (1 - net margin)
= 37.4p ÷ (1 – 0.3) = 53.4p
Cowsville charges lower fares per passenger mile. Which may explain its higher load
factor and therefore its lower cost per passenger mile)
Non financial Reporting:

This is concerned with business ethics and accountability to stakeholders

Companies should look after ALL shareholders and be transparent in its dealings with
them when compiling corporate reports.
CSR requires directors to look at the aims and purposes of the company and not
assume profit to be the only motive for shareholders.
Arrangements should be put in place to ensure that the business is conducted in a
responsible manner. This includes environmental and social targets, monitoring of
these and continuous improvement.
There is pressure now for companies to show more awareness and concern, not only
for the environment but for the rights and interests of the people they do business
with.
Governments have made it clear that directors must consider the short-term and long-
term consequences of their actions, and take into account their relationships with
employees and the impact of the business on the community and the environment.
CSR requires the directors to address strategic issues about the aims, purposes, and
operational methods of the organisation, and some redefinition of the business model
that assumes that profit motive and shareholder interests define the core purpose of
the company.
The reporting of the company’ ’ s effect on society at large
It expands the traditional role that company´’ss only provide for the shareholders.
Why prepare a social report?
Build their reputation on it (e.g. body shop) Society expects it (Shell)
Long term it will increase profits Fear that governments may force it otherwise
How companies interact responsibly with society Provide fair pay to employees
Safe working environment Improvements to physical infrastructure in which it operates

Is it against the maximising shareholder wealth principle?

Organisations are rarely controlled by shareholders as most are passive investors.
This means large companies can manipulate markets - so social responsibility is a way of
recognising this, and doing something to prevent it happening from within.
Also, of course, business get help from outside and so owe something back. They benefit
from health, roads, education etc. of the workforce and suppliers and customers.
This s‘ ocial contract’means that the companies then take on their own social responsibility
Transparency in Corporate Reports
Stakeholders are demanding more from entities.
Investors in particular need to know what they are investing in ethically, hence the
demand for transparency in corporate reports. Stakeholders need to understand how
an entity does business.
For example,
EU law requires large companies to disclose certain information on the way they
operate and manage social and environmental challenges.
This helps investors, consumers, policy makers and other stakeholders to evaluate the
non-financial performance of large companies and encourages these companies to
develop a responsible approach to business.
Companies are required to include non-financial statements in their annual reports
from 2018 onwards.
Transparency & Non-Financial Standards
This has become more important recently as stakeholders are interested in:
Management of business
Future prospects
Environmental concerns
Social responsibility of company

How is this reported ?

Operating and Financial Review (OFR)
Looks at results and talks about future prospects
Corporate Governance Report
Looks at how the company is directed and controlled
Environmental and social report
Looks at the environment and social concerns and the sustainability of these
Management Commentary
Looks at the trends behind the figures and what is likely to affect future
performance and position
IFRS Practice Statement Management Commentary
On 8 December 2010 the IASB issued the IFRS Practice Statement Management
Commentary.
The Practice Statement provides a broad, non-binding framework for the presentation
of management commentary that relates to financial statements prepared in
accordance with IFRS.
The Practice Statement is not an IFRS. Consequently, entities are not required to comply
with the Practice Statement, unless specifically required by their jurisdiction.
Management commentary is a narrative report that provides a context within which to
interpret the financial position, financial performance and cash flows of an entity.
It also provides management with an opportunity to explain its objectives and its
strategies for achieving those objectives.
Management commentary encompasses reporting that jurisdictions may describe as
management’s discussion and analysis (MD&A), operating and financial review (OFR),
or management’s report.
Management commentary fulfils an important role by providing users of financial
statements with a historical and prospective commentary on the entity’s financial
position, financial performance and cash flows.
It serves as a basis for understanding the management’s objectives and strategies for
achieving those objectives.
The Practice Statement permits entities to adapt the information provided to particular
circumstances of their business, including the legal and economic circumstances of
individual jurisdictions.
This flexible approach will generate more meaningful disclosure about the most
important resources, risks and relationships that can affect an entity’s value, and how
they are managed.
The purpose of an OFR is to assist users, principally investors, in making a forward-
looking assessment of the performance of the business by setting out management’s
analysis and discussion of the principal factors underlying the entity’s performance and
financial position.
Typically, an OFR would comprise some or all of the following:
Description of the business and its objectives;
Management’s strategy for achieving the objectives;
Review of operations;
Commentary on the strengths and resources of the business;
Commentary about such issues as human capital, research and development
activities, development of new products and services;
Financial review with discussion of treasury management, cash inflows and
outflows and current liquidity levels.
The publication of such a statement would have the following advantages:
It could be helpful in promoting the entity as progressive and as eager to
communicate as fully as possible with investors;
It could be a genuinely helpful medium of communicating the entity’s plans and
management’s outlook on the future;

However, there could be some drawbacks:

If an OFR is to be genuinely helpful to investors, it will require a considerable
input of senior management time.
This could be costly, and it may be that the benefits of publishing an OFR would
not outweigh the costs;
There is a risk in publishing this type of statement that investors will read it in
preference to the financial statements, and that they may therefore fail to read
important information.
Environmental, Social, and ethical requirement of Performance Measurement

IFRS
No required disclosure requirements for environmental and social matters.
However:
Provisions for environmental damage are recognised under IAS 37
IAS 1 requires disclosure to a proper understanding of financial statements.

Voluntary Disclosure
Voluntary disclosure and the publication of environmental reports has now become
the norm for quoted companies in certain countries as a result of pressure from
stakeholder groups to give information about their environmental and social
'footprint'.
The creation of ethical indices has added to this pressure - for example the FTSEA
Good index in the UK, and the Dow Jones Sustainability Group Index in the US.
Sustainability Reporting
This integrates environmental, social and economic performance data
The most well-known is the Global Reporting Initiative.
The GRI is a long-term, multi-stakeholder, international not-lor-profit organisation
whose mission is to develop and disseminate globally applicable GRI Standards on
sustainability reporting for voluntary use by organisations.

Environmental Reporting
This is the disclosure of environmental responsibilities and activities
Increasing awareness of environmental issues and pressure from non governmental
organisations (NGOs) make this vital to an entity
Social Reporting
This discloses the social impact of a business's activities:
Eg.
Charity donations
Giving employees time to support charities
Employee satisfaction levels and remuneration issues;
Community support; and
Stakeholder consultation information

Framework for environmental and sustainability reporting

The idea here is that everything must be able to continue in the future
We must not use up resources, social or environmental, without replacing them
Any that is not replaced is called the social or environmental footprint
Reporting Sustainability
Voluntary
Increasingly popular (often put on website too)
Sometimes called ‘the triple bottom line’ (Profits, people and planet)

Environmental Reporting
Can be in the published annual report
Can be a separate report
No mandatory standards to follow
Covers inputs (Using up of resources)
Covers outputs (Pollution etc.)
Its voluntary basis causes problems:
Users can disclose the good but not the bad
No external influence means less confidence in the report
Benefits of an Environmental Report
Can highlight inefficiencies
Identifies opportunities to reduce waste
Can create a positive image as a good corporate citizen
Increased consumer confidence in it
Employees like it
Investors look for environmental concerns nowadays
Reduces risk of litigation against it
Can give competitive edge
This Book Is Written By Zeeshan Hasan The Lecturer of Various ACCA papers Since more
then Seven Years.
Zeeshan Hasan Also Possess the Working Experience at Big Four Accountancy Firm and In
corporate Sector
For Contact
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