PROFESSIONAL DEVELOPMENT & LEARNING ACADEMY

Financial Accounting and

Reporting
Module 4: Application of specific
accounting standards

This module represents 15% of the exam weighting

Introduction
In this module we examine a number of specific issues,
including:
• intangible assets,
• impairment of assets,
• revenue recognition,
• Income tax,
• foreign currency, and
• leases.

Module 4: Application of specific accounting standards

Learning objectives
After completing this module, you should be able to:
• calculate the carrying amounts of different classes of intangible
assets and prepare the relevant journal entries;
• interpret contracts to determine the amount and timing of
revenue to be recognised in the financial statements and
reconcile the differences between ledgers if necessary;
• calculate current and deferred income tax and prepare the
relevant journal entries to record the tax effect in the financial
statements;
• calculate and account for foreign currency transactions at
transaction date and subsequent dates;
• translate financial statements from a functional currency to a
presentation currency; and
• account for leases.

Module 4: Application of specific accounting standards

IAS 38 Intangible assets 1

Module 4: Application of specific accounting standards

IAS 38 Intangible assets 2

Module 4: Application of specific accounting standards

IAS 38 Intangible assets 3

Module 4: Application of specific accounting standards

IAS 38 Intangible assets 4

Module 4: Application of specific accounting standards

Question Practice 1
Costs generally incurred by a newly established entity include
1. Preopening costs of a business facility
2. Recipes, secret formulas, models and designs, prototype
3. Training, customer loyalty, and market share
4. An in-house-generated accounting software
5. The design of a pilot plan
6. Licensing, royalty, and stand-still agreements
7. Operating and broadcast rights
8. Goodwill purchased in a business combination

Which of the above costs are eligible for capitalisation according

to IAS 38, and which of them should be expensed when they are
incurred?

Module 4: Application of specific accounting standards

Question Practice 1 – Solution
Costs that are eligible for capitalisation include items 2., 5.,
6., 7., and 8. These costs are eligible for capitalisation under
IAS 38 because
• they meet the criteria of “identifiability” (i.e., they are
separable or they arise from contractual rights);
• it is probable that future economic benefits will flow to
the entity; and
• these costs can be measured reliably.

Costs that should be expensed because they do not meet

the criteria under IAS 38 include items 1., 3., and 4.

Module 4: Application of specific accounting standards

IAS 36 Impairment of assets 1

Module 4: Application of specific accounting standards

IAS 36 Impairment of assets 2

Module 4: Application of specific accounting standards

Question Practice 2

The carrying amount of an asset is $175 000. The following

data has been obtained in relation to the asset.
• Future cash flows expected to be derived from the
asset, $190 000.
• Estimated fair value of the asset, $170 000.
• Present value of future cash flows expected to be
derived from the asset, $155 000.
• Estimated costs of disposal for the asset, $12 000.
In accordance with IAS 36 Impairment of Assets, what is the
recoverable amount of the asset?

Module 4: Application of specific accounting standards

Question Practice 2 – Solution

The correct answer is $158 000.

The recoverable amount of an asset is the 'higher of its fair

value less costs of disposal and its value in use' (IAS 36,
para 6). The value in use is the 'present value of the future
cash flows expected to be derived from an asset' (IAS 37
para 6).

In this case, the fair value less costs of disposal is $158

000 ($170 000 less $12 000) and the present value of the
future cash flows is $155 000.

Therefore, the higher amount is the fair value less costs of

disposal, $158 000.

Module 4: Application of specific accounting standards

IAS 36 Impairment of assets 3

Suggested working:
Before impairment Impairment loss After impairment
$'000 $'000 $'000
Goodwill X (X)
Other intangible
X (X) X
assets
PPE X (X) X
X (X) X

Module 4: Application of specific accounting standards

Question Practice 3

Module 4: Application of specific accounting standards

Question Practice 3 – Solution

Module 4: Application of specific accounting standards

IAS 36 Impairment of assets 4

Module 4: Application of specific accounting standards

 Question Practice 4
The calculation refers to an impairment loss suffered by subsidiary Khalid
at 31 December 20X5:
Goodwill Net Assets Total
$million $million $million
31 December 20X5 – carrying amount 300 900 1 200
Impairment (300) (200) (500)
-- 700 700

There has been a favorable change in the estimates of the recoverable

amount of Khalid’s net assets since the impairment loss was recognised.
The recoverable amount is now $800 million at 31 December 20X6. Assets
are depreciated at 20% reducing balance.

Show the accounting treatment for the reversal of the impairment loss as of
31 December 20X6.

Module 4: Application of specific accounting standards

Question Practice 4 – Solution
The reversal of the impairment loss on goodwill cannot be accounted for under
IAS 36. The carrying amount of Khalid can be increased up to the lower of the
recoverable amount ($800 million) and the carrying value ($720 million*) of the
net assets had there been no previous impairment.

Carrying amount of Khalid’s net assets at 31 December 20X6:

Goodwill Net Assets Total
$million $million $million
Carrying amount -- 560** 560
Reversal of impairment loss 0 160 160
Carrying amount after reversal of impairment loss -- 720 720

* [900 - (20% of 900)]

**[700 - (20% of 700)]

Module 4: Application of specific accounting standards

IFRS 15 Revenue from contract with customers 1

IFRS 15 is a new accounting standard.

Module 4: Application of specific accounting standards

IFRS 15 Revenue from contract with customers 2

 IFRS 15 sets out a five-step model to be applied for the

recognition of revenue:
Step 1: Identify the contract with the customer.
Step 2: Identify the separate performance obligations.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations.
Step 5: Recognise revenue when or as a performance obligation
is satisfied.

 IFRS 15 Disclosure requirements are:

– Accounting policy for each recognition;
– The amount of each significant category of revenue; and
– Amount of revenue from exchange of goods or services.

Module 4: Application of specific accounting standards

Question Practice 5

On 1 January 20X4 FF Co. sold a machine to a customer

along with free technical support for two years for $45 000.
The technical support could have been purchased
separately for $3500.

Required:
Calculate FF’s revenue for the year ended 31 December
20X4

Module 4: Application of specific accounting standards

Question Practice 5 – Solution
$ %
Machine 45 000 93%
Technical support 3 500 7%
48 500

There are two performance obligations as the technical support is a distinct

obligation as it can be bought separately.

FF can recognise all of the revenue on the sale of the machine as control has
been passed to the customer so the performance obligation has been satisfied.
The revenue on the technical support should be recognised over a period of time.

Year ended 31 December 20X4 $

Machine (45 000 x 93%) 41 850
Technical support (45 000 x 7% / 2 years) 1 575
Total 43 425

Module 4: Application of specific accounting standards

IAS 12 Income taxes 1

Current tax

Module 4: Application of specific accounting standards

IAS 12 Income taxes 2
Deferred tax

Module 4: Application of specific accounting standards

IAS 12 Income taxes 3
Taxable temporary differences

Module 4: Application of specific accounting standards

IAS 12 Income taxes 4
Taxable temporary differences

Module 4: Application of specific accounting standards

Question Practice 6
PQR Ltd had the following liabilities at the end of the reporting period:
(A) A liability for a loan denominated in foreign currency, and at the date of the
loan realised $100 000. Due to movements in the exchange rate between
the Australian dollar and the foreign currency, the liability was remeasured by $20
000 to $120 000 at the end of the reporting period.
(B) A provision for employees benefits of $40 000.
(C) Rent received in advance of $20 000.
(D) Trade creditors of $35 000.
The tax rate is 30%.
In terms of IAS 12 Income Taxes, what is the deferred tax balance, at the end of
the reporting period, arising from the above?

A. Deferred tax asset - $24 000

B. Deferred tax liability - $24 000
C. Deferred tax asset - $34 500
D. Deferred tax asset - $80 000

Module 4: Application of specific accounting standards

Question Practice 6 – Solution

The correct answer is A.

(A) Carrying amount is $120 000, while tax base is $100 000. Therefore the
amount of the deductible temporary difference = $20 000. DTA = $6 000.
(B) Carrying amount is $40 000 while tax base is 0. Therefore the amount of the
deductible temporary difference = $40 000. DTA = $12 000.
(C) Carrying amount is $20 000, while tax base is 0. Therefore the amount of
the deductible temporary difference = $20 000. DTA = $6 000.
(D) There is no temporary difference arising from trade creditors.
Total DTA = $24 000.

Module 4: Application of specific accounting standards

IAS 12 Income taxes 5
Disclosure

Module 4: Application of specific accounting standards

Question Practice 7
A company has a taxable profit for the year of $700 000.

Tax for the previous year was provided for in the financial statements at $200 000
but was finally agreed with the tax authorities at $180 000.

Transfers of $20 000 and $45 000 were made to the deferred tax liability and
deferred tax asset account respectively.

The tax rate is 30%.

Based on the facts presented on the above case, what would be the total tax
expense in terms of IAS 12 Income Taxes?

A. $165 000
B. $185 000
C. $190 000
D. $215 000

Module 4: Application of specific accounting standards

Question Practice 7 – Solution

The correct answer is A.

$’000
Current tax expense ($700 000 x 30%) 210
Over provision for previous year ($200 000 – $180 000) (20)
Net decrease in DTA ($45 000 – $20 000) (25)
Total tax expense 165

Module 4: Application of specific accounting standards

IAS 21 The Effects of Changes in Foreign Exchange Rates 1

Functional and Presentation Currency

Module 4: Application of specific accounting standards

IAS 21 The Effects of Changes in Foreign Exchange Rates 2

Individual entity stage

Module 4: Application of specific accounting standards

Question Practice 8

Module 4: Application of specific accounting standards

Question Practice 8 – Solution

Module 4: Application of specific accounting standards

IAS 21 The Effects of Changes in Foreign Exchange Rates 3

Foreign Operations 1

Module 4: Application of specific accounting standards

IAS 21 The Effects of Changes in Foreign Exchange Rates 3

Foreign Operations 2

Module 4: Application of specific accounting standards

IAS 21 The Effects of Changes in Foreign Exchange Rates 3

Foreign Operations 3

Module 4: Application of specific accounting standards

Question Practice 9

Module 4: Application of specific accounting standards

Question Practice 9 – Solution

Module 4: Application of specific accounting standards

IFRS 16 Leases 1

 A lease is a contract that allows the lessee the right to

use an asset for a period of time.

 IFRS 16 requires lessees to recognise a right-of-use

asset and a corresponding liability.

Module 4: Application of specific accounting standards

IFRS 16 Leases 2
Accounting treatment 1/3

Module 4: Application of specific accounting standards

IFRS 16 Leases 3
Accounting treatment 2/3
 Initial recognition
Dr. Right-of-use asset
Cr. Lease liability
 Depreciating the asset
Dr. Depreciation expense
Cr. Right-of-use asset
 Lease liability
The liability is increased by interest charged, and reduced by payments made.
$
1.1.X1 Opening lease liability X
31.12.X1 Interest at x% X
31.12.X1 Instalment in arrears (X)
31.12.X1 Closing liability X
31.12.X2 Interest at x% X
31.12.X2 Instalment in arrears (X)
31.12.X2 Lease liability > one year X

Module 4: Application of specific accounting standards

IFRS 16 Leases 4
Accounting treatment 3/3

Module 4: Application of specific accounting standards

Question Practice 10
On 1 July 20X0 Charcoal Co. obtained an asset under
a lease. The present value of the annual payments
was $125 000 and Charcoal is required to make 10
annual payments of $15 000 in arrears. The interest
rate implicit in the lease is 10 per cent.

What is the finance charge for the year ended 30

June 20X2?

Module 4: Application of specific accounting standards

Question Practice 10 – Solution

The answer is $12 250.

1 July 20X0 125 000

Interest at 10% 12 500
Repayment (15 000)
Liability 122 500
Interest at 10% 12 250

Module 4: Application of specific accounting standards

 PROFESSIONAL DEVELOPMENT & LEARNING ACADEMY

QUESTIONS

Module 4: Application of specific accounting standards