CFAS-Finals-Reviewer

Bachelor of Science and Accoutancy (University of San Carlos)

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CHAPTER 1: INTRODUCTION AND DEVELOPMENT OF STANDARDS - 14 board members: Chair and Vice Chair BASIC STEPS IN DEVELOPING THE ACCOUNTING STANDARDS
IFRS FOUNDATION i. 4 – Asia/Oceania
1. Agenda Consultation
➢ A non-profit organization responsible for overseeing the work of the ii. 4 – Europe
2. Research Program
International Accounting Standards Board (IASB) iii. 4 – America
i. Main Purpose
➢ Has a fun-raising responsibilities iv. 1 – Africa
ii. Main Output
v. 1 – Any Area
3. Standard Setting Program
Objective: (Subject to maintaining overall geographical 4. Maintenance Program
To develop, in
balance) IFRS INTERPRETATIONS COMMITTEE SUPERMAJORITY
the public
interest, a ➢ Reviews the implementation issues of IASB ➢ Requires 9 IASB members (by ballot) in favor of the publication of a
➢ Has 14 voting members, appointed by IFRS Foundation Trustees for document if it has 15 or fewer appointed members
renewable terms of three years ➢ Requires 10 IASB members (by ballot) in favor of the publication of
WHY? a document if it has 16 appointed members
IFRS ADVISORY COUNCIL ➢ Abstaining is equivalent to voting against a proposal
To provide a global framework for how public companies prepare and
disclose their financial statements. Which they provide general guidance ➢ Provides advice and counsel to the IFRS Foundation Trustees and MANDATORY PARTS OF AN ACCOUNTING STANDARDS
for the preparations of financial statements, rather than setting rules for IASB Board
industry-specific reporting a. The principles and the related application guidance
ACCOUNTING STANDARDS ADVISORY FORUM (ASAF) b. The defined terms
MONITORING BOARD c. The effective date and the transition paragraphs
➢ An advisory forum in which members can constructively contribute
➢ A group of capital market authorities and provides formal link toward the achievement of the IASB’s goal Additional materials that is not integral part of the Standard:
between the trustees and public authorities in order to enhance
the public accountability of the IFRS Foundation DUE PROCESS HANDBOOK i. Table of Contents
ii. Introduction
Responsibilities: ➢ A proper guideline followed by IASB and IFRS Interpretation
iii. Basis of Conclusion
Committee that helps them to follow a thorough, transparent and
iv. Dissenting Opinions
1. Oversees the IFRS Foundation Trustees participatory due process issuances
2. Participates in the trustees’ nominations process
3. Approves appointments to the PRINCIPLES FOLLOWED BY DUE PROCESSS (to carry the mission of IASB)
PHILIPPINE ACCOUNTANCY ACT OF 2004 – RA9298
1. Transparency
trustees’ Goal: ➢ A law governing the Accounting Practice in the
2. Full and fair consultation
• To serve as mechanism for formal interaction between capital 3. Accountability Philippines KEY PLAYERS OF ACCOUNTING
markets authorities and the IFRS foundation
• To enhance public accountability of the IFRS Foundation while not MANDATORY DUE PROCESS STEPS (must be followed to protect the integrity A. Philippine Regulatory Commission – Board of Accountancy (PRC –
impairing the independence of the standards-setting process of the standard – setting process) BOA)
• Professional regulatory board created under RA9298
INTERNATIONAL ACCOUNTING STANDARDS BOARDS (IASB) a. Debating any proposals in one or more public meetings
b. Exposing for public comment a draft of any proposed new Functions:
➢ Independent standard-setting body that is responsible for the standard/amendment to a standard/interpretations – with
development and publication of IFRS and help it carry its mission as minimum comment period 1. Conducts and administer licensure examinations
the standard setting body c. Considering in the timely manner those comment letters received 2. Regulates and supervises (BOA is the leg of PRC that
➢ Responsible for approving interpretations of IFRS as developed by on the proposals regulates the accountancy profession
the IFRS committee d. Considering whether the proposals should be exposed again B. Financial Reporting Standards Council (FRSC)
➢ Formed in 2001: to replace the International Accounting Standards e. Reporting to the Advisory Council on the technical program, major • Successor of the Accounting Standard Council (ASC)
Council projects, project proposals and work priorities • Established by the BOA in 2006
➢ Members: f. Ratification of an interpretation by the IASB • Composed of 15 members
- Has initial term of 5 years

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Chairperson (1) 4. Government – Government Association of CPA
Representative members from:
Board of Accountancy (BOA) (1)
Commission on Audit (COA) (1)
Securities and Exchange (SEC) (1)
Bangko Sentral ng Pilipinas (BSP) (1)
Bureau of Internal Revenue (BIR) (1)
Financial Instrument Exchange (FINEX) (1)
PICPA – Public Practice
(2)
Commerce and Industry (2)
Academe (2)
Government (2)
Total (15)

Function:

1. Monitors the technical activities of IASB and invites

comments on exposure drafts of proposed IFRSs and
PFRS when finalized
2. Monitors the issuance of IFRIC
C. Philippine Interpretations Committee (PIC)
• To assist FRSC in establishing and improving the financial
reporting standards of the Philippines
• Formed by FRSC in August 2006

Objective:

1. To issue implementation guidance on PAS, PFRS, and

related interpretations adopted by the FRSC from
accounting pronouncements issued by IASB
2. To comment on exposure draft of proposed PFRS and
other documents that may be issued for comment by the
FRSC
3. To comment on exposure draft of proposed accounting
standards or proposed regulations with accounting
relevance that may be issued by government agencies,
such as the SEC, BSP, and Insurance Commission
D. Philippine Institute of Certified Public Accountants (PICPA)
• An organization of CPAs that keep the professional
accountants up to date on technical and ethical standards
through trainings and conventions

Four Sectors:

1. Public Practice – Association of CPA in Public Practice

2. Commerce and Industry – Association of CPA in
Commerce and Industry
3. Education/Academe – National Association of CPA in
Education
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COUNCIL FOR ACCREDITATION AND QUALITY CONTROL OF PRACTICING ed companies – companies with atleast Php 500 million worth
CPA’s of assets and companies with secondary licenses
b. Bangko Sentral ng Pilipinas (BSP)
a. Security and Exchange Commission (SEC) - Accredits practitioners who audit bank and other financial
- A institutions
c - Selection and application of accounting policies by banks and
c
other entities performing banking functions
r
c. Insurance Commission (IC)
e
- Accredits practitioners who audit insurance companies
d
d. Board of Accountancy (BOA)
i
t - Accredits CPA’s in public practice with basic requirements
s CONTINUING PROFESSIONAL DEVELOPMENT
p ➢ A record of what you experience, learn, and apply
r
a How many CPD units for accounting profession?
c
• 120 units within a compliance of 3 years
t
• Minimum of 40 units from 120 units must be earned from
i
the thematic areas:
t
a. Technical Competence – minimum of 30 units
i
b. Professional Skills – minimum of 5 units
o
c. Professional values, ethics, and attitudes – minimum
n
of 5 units
e
• The remaining 80 units are flexible CPD units
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CHAPTER 2: CONCEPTUAL FRAMEWORK 1. Promotes transparency by enhancing the international
CONCEPTUAL FRAMEWORK comparability and quality of financial information
2. Strengthen accountability by reducing the information gap between SUMMARY:
Function: To describe the objective of, and the concepts for General Purpose providers of capital and the management of the entity
Financial Accounting i. Financial Performance would tell us the strength of the entity
3. Contribute to the economic efficiency by helping investors to
against adverse market conditions
Objective: Financial Reports/Statements that’s provide useful information identify the opportunities and risks around the world, thus
ii. Information about an entity’s financial performance would tell
improving capital allocations
us about the entity’s operational efficiency, ability to generate
Goal: Guiding principle on what concept to apply cash flow both in the past and future, resiliency to adverse
THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING
Purpose: market conditions
➢ It is the foundation of the Conceptual Framework iii. Past cash flow will show us how well the entity’s manage its
a. Assist the IASB to develop the accounting standards (IFRS) based on task and will tell us about the entity’s cash management
consisting concepts Objective: Provide financial information about the reporting entity that is iv. Changes in our assets and liabilities may be cause by other
b. Assist the preparers of FR to develop consistent accounting policies useful to the existing and potential investors, lender, and other creditors transactions such as the issuance of additional debt or equity
and provisions (Primary users) in making decisions, relating to providing resources to the instruments
c. Assist all parties who will use the FR/FS to understand and interpret entity
the standards QUALITATIVE CHARACTERISTIC OF USEFUL INFORMATION
Nature:
A. Fundamental Qualitative Characteristic
a. Do not and cannot provide all the information that the existing and I. Relevance
Note: potential investors, lenders, and creditors need o Capable of making difference
✓ Conceptual Framework is NOT an Accounting Standards b. Focuses on common information needs i. Predictive Value
✓ Nothing in conceptual framework overrides the standards/any c. Not designed for the financial information needs of management ▪ Used as an input in the process to predict
requirement in a standard d. Based on estimates, judgements, and models rather than exact future outcomes
✓ Requirement in the standards may depart from conceptual depiction ▪ “forwards – looking”
framework (Why? – CF is more of a guiding principle but not e. Not designed to show the value of a reporting entity ▪ Not in the form of predicting/forecasting
applicable to all FS) ii. Confirmatory Value
CHANGES IN THE RESOURCES AND CLAIMS RESULTING FROM FINANCIAL
✓ Revisions of the CF will not automatically lead to changes to the ▪ Provides feedback on previous
PERFORMANCE
standards. It can be revised based on the Board’s experience of evaluation
working with it. ❖ This will help the primary users to understand the return of the ▪ “backward – looking”
economic resources which led to better assessing of management ▪ Can confirm past events/predictions
HEIRARCHY GUIDANCE TO BE FOLLOWED BY THE PREPARERS OF FS/FR stewardship
❖ This will reflect and assess through the process of accrual accounting Materiality
1. The accounting standards (PFRS/PAS)
2. In the absence of standards, the preparer will use judgement and and changes in cash flow o Metter of judgement
shall consider the following: o An “entity-specific” type of relevance
a. Requirement in other PFRS dealing with similar transactions CHANGES IN THE RESOURCES AND CLAIMS NOT RESULTING FROM FINANCIAL o Information is material if it changes to; and can be
b. Conceptual framework PERFORMANCE expected to influence decisions of the primary users
of general purpose financial reports
Management may consider the following: ❖ This will help primary users to have a complete understanding of Four Materiality Process
the changes of these resources and claims and its effect to its 1. Identify
1. Pronouncement issued by other standards setting bodies
financial performance 2. Assess
2. Other accounting literature and industry practices
3. Organize
IASB MISSION: To develop standards that bring transparency, accountability, Remember: 4. Review
and efficiency to financial markets around the world a. Return on Investment II. Faithful Representation
o Faithfully represents the substance of the
CONTRIBUTION OF THE CONCEPTUAL FRAMEWORK TO THE DEVELOPING - Excess of your original investment
phenomena that it purports to represent
STANDARDS b. Return of Investment
o Provides a true, correct and complete depiction of
- Simple payback/return of what you have invested
the economic phenomena
o “Substance over Form”

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i. Completeness
▪ Includes all information necessary for
users to understand the phenomenon
that is provided
A depiction is complete when it shows:
a. A description of the nature (Account
Titles)
b. A numerical depiction (Monetary
amount in FR/FS
c. Description of what the numerical
depiction represents (Compiled notes
to FS/FR)
ii. Neutrality
▪ Information is selected or presented
without bias
To achieve neutrality, entity must exercise:
Prudence - The use of caution of making
judgement under conditions of uncertainty
Types of Prudence:
1. Asymmetric Prudence
▪ A need for systematic asymmetry
▪ You choose the option that is least
favorable to the reporting entity
2. Cautious Prudence
▪ A need to be cautious when making
judgements under conditions of
uncertainty, but without needing to be
more cautious in judgements relation to
gains and assets than those relations to
losses and liabilities
▪ You are not taking into account whether
the potential effect would be
favorable/unfavorable to the entity but
the requirement is to simple exercise
extreme cautions
iii. Free from Error
▪ There are no errors or omission but does
not mean accurate in all aspects
➢ Applying the Fundamental Qualitative Characteristics
1. Identify an economic phenomenon
2. Identify the type of information
3. Determine whether that information is available and whether Objective: To provide financial information about the entity’s assets, liabilities,
it can provide a faithful representation equity, income, and expenses
B. Enhancing Qualitative Characteristic
I. Verifiability
o Evidence (integrity)
i. Direct Verification Elements:
▪ Direct observation
a. Statement of Financial Position
ii. Indirect Verification b. Statement of Financial Performance
▪ Checking the inputs to a model and
GOING CONCERN ASSUMPTION
recalculating the outputs using the same
methodology ➢ An assumption that a reporting entity will continue in operation for
the foreseeable future and it has no intention to enter liquidation or
Challenge for Verification: Forward-looking information
to cease trading
II. Comparability
REPORTING ENTITY
o Enables users to identify and understand similarities
in, and differences among items ➢ An entity that is required/chooses to prepare financial statements
o Not uniformity ➢ Can be a single entity or portion of an entity that comprises more
i. Intra-comparability than one entity
▪ A single entity of different periods ➢ Not necessarily a legal entity
ii. Inter-comparability
FINANCIAL STATEMENTS PREPARED BY DIFFERENT REPORTING ENTITY
To achieve Comparability, it needs:
A. Consolidated Financial Statements
• Consistency • Reporting entity is composed of both the parent and its
▪ Refers to the use of the same procedures subsidiaries that is viewed as a single reporting entity
and other policies throughout multiple B. Unconsolidated Financial Statements
periods • Reporting entity is the parent alone
III. Understandability
o Classifying, characterizing, and presenting information
in a clear and concise manner
C. Combined Financial Statements
o Integrity (Straight-forwardness)
• Reporting entity comprises two or more entities that are
not at all linked by a parent – subsidiary relationship
Goal: Not to make it understandable to everyone but to
I. ASSETS
make it understandable to people equipped with sufficient
➢ Present economic resources controlled by the entity
knowledge in business and economic activities
IV. Timeliness DIFFERENT FORMS OF RIGHT
o Having information available to decision-makers in
1. Rights that corresponds to an obligation of another party
time to be capable of influencing their decision
2. Rights that do not corresponds to another
How to apply EQC?
party CONTROL
➢ Applying it in iterative process that does not follow a prescribed
➢ An entity has the present ability to direct the use of economic
order
resource and obtain the economic benefits that may flow from it
II. LIABILITY
FINANCIAL STATEMENTS
➢ Present obligation of the entity to transfer an economic resource as
a result of the past events
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 Three Criteria: ➢ The process of capturing for inclusion in the statement of financial Types of Measurement Basis:
position or statement(s) of financial performances an item that
1. Entity has an obligation A. Historical Cost
meets the definition of one of the elements of financial statements
2. The obligation is to transfer an economic resource - Provides monetary information about the assets, liabilities and
3. The obligation is a present obligation that exists a result of past Criteria: related income and expenses using information derived, at
events least in part, from the price of the transaction or other event
a. Meets the definition of an asset, liability, equity, income, and
OBLIGATION that give rise to them
expense
b. Provides useful information (relevant and faithfully represented Asset: when it is acquired or created is the value cost incurred in
➢ A duty or responsibility that an entity has no practical ability to avoid
information) acquiring or creating an asset, comprising the consideration paid to
Types of Obligation: acquire or create the asset plus transaction cost
CARRYING AMOUNT
1. Legal Obligation – obligation that arises from contracts Liability: when it is incurred or taken on is the value of the
➢ The amount at which an asset, liability, or equity is recognized in consideration received to incur or take on the liability minus
2. Constructive Obligation – obligations that arise from entity’s
the statement of financial position transaction cost
customary practices
MATCHING PRINCIPLE B. Current Value
UNIT OF ACCOUNT
➢ The simultaneous recognition of income and related expenses - Provide monetary information about the assets, liabilities, and
➢ The right or the group of rights, obligation or the group of related income and expenses using information updated to
which is sometimes referred as matching of cost and income
obligations, or group of rights and obligations, to which recognition reflect conditions at the measurement date
criteria and measurement concepts are applied MEASUREMENT UNCERTAINTY
Bases:
EXECUTORY CONTRACT ➢ The use of estimated is an essential part of accounting process and
does not undermine the usefulness of financial information if the a. Fair Value
➢ A contract or a portion of a contract that is equally unperformed o The price that would be received to sell an asset, or
estimates are clearly and accurately described and explained
III. EQUITY paid to transfer a liability in an orderly transaction
➢ The residual interest in the asset of the entity after deducting all its DERECOGNITION between the market participants at the
liabilities measurement date
➢ The removal of all or part of a recognized asset or liability from an
EQUITY CLAIMS b. Value in use
entity’s statement of financial position
o The present value of the cash flows, or other
➢ Normally occur when an item no longer meets the definition and:
➢ Claims on residual interest in the asset of the entity after deducting economic benefits that an entity expects to derive
a. Asset – derecognition occurs when the entity losses control of
all its liabilities from the use of an asset and from its ultimate
all or part of the recognized asset
disposal
Right of Equity Claims: b. Liability – derecognition occurs when the entity no longer has a
present obligation for all or part of the recognized liability
c. Current Cost
a. Dividends
Accounting Requirement of Derecognition: Asset: The cost of an equivalent asset at the measurement
b. Proceeds from satisfying the claim, either in full on liquidation, or in
date comprising the consideration that would be paid at the
part
i. Any assets or liabilities retained after the transaction measurement date plus the transaction cost that would be
c. Other equity claims
ii. The change in the entity’s assets or liabilities as a result of incurred at that date
IV. INCOME
that transaction or other events Liability: The consideration that would be received for an
➢ Increases in assets, or decreases in liabilities that result in increase
equivalent liability at the measurement date minus the
in equity other than those relating to contributions from holders of MEASUREMENT BASIS transaction cost that would be incurred at that date
equity claims
V. EXPENSE ➢ An identified feature
➢ Decreases in assets or increases in liabilities that result in decreases
in equity other than those relating to distributions to holders or Considerations:
equity claims a. The qualitative characteristic of useful financial information
RECOGNITION b. Cost constraints
c. Nature of information provided by a particular measurement basis

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CHAPTER 3: PAS 1 – PRESENTATION OF FINANCIAL STATEMENTS
OBJECTIVE
➢ To prescribe the basis for presentation of general purpose financial
statements, to ensure comparability both with the entity's financial
statements of previous periods and with the financial statements of
other entities.
➢ It sets out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum
requirements for their content
SCOPE
➢ To be applied in preparing and presenting general purpose financial
statements (individual [PFRS/IFRS 10] and consolidated [PAS/IAS
27]) in accordance with Philippine Financial Reporting Standards
(PFRSs) / International Financial Reporting Standards (IFRSs)
Remember: This standard is not applicable to the structure and contents
of the statements of cash flows and interim financial statements
(IAS/PAS 34)
GENERAL PURPOSE FINANCIAL STATEMENTS / FINANCIAL STATEMENTS
➢ Prepared and presented to satisfy the information needs of the
general users, who are not able to require the reporting entity to
prepare accounting reports according to their particular information
needs
FINANCIAL STATEMENTS
➢ It is a structured representation of the financial position and
financial performance of an entity
PURPOSE OF FINANCIAL STATEMENTS
➢ To provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions
➢ It also shows the results of the management’s stewardship of the
resources entrusted to it
To meet this objectives, financial statements provide information about
an entity’s:
a. Assets
b. Liabilities
c. Equity
d. Income and Expenses (including gains and losses)
e. Contributions by and distributions to owners in their capacity
as owners
f. Cash flows
COMPLETE SET OF FINANCIAL STATEMENTS
1. A statement of financial position as at the end of the period
2. A statement of comprehensive income for the period
3. A statement of changes in equity for the period
4. A statement of cash flows for the period
5. Notes, comprising a summary of significant accounting policies and
other explanatory information
6. A statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial
statements
Remember: An entity shall present with equal prominence all of the
financial statements in a complete set of financial statements
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)
➢ Standards and Interpretations adopted by the International
Accounting Standards Board (IASB)
a. International Financial Reporting Standards (IFRS)
b. International Accounting Standards (IAS)
c. Interpretations issued by International Financial Reporting
Interpretations Committee (IFRIC)
d. Interpretations issued by Standing Interpretations Committee
(SIC)
IMPRACTICABLE
➢ It is when the entity is not able to apply the requirement of a
particular standard, after any reasonable effort to do so
NOTES
➢ These are one of the essential component of financial statements
and include the information (financial and non-financial) in addition
to the information which is presented in the other components of
financial statements such as statement of profit or loss and other
comprehensive income, statement of changes inequity, statement
of financial' position and statement of cash flows. These are in the
form of narrative descriptions
MATERIAL
➢ Omissions or misstatements of items are material if they could,
individually or collectively, influence the economic decisions that
users make on the basis of the financial statements
➢ Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances. The size or
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nature of the item, or a combination of both, could be the
determining factor
OTHER COMPREHENSIVE INCOME
➢ It entails the incomes and expenses which are not permitted to be
recognized in profit or loss as per the requirements of the other
standards. It also includes the reclassification, adjustments
Components:
1. Changes in revaluation surplus
2. Actuarial gains and losses on defined benefit plans recognized
in accordance with paragraph 93A of IAS 19 Employee Benefits
3. Gains and losses arising from translating the financial
statements of a foreign operation
4. Gains and losses on re-measuring available-for-sale financial
assets
5. The effective portion of gains and losses on hedging
instruments in a cash flow hedge
OWNERS
➢ Holders of instruments classified as
equity PROFIT OR LOSS
➢ The total of income less expenses, excluding the components of
other comprehensive income
RECLASSIFICATION ADJUSTMENTS
➢ It is the reclassification of certain amounts to profit or loss during
the current accounting period, which were previously recognized in
statement of other comprehensive income
TOTAL COMPREHENSIVE INCOME
➢ It is the increase or decrease in the equity in the current accounting
period resulting due to the events and transactions, which are other
than the transactions with shareholders in their capacity as owners
TERMS DESCRIBED IN IAS/PAS 32 FINANCIAL INSTRUMENTS:
Presentation and are used in this Standard with the meaning specified in IAS
32:
a. puttable financial instrument classified as an equity instrument
(described in paragraphs 16A and 16B of IAS 32)
b. an instrument that imposes on the entity an obligation to deliver to
another party a pro rata shares of the net assets of the entity only
on
 liquidation and is classified as an equity instrument (described in
paragraphs 16C and 16D of IAS 32)
GENERAL FEATURES:
A. Fair Presentation
• This standard requires that the financial. Performance,
financial position and cash flows of an entity should be
fairly presented. Fair presentation of financial statements,
the events and transactions should be reported to
financial statements in accordance with the recognition
and measurement principle for the elements of financial
statements, given in the IASB’s framework, and financial
statements should be prepared in accordance with IFRS
with related disclosure requirements.
To achieve the fair presentation, the entity should make sure
the following:
i. The selection and application of accounting
policies as per IAS 8
ii. The information contained in financial
statements should have all the qualitative
characteristics of financial statements
iii. Complete disclosure should be given as per the
IFRS
B. Un-reserved Statement
• The entity which prepares financial statements in
compliance with all the lFRSs/PFRSs, should place an un-
reserved statement in the notes to accounts, in respect of
such compliance with IFRSs. This is termed as un-reserved
statement. However, the entity cannot make such a
statement unless the financial statements are in
compliance with all the requirements of IFRSs.
C. Disagreement with IFRS
• If in very rare situations, the management identifies that
compliance with a particular requirement of a specific
standard or Interpretation will result in the information,
which is in conflict with the objectives of financial
statements as laid down in the Framework, the entity will
account for such situation as follows:
a) If the regulatory frame work permits departure from such
requirement, the entity will take departure from that
requirement and will disclose the following:
• The financial statements fairly present the
financial performance, financial position and
cash flows of the entity, as per the judgment of
management
• The financial statements of the entity are in
compliance with all the relevant IFRS’s other
than the departure from the particular
requirement
• The title of the standard from which departure is
taken, the details of departure and related
reason for the departure
• The financial effect on financial statements due
to such departure
b) If the regulatory frame work does not permit departure from
such requirement, the entity will reduce the related impact of such
compliance by giving following disclosures:
• The title of the standard from which departure is
taken, the details of departure and related
reason for the departure
• The adjustment which is required as per the
judgment of the management to achieve fair
presentation
D. Going Concern
• At the end of each reporting period, when entity will
prepare its financial statements, the management is
required to assess of whether the entity has ability to
continue its business as a going concern. If management
identifies that it has ability to continue its business as a
going concern, then its financial statement will be
prepared on a going concern basis
• The entity will be treated as going concern, if it can
continue its operations for the foreseeable future such
that neither the management has intention nor the
circumstances are there that the entity will have to curtail
its business activities
E. Accrual Basis of Accounting
• An entity shall prepare its financial statements, except for
cash flow information, using the accrual basis of
accounting
F. Consistency of Presentation
• The entity should use the same accounting policies in the
preparation and presentation of financial statements for
the similar events and transactions, from one period to
the next in order to ensure the comparability of financial
statements unless the change is required by the
circumstance laid down in IAS/PAS 8
G. Materiality and Aggregation
• An entity shall present separately each material class of
similar items. An entity shall present separately items of a
dissimilar nature or function unless they are immaterial
H. Offsetting
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• An entity shall not offset assets and liabilities or income
and expenses, unless required or permitted by an IFRS
I. Frequency Reporting
• An entity shall present a complete set of financial
statements (including comparative information) at least
annually. When an entity changes the end of its reporting
period and presents financial statements for a period
longer or shorter than one year an entity shall disclose, in
addition to the period covered by the financial statements
(a) The reason for using a longer or shorter period
(b) The fact that amounts presented in the financial
statements are not entirely comparable.
J. Comparative Information
• This standard requires an entity to disclose the
comparative information in respect of the previous
accounting period similar to those amounts which are
presented in the financial statements of the current
accounting period
• When the entity changes the presentation or classification
of items in its financial statements, the entity shall
reclassify comparative amounts unless reclassification is
impracticable. When the entity reclassifies comparative
amounts, the entity shall disclose:
a. the nature of the reclassification;
b. the amount of each item or class of items that is
reclassified; and
c. the reason for the reclassification
• When it is impracticable to reclassify comparative
amounts, an entity shall disclose:
a. the reason for not reclassifying the amounts
b. the nature of the adjustments that would have been
made if the amounts had been reclassified.
K. Identification of Financial Statements
• An entity shall clearly identify the financial statements and
distinguish them from other information in the same
published document
a. The title of the entity presenting financial statements
b. Whether these are the financial statements of an
individual entity or consolidated financial statements
for the group of entities:
c. The reporting date for which financial statements are
presented
d. The presentation currency for the amounts reported
in financial statements
e. The level of rounding up for the amounts reported in
financial statements
CONTENTS OF FINANCIAL STATEMENTS
Statement of Financial Position
A. Assets
✓ The assets of the entity will be presented into current and
non-current assets as per the definition on the face of
statement of financial position, unless the presentation on
the basis of liquidity is more appropriate
Currents Assets
✓ The entity will present an asset as current asset, if it
meets any of the following criteria:
a. It is held for trading in the normal course of business
b. It will be realized within a period of 12 months from
the reporting date
c. It is expected to be sold or consumed in the normal
course of business
d. It is cash or cash equivalent as defined in IAS 7
✓ The entity will present all other assets as non-current
assets.
B. Liabilities
✓ The liabilities of the entity will be presented into current
and non-current liabilities as per the definition on the face
of statement of financial position as follows:
Current Liabilities
✓ The entity will present a liability as current liability, if It
relates to the normal course of the business and will be
paid within 12 months from the reporting date
✓ The entity will present all other liabilities as non-current
liabilities
C. Statement of Profit or Loss and Other Comprehensive Income
✓ The entity the all items of incomes and expenses relating
to the current accounting period in the form of either:
a. A single statement of profit or loss and other
comprehensive income or
b. Two separate statements, one is the statement of
profit or loss and another statement of other
comprehensive income
D. Statement of Profit or Loss
✓ The entity will present the following Information in the
statement of profit or loss at minimum:
a. Entity’s Revenue for the current accounting period
b. Interest costs
c. Entity’s share of the profit or loss from associates or
joint ventures
d. Any reclassification adjustment recognized during the
current accounting period
e. Income tax
f. Net profit or loss for the current accounting period
E. Other Comprehensive Income changes in equity, statement of financial'
✓ The entity will present the line items of statement of position and statement of cash flows.
comprehensive income into two sections as follows: o These are in the form of narrative descriptions
a. Items that are not reclassify to profit or loss and include the following:
b. Items that may be reclassify to profit or loss, when ▪ Basis used by the entity for the
certain conditions will meet preparation of the financial statements
✓ The line items of statement of comprehensive income may ▪ Accounting policies of the entity
be presented either ▪ Disclosures required by the standards
a. Net of tax or
b. Before tax with the tax effect being presented as a FORMAT OF STATEMENT OF FINANCIAL POSITION
separate line item under the respective section
✓ The entity is required to disclose the allocation of profit or
loss and comprehensive Income as follows in addition to
the statement of profit or loss and other comprehensive
income:
a. Profit or loss for the current accounting period
attributable to:
i. Owners of the group
ii. Non-controlling interests in the entity
b. Total comprehensive income for the current
accounting period attributable to:
i. Owners of the group
ii. Non-controlling interests, and
Statement of Changes in Equity
o The entity is required to present the following in
respect of each component of entity, in the
statement of changes in equity:
▪ Changes in the elements of equity due
to transaction with owners in the
current accounting period
▪ Changes in the elements of equity due
to the total comprehensive income for
the year
▪ Changes in the components of equity
due to the change in accounting policy
▪ Changes in the components of the
equity due to the requirement of a
standard
Notes
o These contain the information (financial and
non- financial) in addition to the information
which is presented in the other components of
financial statements such as statement of profit
or loss and other comprehensive income,
statement of
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FORMAT OF STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME

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CHAPTER 4: PAS 7 – STATEMENT OF CASH FLOWS
OBJECTIVE
➢ To require the provision of information about the historical changes
in cash and cash equivalents of an entity by means of a statement
of cash flow which classifies cash flows during the period from
operating, investing and financing activities
SCOPE
➢ The requirements of this standard are applicable for the
preparation and presentation of statement of cash flows which is
presented as an essential component of the financial statements in
each accounting period
➢ This governs the preparation of a statement of cash flows
CASH
➢ Comprises cash on hand and demand deposits
➢ It encompasses currency notes, coins used as currency and short
term deposits accessible on demand
CASH EQUIVALENTS
➢ The short term investments which are highly liquid and are
convertible in to identifiable amount of cash within a period of
three months or less, these have least chances of variation in value
• These are normally held by entity in order to meet its short
term cash needs or commitments rather than held for
investment purposes
• These also include bank overdrafts which are held by the
entity for the purpose of cash management
COMPONENTS OF CASH AND CASH EQUIVALENTS
➢ An entity shall disclose the components of cash and cash equivalents
and shall present a reconciliation of the amounts in its statement of
cash flow with the equivalent items reported in the statement of
financial position
CASH FLOWS
➢ The inflows and outflows in the normal conduct of the business, of
cash and cash equivalents
OPERATING ACTIVITIES
➢ The principal revenue-producing activities of the entity and other
activities that are not investing or financing activities
➢ The cash flows which are generated by the principal business
activities of the entity are termed as cash flows from operating
activities. Cash flows from the operating activities reflects the cash
generating ability of the operations and the extent to which such
cash flows can be used to carry on operations, for the payment of
liabilities, distribution to shareholders and for the acquisition of
new investments.
The following are the examples of cash flows from operating activities:
a. Cash received related the sale of goods
b. Cash received related to rendering of service
c. Cash received related to royalty or commissions income
d. Cash received related to the sale of investments, which are
held for trading
e. Cash paid or received by a financial institute for the grant and
receipt of loan amount
f. Cash received or paid by the insurance company in respect of
for premiums and claims
g. Cash paid to suppliers for purchase of goods or services
h. Salaries Paid to employees;
i. Any cash paid or received as a refund of income tax
➢ Any cash received from disposal of a non-current asset is not the
part of cash flows from operating activities, instead it is included in
cash flows from investing activities
INVESTING ACTIVITIES
➢ The acquisition and disposal of long-term assets and other
investments not included in cash equivalents
➢ The activities which are undertaken by the entity, for the purchase
of
long term assets and investments (which are not the part of cash
equivalents), including the disposal of such long term assets and
investments are termed as investing activities. Cash flow from
investing activities reflects the amount of expenditure made by the
entity for the purchase of long term assets to generate economic
benefits for a long time period.
The following are the examples of cash flows from investing activities:
a. Cash paid to purchase non-current assets (tangible and intangible
both)
b. Cash paid to purchase long term investments other those held for
trading
c. Cash paid for the capitalized development expenditure
d. Cash paid for the self-constructed asset
e. Cash received from disposal of non-current assets (tangible and
intangible both) and long term investments
f. Loans granted to other party (except loans granted by the financial
institution)
g. Cash received in respect of loan receivables
h. Cash received as a result of government grant
i. Interest and dividend income received on long term investments
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FINANCING ACTIVITIES
➢ Activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity
➢ The activities which are undertaken by the entity to raise capital or
long term funds for the business, and which results in change in the
equity and borrowed funds of the entity are termed as financing
activities. Cash flows from financing activities enable the users to
evaluate the finance structure of the entity.
The following are the examples of cash flows from investing activities:
a. Proceeds received on issue of equity instruments such as ordinary
shares
b. Proceeds received on issue of loan notes, debentures or bonds
c. Bank loan borrowed
d. Repayments of loan notes, debentures, bonds or a bank loan
e. Repayment of finance lease by lessee
f. Dividend paid to the owners of
finance PRESENTATION OF STATEMENT OF
CASH FLOWS
➢ The statement of cash flow shall report cash flows during the period
classified by operating, investing and financing activities
REPORTING CASH FLOWS FROM OPERATING ACTIVITIES
➢ The entity will present cash inflows and outflows related to major
classes of the investing and financing activities, under the respective
functions as per the requirements of this standard
➢ The entity will report cash flow from operating activities either using:
A. Direct Method
o Major classes of gross cash receipts and gross cash
payments are disclosed
B. Indirect Method
o Profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or
accruals of past or future operating cash receipts or
payments, and items of income or expense
associated with investing or financing cash flows
However,
This method supports the use of direct method, because
under direct method users are able to evaluate the
information about the cash inflows and outflows related
to the major classes of the operations which is not
available under indirect method

REPORTING CASH FLOWS FROM INVESTING AND FINANCING ACTIVTIES
➢ An entity shall report separately major classes of gross cash receipts
and gross cash payments arising from investing and financing
activities, except to the extent that cash flows described in
paragraphs 22 and 24 are reported on a net basis
REPORTING CASH FLOWS ON A NET BASIS
➢ Cash flows arising from the following operating, investing or
financing activities may be reported on a net basis:
a. cash receipts and payments on behalf of customers when the
cash flows reflect the activities of the customer rather than
those of the entity
b. cash receipts and payments for items in which the turnover is
quick, the amounts are large, and the maturities are short.
➢ Cash flows arising from each of the following activities of a financial
institution may be reported on a net basis:
a. cash receipts and payments for the acceptance and repayment
of deposits with a fixed maturity date
b. the placement of deposits with and withdrawal of deposits
from other financial institutions
c. cash advances and loans made to customers and the
repayment of those advances and loans.
CASH FLOWS IN FOREIGN CURRENCY
➢ The entity is required to adjust the cash flows in foreign currency as
follows:
a. Cash flows which arise from a foreign currency transaction will
be presented in the functional currency of the entity, using the
exchange rate on the date of cash flow.
b. Cash flows related to the foreign subsidiary will be translated,
using the exchange rate on the date of cash flow.
c. The exchange gains and loss related to foreign currency
transactions are unrealized, therefore are treated as non-cash
items in the preparation of statement of cash flows.
INTEREST AND DIVIDENDS
➢ Cash flows from interest and dividends received and paid shall each
be disclosed separately. Each shall be classified in a consistent
manner from period to period as either operating, investing or
financing activities
➢ The entity will account for the cash flows related to interest and
dividend as follows:
a. The interest and dividend income can either be presented c. the amount of cash and cash equivalents in the subsidiaries or
under operating activities as these are used to determine the other businesses over which control is obtained or lost; and
profits, or under investing activities as these are related d. the amount of the assets and liabilities other than cash or cash
investments. equivalents in the subsidiaries or other businesses over which
b. The interest expense can either be presented under operating control is obtained or lost, summarized by each major
activities as these are used to determine the profits, or under category.
financing activities as these are related cost for the funds
borrowed.
c. The dividend paid can either be presented under operating NON-CASH TRANSACTIONS
activities to enable the users to identify the sufficiency of
➢ Investing and financing transactions that do not require the use of
profits to pay dividends, or under financing activities as these
cash or cash equivalents shall be excluded from a statement of cash
are related cost of the equity funds
flow. Such transactions shall be disclosed elsewhere in the financial
TAXES ON INCOME statements in a way that provides all the relevant information about
these investing and financing activities
➢ Cash flows arising from taxes on income shall be separately ➢ The entity will not take into account the effect of non-cash items
disclosed and shall be classified as cash flows from operating which are relating to investing and financing activities such as:
activities unless they can be specifically identified with financing and a. Purchase of a non-current asset on credit
investing activities b. Purchase of subsidiary by issue of equity instruments
c. Bonus issue
INVESTMENT IN SUBSIDIARY, ASSOCIATE AND JOINT VENTURE
OTHER DISCLOSURES
➢ The entity is required to account for the cash flows related to,
Investment in Subsidiary, Associate and Joint Venture as follows: ➢ An entity shall disclose, together with a commentary by
a. If the investment in subsidiary, associate or joint venture is management, the amount of significant cash and cash equivalent
accounted for using cost or equity method then the investor balances held by the entity that are not available for use by the
will only report cash flows in the form of dividend group
b. The cash inflows or outflows related to disposal or acquisition
of interest in subsidiary, which results in acquisition or loss of Remember: The entity will report cash flow from operating activities either
using direct method or indirect method
control are reported in investing activities
c. The cash inflows or outflows related to disposal or acquisition
of interest in subsidiary which does not results in acquisition or
loss of control are reported in financing activities except when
such investment is held by the investment entity
d. The cash inflows or outflows related to disposal or acquisition
of interest in subsidiary, which results in acquisition or loss of
control are reported in investing activities net of the cash or
cash equivalent acquired or transferred with that subsidiary.
CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES AND OTHER BUSINESSES
➢ The aggregate cash flows arising from obtaining or losing control of
subsidiaries or other businesses shall be presented separately and
classified as investing activities
➢ An entity shall disclose, in aggregate, in respect of both obtaining
and losing control of subsidiaries or other businesses during the
period each of the following:
a. the total consideration paid or received;
b. the portion of the consideration consisting of cash and cash
equivalents;
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CHAPTER 5: PAS 8 – ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS
OBJECTIVE
➢ This standard purports to enhance and maintain the reliability and
comparability of financial statements by providing guidelines for the
selection and application of accounting policy, treatment of change
in accounting policy and accounting estimates along with the
guidance for the correction of errors. It also provides the related
disclosure requirements required by the entity
SCOPE
➢ The requirements of this standard are applicable for the selection
and application of accounting policy, treatment of change in
accounting policy and accounting estimates along with the
accounting for the correction of errors related to previous periods.
ACCOUNTING POLICIES
➢ The specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial
statements
CHANGE IN ACCOUNTING ESTIMATE
➢ An adjustment of the carrying amount of an asset or a liability, or
the amount of the periodic consumption of an asset, that results
from the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities
➢ Result from new information or new developments and, accordingly,
are not corrections of errors
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)
➢ These are Standards and Interpretations adopted by the
International Accounting Standards Board (IASB). They comprise:
a. International Financial Reporting Standards (IFRS)
b. International Accounting Standards (IAS)
c. Interpretations developed by the International Financial
Reporting Interpretations Committee (IFRIC)
d. Interpretations issued by Standing Interpretations Committee
(SIC).
MATERIAL
➢ The omission or misstatement of the information is considered as
material, if it can, individually or collectively, effect the economic
decision of the users taken on basis of the financial statements. The
information can be material by size, or nature
PRIOR PERIOD ERRORS
➢ Omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to
use, or misuse of, reliable information that:
a. was available when financial statements for those periods were
authorized for issue; and
b. could reasonably be expected to have been obtained and taken
into account in the preparation and presentation of those
financial statements.
➢ Such errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of
facts, and fraud.
RETROSPECTIVE/RETROACTIVE APPLICATION
➢ It is applying a new accounting policy to transactions, other events
and conditions as if that policy had always been applied
RETROSPECTIVE RESTATEMENT
➢ It is correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if a prior period
error had never occurred
PROSPECTIVE APPLICATION
➢ A change in accounting policy and of recognizing the effect of a
change in an accounting estimate, respectively, are:
a. applying the new accounting policy to transactions, other
events and conditions occurring after the date as at which the
policy is changed; and
b. recognizing the effect of the change in the accounting estimate
in the current and future periods affected by the change.
IMPRACTICABLE
➢ Applying a requirement is impracticable when the entity cannot
apply it after making every reasonable effort to do so.
For a particular prior period, it is impracticable to apply a change in an
accounting policy retrospectively or to make a retrospective restatement
to correct an error if:
a. the effects of the retrospective application or retrospective
restatement are not determinable;
b. the retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in
that period; or
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c. the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to distinguish
objectively information about those estimates that:
• provides evidence of circumstances that existed on the
date(s) as at which those amounts are to be recognized,
measured or disclosed
• would have been available when the financial statements
for that prior period were authorized for issue from other
information.
ACCOUNTING POLICY
➢ These are specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial
statements
➢ This informs users how the financial statement was prepared and
thus helps them in formulating sound economic decisions
SELECTION AND APPLICATION OF ACCOUNTING POLICY
➢ When an IFRS specifically applies to a transaction, other event or
condition, the accounting policy or policies applied to that item shall
be determined by applying the IFRS
➢ In the absence of an IFRS that specifically applies to a transaction,
other event or condition, management shall use its judgement in
developing and applying an accounting policy that results in
information that is:
a. relevant to the economic decision-making needs of users;
and
b. reliable, in that the financial statements:
i. represent faithfully the financial position, financial
performance and cash flows of the entity;
ii. reflect the economic substance of transactions, other
events and conditions, and not merely the legal form;
iii. are neutral, e.g. free from bias
iv. are prudent; and
v. are complete in all material respects.
➢ In making the judgement,
I. Management shall refer to, and consider the
applicability of, the following sources in descending
order:
a. the requirements in IFRSs dealing with similar and related
issues; and
b. the definitions, recognition criteria and measurement
concepts for assets, liabilities, income and expenses in the
Framework.
II. Management may also consider the most recent
pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop
accounting standards, other accounting literature and
 accepted industry practices, to the extent that these
do not conflict with the sources in (I)
CHANGES IN ACCOUNTING POLICIES
RETROSPECTIVE APPLICATION
➢ An entity shall change an accounting policy only if the change:
a. is required by an IFRS; or
b. results in the financial statements providing reliable and more
relevant information about the effects of transactions, other
events or conditions on the entity’s financial position, financial
performance or cash flows.
a. the application of a new accounting policy for transactions,
other events or conditions that did not occur previously or
were immaterial.
ACCOUNTING FOR THE CHANGE IN ACCOUNTING POLICY
➢ The entity will account for the change in accounting policy in the
circumstance in which change in accounting policy is allowed, as
follows:
a. If the change in accounting policy arises, when an IFRS requires
then such change in accounting policy will be accounted for as
per the transitional provision given in the that standard i.e. the
relevant standard will specify how to account for the change in
accounting policy, either it will have prospective application or
retrospective application. However, if the relevant standard,
requiring the change in accounting policy does not specify that
how to account for the change in accounting policy, then such
change in accounting policy will have retrospective application
b. If the change in accounting policy arises, when the
management believes that the change in accounting policy
would result in more relevant and reliable information being
reflected in financial statements, then such change in
accounting policy will also have retrospective application
c. However, following situations do not constitute to the change
in accounting policy:
i. The selection and application of a new accounting
policy for the events and transactions which have
never occurred in the past, such as first time receipt
DISCLOSURE
of government grant and
ii. The selection and application of a new accounting
policy for the events and transactions which are
different in substance from events and transactions
occurring before
The change in the above mentioned circumstances (i) and (ii) will
not be treated as the change in accounting policy therefore, it will
have prospective application in such circumstances.
The measurement from cost to revaluation model of the property, plant e) The effect of transitional provision upon the future
and equipment under IAS 16and intangible assets under IAS 38 is a periods (if any)
change in accounting policy, but it will be accounted for asper the f) For the current period and each prior period presented, to
requirements of those standards, rather than IAS 8. the extent practicable, the amount of the adjustment:
i. For each financial statement line item affected;
and
ii. If IAS 33 Earnings per Share applies to the entity,
➢ When the entity is required to apply the change in accounting policy
for basic and diluted earnings per share; The
as retrospectively, the entity will apply the accounting policy to the
details of the circumstances if the retrospective
related events and transactions, such that new accounting policy
applications became impracticable due to the
had always been in application. It will be accounted for as follows:
period specific affect or cumulative effect of the
a. The entity will adjust the effect of the change in accounting
previous periods
policy retrospectively to the extent it is possible to determine
g) The amount of the adjustment relating to periods before
the effect of change in accounting policy in respect of the
those presented, to the extent practicable
previous periods i.e. the entity is required to apply the new
➢ When a voluntary change in accounting policy has an effect on the
accounting policy in the previous periods as far back as
current period or any prior period, would have an effect on that
possible.
period except that it is impracticable to determine the amount of
➢ For this purpose, the entity will apply the new accounting policy to
the adjustment, or might have an effect on future periods, an entity
the carrying values of related assets and liabilities as at the start of
shall disclose:
the earliest accounting period, to which retrospective application is
a) The nature of the change in accounting policy
possible, that may be the current accounting period and the
b) The reasons why applying the new accounting policy
resulting adjustment will be made to the retained earnings, as
provides reliable and more relevant information
follows:
c) For the current period and each prior period presented, to
i. If the effect of change in accounting policy relates to
the extent practicable, the amount of the adjustment:
previous period only, the entity will restate the balances
i. For each financial statement line item affected;
of related asset or liability in the previous period and a
and
corresponding adjustment in the opening retained
ii. If IAS 33 applies to the entity, for basic and
earnings of current year
diluted earnings per share;
ii. If the effect of change in accounting policy relates to prior
d) The amount of the adjustment relating to periods before
accounting periods than the previous accounting period,
those presented, to the extent practicable; and
then the adjustment will be made in the opening retained
e) If retrospective application is impracticable for a particular
earnings of the comparative year and the entity will also
prior period, or for periods before those presented, the
restate the balances of related assets or liabilities
circumstances that led to the existence of that condition
b. If it is not possible to determine the period specific effect or
and a description of how and from when the change in
cumulative effect of change in accounting policy in respect of
accounting policy has been applied.
the previous periods then, the entity will apply the new
➢ When an entity has not applied a new IFRS that has been issued but
accounting policy from the start of the earliest accounting
is not yet effective, the entity shall disclose:
period from which it is practicable to do so.
a. this fact; and
b. known or reasonably estimable information relevant to
assessing the possible impact that application of the new IFRS
➢ When initial application of an IFRS has an effect on the current will have on the entity’s financial statements in the period of
period or any prior period, would have such an effect except that it initial application.
is impracticable to determine the amount of the adjustment, or
might have an effect on future periods, an entity shall disclose: ACCOUNTING ESTIMATES
a) The title of the IFRS
➢ These are the judgments or assumptions taken by the entity
b) The details of in change in accounting policy that is made
because of uncertainties attaching to the business circumstances in
in accordance with its transitional provisions
order to determine the carrying value of an asset or liability in the
c) The nature of the change in accounting policy
financial statements. It includes the estimation of:
d) The details of transitional provision given (if any) by the
standard to account for change in accounting policy
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 a. Useful life related asset or liability along with a corresponding adjustment
b. Residual Value to the opening retained earnings, of the comparative year
c. Depreciation Method ➢ If it is not possible to determine the period specific effect or
d. Fair Value cumulative effect of an error in respect of the previous periods
e. Net Realizable Value then, the entity will restate the balances from the start of the
f. Provisions earliest accounting period from which it is practicable to do so.

CHANGE IN ACCOUNTING ESTIMATES DISCLOSURES

➢ It is the adjustment in the carrying value of an asset or liability as a

result of review, of the current status, of the estimated future
economic benefits and obligations related to the asset and liability.
➢ Accounting estimates changes due to the availability of new and
advanced information or developments.
ACCOUNTING FOR CHANGE IN ACCOUNTING ESTIMATE
➢ The standard requires the entity to account for the change in
accounting estimate prospectively i.e. it will be applied in the year
of change if it affects the current year only, in the current and
future years, if it affects the both.
➢ The entity is required to disclose the following in respect of the
prior period error;
a. The details of the error
b. The amount of adjustment made at the start of the current or
comparative year in respect of correction of error
c. The details of the circumstances if the retrospective
applications became impracticable due to the period specific
affect or cumulative effect of the previous periods

DISCLOSURES

➢ The entity is required to disclose the details and the effect of

change in accounting estimate related to the current and future
years both.

PRIOR PERIOD ERROR

➢ It is defined as the omissions and misstatements in the financial

statements of an entity, in one or more previous accounting
periods, which occurs due to failure of use of information:
a. Which was available when financial statements of such
accounting periods were prepared or
b. Which could be available if certain procedure would have
applied
➢ This may comprise the numerical mistakes, misapplication of
accounting policies, or misinterpretations of circumstances, and
fraud.

ACCOUNTING FOR ERROR

➢ The entity will correct the effect of the error by retrospective

restatement such as error has never occurred, to the extent it is
possible to do so, as follows:
a. If the error has occurred in previous period, by restating the
balances in the comparative year corresponding adjustment to
the opening retained earnings, of the current year
b. If the error relates to the accounting period preceding the
previous accounting periods, by restating the carrying values of

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CHAPTER 6: PAS 2 – INVENTORIES
OBJECTIVE
➢ To prescribe the accounting treatment for inventories. A primary
issue in accounting for inventories is the amount of cost to be
recognized as an asset and carried forward until the related
revenues are recognized
➢ To provide guidance on the determination of cost and its subsequent
recognition as an expense, including any write-down to net
realizable value
➢ To provide guidance on the cost formulas that are used to assign
costs to inventories
SCOPE
➢ The requirements of this standard are applicable for the accounting
treatment of inventories.
Except:
a. The work in progress related to construction contracts, which
are covered under IAS 11
b. Financial instruments
c. Biological assets related to agricultural activity and agricultural
produce at the point of harvest (see IAS 41 Agriculture)
➢ This Standard does not apply to the measurement of inventories
held by:
a. producers of agricultural and forest products, agricultural
produce after harvest, and minerals and mineral products, to
the extent that they are measured at net realizable value in
accordance with well-established practices in those industries.
When such inventories are measured at net realizable value,
changes in that value are recognized in profit or loss in the
period of the change
b. commodity broker-traders who measure their inventories at
fair value less costs to sell. When such inventories are
measured at fair value less costs to sell, changes in fair value
less costs to sell are recognized in profit or loss in the period of
the change
INVENTORIES
➢ Assets which includes:
a. Held for sale in the ordinary course of business (Finished Goods
Inventory)
b. In the process of production for such sale (Work in Process
Inventory)
c. In the form of materials or supplies to be consumed in the
production process or in the rendering of services (Raw
Materials Inventory)
NET REALISABLE VALUE
➢ The estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs
necessary to make the sale
FAIR VALUE
➢ The amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length
transaction
MEASUREMENT OF INVENTORIES
➢ The entity will measure the inventory at reporting date at the lower
off
a. Cost of the inventory
b. Its Net Realizable Value
This is in accordance with the prudence
concept. Cost of Inventory
- The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition.
It will be determined as:
i. Basic List Price
ii. Less any Trade Discount or Rebate,
iii. Plus, any directly related cost which includes:
Transportation cost, Sales tax and Import duties (if
nonrefundable), any legal charges, handling costs, any
other cost incurred for the acquisition of finished goods or
raw material
iv. Conversion cost i.e. (Direct labor and Production
Overheads)
v. Any other cost which is necessary to bring the inventory
into its present condition and location such as designing
cost or storage cost if essential before use in production
process
A. Cost of Purchase
- The costs of purchase of inventories comprise the purchase
price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing
authorities), and transport, handling and other costs directly
attributable to the acquisition of finished goods, materials and
services. Trade discounts, rebates and other similar items are
deducted in determining the costs of purchase.
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B. Cost of Conversion
- Conversion cost is the cost of converting the raw material into
finished goods and it encompasses (Direct labor cost and
Production Overheads)
- Production overheads include fixed and variable overheads
- Fixed production overheads are those which remain fixed,
irrespective of the level of production and these are allocated
on the basis of normal or average capacity.
- The normal capacity should take into account the production
loss due to planned repair and maintenance.
- If the actual production is lower than budgeted, then
unallocated overheads will be charged to statement of profit or
loss as expense.
- If the actual production is higher than the budgeted, then fixed
overhead allocated to each unit should be decreased, on the
basis of actual production
- Variables production overheads are those which vary with the
level of production and are allocated on the basis of use of
such facility
C. Other Cost
- Included in the cost of inventories only to the extent that they
are incurred in bringing the inventories to their present
location and condition
e.g. It may be appropriate to include non-production overheads or
the costs of designing products for specific customers in the cost of
inventories
Notes:
Following are the costs which will not be recorded as part of cost of
inventory and will be charged to the statement of profit or loss as
expense which includes:
i. Any amount of abnormal loss due to wasted material or labor.
ii. Storage cost if it is not necessary before a production process
iii. Any administrative and selling overheads.
If production of inventory is financed through a loan and inventory
takes a substantial time period to get ready for sale or intended use,
then any related interest cost will become the part of cost of inventory
as per IAS 23.
If the inventory is purchased on extended credit period or on deferred
installment basis, then the cost of such inventory will be its Cash Price
Equivalent any excess paid over the cash price will be treated as
Interest expense which will be recognized over the period of credit.
COST INVENTORY OF A SERVICE PROVIDER
 ➢ The cost of inventories of a service provider includes the cost of
direct labor or personnel who are engaged in rendering the services
and other directly attributable costs. However, it should not include
any administrative and selling overheads, and profit margins.
COST OF AGRICULTURAL PRODUCE HARVESTED FROM BIOLOGICAL ASSET
➢ In accordance with IAS 41 Agriculture inventories comprising
agricultural produce that an entity has harvested from its biological
assets are measured on initial recognition at their fair value less
costs to sell at the point of harvest. This is the cost of the
inventories at that date for application of this Standard
TECHNIQUES FOR THE MEASUREMENT OF COST
✓ Standard Unit Cost Method
- Under this method, the cost of inventory is determined by
taking into account normal direct material cost, labor cost and
directly attributable overheads.
✓ Retail Price Method
- This method is normally used by the entities engaged in the
retail business with large number of items in inventory having
similar margins. The cost of inventory will be determined by
deducting the margin from the selling price of such inventory
items.
COST MEASUREMENT FORMULAS
➢ The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and segregated for
specific projects shall be assigned by using specific identification of
their individual costs.
➢ The cost of items of inventory that are ordinarily interchangeable or
similar in nature can be determined by using first-in, first-out (FIFO)
method or weighted average cost method.
➢ Under FIFO method the units of inventory which are purchased or
produced first are deemed to be sold first and the units remaining in
the inventory will be with the most recent prices.
➢ Under weighted average cost method, a weighted average cost per
unit is calculated by taking into account the cost of the units at the
start of the period and the cost of the units which are purchased or
produced during the year on periodic basis or when new shipment
is received.
➢ This Standard requires that the entity should use the same formula
for all the inventories in different segments of the business but
have same nature and use.
NET REALISABLE VALUE
➢ If the cost of inventory exceeds the value which is expected to be amount in classifications appropriate to the entity;
received from its ultimate sale, then the inventory will be written
down to its net realizable value.
➢ The net realizable value of inventory may fall down because of
increase in cost, fall in selling price, physical damage or
obsolescence.
➢ It should be the reliable estimate on the date of measurement
considering all the relevant factors.
➢ If the cost of inventory falls lower than NRV, then each item of
inventory should be written down to its NRV on individual basis.
However, this may be applicable upon group of items in inventory if
they are similar in nature or ultimate purpose.
➢ The entity should consider the purpose of the inventory in
determination of its NRV such as, whether it is held for sale under a
firm contract or for general sale purpose.
➢ The raw material which is held by the entity for use in production of
finished goods needs not to be written down below its cost, if the
finished goods in which such material will be used are expected to
be sold at above its cost. However, if the finished goods in which
such material will be used are expected to be sold at less than its
cost, then the cost of such raw material will be written down to its
NRV.
➢ If the same existing inventory is held at a subsequent reporting
date, the NRV of the inventory will be re-measured at each
subsequent reporting date. If subsequent circumstances indicate
that NRV of inventory has increased, for which a write down has
been recorded in the previous period, the reversal of write down
will be made up to the extent of original write down made in the
previous period
RECOGNITION AS AN EXPENSE
➢ The carrying value of inventory will be recorded as expense in the
period in which such inventory is sold. However, if the inventory is
used in the construction of another asset then the cost of such
inventory will become the part of cost of other asset
➢ Any losses related to the inventory and write down of inventory to
its
NRV will be recorded as expense in the relevant period in which loss
or write down arises.
➢ The reversal of write down related to inventory will be recorded as
reduction in expense in the period in which reversal of write down
arises.
DISCLOSURE
➢ The financial statements shall disclose:
a. The accounting policies adopted in measuring inventories,
including the cost formula used;
b. The total carrying amount of inventories and the carrying
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 c. The carrying amount of inventories carried at fair value less
costs to sell;
d. The amount of inventories recognized as an expense during
the period
e. The amount of any write-down of inventories recognized as
an expense in the period in accordance with paragraph 34
f. the amount of any reversal of any write-down that is
recognized as a reduction in the amount of inventories
recognized as expense in the period in accordance with
paragraph 34;
g. the circumstances or events that led to the reversal of a
write- down of inventories in accordance with paragraph 34
h. the carrying amount of inventories pledged as security for
liabilities.

CHAPTER 7: PAS 16 – PROPERTY, PLANT, AND EQUIPMENT

OBJECTIVE

➢ This Standard deals with the accounting treatment of Property,

Plant & Equipment including the guidance for the main issues
related to the recognition & measurement, determination of
carrying value, depreciation charges, any impairment loss and de-
recognition aspects for the property, plant & equipment in the
financial statements of an entity

SCOPE

➢ The requirements of this standard are applicable for the

accounting treatment of property, plant and equipment

This Standard is not applicable:

a. To the property, plant and equipment which are classified as

held for sale and are covered under IFRS5
b. For the accounting treatment of biological assets related to
agricultural activity which are covered under IAS 41
c. For the accounting treatment of exploration and evaluation
assets and mineral rights and reserves such as oil and gas and
other non-regenerative resources which are covered under
IFRS 6.
➢ However, IAS 16 is applicable to the property, plant & equipment,
which are used to maintain or develop the biological assets under
IAS 4 and mineral rights and reserves such as oil and gas and other
non-regenerative resources which are covered under IFRS 6.

PROPERTY, PLANT, AND EQUIPMENT

➢ The item which meets the following criteria will be treated as

property plant and equipment as the standard prescribes:

These are tangible items

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 a. That are held for use in the production, supply of goods or
services, rental to others, or use in administration and
b. Their economic benefits are for more than one accounting
period.
COST
➢ It is the amount of cash or cash equivalents paid or the fair value of
the consideration transferred to acquire, purchase or construct an
APPLICATION OF INITIAL RECOGNITION
asset
CARRYING VALUE
➢ It is the value at which asset will be presented in the statement of
financial position and it is determined as Cost Less Accumulated
Depreciation and Accumulated Impairment Loss.
DEPRECIABLE AMOUNT
➢ It is the amount of asset which will be depreciated over its useful
life and is determined as the cost of an asset less its residual value.
RESIDUAL VALUE
➢ It is the estimated net disposal proceeds that an entity would
currently obtain from disposal of the asset, if the asset were already
in the condition and situation which is expected to be at the end of
its useful life.
USEFUL LIFE
➢ It is the period of time or number of production units for which
asset will be used by the management.
DEPRECIATION
➢ It is the systematic allocation of the depreciable amount of an asset
over its related useful life
FAIR VALUE
➢ It is amount that is expected to be received to sell an asset or
required to be paid to transfer a liability, in an orderly transaction
between market participants at the date of measurement (IFRS 13)
IMPAIRMENT LOSS
INITIAL MEASUREMENT
➢ If the carrying value of asset exceeds its recoverable value, the
excess is known as impairment loss
INITIAL RECOGNITION
➢ An asset will be recognized as property, plant and equipment if it
meets:
a. The definition of property, plant & equipment and
b. The recognition criteria given in IASB’s frame work i.e.
- The future economic benefits related to the asset are
probable, to flow to the entity and
- The cost of the asset is reliably measurable.
➢ The entity will apply the initial recognition rule to the following
items as follows:
1. Spare Parts & Servicing Equipment:
• Normally these are treated as inventory and their cost
will be charged to the statement of profit or loss as
expense when these are consumed by the entity.
• However, the cost of major spare parts will be
capitalized as property, plant & equipment if these:
✓ Are specialized in nature and can only be
used with the specific asset
✓ Have material cost and
✓ Their economic benefits are expected to be
for more than one accounting period.
2. Safety Equipment’s:
• These do not enhance the economic benefits of related
asset, therefore, their cost will be charged to statement
of profit or loss as expense such as fire alarms, sound
proof equipment’s and smoke filters.
• However, if an entity identifies that it will enhance the
economic benefits of related asset then its cost will be
capitalized as part of property, plant & equipment.
3. Aggregation & Segmenting:
• This Standard does not prescribe that what items
constitute property, plant & equipment. Therefore, if
the cost of individually insignificant items such as tools,
jigs, dies, and structures becomes material after
aggregation then these may be recognized as property,
plant and equipment. (Aggregation)
• If an asset contains different components and these
components are different in nature with each
component having different useful life, then each
component will be recognized as property, plant and
equipment separately. (Segmenting)
➢ The assets which are recognized as property, plant and equipment
are initially measured at Cost which is determined as:
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a. Manufacturer’s or distributor’s list price
b. Less any Trade Discount or Rebate,
c. Plus, any directly related cost which includes: Transportation
cost, Sales tax and Import duties (if non-refundable), any Legal
charges, Handling cost, Site preparation cost, Installation cost,
Professional charges, Pre-production testing cost (Net
expense), any Modification cost (owner specified), any
Dismantling and Restoration cost.
d. Any other cost which is necessary to bring the asset into its
operating use or intended use by the management.
➢ The capitalization of cost will cease when the asset becomes
available for operating use or intended use by the management
Notes:
1. Following elements of cost will not become the part of the cost of
asset and will be charged to statement of profit or loss as expense:
a. Insurance cost
b. Labor training cost
c. Rectification cost of an error
d. Cost of initial operating losses
e. Start-up cost
f. Relocation cost
g. Cost related to opening of new facility
h. Any general and administrative overheads
2. Any cash discount taken for the prompt payment of cash related to
asset will not affect the cost of the asset, and it will be recorded as
income separately in the statement of profit or loss.
3. If an asset is purchased on extended credit period or on deferred
installment basis, then the cost of such asset will be its Cash Price
Equivalent any excess paid over the cash price will be treated as
Interest expense which will be recognized over the period of credit.
4. The cost of the asset held by the lessee under finance lease will be
determined in accordance with IAS 17.
Self-Constructed Asset
❖ If an entity chooses to construct an item of property, plant &
equipment using its own resources, then the cost of such self-
constructed asset will be determined as the cost of the asset
which is constructed by the entity for sale in the normal course
of the business under IAS 2, i.e. it will be the sum of Material,
Labor and Overhead cost of such asset.
❖ However, any cost of abnormal wasted material, labor or other
resources will be charged to statement of profit or loss as
expense.
Exchange of Asset
❖ If an entity acquires an item of property, plant and equipment
in exchange for a non-monetary asset, then the cost of the
asset acquired in exchange will be determined as follows:
A. If Transaction of Exchange has Commercial Substance:
o The transaction of exchange will deem to have
commercial substance if:
a. The risk, timing and amount of cash flows related to the
asset acquired are different from the asset transferred;
b. The exchange has resulted in the change in the entity
specific value of that operational portion of the entity
c. The change in (a) and (b) above is material.
❖ In such circumstances the entity will determine the cost of the
asset acquired in exchange as:
a. The fair value of asset transferred ± cash,
b. If the fair value of asset transferred is not determinable,
then it will be recognized at the fair value of asset
acquired,
❖ Any gain or loss on the exchange transaction will be charged to
the statement of profit or loss.
B. If Transaction of Exchange does not have Commercial
Substance:
o If the transaction of exchange does not have
commercial substance or the fair value of asset
transferred and the asset acquired both are not
determinable, then the new asset will be
recognizing at the carrying value of asset
transferred, which will result in no gain or loss on
exchange.
I. Subsequent Recognition
a. Property, plant and equipment may be requiring the
replacement of some component parts during the
useful life (such as the spare parts of a plant or walls
of a building). In such circumstances, the entity will
recognize the cost of replacement in the carrying
value of relevant asset if it satisfies the recognition
criteria given in this Standard.
b. The cost of day to day or ongoing repair and
maintenance will be charged to the statement of
profit or loss as expense.
c. If the asset requires an inspection after a specified
interval as per industry laws (such as airline industry)
then the entity will recognize the cost of such
inspection in the carrying value of related asset, if its
economic benefits are for more than one accounting
period.
II. Subsequent Measurement
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o The entity has two options to account for the h. The entity will depreciate the asset even if the
property, plant and equipment at reporting date as a asset is idle, until the asset is fully depreciated.
choice of accounting policy;
a. Cost Model Depreciation Method:
• If an entity chooses to measure the property, plant and
equipment under Cost model at reporting date, then such a. The depreciation method opted by the entity
assets will be measured at Cost less accumulated should be in accordance with the pattern of
depreciation less accumulated impairment loss. economic benefits which are to be consumed by
the entity over its useful life.
b. The entity should review the depreciation
method opted at each reporting date and if
there is any change in the pattern of
Depreciation:
consumption of economic benefits related to
the asset, then the entity should change the
a. It is the systematic allocation of the depreciable
depreciation method in accordance with the
amount of an asset over its related useful life.
new pattern of consumption of economic
b. Each component of property, plant and
benefits and such change will be accounted for
equipment having substantial cost will be
as change in accounting estimate, which will be
depreciated separately.
applied prospectively from that date.
c. The depreciation charge for the accounting
period will be charged to the statement of profit
Useful Life:
or loss as an expense. However, if the asset is
▪ The entity should consider the following
being used in the construction of another asset,
aspects in determination of the useful life
then the depreciation charge will be added to
of the asset:
the cost of such asset under construction or
a. The expected use of the asset including its
being produced, such as the depreciation of the
production capacity or output.
manufacturing plant is added in the cost of
b. Any expected physical wear and tear due to
inventory.
its operational use including its expected
d. The entity should review the useful life and
repair and maintenance plan.
residual value of the asset at each reporting
c. Any expected change in the demand of the
date, if it has changed as of the original estimate
product related to the asset due to
the entity should also revise the useful life and
commercial or technical changes in the
residual value following the change. It will be
market.
accounted for as change in accounting estimate
d. Any legal restriction on the asset in terms
and it will have Prospective Application in
of its use.
accordance with IAS 8.
▪ The useful life of the asset is a matter of
e. The entity will continue to depreciate the asset
judgment according to the expected use of
even if fair value of asset is higher than its
the asset by management.
carrying value. However, entity will not charge
any depreciation if the residual value of the
Impairment:
asset exceeds its carrying value.
Any impairment will be determined as per the
f. The depreciation charge will commence, when
requirements of IAS 36.
the asset is available for operating use or
intended use by the management. Revaluation Model
g. The entity will cease depreciation charge when
either the asset is classified as held for sale • If an entity chooses to measure the property, plant and
under IFRS5 or the asset is de-recognized from equipment under Revaluation model at reporting date,
statement of financial position. then such assets will be measured at Revalued Amount
less
subsequent accumulated depreciation less subsequent
accumulated impairment loss.
The entity should consider the following points in
revaluation:
a. Normally the revalued amount is taken as fair
value of asset which is determined in
accordance with IFRS 13.
b. The frequency of revaluation depends upon the
volatility of the market related to the asset.
c. Revaluation should be performed regularly
enough, so that the carrying value of asset
should not be materially different from its
revalued amount.
d. When the asset is revalued, its depreciation
charge to the date of revaluation will be reset to
zero, as it will be reflected in the revalued
amount
e. Once an asset is revalued, the whole class of
assets to which that asset belongs has to be
revalued to avoid the presentation of assets in
the same category at different cost and values
with different valuation dates.
f. Any increase in the carrying value of the asset
resulting from revaluation will be recognized in
other comprehensive income and will be
accumulated in a separate column of the
statement of changes in equity. However, first, it
will reverse any loss related to the asset up to
the extent it is recognized in the previous years.
g. Any decrease in the carrying value of the asset
resulting from the revaluation will be recognized
in the statement of profit or loss as expense.
However, first, it will offset any revaluation
surplus related to the asset up to the extent it is
recognized in the previous years.
h. If depreciation charge on the basis of revalued
amount exceeds the original depreciation
charge, then the excess will be transferred out
of the revaluation surplus to the retained
earnings as realization of the revaluation
surplus. However, this transfer is optional and if
opted by the entity then it will be applicable
annually till the disposal of related asset.
i. Any remaining revaluation surplus in the
statement of changes in equity will be
transferred as whole to the retained earnings
when the asset is de-recognized from the
statement of financial position.
DISPOSAL CHAPTER 8: PAS 23 - BORROWING COST
CORE PRINCIPLE
➢ An entity will de-recognize the asset from statement of financial
position when: ➢ Borrowing costs that are directly attributable to the acquisition,
a. The asset is disposed of: construction or production of a qualifying asset form part of the
b. No economic benefits are expected either from use or from cost of that asset. Other borrowing costs are recognized as an
sale of asset expense
❖ Any gain or loss on the disposal of asset will be charged to the
statement of profit or loss which will be the difference SCOPE
between carrying value and disposal proceeds
➢ The requirements of this Standard are applicable to deal with the
❖ If the asset is sold on extended credit period or on deferred
accounting treatment of borrowing cost. However, this standard
installment basis, then the disposal proceeds will be taken as
does not apply to the actual or imputed cost related to the equity
cash price equivalent and any excess over the cash price will be
instruments
treated as Interest Income which will be recognized over the
period of credit. BORROWING COST
DISCLOSURES ➢ Interest and other costs that an entity incurs in connection with the
borrowing of funds
➢ For each class of property, plant and equipment, the entity is
required to disclose the following:
This may include:
a. The measurement model
b. Method of depreciation a. Interest expense calculated using the effective interest method as
c. Depreciation rate or useful life described in IAS 39 Financial Instruments: Recognition and
d. A statement reconciling the carrying value at the start of the Measurement;
period to the carrying value at reporting date which includes: b. Finance charges in respect of finance leases recognized in
• Any additions and disposals during the year accordance with IAS 17 Leases
• Any assets acquired as part of a business combination c. Exchange differences arising from foreign currency borrowings to
• Any impairment loss recognized in the current year the extent that they are regarded as an adjustment to interest costs
• Depreciation charge for the year
• Assets classified as held for sale under IFRS 5 QUALIFYING ASSET
• Any exchange differences arising on translation of foreign
➢ An asset that necessarily takes a substantial period of time to get
currency assets.
ready for its intended use or sale
e. Any expense on the asset during the year which was
capitalized as part of the carrying amount of the asset. This may include:
f. Any compensation received from the third parties in respect of
any impairment related to the asset. a. Inventories
g. Any depreciation charges which are recognized as part of cost b. Manufacturing plants
of other assets. c. Power generation facilities
h. Any change in useful life, residual value or depreciation d. Intangible assets
method related to the property, plant and equipment. e. Investment properties.
i. The entity should disclose the date of revaluation, involvement
of the expert and the revaluation surplus in respect of the Remember: Qualifying asset does not include assets which are ready for
assets which are revalued in the current period. sale or use, at the time when these are acquired and the assets which
j. Carrying values of the assets which are idle. are completed in the short interval.
RECOGNITION OF BORROWING COST
➢ An entity shall capitalize borrowing costs that are directly
attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
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 recognize other borrowing costs as an expense in the period in
which it incurs them
• The borrowing cost which relates to a qualifying asset is
called ‘Eligible Borrowing Cost’ as it becomes eligible to be
capitalized in the cost of asset.
• The borrowing cost related to qualifying asset, which
becomes eligible to be capitalized, is that borrowing cost
that can be avoided if that asset is not produced or
constructed.
• The cost of qualifying asset including the capitalized
borrowing cost should not exceed the Recoverable value of
the asset, if exceeded then the asset will be written down
to its recoverable value as per the requirements of IAS 36.
BORROWING COST ELIGIBLE FOR CAPITALIZATION
➢ An entity shall suspend capitalization of borrowing costs during
extended periods in which it suspends active development of a
qualifying asset.
CESSATION OF CAPITALIZATION
➢ An entity shall cease capitalizing borrowing costs when substantially
all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete.
➢ When an entity completes the construction of a qualifying asset in
parts and each part is capable of being used while construction
continues on other parts, the entity shall cease capitalizing
borrowing costs when it completes substantially all the activities
necessary to prepare that part for its intended use or sale.

➢ The measurement of the borrowing cost related to the qualifying DISCLOSURE

asset which is capitalize as part of the cost of such asset, depends
upon:
A. Specific Loan/Fund:
- The loan which is specifically borrowed for the construction or
acquisition of a qualifying asset only is called specific loan. In
such situation the borrowing cost eligible for capitalization will
be calculated as, actual borrowing cost incurred on the asset
less any income from temporary investment of funds during
the period of construction.
B. General Loan/Funds:
- The loan which is borrowed for the qualifying asset and general
use in business both is called general loan. In such situation the
borrowing cost eligible for capitalization will be calculated as,
the expenditure on the qualifying asset during the accounting
period will be multiplied with weighted average borrowing cost
percentage of the entity in respect of the loans which were
outstanding during the accounting period.
➢ An entity shall disclose:
a. the amount of borrowing costs capitalized during the period;
and
b. the capitalization rate used to determine the amount of
borrowing costs eligible for capitalization.
TRANSITIONAL PROVISIONS
➢ When application of this Standard constitutes a change in
accounting policy, an entity shall apply the Standard to borrowing
costs relating to qualifying assets for which the commencement
date for capitalization is on or after the effective date.
➢ However, an entity may designate any date before the effective date
and apply the Standard to borrowing costs relating to all qualifying
assets for which the commencement date for capitalization is on or
after that date.

COMMENCEMENT OF CAPITALIZATION

➢ An entity shall begin capitalizing borrowing costs as part of the cost

of a qualifying asset on the commencement date. The
commencement date for capitalization is the date when the entity
first meets all of the following conditions:
a. it incurs expenditures for the asset;
b. it incurs borrowing costs; and
c. it undertakes activities that are necessary to prepare the asset
for its intended use or sale.

SUSPENSION OF CAPITALIZATION

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CHAPTER 9: PAS 38 – INTANGIBLE ASSET
OBJECTIVE
➢ This Standard deals with the accounting treatment of Intangible
Assets, which are not covered by other accounting standards
including the guidance for the main issues related to the recognition
&measurement of intangible assets, including relevant disclosure
requirements.
SCOPE
➢ This Standard shall be applied in accounting for intangible assets,
except:
a. Intangible assets that are within the scope of another Standard;
b. Financial assets, as defined in IAS 32 Financial Instruments:
Presentation;
c. The recognition and measurement of exploration and
evaluation assets (see IFRS 6 Exploration for and Evaluation of
Mineral Resources); and
d. Expenditure on the development and extraction of, minerals,
oil, natural gas and similar non-regenerative resources.
ACTIVE MARKET
➢ A market in which all the following conditions exist:
a. The items traded in the market are homogeneous;
b. Willing buyers and sellers can normally be found at any time;
and
c. Prices are available to the public.
COST
➢ The amount of cash or cash equivalents paid or the fair value of
other consideration given to acquire an asset at the time of its
acquisition or construction, or, when applicable, the amount
attributed to that asset when initially recognized in accordance with
the specific requirements of other IFRSs, e.g. IFRS 2 Share-based
Payment.
AMMORTIZATION
➢ The systematic allocation of the depreciable amount of an
intangible asset over its useful life.
ASSET
➢ A resource:
a. Controlled by an entity as a result of past events; and
b. From which future economic benefits are expected to flow to
the entity.
CARRYING AMOUNT
➢ The amount at which an asset is recognized in the statement of
financial position after deducting any accumulated amortization and
accumulated impairment losses thereon
DEPRECIABLE AMOUNT
➢ The cost of an asset, or other amount substituted for cost, less its
residual value
USEFUL LIFE
➢ The period over which an asset is expected to be available for use
by an entity; or
➢ The number of production or similar units expected to be obtained
from the asset by an entity.
ENTITY – SPECIFIC VALUE
➢ The present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its
useful life or expects to incur when settling a liability
FAIR VALUE OF AN ASSET
➢ The amount for which that asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.
IMPAIRMENT LOSS
➢ The amount by which the carrying amount of an asset exceeds its
recoverable amount
RESIDUAL VALUE OF AN INTANGIBLE ASSET
➢ The estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition
expected at the end of its useful life.
DEVELOPMENT
➢ The application of research findings or other knowledge to a plan or
design for the production of new or substantially improved
materials, devices, products, processes, systems or services before
the start of commercial production or use.
RESEARCH
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➢ The original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding
INTANGIBLE ASSETS
➢ An identifiable non-monetary asset without physical
substance. MONETARY ASSET
➢ Are money held and assets to be received in fixed or determinable
amounts of money.
IDENTIFIABLE
➢ As per the definition of intangible asset under this standard, an
intangible asset must be identifiable, to be distinguished from the
goodwill, which is covered under IFRS 3. An asset will be identifiable
if it meets anyone of the following:
a. It is separable, i.e. it is capable of being separated from the
business entity and sold, transferred, licensed, rented or
exchanged, either on individual basis or along with the related
contractor
b. It arises from a contractual legal right, irrespective of the fact
whether those rights are transferable or separable from the
business entity.
CONTROL
➢ The definition of intangible asset requires that the intangible asset
must be controlled by the entity, and an entity controls an
intangible asset if it has ability to obtain economic benefits related
to the asset and can restrict others from such benefits. Normally
control arises through a legal contract or when an entity has
absolute right of use of asset. For example:
➢ Market share, customer loyalty and staff technical knowledge may
give rise to future economic benefits. An entity controls those
benefits if, these are protected by having customer contracts, trade
agreements and legal contracts with employees. However, in the
absence of legal contract entity has insufficient control over related
future economic benefits and in such a case these will not qualify to
be recognize as intangible assets
RECOGNITION AND MEASUREMENT
An intangible asset may arise in following ways:
A. Intangible Assets Separately Acquired
• These are individually purchased from the external parties
and these will be recognized, if following criteria is
satisfied:
 a. It should meet the definition of intangible asset and
b. The recognition criteria given in IASB’s framework i.e.
i. The future economic benefits are probable to
flow to the entity and
ii. The cost of the asset is reliably measurable.
• These are initially measured at Cost, which comprises:
a. Purchase Price
b. Less any Trade Discount or Rebate,
c. Plus, any directly related cost which includes
• Sales tax and Import duties (if non-refundable), Legal
charges, Pre-production testing cost (Net expense) and
any other cost which is essential in bringing the asset into
its operating or intended use by the management.
• The capitalization of cost will cease when the asset
becomes available for operating or intended use by the
management.
Note:
I. Following elements of cost will not be added to the cost
of asset rather these will be charged to statement of
profit or loss as an expense:
a. Relocation cost
b. Any general and administrative overheads
c. Initial operating losses
II. If an intangible asset is purchased on extended credit
period or on deferred installment basis, then the cost of
such intangible asset will be its Cash Price Equivalent any
excess paid over the cash price will be treated as Interest
expense which will be recognized over the period of
credit.
B. Intangible Assets acquired as part of Business Combination
• If there is an intangible asset related to subsidiary at the
date of business combination, the acquirer will recognize
such intangible asset in the consolidated financial
statements in accordance with IFRS 3, separately from the
goodwill at Fair Value at the date of business combination,
and it is irrelevant whether that asset has been recognized
in the financial statements of subsidiary such as brand
name, trademarks, customer relationships and market
share.
C. Acquisition by way of Government Grant
• An entity may acquire an intangible asset free of cost, or
for nominal consideration, as a result of government
grant. It may be the case when government transfers to
the entity intangible assets such as airport landing rights,
telecommunication license, or import license.
• The entity will recognize such intangible assets either at
Fair Value or at Nominal Cost including directly
attributable expenditure in accordance with IAS 20.
D. Intangible Asset Acquired in Exchange
• An entity may acquire an intangible asset in exchange for
a non-monetary asset or combination of non-monetary
and monetary assets, then the cost of the intangible asset
acquired in exchange will be determined as follows:
I. If transaction of Exchange has Commercial
II.
Substance:
The transaction of exchange will be deemed to have
commercial substance if:
a. The risk, timing and amount of cash flows related to
the intangible asset acquired are different from the
asset transferred;
b. The exchange has resulted in the change in the entity
specific value of that operational portion of the entity
c. The change in (a) and (b) above is material.
In such circumstances the entity will determine the cost of
the Intangible asset acquired in exchange as:
1. The fair value of asset transferred ± cash,
2. If the fair value of asset transferred is not
determinable, then it will be recognized at the fair
value of asset acquired,
Any gain or loss on the exchange transaction will be
charge to statement of profit or loss.
II. If Transaction of Exchange does not have
Commercial Substance
If the transaction of exchange does not have commercial
substance or the fair value of asset transferred and the
intangible asset acquired both are not determinable, then
the intangible asset acquired will be recognize at the
carrying value of asset transferred, which will result in no
gain or loss on exchange.
E. Internally Generated Intangible Assets:
• These are generated by the entity using its own resources
over the passage of time. These are accounted for as
follows:
I. Internally Generated Goodwill
✓ Internally generated goodwill, brand name, customer loyalty,
market share, labor skills or advance knowledge, mastheads,
trademarks and advertisement costs are not allowed to be
recognized as an intangible asset because:
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a. These are not identifiable as per the
definition of intangible asset i.e. (not
separable from the business) and
b. These do not have cost distinguished
from the regular activities of the
business.
Other Internally Generated Intangible Asset
✓ Other internally generated intangible assets which
are generated by the entity as part of research and
development activities will be accounted for, by
dividing these into following two phases:
A. Research Phase
❖ No intangible asset arising from research (or
from the research phase of an internal
project) shall be recognized. Expenditure on
research (or on the research phase of an
internal project) shall be recognized as an
expense when it is incurred.
The research phase activities may include:
a. Activities undertaken by the entity for the
purpose of obtaining new knowledge;
b. Activities undertaken to find out
alternatives for material, device, product, or
a processes.
B. Development Phase
❖ An intangible asset arising from development
(or from the development phase of an
internal project) shall be recognized if, and
only if, an entity can demonstrate all of the
following:
a. the technical feasibility of completing the
intangible asset so that it will be available
for use or sale.
b. its intention to complete the intangible
asset and use or sell it.
c. its ability to use or sell the intangible asset
d. how the intangible asset will generate
probable future economic benefits. Among
other things, the entity can demonstrate the
existence of a market for the output of the
intangible asset or the intangible asset itself
or, if it is to be used internally, the
usefulness of the intangible asset.
e. the availability of adequate technical,
financial and other resources to complete
the development and to use or sell the
intangible asset.

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 f. its ability to measure reliably the
expenditure attributable to the intangible
asset during its development.
✓ If the cost under development phase does not meet
the above capitalization criteria, it will be charged to
the statement of profit or loss as an expense.
✓ The capitalization of development phase cost will
commence right from the date, when the project
meets the capitalization criteria as above.
COST OF INTERNALLY GENERATED INTANGIBLE ASSET
➢ The sum of expenditure incurred from the date when the intangible
asset first meets the recognition criteria
➢ Comprises all directly attributable costs necessary to create,
produce, and prepare the asset to be capable of operating in the
manner intended by management
RECOGNITION OF EXPENSE
➢ Expenditure on an intangible item shall be recognized as an expense
when it is incurred unless:
a. It forms part of the cost of an intangible asset that meets the
recognition criteria (see paragraphs 18-67); or
b. The item is acquired in a business combination and cannot be
recognized as an intangible asset. If this is the case, it forms
part of the amount recognized as goodwill at the acquisition
date (see IFRS 3).
PAST EXPENSES NOT TO BE RECOGNIZE AS AN ASSET
➢ Expenditure on an intangible item that was initially recognized as an
expense shall not be recognized as part of the cost of an intangible
asset at a later date
MEASUREMENT AFTER RECOGNITION
➢ An entity shall choose either the cost model or the revaluation
model as its accounting policy. If an intangible asset is accounted for
using the revaluation model, all the other assets in its class shall
also be accounted for using the same model, unless there is no
active market for those assets.
A. Cost Model
• After initial recognition, an intangible asset shall be
carried at its cost less any accumulated amortization and
any accumulated impairment losses.
Amortization
a. It is the systematic allocation of the depreciable amount
of an intangible asset over its related useful life.
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b. The amortization charge of the intangible asset for the
accounting period will be charged to the statement of
profit or loss as an expense. However, if the intangible
asset is being used in the construction of another asset,
then the amortization charge will be added to the cost of
such asset under construction or being produced.
c. The residual value of the intangible asset will assume to
be zero unless an active market exists, from which
residual value can be determined or there is purchase
commitment from the third party at the end of its useful
life.
d. The entity will continue to amortize the intangible asset
which has limited useful life, even if the fair value of asset
is higher than its carrying value. However, any
amortization will not be charged if the residual value of
the intangible asset exceeds its carrying value.
e. The amortization charge will commence, when the
intangible asset is available for operating use or intended
use by the management.
f. The entity will cease amortization charge when either, the
intangible asset is classified as held for sale under IFRS 5,
or the intangible asset is de-recognized from the
statement of financial position.
g. The intangible assets having indefinite life will not be
amortized and will be tested for impairment annually as
per IAS 36.
Amortization Method
a. The amortization method should reflect the pattern of
economic benefits from the intangible asset. If the pattern
of economic benefits is not determinable, then use
straight line method.
b. The entity should review the amortization method
selected at each reporting date and if there is any change
in the pattern of consumption of economic benefits
related to the intangible asset, then the entity should
change the amortization method in accordance with the
new pattern of consumption of economic benefits and
such change will be accounted for as change in accounting
estimate, which will be applied prospectively from that
date.
Useful Life
The entity should consider the following aspects in
determination of the useful life of the asset:
a. The expected use of the intangible asset including its
production capacity or output.
b. The product life cycle related to the intangible asset.
c. Any expected change in the demand of the product
related to the intangible asset due to commercial or
technical changes in the market.
d. Any legal restriction on the asset in terms of its use.
e. Future actions of competitors in the market.
f. Any subsequent expense required on the intangible asset
to obtain future economic benefits
▪ An intangible asset will be deemed to have an indefinite
useful life if, based on an analysis of all of the relevant
factors, there is no determinable time period over which
the asset is expected to generate economic benefits for the
entity.
▪ The entity should review the useful life the intangible asset
at each reporting date, if it has changed as of the original
estimate the entity should also revise the useful life
accordingly following the change, it will be accounted for as
change in accounting estimate, and it will have Prospective
Application in accordance with IAS 8.
▪ The useful life of the asset is a matter of judgment,
according to the expected use of the asset by management.
▪ The useful life of the asset which arises from a legal
contract should not exceed its contractual life.
Impairment
▪ Any impairment will be determined as per the
requirements of IAS 36.
B. Revaluation Model
• After initial recognition, an intangible asset shall be
carried at a revalued amount, being its fair value at the
date of the revaluation less any subsequent accumulated
amortization and any subsequent accumulated
impairment losses.
• For the purpose of revaluations under this Standard, fair
value shall be determined by reference to an active
market.
• Revaluations shall be made with such regularity that at
the end of the reporting period the carrying amount of
the asset does not differ materially from its fair value.
RETIREMENTS AND DISPOSAL
➢ An intangible asset shall be derecognized:
a. on disposal; or
b. when no future economic benefits are expected from its use or
disposal.
➢ The gain or loss arising from the de-recognition of an intangible asset
shall be determined as the difference between the net disposal
proceeds, if any, and the carrying amount of the asset. It shall be
recognized in profit or loss when the asset is derecognized (unless
 IAS 17 requires otherwise on a sale and leaseback). Gains shall not
be classified as revenue.

DISCLOSURE

➢ The entity is required to disclose the following in respect of the

intangible assets:
a. Intangible assets having indefinite useful life
b. Useful life of Intangible assets having limited useful life
c. Amortization method used for the intangible assets with
limited useful life
d. Carrying value and accumulated amortization at the start of
the year
e. The line item in the statement of profit or loss, in which
amortization charge is included.
f. A statement reconciling the carrying value at the start of the
period to the carrying value at reporting date which includes:
i. Any additions identifying the intangible assets
separately purchase and internally developed along
with any disposals during the year
ii. Any assets acquired as part of a business combination
iii. Any revaluation increase or decrease or impairment
loss recognized in the current year
iv. Depreciation charge for the year
v. Assets classified as held for sale under IFRS 5
vi. Any exchange differences arising on translation of
foreign currency assets.
• Any change in accounting estimate during the current year
such as change in residual value, useful life or
amortization method
• For intangible assets having indefinite life, the factors
supporting such assessment
• Intangible assets which are acquired by way of
government grant and are recognized at fair value, the
entity will disclose:
g. Initial fair value
h. Carrying value at year end
i. Measurement model at reporting date
i. Intangible assets which are subject to pledge
arrangements
ii. Class of intangible assets which are revalued
iii. Date of revaluation
iv. Carrying value of such intangible assets
v. Carrying value that would have been if such assets
have not been revalued
vi. Amount of expenditure under research phase in the
current year.
vii. Intangible assets which are fully amortized but are still
under use by the entity.

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CHAPTER 10: PAS 40 – INVESTMENT PROPERTY
OBJECTIVE
➢ The objective of this Standard is to prescribe the accounting
treatment for investment property and related disclosure
requirements.
SCOPE
➢ This Standard shall be applied in the recognition, measurement and
disclosure of investment property
➢ This also applies to:
a. The books of lessee, for the accounting treatment of Property
Interest held by lessee.
b. The books of lessor, for the accounting treatment of
Investment Property provided to lessee under operating lease.
➢ This does not apply to:
a. biological assets related to agricultural activity (see IAS 41
Agriculture); and
b. mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
CARRYING AMOUNT
➢ The amount at which an asset is recognized in the statement of
financial position
COST
➢ The amount of cash or cash equivalents paid or the fair value of
other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized in accordance with
the specific requirements of other IFRSs, e.g. IFRS 2 Share-based
Payment.
FAIR VALUE
➢ The amount for which an asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction.
INVESTMENT PROPERTY
➢ Property (land or a building—or part of a building—or both) held
(by the owner or by the lessee under a finance lease) to earn rentals
or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for
administrative purposes; or
b. sale in the ordinary course of business.
Examples of Properties which are treated as Investment Property:
1. The property which is held for Capital Appreciation in long term.
2. The Property which is held currently, for undetermined future use,
i.e. (the owner has not yet decided the future use of property)
3. The property held to be leased out under one or more operating
leases to lessee
4. The property under construction, which will be used as Investment
Property in future.
Examples of Properties which are not treated as Investment Property:
1. The property which is held for sale in the normal course of business
(IAS 2 Inventory),
2. The property being constructed on behalf of third parties (IAS 11
Construction Contracts).
3. The property held for the purpose of use in production, supply of
goods/services, or use in administration i-e. Owner Occupied
Property (IAS 16),
4. The property which is occupied by employees, being provided by
employer as part of remuneration package (whether or not the
employee pays rent)
5. The property which is held to be leased out, under a finance
lease. OWNER-OCCUPIED PROPERTY
➢ Property held (by the owner or by the lessee under a finance lease)
for use in the production or supply of goods or services or for
administrative purposes.
PROPERTY INTEREST
➢ The properly held by lessee under operating lease, and lessee has
the right to:
a. Sublet the property to other parties and
b. Participate in Capital Appreciation in the value of such property.
➢ The property with such rights is called Property Interest
➢ This Standard provides an option for such kind of Property interest,
can be recognized as Investment Property, in the financial
statements of lessee under Fair Value model. This classification
option is applicable upon each Property Interest on property-by-
property basis.
➢ If this classification option is opted for one such Property Interest,
all other Investment Properties have to be accounted for under fair
value model, and such classification option should be included in
the disclosures.
RECOGNITION
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➢ Investment property shall be recognized as an asset when, and only
when:
a. it is probable that the future economic benefits that are
associated with the investment property will flow to the entity;
and
b. the cost of the investment property can be measured
reliably. MEASUREMENT AT RECOGNITION
➢ An investment property shall be measured initially at its cost.
Transaction costs shall be included in the initial measurement.
➢ The initial cost of a property interest held under a lease and
classified as an investment property shall be as prescribed for a
finance lease by paragraph 20 of IAS 17, ie the asset shall be
recognized at the lower of the fair value of the property and the
present value of the minimum lease payments. An equivalent
amount shall be recognized as a liability in accordance with that
same paragraph.
DUAL-PURPOSE PROPERTIES
➢ If a property is being under dual-use i.e. property contains a part of
the property which is held for rental earnings or capital appreciation
and another part which is held for use in the production, supply of
goods/services, or for use in administration. Such property will be
accounted for as:
a. If both portions are separable i.e. (could be sold or leased out
separately under finance lease), then entity should account for
each portion on individual basis under relevant IAS
b. If both portions are not separable i.e. (could not be sold or
leased out separately under finance lease), the property will be
treated as Investment Property only, if an immaterial part of
such property is held for use in the production, supply of
goods/services or for use in administration.
ANCILLARY SERVICES
➢ Investment property should not include Ancillary Services (Meals,
Cleaning, Security, Utilities, and Maintenance services). If in case of
a certain property, an entity provides ancillary services to the
occupants of a property, the entity shall apply the following:
a. The property will be Investment Property, if quantum of the
services is immaterial or insignificant. For example, security or
maintenance services.
b. The property will not be Investment Property, if quantum of
the services is material or significant. For example, owner-
managed hotel. Therefore, such properties will be covered in
IAS 16
INVESTMENT PROPERTY IN CONSOLIDATED FINANCIAL STATEMENTS
The property which is leased to, the Parent Co. by a Subsidiary Co. or vice
versa, will not be treated as Investment Property in the consolidated financial
statements, instead it will be treated as Owner-occupied Property under IAS
16, because the property is under owner-occupied use from the Group
perspective. However, the property will remain Investment Property in the
individual financial statements of the entity who owns it.
INITIAL RECOGNITION
A property will be recognized as Investment Property if it meets the following
criteria:
a. The definition of Investment Property
b. If future economic benefits are probable to flow to the entity
c. Its cost is reliably
measurable. INITIAL MEASUREMENT
The Investment Property is initially measured at Cost including Transaction
Costs. The cost of Investment Property includes:
a. Purchase Price and
b. Any directly related cost such as (professional or legal charges,
property transfer taxes & any other transaction costs)
OTHER POINTS RELATED TO INITIAL MEASUREMENT
• Any other cost which relates to ongoing activities of
Investment property will be charged to Profit &Loss
account as expense.
• If the Investment Property is purchased on extended credit
period, the cost of the property will be cash price
equivalent and any excess over cash price will be treated
as interest expense and will be recognize over the period
of credit.
• If lessee chooses to recognize the Property Interest as
Investment Property as per classification option available
in IAS 40, then the initial cost of such a Property Interest
shall be prescribed, as for finance lease under IAS 17.
Therefore, such a Property Interest will be recognized at
the lower off:
• The Present value of minimum lease payments and.
• Fair value of the Property Interest or the entity will also
recognize a liability with an equivalent amount
SUBSEQUENT RECOGNITION
• Any expenditure upon Investment Property, during the life
of Investment Property will be recognize in the carrying
amount of investment property, if such expense results in
increase in economic benefits of the investment property the following points;
that would obtain otherwise.
• Any other expense to maintain the Investment Property
will be treated as expense in the statement of profit or
loss.
SUBSEQUENT MEASUREMENT
1. The entity has two options to account for the Investment Property
at reporting date;
A. Cost Model
The entity which chooses Cost model to account for its
Investment Property after initial recognition, will measure the
investment Property as per Cost Model rules prescribed in IAS
16 i.e. Cost less Accumulated Depreciation Less Accumulated
impairment loss.
B. Fair Value Model
The entity which chooses Fair Value model to account for its
Investment Property after initial recognition, will measure the
investment Property at Fair Value.
• Under fair vale model, the investment property will
be
measured at fair value on reporting date.
• Any change (increase or decrease) in the fair value of
investment property at reporting date, will be
reported to the statement of profit or loss.
• Investment property under fair value model is not
depreciated.
• Once the entity opts to use the fair value model, it
should be used for all the investment properties,
except the Investment property for which fair value is
not available under specified circumstances.
• The entity which has opted to measure an
investment property at fair value, it will continue to
measure the property at fair value, up to the date of
disposal or until the date of change in use of the
property.
2. Whichever model is chosen; it should be applied for all the
Investment Properties held by the entity.
3. A property interest held by a lessee, which is classified as an
investment property as per classification option available in IAS 40,
will be accounted for using the requirements of fair value model.
4. An entity has the option, that it may choose cost model or the fair
value model for the measurement of all the investment properties
backing liabilities, whose return is directly linked to the fair value of,
or returns from, specified assets and pool of investment properties.
FAIR VALUE DETERMINATION
➢ The fair value of the investment property is determined as per the
requirements of IFRS 13; however, the entity should also consider
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 1. The fair value should be determined as per the current condition
of the investment property, in the current market conditions.
2. In determination of fair value of investment property, the entity
should avoid the double-counting, by not considering the different
items separately, which are the part of investment property, such
items include lifts, air-conditioning, furniture & fixture and integral
parts of a building.
3. If in exceptional circumstances, the fair value of a certain
investment property is not determinable and alternative reliable
measurements (discounted cash flows) are also not available, then
entity should measure such investment property under cost model
till the date of disposal and residual value of such property will
assumed to be zero.
4. If the fair value of an investment property being constructed is not
available, and entity estimates that the fair value of such property
will be determinable upon its completion, then in such
circumstances entity should account for the investment property
being constructed under cost model until
5. Its fair value becomes available or
6. Construction work is

finished TRANSFERS

The transfer of property will take place, if there is change in the use of
property such as:

a. The development of investment property, to be sold in the normal

course of business, will result in transfer of property from IAS 40 to
IAS 2.
b. The use of investment property as owner-occupied property will
result in transfer of property from IAS40 to IAS 16.
c. Cease of use of owner-occupation in a property to be used as
investment property, will result in transfer of property from IAS 16
to IAS 40.
d. If a property is let out under operating lease to other party, which
was held for sale in normal course of business, will result in
transfer of property from IAS 2 to IAS 40.

In all such circumstances the entity will apply the following accounting
treatment:

• If a property is transferred from inventory (IAS 2) to investment

property (IAS 40), it will be measured at fair value, any difference
between the fair value of property and its previous carrying value
under IAS 2 will be reported in the statement of profit or loss on
the date of reclassification. Subsequently, the entity will apply fair
value model under IAS 40.
• If a property is transferred from owner-occupied (IAS 16) to
investment property (IAS 40) which will be measured at fair value,
the entity will apply IAS 16 rules up to the date of reclassification.
However, any difference between the fair value of property and
its
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 carrying value under IAS 16 on the date of reclassification will be f. For the property for which fair value could not be determined
treated as Revaluation Surplus/Loss, which will be accounted for as and the entity has to measure such property under cost model,
revaluation rules under IAS 16. Subsequently, the entity will apply the entity should disclose:
fair value model under IAS 40. i. Nature of the Investment Property
• If an investment property (IAS 40) is transferred to inventory (IAS 2) ii. Reason why the fair value is not determinable
or owner-occupied property (IAS 16), no gain/loss will arise on the g. For the property which has been disposed of the entity should
date of reclassification and carrying value under IAS 40 will become disclose:
deemed cost for subsequent accounting. i. Its carrying amount on disposal date
• When the development of the investment property under ii. Any amount of gain or loss on disposal
construction is completed, which will be measured under fair value
model, any resulting difference between its fair value and carrying
value will be reported to the statement of profit or loss.

DE-RECOGNITION OF INVESTMENT PROPERTY

The investment property will be derecognized from the financial statements,

under following situations:

a. Upon disposal of Investment property or

b. When no economic benefits are available either by use of property
or from its sale
c. However, any gain or loss, resulting from the disposal of investment
property will be charged to statement of profit or loss in the related
period.
d. Any compensation recoverable from any third parties will be
recognized in statement profit or loss, in respect of investment
property which was impaired or lost, in the period in which it
becomes receivable.

DISCLOSURE

1. The entity should disclose the following:

a. The measurement model used by the entity i.e. the cost or fair
value model.
b. The circumstance in which entity has opted the classification
option for property interest.
c. How entity has determined the fair value for investment
property.
d. Any amounts recognized in statement of profit or loss in
respect of:
i. Any rental earnings from investment property
ii. Any operating expense such as repair & maintenance
iii. Any movement in fair value of investment property.
e. For the investment property under cost model, the entity
should disclose:
i. Depreciation Method
ii. Estimate of useful life
iii. Its gross carrying amount
iv. Any amount of impairment loss

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CHAPTER 11: PAS 36 – IMPAIRMENT OF ASSET ➢ the present value of the future cash flows expected to be derived
OBJECTIVE from an asset or cash-generating unit.
CASH-GENERATING UNIT
➢ The objective of this Standard is to prescribe the procedures that an IDENTIFICATION OF IMPAIRMENT LOSS
entity applies to ensure that its assets are carried at no more than ➢ the smallest identifiable group of assets that generates cash inflows
their recoverable amount. An asset is carried at more than its that are largely independent of the cash inflows from other assets An asset or cash generating unit is considered to be impaired when its
recoverable amount if or groups of assets. carrying value exceeds the recoverable value. However, an entity should
its carrying amount exceeds the amount to be recovered through apply the impairment test as follows:
CORPORATE ASSETS
use or sale of the asset. If this is the case, the asset is described as
1. The entity is required to apply impairment test on annual basis for
impaired and the Standard requires the entity to recognize an ➢ assets other than goodwill that contribute to the future cash flows the following assets:
impairment loss. The Standard also specifies when an entity should of both the cash-generating unit under review and other cash- a. Goodwill acquired in a business combination
reverse an impairment loss and prescribes disclosures. generating units. b. Intangible assets having indefinite useful life
SCOPE c. Intangible asset under development
COST OF DISPOSAL
2. For all other non-current assets or a cash generating unit, the entity
➢ This Standard shall be applied in accounting for the impairment of ➢ incremental costs directly attributable to the disposal of an asset or will assess at each reporting date that whether an indication exist
all assets, other than: cash-generating unit, excluding finance costs and income tax for the impairment loss. If such an indication exists, the entity is
a. inventories (see IAS 2 Inventories); expense. required to apply the impairment test as prescribed in this
b. assets arising from construction contracts (see IAS 11 standard. The indications reflecting impairment loss are as follows:
Construction Contracts) DEPRECIABLE AMOUNT i. Internal Indications
c. deferred tax assets (see IAS 12 Income Taxes);
d. assets arising from employee benefits (see IAS 19 Employee ➢ the cost of an asset, or other amount substituted for cost in the Following are the internal indicators which may reflect the
Benefits); financial statements, less its residual value. existence of impairment loss:
e. financial assets that are within the scope of IAS 39 Financial DEPRECIATION (AMORTIZATION) o Significant reduction in the actual cash inflows
Instruments: Recognition and Measurement;
f. investment property that is measured at fair value (see IAS 40 than budgeted
➢ the systematic allocation of the depreciable amount of an asset
Investment Property); o Physical damage or deterioration
over its useful life.
g. biological assets related to agricultural activity that are o Operating Loss or net cash outflows from the
measured at fair value less costs to sell (see IAS 41 Agriculture); FAIR VALUE LESS COST TO SELL asset
h. deferred acquisition costs, and intangible assets, arising from o Frequent repair and maintenance of asset
➢ the amount obtainable from the sale of an asset or cash-generating
an insurer’s contractual rights under insurance contracts within
unit in an arm’s length transaction between knowledgeable, willing ii. External Indications
the scope of IFRS 4 Insurance Contracts; and
parties, less the costs of disposal.
i. non-current assets (or disposal groups) classified as held for
Following are the external indicators which may reflect the
sale in accordance with IFRS 5 IMPAIRMENT LOSS existence of impairment loss:
Non-current Assets Held for Sale and Discontinued Operations.
➢ the amount by which the carrying amount of an asset or a cash- o Sudden fall in market value
ACTIVE MARKET generating unit exceeds its recoverable amount. o Technological, economic or legal changes in the
➢ A market in which all the following conditions exist: market with an adverse effect upon the entity
RECOVERABLE VALUE
a. the items traded within the market are homogeneous; o Increase in the interest rates which will affect the
b. willing buyers and sellers can normally be found at any time; ➢ an asset or a cash-generating unit is the higher of its fair value less discount rate of the entity
and costs to sell and its value in use. o Decrease in demand of the product related to the
c. prices are available to the public. asset
USEFUL LIFE
MEASURING RECOVERABLE AMOUNT
CARRYING AMOUNT a. the period of time over which an asset is expected to be used by
the entity; or The entity will follow the following rules for the determination of recoverable
➢ the amount at which an asset is recognized after deducting any b. the number of production or similar units expected to be obtained value of an asset or a cash generating unit:
accumulated depreciation (amortization) and accumulated from the asset by the entity.
impairment losses thereon. ✓ Normally recoverable value is the higher of value in use or fair value
VALUE IN USE less cost to sell

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 ✓ If either the value in use or fair value less the cost to sell is
determined to be higher than the carrying value, there is no need to
determine the second element as there is no impairment loss.
✓ If the entity is unable to determine the fair value less cost to sell of
an asset because of its specialized nature, then it’s value in use will
be taken as its recoverable value
✓ The recoverable value of the asset which is classified as held for sale
will be its fair value less cost to sell
✓ This standard requires that the recoverable value should be
determined for individual assets. If it becomes impracticable, then it
should be determined for a cash generating unit.
FAIR VALUE LESS COST TO SELL
➢ It is determined as market value of asset less its cost to sell such as
legal charges, stamp duty charges or transaction duties other than
amount which is recognized as liability.
VALUE IN USE
➢ It is present value of estimated future net cash inflows that an
entity would obtain from the continuous use of asset over its useful
life and from its ultimate disposal. The entity should consider the
following aspects in determination of value in use of an asset or a
cash generating unit:
• Value in use is determined by estimating asset’s future cash inflows
and outflows; then multiplying these with an appropriate discount
rate
• The future cash inflows include the estimated cash inflows that an
entity would obtain from continuous use of asset and from its
ultimate disposal proceeds expected at the end of its useful life
• The future cash outflows include the regular or day to day repair and
maintenance of the asset
• In determining the future cash flows, the entity should take into
account the effect of any expected variation in cash flows and
timing of such cash flows
• The effect of passage of time
• The cash flow forecasts prepared by the entity should be
supplemented by the appropriate and realistic assumptions by the
management on the basis of management’s best estimate in the
current circumstances
• The cash flow forecasts prepared should be based on most recent
financial forecast approved by management up to maximum of five
years unless a later period could be justified and then cash flows for
entire life of the asset are determined by extrapolation.
• The entity should consider the expected future cash flows in the
present condition of the asset without taking into account the effect
of:
• Any future reorganization to which entity has not been committed
yet or
• Any planned future improvement, up-grade, or enhancement to the
asset
• The entity should use pre-tax discount rate and pre-tax expected
future cash flows i.e. before taking into account the effect of any
income tax
• For foreign currency cash flows, these will be determined in the
currency in which such cash flows will arise and entity will use
applicable discount rate.
RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS ON INDIVIDUAL
ASSET
The entity will account for the impairment loss related to the individual asset
as follows;
✓ Impairment loss is only when carrying value of asset exceeds its
recoverable value. The excess is treated as impairment loss and in
such circumstances the asset will be written down to its recoverable
value.
✓ The impairment loss on the asset under cost model will be charged
to statement of profit or loss as an expense. However, impairment
loss on the asset under revaluation model will be charged first
against its revaluation surplus if any, to the extent it is available in
the previous periods and any excess impairment loss will be charged
to statement of profit or loss.
✓ After the charge of impairment loss, asset’s depreciation or
amortization charge will be determined on the basis of any
recoverable value less any residual value, over its remaining useful
life
IDENTIFYING A CASH GENERATING UNIT
➢ This standard requires the entity to determine the recoverable
value for an individual asset when there is an indication of
impairment. However, if it becomes impracticable to calculate the
recoverable value of an individual asset then in such circumstances
recoverable value will be determined for the group of assets i.e. the
cash generating unit to which the asset belongs. The recoverable
value of an individual asset may not be determinable in the
following circumstances:
a. When value in use of an asset is not determinable on individual
basis or value in use is materially different from its fair value
less cost to sell
b. When asset is dependent upon other asset to generate
economic benefits
➢ In such circumstances, recoverable value should be determined for
the group of assets i.e. the cash generating unit to which asset
belongs. Cash generating unit is the smallest, identifiable
combination of assets that is capable to generate cash inflows
which
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are significantly independent of the cash flows from other assets or
groups of assets.
DETERMINATION OF CARRYING VALUE OF A CASH GENERATING UNIT
The carrying value of a cash generating unit includes the following:
1) The carrying value of directly related assets in the cash-generating
unit that are inter-dependent to generate future cash inflows,
without taking into account any recognized liability related to the
assets in the cash generating unit, unless the recoverable value of
the cash generating unit is not determinable without consideration
of this liability
2) Share of goodwill, as goodwill does not generate economic benefits
independently and it supports other assets to generate future cash
inflows, therefore, goodwill arising in a business combination at the
date of acquisition, will be allocated to each of the cash generating
units of the acquirer, or group of cash generating units, to which
goodwill is expected to support to generate future economic
benefits using reasonable consistent basis. However, each cash
generating unit or group of cash generating units to which the
goodwill is allocated should:
a) Reflect the smallest level in the entity at which the goodwill is
assessed for internal reporting purposes and
b) Not greater than the operating segment as defined in IFRS 8
3) The entity should also allocate the share of all the corporate assets
which relate to the cash generating unit under review for
impairment as follows:
a) If a portion of the carrying value of a corporate asset can be
allocated on a reasonable and consistent basis to the cash
generating unit, the entity will compare the carrying value of
the cash generating unit, including the allocated share of
carrying value of corporate asset, with its recoverable value
and will recognize any resultant impairment loss as per the
requirements of this standard.
b) If entity does not have any reasonable and consistent basis to
allocate the portion of carrying value of corporate asset to the
cash generating unit, entity will:
i. Compare the carrying value of such cash generating
unit, excluding the corporate asset, with its
recoverable value and will recognize any resultant
impairment loss as per the requirements of this
standard, and then,
ii. The entity is required to determine the smallest
group of cash generating units including the cash
generating unit under review, to which a share of the
carrying value of the corporate asset can be allocated
on reasonable consistent basis and compare the
carrying
 value of such group of cash generating units, asset as per the
including allocated share of the corporate asset with
the recoverable value of the group of cash generating
units and will recognize any resultant impairment loss
as per the requirements of this standard.

IMPAIRMENT LOSS FOR A CASH GENERATING UNIT

If the carrying value exceeds the recoverable value of cash generating unit,
the excess is treated as impairment loss and it will be accounted for in the
following order:

a. First, to the allocated goodwill in the cash generating till it comes to

zero
b. Then any remaining impairment loss to the remaining assets in the
cash generating unit on proportionate basis, using the carrying
values of assets in the cash generating unit

The allocated impairment loss to each asset will be treated as

impairment loss on individual asset and will be recognize as per the
requirements of this standard. However, while allocating impairment
loss, the carrying value of each asset in the cash generating unit should
not decrease than the higher of:

i. Recoverable Value
ii. Zero

REVERSAL OF IMPAIRMENT LOSS

After the impairment loss is recognized, the entity should assess at each year
end date that is there any indication of reversal of impairment loss, if any
indication exists such as increase in demand of the product related to the
asset or decrease in interest rates, in such circumstances the entity will
reverse the impairment loss as follows:

• The impairment loss on individual asset will be reversed but up to a

limit i.e. the carrying value of the asset should not go beyond the
amount that would have been if impairment loss has never been
charged, after the reversal of impairment loss.
• The reversal of impairment loss on individual asset will be charged
to
statement of profit or loss, however reversal of impairment loss of
asset under revaluation model will be accounted for as revaluation
increase as per IAS 16
• After the reversal of impairment loss, the depreciation or
amortization charge will be based on the revised carrying value less
residual value over its remaining useful life.
• The reversal of impairment loss on a cash generating unit will be
allocated to the assets on pro-rata basis of carrying values of assets
in that cash generating unit and the allocated increase in the
carrying value of each asset in the cash generating unit will be
accounted for, as the increase in carrying value of individual

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r nt loss on goodwill is not reversed.
e
q DISCLOSURES
u
o The impairment loss recognized in the current reporting period
i
o The line item in which loss is presented in the statement of profit or
r
loss
e
o The amount of impairment loss recognized, related to asset under
m
e revaluation model in the other comprehensive income statement
n and any reversal related to such assets
t o The amount of reversal of impairment loss recognized in the current
s period and the line item in the statement of profit or loss in which
such reversal is presented
o o The entity is required to disclose the following in respect of
f individual asset, cash generating unit and goodwill for which
impairment loss is recognized in the current period:
t a) The description of individual asset
h b) The description of cash generating unit
i c) The circumstances reflecting impairment loss
s d) Any change in the assets of the cash generating unit as
compared to the previous accounting period
s o How the entity has determined the recoverable value
t o Basis to determine the fair value less cost to sell and value in use
a o The entity’s estimates of future cash flows, related supportable
n assumptions and discount rates for determination of value in use
d o Amount of goodwill allocated to the cash generating unit
a o Description of the assets forming cash generating unit
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CHAPTER 12: PFRS 5 – NONCURRENT ASSET HELD FOR SALE HIGH PROBABLE been classified as held for sale or as held for distribution to owners,
OBJECTIVE and
Criteria: b. its recoverable amount at the date of the subsequent decision not
i. Specifies the accounting treatment for assets (or disposal groups) to sell or distribute
held for sale a. Appropriate level of management must be committed to a plan to
ii. Sets the presentation and disclosure requirements for discontinued sell the asset An entity reclassifies an asset (or disposal group) directly from being held for
operations b. An active program to find a buyer must be initiated sale to being held for distribution to owners, or directly from being held for
c. The asset must be actively marketed for sale at a price that is distribution to owners to being held for sale, then change in classification is
SCOPE reasonable to its current fair value considered a continuation of the original plan of disposal. The entity:
d. The sale must be completed within one year from the date of
A. The classification and specification requirements of PFRS 5 will classification a. shall not follow the guidance when classification ceases to account
apply to all recognized non-current assets and to all disposal groups e. Significant changes to be made to the plan should be for this change. The entity shall apply the classification,
of an entity presentation and measurement requirements in this IFRS that are
B. The measurement requirements shall apply to all recognized non- unlikely MEASUREMENT applicable to the new method of disposal.
current assets and to all disposal groups b. shall measure the non-current asset (or disposal group) in terms of
• An entity shall measure a non-current asset (or disposal group)
EXCEPT: the requirement of this Standard and recognize any reduction or
classifies as held for sale at the lower of its carrying amount and fair
increase in the fair value less costs to sell/costs to distribute of the
value less costs to sell
1. Deferred tax assets (PAS 12 Income taxes) non-current asset (or disposal group)
• An entity shall measure a non-current asset (or disposal group)
2. Assets arising from employee benefits (PAS 19 Employee Benefits) c. shall not change the date of classification. This does not preclude an
classifies as held for distribution to owners at the lower of its
3. Financial assets within the scope of PFRS 9 Financial Instruments extension of the period required to complete a sale or a distribution
carrying amount and fair value less cost to distribute
4. Non-current assets that are accounted for in accordance with that to owners if the conditions are met for a sale beyond one year.
fair value model in PAS 40 Investment Property RECOGNITION
5. Non-current assets that are measured at fair value less costs to sell PRESENTATION
in accordance with PAS 41 Agriculture • An entity shall recognize an impairment loss for any initial or
➢ PFRS 5 provides that non-current assets classified as held-for-sale
6. Groups of contracts within the scope of PFRS 17 Insurance subsequent write-down of the asset (or disposal group) to fair value
and the assets of disposal group classified as held-for-sale must be
less costs to sell, to the extent that it has not been recognized in
Contracts EFFECTIVE DATE presented separately from other assets in the statement of financial
accordance with IAS 36 Impairment of Assets.
position. The liabilities of a disposal group classified as held-for-sale
• An entity shall recognize a gain for any subsequent increase in fair
➢ An entity shall apply this for annual periods beginning on or after 1 are also presented separately from other liabilities in the statement
value less costs to sell of an asset, but not in excess of the
January 2005. Earlier application is encouraged of financial position.
cumulative impairment loss that has been recognized either in
DEFINED TERMS accordance with this IFRS or previously in accordance with IAS 36 DISCLOSURE
Impairment of Assets.
1. Discontinued Operation • An entity shall not depreciate (or amortize) a non-current asset An entity shall disclose the following information in the notes in the period in
- a component of an entity that has been disposed of or is while which a non-current asset (or disposal group) has been either classified as
classified as held for sale, and: it is classified as held for sale or while it is part of a disposal group held for sale of sold:
o Represents a separate major line of business or classified as held for sale. Interest and other expenses attributable
to the liabilities of a disposal group classified as held for sale shall 1. A description of the non-current asset (or disposal group)
geographical area of operations
continue to be recognized 2. A description of the facts and circumstances of the sale, or leading
o Is part of a plan to dispose of, or
to expected disposal, and the expected manner and timing of that
o Is a subsidiary acquired solely with a view to resale
CHANGES TO A PLAN OF SALE OR TO A PLAN OF DISTRIBUTION TO OWNERS disposal
2. Disposal Group 3. The gain or loss recognized in accordance with paragraphs 20-22 of
o A group of assets (and liabilities directly associated with The entity shall measure a non-current asset (or disposal group) that ceases PFRS 5 and, if not presented separately in the statement of
those assets) to be disposed of, by sale or otherwise to be classified as held for sale or as held for distribution to owner (or ceases comprehensive income, the caption in the statement of
together as a group in a single transaction to be included in a disposal group classified as held for sale or as held for comprehensive income that includes that gain or loss;
distribution to owners) at the lower of: 4. If applicable, the reportable segment in which the non-current asset
(or disposal group) is presented in accordance with PFRS 8
a. its carrying amount before the asset (or disposal group) was
Operating Segments
classified as held for sale or as held for distribution to owners,
adjusted for any depreciation, amortization or revaluations that
would have been recognized had the asset (or disposal group) not

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Downloaded by Jemina Poche (minapch03@gmail.com)
CHAPTER 13: PAS 41 – AGRICULTURE Set of Criteria: - is the detachment of produce from a biological asset or the
OBJECTIVE cessation of a biological asset’s life processes
1. Capability to change – animals and plants must be alive and
➢ To prescribe the accounting treatment and disclosures related to capable of biological transformation CLASSIFICATION
agricultural activity 2. Management of change – the management facilitates the
biological transformation, thus necessitating human I. A non-current asset (or disposal group) as held for sale if its
SCOPE carrying amount will be recovered principally through a sale
intervention by enhancing, or the least stabilizing conditions
➢ Applied to account for the following when they relate to agricultural for the process to take place transaction rather than through continuing use
activity: 3. Measurement of change- there must a basis for the II. A non-current asset (or disposal group) is classified as held for
1. Biological assets, except for bearer plants; measurement of change either in quantity or quality distribution to owners when the entity is committed to
2. Agricultural produce at the point of harvest; and 2. Agricultural Produce distribute the asset (or disposal group) to the owners
3. Conditional or unconditional grants relating to a biological - It is the harvested produce of the entity’s biological assets
Note: An entity shall not classify as held for sale a non-current asset (or
asset measured at its fair value less costs to sell. 3. Bearer Plant
disposal group) that is to be abandoned
- A living plant that:
EXCEPT: o is used in the production or supply of agricultural produce RECOGNITION
a. Land related to agricultural activity o is expected to bear produce for more than one period
o has a remote likelihood of being sold as agricultural ➢ An entity shall recognize a biological asset or agricultural produce
b. Bearer plants related to agricultural activity when and only when:
c. Government grants related to bearer plants produce, except for incidental scrap sales
a. the entity controls the asset as a result of past events
d. Intangible assets related to agricultural activity b. it is probable that future economic benefits associated with the
Note:
e. Right of use assets arising from a lease of land related to asset will flow to the entity
agricultural activity Bearer Plants related to agricultural activity are covered under c. the fair value or cost of the asset can be measured
f. Agricultural produced after the point of PAS 16
reliably MEASUREMENT
harvest EFFECTIVE DATE Produce growing on bearer plants is within PAS 41
A. Biological Asset
➢ An entity shall apply this for annual periods beginning on or after 1 4. Biological Asset o shall be measured on initial recognition and at the end of
January 2005. Earlier application is encouraged - A living plant or animal each reporting period at its fair value less cost to sell,
5. Biological Transformation except where the fair value cannot be measured reliably
DEFINED TERMS - comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes B. Agricultural Asset / Produce
1. Agricultural Activity in a biological asset. o Agricultural produce harvested from an entity's biological
- It is the management by an entity of the biological assets shall be measured at its fair value less costs to sell
transformation and harvest of biological assets for sale or for Two possible outcomes: at the point of harvest. Such measurement is the cost at
conversion into agricultural produce or into additional that date when applying IAS 2 or another applicable
A. Assets change through growth, degeneration and procreation
biological assets standards
a. Growth - increase in quantity or improvement of the
Example: quality of an animal or plant SUBSEQUENT GAINS OR LOSSES
b. Degeneration - decrease in quantity or deterioration in
a. Raising livestock quality of an animal or plant I. Biological Asset
b. Forestry c. Procreation - creation of additional living animals or plants a. A gain or loss arising on initial recognition of a biological
c. Annual or perennial cropping B. Production of Agricultural Produce asset at fair value less costs to sell and from a change in
d. Cultivating orchards and plantations 6. Cost to Sell fair value less costs to sell of a biological asset shall be
e. Floriculture - are the incremental cost directly attributable to the disposal of included in profit or loss for the period in which it arises
f. Aquaculture an asset, excluding finance cost income taxes. b. A loss may arise on initial recognition of a biological asset,
7. Group of Biological Asset because costs to sell are deducted in determining fair
- is an aggregation of similar living animals or plants value less costs to sell of a biological asset. A gain may
8. Harvest arise on initial recognition of a biological asset, such when
a calf is born
II. Agricultural Produce

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 a. A gain or loss arising on initial recognition of agricultural
produce at fair value less costs to sell shall be included in
profit or loss for the period in which it arises
b. A gain or loss may arise on initial recognition of
agricultural produce as a result of harvesting

ADDITIONAL NOTES

I. Instances wherein the cost may approximate the fair value

1. Little biological transformation has taken place since initial
cost incurrence
2. The impact of the biological transformation on price is not
expected to be material
II. Unconditional Government grant under Pas 41
o Recognized when and only when, the government
grant becomes receivable
III. Conditional Government grant under Pas 41
o Recognized when and only when, the conditions
attaching to the government grant are met

DISCLOSURE

Requirements:

• Aggregate gain or loss from the initial recognition of biological

assets and agricultural produce and the change in fair value less
costs to sell during the period
• Description of an entity's biological assets, by broad group
• Description of the nature of an entity's activities with each group of
biological assets and non-financial measures or estimates of
physical quantities of output during the period and assets on hand
at the end of the period
• Information about biological assets whose title is restricted or that
are pledged as security
• Commitments for development or acquisition of biological assets
• Financial risk management strategies
• reconciliation of changes in the carrying amount of biological assets,
showing separately changes in value, purchases, sales, harvesting,
business combinations, and foreign exchange differences

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CHAPTER 14: PFRS 9 – FINANCIAL INSTRUMENTS
OBJECTIVE
➢ To establish principles for the financial reporting of financial assets
and financial liabilities that will present relevant and useful
information to users of financial statements for their assessment of
the amounts, timing and uncertainty of an entity’s future cash
flows.
Navigating through PFRS 9
SCOPE
This Standard shall be applied by all entities to all types of financial
instruments except:
a. Those interests in subsidiaries, associates and joint ventures that are
accounted for in accordance with IFRS 10, IAS 27 or IAS 28.
However, entities shall apply this Standard to derivatives on an interest
in a subsidiary, associate or joint venture unless the derivative meets
the definition of an equity instrument of the entity in IAS 32 Financial
Instruments: Presentation
b. rights and obligations under leases to which IFRS 16 Leases applies.
However:
(i) finance lease receivables (i.e. net investments in finance leases) and
operating lease receivables recognized by a lessor are subject to the
derecognition and impairment requirements of this Standard;
(ii) lease liabilities recognized by a lessee are subject to the
derecognition requirements of this Standard and derivatives that are
embedded in leases are subject to the embedded derivatives
requirements of this Standard.
c. employers’ rights and obligations under employee benefit plans, to
which IAS 19 applies.
d. financial instruments issued by the entity that meet the definition of an
equity instrument.
However, the holder of such equity instruments shall apply this
Standard to those instruments, unless they meet the exception in (a).
e. rights and obligations arising under:
(i) an insurance contract as defined in IFRS 4 Insurance Contracts,
other than an issuer’s rights and obligations arising under an
insurance contract that meets the definition of a financial guarantee
contract, or
(ii) a contract that is within the scope of IFRS 4 because it contains a
discretionary participation feature. However, this Standard applies to
a derivative that is embedded in a contract within the scope of IFRS 4
if the derivative is not itself a contract within the scope of IFRS 4.
Moreover, if an issuer of financial guarantee contracts has asserted explicitly that it regards such contracts as insurance contracts
previously and has used accounting that is applicable to insurance contracts, the
issuer may elect to apply either this Standard or IFRS 4 to such financial
guarantee contracts. The issuer may make that election contract by
contract, but the election for each contract is irrevocable.
f. any forward contract between an acquirer and a selling shareholder to
buy or sell an acquire that will result in a business combination within
the scope of IFRS 3 Business Combinations at a future acquisition date
g. loan commitments
The following loan commitments are within the scope of this standard:
(i) loan commitments that the entity designates as financial liabilities at
fair value through profit or loss. An entity that has a past practice of
selling the assets resulting from its loan commitments shortly after
origination shall apply this Standard to all its loan commitments in the
same class;
(ii) loan commitments that can be settled net in cash or by delivering or
issuing another financial instrument. These loan commitments are
derivatives. A loan commitment is not regarded as settled net merely
because the loan is paid out in instalments (for example, a mortgage
construction loan that is paid out in instalments in line with the progress
of construction); and
(iii) commitments to provide a loan at a below-market interest rate.
h. financial instruments, contracts and obligations under share-based
payment transactions to which IFRS 2 Share-based Payment applies,
except for those contracts to buy or sell a non-financial item that can be
settled net in cash or another financial instrument, or by exchanging
financial instruments, as if the contracts were financial instruments:
(i) and are not entered into and continue to be held for the purpose of
the receipt or delivery of a non-financial item in accordance with the
entity’s expected purchase, sale or usage requirements;
(ii) may be irrevocably designated as measured at fair value through
profit or loss. This designation is available only at inception of the
contract and only if it eliminates or significantly reduces a recognition
inconsistency (sometimes referred to as an ‘accounting mismatch’) that
would otherwise arise from not recognizing that contract. This Standard
shall be applied to those contracts that an entity designates as measured
at fair value through profit or loss.
i. rights to payments to reimburse the entity for expenditure that it is
required to make to settle a liability that it recognizes as a provision in
accordance with IAS 37 or for which, in an earlier period, it recognized a
provision in accordance with IAS 37.
j. rights and obligations within the scope of IFRS 15 Revenue from
Contracts with Customers that are financial instruments, except for those
that IFRS 15 specifies are accounted for in accordance with this Standard.
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EFFECTIVE DATE

➢ An entity shall apply this Standard for annual periods beginning on

or after 1 January 2018. Earlier application is permitted. If an entity
elects to apply this Standard early, it must disclose that fact and
apply all of the requirements in this Standard at the same time

DEFINED TERMS

• Accounts receivable
- amounts due from customers for goods or services which have
been provided in the normal course of business operations.
• Amortized cost of financial asset or financial liability
- is the amount at which the asset or liability was measured
upon initial recognition, minus principal repayments, plus or
minus the cumulative amortization of any premium or discount,
and minus any write-down for impairment or uncollectibility.
• Available-for-sale financial assets
- are those non-derivative financial assets which are designated
as available-for-sale or are not classified as:
o Loans and receivables;
o Held-to-maturity investments; or
o Financial assets at fair value through profit or loss.
Note: IFRS 9 does not contain the classification for available-for-sale
financial assets.
• Carrying amount
- is the amount at which an asset is presented in the statement
of financial position.
• Cash
- refers to cash on hand and demand deposits with banks or
other financial institutions.
• Cash equivalents
- are short-term, highly liquid investments that are readily
convertible to known amounts of cash which are subject to an
insignificant risk of changes in value.
• Compound instrument
- is an issued single financial instrument that contains both
liability and equity (e.g. a convertible loan). Under IAS 32
principles, such instruments are split accounted.
• Control
- is the ability to direct the strategic and financial and operating
policies of an entity so as to obtain benefits from its activities.
• Credit risk
- is the risk that a loss may occur from the failure of one party to
a financial instrument to discharge an obligation according to
the terms of a contract.

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• Derecognition
- is the removal of a previously recognized financial asset or
liability from an entity’s statement of financial position.
• Derivative
- is a financial instrument or other contract with all three of the
following features:
o Its value changes in response to changes in a specified
interest rate, security price, commodity price, foreign
exchange rate, index of prices or rates, a credit rating or
credit index, or other variable, provided in the case of a
non-financial variable that the variable is not specific to a
party to the contract.
o It requires little or no initial net investment relative to the
other types of contracts that have a similar response to
changes in market conditions.
o It is settled at a future date.
• Effective interest method
- is a method of calculating the amortized cost of a financial
asset or a financial liability (or group of financial instruments)
and of allocating the interest income or expense over the
relevant period.
• Effective interest rate
- is the rate that exactly discounts estimated future cash flow to
the net carrying amount of the financial instrument through
the expected life of the instrument (or a shorter period, when
appropriate). In calculating the effective rate, the entity should
estimate future cash flows after considering all of the
contractual terms of the financial instrument but without
considering future credit losses. Fees, points paid or received
between parties to the contract, transaction costs and other
premiums and discounts are also included.
• Embedded derivative
- is a component of a hybrid (combined) financial instrument
that also includes a non-derivative host contract with the effect
that some of the cash flows of the combined instrument vary
in a way similar to a standalone derivative.
• Equity instrument
- is any contract that evidences a residual interest in the assets
of an entity after deducting all its liabilities.
• Fair value
- is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable and willing parties in
an arm’s-length transaction.
• Financial instrument
- is any contract which gives rise to both a financial asset of one
entity and a financial liability or equity instrument of another
entity.
• Financial asset is any asset that is one of the following:
• Financial liability is any liability which meets either of the following
criteria:
• Hedging
- involves designating one or more hedging instruments such
that the change in fair value or cash flows of the hedging
instrument is an offset, in whole or part, to the change in fair
value or cash flows of the hedged item. The objective is to
ensure that the
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gain or loss on the hedging instrument is recognized in profit or
loss in the same period that the hedged item affects profit or
loss.
• Hedging instrument for hedge accounting purposes
- is a designated derivative or (for a hedge of the risk of changes
in foreign currency exchange rates only) a designated non-
derivative financial asset or non-derivative financial liability
whose fair value or cash flows are expected to offset changes
in the fair value or cash flows of a designated hedged item.
• Held-to-maturity investments
- are non-derivative financial assets with fixed or determinable
payments and fixed maturities that the entity has the positive
intent and ability to hold to maturity.
• Liquidity risk
- is the risk that an entity may encounter difficulty in meeting
obligations associated with financial liabilities.
• Loans and receivables
- are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market, other than:
o those at fair value through profit or loss;
o those designated as available-for-sale; and
o those which the holder may not recover substantially all
of its initial investment.
• Market risk
- is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices.
There are three types of market risk:
o currency risk;
o interest rate risk; and
o other price risk.
• Market value
- is the amount obtainable from a sale, or payable on
acquisition, of a financial instrument in an active market.
• Other price risk
- is the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices (other than
those arising from interest rate risk or currency risk), whether
those changes are caused by factors specific to the individual
financial instrument or its issuer, or factors affecting all similar
financial instruments traded in the market.
• Transaction costs
- are the incremental costs directly attributable to the
acquisition or disposal of a financial asset or liability.
INITIAL RECOGNITION
 ➢ An entity shall recognize a financial asset or a financial liability in its
statement of financial position when, and only when, the entity
becomes party to the contractual provisions of the instrument
INITIAL MEASUREMENT
➢ Except for trade receivables which do not contain a significant
financing component, at initial recognition, an entity shall measure
a financial asset or financial liability at its fair value plus or minus, in
the case of a financial asset or financial liability not at fair value
through profit or loss, transaction costs that are directly attributable
to the acquisition or issue of the financial asset or financial liability
FINANCIAL ASSETS
CLASSIFICATION
A financial asset shall be measured at fair value through profit or loss unless it
is measured at amortized cost or at fair value through other comprehensive
income. However, an entity may make an irrevocable election at initial
recognition for particular investments in equity instruments that would
otherwise be measured at fair value through profit or loss to present
subsequent changes in fair value in other comprehensive income.
SUBSEQUENT MEASUREMENT
After initial recognition, an entity shall measure a financial asset at:
a. amortized cost;
b. fair value through other comprehensive income; or
c. fair value through profit or loss.
An entity shall apply the impairment requirements to financial assets that are
measured at amortized cost and to financial assets that are measured at fair
value through other comprehensive income.
DERECOGNITION
(a) Derecognition requirements are applied to a part of a financial asset (or a
part of a group of similar financial assets) if, and only if, the part being
considered for derecognition meets one of the following three conditions.
i. The part comprises only specifically identified cash flows from a
financial asset (or a group of similar financial assets).
ii. The part comprises only a fully proportionate (pro rata) share of the
cash flows from a financial asset (or a group of similar financial
assets).
iii. The part comprises only a fully proportionate (pro rata) share of
specifically identified cash flows from a financial asset (or a group of
similar financial assets).
(b) In all other cases, derecognition requirements are applied to the financial
asset in its entirety (or to the group of similar financial assets in their
entirety).
In the derecognition requirements, the term ‘financial asset’ refers to either a
part of a financial asset (or a part of a group of similar financial assets) as
identified in (a) above or, otherwise, a financial asset (or a group of similar
financial assets) in its entirety.
An entity shall derecognise a financial asset when, and only when:
a. the contractual rights to the cash flows from the financial asset
expire, or
b. it transfers the financial asset and the transfer qualifies for
derecognition.
TRANSFER
An entity transfers a financial asset if, and only if, it either:
1. transfers the contractual rights to receive the cash flows of the
financial asset, or
2. retains the contractual rights to receive the cash flows of the
financial asset, but assumes a contractual obligation to pay the cash
flows to one or more recipients in an arrangement that meets all of
the following conditions:
a. The entity has no obligation to pay amounts to the
eventual recipients unless it collects equivalent amounts
from the original asset. Short-term advances by the entity
with the right of full recovery of the amount lent plus
accrued interest at market rates do not violate this
condition.
b. The entity is prohibited by the terms of the transfer
contract from selling or pledging the original asset other
than as security to the eventual recipients for the
obligation to pay them cash flows.
c. The entity has an obligation to remit any cash flows it
collects on behalf of the eventual recipients without
material delay. In addition, the entity is not entitled to
reinvest such cash flows, except for investments in cash or
cash equivalents (as defined in IAS 7 Statement of Cash
Flows) during the short settlement period from the
collection date to the date of required remittance to the
eventual recipients, and interest earned on such
investments is passed to the eventual recipients.
✓ When an entity transfers a financial asset, it shall evaluate the extent to
which it retains the risks and rewards of ownership of the financial asset.
✓ If an entity transfers a financial asset in a transfer that qualifies for
derecognition in its entirety and retains the right to service, the financial
asset for a fee
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✓ If a transfer does not result in derecognition because the entity has
retained substantially all the risks and rewards of ownership of the
transferred asset, the entity shall continue to recognize the transferred
asset in its entirety and shall recognize a financial liability for the
consideration received. In subsequent periods, the entity shall recognize
any income on the transferred asset and any expense incurred on the
financial liability.
✓ If an entity neither transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset, and retains control of the
transferred asset, the entity continues to recognize the transferred asset
to the extent of its continuing involvement. The extent of the entity’s
continuing involvement in the transferred asset is the extent to which it is
exposed to changes in the value of the transferred asset.
✓ When an entity continues to recognize an asset to the extent of its
continuing involvement, the entity also recognizes an associated liability.
Despite the other measurement requirements in this Standard, the
transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the entity has retained.
RECLASSIFICATION
✓ If an entity reclassifies financial assets, it shall apply the reclassification
prospectively from the reclassification date. The entity shall not restate
any previously recognized gains, losses (including impairment gains or
losses) or interest.
✓ If an entity reclassifies a financial asset out of the amortized cost
measurement category and into the fair value through profit or loss
measurement category, its fair value is measured at the reclassification
date. Any gain or loss arising from a difference between the previous
amortized cost of the financial asset and fair value is recognized in profit
or loss.
✓ If an entity reclassifies a financial asset out of the fair value through profit
or loss measurement category and into the amortized cost measurement
category, its fair value at the reclassification date becomes its new gross
carrying amount.
✓ If an entity reclassifies a financial asset out of the amortized cost
measurement category and into the fair value through other
comprehensive income measurement category, its fair value is measured
at the reclassification date. Any gain or loss arising from a difference
between the previous amortized cost of the financial asset and fair value
is recognized in other comprehensive income. The effective interest rate
and the measurement of expected credit losses are not adjusted as a
result of the reclassification.
✓ If an entity reclassifies a financial asset out of the fair value through other
comprehensive income measurement category and into the amortized
cost measurement category, the financial asset is reclassified at its fair
value at the reclassification date.
✓ However, the cumulative gain or loss previously recognized in other
comprehensive income is removed from equity and adjusted against the
 fair value of the financial asset at the reclassification date. As a result, the
financial asset is measured at the reclassification date as if it had always
been measured at amortized cost. This adjustment affects other
comprehensive income but does not affect profit or loss and therefore is
not a reclassification adjustment.
✓ If an entity reclassifies a financial asset out of the fair value through profit
or loss measurement category and into the fair value through other
comprehensive income measurement category, the financial asset
continues to be measured at fair value.
✓ If an entity reclassifies a financial asset out of the fair value through other
comprehensive income measurement category and into the fair value
through profit or loss measurement category, the financial asset
continues to be measured at fair value. The cumulative gain or loss
previously recognized in other comprehensive income is reclassified from
equity to profit or loss as a reclassification adjustment at the
reclassification date.
FINANCIAL LIABILITIES
CLASSIFICATION
An entity shall classify all financial liabilities as subsequently measured at
amortized cost, except for:
(a) financial liabilities at fair value through profit or loss. Such liabilities,
including derivatives that are liabilities, shall be subsequently measured at fair
value.
(b) financial liabilities that arise when a transfer of a financial asset does not
qualify for derecognition or when the continuing involvement approach
applies.
(c) financial guarantee contracts. After initial recognition, an issuer of such a
contract shall (unless (a) or (b) applies) subsequently measure it at the higher
of:
(i) the amount of the loss allowance (impairment) and
(ii) the amount initially recognized less, when appropriate, the
cumulative amount of income recognized in accordance with the
principles of IFRS 15 Revenue from Contracts with Customers.
(d) commitments to provide a loan at a below-market interest rate. An issuer
of such a commitment shall (unless (a) applies) subsequently measure it at the
higher of:
(i) the amount of the loss allowance (impairment) and
(ii) the amount initially recognized less, when appropriate, the
cumulative amount of income recognized in accordance with the
principles of IFRS 15 Revenue from Contracts with Customers.
(e) contingent consideration recognized by an acquirer in a business
combination to which IFRS 3 Business Combinations applies. Such contingent consideration shall subsequently be measured at fair value with changes
recognized in profit or loss.
SUBSEQUENT MEASUREMENT
An entity may, at initial recognition, irrevocably designate a financial liability
as measured at fair value through profit or loss (when a contract contains one
or more embedded derivatives and the host is not an asset within the scope
of this Standard) or when doing so results in more relevant information,
because either:
(a) it eliminates or significantly reduces a measurement or recognition
inconsistency (sometimes referred to as ‘an accounting mismatch’) that would
otherwise arise from measuring assets or liabilities or recognizing the gains
and losses on them on different bases; or
(b) a group of financial liabilities or financial assets and financial liabilities is
managed, and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy, and
information about the group is provided internally on that basis to the entity’s
key management personnel.
DERECOGNITION
✓ An entity shall remove a financial liability (or a part of a financial liability)
from its statement of financial position when, and only when, it is
extinguished—i.e. when the obligation specified in the contract is
discharged or cancelled or expires.
✓ An exchange between an existing borrower and lender of debt instruments
with substantially different terms shall be accounted for as an
extinguishment of the original financial liability and the recognition of a
new financial liability. Similarly, a substantial modification of the terms of
an existing financial liability or a part of it (whether or not attributable to
the financial difficulty of the debtor) shall be accounted for as an
extinguishment of the original financial liability and the recognition of a
new financial liability.
✓ The difference between the carrying amount of a financial liability (or part
of a financial liability) extinguished or transferred to another party and the
consideration paid, including any non-cash assets transferred or liabilities
assumed, shall be recognized in profit or loss.
RECLASSIFICATION
An entity shall not reclassify any financial
liability. GAINS AND LOSSES
• A gain or loss on a financial asset or financial liability that is measured at fair
value shall be recognized in profit or loss unless:
(a) it is part of a hedging relationship;
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 (b) it is an investment in an equity instrument and the entity has elected
to present gains and losses on that investment in other comprehensive
income;

(c) it is a financial liability designated as at fair value through profit or loss

and the entity is required to present the effects of changes in the liability’s
credit risk in other comprehensive income; or

(d) it is a financial asset measured at fair value through other

comprehensive income.

•A gain or loss on a financial asset that is measured at amortized cost and is

not part of a hedging relationship shall be recognized in profit or loss
when the financial asset is derecognized, reclassified through the
amortization process or in order to recognize impairment gains or losses.
•A gain or loss on a financial liability that is measured at amortized cost and is
not part of a hedging relationship shall be recognized in profit or loss
when the financial liability is derecognized and through the amortization
process.

HEDGING ACCOUNTING

OBJECTIVE & SCOPE

➢ to represent, in the financial statements, the effect of an entity’s

risk management activities that use financial instruments to
manage exposures arising from particular risks that could affect
profit or loss (or other comprehensive income, in the case of
investments in equity instruments for which an entity has elected
to present changes in fair value in other comprehensive income).
This approach aims to convey the context of hedging instruments
for which hedge accounting is applied in order to allow insight into
their purpose and effect.

CRITERIA

A hedging relationship qualifies for hedge accounting only if all of the

following criteria are met:

(a) the hedging relationship consists only of eligible hedging instruments and
eligible hedged items.

(b) at the inception of the hedging relationship there is formal designation

and documentation of the hedging relationship and the entity’s risk
management objective and strategy for undertaking the hedge. That
documentation shall include identification of the hedging instrument, the
hedged item, the nature of the risk being hedged and how the entity will
assess whether the hedging relationship meets the hedge effectiveness
requirements (including its analysis of the sources of hedge ineffectiveness
and how it determines the hedge ratio).

(c) the hedging relationship meets all of the following hedge effectiveness
requirements:

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 (i) there is an economic relationship between the hedged item and
the hedging instrument;
(ii) the effect of credit risk does not dominate the value changes
that result from that economic relationship; and
(iii) the hedge ratio of the hedging relationship is the same as that
resulting from the quantity of the hedged item that the entity
actually hedges and the quantity of the hedging instrument that the
entity actually uses to hedge that quantity of hedged item.
However, that designation shall not reflect an imbalance between
the weightings of the hedged item and the hedging instrument that
would create hedge ineffectiveness (irrespective of whether
recognized or not) that could result in an accounting outcome that
would be inconsistent with the purpose of hedge accounting.
HEDGE ITEM
• A hedged item can be a recognized asset or liability, an
unrecognized firm commitment, a forecast transaction or a net
investment in a foreign operation. The hedged item can be:
(a) a single item; or
(b) a group of items.
• A hedged item can also be a component of such an item or group of
items. The hedged item must be reliably measurable.
• If a hedged item is a forecast transaction (or a component thereof),
that transaction must be highly probable.
HEDGING RELATIONSHIPS
There are three types of hedging relationships:
(a) fair value hedge: a hedge of the exposure to changes in fair value of a
recognized asset or liability or an unrecognized firm commitment, or a
component of any such item, that is attributable to a particular risk and could
affect profit or loss.
(b) cash flow hedge: a hedge of the exposure to variability in cash flows that
is attributable to a particular risk associated with all, or a component of, a
recognized asset or liability (such as all or some future interest payments on
variable-rate debt) or a highly probable forecast transaction, and could affect
profit or loss.
(c) hedge of a net investment in a foreign operation as defined in IAS 21 The
effects of changes in Foreign Exchange Rates.
• If a hedging relationship ceases to meet the hedge effectiveness
requirement relating to the hedge ratio but the risk management
objective for that designated hedging relationship remains the same, an
entity shall adjust the hedge ratio of the hedging relationship so that it
meets the qualifying criteria again.
• An entity shall discontinue hedge accounting prospectively only when
the hedging relationship (or a part of a hedging relationship) ceases to
meet the qualifying criteria (after taking into account any rebalancing of
the hedging relationship, if applicable). This includes instances when the
hedging instrument expires or is sold, terminated or exercised. For this
purpose, the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if such a
replacement or rollover is part of, and consistent with, the entity’s
documented risk management objective.
• Discontinuing hedge accounting can either affect a hedging relationship
in its entirety or only a part of it (in which case hedge accounting
continues for the remainder of the hedging relationship).
HEDGES OF GROUPED ITEMS
A group of items (including a group of items that constitute a net position is an
eligible hedged item only if:
(a) it consists of items (including components of items) that are, individually,
eligible hedged items;
(b) the items in the group are managed together on a group basis for risk
management purposes; and
(c) in the case of a cash flow hedge of a group of items whose variabilities in
cash flows are not expected to be approximately proportional to the overall
variability in cash flows of the group so that offsetting risk positions arise:
(i) it is a hedge of foreign currency risk; and
(ii) the designation of that net position specifies the reporting
period in which the forecast transactions are expected to affect
profit or loss, as well as their nature and volume.
DISCLOSURES
The disclosure requirements for IFRS 9 are contained within IFRS 7 Financial
Instruments: Disclosures.
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CHAPTER 16: PAS 28 – INVESTMENTS IN ASSOCIATES AND JOINT - When downstream transactions provide evidence of a
VENTURES reduction in the net realizable value of the assets to be sold or
OBJECTIVE contributed, or of an impairment loss of those assets, those
losses shall be recognized in full by the investor
➢ To prescribe the accounting for investments in associates and to set h. Significant Influence
• Goodwill relating to an associate or a joint venture is included in the
out the requirements for the application of the equity method - is the power to participate in the financial and operating policy
carrying amount of the investment. Amortization of that goodwill is
when accounting for investments in associates and joint ventures decisions of the investee but is not control or joint control of
not permitted
those policies
SCOPE • Any excess of the entity’s share of the net fair value of the investee’s
THE EXISTENCE OF SIGNIFICANT INFLUENCE BY AN ENTITY IS USUALLY identifiable assets and liabilities over the cost of the investment is
➢ PAS 28 shall be applied by all entities that are investors with joint EVIDENCED IN ONE OR MORE OF THE FOLLOWING WAYS: included as income in the determination of the entity’s share of the
control of, or significant influence over, an investee associate or joint venture’s profit or loss in the period in which the
a. Representation on the board of directors or equivalent governing investment is acquired
body of the investee
EFFECTIVE DATE b. Participation in policy-making processes, including participation in ADJUSTMENTS
decisions about dividends or other distributions
➢ An entity shall apply this standard for annual periods beginning on a. Depreciation and impairment losses
c. Material transactions between the entity and its investee
or after 1 January 2013. Earlier application is permitted b. Different reporting dates
d. Interchange of managerial personnel
c. When accounting policies are not uniform
DEFINED TERMS e. Provision of essential technical information
d. Share of losses equals or exceeds the interest in the association or
a. Associate joint venture
- is an entity over which the investor has significant influence EQUITY METHOD
b. Consolidated Financial Statements EXCEPTIONS FROM APPLYING EQUITY METHOD
• On initial recognition, the investment in an associate or a joint
- are the financial statements of a group in which assets, venture is recognized at cost, and the carrying amount is increased
liabilities, equity, income, expenses and cash flows of the • The entity is a wholly owned subsidiary, or is a partially-owned
or decreased
parent and its subsidiaries are presented as those of a single subsidiary of another entity and its other owners
• Distributions received from an investee reduce the carrying amount
economic entity • The entity’s debt or equity instruments are not traded in a public
of the investment
c. Equity Methods market
• Adjustments to the carrying amount may also be necessary for
- is a method of accounting whereby the investment is initially • The entity did not file, nor is it in the process of filing, its financial
changes in the investors proportionate interest in the investee
recognized at cost and adjusted thereafter for the post statements with a securities commission or other regulatory
acquisition change in the investor’s share of the investee’s net POTENTIAL VOTING RIGHTS organization, for the purpose of issuing any class of instruments in a
assets. public market
d. Joint Arrangement ➢ When potential voting rights or other derivatives containing • The ultimate or any intermediate parent of the entity produces
possible exercise or conversion of potential voting rights exists, an financial statements available for public use that comply with IFRSs,
- is an arrangement of which two or more parties have joint
entity's interest in an associate or a joint venture is determined in which subsidiaries are consolidated or are measured at fair value
control.
solely on the basis of existing ownership interest and does not through profit or loss in accordance with IFRS 10
e. Joint Control
reflect the possible exercise or conversion of potential voting rights
- is the contractually agreed sharing of control of an DISCONTINUING THE USE OF EQUITY METHOD
and other derivative instruments, an entity has, in substance, an
arrangement, which exists only when decisions about the existing ownership as a result of a transaction that currently gives it
relevant activities require the unanimous consent of the parties • If the investment becomes a subsidiary, the entity shall account for
access to the returns associated with an ownership interest
sharing control. its investment in accordance with IFRS 3 business combinations and
f. Joint Venture APPLICATION OF EQUITY METHOD the IFRS 10 consolidated financial statements
- is a joint arrangement whereby the parties that have joint • If the retained interest in the former associate or joint venture is a
control of the arrangement have rights to the net assets of the A. Upstream financial asset, the entity shall measure the retained interest at fair
arrangement - When upstream transactions provide evidence of a reduction value. The fair value of the retained interest shall be regarded as its
g. Joint Venturer in the net realizable value of the assets to be purchased or of fair value on initial recognition as a financial asset in accordance
- is a party to a joint venture that has joint control of that joint an impairment loss of those assets, the investor shall recognize with IFRS 9 financial instruments
venture. its share in those lose • The entity shall recognize in profit or any difference between:
B. Downstream a. the fair value of any retained interest and any proceeds from
disposing of a part interest in the associate or joint venture

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 b. the carrying amount of the investment at the date the equity
method was discontinued
• When an entity discontinues the use of the equity method, the
entity shall account for all amounts previously recognized in other
comprehensive income in relation to that investment on the same
basis as would have been required if the investee had directly
disposed of the related assets or liabilities

PRESENTATION AND DISCLOSURE

➢ There are no disclosures specified in this Standard. Instead, IFRS 12

Disclosure of Interests in Other Entities outlines the disclosures
required for entities with joint control of, or significant influence
over, an investee

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CHAPTER 17: PFRS 11 – JOINT ARRANGEMENTS
OBJECTIVE
➢ To establish principles for financial reporting by entities that have
an interest in arrangements that are controlled jointly (i.e. joint
arrangements)
SCOPE
➢ IFRS 11 applies to all entities that are a party to a joint
arrangement EFFECTIVE DATE
➢ Effective for annual periods beginning on or after 1 January 2013.
Early application is permitted
DEFINED TERMS
A. Joint Arrangements
- It is an arrangement of which two or more parties have joint
control and the following characteristics are present
o The parties are bound by a contractual arrangement, and
o The contractual arrangement gives two or more of the
parties joint control of the arrangement
No single party controls the arrangement
B. Joint Control
- ‘the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control’
- All the parties or a group of parties control the arrangement
collectively when they act together to direct the relevant
activities that significantly affect the returns of the
arrangement
- Judgement will need to be applied when assessing whether all
the parties or a group of parties have joint control over a joint
arrangement. This assessment shall be made by considering all
facts and circumstances. If these facts and circumstances
change, an entity shall reassess whether joint control of the
arrangement still exists
JOINT ARRANGEMENT TYPES
A joint arrangement can be classified as a
• Joint operation (A joint arrangement whereby the parties that have
joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement) or
• Joint venture (A joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the
arrangement)
CLASSIFICATION OF JOINT ARRANGEMENTS AS A JOINT OPERATION OR JOINT
VENTURE
A. JOINT OPERATIONS
➢ Judgement will need to be exercised when making this
classification. In arriving at the classification, the rights and
obligations of the parties to the arrangement must be assessed. In
making this assessment, the following shall be considered
a. Structure of the joint arrangement
b. When structured through a separate vehicle
o Legal form of the separate vehicle
o Terms agreed by the parties in the contractual
arrangement, and
o When relevant, other facts and
circumstances FINANCIAL STATEMENTS OF PARTIES TO A JOINT
ARRANGEMENTS
A. JOINT OPERATIONS
A joint operator is required to recognize in relation to its interest in a joint
operation
• Its assets, including its share of any assets held jointly
• Its liabilities, including its share of any liabilities incurred jointly
• Its revenue from the sale of its share of the output arising from the
joint operation
• Its share of the revenue from the sale of the output by the joint
operation, and
• Its expenses, including its share of any expenses incurred jointly
Note: These shall be accounted for in accordance with the applicable IFRS
If a party that participates in, but does not have joint control of a joint
operation, and rights to the assets and obligations relating to that joint
operation
• Are present, it is required to account for these as above
• Are not present, it is required to account for its interest in the joint
operation in accordance with the applicable IFRSs to that interest
B. JOINT VENTURES
A joint venture is required to recognize its interest in a joint venture as an
investment and shall account for that investment using the equity method in
accordance with IAS 28 Investments in Associates and Joint Ventures unless
the entity is exempted from applying the equity method
A party that participates in, but does not have joint control of a joint venture
is required to account for its interest in the arrangement in accordance with
IFRS
9 Financial Instruments, unless it has significant influence over the joint
venture, then it shall account for it in accordance with IAS 28
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SEPARATE FINANCIAL STATEMENTS
The same accounting treatment is required as per the financial
statements of parties to a joint operation
B. JOINT VENTURES
A joint venture shall account for its interest in accordance with IAS 27
Separate financial statements
A party that participates in, but does not have joint control of a joint
arrangement shall account for its interest in a joint venture in accordance
with IFRS 9, however, if the party has significant influence over the joint
venture it shall apply IAS 27
DISCLOSURE
➢ There are no dis closures specified in IFRS 11. Instead, IFRS 12
Disclosure of Interests in Other Entities outlines the dis closures
required.
CHAPTER 18: PAS 27 – SEPARATE FINANCIAL STATEMENTS
OBJECTIVE
➢ The objective of this Standard is to prescribe the accounting and
disclosure requirements for investments in subsidiaries, joint
ventures and associates when an entity prepares separate financial
statements
SCOPE
➢ This Standard shall be applied in accounting for investments in
subsidiaries, joint ventures and associates when an entity elects, or
is required by local regulations, to present separate financial
statements
EFFECTIVE DATE
➢ An entity shall apply this Standard for annual periods beginning on
or after 1 January 2013.
DEFINED TERMS
a. Consolidated financial statements
- are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the
parent and its subsidiaries are presented as those of a single
economic entity.
b. Separate financial statements
- are those presented by an entity in which the entity could
elect, subject to the requirements in this Standard, to account
for its investments in subsidiaries, joint ventures and associates
either at cost, in accordance with IFRS 9 Financial
Instruments, or
 using the equity method as described in IAS 28 Investments in
Associates and Joint Ventures.

RECOGNITION AND MEASUREMENT

When an entity prepares separate financial statements, it shall account for

investments in subsidiaries, joint ventures and associates either:

a. at cost;
b. in accordance with IFRS 9 Financial Instruments; or
c. using the equity method as described in IAS 28 Investments in
Associates and Joint Ventures.

The entity shall apply the same accounting for each category of investments.
Investments accounted for at cost or using the equity method shall be
accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations when they are classified as held for sale or for
distribution (or included in a disposal group that is classified as held for sale
or for distribution). The measurement of investments accounted for in
accordance with IFRS 9 Financial Instruments is not changed in such
circumstances.

DIVIDENDS

➢ Dividends from a subsidiary, a joint venture or an associate are

recognized in the separate financial statements of an entity when
the entity’s right to receive the dividend is established. The dividend
is recognized in profit or loss unless the entity elects to use the
equity method, in which case the dividend is recognized as a
reduction from the carrying amount of the investment.

PRESENTATION AND DISCLOSURE

➢ An entity shall present and disclose information that enables users

of the financial statements to evaluate the financial effects of
investments in subsidiaries, joint ventures and associates

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CHAPTER 20: PAS 24 – RELATED PARTY DISCLOSURE C. Key Management personnel
OBJECTIVE - are those persons having authority and responsibility for
planning, directing and controlling the activities of the entity,
➢ This Standard requires disclosure of related party relationships,
directly or indirectly, including any director (whether executive
transactions and outstanding balances, including commitments, in
or otherwise) of that entity
the consolidated and separate financial statements of a parent or
investors with joint control of, or significant influence over, an THIS STADARD CONTAINES A DETAILED DEFINITION OF A RELATED PARTY; THE
investee presented in accordance with IFRS 10 Consolidated INDIVIDUAL ELEMENT ARE SUMMARIZED BELOW
Financial Statements or IAS 27 Separate Financial Statements
➢ This Standard also applies to individual financial statements. In A. A person or a close member of that person’s family is related to a
considering each possible related party relationship, attention is reporting entity if that person
directed to the substance of the relationship and not merely the - has control or joint control of, or significant influence over, the
legal form. reporting entity
- or is a member of the key management personnel of the
SCOPE
reporting entity or of a parent of the reporting entity AN ENTITY IS RELATED TO A REPORTING ENTITY
This standard shall be applied in preparing and presenting separate financial B. An entity is related to a reporting entity if any of the following
statements and consolidated financial statements applies:
o The entity and the reporting entity are members of the
This shall be used in: same group
o One of the entities is an associate or joint venture of the
• Identifying related party relationships and transactions
other entity or if both entities are joint ventures of the
• Identifying outstanding balances, including commitments, between
same third party
an entity and its related parties
o The entity is a post-employment benefit plan of the
• Identifying the circumstances in which disclosure of the items above
employees of either the reporting entity or an entity
is required
related to the reporting entity
• Determining the disclosures to be made about those items
o The entity is significantly influenced by a person that has
EFFECTIVE DATE control or joint control of the reporting entity or is a
member of the key management personnel of the other
➢ An entity shall apply this standard retrospectively for annual periods entity or its parent
beginning on or after 1 January 2011. Earlier application is o The entity provides key management personnel services
permitted. Application is permitted, either of the whole standard or to the reporting entity or to its parent. The entity
of the partial exceptions for government – related entities performing the key management personnel services is
also referred to as the “management entity’’.
DEFINED TERMS
HOW TO KNOW IF A PERSON IS RELATED TO AN ENTITY?
A. Related Party Transactions
- is a transfer of resources, services or obligations between a
reporting entity and a related party, regardless of whether a
price is charged
B. Close member of a Person’s Family
- those family members who may be expected to influence, or
be influenced by, that person in their dealings with the entity,
and include:
o that person’s children and spouse or domestic partner
o children of that person’s spouse or domestic partner
o dependents of that person or that person’s spouse or
domestic partner

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PRESENTATION AND DISCLOSURE

➢ An entity shall present and disclose information that enables users

of the financial statements to evaluate the financial effects of
related parties, balances and transactions

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