ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 1 – Conceptual Framework

Conceptual Framework for Financial Reporting
Introduction
The importance of a conceptual framework
A conceptual framework is a set of theoretical principles and concepts that underlie the preparation and
presentation of financial statements.
If no conceptual framework existed, then accounting standards would be produced on a haphazard basis as
particular issues and circumstances arose.
These accounting standards might be inconsistent with one another, or perhaps even contradictory.
The comparability of the financial statements with peers will become very difficult.

A strong conceptual framework means that there are principles in place from which all future accounting
standards draw. It also acts as a reference point for the preparers of financial statements if no accounting
standard governs a particular transaction (although this will be extremely rare).

The purpose of the Conceptual Framework is to assist:

(a) the Board when developing new IFRS Standards, helping to ensure that these are based on consistent
concepts
(b) preparers of financial statements when no IFRS Standard applies to a particular transaction, or when
an IFRS Standard offers a choice of accounting policy
(c) all parties when understanding and interpreting IFRS Standards.

The Conceptual Framework is not an accounting standard. It does not override

the requirements in a particular IFRS Standard

The objective of financial reporting

The Conceptual Framework states that the purpose of financial reporting is to provide information to
current and potential investors, lenders and other creditors that will enable them to make decisions about
providing economic resources to an entity.

Fundamental characteristics
The Conceptual Framework states that financial information is only useful if it is:

 Relevant
 a faithful representation of an entity’s transactions.

Relevance and faithful representation are the fundamental characteristics of useful financial information.

1. Relevance

Relevant information will make an impact on the decisions made by users of the financial statements.
Relevance requires management to consider materiality. An item is material if omitting, misstating or
obscuring it would influence the economic decisions of users.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

2. Faithful representation
A faithful representation of a transaction would represent its economic substance rather than its legal form.

A perfectly faithful representation would be:

 Complete
 Neutral
 Free from error

When preparing financial reports, preparers should exercise prudence. Prudence means that assets and
income are not overstated and liabilities and expenses are not understated. However, this does not mean that
assets and income should be purposefully understated, or liabilities and
expenses purposefully overstated. Such intentional misstatements are not neutral.

Enhancing characteristics (Tip: Students should try to elaborate these on their own in exam scenario in
their own words with focus on investors)

In addition to the two fundamental qualitative characteristics, there are four enhancing qualitative
characteristics of useful financial information:

Comparability – investors should be able to compare an entity’s financial

information year-on-year, and one entity’s financial information with another.

Timeliness – older information is less useful.

Verifiability – knowledgeable users should be able to agree that a particular depiction of a transaction
offers a faithful representation.

Understandability – information should be presented as clearly and concisely as possible.

 ACCA SBR Notes – 2020-21 by Aditya Sheth

Related party

Related party relationships and definition explained in a simple way with example

1 - How is a person related?

i. If Mr. X has control or joint control over Company A
ii. If Mr. X has Significant Influence over Company A
iii. If Mr. X is a KMP in Company A or a KMP in parent company of this company A

2 - How are entities related?

i. Company B and C are related if they are a part of same group i.e. part of group A which controls all
of them
ii. If Company B is an associate or JV of Company A
iii. Company B and C are JVs of Company A
iv. If B is associate and C is JV of A, then both B and C are also related
v. Company B is a post employment benefit plan for either Company A or any related party of A
vi. If B is controlled or jointly controlled by Mr. X, who also controls Company A
vii. If Mr. X, who controls company A, has significant influence over B - then A and B are related.
Also, if Mr. X is a KMP in B and at the same time controls A, then too A and B are related
viii. If company B provides KMP services to company A or parent company of A or any other group
company, then B is related to all of them

Who is NOT A RELATED PARTY

i. Just because Company A and B have Mr. X as a common KMP or director, they are not related
ii. If Mr. X, who is a KMP in Company A, has significant influence over Company B - A and B are not
related in this case because definition requires Mr. X to control B for it to be related to A

Why it is important to disclose RPT transactions

 Financial performance and position of both companies can be inflated.
 Users assume that all transactions are done at fair price.
 Minimize the risk of unethical behavior.
 Restores stakeholder's faith in the ethical and moral behavior of company that controls are in place.
 Materiality concept should be ignored on grounds of qualitative factor that it is with a related
company. Quantitative factor should be considered if company feels it won’t affect user's decision.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 2 - Ethics
The code of ethics and conduct
The ACCA requires its members to adhere to a code of professional ethics. This provides a set of moral
guidelines for professional accountants.

The fundamental principles of this code are: (P.I.C.O.P)

(a) Integrity – to be straightforward and honest in all professional and business relationships.
(b) Objectivity – to not allow bias, conflict of interest or undue influence of others to override
professional or business judgments.
(c) Professional Competence and Due Care – to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional services based on current
developments in practice, legislation and techniques and act diligently and in accordance with
applicable technical and professional standards.
(d) Confidentiality – to respect the confidentiality of information acquired as a result of professional
and business relationships and, therefore, not disclose any such information to third parties without
proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the
information for the personal advantage of the professional accountant or third parties.
(e) Professional behavior – to comply with relevant laws and regulations and avoid any action that
discredits the profession

TIP: In general, the ethical dilemmas that are likely to be tested in the Strategic Business Reporting (SBR)
exam occur in the context of manipulation of financial statements, with someone in authority, such as
a managing director, wishing to present the financial statements in a more favorable light.
Therefore, for all the ethics question, you should conclude your answer with this paragraph to gain
those additional marks allotted to conclusion.
"The accountant is correct to challenge the finance director and has an ethical responsibility to do so.
Despite the fact that the finance director is acting in an intimidating manner, the accountant should explain
the technical issues to the director. If the director refuses to comply with accounting standards, then it would
be appropriate to discuss the matter with other directors and to seek professional advice from ACCA. Legal
advice should be considered if necessary. The accountant should keep a record of conversations and actions.
Resignation should be considered if the matters cannot be satisfactorily resolved"
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 3 – Non-current assets

Property Plant and Equipment (IAS 16)
Measurement models
IAS 16 allows a choice between:
1. the cost model
Under the cost model, property, plant and equipment is held at cost less any accumulated
depreciation and impairment losses.
2. the revaluation model.
Under the revaluation model, property, plant and equipment is carried at fair value less any
subsequent accumulated depreciation and impairment losses. At each year period end, after
reducing the accumulated depreciation, carrying amount is compared with the fair value on the
date. The resultant gain/loss in dealt as below: (Tip: This is a short cut to remember revaluation
rules)
1st time gain – Credit Revaluation surplus
2nd time loss – Reverse previous Revaluation surplus. Balance, if any, debit P&L.
1st time loss – Debit P&L
2nd time gain – Reverse previous P&L. Balance, if any, Credit in Revaluation Surplus

Excess Depreciation over historical cost depreciation can be transferred to realised earnings through
reserves. This is only an option given for revaluation model where the revised depreciation after
revaluation is more than the original depreciation. There is no compulsion to follow this approach.
If the revaluation model is applied (IAS 16: para. 36):
(a) Revaluations must be carried out regularly, depending on volatility.
(b) The asset should be revalued to fair value, using the fair value hierarchy in IFRS 13.
(c) If one asset is revalued, so must be the whole of the rest of the class of assets at the same time

Recognition depends on two criteria (IAS 16: para.7):

(a) It is probable that future economic benefits associated with the item will flow to the entity
(b) The cost of the item can be measured reliably

What are the items added to Initial Recognition amount of PPE?

1. Purchase Price (less Trade discount)
2. Directly attributable costs of bringing the asset to working condition for intended use (e.g; Employee
benefit cost, Site preparation cost, Installation cost, cost of testing)
3. Finance costs (Borrowing cost for qualifying assets)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Impairment of Assets (IAS 36)

If an asset's value in the financial statements is higher than its realistic value, measured as its 'recoverable
amount', the asset is judged to have suffered an impairment loss. It should therefore be reduced in value, by
the amount of the impairment loss. The amount of the impairment loss should be written off in statement of
profit and loss immediately.

IAS 36 lists the following two types of indications that an asset is impaired: (External and Internal)
External sources of information:
– unexpected decreases in an asset’s market value
– significant adverse changes have taken place, or are about to take place, in the technological, market,
economic or legal environment
– increased interest rates have decreased an asset’s recoverable amount
– the entity’s net assets are measured at more than its market capitalisation.

Internal sources of information:

– evidence of obsolescence or damage
– there is, or is about to be, a material reduction in usage of an asset
– evidence that the economic performance of an asset has been, or will be, worse than expected.

Annual impairment tests, irrespective of whether there are indications of impairment, are required for:
 Intangible assets with an indefinite useful life/not yet available for use
 Goodwill acquired in a business combination

The Recoverable amount is the higher of fair value less costs to sell and value in use

Value in use is calculated by estimating future cash inflows and outflows from the use of the asset and its
ultimate disposal, and applying a suitable discount rate to these cash flows.
With regards to estimates of cash flows, IAS 36 stipulates that:
 The cash flow projections should be based on reasonable assumptions and the most recent budgets
and forecasts
 The cash flow projections should relate to the asset’s current condition and should exclude
expenditure to improve or enhance it
 For periods in excess of five years, management should extrapolate from earlier budgets using a
steady, declining or zero growth rate
 Management should assess the accuracy of their budgets by investigating the reasons for any
differences between forecast and actual cash flows.

What all comprises of cashflows for the above value in use?

The cash flows should include (IAS 36: para. 50):
(a) Projections of cash inflows from continuing use of the asset
(b) Projections of cash outflows necessarily incurred to generate the cash inflows from continuing use of
the asset
(c) Net cash flows, if any, for the disposal of the asset at the end of its useful life
(d) Future overheads that can be directly attributed, or allocated on a reasonable and consistent basis
 ACCA SBR Notes – 2020-21 by Aditya Sheth

The cash flows should exclude:

(a) Cash outflows relating to obligations already recognised as liabilities (to avoid double counting)
(b) The effects of any future restructuring to which the entity is not yet committed
(c) Cash flows from financing activities or income tax receipts and payments

The discount rate used to calculate value in use should reflect:

 the time value of money, and
 the risks specific to the asset for which the future cash flow estimates have not been adjusted

Reversal of impairment loss:

the carrying amount of an asset is not increased above the lower of (para. 117):
(a) Its recoverable amount (if determinable); and
(b) Its depreciated carrying amount had no impairment loss originally been recognised. (Tip: Calculate
carrying amount after reducing the depreciation on the asset based on historical cost and original useful
life and then compare it with recoverable amount)

Once recognised, impairment losses on goodwill are not reversed. (Tip: Always remember, goodwill is
only measured once on acquisition and it is never revalued upwards; unless there is a further acquisition)

Cash-generating units
It is not usually possible to identify cash flows relating to particular assets. For example, a factory
production line is made up of many individual machines, but the revenues are earned by the production line
as a whole. In these cases, value in use must be calculated for groups of assets (rather than individual
assets).
These groups of assets are called cash-generating units (CGUs). If a production unit can generate cash
flows on its own, then it becomes a separate CGU.
A cash-generating unit is the smallest group of assets that generates independent cash flows.
If an impairment loss arises in respect of a cash-generating unit, IAS 36 requires that it is allocated among
the assets in the following order:
1. To the respective damaged asset
2. To goodwill allocated to the CGU
3. Other Non currents (not to include current assets) on a pro rata basis

However, the carrying amount of an asset cannot be reduced below the highest of:
 fair value less costs to sell
 value in use
 nil.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Fair value measurement (IFRS 13)

For all assets which are carried at their fair value in their Financial Statements, there has to be a way of
arriving at this Fair value. IFRS 13 guides regarding how can this be obtained.

IFRS 13 does not apply to:

 share-based payment transactions (IFRS 2 Share-based Payments)
 leases (IFRS 16 Leases).

Level 1 input is considered to be the highest reliable input since it derives the price from quoted prices for
identical assets in active markets. (Eg: Price of an i10 car which is readily sold in the market)

Level 2 input is considered to be less reliable than level 1 input since it derives its prices from observable
prices that are not level 1 inputs which may include i. Quoted prices for similar assets in active markets or
ii. Quoted prices for identical assets in less active markets (Eg: Price of a Santro car after adjusting it from
price of an i10 car which is actively traded in the market)

Level 3 input is considered to be the least reliable since they are unobservable. This could include cash or
profit forecasts using an entity’s own data.

Therefore, Priority is given to level 1 inputs. The lowest priority is given to level 3 inputs.

Markets

The price received when an asset is sold (or paid when a liability is transferred) may differ depending on the
specific market where the transaction occurs.

Principal market
IFRS 13 says that fair value should be measured by reference to the principal market.

The principal market is the market with the greatest activity for the asset or liability being measured.

The entity must be able to access the principal market at the measurement date. This means that the
principal market for the same asset can differ between entities.

Most advantageous market

If there is no principal market, then fair value is measured by reference to prices in the most advantageous
market. The most advantageous market is the one that maximises the net amount received from selling an
asset (or minimises the amount paid to transfer a liability).

Transaction costs (such as legal and broker fees) will play a role in deciding which market is most
advantageous. However, fair value is not adjusted for transaction costs because they are a
characteristic of the market, rather than the asset.

To summarize, in determining the most advantageous market, you will take into consideration transaction as
well as transportation cost. Whereas to compute the fair value for reporting in financial statement, you will
NOT CONSIDER TRANSACTION COST.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Intangible assets (IAS 38)

What is an Intangible asset? An identifiable non-monetary asset without physical substance.

Recognition of Intangible asset depends on two criteria (IAS 38: para. 18):
(a) It is probable that future economic benefits that are attributable to the asset will flow to the entity.
(b) The cost of the asset can be measured reliably. (Tip: This criterion is mostly common for recognition of
all assets and liabilities since you need an amount to pass a journal entry)

Internally generated intangible assets

To assess whether an internally generated intangible assets meets the criteria for recognition, an
entity classifies the generation of the asset into a research phase and a development phase.

All Research expenses are debited to P&L and they are NEVER capitalized.
Similarly, start-up, training, advertising, promotional, relocation and reorganization costs are all
recognized as expenses

During the Development phase, internally generated intangible assets that meet the below PIRATE criteria
must be capitalized. It should meet ALL of the below criteria and any expenditure not meeting even one of
the below should be expensed off.

• Probable future economic benefits

• Intention to complete and use/sell asset
• Resources adequate and available to complete and use/sell asset
• Ability to use/sell the asset
• Technical feasibility of completing asset for use/sale
• Expenditure can be measured reliably

Cost or Revaluation model (similar to IAS 16) should be applied to Intangible assets after initial
recognition. There will not usually be an active market in an intangible asset; therefore the revaluation
model will usually not be available.

An intangible asset with an indefinite useful life should not be amortised. IAS 36 requires that such an
asset is tested for impairment at least annually. TIP: Such assets should be tested atleast annually to confirm
whether it still qualifies as an indefinite useful life asset. If not, then amortization based on revised useful
life should be applied from that date onwards.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Investment property (IAS 40)

What qualifies as an Investment Property? Property (land or building – or part of a building – or both)
held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or
both.

It should not be held for use in the production or supply of goods or services or for administrative
purposes; or for Sale in the ordinary course of business.

Owner-occupied property, including property held for future use as owner-occupied property does not
qualifies as Investment property.

Investment property is recognised when it is probable that future economic benefits will flow to the
entity and the cost can be measured reliably (Tip: Again, a common criterion for recognition of all assets
and liabilities)

After recognition, entities can choose between two models, the fair value model and the cost model.

Cost model is the same as that of IAS 16 Property, plant and Equipment.

Fair value model is the same as Revaluation model of IAS 16 BUT any change in fair value is reported in
profit or loss (unlike OCI or P&L in IAS 16) and Investment property is NOT Depreciated.
(Tip: For investment property, every gain/loss goes in P&L only. There is no concept of OCI for investment
property)

Transfers from PPE to Investment property

1. Till the date of transfer, all rules of PPE will apply (Depreciation to be done till the date of transfer)
2. All gains and losses for fair valuation (after depreciation) to be treated as revaluation gain/loss under IAS
16 rules
3. After transfer, all rules of IAS 40 will apply

Transfers from Investment property to PPE

1. Till the date of transfer, all rules of IAS 40 will apply
2. All gains and losses for fair valuation to be treated as revaluation gain/loss under IAS 40 rules i.e.
everything goes to P&L
3. After transfer, all rules of IAS 16 will apply

Any gain or loss on disposal of investment property should be recognised as income or expense in profit
or loss
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Government grants (IAS 20)

Government grants are transfers of resources to an entity in return for past or future compliance with
certain conditions.

There are two types of Grants:

Grants related to assets

Grants for purchases of non-current assets should be recognised over the expected useful lives of the related
assets. IAS 20 provides two acceptable accounting policies for this:
 deduct the grant from the cost of the asset and depreciate the net cost
 treat the grant as deferred income and release to profit or loss over the life of the asset.

Income based Grant

Grants relating to income may either be shown separately or as part of 'other income' or alternatively
deducted from the related expense.

Tip: Remember that in all the above cases, the net impact in P&L has to be the same.

A government grant that becomes repayable is accounted for as a change in accounting estimate in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 20: para.
32).
(i) Repayments of grants relating to income are applied first against any unamortised deferred credit and
then in profit or loss. (This means first reverse any deferred income created and then charge the balance
to P&L)
(ii) Repayments of grants relating to assets are recorded by increasing the carrying amount of the asset or
reducing the deferred income balance. Any resultant cumulative extra depreciation is recognised in profit
or loss immediately.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

IAS 23 Borrowing Costs

Borrowing costs should be capitalised if they relate to the acquisition, construction or production of a
qualifying asset.
IAS 23 defines a qualifying asset as one that takes a substantial period of time to get ready for its intended
use or sale.

Borrowing costs should only be capitalised while construction is in progress. IAS 23 stipulates that:
 Capitalisation of borrowing costs should commence when all of the following apply:
 expenditure for the asset is being incurred
 borrowing costs are being incurred
 activities that are necessary to get the asset ready for use are in progress.
 Capitalisation of borrowing costs should cease when substantially all the activities that are
necessary to get the asset ready for use are complete.
 Capitalisation of borrowing costs should be suspended during extended periods in which active
development is interrupted.

Tip: If the borrowing was done on 01 Jan 20X1 and the construction began from 01 Feb 20X1, then the
capitalization of expense will start only from 01 Feb 20X1. Remember: When the borrowed amount is not
fully deployed for construction of asset, that amount should be deducted as investment income from this
borrowing cost used for capitalization. Therefore, if out of the total borrowing of $10 million done on 01
Jan, only $8 million is deployed for construction on 01 Feb, the interest income on balance $2 million
should be reduced from borrowing cost of total $10 million from 01 Feb onwards.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Agriculture (IAS 41)

IAS 41 Agriculture covers the accounting treatment of biological assets (except bearer plants) and
agricultural produce at the point of harvest.
Agricultural produce is 'the harvested product of the entity’s biological assets. At the date of harvest,
agricultural produce should be recognised and measured at fair value less estimated costs to sell.
After harvest IAS 2 Inventories applies to the agricultural produce.

Biological assets are measured both on initial recognition and at the end of each reporting period at fair
value less costs to sell (IAS 41: para. 12). A biological asset is 'a living plant or animal'
Agricultural produce at the point of harvest is also measured at fair value less costs to sell (IAS 41:
para. 13). The fair value less costs to sell of agricultural produce harvested becomes its cost under IAS 2.
After harvest, the agricultural produce is measured at the lower of cost and net realisable value in
accordance with IAS 2.

Changes in fair value less costs to sell are recognised in profit or loss (IAS 41: para. 26).

Where fair value cannot be measured reliably, biological assets are measured at cost less accumulated
depreciation and impairment losses (IAS 41: para. 30).

Application of IAS 41 definitions

A farmer buys a dairy calf. The calf is a biological asset.
The calf grows into a mature cow Growth is a type of biological transformation
The farmer milks the cow. The milk has been harvested. Milk is agricultural produce.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 4 – IFRS 15 Revenue

5 step Revenue model
The approach to recognising revenue in IFRS 15 can be summarised in five steps. (I.P.T.P.S)
1. Identify the contract with the customer
2. Identify the Performance obligation(s)
3. Determine the Transaction price
4. Allocate the transaction Price to the performance obligations
5. Recognise revenue when (or as) the performance obligations are Satisfied

1. Identify the contract with the customer

The IFRS 15 revenue recognition model applies where:

a) A contract exists (a contract is an agreement between two or more parties that creates enforceable
rights and obligations); and
b) All of the following criteria are met (para. 9)

C.C.R.A.P
 The contract has Commercial substance (risk, timing or amount of future cash flows expected to
change as result of contract)
 It is probable that entity will collect the Consideration (customer's ability and intention to pay that
amount of consideration when it is due) (Tip: This criteria has the highest chances of being tested in
exam where the customer may not have the ability to pay and therefore the whole contract will not
fall under IFRS 15)
 The entity can identify each party's Rights
 The parties have Approved the contract (in writing, orally or implied by the entity's customary
business practices)
 The entity can identify Payment terms

When performance obligation is satisfied over a period of time (i.e more than 12 months), Revenue is
recognized based on the percentage completion of the total performance obligation.
There are two methods to arrive at the percentage completion:

Input method (Based on cost incurred)

This method derives the percentage completion by dividing cost incurred till date by total cost expected
to be incurred for the full contract.

Output method (Based on services transferred to the buyer)

This method derives the percentage completion by dividing revenue certified by customer (invoices
billed/trade receivable) till date by total contract value.

Both the methods are widely acceptable and the choice is at the discretion of the company.
Revenue recognition under both the methods will be done by applying the percentage completion
amount to the total contract value.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Financing Component
In determining the transaction price, an entity must consider if the timing of payments provides the
customer or the entity with a financing benefit (i.e. the payment can be done much after the performance
obligation has been satisfied). IFRS 15 provides the following indications of a significant financing
component:
 the difference between the amount of promised consideration and the cash selling price of the
promised goods or services (i.e. current cash selling price would be less than the promised
consideration payable after some years)
 the length of time between the transfer of the promised goods or services to the customer and the
payment date. (i.e. there is a lot of delay in payment as decided in the contract even after the
performance obligation is satisfied)

If there is a financing component, then the consideration receivable needs to be discounted to present
value using the rate at which the customer borrows money. The unwinding of this present value after
a year will be recognized as an interest income and not included as Revenue.

Loss making projects

When the company expects a project to be loss making, the entire loss over the contract period needs to
be immediately recorded in P&L on the day company is made aware of any such future expected losses.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 5 – IAS 19 Employee Benefits

This chapter will focus mainly on Post-employment benefits that an employee receives (e.g Pension)
There are 2 types of Post-employment benefit plans:

Defined Benefit plan Defined contribution plan

Benefits to be paid to employees are fixed Only contribution are fixed and no guarantee for
benefits to be paid
Any surplus/deficit in the plan, from where the Any surplus/deficit is bourne by employees
payment will be made to the employees, is bourne meaning they can lose out on the benefits as
by employer expected earlier
Additional contribution to be made by employer if No additional contribution is compulsory for the
there is a deficit employer incase of deficit
This plan favours the employee This plan favours the employer

The main difference between the two types of plans lies in who bears the risk: if the employer bears the
risk, even in a small way by guaranteeing or specifying the return, the plan is a defined benefit plan.
A defined contribution scheme must give a benefit formula based solely on the amount of the
contributions, and therefore no guarantee is offered by the employer.

A post-employment benefit plan or scheme consists of a pool of assets, together with a liability for pensions
owed. Pension plan assets normally consist of investments, cash and (sometimes) properties. The return
earned on the assets is used to pay pensions to employees when its due.

Accounting for defined contribution plans

The entity should charge the total agreed pension contribution of that year to profit or loss as an
employment expense in each year. Any amount unpaid at year end will be shown as a liability. There is no
asset created for this type of plan.

Accounting for defined benefit plans

This is much more complex and has a greater chance of being asked in the exam. (Tip: Accounting for this
type of plan can be asked as a part of Group questions or as a part of Section B for 5-8 marks)
The below format summarizes the working for Asset/Liabilities:
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Explanation of the above format: (you need to make it for both, assets and liabilities, separately in the
below manner)
What we are trying to achieve here is the movement between opening and closing balance of planned asset
and obligation for a pension plan. (Tip: Think of it like a PPE working required in cashflow statement to
find out the balancing amount of cash inflow/outflow)
 You start with the opening balance
 You compute the interest on the opening balance based on the rate of that year. (Remember: For
obligations (liability) only, if there is a past service cost, add it to the opening balance to compute
interest cost). In your P&L, only the NET INTEREST cost (Interest cost less Interest income) is
expensed off.
 Plot all the adjustments that would impact Asset and Liabilities individually
 Find out the difference between this theoretical value of asset and liabilities as compared to the
closing fair value given in the question
 The difference between the above two goes in Other Comprehensive Income

What goes in P&L for defined benefit pension plan?

 Net interest cost, as explained above
 Past service cost (Tip: This arises most of the times due to change of plan in current year and
therefore it is expensed in the P&L)
 Current service cost (this is the salary or bonus or any other employee related expense for current
year)
What goes in Balance sheet?
Only the NET amount of the asset and liability as worked out above.

The asset ceiling

Most defined benefit pension plans are in deficit (i.e. the obligation exceeds the plan assets) although some
defined benefit pension plans show a surplus.
If a defined benefit plan is in surplus, IAS 19 states that the surplus must be measured at the lower of:
 the amount calculated as normal (per above format)
 the total of the present value of any economic benefits available in the form of refunds from the plan
or reductions in future contributions to the plan.
This is known as applying the ‘asset ceiling’. It means that a surplus can only be recognised to the extent
that it will be recoverable in the form of refunds or reduced contributions in the future. This ensures that an
asset is only recognised if it has the potential to bring economic benefits to the reporting entity.

Criticisms
Retirement benefit accounting continues to be a controversial area. Commentators have perceived the
following problems with IAS 19:
 Classification – some types of pension plans cannot be easily classified as 'defined benefit' or
'defined contribution'.
 Volatility – the fair values of defined benefit plan assets may be volatile or difficult to measure
reliably.
 Short-term – IAS 19 requires defined benefit plan assets to be valued at fair value. However, most
pension scheme assets and liabilities are held for the long term.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

 Complexity – the treatment of defined benefit pension costs in the statement of profit or loss and
other comprehensive income is complex and may not be easily understood by users of the financial
statements. It has been argued that all the components of the pension cost are so interrelated that it
does not make sense to present them separately.
 Conceptual Framework – the requirement to reflect future salary increases and unvested benefits
when measuring the defined benefit obligation seems to be at odds with the Conceptual
framework’s definition of a liability because there is no current obligation to pay these.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 6 – Provisions, Contingencies and Events after

reporting period
Provisions (IAS 37)
Recognition
A provision is recognised when (IAS 37: para. 14): (P.E.R)
a. An entity has a present obligation (legal or constructive) as a result of a past event;
b. It is probable (more than 50%) that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
c. A reliable estimate can be made of the amount of the obligation.

A legal obligation is one that derives from a contract, legislation or any other operation of law.
A constructive obligation is an obligation that derives from an entity's past actions. (e.g. it is an
expectation that is built up by the way it has behaved in the past or is expected to behave)

The amount recognised as provision is the best estimate of the expenditure required to settle the present
obligation at the end of the reporting period
a. Where the provision being measured involves a large population of items: Use expected values.
b. Where a single obligation is being measured: The individual most likely outcome may be the best
estimate

If the effect of the time value of money is material, then the provision should be discounted to present
value.

Restructuring
Restructuring is a programme that is planned and is controlled by management and materially changes
either the scope of a business undertaken by an entity, or the manner in which that business is conducted
(IAS 37: para. 10).
Examples of restructuring include (IAS 37: para. 70):
 The sale or termination of a line of business
 The closure of business locations or the relocation of business activities
 Changes in management structure
 Fundamental reorganisations that have a material effect on the nature and focus of the entity's
operations
A provision for restructuring is recognised only when the entity has a constructive obligation to
restructure. Such an obligation only arises where an entity:
1. Has a detailed formal plan for the restructuring; and
2. Has raised a valid expectation in those affected that it will carry out the restructuring by starting to
implement that plan or announcing its main features to those affected by it.
Where the restructuring involves the sale of an operation, no obligation arises until the entity has
entered into a binding sale agreement.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

What costs can be included in the restructuring provision?

A restructuring provision should only include the direct costs of restructuring. These must be both:
 necessarily entailed by the restructuring
 not associated with the ongoing activities of the entity

IAS 37 specifically prohibits the following costs from being included in a restructuring provision:
 retraining and relocating staff
 marketing products
 expenditure on new systems
 future operating losses (unless these arise from an onerous contract)
 profits on disposal of assets.

Criticisms of IAS 37
The following criticisms have been made of IAS 37:

 Judgement – provisions are estimated liabilities and IAS 37 requires the exercise of judgement.
This may increase the risk of bias and reduce comparability between entities.
 Inconsistent – before recognising a provision, an entity must assess if the outflow of economic
benefits is probable. This is inconsistent with other standards, such as IFRS 9 Financial Instruments.
 Out-dated – IAS 37 was issued many years ago and does not reflect the current thinking of the
International Accounting Standards Board.
 Best estimates – provisions for single obligations are recognised at the ‘best estimate’ of the
expenditure that will be incurred, but guidance in this area is lacking.
 Types of costs – IAS 37 does not specify what types of costs should be included when measuring a
provision. For example, some entities include legal costs within provisions, but others do not.
 Risk – IAS 37 states that entities may need to make a risk adjustment to provisions, but it does not
explain when to do this or how to calculate the adjustment.
 Contingent assets – these are not recognised unless the inflow of benefits is ‘virtually certain’.
There is a lack of guidance about the meaning of ‘virtually certain’.
 Timing – there can be timing differences between when one entity recognises a contingent liability
and when the other entity recognises a contingent asset.
 Contradictory guidance - IAS 37 defines an obligating event as one where the entity has no
realistic alternative but to settle the obligation. However, the standard also states that no provision
should be recognized if the liability can be avoided by future actions – even if those actions are
unrealistic (e.g. a change in the nature of the entity’s operations).
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Contingent liability:
(a) A possible obligation (less than 50%) 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;
or
(b) A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of economic benefit will be required to settle the obligation; or
(ii) The amount of the obligation cannot be measured with sufficient reliability.

Contingent liabilities should not be recognised in financial statements, but should be disclosed unless the
possibility of an outflow of economic benefits is remote. If it is remotely possible, then ignore it.

Contingent asset: A possible asset that arises from past events and whose existence will be confirmed by
the occurrence of one or more uncertain future events not wholly within the entity's control. (IAS 37: para.
10)

A contingent asset should not be recognised, but should be disclosed where an inflow of economic
benefits is probable (Only if it has more than 50% chances, recognise it as Contingent asset)

Events after the reporting period (IAS 10)

What falls under events after reporting period?: Those events that occur between the year end and the
date on which the financial statements are authorised for issue.

These events can be either of the below 2 types:

Adjusting event:
Provide evidence of conditions that existed at the end of the reporting period. (Eg: An inventory valuation
report that comes after year end date but proves that a fire or flood damaged the goods in warehouse
before the year end date)
These type of events are ALWAYS adjusted in financial statement to give the impact of the damage caused.

Non-adjusting events:
Indicative of conditions that arose after the end of the reporting period (Eg: An inventory valuation report
that comes after year end date and proves that a fire or flood damaged the goods in warehouse after the
year end date only)
These type of events are NEVER ADJUSTED in financial statement because they happened after the
reporting date. That’s why they are only disclosed in the financial statement as a way of note in notes to
accounts.

If management determines after the reporting period that the reporting entity will be liquidated or cease
trading, the financial statements are adjusted so that they are not prepared on the going concern basis. (this
is because the year end conditions forced the management to believe that it no longer can operate profitably
and that’s why financial statements are adjusted now)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 7 – Income taxes IAS 12

Deferred tax can be a daunting topic for most of the students but if the logic is clear in your head, this is the
most easy chapter to deal with.

You have encountered income taxes in your earlier studies in Financial Reporting; however, in SBR, this
topic is examined at a much higher level. Deferred tax is most likely to feature as part of a consolidation
question in Section A, but it could also be tested as a whole question in Section B.
These notes will, therefore, only focus on Deferred tax rather than Income tax.

Why does a need for Deferred tax arise?

There will be differences between the principles in an accounting standard and the tax rules in a particular
jurisdiction. Accounting profits therefore differ from taxable profits. The difference on account of this is
termed as a Temporary difference or a Permanent difference.

Temporary differences may mean that profits are reported in the financial statements before they are
taxable by the authorities. Conversely, it might mean that tax is payable to the authorities even though
profits have not yet been reported in the financial statements.

A temporary difference is the difference between the carrying amount of an asset or liability and its tax
base. The tax base is the 'amount attributed to an asset or liability for tax purposes.
The tax base of an asset is the amount that will be deductible for tax purposes.
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes
in future periods.

Tax payable by an entity is calculated by the tax authorities using a tax computation. A tax computation is
similar to a statement of profit or loss, except that it is constructed using tax rules instead of IFRS. Now
imagine the tax authorities drawing up a statement of financial position for the same entity, but using tax
rules instead of IFRS. In these 'tax accounts', assets and liabilities will be stated at their carrying amount for
tax purposes, which is their tax base. Different tax jurisdictions may have different tax rules. The tax rules
determine the tax base.

In the SBR exam, the question will state the tax rules in a jurisdiction, or the tax base of certain assets
or liabilities in that jurisdiction. Students are not expected to remember the tax treatment of any particular
transaction.

Why knowing the temporary difference is important?

Temporary difference = Carrying amount (-) Tax base
If you don’t know the temporary difference, the amount of Deferred tax will go for a toss.
Deferred tax = Temporary difference * Tax rate applicable or enacted by end of the year

Most important
Deferred tax is a balance sheet item. Therefore, only the incremental entry is passed year on year and
not the total amount of the above formula.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

There can be two types of Temporary Differences:

Taxable temporary differences (which gives rise to Deferred tax liability)
This means, an entity has not paid tax in the current year since tax rules doesn’t make a particular item
taxable today or makes it less taxable today. However, that doesn’t mean you can avoid this tax altogether.
Tax authorities will charge you in future. Therefore, on a prudence basis you record a liability to pay this
tax in future. That’s why it is termed as Deferred tax liability because you are not paying it today.

Deductible temporary diffences (which gives rise to Deferred tax asset)

This means, an entity has paid tax in the current year since tax rules make a particular item taxable today
or makes it more taxable today. However, that doesn’t mean you have to pay tax as per accounting on that
item again in future. Tax authorities will never double charge you. Therefore, you record an asset for this
advance tax payment because you will get a deduction for this in future.
That’s why it is termed as Deferred tax asset because you will receive it as a benefit in future.

Always remember, for Assets: for Liabilities

Carrying amount > Tax base = DTL Carrying amount > Tax base = DTA
Carrying amount < Tax base = DTA Carrying amount < Tax base = DTL

Deferred tax should be recognised on the revaluation of property, plant and equipment. This is because an
increase in carrying amount of an asset because of this revaluation will not impact the tax base of an asset
because the tax authorities do not believe in revaluing assets value at each year end.
Revaluation gains are recorded in other comprehensive income and so any deferred tax arising on the
revaluation must also be recorded in other comprehensive income.

Where an entity has unused tax losses, IAS 12 allows a deferred tax asset to be recognised only to the extent
that it is probable that future taxable profits will be available against which the unused tax losses can be
utilized. This is because, if there are not enough profits available in future, the existing deferred tax asset
will not be offset as there will be no tax liability to set it off against. Therefore, adequate profit is always a
criteria that needs to be looked at before creating a deferred tax asset.

TIP: In your exam, you may be given a question where the entity is making a loss since many years and the
economy is also in a bad state. In such a scenario, it will not be certain that there will be profits in future
against which the DTA can be set off. Pay attention to this rule of IAS 12 when you answer in exam.
Write the following line: DTA can only be recognised for any credit or unused tax losses when it is 100%
certain that there will be profit in future against which this DTA will be reversed.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 8 - Financial instruments

Financial asset (Eg. Trade receivables, Options, Shares) (IAS 32: para. 11): Any asset that is:
(a) Cash;
(b) An equity instrument of another entity;
(c) A contractual right:
(i) To receive cash or another financial asset from another entity; or
(ii) To exchange financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity; or
(d) A contract that will or may be settled in the entity's own equity instruments

Financial liability (Eg. Trade Payables, Loans) (IAS 32: para. 11): Any liability that is:
(a) A contractual obligation:
(i) To deliver cash or another financial asset to another entity; or
(ii) To exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity; or
(b) A contract that will or may be settled in an entity's own equity instruments.

IAS 32 clarifies that an instrument is only an equity instrument if neither (a) nor (b) in the definition of
a financial liability are met (IAS 32: para. 16). The critical feature of a financial liability is the contractual
obligation to deliver cash or another financial asset. In Equity, there is no contractual obligation to
deliver cash in the form of dividend. Dividends is at the discretion of the company. If Dividend is paid, then
it is an Equity. For a liability, there will always be a date set at which the cashflow will happen. This is a
critical feature too which discriminates a liability from equity.
Tip: In your exam, you may be asked to differentiate an equity and liability. Knowing their definition
as set above will help you in answering the question.

Compound instruments
Where a financial instrument contains some characteristics of equity and some of financial liability then its
separate components need to be classified separately.

How to arrive at the break up of Equity and Liability for Compound Instruments?
Equity component = Total principal value of loan less present value of all cash outflows on initial date
(Principal and interest)

Treasury Shares: If an entity reacquires its own equity instruments ('treasury shares'), the amount paid is
presented as a deduction from equity. That means, the entity is investing in itself.
No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of an entity's
own equity instruments. Any premium or discount is recognised in reserves.

Financial contracts vs executory contracts

IFRS 9 applies to those contracts where you buy or sell a non-financial item that can be settled net in cash
or another financial instrument, or by exchanging financial instruments as if the contracts were financial
instruments (IFRS 9: para. 2.4). These are considered financial contracts.

However, contracts that were entered into (and continue to be held) for the entity's expected purchase, sale
or usage requirements of non-financial items are outside the scope of IFRS 9 (IFRS 9: para. 2.4). These
 ACCA SBR Notes – 2020-21 by Aditya Sheth

are executory contracts. Executory contracts are contracts under which neither party has performed any of
its obligations

Factoring of receivables
Factoring means the amount of receivable have been forwarded to an agent (Factor) to collect it on your
behalf. This usually happens when the receivable is taking than a longer time to recover. The factor will
pursue these receivables on the Company’s behalf. There are two scenarios in factoring:
a. he will collect the money and forward you the amount after deducting a commission (Eg. Total
receivables are say 100 million and he deducts 5% from the same and forwards you the balance). These
scenarios are called factoring with recourse. Here the factor is not responsible if the ultimate debtor
doesn’t pay. This will be still a loss of the company only. Factoring with recourse means the risk and
rewards attached to the receivable (risk of him failing to pay you and reward of money being collected)
still stays with the original owner i.e the Company. During such a scenario, if the factor advances some
money to the Company before he collects anything from the Debtor, it is considered as an advance given
by factor since if the debtor fails to pay the money, Factor will collect this advance back from you.
Hence, it is a short term liability. This is because factor is not bearing any risk of non-payment.
Receivable will only be derecognized from the books of the Company when the whole amount is settled.
b. Contrary to the above, the second scenario will be where the factor gives you almost major portion of
the receivable that you are unable to recover (say 80-90%) and he will take up the ownership to collect it
from the debtor. This is called as factoring without recourse. Here the factor is responsible for any
non-payment by the debtor. All risks and rewards are transferred to him and company should de-
recognise the receivables from their books once the contract with factor is finalized. There will generally
be never an advance of say 20-30% in this case. If there is, it is reduced from the receivables only and
not considered as an advance from factor as a liability.

Classification of Financial assets

Debt instruments (Loan given to someone)

Business model Initial Subsequent measurement

measurement on
day 1
Held to collect contractual cash Fair value + Amortised cost
flows; and cash flows are solely transaction
principal and interest costs
Held to collect contractual cash Fair value + Fair value through other
flows and to sell, if a suitable transaction comprehensive income (with
opportunity arises; and cash costs reclassification to profit or loss
flows are solely principal and (P/L) on derecognition)
interest Note:- Amortised cost (EIR) will still be done each year
and then this amount will be compared with fair value

Investments in Equity Instruments (Equity shares purchased of some another company)

At initial recognition, on day 1, they are recorded as Fair value + Transaction cost.
Subsequently, they are recognized as Fair value through other comprehensive income (no reclassification
to P/L on derecognition) Note: dividend income recognised in P/L
This is the default approach, however entities may opt for Fair value through P&L if they are held for
trading.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

All other Financial assets are classified as Fair value through P&L with initial recognition as only
Fair value. Transaction cost in such cases is expensed to P&L.

An 'accounting mismatch' is a measurement or recognition inconsistency that would arise from measuring
assets or liabilities or recognising gains or losses on them on different bases. Any financial asset can be
designated at fair value through profit or loss if this would eliminate the mismatch.
(Eg. Loan taken for a Property, Plant and Equipment. Loan would be valued at Amortised cost however
gains or losses on PPE may go to OCI or P&L. In such a case, an election can be made to value the loan at
FVTPL).

Financial assets are reclassified under IFRS 9 when, and only when, an entity changes its business model
for managing financial assets (IFRS 9: para. 4.4.1). The reclassification should be applied prospectively
from the reclassification date (IFRS 9: para. 5.6.1).
These rules only apply to investments in debt instruments as investments in equity instruments are
always held at fair value and any election to measure them at fair value through other comprehensive
income is an irrevocable one.

Classification of Financial Liabilities

Most financial liabilities will be classified as Amortised cost. (Eg. Trade payables, Loans). They are initially
recorded at Fair value less transaction cost. Subsequently the Amortised cost (EIR) method is followed.

EIR Method for Assets and Liabilities is the same.

 First, plot opening balance as per respective initial recognition rules
 Add effective interest on that based on market rate of borrowing
 Less interest or any other payments actually made (interest rate of the loan in the question and not
market rate)
 This gives the closing balance of year 1 which is the opening balance for year 2

Any other liabilities held for trading or Derivatives that are liabilities will be classified as Fair value
through P&L. Initial recognition will be only Fair value. Transaction cost will be expensed in P&L.

Financial guarantee contracts (Guarantee given on behalf of someone)

Initial recognition will be at Fair value less transaction costs. Subsequently they are measured at the higher
of:
 Impairment loss allowance (Amount that the guarantor will have to pay now), or
 Amount initially recognized less amounts amortised to P/L (Guarantee commission receivable)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Impairment of Financial Assets

Expected Credit Loss model (ECL)

IFRS 9 uses a forward-looking impairment model. Under this model future expected credit losses are
recognised. This is different to the impairment model used in IAS 36 Impairment of Assets because in IAS
36 an impairment loss is only recognised when objective evidence of impairment exists

These impairment rules only apply to financial assets at amortised cost and debt instruments at FVOCI.
They are not applicable to Financial assets carried at FVTPL because in those cases, subsequent fair
valuation will anyway take into account these losses.

ECL model is applied on day 1 i.e on initial recognition and then subsequently at each period end till the
asset is derecognized.

At initial recognition of a financial asset, a loss allowance equal to 12-month expected credit losses must
be recognised.

At each subsequent reporting date, the loss allowance required depends on whether there has been a
significant increase in credit risk of that financial instrument since initial recognition.

Stages How to identify Loss amount Effective interest

Stage 1 By default stage – No significant 12 month expected EIR on gross carrying
increase in credit risk credit loss amount
Stage 2 Significant increase in credit risk since Recognise lifetime EIR on gross carrying
initial recognition (Eg: Delay in expected credit losses amount
payment of interest or principal)
Stage 3 Objective evidence of impairment at the Recognise lifetime EIR on net carrying
reporting date (Eg: Default of payment expected credit losses amount after reducing
or bankruptcy) the ECL amounts

There is a rebuttable presumption that the credit risk has increased significantly when contractual
payments are more than 30 days past due.

For Investments in debt instruments measured at fair value through other comprehensive income
 Portion of the fall in fair value relating to credit losses recognised in profit or loss (i.e ECL loss in
P&L)
 Remainder recognised in other comprehensive income (i.e after reducing ECL loss, if there is still a
deficit in fair value and carrying amount, that deficit will go in OCI)

Reversal of impairment loss

If an entity has measured the loss allowance at an amount equal to lifetime expected credit losses in the
previous reporting period, but determines that the conditions are no longer met, it should revert to
measuring the loss allowance at an amount equal to 12-month expected credit losses (IFRS 9: para. 5.5.7).
The resulting impairment gain is recognised in profit or loss
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Hedge accounting
Companies enter into hedging transactions in order to reduce business risk. Where an item in the statement
of financial position or future cash flow is subject to potential fluctuations in value that could be detrimental
to the business, a hedging transaction may be entered into.
The aim is that where the item hedged makes a financial loss, the hedging instrument would make a gain
and vice versa, reducing overall risk

Adopting the hedge accounting provisions of IFRS 9 is mandatory where the hedging relationship
meets all of the following criteria (IFRS 9: para. 6.4.1):
1. The hedging relationship consists only of eligible hedging instruments and eligible hedged items;
2. It was designated at its inception as a hedge with full documentation of how this hedge fits into
the company's strategy;
3. The hedging relationship meets all of the following hedge effectiveness requirements:
a. There is an economic relationship between the hedged item and the hedging instrument; ie the
hedging instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk;
b. The effect of credit risk does not dominate the value changes that result from that economic
relationship; ie the gain or loss from credit risk does not frustrate the effect of changes in the
underlyings on the value of the hedging instrument or the hedged item, even if those changes
were significant; and
c. The hedge ratio of the hedging relationship (quantity of hedging instrument vs quantity of
hedged item) is the same as that resulting from the quantity of the hedged item that the entity
actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge
that quantity of hedged item.

IFRS 9 identifies different types of hedges which determines their accounting treatment. The hedges
examinable are:
(a) Fair value hedges; and
(b) Cash flow hedges.

Fair value hedge

These hedge the change in value of a recognised asset or liability (or unrecognised firm commitment) that
could affect profit or loss (IFRS 9: para. 6.5.2), eg hedging the fair value of fixed rate loan notes due to
changes in interest rates or hedging the value of inventory by entering into forward contract to purchase at a
specified rate.

All gains and losses on both the hedged item and hedging instrument are recognised as follows
(IFRS 9: para. 6.5.8):
(a) Immediately in profit or loss
(b) Immediately in other comprehensive income if the hedged item is an investment in an equity
instrument held at fair value through other comprehensive income.

In both cases, the gain or loss on the hedged item adjusts the carrying amount of the hedged item i.e the
opposite leg of the entry will go to the derivative contract asset/liability account.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Cash flow hedges

These hedge the risk of change in value of future cash flows from a recognised asset or liability (or highly
probable forecast transaction) that could affect profit or loss.

The hedging instrument is accounted as follows:

The portion of the gain or loss on the hedging instrument that is effective is recognised in other
comprehensive income.
Any excess gain or loss on the instrument must be recognised in profit or loss (i.e if the gain or loss on the
hedging instrument (derivative contract) since the inception of the hedge is greater than the loss or gain on
the hedged item (dollars), this excess gain goes in P&L)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 9 – Leases IFRS 16

What is a Lease?
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.
The customer controls the asset’s use if it has:
 the right to substantially all of the identified asset's economic benefits, and
 the right to direct the identified asset's use.

Important: Where it is the supplier that controls the asset used, it is a service contract rather than a
lease.

Lease term: The non-cancellable period for which a lessee has the right to use an underlying asset

Lessee Accounting (the person who has taken the asset on rent) This has the highest chances of being asked
in exam scenario.

At the commencement date (the date the lessor makes the underlying asset available for use by the lessee),
the lessee recognises (IFRS 16: para. 22):
 A lease liability (Present value of lease payments to be made in future)
 A right-of-use asset (PV of lease liability + any advance payment + deposit + any decommissioning
cost)

How will this lease liability become zero in balancesheet?

The lease liability is increased by unwinding of discount at every period end (since you did a present value,
you need to reach the original amount by reversing the discount applied i.e unwinding) and by reducing the
lease liability by payments made during the year.
Remember for year end balance of Lease liability:
When payments are made in advance (i.e first day of the year), Unwinding will happen AFTER reducing
the payments made.
When payments are made in arrears (i.e last day of the year), Unwinding will happen BEFORE reducing
the payments made.

How will this right of use asset become zero in balancesheet?

The right-of-use asset is depreciated from the commencement date to the earlier of the end of its useful life
or end of the lease term
If ownership is expected to be transferred, then it is depreciated to end of its useful life.

IFRS 16 provides an optional exemption from the full requirements of the standard for (IFRS 16:
para. 5):
 Short-term leases (leases with a lease term of 12 months or fewer) (IFRS 16: Appendix A)
 Leases for which the underlying asset is low value (not based on materiality but for low value
from all users and different lessee’s perspective) eg. Tablet, phone, small furniture, computer
In such a case, lease expense is recorded in P&L on straight line basis and no RTA or lease liability is
recorded
 ACCA SBR Notes – 2020-21 by Aditya Sheth

How to present Lease liability in balancesheet?

When payment is made in advance, the payment becomes current liability and balance is non-current.
When payment is made in arrear, go one year further in lease liability calculation (explained above) and
deduct the closing balance from the current day's closing balance. This difference becomes your current
liability

Deferred tax implications

Under a lease, the lessee recognises a right-of-use asset and a corresponding lease liability. The net of these
two amounts figure is the carrying amount of the right-of-use asset for deferred tax purposes. If an entity is
granted tax relief as lease rentals are paid, a temporary difference arises, as the tax base of the lease is zero.
This results in a deferred tax asset. Tax deductions are allowed on the lease rental payment made, which, at
the beginning of the lease, is lower than the combined depreciation expense and finance cost recognised for
accounting. Therefore, the future tax saving on the additional accounting deduction is recognised now in
order to apply the accruals concept.

Carrying amount:
Right-of-use asset (carrying amount) X
Lease liability (X)
(X)
Tax base 0

Temporary difference (X)

Deferred tax asset at x% X

The tax base is $0 as we are assuming that the lease payments are tax deductible when paid.

Lessor accounting
The approach to lessor accounting classifies leases into two types (IFRS 16: para. 61):
 Finance leases (where a lease receivable is recognised in the statement of financial position); and
 Operating leases (which are accounted for as rental income)

A finance lease is a lease where substantially all of the risks and rewards of the underlying asset transfer to
the lessee or Ownership is transferred to the lessee at the end of the lease or The lease term (including any
secondary periods) is for the major part of the asset's economic life or At the inception of the lease, the
present value of the lease payments amounts to at least substantially all of the fair value of the leased asset.
An operating lease is a lease that does not meet the definition of a finance lease.

Finance leases
Initial treatment
At the inception of a lease, lessors present assets held under a finance lease as a receivable. The value of the
receivable is calculated as the present value of Fixed payments to be received in future plus Variable
payments that depend on an index or rate plus termination penalties.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Subsequent treatment
The subsequent treatment of the finance lease is that the carrying amount of the lease receivable is increased
by finance income earned, which is also credited to the statement of profit or loss. The carrying amount of
the lease receivable is reduced by cash receipts. (TIP: this is similar approach to that of lease liability under
lessee accounting)

Operating leases
A lessor recognises income from an operating lease on a straight line basis over the lease term.
Any direct costs of negotiating the lease are added to the cost of the underlying asset. The underlying asset
should be depreciated in accordance with IAS 16 Property, Plant and Equipment or IAS 38 Intangible
Assets.

Sale and leaseback

If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases it back,
IFRS 16 requires that both entities assess whether the transfer should be accounted for as a sale.
For this purpose, entities must apply IFRS 15 Revenue from Contracts with Customers to decide whether a
performance obligation has been satisfied. This normally occurs when the customer obtains control of a
promised asset. Control of an asset refers to the ability to obtain substantially all of the remaining benefits.
If the transfer does qualify as a sale then IFRS 16 states that:
 The seller-lessee must measure the right-of-use asset as the proportion of the previous carrying
amount that relates to the rights retained.
This means that the seller-lessee will recognise a profit or loss based only on the rights transferred
to the buyer-lessor.

 The buyer-lessor accounts for the asset purchase using the most applicable accounting standard
(such as IAS 16 Property, Plant and Equipment). The lease is accounted for by applying lessor
accounting requirements.

Transactions not at fair value

If the sales proceeds or lease payments are not at fair value, IFRS 16 requires that:
 below market terms (e.g. when the sales proceeds are less than the asset’s fair value) are treated as a
prepayment of lease payments. Add to RTA
 above market terms (e.g. when the sales proceeds exceed the asset’s fair value) are treated as
additional financing. Loan
The lease liability is originally recorded at the present value of lease payments. This amount is then split
between:
 The present value of lease payments at market rates; and
 The additional financing (the difference) which is in substance a loan

RTA amount in sale and leaseback (the below working PLUS any prepayment done)
Cross multiplication to be done =
Present value of lease liability * Carrying amount of asset taken on lease
Fair value of the asset taken on lease
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Profit amount working

Cross multiplication to be done =
Present value of lease liability * actual gain on sale of asset (i.e Carrying amount – Fair value)
Fair value of the asset taken on lease
This amount that you get by doing the above calculation is the gain on the rights you have retained.
However, in P&L only gain on rights transferred to buyer is recognized.
The same is derived as actual gain on sale of asset (i.e Carrying amount – Fair value) minus gain on rights
retained (amount worked out above).

Accounting entry for sale and leaseback for checking the profit amount worked out above
Tip: The balance after plotting the first 4 below items will always go in P&L as gain/loss
Dr. Cash (amount received from buyer)
Dr. RTA (Right of use asset as worked out by cross multiplication above plus prepayment done)
Cr. Carrying amount of asset
Cr. Lease liability (present value of lease payments)
Cr. P&L (the gain on rights transferred to the buyer)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 10 Share-based payment IFRS 2

Share-based payment occurs when an entity buys goods or services from other parties (such as employees
or suppliers) and:
 settles the amounts payable by issuing its shares or share options, or (Equity settled)
 incurs liabilities for cash payments based on its share price. (Cash settled)

If equity-settled, recognise a corresponding increase in equity.

If cash-settled, recognise a corresponding liability. The expense will be debited to P&L in both the
cases.

Equity-settled ⇒ Use the fair value at grant date and do not update for subsequent changes in fair value
Cash-settled ⇒ Update the fair value at each year end with changes recognised in profit or loss

The share-based payment expense should be spread over the vesting period (i.e the period from the day
options are granted – grant date to the day the options are allowed to be exercised - vesting date)

Share based payment liability/equity at year end =

Expense for the period will be calculated as:

 ACCA SBR Notes – 2020-21 by Aditya Sheth

Share-based payment with a choice of settlement

If the entity has the choice of whether to settle the share-based payment in cash or by issuing shares, the
accounting treatment depends on whether there is a present obligation to settle the transaction in cash.
A present obligation exists if the entity has a stated policy of settling such transactions in cash or past
practice of settling in cash, because this creates an expectation, and so a constructive obligation, to settle
future such transactions in cash.
If the present obligation exists, the share-based payment is treated as Cash settled share-based payment.
Otherwise, it’s an equity settled share-based payment.

Counterparty has the choice

If instead the counterparty (eg employee or supplier) has the right to choose whether the share-based
payment is settled in cash or shares, the entity has granted a compound financial instrument.

Debt component will be valued as per Cash settled transaction.

Equity component will be valued at grant date as:
Fair value of shares alternative at grant date X
Less: Fair value cash alternative at grant date (X)
Equity component X

Cancellations and settlements

An entity may cancel or settle a share option scheme before the vesting date.
 If the cancellation or settlement occurs during the vesting period, the entity immediately recognises
the amount that would otherwise have been recognised for services received over the vesting period
('an acceleration of vesting' (IFRS 2, para 28a)).
 Any payment made to employees up to the fair value of the equity instruments granted at
cancellation or settlement date is accounted for as a deduction from equity.
 Any payment made to employees in excess of the fair value of the equity instruments granted at the
cancellation or settlement date is accounted for as an expense in profit or loss

Modifications
Any modifications that increase the total fair value of the share-based payment must be recognized over the
remaining vesting period (ie as a change in accounting estimate). This increase is recognised in addition
to the amount based on the grant date fair value of the original equity instruments.
The difference between the fair value of the new arrangement and the fair value of the original arrangement
(the incremental fair value) at the date of the modification must be recognised as a charge to profit or loss.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Deferred tax implications because of share based payment

An entity may receive a tax deduction that differs from related cumulative remuneration expense which may
arise in a later accounting period.
For example, an entity recognises an expense for share options granted under IFRS 2, but does not receive a
tax deduction until the options are exercised and receives the tax deduction based on the share price on the
exercise date.

The carrying amount of share-based payment is always take as ZERO because that amount is an
expectation of the liability/equity measured on grant date whereas the tax authorities will allow a deduction
based on the fair value on exercise date.

If the amount of the tax deduction (or estimated future tax deduction as given in the question) exceeds the
amount of the related cumulative remuneration expense (expense as per accounting), this indicates that the
tax deduction relates also to an equity item.
The excess is therefore recognised directly in equity.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 11 - Small and medium entities

Remember the
highlighted words
A small or medium entity may be defined or characterised as follows:
 they are usually owner-managed by a relatively small number of individuals such as a family
group, rather than having an extensive ownership base
 they are usually smaller entities in financial terms such as revenues generated and assets and
liabilities under the control of the entity they usually have a relatively small number of employees
 they usually undertake less complex or difficult transactions which are normally the focus of a
financial reporting standard.

What is the effect of introducing the SMEs Standard?

The SMEs Standard will be updated approximately every three years. In contrast, companies that use full
IFRS and IAS Standards have to incur the time cost of ensuring compliance with regular updates.
Accounting under full IFRS and IAS Standards necessitates compliance with approximately 3,000
disclosure points. In contrast, the SMEs Standard comprises approximately 300 disclosure points all
contained within the one document. This significantly reduces the time spent and costs incurred in
producing financial statements.

Key omissions from the SMEs Standard

The subject matter of several reporting standards has been omitted from the SMEs Standard, as follows:
 Earnings per share (IAS 33)
 Interim reporting (IAS 34)
 Segmental reporting (IFRS 8)
 Assets held for sale (IFRS 5).
Omission of subject matter from the SMEs Standard is usually because the cost of preparing and
reporting information exceeds the expected benefits which users would expect to derive from that
information.

Accounting choices disallowed under the SMEs Standard

There are a number of accounting policy choices allowed under full IFRS and IAS Standards that are not
available to companies that apply the SMEs Standard. Under the SMEs Standard:
 Goodwill is always recognised as the difference between the cost of the business combination and
the fair value of the net assets acquired. In other words, the fair value method for measuring the
non-controlling interest is not available.
 Intangible assets must be accounted for at cost less accumulated amortisation and impairment. The
revaluation model is not permitted for intangible assets.
 After initial recognition, investment property is remeasured to fair value at the year end with gains or
losses recorded in profit or loss. The cost model can only be used if fair value cannot be
measured reliably or without undue cost or effort.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Key simplifications in the SMEs Standard

The subject matter of other reporting standards has been simplified for inclusion within the SMEs Standard.
Key simplifications to be aware of are as follows:
 Borrowing costs are always expensed to profit or loss.
 Whilst associates and jointly controlled entities can be accounted for using the equity method in the
consolidated financial statements, they can also be held at cost (if there is no published price
quotation) or fair value. Therefore, simpler alternatives to the equity method are available.
 Depreciation and amortisation estimates are not reviewed annually. Changes to these estimates are
only required if there is an indication that the pattern of an asset's use has changed.
 Expenditure on research and development is always expensed to profit or loss.
 If an entity is unable to make a reliable estimate of the useful life of an intangible asset, then the
useful life is assumed to be ten years.
 Goodwill is amortised over its useful life. If the useful life cannot be reliably established then
management should use a best estimate that does not exceed ten years.
 On the disposal of an overseas subsidiary, cumulative exchange differences that have been
recognised in other comprehensive income are not recycled to profit or loss.
 There are numerous simplifications with regards to financial instruments. These include:
 Measuring most debt instruments at amortised cost.
 Recognising most investments in shares at fair value with changes in fair value recognised in
profit or loss. If fair value cannot be measured reliably then the shares are held at cost less
impairment

Advantages and disadvantages of the SMEs Standard

Advantages
 There will be time and cost savings due to simplifications and omissions, particularly with regards to
disclosure.
 The SMEs Standard is worded in an accessible way.
 All standards are located within one document so it is therefore easier and quicker to find the
information required.

Disadvantages
 There are issues of comparability when comparing one company that uses full IFRS and IAS
Standards and another which uses the SMEs Standard.
 The SMEs Standard is arguably still too complex for many small companies. In particular, the
requirements with regards to leases and deferred tax could be simplified.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 12 – IFRS 5 Non-current

assets held for sale
Classification of non-current assets (or disposal groups) as held for sale
An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be
recovered principally through a sale transaction rather than through continuing use (IFRS 5: para. 6).

To be classified as 'held for sale', the following criteria must be met (IFRS 5: paras. 7–8):

1. The asset (or disposal group) must be available for immediate sale in its present condition, subject
only to usual and customary sales terms; and
2. The sale must be highly probable. For this to be the case: (P.U.M.A.S)
 Price at which the asset (or disposal group) is actively marketed for sale must be reasonable in
relation to its current fair value;
 Unlikely that significant changes will be made to the plan or the plan withdrawn (indicated by
actions required to complete the plan);
 Management (at the appropriate level) must be committed to a plan to sell;
 Active programme to locate a buyer and complete the plan must have been initiated;
 Sale expected to qualify for recognition as a completed sale within one year from the date of
classification as held for sale (subject to limited specified exceptions).

Approach to be followed for IFRS 5

 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 13 – Current issues

The SBR syllabus and list of examinable documents identifies the following current issues:
 accounting in the current business environment
 accounting policy changes
 materiality
 disclosure of accounting policies
 defined benefit plan amendments, curtailments and settlements
 management commentary
 developments in sustainability reporting
 debt and equity
 deferred tax

Accounting in the current business environment

SBR exam questions are likely to be set in a contemporary context. Current issues in the accounting
profession include the application of IFRS Standards to current business transactions and scenarios.

This section discusses the accounting treatment and accounting dilemmas raised by two contemporary
issues: cryptocurrency (their value is increasing exponentially) and natural disasters (eg. Covid-19)

Cryptocurrency
Cryptocurrencies are virtual currencies that provide the holder with various rights. They are not issued by a
central authority and so exist outside of governmental control. Cryptocurrencies, such as the Bitcoin, can be
used to purchase some goods and services although they are not yet widely accepted. The market value is
extremely volatile and some investors make high returns through short-term trade.
The accounting treatment of cryptocurrency is not clear cut. Cryptocurrencies do not constitute ‘cash’
because they cannot be readily exchanged for goods and services. Moreover, they do not qualify as a ‘cash
equivalent’ (in accordance with IAS 7 Statement of Cash Flows) because they are subject to a significant
risk of a change in value.
An investment in cryptocurrency does not represent an investment in the equity of another entity or a
contractual right to receive cash, and so does not meet the definition of a financial asset as per IAS 32
Financial Instruments: Presentation.
The most applicable accounting standard would appear to be IAS 38 Intangible Assets because
cryptocurrency is an identifiable non-monetary asset without physical substance.
Although cryptocurrencies most likely fall within the scope of IAS 38, the measurement models in that
standard do not seem appropriate. The fair value of cryptocurrency is volatile so a cost based measure is
unlikely to provide relevant information. The revaluation model in IAS 38 initially seems more appropriate,
but this requires gains on remeasurement to fair value to be presented in other comprehensive income. Many
entities invest in cryptocurrencies to benefit from short-term changes in fair value and gains or
losses on short-term investments are normally recorded in profit or loss (e.g. assets inside the scope of IFRS
9 Financial Instruments).
As can be seen, the accounting treatment of cryptocurrencies is not straightforward. In the absence of an
appropriate accounting standard, preparers of financial statements should refer to the principles in existing
IFRS Standards as well as the Conceptual Framework in order to develop an accounting policy.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Natural disasters
Natural disasters include Covid-19, volcanic eruptions, earthquakes, droughts, tsunamis, floods and
hurricanes. Many of these have become more prevalent, most likely as a result of climate change. Natural
disasters devastate communities, and the process of recovery can last for years. Companies that operate in
areas effected by natural disasters will also have to consider the financial reporting consequences. Some of
these are considered below. (Tip: This can be asked in your exam due to the ongoing pandemic)

Impairments
A natural disaster is likely to trigger an impairment review – particularly in relation to property, plant and
equipment (PPE). This is because, in accordance with IAS 36 Impairment of Assets, there are likely to be
indicators of impairment. This may be because individual assets are damaged, or it may be
because the economic consequences of the disaster trigger a decline in customer demand. If PPE is
destroyed, then it should be derecognised rather than impaired.
In line with IFRS 9 Financial Instruments, entities that lend money will need to assess whether credit risk
associated with the financial asset has increased significantly. A natural disaster is likely to lead to a higher
default rate, so some financial assets will become credit-impaired.
Natural disasters may lead to inventory damage. Alternatively, the economic consequences of the disaster
may mean that inventory must be sold at a reduced price. As per IAS 2 Inventories, some inventory may
need to be remeasured from its cost to its net realisable value.

Insurance
It is likely that entities affected by natural disasters will need to account for insurance claims. This can be a
difficult area because of uncertainty regarding the nature of the claim, the type of coverage provided by the
insurance, and the timing and amount of any proceeds recoverable.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets only allows the recognition of an asset
from an insurance claim if receipt is virtually certain. This is a high threshold of probability and so
recognition is unlikely. However, if an insurance pay-out is deemed probable then a contingent asset can be
disclosed.
Additional liabilities
As a result of a natural disaster, an entity may decide sell or terminate a line of business, or to save costs by
reducing employee headcount. In accordance with IAS 37, a provision will be recognised if there is a
present obligation from a past event and an outflow of economic benefits is probable. An obligation only
exists if a restructuring plan has been implemented or if a detailed plan has been publicly announced. When
measuring the provision, only the direct costs from the restructuring, such as employee redundancies, should
be included.
Provisions may be required if there is an obligation to repair environmental damage. Moreover,
decommissioning provisions (when an entity is obliged to decommission an asset at the end of its life and
restore the land) will require review because the natural disaster may alter the timing or amount of the
required cash flows
Going concern
Natural disasters will lead to changes in the economic environment, as well as business interruption and
additional costs. If there are material uncertainties relating to going concern, then these must be disclosed in
accordance with IAS 1 Presentation of Financial Statements. If the going concern assumption is not
appropriate, then the financial statements must be prepared on an alternative basis and this fact must be
disclosed
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Accounting policies
The accounting treatment
In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity
should only change an accounting policy if:
 required by an IFRS Standard, or
 results in more reliable and relevant information for financial statement users.
When a change is required by an IFRS Standard, then the standard normally specifies transitional
provisions. When the change is not required by an IFRS Standard then it is implemented retrospectively,
unless it is impractical to do so.
In contrast, a change in accounting estimate is dealt with prospectively. Unlike with a change in policy, this
will impact the statement of profit or loss in the current year only.

Materiality
Background
Materiality as a concept is used widely in financial reporting. However, the Board accepts that further
guidance is needed on how to apply it to the preparation and interpretation of financial statements.

The Board have issued a Practice Statement called Making Materiality Judgements. This provides non-
mandatory guidance that may help preparers of financial statements when applying IFRS Standards
The current definition of materiality is that an item is material if its omission or misstatement would
influence the economic decisions of financial statement users.
The Board are proposing to expand this definition to say that an item is also material if obscuring it would
influence the economic decisions of financial statement users.
The objective of financial statements is to provide useful information about the reporting entity to existing
and potential investors, lenders and other creditors to help them make decisions about providing resources to
that entity. This requires that the preparers of the financial information make materiality judgements.

When assessing whether information is material, an entity should consider:

 Quantitative factors – measures of revenue, profit, assets, and cash flows
 Qualitative factors – related party transactions, unusual transactions, geography, and wider economic
uncertainty.
Materiality judgements are relevant to recognition, measurement, presentation and disclosure decisions.

Defined benefit plan amendments, curtailments and settlements

The problem
If there is a plan amendment, settlement or curtailment (PASC) then the effect of this is calculated by
comparing the net defined benefit deficit before and after the event.
Even though the reporting entity remeasures the defined benefit deficit in the event of a PASC, IAS 19 did
not previously require the use of updated assumptions to determine current service cost and net interest for
the period after the PASC.
The Board argued that ignoring updated assumptions is inappropriate, because these are likely to provide a
more faithful representation of the impact of the entity’s defined benefit pension plan during the reporting
period.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Amendments
The Board amended IAS 19 to clarify that the reporting entity must determine:
 the current service cost for the remainder of the reporting period after the PASC using the actuarial
assumptions used to remeasure the net defined benefit liability
 net interest for the remainder of the reporting period after the PASC using the remeasured defined
benefit deficit and the discount rate used to remeasure the defined benefit deficit.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 14 – IFRS 8 Segment

reporting and Additional performance
measures (APM)
Segmental reports are designed to reveal significant information that might otherwise be hidden by the
process of presenting a single statement of profit or loss and other comprehensive income and statement of
financial position for an entity.
IFRS 8 Operating Segments requires certain entities to disclose information about each of its operating
segments that will enable users of the financial statements to evaluate the nature and financial effects of the
business activities in which it engages and the economic environments in which it operates.

How to identify the reportable segments?

An operating segment should be reported on separately in the financial statements if any of the following
criteria are met (IFRS 8: para.13):
 Its revenue (internal and external) is 10% or more of total revenue;
 Its reported profit or loss is 10% or more of all segments in profit (or all segments in loss ifgreater);
or
 Its assets are 10% or more of total assets.Segments should be reported until at least 75% of the
entity's external revenue has been disclosed.
If all segments satisfying the 10% criteria have been disclosed and they do not amount to 75% of total
external revenue, additional operating segments should be disclosed (even if they do not meet the above
criteria) until the 75% level is reached

Additional performance measures

Background
Users of financial statements are demanding more information. In response, many entities present additional
performance measures (APMs) in their published many statements, such as:
 EBIT – earnings before interest and tax
 EBITDA – earnings before interest, tax, depreciation and amortisation
 Net financial debt – gross debt less cash and cash equivalents and other financial assets
 Free cash flow – cash flows from operating activities less capital expenditure.

APMs are presented either within the financial statements themselves or in other communications such as
media releases and analyst briefings

Benefits
APMs can have many benefits, such as:
 Helping users of financial statements to evaluate an entity through the eyes of management
 Enabling comparison between entities in the same sector or industry
 Stripping out elements that are not relevant to current or future year operating performance
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Drawbacks
Presenting APMs in financial statements can create problems:
 An entity might calculate an APM in a different way year-on-year
 Two entities might calculate the same APM in a different way
 Entities often provide little information about how an APM is calculated or how it reconciles with
the figures presented in the financial statements
 APMs might be selected and calculated so as to present an overly optimistic picture of an entity’s
performance
 Too much information can be confusing to users of the financial statements
 Giving an APM undue prominence may mislead users of the financial statements into believing it is
a requirement of IFRS Standards.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 15 – Consolidation
Subsidiary: An entity that is controlled by another entity.

Control: The power to govern the financial and operating policies of an entity so as to obtain benefits from
its activities.
The key point in the definition of a subsidiary is control. An investor controls an investee if, and only if, the
investor has all of the following:
1. Power over the investee to direct the relevant activities
Examples of power
 Voting rights
 Rights to appoint, reassign or remove key management personnel
 Rights to appoint or remove another entity that directs relevant activities

2. Exposure or rights to variable returns from its involvement with the investee
Examples of variable returns
 Dividends
 Interest from debt
 Changes in value of investment
 Remuneration for servicing investee's assets or liabilities

3. The ability to use its power over the investee to affect the amount of the investor's returns
An investor can have the current ability to direct the activities of an investee even if it does not
actively direct the activities of the investee.
Exclusion of a subsidiary from the consolidated financial statements
IFRS 10 does not permit entities meeting the definition of a subsidiary to be excluded from the
consolidated financial statements. The rules on exclusion of subsidiaries from consolidation are necessarily
strict, because this is a common method used by entities to manipulate their results.

An exception to the 'no exclusion from consolidation's principle is made where the parent is an investment
entity. Investments in subsidiaries are not consolidated, and instead are held at fair value through profit
or loss.
This allows an investment entity to account for all of its investments, whatever interest is held, at fair
value through profit or loss. The IASB believes this approach provides more relevant information to
users of financial statements of investment entities.

The accounting treatment is mandatory for entities meeting the definition of an investment entity, ie an
entity that (IFRS 10: para. 27):
 Obtains funds from one or more investors for the purpose of providing those investor(s) with
investment management services;
 Commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both; and
 Measures and evaluates the performance of substantially all of its investments on a fair value
basis.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Adjustments for intragroup transactions with subsidiaries:

On consolidation, the financial statements of a parent and its subsidiaries are combined and treated as a
single entity. As a single entity cannot trade with itself, the effect of any intragroup transactions must be
eliminated:
 All intragroup assets, liabilities, equity, income, expenses and cash flows are eliminated in full.
 Unrealised profits on intragroup transactions are eliminated in full.
Whenever a subsidiary/Parent sells any goods to each other, always remember these 3 steps
1. Remove the entire transaction amount from Revenue and Cost of Sales (regardless of the profit
element and inventory being sold/unsold). This entry will remove revenue included in books of
the seller and COS included in the books of the buyer
Dr. Revenue
Cr. Cost of sales

2. Next step is to remove any trade receivable and payable outstanding by passing an entry to nullify
these balances

3. Last and most important step will be to remove the unrealized profit element from the inventory
which is not yet sold in the books of the buyer. (Profit % * Inventory unsold) This entry is done to
ensure that the inventory is valued at the cost or NRV, whichever is lower.
Dr. COS
Cr. Inventory
Business combination: A transaction or other event in which an acquirer obtains control of one or more
businesses.
Business: An integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing goods or services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activities.
The definition of a business is important. If an acquired group of assets and liabilities meets the definition
of a business, the transaction is a business combination and is accounted for under IFRS 3. If not, then it is
an asset acquisition and is accounted for as such. This is an application of substance over form.

Measuring non-controlling interests at acquisition

There are 2 types of method to measure NCI in the books of parent: The question will state which
method parent is choosing. They have to state this and you don’t need to make an assumption about
it.
1. Fair value method (Full goodwill method)
How to arrive at that? – It will be either given directly given in the question OR
Arrive at it by multiplying the NCI number of shares (Total shares * NCI%) and multiplying it with
the fair value/market price per share on acquisition date
2. Proportion of net assets method (Partial goodwill method)
How to arrive at that? – Multiply NCI% with the fair value of net assets value on acquisition date
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Treatment of impairment loss on Goodwill under both NCI methods

Under Fair value method:
 Deduct all of cumulative impairment losses from goodwill amount
 Post the group share (80%) of cumulative impairment losses to the retained earnings working and
the NCI share of impairment losses (20%) to the NCI working (ownership) (as some of the losses
relate to group goodwill and some related to NCI goodwill)

Under Proportion of net assets method:

 Deduct all of cumulative impairment losses from goodwill (control)
 Deduct all of cumulative impairment losses to the retained earnings working (ownership) (as they all
relate to group goodwill). Nothing of impairment goes to NCI under this method.

Remember: When impairment of subsidiary is asked, you need to gross up the goodwill if partial
method is followed and then arrive at the impairment loss as a whole of the subsidiary.

The 3 important working notes for the Consolidation question of section A in your exam will be:
 Goodwill
 For goodwill, purchase consideration will be: Cash paid + Fair value of Shares given +
Present value of deferred consideration + Best estimate of Contingent consideration
 Group Retained Earnings (Tip: add as many column in RE working as the companies and make
adjustments required to be done in P&L in this working)
 Non-controlling interest (remember not to adjust impairment loss if it is partial goodwill method)
ACCA SBR Notes – 2020-21 by Aditya Sheth
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Associates

Associate: An entity over which the investor has significant influence.

Significant influence is the power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies.

If an investor holds 20% or more of the voting power of the investee, it can be presumed that the investor
has significant influence over the investee.

An investment in an associate is accounted for in consolidated financial statements using the equity
method.

The Equity method means in SOFP, the following performa will be followed to arrive at the year-end
amount of the associate. Incase there are dividends paid, that will also be reduced from the below.
Further, even profit/loss on sale of goods will also be deducted from the below performa.

In SOPL, only one single line item will appear as ‘Share of profit from associate’. This line item will be
placed just above the ‘Profit before tax’ line item of SOPL.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Negative goodwill or Bargain Purchase

Normally goodwill is a positive balance which is recorded as an intangible non-current asset. Occasionally it
is negative and arises as a result of a 'bargain purchase'. In this instance, IFRS 3 requires reassessment of the
calculations to ensure that they are accurate and then any remaining negative goodwill should be recognised
as a gain in profit or loss and therefore also recorded in group retained earnings.

Measurement period
If the initial accounting for a business combination is incomplete by the end of the reporting period in which
the combination occurs, provisional figures for the consideration transferred, assets acquired and liabilities
assumed are used (IFRS 3: para. 45). This means that when the figure on acquisition are provisional or all
details are not available about the assets/liabilities or purchase consideration, then you can change the
goodwill within one year.
Adjustments to the provisional figures may be made up to the point the acquirer receives all the necessary
information (or learns that it is not obtainable), with a corresponding adjustment to goodwill, but the
measurement period cannot exceed one year from the acquisition date (IFRS 3: para. 45).
Thereafter, goodwill is only adjusted for the correction of errors.

Step Acquisition

Accounting Boundaries (in percentage of holding)

0 to 20 to 50 to 100

Investment Associate Subsidiary

As per IFRS 9 Equity accounting Line by line consolidation
There can be 4 possible scenarios for acquisition. Learn the treatment of each of them thoroughly since
they will most likely be tested in your Section A

First scenario - from 10% to 70% (Investment sold & Subsidiary purchased)
 Investment is sold. Record gain/loss in P&L (Gain/loss = Fair value of investment on step acq date
(-) Cost when investment was initially acquired)
 Record as subsidiary from acquisition date
 Calculate goodwill because a subsidiary is purchased
- Purchase consideration will be 60% of actual purchase consideration and 10% fair value of
investment on additional stake acq date.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Second scenario - from 35% to 70% (Investment sold & Subsidiary purchased)
 Associate is sold. Record gain/loss in P&L after calculating the revised amount as per Equity method
(Gain/loss = Carrying amount in books on step acq date (-) Cost when associate was initially
acquired)
 Record as subsidiary from acq date
 Calculate goodwill because a subsidiary is purchased and line by line consolidation
- Purchase consideration will be 35% of actual purchase consideration and 35% fair value of
associate on acq date

Third scenario - from 10% to 25%

 Investment is sold. Record gain/loss in P&L (Gain/loss = Fair value of investment on step acq date
(-) Cost of investment on initial acq date)
 Only single line item in P&L for ‘share of profit from associate’
 At balance sheet date, equity method to be used for amount of associate
- Cost of associate will be 15% of actual purchase consideration and 10% fair value of investment
on acq date

Fourth scenario - Accounting boundary is not crossed and additional stake acquired (from 60% to
70%) NCI is going down from 40% to 30%

 First calculate the NCI on step acquisition date i.e carrying amount of NCI, as per NCI performa
above, on step acq date
 Second, pro rata this amount for the additional stake gained i.e the above will be 40% so then what
will be 10% (percentage additionally acquired)
 Third, reduce the above percentage acquired (10%) of NCI from NCI (40%) at this event date
 There will be no gain/loss in P&L for this scenario as accounting boundary is not crossed. Write
this below paragraph when accounting boundary is not crossed and additional stake is
acquired/disposed
“Since there is no accounting boundary crossed in this scenario, there is no impact given in P&L.
This is merely a transaction between the owners of the company where additional stake is obtained.
Therefore, the difference between NCI value (10%) at step acq date and fair value paid for the same
will be debited/credited to Equity”

Always remember: When accounting boundary is crossed, there HAS to be an

impact in P&L. Be it step disposal or acquisition.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Step Disposal
First scenario - from 70% to 10% (Subsidiary sold & Investment purchased)

 Subsidiary is sold. Record Group gain/loss in P&L (Group Gain/loss = Add everything pertaining to
the subsidiary that is coming in (-) everything that is going out. See performa below)
 Record as an investment from Disposal date
 Only consolidate P&L till disposal date

Second scenario - from 70% to 35% (Subsidiary sold & Associate purchased)
 Subsidiary is sold. Record Group gain/loss in P&L (Group Gain/loss = Add everything pertaining to
the subsidiary that is coming in (-) everything that is going out. See performa below)
 Record as an associate from acq date. Single line item in P&L only from sale date. Till sale date, full
consol in P&L

Third scenario - from 25% to 10% (Associate sold and Investment purchased)
 Associate is sold. Record gain/loss in P&L after calculating the revised amount as per Equity method
(Gain/loss = Carrying amount in books on step acq date (-) Cost when associate was initially
acquired)
 Only single line item in P&L for ‘share of profit from associate’ till the date of sale. After sale
nothing in P&L except fair value changes.

Fourth scenario - Accounting boundary is not crossed and disposal of stake is done (from 70% to
60%) NCI is going up from 30% to 40%

 First calculate the NCI on step disposal date i.e. carrying amount of NCI, as per NCI performa
above, on step disposal date
 Second, pro rata this amount for the disposal of stake done i.e. the above will be 30% so then what
will be 10% (percentage additionally sold or percentage of NCI going up)
 Third, add the above percentage of NCI acquired (10%) to existing NCI (30%) at this event date
 There will be no gain/loss in P&L for this scenario as accounting boundary is not crossed.

Important entry for step disposal/acquisition where accounting boundary is not crossed and effect is to be
given in Equity.

For step acquisition:

Dr. NCI
Dr. Equity (this will be balancing entry. Impact in Parent’s column of group retained earning)
Cr. Cash paid for additional acquisition

For step Disposal:

Dr. Cash received for sale is stake
Cr. Equity (this will be balancing entry. Impact in Parent’s column of group retained earning)
Cr. NCI
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Performa for Group Calculation of Gain/Loss on sale of Subsidiary (add everything coming in minus
everything going out of the subsidiary from consolidated books)

IFRS 11 Joint Arrangements

Joint arrangements are defined 'as arrangements where two or more parties have joint control' (IFRS
11, Appendix A). This will only apply if the relevant activities require unanimous consent of those who
collectively control the arrangement.
Joint arrangements may take the form of either:
 Joint operations
 Joint ventures.
The key distinction between the two forms is based upon the parties’ rights and obligations under the joint
arrangement.

Joint operations
Joint operations are defined as joint arrangements whereby 'the parties that have joint control have rights
to the assets and obligations for the liabilities' (IFRS 11, Appendix A). Normally, there will not be a
separate entity established to conduct joint operations.
Example of a joint operation
A and B decide to enter into a joint operation to produce a new product. A undertakes one manufacturing
process and B undertakes the other. A and B have agreed that decisions regarding the joint operation will be
made unanimously and that each will bear their own expenses and take an agreed share of the sales revenue
from the product.

Accounting treatment
If the joint operation meets the definition of a 'business' then the principles in IFRS 3 Business
Combinations apply when an interest in a joint operation is acquired:
 Acquisition costs are expensed to profit or loss as incurred
 The identifiable assets and liabilities of the joint operation are measured at fair value
 The excess of the consideration transferred over the fair value of the net assets acquired is
recognised as goodwill.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

At the reporting date, the individual financial statements of each joint operator will recognise:
 its share of assets held jointly
 its share of liabilities incurred jointly
 its share of revenue from the joint operation
 its share of expenses from the joint operation.
The joint operator's share of the income, expenses, assets and liabilities of the joint operation are included in
its individual financial statements and so they will automatically flow through to the consolidated financial
statements

Joint ventures
Joint ventures are defined as joint arrangements whereby 'the parties have joint control of the
arrangement and have rights to the net assets of the arrangement' (IFRS 11, Appendix A). This will
normally be established in the form of a separate entity to conduct the joint venture activities.

Example of a joint venture

A and B decide to set up a separate entity, C, to enter into a joint venture. A will own 55% of the equity
capital of C, with B owning the remaining 45%. A and B have agreed that decision-making regarding the
joint venture will be unanimous. Neither party will have direct right to the assets, or direct obligation for the
liabilities of the joint venture; instead, they will have an interest in the net assets of entity C set up for the
joint venture.
Accounting treatment
In the individual financial statements, an investment in a joint venture can be accounted for:
 at cost
 in accordance with IFRS 9 Financial Instruments, or
 by using the equity method.

In the consolidated financial statements, the interest in the joint venture entity will be accounted for using
the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures. The treatment
of a joint venture in the consolidated financial statements is therefore identical to the treatment of an
associate.
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 16 – Foreign transactions and

entities
Functional currency: The currency of the primary economic environment in which the entity operates.

Determining an entity's functional currency

An entity considers the following factors in determining its functional currency (IAS 21: para. 9):
The currency:
1. That mainly influences sales prices for goods and services (this will often be the currency in which
sales prices for its goods and services are denominated and settled); and
2. Of the country whose competitive forces and regulations mainly determine the sales prices of its
goods and services
3. The currency that mainly influences labour, material and other costs

Presentational currency: Currency in which the financial statements are presented

At the end of the reporting period foreign currency assets and liabilities are treated as follows: (This is
only applicable if you have purchased anything in foreign currency)
Monetary assets and liabilities - Restated at the closing rate
Non-monetary assets measured interms of historical cost (eg non-current assets) - Not restated (ie they
remain at historical rate at the date of the original transaction)
Non-monetary assets measured at fair value - Translated using the exchange rate at the date when the
fair value was measured

Translating the subsidiary’s financial statements (when full company’s balancesheet and P&L are
translated)
The rules for translating an overseas subsidiary into the presentation currency of the group are as follows:
 Income, expenses and other comprehensive income are translated at the exchange rate in place at
the date of each transaction. The average rate for the year may be used as an approximation.
 Assets and liabilities are translated at the closing rate of exchange.

Goodwill should be calculated in the functional currency of the subsidiary. According to IAS 21, goodwill
should be treated like other assets of the subsidiary and translated at the reporting date using the closing
rate. (TIP: Calculate the goodwill normally in the foreign currency and then translate all items as per their
translation rules. Consideration, NCI and FV of net assets at acquisition as per rate on that day)

Exchange gains and losses arising from the translation of goodwill and the subsidiary’s opening net
assets and profit which are attributable to the group are normally held in a translation reserve, a separate
component within equity

Transactional gain/loss will go in P&L (i.e. the gain/loss on foreign exchange arising on account of a
particular transaction that you have entered into)

Translational gain/loss will go in OCI (i.e. the gain/loss on translation of one company’s balancesheet in
other currency)
 ACCA SBR Notes – 2020-21 by Aditya Sheth

Performa for exchange difference for the year:

 ACCA SBR Notes – 2020-21 by Aditya Sheth

Chapter 17 – Group Statement of

Cashflow
Group statements of cash flows could be examined in either Section A or B of the SBR exam. The first
question in Section A of the exam will be based on the financial statements of groups and could therefore be
entirely focused on the group statement of cash flows. Questions may require the preparation of extracts
from the group statement of cash flows and will require discussion and explanation of any calculations
performed.

Therefore, you will not be asked a full cashflow but some bits of it.

Consolidated statement of cash flows

A group's statement of cash flows should only deal with flows of cash external to the group. Cash flows
that are internal to the group should be eliminated (IAS 7: para. 37).
Additional considerations for a group statement of cash flows include:
 Dividends paid to the non-controlling interests
 Dividends received from associates and joint ventures
 Cash flows on acquisition or disposal of associates and joint ventures
 Removing the group share of the profit or loss of associates and joint ventures from group profit
before tax in the 'cash flows from operating activities' section (indirect method only)
 Cash flows on acquisition or disposal of subsidiaries
 The effect of assets and liabilities of subsidiaries acquired or disposed of on the calculation of
working capital adjustments and cash flows
 Impairment losses on goodwill

Dividends paid to non-controlling interests

 ACCA SBR Notes – 2020-21 by Aditya Sheth

Dividends received from associates and joint ventures

Important: When a parent company acquires a subsidiary, they pay cash to do the same. However, there
will already be a cash/overdraft balance in the subsidiary or any other form of cash and cash equivalents.
These balances of subsidiary should be netted off and presented in Group Cashflow statement.

Also, the balances of Assets and Liabilities of subsidiary will be shown as ‘addition’ in the working
note to arrive at the balancing cashflow figure

General definition of Operating free cashflow: (this may be given in the question as well)
Free cash flow is the cash that a company generates from its normal business operations after subtracting
any money spent on capital expenditures. Capital expenditures or CAPEX for short, are purchases of long-
term fixed assets, such as property, plant, and equipment