Fi instrument

Fin liab vs fin asset --- see ss

The calc of simple loan and red. Pref shares is same

AMMORTIZED COST TABLE;

Obligation at start + interest - payemnt

= obligation at end
Par value-issue cost should be charged Par value x Normal rate
o+I-p
-disc Based on time period
(O at start x EFFECTIVE rate)

-this will be recorded in if not yet paid then it will

be rec in current libality

Pnl

COPMPUND INSTRUMENT
instrument havong both equity and liability component

ias 32 says whenever you issue compound instrument you have to seperate both and
equity inst. (shall be reported in equity section) and liability inst. (shall be
reported in liability section)

Q. Must refer SNAP of compound interest

Covertible loan ; which has option to convert into shares (equity) --- the option
should be considered as equity and the rest part shoyld be considederd liability

step 1 ; calculate the total amount of instrument at par value

step 2 ; calculate the amount of loan by calculating the total Present Value of
Instrument, and using this seperate the liability and equity

YEAR CASH FLOWS DISCOUNT RATE(should be same as of simple

loan) P.V ( CF x Disc. Rate)

year 1
2 interest at par value
3

Last Year interst+Prinicpal

total -----> this will be the amount of loan ----> (This - total amount of
instrument at par value)=
ammount of equity

step 3; the equity part shall remain in equity in balance sheet as it is but the
loan shall be ammortized over the period;

Obligation at start + interest -

payment = obligation at end

loan amount calc. in step 2 (OaS x Effective Rate of simple loan)

interest at par value (OaS + Interest - Payment)
MODELS FOR MEASUREMENT

1. AMMORTIZED COST 2.FV THROUGH OCI

3.FV THROUGH PNL
FINANCIAL ASSET
-DEBT SEC YES YES
YES
-EQUITY SEC NO YES
YES

FINANCIAL LIAB
-DEBT SEC YES NO
YES

Hold to collect + Hold to colleect & sell

Hold to sell
SPPI when prices are favourable

RECOGNITION;

Initially---> FV + Tr. Cost Fv + Tr. Cost Fv

Only

Subsequently---> Ammortized Tr. Cost changes in FV;

changes in FV;
Inv Dr
Inv Dr
OCI Cr
Pnl Cr

Transaction Cost ---> (% x Face Value +/- Prem./Disc.)

Return on investment % ---> everytime of Face Value

> In case of Shares--> No revaluation shall be carried out of shares being

disposed----> remaining shares would be revalued

Ammotization Of Tr. Cost

AMMORTIZED COST TABLE;

Obligation at start + interest - payemnt
= obligation at end
Face Value=
Par value-issue cost should be charged Par value x Normal rate
o+I-p
-disc Based on time period
(O at start x EFFECTIVE rate)

-this will be recorded in if not yet paid then it will

be rec in current libality
Pnl

-In case of Financial Asset the transaction cost will be added in investment and
investment is ammortized over the period(ie decrease in investment)
,ENTRIES;
Cash Dr
Int. *INCOME* Cr
Investment Cr
In case of Financial Liability the transaction cost will be deducted from
liability initially and will be ammortized over the period (ie increase in
liability)

Int *EXPENSE* Dr
Cash Cr
Fin. liability Cr

-Principal amount is another name of Par Value dont get confused

Impairment Of Financial Asset;

If an Financial Asset IS HELD AT FV THROUGH OCI OR AT AMMORTIZED COST then

on Initial Recognition they are supposed to book a credit allowance of imapirment,

equal to 12 months;
Impairment
Loss Dr
CALCULATED AS; Probability x Expected Credit Loss Provision
for Impairment Cr

Subsequently --> If credit risk increase Credit Allowance then 12 months credit
allowance will be replaced for allowace of life time----> If credit quality
improves-> Then 12 months loss is reinstated

Q.159 Mistake I did--->

An 8% $30 million convertible loan note was issued on 1 April 20X5 at par. Interest
is payable in arrears on
31 March each year. The loan note is redeemable at par on 31 March 20X8 or
convertible into equity shares at
the option of the loan note holders on the basis of 30 shares for each $100 of
loan. A similar instrument
without the conversion option would have an interest rate of 10% per annum.
The present values of $1 receivable at the end of each year based on discount rates
of 8% and 10% are:
8% 10%
End of year 1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
Cumulative 2.58 2.49

In this i multiplied the Repayment + Interest --> in last year with 2.49 however
its just a total of above --> See Answer for good approach

30*8%*2.49 = 5.976
30*0.75 = 22.5 => 28.476 => 30 - 28.476 = 1.524 (ans)
-If an entitiy has not yet made decision of initial recognition of equity
instrument then ifrs 9 requires it to measure at FV through Pnl

-In case of FV through OCI ---> At the time of repayment--> entry would be --->
OCI dr------> All those changes in FV being parked at OCI

Retained Earning Cr.

How should the convertible loan notes be accounted for? ==> As Debt And Equity

Q. An 8% $30 million convertible loan note,, A similar instrument

without the conversion option would have an interest rate of 10% per annum.

in the above case what % will be used to caluclate interest and what will be used
as a discount rate?

since it is an 8% 30 million loan the interest will be calculated using 8% and 10%
will be used for discounting purpose

Q. and now what % will be used as an effective rate of interest for ammortization
table of loan/financial liability ? Ans => 10% and 8% will be used as % for
regular interest payment of par value

Dexon's draft statement of financial position as at 31 March 20X8 shows financial

assets at fair value through
profit or loss with a carrying amount of $12.5 million as at 1 April 20X7.
These financial assets are held in a fund whose value changes directly in
proportion to a specified market index.
At 1 April 20X7 the relevant index was 1,200 and at 31 March 20X8 it was 1,296.
What amount of gain or loss should be recognised at 31 March 20X8 in respect of
these assets?

12500/1200*1296 = 13500 => 13500-12500 = 1,000,000 gain

CASE OF EQUITY INVESTMENT AND FV THROUGH OCI

On 1 January 20X8 a company purchased 40,000 $1 listed equity shares at a price of

$3 per share. An
irrevocable election was made to recognise the shares at fair value through other
comprehensive income.
Transaction costs were $3,000. At the year end of 31 December 20X8 the shares were
trading at $6 per share.
What amount in respect of these shares will be shown under 'investments in equity
instruments' in the
statement of financial position as at 31 December 20X8?

Ans : Initially => 40000*3 + (3000) 123000

Subsequently => 123000 - (40000*3) = 117,000 = making the total inv at
240,000

mistkae i did => 120,000 + 3,000, + 40,000 * 3 = 243,000 => x WRONG ANSWER
x
If Bertrand had incurred transaction costs in issuing these loan notes, how should
these have been accounted
for?
A Added to the proceeds of the loan notes
B Deducted from the proceeds of the loan notes
C Amortised over the life of the loan notes
D Charged to finance costs

ANSWER = > Deducted from the proceeds of the loan notes

FIN LIAB.=> where the fair value is not capable of reliable measurement, they
should be measured at cost.

IAS 8

ACCOUNTING POLICY

- Rules, principle, base and Presentation acc. to which FS are made

- Should be applied consistently
- only changes can be made if there is change in ifrs or Management View
- if the changes are to be applied tthen it should be applied restropectively

refer snap of change in policy (which of the following is change in policy)

ACCOUNTING ESTIMATES;

-Estimstes are made for the future

-Should be reviewed anually
-Changes should be applied prospectively

CORRECTION OF ERROR;

-Material Prior Period Errors

-Corrected Retrospectively
-Prior period errors will be settled through Retained Earnings in opening balance
and current period error will be settled through Current Year Income Statement
(see snap of example Triage Co.)---->
dirctors are hopeful--> means it is not virtually certain---> means no recievable
will be recorded ---> (IAS 37)

IAS 36 (impairment) (charged as expense in Pnl)

When carrying ammount is higher than residual value,,, residual value---> Value in
Use(Present value of future cash flows) OR Net Selling Price --> whichever is
*Higher*

- Co. is not required to check for impairment, only check whenever there is an
indication
- but there are 3 types of assets of which Co. is required to check the impairement
anually these are;
1. An intangible asset with an indefinite useful life
2. // // // which available for use but its commercial use is not
yer started.
3. goddwill acquired in a business combination

- Land is not depreciated but it is also tested for impairment when there is an
indicator.

CASH GENERATING UNITS----> Group Of Assets generating Cash Inflows

- impairment is calculated on the same basis, but the allocation shall be
diffenet, it will allocate in the following manner;

1.Obvious Impairment
2.Goodwill allocated to CGU
3.Other Assets Of the Unit (on Pro Rata basis)

- CGU is tested for impairment when there is an impairment indicator, however if

there is a goodwill included in CGU then impairment testing will be annual

- REMEBER--> impairment will never be on Current Assets (must reffer mcq no. 62)

MUST REFER SNAP OF FYNGLE, A C G U;

-Impairment on Goodwill and Obvious Impairment will be provided full (i.e.
not on pro rata basis) ----> After allocating impairment on obvious and goodwill
the remaining impairemnt shall be allocated as : (Value of Asset Being
Impaired/NCA-Goodwill-Obviously Impaired) x Remaining Impairement

imp detail for obviously impaired = MUSSTT REFFER MCQ NO. 62 => (the obviously
impaired is a part of plant and equipment, so after allocating the impairment to
the obviously impaired the remaining plant and equipment (plant and equipment -
carrying amount of obviously impaired) will be impaired as per pro rata basis)

IMPAIRMENT INDICATOR; -----> A hint that the value of the asset has gone down ---->
Must reffer the snap of exanmple--> which one is not indicator of impairment---> it
would be the impairement indicator if the net asset were LOWER then the entity's
No. Of Shares x Share Price

VALUE IN USE---> PRESENT VALUE OF FUTURE CASH FLOWS ---> Refer Snap of 4 METRIC Co.

SCHEDULE OF ADJUSTMENT ----> EXAMPLE ;

Triage Co – Schedule of adjustments to profit for the year ended 31 March 20X6
$’000
Draft profit before interest and tax per trial balance 30,000
Adjustments re:
Note (i)
Convertible loan note finance costs (w (i)) (3,023)
Note (ii)
Amortisation of leased property (1,500 + 1,700 (w (ii))) (3,200)
Depreciation of plant and equipment (w (ii)) (6,600)
Note (iii)
Current year loss on fraud (700 – 450 see below) (250)
Note (iv)
Income tax expense (2,700 + 700 – 800 (w (iii))) (2,600)
–––––––
Profit for the year 14,327
–––––––
The $450,000 fraud loss in the previous year is a prior period adjustment (reported
in the statement of changes in equity).
The possible insurance claim is a contingent asset and should be ignored

SANDOWN note no 7;

30/10/2 = 1.5 + 9 = 10.5

30-10.5 = 19.5
19.5 - 15 = impairment loss of 4.5 --->

ammortization of further six months --> 15/3*6/12= 2.5 --> 15-2.5= 12.5

reff mcq no 71 (the line = the patents have now estimated to have no value)

IAS 16 STUDY TEXT NOTES

CONEPTS;
1.RECOGNITION CRITERIA: A) it is probabale that the future economic benefits
associated with assset will flow to the entity B) the cost can be reliably measured

2.COMPLEX ASSETS: When the assets have other major componenets then these are
broken down into smaller parts, this occurs when diferent parts have different
useful lives and differenet deprectiation rates---> in such the depreciation of
such parts shall be calculated differently

3.Component of cost:
1.Safety and Environmental equipment shall be capitalised
2.Pur Price
3.Import Duties
4.All the directly attributable Cost eg:

– The cost of site preparation

– Initial delivery and handling costs
– Installation costs
– Testing
– Professional fees (architects, engineers)

5.dismentling cost(present value of dism. cost)

6. Cost of testing wether asset is functioning properly (cost - net proceeds
from selling the item)
4 Following will specifically not be capitalised:
1.Admin and General OH
2.Start-Up and similar pre production cost
3.Initial Operating losses BEFORE the asset reaches planned performance
4.Abnormal cost (wasted material,labour or other resources) ---> of a self
constructed asset

5.EXCHANGE OF ASSETS:
Measured at; -Fair Value of Asset Acquired
-If FV of asset can't be reliably measured ---> Fv of Asset Given Up
-If FV of asset given up also cannot be reliably measured---->
Carrying Value Of Asset Given UP

In case of exchange what would be the loss on disposal? => the carrying amount ,,,
e.g. if a company is replacing the asset having carrying value of 25 with the new
asset whose cost is 140, what would be the loss on disposal? => this means the
comapny is paying whole 140 for new asset and the old asset is scraped/sold in $0
--> gain/(loss) on dispoal = 0 - 25 = -(25)

6.Revaluation-----> See Register ---> EXCESS DEPRECIATION --> REV SURPLUS/EXCESS

DEPRECIATION

Q. Auckland purchased a machine for $60,000 on 1 January 20X7 and assigned it a

useful life of 15 years. On
31 March 20X9 it was revalued to $64,000 with no change in useful life.
What will be depreciation charge in relation to this machine in the financial
statements of Auckland for the year
ending 31 December 20X9?

Ans. The machine has been owned for 2 years 3 months, so the remaining useful life
at 31 March 20X9 was 12
years 9 months.

Prior to revaluation it was being depreciated at $4,000 pa (60,000/15), so the

charge for the first three
months of 20X9 was $1,000.

The machine will now be depreciated over the remaining 12 years 9 months = 153
months/12.75 years . So the charge
for the remaining 9 months of 20X9 is $3,765 ((64,000 / 153) × 9) or (64,000/12.75
* 9/12)
So total depreciation for the year ended 31.12.X9 is (1,000 + 3,765) = $4,765

7.Review Of Useful Lives And Depreciation Method;

Both should be reviewed anually and any change shall be accounted as change in
estimate ---> Prospective Application ---> Adjustement To Future Depreciation

8. OVERHAULS:
If the assets requires overhaul after every regular interval then in order to
continue operations then such overhauling cost will be capitalised *when it arise*
and will be treated as an adiitional component and depreciated OVER THE PERIOD OF
NEXT OVERHAUL.

APART FROM OVERHAULING;

Parts of some items of property, plant and equipment may require replacement at
regular intervals. IAS 16
gives examples of a furnace which may require relining after a specified number of
hours or aircraft
interiors which may require replacement several times during the life of the
aircraft. => This cost is recognised in full when it is incurred and added to the
carrying amount of the asset. It will be depreciated over its expected life, which
may be different from the expected life of the other components
of the asset. The carrying amount of the item being replaced, such as the old
furnace lining, is
derecognised when the replacement takes place.

Expenditure incurred in replacing or renewing a component of an item of property,

plant and equipment
must be recognised in the carrying amount of the item. The carrying amount of the
replaced or renewed
component must be derecognised. A similar approach is also applied when a separate
component of an
item of property, plant and equipment is identified in respect of a major
inspection to enable the continued
use of the item.

key point to be noted = its either overhauling, equipment requiring regular

replacemet, expenditure incurred in replacing or renewing a component of PPE,,
other expenses incurred will not be capitalised rather they will be expensed out

P.s. => if today we know that after 5 years asset will need overhaul then today we
wont do anything, but after 5 yrs when it arise it will capitalised and ammortise
over the period of next overhaul

Q.An aircraft requires a planned overhaul each year at a cost of $5,000. This is a
condition of being allowed
to fly.
Ans. Capitalised and depreciated over the period to the next overhaul

9.Disclosures:

Cost At Start: xxx

Rev. Surplus: xxx
Addition: xxx
Disposal: (xxx)
-------
Cost At End xxx

Depreciation

Acc. Dep At Start xxx

Charge for Year xxx
Eliminated On Disposal (xxx)
-------
Acc. Dep. At End xxx

NBV
At End xxx
At Start xxx

10. Useful Life

Determined Considering Factors:
- Expected Physical Wear And Tear
- Obsolence
- Legal or Other Limits on the use of asset

11. Consistency of Depreciation method is important ----> Unless altered

circumstances justify the change

EXAMINERS PLAY IN YEARS AND MONTHS -> KEEP YOUR EYE ON YEARS ON MONTHS = REFFER Q
26

IAS 40 (INVESTMENT PROPERTY)

DEFINITON;
-Property to earn rentals or capital appreciation or both

EXAMPLES:
1.Land held for long term for capital appreciation (not for short term in ordinary
course of business)
2.Bulding leased out under operating lease
3.Building leased by Holding to Subsidiary ---> NOTE: In Cosolidated Financial
Statement such property will be regarded as owner occupied property---> PPE---> IAS
16
4.PROPERTY BEING CONSTRUCTED FOR DEVELOPED FOR FUTURE USE AS INVESTMENT PROPERTY
------- -----------------------------------
5.If the owner have not yet decided that whether to use land for Business
Production or use it for sale in ordinary course of business ---> In such case the
land will be considered as Investment Property and will be treated under IAS 40
untill the decision have been made

6. Following are specifically mentioned as non investment property;

1.Property Inteded for sale in ordinary course of business

2.Property being developed or constructed on behalf of third parties
3. Owner * Occupied* property

7. MEASUREMENT;

INITIALLY -----> At Cost

SUBSEQUENTLY---> COST OR FAIR VALUE ---> Whatever the Policy Co. choose it will
be applied to all of its investment Property--->Where an entity choose to classify
its property held under operating lease then there is no choice, all the investment
property will be measured at Fair Value regardless of whether it is Owned or
Leased.

8. FAIR VALUE MODEL;

- It should be annual
- No depreciation will charged
- The change in Fair Value will be charged in Pnl ( NOT IN COMPREHENSIVE INCOME)
-----> AUDIT RISK = Revlauation gain on Inv Property is recorded in OCI
 - If FV model is selected then all the property shall be dealt will FV except in
extreme cases where FV cannot be reliably measured, in such cases the asset will be
measured at ,

9. COST MODEL;

100% same as ias 16

- the entity should not change model unless the change will result in more
appropriate presentation

TRANSFER OF IAS-16 PPE TO INVESTMENT PROPERTY =>

A business owns a building which it has been using as a head office. In order to
reduce costs, on
30 June 20X9 it moved its head office functions to one of its production centres
and is now letting out its
head office. Company policy is to use the fair value model for investment property.
The building had an original cost on 1 January 20X0 of $250,000 and was being
depreciated over
50 years. At 31 December 20X9 its fair value was judged to be $350,000.
How will this appear in the financial statements at 31 December 20X9?

Solution

The building will be depreciated up to 30 June 20X9.

$
Original cost 250,000
Depreciation 1.1.X0 – 1.1.X9 (250/50  9) (45,000)
Depreciation to 30.6.X9 (250/50  6/12) (2,500)
Carrying amount at 30.6.X9 202,500
Revaluation surplus 147,500
Fair value at 30.6.X9 350,000

The difference between the carrying amount and fair value is taken to a revaluation
surplus in accordance
with IAS 16.

However the building will be subjected to a fair value exercise at each year end
and these gains or losses
will go to profit or loss. If at the end of the following year the fair value of
the building is found to be
$380,000, $30,000 will be credited to profit or loss.

DISPOSAL;

Derecognise (eliminate from the statement of financial position) an investment

property on disposal or
when it is permanently withdrawn from use and no future economic benefits are
expected from its disposal.

Any gain or loss on disposal is the difference between the net disposal proceeds
and the carrying amount
of the asset. It should generally be recognised as income or expense in profit or
loss.

Compensation from third parties for investment property that was impaired, lost or
given up shall be
recognised in profit or loss when the compensation becomes receivable.

IAS 23 - BORROWING COST

1.QUALIFYING ASSET - An aset that takes substantial time to get ready and on whom
the borrowing Cost available for capitalisation is captialised

2. BORROWING COST ELIGIBLE FOR CAPITALISATION---> Borrowing Cost - Investment

Income

3. Two Types Of Boroowing --> 1. General Borrowing 2. Specific Borrowing

Specific Borrowing ---> Whole Borrowing Cost will be capitalised starting from
the period when the capitalization criteria is met(eg Specfic loan taken on jan 1
but cap. criteria is met on june30 then the interest of first six months will not
capitalised, it will be expensed out)

Leclerc has borrowed $2.4 million to finance the building of a factory.

Construction is expected to take
two years. The loan was drawn down and incurred on 1 January 20X9 and work began on
1 March 20X9.
$1 million of the loan was not utilised until 1 July 20X9 so Leclerc was able to
invest it until needed.
Leclerc is paying 8% on the loan and can invest surplus funds at 6%.

Calculate the borrowing costs to be capitalised for the year ended 31 December 20X9
in respect of this project.
2.4 x 8% x 10/12 = 160,000
2.4 x 6% x 5/12 =(20,000) => 140,000

General Borrowing
In a general borrowing the amount of general loan is multiplied using
average rate and apportioned as per the remaining period of the month.
Step 1 --->
--> Weighted Average Rate = Amount of
such borrowings Amount of such borrowings
Rate x
-------------------------------- + Rate x ------------------------------
Total
General Borrowings Total General Borrowings

Step 2 ----> Borrowing Cost = Expenditure Drawn x Weighted Avg Rate x

Remaining Period Of Year

___________________________

12
Capita had the following bank loans outstanding during the whole of 20X8:
$m
9% loan repayable 20X9 15
11% loan repayable 20Y2 24
Capital began construction of a qualifying asset on 1 April 20X8 and withdrew funds
of $6 million on that date to
fund construction. On 1 August 20X8 an additional $2 million was withdrawn for the
same purpose.
Calculate the borrowing costs which can be capitalised in respect of this project
for the year ended
31 December 20X8.

(9% × 15 / 39) + (11% × 24 / 39) = 3.5% + 6.7% = 10.2%

Borrowing costs = $6m × 10.2% × 9/12 = 459,000

+ $2m × 10.2% × 5/12 = 85,000

-----------
544,000

4. Capitalisation Criteria;
Expenses on the asset incurred and,
Borrowing Cost are being incurred and,
Activities neccassary to prepare the asset started --> Not just physical work
---> Obtaining Permit for construction is also included

5. Suspension

Neccassary Suspension ---> Borrowing Cost will not be suspended to be

capitalised for such period
Incidental Suspoension---> // // // be suspended for such period

6. Ceasation Of Capitalisation;

When Substantial Activities are completed even though minor modification may
still be outstanding---> the Capitalisation is required to ceased.

IAS 12 (TAXATION)

CURRENT TAX : Tax as per tax authority

Defered Tax : Difference between the tax of Tax Authority and tax of Accounting

Accounting tax : Tax Calculated on Profit As Per Income Statement or Addition of

Current Tax and Deffered Tax

- Tax libility in the balance sheet will be current tax, and deffered tax
asset/liability will be seperately shown.

Tax Base : Item Appearing In balance sheet of Tax Authority

There are few examples in IAS 12 specfically mentioned in which
Carrying amount will be equal to Tax Base
Carrying Amount : Item appearing in the balance sheet of Company

Temporary Difference : Difference between Carrying Amount and Tax Base

1.Accrued expenses which have already been deducted in determining an entity's
current tax liability for the current or earlier periods
2.A loan payable which is measured at the amount originally received and this
amount is the same as the amount repayable on final maturity of the loan
3.Accrued expenses which will never be deductible for tax purposes
4.Accrued income which will never be taxable

- Negative Answer of (carrying amount - tax base) of Assets = Defer Tax liability,
Postive is Defer Tax Asset
- vice versa of above in liability ca

tax expense charged to profit or loss fty = (+Current year tax provision/-Tax due
from tax authority) + (+increase in deffer tax liab./-decrease in deffer tax
liability) + (+last year dr balance of current tax /-Cr balance of current)

Dr balance of current tax Brought Forward is also called ==> last year Under
Provision
Cr balance of current tax Brought Forward is also called ==> last year Over
Provision

INCREASE/DECREASE OF DEFFER TAX LIABILITY;

(dr)/Cr. balance of deffer tax liab. = (xx)/xx

(Carriying ammount - tax base) x Tax% = (xx)/ xx
----------
(Reduced)/increased provision (xx)/xx
----------

Presenation should be clean--> Your heading shoukd be in full --> YES= Statement of
Financial Position As At (Date) ---> NOT = SOFP As At--> NOT = Statement of
financial Position

try to highlight the headings such as Net Revenue, gross profit, net profit, Other
Expenses heading

-Revaluation gain and gain on disposal can only reported in Other Comprehensive
income

IFRS 5 ASSET HELD FOR SALE

NCA held for sale --> should not be reported in NCA ---> should be reported
seperately in current asset---> Measured at lower of => (NBV) or (FV - Cost to
sell)--> no depreciation ,, difference is charged to income statement as a loss on
held-for-sale assets

----------------
Concept Of FV For Asset Previously Measured At Fair Value;
if prior to the classification of the asset as held for sale asset is maesured at
fair value then and after the classification it is being measured at FV - Cost To
Sell then the cost of sell will immediately charged In PnL

if NBV = 100 and FV- Cost to sell = 60 --> the asset will be recorded at 60 and 40
will be charged as impairment loss in Income Statement/Pnl

Subsequent increase in fair value cannot be in excess of previously recorded

Impairment Loss

Following is the criteria to classify the asset in held for sale;

1.management is committed to a plan to sell

2.the asset is available for immediate sale

3.an active programme to locate a buyer is initiated

4.the sale is highly probable, within 12 months of classification as held for

sale (subject to limited exceptions)

5.the asset is being actively marketed for sale at a sales price reasonable in
relation to its fair value

6.actions required to complete the plan indicate that it is unlikely that plan
will be significantly changed or withdrawn

DISPOSAL GROUP CONCEPT---> Measurement/calculation almost same but --> if there is

an impairment loss then it shoud be allocated as per IAS 36;
-
obvious impairment
-
goodwill
- Pro
Rata

CONCEPT OF DISCONTINUED OPERATION; When Company Is Discountinuing any its operation

then it would be classify as discountinued operation

It says if the company is going to discontinue its operation in the near future
then it should be reported seprerately in Pnl --> For Example:

Sales Co X
COGS Co X
GPX
Expenses Co X
Profit from CO X
PROFIT OR LOSS FROM DO X/(X) <------------
Profit for the year X

(vi) The above balances contain the results of Tourmalet’scar retailing

operations which ceased on 31 December 2002 due to mounting losses. The results
of the car retailing operation, which is to be treated as a discontinuing
operation, for the year to 30 September 2003 are:$000
Sales 15,200
Costofsales 16,000
Operatingexpenses 3,200

The operating expenses are included in administration expenses in the trial

balance. Tourmaletis still paying rentals for the lease of its car showrooms. The
rentals are included in operating expenses. Tourmaletis hoping to use the
premises as an expansion of its administration offices .This is dependent on
obtaining planning permission from the local authority for the change of use,
however this is very difficult to obtain. Failing this,thebest option would be
early termination of the lease which will cost $1·5 million in penalties. This
amount has not been provided for.

Solution:

=15200-16000-32000=-4000

penalty for early terination of lease:

=-4000-1500
=-5,500

As at 30 September 2013 Dune’s property in its statement of financial position was:

Property at cost (useful life 15 years) $45 million Accumulated depreciation $6
million On 1 April 2014, Dune decided to sell the property. The property is being
marketed by a property agent at a price of $42 million, which was considered a
reasonably achievable price at that date. The expected costs to sell have been
agreed at $1 million. Recent market transactions suggest that actual selling prices
achieved for this type of property in the current market conditions are 10% less
than the price at which they are marketed. 16/02/2019ACCA Prepare to Pass -ACCA
F7 by HS47At 30 September 2014 the property has not been sold. At what amount
should the property be reported in Dune’s statement of financial position as at 30
September 2014?

NBV = 39000-1500= 37500

fv - Cost to sell = 42x90%-1 = 36800

Answer is 36800 --> lower off

IFRS 15 REVENUE
FIVE STEP MODEL;

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

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

5. Recognise revenue when (or as) the entity satisfies a performance obligation

METHOD OF MEASUREMENT OF SATISFACTION OF PEROFORMANCE OBLIGATION SATOSFIED OVER

TIME;

INPUT METHODS=> On the basis of entity's input--> labour hours, resources

consumed, cost incurred.

OUTPUT METHODS=> On the basis of value to the customer of the goods or services
trsnsferred--> Surveys of performance completed, appraisal of units produced or
delivered etc.

Revenue includes an amount of $16 million for a sale made on 1 April 2015. The sale
relates to a single productand includes ongoing servicing from Downing Co for four
years. The normal selling price of the product and the servicing would be $18
million and $500,000 per annum ($2 million in total) respectively.

SOLUTION;

Individual Product = 18
IndiuvidualService = 2
-----
20
20 x X% =18

X% = 90% ----> 90% x 16 = 14.4 ---> Record revenue

----> 10% x 16 = 1.6/4 = 0.4 ---> record revenue of 0.4
1.2 ---> remaining will be recorded as unearned
income in liability section
CONSTRUCTION CONTRACT
stage of complettion will be calculated as=> cost incurred
----------------
Total Cost

if a company satisfies performance obligation for more but received the amount less
than the amount of performance obligation then the difference will be recorded as
contract asset in Balance Sheet
----> Vice Vesa for Contract Liability

CONTRACT ASSET/LIABILITY;

STEP 1 = First of all check whether there will be profit or loss ===> (Total
contract price - cost to date - estimated cost)

STEP 2;

In case there will be profit => Conract Asset/liability = Cost Incurred to date +
Recognised Profit(Profit x Stage of completion) - Amount Invoiced to customer =
Asset/(liability)

In case there will be loss => Contract Asset/Liability = Contract Liability =

Cost incurred to date - Forseeable loss (Transaction Price - Total cost of
contract) - amount invoiced

REMEMEBER --> COST INCURRED TO DATE --> Estimated cost to complete is increamental
to the cost incurred to date

Recognised profit = (Total Revenue - Total cost) x % of completion

INSTALLMENTS CONCEPT-->

Hindberg
is a car retailer. On 1
April 2014,
Hindberg
sold a car to
Latterly on the following terms:

The selling price of the car was

$25,300. Latterly paid $12,650
(half of the cost) on 1 April 2014
and would pay the remaining
$12,650 on 31 March 2016 (two
years after the sale).
Hindberg’s
cost of capital is 10% per annum.
What is the total amount which
Hindberg
should credit to profit or
loss in respect of this transaction
in the year ended 31 March
2015?

A $23,105 B $23,000

C $20,909 D $24,150

12650(1+10%)^-2 = 10455

CASH 12650
REC 10455
SALES 23015 (BAL.)

Rec. 1045 (10455x10%)

Interest Income 1045 ---> amount to be credited in Pnl = 1045 + 23015 = 24150

CASE OF SUBSTANCE OVER FORM --> SALE AND REPURCHASE AGREEMENT;

This comes in three forms;

An entity has either;

- obligation to repurchase
- Right to purchase

In both of the above scenario, the risk and rewards are not considered to be
transferred.

- Obligation to purchase, BUT only if reqested.

In this circumstance -> the entity will need to determine the likeliness of
excercising this option by the customer.

the assumption that the company has not yet sold the stock because the risk and
reaward has not yet shifted

ACCOUNTING ENTRY;

CASH DR
LOAN CR

Int. Exp. Dr
int. Pay. Cr

Sale with the right to return;

The decision whether the risk and reward have been trnasferred or not lies with
likeliness of goods to be returned, therefore the revenue of goods expected to be
returned should not be recorded.
COMMISION SALES --> SALES AS AN AGENT ON BEHALF OF PRINCIPAL---> agent can only
record the revenue of commission---> if agent recorded full --> Reverse (Revenue-
Commission) ===> Revenue Dr

Because revenue rec on behalf of principal is to be returned < ------------

PAYABLE Cr

COGS Cr

-SEE Q. 87 kit --> Inflation of service being provided

Derringdo also sells a package which gives customers a free laptop when they sign a
two-year contract for
provision of broadband services. The laptop has a stand-alone price of $200 and the
broadband contract is for
$30 per month.
In accordance with IFRS 15 Revenue from contracts with customers, what amount will
be recognised as
revenue on each package in the first year?
A $439
B $281
C $461
D $158

Year 1 $
Laptop (W) 158
Broadband (562 (W) /2) 281
439

Working
Laptop 200 22% 158
Broadband (30 × 12 × 2) 720 78% 562
920 100% 720

FACTORING
Rec are sold to the factor co., in return the factor co. gives some fixed % of
payment to the company and rest after recovery

WHO WILL BEAR LOSSES OF BAD DEBT;

1. COMPANY ==> Recourse=> Cash Dr

loan Cr ---> whnever there is loan there will be
finance cost

2.F.Co. ====> Non-Recourse => Cash Dr

Debtors Cr
Usually the exAMINER Will give you recourse with entry of---> Cash Dr and DEBTORS
Cr -------> reverse-----> Debtors Dr loan Cr

GOVERNMENT GRANT IFRS 20

1 Accounting treatment of government grants;

Q. Arturo Co receives a government grant representing 50% of the cost of a

depreciating asset which costs
$40,000. How will the grant be recognised if Arturo Co depreciates the asset:
(a) Over four years straight line; or
(b) At 40% reducing balance?
The residual value is nil. The useful life is four years.

The grant should be recognised in the same proportion as the depreciation.

(a) Straight line
Depreciation Grant income
$ $
Year 1 10,000 5,000
2 10,000 5,000
3 10,000 5,000
4 10,000 5,000

(b) Reducing balance

Depreciation Grant income
$ $
Year 1 16,000 8,000
2 9,600 4,800
3 5,760 2,880
4 (remainder) 8,640 4,320

LIABILITY OF GOVT GRANT => REFF Q 89

Presentation of grants related to assets

There are two choices here for how government grants related to assets (including
non-monetary grants
at fair value) should be shown in the statement of financial position:
(a) Set up the grant as deferred income.
(b) Deduct the grant in arriving at the carrying amount of the asset.

A company receives a 20% grant towards the cost of a new item of machinery, which
cost $100,000. The
machinery has an expected life of four years and a nil residual value. The expected
profits of the company,
before accounting for depreciation on the new machine or the grant, amount to
$50,000 per annum in
each year of the machinery's life.

SOLUTION => REFFER PG NO. 102

IFRS 16 (LEASES)
 Right Of Use Of Asset Dr -------> Depreciated at lower of ==> lease
Period & Useful life of asset ==> BUT ==> But if the question says that asset will
be transfered at the end of the
period then it will noly be depreciated at its useful life,,, Lease liability +
other direct costs + prepayments – incentives received + PV of Dism. Cost
Cash Cr ----> Initial Deposit
Lease Obligation Cr-----> Ammortized using the ammortization
table

ON OCT 1 2003 CHAMBERLEIN PURCHASED AN ITME OF PLANT FOR $56 MILLION. THE LEASE
PERIOD IS FOUR YEARS WITH ANNUAL RENTALS OF $16 MILLION IN ADVANCE. THE PLANT IS
EXPECTED TO HAVE NIL RESIDUAL VALUE AT THE END OF SIX YEARS. CHAMBERLEIN USES AN
INTEREST OF 10% PER ANNUM

ROUA 56
LO 56

AMMORTIZATION

ARREARS ==> YEAR LEASE OBLIGATION AT START + INTEREST - PAYMENT =

OBLIGATION AT END
---- ------------------------- -------- ---------
------------------
1 56 5.6 (16)
45.6 ---------> divide into CL and NCl--> for this you have to calculate table
for one more year
(expensed out)
2 45.6 4.56 (16)
34.16 ----------> This will be recorded as NCl and 45.6 - 34.16 = 11.44 ==> this
will be recorded as Cl

ADVANCE ==> YEAR LEASE OBLIGATION AT START - PAYMENT + INTEREST =

OBLIGATION AT END
---- ------------------------- --------- ----------
-------------------
1 56 (16) (4)
44 ------------> Divide it into NCl and Cl---> Remeber the Cl would be
installment-->16, and rest will be NCl=28
(expensed out &

record as CL)

Depreciation = 56/4 = 14

SALE AND LEASE BACK -->Finance Lease;

Profit On Disposal --> Ammortized over the term --> i.e. ==> Profit/lease period =
Ans --> This will be recorded as profit over the lease term
 --> Deffered income will be shown as Current And Non Current
Liability in the balance sheet

Rest accounting will be same as of other finance lease.

SALE AND LEASE BACK --> Operating Lease--> transaction cosnducted at fair value -->
Normal Sale transaction--> Lease Payments will be treatred as simple rentals

at below FV -->
May be compnesated by lower rentals in future

at above FV -->
Excess is deffered and ammortised over the period

SEE QUESTIONS;

179,

IAS
37 => if provision criteria met and there is also legal cost associated to that,
it will also be included in
provision (reff. q46)

Income statement Dr
Provision Cr

PROVSION CRITERIA;
1.PRESENT obligation arising from past event legal and consstructive,,
constructive = due to past practice, pulished policies or sufficiently specific
current statement entity has INDICATED that it will accept certain responsibilities
although they are not legally obliged to do so ..

EXAMPLE ;

For instance, an oil company may have an established practice of always making good
any environmental
damage caused by drilling, even though it is not legally obliged to do so. In this
way, it has created a valid
expectation that it will do this and it will have to recognise the constructive
obligation and make a
corresponding provision each time it drills a new wel

2.outflow is probable==> 50%+

3.and amount can be measured relaibly

RECOGNITION

LARGE POPULATION;

Parker Co sells goods with a warranty under which customers are covered for the
cost of repairs of any
manufacturing defect that becomes apparent within the first six months of purchase.
The company's past
experience and future expectations indicate the following pattern of likely
repairs.

% OF GOODS SOLD DEFECTS COST OF REPAIRS IF ALL ITEMS SUFFERED FROM

THESE DEFECTS

75 NONE -
20 MINOR 1.0
5 MAJOR 4.0

PROVISION?
(75% × $nil) + (20% × $1.0m) + (5% × $4.0m) = $400,000.

TIME VALUE OF MONEY;

A company knows that when it ceases a certain operation in five years' time it will
have to pay
environmental cleanup costs of $5m.
The provision to be made now will be the present value of $5m in five years' time.
The relevant discount rate in this case is 10%.
Therefore a provision will be made for:
$
$5m X 0.62092* 3,104,600

*The discount rate for 5 years at 10%.

The following year the provision will be:
$5m X 0.68301** 3,415,050
310,540

**The discount rate for four years at 10%

The increase in the second year of $310,450 will be charged to profit or loss. It
is referred to as the
unwinding of the discount

If any of these conditions does not meet and outflow chances are not probable (50%
- ) then -----> amount will be disclosed as --> Contingent Liablity in notes to
fianacial statements

remember = if the chances of outflow are remote = do nothing (not even contingent
liability)
= & if there is no POSSIBLE (not present) obligation = Do Nothing (not
even contingent liability)

Contingent Asset ---> Disclosed if the in flow is probable(50% +) ,, and if the

inflow is virtually certain(95% +) then it will be recognised as asset (recieveble)
(not contingent asset)
179
(ii) On 1 January 20X8, Duggan Co was notified that an ex-employee had started
court proceedings against them for unfair dismissal. Legal advice was that there
was an 80% chance that Duggan Co would lose the case and would need to pay an
estimated $1·012m on 1 January 20X9. Based on this advice, Duggan Co recorded a
provision of $800k on 1 January 20X8, and has made no further adjustments. The
provision was recorded in operating expenses. Duggan Co has a cost of capital of
10% per annum and the discount factor at 10% for one year is 0·9091.

1.012 x 0.909 = .920

Income Statement .12 (.92 - .8)

Provision .12 (.92 - .8)

finance cost 0.092

Provision 0.092

Gains from the expected disposal of assets should not be taken into account in
measuring a provision.

Provisions for restructuring :

The IAS gives the following examples of events that may fall under the
definition of restructuring.
 The sale or termination of a line of business
 The closure of business locations in a country or region or the relocation of
business activities
from one country region to another
 Changes in management structure, for example, the elimination of a layer of
management
 Fundamental reorganisations that have a material effect on the nature and focus
of the entity's
operations

The question is whether or not an entity has an obligation – legal or constructive

– at the end of the
reporting period. For this to be the case:

 An entity must have a detailed formal plan for the restructuring

 It must have raised a valid expectation to those affected that it will carry out
the restructuring by
starting to implement that plan or announcing its main features to those affected
by it.

IMPORATANT => A mere management decision is not normally sufficient ,,, Where the
restructuring involves the sale of an operation then IAS 37 states that no
obligation arises until
the entity has entered into a binding sale agreement. This is because until this
has occurred the entity will
be able to change its mind and withdraw from the sale even if its intentions have
been announced publicly.

COST OF RESTRUCTURING;
 Necessarily entailed by the restructuring; and
 Not associated with the ongoing activities of the entity

FOLLOWING ARE SPECIFICALLY MENTIONED IN THE STANDARD WHICH SHOULD NOT BE INCLUDED
IN COST OF RESTRUCTURING PROVISISONS;
-> Retraining or relocating continuing staff
-> Marketing
-> Investment in new systems and distribution networks

provision for un-avoidable dismentling cost ==> asset dr provision cr --> reffer
mcq no. 187

IAS 10 (EVENT AFTER REPORTING DATE) and before the FS is authorised for issue

ADJUSTING EVENT => ADJUST IN FS

NON-ADJUSTING EVENT => DISCLOSE

BELOW ARE THE EXMAPLES OF ADJUSTING AND NON ADJUSTING AS SPECIFIED BY IAS;

Examples of adjusting events would be:

 Evidence of a permanent diminution in property value prior to the year end
 Sale of inventory after the reporting period for less than its carrying value at
the year end
 Insolvency of a customer with a balance owing at the year end
 Amounts received or paid in respect of legal or insurance claims which were in
negotiation at the
year end
 Determination after the year end of the sale or purchase price of assets sold or
purchased before
the year end
 Evidence of a permanent diminution in the value of a long-term investment prior
to the year end
 Discovery of error or fraud which shows that the financial statements were
incorrect

The standard gives the following examples of events which do not require
adjustments:
 Acquisition of, or disposal of, a subsidiary after the year end
 Announcement of a plan to discontinue an operation
 Major purchases and disposals of assets
 Destruction of a production plant by fire after the reporting period
 Announcement or commencing implementation of a major restructuring
 Share transactions after the reporting period
 Litigation commenced after the reporting period

But note that, while they may be non-adjusting, some events after the reporting
period will require

IAS 38

You can only record purchased intangibles asset or Intangible Assets through
development process

following are the internally generated intangibles which can not be recorded as
intangibles but can be recorded as intangib;es if purchased
1. goodwill
2.mastheads
3.Publishing titles
4.Customer list
and other similar items

RESEARCH AND DEVELOPMENT COST ;

Research ---> Expensed Out

Development---> Expensed Out if criteria is not met

---> Capitalised if criteria is met -------> Ammortise over its useful
life if the project is completed --> Amortisation must only begin when commercial
production has commenced(reff mcq no. 51) , should be stopped once the intangible
is listed as held for sale or is being de-recognised from the fs ,,, intangibles
with indefinite lives are not ammortised

critetria;
the technical feasibility of completing the intangible asset (so that it will be
available for use or sale)

intention to complete and use or sell the asset

ability to use or sell the asset

existence of a market or, if to be used internally, the usefulness of the asset

availability of adequate technical, financial, and other resources to complete the

asset

the cost of the asset can be measured reliably.

Each development project must be reviewed at the end of each accounting period to
ensure that the recognition criteria are still met. If the criteria are no longer
met, then the previously capitalised costs must be written off to the income
statement immediately.

If these criteria are met, the entity may choose to either capitalise the costs,
bringing them ‘on balance sheet’, or maintain the policy to write the costs off to
the profit and loss account. Note that if an accounting policy of capitalisation is
adopted it should be applied consistently to all development projects that meet
that criteria.

All expenditure related to an intangible which does not meet the criteria for
recognition either as an
identifiable intangible asset or as goodwill arising on an acquisition should be
expensed as incurred. The

IAS gives examples of such expenditure:

 Start up costs  Advertising costs

 Training costs  Business relocation costs

MEASUREMENT --> intitially at cost

subsequently --> at option to the company whether ;
a) Cost model or,
 b) Revaluation method --> determination of FV = active market
(the value at which there is a buyer to purchase such intangible)
--> the entire class of intangibles should
be revalued as per method mentioned above however if there is no active market for
any intangible in the class of the asset ,,, the revaluation surplus will be
recorded in the revaluation surplus account in the equity,, for revaluation expense
first previously recorded gain in respect of that asset will be removed then
afterwards it will be if there are no surplus the expense will be charged to pnl as
rev. expense,, the excess depreciation will be credited to retained earning account

IAS 2

Inventory should be measure at lower of cost and net realisable value

FINANCIAL STATEMENTS

FORMAT;

Co – Statement of profit or loss and other comprehensive income for the year ended
31 March 2016
$m
Revenue X
Cost of sales (X)
Gross profit X
Distribution costs (X)
Administrative expenses (X)
Other operating income X
Finance costs (X)
Profit before tax X
Income tax expense (X)
Profit for the year X
Other comprehensive income
Gain on revaluation X
Total comprehensive income for the year X

Share Other Revaluation Retained Total

capital equity surplus earnings equity

$’000 $’000 $’000 $’000 $’000

Balance at X X X X X
Equity option X X
Bonus share X (x) --
Right share X X X
TCI X X X
Transfer (X) X --
Balance at X X X X X
 REMEMBER ==> THERE IS NO ENTRY OF DIVIDEND IN PNL
IT WILL BE DEDUCTED DIRECTLY FROM RETAINED EARNING

$’000 $’000
Assets
Non-current assets
Property, plant and equipment X
Intangible Asset X
Investments X X
Current assets X
Total assets X
Equity and liabilities
Equity
Equity shares of $1 each X
Share Premium X
Other components of equity X
Revaluation surplus X
Retained earnings X X
Non-current liabilities
Deferred tax X
5% convertible loan note X X
Current liabilities X
Total equity and liabilities X

SCHEDULE OF ADJUSTMENT ----> EXAMPLE ;

Triage Co – Schedule of adjustments to profit for the year ended 31 March 20X6
$’000
Draft profit before interest and tax per trial balance 30,000
Adjustments re:
Note (i)
Convertible loan note finance costs (w (i)) (3,023)
Note (ii)
Amortisation of leased property (1,500 + 1,700 (w (ii))) (3,200)
Depreciation of plant and equipment (w (ii)) (6,600)
Note (iii)
Current year loss on fraud (700 – 450 see below) (250)
Note (iv)
Income tax expense (2,700 + 700 – 800 (w (iii))) (2,600)
–––––––
Profit for the year 14,327

STEPS 1 => CHECK DATE, PUT HEADING OF FIRST REQUIRMENT (EG SOFP/SOCI)

STEP 2 => PASS DOUBLE ENTRY FOR EVERY NOTES

STEP 3 => MAKE FORMAT AND PUT NUMBERS AS PER DRAFT

STEP 4 => MAKE CHANGES IN ACCOUNTS IN ACCORDANCE WITH DOUBLE ENTRY IN STEP NO. 2
- Dividend is not included in finance cost-> if included deudect -> and Do Always
deduct it from retained earnings

CONSOLIDATION LDR --> Q.120

MOST IMPORTANT !!!!!

Approach to attempt Consolidation;

1. make format including goodwill, nci , investment in ass, and Cons R/e

2. put all the values as well

3. now make format for SONA NCI

GOODWILL Cons. Retained Earning
Scap xx NCI at Acq
(fv/(Sub. Inv x nci%) Cost of cons xx As per books
xx
Sprem. xx post acq adj
(diff. of SONA x // ) NCI at Acq xx post acq share of sub
(diff. of SONA x H% )
Un R. Profit xx
less:FV of NA at acq. (xx) Share of investment inAss (Post acq profit of A
x A%)
FV adjustment xx
less; investment in ass.

less:impairment (xx)

4. now read adjustments and start adjusting in above formats

5. For any adjustments which could have direct impact on B/sheet, do it immediately

Approach to attempt Consolidation Income Statement;

1. Check what is the date of acquisition because in 95% of the the company hae
acquired subsidiary less than 12 months before the reporting date ==> so check the
no of months

2. Make format of pnl, put all the balances , of parent and APPORTIONED BALANCES
(the balance apportioned as per no. of months) of subsidiary

3. Make the adjustment in to Pnl and also show workings

4. Make profit attributable to NCI format ;

Non Controlling Interest

PAT of Subsidiary XX ----> apportioned as per
months
Any other gain or loss XX/(XX)
Less: Excess Depreciation (XX)
Less: Un Realised profit(S to P) (XX)
Less: Impairment (XX)
XX
------------
XX =====> multiply
x NCI% = Profit attributable to NCI

•Basic Definitions

•Unrealized Profit

•Current Account

•Concept of COI

•NCI At Acquisition

•Fair Valuation

•Net Assets

•Goodwill

•Associate

•Retained Earnings

•NCI

SUBSIDIARY ---> CONSOLIDATED ---> MAJOR COMPOSITION OF BOARD OR 50%+ ORDINARY

SHARES ---Key point is control--> if you got enough shares but you dont have the
control then its not your sub.
ASSOCIATED----->EQUITY METHOD---> MINOR COMPOSITION OF BOARD/POWER TO
PARTICIPATE IN DECSISON METHOD OR 20% or MORE ORDINARY SHARES -> SIGNIFICANT
INFLUENCE

CONSOLIDATION MAIN POINTS;

-All Assets and liab of sub should be measured at fair value --> at acquisition
date ===> Net Asset = A - L ==> increase in asset increase NA ,, and increase in FV
will decrease its NA

-All intangible assets should ne recognised for the purpose of consolidation -->
Even the internally generated intangibles

-As per ias 37 only notes to fs of Contingent Liabilities are recorded --> but in
Cons. Contingent liabilities will be recorded Cons. FS

-Similar items should be merged and inter company balances should be cancelled
STEPS TO ATTEMPT;

-Identify ==> the date of acquistion, reporting date, Group Structure --> % of
holding in Sub, % of holding in Associate, % of NCI , Area of Cons. (B/S or PnL)

-Do all the adjustements roughly

-Prepare Net Asset of Subsidaries

-Compute Goodwill, NCI and Consolidated Reserves

-SOFP and SOCi

CONCEPT OF UNREALISED PROFIT;

when one company sells good to another entitity IN THE GROUP, then unless such
goods are further sold by the purchasing entitiy then such profit will be called
unrealise

CALCULATION ->
TRANSACTION BETWEEN PARENT AND SUBSIDIARY = PROFIT x %
OF STOCK STILL IN WAREHOUSE.
TRANSACTION BETWEEN PARENT AND Ass. = PROFIT x %
OF STOCK STILL IN WAREHOUSE x %Ass. SHARES

CASES IN UNREALIZED PROFIT ==> 1.FROM PARENT TO SUB 2.SUB. TO PARENT

3.PARENT TO ASS. 4 .SUB TO ASS. 5.ASS. TO PARENT
6.ASSCIATE TO SUB

R/E DR R/E & NCI DR

R/E DR R/E & NCI DR R/E DR
R/E DR
STOCK CR STOCK
CR INV IN ASS. CR INV IN ASS CR STOCK CR
STOCK CR

INVENTORY AT YEAR END ==> Parent + Subsidiary - Un Realised Profit + Goods in

transit + Fair value

following Intra Current Accounts are to be closed

•Debtors and Creditors --> Rec. of one and Pay. of 0ther

•Investment/ Loan -----> Investment of one and loan of another

•Interest Receivable and Interest Payable

•Div. rec and Div. Payable

There could be the CASH IN TRANSIT (P to S) ---> the intra account balance in this
case would be uneven and ==> Payable Dr CASH IN TRANSIT Dr
OR VICE VERSA

Debtors Cr DEBTORS Cr (see adj no.3 q.121)

STOCK IN TRANSIT = Stock Dr &

Adjustment of unrealised profit as per scenario
Account Pay. Cr

CALCULATING THE COST OF INVESTMENT; ----> The purpose is to calculate the

goodwill

Cash

COI Dr
CASH CR

Share exchange
(adjustment is only required when not recorded by
the holding company)

COI DR
SCAP. CR
S.PREM. CR

Deferred consideration
(recorded at present value and unwinding
will be recognized in consolidated retained earnings)

COI DR ====> Un-Winding = interest exp Dr

DEFF. CONS. CR deff. cons. Cr

Contingent consideration -----> (Contingent

consideration should always be brought in at FV. Any subsequent changes to this FV
post acquisition should go through the
income statement.)
must be
measured at fair value at the acquisition date.
-----------------------

COI DR ========> UNWINDING -> interest exp dr

CON CONS. CR Deff. Cons. cr

MUST REFFER;

Loan or debenture
( it will become as a part of cost of investment COI DR
only if issued as a part of consideration) LOAN
CR

NCI AT ACQUISITION;

- EITHER GIVEN IN QS
- OR CALCULATE ---------> NCI SHARES IN SUB x SHARE PRICE OF SUB.

FAIR VALUATION;

There could be the fair value adjustment for Statement Of Net Asset;

eg On acq date the FV of a machine is in excess of 200$ and the machine is

depreciated over its useful life of 20 years and purchased 2 years ago

AT ACQ. DATE AT REP DATE

FV ADJUSTMENT 200 11.11

(200/18) (INCREAMENT/REMAINING LIFE)

STATEMENT OF NET ASSET;

AT ACQ. DATE AT REP. DATE

Share capital X X

Share Premium X X

Retained Earnings X X

Any other Reserve X X

Fair Valuation X/(X) X/(X)

Up/I.L -- (X) --> UN

REALISED PROFIT OF ONLY SUB TO PARENT

E. Amortisation/Reversal -- X/(X)

E. Depreciation/Reversal -- X/(X)
-> CONCEPT OF GOODWILL

COST OF INV XX
NCI AT ACQ XX
(C x NCI%)* -------------------------> IF ASKED FOR FULL GOODWILL APPROACH THEN USE
NCI AT FAIRVALUE
----
XXX
LESS;
FV OF NET
ASSET AT (XXX)
ACQ.

---------

G.WILL AT XXX
ACQ.

IMPAIRMENT
LOSS (XXX)
-------
G.WIIL
AT REP DATE XXX ---------> IF THIS ANSWER IS NEGATIVE THEN=> THEN IT WILL
BARGAIN PURCHASE GAIN ==> RECORD INCOME IN PnL
-------

CALCULATION OF NON CONTROLLING INTERST

NCI AT ACQUISITION XX
POST ACQ. SHARE OF NCI XX DIFFERENCE OF SONA TABLE x NCI%
----
NCI AT REPORTING XX
----

- ASSOCIATE ACCOUNTING

Investment in Associate = Cost + (Post acquisition Profit x A%) - (Impairment

loss) – (Dividend Received) - (UNREALISED PROFIT x A%) ( P TO A ) or ( S TO A )
|
UN REALISED PROFIT;

3.PARENT TO ASS. 4 .SUB TO ASS. 5.ASS. TO PARENT

6.ASS. TO SUB
|
R/E /COS(PnL) DR R/E & NCI DR R/E DR
R/E DR

INV IN ASS. CR INV IN ASS CR STOCK CR|

STOCK CR

CONSOLIDATED RETAINED EARNINGS |

H co. retained earnings XX

S co. (post acquisition D-C) x H% XX -----------> Difference

of the Statement OF Net Asset Table

Share of investment in A co. (Post

acq profit of A x A%) XX |

Impairment of Associate investment (XX) <--------

U.p of Stock *(if Parent sold to SUB) (XX)

*U.p of Fixed Asset (net of depreciation) * (XX)

Impairment loss (Proportionate) (XX)

Negative Goodwill XX

Unwinding of discount (XX)

Changes in Contingent Consideration XX/(XX)

Any other gains/losses of Parent Company XX/(XX)

Acquisition cost (XX)

-------------
XXX

- SIMPLE RULE FOR CONS. RETAINED EARNING => 100% OF PARENTS + SHARE OF POST
ACQUISTION PROFIT (PROFIT x X% x MONTHS/12) +/- CONSILDATION ADJUSTMENT

SOFP
Net assets: 100% P + 100% S

Share capital: P only

Retained earnings: 100% P plus group share of post-acquisition retained earnings of

S ADD/less consolidation adjustments

Non-controlling interest: At acquisition + NCI share of post-acquisition retained

reserves with Adjustments

SOFP

Non Current Assets(H+S+/-Adjustments) XX

Goodwill XX

Other Investments XX

Investment in Associate
(Cost+Share of Post Profit - impairment loss) XX

Current Assets (H+S+/-Adjustments) XX

----
XX

Share Capital (H only) XX -----> If

there are unrecorded shares => RECORD
Share Premium (H only) XX

Retained Earnings (w) XX

7 ----
XX

NCI (w) XX

Non Current Liabilities (H+S+/-Adjustments) XX -------> In case

there are Defered Considerstion ==> Deff. Cons + Unwinding of interest
-------> In case
there are Contingent Consideration ==> Cont. Cons. +/- FV Adj.

Current Liabilities (H+S+/-Adjustments) XX -------> P + S -

Current A/C Adj. + Goods In transit
----
XX
----
 CALCULATION OF NCI

- FAIR VALUE = FULL GOODWILL METHOD

- NCI'S Proportionate Shares = FV of Net Asset at acquisition x NCI%

CALCULATION OF REVALUATION OF HOLDING'S PROPERTY

- REVALUATION OF PARENT XX

- REVALUATION OF SUB (Post Acq. Only) x H% XX -----> REST WILL BE ADDED

AT NCI
------
xx
-------

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (SOCI)

MAIN POINT ;
------------
THE CONS. INCOME STATEMENT IS MADE FOR ONLY CONTROLLING PERIOD, AND IF THE
CONTROLLING PERIOD IS LESS THAN 12 MONTHS THEN WE HAVE TO PROPORTIONATE

Revenue (H+S- Inter Co. sales) ) XX

COGS (H+S-inter co. Sales +U.P+ED -RD) (XX) -> FOR
EXCESS DEPRECIATION MUST Q142 PRODIGAL ADJ. NO. 2 !
Gross Profit XX
Operating Expenses (H+S+ Impairment Loss) (XX)
Other Income (H+S-Inter Co.) XX
Negative goodwill XX
Share of profit from associate (Net of Impairment Loss) XX
Changes in CC XX/(XX)
Gain or loss on investment(FVTPL) XX/(XX)
Finance Cost (H+S-Inter Co.+ Unwinding of discount) (XX)
Profit Before Tax XX
----
Tax ( H + S) (XX)
----
Profit For the year XX
Other comprehensive income
 Gain on revaluation (H + S) XX > reffer
adjustment no. i Q 143 Plastik Co.
Gain or loss on investments (H+S)(FVTOCI) XX
----
Total comprehensive income XX
----
Profit Attributable to:
Owners of Parent XX
NCI XX

Total comprehensive income attributable to:

Owners of the parent XX
Non-controlling interest XX
XX
Non Controlling Interest
PAT of Subsidiary XX
Any other gain or loss XX/(XX)
Less: Excess Depreciation (XX)
Less: Un Realised profit(S to P) (XX)
Less: Impairment (XX)
XX
------------
XX =====> multiply
x NCI% = Profit attributable to NCI
------------

CONCEPT OF IMAPAIRMENT;

IN CASE OF PARTIAL GOOD WILL (NCI NOT AT FAIR VALUE)

Less from Gwill xx ---> Parent% only R/E DR

less from Cons. res. xx ---> Parent% only GOODWILL CR

IN CASE OF FULL GOODWILL (NCI AT FAIR VALUE)

less from goodwill xx ----> (100%) NCI DR

less from Cons. Res. xx -----> (parent% only) R/E DR
less from NCI xx -----> (nci% only) GODDWILL CR

HOWEVER , as far as Pnl is concerned the whole impairment of goodwill will be

deducted from Admin Exp,, and Whole from profit att. to NCI as well.

LDR --> Q 120 ==> 1. the rev. surplus will be added in cons. retained earning and
it will be as follows --> (whole of prior to acquisition) + (revaluation after
acquisition x sub.%) + the rem. will be added to nci share

check whether nci fv give is of ac date or rep date ,, if acq date --> do post acq
adjustment

Q.141

DO MEMORIZE TABLE OF PROFIT ATTRIBUTABLE TO NCI ---> ALSO KEEP IN MIND WHILE
ATTEMPTING CONS PNL THAT IF THE TRANSACTION HAS AN IMPACT ON SUB'S PROFIT THEN ALSO
INCORPORATE IT ON NCI
HOWEVER FOLLOWING TRANSACTION ARE MUST TO BE A/C FOR ==> IMPAIRMENT LOSS, UN
REALISED PROFIT AND EXCESS DEPRECIATION

Q142 --> LDR ON CALCULATOR

Q. 157

LEARNING OUTCOMES;

1.for ascretaining share of profit from associate take PROFIT FOR THE YEAR NOT
TOTAL COMPREHNSIVE INCOME

2. The impairment loss of share of profit from associate will be will be taken as
whole --> NOT IMPAIRMENT LOSS x ASS. %

3. SHARE OF OTHER COMPREHENSIVE INCOME OF ASSOCIATE WILL BE SHOWN SEPERATELY IN PNL

IN THE OTHER COMPREHENSIVE SECTION

Q 158

LEARNING OUTCOMES;

MISTAKE = > IN INVESTMENT IN ASSOCIATE THE (POST ACQUISITION PROFIT x % OF

INVESTMENT ) IS ALSO ADDED

MISTAKE NO 2 => IMPAIRMENT IN ASSOCIATE WLL BE DEDUCTED IN FULL IN CONS. RETAINED

EARNINGS -> NOT IMPAIRMENT x % OF INV

MIATAKE NO. 3 => IN CASE OF NCI AT FAIR VALUE --> GIVEN IS OF ACQ. DATE --> for
post acquistion changes, simply mutilply % of of NCI x Difference of SONA

Q 142

adjustment no 2. -> if there is transfer of ppe within the group then excess dep
due to gain on disposal is added NCI whie ascertaining the share of NCI and reduced
depreciation will be deducted

RATIOS

1. DISPOSAL OF SUBSIDIARY

2 CASES --> 1 in which company losses the control --> 2 in which company doent
lost control but heoir thier stake is reduced

imp -> calculation of gain --> 2 types of gain --> 1 from the groups perspective
and 2nd from the parent cos perspective

GAIN FOR PARENT;

cash rec xx
less:investment (xx)
-------
xx

GAIN FOR GROUP

Cash rec xx
add fv of inv. retained xx
less NA of Sub. at disposal xx
goodwill xx
NCI (xx)
---------
xx
GAIN (xx)
-------------
xx

EPS ( EARNING PER SHARE)

--> PROFIT ATTRIBUTABLE TO ORD. SHARE HOLDER

PAT- PREF. DIVIDEND - NCI( in case eps for Cons.)

= -----------------------------------------------------
W. AVG NO. OF ORDINARY SHARES

TERP

2 FOR EVERY 5 SHARES

5 x 2.4 = 12
2 x 1 = 2
----
14
14/7 = 2

IF NEW SHARES ARE ISSUED DURING THE YEAR THEN THE NO. SHARES WILL BE CALCULATED ON
TERP BASIS AND THEN BE PROPORTIONATED ON MONTHLY BASIS EG

1 APRIL NO OF SHARES = 40000

1 OCT NEW SHARES ISSUED--> TOTAL NO. OF SHARES = 56000

TERP AFTER RIGHT ISSUE = 2

PRICE BEFORE RIGHT ISSUE = 2.4
PROFIT ATT. TO ORD SHARE HOLDERS = 19500
SOL;
ADJ. FACTOR --> PRICE BEFORE ROGHT ISSUE/TERP --> 2.4/2 = 1.2

40,000 * 6/12 * 1.2 = 24000

56,000 * 6/12 = 28000 = 52000

EPS = 19500/52000 = 0.375

CASE OF BONUS ISSUE ;

BONUS ADJUSTMENT FACTOR --> (1 + e.g 2/5) --> 1 is constant

income att to ord sh ; 13800

q. 1 apr -> ord shares = 40,000

co. issued 8000 new shares on july 1
and co issued BONUS SHARE on jan 1 for 1 share for every four shares held

step 1;
BAF = 1 + 1/4 = 1.25 --> to be applied to all the shares

W AVG SHARES ;

40,00O x 1.25 =
8000 x 9/12 x 1.25 = 57500

13800/57500 = 0.24

NOTE -> PROPTIONMENT OF SHARES IN BONUS CASE WILL BE = FOR HOW MANY MONTHS WE HAVE
ISSUED THOSE SHARES IN THE YEAR
-> PROPORTIONMENT OF SHARES IN RIGHT ISSUE WILL BE = NO OF MONTHS BEFORE NEXT
ISSUE OF SHARES

RESTATEMENT OF EPS;

PREVIOUS YEARS EPS

= -----------------------
BONSU ADJ. FACTOR -------> IF COMPANY ISSUED RIGHT AND BONUS BOTH, THEN
BOTH ADJ FACTOR WILL BE ADDED
DILLUTED EPS

--> MEANS WE ARE CALC EPS ON THE ASSUMPTION THAT ALL THE SHARES THAT ARE
CONVERTIBLE WILL BE EXCERCISED

RATIOS

1 mark per valid points, and usually 5 marks for ratio calculation this means you
have to include at least 12 - 15 valid points

KEY POINT FOR RATIO DRAFTING;

--> 1 => First of all divide your answer in four paragraprh, one for profitability,
second for liquidity,and third for gearing ratio

--> 2 => for every ratio there are 3 steps--> 1. Identification 2.Reason --> FIND
and COMMENT = (TIP ; Reasons are mostly hidden in the components of formula) 3.
Impact on Share Holders' wealth, ---> either it will increase or not?
For Example(*1) => ROCE based on-> Profit Margin x Asset Turnover
IDENTIFICATION => There is an increase in ROCE

REASON => the increase of ROCE could be due to (1. High Price and Low
Selling Units) or (2. Low Price and High selling units)
IMPACT => hence keeping in view the ROCE the shareholders wealth seems to
be increased
--> 3 => (write from shareholder's perspective, that how changes in such ratio will
affect shareholders' wealth)

PROFITABILITY RATIO ;

1. ROCE -> COMPARE WITH-> previos year/other companies/borrowing cost

REASON OF INCREASE/DECREASE (EBIT/Total Assets - Current Liabilities) =>

under/over valued asset , high/low pbit due to high/low operating expense or
high/low sales or high/low selling price or high/low selling units etc.

2. ROCE BASED ON ASSET TURONVER(Sales/Cap. Employed) x PROFIT MARGIN(PBIT/Sales) ->

REASON IS MENTIONED ABOVE IN EXAMPLE (*1) (Capital employed = total aseets -
current liabilities)

3. LOOKING AT INCREASE/DECREASE IN PROFITABILITY -> BY COMPARING GROSS PROFIT

MARGIN & PBT MARGIN (with previous yr/industry) -> REASONS= INCREASE/ DECREASE OF
COST OF SALES, INCREASE/DECREASE OF OPERATING EXPENSE

4. ASSET TURNOVER VS PROFIT MARGIN

(a) A high profit margin means a high profit per $1 of sales, but if this also
means that sales prices are
high, there is a strong possibility that sales revenue will be depressed, and so
asset turnover lower.

(b) A high asset turnover means that the company is generating a lot of sales, but
to do this it might
have to keep its prices down and so accept a low profit margin per $1 of sales.

ASSET TURNOVER = SALES / CAPITAL EMPLOYED

PROFIT MARGIN = NET PROFIT / SALES

GEARING RATIO ;

1. Keep in view all the gearing ratios,

discuss reason for increase/decrease and,
compare then conclude whether share investment in the company have become more
riskier or less riskier.
2. Also compare in your point the finance cost in Pnl with previous year/industry
and discuss whether the change is increasing/decreasing the amount available for
dividend
RATIOS ;

i Debt Ratio = All assets

------------ -> More than 50% is said to be high geared company
(although there is no specific benchmark)
All Debts ---> Current + Non-Current --> make sure you are not
including liabilities other than debts such as deffer tax liability

ii Gearing/Leverage Ratio = Debt -----------------------> long term debts not

short term
---------------
Debt + Equity

iii Interst Cover = PBIT

---------------- => Basically shows confidence of Share
holders to invest in the company --> technically it shows that the company can
comfortably pays it interst out of
Int. Charges profits or not.

LIQUIDITY RATIO ; Risk -> CASH FLOW PROBLEM

i. Current Ratio = current asset/ current liab.

ii. Quick Ratio = (current asset - inventory)/current laibility

both the above ratios show the companys ability to pay its liability from its
current asset--> ratio less than 1 shows that the company does have enough assets
to pay its liability

iii. inventory TO days =Closing inventory/cost of sales * 365 --> in how many days
inventory is being sold --> more days = slow moving inventory

iv. Rec. TO days = (Trade Rec/Sales) x 365 days --> lenght of time it takes for a
company's customers to pay what they owe is A/C Rec. collection period --> more
period shows the inefficiency of credit department and increase in risk of bad debt
leading to cash flow problems to the company

v. A/c payable days = (trade A/c payable/purchases) *365 --> more indicates the
cash flow problem and inability to pay suppliers on time -> leading to unsatisfied
suppliers and company might loose potential early payment discount due to it

GIVE CONCLUSION IN THE END!! --> SUMMARISING THE ABOVE, WHILE CONCLUDING the
effect on share holders wealth ,, and future probabilities on share holders
wealth ,, must reffer conclusions in kit

ACQUISITION OF NEW BUSINESS OPERATIONS -> FOR ROCE = EXCLUDE THE AMOUNT PAID FOR
ACQUISITION FROM CAPITAL EMPLOYED -> REFFER Q 257

whenever a company is acquiring a new business then always compare the result of
before and after acquisiton then comment on it --> REFFER Q 257

HOW TO SAVE TIME?

STEP 1 QUICKLY CALCULATE ALL THE REQUIRED RATIO

STEP 2 DIVIDE THE RATIOS IN TO PROFITIBILITY , LIUIDITY AND GEARING ==> IN YOUR
MIND

STEP 3 LOOK FOR ADDITIONAL INFORMATION GIVEN AND TRY TO DIVIDE THAT INFO IN YOUR
MIND IN TO PROFITIBILITY, LIQUIDITY AND GEARING

STEP 4 PROFITIBILITY ;

1. compare the increse/decrease in net profit and gross profit with

increase/decrease with revenue ==> write reason which is increase/decrease in
operating expense,

and if the new acquistion have been made then also look that whehther the
revenue and cost of sales have been increased or decrease

2. roce = compare the PBIT of this year with PBIT of previous year, then compare
the capital employed of this year with previous year --> conclude whether
increase/decrease is due to increase/decrease in PBIT or due to increase/decrease
of capital emoloyed

example ; the pbit of this year have doubled (100% increase) and capital employed
of this year has increased by 20% this means the change in ROCE is due to
increasing pbit
3 liquidity -- > use all the ratios to comment

gearing -> comment using the gearing ratio = debt/ debt + equity --> in case of
acquisition and such acquisition is financed by loan -> comment on it
--> in case of
acquisition and such acquisition is financed by loan -> and if diviodends are also
paid then write the dividend could have been withheld to finance the new purchase
resulting in low gearing and less risky investment for the shareholders

CASH FLOW f

NEGATIVE IN SCAP AND SHARE PREM ACCOUNT => RIGHT ISSUE (INFLOW FROM FINANCING
ACTIVITIES)

NEGATIVE IN REATAINED EARNING IS THE DIVIDEND PAID

LEASE NEGAITVE IS THE PRINCIPAL PAID --> OUTFLOW FROM *FINANCING ACTIVITIES*

TAX CALCULATION ;

BD = CURRENT + DEFFER TAX

INCOME TAX FTY= XX

BAL. = cash outflow of tax

CD = CURENT + DEFFER

ALWAYS CHECK MOVEMENT OF LEASE OBLIGATION BY INCLUDING CURRENT AND NON CURRENT
BOTH,, WHILE KEEP AN EYE ON ADDITION TO ROU =(this will be added in lease
obligation account and balancing will be lease obligation paid = outflow)

--> must reffer ppe adjustments of q 285 mocha

--> must reffer lease adjustments of q 285 mocha
--> must reffer scap adjustment of q 285 mocha

http://www.accaglobal.com/gb/en/student/getting-started/important-dates.html

IFRS 8
Operating Segments.

An operating segment is a component of an entity:

– which engages in business activities from which it may earn revenues and incur
expenses,

– whose operating results are reviewed regularly by the entity’s chief operating
decision maker to make decisions about
resources to be allocated to the segment and assess its performance, and

– for which discrete financial information is available

IFRS 8 requires an entity to report financial and descriptive information about its
reportable segments. Reportable segments
are operating segments or aggregations of operating segments which meet specified
criteria, including that its reported revenue
is 10% or more of the combined revenue of all operating segments.