Financial Reporting

(2021 S1 CPA)

Cindy Zhang
 Module 2

Presentation of Financial Statements

(Exam Weight 14%)

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 Complete Set of Financial Statements (P.61)

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 Complete Set of Financial Statements (P.62-64)
 Where compliance with an IFRS would not result in a fair presentation (extremely
rare) departure is permitted. A director report can be included but is not a
mandatory requirement of IAS 1. the financial statements have been prepared on a
going concern basis does not have to be disclosed.

 IAS 1 para. 79 states: 'An entity shall disclose the following, either in the
statement of financial position or the statement of changes in equity, or in the
notes: (a) for each class of share capital: (i) the number of shares authorised; (ii)
the number of shares issued and fully paid, and issued but not fully paid.'

 Going concern(financial distress and its future is uncertain, it is still considered

a going concern).

 Entities are permitted to use other appropriate titles for the financial statements (IAS
1, para. 10). One example is using the title of balance sheet instead of statement of
financial position.

 In Australia, reporting entities are required to prepare and present general purpose
financial statements.
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 Accounting Policies(P.67)
Accounting policies are defined as ‘the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements’ (IAS 8, para. 5). Examples of
accounting policies include whether to capitalise or expense borrowing costs and whether to
value non-current assets at cost or at fair value. IAS 8 does not require the financial effects of a
voluntary accounting policy change on subsequent reporting periods to be disclosed

Change only when required by IFRS or

results in reliable and more relevant
When choosing policy consider, in
information.（IAS 8)
descending order:
Apply transitional provisions in new
– IFRS
IFRS (if applicable); Otherwise adjust
– Conceptual Framework retrospectively.
– Other standard setting bodies Voluntary change in accounting policy,
that use a similar framework which must be applied retrospectively

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 Changes in accounting policies(P.70)

 Where an entity changes an accounting policy, it must not only apply the policy
retrospectively (where it is practical – which involves making every reasonable effort
to do so), but it must also make several disclosures. If the accounting policy change
arises from the initial application of a standard or interpretation, then the entity must
disclose information including items such as:

 ‘the title of the IFRS’ and description of transitional provisions if applicable;

 the nature of the change;

 the amount of adjustment for each financial statement item; and

 the adjustments relating to prior periods

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 Changes in accounting estimates and prior error(P.72)

Changes in accounting estimates: account for a change prospectively. Include in profit

or loss in the period of the change. Examples of estimates include:

• bad debts
• inventory obsolescence
• the fair value of financial assets and liabilities
• the useful lives of depreciable assets
• warranty obligations

Prior period error: Omissions from, and misstatements in, the entity’s financial statements
for one of more prior periods arising from a failure to use, or misuse of, reliable information
that:

(a) was available when the FS for those periods were authorised for issue; and
(b) could reasonably be expected to have been obtained and taken into account.

Treatment: adjust retrospectively (unless impracticable to do so): Restate comparative

amounts for the prior period(s) in which the error occurred.

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 Practice Question 1

 The accounting policies for A Ltd are set out in the notes to the financial statements
under Note 1 which state that fixed assets are measured using the cost model and
are depreciated over a useful life of 10 years.

 During the current financial year, the useful life of a particular item of PPE that was
purchased 2 years ago was determined to only be 7 years.

 How should this be treated in the accounting records in terms of IAS 8?

• A. Change in accounting policy and full retrospective adjustment.

• B. Change in accounting estimate with prospective adjustment.
• C. An accounting error with restatement of comparative years.
• D. A voluntary change in accounting policy with prospective adjustment and
disclosure in the notes regarding the reason for the change.

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 Practice Question 1 Answer

 Correct answer option : B

• B is correct as the change in the useful life from 10 years to 7 years is a change in
estimate. (IAS 8, para. 32).

• A and D are not correct as this is not an accounting policy change.

• C is not correct as this is not an error.

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 Practice Question 2

 In accordance with IAS 8 Accounting Policies, Changes in Estimates and Errors,

which one of the following changes should be applied retrospectively?

• A. An increase in the estimate of doubtful debts.

• B. An inventory write-down due to obsolescence.

• C. A voluntary change in subsequent measurement of equipment.

• D. A reduction in depreciation expense due to a change in expected useful life.

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 Practice Question 2 Answer

 C is correct because this represents a voluntary change in accounting policy, which

must be applied retrospectively under IAS 8 para. 19(b).

 A, B and D are incorrect because these are a change in accounting estimate, which is
to be applied prospectively under IAS 8 paras 36 and 37.

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 Events after the reporting period(P.75)

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 Events after the reporting period(P.76)

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 Events after the reporting period examples(P.76)
Non-adjusting events

• Fall in market value of investments

after the reporting period

• Major share transactions (e.g.

issuing new shares, bonus share
issues) after the reporting period

• Plans to discontinue operations after

the reporting period

• Major purchases of assets after the

reporting period

• Losses as a result of catastrophes

(e.g. fire) after the reporting period

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 Practice Question 3
 LMO Ltd’s (LMO) reporting period ended on 30 June 20X1 and the financial
statements were issued on 15 September 20X1.

 Which of the following is an adjusting event?

• A. The fair value of land was $750,000 at 30 June 20X1. On 31 July this valuation
was reduced to $650,000 due to council re-zoning.

• B. The construction of new office premises was in progress at the end of the
reporting period and was completed on 15 August 20X1.

• C. On 25 July 20X1, LMO signed a contract to sell its existing office premises for
$1,500,000 for which settlement is expected to be on 25 September 20X1.

• D. A court case was in progress at the end of the reporting period which was
finalised on 13 September 20X1 and damages were awarded against the entity.

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 Practice Question 3 Answer

 D is correct as this is an adjusting event. The conclusion of the case occurred after the end of
the reporting period but relates to a condition which existed at the end of the reporting period.

 A is not correct as this is a non-adjusting event. The decline in the fair value of the land was
due to a condition which occurred after the end of the reporting period. This condition does not
change the market value of the land at the end of the reporting period.

 B is not correct as this is a non-adjusting event. The construction of the office was finalised
after the end of the reporting period. This does not affect the valuation of the construction in
process value attributed to the building of the financial statements at the end of the reporting
period.

 C is not correct as this is a non-adjusting event. The sales contract was signed after the end of
the reporting period. Settlement will occur in the next reporting period. The asset 'office premises'
existed at the end of the reporting period and should be included in the financial statements as of
the end of the reporting period.

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 Practice Question 4

 Onus Ltd’s (Onus) reporting period ends on 31 December and the financial
statements are issued on 31 March. Which of the following is a non-adjusting event?

• A. A major customer owing $200,000 filed for bankruptcy on 24 January.

• B. On 15 March, the entity had damages of $25,000 awarded against it after a year-
long court battle with a supplier.

• C. The auditor attended the stock count and on 29 March requested that the entity
adjusts this value by $13,000 due to a valuation error.

• D. Onus' 20% stake in XYZ Ltd was recorded at $550,000 in the financial
statements, but this value had decreased to $450,000 as at 31 March.

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 Practice Question 4 Answer

 D is correct as this is a non-adjusting event (paragraph 11, IAS 10): the decrease in the market
value of an investment after the end of the reporting period. This decrease in value was caused by
conditions that occurred after the end of the reporting period. These conditions do not change the
market value of the investment at the end of the reporting period.

 A, B and C are not correct because they are adjusting events (see paragraph 9 of IAS 10). The
information disclosed in financial statements should reflect conditions existing at the end of the
reporting period.

 A is not correct as it is likely that the major customer was already insolvent as at 31 December; B
is not correct as the $25 000 in damages related to an event that occurred in the previous period;
C is not correct as the actual valuation should be $13 000 less.

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 Comprehensive income & presentation(P.83)

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 Items to be disclosed in two statements(P.86)

• Line items required (IAS 1 Para 82 and 82A)

 Revenue（P/L)
 Gains/losses arising from derecognition of financial assets(P/L)
 Finance costs(P/L)
 Share of profit/loss of associates and JVs(P/L)
 Gains/losses re reclassification of financial assets(P/L)
 Tax expense(P/L)
 Profit/loss re discontinued operations(P/L)
 Profit/loss

 Each component of other comprehensive income(OCI)

 Share of other comprehensive income of associates and JVs(OCI)
 Increases/decreases in asset revaluation surplus(OCI)
 Gains/losses on cash flow hedges (OCI)
 Exchange differences on translating foreign operations(OCI)

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 OCI that is subsequently reclassified to the P/L(P.88)

 An example of an item of OCI that is subsequently reclassified to the profit or loss is gains/losses
on the translation of the financial statements of a foreign operation.

 When the foreign operation is held, the translation gains/losses are recognised in OCI and
accumulated in equity in a ‘foreign currency translation reserve’.

 When the foreign operation is disposed of, IAS 21 requires the cumulative amount of exchange
differences to be reclassified from equity (OCI) to the profit or loss (IAS 21, para. 48).

 IAS 1 requires an entity to disclose the amount of income tax relating to each item of
comprehensive income either in the applicable financial statement or in the notes to the
financial statements (IAS 1, para. 90).

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 Statement of P/L and OCI example

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 Practice Question 5

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 Practice Question 5 Answer

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 Statement of Change of Equity(P.92)

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 Format of Statement of Financial Position(P.94)

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 IAS 7-Statement of Cash Flow(P.99)

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 Operating Cash Flow Example(P.101)

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 Investing Cash Flow Example(P.101)

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 Financing Cash Flow Example(P.102)

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 Formula Summary 1

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 Formula Summary 2

 Formula 3.

• Bad debts=doubtful debt expense + decrease in allowance for doubtful debts

• Bad debts=doubtful debt expense - increase in allowance for doubtful debts

 Formula 4.

• Closing balance of retained earnings=Opening balance of retained earnings+ Net Profit after tax
for current year -Dividend declared/paid for the current year

 Formula 5.

• Dividend Paid=Opening balance of final dividend payable(liability)+Interim dividend + Final

dividend- Closing balance of final dividend payable(liability)

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 Formula Summary 3
 Formula 6
• Inventory purchased on credit= Closing balance of inventory+ Cost of goods (from P&L)-
Opening balance of inventory

 Formula 7(‘Cash paid to suppliers and employees’ is derived by adding cash ‘paid to
suppliers of inventory’ and ‘cash paid for operating expenses’.)

• Payments to suppliers and employees=Opening balance of trade payables + Expenses (from

P&L) + Inventory purchased on credit (from above Formula 6) − Closing Balance of trade
payables

 Formula 8

• Purchase of property, plant and equipment (PPE)=Closing balance of PPE +Disposals (at cost)
− Opening balance of PPE

 Formula 9
• Income taxes paid=Opening balance of income tax payable +Income tax expense(P/L)-Closing
balance of income tax payable

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 Practice Question 6

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 Practice Question 6 Answer

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 Practice Question 7
For the year ended 31 December 20X8, Absalom Ltd’s (Absalom’s) statement of profit o loss and other
comprehensive income included operating expenses of $320 000. In addition, Absalom’s statement of
financial position as at 31 December 20X8 revealed the following information

20X7 20X8

Prepaid expenses 16 000 20 000

Trade payables 35 000 37 000

According to IAS 7 Statement of Cash Flows, what was the amount of cash paid to suppliers of Goods
and services by Absalom for the year ended 31 December 20X8?

• A $314 000
• B $318 000
• C $322 000
• D $326 000

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 Practice Question 7 Answer

 Correct answer option : C

• Cash paid to suppliers = operating expenses + increase in prepaid expenses –

increase in trade payables ($320 000 + $4000 - $2000= $322 000)

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 Practice Question 8
 The financial statements of Starnight Ltd (Starnight) showed a total equity balance of $2
500 000 for the reporting period ended 31 December 20X4. During the 20X5 financial
year, Starnight recognised the following transactions:

1. Factory buildings were revalued from their carrying amount of $500,000 to $750,000;
2. A dividend of $50,000, which was declared in the previous financial year, was paid to
shareholders on 31 March 20X5;
3. A dividend for the current financial year of $75,000 was declared on 15 December 20X5.
The $75,000 is unpaid and has been recognised as a liability at the end of the reporting
period;
4. The entity made a profit after-tax of $350,000.

 What is the closing balance of the total equity for the year ended 31 December 20X5?

• A. $2,775,000
• B. $2,975,000
• C. $3,025,000
• D. $3,050,000

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 Practice Question 8 Answer

 C is correct and is explained as follows: $2,500,000 Opening equity balance +

$350,000 profit for the year = $2,850,000 - ($75,000) dividend declared + $250,000
revaluation of buildings = $3,025,000 Closing equity balance

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 Practice Question 9

 James Ltd has completed its 20X8 financial statements which reveal, in part, the following
information:

• $220 000 net profit after income tax for the year

• $260 000 total comprehensive income

• $40 000 of other comprehensive income relates exclusively to the revaluation of land and buildings
to fair value during the year

• $70 000 dividends paid

 Opening equity balances:

• $600 000 share capital

• $440 000 retained earnings

• $120 000 revaluation surplus

 no shares were issued or bought back during the reporting period

 Please calculate closing balance of retained earnings and closing balance of equity

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 Practice Question 9 Answer

 Closing balance of retained earnings=Opening balance of retained earnings+ Net

Profit after tax for current year -Dividend declared/paid for the current year

 Closing balance of retained earnings=$440 000 Opening retained earnings + $220

000 net profit for the year after tax– $70 000 Dividends paid = $590 000

 Total closing equity = Share capital $600 000 + Retained earnings $590 000 +
Revaluation surplus $160 000 = $1 350 000

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 Practice Question 10
The following information relates to the activities of Cashin Pty Ltd. Income tax may be
ignored.

Net Operating Cash Flow after income tax $720,000

Decrease in trade payables $23,000
Decrease in inventory $11,500
Increase in trade receivables $24,600
Cash proceeds from sale of plant (book value of $25,000) $14,000
Increase in allowance for doubtful debts $1,000.00

What is the profit from operating activities for the period?

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 Practice Question 10 Tips

 Tips(From Operating Net Cash Flow to Profit Calculation Process)

• Decrease in asset: Less

• Increase in asset: Add

• Decrease in liability: Add

• Increase in liability: Less

• Non cash expense: Less

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 Practice Question 10 Answer

 Solutions:

• $720,000+$23,000-$11,500+$24600-11,000-$1,000=$744,100

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 Module 3

Revenue From Contracts With

Customers; Provisions,
Contingent Liabilities and Contingent Assets

(Exam Weight 10%)

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 Scope of IFRS 15(P.118)

 IFRS 15 applies to all contracts with customers, except those contracts that are:

• Lease contracts within the scope of IFRS 16 Leases;

• Insurance contracts within the scope of IFRS 4 Insurance Contracts

• Financial instruments and other contractual rights or obligations within the scope of
IFR9

• Non-monetary exchange between entities in the same line of business to facilitate

sales to customers or potential customers

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 The IFRS 15 five-step model(P.120)

 Step 1: Identify the contracts with the customers

 Step 2: Identify the performance obligations in the contract

 Step 3: Determine the transaction price of the contract

 Step 4: Allocate the transaction price to each performance obligation

 Step 5: Recognise revenue when each performance obligation is satisfied.

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 Step 1: factors identify the contracts with the customer(P.121)

 The parties have approved the contract and are committed to perform their
obligations;

 The entity can identify each party’s rights regarding, and the payment terms for, the
goods services to be transferred;

 The contract has commercial substances ;

 The collection of consideration to which is entitled to in exchange for the goods or

services is probable

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 Example 3.3 (P.123)
 An entity promises to sell 100 widgets to a customer over 12 months for a transaction
price of $8000 ($80 per widget). The customer obtains control of each widget at the
time of transfer. After six months, the entity had transferred control of 45 widgets to
the customer under the existing contract. The contract is modified as follows.

 Scenario A: Contract Modification that is a Separate Contract

• Require the delivery of an additional 40 widgets at an additional price of $3000 ($75

per widget). The contract modification is a new contract that is separate from the
existing contract. The scope of the contract has increased due to the promise of
additional widgets that are distinct from the existing widgets (IFRS 15, para. 20(a)).
Moreover, the price of the additional widgets reflects their stand-alone selling price at
the time of the modification (IFRS 15, para. 20(b)).

• Under IFRS 15, no adjustment is made to revenue recognised on the 45 widgets that
have been transferred to the customer ($3600). Following the modification, the entity
will recognise revenue separately for the 55 widgets remaining under the existing
contract ($4400) and the 40 widgets remaining under the additional contract ($3000).

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 Example 3.3 (P.123)
 Scenario B: Contract Modification that is Not a Separate Contract

• Require the delivery of an additional 40 widgets. The entity agrees to a reduced price
for $70 per widget for the additional 40 widgets and all remaining widgets on the
original contract. This price reflects the higher volume purchased when considering
both the original contract and the additional order.

• The contract modification is a not accounted for as a separate contract because it fails
to meet the conditions in IFRS 15, para 20. The entity determines that the negotiated
price of $70 per widget for the additional widgets does not reflect the stand-alone
selling price of the additional 40 widgets which is $80 per widget. Because the
remaining widgets to be delivered are distinct from those already transferred, the
entity applies the requirements in IFRS 15, paragraph 21(a) and accounts for the
modification as a termination of the original contract and the creation of a new
contract.

• Consequently, the amount recognised as revenue for the remaining widgets is $3850
($70 × 55 widgets not yet transferred under the original contract) + $2800 ($70 × 40
widgets to be transferred under the contract modification).

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 Step 2: Identify the performance obligations in the contract(P.123)

 A good or service (or a bundle of goods or services) that is distinct; or

 A series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer(IFRS 15, para.22)

 For example, a software developer enters into a contract with a customer to transfer
a software license, provide an installation service, and provide software updates and
technical support for a three-year period.

 The entity also sells each of these components separately. Four performance
obligations: software license; installation service; software updates; and
technical support .

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 Practice Question 11

 On July 20X1, Shine Ltd (Shine) enters into a contract to sell 50 light fittings to Bright
Ltd (Bright) over two years at $100 per light fitting. As at 30 June 20X2, Shine has
delivered 30 light fittings. At that time, the contract is modified to require the delivery
of an additional 25 light fittings at $110 per light fitting.

 In accordance with IFRS 15 Revenue from Contracts with Customers, what is the
value of the remaining performance obligations to be recognised by Shine as at 30
June 20X2?

• A. $4650

• B. $4725

• C. $4750

• D. $4950

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 Practice Question 11 Answer

 C is correct because the contract modification is to be accounted for as a separate

contract, and future revenues associated with remaining performance obligations
are to be accounted for separately (i.e. 20 fittings × $100 + $25 fittings × $110).

 A incorrectly calculated as if the delivery of the light fittings forms part of a single
performance obligation (i.e. Average price = ((50 fittings × $100) + (25 fittings ×
$110)) / 75 = $103.33. Revenue associated with units not yet delivered = $103.33 ×
45).

 B incorrectly calculated at the average transaction price (i.e. 45 fittings × $105),

 D incorrectly calculated at the new transaction price (i.e. 45 fittings × $110).

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 Step 3: Determine the transaction price of the contract(P.125)

 Consider whether the following constitutes a consideration of a fixed amount,

variable amount or combination of both.(Question 3.3.P.126)

• A construction company enters into a contract with a customer to build an office

block. The consideration promised by the customer is $1,500,000 with a $350,000
performance bonus if the office block is completed within 18 months.

• A construction company enters into a contract with a customer to build a warehouse

for $500,000. The contract specifies that the warehouse is to be completed by 30
June 20X6, and if it is not completed by 31 August 20X6, the construction company
incurs a $50,000 penalty

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 Question 3.3 Answer(P.486)

 Contract for construction of office block The consideration promised under this
contract is a combination of both fixed and variable amounts. The $1 500 000
represents fixed consideration, as the construction company is entitled to this amount
on completion of the office block independent of the timeliness of completion. The
$350 000 is variable consideration, as it is a performance bonus in accordance with
para. 50 of IFRS 15. The construction company is only entitled to the $350 000 if the
office block is completed within 18 months. If not, the construction company does not
receive this amount. As such, whether the construction company receives $350 000
varies according to the timeliness of completion.

 Contract for construction of warehouse The consideration promised under this

contract is a combination of both fixed and variable amounts. The amount of $450
000 ($500 000 –$50 000) is fixed, as the entity is entitled to this amount irrespective
of whether the penalty is imposed. The $50 000 arising from the penalty is variable in
accordance with para. 50 of IFRS 15, as it is dependent on whether construction is
completed by 31 August 20X6.

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 Estimating Variable Consideration(P.126)

 Expected value method

 the expected value of variable consideration is the sum of probability weighted

Amounts in a range of possible consideration amounts.

 The most likely amount method

 the expected value of variable consideration is the Consideration amount the entity
is entitled to under the ‘most likely’ possible outcome of a contract.

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 Practice Question 12

 Entity W sells 50 pairs of shoes on 1 February 20X5 for $70 a pair. The contract with
customers allows the shoes to be returned for a full refund if returned within 30 days. Past
experience indicates that there is a 60% chance that 2 pairs would be returned, 30%
chance that no pairs would be returned and 10% chance that 5 pairs would be returned.

 What is the revenue that should be recognised on 1 February 20X5 if the expected value
method is used?

• A. $2,016

• B. $3,360

• C. $3,381

• D. $3,455

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 Practice Question 12 Answer

 C is correct because $3,381 is the sum of the probability-weighted amounts of

$1,050, $315 and $2,016. The probability-weighted amounts are calculated as
follows: $1,050 for zero returns (50 shoes x $70 x 30%) $315 for 5 returns (45
shoes x $70 x 10%) $2,016 for 2 returns (48 shoes x $70 x 60%)

 The sum of these is $1,050 + $315 + $2,016 = $3,381.

 Under the expected value method, the expected value of variable consideration is
the sum of probability weighted amounts in a range of possible consideration
amounts.

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 Practice Question 13

 Entity W sells 50 pairs of shoes on 1 February 20×5 for $70 a pair. The contract with
customers allows the shoes to be returned for a full refund if returned within 30 days. Past
experience indicates that there is a 60% chance that 2 pairs would be returned, 30%
chance that no pairs would be returned and 10% chance that 5 pairs would be returned.

 What is the revenue that should be recognised on 1 February 20×5 if the most likely method
is used?

• A. $2,016

• B. $3,360

• C. $3,381

• D. $3,455

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 Practice Question 13 Answer

 B is correct because the most likely outcome is that 48 pairs would be sold. This is
indicated by a 60% chance. So 48 x $70 = $3,360.

 Under the most likely amount method, the expected value of variable consideration
is the consideration amount the entity is entitled to under the ‘most likely’ possible
outcome of a contract.

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 Step 4: Allocate the transaction price to each performance
obligation(P.131）

 Under paragraph 79 of IFRS 15, the three suitable estimation methods

(illustrated in figure 3.2) include the following.

• Adjusted market assessment approach: An entity evaluates the market in which

it sells goods or services and estimates the price customers would be willing to pay
for those goods or services, whether provided by the entity or a competitor.

• Expected cost plus a margin approach: An entity forecasts its expected costs of
satisfying a performance obligation and then adds an appropriate margin for that
good or service.

• Residual approach: An entity estimates the stand-alone selling price as the total
transaction price less the sum of the observable stand-alone selling prices of other
goods or services promised in the contract.

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 Allocation of a discount(P.133）

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 Allocation of a discount(P.133）

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 Step 5: Recognize revenue when each performance obligation
is satisfied(P.133）

 A performance obligation is satisfied over time if one of the following criteria is

met:

• (a)the customer simultaneously receives and consumes the benefits provided by

the entity’s performance as the entity performs;

• (b) the entity’s performance creates or enhances an asset that the customer
controls as the asset is created or enhanced; or

• (c) the entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date (IFRS 15, para. 35).

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 Contracts Costs(P.136）

 In certain instances, IFRS 15 permits an entity to recognise the following as

assets;

• The incremental costs of obtaining a contract with a customer; and

• The costs to fulfill a contract with a customer. Each type of contract cost will now be
considered in turn.

 An incremental cost is the increase in total costs resulting from an increase in

production or other activity. For instance, if a company's total costs increase from
$320,000 to $360,000 as the result of increasing its machine hours from 8,000 to
10,000, the incremental cost of the 2,000 machine hours is $40,000.

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 Contracts Costs(P.136）

 Under paragraph 91 of IFRS 15, the incremental costs of obtaining a contract

shall be recognised as an asset if the entity expects to recover those costs.
There are two aspects to this recognition requirement. First, the costs of
obtaining a contract are ‘incremental’, and, second, the entity expects to
recover these costs.

 Costs of obtaining a contract are incremental if they would not have been
incurred Had the contract not been obtained (IFRS 15, para. 92), while recovery
of these costs may be either direct (i.e. reimbursement by the customer under the
terms of the contract) or indirect (i.e. incorporated into the profit margin of the
contract).

 Costs of obtaining a contract that are not incremental (i.e. costs incurred
regardless of Whether the contract was obtained) are recognised as an expense
when incurred, Unless they are chargeable to the customer regardless of whether
the contract is obtained (IFRS 15, para. 93).

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 Question 3.4 (P.136）

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 Question 3.4 Answer (P.486）

 In accordance with paragraph 91 of IFRS 15, the entity recognises an asset for
$12 500 as the incremental costs of obtaining the contract. This amount relates
to the commissions to sales employees for obtaining the contract, which would not
have been incurred if the contract had not been obtained. Further, the entity
expects to recover those costs through future fees for the consulting services. As
the contract is for three years, the amortisation period is longer than one year.

 The travel costs to deliver the proposal ($20 000) and the portion of legal fees
payable irrespective of the success of the tender ($10 000) are not incremental and
cannot be recognised as an asset. In relation to the $15 000 legal fees payable on
the tender being successful, although incremental, the entity would not expect to
recover these costs either directly or indirectly. As such, these costs would be
expensed as incurred.

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 Practice Question 14

 Where a contract with a customer is partially within the scope of IFRS 15 Revenue from
Contracts with Customers and partially within the scope of another standard

• A the requirements of the Concept Framework are applied to determine how to measure
The separate parts of the contract.

• B the requirements of the IFRS 15 are applied, regardless of whether the other standard
specifies how to measure or initially measure one or more parts of the contract.

• C if the other standard does not specify how to separate or initially measure one or more
parts of the contract, then an entity shall apply the other standard to the contract.

• D if the other standard specifies how to separate or initially measure one or more parts of
the contract, then an entity shall apply those separation or measurement requirements first.

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 Practice Question 14 Answer

 Correct answer option : D

 Explanation of correct option : The correct answer is Option D because IFRS 15

para. 7 requires that where a contract with a customer is partially within the scope
of IFRS 15 and partially within the scope of one of the above standards:

 If the other standards specify how to separate or initially measure one or more
parts of the contract, then an entity shall apply those separation or measurement
requirements first. The transaction price of the contract is then reduced by the
amounts initially measured under the other standards, with the remaining
transaction price being accounted for under IFRS 15.

 If the other standards do not specify how to separate or initially measure one or
more parts of the contract, then an entity shall apply IFRS 15 to the contract.

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 Practice Question 15

 According to IFRS 15 Revenue from Contracts with Customers, the adjusted market
approach for estimating the stand-alone selling price of goods and services can be
described as where

• A an entity forecasts its expected costs of satisfying a performance obligation and then
adds an appropriate margin for that good or service.

• B an entity evaluates the market in which it sells goods or services and estimates the Price
customers would be willing to pay for those goods or services.

• C an entity evaluates the cost of goods or services purchased and estimates the price
customers would be willing to pay for those goods or services.

• D an entity estimates the stand-alone selling price as the total transaction price less the
sum of the observable stand-alone selling prices of other goods or services promised in the
contract.

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 Practice Question 15 Answer
 Correct answer option : B

• Explanation of correct option : The correct answer is Option B because under this
approach, an entity focuses on market conditions, including supply of and customer
demand for, the good or service; competitor pricing for the same or similar good or
service; and the entity’s share of the market (IFRS 15, para. 79).

 Explanation of incorrect options :

• Option A is incorrect because this is the expected cost plus a margin approach
(IFRS 15, para. 79).

• Option C is incorrect because this is not an approach considered by IFRS 15.

• Option D is incorrect because this is the residual approach (IFRS 15, para. 79).

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 Scope of IAS 37 Provision(P.142)

 IAS 37 applies to all provisions (contingent liability and contingent assets) other
than those:

• Resulting from executory contracts, except where the contract is onerous; and

• Covered by another standard.

 Executory contracts are ‘contracts under which neither party has performed any
of its obligations or both parties have partially performed their obligations to an
equal extent’ (IAS 37, para. 3).

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 Scope of IAS 37 Provision(P.142)

Importantly, IAS 37does not apply to financial instruments (including guarantees) that are
within the scope of IFRS 9 Financial Instruments.

Other provisions, contingent liabilities and contingent assets covered by other standards
are:

 construction contracts (IAS 11 Construction Contracts) (covered in Module 1);

 income taxes (IAS 12 Income Taxes) (covered in Module 4);

 lease (IFRS 16 Leases), unless the operating lease has become onerous (covered in
Module 1);

 employee benefits (IAS 19 Employee Benefits); and

 insurance contracts within the scope of IFRS 4 (IAS 37, para.5)

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 Recognition of Provision(P.143)

 Provisions are defined by IAS 37 as liabilities of uncertain timing or amount (para.

10).

 Provision = liability of uncertain timing or amount

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 Recognition of Provision(P.143-145)
 Where dividends are proposed or declared after the balance sheet date, the
enterprise should not recognise them as a liability at the balance sheet date in
the financial statements. Conversely, A public declaration (announcement) by the
company before the year-end that provides details of the amount of the dividend
creates a constructive obligation as defined under IAS 37, and have not yet
been paid at the balance sheet date, they are recognised as a liability.

 Where there is a continuous range of possible outcomes, and each point in

that range is as likely as any other, the mid-point of the range is used

 Where the provision being measured involves a large population of items, the
name for this statistical method of estimation is “expected value”’ (IAS 37, para.
39).

 Where a single obligation is being measured, the individual most likely outcome
may be the best estimate of the liability’ (IAS 37, para. 40).

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 Provision Disclosure(P.147)

 For each class of provision, an entity shall disclose:

• (a) the carrying amount at the beginning and end of the period;
• (b) additional provisions made in the period, including increases to existing
provisions;
• (c) amounts used (i.e. incurred and charged against the provision) during the
period;
• (d) unused amounts reversed during the period; and
• (e) the increase during the period in the discounted amount arising from the
passage of time and the effect of any change in the discount rate.

 Comparative information is not required.

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 Recognition of Provision(P.144)

Present obligation

Legal obligation Constructive obligation

Derives from: Derives from:
• A contract • Established pattern of
past practice
• Legislation
• Creation of valid
• Other operation of law expectation

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 Practice Question 16

 The accountant for RYK Ltd (RYK) is preparing the financial report for the period ended 31
December 20X6. The accountant notes that an electricity invoice for the last six months’
usage has not been received. Which of the following is most correct for recognising the
liability?

• A. A present obligation exists and RYK should recognise a liability based on a reliable
estimate.

• B. As the invoice has not yet been received, no present obligation exists so RYK cannot
recognise a liability.

• C. A possible obligation exists, however it is not certain when the invoice will be received so
the accountant should recognise a provision.

• D. A present obligation exists, however as the amount of usage cannot be reliably

measured, the estimated costs can only be disclosed as a contingent liability.

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 Practice Question 16 Answer

 A is correct because the entity did not need to receive an invoice for a present
obligation to exist. RYK has used electricity (the past event) so it has a legal
present obligation to pay for this and it is liable for the costs (outflow of resources).
As it should be straightforward to make an estimate of the cost involved it can be
reliably measured and the outflow is probable. So, this meets the definition and
recognition criteria of a liability.

 B is not correct because there is still a present obligation even though an invoice
has not been received.

 C is not correct as this is not a possible obligation, but a present obligation.

 D is not correct as the usage can be estimated based on past experience and
estimated costs are permitted to be used when recognising liabilities

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 Practice Question 17

 The Solar Constructions Company Ltd is aware of draft legislation that, when enacted, will
require the company to refund certain amounts previously charged to its customers. The
company intends to lobby against the legislation. At the reporting date, the planned
legislative changes have been approved and are now effective.

 Which of the following treatments would be required at the reporting date?

• A. Recognise a provision as the legislation has been enacted

• B. Make no disclosure as the company has not yet started refunding the amounts

• C. Make no disclosure if the company does not intend to comply with the legislation

• D. Disclose a contingent liability as the company intends to lobby against the legislation

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 Practice Question 17 Answer

 A is correct because a provision should be recognised because a legal obligation

for the future sacrifice of economic benefits now exists (due to the legislation being
enacted) in relation to a past event (previous transactions with the customers).

 B is incorrect. A present obligation exists because an obligating past event

(previous transactions with the customers) has occurred.

 C is incorrect. As the legislation is enacted, there will be a legal obligation for the
future sacrifice of economic benefits, irrespective of any intention of the company to
act illegally.

 D is incorrect. On enactment of the legislation, the company will have a legal

obligation for the future sacrifice of economic benefits, irrespective of its intention to
lobby against it.

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 Contingent Liabilities and Assets(P.151)

Contingent asset Contingent liability

• A possible asset that arises from • A possible obligation that arises

past events and whose existence from past events and whose
will be confirmed by the existence will be confirmed by the
occurrence of one or more occurrence of one or more
uncertain future events not wholly
within the entity’s control uncertain future events not wholly
within the entity’s control; or
• Disclose where inflow of economic
benefits is probable • A present obligation where an
outflow is not probable or cannot
be measured reliably.
• Where virtually certain recognise
asset (no longer contingent.)
• Usually disclose in the notes
unless remote

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 Practice Question 18

 Which of the following is a correct statement in relation to provisions and contingencies?

 A. An item of a contingent nature may be recognised, but not disclosed, in the body of the
financial statements.

 B. The ability to reliably estimate the amount of a present obligation can be the difference
between recognising a provision and disclosing a contingent liability.

 C. IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to contingent

liabilities and contingent assets of insurers that result from insurance contracts.

 D. A present obligation exists in all circumstances where a company may have some choice
in whether or not to make a future sacrifice of economic benefits in settlement of an
obligation.

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 Practice Question 18 Answer

 B is correct because a provision exists in the event of a present obligation with a

probable future sacrifice of economic benefits where a reliable estimate of the
amount of the obligation can be made.

 A is incorrect. Recognition means that an item is included in the financial

statements.

 C is incorrect. IAS 37 does not apply to such contingent liabilities and contingent
assets (since they result from insurance contacts, they are covered by IFRS 4
Insurance Contracts).

 D is incorrect. For present obligations to exist, the entity must have no realistic
alternative but to make the future sacrifice of economic benefit.

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 Practice Question 19

 Which of the following about the disclosure of contingent assets and liabilities is not
correct?

• A. An estimate of the financial effect of a contingent asset should be disclosed.

• B. Contingent liabilities require recognition in the statement of financial position and

disclosure in the notes.

• C. Disclosure of contingent liabilities is required unless the possibility of an outflow of

resources is remote.

• D. A description of the nature of the contingent asset at the end of the reporting period
should be disclosed

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 Practice Question 19 Answer

 B is correct because this is not an accurate statement. Para. 27 of IAS 37 states

"An entity shall not recognise a contingent liability". IAS 37 requires the disclosure
of contingent liabilities in the notes accompanying the statements unless the
possibility of an outflow of resources is remote (IAS 37 para. 28).

 A and D are accurate statements because para. 89 of IAS 37 requires disclosure of

the description of the nature of the contingent assets at the end of the reporting
period. Where practicable this should also include an estimate of their financial
effect.

 C is an accurate statement because para. 28 of IAS 37 requires the disclosure of

contingent liabilities in the notes accompanying the statements unless the
possibility of an outflow of resources is remote.

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 Practice Question 20

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 Practice Question 20 Answer

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