SBR Notes by Ali Amir 20-21

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IAS 16 and IAS 40

Property, Plant and Equipment and
Investment Property
They include only tangible assets and are only of 4 types in IAS 16.
 Held for use in production OR

 Held for provision of services OR
 Held for administrative purpose OR
 Held for rental to others except land and buildings.
And are expected to be used in more than one accounting period.
IAS 40:
Investment properties include properties (land and buildings) held for capital appreciation or for
rental to others.
Land and buildings

can fall in
IAS 16 if used IAS 40 if used IAS 2 if used in
for production
for rental OR ordinary course of
for services
capital appreciation. business.
for admin use
Assets included in IAS 40 are:
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• Land held with currently undetermined future use

• Property rented under operating lease.
• Property under construction to be rented out in future.
In finance lease risk and rewards are transferred to lessee so lessor does not account for assets and
hence IAS 40 cannot apply there.
Common points between IAS 40 and IAS 16:
if the property
have partial own
use.
rental portion in own use in IAS

IAS 40 16.
The cost is allocated in both of them with percentage of use but if the part of building cannot be sold
separately (rental and own use) than material portion is selected for treatment.
intercompany ancilliary
rentals. services.
in consolidated
in separate F/S if significant if not significant
F/S IAS 16 is
IAS 40 is used. than in IAS 16. than in IAS 40.
used.
Properties rented to employees are not included in IAS 40 but in IAS 16.
Initial recognition:
Initial recognition of both IAS 16 and IAS 40 are same and rules are:
(i) Future economic benefits are probable

(ii) Cost can be reliably measured.
Initial measurement:
Assets in both IAS 16 and IAS 40 are initially recorded at cost which is.
• Cash or cash equivalents paid OR

• Fair value of any consideration given to acquire an asset.
If cash paid and fair value both are given than cash paid is cost.
Subsequent measurement:
Cost model:
If cost model is used than it is same in IAS 16 and IAS 40.
COST x
Acc. Depreciation (x)
Acc. Impairment (x)
Asset recorded XX
Revaluation model:
This model is used in IAS 16, any gain is moved in other comprehensive income + equity.
And any loss is moved in profit/loss.
• Depreciation will be charged.

• Impairment loss is calculated.
If there are some losses already available in statement of P/L than charge revaluation surplus up to the
maximum of loss to statement of P/L and then remaining will go to statement of other comprehensive
income.
If there is a revaluation loss than it is first settled with any revaluation gain if available in statement of
other comprehensive income any remaining losses are then transferred to statement of P/L.
Fair value model:
This model is used for assets in IAS 40. Both gain and losses are moved in profit/loss.
• No depreciation is charged.
• No impairment.
Different points:
IAS16:
Exchange of assets:
Measure assets acquired at fair value unless:
(i) Transaction lack commercial substance OR

(ii) Fair value of both assets given and acquired is unknown.
In above two cases measure at carrying value of asset given.
Commercial substance:
COMMERCIAL SUBSTANCE is defined as the event or transaction causing the

cash flows of the entity to change. That is, if the expected cash flows after the exchange differ from
what would have been expected without this occurring, the exchange has commercial substance and is
to be accounted for at fair value.
Complex assets:
Complex asset is an asset in which different components are treated as

separate asset to make deprecation calculations easier. Complex asset is simply a collection of such
components that make up one real asset where each component cannot be put to use separately. For
example, an air craft.
Example 1: an aircraft costs $50000 and thrillers costs $5000 in it. But thrillers need replacement every
5 years and the useful life of aircraft is 25 years. Calculate depreciation.
SOLUTION:
Revaluation surplus:
• On disposals it can be transferred to retained earnings with full amount at the end. OR
• Can be annually transferred with excess depreciation.
Property transfers:
IAS-16 ➔ IAS-40.
IAS-40 ➔ IAS-16.
Or with IAS-2 to them.
This only happens when the use of asset is changed. The amount on which asset is transferred is.
• If cost model is used in both standards than transfer with carrying value of the date of change in
use.
• If revaluation or fair value model is used in any or both than first revalue assets at the date of
change in use than any gain or loss is transferred with rules of old/current standard than
transfer with revalued amount in new standard.
IAS-38(intangible assets)
Intangible assets are identifiable non-monetary assets without physical existence.
Identifiable means separable OR arise through contract.
Separable ➔ can be sold or rented separately from business therefore internally generated goodwill is
not an intangible asset.
Arise through contract ➔ intangible assets which are purchased etc. therefore purchased goodwill is an
intangible asset.
Non-monetary:
They cannot be converted into fix and determinable amount of cash. Almost 95% of
intangible assets are non-monetary.
Recognition criteria:
(i) Probable future economic benefits.

(ii) Cost can be reliably measured.
• Future economic benefits may be increase in sales or decrease in cost.
internally generated
intangible assets
Research and
Development all others expensed out.
expenditure
Research is always includes

expenced except goodwill,customer
purchased. list,brands etc.
development cost is
capitalized if the criteria
below is satisfied.
Criteria:
(i) Probable future benefit.

(ii) Intention to complete.
(iii) Resources are available.
(iv) Ability to use.

(v) Technically feasible.
(vi) Cost can be measured reliably.
To remember this use pneumonic ‘PIRATE’.
Expenses once expensed out cannot be subsequently capitalized but expenses once capitalized can be
expensed out.
Some expenses are always expensed out and cannot be capitalized these are.
(i) Staff training.

(ii) Business relocation cost.
(iii) Business startup cost.
(iv) Marketing cost.
Same as IAS-16 but includes one extra point. In revaluation model active market
must exist and mostly they are not available therefore intangible assets are recorded on cost model
mostly.
if useful life is
finite indefinite
donot amortize but

than amortize. test for impairment
at each y/e.
De-recognition criteria:
i) On disposal OR
ii) No future economic benefits are expected to flow to entity.
IAS-36 (impairment of assets)

Assets are impaired when their carrying value exceeds their recoverable amount.
recoverable amount is
higher off.
fair value less cost of

value in use
disposal.
present value of future

expected net cash flows
from use of asset including
net disposal proceeds.
Guidelines for future net cash flows:
• Reasonable and supporting assumptions are made.

• Cash flows ➔ revenue expenditures are only included and not from capital expenditures.
• Increases in economic benefits due to capital expenditure are also not included.
• Tax effects are not taken into account and pre-tax cash flows are used.
• Cash flows from financing activities are not taken into account for example shares.
• Normally 5-year cash flows are projected if evidence is available than more years can also be
projected.
Guidelines for using interest rates:
• Current market rate with risk adjusted to specific asset.

• Discount rate is used pre-tax.
• If current market rate is not available than WACC or incremental borrowing rate is used.
• If asset is made in another country than find the value in use of asset in the currency of country
asset is made in using the discount rate of destination country too and finds impairment.
Risk is not adjusted in both cash flows and interest at one time.
Recognition of
impairment
cost model revaluation model.
first recognize in OCI

recognize impairment upto the extent of
loss in P/L. surplus any excess will
be recognized in P/L.
Reversal of impairment loss:
• No reversal for unwinding because that increase is due to time.

• Reversal on impairment of goodwill is not allowed because it will than becomes internally
generated which is not recorded.
• If the asset was not impaired what was the carrying value reverse impairment with only
maximum of that difference.
reversal of
impairment
revaluation
cost model
model
in revaluation
in P/L.
surplus.
Example 2: on 1 Jan 2019 cost of asset was 40000 with a useful life of 4 years. At 31 Dec 2019
recoverable amount is 25000. Recoverable amount at 31 Dec 2020 is 27000. what the amount of
reversal of impairment?
Solution:
Indicators of impairment:
External:
• Market interest rate is increased.

• Decrease in market value of asset.
• Change in technology that has adverse effect on asset.
• Book value of net assets of company is more than market capitalization.
Internal:
• Damage to an asset
• Change in use of asset.
• Worse economic performance than expected.
Apply impairment at each year end on intangible assets with indefinite useful life, intangible assets in
development phase and goodwill acquired.
Cash generating unit:
Smallest identifiable group of assets that can generate cash flows independently from
other assets.
Allocation of impairment to CGU:
The sequence is at very first it is allocated to damaged assets, then to goodwill, then to those assets
whose fair value is given and at the end on pro rata basis excluding current assets.
pro rata
assets basis
whose fair excluding
value is current
goodwill assets
known
damaged
assets
IAS-20
(GOVT Grants and disclosure of GOVT
assistance)
In Govt grants resources are transferred to entity but in Govt assisstance no resources are transferred.
Govt assisstances are just disclosed in notes to the accounts.
Govt Grant:
There are two types of Govt grants.
• Grant related to asset.

• Grant related to income.
Grant related to asset
primary purpose to
purchase or construct
an asset.
monetary non-monetary.
either deduct from OR show grant

asset cost/C.V and received as deffered
recorded at fair value.
than depriciate on income and depriciate
reduced cost. on full amount.
Example 3:
An entity purchased a machine which costs $50000 with a useful life of 3 years and grant
received is $20000. How this should be accounted for in financial statements?
Solution:
grant related to
income
primary purpose is all

others than related to
asset.
monetary and non-

monetary
recognize in P/L when

related expenses are
recognized.
shown as other
income in P/L OR
deducted from
related expenses.
Repayment of GOVT Grant:
Is a change in accounting estimate➔ when condition is not met➔ no

adjustments in previous accounting.
IAS-23(borrowing cost)
Interest and other cost incurred in connection with borrowings of funds.
Assets whose initial measurement is on fair value are not included in this standard.
Rule for treatment.
On qualifying all other purposes.

assets.
borrowing cost will

be capitalised as expensed out
part of asset cost.
Qualifying asset:
Asset that take substantial period of time to get ready for the intended use or sale.
• Purchased buildings are not qualifying assets but to construct them is qualifying.
• Inventory produced in large quantities on repetitive basis is not included in this standard.
borrowing cost less

specific borrowings
income on idle funds.
borrowing cost on
qualifying asset.
funds
utilized*capitalisation
general borrowings
rate*time
aportionment.
Capitalization rate= (total interest expense/total borrowings) *100
in general borrowings income on idle funds is included in statement of profit/loss as income.
Commencement of capitalization:
(i) Cost incurred on asset.

(ii) Borrowing cost incurred.
(iii) Activities necessary to build an asset are undertaken.
When all three conditions are satisfied than borrowing cost will start capitalized.
Cessation of borrowing cost capitalization:
When asset is substantially (more than 90% but not 100%)

completed. Because delaying the asset completion deliberately may result in borrowing cost being over
capitalized.
Suspension of capitalization:
Like due to raining work is stopped than that month cost is expensed out but if
stopping is necessary to complete asset than that month cost will be capitalized.
IAS-37
Provisions, contingent asset and
contingent liability
PROVISIONS:
It is a liability of uncertain timing or amount for example legal cases, warranty and dismantling cost.
(i) It is a present obligation due to past event

(ii) Outflow of resources are probable.
(iii) Amount can be reliably measured/estimated.
All of the above conditions must be satisfied if anyone is missing than that is contingent liability.
contractive past history

present obligation of company.
obligation
by law
Past event is obligating event with which obligation is arises.
Measurement of provision:
Best estimate required to settle the present obligation at the balance sheet
date. The best estimate is the probability weighted expected values when a range of estimates exist OR
the midpoint within the range if all estimates are equally likely. If time value of money is significant than
measure provision at present value and provision is unwound at each year end. They must be reviewed
at end of each accounting period and adjusted to reflect the best estimate.
Contingent liabilities.
It is a possible obligation that arise from past events and whose existence will be
confirmed by the occurrence or non-occurrence of future event. OR
A present obligation that is not recognized because it is not probable that outflow of resources will be
required to settle the obligation or the amount of the obligation cannot be reliably measured.
probable than record.
if provisions/contingent reasonable possible

liabilities are than disclose.
remote than ignore.
IFRS-16 (Leases)
IAS 17 undated to IFRS-16 because in operating lease risk and reward remains with the lessor but
economic benefits are obtained by lessee which should be recorded in lessee book of accounts
therefore IFRS-16 is introduced.
As asset was not recorded in lessee books therefore nothing is credited too which arises off balance
sheet financing.
In IFRS-16 all the leases will be finance lease and there is no operating lease. The accounting of lessor is
same there is no change.
LESSOR➔ owner of the asset.
LESSEE ➔ user of asset.
accounting
All other leases
treatment below.
LESSEE
exemption is
simplified
approach.
Exemption or simplified approach applies on two types of leases.
(i) Short term lease ➔ 12 months or less.

(ii) Low valued assets ➔depends on materiality and assessed on the cost when it is
purchased.
Rentals paid are recognized in profit or loss on straight line basis.
Dr. Rental expense x
Cr. Cash x
Accounting treatment by LESSEE on all other leases:
The lessee will record right to use asset and a lease

liability.
Dr. right to use asset x
Cr. Lease liability x
The amount of entry will be present value of future lease payments. This is because entry should be
done by principal amount only and payment includes Principal + interest.
Present value ➔ Principal amount only.
Right to use asset may include down payments, initial direct cost, P.V of dismantling cost, P.V of future
lease payments.
Dr. Right to use asset x
Cr. Cash x
Suppose if down payment is 50000 and present value of lease liability is 100000 therefore assets value is
150000.
Dr. Right to use asset 150000
Cr. Lease liability 100000
Cr. Cash 50000
Present value of future lease payments may include fixed rentals, variable rentals, guaranteed residual
value, bargain purchase options and any penalties.
• After the year end depreciate right to use asset.
If the assets ownership is transferred to lessee than depreciate on useful life.
If assets ownership is not transferred than depreciate on lower off lease term and useful life.
• Split the rentals paid between interest and principal and reduce lease account balance with
principal amount only.
Dr. Lease liability x
Dr. Interest expense x
Cr. Cash x
How to split?
If rentals are at year end➔ opening balance of lease liability + interest – rentals = closing balance at year
end.
If rentals are at start of the year➔ opening balance of lease liability – rentals= remaining liability at start
of the year (closing balance) + interest.
Sale and lease back.
If risk and rewards remain with seller lessee.
(i) Seller will not derecognize asset.

(ii) Treat cash received as loan.
Dr. Cash x
Cr. Loan x
If some of the risk and rewards are transferred to buyer lessor.
Dr. Right to use asset. x
Dr. Cash x
Cr. P.P. E x
The difference will be gain/loss.
• P.P.E is credited with their carrying amount.

• Lease liability is recorded at present value.
• Gain/loss is recorded with percentage of risk and rewards transferred.
• Right to use asset is recorded with percentage of risk and rewards retained.
% of risk retained= (P.V of lease payments/F.V of asset) *100.
sale proceeds are

less than F.V of
asset
sale proceeds are

risk and rewards
higher than F.V of
transferred
asset
sale proceeds
equals to fair
value.
if sale proceeds are less than fair value of asset lessor will compensate you in rentals like if M.V is 1000
than you may pay 800 for rent.
The difference between sale proceeds and fair value is treated as prepaid expense and added to right to
use asset.
But if sale proceeds are higher than fair value of asset than difference will be treated as additional
finance cost and lease liability is reduced.
Accounting treatment by lessor:
accounting treatment
by lessor.
operating lease Finance lease
risk and rewards of risk and rewards of

ownership remains ownership of asset is
with lessor. transferred to lessee.
IAS-40 is applied.
Primary indicators of finance lease:
If any one point listed below is met than lease is finance lease.
• Ownership of asset transferred to lessee at the end of lease term.

• Lease contains a bargain purchase option.
• Asset is leased for major part of its economic life even if ownership is not transferred.
• At inception of lease present value of lease liability is substantially equal to fair value of asset.
• Asset is of specialized nature that only lessee can use it without major notification.
Secondary indicators of finance lease:
• Any losses on calculation of lease are born by lessee.

• Lessee has option to lease asset for secondary period at nominal rental.
• Any gain/loss on change in residual value accrues to lessee.
Accounting treatment of operating lease:
• Lessor will record assets in its book of accounts.

• Rentals received will be recognized in profit/loss as income on straight line basis.
Dr. Cash x
Cr. Rental income x
• Lessor will recognize depreciation expense in profit/loss.
Accounting treatment of finance lease by lessor.
Finance lease.
manufacturer/dealor
other lessor
lessor
Other lessor.
Dr. Lease receivable x
Cr. Right to use asset x
Entry will be made by net investment which is ➔ P.V of lease payments + P.V of unguaranteed residual
value.
For interest.
Dr. Cash x
Cr. Lease receivable x
Cr. Interest income x
Manufacturer dealer lessor:
This entry will be made only in year one.
Dr. Lease receivables x
Cr. Sales x
Cr. Cost of sales x
• Lease receivables will be recorded by net investment.

• Sales will be recorded by P.V of lease payment.
• Cost of sales will be recorded by P.V of unguaranteed residual value.
P.V of lease payment here in case of manufacturer dealer lessor is calculated by market interest rate but
in other cases interest rate implicit in lease is used.
Dr. cost of sales x
Cr. Inventory x
Market interest rate is used to prevent overstatement of sales at P.V.
Subsequent accounting of manufacturer/dealer lessor is same as other lessor.
IFRS 15 Revenue Recognition.

Approach to revenue recognition:
there is a five-step approach for revenue recognition.
i) Identification of contract with the customer.

ii) Identify the separate performance obligation.
iii) Determination of transaction price.
iv) Allocation of transaction price to separate performance obligations.
v) Recognize the revenue when each separate performance obligation is satisfied.
1 Identification of contract with the customer:
It is an agreement between the seller and buyer to provide

goods or services in exchange for consideration. The contract can be either written, oral agreement or
an implicit understanding between seller and buyer.
There are five additional criteria to satisfy step 1.
a) The contract has commercial substance.

b) Commitment by both parties.
c) Each party right can be identified.
d) Payment terms are identified. (payment is not necessary to be fixed).
e) It is probable that entity will collect the consideration.
2 Identify the separate performance obligations:
It is an enforceable promise in a contract with a customer to

transfer a good or service to the customer. The obligations may be one or more than one in a contract.
For example (1): a company sold coffee and bagel in a same contract. Here we have two
separate/independent performance obligations (coffee and bagel) but one contract.
Example (2): a company sold large latte which is made up of coffee and milk. Both (coffee and milk) are
inter-related products but we have only one performance obligation which is to serve coffee.
EXAMPLE 4:
Assume that pakwheels sells an auto mobile to sehgal motors at a price that includes six months
of services such as navigation and remote diagnostics. These services are regularly sold on a standalone
basis by pakwheels for a monthly fee. After the six months period the consumer can renew these
services on a fee basis with pakwheels. The question is whether pakwheels sold one or two products?
Solution:
3 Determination of transaction price:
➢ Cash: easy
➢ Deferred payment is discounted to present value.
➢ Non-cash consideration is recorded at fair market value.
➢ Variable consideration is recorded at either probable expected value or at most likely outcome.
Discounting is not required where consideration is due in less than one year.
For example, drug companies often offer rebates to customers, generally large health networks, that
increase as those customers buy more of a particular drug. In such cases the drug company would use a
probable weighted average approach to adjust revenues in periods when the amount of the rebate is
uncertain.
Example 5: Ahmad constructions enters into a contract with a customer to build a warehouse for
$100,000, with a performance bonus of $50,000 that will be paid based on the timing of completion.
The amount of performance bonus decreases by 10% per week for every week beyond the agreed upon
completion date. The contract requirements are similar to contracts that ahmad constructions has
performed previously and management believes that experiences is predictive for this contract. They
estimated that there is a 60% probability that the contract will be completed by the agreed upon
completion date. 30% probability that it will be completed 1 week late and only 10% probability that it
will be completed 2 weeks late.
How should Ahmad constructions account for this revenue?
Solution:
4 Allocation of transaction price to separate performance obligation:
The transaction price should be

allocated to the separate performance obligations in proportion to the stand-alone selling price of each
element of contract.
For example, if we buy the following items separately than prices will be.
Burger $3.5
Fries $1.5
Soda $2.0
$7.0
And we buy all of them in a deal that will cost $5. now this $5 is allocated to each of them separately to
determine transaction price.
Burger = $5*(3.5/7) = $2.5
Fries = $5*(1.5/7) = $1.05
Soda = $5*(2/7) = $1.45
If the goods or services are not sold separately than the transaction price must be allocated to the
separate performance obligations using a reasonable approach.
Reasonable using 3 methods:
i) Adjusted market assessment approach: referring to the prices from the competitors for
similar goods or services. Adjustments might be needed.
ii) Expected cost plus a margin approach: forecast expected costs of satisfying a performance
obligation and then add an appropriate margin for that good or service.
iii) Residual approach: total transaction price less the sum of observable stand-alone selling
prices of other goods or services promised in the contract.
5 Recognize the revenue when separate obligations are satisfied:
The obligations can be satisfied either

point in time or over the time period.
Mostly for services recognize revenue by the stage of completion over the time period and for goods
recognize revenue when they are delivered or risk and rewards are transferred.
IAS-19 (Employee benefits)

Employee benefits are benefits against services like wages, bonuses etc.
There are four types of benefits.
(i) Short term employee benefits

(ii) Termination benefits
(iii) Post-employment benefits
(iv) Other long-term benefits
Short term benefits:
Paid with-in 12 months from reporting date like wage salaries paid leaves bonuses
allowances etc.
If the employees are used to construct an asset than their salaries are capitalized in that asset cost
otherwise expensed.
Termination benefits:
They are cash and other services paid to employees when their employment has
been terminated. The extent of these benefits may be based on company policy or they may be
negotiated on an individual basis.
Post-employment benefits:
They are the benefits which will need to be paid after the employee has
completed his/her employment. The examples of post-employment benefits include pensions, other
retirement benefits, post-employment life insurance and post-employment medical care.
Other long-term benefits:
Other long-term employee benefits that could arise include long-term disability
payments, anniversary payments or bonus payments which are payable greater than 12 months after
the period end, golden or silver jubilee payments.
Paid leaves
• Accumulated paid leaves➔ unused leaves are c/f to next year.

• Non-accumulating paid leaves➔ unused leaves cannot be c/f to next year.
Example 6:
2018 2019
B/F - 15
Available leaves 25
Leaves taken (10)
Days extra worked (bal) 15
How the expenses are recorded?
Solution:
Calculation:
No of employees expected to utilize leaves * average used leaves per employee * average salary
per day per employee.
Post-employment benefits:
• Define contribution plan.

• Define benefit plan.
Define contribution plan:
In this plan employer contributions are fixed and benefits paid are variable for
example provident funds. The contributions paid by the employer will be recognized as an expense in
P/L if paid and as a current liability if not paid yet.
Investment risk is on employee.
Dr. Expense x
Cr. Cash/payable x
Define benefit plan:
In this plan employer contributions are variable and benefits paid are fixed for
example gratuity and pensions.
Investment risk in on employer.
Accounting treatment of define benefit plan.
Performa:
SOFP
Closing balance F.V of define benefit asset x
Closing balance P.V of define benefit obligation x
NCA/NCL x/(x)
Statement of P/L:
Net interest (expense)/income (x)/x
Current service cost (x)
Past service cost (x)
Curtailment x
Gain/Loss on settlement x/(x)
Other comprehensive income.
Net re measurement gain/loss x/(x)
Define benefit plan

Dr Cr
O.B(F.V of define benefit asset ) x OB (PV of define benefit obligation) x
Net interest income x Net interest expense x
Gain on settlement x Current service cost x
Curtailment x Past service cost x
Contribution into the plan x Loss on settlement x
CB (PV of define benefit obligation) x CB (PV of define benefit asset) x
Net re measurement gain (bal.) x Net re measurement loss x
• No effect of cash payments in P/L.

• No effects of benefits paid.
Asset ceiling:
The asset ceiling is the present value of any economic benefits available in the form of refunds
from the plan or reductions in future contributions to the defined benefit plan
Assets must be recorded at lower off.
(i) Asset ceiling amount

(ii) Surplus calculated.
Note: asset ceiling amount will always be given in exam and surplus is the difference between closing
balances of account above.
Any reduction in surplus calculated is moved in OCI as impairment.
Any gain/loss by actuary assumptions is moved in OCI.
Settlement Curtailment
cash outflow no cash outflow
Dr. plan
Dr. define plan
obligation and
and Cr. P/L
Cr. plan asset
any gain or loss

always gain no
on settlement is
loss can occur.
moved in P/L.
IFRS 13 fair value

It is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at measurement date.
SCOPE:
It includes all IFRS where fair valuation is required except.
a) Share based payment transactions (IFRS 2)

b) Leases (IFRS 16)
c) Measurements which are similar but not the same as fair value for example NRV in inventories
(IAS 2) and value in use in (IAS 36).
As discussed above it is a market-based measure and not an entity specific one hence it categorizes a
fair value hierarchy for inputs into three levels of valuation.
i) Prices in active markets for identical assets and liabilities that the entity can access at the
measurement date. No adjustments are required in the value obtained by this level.
ii) Prices in active markets for similar assets and liabilities that the entity can access at the
measurement date. Adjustments are required in the value obtained by this level.
iii) Special valuation techniques for example discounting the estimated net cash flows of future.
If value is not obtained from level 1 than proceed to level 2 and if again value is not obtained than
proceed to level 3.
ACTIVE MARKET:
It is a market that routinely experiences high transaction volumes. There is usually a

small spread between bid and ask prices, since there are so many buyers and sellers who are interested
in trading.
In this market transactions for the assets and liabilities take place with sufficient frequency and volume.
IFRS 13 assumes that the transactions take place either in principal market or the most advantageous
market.
PRINCIPAL MARKET:
It is the market having the greatest volume and activity level for the sale of certain
assets or liabilities.
MOST ADVANTAGEOUS MARKET:
It is the market that maximizes the amount that would be received to

sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into
account transaction costs and transport costs
for non-financial assets (land and buildings etc.) the fair value measurement is the value for using the
asset in its highest and best use or by selling it to another market participant that would use it in its
highest and best use.
Highest and best use is a valuation concept that considers how market participants would use a non-
financial asset to maximize its benefit or value. The maximum value of a non-financial asset to market
participants may come from its use in combination with other assets and liabilities or on a standalone
basis.
IFRS-5
Non-current Assets held for sale and discontinued
operations.
Criteria:
• Asset must be available for immediate sale.

• Asset sale must be highly probable.
• Management is committed to sale the asset.
• Entity is actively locating the buyer.
• Asset is marketed at price reasonable as compared to market price.
• Sale is expected to take place within 12 months from the date of classification held for sale.
• Chances of with drawl from selling an asset are highly unlikely.
When asset is transferred from IAS-16 to IFRS-5 entry will be.
Dr. NCA held for sale x
Cr. Property, Plant and equipment x
➢ If cost model is used than classify asset held for sale at lower off:
(i) Carrying value at the date asset is classified as held for sale. OR
(ii) Fair value less cost to sell.
➢ If revaluation model is used than first revalue asset at the date asset is classified as held for sale.
Then transfer it in IFRS-5 at lower off:
(i) Carrying value OR
(ii) Fair value less cost to sell.
Carrying value in revaluation model will be equal to fair value.
To verify in revaluation model either answer is correct impairment loss will always be equal to cost to
sell.
• Once an asset is classified as held for sale no depreciation is charged.
Subsequent measurement in IFRS-5:
Subsequent
measurement
impairment loss reversal of loss
maximum upto the

in P/L. amount of impairment
loss recognized to date.
Reversal of asset classified as held for sale:
Lower off:
(i) Recoverable amount

(ii) C.V that would have been if the asset was not classified as held for sale.
Dr. Property, plant and equipment x
Cr. NCA held for sale x
Discontinued operations:
It is a disposal group whose carrying value is recovered through sale rather than
through continuing use.
a) It represents a separate major line of business or geographical area.

b) Subsidiary acquired for re sale.
c) Component of major line of business or geographical area like from USA, PAK, LONDON➔ PAK
division is closed.
IAS-21
Effects of changes in foreign exchange
rates
SOFP
monetary items non-monetary items
if on revaluation/Fair
retranslate at each y/e
if on cost model than value model than
with any gain/loss
never retranslate. retranslate at the date
recognized in P/L.
asset is revalued.
Example 7:
At 15 December 2018 the company made a credit sale of 1500 pounds and the company year-
end is 31 December calculate the effect of foreign exchange rates if at.
15 December 1 pound = $1.2
31 December 1 pound = $1.25
Solution:
Example 8:
At 1 Jan 2019 a company purchased a machine for 2000 pounds with useful life of 5 years
company policy is to measure the assets at revaluation model. At 31 Dec 2019 (year-end) fair value of
machine was 2200 pounds. What is the effect of exchange rates the following exchange rates are useful.
1 Jan 2019: 1 pound = $1.3.
31 Dec 2019: 1 pound = $1.4
Solution:
Exchange rates in consolidation:
Goodwill of foreign subsidiary:
Cost of investment x
F.V of NCI x
Total consideration X
F.V of net assets of subsidiary at acquisition (x)
Goodwill at acquisition x
Impairment of goodwill (x)
Goodwill at year end x
After goodwill is calculated in subsidiary currency it is than converted in parent currency for inclusion in
consolidation.
In this case exchange gain/loss will occur. this gain/loss on subsidiary retranslation is always moved in
OCI.
Goodwill at acquisition with acquisition date exchange rate x
Impairment of goodwill at average rate (x)
X➔A
Goodwill at year end with y/e exchange rate x➔B
The difference between A and B is the gain/loss on subsidiary retranslation which is always moved in
OCI.
Functional currency:
It is the currency in which entity operates mostly the currency in which labor and
material cost is beard and usually sales prices are made.
Presentation currency:
It is the currency in which entity presents financial statements mostly same as functional
currency.
Foreign currency:
Currency which is not functional currency.
functional
currency of
subsidary
dependent on independent
parent from parent.
same functional the functional

currency as of currency will be
Parent. different.
IAS-24
Related parties
These transactions are by nature material even if of immaterial amount and their objective is to ensure
that entity financial statements contain disclosures necessary to draw attention to the possibility that its
financial statements may be affected by the existence of related parties.
Person and entity:
Both of them are related parties when.
• A person controls entity.

• A person have significant influence on entity.
• A person is a key management personal.
Key management personal is an individual who have authority to allocate resources and can make
company decisions.
Entity and Entity:
Two entities are related parties when.
• An entity has control over other entity
In one group all the subsidiaries are related parties of each other.
Parent A ➔ Subsidiary B ➔ Subsidiary C
All are related parties of each other.
• An entity has significant influence over another entity.
Parent A ➔ Associate B ➔ Associate C.
A and C are not related parties but A and B, B and C are related parties.
If an entity has significant influence over one entity and joint control in another than both significant
influenced and jointly controlled are related parties of each other.
IFRS-2
Share based payments
In share-based payments assets/services are purchased and shares are given in consideration.
equity settled
share based
payments.
cash settled
share based
share based
payments.
payments.
choice.
Equity settled share-based payments (SBP):
Here goods and services are received in exchange for shares.
Dr. asset/expense x
Cr. share capital x
Cr. Share premium x
If SBP are with employees than measure at fair value of instruments granted because fair value of
goods/services received is unknown.
If share based payments are with others than measure at fair value of services received if the amount is
unknown than measure at fair value of instruments granted.
SBP with employees are of two types.
(i) Already vested

(ii) Will vest in future.
Already vested:
Recognize expense immediately in P/L. like 1000 shares are issued with nominal value of
$1 due to previous year performance and market value of these shares are $3/share.
Dr. expense 3000
Cr. Share capital 1000
Cr. Share premium 2000
If shares are not issued yet and will be issued in future than
Dr. Expense x
Cr. Equity reserve x
Will vest in future:
Allocate expense over the vesting period.
Dr. Expense x
Cr. Equity reserve x
This entry will be made at each year end than in last year.
Dr. Equity reserve x
Cr. Share capital x
Cr share premium x
Expense will be calculated as:
No of employees expected to utilize options * fair value at grant date * no of shares per employee *
time apportion.
Cash settled share-based payments:
In this type of payments cash is paid based on share price against

goods/services received.
Expenses are calculated as.
O/B of liability x
Cash paid x
Expense (bal. figure) x
C/B of liability x
Cash paid is calculated as:
No of employees * shares * intrinsic value.
Intrinsic value:
It is the difference in share price between the prices at start and end of vesting period.
Like today share price is $15 and after 3 years of vesting period we will pay directors $20. This $5
increase is intrinsic value.
Share options➔ equity settled.
Share appreciation rights➔ cash settled.
Always create deferred tax asset on share-based payments which will be.
Intrinsic value * tax rate= deferred tax asset.
vesting conditions
service condition performance condition
if the condition is
donot recognize
market condition than
expense if condition is
recognize expense even
not met.
if condition is not met.
for all others donot

recognize expense if
condition is not met.
Equity settled share-based payments cash settled share-based payments.

Equity price of grant date is used and cannot be Fair value at each year end is used.
re-measured. Cash paid is recorded with intrinsic value which
When vesting period is completed further is increase in share price between starting and
accounting is not done. ending of vesting period.
When vesting period is completed accounting is
done until cash is not made to employees and
liability becomes zero.
Re-measure the liability until it is settled.
Modification
favourable to unfavourable to
employees employees.
ignore modification
employer will have to and recognize
bear extra expense. expense that would
have been recorded.
record extra expense

over the remaining
vesting period.
IAS-8
Accounting policies, changes in accounting estimates and errors.
if YES than apply

policy of that
standard.
is standard
transaction
available?
if NO than create
your own policy.
How the policies are created?
• Check framework
• Check related accounting standards
• Check standards in any other countries.
Accounting policies do not change due to comparability of financial statements but can only be changed
if.
• Required by standard
• Relevant and reliable information is obtained.
If policy is changed and errors are corrected than retrospective impact is given while the impact of
change in accounting estimates are given prospectively.
IFRS-8
Operating Segments
It is a segment:
• That engages in business activities from which it earns revenue and incurs cost. AND
• Its results are monitored by chief operating decision maker. AND
• For which discrete financial information is available.
Note: all of the above three condition must be met.
Aggregation criteria:
• Nature of the product or service is same

• Production process is same
• Distribution channel is same
• Regulatory environment is same
• Class of customers are same
Note: all of the above five point must be met.
Reportable segment:
It is a segment in an operating segment and.
• Its revenue is 10% or more of all segments OR

• Its assets are 10% or more of all segments OR
• Its profit or loss is 10% or more of all segments.
IAS-32
Financial instruments presentation.
It is a contract which creates financial asset of one entity and financial liability/equity instrument of
another entity.
Financial assets:
• Right to receive cash

• Cash
• Equity instrument of another entity
• Right to exchange financial assets under favorable terms.
Financial liability:
• Obligation to pay cash.

• Obligation to pay any other financial asset
• Obligation to exchange financial asset under unfavorable terms.
financial liability
Dividends are
because obligation to
mandatory
pay cash exist
Normal
equity instrument
dividends are
because no bligation
discretionary
to pay cash exist.
ordinary shares issued euity instruments

callable because no obligation
to pay cash.
financial liabilities
puttable because obligation to
pay cash exist.
dividends are
financial liability
mandatory
irredeemable
dividends are
equity instrument.
Preference shares discretionary
issued
financial liability
redeemable because obligation to
pay cash as dividend.
If from principal and interest any one is mandatory to pay than treatment is financial liability.
least cost option

right of conversion is
classification depends
with entity
on situation.
convertable bonds/loan
notes/convertable pref
shares.
compound financial
right of conversion is
instrument do split
with holder.
accounting.
Equity is a residual that remains if the characteristics of financial liability are not fulfilled. A financial
instrument must be classified as a financial liability if the contractual terms contain an unavoidable
obligation.
Cash-liabilities= Equity
Year cash flows D.F P.V
1 interest x x
2 interest x x
3 interest + Principal x x
Liability X
• Discount factor is the market rate without conversion to get 100% pure liability.
Example 9:
A company has issued $1000 convertible bond @5% interest per annum. Each $100 bond can be
converted in 25 ordinary shares at the option of bond holder. Market interest of similar bond without
conversion option is 8%. Bond has term of three years. what is the liability and equity?
Solution:
IFRS-9
Financial instruments measurement
Financial assets/liabilities will be recognized in SOFP when the entity becomes party to
the contractual provisions of the instrument.
De-recognition criteria:
Financial assets are de-recognized when the right to receive cash expires or
financial asset is transferred. Financial liabilities are de-recognized when obligation is discharged,
cancelled, expired or pays off.
On de-recognition of financial asset any gain/loss is moved in P/L.
donot de-recognize
with recourse and treat cash
received as loan.
Factoring
de-recognize as risk
without recourse and rewards are
transferred.
• Financial assets are initially measured at fair value.
ordinary shares debt instruments
F.V through P/L. F.V through OCI

by default if election is made F.V through P/L. F.V through OCI amortized cost.
expensed. than capitalized.
Impairment of financial assets:
Impairment is only applied in models where amortized cost is used.
There are two types of impairment loss models incurred loss model not applicable now and expected
loss model.
Losses expected in future:
Dr. Impairment loss x
Cr. Loss allowance x
The amount will be present value of future expected cash shortfalls discounted at original effective rate
of interest * probability of occurrence.
Loss already incurred:
Carrying value x
Recoverable amount (x)
Recoverable amount is present value of future expected cash flows discounted at original effective
interest rate while in Fair value market interest rate is used.
Impairment of debt instruments:
Amortized cost Fair value

through OCI.
Impairment P/L P/L
loss
Loss Deduct from OCI
allowance financial asset
Derivatives:
• It derives its value from underlying items

• Require nil or little initial investment.
• Will be settled in future.
Purpose of derivatives:
• Speculation ➔ to earn profit

• Hedging ➔ to pay fixed amount.
Speculation:
Re-measure at fair value with any gain/loss recognized in P/L.
Hedging:
Hedging is of two types.
• Fair value hedging

• Cash flow hedging
In fair value hedging both hedge items and instruments are re-measured at year end with any gain or
loss recognized in P/L or OCI depending on previous treatment.
In cash flow hedging re-measure hedge instruments only and not hedge items. Any effective gain/loss is
recognized in OCI and in-effective in P/L.
Gain/loss on hedge items ➔ effective
Gain/loss on hedge instruments ➔ in-effective
IAS-12 (Income Tax)

It includes:
Current tax +/- under/over provisions +/- deferred tax.
• Current tax is tax payable on taxable profits.

• Under/over provisions are changes in accounting estimates so prospective impact is given.
Deferred Tax:
• No cash outflow
• It is created in one period and reversed in another
• It is created due to matching concept.
Example:
Credit sale in 2018 and cash received in 2019. Assume tax rate is 20%.
2018 2019
Credit sale 50000 -
Cost 0 -
PBT 50000 0
Current tax - (10000)
Deferred tax (10000) 10000
PACT/PADT 50000/40000 (10000)/0.
In 2018:
Dr. P/L 10000
Cr. Deferred tax liability 10000
In 2019:
Dr. P/L 10000
Cr. Current tax liability/cash 10000
Dr. Deferred tax liability 10000
Cr. P/L 10000
Calculation of Deferred tax:
Particulars Carrying value Tax base
Assets X Y
Liabilities X Y
There may be net temporary differences that arise between C.V and tax base value these are of two
types.
(i) Taxable temporary difference➔ higher future tax

(ii) Deductible temporary difference➔ lower future tax
Taxable temporary difference Deductible temporary

difference
Assets C.V>T.B T.B>C.V
Liabilities T.B>C.V C.V.T.B
Calculation of Tax base:
(i) Un-earned income.
Carrying value x
Income already taxed (x)
Tax base x
(ii) Property, plant and equipment.
Cost x
Depreciation as per tax rules (x)
Tax base x
(iii) Other liabilities.
Carrying value x
Deductions that will be allowed in future (x)
Tax base x
• No deferred tax will arise on permanent differences.

• Tax base of development cost will always be zero.
• Deferred tax always moves into non-current assets/liabilities.
• Deferred tax will not be discounted at present value.
• Check the reason why deferred tax arises and move it into P/L or OCI depends on their nature.
• Tax rate is used which is confirmed.
Net taxable temporary difference * tax rate=deferred tax liability.
Net deductible temporary difference * tax rate= Deferred tax asset.
Closing balance-opening balance= amount in P/L or OCI.
Recognition of deferred tax assets:
It is recognized if the following points are met.
• Availability of future taxable profits. OR

• Tax planning opportunity to create taxable profits.
Deffered tax
asset may arise
by deductible unused tax

carried forward
temporary credits carried
losses
differences forward
Consolidation
Subsidiary:
a subsidiary is a company that is controlled by a parent company. Control exists if any one point
below is met.
• Major voting rights

• More than 50% holding
• Holding less than 50% shares with remaining held by large and dispersed share holders
• Agreement with other parties.
Associate:
an associate is a company in which other company have significant influence. it arises if any one
point below is met.
• 20% to 50% holding.

If an entity holds less than 20% shares and any one point below meets than significant influence
arises.
(i) Representation on board of directors.
(ii) Participation in policy making process.
(iii) Provision of technical services.
(iv) Material transactions between entities.
(v) Interchange of management personal.
Significant influence is power to participate in operating and financing decisions of entity while control
exists when investor is exposed to variable returns through its involvement with investee and can
influence those returns through power over relevant activity.
Subsidiary consolidation ➔ Full consolidation method.
Associate consolidation ➔ Equity method accounting.
Equity method:
Investment in associate x
Share of post-acquisition profit of associate x
Impairment of associate (x)
Dividends paid by associate to parent (x)
Unrealized profits (downstream transactions) (x)
goodwill
Full goodwil Partial goodwill

method method
this includes this includes

goodwill for goodwill for
parent plus NCI. parent only.
Note: goodwill is always calculated at acquisition so workings will be done with values at start of the
year.
Full goodwill method:
Cost of investment by parent x
Fair value of NCI x
Fair value of net assets of subsidiary acquired (x)
Goodwill X
Partial goodwill method:
Cost of investment by parent x
Fair value of net assets * % of parent (x)
Goodwill X
• If the difference is positive than amount is goodwill and recorded in balance sheet.
• If the difference is negative than amount is gain on bargain purchase and moved into P/L.
Cost of investment includes:
Cash, deferred consideration, share exchange, contingent consideration, loan notes and any
other.
• Deferred considerations are recorded at present value.

• Share exchanges are recorded at market value of parents share price.
• Contingent consideration is recorded at fair value even if not probable.
• Loan notes are recorded at par value.
• Any other at fair value of consideration given.
If fair value of NCI is not given than it is calculated as:
Shares held by NCI in subsidiary * fair value of subsidiary shares.
Fair value of net assets of subsidiary acquired:
Share capital x
Share premium x
Retained earnings at acquisition x
Other reserves at acquisition x
Fair value adjustment x/(x)
• The deferred tax liability is deducted from fair value adjustments because when liability
increases net assets decreases hence goodwill increases.
Dr. Goodwill x
Cr. Deferred tax liability x
Intangible assets of subsidiary:
According to IAS 38 internally generated intangible assets are not

recognized because their cost cannot be reliably measured.
While according to IFRS 3 (Business combinations) all internally generated intangible assets of subsidiary
is recorded at fair value because we paid for it.
According to IAS 37 contingent liabilities are disclosed in notes to the accounts but according to IFRS 3
all contingent liabilities of subsidiary are recorded at fair value at the date of acquisition even if they are
not probable.
Effects of cost of acquisition. Effect in P/L at year end in SOFP

Cash No effect No effect
Deferred consideration Unwinding (interest expense) Present value + unwinding
Share exchange No effect as equity never re- Same at acquisition
measures
Contingent consideration If cash than gain/loss and if Recorded at fair value.

shares than no effect.
Loan notes Recorded at Amortized cost Closing balance in SOFP.
Others No effect No effect
Effect of fair value adjustments:
Additional depreciation will be charged because subsidiary depreciated

assets on carrying value and at acquisition asset is recorded at fair value in parents’ F/S which is mostly
higher than carrying value and depreciation will be reversed if carrying value is higher than fair value.
In case of land no depreciation is charged.
Group retained earnings:
Parent retained earnings x
Share of post-acquisition profit of subsidiary x
Income/expenses of parent for the year x/(x)
Share of income/expense of subsidiary x/(x)
x/(x)
Workings for NCI retained earnings:
Full goodwill method partial goodwill method

F.V of NCI X -
Share of fair value of net assets - X
of subsidiary at acquisition.
Share in post-acquisition profits X X
of subsidiary
NCI share in Income/expense of x/(x) x/(x)
subsidiary for the year
Step acquisition:
In both case I(simple investment ➔ subsidiary) and case II (associate ➔ subsidiary) Goodwill is
calculated as:
Full goodwill method:
Fair value of previous investment at acquisition date x
New investment made at acquisition x
Fair value of NCI x
Fair value of net assets of subsidiary acquired (x)
Goodwill x
Partial goodwill method:
Fair value of previous investment at acquisition date x
New investment made at acquisition x
parents share in fair value of net assets of subsidiary at acquisition (x)
goodwill x
• Any gain/loss obtained on remeasuring fair value of previous investment is moved into
profit/loss.
Case III:
Simple investment ➔ Associate.
Same equity method is applied with one addition.
Fair value of previous investment x
Investment in associate x
Share of post-acquisition profit of associate x
Impairment of associate (x)
Dividends paid by associate to parent (x)
Unrealized profits (downstream transactions) (x)
• Any gain/loss obtained on remeasuring fair value of previous investment is moved into
profit/loss.
Case IV:
If just the control is increased (70% ➔ 80%) than no goodwill is calculated but just NCI and cash
is decreased.
Dr. NCI x
Cr. Cash x
Revised NCI is calculated as.
Full goodwill method Partial goodwill method

F.V of NCI X -
Share of fair value of net assets - X
of subsidiary
Share of subsidiary adjustment X X
Acquisition of subsidiary by (X) (X)
parent
Profit of subsidiary after x X
additional acquisition.
Impairment of goodwill:
When carrying value exceeds recoverable amount.
allocation of
goodwill impairment
partial goodwill
full goodwill method
method
Dr. P/L
Dr. P/L
Dr. NCI
Cr. Goodwill
C.r Goodwill

Net assets of subsidiary as per x X
SOFP
F.V at acquisition x/(x) x/(x)
Additional depriciation on fair x/(x) x/(x)
value adjustment
Goodwill x X (grossed up)
Carrying value X X
Recoverable amount (always (x) (x)
given)
Impairment loss x x
Amount of entry will be impairment loss * % of parent.
Step disposals:
• Consolidate P/L untill the date of disposal

• Donot consolidate balance sheet.
• No gain/loss is calculated if control is retained.
if the control is not retained than gain/loss is calculated as.

Cash received x x
Fair value of investment retained x x
NCI at disposal x -
Fair value of net assets of (x) (x)
subsidiary at disposal
Goodwill (x) (x)
Gain/Loss X X
• The gain and loss is moved into profit/loss because it is realized.
IAS 7 (Cash Flows)

Cash flow from operating activities:
Profit before tax x
Adjustments for non-cash/non-operating items.
Finance cost x
Depreciation x
Loss/(gain) on disposal x/(x)
Impairment of goodwill/associate x
Share of post-acquisition profit of associate (x)
Current service cost, past service cost, net interest expense x
Curtailment, net interest income (x)
Amortization of Government grant (x)
Cash received from grant related to income x
(increase)/decrease in current assets (x)/x
Increase/ (decrease) in current liabilities x/(x)
Contributions into the plan (x)
Tax paid (x)
Finance cost (x)
Cash flows from investing activities:
Payments for purchase of property, plant and equipment (x)
Proceeds from sale of property, plant and equipment x
Net payments for purchase of subsidiary (net off with bank balances received) (X)
Payments for purchase of associate (x)
Dividends received from associate x
Cash received from grant related to asset x
Cash flows from financing activities:
Payment of lease liability (x)
Dividend paid by parent (x)
Dividend paid by subsidiary to NCI (x)
Note:
The further part of SBR exam contains technical articles which are available on ACCA website do read
them and practice from exam kit as much as possible.
Solution of examples
Example 1:
Thrillers will be depreciated over 5 years and remaining cost of the aircraft will be depreciated
over 25 years hence depreciation expense will be.
Depreciation expense:
Remaining cost of the building = $45000/25 = 1800
Thrillers cost= $5000/5 =1000
Total depreciation expense= $1800 + $1000 = $2800.
Example 2:
Cost 40000
Depreciation (10000)➔40000/4
C.V 30000
Impairment loss (5000)➔balancing figure
Recoverable amount 25000➔given
Depreciation (8333)➔ 25000/3
C.V at 31 dec 2020 16667
Reversal 10333 ➔ balancing figure
Recoverable amount 27000
If the asset was not impaired than carrying value at 31 dec 2020 will be $20000 hence only 3333 (20000-
16667) is reversed.
Dr. P.P.E 3333
Cr. P/L 3333
Example 3:
if the amount of the grant is deducted from asset cost than depreciation expense in P/L will be
10000 (50000-20000)/3 each year and asset is recorded at 20000 (cost - grant in full – depreciation) in
year 1, at 10000 in year 2 and at zero in year 3. But if the grant is treated as deferred income than
calculation of depreciation expense remains normal and at each year end 6667 (grant/useful life) is
recorded as govt grant in statement of P/L. and in liabilities an unearned income is shown at 13333
(20000-6667) in year 1, at 6667 in year 2 and at zero at the end of useful life.
Example 4:
Pakwheels are selling two products (automobile and services). Both are distinct and not
interdependent.
Example 5:
Management believes that probability weighted method is the most predictive approach.
60% chance of $150,000 = $90,000
30% chance of $145,000 = $43,500
10% chance of $140,000 = $14,000
$147,500
Example 6:
Expense of 15 days is recorded in 2018 because employee worked 15 days extra.
Recognize expense in the period to which it relates and not in the period in which it is paid. (matching
concept).
Example 7:
At 15 December
Dr. receivables 1800 (1500*1.2)
Cr sales 1800 (1500*1.2)
At year end receivables are retranslated because they are monetary items the total will be 1875
(1500*1.25) the difference of 75 (1875-1800) is treated as an increase in receivables with corresponding
entry into P/L.
Example 8:
At the date of acquisition asset is recorded at $2600 (2000*1.3) than asset is depreciated at year
end with amount of 520 (2600/5) hence carrying amount at 31 December will than become $2080
(2600-520) and as the asset is revalued at year end the fair value will become $3080 (2200*1.4). this
difference of $1000 is recorded as retranslation gain.
If this property is investment property than treatment will be same but depreciation is not charged.
Example 9:
Years Cash flows Discount factor 8% Present value
1 5000 .926 4630
2 5000 .857 4285
3 105000 .794 83370
Liability is 92285
Equity will be cash less liability (100000 – 92285) = 7715.
8% discount factor is used to get 100% pure liability.

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IAS 16 and IAS 40

 Held for use in production OR

And are expected to be used in more than one accounting period.

Land and buildings

IAS 16 if used IAS 40 if used IAS 2 if used in

Assets included in IAS 40 are:

• Land held with currently undetermined future use

Common points between IAS 40 and IAS 16:

rental portion in own use in IAS

(i) Future economic benefits are probable

• Cash or cash equivalents paid OR

If cost model is used than it is same in IAS 16 and IAS 40.

Acc. Depreciation (x)

Acc. Impairment (x)

• Depreciation will be charged.

Fair value model:

Measure assets acquired at fair value unless:

(i) Transaction lack commercial substance OR

In above two cases measure at carrying value of asset given.

COMMERCIAL SUBSTANCE is defined as the event or transaction causing the

Complex asset is an asset in which different components are treated as

Or with IAS-2 to them.

Identifiable means separable OR arise through contract.

(i) Probable future economic benefits.

Research is always includes

(i) Probable future benefit.

(iv) Ability to use.

To remember this use pneumonic ‘PIRATE’.

(i) Staff training.

donot amortize but

IAS-36 (impairment of assets)

fair value less cost of

present value of future

Guidelines for future net cash flows:

• Reasonable and supporting assumptions are made.

Guidelines for using interest rates:

• Current market rate with risk adjusted to specific asset.

cost model revaluation model.

first recognize in OCI

Reversal of impairment loss:

• No reversal for unwinding because that increase is due to time.

• Market interest rate is increased.

Cash generating unit:

Allocation of impairment to CGU:

Govt assisstances are just disclosed in notes to the accounts.

There are two types of Govt grants.

• Grant related to asset.

Grant related to asset

either deduct from OR show grant

primary purpose is all

monetary and non-

recognize in P/L when

Repayment of GOVT Grant:

Is a change in accounting estimate➔ when condition is not met➔ no

Rule for treatment.

On qualifying all other purposes.

borrowing cost will