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Financial Reporting
Notes by Zubair Saleem

SKANS School of Accountancy

Lahore
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Table of Content

Contents
IAS -1 Presentation of Financial Statements ..................................................................................... 2
Chapter-3 Investment property ....................................................................................................... 15
Chapter-4 IFRS-9 Financial instruments ........................................................................................... 19
Chapter 5 -IAS-32 Presentation of Financial Instruments............................................................... 24
Chapter -6 IFRS-16 Leases ................................................................................................................ 27
Chapter-7 IFRS-15 Revenue from Contracts with Customers ......................................................... 35
Chapter-8 IAS-12 Tax ........................................................................................................................ 42
Chapter-9 Final accounts.................................................................................................................. 46
Chapter-10 Intangible assets ........................................................................................................... 47
Chapter -11 IAS-37 Provision contingent liability and contingent assets ...................................... 51
Chapter 12 IAS-36 Impairment of Non-current assets .................................................................... 53
Chapter-13 “CONSOLIDATION” ....................................................................................................... 56
Chapter -14 IAS-28 Investment in associate .................................................................................... 72
Chapter-15 Consolidated Statement of Comprehensive Income ................................................... 74
Chapter -16 IAS-8 Change in accounting policy, Estimates and Errors ........................................... 82
Chapter-17 IFRS 5 Asset held for sale & Discontinued operations.................................................. 84
Chapter 18 IAS-10 Events After Reporting period............................................................................. 1
Chapter 19 IAS-21 Translation of foreign currency Transactions ..................................................... 3
Chapter 20-IAS – 33 “EARNING PER SHARE” ..................................................................................... 4
Chapter 21-IAS-41 Agriculture ........................................................................................................... 9
Chapter 22 IFRS-13 Fair Value Measurement ................................................................................. 12
Chapter-23 Interpretation of financial statements -Ratio analysis ................................................ 14
Chapter 24 IAS-12 Deferred Tax ...................................................................................................... 17
Chapter 25 IAS-7 Statement of Cashflows....................................................................................... 22
Chapter 26 IASB Framework .............................................................................................................. 1
Chapter 27 IAS-23 Borrowing cost ..................................................................................................... 4
Chapter 28 Government Grants......................................................................................................... 5
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IAS -1 Presentation of Financial Statements

IAS-1 sets out the overall requirements for financial statements,

including how they should be structured, the minimum requirements for their content and
overriding concepts such as going concern, the accrual basis of accounting and the current/non-
current distinction.

1.Scope

IAS 1 applies to all general-purpose financial statements that are prepared and presented in
accordance with International Financial Reporting Standards (IFRSs). [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position
to require financial reports tailored to their particular information needs. [IAS 1.7]

1.2. Structure of Financial Statements

IAS 1 requires an entity to clearly identify: [IAS 1.49-51]

the financial statements, which must be distinguished from other information in a published
document each financial statement and the notes to the financial statements.

In addition, the following information must be displayed prominently, and repeated as necessary:
[IAS 1.51] the name of the reporting entity and any change in the name whether the financial
statements are a group of entities or an individual entity information about the reporting period
the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates)
the level of rounding used (e.g. thousands, millions).
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Exceptional items are the name often given to material items of income and expense of such size,
nature or incidence that disclosure is necessary in order to explain the performance of the entity.
The accounting treatment is to:

• include the item in the standard statement of profit or loss line

• disclose the nature and amount in the notes.

The Word Extra ordinary item is specifically disallowed to be used in financial statements
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Company Name
Statements of Changes in Equity
for the year ended -------

Share Share Revaluation Other Retained Equity

Capital Premium Reserve Equity
Earnings Option
Reserves

$ $ $ $ $ $

Opening bal.
xx xx xx xx xx xx

Previous year (xx)

fraud/error/changes
in accounting policy

Right issue xx xx

Bonus issue xx (xx)

Total xx xx xx
Comprehensive
income

Ordinary dividend (xx)

IAS-16 PPE(transfer) (xx) xx

Closing balance xxx xxx xxx xxx xxx xxx

The SOCIE provides a summary of all changes in equity arising from transactions with owners in
their capacity as owners.

This includes the effect of share issues and dividends.

Other non-owner changes in equity, such as comprehensive income, are disclosed in aggregate
only
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Question-1

At 30 September 20X2 the trial balance of Cavern Co includes the following balances:

$'000

Equity shares of 20c each 50,000

Share premium 15,000

Cavern Co has accounted for a fully subscribed rights issue of equity shares made on 1 April 20X2 of one
new share for every four in issue at 42 cents each. This was the only share issue made during the year.

Show the balances on the share capital and share premium accounts at 30 September 20X1?

Question-2

At 30 September 20X2 the trial balance of Yasir Co includes the following balances:

$'000

Equity shares of 50c each 60,000

Share premium 50,000

Yasir Co has accounted for a fully subscribed rights issue of equity shares made on 1 April 20X2 of two
new shares for every five in issue at 80 cents each. This was the only share issue made during the year.

Show the balances on the share capital and share premium accounts at 30 September 20X1?
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1.3 Current and non-current classification

An entity must normally present a classified statement of financial position, separating current and non-
current assets and liabilities, unless presentation based on liquidity provides information that is reliable.
[IAS 1.60]

Current assets are assets that are: [IAS 1.66]

• expected to be realized in the entity's normal operating cycle

• held primarily for the purpose of trading

• expected to be realized within 12 months after the reporting period

• cash and cash equivalents (unless restricted).

All other assets are non-current. [IAS 1.66]

Current liabilities are those: [IAS 1.69]

• expected to be settled within the entity's normal operating cycle

• held for purpose of trading

• due to be settled within 12 months

• for which the entity does not have the right at the end of the reporting period to defer settlement
beyond 12 months.

Other liabilities are non-current.

When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the
discretion to do so, the debt is classified as non-current, even if the liability would otherwise be due within
12 months. [IAS 1.73]

If a liability has become payable on demand because an entity has breached an undertaking under a long-
term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed,
after the reporting date and before the authorisation of the financial statements for issue, not to demand
payment as a consequence of the breach. [IAS 1.74]

However, the liability is classified as non-current if the lender agreed by the reporting date to provide a
period of grace ending at least 12 months after the end of the reporting period, within which the entity can
rectify the breach and during which the lender cannot demand immediate repayment. [IAS 1.75]
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Question-1
At 30 September 20X2 the trial balance of Cavern Co includes the following balances:
$'000
Equity shares of 20c each 50,000
Share premium 115,000
Retained Earnings 105,000
Revaluation reserve 12000
Other equity reserve 22000

Cavern Co has accounted for a fully subscribed rights issue of equity shares made on 1 April 20X2 of Three
new share for every eight in issue at 70 cents each. This was the only share issue made during the year.
Income statement extracts for the year ended
$ 000
PAT 20,000
OCI
Rev Gain on PPE 2550
FVTOCI loss (6500)

Company declared a dividend of 10 cents per share during the year at 30 June 2002.
There was a fraud in the previous year of $5500,000 in the last year discovered n during year

Required
Prepare statement of changes in Equity
Solution -1
Equity Share Retained Revaluation Other equity Total
shares premium Earnings reserve reserve
Opening Bal 36,364 80,909 105,000 12000 22000

Previous Year Fraud (5500)

Restated Balance

Right Issue 13,636 34,091

Total comprehensive 20,000 2550 (6500)

Income

Dividend (25000)

Closing Balance 50,000 115,000 94,500 14550 15,500

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Dividend = (250,000*0.10) = 25000

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Chapter-2
Property plant and Equipment
Pre
Operating
Loss
Training Cost
Settlement
Tangible, Non-current assets, held for use (lack of Discount
control)
Cost in
Recognition; to incorporate PPE in f/s Profit &
Definition of PPE met Loss
Account
1) Cost must be measured reliably Abnormal
Maintainence
2) Inflow of economic benefits are Probable Cost
loss/Rectificatio
n Cost
General or
Admin
Initial measurement overheads

at cost

Purchase price Directly attributable Estimated cost

List price expenses of dismantling
- trade discount transportation & handling removing and
+Import duty Installation, site preparation Restoration
+non-refundable Testing cost -if obligation
Taxes exist at installation

Present. Value and

Unwind each year
Reporting date

Subsequent measurement
Cost Model Revaluation Model
Cost ** Fair value **
Less acc. Dep. ** Less subsequent Acc. Dep **
Less accumulated I/L ** Less subsequent Acc. I/L **
** **
Conditions for Revaluation Model
1)
2) Fair value is reliable
3) Revalue on regular basis
(Whenever material difference)
4) Whole class of asset must be revalued
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Treatment of revaluation reserve

Realization through
Sale Use
Transfer rev. reserve of Transfer rev. reserve towards R/E over
Asset sold towards R/E remaining useful life (within SOCIE)
At disposal date (within
SOCIE)
Dr. Rev. Reserve Dr. Rev. Reserve
Cr. R/E Cr. R/E

Calculation of transferable amount

1) 𝑁𝑒𝑤 𝑑𝑒𝑝 − 𝑂𝑙𝑑 𝑑𝑒𝑝
Or
𝑅𝑒𝑣. 𝑔𝑎𝑖𝑛
2) 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑙𝑖𝑓𝑒

Revaluation Gain
Charge to OCI if there is no previous loss on same asset, if previous loss exists than gain will first set off the
previous loss in p/l and over and above Revaluation gain charge to other comprehensive income
Revaluation loss
Charge to P/L if there is no previous gain on same asset, if previous gain exists than loss will first setoff previous
gain (net of excess dep if policy is to transfer) in OCI and over and above loss will be charged to P/L

Previous Years Current Year Treatment

1-Loss $5 Loss $3 $3 to P&L
2-Loss $5 Gain $4 $4 to P&L
3-Loss $5 Gain $7 $2 gain to OCI
$5 gain to P&L
4-Gain $5 Loss $8 $5 loss to OCI
$3 loss to P&L
5-Gain $5 Loss $3 $3 loss to OCI
6-Gain $5 Gain $3 $3 Gain to OCI
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Depreciation
Dep. Charge due to physical wear & tear, usage & technology obsolescence
Matching concept

Dr. Dep (charge to p/l or capitalize as part of another asset)

v
Cr. Asset

𝑐𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑠𝑙𝑢𝑒

Straight line method 𝑡𝑎𝑡𝑎𝑙 𝑢𝑠𝑒𝑓𝑢𝑙𝑙 𝑙𝑖𝑓𝑒
OR 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙𝑙 𝑙𝑖𝑓𝑒

Reducing balance method 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 ∗ %𝑎𝑔𝑒

𝑐𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
Machine hour method 𝑡𝑜𝑡𝑎𝑙 𝑢𝑠𝑒𝑓𝑢𝑙𝑙 𝑙𝑖𝑓𝑒 (ℎ𝑜𝑢𝑟𝑠)
∗ 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 ℎ𝑜𝑢𝑟𝑠
OR
𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙𝑙 𝑙𝑖𝑓𝑒(ℎ𝑜𝑢𝑟𝑠)
∗ 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑑 ℎ𝑜𝑢𝑟𝑠

Must review residual value, useful life and depreciation Methods at each reporting date and if
revised treat this change as change in accounting estimate and account for prospectively – means
no adjustment is required in previous years (prior years)
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Subsequent Expenditure on PPE

•Charge to Profit & Loss

Repair, Maintenance, Repaint

Improvement Expenditure •Add to the carrying value of PPE

- Useful Life, Quality, Capacity Increases

-Per unit cost, Production time decreases

•Old Part=>Derecognise
•New Part=>Capitalise as a separate asset
Replacement of Major Part

•Short Term=>Charge to P&L a/c

Overhauling, Inspection Cost •Longer Term=>Capitalise as a separate part of asset &
depreciate over its useful Life
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Derecognition
To eliminate previously recognized PPE from F/S

Any gain or loss on disposal or derecognition will charge to p/loss

Dr Cash xx Or profit/ loss

Cr asset carrying value xx = disposal proceed – carrying value
Cr /Dr Profit /loss (balance amount) xx

Illustration
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Chapter-3 Investment property

Land & Building (Right of Use to land or building) held for Capital Appreciations & for Rental
Purpose to Others or for Both

, Other than;
- Property held for use (Owner Occupied Property) [IAS-16] PPE
- Property acquired for resale purpose in ordinary cause of business [IAS-16]
inventory [IAS-2]
1) Recognition: - Definition of Investment Property should be met
a. Cost can be measured reliably
b. Inflow of Economic benefits are Probable
2) Measurement:
Initial Measurement (at the time of recognition) Subsequent Measurement

At Cost: Cost Model Fair Value

Model
(i) Purchase Price Cost xx Carrying Value=Fair
Value
(ii) Directly Attributable Expense - Acc.Dep (xx) No Depreciation
- Acc.Imp.Loss (xx) No Impairment
Loss
F.V Gain/Loss P/L

3) De-Recognition: When Substantial Risk & Rewards of Investment Property no longer

belongs to entity,
(Disposal, Completely
Destroyed) Profit & Loss = Disposal
Proceed – Carrying Value
-Compensation from third parties charged to
profit & loss when becomes receivable
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-Investment property includes

a. Equipment such as lifts or air conditioning
in an investment property
b. Furniture in case of furnished rental
property
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Chapter-4 IFRS-9 Financial instruments

Ordinary shares, preference shares, loan notes, Bonds, Debentures* (Option, Future, forward
contracts)

Financial Assets
a. Investment in equity ------------------(Buyer of ordinary shares)
b. Investment in debt --------------------(Buyer of bonds/loan notes/Debentures)
Classification of Financial Assets (investments)

Additional points
a) *Intention for BMM is assessed over portfolio level not on individual investment level.
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b) *Irregular sales have no impact on BMM of Hold

c) Business may have more than one model
d) *if investment has met the criteria for amortized cost classification but this will create an
accounting mismatch, then you should classify this investment at FVTPL (to eliminate accounting
mismatch).

Accounting Treatment of Financial assets

Example-1
Sheela ltd bought 30,000 $1 ordinary shares of NML for $2 each. Initial measurement: 60,000+3000=63000$
Commission to broker 10 cents/share. DR Investment equity 63000
on 1 October 2020 market value at year ended 31 December Cr Bank 63000
$ Subsequent:
2020 2.5 SOCI: 2020 2021 2022
P&L:
OCI: 12,000 (30,000) 24,000
SOFP:
FVTOCI 75000 45000 69000

2023:
Dr cash 72,000
Cr FVTOCI 69,000
Cr profit 3,000
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2021 1.5
2022 2.3
During 2023, 30,000 sold for $2.5 each, selling commission 10 cents/share:
Accounting for 4 years?
a) If entity has made irrevocable election
b) If not made an irrevocable election

Initial measurement: 60,000 SOFP:

DR Investment equity 60,000 FVTPL 75000 45000 69000
Cr Bank 60,000
Subsequent: 2023:
SOCI: 2020 2021 2022 Dr cash 72,000
P&L: 15,000 (30,000) 24,000 Cr FVTPL 69,000
(3,000) Cr profit 3,000
OCI:
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Example-2

Munni ltd bought a bond of $10,000 @ 3%

which has maturity after 3 years,
redeemable at a premium of $2,317.
Effective rate is 10%
Accounting for 3 years under amortised cost?

Example-3

H.A bought a bond of

$10,000 @ 5% for $9000.
Transaction cost is $300.
Bond is redeemable @ substantial premium.
Effective rate is 12%.
Accounting for 2 years?

Example-4
Entity bought a bond of $20,000 @ 5% for $19,000
Transaction cost is $500.
Effective rate is 10%
Extracts for 3 years?
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Example-5
On 1 January 20X1 James issued a loan note with a $50,000 nominal value. It was issued at a discount of
16% of nominal value. The costs of issue were $2,000. Interest of 5% of the nominal value is payable
annually in arrears. The bond must be redeemed on 1 January 20X6 (after 5 years) at a premium of $4,611.
The effective rate of interest is 12% per year.

Required: How will this be reported in the financial statements of James over the period to redemption?

Example-6

a) Hoy raised finance on 1 January 20X1 by the issue of a two-year 2% bond with a nominal value of
$10,000. It was issued at a discount of 5% and is redeemable at a premium of $1,075. Issue costs can be
ignored. The bond has an effective rate of interest of 10%.

b) Wiggins raised finance by issuing $20,000 6% four-year loan notes on 1 January 20X4. The loan notes
were issued at a discount of 10%, and will be redeemed after four years at a premium of $1,015. The
effective rate of interest is 12%. The issue costs were $1,000.
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Chapter 5 -IAS-32 Presentation of Financial Instruments

(Ordinary Shares, Preference Shares, Loan Notes, Debentures, Stock, Derivatives)

> Issuer: Who issue Loan Notes etc > Holder: Who Buy Loan Notes etc
Who issue ordinary shares
Who issue Preference shares
Financial Assets -IFRS 9
Amortised cost
FVTPL
FVTOCI

1 Classification of Issue of Financial Instruments: (In Issuer’s Books)

Classification into Debt and Equity

Dr Cash xx
Cr Liability / Equity xx ?

Classification Criteria:
• Substance (Economic reality) over form (legal status)

• Definition of Financial Liability & Equity

Financial Liability = Obligation to Pay Principle or Interest
Equity = No Obligation to Pay Principle & Interest

> Timings of Classification:

• Classify issue of Financial Instruments at the time of issue & once classified, it can’t be reclassified.

Puttable financial Instruments

• Puttable Financial Instruments. (Normally Financial Liability)
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2 Treatment of Issue Cost, Interest Paid & Dividend Paid: (Depends On)

On Liability
Charge to P/L as Finance Cost,
Using Effective Interest Rate Method.
on Equity
Directly Charge to Equity in SOCIE
Ord. Dividends less from Retained Earnings
Issue Cost of Equity Opt. less from Equity Opt.
Issue Cost of Ord. Shares less from Share Premium/R.E

1.Effective Interest Rate Methods:

Total Finance Cost= Years O/B of Liability Finance Cost Interest Paid Rollover C/B
Interest Paid ×× Y1 xx xx xx xx xx
Issue Cost ×× O/B × Effective Nominal Value ×
Discount ×× Rate Nominal Rate
Premium ××
Total Finance Cost ×× (Allocate over loan term using Effective Interest Rate)

Opening Balance:
Nominal Value ××
- Discount (××)
Cash Received ××
- Issue Cost (××)
×

3 Compound/Hybrid Instruments: that has features of both Liability & Equity.

Example- Convertible Loan or Convertible Preference share

Split Accounting = Liability: Present Value of max possible Cash outflows

Equity: Residual Value

Then liability will be remeasured using effective interest rate method at amortized cost

Illustration
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4 Treasury Shares: • Buy back of own equity shares.

• Buying other company shares are investment.
• Any cash received or paid on issue of equity instruments or buy back of equity
instruments & re-issue of equity instruments will directly charge to equity in SOCIE & no
profit/loss will be calculated.
Dr Treasury Shares xx (SOCIE)
Cr Cash xx
5 Definition

> Financial Instruments: Any contract which give arise Financial Asset for one entity & Financial
Liability / Equity for another entity.
1.Ordinary Shares: Issuer = Equity
Holder = Financial Asset (Investment)
2.Loan Notes: Issuer = Financial Liability
Holder = Financial Asset

3.Derivatives: Standing at Gain = Financial Asset

Standing at Loss = Financial Liability

Assets:
Financial Assets = Cash, Bank, Receivable, Inv. In Equity, Inv. In Debt, Derivative at Gain. Non-
Financial Assets = PPE, Intangible Asset, Biological Asset, Inventory, Prepayment.

Liabilities:
Financial Liabilities = Loan, Payable, Accruals.
Non -Financial Liabilities = Tax Payable, Revenue Recorded in Advance.

> Financial Assets: (i) Cash

(ii) Equity Instruments of another entity (Inv. In Equity)
(iii) Contractual rights to receive cash (Inv. In Debts, Receivables)
(iv) Contractual rights to exchange Financial Instruments with another entity under
favorable terms (Derivatives Standing at Gain)

> Financial Liabilities: (i) Contractual obligation to pay cash (Payable or Loans)
(ii) Contractual obligation to exchange Financial Instruments with another entity
under unfavorable terms (Derivatives Standing at Loss)
> Equity: (i) Residual interest on assets of the entity after deducting its liabilities

6- Offsetting

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Chapter -6 IFRS-16 Leases

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Subsequent Measurement of lease liability

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Identification of lease contract

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Example-1

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Chapter-7 IFRS-15 Revenue from Contracts with Customers

Revenue From Contracts with Customers

Income arising in the course of an entity’s ordinary activities. (normal trading & operating
activities)”

Five Step Process/Model:(Revenue Recognition)

1. Identify the Contract

✓ How to identify the contract

✓ Contract is approved by both parties

✓ Inflow of future economic benefits is probable

✓ Payment terms agreed

✓ Each party’s rights & obligations are identifiable

✓ Contract has commercial substance

2.Identify the separate performance obligations within a contract

3. Determine the transaction price

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 4. Allocate transaction price to the performance obligations in a contract

5. Recognize revenue when or as performance obligation is satisfied

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i Sale of goods with rendering of services
• Revenue of goods sold should be recognized when control passes to customer usually at delivery
date, where as

• Rendering of services revenue should be allocated over service period.

ii. Sale of goods with the right to return

Entity sold goods (50 units) with right to return at selling price of $1000/unit cost of each unit is $400. it is
expected that 7 units will be returned.

Solution

iii. Sales as an agent

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Viii-Factoring

ix-Construction contracts

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 Chapter-8 IAS-12 Tax

Current Tax Under/Over Provision Deferred tax

Tax for the year Under/Over Provision Related to previous Deferred Tax
Year
Taxable profits *Rate of tax
Trial balance
Taxable temporary difference
Under provision (Expense) Dr *tax Rate
Tax exp xx
Tax Payable xx Over provision (income) Cr Deferred Tax liability

O/B xx

C/B (SOFP) xx
Tax Receivable xx
Tax income xx Increase or decrease (P&L)

Statement of comprehensive income Statement of financial position

P&Loss Long Term Liability

PBT Deferred Tax liab ?

Tax exp ? Short Term Liability

PAT Tax Payable ?

OCI

Rev.Gain

Tax on Rev.gain ?

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Income statement (P&loss)

Current tax + (under provision/- over provision) + (Increase in def. Tax liab/ - decrease in def. Tax liab)

Example:1

Bear Co’s Trial balance shows a credit balance of $300 brought forward on current tax and a credit balance of $9000
on deferred tax. The tax charge for the current year is estimated at $10,000. At year end taxable temporary
difference of $30,000 and Tax rate is 40%

Extracts for the year?

Solution: P&loss

D. Tax Liab Tax exp 12700 (300 income-10,000 exp-3000 exp)

O/B 9000 Long Term Liability

C/B 12000 (30,000*40%) SOFP Def. Tax liab 12000

________ S.T.L

3000 Expense Tax payable 10,000

Example:2 (With Revaluation gain)

Trial Bal
Dr Cr
Over Provision 300
O/B of Def. Tax liab 20,000
Tax rate is 15%
Adjustments:
A) Tax for the year 30,000
B) Taxable temporary difference at year end is $200,000 which includes rev. gain of 39000

SOCI
Solution: P&loss:
Deferred tax Tax exp 33850 (-300+4150+30,000)
OCI:
P&loss OCI
Tax on Rev.gain 5850
O/B 20,000 -
SOFP
C/B 24150 (161000*15%) 5850 (39000*15%) = 30,000 SOFP
L.T.L 30,000
______________ _________________
S.T.L 30,000
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 4150 exp (P&loss) 5850 exp (OCI)

Example: 3
Bear Co’s Trial balance shows a credit balance of $300 brought forward on current tax and a credit balance of $9000 on deffered
tax. The tax charge for the current year is estimated at $10,000. At year end taxable temporary difference of $30,000 and Tax rate
is 40%

Extracts for the year?

Example: 4 Trial Bal

Dr CR
Current tax previous year bal 200 SOCI
Deffered tax liab 10,000 P&loss
Adjustment: Tax exp 11200(200exp +13500 exp—2500
Tax for the year 13500 income)
At year end taxable temporary difference of $ 150,000. Tax rate is 5% SOFP:
Extracts? L.T.L
D. Tax Liab Def. Tax liab 7500
O/B 10,000 S.T.L
C/B 7500 (150,000*5%) SOFP Tax payable 13500
________
2500 Exp

Example:5 with Revaluation gain Solution:

Trial Bal Deffered tax
Dr Cr P&loss OCI
Over Provision 500 O/B 15000 -
O/B of Def. Tax liab 15,000 C/B 18000 (120,000*15%) 9000 (60,000*15%) =
Tax rate is 15% 27,000 SOFP
Adjustments: ______________ _________________
a) Tax for the year 22,000 3000 exp (P&loss) 9000 exp (OCI)
b) Taxable temporary difference at year end is $180,000
which includes rev.gain of 60,000 SOCI
Extracts?
P&loss:
Tax exp 24500 (-500+22000+3000)
OCI:
44 | P a g e Tax on rev.gain 9000

SOFP
L.T.L 27000
S.T.L 22000
Example:6
Trial Bal
Dr CR
Under/over provision 200
O/B Deffered tax liab 8000
Adjustment:
Tax for the year 9500
At year end taxable temporary difference of $ 50,000. Which includes rev.gain of $10,000.Tax rate is 25%
Extracts?
D. Tax Liab
O/B 9000
C/B 12000 (30,000*40%) SOFP
________
3000 Exp

SOCI
P&loss
Tax exp 12700 (-300 income+10,000 exp +3000exp)

SoFP:
L.T.L
Deff.tax liab 12000
S.T.L
Tax payable 10,000

45 | P a g e
Chapter-9 Final accounts

Kaplan Kit
351-Candel 103 279 Dec 08 (A)

352 Pricewell 105 282 Jun 09 (A)

353 Highwood 107 287 Jun 11 (A)

354 Keystone 108 291 Dec 11 (A)

355 Fresco 110 294 Jun 12 (A)

356 Quincy 111 296 Dec 12 (A)

357 Atlas 113 299 Jun 13 (A)

358 Moby 114 302 Dec 13 (A)

359 Xtol 116 306 Jun 14 (A)

360 Dune 117 310 Jun 10 (A)

361 Kandy 119 314 Dec 14(A)

362 Clarion 120 317 Jun 15 (A)

363 Moston 122 320 Sep/Dec 15 (A)

364 Triage 123 322 Sep 16

365 Haverford 125 327 Mar/Jun 18

366 Duggan

46 | P a g e
Chapter-10 Intangible assets

47 | P a g e
48 | P a g e
49 | P a g e
50 | P a g e
Chapter -11 IAS-37 Provision contingent liability and contingent assets

51 | P a g e
52 | P a g e
Chapter 12 IAS-36 Impairment of Non-current assets

Definition of impairment loss ; Excess of carrying value of asset recoverable amount

5-year limit
Pretax cash flows
Ignore finance cost
Ignore future capital
Higher off;
nature expenditure
a) Net selling price (fair value less cost to sell)
b) Value in use( present value of net future cash
flow through continuous use of asset and from Pretax rate
sell at end using discount rate)
Risk adjusted rate
Updated Rate

Timing of impairment test

When there is an indication of impairment loss (assess indication at each reporting date)

External indication Internal indication

Interest rate increase Asset damage
Market value significantly Poor performance
Decrease assets classified as held for sale
Pastel change with adverse effect
Market capitalization decrease in
Relation with book value of net
Assets
Annual impairment test required
On purchased goodwill
Internally generated intangible assets under development
Intangible asset with indefinite useful life
Cash generating unit
Smallest combination of assets which can generate cash flow independently from other asset of
business
carry value of CGU **
recoverable ---- (**)
impairment loss **
Allocation basis
1) Obvious impaired asset
2) Good will
3) Other assets on pro rata basis using their carrying value

VIU fair value Recoverable value

1. Available Available higher off
2. Available not Available VIU
3. not Available Available apply impairment test on CGU

53 | P a g e
example-

54 | P a g e
Reversal of impairment loss
Dr. Asset
Cr. Reversal of impairment loss
Treatment of reversal of impairment loss

Cost model Revaluation model

Charge to p/l Treated as revaluation gain

No reversal on goodwill
Reversal of impairment loss will up to previous impairment loss adjusted for under depreciation or up
to asset historic carrying value
Outside the scope
Inventory (IAS 2)
Financial asset (IFRS 9)
Deferred tax (IAS 12)
Employee benefits (IAS 19)
Asset HFS (IFRS 5)

Example- Reversal

55 | P a g e
Chapter-13 Consolidation

(P+S) – Single Economic entity concept

1. Line by line (100%) Addition
2. Intra group transaction / balances must be eliminated
3. Goodwill calculation
4. NCI value calculation
5. Consolidated earnings calculations

(W-1)Goodwill
Goodwill: An asset representing the future economic benefits arising from other assets acquired in a business
combination that are not individually identified and separately recognised.

$.'000 $.'000
Consideration paid by parent xx
Fair value of old investment xx
add: Fair value of NCI xx (NCI no. of shares x MV of sub share price at Acq.)
less: FV of sub net assets at Acq.
share capital xx
share premium xx
OCE xx
RE xx
Contingent liability of sub
Intangible assets of sub

FV adjustment xx (xx)
Goodwill / Bargain purchase gain xx / (xx)

income (P&Loss) in the year of

1. non-current asset (SOFP) acquisition
2. No amortization
3. Impairment test apply
(W-2)Consolidated Reserves2(a)
Cons.
Retained. Cons.
Earnings OCE

Parent xx Xx
Parent Income/gain xx Xx
Parent Expense/ loss (xx) (xx)
Parent's share in sub's post Acq. Profit/loss(2(b)) xx Xx
xx Xx

56 | P a g e
 Equity section of consolidated SOFP

2(b)

Subsidiary's Post
Retained
earnings OCE
Subsidiary xx Xx
Sub's Income/gain xx Xx
Sub's Expense/ loss (xx) (xx)
(Only post) xx Xx

Parent share xx Xx
NCI share xx Xx

Subsidiary’s Equity

Post-
At Acquisition(W1)
Acquisition(W2)

Goodwill
Parent NCI
calculation

Consolidated NCI
R.E / OCE Working
(W-3)NCI
Non-controlling interest (NCI) is defined by IFRS 10 as: ‘the equity in a subsidiary not attributable, directly or
indirectly, to a parent.’

Rs.
FV of NCI at Acq. / Proportionate share of NCI xx
NCI share in sub post R/E xx
NCI share in sub post OCE xx
Adjustments:
NCI in imp loss on Goodwill (if 100% goodwill) (xx)
xx

57 | P a g e
 Example 1

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earnings 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1. P ltd acquired80% of S ltd and at acquisition retained earnings and other components of equity of S ltd were
Rs.120 and Rs.70.
2. Fair value of NCI at acquisition Date was Rs.120

Required: Prepare consolidated statement of financial position.

Note the following features in following examples:

✓ The asset in the parent’s statement of financial position representing the cost of investment in the subsidiary
disappears in the consolidation.

✓ Each consolidated asset and liability is constructed by adding together the balances from the statements of
financial position of the parent and the subsidiary.

✓ The share capital (and share premium) in the consolidated statement of financial position is always just the
share capital (and share premium) of the parent. That of the subsidiary disappears in the consolidation
process.

58 | P a g e
 IFRS-3 Goodwill

Proportionate Full Goodwill

Only parent related goodwill

(W1) Consideration XX
(W1) Consideration xx NCI at fair value XX
NCI at proportinated share XX F.value of sub Net Assets at acq. (xx)
F.value of sub Net Assets at acq. Goodwill XX
(xx)
Goodwill xx

NCI should be measured at

proportionated share NCI should be measured at Fair
Value

Impairment loss on goodwill

Dr. Impairment loss xxx
Cr. Goodwill xxx

Full Goodwill Impairment loss will be charged to CRE and NCI in case of 100% goodwill;

Proportionated Goodwill Whereas it will be charged to CRE in case of proportionate goodwill.

Example –

Consideration paid by parent for 80% sub is $200 and fair value of NCI at acquisition date is $50
Carrying Value Fair Value
subsidiary net asset at acquisition $ 185 $ 196
Full goodwill and partial goodwill ?

59 | P a g e
FAIR VALUE ADJUSTMENT

Parent's Assets

Fair value Fair value

increase decrease

Dr. Asset For Dr. Loss (Cons. RE/OCE) For

Cr. Gain (Cons. RE/OCE) Depreciation: (w2(a)) Depreciation
(w2(a)) Cr. Asset Reversal:
Dr. Dep Exp
(CRE(w2(a)) Dr. Asset
Cr. Asset Cr. Dep
(CRE(w2(a))

60 | P a g e
 Subsidiary's Assets

After Acquisition
At Acquisition date date

Fair value Fair value Fair value increase Fair value

increase decrease decrease

Dr. Asset Dr. Loss (pre acq.)(w1) Dr. Asset Dr. Loss (post acq.)(w2(b))
Cr. Gain (pre acq.)(w1) Cr. Asset Cr. Gain (post acq.)(w2(b)) Cr. Asset

For Depreciation: For Depreciation Reversal: For Depreciation: For Depreciation Reversal:
Dr. Dep Exp (Post RE(w2(b))) Dr. Asset Dr. Dep Exp (Post RE(w2(b))) Dr. Asset
Cr. Asset Cr. Dep (Post RE(w2(b))) Cr. Asset Cr. Dep (Post RE(w2(b)))

61 | P a g e
OTHER FAIR VALUE ADJUSTMENTS:
1.Intangible asset of subsidiary at acquisition date (whether recognized or not) should be recognized at
its FAIR VALUE at acquisition date.
Dr. Intangible asset xxx
Cr. Gain (Pre)(w1) xxx
Amortization:

Dr. Amortization (post) (w2(b)) xxx

Cr. Intangible asset xxx

2.Contingent liability of subsidiary at acquisition date should be recognized at its FAIR VALUE.
Many acquired businesses will contain contingent liabilities such as contingent liabilities for the settlement of legal
disputes or for warranty liabilities. IFRS 3 states that contingent liabilities should be recognised at acquisition ‘even if it is
not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.’ The
contingent liabilities should be measured at fair value at the acquisition date. (Contingent assets are not recognised).

Dr. Expense (Pre) xxx

Cr. Contingent liability xxx

POST ACQUISITION MOVEMENTS:

Increase - Dr. Expense (Post) xxx

Cr. Cont. Liability xxx

Decrease - Dr. Cont. liability xxx

Cr. Income xxx

Note Restructuring costs

An acquirer should not recognise a liability for the cost of restructuring a subsidiary or for any other costs expected to
be incurred as a result of the acquisition (including future losses).
This is because a plan to restructure a subsidiary after an acquisition cannot be a liability at the acquisition date. For
there to be a liability (and for a provision to be recognised) there must have been a past obligating event. This can only
be the case if the subsidiary was already committed to the restructuring before the acquisition.
This means that the acquirer cannot recognise a provision for restructuring or reorganisation at acquisition and then
release it to profit and loss in order to ’smooth profits’ or reduce losses after the acquisition.

62 | P a g e
 Example 2 Followings are the statement of financial position at 31 December 2011 for P ltd and S ltd

P ltd S ltd
Non-current asset 200 300
Investment in subsidiary 350
Current asset 150 150
TOTAL 700 450
Share Capital @1 Rs. 200 50
Retained earnings 250 200
Other components of equity 150 100
Liabilities 100 100
Total 700 400

1 P ltd acquired 40 ordinary shares of S ltd on 1 January 2010 and retained earnings and other components of S
ltd were Rs.100 and Rs.60 at that date
2 Fair value of subsidiary asset at acquisition date not adjusted in subsidiary individuals’ financial statements
All values are Rs.
Carrying value Fair value remaining life at acquisition exist at year end
Land 70 100 N/A yes
Building 80 120 20 years yes
Inventory 10 7 N/A No

3 FVTOCI investment of parent & subsidiary increase by Rs.30 & Rs.20 respectively at the year-end
4 Goodwill is impaired by 20% and 10% of its original value in the year ended 31 December 2010 and 31
December 2011 respectively

Required: Prepare consolidated statement of financial position.

63 | P a g e
Unrealized profit Adjustment

* (URP on unsold goods only)

Sale of inventory

Parent seller Subsidiary seller

Dr.Profit(CRE)(w2(a)) Dr. Profit (Sub. post)(w2(b))

Cr. Inventory Cr. Inventory

Sale of Non-Current
Assets

Parent seller Subsidiary seller

Dr.Profit(CRE)(w2(a)) Dr. Profit (Sub. post)(w2(b))

Cr. Asset Cr. Asset

Dr.Asset Dr. Asset

Cr. Reversal of dep(w(2(b)) Cr. Reversal of dep(w2(a))

64 | P a g e
 Example 3
Followings are the statement of financial position at 31 December 2011 for P ltd and S ltd

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earnings 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1 P ltd acquired 40 ordinary shares of S ltd on 1 January 2010 and retained earnings and other components of S
ltd were Rs.100 and Rs.60 at that date
2 Fair value of subsidiary asset at acquisition not adjusted in subsidiary individuals’ financial statements
All values are Rs.
Carrying value Fair value remaining life at acquisition exist at year end
Land 70 100 N/A yes
Building 80 60 20 years yes
Inventory 10 15 N/A No
3 Goodwill is impaired by 20% and 10% of its original value in the year ended 31 December 2010 and 31
December 2011 respectively
4 FVTPL investment of parent & subsidiary increase by Rs.30 & Rs.20 respectively at the year-end
5 Parent sold goods to subsidiary and earned a profit of Rs.40 on these goods. 40% are still held in subsidiary
books at year end .
6 Subsidiary sold plant to parent for Rs.80 on 1 July 2010, carrying value of plant just before the disposal was
Rs.50, remaining life of plant at disposal date was 5 years

Required: Prepare consolidated statement of financial position at 31 December 2011.

65 | P a g e
 Intra group Receivables/Payables
(current A/C's)

Balances are
Balances are same different

Cash in transit
Dr. Payables
Goods in transit
Cr. Receivables

Dr. Cash/Goods
Dr Payable
Cr.Reveivables
Receipient books or
Parent books

Intra group loan/Investment

Dr. Loan/Preference share liablity

Cr. Investment

66 | P a g e
 Example 4

P ltd S ltd
Non-current asset 250 300
Investment in subsidiary 350
Current asset 100 100
TOTAL 700 400
Share Capital 100 50
Retained earning 350 200
Other components of equity 150 100
Liabilities 100 50
Total 700 400

1 P ltd acquired 70% of S ltd and at acquisition retained earnings and other components of equity of S ltd were
Rs.90 and Rs.70
2 Fair value of subsidiary asset increases by Rs.110 at acquisition date &depreciation is Rs.10
3 FVTOCI investment of parent & subsidiary decrease by Rs.30 & Rs.20 respectively at the year-end
4 Subsidiary sold goods and unrealized profit at year end is Rs.20
5 Fair value of non-controlling interest at acquisition date was Rs.120
6 Impairment loss on goodwill is Rs.10
7 Intra group payables were Rs.20 at year end which did not agree with corresponding receivables due to cash in
transit of Rs.5

Required: Prepare consolidated statement of financial position.

67 | P a g e
 Example-5

You are provided with the following statements of financial position (balance sheets) for Shark and Minnow.

STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X0

(a) Shark Shark Minnow
Rs.'000 Rs.'000 Rs.'000 Rs.'000
Non-current assets, at net book value
Plant 325 70
Fixtures 200 50
525 120
Investment
Shares in Minnow at cost 200
Current assets
Inventory at cost 220 70
Receivables 145 105
Bank 100 0
465 175
1,190 295
Equity
Rs.1 Ordinary shares 700 170
Retained earnings 215 50

Current liabilities
Payables 275 55
Bank overdraft 0 20
275 75
1,190 295

The following information is also available.

purchased 70% of the issued ordinary share capital of Minnow four years ago, when the retained earnings of
Minnow were Rs.20,000. There has been no impairment of goodwill.

(b) For the purposes of the acquisition, plant in Minnow with a book value of Rs.50,000 was revalued to its fair value
of Rs.60,000. The revaluation was not recorded in the accounts of Minnow. Depreciation is charged at 20% using
the straight-line method.

(c) Shark sells goods to Minnow at a markup of 25%. At 31 October 20X0, the inventories of Minnow included
Rs.45,000 of goods purchased from Shark.

(d) Minnow owes Shark Rs.35,000 for goods purchased and Shark owes Minnow Rs.15,000.

(e) It is the group's policy to value the non-controlling interest at fair value.

(f) The market price of the shares of the non-controlling shareholders just before the acquisition was Rs.1.50.

Required: Prepare the consolidated statement of financial position of shark as at 31 October 20X0.

68 | P a g e
CONSOLIDATION - FORMS OF CONSIDERATION:

1) “Cash”

Dr. Investment in subsidiary xxx

Cr. Cash xxx

2) “Issue of shares”

Dr. Investment in subsidiary* xxx

Cr. Share capital xxx
Cr. Share premium xxx

*(no. of shares issued by parent x Market value of parent’s share)

3) “Issue of loan notes”

Dr. Investment in subsidiary xxx

Cr. Loan xxx

4) “Deferred Consideration”

Dr. Investment in Subsidiary xxx (present value)

Cr. Deferred liability xxx (present value)

Unwinding of interest (Liability x interest rate)

Dr. Interest Expense xxx (CRE)

Cr. Deferred Liability xxx

5) “Contingent Consideration”

“Consideration dependent on certain future events or future performance targets”

Criteria:

✓ Fair value can be measured reliably. And probability will not be seen for recognition

Dr. Investment in Subsidiary xxx (Fair value)

Cr. Contingent Consideration xxx

“Further movement in contingent consideration depends on”

a) “Settlement in cash/other consideration”

Further movement will be charged to P&L (CRE)

b) “Settlement in shares”
No further movement will be recognized

69 | P a g e
6)” Other assets “
PPE, Investment property, and any other asset Transferred in exchange of Subsidiary shares

Dr. Investment in Subsidiary xxx (Fair value)

Cr. Asset carrying value xxx
Dr/Cr loss /Profit on disposal xxx/xxx

Not forms of consideration

Costs of acquisition: transaction costs Transaction costs incurred in making an acquisition, such as the cost of the fees of
advisers and lawyers, must not be included in the cost of the acquisition.

These costs must be treated as an expense as incurred and written off to profit or loss.

The amount of transaction costs associated with an acquisition and written off during the period to profit or loss must
be disclosed in a note to the financial statements

Example A:

P Ltd. acquired 80% of S Ltd.’s equity shareholding. Share capital of S Ltd is Rs.125,000 @ Rs.20 each share.
P Ltd:
1) Paid cash of Rs.30 per share acquired
2) issued Rs.100 @ 6% loan note for every 600 shares acquired
3) issued its 3 ordinary shares for every 5 shares of subsidiary:
-Share price of P ltd @ acquisition Rs.25 each
-Share price of S ltd @ acquisition Rs.35 each
4) Promised to pay Rs.300,000 after 2 years
-Interest rate is 10%
Required:
Calculate the total amount of consideration and fair value of NCI

Example B:

Beta Co. acquired 70% of XYZ Co.’s shareholding. XYZ’s share capital is Rs.40,000 @ Rs.10 each share.
Beta Co.:
1) Paid cash of Rs.5 for each share acquired (Rs.14000)
2) Issued Rs.500 @ 8% loan notes for every 400 shares acquired (Rs.3500)
3) Issued its 2 ordinary shares for every 3 shares of XYZ Co. (Rs.59733)
-share price of Beta Co. @ acquisition Rs.32 each
-share price of XYZ Co. @ acquisition Rs.45 each
4) Promised to pay Rs.90,000 after 1 year. Interest rate prevailing in the market is 10% (Rs.81818)

Required:
Calculate the total amount of consideration and fair value of NCI

70 | P a g e
71 | P a g e
 Chapter -14 IAS-28 Investment in associate

SIGNIFICANT INFLUENCE
EQUITY METHOD:
Rs.'000
Cost (Pre + goodwill) xxx
Add: Share of post acq. Profit and OCI xxx
Less: Impairment loss (xxx)
Less: URP if parent seller (xxx)
Investment in associate xxx SOFP(NCA)

W 1 - SHARE OF POST ACQUISITION RESERVE

Dr. Investment in associate xxx

Cr. CRE/Cons. OCE xxx

W 2 – IMPAIRMENT LOSS ON INVESTMENT IN ASSOCIATE

Dr. Impairment loss (CRE) xxx

Cr. Investment in associate xxx

W 3 – DIVIDEND RECEIVED FROM ASSOCIATE

Dr. Cash xxx

Cr. Investment in associate xxx

W 4 – URP WITH ASSOCIATE

Only parent share of URP:

PARENT SELLER ASSOCIATE SELLER

Dr. Profit (CRE) xxx Dr. Profit (CRE) xxx

Cr. Investment in associate xxx Cr. Inventory xxx

Downstream transaction (P A) upstream transaction (P A)

(Inventory held with associate, and associate’s inventory cannot be consolidated therefore Investment in associate is
credited instead of inventory)

72 | P a g e
EXAMPLE :

P Co, a company with subsidiaries, acquires 25,000 of the 100,000 Rs.1 ordinary share in A Co for Rs.60,000 on 1 January
20X8. In the year to 31 December 20X8, A Co earns profits after tax of Rs.24,000, from which it declares a dividend of
Rs.6,000.

How will A Co's results be accounted for in the consolidated accounts of P Co for the year ended 31 December 20X8?

73 | P a g e
Chapter-15 Consolidated Statement of Comprehensive Income

74 | P a g e
75 | P a g e
76 | P a g e
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80 | P a g e
81 | P a g e
 Chapter -16 IAS-8 Change in accounting policy, Estimates and Errors

82 | P a g e
83 | P a g e
Chapter-17 IFRS 5 Asset held for sale & Discontinued operations

Asset whose carrying value will be

Recoverable through sale rather
Then use.

Presentation of Asset held for sale

• Represent as current asset
• No depreciation will charge
• Met the criteria of classification of asset as HFS

Criteria for Held for Sale

1. Asset is immediately available for sale in its present condition (no delay from seller)
2. Sale is highly probable
I. Sale is expected in 12 months
II. Program to locate buyer
III. Management is committed to sell & it is unlikely decision will change
84 | P a g e
 IV. Demand price is reasonable in relation to market value
Initial measurement
Lower off;
a) Carrying value
Carrying value need to be adjusted as per previous standard for
depreciation,
Revaluation
and impairment
b) Net selling price (fair value less cost to sell)
Note; if net selling price is lower than carrying value then difference will be impairment loss as per IFRS 5 &
will be charge to p/l
journal entry;
Dr. asset HFS
Dr. imp loss (Bal) Value of NCA will be ;
Cr. NCA (carrying value) Lower off;
Subsequent measurement; (if not sold till year-end) Apply A. Recoverable value
Higher off;
criteria again a) Value in
use
b) Net selling
price
B. Carrying value of
asset if not
classified s HFS

Criteria met Criteria doesn’t met

Fair value less cost to sell Dr. NCA
Any gain or loss will be charge to p/l Dr./Cr. p/l (Bal)
But gain can’t exceed previous loss Cr. HFS (carrying value) (both IFRS 5 or
previous standard loss)
Disposal group ( combination of assets and liability and accounting is same

85 | P a g e
86 | P a g e
 Chapter 18 IAS-10 Events After Reporting period

IAS-1
Events A er repor ng Period

ubair Saleem FR II study Notes

1

ubair Saleem FR II study Notes

1|Page
 ubair Saleem FR II study Notes
3

ubair Saleem FR II study Notes

4

2|Page
Chapter 19 IAS-21 Translation of foreign currency Transactions

Foreign currency transaction

Initial Subsequent measurement
measurement
Monetary items Non Monetary Items

Translate FC at spot exchange Retranslate at earlier off:

rate of transaction date a) Settlement date
Carried at Cost Carried at fair value
b) Year end
Gain or loss will charged to P&L

Retranslate when fair value

No translation required determined
Carry at historic exchange rate Gain/loss according to relevant
standard

Foreign Currency
Currency other then functional currency

Functional currency
Currency of primary economic environment in which entity operates

Factors to consider Functional currency

A holding or parent company with foreign operations must translate the financial statements of those operations into own reporting currency.

Primary Factors to consider:

1-Influence sale prices

2-Competitive forces and regulations determines the sales price of its goods and services

3-Influence labor, material and other costs of providing goods or services

Sometimes the functional currency is not immediately obvious. Management needs to consider the below factors:

Secondary Factors to consider:

1-Funds from financing activities

2-Receipts from operating activities

Presentation currency

Currency in which entity present their financial statements

3|Page
Chapter 20-IAS – 33 “EARNING PER SHARE”
✓ Important performance indicator

Basic EPS Diluted EPS

Actual No. of shares Impact of potential
in issue ordinary shares on Basic
EPS
EPS = Earnings available to ordinary shareholders (PAT)
Weighted average no. of shares

1) Issue of shares during year @ MV

2) Bonus issue during year (No inflow of resources)
3) Right issue during year

Example - 1:

PAT = $20,000
1 Jan – No. of shares 50,000 shares
1 Mar – Issue at MV 10,000 shares
1 Sep – Issue at MV 15,000 shares

Basic EPS for Year end 31 Dec?

Solution:

No. of Months Bonus Right

Date W. Avg
shares outstanding Issue issue
1-Jan 50,000 2/12 8,333
1-Mar 10,000
60,000 6/12 30,000

1-Sep 15,000
75,000 4/12 25,000
63,333

EPS = 20,000/63,333 = 32 cents per share

4|Page
BONUS ISSUE:

For comparable EPS assume bonus issue is from start of the business/Earliest period presented.

How to adjust bonus issue?

No. of shares 30,000
Bonus issue 1 for 10
A. 1 for 5 = 6/5
No. of shares after bonus issue
B. 2 for 5 = 7/5
Method 1 Method 2
C. 2 for 10 = 12/10
D. 1 for 4 = 5/4
30,000 (Bonus fraction)
Bonus 3,000 (30,000 x 1/10) 30,000 x 11/10
33,000 = 33,000

Example - 2:

PAT = $50,000
Previous year EPS = 1.10 per share
1) 1 Jan – No. of shares 20,000 shares 1/12
2) 1 Feb – Issue at MV 10,000 shares 3/12
3) 1 May – Bonus issue 1 for 4 4/12
4) 1 Sep – Issue at MV 15,000 shares 3/12
5) 1 Dec – Bonus issue 2 for 5 1/12

Basic EPS =? ; Restated previous year EPS =?

Solution:

No. of Time Bonus Right

Date W. Avg
shares ratio Issue issue
1-Jan 20,000 1/12 5/4, 7/5 - 2,916
1-Feb 10,000
30,000 3/12 5/4 , 7/5 - 13125
1-May
(30,000 x 1/4) 7,500
37500 4/12 7/5 - 17500
1-Sep 15000
52500 3/12 7/5 - 18375
1-Dec
(52500 x 2/5) 21,000
73500 1/12 - - 6125
58041

5|Page
 Basic EPS = 50,000/58,041 = 86 cents per share
Restated previous EPS= 1.10 x 5/7 x 4/5 = $0.628 per share (or) 62.8 cents per share

RIGHT ISSUE:

Right fraction = MV before right issue (Cum right price)

Theoretical ex-right price

Example - 1:

1 for 4 right issue @ $3 each

MV before right issue 4$

Solution:

No. of shares Price/share $

4 4 16
1 3 3
5 19

19/5 = 3.8 per share

Example - 2:

2 for 5 right issue @ 3 each

MV before right issue $4 4/3.71

No. of shares Price/share $

5 4 20
2 3 6
7 26

26/7 = 3.71 per share

6|Page
 Example - 3:

PAT = $30,000
No. of shares at 1 Jan 15000
Bonus issue at 1 March, 2 for 5 - 7/5
Issue at MV at 1 August 10,000 shares
Right issue at 1 Sep, 3 for 4 at $2 each; MV before Right issue $2.5

EPS for year end 31 Dec =?

Solution:

No. of shares Price/share $

4 2.5 10
3 2 6
7 16

16/7 = 2.28

Right fraction = 2.5/2.28

No. of Time Bonus Right

Date W. Avg
shares ratio Issue issue
1-Jan 15,000 2/12 7/5 2.5/2.28 3,838
1-Mar
(15,000 x 2/5) 6,000 5/12 - 2.5/2.28 9594
1-Aug 10,000
31,000 1/12 - 2.5/2.28 2833
1-Sep
(31,000 x 3/4) 23,250
54,250 4/12 - - 18083
34348

EPS = 30,000/34348 = 0.873

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Diluted EPS
Dilute impact of potential (convertible loan, share option) ordinary share on basic EPS.

In case of share option:

Diluted EPS = Basic Earnings

Basic W. avg no. of shares + Free of cost issue under option

Example:
PAT = $30,000
W. avg no. of shares 60,000
Options in issue 20,000
Exercise price $2; Avg. MV $5

Solution

Basic EPS = 30,000/60,000 = 0.5

Diluted EPS = 30,000 / (60,000 + 12,000) = 0.416 per share

In case of Convertible loan:

Diluted EPS = Basic Earnings + interest saved net of tax

Basic w. avg no. of shares + No. of shares issued on conversion of convertible loan

Example:

PAT = $30,000
W. avg no. of shares 50,000
Convertible loan of $20,000@5%
Tax rate 30%
$100 can be converted into 60 shares after 5 years

Solution

Basic EPS = 30,000/50,000 = 0.6 per share

Loan into shares = 20,000 x 60/100 = 12,000

Interest saved:

20,000 x 5% 1000
1000 x 30% 300
Interest saved 700

Diluted EPS = (700 + 30,000) / (50,000 + 12,000) = 0.495 per share

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Chapter 21-IAS-41 Agriculture

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 Living Plant or
Biological Asset
Animals

IAS 41 Agriculture
Produce from Living Plant and
Biological Produce Animals.
For Example Apples

ownership or rights of
Control
asset

Recognition Criteria Value Future economic benefit

Fair Value or cost can be

Measurement
measured reliably
Biological Asset

Initial Measurement Fair value less cost to sell

Measurement
Subsequent Fair value less cost to sell
Measurement and gain/loss in SOPL

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 Land on which crops are
harvested

Animals through which

Non Current Assets
Bioproducts are produced

Wood lodge
Presentation Plants to be harvested in
next 12 months
Biological Asset
Animals to be slaughtered
in next 12 months
Current Assets

Biological Produce Inventory IAS 2

Bearer Plants
✓ Immaterial Residual Value
✓ Non-current asset with definite useful life
✓ Treated as PPE in accordance with IAS 16

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Chapter 22 IFRS-13 Fair Value Measurement
Definition
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (i.e., an exit price).

Fair value may be required to be measured on a

• recurring basis or a
• non-recurring basis

IFRS 13 establishes a hierarchy that categorises the inputs to valuation techniques used to measure fair value as follows:

➢ Level 1 inputs comprise quoted prices (‘observable’) in active markets for identical assets and liabilities at the measurement
date. This is regarded as providing the most reliable evidence of fair value and is likely to be used without adjustment.

➢ Level 2 inputs are observable inputs, other than those included within Level 1 above, which are observable directly or
indirectly. This may include quoted prices for similar (not identical) assets or liabilities in active markets, or prices for
identical or similar assets and liabilities in inactive markets. Typically, they are likely to require some degree of adjustment
to arrive at a fair value measurement.

➢ Level 3 inputs are unobservable inputs for an asset or liability, based upon the best information available, including
information that may be reasonably available relating to market participants.

Principal market
The market with the greatest volume and level of activity for the asset or liability

Most advantageous market

The market that maximises the amount that would be received to sell the asset or minimises the amount that would be
paid to transfer the liability, after taking into account transaction costs and transport costs

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Valuation Methods/Techniques to Measure Fair Value

✓ Market approach uses prices and other relevant information generated by market transactions involving identical or
comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g., a business)

✓ Cost approach reflects the amount that would be required currently to replace the service capacity of an asset (current
replacement cost)

✓ Income approach converts future amounts (cash flows or income and expenses) to a single current (discounted) amount,
reflecting current market expectations about those future amounts.

Highest and best use

The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and
liabilities (e.g. a business) within which the asset would be used

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Chapter-23 Interpretation of financial statements -Ratio analysis

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Working Capital changes

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Drawbacks of Ratio analysis

✓ Although there are general guidelines (for example, the quick ratio should not normally be less than 1:1), there is no such
thing as an ‘ideal’ ratio. A quick ratio of less than 1:1 would be acceptable in some businesses, but dangerously low for
many others.
✓ Unless ratios are calculated on a uniform basis, from uniform data, comparisons can be very misleading.
✓ The statement of financial position shown in the financial statements may not be representative of the financial position at
other times in the year. Many businesses set the end of their accounting period to a date on which there is a relatively low
amount of trading activity. Retail organizations often have an end of February accounting date (after the peak pre-
Christmas trading and the January sales). As a result, the balances on a statement of financial position are not
representative of the average position throughout the accounting period.
Consider inventory levels in a retail organization.
They may vary throughout the year with lows at the end of a season and highs at the start of the season.
Adding opening and closing inventory and dividing by two will not produce a fair average.

✓ Ratios based on historical cost accounts do not give a true picture of trends from year to year. An apparent increase in
profit may not be a true increase, and may simply reflect the effects of inflation.

✓ Financial statements only reflect those activities which can be expressed in money terms. They do not give a complete
picture of the activities of a business. For example, the size of the order book is normally ignored in financial statements.

✓ The application of accounting policies in the preparation of financial statements must be understood when attempting to
interpret financial ratios.

✓ Ratios must not be used as the sole test of efficiency. Concentration on achievement of target ratios by managers may
inhibit the incentive to grow and expand, to the detriment of the long-term interests of the company.

✓ A few simple ratios do not provide an automatic means of running a company. Business problems usually involve complex
patterns which cannot be solved solely by the use of ratios.

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Chapter 24 IAS-12 Deferred Tax

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Examples Of Taxable and Deductable difference

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Illustration

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MCQ-1

MCQ-2

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 Chapter 25 IAS-7 Statement of Cashflows

Cash flow from operating activities Cash flow from investing activities
PBT ** (due to NCA)
Adjustment;
Depreciation ** investment income received **
Impairment loss Fair ** Payment for acquisition of NCA (**)
value (gain)/loss (**)/** Disposal proceeds of NCA **
Amortization of Govt. grant (**) Govt. grant received
(profit)/loss on disposal (**)/** Rental income
(**)/**
Exchange (gain)/loss (**)/**
**
↑↓ In provision **
Investment income (**)/**
Finance cost (**)
Penalty cost related to loan ** Cash flow from financing activities
(↑)↓ In inventory **
(↑)↓ In receivable (**)/** Issue of shares/loan notes **
↑(↓) in payable (**)/** Repayment of loan notes (**)
**/(**) Payment for lease liability (**)
Cash flow from operating activities Penalty cost of loan (**)
Pension contribution (**)/** Dividend paid (**)
Tax paid (**)
Interest paid (**)
(**)

Net cash flow from operating activities (**)/**

↑↓ i n cash + cash equivalent (**)/**

O/B of cash + cash equivalent (**)/**
C/B of cash + cash equivalent (**)/**

Accounts for cash flow

PPE (carrying value)
B/D Disposal (carrying value) Cash
acquisition Impairment/revaluation loss credit
acquisition depreciation ( add to PBT) acquisition under
finance lease Asset held for sate revaluation gain
present value of desmentling removing
& restoration
C/D

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 Tax
B/D (deffered + current)
Tax expense (P/L & OCI & at
Tax paid acquisition)

C/D(deffered + current)

Lease liability
B/D (long term + short term)
payment for lease liability asset acquisition under lease

C/D(Long term + short term)

Govt. grant
B/D (long term + short term)
govt. grant received (related to
Amortization of govt. grant asset
C/D
(Long term + short term)

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 Finance cost
B/D (interest payable) unwinding of interest
interest expense (SOCI) interest paid (balancing)
C/D (interest payable)
 Chapter 26 IASB Framework
1. Objective of financial statements

✓ To provide – Information
✓ About
Financial performance (P&L)
Financial position (SOFP)
Changes in financial position (SOCIE/Cash flows)
✓ To – Investors, Creditors and Lenders (Existing and potential)
✓ Help – in decision making about providing resources
✓ And to help them to assess the stewardship

2. Qualitative characteristics

Fundamental Enhancing

Relevance Faithful Representation

Helps in decision making (Substance over form) Comparable Timely Understandable Verfiable
(Predictive, confirmatory Nature) (a) Free from errors (Consistency)
All material items (disclose) (b) Complete (Past results & other entities)
(By nature/by amount) (c) Neutral/unbiased
Omission / misstatement would affect decision (Prudence concept)

3. Recognition criteria

Only items that meet the Definitions of elements are recognized.

An element should be recognised if it provides users with:

▪ relevant information about the asset or the liability and about any income, expenses or changes in equity;
▪ a faithful representation of the asset or the liability and of any income, expenses or changes in equity; and
▪ information that results in benefits exceeding the cost of providing that information.

4. Definitions

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The main changes to definition of asset clarifies that an asset is not an inflow of economic benefits rather it is the
economic resources controlled by the entity. The flow of economic benefits to the entity needs to not be certain or even
likely.

Equity
The residual interest in the net assets of an entity.

Income
Increases in assets or decreases in liabilities that result in an increase to equity (excluding contributions from equity holders).

Expenses
Decreases in assets or increases in liabilities that result in decreases to equity (excluding distributions to equity holders).

Derecognition
Derecognition is the removal of some or all of an asset or liability from the statement of financial position. This normally
occurs when the entity:

✓ loses control of the asset, or

✓ has no present obligation for the liability.

Accounting for derecognition should faithfully represent the changes in an entity’s net assets, as well as any assets or liabilities
retained. This is achieved by:

✓ derecognizing any transferred, expired or consumed component

✓ recognizing a gain or loss on the above, and
✓ recognizing any retained component.

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5. Measurement
Historic cost
Current Values (Replacement cost/ current cost, Realizable value, Present value, Fair Values, Value in use)

6. Derecognition

Derecognition is the removal of some or all of an asset or liability from the statement of financial position. This normally
occurs when the entity:

✓ loses control of the asset, or

✓ has no present obligation for the liability.

Accounting for derecognition should faithfully represent the changes in an entity’s net assets, as well as any assets or liabilities
retained. This is achieved by:

✓ derecognizing any transferred, expired or consumed component

✓ recognizing a gain or loss on the above, and
✓ recognizing any retained component.

7. Concepts of capital and & capital maintenance

Financial Physical (purchasing power)

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 Chapter 27 IAS-23 Borrowing cost

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 Chapter 28 Government Grants
Accounting for Government Grants & Disclosure of Government Assistance
Government assistance is action by government

designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.
It does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of
infrastructure in development areas or the imposition of trading constraints on competitors
Government grants

are assistance by government in the form of transfers of resources to an entity

in return for past or future compliance with certain conditions relating to the operating activities of the entity.

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