DipIFR Textbook

DipIFR Course notes
Syllabus A: International sources of authority .............................................2

Syllabus A1. IASB and the regulatory framework ................................................................2
Syllabus B: Elements of financial statements ...........................................25
Syllabus B1. Revenue recognition ..................................................................................25
Syllabus B2. Property, plant and equipment ....................................................................43
Syllabus B3. Impairment of assets ..................................................................................88
Syllabus B4. Leases .....................................................................................................96
Syllabus B5. Intangible assets and goodwill ................................................................... 119
Syllabus B6. Inventories...............................................................................................128
Syllabus B7. Financial instruments ................................................................................130
Syllabus B8. Liabilities – provisions, contingent assets and liabilities ..................................178
Syllabus B9. Accounting for employment and post-employment benefits..........................185
Syllabus B10. Tax in financial statements .......................................................................195
Syllabus B11. The effects of changes in foreign currency exchange rates .........................212
Syllabus B12. Agriculture .............................................................................................217
Syllabus B13. Share-based payment ...........................................................................219
Syllabus B14. Exploration and evaluation expenditures ...................................................244
Syllabus B15. Fair value measurement..........................................................................250
Syllabus C: Presentation and additional disclosures ..............................253
Syllabus C1. Presentation of the SFP, and statement of P/L and OCI ...............................253
Syllabus C2. Earnings per share .................................................................................. 270
Syllabus C3. Events after the reporting date ..................................................................283
Syllabus C4. Accounting policies, changes in accounting estimates ................................286
Syllabus C5. Related party disclosures ......................................................................... 289
Syllabus C6. Operating segments ................................................................................292
Syllabus C7. Reporting requirements of SMEs ...............................................................301
Syllabus D: Preparation of external financial reports...............................313
Syllabus D1. Preparation of group consolidated external reports ......................................313
Syllabus D2. Business combinations – intra-group adjustments .......................................350
Syllabus D3. Business combinations – fair value adjustments ..........................................354
Syllabus D4. Business combinations – associates and joint arrangements........................365
Syllabus D5. Complete disposal of shares in subsidiaries ................................................375
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Syllabus A: International sources of authority
Syllabus A1. IASB and the regulatory framework
Syllabus A1. Discuss the need for international financial reporting standards and possible
barriers to their development
A regulatory framework is needed to ensure relevant

and reliable information is given to users
A regulatory framework regulates the behaviour of companies towards their investors
They increase users’ understanding of, and their confidence, in financial statements
Benefits of adopting IFRS

• They are high-quality and transparent global standards that are intended to
achieve consistency and comparability
• Companies that use IFRS and have their financial statements audited in
accordance with International Standards on Auditing (ISA) will have an enhanced
status and reputation
• The International Organisation of Securities Commissions (IOSCO) recognise

IFRS for listing purposes
Thus companies that use IFRS need produce only one set of financial statements
for any securities listing for countries that are members of IOSCO.
• Companies that own foreign subsidiaries will find the process of consolidation
simplified if all their subsidiaries use IFRS
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• Companies that use IFRS will find their results are more easily compared with
those of other companies that use IFRS
This would help the company to better assess and rank prospective investments
in its foreign trading partners
What are the challenges of adopting IFRS to national standards?
1. Laws and regulations
2. IFRS training to finance staff and regulators
3. Greater complexity in the financial reporting process
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Syllabus A1. Explain the structure and constitution of the IASB and the standard setting
process
The role of the regulatory systems
Introduction
Limited liability companies are required by law to prepare and publish financial
statements annually.
The form and content of these accounts are primarily regulated by national
legislation.
They must also comply with International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs).
Accounting Standards
International Accounting Standards were issued by the IASC from 1973 to 2000.
They provide guidance as to how items should be shown in a set of financial

statements both in terms of their monetary value and any other disclosures.
They are a single set of high quality, understandable and enforceable global
standards.
The IASB replaced the IASC in 2001.
Since then, the IASB has amended some IASs and has proposed to amend others,
has replaced some IASs with new International Financial Reporting Standards, and
has adopted or proposed certain new IFRSs on topics for which there was no
previous IAS.
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Accounting standards were developed for two main reasons
• To reduce subjectivity
• To achieve comparability between different organisations
Financial statements may not be described as complying with IFRSs unless they
comply with all of the requirements of each applicable standard and each applicable
interpretation.
The IFRS Foundation (IFRSF)
The IFRS Foundation is an independent organisation having two main bodies, the
Trustees and the International Accounting Standards Board (IASB), as well as the
IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRS IC).
The IFRSF is governed by a board of 22 trustees.
These trustees appoint the members of the IASB, IFRS IC and the IFRS AC.
They also review annually the strategy of the IFRSF and the IASB and its
effectiveness, including consideration, but not determination, of the IASB's agenda.
These trustees also raise the funds necessary to support the IFRSF.
The International Accounting Standards Board (IASB)
The International Accounting Standards Board (IASB) is an independent, privately-

funded accounting standard-setter based in London, UK.
There are 14 Board members, each with one vote.
The IASB is committed to developing, in the public interest, a single set of high
quality, understandable and enforceable global accounting standards that require
transparent and comparable information in general purpose financial statements.
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In addition, the IASB co-operates with national accounting standard-setters to
achieve convergence in accounting standards around the world.
How are standards developed?
International Financial Reporting Standards (IFRSs) are developed through an

international consultation process, the "due process” that involves interested
individuals and organisations from around the world.
The due process comprises six stages:
1. IAASB reviews auditing developments and takes suggestions from interested

parties.
2. Planning the project, including forming a 'working group' to advise the IASB and
its staff on the project;
3. Developing and publishing the discussion paper for public comment;
4. Draft standard produced and commented on by interested parties for a period of

120 days (Exposure period).
5. Project task force considers comments and amendments made if appropriate.
If changes significant there may be another exposure period.
6. Standard finalised and approved by meeting of IAASB at which there must be a

minimum of 12 members.
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Syllabus A1. Understand and interpret the Financial Reporting Framework
The IASB framework is not a standard nor does it

override any standards
Definition
It sets out the concepts which underlie the accounts. It means that basic principles
do not have to re-debated for every new standard.
• It is..
‘a constitution, a coherent system of interrelated objectives and fundamentals
which can lead to consistent standards and which prescribe the nature, function
and limits of financial accounting and financial statements’
What’s its purpose?
The IASB’s Framework for the Preparation and Presentation of Financial Statements
describes the basic concepts by which financial statements are prepared:
• Serves as a guide in developing accounting standards.
• Serves as a guide to resolving accounting issues that are not addressed directly
in a standard.
(In fact IAS 8 requires management to consider the definitions, recognition criteria,
and measurement concepts for assets, liabilities, income, and expenses in the
Framework.)
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What does it ‘look’ like?
It includes the following:
1. The objective of financial statements
2. Underlying assumptions
3. Qualitative characteristics of good information
4. Elements of FS
5. Recognition of Elements
6. Measurement of Elements
7. Concepts of Capital
More on these in other sections
Arguments for a conceptual framework
• It may seem a very theoretical document but it has highly practical aims.
• Without a framework then standards would be developed without consistency

and also the same basic principles would be continually examined. Perhaps even
sometimes with differing conclusions.
• The IASB therefore becomes the architect of financial reporting with a framework
as solid foundations upon which everything else relies.
• Also without such a framework then a rules based system tends to come in
instead. The rules get added to as situations arise and finally become
cumbersome and unadaptable.
• It also prevents political lobbyists from changing pressurising changes in

standards as the principles have already been agreed upon.
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So a conceptual framework basically provides a framework for:
1. what should be brought into the accounts
2. when it should be brought into the accounts and
3. at how much it should be measured
Arguments against a conceptual framework
• Financial Statements are prepared for many different users - can one set of
principles be agreed by all?
• Perhaps different users need different information and hence different

measurement bases and principles
• Even with framework principles - standards go through a huge analysis process,

for example the revenue recognition exposure draft has now been re-exposed!
GAAP & the framework
• In some ways the framework tries to codify the current GAAP into new standards
- or at least current thinking
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Discuss ‘fair presentation’ and the accounting concepts/principles
Chapter 1: The Objective of Financial Reporting
Definition
The objective is to provide financial information that is useful to present and potential
equity investors, lenders and other creditors in making decisions.
The degree to which that financial information is useful will depend on its qualitative
characteristics.
A few observations about the objective:
• Wide Scope
Its scope is wider than financial statements. It is the objective of financial
reporting in general.
• Users
Financial reporting is aimed primarily at capital providers. That does not mean
that others will not find financial reports useful. It is just that, in deciding on the
principles for recognition, measurement, presentation, and disclosure, the
information needs of capital providers are paramount.
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• Decision usefulness & stewardship
Decision usefulness to capital providers is the overriding purpose of financial
reporting, as well as assessing the stewardship of resources already committed
to the entity.
The ability of management to discharge their stewardship responsibilities

effectively has an effect on the entity’s ability to generate net cash inflows in the
future, implying that potential investors are also assessing management
performance as they make their investment decision.
• Capital providers - main users
The Framework identifies equity investors, lenders and other creditors as ‘capital
providers’. Governments, their agencies, regulatory bodies, and members of the
public are identified as groups that may find the information in general purpose
financial reports useful. However, these groups have not been identified as
primary users.
Limitations of FS
The Boards note that users of financial reports should be aware of the limitations of
the information included in such reports – specifically, estimates and the use of
judgement.
Additionally, financial reports are but one source of information needed by those who
make investment decisions. Information about general economic conditions, political
events and industry outlooks should also be considered.
Financial reporting should also include management’s explanations, since

management knows more about the entity than external users.
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Chapter 2: The Reporting entity
The chapter on the Reporting Entity will be inserted once the IASB has completed its
re-deliberations following the Exposure Draft ED/2010/2 issued in March 2010.
Chapter 3: Qualitative Characteristics of Useful Financial Information
Main Principle
Financial information is useful when it is relevant and represents faithfully what it

purports to represent. The usefulness of financial information is enhanced if it is
comparable, verifiable, timely and understandable.
Fundamental characteristics:
i. Relevance
Relevant information makes a difference in the decisions made by users.
Therefore it must have a predictive value, confirmatory value, or both. The

predictive value and confirmatory value of financial information are interrelated.
Materiality is an entity-specific aspect of relevance. It is based on the nature and/

or size of the item relative to the financial report.
ii. Faithful representation
General purpose financial reports represent economic phenomena in words and

numbers.
To be useful, financial information must not only be relevant, it must also

represent faithfully the phenomena it purports to represent.
This maximises the underlying characteristics of completeness, neutrality and

freedom from error.
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Enhancing characteristics:
1. Comparability (including consistency)
2. Timeliness
3. Reliable information
4. Verifiability
Helps to assure users that information represents faithfully the economic

phenomena that it purports to represent.
It implies that knowledgeable observers could reach a general consensus

(although not necessarily absolute agreement) that the information does
represent faithfully the economic phenomena.
5. Understandability
Enables users with a reasonable knowledge to comprehend the information.
Understandability is enhanced when the information is:
• Classified
• Characterised
• Presented clearly and concisely
However, relevant information should not be excluded solely because it may be too
complex.
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Two constraints that limit the information provided in useful financial
reports:
1. Materiality
Information is material if its omission or misstatement could influence the

decisions that users make on the basis of an entity’s financial information.
Materiality is not a matter to be considered by standard-setters but by preparers

and their auditors.
2. Cost-benefit
The benefits of providing financial reporting information should justify the costs of
providing that information.
Potential Problems
Decision usefulness seen as more important than the giving information about how
well the company is being looked after (Stewardship).
Although it may be said that stewardship is taken into account when talking about
decision usefulness - perhaps there should be a more specific mention of it.
Faithful representation has replaced reliability.
This is even more vague and could lead to problems regarding treatment of some
items where substance over form exists
Should it encompass not for profits also?
Why the split between fundamental and enhancing characteristics?
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Accounts must represent faithfully the phenomena it

purports to represent
Faithful Representation means..
1. Substance over form
Faithful representation means capturing the real substance of the matter.
2. Represents the economic phenomena
Faithful means an agreement between the accounting treatment and the

economic phenomena they represent.
The accounts are verifiable and neutral.
3. Completeness, Neutrality & Verifiability
Examples
Sell and buy back = Loan
An entity may sell some inventory to a finance house and later buy it back at a price
based on the original selling price plus a pre-determined percentage. Such a
transaction is really a secured loan plus interest. To show it as a sale would not be a
faithful representation of the transaction.
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Convertible Loans
Another example is that an entity may issue convertible loan notes. Management
may argue that, as they expect the loan note to be converted into equity, the loan
should be treated as equity. They would try to argue this as their gearing ratio would
then improve. However, it is recorded as a loan as primarily this is what it is.
As noted previously, simply following rules in accounting standards can provide for
treatment which is essentially form over substance. Whereas, users of accounts
want the substance over form.
The concept behind faithful representation should enable creators of financial

statements to faithfully represent everything through measures and descriptions
above and beyond that in the accounting standard if necessary.
Limitations to Faithful Representation
1. Inherent uncertainties
2. Estimates
3. Assumptions
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Recognition and measurement
Recognition
Please remember this!!!
For an item to be recognised in the accounts it must pass three tests:
1. Meet the definition of an asset/liability or income/expense or equity
2. Be probable
3. Be reliably measurable
Definitions
• Asset
An asset is a resource controlled by the enterprise as a result of past events and

from which future economic benefits are expected to flow to the enterprise.
• Liability
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
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• Equity
Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities.
• Income
Income is increases in assets (or decreases of liabilities) that result in increases

in equity, other than contributions from equity participants.
• Expense
Expenses are decreases in assets or (incurrences of liabilities) that result in

decreases in equity, other than distributions to equity participants.
How this is applied in specific cases?
1. Factoring of receivables
Where debts are factored, the firm sells its debts to the factor. This may be a true
sale or just a means of getting cash in and so in effect a loan.
It all depends on whether the debtors sold are still an asset to the company.
The definition of an asset refers to economic benefits so whoever receives those

benefits should hold the debtors as an asset.
• Example
RCA (that fine academy) sells some of its debtors to a factor. The terms of
the arrangement are as follows:
Factor charges 5% Interest on all outstanding debts every month
Any bad debts are transferred back to RCA for a refund.
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• Solution
The best way to view this is by looking at who takes the risks. The risk of a
debtor is that they pay slowly and/or go bad.
The 5% interest charge means that if the debtor is a slow payer, RCA pays
5% so takes the risk. Equally if the debt goes bad RCA takes the risk. So they
remain RCA debtors. The money from the so called sale is treated as a loan.
As the debtors pay the factor that is the loan being paid off.
2. Consignment Stock
This is where inventories are held by one party but are owned by another (for
example a manufacturer and car dealer arrangement)
Often used in a ‘sale or return’ basis.
• Issue
The issue is - to whom does the stock belong? Not the legal form but the
substance. Again look at who is taking most of the risks and it is they who
should have the stock on their SFP.
• Risks
Who takes the risk of obsolescence?
Who takes the risk of the sell on price falling?
Who takes the risk of the stock taking a long time to sell?
Example
Here’s an agreement between a car manufacturer (m) and a car dealer (d)
The price of vehicles is fixed at the date of transfer. (Price fall risk taken by d)
D has no right to return unsold cars (obsolescence risk taken by d)
D pays m 2% a month on all unsold cars. (slow moving stock risk taken by d)
Therefore the cars should be on D’s statement of financial position.
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Syllabus A1. Explain the progress towards international harmonisation
Convergence
Norwalk agreement
In the US the FASB issues their accounting standards and recently they also
recognised the need to follow a 'principles-based' approach to standard-setting (as
the IASB has always done)
Common conceptual framework
In 2004 the IASB and FASB agreed to develop a common conceptual framework
The IASB maintains a policy of dialogue with other key standard setters around the
world, in the interest of harmonising standards across the globe.
Partner standard setters are often involved in the development of Discussion Papers
and Exposure Drafts on new areas.
However, many fundamental disagreements exist between countries and

organisations about the way forward.
A particular problem is the different reporting needs in developed (and non-

developed) countries
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Barriers to harmonisation
• Different purposes of financial reporting - For tax assessment or investor

decision-making?
• Different legal systems
• Different user groups - In the USA investor and creditor groups are given
prominence, while in Europe employees enjoy a higher profile.
• Developing countries - these are lagging behind and need time to get the
principles in place first
• Nationalism - ‘ours is better than yours’
• Circumstances - such as hyperinflation, civil war, currency restriction
• The lack of strong accountancy bodies - so lacking a will and drive for
harmonisation
Advantages of global harmonisation
1. Investors can easily compare international companies and investment across

borders is growing
2. Multinational companies would be easier to control and get investment, especially

the consolidation of foreign subsidiaries
3. A reduction in audit costs

Governments of developing countries would save time and money if they could
adopt international standards
4. Tax authorities - It will be easier to calculate the tax liability of investors, including
multinationals who receive income from overseas sources.
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Syllabus A1. Account for the first-time adoption of International Financial Reporting Standards.
Here we look at 1st time adoption of IFRS
An entity’s first IFRS financial statements must:
• be transparent for users and comparable over all periods presented
• provide a suitable starting point for IFRS accounting
• be generated at a cost that does not exceed the benefits
An opening IFRS based SFP (using the same accounting policies as the future IFRS
based FS) is needed at the date of moving to IFRSs. This is the suitable starting
point.
The opening IFRS based SFP shall...
1. recognise all assets and liabilities (where IFRSs say they should be recognised)
2. not recognise assets or liabilities (where IFRSs say they should not be
recognised)
3. Reclassify items (that IFRS say needs reclassification)
4. apply IFRSs in measuring all recognised assets and liabilities
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Limited exemptions
Where the cost of complying is likely to exceed the benefits to users of financial
statements.
Retrospective Application
This is applying IFRS to previous periods - this is restricted if it means management
judgements (about past conditions) are needed when the actual outcome is now in
fact known.
Disclosures
Needed to explain how the transition from previous GAAP to IFRSs affected the
entity’s reported financial position, financial performance and cash flows
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Syllabus B: Elements of financial statements
Syllabus B1. Revenue recognition
Syllabus B1. Explain and apply the principles of revenue recognition:

i. Identification of contracts
ii. Identification of performance obligations
iii. Determination of transaction price
iv. Allocation of the price to the performance obligations
v. Recognition of revenue when/as performance obligations are satisfied
Revenue Recognition - IFRS 15
When & how much to Recognise Revenue?
Here you need to go through the 5 step process…
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a performance obligation
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Before we do that though, let’s get some key definitions out of the way..
Key definitions
• Contract
An agreement between two or more parties that creates enforceable rights and
obligations.
• Income
Increases in economic benefits during the accounting period in the form of

increasing assets or decreasing liabilities
• Performance obligation
A promise in a contract to transfer to the customer either:
- a good or service that is distinct; or
- a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.
• Revenue
Income arising in the course of an entity’s ordinary activities.
• Transaction price
The amount of consideration to which an entity expects to be entitled in exchange

for transferring promised goods or services to a customer.
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Syllabus B1.
Explain and apply the principles of revenue recognition:
i. Identification of contracts
ii. Identification of performance obligations
iii. Determination of transaction price
iv. Allocation of the price to the performance obligations
v. Recognition of revenue when/as performance obligations are satisfied
Describe and apply the acceptable methods for measuring progress towards complete
satisfaction of performance obligations
Explain and apply the criteria for the recognition of contract costs
Revenue Recognition - IFRS 15 - 5 steps
Ok let’s now get into a bit more detail…
Step 1: Identify the contract(s) with a customer
• The contract must be approved by all involved
• Everyone’s rights can be identified
• It must have commercial substance
• The consideration will probably be paid
Step 2: Identify the separate performance obligations in the contract
This will be goods or services promised to the customer
These goods / services need to be distinct and create a separately identifiable

obligation
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• Distinct means:
The customer can benefit from the goods/service on its own AND
The promise to give the goods/services is separately identifiable (from other

promises)
• Separately identifiable means:
No significant integrating of the goods/service with others promised in the

contract
The goods/service doesn’t significantly modify another good or service promised

in the contract.
The goods/service is not highly related/dependent on other goods or services

promised in the contract.
Step 3: Determine the transaction price
How much the entity expects, considering past customary business practices
• Variable Consideration
If the price may vary (eg. possible refunds, rebates, discounts, bonuses,
contingent consideration etc) - then estimate the amount expected
• However variable consideration is only included if it’s highly probable there won’t
need to be a significant revenue reversal in the future (when the uncertainty has
been subsequently resolved)
• However, for royalties from licensing intellectual property - recognise only when
the usage occurs
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Step 4: Allocate the transaction price to the separate performance
obligations
If there’s multiple performance obligations, split the transaction price by using

their standalone selling prices. (Estimate if not readily available)
• How to estimate a selling Price
- Adjusted market assessment approach

- Expected cost plus a margin approach
- Residual approach (only permissible in limited circumstances).
• If paid in advance, discount down if it’s significant (>12m)
Step 5: Recognise revenue when (or as) the entity satisfies a
performance obligation
Revenue is recognised as control is passed, over time or at a point in time.
• What is Control
It’s the ability to direct the use of and get almost all of the benefits from the asset.
This includes the ability to prevent others from directing the use of and obtaining
the benefits from the asset.
• Benefits could be:
- Direct or indirect cash flows that may be obtained directly or indirectly
- Using the asset to enhance the value of other assets;
- Pledging the asset to secure a loan
- Holding the asset.
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• So remember we recognise revenue as asset control is passed (obligations
satisfied) to the customer
This could be over time or at a specific point in time.
Examples (of factors to consider) of a specific point in time:
1. The entity now has a present right to receive payment for the asset;
2. The customer has legal title to the asset;
3. The entity has transferred physical possession of the asset;
4. The customer has the significant risks and rewards related to the ownership of
the asset; and
5. The customer has accepted the asset.
Contract costs - that the entity can get back from the customer
These must be recognised as an asset (unless the subsequent amortisation would

be less 12m), but must be directly related to the contract (e.g. ‘success fees’ paid to
agents).
Examples would be direct labour, materials, and the allocation of overheads - this
asset is then amortised
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Syllabus B1. Explain and apply the criteria for the recognition of contract costs.
Prepare financial statement extracts for contracts with multiple performance obligations, some
of which are satisfied over time and some at a point in time.
Presentation in financial statements
Show in the SFP as a contract liability, asset, or a receivable, depending on when

paid and performed
i.e.. Paid upfront but not yet performed would be a contract liability
Performed but not paid would be a contract receivable or asset
1. A contract asset if the payment is conditional (on something other than time)
2. A receivable if the payment is unconditional
Contract assets and receivables shall be accounted for in accordance with IFRS 9.
Disclosures
All qualitative and quantitative information about:
• its contracts with customers;
• the significant judgments in applying the guidance to those contracts; and
• any assets recognised from the costs to fulfil a contract with a customer.
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Syllabus B1. Specifically account for the following types of transactions:
(i) Principal versus agent;
Illustration 1 - Agent or not?
An entity negotiates with major airlines to purchase tickets at reduced rates
It agrees to buy a specific number of tickets and must pay even if unable to resell
them.
The entity then sets the price for these ticket for its own customers and receives
cash immediately on purchase
The entity also assists the customers in resolving complaints with the service
provided by airlines. However, each airline is responsible for fulfilling obligations
associated with the ticket, including remedies to a customer for dissatisfaction with
the service.
How would this be dealt with under IFRS 15?
This is clear here when the ticket is purchased
Step 2: Identify the performance obligations in the contract
This is tricky - is it to arrange for another party provide a flight ticket - or is it - to

provide the flight ticket themselves?
Well - look at the risks involved. If the flight is cancelled the airline pays to reimburse,
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If the ticket doesn't get sold - the entity loses out
Look at the rewards - the entity can set its own price and thus rewards
On balance therefore the entity takes most of the risks and rewards here and thus
controls the ticket - thus they have the obligation to provide the right to fly ticket
This is set by the entity
Step 4: Allocate the transaction price to the performance obligations in the contract
The price here is the GROSS amount of the ticket price (they sell it for)
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Recognise the revenue once the flight has occurred
Illustration 2 - Loyalty discounts
An entity has a customer loyalty programme that rewards a customer with one
customer loyalty point for every $10 of purchases.
Each point is redeemable for a $1 discount on any future purchases
Customers purchase products for $100,000 and earn 10,000 points
The entity expects 9,500 points to be redeemed, so they have a stand-alone selling
price $9,500
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This is when goods are purchased
Step 2: Identify the performance obligations in the contract
The promise to provide points to the customer is a performance obligation along

with, of course, the obligation to provide the goods initially purchased
$100,000
Step 4: Allocate the transaction price to the performance obligations in the contract
The entity allocates the $100,000 to the product and the points on a relative stand-
alone selling price basis as follows:
So the standalone selling price total is 100,000 + 9,500 = 109,500
Now we split this according to their own standalone prices pro-rata
Product $91,324 [100,000 x (100,000 / 109,500]

Points $8,676 [100,000 x 9,500 /109,500]
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Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Of course the products get recognised immediately on purchase but now lets look at
the points..
Let’s say at the end of the first reporting period, 4,500 points (out of the 9,500) have
been redeemed
The entity recognises revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and
recognises a contract liability of $4,566 (8,676 – 4,110) for the unredeemed points
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(i) Principal versus agent;
Agency
Agency is defined in relation to a principal. What?! Well all this means is an owner
(principal) lets somebody run her business (manager).
The agent is doing this job on behalf of someone else.
Footballers, film stars etc all have agents. They work on behalf of the star. The star
hopes that the agent is working in their best interest and not just for their own
commission…
Principals and Agents
A principal appoints an agent to act on his or her behalf.
In the case of corporate governance, the principal is a shareholder and the agents
are the directors.
The directors are accountable to the principals
Agency Costs
• A cost to the shareholder through having to monitor the directors
• Over and above normal analysis costs
• A result of comprised trust in directors
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(ii) Repurchase agreements;
Repurchase Agreement - 'Repo’
A Repo Agreement is a contractual arrangement between two parties:
1. Assets owner (Borrower of cash)

The assets owner sells securities (Financial assets) to an investor
2. Investor (Lender of cash)

The investor buys securities
The Assets owner sells the Financial assets to investors, usually on an overnight
basis, and buys them back the following day at the same price, plus interest on the
sale proceeds
Repurchase Agreements provide an opportunity for financial institutions such as

banks or mutual funds to lend excess funds on a short term basis in a secure
manner.
Based on IFRS 15, the repurchase transaction should be treated as a financing

arrangement that does not give rise to revenue.
Therefore, no revenue would be recognised and the “sale proceeds” would be

treated as borrowing.
The borrowing is to be treated as a financial liability measured at amortised cost
In the books of the borrower, the bonds will be shown as an asset and the cash
received from the lender would be shown under the liability side as a “Borrowing
under repurchase agreement”
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Accounting for
1. On-balance sheet (Financial Assets):

If the financial asset (Bond) is sold under a repurchase agreement, it cannot be
derecognised from the books as the transferor retains substantially all the risks
and rewards of ownership.
An accounting entry appears as secured loan and not as a “sell” transaction.
Bonds given as collateral remain on the balance sheet.
2. Recognition of sale proceeds as a financial liability

DR Cash / CR Financial liability
3. Profit & loss account (Interest)

Repo interest is treated as payment of interest on accrual basis.
Recognition of interest expense

DR Interest expense / CR Financial liability
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(iii) Bill and hold arrangements.
'Bill And Hold’ Arrangements
A form of sales arrangement in which a seller of a good bills a customer for

products but does not ship the product until a later date.
Revenue is normally only recognised when goods are shipped to the buyer.
All of following criteria must be met before a bill and hold transaction will
be allowed:
• The risks of ownership have passed to the buyer
• The buyer has committed in writing to buy the goods
• The buyer has requested that the seller hold the goods, and has a business
reason for doing so
• There is a scheduled delivery date for the goods that is reasonable
• There are no remaining obligations that the seller must complete
• The goods cannot be used to fill orders from other customers, and so have been
segregated
• The goods must be complete
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(iv) Consignment agreements
Consignment occurs when goods are sent by their

owner (the consignor) to an agent (the consignee), who
undertakes to sell the goods.
The consignor continues to own the goods until they are sold, so the goods appear
as inventory in the accounting records of the consignor, not the consignee.
The unsold goods will normally be returned by the consignee to the consignor.
Consignment Accounting - Initial Transfer of Goods
When the consignor sends goods to the consignee, there is no need to create an
accounting entry related to the physical movement of goods.
It is usually sufficient to record the change in location within the inventory record of
the consignor.
The consignor might do:
• Periodically send a statement to the consignee, stating the inventory that should
be on the consignee's premises.
• Request from the consignee a statement of on-hand inventory at the end of each
accounting period when the consignor is conducting a physical inventory count.
• It may also be useful to occasionally conduct an audit of the inventory reported by

the consignee.
From the consignee's perspective, there is no need to record the consigned

inventory, since it is owned by the consignor.
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It may be useful to keep a separate record of all consigned inventory, for
reconciliation and insurance purposes.
Consignment Accounting - Sale of Goods by Consignee
When the consignee eventually sells the consigned goods, it pays the consignor a
pre-arranged sale amount.
• The consignor records this prearranged amount

DR Cash
CR Sales
• It also remove the related amount of inventory from its records:
DR Cost of goods sold

CR Inventory
• A profit or loss on the sale transaction will arise from these two entries.
• Depending upon the arrangement with the consignee, the consignor may pay a
commission to the consignee for making the sale.
If so, this is:
DR Commission expense
CR Accounts payable
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From the consignee's perspective
A sale transaction triggers a payment to the consignor for the consigned goods that
were sold.
• There will also be a sale transaction to record the sale of goods to the third party
DR Cash or accounts receivable

CR Sales
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Syllabus B2. Property, plant and equipment
Syllabus B2. Define the initial cost of a non-current asset (including a self-constructed asset)
and apply this to various examples of expenditure, distinguishing between capital and revenue
items
Capital and revenue expenditure
Capital expenditure
Can be defined as expenditure on productive assets e.g. non-current assets such as

buildings, lifts, heating, machinery, vehicles, and office equipment.
This can be for expansion and/or to improve quality for profitability purposes.
Capital expenditure appears as a non-current asset in the statement of financial

position.
Depreciation is charged in the income statement as an expense.
All the costs incurred in self constructed assets (a business builds its own non-
current asset) should be included as a non-current asset in the statement of financial
position.
Revenue Expenditure
This expenditure is on day to day items, i.e. where the benefit is received short
term.
This includes salaries, telephone costs or rent.
It is incurred for the purpose of trade, i.e. for expenditure classified as selling and
distribution expenses, administration expenses and fixed charges or to maintain the
existing earning capacity of non-current assets.
Revenue expenditure is included as an expense in the period in which it is incurred
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Capital Income
Capital income is the proceeds from the sale of non-current assets and non-current
asset investments
Revenue Income
Revenue income is derived from the sale of trading assets and from interest and
dividends received from investments held by the business.
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Capital and revenue items
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Nature of
Meaning
Transaction
i. it increases the value of non-current assets

capital expenditure
ii. it improves the earning capacity of an asset
iii.e.g. purchase of computers, vehicles, building, land,
plant and machinery; stamp duty, registration fees,
solicitor’s fees, architect’s fees, installation charges;
fitting of air conditioner in vehicles
i. it is incurred to maintain existing capacity of asset

ii. regular expenditure
revenue expenditure
iii.e.g. repairs and maintenance to machinery, electricity
cost for machinery, spare parts for machinery
i. it is income which is not earned out of the regular

operations of an entity, i.e. not realized by the sale of the
merchandise of the entity
capital receipt
ii. it is a receipt earned when an item of capital expenditure
is sold
iii. it decreases the value of non-current assets
i. it is a regular receipt/income
ii. it decreases current assets
revenue receipt iii. it is a result of the sale of the entity’s merchandise and
other revenue items such as rent received or commission
received
Capital expenditure results in the appearance of a non-current asset in the statement

of financial position of the business.
Revenue expenditure results in an expense in the statement of profit or loss.
46 aCOWtancy.com
Syllabus B2.
Define the initial cost of a non-current asset (including a self-constructed asset) and apply this
to various examples of expenditure, distinguishing between capital and revenue items
Identify pre-conditions for the capitalisation of borrowing costs
Describe, and be able to identify, subsequent expenditures that should be capitalised
Initial Recognition of PPE
When should we bring PPE into the accounts?
When the following 3 tests are passed:
1. When we control the asset
2. When it’s probable that we will get future economic benefits
3. When the asset’s cost can be measured reliably
What gets included in 'Cost'
1. Directly attributable costs to get it to work and where it needs to be
eg. site preparation, delivery and handling, installation, related professional fees
for architects and engineers
2. Estimated cost of dismantling and removing the asset and restoring the
site.
This is:
Dr PPE
Cr Liability
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All at present value
This will need discounting and the discount unwound:

Dr interest (with unwinding of discount)
Cr liability
3. Borrowing costs
If it is an asset that takes a while to construct.
Interest at a market rate must be recognised or imputed.
Let's look at the Future obligated costs in detail..
Future obligated costs
Dr PPE
Cr Liability
at present value
• The present value is calculated by discounting down at the rate given in the exam
eg. 100 in 2 years time at 10% = 100/1.10/1.10 = 82.6
• So the double entry would be:
Dr PPE 82.6
Cr Liability 82.6
However the LIABILITY needs unwinding..
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• Unwinding of discount
Dr Interest
Cr Liability
Use the original discount rate (so here 10%)
10% x 82.6 = 8.26
Dr Interest 8.26
Cr Liability 8.26
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Syllabus B2. Calculate depreciation on:
– revalued assets, and
– assets that have two or more major items or significant components
Depreciation
The depreciable amount (cost less prior depreciation, impairment, and residual
value) should be allocated on a systematic basis over the asset’s useful life
Residual Value & UEL
• Should be reviewed at least at each financial year-end
• if expectations differ from previous estimates, any change is accounted

for prospectively as a change in estimate.
Which Method of Depreciation should be used?
• It should reflect the pattern in which the asset’s economic benefits are consumed
by the enterprise
How often should depreciation methods be reviewed?
• At least annually
• If the pattern of consumption changes, the depreciation method should be

changed prospectively as a change in estimate.
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Accounting treatment
Depreciation should be charged to the income statement
Depreciation begins when the asset is available for use and continues until the
asset is de-recognised
Significant parts are depreciated separately
• If the cost model is used each part of an item of PPE with a significant cost (in
relation to the total cost) must be depreciated separately
• Parts which are regularly replaced - depreciate separately
The replacement cost is then added to the asset cost when recognition criteria
are met
The carrying amount of the replaced parts is de-recognised
Major Inspections for faults (e.g. Aircraft)
The inspection cost is added to the asset cost when recognition criteria are met
If necessary, the estimated cost of a future similar inspection may be used as an

indication of what the cost of the existing inspection component was when the item
was acquired or constructed
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An asset with a component included with a different UEL:
This could be something like Land and buildings - basically you should take the land
value away from the total cost and then depreciate the remainder over the UEL of
the building.
• Illustration
Buy House for 100,000.

The land has a value of 40,000.
UEL of building is 10 years
• Solution:
The value of the building itself is: 100,000 - 40,000 = 60,000
Depreciation would be:

Land 40,000 - zero depreciation
Building 60,000 / 10 years = 6,000
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Syllabus B2. Identify pre-conditions for the capitalisation of borrowing costs
IAS 23 Borrowing Costs
Borrowing Costs
Let’s say you need to get a loan to construct the asset of your dreams - well the
interest on the loan then is a directly attributable cost.
So instead of taking interest to the I/S as an expense you add it to the cost of the
asset.
(in other words - you capitalise it)
There are 2 scenarios here to worry about:
1. You use current borrowings to pay for the asset
2. You get a specific loan for the asset
1) Use current borrowings
This is looking at the scenario where we use funds we have already borrowed from
different sources.
So, if the funds are borrowed generally – we need to calculate the weighted average
cost of all the loans we have generally.
(I know you're thinking - how the cowing'eck do I work out the weighted average of
borrowings... aaarrgghh!).
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Well relax my little monkey armpit - here's how you do it:
1. Calculate the total amount of borrowings
2. Calculate the interest payable on these in total
3. Weighted average of borrowing costs = Divide the interest by the borrowing - et

voila!
4. We then take this weighted average of borrowing costs and multiply it by any
expenditure on the asset.
The amount capitalised should not exceed total borrowing costs incurred in the
period.
Illustration
5% Overdraft 1,000
8% Loan 3,000
10% Loan 2,000
We buy an asset with a cost of 5,000 and it takes one year to build - how much
interest goes to the cost of the asset?
Solution
Calculate the WA cost of the borrowings:
1. Total Borrowing = (1,000+3,000+2,000) = 6,000
2. Interest payable = (50+240+200) = 490
3. 490/6,000 = 8.17%
4. So the total interest to be added to the asset is 8.17% x 5,000 = 408
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2) Get a specific loan
Ok well you would think this is easy - just the interest paid, surely?! But it’s not quite
that easy…
It is the actual borrowing costs less investment income on any temporary

investment of the funds
So what does this mean exactly?
Well imagine you need 10,000 to build something over 3 years. You borrow 10,000
at the start but dont need it all straight away.
So the bit you dont need you leave in the bank to gain interest
So, the amount you could capitalise would be the interest paid on the 10,000 less the
interest received on the amount not used and left in the bank (or reinvested
elsewhere)
Steps:
1. Calculate the interest paid on the specific loan
2. Calculate any interest received on loans proceeds not used
3. Add the net of these 2 to 'cost of the asset'
Illustration
Buy asset for 2,000 - takes 2 years to build.
Get a 2,000 10% loan.
We reinvest any money not used in an 8% deposit account.

In year 1 we spend 1,200.
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How much interest is added to the cost of the asset?
1. Interest Paid = 2,000 x 10% = 200
2. Interest received = ((2,000-1,200) x 8%) = 64
3. Dr PPE Cost (200-64) = 136

Cr Interest Accrual
Basic Idea
Borrowing costs that are directly attributable to the acquisition, construction or

production of a qualifying asset form part of the cost of that asset.
Other borrowing costs are recognised as an expense.
So what is a “Qualifying asset?”
It is one which needs a substantial amount of time to get ready for use or sale.
This means it can’t be anything that is available for use when you buy it.
It has to take quite a while to build (PPE, Investment Properties, Inventories and
Intangibles).
You don’t have to add the interest to the cost of the following assets:
1. Assets measured at fair value,
2. Inventories that are manufactured or produced in large quantities on a repetitive

basis even if they take a substantial period of time to get ready for use or sale.
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When should we start adding the interest to the cost of the asset?
Capitalisation starts when all three of the following conditions are met:
1. Expenditure begins for the asset
2. Borrowing costs begin on the loan
3. Activities begin on building the asset e.g. Plans drawn up, getting planning etc.
So just having an asset for development without anything happening is not

enough to qualify for capitalisation
Are borrowing costs just interest?
It’s actually any costs that an entity incurs in connection with the borrowing of funds.
So it includes:
• Interest expense calculated using the effective interest method.
• Finance charges in respect of finance leases
What about if the activities stop temporarily?
Well you should stop capitalising when activities stop for an extended period
During this time borrowing costs go to the profit or loss.
Be careful though - If the temporary delay is a necessary part of the construction

process then you can still capitalise, e.g. Bank holidays etc.
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When will capitalisation stop?
Well, when virtually all the activities work is complete. This means up to the point
when just the finalising touches are left.
NB
• Stop capitalising when AVAILABLE for use. This tends to be when the
construction is finished
• If the asset is completed in parts then the interest capitalisation is stopped on the
completion of each part
• If the part can only be sold when all the other parts have been completed, then
stop capitalising when the last part is completed
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Syllabus B2.
State and appraise the effects of the IASB's rules for the revaluation of property, plant and
equipment
Account for gains and losses on the disposal of re-valued assets
After the initial recognition there are 2 choices:
Cost model
• Cost less accumulated depreciation and impairment
• Depreciation should begin when ready for use not wait until actually used
Revaluation model
Fair value at the date of revaluation less depreciation
• If we follow the revaluation model - how often should we revalue?
Revaluations should be carried out regularly
For volatile items this will be annually, for others between 3-5 years or less if
deemed necessary.
• Ok and which assets get revalued?
If an item is revalued, its entire class of assets should be revalued
• And to what value?
Market value normally is fair value.
Specialised properties will be revalued to their depreciated replacement cost.
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Accounting treatment of a Revaluation
An increase in the revalued amount (above depreciated historic cost)
Any increase above depreciated historic cost is credited to equity under the heading
"revaluation surplus" (and shown in the OCI)
• DR Asset
CR equity - “revaluation surplus”
An increase in the revalued amount (up to depreciated historic cost)
is taken to the income statement.
• DR Assets
CR I/S
A decrease down to Historic cost
Any decrease down to depreciated historic cost is taken to the revaluation reserve
(and OCI) as a debit.
• DR equity - “revaluation surplus”

CR Assets
A decrease below historic cost
Any decrease below depreciated historic cost is debited to the income statement
• DR Income statement
CR Assets
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Disposal of a Revalued Asset
The revaluation surplus in equity - IS NOT transferred to the income statement - it

just drops into RE.
It will, therefore, only show up in the statement of changes in equity.
Let´s make no mistake about this - the revaluation adjustments can be very tricky.
when you revalue upwards:
1. the asset will increase .... therefore
2. the depreciation will increase ... and hence
3. the expenses will increase ...
4. This means smaller profits and smaller retained earnings just because of the
revaluation!
Shareholders will not be impressed by this as retained earnings are where they are
legally allowed to get their dividends from.
Because of this, a transfer is made out of the revaluation reserve and into retained
earnings every year with the extra depreciation caused by the previous revaluation.
This, though, then causes more problems if the asset is subsequently impaired etc. -
but worry not - the COW has the answer!
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This is what you do in a tricky looking revaluation question:
1. Calculate the Depreciated Historic Cost
This is basically what the asset would have been worth had nothing (revaluations/
impairments) occurred in the past.
We do this because anything above this figure is a genuine revaluation and so

goes to the RR.
Similarly anything below this is a genuine impairment and goes to the income
statement.
2. Calculate the NBV just before the Revaluation or Impairment in question
3. Now calculate the difference between step 2 and the new NBV (the amount to be
revalued or impaired to).
This will be the debit or credit to the asset.
The other side of the entry will depend on the depreciated historic cost calculated
in step 1.
I know all that sounds tricky - so let’s look at an illustration:
Illustration
An asset is bought for 1,000 (10yr UEL).

2 years later it is revalued to 1,000.
One year after that it is impaired to 400.
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What is the double entry for this impairment?
DHC would be 1,000 less 3 years of depreciation = 700
2. Calculate the NBV just before the Impairment
NBV at date of impairment = 1000 NBV one year earlier.

So 1,000 less depreciation of (1,000 / 8) = 125 = 875
3. Now calculate the difference between step 2 and the amount to be impaired to
Impair to 400.
So from 875 to 400 - credit Asset 475
4. Accounting treatment
Dr RR with any amount above the DHC of 700. So 875-700 = 175

Dr I/S with any amount below DHC of 700. So 700-400 = 300
Dr I/S 300
Dr RR 175
Cr PPE 475
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Illustration
1/1/20x2 an asset has a carrying amount of 140 and a remaining UEL of 7 years. No
residual value. The asset is revalued to 60 on 1/1/20x3.
On 1/120x5 the asset is revalued to 110
DHC would be 140 - depreciation (140 / 7 years x 3 years) = 80
2. Calculate the NBV just before the Revaluation
The asset is revalued to 60 on 1/1/20x3.
So 60 less depreciation of (60 / 6 x 2) = 40
3. Now calculate the difference between step 2 and the amount to be revalued to
On 1/120x5 the asset is revalued to 110
So from 40 to 110 - DR Asset 70
Cr RR with any amount above the DHC of 80. So 110-80 = 30

Cr I/S with any amount below DHC of 80. So 80-40 = 40
Dr PPE 70
Cr I/S 40
Cr RR 30
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Componentisation
Various components of an asset to be identified and depreciated
separately if they have differing patterns of benefits.
If a significant component is expected to wear out quicker than the overall asset, it is
depreciated over a shorter period.
Then any restoring or replacing is capitalised.
This approach means different depreciation periods for different components.
Examples are land, roof, walls, boilers and lifts.
So the depreciation reflects the effect of a future restoration or replacement.
A challenging process
due to..
• Difficulties valuing components
because it is unusual for the various component parts to be valued, so..

1. Involve company personnel in the analysis
2. Applying component accounting to all assets
3. How far the asset should be broken down into components
4. Any measure used to determine components is subjective
5. Asset registers may need to be rewritten
6. Breaking down assets needs ‘materiality', setting a de minimis limit
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• When a component is replaced or restored
The old component is de-recognised to avoid double-counting and the new

component recognised.
• Where it is not possible to determine the carrying amount of the replaced part of
an item of PPE
Best estimates are required.
A possibility is:
• Use the replacement cost of the component, adjusted for any subsequent
depreciation and impairment
• A revaluation
Apportion over the significant components.
• When a component is replaced
1. The carrying value of the component replaced should be charged to the

income statement
2. The cost of the new component recognised in the statement of financial

position
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Transition to IFRS
Use the ‘fair value as deemed cost’ for the asset:
• The fair value is then allocated to the different significant parts of the asset
Componentisation adds to subjectivity.
The additional depreciation charge can be significant.
Accountants and other professionals must use their professional judgment when
establishing significance levels, assessing the useful lives of components and
apportioning asset values over recognised components.
Discussions with external auditors will be key one during this process.
67 aCOWtancy.com
Exceptional items get disclosed separately
This is where disclosure is necessary in order to explain the performance of the

entity better
The NORMAL accounting treatment is to:
• Show in the standard line in the I/S
• Disclose the nature and amount in notes
EXCEPTIONS such as these can have their own I/S line:
• Write down of inventories to net realisable value (NRV)
• Write down of property, plant and equipment to recoverable amount
• Restructuring costs
• Gains/losses on disposal of non-current assets
• Discontinued operations profits / losses
• Litigation settlements
• Reversals of provisions
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Syllabus B2. Apply the provisions of accounting standards relating to government grants and
government assistance
Government grants are a form of government

assistance.
When can you recognise a government grant?
When there is reasonable assurance that:
• The entity will comply with any conditions attached to the grant and
• the grant will be received
However, IAS 20 does not apply to the following situations:
1. Tax breaks from the government
2. Government acting as part-owner

of the entity
3. Free technical or marketing advice
Accounting treatment of government grants
Dr Cash
The debit is always cash so we only have to know where we put the credit..
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There are 2 approaches - depending on what the grant is given for:
• Capital Grant approach:

(Given for Assets - For NCA such as machines and buildings)
Recognise the grant outside profit or loss initially:
Dr Cash
Cr Cost of asset
or
Cr Deferred Income
• Income Grant approach:
(Given for expenses - For I/S items such as wages etc)
Recognise the grant in profit or loss
Dr Cash
Cr Other income (or expense)
Capital Grant approach - accounting for as "Cr Cost of asset"
• Dr Cash Cr Cost of asset
This will have the effect of reducing depreciation on the income statement and
the asset on the SFP
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• An Example
Asset $100 with 10yrs estimated useful life

Received grant of $50
Accounting for a grant received:

DR Cash $50
CR Asset $50
At the Y/E
Depreciation charge:
DR Depreciation expense (I/S) (100-50)/10yrs = $5
CR Accumulate depreciation $5
Capital Grant approach - accounting for as "Cr Deferred Income"
• Dr Cash
Cr Deferred Income
This will have the effect of keeping full depreciation on the income statement and
the full asset and liability on the SFP
Then...
Dr Deferred Income
Cr Income statement (over life of asset)
This will have the effect of reducing the liability and the expense on the income
statement
• An Example
Asset $100 with 10yrs estimated useful life

Received grant of $50
Accounting for a grant received:

DR Cash $50
CR Deferred income $50
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At the Y/E
Depreciation charge:
DR Depreciation expense (I/S) 100/10yrs = $10
CR Accumulate depreciation $10
Release of deferred income:

DR Deferred income 50/10yrs =$5
CR I/S $5
That's all I'll say here as it is best seen visually and practically in the video :)
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Syllabus B2. Apply the provisions of accounting standards relating to government grants and
government assistance
Government grants Part 2
Conditions
These may help the company decide the periods over which the grant will be earned.
It may be that the grant needs to be split up and taken to the income statement on
different bases.
Compensation
The grant may be for compensation on expenses already spent.
Or it might be just for financial support with no actual related future costs.
Whatever the situation, the grant should be recognised in profit or loss when it
becomes receivable.
NB
If a condition might not be met then a contingent liability should be disclosed in the
notes. Similarly if it has already not been met then a provision is required.
Non-monetary government grants
Think here, for example, of the government giving you some land (ie not cash).
To put a value on it - we use the Fair Value. Alternatively, both may be valued at a
nominal amount.
Repayment of government grants
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This means when we are not allowed the grant anymore and so have to repay it
back.
This would be a change in accounting estimate (IAS 8) and so you do not change
past periods just the current one.
• Accounting treatment (capital grant repayment):
• Dr Any deferred Income Balance or Dr Cost of asset

• Dr Income statement with any balance
and CR cash with the amount repaid
The extra depreciation to date that would have been recognised had the grant not
been netted off against cost should be recognised immediately as an expense.
• Accounting treatment - Income Grant Repayment
Dr Income statement
Cr Cash
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Syllabus B2. Describe the criteria that need to be present before non-current assets are
classified as held for sale, either individually or in a disposal group
Assets Held for Sale
How do we deal with items in our accounts which we are no longer going
to use, instead we are going to sell them
So, think about this for a moment.. Why does this matter to users?
Well, the accounts show the business performance and position, and you expect to
see assets in there that they actually are looking to continue using.
Therefore their values do not have to be shown at their market value necessarily (as
your intention is not to sell them)
Here, though, everything changes… we are going to sell them.
So maybe market value is a better value to use, but they haven’t been sold yet, so
showing them at MV might still not be appropriate as this value has not yet been
achieved
So these are the issues that IFRS 5 tried, in part, to deal with and came up with the
following solution..
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Accounting Treatment
Step 1 - Calculate the Carrying Amount...
Bring everything up to date when we decide to sell
This means:
- charge the depreciation as we would normally up to that date or

- revalue it at that date (if following the revaluation policy)
Step 2 - Calculate FV - CTS
Now we can get on with putting the new value on the asset to be sold..
Measure it at Fair Value less costs to sell (FV-cts).
This is because, if you think about it, this is the what the company will receive.
HOWEVER, the company hasn’t actually made this sale yet and so to revalue it now
to this amount would be showing a profit that has not yet happened
Step 3 - Value the Assets held for sale
IFRS 5 says the new value should actually be…
...The lower of carrying amount (step 1) and FV-CTS (step 2)
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Step 4 - Check for an Impairment
Revaluing to this amount might mean an impairment (revaluation downwards) is

needed.
This must be recognised in profit or loss, even for assets previously carried at
revalued amounts.
Also, any assets under the revaluation policy will have been revalued to FV under
step 1
Then in step 2, it will be revalued downwards to FV-cts.
Therefore, revalued assets will need to deduct costs to sell from their fair value and
this will result in an immediate charge to profit or loss.
Subsequent increase in Fair Value?
• This basically happens at the year-end if the asset still has not been sold
A gain is recognised in the p&l up to the amount of all previous impairment

losses.
Non-depreciation
Non-current assets or disposal groups that are classified as held for sale shall not be
depreciated.
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When is an asset recognised as held for sale?
• Management is committed to a plan to sell

• The asset is available for immediate sale
• An active programme to locate a buyer is initiated
• The sale is highly probable, within 12 months of classification as held for sale
• The asset is being actively marketed for sale at a sales price reasonable in
relation to its fair value
Abandoned Assets
The assets need to be disposed of through sale. Therefore, operations that are
expected to be wound down or abandoned would not meet the definition. Therefore
assets to be abandoned would still be depreciated.
Balance sheet presentation
Presented separately on the face of the balance sheet in current assets
• Subsidiaries Held for Disposal
IFRS 5 applies to accounting for an investment in a subsidiary held only with a

view to its subsequent disposal in the near future.
• Subsidiaries already consolidated now held for sale
The parent must continue to consolidate such a subsidiary until it is actually

disposed of. It is not excluded from consolidation and is reported as an asset held
for sale under IFRS 5.
So subsidiaries held for sale are accounted for initially and subsequently at FV-
CTS of all the net assets not just the amount to be disposed of.
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Syllabus B2. Describe the criteria that need to be present before non-current assets are
classified as held for sale, either individually or in a disposal group
Account for non-current assets and disposal groups that are held for sale
Held for sale disposal group
This is where we sell more than a single asset, in fact it may be a whole
company
A 'disposal group' is a group of assets, possibly with some associated liabilities,

which an entity intends to dispose of in a single transaction.
Any impairment losses reduce the carrying amount of the disposal group in the order
of allocation required by IAS 36
A disposal group with reversal of impairment losses
Normally the rule here is that an impairment under IFRS 5 can only be reversed up
to as much as a previous impairment.
A disposal group may take up the advantage of some assets within the group using
up the unused Impairment losses on other assets.
• Illustration
Disposal group assets Asset 1 Asset 2 Asset 3
Previous impairment (100) (20) (30)
Nbv 80 90 100
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Here the total nbv is 270.
If by the year end the FV-CTS is now:
Asset 1: 150,
Asset 2: 100 and
Asset 3: 150
Asset 1 it can be revalued to 150, increase of 70 as previous impairment was 100
Asset 2 can be revalued to 100, an increase of 10 as previous impairment was 20
Asset 3 could normally not be revalued to 150, an increase of 50 but only to 130 as
it’s previous impairment was only 30
However, it can also use any unused impairments of the other assets in it's disposal
group such as 10 from asset 2 and a further 10 from asset 1, and so can be revalued
up to 150.
What if the asset or disposal group is not sold within 12 months?
1. Normally, returns to PPE at the amount it would have been at had it not gone to
held for sale.
2. Check for impairment.
3. Or, keep in HFS if delay is caused by circumstances outside the control of the
entity e.g.
Buyer unexpectedly imposes transfer conditions which extend beyond a year
Or the market demand has collapsed.
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Syllabus B2. Discuss the way in which the treatment of investment properties can differ from
other properties.
Apply the requirements of international financial reporting standards to investment properties
IAS 40 Investment property Part 1
A building (or land) owned but not used - just an investment
The building is not used it just makes cash by:
1. its FV going up (capital appreciation) or
2. from rental income
It might not even belong to the entity it could even be just on an operating lease.
This is still an IP (if the FV model is used)
This allows leased land (which is normally an operating lease) to be classified as

investment property.
Land held for indeterminate future use is an investment property where the entity has
not decided that it will use the land as owner occupied or for short-term sale
Accounting treatment for the Rental Income
1. Add it to the income statement
2. Easy! (Even for a gonk like you!) :p
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Accounting treatment for the FV increase
• The difference in FV each year goes to the I/S
• Double easy - double gonky
No depreciation is needed because it's not used :)
Give me examples of what can be Investment Properties cowy.
ok you asked for it:
1. Land held for long-term capital appreciation rather than short-term sale
2. Land held for a currently undetermined future use
This basically means they haven't yet decided what to do with the land
3. A building owned but leased to a third party under an operating lease
4. A building which is vacant but is held to be leased out under an operating lease
5. Property being constructed or developed for future use as an investment property
Ok smarty pants - what ISN'T an Investment property?
• Property intended for sale in the ordinary course of business
(It's stock!)
• Owner-occupied property
• Property leased to another entity under a finance lease
• Property being constructed for third parties
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Parts of property
These can be investment properties if the different sections can be sold or leased
separately.
• Mais oui, monsier/madame
For example, company owns a building and uses 4 floors and rents out 1. The
latter can be an IP while the rest is treated as normal PPE
Can it still be an IAS 40 Investment property if we are involved in the building still by
giving services to it?
Si Claro hombre/mujer - It´’s still an IAS 40 Investment property if the supply is small
and insignificant.
• If it’s a significant part of the deal with the tenant then the property becomes an
IAS 16 property.
What if my subsidiary uses it but I don’t?
Right ok - now your questions are getting on my nerves… but still - it’s an IAS 40
Investment property in your own individual accounts - because you personally are
not using it.
However, in the group accounts it´s an IAS 16 property because someone in the
group is using it.
..now enough of the questions already.. get back to facebook ..
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Investment Property Part 2
When can we bring an Investment Property into the accounts?
As with everything else, an investment property should be recognised when:
1. It is probable that the future economic benefits will flow; and
2. The cost of the investment property can be measured reliably.
Cool - and at how much do we show it at initially?
Initially measured at cost.
This includes:
1. Purchase price
2. Directly attributable costs, for example transaction costs (professional fees,

property transfer taxes)
This does not include:
1. Start-up costs
2. Operating losses incurred before the investment property achieves the planned
level of occupancy
3. Abnormal amounts of wasted labour, material or other resources incurred in

constructing or developing the property
NB
If the property is held under a lease then you must show it initially at the lower of:
• Fair value and
• The present value of the minimum lease payments
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Ok so how do we value it after the initial cost?
You choose between two models:
1. The IAS 16 cost model
2. The fair value model
The policy chosen should be applied consistently to all of the entity’s investment
property.
If the property is held under an operating lease the fair value model must be
adopted.
Cost model
Basically as per IAS 16. The property is measured at cost less depreciation and
impairment losses (the fair value should still be disclosed though).
Fair value model
All investment properties should be measured at fair value at the end of each
reporting period.
Changes in fair value added to / subtracted from the asset and the other side
recognised in the income statement.
No depreciation is therefore ever recognised.
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Investment property Part 3
Change in use
This bit deals with when we decide say to use it as a normal property instead of
renting it out or vice-versa etc.
Examples
1. We occupy and start to use the investment property
All owner-occupied property falls under IAS 16 - cost less depreciation and
impairment losses.
If the FV model was being used then the FV at change of use date is the deemed
cost for future accounting.
2. Start developing an investment property with the intention of selling it when
finished
The property is to be sold in the normal course of business and should therefore
be reclassified as inventory and accounted for under IAS 2 Inventories.
3. Start developing an investment property with the intention of letting it out when
finished
The property should continue to be held as an investment property under IAS 40.
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4. We were using the building but now we are going to let it out when finished
Transfer to investment properties and account under IAS 40.

When we transfer it though (if FV model) we revalue it.
Any revaluation here goes to the Revaluation reserve and OCI as normal (not the
income statement as under IAS 40).
5. A property that was originally held as inventory has now been let to a third party.
Transfer from inventory to investment properties.
Here when the transfer is made, we revalue (if FV model) to FV and any
difference goes to the income statement.
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Syllabus B3. Impairment of assets
Define and calculate the recoverable amount of an asset and any associated impairment
losses
Identify, circumstances which indicate that the impairment of an asset may have occurred
IAS 36 Impairments
A company cannot show anything in its accounts higher than what

they’re actually worth
“What they’re actually worth” is called the “Recoverable Amount”
So no asset can be in the accounts at MORE than the recoverable amount.
Less is fine, just not more.
So, assets need to be checked that their NBV is not greater than the RA.
If it is then it must be impaired down to the RA
So how do you calculate a Recoverable Amount?
There are 2 things an entity can do with an asset
1. Sell it or
2. Use it
It will obviously choose the one which is most beneficial
So, you'll choose the higher of the following

• FV-CTS
(Fair value less costs to sell)

• VIU
(Value in use)
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So the higher of the FV - CTS and VIU is called the Recoverable amount
Illustration
In the accounts an item of PPE is carried at 100.

It’s FV-CTS is 90 and its VIU is 80.
• This means the recoverable amount is 90 (higher of FV-CTS and VIU)
• And that the PPE (100) is being carried at higher than the RA, which is not
allowed, and so an impairment of 10 down to the RA is required in the accounts
(100 - 90)
Recognition of an Impairment Loss
An impairment loss should be recognised whenever RA is below carrying amount.
The impairment loss is an expense in the income statement
Adjust depreciation for future periods.
Here's some boring definitions for you:
• Fair value
The amount obtainable from the sale of an asset in a bargained transaction
between knowledgeable, willing parties.
• Value in use
The discounted present value of estimated future cash flows expected to arise
from:
- the continuing use of an asset, and from
- its disposal at the end of its useful life
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Recoverable Amount in more detail
Fair Value Less Costs to Sell
• If there is a binding sale agreement, use the price under that agreement less
costs of disposal
• If there is an active market for that type of asset, use market price less costs of
disposal.
Market price means current bid price if available, otherwise the price in the most
recent transaction
• If there is no active market, use the best estimate of the asset's selling price less
costs of disposal (direct added costs only (not existing costs or overhead))
Let's look at VIU in more detail..
The future cash flows:
• Must be based on reasonable and supportable assumptions
(the most recent budgets and forecasts)
• Budgets and forecasts should not go beyond five years
• The cashflows should relate to the asset in its current condition
– future restructuring to which the entity is not committed and expenditures to

improve the asset's performance should not be anticipated
• The cashflows should not include cash from financing activities, or income tax
• The discount rate used should be the pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the asset
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Identifying an Asset That May Be Impaired
At each balance sheet date, review all assets to look for any indication that an asset
may be impaired.
If there is an indication that an asset may be impaired, then you must calculate the
asset’s recoverable amount... to see if it is below carrying value
if it is - then you must impair it
Illustration
Asset has carrying value of 100
It has a FV-CTS of 90
It has a VIU of 95
It's recoverable amount is therefore the higher of the 2 = 95 and this is below the
carrying value in the books (100) and so needs impairment of 5.
What are the indicators of impairment?
1. Losses / worse economic performance
2. Market value declines
3. Obsolescence or physical damage
4. Changes in technology, markets, economy, or laws
5. Increases in market interest rates
6. Loss of key employees
7. Restructuring / re-organisation
Just to confuse you a little bit more, we do not JUST check for impairment when
there has been an indicator (listed above).
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We also check the following ANNUALLY regardless of whether there
has been an impairment indicator or not:
1. an intangible asset with an indefinite useful life
2. an intangible asset not yet available for use
3. goodwill acquired in a business combination
Reversal of an Impairment Loss
First of all you need to think about WHY the impairment has been reversed..
1. Discount Rate Changes
Here, no reversal is allowed. So if the discount rate lowers and thus improves the
VIU, this is not considered to be a reversal of an impairment.
2. Other
The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been
recognized
Reversal of an impairment loss is consistent with the original treatment of the

impairment in terms of whether recognised as income in the income statement or
OCI.
Reversal of an impairment loss for goodwill is prohibited.
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Syllabus B3. Describe what is meant by a cash-generating unit
State the basis on which impairment losses should be allocated, and allocate a given
impairment loss to the assets of a cash- generating unit.
Cash Generating Units
Sometimes individual assets do not generate cash inflows so the

calculation of VIU is impossible
In such a case then the asset will belong to a larger group that does generate cash.
This is called a cash generating unit (CGU) and it is the carrying value of this which
is then tested for impairment
Recoverable amount should then be determined for the asset's cash-generating unit
(CGU)
CGU - A restaurant
For example, the tables in a restaurant do not generate cash.
They do belong to a larger CGU though (the restaurant itself).
It is the restaurant that is then tested for impairment
The carrying amount of the CGU is made up of the carrying amounts of all the assets
directly attributed to it.
Added to this will be assets that are not directly attributed such as head office and a
portion of goodwill.
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Illustration
A subsidiary was acquired, which included 3 cash generating units and the goodwill
for the whole subsidiary was 40m
Each CGU would be allocated part of the 40 according to the carrying amount of the
assets in each CGU as follows:
CGU 1 2 3
NBV 200 200 400
Goodwill 10 10 20
A CGU to which goodwill has been allocated (like the 3 above) shall then be tested
for impairment at least annually by comparing the carrying amount of the unit,
including the goodwill, with the recoverable amount of the CGU
If the carrying amount of the unit exceeds the recoverable amount of the unit, the
entity must recognise an impairment loss (down to the unit’s RA)
Order of Impairment
But the problem is what do you impair first - the assets or the goodwill in the unit?
The impairment loss is allocated in the following order:
1. Reduce any goodwill allocated to the CGU
2. Reduce the assets of the unit pro rata
Note: The carrying amount of an asset should not be reduced below its own
recoverable amount
Illustration
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The following carrying amounts were recorded in the books of a restaurant
immediately prior to the impairment:
Goodwill 100
Property, plant and equipment 100
Furniture and fixtures 100
The fair value less costs to sell of these assets is $260m whereas the value in use is
$270m
Required: Show the impact of the impairment
Solution
Recoverable amount is 270 - so the CV of the CGU needs to be reduced from 300 to
270 = 30
This 30 reduces goodwill down to 70
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Syllabus B4. Leases
Syllabus B4. Account for right of use assets and lease liabilities in the records of the lessee.
Leases - Definition
IFRS 16 gets rid of the Operating lease (which showed no liability on the
SFP).
So, every lease now shows a liability!
Therefore, the definition of what is a lease is super important (as it affects the
amount of debt shown on the SFP)
Here is that definition:
A contract that gives the right to use an asset for a period of time in exchange for
consideration
So let's dig deeper
There's 3 tests to see if the contract is a lease…
1. The asset must be identifiable

This can be explicitly - it's in the contract
Or implicitly - the contract only makes sense by using this 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 the asset is used
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Example
A contract gives you exclusive use of a specific car

You can decide when to use it and for what
The car supplier cannot substitute / change the car
So does the contract contain a lease?
Does it pass the 3 tests?
1. Is there an Identifiable asset?
Yes the car is explicitly referred to and the supplier cannot substitute the car
2. Does the customer have substantially all benefits during the period?
Yes
3. Does the customer direct the use?
Yes he/she can use it for whatever and whenever they choose
So, yes this contract contains a lease because it's...

consideration
Example
A contract gives you exclusive use of a specific airplane

You can decide when it flies and what you fly (passengers, cargo etc.)
The airplane supplier though operates it using its own staff
The 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?
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Does it pass the 3 tests?
1. 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
2. Does the customer have substantially all benefits during the period?
Yes it has exclusive use
3. 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...
consideration
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Basic Rule
Lessees recognise a right to use asset and associated liability on its
SFP 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
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After the initial Measurement - Asset
• Cost - depreciation (normally straight line) less any impairments
• Any subsequent re-measurements of the liability
After the initial Measurement - Liability

• Effective interest rate method (amortised cost)
• Any re-measurements (e.g. residual value guarantee changes)
Example
3 year lease term
Annual lease payments in arrears 5,000

Rate implicit in lease: 12.04%
PV of lease payments: 12,000
Answer
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 (I/S) 12.04% (Payment) Closing

12,000 1,445 (5,000) 8,445
8,445 1,017 (5,000) 4,463
4,463 537 (5,000) 0
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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)
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Variable Lease payments example
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
(so these are variable payments based upon an index / rate)
ANSWER (IGNORING DISCOUNTING)
Start of year 1:
Dr Asset 500 Cr Cash 500
Dr Asset 4500 Cr Lease Liability 4500 (9 x 500)
End of year 2:
Asset will be 5,000 - 1,000 (straight line depreciation) = 4,000
Lease liability will be 8 x 500 = 4,000
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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)
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The Lease Term
This is important because..
The lease liability = PV of payments in the lease term!
How is the Lease Term calculated?
• Period which can't be cancelled
• + any option to extend period (if reasonably certain to take up)
• + period covered by option to terminate (if reasonably certain not to take up)
So what does "Reasonably Certain" mean?
Market conditions mean its favourable to do it
Significant leasehold improvements made
High costs to terminate the lease
The asset is very important to the lessee (or specialised/customised to the lessee)
Problem
How do we 'weight' these factors that tell us whether the lessee is reasonably certain
to extend the term or not?
Eg A flagship store in a prime and much sought-after location.
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Significant judgement would be needed to determine whether the prime geographical
location of the store or other factors (for example termination penalties, lease hold
improvements, etc.) indicate that it is reasonably certain whether or not the lessee
will renew the store lease.
When is the lease term re-assessed?
It's very rare but
1. When the lessee exercises (or not) an option in a different way than previously
was reasonably certain;
2. When something happens that contractually obliges the lessee to exercise an

option not previously included in the determination of the lease term or
3. When something significant happens that affects whether it is reasonably certain

to exercise an option. This trigger is only relevant for the lessee (and not the
lessor).
Example
A 10 year lease with an option to extend for 5 years.
Initially, the lessee is not reasonably certain that it will exercise the extension option.
So the lease term is set for 10 years.
After 5 years, they decides to sublease the building for 10 years
Answer
Entering into a sublease is a significant event and it affects the entity’s assessment
of whether it is reasonably certain to exercise the extension option.
So, the lessee must change the lease term of the head lease
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Syllabus B4. Explain the exemption from the recognition criteria for leases in the records of the
lessee.
Leases - Exemptions
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)
1. Treat them like operating leases
Just expense to the Income Statement (on a straight line / systematic basis)
2. Each class of asset must have the same treatment
3. This exemption ONLY applies to Lessees
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Exemption 2: Low Value Assets
e.g. IT equipment, office furniture with a value of less than $5,000
1. Treat them like operating leases
Just expense to the Income Statement (on a straight line basis)
2. Choice is made on a lease by lease basis
3. This exemption ONLY applies to Lessees
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Syllabus B4. Explain the exemption from the recognition criteria for leases in the records of the
lessee.
Measurement Exemptions
Exemption 1: Investment Property
(if it uses the FV 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
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Syllabus B4. Explain the distinction between operating leases and finance leases from a lessor
perspective.
Account for operating leases and finance leases in the financial statements of lessors
Lessor Accounting - Finance Lease
Lessor Accounting
Is it a Finance Lease or an Operating Lease?
If the majority of the risks and rewards are transferred to the lessee then it's a
finance lease
Other Indicators of a Finance Lease
1. Ownership transferred at the end
2. Option to buy at the end at less than Fair Value
3. Lease term is for majority of the asset's UEL
4. PV of future lease payments is close to the actual Fair Value of the asset
5. The asset is specialised and customised for the lessee
Finance Lease accounting
Dr Lease Receivable Cr Asset
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What makes up the Lease Receivable?
1. PV of lease payments
(Fixed receipts, Variable receipts (based on index / rate), Residual Value

guaranteed to receive, Exercise price to be received of any likely purchase option
from the lessee, Any penalties likely to be received from the lessee for early
termination)
2. Unguaranteed Residual Value
Lessor - Finance Lease accounting
Effective Interest Closing

Opening Lease Amounts Received
Received Lease
Receivable
Receivable
Dr Lease Dr Lease Receivable Dr Cash Balancing
Receivable Cr Interest Cr Lease Receivable figure
Cr PPE Receivable
Lessor accounting if Operating Lease
Remember this is when the lessor keeps the risks and rewards of the asset
Accounting rules
Keep the Asset on the SFP as normal

Show lease receipts on the income statement (straight line basis)
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Syllabus B4. Account for operating leases and finance leases in the financial statements of
lessors
Lessor Accounting - Operating Lease
Ok - let´s have a think about this
Remember that when we say operating lease - we mean the risks and rewards are
NOT taken by the lessee. So have we sold the asset or not?
Revenue recognition tells us that when the risks and rewards for goods are passed
on then we have made a sale and can recognise the revenue.
So, no the lessor has NOT in substance sold the asset. Therefore the lessor keeps
the asset on its SFP.
Income from an operating lease (not including services such as insurance and
maintenance), should be shown straight-line in the income statement over the length
of the lease (unless the item is used up on a different basis - if so use that basis).
SFP Income statement

Keep the Asset there Operating Lease rentals received
Negotiating costs etc.
Any initial direct costs incurred by lessors should be added to the carrying amount of
asset on the SFP and expensed over the lease term (NOT the assets life).
Operating Lease Incentives
The lessor should reduce the rental income over the lease term, on a straight-line
basis with the total of these.
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Syllabus B4. Account for sale and leaseback transactions in the financial statements of
lessees.
Sale and Leaseback
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
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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
Example
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.
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Answer
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)
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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).
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Further Guidance on Lease accounting
Some further guidance on measuring Right to use Assets
1. Discount rate
The lessee uses the discount rate the interest rate implicit in the lease - if this
rate cannot be readily determined, the lessee should use its incremental
borrowing rate (for similar amount, term & security)
2. Restoration costs
This should be included in the initial measurement of the right-of-use asset and
as a provision. This corresponds to the accounting for restoration costs in IAS 16
Property, Plant and Equipment.
If the expected restoration costs change - then the right-of-use asset and
provision is changed
3. Initial direct costs

These are incremental costs that would not have been incurred if a lease had not
been obtained. e.g. commissions or some payments made to existing tenants to
obtain the lease.
All initial direct costs are included in the initial measurement of the right-of-use asset.
4. Subsequent measurement
The lease liability is measured in subsequent periods using the effective interest
rate method.
The right-of-use asset is depreciated on a straight-line basis or another

systematic basis that is more representative of the pattern in which the entity
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expects to consume the right-of-use asset.
The lessee must also apply the impairment requirements in IAS 36,‘Impairment of
assets’, to the right-of-use asset.
Using straight-line depreciation (for the asset) and the effective interest rate (for the
lease liability) will mean higher charges at the start of the lease and less at the end
(‘frontloading’)
But this might not properly reflect the economic characteristics of a lease contract
(especially for 'operating leases'.
It also means the carrying amount of the right-of-use asset and the lease liability
won't be equal in subsequent periods. The right-of-use asset will, in general, be
lower than the carrying amount of the lease liability.
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When should the lease liability be reassessed?
(only if the change in cash flows is based on contractual clauses that have been part
of the contract since inception) otherwise it's a modification not a reassessment
Component of the lease liability Reassessment
Lease Term When? – If there is a change in the lease

term.
How? – Reflect the revised payments using

a revised discount rate(the interest rate
implicit in the lease for the remainder of
lease term)
Exercise price of a purchase option When? – A significant event (within the
control of the lessee) affects whether the
lessee is reasonably certain to exercise an
option.
How? – Reflect the revised payments using

a revised discount rate(the interest rate
implicit in the lease for the remainder of
lease term)
Residual value guarantee When? – If there is a change in the amount
expected to be paid.
How? – Include the revised residual

payment using the unchanged discount rate.
Variable lease payment (dependent When? – If a change in the index/rate
on an index or a rate) results in a change in cash flows.
How? – Reflect the revised payments based

on the index/rate at the date when the new
cash flows take effect for the remainder of
the term using the unchanged discount rate
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Syllabus B5. Intangible assets and goodwill
Syllabus B5. Define the criteria for the initial recognition and measurement of intangible assets
What is an Intangible asset?
Well, according to IAS 38, it’s an identifiable non-monetary asset without physical
substance, such as a licence, patent or trademark.
The three critical attributes of an intangible asset are:
1. Identifiability
2. Control (power to obtain benefits from the asset)
3. Future economic benefits
Whooah there partner, what´s identifiable mean??
Well it just means the asset is one of 2 things:
1. It is SEPARABLE, meaning it can be sold or rented to another party on its own

(rather than as part of a business) or
2. It arises from contractual or other legal rights.
It is the lack of identifiability which prevents internally generated goodwill being

recognised. It is not separable and does not arise from contractual or other legal
rights.
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Examples
• Employees can never be recognised as an asset; they are not under the control
of the employer, are not separable and do not arise from legal rights
• A taxi licence can be an intangible asset as they are controlled, can be sold/
exchanged/transferred and arise from a legal right
(The intangible doesn’t have to be separable AND arise from a legal right, just
one or the other is enough).
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Syllabus B5. Distinguish between goodwill and other intangible assets
Define the criteria for the initial recognition and measurement of intangible assets
When can you recognise an IA and for how much?
Well it's the old reliably measurable and probable again!
In posher terms...
1. When it is probable that future economic benefits attributable to the asset will flow
to the entity
2. The cost of the asset can be measured reliably
So at how much should we show the asset at initially?
Well thick pants - it’s obviously brought in at cost!! Aaarh but what is cost I hear you
whisper in my big floppy cow-like ears.. well it’s
• Purchase price plus directly attributable costs
Remember that directly attributable means costs which otherwise would not have
been paid, so often staff costs are excluded.
Let’s now look at some specific issues that come up often in the exam:
• IA acquired as part of a business combination
Well this time, the intangible asset (other than goodwill ) should initially be
recognised at its fair value.
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If the FV cannot be ascertained then it is not reliably measurable and so cannot
be shown in the accounts.
In this case by not showing it, this means that goodwill becomes higher.
• Research and Development Costs

Research costs are always expensed in the income statement
Development costs are capitalised only after technical and commercial feasibility
of the asset for sale or use have been established.
This means that the enterprise must intend and be able to complete the
intangible asset and either use it or sell it and be able to demonstrate how the
asset will generate future economic benefits.
If entity cannot distinguish between research and development - treat as research

and expense
• Research and Development Acquired in a Business Combination
Recognised as an asset at cost, even if a component is research.
Subsequent expenditure on that project is accounted for as any other research

and development cost
• Internally Generated Brands, Mastheads, Titles, Lists
Should not be recognised as assets - expense them as there is no reliable

measure
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• Computer Software
If purchased: capitalise as an IA
Operating system for hardware: include in hardware cost
If internally developed: charge to expense until technological feasibility,

probable future benefits, intent and ability to use or sell the software, resources to
complete the software, and ability to measure cost.
Always expense the following:
1. Internally generated goodwill
2. Start-up, pre-opening, and pre-operating costs
3. Training cost
4. Advertising and promotional cost, including mail order catalogues
5. Relocation costs
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Syllabus B5. Explain the subsequent accounting treatment, including the principle of
impairment tests in relation to purchased goodwill
Intangible Assets - Future Measurement
So we can use either historic cost or revaluation.
Historic Cost (and amortise)
Generally intangible assets should be amortised over their useful economic life.
1. If has a useful economic life
Amortise over UEL
Residual values should be assumed to be nil, except in the rare circumstances

when an active market exists or there is a commitment by a third party to
purchase the asset at the end of its useful life.
2. If has an indefinite UEL
Check for impairment every year
There should also be an annual review to see if the indefinite life assessment is
still appropriate.
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Revaluation (and amortise)
This model can only be adopted if an active market exists for that type of asset.
Revaluing Intangibles is hard, because there is no physical substance, and so a

reliable measure is tricky.
1. There MUST be an active market
2. The item MUST be unique
So what’s an ‘active market’?
• Firstly I should mention that these are rare, but may exist for certain licences and
production quotas
• These, though, are markets where the products are unique, always trading and
prices available to public
Examples where they might exist:
1. Milk quotas
2. Stock exchange seats
3. Taxi medallions
These two tests make it very difficult for any intangibles to be revalued so the historic
cost choice is by far the most common.
If the revaluation model is adopted, revaluation surpluses and deficits are accounted
for in the same way as those for PPE
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Syllabus B5. Describe and apply the requirements of IFRSs to internally generated assets
other than goodwill (e.g. research and development)
Research and development
Research is expensed, Development is often an asset.
Research
Research is investigation to get new knowledge and understanding
• All goes to I/S
Development
Under IAS 38, an intangible asset must demonstrate all of the following criteria:
(use pirate as a memory jogger)
1. Probable future economic benefits
2. Intention to complete and use or sell the asset
3. Resources (technical, financial and other resources) are adequate and available
to complete and use the asset
4. Ability to use or sell the asset
5. Technical feasibility of completing the intangible asset (so that it will be available
for use or sale)
6. Expenditure can be measured reliably
Once capitalised they should be amortised.
Amortisation begins when commercial production has commenced.
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Once capitalised they should be amortised
The cost of the development expenditure should be amortised over the useful life.
Therefore, the cost of the development expenditure is matched against the revenue
it produces.
Amortisation must only begin when the asset is available for use (hence matching
the income and expenditure to the period in which it relates).
It is an expense in the income statement:
• Dr Amortisation expense (I/S)

Cr Accumulated amortisation (SFP)
It must be reviewed at the year-end to check it still is an asset and not an expense.
If the criteria are no longer met, then the previously capitalised costs must be written
off to the statement of profit or loss immediately.
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Syllabus B6. Inventories
Syllabus B6. Measure and value inventories
Basic Inventory
Inventories should be measured at the lower of cost and net realisable
value
What goes into 'cost'?
1. Purchase price
2. Conversion costs
3. Costs to bring into current location & condition
What does NOT go into 'cost'
• Abnormal amounts
• Storage costs
• Administration overheads
• Selling costs
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Illustration
Item A has the following costs:
Direct Labour 100

Raw Materials 200
Depreciation on production machines 10
Factory Manager wage 10
Other production Overheads 8
Admin Overheads 5
What is the 'cost'
Solution
328
Include everything except admin costs
Net Realisable Value
The net realisable value of an item is essentially its net selling proceeds after all
costs have been deducted
It is calculated as follows..
Estimated selling price X

Less: estimated costs of completion (X)
Less: estimated selling and distribution costs (X)
X
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Syllabus B7. Financial instruments
Syllabus B7. Explain the definition of a financial instrument
Financial Instruments - Introduction
Ok, ok, relax at the back - this is not as bad as it seems… trust me
Definition
• First of all it must be a contract
• Then it must create a financial asset in one entity and a financial liability or equity
instrument in another.
• Examples:
An obvious example is a trade receivable. There is a contract, one company has
the debt as a financial asset and the other as a liability
• Other examples:
Cash, investments, trade payables and loans….
And the trickier stuff…..
It also applies to derivatives financial such as call and put options, forwards, futures,
and swaps.
And the just plain weird….
It also applies to some contracts that do not meet the definition of a financial
instrument, but have characteristics similar to derivative financial instruments.
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Such as precious metals at a future date when the following applies:
1. The contract is subject to possible settlement in cash NET rather than by

delivering the precious metal
2. The purchase of the precious metal was not normal for the entity
The trick in the exam is to look for contracts which state “will NOT be delivered” or
“can be settled net” - these are almost always financial instruments
The following are NOT financial instruments:
Anything without a contract

e.g. Prepayments
Anything not involving the transfer of a financial asset

e.g. Deferred income and Warranties
Recognition
The important thing to understand here is that you bring a FI into the accounts when
you enter into the contract NOT when the contract is settled. Therefore derivatives
are recognised initially even if nothing is paid for it initially.
• Substance over form
Form (legally) means a preference share is a share and so part of equity.

HOWEVER, a substance over form model is applied to debt/equity classification.
Any item with an obligation, such as redeemable preference shares, will be
shown as liabilities.
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De-recognition
This basically means when to get rid of it / take it out of the accounts
• So you should do this when:
o The contractual rights you used to have have expired/gone
• For Example
o You sell an asset and its benefits now go to someone else (no conditions
attached)
• You DONT de-recognise when..
o You sell an asset but agree to buy it back later (this means you still have an
interest in the risk and rewards later)
The difference between equity and liabilities
IAS 32 Financial Instruments: Presentation
establishes principles for presenting financial instruments as liabilities or equity.
• IAS 32 does not classify a financial instrument as equity or financial liability on

the basis of its legal form but the substance of the transaction.
The key feature of a financial liability
1. is that the issuer is obliged to deliver either cash or another financial asset to the
holder.
2. An obligation may arise from a requirement to repay principal or interest or

dividends.
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The key feature of an Equity
has a residual interest in the entity’s assets after deducting all of its liabilities.
• An equity instrument includes no obligation to deliver cash or another financial

asset to another entity.
• A contract which will be settled by the entity receiving or delivering a fixed

number of its own equity instruments in exchange for a fixed amount of cash or
another financial asset is an equity instrument.
• However, if there is any variability in the amount of cash or own equity

instruments which will be delivered or received, then such a contract is a financial
asset or liability as applicable.
An accounting treatment of the contingent payments on acquisition of
the NCI in a subsidiary
• IAS 32 states that a contingent obligation to pay cash which is outside the control
of both parties to a contract meets the definition of a financial liability which shall
be initially measured at fair value.
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Syllabus B7. Determine the appropriate classification of a financial instrument, including those
instruments that are subject to ‘split classification’ – e.g. convertible loans.
Financial liabilities - Categories
There's only 2 categories, FVTPL and Amortised cost.. Yay!
Right-y-o, we’ve looked at recognising (bring into the accounts for those of you who
are a sandwich short of a picnic*) - now we want to look at HOW MUCH to bring the
liabilities in at.
*A quaint old English saying - meaning you're an idiot :p
We already dealt with this on a tricky convertible loan.
Trust me this section is much easier.
Basically there are 2 categories of Financial Liability...
1. Fair Value Through Profit and Loss (FVTPL)
This includes financial liabilities incurred for trading purposes and also
derivatives.
2. Amortised Cost
If financial liabilities are not measured at FVTPL, they are measured at amortised
cost.
The good news is that whatever the category the financial liability falls into - we
always recognise it at Fair Value INITIALLY.
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It is how we treat them afterwards where the category matters (and remember here
we are just dealing with the initial measurement).
Accounting Treatment of Financial Liabilities (Overview)
Initially At Year-End Any gain/loss

FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost
So - the question is - how do you measure the FV of a loan??
Well again the answer is simple - and you’ve done it already with compound
instruments. All you do is those 2 steps:
STEP 1: Take all your actual future cash payments

STEP 2: Discount them down at the market rate
If the market rate is the same as the rate you actually pay (effective rate) then this
is no problem and you don’t really have to follow those 2 steps as you will just come
back to the capital amount…let me explain
10% 1,000 Payable Loan 3 years
Capital 1,000 x 0.751 = 751

Interest 100 x 2.486 = 249
Total 1,000
So the conclusion is - WHERE THE EFFECTIVE RATE YOU PAY (10%) IS THE
SAME AS THE MARKET RATE (10%) THEN THE FV IS THE PRINCIPAL - so no
need to do the 2 steps.
Always presume the market rate is the same as the effective rate you’re paying
unless told otherwise by El Examinero.
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Possible Naughty Bits
Premium on redemption
This is just another way of paying interest. Except you pay it at the end (on
redemption)
e.g. 4% 1,000 payable loan - with a 10% premium on redemption.
This means that the EFFECTIVE interest rate (the rate we actually pay) is more than
4% - because we haven’t yet taken into account the extra 100 (10% x 1,000) payable
at the end. So the examiner will tell you what the effective rate actually is - let’s say
8%.
The crucial point here is that you presume the effective rate (e.g. 8%) is the same as
the market rate (8%) so the initial FV is still 1,000.
Discount on Issue
Exactly the same as above - it is just another way of paying interest - except this
time you pay it at the start
e.g. 4% 1,000 payable loan with a 5% discount on issue.
So again the interest rate is not 4%, because it ignores the extra interest you pay at
the beginning of 50 (5% x 1,000). So the effective rate (the rate you actually pay) is
let’s say 7% (will be given in the exam).
The crucial point here is that the discount is paid immediately. So, although you
presume that the effective rate (7%) is the same as the market rate (7% say), the
INITIAL FV of the loan was 1,000 but is immediately reduced by the 50 discount - so
is actually 950
NB You still pay interest of 4% x 1,000 not 4% x 950
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Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of financial assets and financial liabilities in accordance with applicable financial
reporting standards and the finance costs associated with them.
Financial Liabilities - Amortised Cost
So, we’ve just looked at initial measurement (at FV) Now let’s look at how we
measure it from then onwards….
This is where the categories of financial liabilities are important - so let’s remind
ourselves what they are:
Initially At Year-End Any gain/loss

FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost -
So you only have 2 rules to remember - cool…
1. FVTPL
- simple just keep the item at its FV (remember this is those 2 steps) and put the
difference to the income statement
2. Amortised Cost
- Amortised Cost is the measurement once the initial measurement at FV is done
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Amortised Cost
This is simply spreading ALL interest over the length of the loan by charging
the effective interest rate to the income statement each year.
If there’s nothing strange (premiums etc) then this is simple. For example
10% 1,000 Payable Loan
Opening Interest to I/S Interest actually Paid Closing Loan on SFP

1,000 100 (100) 1,000
Now let’s make it trickier
10% 1,000 Loan with a 10% premium on redemption . Effective rate is 12%

1,000 120 (100) 1,020
So in year 1 the income statement would show an interest charge of 120 and the
loan would be under liabilities on the SFP at 1,020. This SFP figure will keep on
increasing until the end of the loan where it will equal the Loan + premium on
redemption.
And trickier still…
10% 1,000 loan with a 10% discount on issue. Effective rate is 12%

900 108 (100) 908
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IFRS 9 requires FVTPL gains and losses on financial liabilities to be split into:
1. The gain/loss attributable to changes in the credit risk of the liability (to be placed
in OCI)
2. The remaining amount of change in the fair value of the liability which shall be
presented in profit or loss.
The new guidance allows the recognition of the full amount of change in the FVTPL
only if the recognition of changes in the liability's credit risk in OCI would create or
enlarge an accounting mismatch in P&L.
Amounts presented in OCI shall not be subsequently transferred to P&L, the entity
may only transfer the cumulative gain or loss within equity.
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Syllabus B7. Determine the appropriate classification of a financial instrument, including those
instruments that are subject to ‘split classification’ – e.g. convertible loans.
Financial Liabilities - convertible loans
When we recognise a financial instruments we look at substance rather than form
Anything with an obligation is a liability (debt).
However we now have a problem when we consider convertible payable loans. The
‘convertible’ bit means that the company may not have to pay the bank back with
cash, but perhaps shares.
So is this an obligation to pay cash (debt) or an equity instrument?
In fact it is both! It is therefore called a Compound Instrument
Convertible Payable Loans
These contain both a liability and an equity component so each has to be shown
separately.
• This is best shown by example:
2% Convertible Payable Loan €1,000
• This basically means the company has offered the bank the option to convert the
loan at the end into shares instead of simply taking €1,000
• The important thing to notice is that that the bank has the option to do this.
• Should the share price not prove favourable then it will simply take the €1,000 as
normal.
Features of a convertible payable loan
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1. Better Interest rate
The bank likes to have the option. Therefore, in return, it will offer the company a
favourable interest rate compared to normal loans
2. Higher Fair Value of loan
This lower interest rate has effectively increased the fair value of the loan to the
company (we all like to pay less interest ;-))
We need to show all payable loans at their fair value at the beginning.
3. Lower loan figure in SFP
Important: If the fair value of a liability has increased the amount payable (liability)
shown in the accounts will be lower.
After all, fair value increases are good news and we all prefer lower liabilities!
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How to Calculate the Fair Value of a Loan
So how is this new fair value, that we need at the start of the loan, calculated?
Well it is basically the present value of its future cashflows…
Step 1: Take what is actually paid (The actual cashflows):
Capital €1,000
Interest (2%) €20 pa.
Now let’s suppose this is a 4 year loan and that normal (non-convertible) loans carry
an interest rate of 5%.
Step 2: Discount the payments in step 1 at the market rate for normal loans (Get the
cashflows PV)
Take what the company pays and discount them using the figures above as follows:
Capital €1,000 discounted @ 5% (4 years SINGLE discount figure) = 1,000 x 0.823

= 823
Interest €20 discounted @ 5% (4 years CUMULATIVE)= 20 x 3.465 = 69
Total = 892
This €892 represents the fair value of the loan and this is the figure we use in the
balance sheet initially.
The remaining €108 (1,000-892) goes to equity.
Dr Cash 1,000
Cr Loan 892
Cr Equity 108
Next we need to perform amortised cost on the loan (the equity is left untouched
throughout the rest of the loan period).
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The interest figure in the amortised cost table will be the normal non-convertible rate
and the paid will the amounts actually paid.
The closing figure is the SFP figure each year
Opening Interest Payment Closing

892 892 x 5% = 45 (1,000 x 2% = 20) 892 + 45 - 20 = 917
917 917 x 5% = 46 (1,000 x 2% = 20) 917 + 46 - 20 = 943
943 48 (1,000 x 2% = 20) 971
971 49 (1,000 x 2% = 20) 1,000
Now at the end of the loan, the bank decide whether they should take the shares or
receive 1,000 cash…
Option 1: Take Shares (lets say 400 ($1) shares with a MV of $3)
Dr Loan 1,000
Dr Equity 108
Cr Share Capital 400
Cr Share premium 708 (balancing figure)
Option 2: Take the Cash
Dr Loan 1,000
Cr Cash 1,000
Dr Equity 108
Cr Income Statement 108
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Conclusion
1. When you see a convertible loan all you need to do is take the capital and
interest PAYABLE.
2. Then discount these figures down at the rate used for other non convertible
loans.
3. The resulting figure is the fair value of the convertible loan and the remainder sits
in equity.
4. You then perform amortised cost on the opening figure of the loan. Nothing
happens to the figure in equity
Convertible Payable Loan with transaction costs - eek!
Ok well remember our 2 step process for dealing with a normal convertible loan?
No?? Well you’re an idiot. However, luckily for you, I’m not so I will remind you :p
Step 1) Write down the capital and interest to be PAID
Step 2) Discount these down at the interest rate for a normal non-convertible loan
Then the total will be the FV of the loan and the remainder just goes to equity.
Remember we do this at the start of the loan ONLY.
Right then let’s now deal with transaction or issue costs.
These are paid at the start.
Normally you simply just reduce the Loan amount with the full transaction costs.
However, here we will have a loan and equity - so we split the transaction costs pro-
rata
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I know, I know - you want an example…. boy, you’re slow - lucky you’re gorgeous
eg 4% 1,000 3 yr Convertible Loan.

Transaction costs of £100 also to be paid.
Non convertible loan rate 10%
Step 1 and 2
Capital 1,000 x 0.751 = 751

Interest 40 x 2.486 = 99 (ish)
Total = 850
So FV of loan = 850, Equity = 150 (1,000-850)
Now the transaction costs (100) need to be deducted from these amounts pro-rata
So Loan = (850-85) = 765

Equity (150-15) = 135
And relax….
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reporting standards and the finance costs associated with them.
Financial Assets - Initial Measurement
There are 3 categories to remember:
Initial Year-end Difference goes

Category
Measurement Measurement where?
FVTPL FV FV Profit and Loss

FVTOCI FV FV OCI
Amortised
FV Amortised Cost -
Cost
Financial assets that are Equity Instruments
e.g. Shares in another company
These are easy - Just 2 categories
• FVTPL
FVTPL = Fair Value through Profit & Loss
These are Equity instruments (shares) Held for trading
Normally, equity investments (shares in another company) are measured at FV in

the SFP, with value changes recognised in P&L
Except for those equity investments for which the entity has elected to report
value changes in OCI.
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• FVTOCI
FVTOCI = Fair Value through Other Comprehensive Income
These are Equity instruments (shares) Held for longer term
• NB. The choice of these 2 is made at the beginning and cannot be changed
afterwards
There is NO reclassification on de-recognition
Financial Assets that are Receivable Loans
There are basically 3 types:
1. Fair Value Through Profit & Loss (FVTPL)
A receivable loan where capital and interest aren’t the only cashflows
2. FVTOCI
Receivable loans where the cashflows are capital and interest only BUT the
business model is also to sell these loans
3. Amortised Cost
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A financial asset that meets the following two conditions can be
measured at amortised cost:
1. Business model test:
Do we normally keep our receivable loans until the end rather than sell them on?
2. Cashflows test
The contractual terms of the financial asset give rise on specified dates to cash
flows that are solely payments of principal and interest on the principal
outstanding
In other words:
Are the ONLY cashflows coming in capital and interest?
So what sort of things go into the FVTPL category?
• If one of the tests above are not passed then they are deemed to fall into the
FVTPL category
This will include anything held for trading and derivatives.
INITIAL measurement
• Good news! Initially both are measured at FV.
Easy peasy to remember.
The FV is calculated, as usual, as all cash inflows discounted down at the market
rate.
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FVTPL can be:
1. Equity items held for trading purposes
2. Equity items not held for trading (but OCI option not chosen)
3. A receivable loan where capital and interest aren’t the only cashflows
Derivative assets are always treated as held for trading
Initial recognition of trade receivables
1. Trade receivables without a significant financing component
Use the transaction price from IFRS 15
2. Trade receivables with a significant financing component
IFRS 9 does not exempt a trade receivable with a significant financing

component from being measured at fair value on initial recognition.
Therefore, differences may arise between the initial amount of revenue

recognised in accordance with IFRS 15 – and the fair value needed here in IFRS
9
Any difference is presented as an expense.
FVTOCI - Receivable loans held for cash and selling
Interest revenue, credit impairment and foreign exchange gain or loss recognised in
P&L (in the same manner as for amortised cost assets)
Other gains and losses recognised in OCI
On de-recognition, the cumulative gain or loss previously recognised in OCI is

reclassified from equity to profit or loss
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reporting standards and the finance costs associated with them
Financial assets - Accounting Treatment
So we have these 3 categories..
Initial Year-end Difference goes

Category
Measurement Measurement where?
FVTPL FV FV Profit and Loss
FVTOCI FV FV OCI
Amortised
FV Amortised Cost -
Cost
Initially both are measured at FV.
Now let's look at what happens at the year-end..
FVTPL accounting treatment
1. Revalue to FV
2. Difference to I/S
FVTOCI accounting treatment
1. Revalue to FV
2. Difference to OCI
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Amortised cost accounting treatment
1. Re-calculate using the amortised cost table
(see below)
An Example:
8% 100 receivable loan (effective rate 10% due to a premium on redemption)
Amortised Cost Table
Opening Balance Interest (effective rate) (Cash Received) Closing balance

100 10 (8) 102
The interest (10) is always the effective rate and this is the figure that goes to the
income statement.
The receipt (8) is always the cash received and this is not shown in the income
statement - it just decreases the carrying amount
Any expected credit losses and forex gains/losses all go to I/S
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Syllabus B7.
Determine the appropriate classification of a financial instrument, including those instruments
that are subject to ‘split classification’ – e.g. convertible loans.
Discuss and account for the initial and subsequent measurement (including the impairment) of
financial assets and financial liabilities in accordance with applicable financial reporting
standards and the finance costs associated with them.
Compound instruments (Convertible loans)
Be careful here as these are treated differently according to whether they are
receivable loans (assets) or payable loans (liabilities)
This is because, if you remember, the amortised cost category for financial assets
has 2 tests, whereas the amortised cost category for liabilities does not have any
The 2 tests for placing a financial asset into the amortised cost category are:
1. Business model - do we intend to keep (not sell) the loan
... presumably we do hold until the end and not sell it - so yes that test is passed
2. Cashflow test - Are the cash receipts capital and interest only?
No - There is the potential issue of shares that we may ask for instead of the
capital back.
For a receivable convertible loan - it fails the cashflow test - as one receipt may be
shares and not just capital and interest
Therefore a receivable convertible loan cannot be amortised cost and so is a FVTPL

item
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However, there are no such tests for liabilities, and so a payable convertible loan is
not held for trading and so falls into the amortised cost category
Type Category
Receivable Convertible Loan FVTPL
Payable Convertible Loan Amortised Cost
Accounting Treatment of above categories summary
Initial Year End

FVTPL FV FV
Amortised Cost FV Amortised Cost
An Example:
2% Convertible Loan €1,000
You are also told the non-convertible interest rates are as follows:
Start: 5%
End of year 1: 6%
End of year 2: 7%
End of year 3: 8%
• As in the payable we need to calculate FV initially.
We did this and it came to 892.
• Then we perform amortised cost BUT also adjust to FV each year end as this a
FVTPL item.
Here’s a reminder of what we had before (but with a new FV adj column added....
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Opening Interest Payment FV adj Closing
892 45 -20 917
917 46 -20 943
943 48 -20 971
971 49 -20 1,000
So we need to change the closing figures (and hence opening next year) to the new
FV at each year end.
Calculating the FV of a loan is the same as before..
• Step 1: Take all the CASH payments (capital and interest)
• Step 2: Discount them down at the MARKET rate
• FV at end of year 1
Capital discounted = 1,000 / 1.06^3 (3 years away only now) = 840
Interest = 20pa for 3 years @ 6% = 20 x 2.673 = 53
Total = 893
Capital discounted = 1,000 / 1.07^2 (2 years away only now) = 873
Interest = 20pa for 2 years @ 7% = 20 x 1.808 = 36
Total = 909
Capital discounted = 1,000 / 1.08 (1 year away only now) = 926
Interest = 20pa for 1 year @ 8% = 20 x 0.926 = 19
Total = 945
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So the table now becomes...
Opening Interest Payment FV adj Closing

892 45 -20 -24 893
893 46 -20 -10 909
909 48 -20 +8 945
945 49 -20 +26 1,000
Remember interest goes to the income statement as does the FV adjustment also
The closing figure is the SFP receivable loan amount
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Financial Instruments - Transactions costs
Transaction Costs
There will usually be brokers’ fees etc to pay and how you deal with these depends
on the category of the financial instrument...
For FVTPL - these go to the income statement.
For everything else they get added/deducted to the opening balance.
So if it is an asset - it will increase the opening balance
If it is a liability - it will decrease the opening balance
Nb. If a company issues its own shares, the transaction costs are debited to share
premium
Illustration 1
A debt security that is held for trading is purchased for 10,000. Transaction costs are
500.
• The initial value is 10,000 and the transaction costs of 500 are expensed.
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Illustration 2
A receivable bond is purchased for £10,000 and transaction costs are £500.
• The initial carrying amount is £10,500.
Illustration 3
A payable bond is issued for £10,000 and transaction costs are £500.
• The initial carrying amount is £9,500.
Note: With the amortised cost categories, the transaction costs are effectively being
spread over the length of the loan by using an effective interest rate which
INCLUDES these transaction costs
Illustration: Transaction costs
An entity acquires a financial asset for its offer price of £100 (bid price £98)
IFRS 9 treats the bid-offer spread as a transaction cost:
1. If the asset is FVTPL
The transaction cost of £2 is recognised as an expense in profit or loss and the

financial asset initially recognised at the bid price of £98.
2. If the asset is classified as amortised cost
The transaction cost should be added to the fair value and the financial asset initially
recognised at the offer price (the price actually paid) of £100.
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Treasury shares
It is becoming increasingly popular for companies to buy back shares as another

way of giving a dividend. Such shares are then called treasury shares
1. Deduct from equity
2. No gain or loss shown, even on subsequent sale
3. Consideration paid or received goes to equity
Illustration
Company buys back 10,000 (£1) shares for £2 per share. They were originally
issued for £1.20
• Dr RE 20,000 Cr Cash 20,000
The original share capital and share premium stays the same, just as it would
have done if they had been bought by a different third party
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Impairment of Financial Instruments
Expected Credit Loss model
This applies to:
1. Amortised cost items
2. FVTOCI items
How it works
• Significant increase in credit risk occurred? Show lifetime expected losses
• No significant increase in credit risk? Show 12-month expected losses only
How do you calculate the Expected Credit Loss?
Use:
1. a probability-weighted outcome
2. the time value of money
3. the best available forward-looking information.
Notice the use of forward-looking info - this means judgement is needed - so it will be
difficult to compare companies
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Stage 1 - Assets with no significant increase in credit risk
For these assets:
1. 12-month expected credit losses (‘ECL’) are recognised and
2. Interest revenue is calculated on the gross carrying amount of the asset (that is,
without deduction for credit allowance)
12-month ECL are based on the asset’s entire credit loss but weighted by the
probability that the loss will occur within 12 months of the Y/E
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Stage 2 - Assets with a significant increase in credit risk (but no evidence of
impairment)
For these assets:
1. Lifetime ECL are recognised
2. Interest revenue is still calculated on the gross carrying amount of the asset.
Lifetime ECL come from all possible default events over its expected life
Expected credit losses are the weighted average credit losses with the probability of
default (‘PD’) as the weight.
Stage 3 - Assets with evidence of impairment
For these assets:
1. Lifetime ECL are recognised and
2. Interest revenue is calculated on the net carrying amount (that is, net of credit
allowance
In subsequent reporting periods, if the credit quality improves so there’s no longer a

significant increase in credit risk since initial recognition, then the entity reverts to
recognising a 12-month ECL allowance
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Where does the impairment go?
• The changes in the loss allowance balance are recognised in profit or loss as an
impairment gain or loss
So what do all these new rules on impairment mean?
Impairments are now recorded BEFORE any actual impairment (except for FVTPL
items) due to the 12-month ECL allowance for all assets
The ECL model is more forward looking when calculating ECLs
Entities with shorter term and higher quality financial instruments are likely to be less
significantly affected.
Higher volatility in the ECL amounts charged to profit or loss, increasing as economic
conditions are forecast to deteriorate, meaning more judgement required
For companies, the ECL model will most likely not cause a major increase in
allowances for short-term trade receivables because of their short term nature.
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The provision matrix should help measure the loss allowance for short-term trade
receivables.
Collective Basis
• If the asset is small it’s just not practical to see if there’s been a significant
increase in credit risk
So, you can assess ECLs on a collective basis, to approximate the result of using
comprehensive credit risk information that incorporates forward-looking
information at an individual instrument level
Simplified Approach
• This means no tracking changes in credit risk!
Instead just recognise a loss allowance based on lifetime ECLs at each reporting
date, right from origination.
The simplified approach is for trade receivables, contract assets with no

significant financing component, or for contracts with a maturity of one year or
less
12-month expected credit losses
These are a portion of the lifetime ECLs that are possible within 12 months
The portion is weighted by the probability of a default occurring
It is not the predicted (probable) defaults in the next 12 months. For instance, the
probability of default might be only 25%, in which case, this should be used to
calculate 12-month ECLs, even though it is not probable that the asset will default.
Also, the 12-month expected losses are not the cash shortfalls that are predicted
over only the next 12 months. For a defaulting asset, the lifetime ECLs will normally
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be significantly greater than just the cash flows that were contractually due in the
next 12 months.
Lifetime expected credit losses
These are from all possible default events over the expected life
Estimate them based on the present value of all cash shortfalls
So, basically, it’s the difference between:
• The contractual cash flows And
• The cash flows now expected to receive
As PV is used, even late (but the same) cashflows create an ECL
For a financial guarantee contract, the ECLs would be the PV of what it expects to
pay as guarantor less any amounts from the holder
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Impairment of Financial Instruments- Illustrations
Illustration 1
A company has a 5yr 6% receivable loan of $1,000,000
They expect credit losses of $10,000 pa.
The present value (discounted at 6%) of these lifetime expected credit losses is
$42,124.
The present value of the 12-month expected credit losses is $9,434
Solution - how to deal with this financial asset
• On day 1
Dr Loan receivable $1,000,000

Cr Cash $1,000,000
• End of yr 1 - no significant increase in credit risk - show 12m ECL
Dr I/S Impairment loss $9,434

Cr Loss allowance in financial position $9,434
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• End of yr 1 - significant increase in credit risk - show re-estimate of lifetime
ECL
Let’s say the present value of the lifetime expected credit losses is $34,651.
Dr I/S Impairment loss $25,217 (34,651 – 9,434)

Illustration 2
A company has a receivable loan of $1,000,000.
They estimates that the loan has a 1% probability of a default occurring in the next
12 months.
It further estimates that 25% of the gross carrying amount will be lost if the loan
defaults.
How much should the 12m ECL be?
Solution:
= 1% x 25% x $1,000,000 = $2,500
Illustration 3
An entity has a 10 yr 6% loan receivable of $1,000,000.
On initial recognition the probability of default is 1%. Expected lifetime losses

$250,000
End of year 1 - probability of default increases to 1.5%
End of year 2 - probability of default increases to 30% (but still no evidence of

impairment) - expected lifetime losses now $100,000
End of year 3 - probability of default increases further - expected lifetime losses now
150,000 (but still no evidence of impairment)
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End of year 4 - probability of default increases further - expected lifetime losses now
200,000 (but still no evidence of impairment)
The loan eventually defaults at the end of Year 5 and the actual loss amounts to
$250,000.
At the beginning of Year 6, the loan is sold to a third party for $740,000
Solution
• Initial recognition
Dr Loan receivable – amortised cost asset $1,000,000

Cr Cash $1,000,000
Dr I/S Impairment loss (1% x 250,000) $2,500

• At the end of Year 1
Dr Impairment loss in profit or loss (3,750 – 2,500) $1,250

The new 12m ECL would be 1.5% x 250,000 = $3,750.
Interest income 6% x 1,000,000 = $60,000.
• At the end of Year 2
Dr I/S Impairment loss (100,000 - 3,750) $96,250

Interest income 6% x 1,000,000 = $60,000
Notice that interest is still calculated on gross amount
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• At the end of year 3



From Year 6 onward, interest income would be calculated at 6% on the net

carrying amount of the loan $750,000.
• Start of year 6
Dr Cash $740,000
Dr Loss allowance in financial position – de-recognised $250,000
Dr Loss on disposal in profit or loss $10,000
Cr Gross loan receivable – de-recognised $1,000,000
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Syllabus B7. Discuss the conditions that are required for a financial asset or liability to be de-
recognised
De-recognition of Financial Assets
De-recognition of a financial asset occurs where:

1. The contractual rights to the cash flows of the financial asset have expired
(debtor pays), or
2. The financial asset has been transferred (e.g., sold) including the risks and
rewards.
Illustration 1
A company sells an investment in shares, but retains the right to repurchase the
shares at any time at a price equal to their current fair value.
• The company should de-recognise the asset
Illustration 2
A company sells an investment in shares and enters into an agreement whereby the
buyer will return any increases in value to the company and the company will pay the
buyer interest plus compensation for any decrease in the value of the investment.
• The company should not de-recognise the investment as it has retained

substantially all the risks and rewards
Financial Liability De-recognition
The risks and rewards transfer does not apply for financial liabilities. Rather, the
focus is on whether the financial liability has been extinguished.
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Syllabus B7.
Explain the conditions that are required for hedge accounting to be used.
Prepare financial information for hedge accounting purposes, including the impact of treating
hedging arrangements as fair value hedges or cash flow hedges.
Describe the financial instrument disclosures required in the notes to the financial statements
Hedging is all about matching.
Objective
To manage risk companies often enter into derivative contracts
• e.g. Company buys wheat - so it is worried about the price of wheat rising (risk).
• To manage this risk it buys a wheat derivative that gains in value as the price of
wheat goes up.
• Therefore any price increase (hedged item) will be offset by the derivative gains
(hedging item)
So, the basic idea of hedge accounting is to represent the effect of an entity’s risk
management activities
IFRS 9 changes
• IFRS 9 has made hedge accounting more principles based to allow for effective
risk management to be better shown in the accounts
• It has also allowed more things to be hedged, including non-financial items
• It has allowed more things to be hedging items also - options and forwards
• There also used to be a concept of hedge effectiveness which needed to be
tested annually to see if hedge accounting could continue - this has now been
stopped.
Now if its a hedge at the start it remains so and if it ends up a bad hedge well the
FS will show this
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Accounting Concept
The idea behind hedge accounting is that gains and losses on the hedging
instrument and the hedged item are recognised in the same period in the income
statement
It is a choice - it doesn’t have to be applied
There are 3 types of hedge:

1. Fair value hedges
Here we are worried about an item losing fair value (not cash).
For example you have to pay a fixed rate loan of 6%. If the variable rate drops to
4% your loan has lost value. If the variable rate rises to 8%, then you have
gained in fair vale
Notice you still pay 6% in both scenarios - so the risk isn’t cashflow - it is fair
value
2. Cash flow hedges
Here we are worried about losing cash on the item at some stage in the future
For example, you agree to buy an item in a foreign currency at a later date. If the
rate moves against you, you will lose cash
3. Hedges of a net investment in a foreign operation
This applies to an entity that hedges the foreign currency risk arising from its net
investments in foreign operations
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Hedged items
The hedged item is the item you’re worried about - the one which has risk (which
needs managing)
A hedged item can be:
• A recognised asset or liability (financial or not)
• An unrecognised commitment
• A highly probable forecast transaction
• A net investment in a foreign operation
They must all be separately identifiable, reliably measurable and the forecast
transaction must be highly probable.
When can we use hedge accounting?
The hedge must meet all of the following criteria: (replacing the old 80-125% criteria)
• An economic relationship exists between the hedged item and the hedging
instrument – meaning as one goes up in FV the other will go down
For example, a UK company selling to US customers - enters into a $100 to £

futures contract which ends when the UK company is expected to receive $100
Here - the future $ receipt will be the hedged item and the futures contract the
hedging item
In the above example it is an obvious economic relationship as it’s the same

amount and same timing
However, sometimes the amounts and timings won’t be the same so you may
use judgement as to whether this is actually a proper hedge or not - here
numbers could be used
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• Credit risk doesn’t dominate the fair value changes
So, after having established an economic relationship (above) - IFRS 9 just wants
to make sure that any credit risk to the hedged or hedging item wont affect it so
much as to destroy the relationship
• Fair Value Hedges
Gains and losses of both the Hedged and Hedging item are recognised in the
current period in the income statement
• Cashflow hedges
Here the hedged item has not yet made its gain or loss (it will be made in the
future e.g. Forex)
So, in order to match against the hedged item when it eventually makes its gain
or loss, the “effective” changes in fair value of the hedging instrument are
deferred in reserves (any ineffective changes go straight to the income
statement)
These deferred gains/losses are then taken from reserves/OCI and to the income
statement when the hedged item eventually makes its gain or loss
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• Hedges of a net investment in a foreign entity
Same as cash-flow, changes in fair value of the hedging instrument are deferred
in reserves/OCI
Normally individual company forex gains/losses are taken to the income

statement and foreign subsidiary retranslation gains/losses taken to the OCI/
Reserves.
So, lets say a UK holding company has a UK subsid and a Maltese subsid. The
Malta sub also has loaned the UK sub some cash in Euros.
Normally the UK sub would retranslate this loan and put the difference to the
income statement. Also the Maltese sub is retranslated and the difference taken
to OCI. Here, it is allowed for the UK sub to hold the translation losses also is
reserves (like a cashflow hedge) as long as the loan is not larger than the net
investment in the Maltese sub
Special cases of hedging items which reduce P&L Volatility
1. Options - time value element when intrinsic value of option is the

designated hedging item
If the hedging item is an option - then the time value changes in that option will be
taken to the OCI (and equity)
When the hedged item is realised, these then get reclassified to P&L
2. Forward points - when the spot element of a forward contract is the

designated hedging item
If the hedging item is a forward contract then the forward points FV changes MAY
be taken to OCI, and again gets reclassified when the hedged item hits the I/S
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3. Currency basis risk
The spread from this can be eliminated from the hedge - and instead either be
valued as FVTPL or FVTOCI(with reclassification)
Illustration of a FV Hedge
5% 100,000 fixed rate 5 year Receivable loan. (Current variable rates 5%).
Here we are worried that variable rates may rise above this - if they did then the FV
of this receivable would worsen.
So we would have a FV loss.
If the variable rates go lower, then we are happy (as we are receiving a fixed rate)
and so the FV would improve.
This company hedges against the variable rates going down - by entering into a
variable rate swap (This is the hedging item).
With this derivative, if variable rates rise we will benefit from receiving more but the
FV of our fixed rate receivable loan will have lowered.
These 2 should cancel themselves out.
Market interest rates then increase to 6%, so that the fair value of the fixed rate bond
has decreased to $96,535.
As the bond is classified as a hedged item in a fair value hedge, the change in fair
value of the bond is instead recognised in profit or loss:
Dr Hedging loss Income Statement (hedged item) 3,465

Cr Fixed rate bond 3,465
At the same time, the company determines that the fair value of the swap has
increased by $3,465 to $3,465.
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Since the swap is a derivative, it is measured at fair value with changes in fair value
recognised in profit or loss. Therefore, Entity A makes this journal entry:
Dr Derivative (FVTPL) (hedging item) 3,465

Cr Hedging gain Income statement 3,465
Since the changes in fair value of the hedged item and the hedging instrument
exactly offset, the hedge is 100% effective, and the net effect on profit or loss is zero.
Illustration Cashflow Hedge
Company has the euro as its functional currency. It will buy an asset for $20,000 next
year.
It enters into a forward contract to purchase $20,000 a year´s time for a fixed amount
(10,000).
Half way through the year (the company’s Year-end) the dollar has appreciated, so
that $20,000 for delivery next year now costs 12,000 on the market.
Therefore, the forward contract has increased in fair value to 2,000
Solution
Dr Forward Asset 2,000

Cr Equity / OCI 2,000
When the company comes to pay for the asset, the dollar rate has further increased,
such that $20,000 costs 14,000 in the spot market.
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Therefore, the fair value of the forward contract has increased to 4,000
Dr Forward Asset 2,000

Cr Equity 2,000
The forward contract is settled:
Dr Cash 4,000
Cr Forward Asset 4,000
The asset is purchased for $10,000 (14,000):
Dr Machine 14,000
Cr Accounts Payable 14,000
The deferred gain left in equity of 4,000 should either
Remain in equity and be released from equity as the asset is depreciated or
Be deducted from the initial carrying amount of the machine.
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Syllabus B8. Liabilities – provisions, contingent assets and
liabilities
Syllabus B8.
Define provisions, legal and constructive obligations, past events and the transfer of economic
benefits
State when provisions may and may not be made, and how they should be accounted for
Explain how provisions should be measured
Define contingent assets and liabilities – give examples and describe their accounting
treatment
Provisions
A provision is a liability of uncertain timing or amount

Double entry
• Dr Expense
Cr Provision (Liability SFP)
If it is part of a cost of an asset (e.g. Decommissioning costs)

• Dr Asset
Cr Provision (Liability SFP)
Recognise when
1. There is an obligation (constructive or legal)
2. There is a probable outflow
3. It is reliably measurable
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At how much?
The best estimate of the expenditure
1. Large Population of Items..
⇒ use expected values.
2. Single Item...
⇒ the individual most likely outcome may be the best estimate.
Discounting of provisions
• Provisions should be discounted
Eg. A future liability of 1,000 in 2 years time (discount rate 10%)
1,000 x 1/1.10 x 1/1.10 = 826
Dr Expense 826
Cr Provision 826
• Then the discount unwound
Year 1
826 x 10% = 83
Dr Interest 83
Cr Provision 83
Year 2
(826+83) x 10% = 91
Dr Interest 91
Cr Provision 91
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Measurement of a Provision
The amount recognised as a provision should be the best estimate of the

expenditure required to settle the present obligation at the end of the reporting
period.
• Provisions for one-off events
o E.g. restructuring, environmental clean-up, settlement of a lawsuit
o Measured at the most likely amount
• Large populations of events
o E.g. warranties, customer refunds
o Measured at a probability-weighted expected value
A company sells goods with a warranty for the cost of repairs required in the first 2
months after purchase.
Past experience suggests:
88% of the goods sold will have no defects
7% will have minor defects
5% will have major defects
If minor defects were detected in all products sold, the cost of repairs will be
$24,000;
If major defects were detected in all products sold, the cost would be $200,000.
What amount of provision should be made?
(88% x 0) + (7% x 24,000) + (5% x 200,000) = $11,680
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Contingent Liabilities
• These are simply a disclosure in the accounts
• They occur when a potential liability is not probable but only possible
(Also occurs when not reliably measurable)
Contingent Assets
Here, it is not a potential liability, but a potential asset.
The principle of PRUDENCE is important here, it must be harder to show a potential

asset in your accounts than it is a potential liability.
This is achieved by changing the probability test.
For a potential (contingent) asset - it needs to be virtually certain (rather than just
probable).
Probability test for Contingent Liabilities
• Remote chance of paying out - Do nothing
• Possible chance of paying out - Disclosure
• Probable chance of paying out - Create a provision
Probability test for Contingent Assets
• Remote chance of receiving - Do nothing
• Possible chance of receiving - Do nothing
• Probable chance of receiving - Disclosure
• Virtually certain of receiving - create an asset in the accounts
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Syllabus B8. Identify and account for:
– Onerous contracts
– Environmental and similar provisions
Discuss the validity of making provisions for future repairs or renewals.
Some typical examples
Specific types of provision
• Future operating losses
Provisions are not recognised for future operating losses (no obligation)
• Onerous contracts
Recognised and measured as a provision (as there is a contract and so a legal

obligation)
• Restructuring
Restructuring - Create a provision when:
1. There is a detailed formal plan for the restructuring; and
2. There is a valid expectation in those affected that it will carry out the restructuring
by starting to implement that plan or announcing its main features to those
affected by it (this creates a constructive obligation)
Provide only for costs that are:
• (a) necessarily entailed by the restructuring; and

(b) not associated with the ongoing activities of the entity
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Possible Exam Scenarios
• Warranties
Yes there is a legal obligation so provide. The amount is based on the class as a
whole rather than individual claims. Use expected values
• Major Repairs
These are not provided for. Instead they are treated as replacement non current
assets. See that chapter
• Self Insurance
This is trying to provide for potential future fires etc. Clearly no provision as no
obligation to pay until fire actually occurs
• Environmental Contamination Clearance

Yes provide if legally required to do so or other parties would expect the company
to do so as it is its known policy
• Decommissioning Costs
All costs are provided for. The debit would be to the asset itself rather than the
income statement
• Restructuring
Provide if there is a detailed formal plan and all parties affected expect it to
happen. Only include costs necessary caused by it and nothing to do with the
normal ongoing activities of the company (e.g. don’t provide for training,
marketing etc)
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• Reimbursements
This is when some or all of the costs will be paid for by a different party.
This asset can only be recognised if the reimbursement is virtually certain, and
the expense can still be shown separately in the income statement
Circumstance Provide?
Accrue a provision (past event was the sale of
Warranties/guarantees
defective goods)
Accrue if the established policy is to give
Customer refunds
refunds
Onerous (loss-making) contract Accrue a provision
Accrue a provision if the company's policy is to
Land contamination clean up even if there is no legal requirement to
do so
Future operating losses No provision (no present obligation)
No provision (there is no obligation to provide
Firm offers staff training
the training)
Major overhaul or repairs No provision (no obligation)
Restructuring by sale of an Accrue a provision only after a binding sale
operation/line of business agreement
Restructuring by closure of Accrue a provision only after a detailed formal
business locations or plan is adopted and announced publicly. A
reorganisation Board decision is not enough
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Syllabus B9. Accounting for employment and post-employment
benefits
Syllabus B9. Describe the nature of defined contribution, and defined benefits schemes
Explain the recognition and measurement of defined benefit schemes in the financial
statements of contributing employers
Account for defined benefit schemes in the financial statements of contributing employers
Pensions Introduction
Objective of IAS 19
Companies give their employees benefits - the most obvious being wages but there
are, of course, other things they may offer such as pensions.
IAS 19 says that the benefit should be shown when earned rather than when paid.
Employee benefits include paid holiday, sick leave and free or subsidised goods
given to employees.
Short-term Employee Benefits
As we mentioned above, any benefits payable within a year after the work is done,
(such as wages, paid vacation and sick leave, bonuses etc.) should be recognised
when the work is done not when paid for.
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Profit-sharing and Bonus Payments
Recognise when there is an obligation to make such payments and a reliable

estimate of the expected cost can be made.
Illustration
Grazydays PLC give their employees 6 weeks of paid holiday each year, and
because they’re groovy employers, any holiday not taken can be carried forward to
the next year.
• Accounting Treatment
Any untaken holiday entitlement should be recognised as a liability in the current
year even though it wouldn’t be taken until the next year.
Types of Post-employment Benefit Plans

There are two types:
1. Defined Contribution plan
In this one the company just promises to pay fixed contributions into a pension
fund for the employee and has no further obligations.
The contribution payable is recognised in the income statement for that period.
If contributions are not payable until after a year they must be discounted.
2. Defined Benefit plan
This is a post-employment benefit that gives the company an obligation to pay a

defined pension to its employees who have left.
The SFP Figure
The present value of the obligation less FV of assets (in the pension fund).
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Syllabus B9. Explain the recognition and measurement of defined benefit schemes in the
financial statements of contributing employers
Defined Benefit Scheme - Terms
Defined benefit plan
As we said in the intro - this is “A post-employment benefit that creates a

constructive obligation to the enterprise’s employees”.
• The SFP shows the pension fund as it stands at the year end in terms of the
present value of the obligation less FV of assets.
Let’s dig a little deeper to make some sense out of this.
• The idea is that the company puts money into the fund, the fund spends that
money on assets.
The assets make an EXPECTED return. The company hopes this return will pay
off the employees future pensions when they leave the company.
• Of course, the fund will not always exactly match the pension liability. Therefore
there will either be a surplus or deficit on the SFP.
Let’s look at some terms before we put it all together:
1. Actuarial gains/losses
These occur due to differences between previous estimates and what actually
occurred.
These are recognised in the OCI.
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2. Past service cost
Dr Income statement
Cr Pension Liability
This is a change in the pension plan resulting in a higher pension obligation for
employee service in prior periods.
They should be recognised immediately if already vested or not.
3. Plan curtailments or settlements
Curtailments are reductions in benefits or the number of employees covered by

the pension.
Any gain/loss is recognised when the curtailment occurs.
4. Current service cost
Increase in pension liability due to benefits earned by employee service in the

period.
Dr Income statement
5. Interest cost
The unwinding on the discount of the pension liability.
Dr Interest
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6. Expected return on plan assets
This is the Interest, dividends and other revenue from the pension assets and is
now to be based on the return from AA-rated corporate bonds.
This means companies cannot set expected returns according to the assets
actually held by the plan; it could encourage them to invest in more secure
vehicles than is currently the case, seeing as the potential higher return will no
longer be reflected in the accounts.
The reason behind this is to improve transparency and consistency.
Dr Pension Asset
Cr Interest received
The Interest cost and EROA are netted off against each other. They use the
same discount rate.
So if a fund has more assets than liabilities (a surplus) - it will have net interest
received.
If a fund has more liabilities than assets (a deficit) - it will have net interest paid.
7. Contributions to Pension fund
This is simply the money that the company puts in to the fund - so the fund can
buy assets to generate an expected return.
Dr Pension Asset
Cr Cash
8. Benefits paid
These are the actual pensions paid out to former employees.
Paying the pensions means we reduce the liability, but we use the pension fund
to do it, so we reduce the pension asset also.
Dr Pension Liability
Cr Pension Asset
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Other Long-term Benefits (eg Profit shares, bonuses)
A simplified application of the model described above for other long-term employee
benefits:
All past service cost is recognised immediately.
Termination Benefits (e.g. Redundancy)
Amount payable only recognised when committed to either:
1. Terminating the employment of employees before the normal retirement date; or
2. Providing benefits in order to encourage voluntary redundancy.
“Demonstrably committed” means a detailed formal plan without realistic

possibility of withdrawal.
Discount down if payable in more than a year.
Equity Compensation Benefits
No recognition for stock options issued to employees as compensation.
Nor does it require disclosure of the fair values of stock options or other share-based
payment.
IAS 19 ‘Asset Ceiling’
This stops gains being shown just because Past service costs (unvested) have been
deferred.
It may be that there are net assets but not all can be recovered through refunds /
contributing less in the future.
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In such cases, deferral of past service cost may not result in a refund to the entity or
a reduction in future contributions to the pension fund, so a gain is prohibited in
these circumstances.
So, any asset recognised in the balance sheet should be the lower of:
• the net total calculated; and
• the net total of:
(i) past service costs not recognised as an expense; and
(ii) the present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the plan.
An asset may arise where a defined benefit plan has been overfunded or in
certain cases where actuarial gains are recognised.
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Syllabus B9. Explain the recognition and measurement of defined benefit schemes in the
financial statements of contributing employers
Defined Benefit - Illustration
This is best seen on the video - but here goes in the written word….
Illustration
• Pension Fund asset b/f 400

Pension Fund Liability b/f 600
Current service cost 100
Expected return on assets 10%
Discount rate 10%
Contributions paid (@ year-end) 80
Benefits paid (@ year-end) 60
Actuarial c/f: Pension Fund Asset 500

Pension Fund Liability 650
Solution
• Current Service cost
Dr I/S 100
Cr Pension Liability 100
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• Expected return on Assets
Dr Pension asset 40 (10% x 400)

Cr Interest 40
• Unwinding of discount
Dr Interest 60 (10% x 600)

Cr Pension Liability 60
• Contributions Paid
Dr Pension asset 80
Cr Cash 80
• Benefits paid
Dr Pension Liability 60
Cr Pension Asset 60
Having done those double entry we can see that assets have increased by 60 (400
to 460) and liabilities have increased by 100 (600 to 700) giving a net increase in the
SFP pension liability of 40.
We now compare the pension assets and liabilities figure (which is based upon
assumptions) to what has actually occurred.
This is given in the actuarial figures c/f.
So, the assets made an actuarial gain of 40 and the liabilities a gain of 50.
This total gain of 90 is recognised in the OCI as a gain.
The balance sheet is showing a liability of 240, less the re-measurement of 90,
equals 150 Liability.
This matches what is actually in the pension fund (650- 500) = 150.
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Syllabus B9. Describe the nature of defined contribution, and defined benefits schemes
Defined Contribution Scheme
Short-term Employee Benefits
Benefits payable within a year after work is done, such as wages, paid vacation and
sick leave, bonuses etc. should be recognised when work is done.
Profit-sharing and Bonus Payments
Recognise when there is an obligation to make such payments and a reliable

estimate of the expected cost can be made.
Defined contribution plan
• The enterprise pays fixed contributions into a fund and has no further obligations.
• The contribution payable is recognised in the income statement for that period.
• If contributions are not payable until after a year they must be discounted.
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Syllabus B10. Tax in financial statements
Syllabus B10. Account for current tax liabilities and assets in accordance IFRSs
Income Tax
Current tax
The amount of income taxes payable or receivable in a period
Any tax loss that can be carried back to recover current tax of a previous period is
shown as an asset
If the gain or loss went to the OCI, then the related tax goes there too
Deferred Tax
This is basically the matching concept.
Let´s say we have credit sales of 100 (but not paid until next year).
There are no costs.
The tax man taxes us on the cash basis (i.e. next year).
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The Income statement would look like this:
Income Statement
Sales 100
Tax (30%) (0)
Profit 100
This is how it should look.
The tax is brought in this year even though it´s not payable until next year, it´s just a
temporary timing difference.
Income Statement SFP

Sales 100
Tax (30%) (30) Deferred tax payable 30
Profit 100
Illustration
• Tax Base
Let’s presume in one country’s tax law, royalties receivable are only taxed when
they are received
• IFRS
IFRS, on the other hand, recognises them when they are receivable
Now let’s say in year 1, there are 1,000 royalties receivable but not received until
year 2.
The Income statement would show:
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Royalties Receivable 1000
Tax (0) (They are taxed when received in yr 2)
This does not give a faithful representation as we have shown the income but not the
related tax expense.
Therefore, IFRS actually states that matching should occur so the tax needs to be
brought into year 1.
Dr Tax (I/S)
Cr Deferred Tax (SFP provision)
Deferred tax on a revaluation
Deferred tax is caused by a temporary difference between accounts rules and tax
rules.
One of those is a revaluation:
Accounting rules bring it in now.
Tax rules ignore the gain until it is sold.
So the accounting rules will be showing more assets and more gain so we need to
match with the temporarily missing tax.
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Illustration
A company revalues its assets upwards making a 100 gain as follows:
OCI SFP
PPE 1,000 + 100
Revaluation Gain 100 Revaluation surplus 100
This is how it should look.
The tax is brought in this year even though it´s not payable until sold, it´s just a
temporary timing difference.
Notice the tax matches where the gain has gone to.
OCI SFP
PPE 1,000 + 100
Deferred tax payable (30%) (30)
Revaluation Gain 100-30 Revaluation surplus 100-30
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Syllabus B10. Outline the principles of accounting for deferred tax
Explain the effect of taxable and deductible temporary differences on accounting and taxable
profits
Identify and account for the IASB requirements relating to deferred tax assets and liabilities
Calculate and record deferred tax amounts in the financial statements.
Deferred Tax Scenarios
So as we saw in the introductory section, deferred tax is all about matching.
If the accounts show the income, then they must also show any related tax.
This is normally not a problem as both the accounts and taxman often charge
amounts in the same period.
The problem occurs when they don’t.
We saw how the accounts may show income when the performance occurs, while
the taxman only taxes it (tax base) when the money is received.
In this case, as financial reporters we must make sure we match the income and
related expense.
So this was a case of the accounts showing ‘more income’ than the tax man in the
current year (he will tax it the following year when the money is received).
So we had to bring in ‘more tax’ ourselves by creating a deferred tax liability.
So, basically deferred tax is caused simply by timing differences between IFRS rules
and tax rules.
Therefore IFRS demands that matching should occur i.e.
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Difference between Tax adjustment needed for Deferred
Double entry
IFRS and Tax base matching to occur Tax
Dr Tax (I/S)
More Income in I/S More tax needed Liability Cr Def Tax
Liability (SFP)
Hopefully you can see then that the opposite also applies:
Difference between IFRS Tax adjustment needed for Deferred Double

and Tax base matching to occur Tax entry
Dr Def tax
asset
More expense in I/S Less tax needed Asset
Cr tax (I/
S)
In fact, the following table all applies:
Difference Tax effect Difference

1 More Income More tax Liability
2 Less income Less tax Asset
3 More expense Less tax Asset
4 Less expense More tax Liability
Remember this “more income etc.” is from the point of view of IFRS. I.e. The
accounts are showing more income, as the taxman does not tax it until next year.
We will now look at each of these 4 cases in more detail.
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Case 1
Difference Tax effect Deferred Tax

1 More Income More tax Liability
Issue
IFRS shows more income than the taxman has taken into account.
Example
Royalties receivable above.
Double entry required:

Dr Tax (I/S)
Cr Deferred tax Liability (SFP)
Case 2

2 Less Income Less tax Asset
Issue
IFRS shows less income than the taxman has taken into account.
Example
Taxman taxes some income which IFRS states should be deferred such as upfront
receipts on a long term contract.
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Dr Deferred Tax Asset (SFP)
Cr Tax (I/S)
This will have the effect of eliminating the tax charge for now, so matching the fact
that IFRS is not showing the income yet either.
Once the income is shown, then the tax will also be shown by:
Dr Tax (I/S)
Cr Deferred tax asset (SFP)
Case 3

3 More Expense Less tax Asset
Issue
IFRS shows more expense than the taxman has taken into account.
Example
IFRS depreciation is more than Tax depreciation (WDA or CA).

Dr Deferred Tax Asset (SFP)
Cr Tax (I/S)
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Illustration
IFRS TAX
Asset Cost 1,000 1,000
Depreciation (400) (300)
NBV 600 700
Simply compare 700-600 =100
100 x tax rate = deferred tax asset
Case 4

4 Less Expense More tax Liability
Issue
IFRS shows less expense than the taxman has taken into account.
Example
IFRS depreciation is less than Tax depreciation (WDA or CA).

Dr Tax I/S
Cr Deferred Tax Liability
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Illustration
IFRS TAX
Asset Cost 1,000 1,000
Depreciation (300) (400)
NBV 700 600
Simply compare 700-600 =100
100 x tax rate = deferred tax liability
Then multiply this by the tax rate (e.g. 30%) = 100 x 30% = 30
NOTE
In actual fact, the standard refers to assets and liabilities rather than more income
and more expense etc. Simply use the above tables and substitute the word asset
for income and expense for liability.
Difference Tax effect Difference

1 More Asset More tax Liability
2 Less Asset Less tax Asset
3 More Liability Less tax Asset
4 Less Liability More tax Liability
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Possible Examination examples of Case 1& 4
Accelerated capital allowances (accelerated tax depreciation) - see above.
Interest revenue - some interest revenue may be included in profit or loss on an

accruals basis, but taxed when received.
Development costs - capitalised for accounting purposes in accordance with IAS 38

while being deducted from taxable profit in the period incurred.
Revaluations to fair value

In some countries the revaluation does not affect the tax base of the asset and
hence a temporary difference occurs which should be provided for in full based on
the difference between its carrying value and tax base.
NOTE: Double entry here is:

Dr Revaluation Reserve with the tax (as this is where the “income” went)
Cr Deferred tax liability
Fair value adjustments on consolidation

IFRS 3/ IAS 28 require assets acquired on acquisition of a subsidiary or associate to
be brought in at their fair value rather than carrying amount.
The deferred tax effect is a consolidation adjustment - this is more assets (normally)
so a deferred tax liability. The other side would be though to increase goodwill. And
vice-versa.
Undistributed profits of subsidiaries, branches, associates and joint ventures
No deferred tax liability if Parent controls the timing of the dividend.
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Possible Examination examples of Case 2 & 3
Provisions - may not be deductible for tax purposes until the expenditure is
incurred.
Losses - current losses that can be carried forward to be offset against future
taxable profits result in a deferred tax asset.
Fair value adjustments

liabilities recognised on business combinations result in a deferred tax asset where
the expenditure is not deductible for tax purposes until a later period.
A deferred tax asset also arises on downward revaluations where the fair value is
less than its tax base.
NOTE: Here, the deferred tax asset here is another asset of S at acquisition and so
reduces goodwill.
Unrealised profits on intragroup trading

the tax base is based on the profits of the individual company who has made a
realised profit.
THERE IS NO DEFERRED TAX EFFECT ON INITIAL GOODWILL.
How much deferred tax?
Deferred tax is measured at the tax rates expected to apply to the period when the
asset is realised or liability settled, based on tax rates (and tax laws) that have been
enacted by the end of the reporting period.
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No Discounting
Deferred tax assets are only recognised to the extent that it is probable that taxable
profit will be available against which the deductible temporary difference can be
used.
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Syllabus B10. Identify and account for the IASB requirements relating to deferred tax assets
and liabilities
Calculate and record deferred tax amounts in the financial statements.
Miscellaneous Deferred Tax Items
On acquiring a Subsidiary
Here you need to check the Net Assets at acquisition (from your equity table) and
compare it to the tax base of the NA (this will be given in the exam)
Again you just look to see if the accounts are showing more or less assets and
create a deferred tax liability / asset at acquisition also. This will affect goodwill.
Illustration 1
H acquires 100% S for 1,000. At that date the FV of S’s NA was 800 and the tax
base 700. Tax is 30%.
How much is goodwill?
Goodwill
FV of Consideration 1,000
NCI -
FV of NA acquired -800
New Deferred tax liability
30
(800-700) x 30%
Goodwill 230
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Un-remitted Earnings of Group Companies
H always has the right to receive profits (and dividends from them) from S or A.
However not all profits are immediately paid out as dividends.
This creates deferred tax as H will receive the full amount one day and when it does
it will be taxed. Therefore, a deferred tax liability should be created to match against
the profits shown from S and A
However, for Subsidiaries only, H might control its dividend policy and have no
intention of paying dividends out and no intention of selling S either in the
foreseeable future.
Therefore when this is the case NO deferred tax liability is created (this can not be
the case for Associates as H does not control A)
Unrealised Profit Adjustments
Here, the group makes an adjustment and decreases profits, in the group accounts
only.
However, tax is charged on the individual companies and not the group. So, the
group accounts will be showing less profits and so the tax needs adjusting by
creating a deferred tax asset
The issue though is what tax rate to use - that of the selling company or that of the
buyer who holds the stock?
IAS 12 says you should use the tax rate of the buyer
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Setting Off
A deferred tax asset can normally be set off against a deferred tax liability (to the
same tax jurisdiction) as the liability gives strong evidence that profits are being
made and so the asset will come to fruition
Deferred Tax Liability 1,000

Deferred Tax Asset -800
NCI 200
If, however, the deferred tax asset is more than the liability then the deferred tax
asset can only be recognised if is probable that it will be recovered in the near future
Deferred Tax Liability 1,000

Deferred Tax Asset -1,100
NCI NO SET OFF
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Syllabus B10. Describe the general principles of government sales taxes (e.g. VAT or GST)
VAT
As goods pass down the supply line, the person who eventually suffers the VAT is
the end user
Buying down the supply chain
1. Producer sells to retailer for 100 + 20 (VAT)
The Producer shows 20 output tax on its VAT return and pays it over to the
authorities
Don't forget though that they received the 20 that they're paying over to the VAT
authorities so they are neutral tax payers.
2. Retailer sells to customer for 200 + 40 (VAT)
The retailer shows 20 INPUT tax on its VAT return and 40 OUTPUT tax - it has to
pay the net 20 to the VAT authorities
So, they paid 20 VAT to the producer, received 40 from the customer, and paid 20
to VAT authorities so they're neutral tax payers again
3. Customer pays 240
Customer has paid the 40 VAT, so they have ultimately paid the 2 x 20 paid over
to the authorities earlier
OUTPUT TAX - INPUT TAX = Paid over to authorities
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Syllabus B11. The effects of changes in foreign currency
exchange rates
Syllabus B11. Discuss the recording of transactions and translation of monetary/non-monetary
items at the reporting date for individual entities in accordance with IFRSs
Foreign Exchange Single company
Transactions in a single company

This is where a company simples deals with companies abroad (who have a different
currency).
The key thing to remember is that…
ALL EXCHANGE DIFFERENCES TO INCOME STATEMENT
So - a company will buy on credit (or sell) and then pay or receive later. The problem
is that the exchange rate will have moved and caused an exchange difference.
Step 1: Translate at spot rate
Step 2: If there is a creditor/debtor @ y/e - retranslate it (exch gain/loss to I/S)
Step 3: Pay off creditor - exchange gain/loss to I/S
Illustration 1
On 1 July an entity purchased goods from a foreign country for Y$10,000.
On 1 September the goods were paid in full.
The exchange rates were:

1 July $1 = Y$10
1 September $1 = Y$9
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Calculate the exchange difference to be included in profit or loss
according to IAS 21 The Effects of Changes in Foreign Exchange Rates.
• Solution
Account for Payables on 1 July: Y$10,000/10 = 1,000

Payment performed on 1 September: Y$10,000 / 9 = 1,111
The Exchange difference: 1,000 - 1,111 = 111 loss
Illustration 2
Maltese Co. buys £100 goods on 1st June (£1:€1.2)

Year End (31/12) payable still outstanding (£1:€1.1)
5th January £100 paid (£1:€1.05)
Solution
Initial Transaction
Dr Purchases 120
Cr Payables 120
Year End
Dr Payables 10
Cr I/S Ex gain 10
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On payment
Dr Payables 110
Cr I/S Ex gain 5
Cr Cash 105
Also items revalued to Fair Value will be retranslated at the date of revaluation and
the exchange gain/loss to Income statement.
All foreign monetary balances are also translated at the year end and the differences
taken to the income statement.
This would include receivables, payables, loans etc.
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Syllabus B11. Distinguish between reporting and functional currencies
Determine an entity’s functional currency
Foreign currency - extras
Foreign Currency - Examinable Narrative & Miscellaneous points
Functional Currency
Every entity has its own functional currency and measures its results in that currency
Functional currency is the one that
influences sales price

the one used in the country where most competitors are and where regulations are
made and
the one that influences labour and material costs
If functional currency changes then all items are translated at the exchange rate at
the date of change
Presentation Currency
An entity can present in any currency it chooses.
The foreign sub (with a foreign functional currency) will present normally in the
parents presentation currency and hence the need for foreign sub translation rules!
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Foreign currency dealings between H and S
There is often a loan between H and a foreign sub. If the loan is in a foreign currency
don’t forget that this will need retranslating in H’s or S’s (depending on who has the
‘foreign’ loan) own accounts with the difference going to its income statement.
If H sells foreign S, any exchange differences (from translating that sub) in equity are
taken to the income statement (and out of the OCI).
Deferred tax
There are deferred tax consequences of foreign exchange gains (see tax chapter).
This is because the gains and losses are recognised by H now but will not be dealt
with by the taxman until S is eventually sold.
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Syllabus B12. Agriculture
Syllabus B12. Recognise the scope of international accounting standards for agriculture
Discuss the recognition and measurement criteria including the treatment of gains and losses,
and the inability to measure fair value reliably
Identify and explain the treatment of government grants, and the presentation and disclosure of
information relating to agriculture
Accounting for Biological Assets
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2. Do the quiz again (next topic)
You should feel comfortable with Agriculture IAS 41 - and who would have thought
that half an hour ago? ;)
Good luck!
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Syllabus B12. Report on the transformation of biological assets and agricultural produce at the
point of harvest and account for agriculture related government grants
Government grants - agriculture
Government grants
2 types:
1. Unconditional government grants
Unconditional government grants received in respect of biological assets

measured at fair value less costs to sell are recognised in profit or loss when the
grant becomes receivable.
2. Conditional government grants
If such a grant is conditional (including where the grant requires an entity not to
engage in certain agricultural activity), the entity recognises the grant in profit or
loss only when the conditions have been met.
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Syllabus B13. Share-based payment
Syllabus B13. Understand the term ‘share-based payment’
Explain the difference between cash settled share based payment transactions and equity
settled share based payment transactions
Discuss the key issue that measurement of the transaction should be based on fair value
Share Based Payments - Introduction
What is a SBP transaction?

Well first of all it needs to be for receiving good or services and in return the
company gives:
1. Its own shares
2. Cash based upon the price of its own shares
Contracts to buy or sell non-financial items that may be settled net in shares or rights
to shares are outside the scope of IFRS 2 and are addressed by IAS 32
There are 3 types of Share based payment..
These are..
1. Equity-settled share-based payment
This is where the company pays shares in return for goods and/or services
received.
• Dr Expense
Cr Equity
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2. Cash-settled share-based payment
This is where cash is paid in return for goods and services received,
HOWEVER..the actual cash amount though is based on the share price.
These are also called SARs (Share Appreciation Rights).
• Dr Expense
Cr Liability
3. Transactions with a choice of settlement
A choice of cash or shares paid in return for goods and services received.
• depends on choice made
Vesting period
Often share based payments are not immediate but payable in say 3 years. The
expense is spread over these 3 years and this is called the vesting period.
How much to recognise?
So we have decided that share based payments (either shares or cash based on
share price) should go into the accounts .
(Dr expense Cr Equity or Liability)
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We now have to look at the value to put on these:
• Option 1: Direct method
Use the FV of the goods or services received
• Option 2: Indirect method
Use the FV of the shares issued by the company
Equity settled - Use FV of shares @ grant date

Cash settled - Update FV of shares each year
IFRS 2 suggests you choose option 1 - the FV of the goods/services.
However, if the FV of these cannot be reliably measured then you should go for
option 2 - FV of shares issued.
Strangely enough, option 2 is the most common. This is because share based
payments are often associated with paying employees.
You cannot put a value on the work done by employees - except for the value of
what you pay them i.e. Option 2.
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Syllabus B13. Discuss the key issue that measurement of the transaction should be based on
fair value
Identify the principles applied to measuring both cash and equity settled share-based payment
transactions
Compute the amounts that need to be recorded in the financial statements when an entity
carries out a transaction where the payment is share based
SBP - Equity Settled
This is where payments are made with an equity instrument such as a
share or a share option.
Measurement
• The FV of the product / service acquired (if possible)
• FV of equity instrument issued
FV of Equity Instrument
This is basically MARKET VALUE, taking into account the terms and market related
conditions of the offer.
If there is no MV available, then the “Intrinsic Value” option is available. This is

basically the share price less the exercise price.
However, if this is chosen then the accounting treatment below is slightly different. It
will need to be remeasured to the new intrinsic value each year - this will be very
rare.
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Dr Expense (or asset)

Cr Equity
The problem is we only do the above double entry once the item has ‘vested’ (i.e.
satisfied all conditions to be met to make the share payable)
For example, if shares are issued for the purchase of a building, and the building is
available to use immediately, then it has vested immediately and you would Dr PPE
Cr Equity with the FV of the asset acquired.
If, however, share options are issued, but only once employees have stayed in the
job for say 3 years, then this means they do not fully vest for 3 years. What you do
here, is recognise the expense as it vests - over what we call the ‘vesting period’. So,
in this example, you would calculate the full cost of the options at grant date and in
the first year Dr Expense Cr Equity with 1/3 of that total.
Precise Measurement
You take the best available estimate at the time of the number of equity
instruments expected to vest at the end.
The value used for the share options throughout the vesting period remains at the
GRANT DATE value (with the exception of “intrinsic value” method above).
Illustration
An entity grants 100 share options on its $1 shares to each of its 500 employees on
1 January Year 1.
Each grant is conditional upon the employee working for the entity over the next
three years.
The fair value of each share option as at 1 January Year 1 is $10.
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On the basis of a weighted average probability, the entity estimates on 1 January
that 100 employees will leave during the three-year period and therefore forfeit their
rights to share options.
The following actually occurs:
• – 20 employees leave during Year 1 and the estimate of total employee

departures over the three-year period is revised to 70 employees
– 25 employees leave during Year 2 and the estimate of total employee
departures over the three-year period is revised to 60 employees
– 10 employees leave during Year 3
Solution
Step 1:
Decide if this is a cash or equity settled SBP - share options are equity settled (so Dr
Expense Cr Equity).
Step 2:
Decide whether to value directly or indirectly - these are for employees so indirectly.
Step 3:
Calculate how many employees (and their share options each) are expected to be
issued at the end of the vesting period.
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Year 1:
430 Employees expected to be left at end (500-70) x 100 (share options each) x $10
(FV @ GRANT date) x 1/3 (time through vesting period) = 143,300
Year 2:
440 x 100 x $10 x 2/3 - 143,300 = 150,000
Year 3:
445 x 100 x $10 x 3/3 - 293,300 = 151,700
So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Equity 143,300

Notice that if you add these up it comes to 445,000.
This is exactly our final liability (445 x 100 x $10 x 3/3) - it’s just we’ve spread it over
the 3 years vesting period.
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Syllabus B13. Explain the difference between cash settled share based payment transactions
and equity settled share based payment transactions
Identify the principles applied to measuring both cash and equity settled share-based payment
transactions
Compute the amounts that need to be recorded in the financial statements when an entity
carries out a transaction where the payment is share based
SBP - Cash Settled
They are often called “Share Appreciation Rights (SARs)”
These are when a company promises to pay for goods or services for cash, however
the cash price is linked to the share price
The double entry is:
• Dr Expense
Cr Cash or Liability
If the payment is for a service stretching over a number of years (vesting period)
then the expense is recognised over the number of years and the liability is
calculated by taking into account the change in the share price
Illustration 1
1 Jan Year 1 - 100 share appreciation rights (SARs) given to each of the company’s
1000 employees.
FV of these at grant date was £5.
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The employees had to be in service for 3 years to take the SAR
End of year 1 - 100 employees had left and 140 more expected to leave by the end
of year 3. FV of SAR now £6
End of year 2 - 40 employees left in the year and another 50 expected to leave in
year 3. FV of SAR now £8
End of year 3 - 60 employees left and the FV of SAR is now £7
Solution
Year 1 - 760 (1,000 - 100 -140) x 100 x £6 x 1/3 = 152,000 (Dr Expense Cr Liability)
Year 2 - 810 (1,000 - 100 - 40 - 50) x 100 x £8 x 2/3 = 432,000 - 152,000 = 280,000
(Dr Expense Cr Liability)
Year 3 - 800 (1,000 - 100 - 40 - 60) x 100 x £7 x 3/3 = 560,000 - 432,000 = 128,000
(Dr Expense Cr Liability)
Finally the 560,000 is paid
Dr Liability 560,000
Cr Cash 560,000
Illustration 2
An entity grants 100 share options on its $1 shares to each of its 500 employees on
1 January Year 1.
Each grant is conditional upon the employee working for the entity over the next
three years.
The fair value of each share option as at 1 January Year 1 is $10.
On the basis of a weighted average probability, the entity estimates on 1 January

that 100 employees will leave during the three-year period and therefore forfeit their
rights to share options.
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The following actually occurs:
– 20 employees leave during Year 1 and the estimate of total employee departures
over the three-year period is revised to 70 employees
– 25 employees leave during Year 2 and the estimate of total employee departures
over the three-year period is revised to 60 employees
– 10 employees leave during Year 3
Information of share price at the end of each year:

Year 1 10
Year 2 12
Year 3 14
Solution
As this is cash settled then the double entry becomes Dr Expense Cr Liability and we
do not keep the value of the option @ grant date but change it as we pass through
the vesting period.
• Y1: 430 x 100 x 10 x 1/3 = 143,300

Y2: 440 x 100 x 12 x 2/3 - 143,300 = 208,700
Y3: 445 x 100 x 14 x 3/3 - 623,000 x 3/3 - 352,000 = 271,000
• So you can see that the “costs” and so the entries into the accounts would be:
Year 1: Dr Expense 143,300 Cr Liability 143,300

Notice that if you add these up it comes to 623,000.
• This is exactly our final liability (445 x 100 x $14 x 3/3) - it’s just we’ve spread it
over the 3 years vesting period.
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Syllabus B13. Identify the principles applied to measuring both cash and equity settled share-
based payment transactions
SBP with a Choice of Settlement
Share-based payment with a choice of settlement
Entity has the choice
Is there a present obligation to settle in cash?
1. Yes
Treat as cash-settled
2. No
Treat as equity-settled
Counter-party has the choice
The transaction is a compound financial instrument which needs splitting

into debt and equity
• Debt Portion
This must be calculated first..the FV of the cash option at grant date
Then it is treated just like a normal cash-settled SBP
• Equity Portion
This is the FV of the option less the debt portion calculated above at grant date
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Illustration 1
An entity grants an employee a right to receive either 8,000 shares or cash to the
value, on that date, of 7,000 shares. She has to remain in employment for 3 years.
The market price of the entity's shares is $21 at grant date, $27 at the end of year 1,
$33 at the end of year 2 and $42 at the end of the vesting period, at which time the
employee elects to receive the shares.
The entity estimates the fair value of the share route to be $19.
Show the accounting treatment.
Solution
The fair value of the cash route at grant date is: 7,000 × $21 = $147,000
The fair value of the share route is: 8,000 × $19 = $152,000 - 147,000 = $5,000
We then treat them as cash and equity settled SBPs as appropriate:
Year Cash Equity I/S

1 7,000 x $27 x 1/3 = 63,000 5,000 x 1/3 = 1,667 64,667
2 7,000 x $33 x 2/3 = 154,000 5,000 x 1/3 = 1,667 92,667
3 7,000 x $42 x 3/3 = 294,000 5,000 x 1/3 = 1,667 141,667
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Entity has the choice of issuing shares or cash
Option 1 - Obligated to pay cash
The entity is prohibited from issuing shares or where it has a stated policy, or past
practice, of issuing cash rather than shares.
Treat as a cash-settled SBP
Option 2 - Not obligated to pay cash
Treat as if it was purely an equity-settled transaction.
If on settlement, cash was actually paid, the cash should be treated as if it was a
repurchase of the equity instrument by a deduction against equity.
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Vesting Period
This is normally a set amount of time but sometimes it may be dependent upon a
condition to be satisfied.
Vesting Conditions
These are conditions that have to be met before the holder gets the right to the
shares or share options
There are 2 types of Vesting Condition:

1. Non-market based
Those not relating to the market value of the entity’s shares
2. Market based
Those linked to the market price of the entity’s shares in some way
Non-Market Vesting Conditions
Here only the number of shares or share options expected to vest will be accounted
for.
At each period end (including interim periods), the number expected to vest should
be revised as necessary.
Illustration 1
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An entity granted 10,000 share options to one director. The director had to work
there for 3 years, and indeed he did
Also to get the options, the director had to reduce costs by 10% over the vesting
period.
At the end of the first year, costs had reduced by 12%. By the end of the 2nd year,
costs had only reduced in total by 7%.
By the end of yr. 3 though the costs had been reduced by 11%
The FV of the option at grant date was $21
How should the transaction be recognised?
Solution
The cost reduction target is a non-market performance condition which is taken into
account in estimating whether the options will vest. The expense recognised in profit
or loss in each of the three years is:
Yearly Charge Cumulative

(10,000 × £21)/3 years
Year 1 70,000
= 70,000
Year 2 (performance target not expected to
-70,000 0
be met)
(10,000 x $21)
Year 3 210,000
= 210,000
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Market Vesting Conditions
These conditions are taken into account when calculating the fair value of the equity
instruments at the grant date.
They are not taken into account when estimating the number of shares or share
options likely to vest at each period end.
If the shares or share options do not vest, any amount recognised in the financial
statements will remain.
Make an estimate of the vesting period at the acquisition date
1. If vesting period is shorter than original estimate
Expense all the remainder in the year the vesting condition is complied with
2. If vesting period is longer than the original estimate
Expense still using the original estimate of vesting period
Market and non-market based vesting conditions together
Where both market and non-market vesting conditions exist, then as long as the non
market conditions are met the company must expense (irrespective of whether
market conditions are satisfied)
So, where market and non-market conditions co-exist, it makes no difference

whether the market conditions are achieved.
The possibility that the target share price may not be achieved has already been
taken into account when estimating the fair value of the options at grant date.
Therefore, the amounts recognised as an expense in each year will be the same
regardless of what share price has been achieved.
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Illustration 2
A company granted 10,000 share options to a director. He must work there for 3
years. He did this.
Also the share price should increase by at 25% over the three-year period.
During the 1st year the share price rose by 30% and by 26% compound over the
first two years and 24% per annum compound over the whole period
At the date of grant the fair value of each share option was estimated at £18
How should the transaction be recognised?
Solution
The director satisfied the service requirement but the share price growth condition
was not met.
The share price growth is a market condition and is taken into account in estimating
the fair value of the options at grant date.
Therefore, no adjustment should be made if there are changes from that estimated in
relation to the market condition. There is no write-back of expenses previously
charged, even though the shares do not vest.
The expense recognised in profit or loss in each of the three years is one third of
10,000 x £18 = £60,000.
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IFRS 2 Share based payments deferred tax
Deferred tax implications
Issue
An entity recognises an expense for share options but the taxman offers the tax
deduction on the later exercise date.
This is therefore an example of accounts showing more expenses (than the taxman
has allowed so far) and so a deferred tax asset occurs.
The taxman may calculate his expense on the intrinsic value basis.
This may offer a greater deduction (at the end) than our expense.
This extra deferred tax asset is set off against equity (and OCI) not the income
statement.
Illustration
An entity granted 1,000 share options to an employee vesting 3 years later.
The fair value of at the grant date was $3.
Tax law allows a tax deduction of the intrinsic value of$1.20 at the end of year 1 and
$3.40 at the end of year 2.
Assume a tax rate of 30%.
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Solution
• Year 1
Accounts 1,000 x 1/3 x 3 = 1,000
Tax Has allowed 0
However, at the end he will allow 1,000 x 1/3 x 1.2 = 400
Therefore the deferred tax asset is capped at 400.
So, the double entry is:

Dr Deferred Tax Asset (400x30%) 120
Cr Tax (I/S) 120
• Year 2
Accounts 1,000 x 2/3 x 3 - 1,000 = 1,000
Tax 1,000 x 2/3 x 3.4 - 400 = 1.867
Therefore we have expensed 2,000 (1,000 + 1,000)
The tax man will allow at the end 2,267 (400 + 1,867)
So, the deferred tax asset should now be 2267 x 30% = 680
Of this only 2,000 x 30% = 600 should have gone to the income statement (to
match with the 2,000 expense).
The remaining 80 should have gone to equity.
Year 2
Income statement
Expense 1,000
Tax (600 - 120) -480
Equity
Share Options 2,000
Tax asset 80
Double entry
Dr Deferred tax asset (680-120) 560
Cr Income statement 480
Cr Equity 80
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IFRS 2 Modifications and Cancellations
IFRS 2 Modifications and Cancellations

The entity might:
• Reprice (modify) share options, or

• Cancel or settle the options.
Equity instruments may be modified before they vest.
For example, a fall in the actual share price may mean that the original option
exercise price is no longer attractive.
Therefore the exercise price is reduced (the option is ‘re-priced’) to make it valuable
again.
Such modifications will often affect the fair value of the instrument and therefore the
amount recognised in profit or loss.
1. Continue to recognise the original fair value of the instrument in the normal way
(even where the modification has reduced the fair value)
2. Recognise any increase in fair value at the modification date (or any increase in
the number of instruments granted as a result of modification) spread over the
period between the modification date and vesting date.
3. If modification occurs after the vesting date, then the additional fair value must be
recognised immediately unless there is, for example, an additional service period,
in which case the difference is spread over this period.
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Illustration 1
At the beginning of year 1, an entity grants 100 share options to each of its 500
employees over a vesting period of 3 years at a fair value of $15.
Year 1:
40 leave, further 70 expected to leave; share options repriced (as mv of shares has
fallen) as the FV had fallen to $5. After the repricing they are now worth $8.
Year 2:
35 leave, further 30 expected to leave
Year 3:
28 leave
Solution
The repricing has increased FV by (8-5) = 3
This amount is recognised over the remaining two years of the vesting period, along
with remuneration expense based on the original option value of $15.
1. Year 1
Income statement & Equity

(500-110) x 100 x 1/3 x $15 = 195,000
2. Year 2
[(500 – 105) × 100 × (($15 × 2/3) + ($3 × ½))] 454,250 - 195,000
Dr Expenses $259,250
Cr Equity $259,250
3. Year 3

[(500 – 103) × 100 × ($15 + $3 ) 714,600 - 454,250
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Dr Expenses $260,350
Cr Equity $260,350
Illustration 2
An entity granted 1,000 share options at an exercise price of £50 to each of its 30
key management personnel.
They had to stay with the entity for 4 years
At grant date, the fair value of the share options was estimated at £20 and the entity
estimated that the options would vest with 20 managers.
This estimate didn’t change in year 1
The share price fell early in the 2nd year. So half way through that year they modified
the scheme by reducing the exercise price to £15. (The fair value of an option was
£2 immediately before the price reduction and £11 immediately after.)
It retained its estimate that options would vest with 20 managers.
How should the modification be recognised?
Solution
The total cost to the entity of the original option scheme was: 1,000 shares × 20
managers × £20 = £400,000
This was being recognised at the rate of £100,000 each year.
The cost of the modification is:

1,000 x 20 managers × (£11 – £2) = £180,000
This additional cost should be recognised over 30 months, being the remaining
period up to vesting, so £6,000 a month.
The total cost to the entity in the second year and from then on is: £100,000 +
(£6,000 × 6) = £136,000.
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Cancellations and settlements
An entity may settle or cancel an equity instrument during the vesting period.
Basically treat this as the vesting period being shortened.
Charge any remaining fair value of the instrument that has not been recognised
immediately in profit or loss (the cancellation or settlement accelerates the charge
and does not avoid it).
Any amount paid to the employees by the entity on settlement should be treated as a
buyback of shares and should be recognised as a deduction from equity.
If the amount of any such payment is in excess of the fair value of the equity
instrument granted, the excess should be recognised immediately in profit or loss.
A cash settlement made to an employee on cancellation
• Dr Equity
Dr Income statement (excess over amount in equity)
Cr Cash
An equity settlement made to an employee on cancellation
This is basically a replacement of the option and so is treated as a modification (see

earlier) at this value:
Fair value of replacement instruments* X
Less: Net fair value of cancelled instruments (X)
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Illustration
2,000 share options granted at an exercise price of $18 to each of its 25 key
management personnel.
The management must stay for 3 years.
The fair value of the options was estimated at $33 and the entity estimated that the
options would vest with 23 managers.
This estimate stayed the same in year 1
In year 2 the entity decided to abolish the existing scheme half way through the year
when the fair value of the options was $60 and the market price of the entity's shares
was $70.
Compensation was paid to the 24 managers in employment at that date, at the rate
of $63 per option.
How should the entity recognise the cancellation?
Solution
The original cost to the entity for the share option scheme was: 2,000 shares × 23
managers × $33 = $1,518,000
This was being recognised at the rate of $506,000 in each of the three years.
At half way through year 2 when the scheme was abolished, the entity should
recognise a cost based on the amount of options it had vested on that date.
The total cost is:

2,000 × 24 managers × £33 = $1,584,000
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After deducting the amount recognised in year 1, the year 2 charge to profit or loss is
$1,078,000.
The compensation paid is: 2,000 × 24 × $63 = $3,024,000
Of this, the amount attributable to the fair value of the options cancelled is:
2,000 × 24 × $60 (the fair value of the option, not of the underlying share) =
$2,880,000
This is deducted from equity as a share buyback.
The remaining $144,000 ($3,024,000 less $2,880,000) is charged to profit or loss.
Cancellation and resistance
Where an entity has been through a capital restructuring or there has been a
significant downturn in the equity market through external factors, an alternative to
repricing the share options is to cancel them and issue new options based on
revised terms.
The end result is essentially the same as an entity modifying the original options and
therefore should be recognised in the same way.
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Syllabus B14. Exploration and evaluation expenditures
Syllabus B14. Outline the need for an accounting standard in this area and clarify its scope
The need for an accounting standard
Expenditure on the exploration for, and evaluation of, mineral resources
is not covered by:
• IAS 16 – Property, Plant and Equipment

• IAS 38 – Intangible Assets.
This has meant that, entities should determine their accounting policies for
exploration and evaluation expenditures in accordance with the general
requirements of IAS 8 – Accounting Policies, Changes in Accounting Estimates and
Errors.
The Drawbacks:
1. Diversity of the acc. policies

This could lead to divergence of practice.
2. Comparison
It is difficult to compare the financial statements with the competitors since they
use different accounting policies.
The IASB issued IFRS 6 – Exploration for and Evaluation of Mineral Resources – to
achieve some level of standardisation of practice in this area.
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Syllabus B14. Give examples of elements of cost that might be included in the initial
measurement of exploration and evaluation assets
Describe how exploration and evaluation assets should be classified and reclassified
Describe the method of accounting specified by the IASB for the exploration for and evaluation
of mineral resources
Explain when and how exploration and evaluation assets should be tested for impairment
Exploration for and evaluation of mineral resources
IFRS 6 Exploration for and Evaluation of Mineral Resources
Exploration for and evaluation of mineral resources is the search for mineral
resources after the entity has obtained legal rights to explore in a specific area.
Mineral resources can be:
1. Oil
2. Natural gas
3. Similar non-regenerative resources
Exploration and evaluation expenditures

are expenditures incurred in connection with the exploration and evaluation of
mineral resources
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Remember!
These expenditures are incurred BEFORE the technical feasibility and

commercial viability of extracting a mineral resource IS DEMONSTRABLE.
Terms
• Technical feasibility
is the ability of a business to complete the product under current technical

conditions.
• Commercial viability
is the ability of a business or product to compete effectively and to make a profit
Accounting policies
The IFRS permits an entity to develop an accounting policy for exploration and
evaluation assets.
1. Entities determine their own accounting policies
Entities should determine their accounting policies for exploration and evaluation
expenditures in accordance with IAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors.
2. Keep the Acc. policies consistent
IFRS 6 requires relevant entities to determine a policy specifying which

expenditures are recognised as exploration and evaluation assets and apply the
policy consistently.
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3. Clasify the assets as TA or IA
Entities shall consistently classify them as tangible or intangible according to

their nature.
Assets recognition
Assets to be measured at cost at recognition
When they are first recognised in the balance sheet, exploration and evaluation
assets are required to be measured at cost.
The following as examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets:
• acquisition of rights to explore
• topographical, geological, geochemical and geophysical studies
• exploratory drilling
• trenching
• sampling
• activities in relation to evaluating the technical feasibility and commercial viability
of extracting a mineral resource.
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Future Obligations
Where an entity incurs obligations for removal and restoration as a consequence of

having undertaken the exploration for and evaluation of mineral resources, those
obligations are recognised in accordance with the requirements of IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
• This is:
Dr PPE
Cr Liability
All at present value
This will need discounting and the discount unwound:
Dr interest (with unwinding of discount)

Cr liability
Subsequent measurement
After recognition, entities can apply either the cost model or the revaluation
model.
Reclassify the assets...
When the technical feasibility and commercial viability of extracting a mineral

resource become demonstrable, at which point the asset falls outside the scope of
IFRS 6
Impairment
Check whether there are any indications that an asset may be impaired
• If an impairment test is required, any impairment loss is measured in accordance

with IAS 36.
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Impairments Indicators
• The right to explore has expired
if the period for which the entity has the right to explore in the specific area has
expired during the period or will expire in the near future, and is not expected to
be renewed;
• Substantive expenditure no planned

substantive expenditure on further exploration for and evaluation of mineral
resources in the specific area is neither budgeted nor planned;
• Discontinue exploration
the entity has decided to discontinue exploration of mineral resources in the
specific area
A detailed impairment test is required in two circumstances:
1. when the technical feasibility and commercial viability of extracting a mineral

resource become demonstrable, at which point the asset falls outside the scope
of IFRS 6 and is reclassified in the financial statements; and
2. when facts and circumstances suggest that the asset's carrying amount may
exceed its recoverable amount.
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Syllabus B15. Fair value measurement
Syllabus B15. Explain the principle under which fair value is measured according to IFRSs
Identify an appropriate fair value measurement for an asset or liability in a given set of
circumstances
Fair Value
Fair value considers the characteristics of the asset
For example
• The condition and location of an asset
• Any restrictions on the sale or use of an asset
This means that when revaluing its property, plant and equipment, an entity should
consider:
the highest and best use of the assets
Fair value assumes the sales takes place in:

1. The Principal market
the market with greatest volume and level of activity for the asset or liability
2. The most advantageous market
The market that maximises the amount that would be received paid for the asset
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Valuation Techniques
• Market approach
Prices from similar market transactions
e.g. quoted prices of listed equity, debt securities or futures, or market interest
rates
• Income approach
This converts future cash flows to a single discounted amount; e.g. discounted
cash flow models and option pricing models
• Cost approach
This reflects the amount required currently to replace the service capacity of an
asset, i.e. the current replacement cost
When measuring fair value, an entity is required to maximise the use of relevant
observable inputs and minimise the use of unobservable inputs
Level 1 Level 2 Level 3

Quoted prices in
active markets for Unobservable
Definition Observable inputs
identical assets or inputs
liabilities
Current market rents for Projected cash
Share prices on a similar properties and market flows used to value
Example
stock exchange interest rates for the FV of an a none public
investment property business
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How does all this work in practice?
E.g. An entity owns 10,000 ordinary shares in M & S
Since there is an active market for these shares through the London stock exchange,
the entity must use a market approach (level 1 input).
However, the measurement of the fair value of an unlisted debt security may require
the use of an income approach, e.g. a discounted cash flow model using market
interest rate for similar debt securities (level 2 input) and market credit spreads
adjusted for entity-specific credit risk (level 2 or 3 inputs).
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Syllabus C: Presentation and additional
disclosures
Syllabus C1. Presentation of the SFP, and statement of P/L

and OCI
Syllabus C1. State the objectives of IFRSs governing the presentation of financial statements
Describe the structure and content of statements of financial position and statements of profit
or loss and other comprehensive income including continuing operations
IAS 1 Presentation of Financial Statements
The statement of profit or loss (P&L)
is defined as the total of income less expenses, excluding the components of other
comprehensive income
Other comprehensive income (OCI)
comprising of items of income and expense (including reclassification adjustments)

that are not recognised in profit or loss
IFRS currently requires
• the statement of P&L and OCI to be presented as either one statement, being a
combined statement of P&L and OCI
• or two statements, being the statement of P&L and the statement of

comprehensive income.
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An entity has to show separately in OCI
• Those items which would be reclassified (recycled) to P&L and
• Those items which would never be reclassified (recycled) to P&L.
The related tax effects have to be allocated to these sections.
Reclassification adjustments
are amounts recycled to P&L in the current period which were recognised in OCI in
the current or previous periods.
• An example of items recognised in OCI which may be reclassified to P&L are

foreign currency gains on the disposal of a foreign operation and realised gains
or losses on cash flow hedges
Those 20 items which may not be reclassified are changes in a revaluation surplus
under IAS 16 Property, Plant and Equipment, and actuarial gains and losses on a
defined benefit plan under IAS 19 Employee Benefits.
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Syllabus C1. Describe the structure and content of statements of financial position and
statements of profit or loss and other comprehensive income including continuing operations
The main financial statements
The principle financial statements of a sole trader are the statement of financial
position and the statement of profit or loss.
Statement of Financial Position
The statement of financial position is a list of all the assets owned and the liabilities
owed by a business as at a particular date.
It is a snapshot of the financial position of the business at a particular moment.
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Statement of profit or loss
A statement of profit or loss is a record of revenue generated and expenditure

incurred over a given period.
The statement shows whether the business has had more revenue than expenditure
(a profit) or vice-versa (a loss)
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Definitions of Assets Liabilities...
Assets
An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
Some assets are held and used in operations for a long time. These are known
as non-current assets.
Other assets are held for only a short time. They are likely to be realized within the
normal operating cycle or 12 months after the end of the reporting period. These are
classified as current assets.
Liabilities
A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.
Some liabilities are due to be settled within the normal operating cycle or 12 months
after the end of the reporting period. These are classified as current liabilities.
Other liabilities may take some years to repay – non-current liabilities.
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Capital / Equity
Capital is the amount invested in a business by the owner. This is the amount the
business owes to the owner. In the case of a sole trader,
CAPITAL = ASSETS – LIABILITIES
CAPITAL = NET ASSETS
In the case of a limited liability company, capital usually takes the form of shares.
Share capital is known as equity. The Framework defines equity as “the residual
interest in the assets of the entity after deducting all its liabilities.”
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Revenue
Revenue is the income for a period. It is the gross inflow of economic benefits (cash,
receivables, other assets) arising from the ordinary operating activities of an
enterprise (such as sales of goods, sales of services, interest, royalties, and
dividends).
Expenses
Expenses arise in the course of the ordinary activities of the enterprise. They
include, for example, cost of sales, wages and depreciation.
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Notes
1. The top part of the statement of profit or loss, i.e. Sales – Cost of Sales = Gross
Profit, is called the Trading Account. It records the trading activities of the
business.
2. Sundry income includes bank interest, rent receivable, income from investments.
3. Carriage inwards is the cost of transport of goods into the firm and is therefore
added to the purchases figure.
4. Carriage outwards is the cost of transport of goods out of the firm to its
customers, it is not part of the firm's expenses in buying the goods and is always
entered as an expense.
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Statements of financial position
Statement of financial position as at 31 March 20X8
$'000
assets
non-current assets
property, plant and equipment x
other intangible assets x
----
current assets
inventories x
trade receivables x
other current assets x
cash and cash equivalents x
----
----
total assets x
===
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equity and liabilities
equity
share capital x
share premium account x
revaluation reserve x
retained earnings x
----
non-current liabilities
long term borrowings x
long term provisions x
current liabilities
trade payables x
short term borrowings x
current tax payable x
short term provisions x
----
total equity and liabilities x
===
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Statement of profit or loss and other comprehensive

income
Statement of comprehensive income
One of the statements introduced by IAS 1 (revised) is the statement of
comprehensive income.
This statement presents all items of income and expense recognised in profit or loss
together with all other items recognised in income and expense.
Entities may present all items together in a single statement or present two linked
statements – one displaying the items of income and expense recognised in the
statement of profit or loss and the other statement beginning with profit or loss and
displaying all the items included in ‘other comprehensive income’.
Therefore, whereas the statement of profit or loss includes all realised gains and
losses (e.g. net profit for the year), the statement of comprehensive income would
include both the realised and unrealised gains and losses (e.g. revaluation surplus).
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Proforma 1: One single statement
Statement of comprehensive income for the year ended 31 March 20X8
20x8 20x7
$'000 $'000
revenue x x
cost of sales (x) (x)
------ ------
gross profit x x
other income x x
distribution costs (x) (x)
administrative expenses (x) (x)
finance costs (x) (x)
investment income x x
------ ------
profit before tax x x
income tax expense (x) (x)
----- -----
profit for the year x x
other comprehensive income:
gains on property revaluation x x
----- -----
total comprehensive income for the year x x
==== ====
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Proforma 2: Two separate statements
Statement of profit or loss for the year ended 31 March 20X8
20x8 20x7
$'000 $'000
revenue x x
cost of sales (x) (x)
------ ------
gross profit x x
other income x x
distribution costs (x) (x)
administrative expenses (x) (x)
finance costs (x) (x)
investment income x x
------ ------
----- -----
==== ====
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Statement of comprehensive income for the year ended 31 March 20X8
20x8 20x7
$'000 $'000
----- -----
other comprehensive income:
gains on property revaluation x x
----- -----
total comprehensive income for the year x x
==== ====
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Syllabus C1. Discuss the importance of identifying and reporting the results of discontinued
operations.
Define and account for non-current assets held for sale and discontinued operations
Discontinued Operation
An analysis between continuing and discontinuing operations improves

the usefulness of financial statements.
When forecasting ONLY the results of continuing operations should be used.
Because discontinued operations profits or losses will not be repeated.
What is a discontinued operation?
1. A separate major line of business or geographical area
or..
2. is part of a single co-ordinated plan to dispose of a separate major line of

business or geographical area
or..
3. is a subsidiary acquired exclusively with a view to resale
How is it shown on the Income Statement?
The PAT and any gain/loss on disposal
• A single line in I/S
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How is it shown on the SFP?
If not already disposed of yet?
• Held for sale disposal group
How is it shown on the cash-flow statement?

• Separately presented
• in all 3 areas - operating; investing and financing
No Retroactive Classification
IFRS 5 prohibits the retroactive classification as a discontinued operation, when the
discontinued criteria are met after the end of the reporting period
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Syllabus C2. Earnings per share
Syllabus C2. Recognise the importance of comparability in relation to the calculation of
earnings per share (EPS) and its importance as a stock market indicator
IAS 33 EPS Introduction
EPS is a much used PERFORMANCE appraisal measure
It is calculated as:
PAT - Preference dividends / Number of shares
It is not only an important measure in its own right but also as a component in the
price earnings (P/E) ratio (see below)
Diluted EPS
This is saying that the basic EPS might get worse due to things that are ALREADY in
issue such as:
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• Convertible Loan
This will mean more shares when converted
Share options
This will mean more shares when exercised
Who has to report an EPS?

• PLCs
• Group accounts where the parent has shares similarly traded/being issued
EPS to be presented in the income statement.
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Syllabus C2. Define earnings
IAS 33 EPS - earnings figure
This is basically Profit after Tax
less preference dividends
*Be careful of the type of preference share though...
Redeemable preference shares
These are actually liabilities and their finance charge isn’t a dividend in the accounts
but interest.
• Do not adjust for these dividends.
Irredeemable preference shares
These are equity and the finance charge is dividends
• Do adjust for these dividends
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Syllabus C2. Calculate the EPS in the following circumstances:
– where the number of issued ordinary shares is constant throughout the year.
– where the has been an issue of ordinary shares at fair value during the year.
– where there has been a bonus issue of ordinary shares/stock split during the year,
– where there has been a rights issue of ordinary shares during the year.
– where there has been more than one change in the number of issued ordinary shares
during the year
IAS 33 EPS - Number of shares
Calculating the weighted average number of ordinary shares
The number of shares given in the SFP at the year-end - may not be the number of
shares in issue ALL year.
So we need to know how many we had in issue on AVERAGE instead of at the end.
Well if there were no additional shares in the year then obviously the weighted
average is the same as the year end - so no problem!
However, if additional shares have been issued we’ve got some work to do as
follows (depending on how those shares were issued):
Full Market Price issue of shares
No problem here as the new shares came with the right amount of new resources so
the company should be able to use those new resources to maintain the EPS
• No adjustment needed (apart from time)
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Bonus & Rights Issue of shares
More problematic, as the share were issued for cheaper (rights) than usual or for
free (bonus).
In both cases the company has not been given enough new resource to expect the
EPS to be maintained.
This causes comparison to last year problems.
• Adjust for these (Bonus fraction)
• Pretend they were in issue ALL year
• Change comparative (Pretend they were in last year too)
So, how to calculate it is best explained by example:
1st January 100 shares in issue

1st May Full market price issue of 400 shares
1st July 1 for 5 bonus issue
Solution
Draw up a table like this:
DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE
Now fill in the first 2 columns:
1st Jan 100

1st May 500
1st July 600
Notice how this shows the TOTAL shares. Now fill in the timing of how long these
TOTALS lasted for in the year.
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1st Jan 100 4/12

1st May 500 2/12
1st July 600 6/12
Finally look for any bonus issues and pretend that they happened at the start of the
year. We do this by applying the bonus fraction to all entries BEFORE the actual
bonus or rights issue.
In this case the bonus fraction would be 6/5 - so apply this to everything before the
actual bonus issue:
1st Jan 100 4/12 6/5

1st May 500 2/12 6/5
1st July 600 6/12
Finally, multiply through and calculate the weighted average:
1st Jan 100 4/12 6/5 40

1st May 500 2/12 6/5 100
1st July 600 6/12 300
440
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IAS 33 Bonus issue
Bonus issue
Additional shares are issued to the ordinary equity holders in proportion to their
current shareholding, for example 1 new share for every 2 shares already owned.
No cash is received for these shares.
Double Entry
• Dr Reserves or Share premium

Cr Share Capital
IAS 33 pretends that the bonus issue has been in place all year - regardless of when
it was actually made.
We do this by multiplying the totals before the issue by a “bonus fraction”.
Bonus Fraction Calculation - Bonus issue
1 for 2 bonus issue - means we’ve now got 3 where we used to have 2 = 3/2
2 for 5 - now got 7 used to have 5 = 7/5
3 for 4 - now got 7 used to have 4 = 7/4
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Example
1st Jan 100 shares in issue

1st July 1 for 2 bonus issue (i.e. 50 more shares)
• Weighted Average number of shares
100 x 6/12 (we had a total of 100 for 6 months) = 50 x 3/2 (bonus fraction) = 75
150 x 6/12 (we had a total of 150 for 6 months) = 75
Total = 150
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IAS 33 Rights Issue
Rights issue
A rights issue is:

• An issue of shares for cash to the existing ordinary equity holders in proportion to
their current shareholdings.
• At a discount to the current market price. It is, in fact, a mixture of a full price and
bonus issue.
So again we do the same as in the bonus issue - we pretend it happened all year
and to do this we multiply the previous totals by the bonus fraction.
The problem is - calculating the bonus fraction for a rights issue is slightly different:
Example
2 for 5 offered at £4 when the market value is £10
So we are being offered 2 @ £4 = £8
For every 5 which cost us £10 each = £50
So we now have 7 at a cost of £58 = 8.29
This is what we call the TERP (theoretical ex-rights price).
The bonus fraction is the current MV / TERP = 10 / 8.29
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IAS 33 Basic EPS putting it all together
IAS 33 Basic EPS putting it all together
Step 1: Calculate the EARNINGS (PAT - irredeemable pref. shares)
Step 2: Calculate Weighted average NUMBER OF SHARES
Divide one by the other!
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Syllabus C2. Explain the relevance to existing shareholders of the diluted EPS, and describe
the circumstances that will give rise to a future dilution of the EPS
Compute the diluted EPS in the following circumstances:

– where convertible debt or preference shares are in issue
– where share options and warrants exist
Identify anti-dilutive circumstances.
IAS 33 Diluted EPS
This is the basic EPS adjusted for the potential effects of a convertible
loan (currently in the SFP) being converted and options (currently in
issue) being exercised.
This is because these things will possibly increase the number of shares in the future
and thus dilute EPS.
This is how these items affect the Basic Earnings and Shares.
Earnings
The convertible loan will (once converted) increase earnings as interest will no
longer have to be paid.
So increase the basic earnings with a tax adjusted interest savings.
Shares
• Simply add the shares which will result from the convertible loan
Also add the “free” shares from a share option
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Convertible loan
• Add the interest saved (after tax) to the EARNINGS from basic EPS
• Add the extra shares convertible to the SHARES from basic EPS
Options
Step 1 : Calculate the money the options will bring in

Step 2 : Calculate how many shares this would normally buy
Step 3 : Look at the number of shares given away in the option, compare it to those
in step 2 and these are the “free shares”
We add the free shares to the SHARES figure from basic EPS.
Illustration
5% 800 convertible loan - each 100 can be converted into 20 shares (tax 30%)
100 share options @ $2 (MV $5)
How to calculate Interest Saved
5% x 800 = 40 x 70% (tax adjusted) = 28
How to calculate the extra convertible shares
800/100 x 20 = 160
How to calculate the free shares in share options
Cash in from option $200, this would normally mean the company issuing (200/5) 40
shares instead of the 100, so there has effectively been 60 shares issued for ‘free’.
We use this figure in the diluted eps calculation.
An alternative calculation is:

100 x (5-2) / 5 = 60
Solution
Basic EPS Convertible Loan Share options

E 100 + 28
S 50 + 160 + 60
Diluted EPS = 128 / 270 = 0.47
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Syllabus C2. Explain why the trend of EPS may be a more accurate indicator of performance
than a company’s profit trend.
EPS as a performance measure
EPS is better than PAT as an earnings performance indicator
Profit after tax gives an absolute figure
An increase in PAT does not show the whole picture about a company's profitability
Some profit growth may come from acquiring other companies
If the acquisition was funded by new shares then profit will grow but not necessarily
EPS
So EPS trends show a better picture of profitability than PAT
Simply looking at PAT growth ignores any increases in the resources used to earn
them
The diluted EPS is useful as it alerts existing shareholders to the fact that future EPS
may be reduced as a result of share capital changes
Where the finance cost per potential new share is less than the basic EPS, there will
be a dilution
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Syllabus C3. Events after the reporting date
Syllabus C3. Distinguish between and account for adjusting and non-adjusting events after
the reporting date
IAS 10 Events After The Reporting Period
Events can be adjusting or non-adjusting.
We are looking at transactions that happen in this period, and whether we should go
back and adjust our accounts for the year end or not adjust and just put into next
year’s accounts
If the event gives us more information about the condition at the year-end then we
adjust.
If not then we don’t.
When is the "After the Reporting date" period?
It is anytime between period end and the date the accounts are authorised for issue.
• After the SFP date = Between period end and date authorised for issue
Ok and why is it important?

Well it may well be that many of the figures in the accounts are estimates at the
period end.
However, what if we get more information about these estimates etc afterwards, but
before the accounts are authorised and published.. should we change the accounts
or not?
The most important thing to remember is that the accounts are prepared to the SFP
date. Not afterwards.
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So we are trying to show what the situation at the SFP date was. However, it may be
that more information ABOUT the conditions at the SFP date have come about
afterwards and so we should adjust the accounts.
Sometimes we do not adjust though…
Adjusting Events
Here we adjust the accounts if:
The event provides evidence of conditions that existed at the period end
Examples are..
1. Debtor goes bad 5 days after SFP date
(This is evidence that debtor was bad at SFP date also)
2. Stock is sold at a loss 2 weeks after SFP date
3. Property gets impaired 3 weeks after SFP date
(This implies that the property was impaired at the SFP date also)
4. The result of a court case confirming the company did have a present obligation
at the year end
5. The settling of a purchase price for an asset that was bought before the year end
but the price was not finalized
6. The discovery of fraud or error in the year
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Non-Adjusting Events - these are disclosed only
These are events (after the SFP date) that occurred which do not give evidence of
conditions at the year end, rather they are indicative of conditions AFTER the SFP
date
1. Stock is sold at a loss because they were damaged post year-end
(This is evidence that they were fine at the year-end - so no adjustment)
2. Property impaired due to a fall in market values generally post year end
(This is evidence that the property value was fine at the year end - so no
adjustment required).
3. The acquisition or disposal of a subsidiary post year end
4. A formal plan issued post year end to discontinue a major operation
5. The destruction of an asset by fire or similar post year end
6. Dividends declared after the year end
Non-adjusting event which affects Going Concern
Adjust the accounts to a break up basis regardless if the event was a non-adjusting
event.
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Syllabus C4. Accounting policies, changes in accounting
estimates
Syllabus C4. Identify items requiring separate disclosure, including their accounting treatment
and required disclosures
Recognise the circumstances where a change in accounting policy is justified
Define prior period adjustments and errors.
Account for the correction of errors and changes in accounting policies.
Changes in accounting policies and accounting

estimates
Comparatives are changed for accounting POLICY changes only
Changes in accounting estimates have no effect on the comparative
Changes in accounting policy means we must change the comparative too to ensure
we keep the accounts comparable for trend analysis
Accounting Policy
Definition
“the specific principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting the financial statements”
An entity should follow accounting standards when deciding its accounting policies
If there is no guidance in the standards, management should use the most relevant
and reliable policy
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Changes to Accounting Policy
These are only made if:
It is required by a Standard or Interpretation; or
It would give more relevant and reliable information
1. Adjust the comparative amounts for the affected item
(as if the policy had always been applied)
2. Adjust Opening retained earnings
(Show this in statement of changes in Equity too)
Accounting Estimates
Definition
“an adjustment of the carrying amount of an asset or liability, or related expense,
resulting from reassessing the expected future benefits and obligations associated
with that asset or liability”
Examples
Allowances for doubtful debts;
Inventory obsolescence;
Charge the useful economic life of property, plant and equipment
Changes in Accounting Estimate

1. Simply change the current year
2. No change to comparatives
Prior Period Errors

These are accounted for in the same way as changes in accounting policy
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1. Adjust the comparative amounts for the affected item
2. Adjust Opening retained earnings
(Show this in statement of changes in Equity too)
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Syllabus C5. Related party disclosures
Syllabus C5. Define and apply the definition of related parties in accordance IFRSs
Describe the potential to mislead users when related party relationships and transactions are
not disclosed appropriately
Explain the disclosure requirements for related party transactions.
IAS 24 Related Parties
A party is said to be related to an entity if any of the following three

situations occur:
The 3 situations are:
1. Controls / is controlled by entity
2. is under common control with entity
3. has significant influence over the entity
Types of related party
These therefore include:
1. Subsidiaries
2. Associate
3. Joint venture
4. Key management
5. Close family member of above (like my beautiful daughter pictured in her new
school uniform aaahhh)
6. A post-employment benefit plan for the benefit of employees
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Not necessarily related parties
• Two entities with a director in common
• Two joint venturers
• Providers of finance
• A big customer, supplier etc
Stakeholders need to know that all transactions are at arm´s length and if not then
be fully aware.
Similarly they need to be aware of the volume of business with a related party, which
though may be at arm´s length, should the related party connection break then the
volume of business disappear also.
Disclosures
• General
o The name of the entity’s parent and, if different, the ultimate controlling party
o The nature of the related party relationship
o Information about the transactions and outstanding balances necessary for an

understanding of the relationship on the financial statements
• As a minimum, this includes:
Amount of outstanding balances

Bad and doubtful debt information
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• Key management personnel compensation should be broken down by:
o short-term employee benefits
o post-employment benefits
o other long-term benefits
o termination benefits
o share-based payment
• Group and Individual accounts
1. Individual accounts
Disclose related party transactions / outstanding balances of parent, venturer or

investor.
2. Group accounts
The intragroup transactions and balances would have been eliminated.
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Syllabus C6. Operating segments
Syllabus C6. Discuss the usefulness and problems associated with the provision of segment
information
IFRS 8 Segmental Reporting - Introduction
Segmental Reporting (IFRS 8) - Introduction
Objective of IFRS 8
The objective of IFRS 8 is to present information by line of business and by

geographical area.
It applies to plcs and any entity voluntarily providing segment information should
comply with the requirements of the Standard.
So why is it a good thing to have information by line of business and geographical

area?
Well, imagine you are an Apple shareholder.
You will naturally be interested in how well the company is doing.
That information would only make real sense though if it was broken down by
business area.
For example, if most of the profits were from i-Pods, then this would be worrying as
this market is in decline.
You would want to know how they are doing in the desktop computer market, how
they are doing in the smartphone and tablet market as well as any new areas they
may be diversifying into.
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Key Definitions
Business segment (e.g. i-Phone segment):
A component of an entity that:
1. provides a single product or service and
2. is subject to risks and returns that are different from those of other business
segments.
Geographical segment (e.g. European market):

A component of an entity that
1. provides products and services and
2. is subject to risks and returns that are different from those of components
operating in other economic environments.
May be based either on where the entity’s assets are located or on where its
customers are located.
Operating Segment
Engages in business (even if all internal), whose results are regularly reviewed by
the chief operating decision maker and for which separate financial information is
available.
1. Earns revenue and incurs expenses from a business activity
2. Is regularly reviewed by the chief decision maker when handing out resources
3. Has separate financial info available
Therefore the head office is not an operating segment as it is not a business activity.
The idea behind the regular review part is that the entity reports on those segments
that are actually used by management to monitor the business
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Aggregating Segments
Operating Segments can be aggregated together only if
they have similar economic characteristics such as:
1. Similar product / service
2. Similar production process
3. Similar sort of customer
4. Similar distribution methods
5. Similar regulations
Quantitative Thresholds
Any segment which meets these thresholds must be reported on:
1. Profit is 10% or more of all profitable segments
2. Assets are 10% or more of the total assets of all operating segments
Reportable Segments
If the total EXTERNAL revenue of the operating segments reported on (meeting the
quantitative thresholds) is less than 75% of total revenue of the company then
additional operating segments results (those not meeting the quantitative thresholds)
are reported upon (until the 75% is met)
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Illustration
A B C D E F
External Revenue 220 300 75 55 60 710
Internal Revenue 60 15 5 10 90
Profit 60 50 20 -11 14 133
Assets 5,000 4,000 300 300 400 10,000
Which of the segments A-E should be reported upon?
A B C D E
Revenue 280 / 800 = 315 / 800 = 75 / 800 = 60 / 800 = 70 / 800 =
Test 35% Pass 39% Pass 9% Fail 7.5% Fail 9% Fail
60 / 144* = 50 / 144 = 20 / 144 = 14 / 144 =
Profit Test
42% Pass 35% Pass 14% Pass 9% Fail
5,000 / 4,000 / 300 / 300 / 400 /
Assets Test 10,000 = 10,000 = 10,000 = 10,000 = 10,000 =
50% Pass 40% Pass 3% Fail 3% Fail 4% Fail
*Profitable segments only
A, B and C all pass one of the tests and so would be reported on
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External Revenue Test
A + B + C = 595 / 710 = 84% PASS (No more segments needed)
Disclosures for each segment

• Profit
• Total Assets and Liabilities
• External Revenues
• Internal Revenues
• Interest income and expense
• Depreciation
• Profit from Associates and JVs
• Tax
• Other material non-cash items
Measurement
This shall be the same as the one used when reporting to the chief decision maker.
So it is the internal measure rather than an IFRS one
A reconciliation is then provided between this measure and the entity’s actual figures
for:
1. Profit (e.g. Allocation of centrally incurred costs)
2. Assets & Liabilities
Also any asymmetrical allocations.

For example, one segment may be charged depreciation for an asset not allocated
to it
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IFRS 8 requires the information presented to be the same basis as it is reported
internally, even if the segment information does not comply with IFRS or the
accounting policies used in the consolidated financial statements.
Examples of such situations include segment information reported on a cash basis

(as opposed to an accruals basis), and reporting on a local GAAP basis for
segments that are comprised of foreign subsidiaries.
Although the basis of measurement is flexible, IFRS 8 requires entities to provide an
explanation of:
1. the basis of accounting for transactions between reportable segments;
2. the nature of any differences between the segments’ reported amounts and the
consolidated totals.
For example, those resulting from differences in accounting policies and policies for
the allocation of centrally incurred costs that are necessary for an understanding of
the reported segment information.
In addition, IFRS 8 requires reconciliations between the segments’ reported amounts

and the consolidated financial statements.
Entity Wide Disclosures

1. External revenue for each product/service
2. Totals for revenue made at home and abroad
3. NCA totals for those held at home and abroad
4. If 1 customer accounts for 10%+ of revenue this total must be disclosed

alongside which segment it is reported in
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Syllabus C6. Define an operating segment
IFRS 8 Determining Reporting segments
IFRS 8 Determining Reporting segments
Identifying Business and Geographical Segments
• An entity must look to its organisational structure and internal reporting system to
identify reportable segments.
In fact, the segmentation used for internal reports for the board should be the
same for external reports
• Only if internal segments are not along either product/service or geographical

lines is further disaggregation appropriate.
Primary and Secondary Segments
• For most entities one basis of segmentation is primary and the other is secondary
(with considerably less disclosure required for secondary segments)
• To decide which is primary, the entity should see whether business or

geographical factors most affect the risk and returns.
This should be helped by looking at entity’s internal organisational and

management structure and its system of internal financial reporting to senior
management.
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Illustration
External Internal
Product Profit Assets Liabilities
Revenue Revenue
The Nose picker 2,000 30 (100) 3,000 2,000
The Earwax
3,000 20 600 8,000 3,000
extractor
Other Products 5,000 50 1,050 20,000 14,000
Which segments should be reported upon?
Let’s look at the 3 reportable segment tests:

10% of combined revenue = 1,010
10% of profits = 165
10% of losses = 10
10% of assets = 3,100
So,
1. The Nose picker only passes the revenue test, it fails the profits test as a loss of
100 is less than 165 (165 is higher than 10), it fails the assets test.
It is still a reportable segment though as only 1 test needs to be passed
2. The Earwax extractor passes all 3 tests
3. Other Products These are not separate segments and can only be added
together if the nature of the products are similar, as are their customer type and
distribution method.
So ordinarily these would not be disclosed. However we need to check whether

the 2 reported segments meet the 75% external revenue test:
4. Currently only 5,000 out of 10,000 (50%).
Therefore additional operating segments (other products) may be added until the
75% threshold is reached
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Syllabus C6. Identify reportable segments (including applying the aggregation criteria and
quantitative thresholds)
IFRS 8 Pros and Cons
IFRS 8 follows what we call the “managerial approach” as opposed to the old “risks
and rewards” approach to determining what segments are.
This has the following advantages:
1. Cost effective as data can be reported in the same way as it is in the managerial
accounts (though it does need reconciling)
2. The segment data reflects the operational strategy of the business
However there are problems also:
1. It gives a lot of subjective responsibility to the directors as to what they disclose
2. Also the internal nature of how it is reported may actually make it less useful to
some users and lead to problems of comparability
3. There is also no defined measure of profit/loss in IFRS 8
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Syllabus C7. Reporting requirements of SMEs
Syllabus C7. Outline the principal considerations in developing a set of financial reporting
standards for SMEs
IFRS for SME - Introduction
The principal aim when developing accounting standards for small-to medium-sized
enterprises (SMEs) is to provide a framework that generates relevant, reliable and
useful information, which should provide a high-quality and understandable set of
accounting standards suitable for SMEs.
The only real users of accounts for SMEs are:
1. Shareholders
2. Management
3. Possibly government
IFRS for SMEs is a self-contained standard, incorporating accounting principles

based on existing IFRS, which have been simplified to suit SMEs.
If a topic is not covered in the standard there is no mandatory default to full IFRS.
Topics not really required for SMEs are excluded and so the standard does not
address the following topics:
• Earnings per share

• Interim financial reporting
• Segment reporting
• Insurance (because entities that issue insurance contracts are not eligible to use
the standard)
• Assets held for sale
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Good news!
The standards are relatively short and get the preparers to think.
IFRS for SMEs therefore contains concepts and pervasive principles, any further
disclosures may be needed to give a true and fair view.
It will be updated once every 2 or 3 years only.
What is a SME?
There is no universally agreed definition of an SME.
As there are differences between firms, sectors, or countries at different levels of

development.
Most definitions based on size use measures such as number of employees,

balance sheet total, or annual turnover.
However, none of these measures apply well across national borders.
Ultimately, the decision regarding who uses IFRS for SMEs stays with national
regulatory authorities and standard-setters.
These bodies will often specify more detailed eligibility criteria.
If an entity opts to use IFRS for SMEs, it must follow the standard in its entirety – it
cannot cherry pick between the requirements of IFRS for SMEs and the full set.
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Different users entirely
FRS users are the capital markets. So, quoted companies and not SMEs.
The vast majority of the world's companies are small and privately owned, and it
could be argued that full International Financial Reporting Standards are not relevant
to their needs or to their users.
It is often thought that small business managers perceive the cost of compliance with
accounting standards to be greater than their benefit.
Because of this, the IFRS for SMEs makes numerous simplifications to the
recognition, measurement and disclosure requirements in full IFRS.
Examples of these simplifications are:
• Goodwill and other indefinite-life intangibles are amortised over their useful lives,
but if useful life cannot be reliably estimated, then 10 years.
• A simplified calculation is allowed if measurement of defined benefit pension plan

obligations (under the projected unit credit method) involve undue cost or effort.
• The cost model is permitted for investments in associates and joint ventures.
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Syllabus C7. Discuss solutions to the problem of differential financial reporting.
IFRS for SME differing Approaches
Differing approaches
Some argue having 2 sets of rules may mean 2 true and fair views
Local GAAP for SME?
An alternative could have been for GAAP for SMEs to have been developed on a
national basis, with IFRS focusing on accounting for listed company activities.
Then though, SMEs may not have been consistent and may have lacked
comparability across national boundaries.
Also, if an SME wished to later list its shares on a capital market, the transition to
IFRS could be harder.
List SME exemptions in the full IFRS?
Under another approach, the exemptions given to smaller entities would have been
prescribed in the mainstream accounting standard.
For example, an appendix could have been included within the standard, detailing
those exemptions given to smaller enterprises.
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Separate SME standard for each IFRS?
Yet another approach would have been to introduce a separate standard comprising
all the issues addressed in IFRS that were relevant to SMEs.
As it stands now
User friendly
The standard has been organised by topic with the intention of being user-friendlier
for preparers and users of SME financial statements
The standard also contains simplified language and explanations of the standards.
Easier transition to full IFRS
It is based on recognised concepts and pervasive principles and it allows easier

transition to full IFRS if the SME later becomes a public listed entity.
In deciding on the modifications to make to IFRS, the needs of the users have been
taken into account, as well as the costs and other burdens imposed upon SMEs by
the IFRS.
Cost Benefit
Relaxation of some of the measurement and recognition criteria in IFRS had to be

made in order to achieve the reduction in these costs and burdens.
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Stewardship not so important
Small companies pursue different strategies, and their goals are more likely to be
survival and stability rather than growth and profit maximisation.
The stewardship function is often absent in small companies, with the accounts
playing an agency role between the owner-manager and the bank
Access to capital
Where financial statements are prepared using the standard, the basis of
presentation note and the auditor's report will refer to compliance with IFRS for
SMEs.
This reference may improve SME's access to capital.
In the absence of specific guidance on a particular subject, an SME may, but is not
required to, consider the requirements and guidance in full IFRS dealing with similar
issues.
The IASB has produced full implementation guidance for SMEs.
IFRS for SMEs is a response to international demand from developed and emerging
economies for a rigorous and common set of accounting standards for smaller and
medium-sized enterprises that is much easier to use than the full set of IFRS.
It should provide improved comparability for users of accounts while enhancing the
overall confidence in the accounts of SMEs, and reduce the significant costs
involved in maintaining standards on a national basis.
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Syllabus C7. Discuss reasons why the IFRS for SMEs does not address certain topics.
IFRS for SMEs - Main Differences to full IFRS
Main Changes
Financial statements
• Full IFRS:
A statement of changes in equity is required, presenting a reconciliation of equity

items between the beginning and end of the period.
• IFRS for SMEs:
Same requirement.
However, if the only changes to the equity during the period are a result of profit
or loss, payment of dividends, correction of prior-period errors or changes in
accounting policy, a combined statement of income and retained earnings can be
presented instead of both a statement of comprehensive income and a statement
of changes in equity.
Business combinations
• Full IFRS:
Transaction costs are excluded under IFRS 3 (revised).
Contingent consideration is recognised regardless of the probability of payment.
• IFRS for SMEs:
Transaction costs are included in the cost of investment.
Contingent considerations are included as part of the cost of investment if it is

probable that the amount will be paid and its fair value can be measured reliably.
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Expense recognition
• Full IFRS:
Research costs are expensed as incurred; development costs are capitalised and
amortised, but only when specific criteria are met.
Borrowing costs are capitalised if certain criteria are met.
• IFRS for SMEs:
All research and development costs and all borrowing costs are recognised as an
expense.
Non-current assets and goodwill
• Full IFRS:
For tangible and intangible assets, there is an accounting policy choice between
the cost model and the revaluation model.
Goodwill and other intangibles with indefinite lives are reviewed for impairment
and not amortised.
• IFRS for SMEs:
The cost model is the only permitted model.
All intangible assets, including goodwill, are assumed to have finite lives and are
amortised.
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Intangible Assets
• Full IFRS:
Under IAS 38, ‘Intangible assets’, the useful life of an intangible asset is either
finite or indefinite.
The latter are not amortised and an annual impairment test is required.
• IFRS for SMEs:
There is no distinction between assets with finite or infinite lives.
The amortisation approach therefore applies to all intangible assets.
These intangibles are tested for impairment only when there is an indication.
Investment Property
• Full IFRS:
IAS 40, ‘Investment property’, offers a choice of fair value and the cost method.
• IFRS for SMEs:
Investment property is carried at fair value if this fair value can be measured
without undue cost or effort.
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Held for Sale
• Full IFRS:
IFRS 5, ‘Non-current assets held for sale and discontinued operations’, requires
non-current assets to be classified as held for sale where the carrying amount is
recovered principally through a sale transaction rather than though continuing
use.
• IFRS for SMEs:
Assets held for sale are not covered, the decision to sell an asset is considered
an impairment indicator.
Employee benefits – defined benefit plans
• Full IFRS:
The use of an accrued benefit valuation method (the projected unit credit method)
is required for calculating defined benefit obligations.
• IFRS for SMEs:
The circumstance-driven approach is applicable, which means that the use of an

accrued benefit valuation method (the projected unit credit method) is required if
the information that is needed to make such a calculation is already available, or
if it can be obtained without undue cost or effort.
If not, simplifications are permitted in which future salary progression, future

service or possible mortality during an employee’s period of service are not
considered.
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Income taxes
• Full IFRS:
A deferred tax asset is only recognised to the extent that it is probable that there
will be sufficient future taxable profit to enable recovery of the deferred tax asset.
• IFRS for SMEs:
A valuation allowance is recognised so that the net carrying amount of the

deferred tax asset equals the highest amount that is more likely than not to be
recovered.
The net carrying amount of deferred tax asset is likely to be the same between
full IFRS and IFRS for SMEs.
• Full IFRS:
No deferred tax is recognised upon the initial recognition of an asset and liability
in a transaction that is not a business combination and affects neither accounting
profit nor taxable profit at the time of the transaction.
• IFRS for SMEs:
No such exemption.
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• Full IFRS:
There is no specific guidance on uncertain tax positions.
In practice, management will record the liability measured as either a single best
estimate or a weighted average probability of the possible outcomes, if the
likelihood is greater than 50%.
• IFRS for SMEs:
Management recognises the effect of the possible outcomes of a review by the

tax authorities.
It should be measured using the probability-weighted average amount of all the

possible outcomes.
There is no probable recognition threshold.
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Syllabus D: Preparation of external financial
reports
Syllabus D1. Preparation of group consolidated external reports
Syllabus D1. Explain the concept of a group and the purpose of preparing consolidated
financial statements
Explain and apply the definition of subsidiary companies
Definition of a subsidiary
Group Accounting
Presentation
According to IAS 1 accounts must distinguish between:
1. Profit or Loss for the period
2. Other gains or losses not reported in profits above (Other Comprehensive

Income)
3. Equity transactions (share issues and dividends)
Here's some key definitions:
Consolidated financial statements:

The financial statements of a group presented as those of a single economic entity.
Subsidiary: an entity that is controlled by another entity (known as the parent)
Parent: an entity that has one or more subsidiaries
Control: the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities
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Identification of subsidiaries
Control is presumed when the parent has 50% + voting rights of the entity.
Even when less than 50%, control may be evidenced by power..
• Getting the 50%+ by an arrangement with other investors
• Governing the financial and operating policies
• Appointing the majority of the board of directors
• Casting the majority of votes
It could also come from the parent controlling one subsidiary, which in turn controls
another.
The parent then controls both subsidiaries
Power
So a parent needs the power to affect the subsidiary and as we said before this is
normally given by owning more than 50% of the voting rights
It might also come from complex contractual arrangements
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Syllabus D1. Explain the concept of a group and the purpose of preparing consolidated
financial statements
Group Accounting Exemptions
Who needs to prepare consolidated accounts?
Basically a parent company, one with a subsidiary
However there are exceptions to this rule:
• The parent is itself a wholly owned subsidiary
• The parent is a partially (e.g. 80%) owned sub and the other 20% owners allow it
to not prepare consolidated accounts
• The parents shares are not publicly traded
• The parents own parent produces consolidated accounts
Sometimes a sub is purchased with a view to it being sold.

In this case it is an IFRS 5 discontinued operation
The group share of its profits are shown on the income statement and all of its
assets and liabilities shown separately on the SFP
Not Valid reasons for exemption
1. A subsidiary whose business is of a different nature from the parent’s.
2. A subsidiary that operates under severe long-term restrictions impairing the

subsidiary’s ability to transfer funds to the parent.
3. A subsidiary that had previously been consolidated and that is now being held for
sale.
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Syllabus D1. Prepare a consolidated statement of financial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition profits, non-controlling interests and
goodwill
Explain the need for using coterminous year- ends and uniform accounting polices when
preparing consolidated financial statements and describe how it is achieved in practice
Business Combinations - Basics
The purpose of consolidated accounts is to show the group as a single

economic entity.
So first of all - what is a business combination?

• Well my little calf, it’s an event where the acquirer obtains control of another
business.
• Let me explain, let’s say we are the Parent acquiring the subsidiary.
We must prepare our own accounts AND those of us and the sub put together
(called “consolidated accounts”)
This is to show our shareholders what we CONTROL.
Basic principles
The accounts show all that is controlled by the parent, this means:
1. All assets and liabilities of a subsidiary are included
2. All income and expenses of the subsidiary are included
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Non controlling Interest (NCI)
However the parent does not always own all of the above.
So the % that is not owned by the parent is called the “non-controlling interest”.
• A line is included in equity called non-controlling interests. This accounts for their
share of the assets and liabilities on the SFP.
• A line is also included on the income statement which accounts for the NCI’s
share of the income and expenses.
One Thing you must understand before we go on

Forgive me if this is basic, but hey, sometimes it’s good to be sure.
H S
Non Current Asset 500 600
Investment in S 200
Current Assets 100 200
Share Capital 100 100

Reserves 300 400
Current Liabilities 100 50

Non Current Liabilities 300 250
Notice if you add the assets together and take away the liabilities for H - it comes to
400 (500+200+100-100-300)
There are 2 things to understand about this figure:

1. It is NOT the true/fair value of the company
2. It is equal to the equity section of the SFP
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Equity
• This shows you how the net assets figure has come about. The share capital is
the capital introduced from the owners (as is share premium).
• The reserves are all the accumulated profits/losses/gains less dividends since the
business started. Here the figure is 400 for H.
Notice it is equal to the net assets
Acquisition costs
• Where there’s an acquisition there’s probably some of the costs eg legal fees etc
Costs directly attributable to the acquisition are expensed to the income

statement.
• Be careful though, any costs which are just for the parent (acquirer) issuing its
own debt or shares are deducted from the debt or equity itself (often share
premium).
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goodwill
Identify the circumstances in which a gain on a bargain purchase (negative goodwill) arises,
and its subsequent accounting treatment
Simple Goodwill
Goodwill
• When a company buys another - it is not often that it does so at the fair value of
the net assets only.
This is because most businesses are more than just the sum total of their ‘net
assets’ on the SFP.
Customer base, reputation, workforce etc. are all part of the value of the
company that is not reflected in the accounts.
This is called “goodwill”
• Goodwill only occurs on a business combination. Individual companies cannot

show their individual goodwill on their SFPs.
This is because they cannot get a reliable measure, This is because nobody has
purchased the company to value the goodwill appropriately.
On a business combination the acquirer (Parent) purchases the subsidiary -

normally at an amount higher than the FV of the net assets on the SFP, they buy
it at a figure that effectively includes goodwill.
Therefore the goodwill can now be measured and so does show in the group
accounts.
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How is goodwill calculated?
On a basic level - I hope you can see - that it is the amount paid by the parent less
the FV of the subs assets on their SFP.
Let me explain..
S
Non-Current Assets 1,000
Current Assets 400
Share Capital 100

Share Premium 100
Reserves 700
Current Liabilities 100

Non-Current Liabilities 400
In this example S’s Net assets are 900 (same as their equity remember).
This is just the ‘book value’ of the net assets.
The Fair Value of the net assets may be, say, 1,000.
However a company may buy the company for 1.200. So, Goodwill would be 200.
The goodwill represents the reputation etc. of a company and can only be reliably
measured when the company is bought out.
Here it was bought for 1,200. Therefore, as the FV of the net assets of S was only
1,000 - the extra 200 is deemed to be for goodwill.
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The increase from book value 900 to FV 1,000 is what we call a Fair Value
adjustment.
Bargain Purchase
This is where the parent and NCI paid less at acquisition than the FV of S’s net
assets. This is obviously very rare and means a bargain was acquired
So rare in fact that the standard suggests you look closely again at your calculation
of S’s net assets value because it is strange that you got such a bargain and
perhaps your original calculations of their FV were wrong
However, if the calculations are all correct and you have indeed got a bargain then
this is NOT shown on the SFP rather it is shown as:
• Income on the income statement in the year of acquisition
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goodwill
NCI in the Goodwill calculation
So far we have presumed that the company has been 100% purchased when
calculating goodwill.
Our calculation has been this:
Consideration x
FV of Net Assets Acquired (x)
Goodwill x
Non-controlling Interests
Let’s now take into account what happens when we do not buy all of S. (eg. 80%)
This means we now have some non-controlling interests (NCI) at 20%
The formula changes to this:
Consideration x
NCI x
FV of Net Assets Acquired (x)
Goodwill x
This NCI can be calculated in 2 ways:
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1) Proportion of FV of S’s Net Assets
2) FV of NCI itself
Proportion of FV of S’s Net Assets method
This is very straight forward. All we do is give the NCI their share of FV of S’s Net
Assets..Consider this:
P buys 80% S for 1,000. The FV of S’s Net assets were 1,100.
Consideration 1,000
NCI 220
FV of Net Assets Acquired (1,100)
Goodwill 120
The NCI is calculated as 20% of FV of S’s NA of 1,100 = 220
“Fair Value Method” of Calculating NCI in Goodwill
• So in the previous example NCI was just given their share of S’s Net assets.
They were not given any of their reputation etc.
In other words, NCI were not given any goodwill.
• I repeat, under the proportionate method, NCI is NOT given any goodwill.
Under the FV method, they are given some goodwill.
• This is because NCI is not just given their share of S’s NA but actually the FV of
their 20% as a whole (ie NA + Goodwill).
This FV figure is either given in the exam or can be calculated by looking at the
share price (see quiz 2).
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P buys 80% S for 1,000. The FV of S’s Net assets were 1,100. The FV of NCI at this
date was 250.
Consideration 1,000
NCI 250
Goodwill 150
Notice how goodwill is now 30 more than in the proportionate example. This is the
goodwill attributable to NCI.
NCI goodwill = FV of NCI - their share of FV of S’s NA
Remember
Under the proportionate method NCI does not get any of S’s Goodwill (only their
share of S’s NA).
Under the FV method, NCI gets given their share of S’s NA AND their share of S’s
goodwill
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goodwill
Equity Table
S’s Equity Table
As you will see when we get on to doing bigger questions, this is always our first
working.
This is because it helps all the other workings.
Remember that Equity = Net assets
Equity is made up of:
1. Share Capital
2. Share Premium
3. Retained Earnings
4. Revaluation Reserve
5. Any other ‘reserve’!
If any of the above is mentioned in the question for S, then they must go into this
equity table working.
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What does the table look like?
At SFP date At Acquisition Post Acquisition
Share Capital x x x
Share Premium x x x
Retained Earnings x x x
Total x x x
Remember that any other reserve would also go in here.
So how do we fill in this table?
1. Enter the "Year end" figures straight from the SFP
2. Enter the "At acquisition" figures from looking at the information given normally in
note 1 of the question.
Please note you can presume the share capital and share premium is the same
as the year-end figures, so you're only looking for the at acquisition reserves
figures
3. Enter "Post Acquisition" figures simply by taking away the "At acquisition" figures
away from the "Year end" figures
(ie. Y/E - Acquisition = Post acquisition)
So let's try a simple example.. (although this is given in a different format to the
actual exam let's do it this way to start with).
A company has share capital of 200, share premium of 100 and total reserves at
acquisition of 100 at acquisition and have made profits since of 400. There have
been no issues of shares since acquisition and no dividends paid out.
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Show the Equity table to calculate the net assets now at the year end, at acquisition
and post-acquisition
Solution
Now At Acquisition Post-Acquisition
Share Capital 200 200 0
Share Premium 100 100 0
Retained Earnings 500 100 400
Total 800 400 400
Fair Value Adjustments
Ok the next step is to also place into the Equity table any Fair Value adjustments
When a subsidiary is purchased - it is purchased at FAIR VALUE at acquisition.
Using the figures above, if I were to tell you that the FV of the sub at acquisition was
480.
Hopefully you can see we would need to make an adjustment of 80 (let’s say that
this was because Land had a FV 80 higher than in the books):
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Land x 80 x
Total 800 480 x
Now as land doesn’t depreciate - it would still now be at 80 - so the table changes to
this:
Land 80 80 0
Total 880 480 400
If instead the FV adjustment was due to PPE with a 10 year useful economic life left
- and lets say acquisition was 2 years ago, the table would look like this:
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PPE 64 80 -16
Total 864 480 384
The -16 in the post acquisition column is the depreciation on the FV adjustment. (80 /
10 years x 2 years).
This makes the now column 64 (80 at acquisition - 16 depreciation post acquisition).
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goodwill
NCI on the SFP
Non-Controlling Interests
So far we have looked at goodwill and the effect of NCI on this.. Now let’s look at
NCI in a bit more detail (don’t worry we will pull all this together into a bigger
question later).
If you remember there are 2 methods of measuring NCI at acquisition:
1. Proportionate method
This is the NCI % of FV of S’s Net assets at acquisition.
2. FV Method
This is the FV of the NCI shares at acquisition (given mostly in the question).
This choice is made at the beginning.
Obviously, S will make profits/losses after acquisition and the NCI deserve their
share of these.
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Therefore the formula to calculate NCI on the SFP is as follows:
(this is the same figure as used in

NCI @ Acquisition x
goodwill*)
NCI % of S’s post acquisition profits/
x
losses
NCI on the SFP x
* This figure depends on the option chosen at acquisition (Proportionate or FV

method).
Impairment
S may become impaired over time. If it does, it is S’s goodwill which will be reduced
in value first. If this happens it only affects NCI if you are using the FV method.
This is because the proportionate method only gives NCI their share of S’s Net
assets and none of the goodwill.
Whereas, when using the FV method, NCI at acquisition is given a share of S’s NA
and a share of the goodwill.
NCI on the SFP Formula revised
(this is the same figure as used in

NCI @ Acquisition x
goodwill*)
NCI % of S’s post acquisition profits/
x
losses
Impairment (x) (ONLY if using FV method)
NCI on the SFP x
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goodwill
Reserves Calculation
SFP Group Reserves
So far we have looked at how to calculate goodwill and then NCI for the SFP, now
we are looking at how to calculate any group reserves on the SFP
There could be many reserves (eg Retained Earnings, Revaluation Reserve etc),
however they are all calculated the same way
Basic Idea
The basic idea is that group accounts are written from the Parent companies point of
view.
Therefore we include all of Parent (P’s) reserves plus parent share of Subs post
acquisition gains or losses in that reserve.
Let’s look at an example of this using Retained Earnings.
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Illustration 1
P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 600
Now, P’s RE are 1,400 and S’s RE are 700.
What is the RE on the SFP now?
P 1,400
S 80 (80% x (700-600)
1,480
It is worth pointing out here that all these workings only really to start to make sense
once you start to do lots of examples - see my videos for this.
Impairment
If Goodwill has been impaired then goodwill will reduce and retained earnings will
reduce too.
However, the amount of the impairment depends on the NCI method chosen:
1. Proportionate NCI method
This means that NCI has zero goodwill, so any goodwill impaired all belongs to
the parent and so 100% is taken to RE
2. FV method
Here NCI is given a share of NCI, so also takes a share of the impairment.
Therefore the group only gets its share of the impairment in RE (eg 80%)
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Illustration 2
P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 600.
Now, P’s RE are 1,400 and S’s RE are 700.
P uses the FV method of accounting for NCI and impairment of 40 has occurred
since.
What is the RE on the SFP now?
P 1,400
S 80 (80% x (700-600)
Impairment (32) (80% x 40)
1,448
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goodwill
Explain the need for using coterminous year- ends and uniform accounting polices when
preparing consolidated financial statements and describe how it is achieved in practice
Basic groups - Simple Question 1
Have a look at this question and solution below and see if you can work out where all
the figures in the solution have come from.
Make sure to check out the videos too as these explain numbers questions such as
these far better than words can..
P S
Non-Current Asset 500 600
Investment in S 200

Reserves 300 400

Non-Current Liabilities 300 250
P acquired 80% S when S’s reserves were 80.
Prepare the Consolidated SFP, assuming P uses the proportionate method for
measuring NCI at acquisition.
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Goodwill
Consideration 200
NCI 36
FV of Net Assets Acquired (180)
Goodwill 56
NCI
NCI @ Acquisition 36 (from goodwill working above)

NCI % of S’s post acquisition profits 64 (20% x (400-80))
NCI on the SFP 100
Reserves
P 300
S 256 (80% x (400-80)
Impairment (0) (100% because proportionate method x 0)
556
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Group SFP
P S Group
Non-Current Asset 500 600 1,100
Investment in S 200 Goodwill 56
Current Assets 100 200 300

Reserves 300 400 556
NCI 100
Current Liabilities 100 50 150

Non-Current Liabilities 300 250 550
Notice
1) Share Capital (and share premium) is always just the holding company
2) All P + S assets are just added together
3) “Investment in S”..becomes “Goodwill” in the consolidated SFP
4) NCI is an extra line in the equity section of consolidated SFP
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Syllabus D1. Explain the need for using coterminous year- ends and uniform accounting
polices when preparing consolidated financial statements and describe how it is achieved in
practice
Basic Groups - Simple Question 2
P S
Non-Current Asset 500 600
Investment in S 120

Reserves 220 400

Non-Current Liabilities 300 250
P acquired 80% S when S’s Reserves were 40.
At that date the FV of S’s NA was 150.
Difference is due to Land.
There have been no issues of shares since acquisition.
P uses the FV of NCI method at acquisition, and at acquisition the FV of NCI was 35.
No impairment of goodwill.
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Prepare the consolidated set of accounts.
Step 1: Prepare S’s Equity Table
Land 10 10 0
Total 510 150 360
Now the extra 10 FV adjustment now must be added to the PPE when we come to
do the SFP at the end.
Step 2: Goodwill
Consideration 120
NCI 35 (Given)
FV of Net Assets Acquired (150) from S’s Equity table
Goodwill 5
Step 3: Do any adjustments in the question
: NONE
Step 4: NCI
NCI @ Acquisition 35 (given)

NCI % of S’s post acquisition profits 72 (20% x 360 (from S’s Equity table)
NCI on the SFP 107
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Step 5: Reserves
P 220
S 288 (80% x 360 (from S’s equity table))
508
Step 6: Prepare the final SFP (with all adjustments included)
P S Group
Non-Current Asset 500 600 1,110 (including 10 from S’s equity table)
Investment in S 120 Goodwill 5
Current Assets 100 200 300

Reserves 220 400 508
NCI 107
Current Liabilities 100 50 150

Non-Current Liabilities 300 250 550
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Syllabus D1. Explain the subsequent accounting treatment, including the principle of
impairment tests in relation to purchased goodwill
Impairment of Goodwill
Goodwill is reviewed for impairment not amortised.
An impairment occurs when the subs recoverable amount is less than the subs
carrying value + goodwill.
How this works in practice depends on how NCI is measured - Proportionate or Fair
Value method.
Proportionate NCI
Here, NCI only receives % of S's net assets.
NCI DOES NOT have any share of the goodwill.
1. Compare the recoverable amount of S (100%) to..
2. NET ASSETS of S (100%) +

Goodwill (100%)
3. The problem is that goodwill on the SFP is for the parent only - so this needs
grossing up first
4. Then find the difference - this is the impairment - but only show the parent % of
the impairment
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Example
H owns 80% of S. Proportionate NCI
Goodwill is 80 and NA are 200

Recoverable amount is 240
How much is the impairment?
Solution
RA = 240
NA = 200 + G/W (80 x 100/80) = 100 = 300
Impairment is therefore 60.
The impairment shown in the accounts though is 80% x 60 = 48.
This is because the goodwill in the proportionate method is parent goodwill only.
Therefore only parent impairment is shown.
Fair Value NCI
Here, NCI receives % of S's net assets AND goodwill.
NCI DOES now own some goodwill.
1. Compare the recoverable amount of S (100%) to..
2. NET ASSETS of S (100%) +

Goodwill (100%)
3. As, here, goodwill on the SFP is 100% (parent & NCI) - so NO grossing up
needed
4. Then find the difference - this is the impairment - this is split between the parent
and NCI share
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Example
H owns 80% of S. Fair Value NCI
Goodwill is 80 and NA are 200

Recoverable amount is 240
How much is the impairment?
Solution
RA = 240
NA = 200 + G/W 80 = 280
Impairment is therefore 40.
The impairment shown in P's RE as 80% x 40 = 32.

The impairment shown in NCI is 20% x 40 = 8.
Impairment adjustment on the Income Statement
1. Proportionate NCI
Add it to P's expenses.
2. Fair Value NCI
Add it to S's expenses
(this reduces S's PAT so reduces NCI when it takes its share of S's PAT).
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Syllabus D1. Prepare a consolidated statement of profit or loss, statement of profit or loss and
other comprehensive income and statement of changes in equity for a simple group (one or
more subsidiaries), including an example where an acquisition or disposal of an entire interest
occurs during the year and there is a non-controlling interest.
Group Income Statement
Rule 1 - Add Across 100%
Like with the SFP, P and S are both added together. All the items from revenue down
to Profit after tax; except for:
1) Dividends from Subsidiaries

2) Dividends from Associates
Rule 2 - NCI
This is an extra line added into the consolidated income statement at the end. It is
calculated as NCI% x S’s PAT.
The reason for this is because we add across all of S (see rule 1) even if we only
own 80% of S.
We therefore owe NCI 20% of this which we show at the bottom of the income
statement.
Rule 3 - Associates
Simply show one line (so never add across an associate).
The line is called “Share in Associates’ Profit after tax”.
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Rule 4 - Depreciation from the Equity table working
Remember this working from when we looked at group SFP’s?
Now At Acquisition Post Acquisition
PPE 40 50 -10
Total 620 450 170
The -10 from the FV adjustment is a group adjustment. So needs to be altered on

the group income statement. It represents depreciation, so simply put it to admin
expenses (or wherever the examiner tells you), be careful though to only out in THE
CURRENT YEAR depreciation charge.
Rule 5 - Time Apportioning
This isn’t difficult but can be awkward/tricky. Basically all you need to remember is
the group only shows POST -ACQUISITION profits. i.e. Profits made SINCE we
bought the sub or associate.
If the sub or associate was bought many years ago this is not a problem in this
year’s income statement as it has been a sub or assoc. all year.
The problem arises when we acquire the sub or the associate mid year. Just
remember to only add across profits made after acquisition. The same applies to NCI
(as after all this just a share of S’s PAT).
For example if our year end is 31/12 and we buy the sub or assoc. on 31/3. We only
add across 9/12 of the subs figures and NCI is % x S’s PAT x 9/12.
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One final point to remember here is adjustments such as unrealised profits /
depreciation on FV adjustments are entirely post - acquisition and so are NEVER
time apportioned.
Rule 6 - Unrealised Profit
You will remember this table I hope
The idea of what we need to do How we do it on the SFP

Reduce Profit of Seller Reduce SELLERS Retained Earnings
Reduce Inventory Reduce BUYERS Inventory
Well the idea stays the same - it’s just how we alter the accounts that changes,
because this is an income statement after all and not an SFP. So the table you need
to remember becomes:
The idea of what we need to do How we do it on the SOCI

Reduce Profit of Seller Increase SELLERS Cost of Sales
Reduce Inventory No adjustment required
Notice how we do not need to make an adjustment to reduce the value of inventory.
This is because we have increased cost of sales (to reduce profits), but we do this by
actually reducing the value of the closing stock.
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Statement of changes in equity
The revised statement of changes in equity separates owner and non-owner

changes in equity.
It includes only details of transactions with owners, with all non-owner changes in
equity presented as a single line – total comprehensive income.
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Syllabus D1. Explain and illustrate the effect of the disposal of a parent’s investment in a
subsidiary in the parent’s individual financial statements and/or those of the group (restricted to
disposals of the parent’s entire investment in the subsidiary)
Full Disposal
This is when we lose control, so we go from owning a % above 50 to one below 50

(eg 80% to 30%).
In this case we have effectively disposed of the subsidiary (and possibly created a
new associate).
As the sub has been disposed of - then any gain or loss goes to the INCOME
STATEMENT (and hence retained earnings).
Also, the old Subs assets and liabilities no longer get added across, there will be no
goodwill or NCI for it either.
How do you calculate this gain or loss?
Proceeds X
Net Assets (100%) (X)
Goodwill (X)
NCI X
FV of the remaining % (if any) X
Gain/Loss X
What’s the effect on the Income Statement?
Consolidated until sale; Then treat as Associate (if we have significant influence)
otherwise a FVTPL investment.
Show profit on disposal (see above).
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Syllabus D1. Explain and illustrate the effect of the disposal of a parent’s investment in a
subsidiary in the parent’s individual financial statements and/or those of the group (restricted to
disposals of the parent’s entire investment in the subsidiary)
Subsidiary acquired with a view to disposal
A subsidiary that is acquired exclusively with a view to its subsequent disposal is

classified on the acquisition date of the subsidiary as a non-current disposal group
'held for sale' (if it is expected that the subsidiary will be disposed of within one year
and the other IFRS 5 criteria are met with within three months of the acquisition date)
Classification as a discontinued operation

A subsidiary classified as 'held for sale', is included in the definition of a discontinued
operation, with treatment as follows:
• Income statement
Single Line “Discontinued operations” - PAT of the Sub + gain/loss on re-
measurement to held for sale
The income and expenses of the subsidiary are therefore not consolidated on a
line-by-line basis with the income and expenses of the holding company.
• Statement of financial position

The assets and liabilities classified as 'held for sale' presented separately (the
assets and liabilities of the same disposal group may not be offset against each
other).
The assets and liabilities of the subsidiary are therefore not consolidated on a
line-by-line basis with the assets and liabilities of the holding company.
• Statement of Cashflows
No need to disclose the net cash flows attributable to the operating, investing and
financing activities of the discontinued operation (which is normally required) but
is not required for newly acquired subsidiaries which meet the criteria to be
classified as 'held for sale' on the acquisition date
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Syllabus D2. Business combinations – intra-group adjustments
Syllabus D2. Explain why intra-group transactions should be eliminated on consolidation
Report the effects of intra-group trading and other transactions including:

– unrealised profits in inventory and non-current assets
— unsettled intra-group balances at the year- end
– intra-group loans and interest and other intra-group charges, and – intra-group dividends
Intra-Group Balances & In-transit Items
Inter-group company balances
As with Unrealised Profit - this occurs because group companies are considered to
be the same entity in the group accounts.
Therefore you cannot owe or be owed by yourself.
So if P owes S - it means P has a payable with S, and S has a receivable from P in

their INDIVIDUAL accounts.
In the group accounts, you cannot owe/be owed by yourself - so simply cancel these
out:
Dr Payable (in P)
Cr Receivable (in S)
The only time this wouldn’t work is if the amounts didn’t balance, and the only way
this could happen is because something was still in transit at the year end. This
could be stock or cash.
You always alter the receiving company. What I mean is - if the item is in transit, then
the receiving company has not received it yet - so simply make the RECEIVING
company receive it as follows:
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Stock in transit
In the RECEIVING company’s books:
Dr Inventory
Cr Payable
Cash in transit
In the RECEIVING company’s books:
Dr Cash
Cr Receivable
Having dealt with the amounts in transit - the inter group balances (receivables/
payables) will balance so again you simply:
Dr Payable
Cr Receivable
Intra-group dividends
eliminate all dividends paid/payable to other entities within the group, and all
intragroup dividends received/receivable from other entities within the group.
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Syllabus D2. Report the effects of intra-group trading and other transactions including:
– unrealised profits in inventory and non-current assets
Unrealised Profit
The key to understanding this - is the fact that when we make group accounts - we
are pretending P & S are the same entity.
Therefore you cannot make a profit by selling to yourself!
So any profits made between two group companies (and still in group inventory)
need removing - this is what we call ‘unrealised profit’.
Unrealised profit - more detail
Profit is only ‘unrealised’ if it remains within the group. If the stock leaves the group it
has become realised.
So ‘Unrealised profit” is profit made between group companies and REMAINS IN

STOCK.
Example
P buys goods for 100 and sells them to S for 150. S has sold 2/5 of this stock.
The Unrealised Profit is: Profit between group companies 50 x 3/5 (what remains in
stock) = 30.
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How do we then deal with Unrealised Profit
If P buys goods for 100 and sells them to S for 150.
Thereby making a profit of 50 by selling to another group company.
S sells 4/5 of them to 3rd parties.
Unrealised profit is 50 x 1/5 = 10
The idea of what we need to do How we do it on the SFP

Reduce Profit of Seller Reduce SELLERS Retained Earnings
Reduce Inventory Reduce BUYERS Inventory
So why do we reduce inventory as well as profit?
Well let’s say that S buys goods for 100 and sells them to P for 150 and P still has
them in stock.
How much did the stock actually cost the group?
The answer is 100, as they are still in the group.
However P will now have them in their stock at 150.
So we need to reduce stock/inventory also with any unrealised profit.
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Syllabus D3. Business combinations – fair value adjustments
Syllabus D3. Explain why it is necessary for both the consideration paid for a subsidiary and
the subsidiary’s identifiable assets and liabilities to be accounted for at their fair values when
preparing consolidated financial statements
Compute the fair value of the consideration given including the following elements:
- Cash
- Share exchanges
- Deferred consideration
- Contingent consideration
Make sure you use FV of Consideration
Consideration is simply what the Parent pays for the sub.
It is the first line in the goodwill working as follows:
FV of Consideration X
NCI X
FV of Net Assets Acquired (X)
Goodwill X
Normal Consideration
This is straightforward. It is simply:
Dr Investment in S
Cr Cash
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Future Consideration
This is a little more tricky but not much. Here, the payment is not made immediately
but in the future. So the credit is not to cash but is a liability.
Dr Investment in S
Cr Liability
The only difficulty is with the amount.
As the payment is in the future we need to discount it down to the present value at
the date of acquisition.
Illustration
P agrees to pay S 1,000 in 3 years time (discount rate 10%).
Dr Investment in S 751
Cr Liability 751 (1,000 / 1.10^3)
As this is a discounted liability, we must unwind this discount over the 3 years to get
it back to 1,000. We do this as follows:
Year 1 2 3
Dr Interest Cr Liability 75 84 91
Contingent Consideration
This is when P MAY OR MAY NOT have to pay an amount in the future (depending
on, say, S’s subsequent profits etc.). We deal with this as follows:
Dr Investment in S
Cr Liability
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All at fair value
You will notice that this is exactly the same double entry as the future consideration
(not surprising as this is a possible future payment!).
The only difference is with the amount.
Instead of only discounting, we also take into account the probability of the payment
actually being made.
Doing this is easy in the exam - all you do is value it at the FV
(this will be given in the exam you’ll be pleased to know).
Illustration
1/1/x7 H acquired 100% S when it’s NA had a FV of £25m. H paid 4m of its own
shares (mv at acquisition £6) and cash of £6m on 1/1/x9 if profits hit a certain target.
At 1/1/x7 the probability of the target being hit was such that the FV of the
consideration was now only £2m. Discount rate of 8% was used.
At 31/12/x7 the probability was the same as at acquisition.
At 31/12/x8 it was clear that S would beat the target.
Show the double entry
Contingent consideration should always be brought in at FV. Any subsequent

changes to this FV post acquisition should go through the income statement.
Any discounting should always require an winding of the discount through interest on
the income statement
Double entry - Parent Company
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1/1/x7
Dr Investment in S (4m x £6) + £2 = 26
Cr Share Capital 4
Cr Share premium 20
Cr Liability 2
31/12/x7
Dr interest 0.16
Cr Liability 0.16
31/12/x8
Dr Income statement 4 (6-2)

Dr Liability 2
Cr Cash 6
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Syllabus D3. Prepare consolidated financial statements dealing with fair value adjustments
(including their effect on consolidated goodwill) in respect of:
– Depreciating and non-depreciating non-current assets
– Inventory
– Deferred tax
– Liabilities
– Assets and liabilities (including contingencies), not included in the subsidiary’s own statement
of financial position
Explain the subsequent accounting treatment, including the principle of impairment tests in
relation to purchased goodwill
Goodwill - FV of NA (more detail)
Goodwill
So let’s remind ourselves of the goodwill working:
Consideration 800
NCI 330
Goodwill 130
We have just looked in more detail at the sort of surprises the examiner can spring
on us in the first line “consideration” - now let´s look at the bottom line in more detail:
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Fair values of Net Assets at Acquisition
Operating leases. If terms are favourable to the market - recognise as an asset
Internally generated intangibles would now have a reliable measure and would be
brought in the consolidated accounts
Remember both of these items would need to be depreciated in our equity table
working
contingent liabilities (see bottom of this page)
Illustration
1/7/x5 H acquired 80% S for 16m, nci measured at share of net assets. FV of NA
was 10m.
S had a production backlog with a FV of 2m (uel 2 years) and unrecognised

trademarks with a FV of 1m. These are renewable at any time at a negligible cost.
S made a profit of 5m in the year to 31/12/x5.
What would goodwill be in the consolidated SFP?
Consideration 16
NCI 2.6
FV of Net Assets Acquired (13)
Goodwill 5.6
FV of NA working
Per Accounts 10 + FV adj (2+1) 3
Provisional Goodwill
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We get “provisional goodwill’ when we cannot say for certain yet what the FV of Net
Assets are at the date of acquisition.
This is fine, we just state in the accounts that the goodwill figure is provisional.
This means we then have 12 months (from the date of acquisition) to change the
goodwill figure IF AND ONLY IF the information you find (within those 12 months)
gives you more information about the conditions EXISTING at the year-end.
Any information after the 12 month period (even if about conditions at acquisition)
does not change goodwill.
Any differences are simply written off to the income statement.
So, in summary, the FV of NA can be altered retrospectively if within 12 months of

acquisition.
This means goodwill would change. Any alteration after 12 months is through the
income statement.
Illustration
A acquired 70% B on 1/7/x7, NCI measured at share of net assets acquired.
A provisional fair value only was used for plant and machinery of £8m (UEL 10yrs).
Goodwill was £4m.
The year-end of 31/12/x7 accounts were then approved on 25/2/x8.
On 1/4/x8 the FV of the plant was finalised at 7.2m.
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How would this affect the consolidated accounts?
Provisional goodwill is acceptable if disclosed as such in the accounts.
The parent then has one year after acquisition to finalise the FV and alter goodwill.
Should the finalisation occur after one year - no adjustment is required to goodwill.
Provisional Goodwill 4m
Adjusted Goodwill
Original 4m + (0.8 x 70%) = 4.56m
Contingent liabilities
Normally these are just disclosures in the accounts.
However, remember that when a sub is acquired, it is brought into the accounts at
FV.
A contingent liability does have a fair value.
Therefore they must be actually recognised in the consolidated accounts until the
amount is actually paid.
So the rules are:
1. Bring in at the FV
2. Measure afterwards at this amount unless it then becomes probable. As usual, a

probable liability is then measured at the full liability
Note. If it remains just possible then keep it at the initial FV until it is either written off
or paid
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Illustration
1/7/x6 P acquired all of S when it’s NA had a CV of £2m. However, they had
disclosed a contingent liability. This has a FV of £150,000.
1/12/x7 this potential liability was paid at an amount of £200,000.
How are the accounts affected?
Well we would bring it into the equity table (at acquisition column) in the workings at
its FV of 150. This would affect goodwill working accordingly.
Keep it at this amount until it either becomes probable (show at full amount) or paid
Here it is paid so the year end would show no liability - and the post-acquisition
column +150. This would then affect the NCI and reserves working accordingly.
The extra 50 paid will have already been taken into account when the full amount
was paid
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Syllabus D3. Compute the fair value of the consideration given including the following
elements:
- Share exchanges
Share for Share Exchanges
These can form part, or all, of the cost of investment which is used in the goodwill
calculation.
Under normal circumstances, P acquires S’s shares by giving them cash, so the
double entry is
Dr Cost of Investment
Cr Cash
However this time, P does not give cash, but instead gives some of its own shares
If this exchange has yet to be accounted for, the double entry is always:
Dr Cost of Investment
Cr Share capital (with the nominal value of P shares given out)
Cr Share premium (with the premium)
Illustration
P acquired 80% of S shares via a 2 for 1 share exchange.
At the date of acquisition, the following balances were in the books of P and S:
P S
Share Capital $400 ($0.50) $400
Share Premium $100 $50
The share price of P was $2 at the date of acquisition. This has not been accounted
for.
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Show the accounting treatment required to account for the share exchange.
P acquired 80% of S’s shares.
The shares had a value of $400 but a nominal value of $0.50.
This means S has 800 shares in total. P acquired 80% x 800 = 640 shares
The share for share deal was 2 for 1.
So P gives 1,280 of its shares in return for 640 of S’s shares.
P’s shares have a MV of $2 at this date so the “cost of investment is 1,280 x 2 =

2,560
Double entry
Dr Cost of Investment 2,560

Cr Share Capital (P) 1,280
Cr Share Premium (P) 1,280
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Syllabus D4. Business combinations – associates and joint
arrangements
Syllabus D4. Define associates and joint arrangements
Associates
An associate is an entity over which the group has significant influence, but not
control.
Significant influence
Significant influence is normally said to occur when you own between 20-50% of the
shares in a company but is usually evidenced in one or more of the following ways:
• representation on the board of directors
• participation in the policy-making process
• material transactions between the investor and the investee
• interchange of managerial personnel; or
• provision of essential technical information
An associate is not a group company and so is not consolidated. Instead it is

accounted for using the equity method. Intercompany balances are not cancelled.
Statement of Financial Position
There is just one line only “investment in Associate” that goes into the consolidated
SFP (under the Non-current Assets section).
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It is calculated as follows:
Cost 400
Share of A’s post acquisition reserves 200
Less impairment (100)
500
Consolidated income statement
Again just one line in the consolidated income statement:
Share of Associates PAT (-impairment) 100
Include share of PAT less any impairment for that year in associate.
Do not include dividend received from A.
What’s important to notice is that you do NOT add across the associate’s Assets and
Liabilities or Income and expenses into the group totals of the consolidated
accounts. Just simply place one line in the SFP and one line in the Income
Statement.
Unrealised profits for an associate
1. Only account for the parent’s share (eg 40%).
This is because we only ever place in the consolidated accounts P’s share of A’s
profits so any adjustment also has to be only P’s share.
2. Adjust earnings of the seller
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Adjustments required on Income Statement
• If A is the seller - reduce the line “share of A’s PAT”
• If P is the seller - increase P’s COS
Adjustments required on SFP
• If A is the seller - reduce A’s Retained earnings and P’s Inventory
• If P is the seller - reduce P’s Retained Earnings and the “Investment in Associate”
line
Illustration
P sells goods to A (a 30% associate) for 1,000; making a 400 profit. 3/4 of the goods
have been sold to 3rd parties by A.
What entries are required in the group accounts?
Profit = 400; Unrealised (still in stock) 1/4 - so unrealised profit = 400 x 1/4 = 100. As
this is an associate we take the parents share of this (30%). So an adjustment of 100
x 30% = 30 is needed.
Adjustment required on the Income statement
P is the seller - so increase their COS by 30.
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Adjustment required on the group SFP
P is the seller - so reduce their retained earnings and the line “Investment in
Associate” by 30.
H S A
PPE 300,000 100,000 160,000
18,000 shares in S 75,000
24,000 shares in A 30,000
Receivables 345,000 160,000 80,000
Share capital £1 250,000 30,000 60,000
Retained earnings 400,000 180,000 100,000
Trade payables 100,000 50,000 80,000
The retained earnings of S and A were £70,000 and £30,000 respectively when they
were acquired 8 years ago.
There have been no issues of shares since then, and no FV adjustments required.
The group use the proportionate method for valuing NCI at acquisition.
368 aCOWtancy.com
Prepare the consolidated SFP
Solution
Step 1: Equity Table

Share Capital 30,000 30,000 0
Retained Earnings 180,000 70,000 110,000
Total 210,000 100,000 110,000
Step 2: Goodwill
Consideration 75,000
NCI 40,000 (40% x 100,000)
FV of Net Assets Acquired (100,000) from equity table
Goodwill 15,000
H owns 18,000 of S’s share capital of 30,000 so 60%.
Step 3: NCI
NCI @ Acquisition 40,000 (from goodwill working)

(40% x 110,000) (From equity
40 % of S’s post acquisition profits 44,000
table)
Impairment (0)
NCI on the SFP 84,000
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Step 4: Retained Earnings
P 400,000
S 66,000 (60% x 110,000 (From Equity table)
A 28,000 (40% x 70,000 (100-30)
Impairment (0) (100% because proportionate method x 0)
494,000
Step 5: Investment in Associate
Cost 30,000
Share of A’s post acquisition reserves 28,000 (from RE working)
Less impairment (0)
58,000
Final answer - Goodwill
H S A Group
PPE 300,000 100,000 160,000 400,000
18,000 shares in S 75,000 15,000
18,000 shares in A 30,000 Investment in Associate 58,000
Receivables 345,000 160,000 80,000 505,000
Share capital £1 250,000 30,000 60,000 250,000
Retained earnings 400,000 180,000 100,000 494,000
NCI 84,000
Trade payables 100,000 50,000 80,000 150,000
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Syllabus D4. Distinguish between joint operations and joint venture
Prepare consolidated financial statements to include a single subsidiary and an associate or a

joint arrangement.
Joint Ventures
A joint arrangement is an arrangement of which two or more parties
have joint control.
A joint arrangement has the following characteristics:
• The parties are bound by a contract, and
• The contract gives two or more parties joint control
What is Joint Control?
The sharing of control where decisions about the relevant activities need unanimous
consent.
The first step is to see if the parties control the arrangement per IFRS 10.
After that, the entity needs to see if it has joint control as per paragraph above
Unanimous consent means any party can prevent other parties from making
unilateral decisions (about the relevant activities).
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Types of joint arrangements
Joint arrangements are either joint operations or joint ventures:
• A joint operation
Here the parties have rights to the assets, and obligations for the liabilities,
relating to the arrangement.
They are called joint operators.
• A joint venture
Here the parties have rights to the net assets of the arrangement.
Those parties are called joint venturers.
• Classifying joint arrangements
This depends upon the rights and obligations of the parties to the arrangement.
Regardless of the purpose, structure or form of the arrangement.
A joint arrangement in which the assets and liabilities relating to the arrangement
are held in a separate vehicle can be either a joint venture or a joint operation.
A joint arrangement that is not structured through a separate vehicle is a joint

operation.
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Financial statements of parties to a joint arrangement
• Joint Operations
A joint operator recognises:
o its assets, including its share of any assets held jointly
o its liabilities, including its share of any liabilities incurred jointly
o its revenue from the sale of its share of the output of the joint operation
o its share of the revenue from the sale of the output by the joint operation; and
o its expenses, including its share of any expenses incurred jointly
• A joint operator accounts for the assets, liabilities, revenues and expenses
relating to its involvement in a joint operation in accordance with the relevant
IFRSs
• Illustration
An office building is being constructed by A and B, each entitled to half the profits
A has invoiced 300 and had costs of 280

B has invoiced 500 and had costs of 420
This shows that total sales are 800, total costs are 700 - so a profit of 100 needs
splitting 50 each.
A is currently showing a profit of 20, and B of 80. Therefore A now needs to show
a receivable of 30 from B (and B a payable to A).
Revenue should be 400 each, so A needs an extra 100 and costs should be 350
each so an 70 is required.
• Double entry for A

Dr Receivables 30
Cr Revenue 100
Dr COS 70
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If an does not have joint control of a joint operation - it accounts for its interest in the
arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation.
Joint Ventures
The group accounts for this using the equity method (see associates).
(A party that does not have joint control of a joint venture accounts for its interest in
the arrangement in accordance with IFRS 9).
Unrealised profit on sales with JV - always just the share (e.g. 50%)
• P to JV
o Income Statement
Increase P’s COS
o SFP
Decrease P’s RE
Decrease Investment in JV
• JV to P
o Income Statement
Decrease “Share of JV PAT”
Decrease JV’s RE
Decrease P’s stock
• No Elimination of Receivables and Payables to each other
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Syllabus D5. Complete disposal of shares in subsidiaries
Calculate the gain or loss on the complete disposal of shares in a subsidiary in the financial
statements of the parent and the subsidiary.
Explain and illustrate the effect of the complete disposal of a parent’s investment in a subsidiary
in the parent’s individual financial statements and/or those of the group.
Full Disposal
This is when we lose control, so we go from owning a % above 50 to one below 50
(eg 80% to 30%).
In this case we have effectively disposed of the subsidiary (and possibly created a
new associate).
As the sub has been disposed of - then any gain or loss goes to the INCOME
STATEMENT (and hence retained earnings).
Also, the old Subs assets and liabilities no longer get added across, there will be no
goodwill or NCI for it either.
How do you calculate this gain or loss?
Proceeds X
Net Assets (100%) (X)
Goodwill (X)
NCI X
FV of the remaining % (if any) X
Gain/Loss X
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What’s the effect on the Income Statement?
Consolidated until sale; Then treat as Associate (if we have significant influence)
otherwise a FVTPL investment.
Show profit on disposal (see above).
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Syllabus D5. Calculate the gain or loss on the complete disposal of shares in a subsidiary in
the financial statements of the parent and the subsidiary.
Explain and illustrate the effect of the complete disposal of a parent’s investment in a subsidiary
in the parent’s individual financial statements and/or those of the group.
Subsidiary acquired with a view to disposal
A subsidiary that is acquired exclusively with a view to its subsequent disposal is
classified on the acquisition date of the subsidiary as a non-current disposal group
'held for sale' (if it is expected that the subsidiary will be disposed of within one year
and the other IFRS 5 criteria are met with within three months of the acquisition date)
Classification as a discontinued operation
A subsidiary classified as 'held for sale', is included in the definition of a discontinued
operation, with treatment as follows:
• Income statement
Single Line “Discontinued operations” - PAT of the Sub + gain/loss on re-
measurement to held for sale
The income and expenses of the subsidiary are therefore not consolidated on a
line-by-line basis with the income and expenses of the holding company.
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• Statement of financial position
The assets and liabilities classified as 'held for sale' presented separately (the
assets and liabilities of the same disposal group may not be offset against each
other).
The assets and liabilities of the subsidiary are therefore not consolidated on a
line-by-line basis with the assets and liabilities of the holding company.
• Statement of Cashflows
No need to disclose the net cash flows attributable to the operating, investing
and financing activities of the discontinued operation (which is normally
required) but is not required for newly acquired subsidiaries which meet the
criteria to be classified as 'held for sale' on the acquisition date
378 aCOWtancy.com

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DipIFR Course notes

Syllabus A: International sources of authority .............................................2

Syllabus A1. IASB and the regulatory framework

A regulatory framework is needed to ensure relevant

A regulatory framework regulates the behaviour of companies towards their investors

Benefits of adopting IFRS

• The International Organisation of Securities Commissions (IOSCO) recognise

What are the challenges of adopting IFRS to national standards?

1. Laws and regulations

2. IFRS training to finance staff and regulators

3. Greater complexity in the financial reporting process

The role of the regulatory systems

They provide guidance as to how items should be shown in a set of financial

The IASB replaced the IASC in 2001.

• To achieve comparability between different organisations

The IFRS Foundation (IFRSF)

The IFRSF is governed by a board of 22 trustees.

The International Accounting Standards Board (IASB)

The International Accounting Standards Board (IASB) is an independent, privately-

There are 14 Board members, each with one vote.

How are standards developed?

International Financial Reporting Standards (IFRSs) are developed through an

The due process comprises six stages:

1. IAASB reviews auditing developments and takes suggestions from interested

3. Developing and publishing the discussion paper for public comment;

4. Draft standard produced and commented on by interested parties for a period of

5. Project task force considers comments and amendments made if appropriate.

If changes significant there may be another exposure period.

6. Standard finalised and approved by meeting of IAASB at which there must be a

The IASB framework is not a standard nor does it

What’s its purpose?

• Serves as a guide in developing accounting standards.

It includes the following:

1. The objective of financial statements

3. Qualitative characteristics of good information

More on these in other sections

Arguments for a conceptual framework

• Without a framework then standards would be developed without consistency

• It also prevents political lobbyists from changing pressurising changes in

1. what should be brought into the accounts

2. when it should be brought into the accounts and

3. at how much it should be measured

Arguments against a conceptual framework

• Perhaps different users need different information and hence different

• Even with framework principles - standards go through a huge analysis process,

GAAP & the framework

Chapter 1: The Objective of Financial Reporting

A few observations about the objective:

The ability of management to discharge their stewardship responsibilities

• Capital providers - main users

Financial reporting should also include management’s explanations, since

Chapter 3: Qualitative Characteristics of Useful Financial Information

Financial information is useful when it is relevant and represents faithfully what it

Relevant information makes a difference in the decisions made by users.

Therefore it must have a predictive value, confirmatory value, or both. The

Materiality is an entity-specific aspect of relevance. It is based on the nature and/

ii. Faithful representation

General purpose financial reports represent economic phenomena in words and

To be useful, financial information must not only be relevant, it must also

This maximises the underlying characteristics of completeness, neutrality and

1. Comparability (including consistency)

Helps to assure users that information represents faithfully the economic

It implies that knowledgeable observers could reach a general consensus

Enables users with a reasonable knowledge to comprehend the information.