F7 - Revision Notes

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ACCA F7
Financial Reporting
For exams in September 2019
Chapter 03 – Tangible Non-Current Assets

 IAS 16 – Property, Plant and Equipment
 Depreciation Accounting
 IAS 40 – Investment Property
 IAS 2 – Borrowing Costs
Chapter Summary
Non-Current Assets Borrowing Costs (IAS 23)
Property, Plant &  Capitalized re qualifying assets

Equipment (IAS 16) (assets that necessarily take a
Investment Property substantial period of time to be
ready for their intended use/sale)
(IAS 40)
 Funds borrowed specifically:
Definition Definition • BC incurred less investment
• Land/buildings for rental income on temporary
a) Are controlled by an entity for use income/capital appreciation investment
in the production or supply of goods Cost model  Funds borrowed generally
or services, for rental to others, or • As per IAS 16 • Weighted average BC%
for administrative purposes Fair value model (excluding specific BC) x
b) Are expected to be used during • FV at end of reporting period expenditure incurred
more than one period  Cease capitalization when ready
• Gain/loss P/L
• Not depreciated for intended use
 Suspend if development
Recognition interrupted (for an extended
period)
a) Probable Future Economic
Benefits
b) Costs can be measured reliably
Measurement at Measurement after
Depreciation Disclosure Note
recognition Recognition
Purchas e price Cost model • Allocate depreciable amount

• Import duties • Cost less accumulated (cost/ revalued amount less
• Non-refundable purchase taxes depreciation/impairment losses residual value) over useful life
• less: trade discounts Revaluation model • Separate into depreciable parts
Add: Directly attributable • Revalued amount less • Land normally has unlimited
cos ts subsequent accumulated life – not depreciated
(of bringing asset to location and depreciation/ impairment losses • At least annual review of useful
condition necessary to be capable • Upward revaluation to OCI (& life and depreciation method
of operating) R/S)
• Employee benefit costs • Downward revaluation:
• Site preparation o 1st to OCI (& R/S)
• Initial delivery & handling costs o then in P/L
• Installation & assembly costs • Valuation:
• Professional fees o Sufficient regularity that does
• Costs of testing o not differ materially from FV
• Site restoration (IAS 37) o (1) volatile: annual
Add: Finance cos ts o (2) non-volatile: three to five
• Capitalised for qualifying assets o years
(IAS 23) o Market price (in the principal
Add: Subs equent costs o market for the asset)
• Capitalised when: o No market price: current
– Cost of replacing is replacement cost (adjusted for
incurred obsolescence) or present value
– Recognition criteria met o Revalue entire class
• Reserves transfer:
o Actual dep'n - HC dep'n
o Optional

Definition and Recognition

Definition:
 Property, plant and equipment are tangible items:
 Controlled by an entity for use in the production or supply of goods or service, for
rental to others, or for administrative purpose
 Are expected to be used for more than one period
Recognition:
 Property, plant and equipment should be recognis ed once the
recognition criteria have been met:
 It is probable that future economic benefits that are attributable to the asset will flow
to the entity Are expected to be used for more than one period
 The cost of the asset can be reliably measured where the cost includes:
 Purchase price
 Directly attributable costs (cost of site preparation, initial delivery and handling costs,
cost of testing etc.)
 Estimated cost of dismantling/removing the item (IAS 37)
 Finance costs (IAS 23)
Subsequent Recognition
Profit or Loss Balance Sheet
 Asset does not meet the recognition criteria  Asset meets the recognition criteria
 Depreciation of Assets  Upgrades or Improvement
 Repair and Maintenance
Complex Ass ets

 Assets which are made up of separate components
o Assets requiring overhauls
 Each component separately for depreciation purpose and capitalize costs when replaced/overhauled
 Examples: Depreciate airframe over 20 years, seating over 8 years, engines over 6 years
Choice of Accounting Treatment

Cost Model – Cost less accumulated depreciation and impairment loss
Revaluation Model –
 Fair Value less accumulated depreciation and impairment loss
 Fair Value is the price at which an asset will be sold or liability will be settled at an orderly market
transaction
Revaluation of Property, Plant & Equipment

Accounting Treatment
 Whole class of asset should be revalued
 Should be performed sufficiently often
 Revaluation gain is reported in OCI and Revaluation surplus of financial statements
 Depreciation should be charged on Revalued amount
 Excess depreciation can be transferred to retained earnings from revaluation surplus
Illustration Journal Entries
Year Particulars Amount ($) Revaluation Surplus :

Cost 100,000 Dr PPE (Cost) $20,000
X1
Less: Depreciation (10%) (10,000) Dr Accumulated Depreciation $20,000
Carrying Amount 90,000 Cr Revaluation Surplus $40,000
X2
Less: Depreciation (10%) (10,000) Depreciation:
Carrying Amount 80,000 Dr Depreciation Expense $12,000
Add: Revaluation Surplus 40,000 Cr Accumulated Depreciation $12,000
X3 Revalued Amount 120,000 Excess Depreciation:
Less: Depreciation (12,000) Dr Revaluation Surplus $2,000
Carrying Amount 108,000 Cr Retained Earnings $2,000
Revaluation of Property, Plant & Equipment

Illustration (Continued)
Year Particulars Amount ($)
Cost 100,000 Revaluation Loss a/c Treatment
X1
Less: Depreciation (10%) (10,000)  A revaluation loss is charged first to other
comprehensive income
Carrying Amount 90,000
 Any excess reported in profit or loss.
X2
Less: Depreciation (10%) (10,000)
Add: Revaluation Surplus 40,000

X3
Revalued Amount 120,000
Less: Depreciation (12,000)

Journal Entries
Less: Depreciation (12,000)
X4 Dr Revaluation Surplus $40,000
Less: Revaluation Downwards (50,000) Dr Profit or Loss $10,000
Carrying Amount 46,000 Cr PPE $50,000
Investment Property (IAS 40)

Definition:
 Property (land or buildings – or part of a building – or both) held to earn rentals
or for capital appreciation or both, rather than for:
 Use in the production or supply of goods or service
 Sale in ordinary course of business
Recognition:
 An Investment property should be recognised when and only when:
 It is probable that future economic benefits that are attributable to the asset will flow to the entity
 The cost of the asset can be reliably measured
Measurement at recognition:
 An Investment property is initially recognized at cost:
 Cost Comprises:
 Purchase price plus
 Any directly attributable expenditure (e.g. Professional fees)
Choice of Accounting Treatment

Cost Model – Cost less accumulated depreciation and impairment loss
Fair Value Model –
 The investment property is measured at fair value at the end of each reporting period.
 Any gain or loss on remeasurement is included in profit or loss for the period.
 The investment property is not depreciated.
Investment Property (IAS 40)

Scenario – ABC Co Solution
1. ABC Co has a Tennant House cost $150,000 five years ago.  Held for its investment potential and not for use by
The property is freehold and is let out to private individuals ABC Co
for six monthly periods. The current market value of the  Treat as investment property in accordance with IAS 40
property is $175,000.  Rental income to profit or loss
 Cost Model – Depreciation is $3,000 and carrying
amount is $135,000 (150,000 – (5 x 3,000))
 FV Model – revalue to market value of $175,000. The
difference of $25,000 credited to profit or loss
 Need to be consistent and use either fair value or cost
model for all investment properties
2. Stowe Place cost $75,000. This is used by ABC Co as its  Held for use by ABC Co therefore cannot be an
headquarters. The building was acquired ten years ago. investment property
ABC Co depreciates building at 2%  Depreciate over useful life $75,000 x 2% = $1,500 per
annum – charge as an expense to profit or loss
 Carrying amount of $75,000 – ($1,500 x 10) = $60,000
to be shown in statement of financial position
3. Crocket Square is a recently started development which is  Not yet complete so accounting treatment relates to
two thirds complete. ABC Co intends to let this out to a the cost incurred to date.
company called Speedex Co in which it has a controlling  Costs should be capitalised and disclosed under 'Assets
interest. in course of construction' until construction is complete.
 Intention to rent the property out to a group company:
 Not treated as an investment property in the group
financial statements as it is owner-occupied.
 An investment property when construction is
complete in separate financial statements when
complete.
 Depreciate as soon as it comes to use.
Borrowing Cost (IAS 23)

Definition:
 Borrowing Cost:
 Interest and other costs incurred by an entity in connection with the borrowing of funds
 Qualifying Asset:
 An asset that necessarily takes a substantial period of time to get ready for its intended use or sale
Accounting Treatment:
 Borrowing costs that directly relate to the acquisition, construction or production of a qualifying asset must be capitalized
as part of the cost of that asset.
Types of Borrowing Cost:
 Funds borrowed specifically:
 Capitalise actual borrowing costs incurred less investment income on temporary investment of funds
 Funds borrowed Generally:
 Capitalise borrowing costs calculated as the weighted average cost of borrowings for the period multiplied by the
expenditure on the qualifying asset
 Note that the amount capitalised should not exceed total borrowing costs incurred in the period
Commencement of Capitalisation Cess ation of Capitalisation

 Expenditure for the asset are being incurred  Capitalisation of borrowing costs should be suspended during
the extended periods when development is interrupted. e.g.
strikes, inclement weather
 Borrowing costs are being incurred  All of the activities necessary to prepare the qualifying asset for
its intended use or sale are complete.
 Activities that are necessary to prepare the asset for its intended  This is likely to be when the asset is ready for use (even if it is
use or sale are in progress not being used).

Question:
 On January 20X8 Stremans Co borrowed $1.5m to finance the production of two assets, both of which were expected to
take a year to build. Work started during 20X6. The loan facility was drawn down and incurred on 1 Jan 20X6, and was
utilised as follows, with remaining funds invested temporarily.
Alpha ($000) Bravo ($000)

1January 20X6 250 500
1July 20X6 250 500
The loan rate was 9% and Stremans Co can invest surplus funds at 7%.
Required
Ignoring compound interest, calculate the borrowing costs which may be capitalised for each of the assets and consequently the
cost of each asset as at 31 December 20X6.
Answer:
Borrowing Costs (P/L) Alpha Bravo
Borrowing Costs
To 31 Dec 20X6: $500,000/$1,000,000 x 9% 45,000 90,000
Less Investment Income
To 30 Jun 20X6: $250,000/$500,000 x 7% x 6/12 (8,750) (17,500)
36,250 72,500
Cost of Assets
Expenditure Incurred 500,000 1,000,000
Borrowing Costs 536,250 1,072,500

Question:
 Acruni Co had the following loans in place at the beginning and end of 20X6.
1 Jan 20X6 1 Dec 20X6

10% Bank Loan repayable 20X8 120 120
9.5% Bank Loan repayable 20X9 80 80
8.9% Bank Loan repayable 20X7 - 150
The 8.9% debenture was issued to fund the construction of a qualifying asset (a piece of mining equipment), construction of
which began on 1 July 20X6. On 1 Jan 20X6, Acruni Co began construction of a qualifying asset, a piece of machinery for a hydro-
electric plant, using existing borrowings. Expenditure drawn down for the construction was: $30m on 1 Jan 20X6, $20m on 1 Oct
20X6.
Required
Calculate the borrowing costs that can be capitalised for the hydro-electric plant machine.
Answer:
Capitalisation rate = weighted average rate = (10% x (120/120+80)) + (9.5% x (80/120+80)) = 9.8%
Borrowing Cost = ($30m x 9.8%) + ($20m x 9.8% x 3/12) = $3.43m
Chapter 04 – Intangible Assets

 IAS 38 – Intangible Assets
 Research and development costs
 Goodwill (IFRS 3)
Definition and Recognition

Definition:
 An Intangible ass et :
 is an identifiable non-monetary asset without physical substance
 Are held by an entity for use in the production or supply of goods or service, for rental to
others, or for administrative purpose
Recognition:
 An Intangible ass et should be recognis ed once the recognition criteria have
been met:
 It is probable that future economic benefits that are attributable to the asset will flow to
the entity Are expected to be used for more than one period
 The cost of the asset can be reliably measured where the cost includes:
Acquired as part Internally Internally
Separate Acquired by government
of business generated generated
acquisition grant
combination goodwill intangible assets
Cost Fair value Only recognised

NOT recognised Asset/grant @ FV or
(IFRS 3) if PIRATE Nominal amount + direct
criteria met expenditure
Recognition, Measurement & Amortisation

Research Phase Internally Generated
Development Phase
Intangible Asset
Recognize as expense when
incurred
Recognize and amortise if following all Recognize as asset when

conditions are met: conditions are met
 Probable future economic benefits
 Intention to complete and use/sell
 Resources to complete and use/sell
 Ability to use/sell
 Technical feasibility
 Expenditure can be measured reliably
Subs equent Expenditure:

Subsequent expenditure must meet the original recognition criteria to be added to the cost of the intangible asset
Amortis ation:
 Intangible assets with a finite useful life should be amortised over their useful life.
 The period and method used should be reviewed at least every financial year end and adjusted where necessary.
 The depreciable amount of an intangible is the cost/revalued amount less residual value, although the residual value is
generally assumed to be zero.
 Intangible assets with indefinite useful life should not be amortised however should be tested for impairment annually.
Subsequent Re-Measurement & Goodwill

Subs equent Re-Meas urement:
 Cost Model: Cost less accumulated amortisation and impairment loss
 Revaluation model:
 Revalued amount less subsequent accumulated amortisation and impairment loss
 Revalued amount is fair value at the date of revaluation by reference to an active market
 All other assets in the same class should be revalued unless there is no active market for them, in
which case the cost model value should be used for those assets
 Revaluations should done often so that the carrying amount does not differ materially from fair
value
Goodwill:
• Goodwill can be purchased or acquired as part of business combination
• Future economic benefits arising from assets that are not capable of being identified and separately
recognised
• Recognise as an asset and measure at cost/excess of purchase cost over acquired interest
• Do not amortise
• Test for impairment annually
• Gain on bargain purchase (negative goodwill) should recognised via profit or loss
Biogenics - Scenario
Biogenics is a publicly listed pharmaceutical company. During the year to 31 December 20X9 the following
transactions took place:
1) $6m was spent on developing a new obesity drug which received clinical approval on 1 July 20X9 and is
proving commercially successful. The directors expect the project to be in profit within 12 months of the
approval date. The patent was registered on 1 July 20X9. It cost $1.5m and remains in force three years.
2) A research project was set up on 1 October 20X9 which is expected to result in a new cancer drug.
$200,000 was spent on computer equipment and $400,000 on staff salaries. The equipment has an
expected life of four years.
3) On 1 September 20X9 Biogenics acquired an up-to-date list of GPs at a cost of $500,000 and has been
visiting them to explain the new obesity drug. The list is expected to generate sales throughout the life-
cycle of the drug.
Required
Prepare extracts of the statement of financial position of Biogenics at 31 December 20X9 relating to the above
items and summarise the costs to be included in the statement of profit or loss for that year.
Solution:
Workings
1. Computer Equipment $
Cost 200,000
Depreciation (200/4 x 3/12 or 200 x 3/48) (12,500)
Carrying amount 187,500
Biogenics - Scenario
2. Intangible Asset
Patent Development Cost Customer List Total
($’000) ($’000) ($’000) ($’000)
Cost 1,500 6,000 500 8,000
Amortisation:
6/36 (250) (1,000) - -
4/34 - - (59) (1,309)
1,250 5,000 441 6,691
Statement of Financial Position $

Non-Current Asset
Property, Plant and Equipment (W1) 187,500
Intangible Asset (W2) 6,691,000
Statement of Profit or Loss $
Depreciation (W1) 12,500
Amortisation (W2) 1,309,000
Staff Salaries 400,00
Chapter 05 – Impairment of Assets

 IAS 36 – Impairment of Assets
 Cash generating units
 Goodwill and the impairment of assets
 Accounting treatment of an impairment loss
Chapter Summary
Lower of Cost or Impairment of Assets After Impairment
Recoverable amount Review
(IAS 36)
 Consider changes to
Recoverable amount (RA)
remaining useful life/residual
Higher of value
Cash Generating Unit
 Depreciate over remaining
FV less cost Value in useful life
 Where RA cannot be
of disposal Use
measured for individual
CF DF PV asset Impairment Indicators
X 1/(1+r) X  Smallest identifiable group
of assets that generates cash External:
X 1/(1+r)2 X
inflows largely independent  Significant fall in MV
etc X  Significant external adverse changes (in
of cash inflows from other
groups of assets technological, market, economic or legal
 Recognize for impairment environment)
 Increase in market interest rates
Journal Entry for for a CGU assets in the
below order: Internal:
Recognition  Obsolescence/ damage
1) Any damaged goods or
 Significant internal adverse changes (e.g.
Cost Revalued assets discontinuance/restructuring)
2) Goodwill associated to  Asset performance worse than expected
Dr P/L Dr P/L
CGU Except, annual tests for:
Cr Asset Dr OCI 3) Other assets on a pro-rata  Goodwill
Cr Asset Basis  Intangibles with an indefinite useful life
 Development expenditure not yet ready for
use
Definition – IAS 36
 IAS 36 aims to ensure that the carrying amount of assets in the financial statements is not
more than their recoverable amount.
 Carrying amount:
 The value at which the asset is included in the financial statements
 Cost/valuation less accumulated depreciation and impairment losses
 Recoverable amount:
 Fair value less cost to sell:
– The price that would be received to sell the asset in an orderly transaction between
market participants at the measurement date
– If there is an active market in the asset, the fair value should be based on the market
price, or on the price of the recent transactions in similar assets
– If there is no active market in the asset it might be possible to estimate fair value
using best estimates of what market participants might pay in an orderly transaction
– Less the direct incremental costs attributable to the disposal of the asset
 Value in Use:
– The present value of future cash flows expected to be derived from the asset or
cash-generating unit
Definition – IAS 36
 Where an individual asset is impaired:
 If the asset is held at historic cost, the impairment loss is recognised as an expense in profit or loss
 If the asset is held at a revalued amount, the impairment loss is charged:
 Firstly to other comprehensive income (to remove any previous revaluation surplus relating to the
asset)
 Any remainder is recognised as an expense in profit or loss
 Impairment Indicators : An entity should consider whether there are indications that an asset might
have been impaired at the end of each reporting period.
Internal Sources External Sources
Evidence of obsolescence or physical damage Decline in value of asset significantly more than
would have been expected due to the passage of
time or normal use
Adverse changes to the asset's use Adverse effect on the entity in the technological,
market, economic or legal environment in which the
entity operates
Internal evidence that the asset's performance will be Increased market interest rates or other market
worse than expected rates of return affecting discount rates and therefore
reducing value in use
The carrying amount of the entity's net assets
exceeds market capitalisation
Cash Generating Unit

 Cash-generating unit is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or
groups of assets.
 Where it is not possible to estimate the recoverable amount of an individual asset,
an entity should determine the recoverable amount of the cash-generating unit to
which the asset belongs.
 Where a cash-generating unit is impaired, the impairment loss is allocated in the
following order:
 Any damaged goods or asset
 Goodwill allocated to the cash-generating unit
 Then to the other assets of the unit on a pro-rata basis based on the carrying
amount of each asset in the cash-generating unit
 After the recognition of an impairment loss the asset's carrying value should be
depreciated/amortised over its remaining useful life.
Question – Harvest & DX Co

On 31 December 20X1 Harvest purchased all the shares of DX Co for $2m. The net fair value of
the identifiable assets acquired and liabilities assumed of DX at that date was $1.8m. DX C made
a loss in the year ended 31 December 20X2 and at 31 December 20X2 the net assets of DX –
based on fair values at 1 January 20X2 – were as follows:
$’000
Property, plant and equipment 1,300
Capitalised development expenditure 200
Net current assets 250
1,750
An impairment review on 31 December 20X2 indicated that the recoverable amount of DX Co

at that date was $1.5m. The capitalised development expenditure has no ascertainable external
market value and the current fair value less costs of disposal of the property, plant and equipment
is $1,120,000. Value in use could not be determined separately for these two items.
Required
Calculate the impairment loss that would arise in the consolidated financial statements of Invest
as a result of the impairment review of DX Co at 31 December 20X2 and show how the
impairment loss would be allocated.
Solution – Harvest & DX Co

Ass et Values at Allocation of Carrying amount
31.12.X2 Impairment Loss after Impairment
before (W1/W2) Loss
Impairment
$’000 $’000 $’000
Goodwill (2,000-1,800) (W1) 200 (200) -
PPE (W2) 1,300 (180) 1,120
Development Expenditure (W2) 200 (70) 130
Net Current assets 250 - 250
1,950 (450) 1,500
(W1) Calculation of Impairment Loss $’000

Carrying Value (1,750+200) 1,950
Recoverable amount (1,500)
Impairment 450
Impairment loss to write off Goodwill 200

Impairment loss to write off other assets on a pro-rata basis 250
Solution – Harvest & DX Co

(W2) Allocation of Impairment loss to other assets (pro-rata basis) ($’000)
Allocated Loss Pro- rata basis Loss
PPE (1,300-1,120) 180 217 (250 x 1,300/1500)
Development Expenditure 70 33 (250 x 200/1500)
250 250
However, PPE cannot be reduced below FV – CTS of $1,120,000

Chapter 6 – Revenue
 IFRS 15 Reve nue from contracts with customers
 Recognition and measurement
 Common types of transaction
 Presentation and disclosure
 Performance obligations satisfied over time
 IAS 20 Governme nt grants
Chapter Summary
Revenue
Revenue Recognition Government Grant

(IFRS15) (IAS 20)
Re Income:
• Recognize in P/L when expense
recognized
Revenue from Contracts Performance obligations Re Assets:
with customers satisfied over time • Deferred Income (and amortize) or
• Reduce carrying amount of asset
Recognize when there is transfer of
control to the customer:
5 Step Model
1. Identify contract with customer
2. Identify Separate Performance Methods to Determine Recognition of
Revenue & Cost
Disclosure
Obligation Revenue and Costs
3. Determine the transaction Price
4. Allocate the TP to PO • Output Methods – Surveys, • Revenue and costs are • Recognize the P/L in SOPL
5. Recognize revenue when Appraisal results, Units based on proportion of • Recognize the Contract
Performance Obligation is delivered etc. work complete. Asset or Loss in SOFP
satisfied • Input Methods – Resources • If the contract is expected
Consumed, Labour hours, to make a loss, recognize
Cost Incurred etc. the expected loss
immediately
Revenue
 Revenue is the income arising in the course of an entity's ordinary
activities.
 Performance obligation is a promise in a contract with a customer to
transfer to the customer either:
a) A good or service (or a bundle of goods or services) that is distinct; or
b) A series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.
 Stand-alone selling price is the price at which an entity would sell a
promised good or service separately to a customer.
 Transaction price is the amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services
to a cus tomer, excluding amounts collected on behalf of third parties.
 Contract as s et is an entity's right to cons ideration in exchange for goods
or services that the entity has transferred to a customer by satisfying a portion
of performance obligation.
 Contract liability is an entity's obligation to transfer goods or services to a
customer for which the entity has received consideration (or the amount is
due) from the customer.
Recognition & Measurement

 Step 1 – Identify the contract with the customer
 A contract can be written, verbal or implied.
 Step 2 – Identify the separate performance obligations
 Promises to supply goods or services to a customer are performance obligations.
 Separate performance obligations must apply to distinct goods or services.
 A good or service is distinct if it is sold separately, or could be sold separately.
 This is important when considering contracts where goods and services are bundled, such as cellphone
contracts where the handset is included free, but could be sold separately.
 Step 3 – Determine the transaction price
 This is the amount of consideration that the entity expects to be entitled to in exchange for
transferring the goods or services.
 Any variable amount, such as a volume discount, should only be applied where there is no probability of
it being reversed in the future.
 Step 4 – Allocate the transaction price to the performance obligations
 When a contract contains more than one distinct performance obligation, the transaction price is
allocated in proportion to the stand-alone selling price of the good or service underlying each
performance obligation.
 Step 5 – Recognis e revenue when (or as) a performance obligation is satisfied.
 A performance obligation is satisfied when control of the good or service is transferred to the
customer.
Presentation & Disclosure

Presentation:
The presentation requirements of IFRS 15 are important in relation to contracts
where performance obligations are satisfied over time.
In the case of these contracts, there are likely to be contract assets and liabilities to be
accounted for at the end of the reporting period.
Contract liability is recognised where consideration has been transferred in excess
of the performance obligation satisfied.
Contract as s et is recognised where performance obligation has been satisfied but
no consideration has yet been invoiced or received.
Consideration which has been billed (invoiced) will be presented as an amount
receivable, not a contract asset.
Disclos ure
The standard requires the following disclosures:
(a) Revenue from contracts separately disclosed
(b) Impairment losses on any contract assets or receivables
(c) Opening and closing balances of assets, liabilities and receivables
(d) Revenue recognised that was included in opening contract liability
(e) Revenue recognised from performance obligations satisfied in the previous period
Performance is Obligation Satisfied over
time
 Where performance obligations are satisfied over time, the entity
must be able to measure the amount of performance completed at the end of
the accounting period. This determines how much revenue, costs and profit can
be recognised.
 The amount of performance completed can be measured using output
methods (Work certified ÷ Contract price based on the value to the
customer of goods or services transferred) or input methods (Costs to date
÷ Total estimated costs based on cost to the entity of goods or services
transferred).
 Accounting Treatment: Statement of Profit or Loss
$
Revenue (x% × Total contract revenue) X

Expenses (x% × Total contract costs) (X)
Expected loss (X)
Recognised profits/ losses X
Where x% is the stage of completion

Performance is Obligation Satisfied over
time
 Accounting Treatment:
 Statement of Financial Position
Contract ass et/liability $

Contract costs incurred to date X
Recognised profits less recognised losses X
X
Less invoices issued to date (X)
Contract Asset/Liability X/(X)
Trade receivables $
Invoices issued to date X
Less cash received (X)
Trade Receivables X

Recognition & Measurement

IFRS 15 provides guidance on dealing with the following transactions:
Warranties: A warranty which is purchased separately from the product to
which it relates is regarded as a separate performance obligation.
Principal versus agent: A principal controls the goods or services prior to
the transfer of control and recognized revenue when control has been transferred.
An agent will recognize as revenue any fee or commission to which it is entitled for
the satisfaction of its performance obligation as agent.
Repurchas e agreements: These are treated as either a lease in accordance
with IAS 17 or a financing arrangement.This depends on the terms of the
agreement and the option.
Consignment arrangements. No revenue is recognized until control of the inventory
has been transferred. This also applies to bill and hold arrangements.
Question: Example 1
Particulars $
Total contract price 100,000
Costs incurred to date 48,000
Estimated costs to completion 32,000
Invoices issued 58,000
Cash received 50,000
Stage of completion (proportion of contract costs incurred) 60%
 Required:
(a) Prepare relevant extracts from the statement of profit or loss and statement
of financial position.
(b) Show how the statement of financial position would differ if invoices issued
were $64,000 (of which $50,000 was received).
Answer: Example 1
Is the Contract Profitable? $
Total revenue 100,000
Total expected costs (48,000 + 32,000) (80,000)
Overall expected profit 20,000
Stage of Completion 60%
STATEMENT OF PROFIT OR LOSS $
Revenue (60% x 100,000) 60,000
Expenses (60% x 80,000) (48,000)
Profit for the period 12,000
STATEMENT OF FINANCIAL POSITION $
Current Assets:
Contract Assets:
Contract costs incurred to the date 48,000
Recognised Profits 12,000
Less: Invoices issued to date (58,000)
Contract Asset 2,000
Trade Receivables:
Invoices issued to date 58,000
Less: Cash Received (50,000)
Trade Receivables 8,000
IAS 20 – Government Grant

 Government Grant are assistance by government in the form of
transfers of resources to an entity in return for past or future compliance
with certain conditions relating to the operating activities of the entity.
 Recognition: Government grants are only recognised once there
reasonable assurance that the conditions of the grant will be complied with
and the grant will be received
 Accounting Treatment:
 Grants which relate to income:
 For example, grants to assist with wages and salaries costs
 These are recognised in profit or loss either separately as part of 'other income'
or as a deduction from the related expense
 Grants relating to assets:
 For example, grants to assist with the acquisition of non-current assets
 Choice of accounting treatment
IAS 20 – Government Grant

 Grant relating to as s et:
Presented in the statement of financial position either:
 As deferred income
 This is then released over the useful life of the asset with the reduction being shown as 'other income'; or
 By deducting the grant from the carrying amount of the asset
 This means that the carrying amount of the asset and therefore the associated depreciation is lower.
Either way the depreciation charge less the 'other income' will show the same net expense.
 Repayment of grants
 Where a government grant becomes repayable it is accounted for as a change in
accounting estimate under IAS 8.
 Repayment of grants relating to income are applied first against any unamortised deferred
credit and then in profit or loss.
 Repayments of grants relating to assets are recorded by:
 Reducing the deferred income balance; or
 Increasing the carrying amount of the asset; or
 The cumulative additional depreciation that would have been recognised to date had the grant not been
received is recognised in profit or loss immediately.
Chapter 7 – Introduction to Groups

 Group accounts
 Consolidated and separate financial statements
 Content of group accounts and group structure
Chapter Summary
Exemption from
preparing consolidated
Concept Introduction to Groups FS
• P is wholly owned subsidiary
• Shareholders need to know about • Debt/equity not publically traded
the performance of the whole group • Ultimate or any intermediate P
not just the parent Group Financial publishes IFRS
Statements
Parents separate • Subsidiary consolidated Definition of
financial statement • Show results/financial position of Subsidiary
group as a single business entity
• Subsidiary held at:
• Issued to shareholders of P
• An entity controlled by another
o Cost or entity
Fair value • Prepared in addition to S’s own
o
financial statements • Control: when an investor has
all of the following:
Consistent accounting o Power over the investee
policies and year ends o Exposure, or rights to variable
NCI and Mid Year returns from its involvement with
acquisitions investee; and
• Uniform accounting policies in
Consolidated FS Non-Controlling Interest o The ability to use its power
• P & S same reporting date, over the investee to affect the
• Shows non-group shareholders
amount of the investor’s return
otherwise: interest in S’s net assets
o Difference not more than three Mid-year acquisitions
• Examples:
months o >50% voting rights
• Calculate retained earnings at o Right to direct activities for
o Adjustments made for significant date of acquisition
items b/d X benefit of investors
• Use this figure for: o Appoint/remove key management
o Reporting period and gap same PFY x X/12 X o Goodwill calculation
length from period to period o Management contract
o Pre-acq reserves (PAR) in ret’d
Dividends paid (X) earnings calculation
At Acq’n X
Group Accounts - Definitions

Control: An investor controls an investee if the investor
Subs idiary: An entity which an has the following:
investor has control  Power over the investee
 Exposure, or has rights to, variable returns from
the involvement with the investee
Ass ociate: An entity which an  The ability to affect those returns through
investor has significant
influence and which is neither a Power: Existing rights that give the current ability to
subsidiary nor a joint venture direct the relevant activities of the investee
Significant Influence: The power to participate in the
financial and operating policy decisions of an economic
Examples of Power:
activity but no control or joint control over the policies
 Right in the form of voting rights of an investee
 Rights to appoint, reassign or remove members of an investee’s Investment Criteria Accounting
key management personnel who have the ability to direct the Treatment
relevant activities
Subsidiary Control (>50%) Full consolidation (IFRS 10)
 Right to appoint or remove another entity that directs the
Associate Significant Equity Accounting (IAS 28)
relevant activities
Influence (>20%)
 Right to direct the investee to enter into, or veto any changes to,
Investment Held for wealth As a single company accounts
transactions for the benefit of the investor
accretion ( <20%) (IFRS 9)
 Other rights (such as decision making rights specified in a
management contract) that give the holder ability to direct the
relevant activities
Question – Control?
Which one (or more) of the following would be accounted
Control?
for as a subs idiary of A?
1. A holds no shares in B; however through an agreement with B's
Yes
shareholders, A chooses 6 of the 10 Board members.
2. A owns 45% of C's shares. No other individual shareholder owns more than
Yes
5%.
3. A owns 55% of D's shares. Under an contract in place, A must make all
No
decisions in agreement with E, who owns 45% of the shares.
4. A controls F, a partnership, under an agreement. Yes
P Co
P Co controls S Co because it has > 50%
of voting power although it does not own
all of S Co
E.g. if S Co pays a $100 dividend:

S Co • P Co receives $80
• The non-controlling interest receive $20
Group Accounts – IFRS 10

 When a parent entity acquires control of a subsidiary it acquires the company's shares rather than its
individual assets and liabilities.
 Both the parent and the subsidiary continue to exist as separate legal entities and are required to produce
financial statements at the end of each reporting period.
 Under IAS 27 the investment in the subsidiary can be recorded in the parent's separate financial
statements either:
 At cost; or
 At fair value.
 In the ACCA FR exam, the investment is recorded at cost.
Exemption Other Iss ues

 The parent is itself a wholly-owned subsidiary  Different Reporting date:
or a partially owned subsidiary of another  The gap between reporting dates is three months
entity and the owners do not object to the or less and
 Adjustments are made for the effects of significant
parent not presenting consolidated financial
transactions or events that occur between the two
statements. reporting periods.
 Its securities are not publically traded  The consolidated financial statements should be
 It is not in the process of issuing securities in prepared using uniform accounting policies (the
public securities markets. parent's policies).
 The ultimate or intermediate parent publishes  The results of subsidiaries should be consolidated
IFRS – compliant consolidated accounts for all periods when the parent has control.
Chapter 8 – The Consolidated Statement of
Financial Position
 IFRS 10: Summary of consolidation procedures
 Non-controlling interests
 Dividends paid by a subsidiary
 Goodwill arising on consolidation
 Non-controlling interest at fair value
 Intra-group trading
 Intra-group sales of non-current assets
 Summary: consolidated statement of financial position
 Acquisition of a subsidiary during its accounting period
 Fair values in acquisition accounting

Chapter Summary
The Consolidated
Other Reserves
Type of Investment Statement of Financial
Position • Eg – Revaluation
• Treat the same way as retained
• Subsidiary (Control)
• Associate (Significant Influence) earnings
Approach to
Goodwill and Fair Value Intra Group Trading
COSFP
Positive: Gain on Bargain Eliminate in Consolidated SOFP: • Details in coming slides
Purchase • Cash in Transit
Dr Cash
(i) Capitalised (i) Reassess FV used
Cr Receivables
(ii)
• Annual
AdjustImpairment loss
goodwill at (ii) Credit
acquisition for FVReminder to P/L
of net assets • Goods in Transit
and then account for subsequent amortisation/sale Dr Inventories
• Purpose: accurate goodwill figure Cr Payables
• NCI at acquisition measured at: • Intragroup balances (cancelled)
• FV or Dr Payables
• NCI % x FVNA Cr Receivables
Types of Types of Inventories Sold at a Transfer of PPE

Consideration Consideration profit
• Equity Transfer Exceptions to FV recognition/ Eliminate in Unrealized Profit: Eliminate in Unrealized Profit:
Assets Transfer • Sales by P to S • PUP on Transfer (adjust in Selling CO)
• measurement (FR):
Dr COS/RE of P • Proportion of Dep (adjust in Rec CO)
• Deferred - Present Value • Contingent liabilities –
Cr Group Inventories Dr RE of Selling Co (PUP)
• Contingent – Fair Value Recognised if present
• Sales by S to P Cr RE of Receiving Co (Dep)
obligation exists & FV can be
Dr COS/RE of S CR PPE
measured reliably
Cr Group Inventories
Consolidated Statement of Financial

Position – Adjustments
Adjustments Items Consolidation adjustment for Statement of Financial Position
Assets & Liabilities 100% of Parent + 100% of Subsidiary
Share Capital Parent only
Non Controlling Interest NCI at year end:

• Net Assets: NCI’s share of S’s consolidated equity at acquisition or Fair Value: FV of Net Assets at the date of
acquisition
• Add: NCI’s share of S’s post acquisition Retained Earnings +/- adjustments
Goodwill • Consideration paid by parent more than the equity value of the subsidiary
• Impairment of goodwill:
• Reduce from Parent’s R/E if NCI valued based on net assets
• Reduce from Subsidiary’s R/E if NCI based on Fair Value
Retained Earnings Group:100% of Parent + Groups share of S’s post acquisition retained earnings +/- adjustments
Intra - Group Trading Unrealized profit (Profit % x Unsold inventory):

• Reduce from Subsidiary retained earnings if goods sold by subsidiary to parent
• Reduce from Parents retained earnings if goods sold by parent to subsidiary
Intra - Group Assets • Asset & Liability should be cancelled against each other
• Sale of Assets:
• Gain should be removed from the company selling the asset
• Depreciation should be removed from the company owning the asset
Fair Value of Asset • Add fair value change of assets at acquisition to equity balance of subsidiary
• Additional depreciation (FV change/RUL) should be reduced from Subsidiary’s retained earnings
Forms of Consideration • Contingent or Deferred Consideration:
• Add the discounted fair value to consideration paid acquisition
• Reduce the interest on consideration (unwind the discount) from the retained earnings
• Share Exchange
• Add the value of share exchange to consideration paid at acquisition
• Add the share value and share premium to the equity of the parent
Dividends Paid by Subsidiary • To Parent: Cancel the dividend amount
• To NCI: Cash leaves the group will not appear anywhere in consolidation
Chapter 9 – The Consolidated Statement of
Profit or Loss and OCI
 The consolidated statement of profit or loss
 The consolidated statement of profit or loss and
other comprehensive income
 Disposals

Consolidated Statement of Financial
Position – Adjustments
Intra - group trading • Calculate the unrealised profit on unsold inventories at year end
Less: Consolidated gross profit
Intra – group dividend • Group retained earnings are only adjusted for dividends paid to P Co
• Dividend by S Co: to P Co: -- Cancelled on consolidation
• Dividend to NCI – Replaced by the allocation to NCI of share of the profit for the subsidiary
Pre-acquisition profits • Only post acquisition profits of the S Co are brought into the Consolidated
Revenue to profit for year • 100% of P Co +100% of S Co (Excluding adjustments for intra – group transactions)
Intra –group sales • Eliminate intra group activity from both sales revenue and cost of sales
Unrealised profit on intra – • Goods sold by P Co - Increase cost of sales by unrealised profit
group sales • Goods sold by S Co
Increase cost of sales by full amount of unrealised profit
Decrease non – controlling interest by their share of unrealised profit
Depreciation • S Co’s Non CA subjected to FV uplift -- any additional depreciation must be charges to P&L
• NCI to be adjusted for their share
Transfer of non current assets • Increase expense by any profit on transfer
• Reduce by any additional depreciation from increased carrying value of the asset

Associate Entity – Adjustments

Upstream and downstream • Reduce the profit or loss to the extent of the investor’s interest in associate
transactions
Associate’s loss • When investor’s share of loss of the associate equals or exceeds its interest in the associate – Investor should
discontinue including its share of further loss
• Investment reported at nil value
• Additional loss to be recognised only where investor has obligation or payment on behalf of the associate
Impairment loss • To be recognised in accordance with IAS 36 Impairment of assets for each associate individually
Chapter 11 – Financial Instruments

 Financial instruments
 Presentation of financial instruments
 Disclosure of financial instruments
 Recognition and measurement of financial instruments
Chapter Summary
Definitions Financial Instruments Classification
Substance over legal form
Financial Asset Financial Liability
I. Cash I. A contractual obligation to deliver

II. An equity instrument of another entity (for cash or another financial asset to
example shares, share options or share warrants) another entity (for example a trade
III. A contractual right to receive cash or another payable, debenture loan and
financial asset from another entity (for example a redeemable preference shares)
trade receivable) II. A derivative standing at a loss
IV. A derivative standing at a gain
Equity Convertible
Types of Financial Asset Debt Instruments
Instruments Debt
Investment in debt: • Financial assets and liabilities • Ordinary Share capital Separate debt/ equity
• Business model approach: debt held to collect • Redeemable preference shares • Irredeemable components:
principal and interest cash flows o Financial liability Preference shares
PV principal (X x 1/(1+r)n) X
– Amortised cost o Held at amortised cost • Issue costs deducted
Investment in debt: o Effective interest from share premium PV interest flows: X
• Business model approach: debt held to collect charged/credited to P/L
(Nominal interest x 1/(1 + r) 1)
principal and interest cash flows and to sell FA
– FV thru OCI, investment income to P/L Amortised Cost (Nominal interest x 1/(1 + r) 2)
Investment in equity:
(Nominal interest x 1/(1 + r) 3)
• Investments in equity instruments of another entity Initial value b/d (incl trans costs) X
not held for trading under irrevocable election Debt Component X
Interest at effective % X
– FV thru OCI, dividend income to P/L
Equity Component X
All other financial assets (including all Coupon at nominal % X
derivatives): Cash Received X
Amortised cost c/d X
– FV thru P/L
IAS 32 - Definitions
 Financial Instrument a contract that gives rise to both a financial asset of one entity and a financial
liability or equity instrument of another
 Financial Ass et
 Cash;
 An equity instrument of another entity (for example shares, share options or share warrants)
 A contractual right to receive cash or another financial asset from another entity (for example a trade
receivable)
 A derivative standing at a gain
 Financial Liability contractual obligation to deliver cash/other financial asset; contractual obligation to
exchange financial instruments under potentially favorable conditions
 Equity Instrument contract that evidences a residual interest in the assets of an entity after deducting all
its liabilities
IAS 32 Presentation
 Financial Instrument should be classified as either Liability (debt) or Equity
 Compound Instruments might be split to both debt and equity
 Substance over legal form applies
 Interest dividends, loss or gains relating to a financial instrument claimed as a liability are reported in I/S,
while distributions to holders of equity instruments are debited directly to equity
 Offset of a financial asset and liability is only owned where there is a legal enforceable right and the entity
intends to settle net or simultaneously
IAS 9
 IFRS 9 deals with recognition and measurement of financial asset and liabilities. It classifies
assets on the basis of entity’s busines s model and the cash flow model
Busines s Model:
The business objective for a debt instrument is to collect cash flows of the instruments and hold
it till maturity or sell it prior to maturity
 It is not at an individual financial instrument level
 It is based on how key management personnel actually manages the business, rather than
management’s intentions for specific financial assets
 May have more than one model for its financial asset and the classification need not
determined at the reporting entity level. It would be appropriate for entities to carry out the
assessment at portfolio level, rather than at entity level.
 Entity Business model can be to hold financial assets till maturity even if sale of financial
assets occur
Contractual Cash Flow Model
 Only instruments with contractual cash flow of principal and instrument on principal qualify
for amortised cost of measurement
IAS 9 – Measurement
Initial Measurement Financial Instrument:
 Amortised Cost • This is determined on the basis that the entity's business model for managing financial assets is
that they are held to collect interest and principal cash flows
 Fair Value to P/L • This is used where the financial assets are held for trading, comprise derivatives and all other
financial assets.
 Fair Value to OCI • This is used where the financial asset is an investment in the equity instruments of another
(only for Financial entity and such investments are not held for trading.
Asset) • This treatment is optional and an irrevocable election must be made on purchase of the
investment to be able to carry them at fair value through other comprehensive income.
Subs equent Measurement Financial Instrument:

Financial Ass et Financial Liabilities
Amortised Cost Fair Value Amortised Cost Fair Value
 Held to collect  Financial asset at fair  All Others  Financial liabilities at fair
contractual cash flows value through profit or value through profit or
loss loss
 Equity investments  Has to be held for
 Assets held for trading trading and classified at
and to collect inception at FV through
contracted cash flows P/L
are measured at fair  Gain or loss as a result
value through OCI of change in credit risk
must go through OCI
Q&A - Amortised Cost

Question:
A company purchases a deep discount bond with a par value of $500,000 on 1 January 20X1 for proceeds of
$440,000. Annual coupon payments of 5% are payable on 31 December each year. The entity incurred
transaction costs of $5,867. The bond will be redeemed on 31 December 20X3 at par. The effective interest
rate on the bond has been calculated at 9.3%.
Require d
Show the profit or loss impact and carrying value of the bond for each of the years of the bond's life. (20X1–
20X3)
Solution:
At inception the bond is classed as a financial asset and is initially recognised at the amount paid plus the
associated transaction costs.
This is $440,000 + $5,867 = $445,867.
The entry to record the financial asset is:
Dr Financial Asset $445,867
Cr Cash $445,867
IFRS 9 requires financial assets held to collect the cash flows to be held at amortised cos t based on their
effective rate of interest (internal rate of return).
This is shown in the table on the next slide.
Actual Interest is $500,000 x 5% = $25,000
Q&A –Amortised Cost

Working Note:
Year Balance b/d ($) EI 9.3 % (P/L) AI + Cash Received Balance c/d
1 445,867 41,466 (25,000) 462,333
2 462,333 42,997 (25,000) 480,330
3 480,330 44,670 (525,000) -
Statement of Profit or Loss :
Year Particulars $
Income from Other Sources:
X1 Interest on bond (EI) 41,466
Statement of Financial Position:
Year Particulars $
Assets
X1 Financial Asset 462,333
X2 Financial Asset 480,330
X3 Financial Asset -
Compound Financial Instrument

 Compound Financial Instrument contain both a liability and an equity instrument
 IAS 32 states that each component part of the instrument should be classified and valued separately according to
the substance of the arrangement.
 The most common type of compound instrument is convertible debt.
 The compound instrument should be separated as follows:
 Firstly determine the carrying amount of the debt component by reference to a similar liability that does not
have conversion rights
 Then value the equity component as the balancing figure
Question:
A company issued 3,000 convertible bonds at par on 1 January 20X1. The bonds are redeemable 31 December
20X4 at their par value of $100 per bond. The bonds pay interest annually in arrears at an interest rate (based
on nominal value) of 5%. Each bond can be converted at the maturity date into 5 $1 shares. The prevailing
market interest rate for four year bonds that have no right of conversion is 8%.
The present value at 8% of $1 receivable at end of: Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735
Required
Show the accounting treatment of the:
a) Bond at the inception
b) Financial liability component at 31 December 20X1 using amortised cost

Solution:
a) At January
Non-Current Liabilities
Financial liability component of convertible bond (W1) 270,180
Equity
Equity component of convertible bond (300,000 – (W1) 270,180) 29,820
Working 1:
Fair value of equivalent non-convertible debt
Particulars $
Present value of principal payable at end of four years 220,500
(3,000 × $100 = $300,000 × 0.735)
Present value of interest payable annually in arrears for four years:
Year 1 (300,000 × 5%) = 15,000 × 0.926 13,890
Year 2 (300,000 × 5%) = 15,000 × 0.857 12,855
Year 3 (300,000 × 5%) = 15,000 × 0.794 11,910
Year 4 (300,000 × 5%) = 15,000 × 0.735 11,025 49,680
270,180

a) At 31 December 20X1
Statement of Profit or Loss $
Finance cos t (profit or loss )
Effective interest on financial liability component of convertible bond (W2) 21,614

Financial liability component of convertible bond (W2) 276,794
Working 2:
Year Balance b/d ($) EI 8 % (P/L) AI 5% Balance c/d
1 270,180 21,614 (15,000) 276,794
Impairment & Gain and Loss

Impairment
 Impairment review where evidence of financial asset being impaired
 Original effective interest rate should be used when discounting future cash flows to calculate impairment
 Impairment loss is charged to profit or loss
 Where investment in equity instrument suffers impairment loss, this is recognized in statement of changes in equity
and under comprehensive income
Gain and Loss on Remeasurement
 Amortised Cost: Gains and losses are recognized in profit or loss as a result of the amortisation process and
when the asset is derecognized
 Fair Value to P/L: Gains and losses are recognized in profit or loss
 Fair Value to OCI: Gains and losses are recognized in OCI. At disposal transfer can be made to Retained earnings
 Equity Instrument: Entity made an election to present gains and losses to OCI. Dividends will be recognised in profit
or loss.
Own Credit
 IFRS 9 requires that financial liabilities which are designated as measured at FV to P/L are treated differently. In this
case the gain or loss in a period must be classified into:
 Gain or Loss resulting from credit risk which will be recognised in OCI
 Other gain or loss will be recognised in profit or loss
Factoring of Receivables
Debts are not an ass et of the seller Debts are an ass et of the seller
 Transfer is for a single non-returnable fixed  Finance cost varies with speed of collection of debts,
sum. eg:
 By adjustment to consideration for original
transfer; or
 Subsequent transfers priced to recover costs
of earlier transfers.
 There is no recourse to the seller for losses.  There is full recourse to the seller for losses.
 Factor is paid all amounts received from the  Seller is required to repay amounts received from the
factored debts (and no more). Seller has no factor on or before a set date, regardless of timing or
rights to further sums from the factor. amounts of collections from debtors.
Chapter 12 – Leasing
 IFRS 16 – Leases
 Account for right of use assets and lease liabilities in the records of the
lessee.
 Explain the exemption from the recognition criteria for leases in the
records of the lessee.
 Account for sale and leaseback agreements.
Chapter Summary
Definition Leasing Issue
A contract, or part of a contract, that conveys Substance over form:

the right to use an asset, the underlying asset, for 1. Almost all leases must now be
a period of time in exchange for consideration recognised in the statement of financial
position under IFRS 16.
2. Recognition exemptions for short term
(less than 12 months) and leases of low-
Identifying a lease value assets
Key is the right to control the use of the

Short Term Sale & Leaseback
asset, which is:
 Right to obtain substantially all the
economic benefits from use  Short-term leases ≤ 12 months Transaction is a sale per IFRS 15
 The right to direct the use  Leases of low-value assets  Measure the right-of-use asset @ proportion of
 If the lessor can substitute the asset for carrying amount that relates to rights retained
another and would benefit Accounting Treatment: CA x discounted lease payments
economically to do so, no control  Charge lease payments on a straight- fair value
 Non-lease components must be line or other systematic basis over  Gain/loss on sale: only recognise proportion
separated out lease period relating to rights transferred
 Calculate gain/loss = FV/proceeds less CA
Accounting Treatment:  Calculate gain that relates to rights retained:
 Recognise right-of-use asset and lease Gain x discounted lease payments
liability. Lease liability at PVFLP fair value
 Depreciate asset over useful life if  Gain relating to rights transferred is the balancing
ownership transfers or option to figure = Total gain less gain on rights retained
purchase, or
 Shorter of lease term or useful life if no Transaction is NOT a sale per IFRS 15
transfer of ownership or purchase  Continue to recognise the transferred asset
option  Treat transfer proceeds as a financial liability,
accounted as per IFRS 9
 Transaction is like a secured loan
IFRS 16
 IFRS 16 introduces a single lessee accounting model and requires a lessee to
recognise assets and liabilities for all leases with a term of more than twelve
months, unless the underlying asset is of low value.
 The lessee recognises a right-of-use asset, representing its right to use the
underlying asset, and a lease liability representing its obligation to make lease
payments.
 Definitions:
 A lease is a contract, or part of a contract, that conveys the right to use an asset, the
underlying asset, for a period of time in exchange for consideration.
 A right-of-use ass et is an asset that represents a lessee’s right to use an underlying
asset for the lease term.
 An underlying ass et is an asset that is the subject of a lease, for which the right to use
that asset has been provided by a lessor to a lessee.
 Lease payments are made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term.
 Lease term is the non-cancellable period for which the lessee has contracted to lease
the asset together with any further terms for which the lessee has the option to continue
to lease the asset.
 Lease incentives are payments made by the lessor to the lessee or the reimbursement
or assumption by the lessor of costs of the lessee.
IFRS 16
Identifying a leas e
 A contract is, or contains, a lease if the contract conveys the right to control the
use of an identified asset for a period of time in exchange for consideration.
 The right to control the use of an identified asset depends on the lessee having:
 The right to obtain substantially all of the economic benefits from use of the identified
asset; and
 The right to direct the use of the identified asset
 A lessee does not control the use of an identified asset if the lessor can substitute
the underlying asset for another asset and would benefit economically from doing
so.
Short-term and low value leas es
 A lessee may elect to account for lease payments as an expense in profit or loss
over the lease term for the following two types of leases:
 Short-term leases. Leases with a term of twelve months or less. This election is made by
class of underlying asset. A lease that contains a purchase option cannot be a short-term
lease.
 Low-value leases. Leases where the underlying asset is of low value (such as office
furniture or laptops).This election can be made on a lease-by-lease basis.
IFRS 16 – Accounting Treatment

Leases – accounting treatment
Dr Ass et (right of use ass et)
Cr Lease liability
 At the commencement date the right-of-use asset is initially measured at cost. This comprises:
 The amount of the initial measurement of the lease liability
 Any lease payments made before the commencement date, such as initial deposits, less any lease
incentives received
 Any initial direct costs incurred by the lessee
 Any costs which the lessee will incur for dismantling and removing the underlying asset or restoring the
site at the end of the lease term.
Cost X
Less accumulated depreciation X
Less impairment losses X
Right of use ass et X
 Measurement of Asset:
 The asset is depreciated from the commencement date to the earlier of the end of its useful life or the
end of the lease term.
 NB: If the ownership of the asset is expected to be transferred to the lessee at the end of the lease, the
useful life period must be used.
 Alternatively, the asset can be accounted for in accordance with the revaluation model in IAS 16 or the
fair value model in IAS 40 (compulsory if the asset meets the definition of investment property).
IFRS 16 – Accounting Treatment

Leases – Measurement of Liability
 Interest portion of the payment.
 The capital element of the lease payment reduces the amount owed to the finance company and reduces
the lease liability in the statement of financial position.
 It is therefore important to have a methodical approach to calculating the lease liability at the end of the
reporting period.
 To do this you must first identify from the question whether the lease payments are made:
 In arrears (ie at the end of the reporting period); or
 In advance (ie at the beginning of the reporting period).
 If payments are made in advance, the opening lease liability will be lower than if payments are made in
arrears.
 After the commencement date the carrying amount of the lease liability is increased by interest charges on
the outstanding liability and reduced by lease payments made.
 The actuarial method, used by IFRS 16, requires the finance charge to be allocated to periods during
the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability
for each period, ie applying the interest rate implicit in the lease (the lease's internal rate of return) to the
amount of capital outstanding to calculate the finance charge for the period. (The lessee's incremental
borrowing rate may be used if the interest rate implicit in the lease cannot be determined.)
 Consequently, at the start of the lease the finance charges will be large as the outstanding lease
liability is large. Towards the end of the lease's life, the finance charge will be smaller as the
outstanding lease liability is smaller.
Question & Answer

A company leases an asset on 1 January 20X1. The terms of the lease are to pay a non-refundable deposit of
$575 followed by seven annual instalments of $2,000 payable in arrears. The cost of the right-of-use asset
(equivalent to the present value of lease payments) on 1 January 20X1 is $10,000. The interest rate implicit in
the lease is 11%.
Required
Calculate the interest charge in the statement of profit or loss and the lease liability in the statement of
financial position for the year ended 31 December 20X1.
Solution:
Working $
1.1.X1 Liability b/d 10,000
1.1.X1-31.12.X1 Interest at 11% 1,100
31.12.X1 Instalment 1 (in arrears) (2,000)
31.12.X1 Liability c/d 9,100
1.1.X2-31.12.X2 Interest at 11% 1,001
31.12.X2 Instalment 2 (in arrears) (2,000)
Statement of Profit or Loss (extract) $

Finance Cost (Working) 1,100
Statement of Financial Position (extract) $

Non-Current Liabilitie s
Lease Liability (Working) 8,101
Non-Current Liabilitie s
Lease Liability (Working) (9,100-8,101) 999
Question & Answer

Company A makes up its accounts to 31 December each year. It enters into a lease (as lessee) to lease an item
of equipment with the following terms.
Inception of Lease 1 January 20X1
Term 5 years at $2,000 per annum payable in advance
Initial Measurement of Liability $6,075
Useful life Eight Years
Interest rate implicit in the lease 12%
Required
Calculate the interest charge in the statement of profit or loss and the lease liability in the statement of
financial position for the year ended 31 December 20X1.
Solution:
Working - Ass et $
Right of use of asset
PV of Lease Liability 6,075
Advance Lease Payment 2,000
Value of Right of use of asset 8,075
Question & Answer

Working - Liability $
1.1.X1 Initial Liability 6,075
1.1.X1-31.12.X1 Interest at 12% 729
Statement of Profit or Loss (extract) $

Finance Cost (Working) 729
Depreciation (8,075/5 years) 1,615
Statement of Financial Position (extract) $

Non-Current Assets
Right of Use of Asset (8,075 – 1,615) 6,460
Lease Liability (Working) (6,804 – 2,000) 4,804
Current Liabilities
Lease Liability (Working) 2,000
IFRS 16 – Sale & Leaseback

Sale and leaseback transactions
 These describe the situation where an entity sells an asset to a third party and then leases it
back from them.
 The accounting treatment depends on whether or not the transaction meets the IFRS 15
criteria to be recognised as a sale.
 If the transfer does not satisfy the IFRS 15 criteria, the seller continues to recognise the
transferred asset and the transfer proceeds are treated as a financial liability, accounted for in
accordance with IFRS 9. The transaction is more in the nature of a secured loan.
If the transaction satisfies the IFRS 15 criteria:
 The seller/lessee measures the right-of-use asset arising from the leaseback at the proportion
of the previous carrying amount of the asset that relates to the right-of-use retained by
the seller/lessee.
 The seller/lessee only recognises the amount of any gain or loss on the sale that relates to the
rights transferred to the buyer.
If the fair value of the consideration for the sale does not equal the fair value of the asset, or if
the lease payments are not at market rates, the following adjustments should be made:
 Any below-market terms should be accounted for as a prepayment of lease payments.
 Any above-market terms are accounted for as additional financing provided by the
buyer/lessor.
Sale & Leaseback

If Transfer is a Sale:
Right of Use of Ass et: CA x PV of Lease Payments (After deducting additional or addi)
Fair Value of Asset
Gain:
Total Gain: Fair Value – Carrying Amount
Unrealised Gain: Total Gain x PV of Lease Payments
Fair value of Asset
Realised Gain: Total Gain – Unrealised Gain
If Transfer not a Sale:

 Recognise the Asset and the sale proceeds as a financial liability as per IFRS 9
Question & Answers

A company preparing financial statements for year ending 30 September 20X3 included within revenue $100m
for an item of plant sold on 1 June 20X3. The sale did not meet the IFRS 15 criteria. The plant had a carrying
amount of $80m at the date of its sale, which was charged to cost of sales. On the same date, the company
entered into an agreement to lease back the plant for the next five years (being the estimated remaining life of
the plant) at a cost of $28m per annum payable annually in arrears. An arrangement of this type is deemed to
have a financing cost of 12% per annum. No depreciation has been charged on the item of plant in the current
year.
Required
Comment on the substance of the sale and the treatment of it.
Solution:
The sale of the plant has been incorrectly treated on two counts. Firstly even if it were a genuine sale it should
not have been included in revenue and cost of sales, it should have been treated as the disposal of an item of
plant and only the profit or loss on the disposal would be included in profit or loss (requiring separate
disclosures under IAS 1 if material). However, this treatment would also be incorrect. As the sale does not
meet the IFRS 15 criteria, the substance of this transaction is a secured loan. Thus the receipt of $100m for the
'sale' of the plant should be treated as a loan.
The rentals, when they are eventually paid, will be applied partly as interest (at 12% per annum), and the
remainder will be a capital repayment of the loan. In the financial statements an accrual for loan interest of 12%
per annum on $100m for four months ($4m) is required.
The plant remains within non-current assets in the statement of financial position.
Question & Answers

On 1 January 20X2 a company held a freehold building in its books with a carrying amount of $18m and a remaining
useful life of 30 years. On the same date, it entered into an agreement to sell the building to a bank for $30m, but to
continue to occupy it for the next six years at an annual rental of $3m per annum payable in arrears. The transaction
satisfies the performance obligations in IFRS 15 to be treated as a sale. The fair value of the building at the date of sale
was $25m and the present value of the lease payments is $15 million. The interest rate implicit in the lease is 8% per
annum.
Required
Describe how the above transaction should be treated in the financial statements of the company for the year ended 31
December 20X2.
Solution:
The excess over fair value ($5 million) paid by the buyer is recognised as additional financing. The present value of the
annual payments is $15 million. Of this, $10 million relates to the lease and $5 million relates to the additional financing.
The right-of-use asset is measured at the proportion of the previous carrying amount that relates to the right of use
retained.
Carrying amount x PV of lease payments/Fair value: $18m x $10m/$25m = $7.2m
The seller will only recognise the gain that relates to the rights transferred.
This is calculated as follows:
 The gain on sale = $25m – $18m = $7m
 Of this: $7m x $10m/$25m = $2.8m relates to the rights retained
 The balance ($7m – $2.8m) = $4.2m relates to the rights transferred.
 So a gain of $4.2m can be recognised on the transfer.
 A right-of use asset of $7.2m and a lease liability of $15m will be recognised.
Chapter 13 – Provisions and events after the
reporting period
 Provisions
 Provisions for restructuring
 Contingent liabilities and contingent assets
 IAS 37 Summary diagram
 IAS 10 Events afte r the reporting period

Chapter Summary
Provisions & Events Events after Reporting
Contingent Liabilities
after Reporting Period Period
Possible obligation, or
Adjusting events
Present obligation where:
Provisions  Evidence of conditions at year end
 Outflow of resources not probable, or
 FS are amended
 Cannot make reliable estimate.
'A liability of uncertain timing or amount‘ Non-adjusting events
Disclose (unless outflow of resources is remote)
Recognise liability:  Conditions that arose after year end
 Brief description of nature
Present obligation (as a result of a past event)  Nature and financial effect disclosed
 Estimate of financial effect Where
(1) Legal obligation, or  FS are not adjusted
 Indication of uncertainties practicable
(2) Constructive obligation  But if has going concern implications adjust
 Possibility of reimbursement
Probable outflow of resources embodying economic Dividends:
benefits  Not accrued if declared after year end
Contingent Assets Reliable estimate
 Large population – expected values
 Single obligation – most likely outcome
Possible Asset; Inflow
 Discount if material
 Only recognise as asset when virtually certain
 Disclose via note if probable
Application of recognition and Decommissioning &
Restructuring measurement rules Environmental Costs
 Detailed formal
formal plan; and
plan; and Make a provision where there is a legal or
 Detailed Future Operating
 Valid expectation raised by starting
starting to
to constructive obligation to clean up
 Valid expectation raised by Onerous Contract Losses  Provision is discounted to present value:
implement
implement it it
Include only direct expenditures:
only direct expenditures: Provision x 1/ (1 + r)n
Include  Do not provide
(a) Necessarily
Necessarily entailed
entailed by
by the
the restructuring;
restructuring;  Provide for unavoidable DR Asset (depreciate over UL)
(a)
(b) Not associated with the ongoing activities of
of cost: CR Provision
(b) Not associated with the ongoing activities
the entity: Lower of: Provision is compounded up over time:
the entity:
Retraining/relocating staff
 Retraining/relocating staff  Net Cost of fulfilling
 Marketing
 Marketing  Penalties from failure to
Investmentin
 Investment in new
new systems/
systems/distribution
distribution fulfill
networks
networks
Provisions
 A provision is a liability of uncertain timing or amount.
 A provision should be recognised in the financial statements when all three
recognition criteria are satisfied:
 An entity has a present obligation (legal or constructive) as a result of a past event.
 It is probable that an outflow of economic resources will be required to settle the
obligation.
 A reliable estimate can be made of the amount of the obligation.
 An obligation can be legal or constructive:
 A legal obligation is one that derives from a contract or legislation.
 A cons tructive obligation is one that derives from the actions of an entity where:
 An established pattern of past practice, published policies or a specific statement has indicated to other parties that
the entity will accept certain responsibilities
 The entity has created a valid expectation on the part of those other parties that it will discharge those
responsibilities
Journal Entry
Dr Provision Liability
Cr Expense
Provisions
 The amount recognised as a provision should be the best estimate of the cost required
to settle the obligation at the end of the reporting period.
 Where the provision involves a large population of items, such as a warranty provision,
the provision should be calculated using expected values.
 Where a single obligation is being measured, such as the outcome of a court case, the
individual most likely outcome should be provided.
 The amount of the provision should be discounted where the time value of money is
material.
Specific situations
 Future operating losses:
 Provisions should not be recognised for future operating losses.
 They do not meet the definition of a liability or the recognition criteria.
 Onerous contracts:
 An onerous contract is a contract where the unavoidable costs of completing the contract exceed the
benefits expected to be received under it.
 Where an onerous contract exists, the entity should provide for the net loss which is the lower of the
costs of fulfilling the contract and the penalties from failing to fulfill the contract.
 Decommissioning and other environmental costs:
 Provisions for these costs should only be recognised from the date on which the obligating event
occurs.
Provisions
 A restructuring is a planned programme which materially changes the scope of
business undertaken by an entity or the manner in which that business is conducted.
 A provision for restructuring costs is recognised only when the entity has a
constructive obligation to restructure.
 This will only be where an entity:
 Has a detailed formal plan for the restructuring, and
 Has raised a valid expectation in those affected that it will carry out the restructuring
 A restructuring provision should only include direct expenditure arising from the
restructuring and which are:
 Necessarily entailed by the restructuring
 Not associated with the ongoing activities of the entity
 A restructuring provision does not include:
 Retraining/relocating continuing staff
 Marketing
 Investment in new systems and distribution networks
Question & Answer

Question:
 On 12 December 20X0 the board of an entity decided to close down a division.
 Explain the appropriate accounting treatment.
1. Assuming that no steps were taken to implement the decision and the decision was not
communicated to any of those affected by the end of the reporting period 31 December
20X0.
2. If a detailed plan had been agreed by the board on 20 December 20X0, letters sent to
notify customers and the staff of the division have received redundancy notices.
Solution:
1. There has been no obligating event, so no provision is recognised.
2. (2) The communication of the decision to the customers and employers gives rise to a
constructive obligation because it creates a valid expectation that the division will be closed.
 The outflow of resources embodying economic benefits is probable so, at 31

December 20X0 a provision should be recognised for the best estimate of the
costs of closing the division.
Contingent Liability & Contingent Asset

A contingent liability is:
 A possible obligation that arises from past events whose existence will be confirmed only by
the occurrence of one or more uncertain future events not wholly within the control of the
entity; or
 A present obligation that arises from past events but which is not recognised because:
 It is not probable that an outflow of economic benefits will be required to settle the obligation; or
 The amount of the obligation cannot be measured with significant reliability.
 A contingent liability is not recognised in the financial statements.
 Instead it is disclosed in a note to the financial statements unless the possibility of an outflow of
economic benefits is remote in which case the item is not included in the financial statements.
 The following disclosure should be made for each class of contingent liability.
 The nature of the contingent liability
 An estimate of its financial effect
 An indication of the uncertainties relating to the amount or timing of any outflow
 The possibility of any reimbursement
A contingent asset is:
 A possible asset arising from past events whose existence will be confirmed only by the occurrence of
one or more uncertain future events not wholly within the control of the entity
 A contingent asset is not recognised unless the inflow of the related economic benefits is
virtually certain.
 A contingent asset is disclosed where the inflow of economic benefits is probable.
Contingent Liability & Contingent Asset

Start
Present obligation No
No
as a result of an Possible
obligating event? obligation?
Yes Yes
No Yes
Probable outflow? Remote?
Yes No
No (rare)
Reliable estimate?
Yes
Do nothing
Disclose contingent
Provide liability
Events After Reporting Period

Events after the reporting period are those events, both favorable and unfavorable, that occur between the
end of the reporting period and the date when the financial statements are authorized for issue.
There are two types of event after the reporting period:
 Adjusting events:
 The financial statements should be amended to include the effect of adjusting events.
 This is likely to require the recognition of a loss in profit or loss.
 These provide evidence of conditions which existed at the end of the reporting period.
 Examples of adjusting events include:
 Insolvency of a customer with a balance owing at the reporting period
 Sale of inventory after the reporting period for less than its carrying value at the end of the reporting period
 Evidence of an impairment of a non-current asset prior to the end of the reporting period
 The outcome of a legal case which was provided for at the reporting period
 Discovery of fraud or errors which shows that the financial statements were incorrect
 Non-adjus ting events:

 These relate to conditions which arose after the reporting period.
 The nature of the event and an estimate of the financial effect is disclos ed in financial statements.
 This assumes that the non-adjusting event is material to the financial statements.
 Examples of non-adjusting events include:
 Announcement of a plan to discontinue an operation
 Share transactions after the reporting period
 Major purchases and disposals of assets
 Litigation commenced after the reporting period
 The acquisition of or disposal of a subsidiary after the reporting period
Chapter 14 – Inventories & Biological Asset

 Inventories and short-term WIP (IAS 2)
 Biological assets (IAS 41)
Chapter Summary
Inventories and Biological Assets
Inventories (IAS 2)
Biological assets (IAS 41)
Interchangeable
Definitions
Items
 FIFO  Biological ass et: A living animal or
 Weighted average
Valuation plant
 Agricultural produce: The harvested
Lower of: product of the entity's biological assets
Recognition
Cost Net Realizable Value
 Cost of purchase SP Less: Recognise when:
 Costs of production  Costs to Complete  Controlled as a result of past events
 Other costs in bringing  Costs necessary to  Probable future economic
inventories to their make sale benefits, and
present location and  Fair value or cost can be measured
condition eg non- reliably
production overheads Measurement
re product for a
specific customer Biological ass ets:
 Fair value less costs to sell
Plant based biological assets are accounted for under IAS16
Property, plant and equipment using either cost or revaluation
method.
Agricultural produce:
 At the point of harvest – Fair value less costs to sell (becomes
IAS 2 cost)
 Thereafter – As inventories (LCNRV)
Inventories & Short term WIP

 Inventories are assets:
 Held for sale in the ordinary course of business; or
 Used in the production of goods for resale or the rendering of services
 Inventories include:
 Goods purchased and held for resale
 Finished goods produced
 Work in progress being produced
 Materials and supplies awaiting use in the production process
 Inventories must be measured at the lower of:
 Cost
 Net realisable value
 The lower of cost and net realisable value should be calculated on a line by line basis (ie taking each item
separately).
 The cost of inventory comprises:
 Costs of purchase
 Costs of conversion
 Other costs incurred in bringing inventories to their present location and condition
 Costs of purchase
 Purchase price
 Import duties and other taxes
 Transport, handling and any other costs directly attributable to the acquisition of finished goods, materials and
services
 Less trade discounts, rebates and other similar items

 Costs of conversion
 Direct materials and labour
 Variable production overheads
 Fixed production overheads (these must be allocated to items of inventory based on the entity's normal
level of activity)
 Other costs incurred in bringing inventories to their present location and condition.
 For example: the non-production overheads of designing a product for a specific
customer but not:
 Abnormal wastage (materials, labour or overheads)
 Storage costs
 Administrative overheads
 Selling costs
 An approximation to the cost of inventories may also be calculated using one of
two techniques:
 Standard costs: here a cost card is produced to value the normal production values in an item of
inventory (raw materials used, labour hours incurred).
 Standard costs should be reviewed regularly to ensure that they approximate to current costs.
 Retail method: here the cost of inventories is calculated by taking the selling price of the inventories
less the average profit margin realised on the sale of the inventories.

Interchangeable items
 Where inventories comprise interchangeable items it may not be possible to determine which
items of inventories are held at the year end and therefore their associated cost.
 IAS 2 allows their cost to be determined by reference to one of two estimation techniques:
 First in, first out (FIFO): The cost of inventories is calculated on the basis that the inventories held
at the end of the reporting period represent the latest purchases or production.
 Weighted average cos t: The cost of inventories is calculated by using a weighted average price
which is calculated by dividing the total cost of items by the total number of such items. The price is
recalculated on a periodic basis or as each additional shipment is received and items taken out of
inventory are removed at the prevailing weighted average cost.
 Inventories must be measured at the lower of cost and net realisable value.
 Net realisable value:
Estimated selling price X
Less estimated costs of completion (X)
Less estimated selling costs* (X)
X
*Marketing, selling and distribution costs

 Measuring inventories at the lower of cost and net realisable value will
result in any loss being recognised in the financial statements as soon as it
is foreseen.
 Net realisable value may be lower than cost due to:
 An increase in costs or fall in sales price
 Physical deterioration of inventories
 Obsolescence of products
 A management decision to sell products at a loss
 Errors in production or purchasing
Biological Assets
 Biological ass ets are living animals or plants
 Harvest is the detachment of produce from a biological asset or the cessation of a biological asset's life process (as
in slaughter).
 Agricultural produce is the harvested product of an entity's biological assets (such as apples or carcasses).
 IAS 41 distinguishes between two broad categories of agricultural production system:
 Consumable: animals and plants themselves are harvested (such as beef cattle and wheat).
 Bearer: animals and plants bear produce for harvest (such as dairy cows and apple trees).
Note:
 An amendment to IAS 41 in May 2014 transferred the treatment of bearer plants (such as apple trees) to IAS 16, so they are
now accounted for in the same way as items of plant and equipment.
Recognition:
Animals and plants are recognised as assets when:
 The entity controls the asset as a result of past events
 It is probable that future economic benefits associated with the asset will flow to the entity
 The fair value of the asset or its cost to the entity can be measured reliably
Measurement:
 IAS 41 requires all biological assets to be measured at the year end at fair value less estimated point-of-sale costs.
 Fair value can usually be taken to be market value.
 Any gain or loss arising from changes to fair value is recognised in profit or loss.
 Bearer plants are measured at cost or revalued amount less accumulated depreciation.
 Agricultural produce is recognised prior to harvest at fair value less estimated point of sale costs.
 Following harvest agricultural produce is classified as inventory and accounted for in accordance with IAS 2.
Chapter 15 - Taxation
 Current tax
 Deferred tax
 Taxable temporary differences
 Deductible temporary differences
 Measurement and recognition of deferred tax
 Taxation in company accounts
Chapter Summary
Taxation (IAS 12)
Current tax Deferred tax
 Tax Payable/Recoverable in respect of taxable  Tax attributable to Temporary Differences

profit or loss  Differences between carrying amount of an asset
 Accrued Tax Charge: or liability and its tax base
 Dr Current Tax (P/L)  General Calculation:
 Cr Current Tax Payable Amount of CA X
 When paid: Less: Tax Base (X)
 Dr Current Tax payable Taxable Temporary Difference X
 Cr Cash x Tax % = Deferred Tax Lab (X)
 Liability for unpaid amounts  Movement:
 Assets for recoverable amounts  P/L
 OCI (and R/S) (Revaluation)
Current Tax
 Current tax is the amount of income taxes payable or recoverable in respect
of taxable profit or loss for the period.
 Taxable profit (or los s ) is the profit (or loss) for a period, determined in
accordance with the rules established by the taxation authorities, upon which
income taxes are payable (recoverable).
 The tax charge for the period is shown as an expens e in profit or los s .
 Any unpaid amounts of tax are recognised as a liability in the statement of
financial position.
 The accounting entry to record the tax expense is:
DEBIT Tax expense
CREDIT Tax liability
 Underpayment of tax (Debit balance b/f) for previous year should be added
to the tax expense in current year
 Overpayment of tax (Debit balance b/f) for previous year should be
deducted from the tax expense for the current year
Deferred Tax
 Deferred tax is not a tax which is paid, rather it is an accounting
adjus tment.
 It deals with situations where the accounting treatment of a transaction
is different from the tax treatment.
 Some differences are permanent (e.g. penalty expenses), while others are
temporary differences because of the timing of when a transaction is
recognised for accounting purposes and when it is considered for tax.
Temporary differences
CA of an Tax base of an
Differences between
asset/liability asset/liability
Taxable Deductible
temporary There are two types
temporary
differences differences
Deferred Tax
 The temporary difference is calculated by comparing the carrying
amount of an asset or liability in the statement of financial position to its
tax base.
 The tax bas e of an as s et is its value for tax purposes at the reporting
date.
 Deferred tax is provided on temporary differences of difference between
Carrying amount of as s et and tax bas e.
 Deferred tax liabilities are amounts of income taxes payable in future
periods in respect of taxable temporary differences.
 Deferred tax as s ets are the amounts of income taxes recoverable in
future periods in respect of:
– Deductible temporary differences
– The carry forward of unused tax losses
– The carry forward of unused tax credits
Deferred Tax
 Taxable temporary differences describe the situation where because of a
temporary difference in the accounting and tax treatment of an item the
entity will end up paying more tax in the future.
 Taxable temporary differences give rise to deferred tax liabilities.
 One of the most common types of taxable temporary differences are
accelerated depreciation for tax purpos es .
 This is because tax depreciation tends to be available at a higher rate in the
earlier years of the asset's life than the accounting depreciation charged on
the same assets
Ass ets Liabilities
CA > TB: CA > TB:
Taxable Temporary Difference (TTD) Deductible Temporary Difference (DTD)
Deferred Tax Liability (DTL) Deferred Tax Asset (DTA)
CA < TB: CA < TB:
Deductible Temporary Difference (DTD) Taxable Temporary Difference (TTD)
Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) or
Reversal of Deferred Tax Liability (DTL) Reversal of Deferred Tax Asset (DTA)
Deferred Tax
Illustration
ABC Co. buys a coach on 1 January 20X1 for $60,000.
The coach has a useful life of four years and will be
scrapped at the end of its life. The company pays tax at
25% and tax depreciation is available at 30% of cost.
ABC Co. has a profit before tax of $100,000 in each of
the years 20X1 and 20X2
Deferred Tax
Solution:
Current Tax
20X1 20X2
$ $
Profit before tax 100,000 100,000
Add back depreciation (W1) 15,000 15,000
Less tax depreciation (W2) (18,000) (18,000)
Taxable profit 97,000 97,000
Tax at 25% 24,250 24,250
(W1) Accounting depreciation: $60,000 ÷ 4 years = $15,000 per annum
(W2) Tax depreciation: $60,000 x 30% = $18,000 per annum
Deferred Tax
Deferred Tax
Carrying Tax Tax
Particulars Difference
amount Base 25%
$ $ $ $
Cost at 1 Jan 20X1 60,000 60,000
Accounting depreciation/Tax depreciation (30% x $60,000) (15,000) (18,000)
At 31 December 20X1 45,000 42,000 3,000 750*
Accounting depreciation/Tax depreciation (30% x $60,000) (15,000) (18,000)
At 31 December 20X2 30,000 24,000 6,000 1,500^
*Double entry to create deferred tax provision in 20X1:

DEBIT Tax expense 750
CREDIT Deferred tax provision 750
^ Double entry to adjust required deferred tax provision in 20X2:
DEBIT Tax expense 750
CREDIT Deferred tax provision 750
Deferred Tax
Extracts from statement of financial pos ition 20X1 20X2
$ $
Deferred tax provision 750 1,500
Extracts from statement of profit or loss 20X1 20X2

$ $
Profit before tax 100,000 100,000
Current tax (24,250) (24,250)
Deferred tax (750) (750)
Profit for the period 75,000 75,000
Chapter 18 – Earnings Per Share (IAS 33)

 IAS 33 Earnings per share
 Basic EPS
 Effect on EPS of changes in capital structure
 Diluted EPS
 Presentation, disclosure and other matters
Chapter Summary
Earnings Per Share
Basic Earnings Per (IAS 33)
share Diluted EPS
EPS as a performance
Earnings after tax measure  Relevance
Weighted avg. no of shares  Better indication than profit as
 How EPS would change if all 'potential
Earnings = considers changes in capital
ordinary shares‘ converted
Consolidated PFY after  Key stock market indicator
 'Warning' measure
 Tax  Important for P/E ratio
 NCI
 Preference Shares
Limitations Share/Option
Convertible Debt
Warrants
 Historical
 Diluted is theoretical Basic Earnings X Adjust WA for Free Shares
only:
Changes in Equity  Official definitions includes Interest Saved X
one-off income/expense No. of shares under option X
Capital Diluted Earnings X
No. of shares issuable at
(X)
average price
Basic WA X Free Shares X
Issue at full MP Bonus Issue Rights Issue
Max Shares on Conversion X
 Include Shares  Include Shares  Include Shares Diluted Shares X
 Time Appropriation  Bonus fraction adjust  Time appropriation

periods prior to Bonus
 No Bonus Effect  Bonus Fraction
 Eg 1 for 4 bonus,
Bonus Fraction = 5/4
IAS 33 EPS
 Earnings per share or EPS is a ratio which measures the amount of profits
earned by a company for each ordinary share in issue.
 The objective of IAS 33 was to provide a consistent method for the
calculation of EPS in order to improve the comparison of the performance
of different entities in the same period and of the same entity over time.
 IAS 33 only applies to companies whose ordinary shares are publicly
traded (including companies in the process of obtaining a listing).
 EPS need only be presented on the basis on consolidated results in a set of
consolidated financial statements which include the parent's separate
financial statements.
 Where companies choose to present EPS information even though they
are not required to they must do so in accordance with IAS 33.
Profit or Loss for the period attributable to ordinary shareholders
Weighted average number of ordinary shares in issue during the period
IAS 33 EPS
Iss ue at full market price
 Where an entity has issued shares at the current market price it will have received a true price for its shares.
 It will therefore be expected to generate a return on these shares in the form of increased profits.
 However if the share issue occurred part way through the year the entity will only be expected to generate extra earnings
for the time during which it had use of the additional funds.
 As such the number of shares in issue must be time apportioned.
Illustration
 A company has earnings of $100,000 and a year end of 31 December. On 1 October 20X2 the company issued 300,000 shares at full
market price. The share capital before the share issue was 600,000 shares.
Solution
Date Narrative No. of Share Time Period Weighted Average

1.1.X2 Bal b/d 600,000 x 9/12 450,000
1.10.X2 Full Market Price 900,000 x 3/12 225,000
675,000
$100,000
The EPS is = = 14.8 cents
675,000
IAS 33 EPS
Bonus Iss ue
 Bonus shares are issued at no consideration and therefore the company cannot be expected to generate
the same return after a bonus issue.
 In order to make the EPS comparable year on year where there has been a bonus issue, it is necessary to
restate the prior year EPS figure.
 This is done using the reciprocal of the bonus fraction.
Rights iss ue of shares
 When an entity wants to raise additional finance it may choose to do so through a rights issue.
 Here existing shareholders are offered the opportunity to buy more shares in the entity.
 The price they will have to pay for the shares (the rights price) will be lower than the current market price
in order to encourage existing shareholders to subscribe to the rights issue.
 Consequently a rights issue includes both an issue of shares at full price and a bonus issue.
 Consistent with the bonus issue it is necessary to calculate the bonus fraction.
 This is calculated as:
Fair value per share immediately before the exercise of rights
Theoretical ex rights price (TERP)
 It is applied to all periods (months) prior to the rights issue and the prior year EPS is restated using the
reciprocal of the bonus fraction in order for the EPS to be comparable year on year.
Diluted EPS
 The basic EPS is calculated by comparing the profits with the weighted average number of shares currently in issue.
 However it is possible that an entity might have a commitment to issue shares in the future, for example on the
exercise of share options or the conversion of convertible debt.
 These commitments are known by IAS 33 as 'potential ordinary shares' and they may result in a change to the basic
EPS.
 The diluted EPS shows how the basic EPS would change if the 'potential ordinary shares' such as convertible debt
became ordinary shares.
 The diluted EPS therefore warns current shareholders of what may happen to the EPS in the future.
The most efficient way to calculate the diluted EPS is to:
 Take the earnings figure used in the basic EPS calculation and determine how it would change if the 'potential
ordinary shares' became shares
 Take the weighted average number of shares used in the basic EPS calculation and increase it for the number
of 'potential ordinary shares'
Share options or warrants
 Where an entity has issued share options or warrants, individuals will have the right to buy shares at a certain point
in the future.
 The price they will be required to pay will almost certainly be below the current market price.
 This amounts to a situation where some of the shares can be deemed to have been issued at full price and the
remainder will effectively have been issued for no consideration.
 It is only the shares deemed to have been iss ued for no cons ideration which are dilutive.
 These are added on to the basic weighted average number of shares.
Diluted EPS
Convertible Debt
 Adjustments to basic earnings and number of shares where an entity has convertible debt:
Earnings
Basic Earnings X
Add back loan interest saved net of tax X
Diluted Earnings X
 Number of shares:
Basic Weighted average number of shares X

Add additional shares on conversion X
Diluted weighted average number of shares X
Share Options or Warrants

 Performa Calculation:
Number of shares under Option X
Number that would have been issued at average market price (AMP)
[(no. of options × exercise price) ÷ AMP)] X
Number of shares treated as issued for nil consideration X
Chapter 19 – Calculation and interpretation
of accounting ratios and trends
 The broad categories of ratios
 Profitability and return on capital
 Liquidity, gearing and working capital
 Shareholders' investment ratios
 Presentation of financial performance

Ratios & Analysis

Ratios Formula
I. Profitability
PBIT
ROCE ( Return on Capital Employed) %
Capital Employed
Gross Profit
Gross Profit Margin %
Revenue
PBIT
Operating Profit Margin %
Revenue
Revenue
Net Asset Turnover
Capital Employed
PAT
Return on Equity %
Equity
II. Liquidity
Current Assets
Current Ratio
Current Liabilities
Current Assets - Inventories
Quick Ratio
Current Liabilities
Inventory Turnover/days COS Inventories
X 365
Inventories COS
Ratios & Analysis

Ratios Formula
Trade receivables
Receivables Collection Period X 365
Credit turnover
Trade Payables
Payables Payment Period X 365
Credit Purchases /COS
III. Gearing
Interest Bearing Debt
Debt/Equity
Equity
Interest Bearing Debt
Debt/ (Debt + Equity)
Interest Bearing Debt + Equity
Interest Cover PBIT
Interest Payable
IV. Investors’ Ratio

PBIT
Dividend Yield %
Dividend Payable
EPS
Dividend Cover
Dividend Per Share
Share price
Price/Earnings (P/E) ratio
EPS

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Futura Fortune Academia - +91 9633259363

Chapter 03 – Tangible Non-Current Assets

Property, Plant &  Capitalized re qualifying assets

Purchas e price Cost model • Allocate depreciable amount

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Definition and Recognition

Complex Ass ets

Choice of Accounting Treatment

Revaluation of Property, Plant & Equipment

Illustration Journal Entries

Year Particulars Amount ($) Revaluation Surplus :

Revaluation of Property, Plant & Equipment

Carrying Amount 80,000

Add: Revaluation Surplus 40,000

Less: Depreciation (12,000)

Carrying Amount 108,000

Investment Property (IAS 40)

Choice of Accounting Treatment

Investment Property (IAS 40)

Borrowing Cost (IAS 23)

Commencement of Capitalisation Cess ation of Capitalisation

Borrowing Cost (IAS 23)

Alpha ($000) Bravo ($000)

Borrowing Cost (IAS 23)

1 Jan 20X6 1 Dec 20X6

Chapter 04 – Intangible Assets

Definition and Recognition

Cost Fair value Only recognised

Recognition, Measurement & Amortisation

Recognize and amortise if following all Recognize as asset when

Subs equent Expenditure:

Subsequent Re-Measurement & Goodwill

Statement of Financial Position $

Chapter 05 – Impairment of Assets

Cash Generating Unit

Question – Harvest & DX Co

An impairment review on 31 December 20X2 indicated that the recoverable amount of DX Co

Solution – Harvest & DX Co

(W1) Calculation of Impairment Loss $’000

Impairment loss to write off Goodwill 200

Solution – Harvest & DX Co

However, PPE cannot be reduced below FV – CTS of $1,120,000

Revenue Recognition Government Grant

Recognition & Measurement

Presentation & Disclosure

Revenue (x% × Total contract revenue) X

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Contract ass et/liability $

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Recognition & Measurement

IAS 20 – Government Grant

IAS 20 – Government Grant

Chapter 7 – Introduction to Groups

Group Accounts - Definitions

E.g. if S Co pays a $100 dividend:

Group Accounts – IFRS 10

Exemption Other Iss ues

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Types of Types of Inventories Sold at a Transfer of PPE