Advanced Accounting Reports

Dr. Eid Fathy Shaabam

Accounting Department
Faculty of Commerce - Bine suf university

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 A business uses its accounting records to compile financial reports, sometimes
called accounting reports or financial statements. The 3 standard reports that almost
every business uses are the balance sheet, income statement (or profit and loss
statement), the cash flow statement (also known as a statement of cash flows).

Most companies prepare these three accounting reports each month after
completing all of their month-end close procedures. Business owners, managers,
investors, and lenders can then use the company’s balance sheet, profit and loss
statement, and cash flow statement to calculate key performance indicators and
monitor the business’s financial health over time.

Businesses may also use custom-made management accounting reports intended

for specific purposes, such as: Analyzing the profitability of a product line, region,
or client, Tracking employee time or the status of projects reports,
Monitoring accounts receivable aging and accounts payable aging report and
Keeping tabs on operating expenses.

Businesses might also generate reports to send to their accountant or tax preparer.
For example, many accountants and tax preparers ask their clients for a trial balance
report at the end of each accounting period to begin planning a financial statement
audit or preparing a business tax return.

Financial reports should be comparable to those of other companies, especially ones

within the same industry. For that reason, many large companies prepare their financial
reports in accordance with Generally Accepted Accounting Principles (GAAP).
GAAP is a set of regulatory guidelines used across the accounting industry in the U.S.

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 Chapter One

Conceptual Framework of Accounting reporting

Most of the world’s work is done through organizations-groups of people who

work together to accomplish one or more objectives. In doing its work, an
organization uses resources-labor, materials, various services, buildings, and
equipment. These resources need to be financed, or paid for. To work effectively,
the people in an organization need information about the amounts of these
resources, the mean of financing them and the results achieved through using
them. Parties outside the organization need similar information to make
judgments about the organization. Accounting is a system that provides such
information.
Organizations can be classified broadly as either for-profit or nonprofit t. As
these names suggest, a dominant purpose of organizations in the former category
is to earn a profit t, whereas organizations in the latter category have other
objectives, such as governing, providing social services, and providing education.
Accounting is basically similar in both types of organizations.
1.1 Meaning of Accounting:

the Committee on Terminology set up by the American Institute of Certified

Public Accountants formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least, of
a financial character, and interpreting the result thereof.

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 As per this definition, accounting is simply an art of record keeping. The process
of accounting starts by first identifying the events and transactions which are of
financial character and then be recorded in the books of account. This recording is
done in Journal or subsidiary books, also known as primary books. Every good
record keeping system includes suitable classification of transactions and events as
well as their summarization for ready reference. After the transaction and events are
recorded, they are transferred to secondary books. i.e. Ledger.

In ledger transactions and events are classified in terms of income, expense, assets
and liabilities according to their characteristics and summarized in profit & loss
account and balance sheet. Essentially the transactions and events are to be measured
in terms of money. Measurement in terms of money means measuring at the ruling
currency of a country, for example, rupee in India, dollar in the U.S.A. and like. The
transactions and events must have at least in part, financial characteristics. The
inauguration of a new branch of a bank is an event without having financial
character, while the business disposed of by the branch is an event having financial
character. Accounting also interprets the recorded, classified and summarized
transactions and events.

1.2 Objectives and Functions of Accounting:

The main objectives are Systematic recording of transactions, Ascertainment
of results of recorded transactions and the financial position of the business,
providing information to the users for rational decision-making and to know the
solvency position. The functions of accounting are Measurement, Forecasting,
Decision-making, Comparison & Evaluation, Control, Government Regulation
and Taxation.

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1.3 Accounting concepts:
Accounting concepts define the assumptions on the basis of which financial
statements of a business entity are prepared. Certain concepts are perceived,
assumed and accepted in accounting to provide a unifying structure and internal
logic to accounting process. The word concept means idea or notion, which has
universal application. Financial transactions are interpreted in the light of the
concepts, which govern accounting methods. Concepts are those basic
assumptions and conditions, which form the basis upon which the accountancy
has been laid. Unlike physical science, accounting concepts are only result of
broad consensus. These accounting concepts lay the foundation on the basis of
which the accounting principles are formulated.
1.4 Accounting principles:
“Accounting principles are a body of doctrines commonly associated with the
theory and procedures of accounting serving as an explanation of current
practices and as a guide for selection of conventions or procedures where
alternatives exist.”
Accounting principles must satisfy the following conditions:
1. They should be based on real assumptions;
2. They must be simple, understandable and explanatory;
3. They must be followed consistently;
4. They should be able to reflect future predictions;
5. They should be informational for the users.

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 Accounting conventions Accounting conventions emerge of accounting practices,
commonly known as accounting, principles, adopted by various organizations above
a period of time. These conventions are derived by usage and practice. The
accountancy bodies of the world may change any of the convention to improve the
quality of accounting information. Accounting conventions need not have universal
application.

1.5 Fundamental Accounting Assumptions:

The Financial Statements are prepared with the following three Fundamental
Accounting Assumptions. Unless otherwise specified the readers of the Financial
Statements assume that the Financial Statements are prepared in line with these
assumptions. They are Going Concern, Consistency & Accrual. Accounting
Standard 1 describes them as follows:

Going Concern: The enterprise is normally viewed as a going concern, that is, as
continuing in operation for the foreseeable future. It is assumed that the enterprise
has neither the intention nor the necessity of liquidation or of curtailing materially
the scale of the operations.

Consistency: It is assumed that accounting policies are consistent from one period
to another.

Accrual: Revenues and costs are accrued, that is, recognized as they are earned or
incurred (and not as money is received or paid) and recorded in the financial
statements of the periods to which they relate. (The considerations affecting the
process of matching costs with revenues under the accrual assumption are not dealt
with in this Statement.

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 1.5 Limitations of Accounting:
The Financials Statements are prepared on the basis of the above-mentioned
assumptions, conventions and the Accounting Principles which the accountant
chooses to adopt. These bring in lot of subjectivity to the Financial Statements
and hence these basis assumptions conventions and principles become the
limitation of accounting.
The Financial Statements as the name states, accounts only for the items that
can be measured by Money. There are lots of items that money cannot measure
but still are the most valuable assets for the enterprise, like Human Resources,
which the Financial Statements does not depict.
The language of accounting has certain practical limitations and, therefore, the
financial statements should be interpreted carefully keeping in mind all various
factors influencing the true picture.
1.6 Financial Statements:

Financial statements form part of the process of financial reporting. A complete

set of financial statements normally includes a balance sheet, a statement of profit
and loss (also known as ‘income statement’), a cash flow statement and those notes
and other statements and explanatory material that are an integral part of the financial
statements. They may also include supplementary schedules and information based
on or derived from, and expected to be read with, such statements. Such schedules
and supplementary information may deal, for example, with financial information
about business and geographical segments, and disclosures about the effects of
changing prices. Financial statements do not, however, include such items as reports
by directors, statements by the chairman, discussion and analysis by management
and similar items that may be included in a financial or annual report.

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The elements of financial statements:

These are described as elements have the following essential features:

● Assets. These are rights to future economic benefits controlled by an entity as a

result of past transactions or events.

● Liabilities. These are obligations of an entity to transfer future economic benefits

as a result of past transactions or events, i.e. ownership is not essential.

● Ownership interest. This is the residual amount found by deducting all liabilities
from assets which belong to the owners of the entity.

● Gains. These are increases in ownership interest not resulting from contributions
by the owners.

● Losses. These are decreases in ownership interest not resulting from distributions
to the owners.

● Contributions by the owners. These are increases in ownership interest resulting

from transfers from owners in their capacity as owners.

● Distributions to owners. These are decreases in ownership interest resulting from

transfers to owners in their capacity as owners.

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1.6.1 Users and Their Information Needs:

The users of financial statements include present and potential investors,

employees, lenders, suppliers and other trade creditors, customers, governments and
their agencies and the public. They use financial statements in order to satisfy some
of their information needs. These needs include the following:

(a) Investors. The providers of risk capital are concerned with the risk inherent in,
and return provided by, their investments. They need information to help them
determine whether they should buy, hold or sell. They are also interested in
information which enables them to assess the ability of the enterprise to pay
dividends.

(b) Employees. Employees and their representative groups are interested in

information about the stability and profitability of their employers. They are
also interested in information which enables them to assess the ability of the
enterprise to provide remuneration, retirement benefits and employment
opportunities.

(c) Lenders. Lenders are interested in information which enables them to determine
whether their loans, and the interest attaching to them, will be paid when due.

(d) Suppliers and other trade creditors. Suppliers and other creditors are interested
in information which enables them to determine whether amounts owing to
them will be paid when due. Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders unless they are dependent upon the
continuance of the enterprise as a major customer.

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(e) Customers. Customers have an interest in information about the continuance of
an enterprise, especially when they have a long-term involvement with, or are
dependent on, the enterprise.

(f) Governments and their agencies. Governments and their agencies are interested
in the allocation of resources and, therefore, the activities of enterprises. They
also require information in order to regulate the activities of enterprises and
determine taxation policies, and to serve as the basis for determination of
national income and similar statistics.

(g) Public. Enterprises affect members of the public in a variety of ways. For
example, enterprises may make a substantial contribution to the local economy
in many ways including the number of people they employ and their patronage
of local suppliers. Financial statements may assist the public by providing
information about the trends and recent developments in the prosperity of the
enterprise and the range of its activities.

1.6.2 The Objective of Financial Statements:

The objective of financial statements is to provide information about the financial

position, performance and cash flows of an enterprise that is useful to a wide
range of users in making economic decisions. Financial statements prepared for
this purpose meet the common needs of most users. However, financial
statements do not provide all the information that users may need to make
economic decisions since (a) they largely portray the financial effects of past
events, and (b) do not necessarily provide non-financial information.

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1.6.3 Qualitative Characteristics of Financial Statements:
Qualitative characteristics are the attributes that make the information
provided in financial statements useful to users. The qualitative characteristics
are:
• Understandability.
• Relevance.
• Reliability.
• Comparability.
• Faithful Representation.
• Substance Over Form.
• Neutrality.
• Prudence.
• Completeness.
Among these characteristics most important are Prudence and Substance over
form. The characteristics appear diagrammatically as follows:

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From the diagram we can see that for information content to be relevant must
have:
●the ability to influence the economic decisions of users;
●predictive value, i.e. help users to evaluate or assess past, present or future
events; or
●confirmatory value, i.e. help users to confirm their past evaluations.
For information to be reliable must be:
●free from material error, i.e. transactions have been accurately recorded and
reported;
●a faithful representation, i.e. reflecting the commercial substance of
transactions;
●neutral, i.e. not presented in a way to achieve a predetermined result;
●prudent, i.e. not creating hidden reserves or excessive provisions, deliberately
understating assets or gains, or deliberately overstating liabilities or losses;
●complete, i.e. the information is complete subject to a materiality test.
To be useful, the financial information also needs to be comparable over time
and between companies and understandable.
Prudence:
The preparers of financial statements have to contend with the uncertainties
that inevitably surround many events and circumstances, such as the
collectability of receivables, the probable useful life of plant and machinery, and
the warranty claims that may occur. Such uncertainties are recognized by the
disclosure of their nature and extent and by the exercise of prudence in the
preparation of the financial statements. Prudence is the inclusion of a degree of
caution in the exercise of the judgements needed in making the estimates required
under conditions of uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated.
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 However, the exercise of prudence does not allow, for example, the creation
of hidden reserves or excessive provisions, the deliberate understatement of
assets or income, or the deliberate overstatement of liabilities or expenses,
because the financial statements would then not be neutral and, therefore, not
have the quality of reliability.
Substance Over Form:
If information is to represent faithfully the transactions and other events that it
purports to represent, it is necessary that they are accounted for and presented in
accordance with their substance and economic reality and not merely their legal
form. The substance of transactions or other events is not always consistent with
that which is apparent from their legal or contrived form. For example, where
rights and beneficial interest in an immovable property are transferred but the
documentation and legal formalities are pending, the recording of
acquisition/disposal (by the transferee and transferor respectively) would in
substance represent the transaction entered into.
Accounting Standards:
Accounting standards codify acceptable accounting practices. They are the
primary source of the Generally Accepted Accounting Principles (GAAP) and,
therefore, they are at the top in the hierarchy of GAAP. Other sources of GAAP
are technical pronouncements issued by various professional bodies, regulating
the accounting and auditing profession, that stipulate accounting principles and
methods.

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 Accounting standards are issued by institutions that are authorized to set
accounting standards. The standard-setting body that issues accounting standards
is constituted by representatives from various stake holders such as the
accounting profession, the industry and regulators. The process of formulating
standards is a long ‘due-diligence’ process. The process is somewhat akin to a
‘political process’ because the objective is to establish accounting standards.
(a) that are practical in the sense that those can be implemented with reasonable
costs and efforts.
(b) that are acceptable to all stake holders.
Most countries have their own accounting standard setting bodies. In USA
Statements of Financial Accounting Standards (SFAS) are issued by the
Financial Accounting Standards Board (FASB). In India accounting standards
are issued by the Institute of Chartered Accountants of India (ICAI). With
globalization of capital markets, a trend towards convergence of accounting
practices in different territories emerged in 1970s. The International Account
Standards Committee (IASC) was formed in 1973 to formulate International
Accounting Standards (IAS). In 2001 IASC was restructured and now it is known
as International Accounting Standards Board (IASB). Accounting standards
issued by IASB are called International Financial Reporting Standards (IFRS).
Each territory (a country or a group of countries like European Union) has
initiated actions to harmonize its accounting practices with accounting principles
and methods stipulated in IAS / IFRS. Many countries use IAS / IFRS without
modification.

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1.7 Accounting Standards - Applicability, Interpretation, Scope and
Compliance:
Accounting standards are written, policy documents issued by expert
accounting body or by Government or other regulatory authorities covering the
aspects of recognition, measurement, treatment, presentation and disclosure of
accounting transaction in the financial statement. The main purpose of
formulating accounting standard is to standardize the diverse accounting policies
with a view to eliminate to the extent possible the incomparability of information
provided in financial statements and add reliability to such financial statements.
To discuss on whether such standards are necessary in present days it will be
beneficial to go through the advantages and disadvantages which they are said to
provide.
Advantages:
1. It provides the accountancy profession with useful working rules.
2. It assists in improving quality of work performed by accountant.
3. It strengthens the accountant’s resistance against the pressure from directors
to use accounting policy which may be suspect in that situation in which they
perform their work.
4. It ensures the various users of financial statements to get complete crystal
information on more consistent basis from period to period.
5. It helps the users compare the financial statements of two or more
organizations engaged in same type of business operation.

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 Disadvantages:

1. Users are likely to think that said statements prepared using accounting
standard are infallible.

2. They have been derived from social pressures which may reduce freedom.

3. The working rules may be rigid or bureaucratic to some user of financial

statement.

4. The more standards there are, the more costly the financial statements are to
produce.

Applicability of Accounting Standards:

A three tier classification has been framed to ensure compliance of accounting

standards for reporting enterprises.

• Enterprises whose equity or debt securities are listed.

• Enterprises which are in the process of listing their equity or debt securities as
evidenced by the Board resolution in this regard.

• Banks including co-operative banks.

• Financial institutions.

• Enterprises carrying insurance business.

• Holding companies and subsidiaries of enterprises falling under any one of the
categories mentioned above.

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1.8 GAAPS:

GAAP refers to accounting policies and procedures that are widely used in
practice. US GAAP has evolved to be a collection of pronouncements issued by a
particular accounting organization. US GAAP are the accounting rules used to
prepare financial statements for publicly traded companies and many private
companies in United States. Generally accepted accounting principles for local and
state governments operates under different set of assumptions, principles, and
constraints, as determined by the Governmental Accounting Standards Board.
(GASB).

In the United States, as well as in other countries practicing under the English
common law system, the government does not set accounting standards, in the belief
that the private sector has the better knowledge and resources. The Securities and
Exchange Commission (SEC) has the ultimate authority to set US accounting and
financial reporting standards for public (listed) companies.

The SEC has delegated this responsibility to the private sector led by the
Financial Accounting Standards Board (FASB). Other private sector bodies
including the American Institute of Certified Public Accountants (AICPA) and the
FASB’s Emerging Issues Task Force(EITF) also establish authoritative accounting
Standard Board(FIN) also provide implementation and interpretation guidance. The
SEC has the Statutory authority to establish GAAP for fi lings made with it. While
allowing most of the Standard settings to be done in the private sector, the SEC is
still very active in both its oversight responsibility as well as establishing guidance
and interpretations, as it believes appropriate.

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 US GAAP have the reputation around the world of being more perspective and
detailed than accounting standards in other countries. In order to organize and make
clear what is meant by US GAAP, a GAAP hierarchy has been established which
contains four categories of accounting principles. The sources in the higher category
carry more weight and must be followed when conflicts arise. The table given below
summaries the current GAAP hierarchy for financial statements of non-
governmental entities.

1.9 Established Accounting Principles in the US:

Category(a):

Financial Accounting Standards Board(FASB) statements and Interpretations,

American Institute of Certified Public Accountants (AICPA), Accounting Principles
Board (APB) Opinions, and AICPA Accounting Research Bulletins(ARB).

Category(b):

FASB Technical Bulletins, cleared AICPA Industry Audit and Accounting

Guides, and cleared AICPA Statement of Position (SOPs).

Category(c):

Consensus positions of the FASB Emerging Issues Task Force (EITF) and
cleared Accounting Standards Executive Committee of AICPA(ACSEC)Practice
Bulletins.

Category(d):

AICPA Accounting Interpretations, FASB Implementation Guides (QSAs), and

widely recognized and prevalent Industry practices.

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1.10 Other Accounting literature:

Other accounting literature, including FASB concepts statements, APB

Statements; AICPA Issues Papers; International Accounting Standards Committee
Statements; Pronouncements of other professional associations or regulatory
agencies; AICPA Technical Practice Aids; and accounting textbooks, handbooks,
and articles. The US GAAP provisions differ somewhat from International Financial
Reporting Standards though efforts are underway to reconcile the differences so that
reports created under international standards will be acceptable to the SEC for
companies listed on US markets.

AICPA:

The AICPA sets generally accepted professional and technical standards for
CPAs in many areas. Until the 1970’s, the AICPA held a monopoly in this field. In
the 1970’s however, it transferred its responsibility for setting generally accepted
accounting principles (GAAP) to the newly formed Financial Accounting Standards
Board (FASB). Following this, it retained its standards setting function in areas such
as financial statement auditing, professional ethics, attest services, CPA firm quality
control, CPA tax practice and financial planning practice. Before passage of the
Sarbanes-Oxley law, AICPA standards in these areas were considered “generally
accepted” for all CPA practitioners.

Accounting Principles Board(APB) Opinions were published by Accounting

Principles Board(APB). APB was the main organization setting the US GAAP and
its opinions are still an important part of it.

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FASB:

The Financial Accounting Standards Boards(FASB) is private, not-for- profit

organization whose primary purpose is to develop generally accepted accounting
principles in the United States (US GAAP). The FASB’s mission for the private
sector is similar to that of the Governmental Accounting Standards Board for local
and state governments in the United States. The FASB was created in1973, replacing
the Accounting Principles Board of the American Institute of Certified Public
Accountants (AICPA). The FASB.s mission is ‘to establish and improve standards
of financial accounting and reporting for the guidance and education of the public,
including issuers, auditors, and users of financial information.”

The U.S. Securities and Exchange Commission (SEC) has statutory authority to
establish financial accounting and reporting standards for publicly held companies
under Securities Exchange Act of 1934. The SEC designated the FASB as the
organization responsible for setting accounting standards for public companies in
the U.S.

1.11 Components of US GAAP:

Given below are important components of US GAAP:

• FASB Statement of Financial Accounting Standards (FAS).

• FASB Interpretations(FIN).

• FASB Statements of Financial Accounting Concepts (FAS Conc.)

• FASB Technical Bulletins(FTB).

• AICPA Accounting Research Bulletins(ARB).

• AICPA Accounting Principles Board Opinions (APB Opinions).

• AICPA Accounting Interpretations(AIN).

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 Not only there are an extremely large number of different standards under US
GAAP, the volume and complexity is also increasing. This complexity of US GAAP
makes it critically important that the independent accountants that are assisting a
company in fi ling with SEC are acknowledgeable and experts in US GAAP.

1.12 International Accounting Standards:

The International Accounting Standard Board (IASB) was formulated and began
in operations in 2001. The objective of IASB is as follows “Committed to
developing, in public interest, single set of high quality, global accounting standards
that require transparent and comparable information in general purpose financial
statements” The IASB is selected, overseen and funded by the International
Accounting Standards Committee (IASC) Foundation, consisting of 22 trustees. The
responsibility of the trustees, besides others include:

• Appointment of members of the IASB and Standards Advisory Council and the
IFRIC.

• Monitoring the IASB’s effectiveness and adherence to its due process and
consultation procedures.

• Establishing and maintaining appropriate financing arrangement.

• Approve of the budget for the IASC Foundation.

• Responsibility for constitution changes.

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1.12.1 Extract of the International Accounting Standards:

International Accounting Standards (IASs) were issued by the antecedent

International Accounting Standards Council (IASC), and endorsed and amended by
the International Accounting Standards Board (IASB). The IASB will also reissue
standards in this series where it considers it appropriate.

The following are the Extract of the International Accounting Standards and
International Financial Reporting Standards, prepared by IASC Foundation staff
(The same has not been approved by the IASB. For the requirements reference must
be made to International Financial Reporting Standards.)

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International Accounting Standard 1 (IAS 1)

Presentation of Financial Statements:

Objective:

This Standard prescribes the basis for presentation of general purpose financial
statements to ensure comparability both with the entity’s financial statements of
Previous periods and with the financial statements of other entities. It sets out overall
requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.

Scope:

An entity shall apply this Standard in preparing and presenting general purpose
financial statements in accordance with International Financial Reporting Standards
(IFRSs).

International Accounting Standard 2 (IAS 2):

Inventories

International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2

Inventories (revised in 1993) and should be applied for annual periods beginning on
or after 1 January 2005. Earlier application is encouraged. The Standard also
supersedes SIC-1 Consistency—Different Cost Formulas for Inventories.

Reasons for revising IAS 2:

The International Accounting Standards Board developed this revised IAS 2 as

part of its project on Improvements to International Accounting Standards. The
project was undertaken in the light of queries and criticisms raised in relation to the
Standards by securities regulators, professional accountants and other interested
parties. The objectives of the project were to reduce or eliminate alternatives,

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redundancies and conflicts within the Standards, to deal with some convergence
issues and to make other improvements. For IAS 2 the Board’s main objective was
a limited revision to reduce alternatives for the measurement of inventories. The
Board did not reconsider the fundamental approach to accounting for inventories
contained in IAS 2.

Objective and scope:

The objective and scope paragraphs of IAS 2 were amended by removing the
words ‘held under the historical cost system’, to clarify that the Standard applies to
all inventories that are not specifically excluded from its scope.

Scope clarification:

IN6 The Standard clarifies that some types of inventories are outside its scope
while certain other types of inventories are exempted only from the measurement
requirements in the Standard. Paragraph 3 establishes a clear distinction between
those inventories that are entirely outside the scope of the Standard (described in
paragraph 2) and those inventories that are outside the scope of the measurement
requirements but within the scope of the other requirements in the Standard.

International Accounting Standard 7 (IAS 7):

Cash Flows Statements

Objective:

Information about the cash flows of an entity is useful in providing users of

financial statements with a basis to assess the ability of the entity to generate cash
and cash equivalents and the needs of the entity to utilize those cash flows. The
economic decisions that are taken by users require an evaluation of the ability of an
entity to generate cash and cash equivalents and the timing and certainty of their
generation. The objective of this Standard is to require the provision of information
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about the historical changes in cash and cash equivalents of an entity by means of a
statement of cash flows which classifies cash flows during the period from operating,
investing and financing activities.

Scope:

An entity shall prepare a statement of cash flows in accordance with the

requirements of this Standard and shall present it as an integral part of its financial
statements for each period for which financial statements are presented.

Users of an entity’s financial statements are interested in how the entity generates
and uses cash and cash equivalents. This is the case regardless of the nature of the
entity’s activities and irrespective of whether cash can be viewed as the product of
the entity, as may be the case with a financial institution. Entities need cash for
essentially the same reasons however different their principal revenue-producing
activities might be. They need cash to conduct their operations, to pay their
obligations, and to provide returns to their investors. Accordingly, this Standard
requires all entities to present a statement of cash flows.

International Accounting Standard 8 (IAS 8):

Accounting Policies, Changes in Accounting Estimates and Errors

Objective:

The objective of this Standard is to prescribe the criteria for selecting and
changing accounting policies, together with the accounting treatment and disclosure
of changes in accounting policies, changes in accounting estimates and corrections
of errors. The Standard is intended to enhance the relevance and reliability of an
entity’s financial statements, and the comparability of those financial statements
over time and with the financial statements of other entities.

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 Disclosure requirements for accounting policies, except those for changes in
accounting policies, are set out in IAS 1 Presentation of Financial Statements.

Scope:

This Standard shall be applied in selecting and applying accounting policies, and
accounting for changes in accounting policies, changes in accounting estimates and
corrections of prior period errors. The tax effects of corrections of prior period errors
and of retrospective adjustments made to apply changes in accounting policies are
accounted for and disclosed in accordance with IAS 12 Income Taxes.

International Accounting Standard 10 (IAS 10):

Events after the Balance Sheet Date

Objective:

The objective of this Standard is to prescribe:

(a) when an entity should adjust its financial statements for events after the reporting
period.

(b) the disclosures that an entity should give about the date when the financial
statements were authorized for issue and about events after the reporting period.

The Standard also requires that an entity should not prepare its financial
statements on a going concern basis if events after the reporting period indicate that
the going concern assumption is not appropriate.

Scope:

This Standard shall be applied in the accounting for, and disclosure of, events
after the reporting period.

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International Accounting Standard 11 (IAS11):

Construction Contracts

Objective:

Accounting for construction contracts involves measurement and recognition of

costs and revenue in the books of “Contractor”. Objective of this standard is the
allocation of contract revenue and contract costs to the period in which the work is
performed.

Scope:

This Standard shall be applied in accounting for construction contracts in the

financial statements of contractors.

Definitions:

The following terms are used in this Standard with the meanings specified:

A construction contract is a contract specifically negotiated for the construction of

an asset or a combination of assets that are closely interrelated or interdependent in
terms of their design, technology and function or their ultimate purpose or use.

A fixed price contract is a construction contract in which the contractor agrees to a

fixed contract price, or a fixed rate per unit of output, which in some cases is subject
to cost escalation clauses.

A cost plus contract is a construction contract in which the contractor is reimbursed

for allowable or otherwise defined costs, plus a percentage of these costs or a fixed
fee.

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International Accounting Standard 12 (IAS 12):

Income Taxes

Objective:

The objective of this Standard is to prescribe the accounting treatment for income
taxes. The principal issue in accounting for income taxes is how to account for the
current and future tax consequences of:

(a) The future recovery (settlement) of the carrying amount of assets (liabilities) that
are recognized in an entity’s statement of financial position.

(b) Transactions and other events of the current period that are recognized in an
entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity

expects to recover or settle the carrying amount of that asset or liability. If it is
probable that recovery or settlement of that carrying amount will make future tax
payments larger (smaller) than they would be if such recovery or settlement were to
have no tax consequences, this Standard requires an entity to recognize a deferred
tax liability (deferred tax asset), with certain limited exceptions.

Scope:

This Standard shall be applied in accounting for income taxes.

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International Accounting Standard 16 (IAS 16):

Property, Plant and Equipment

Objective:

The objective of this Standard is to prescribe the accounting treatment for

property, plant and equipment so that users of the financial statements can discern
information about an entity’s investment in its property, plant and equipment and
the changes in such Investment. The principal issues in accounting for property,
plant and equipment are the recognition of the assets, the determination of their
carrying amounts and the depreciation charges and impairment losses to be
recognized in relation to them.

Scope:

This Standard shall be applied in accounting for property, plant and equipment
except when another Standard requires or permits a different accounting treatment.

International Accounting Standard 17 (IAS 17):

Leases

Objective:

The objective of this Standard is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosure to apply in relation to leases. Scope
This Standard shall be applied in accounting for all leases other than:

(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative
resources.

(b) licensing agreements for such items as motion picture films, video recordings,
plays, manuscripts, patents and copyrights.

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 However, this Standard shall not be applied as the basis of measurement for:

(a) property held by lessees that is accounted for as investment property (see IAS 40
Investment Property).

(b) investment property provided by lessors under operating leases (see IAS 40).

(c) biological assets held by lessees under finance leases (see IAS 41 Agriculture).

(d) biological assets provided by lessors under operating leases (see IAS 41).

International Accounting Standard 18 (AIS 18): replaced by IFRS 15

Revenue

Objective:

Income is defined in the Framework for the Preparation and Presentation of

Financial Statements as increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of liabilities that result
in increases in equity, other than those relating to contributions from equity
participants. Income encompasses both revenue and gains. Revenue is income that
arises in the course of ordinary activities of an entity and is referred to by a variety
of different names including sales, fees, interest, dividends and royalties.

The objective of this Standard is to prescribe the accounting treatment of revenue

arising from certain types of transactions and events.

The primary issue in accounting for revenue is determining when to recognize

revenue. Revenue is recognized when it is probable that future economic benefits
will flow to the entity and these benefits can be measured reliably. This Standard
identifies the circumstances in which these criteria will be met and, therefore,
revenue will be recognized. It also provides practical guidance on the application of
these criteria.

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Scope:

This Standard shall be applied in accounting for revenue arising from the
following transactions and events:

(a) the sale of goods.

(b) the rendering of services.

(c) the use by others of entity assets yielding interest, royalties and dividends.

International Accounting Standard 19 (IAS 19):

Employee Benefits

Objective:

The objective of this Standard is to prescribe the accounting and disclosure for
employee benefits. The Standard requires an entity to recognize:

(a) a liability when an employee has provided service in exchange for employee
benefits to be paid in the future.

(b) an expense when the entity consumes the economic benefit arising from service
provided by an employee in exchange for employee benefits.

Scope:

This Standard shall be applied by an employer in accounting for all employee

benefits, except those to which IFRS 2 Share-based Payment applies.

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International Accounting Standard 20 (IAS 20):

Accounting for Government Grants and Disclosure of Government Assistance

Scope:

This Standard shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government assistance.

This Standard does not deal with:

(a) the special problems arising in accounting for government grants in financial
statements reflecting the effects of changing prices or in supplementary information
of a similar nature.

(b) government assistance that is provided for an entity in the form of benefits that
are available in determining taxable income or are determined or limited on the basis
of income tax liability (such as income tax holidays, investment tax credits,
accelerated depreciation allowances and reduced income tax rates).

(c) government participation in the ownership of the entity.

(d) government grants covered by IAS 41 Agriculture.

International Accounting Standard 21 (IAS 21):

The Effects of Changes in Foreign Exchange Rates

International Accounting Standard 21 The Effects of Changes in Foreign

Exchange Rates (IAS 21) replaces IAS 21 The Effects of Changes in Foreign
Exchange Rates (revised in 1993), and should be applied for annual periods
beginning on or after 1 January 2005. Earlier application is encouraged. The
Standard also replaces the following Interpretations:

• SIC-11 Foreign Exchange—Capitalization of Losses Resulting from Severe

Currency Devaluations.
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• SIC-19 Reporting Currency—Measurement and Presentation of Financial
Statements under IAS 21 and IAS 29.

• SIC-30 Reporting Currency—Translation from Measurement Currency to

Presentation Currency.

Scope:

IN5 The Standard excludes from its scope foreign currency derivatives that are
within the scope of IAS 39 Financial Instruments: Recognition and Measurement.
Similarly, the material on hedge accounting has been moved to IAS 39.

International Accounting Standard 23 (IAS 23):

Borrowing Costs

Objective:

Borrowing costs that are directly attributable to the acquisition, construction or

production of a qualifying asset form part of the cost of that asset. Other borrowing
costs are recognized as an expense.

Scope:

An entity shall apply this Standard in accounting for borrowing costs. The
Standard does not deal with the actual or imputed cost of equity, including preferred
capital not classified as a liability.

An entity is not required to apply the Standard to borrowing costs directly

attributable to the acquisition, construction or production of:

(a) a qualifying asset measured at fair value, for example a biological asset; or

(b) inventories that are manufactured, or otherwise produced, in large quantities on

a repetitive basis.

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This Standard uses the following terms with the meanings specified:

Borrowing costs: are interest and other costs that an entity incurs in connection
with the borrowing of funds.

A qualifying asset is an asset that necessarily takes a substantial period of time to

get ready for its intended use or sale.

Borrowing costs may include:

(a) interest on bank overdrafts and short-term and long-term borrowings.

(b) amortization of discounts or premiums relating to borrowings.

(c) amortization of ancillary costs incurred in connection with the arrangement of

borrowings.

(d) finance charges in respect of finance leases recognized in accordance with IAS
17 Leases.

(e) exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.

International Accounting Standards 24 (IAS 24):

Related Party Disclosures

Objective

The objective of this Standard is to ensure that an entity’s financial statements

contain the disclosures necessary to draw attention to the possibility that its financial
position and profit or loss may have been affected by the existence of related parties
and by transactions and outstanding balances with such parties.

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Scope:

This Standard shall be applied in:

(a) identifying related party relationships and transaction.

(b) identifying outstanding balances between an entity and its related parties.

(c) identifying the circumstances in which disclosure of the items in (a) and (b) is
required.

(d) determining the disclosures to be made about those items.

This Standard requires disclosure of related party transactions and outstanding

balances in the separate financial statements of a parent, venture or investor
presented in accordance with IAS 27 Consolidated and Separate Financial
Statements.

Related party transactions and outstanding balances with other entities in a group
are disclosed in an entity’s financial statements. Intragroup related party transactions
and outstanding balances are eliminated in the preparation of consolidated financial
statements of the group.

International Accounting Standard 26 (IAS 26):

Accounting and Reporting by Retirement Benefit Plans

Scope:

This Standard shall be applied in the financial statements of retirement benefit

plans where such financial statements are prepared.

Definitions:

The following terms are used in this Standard with the meanings specified:

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Retirement benefit plans are arrangements whereby an entity provides benefits for
employees on or after termination of service (either in the form of an annual income
or as a lump sum) when such benefits, or the contributions towards them, can be
determined or estimated in advance of retirement from the provisions of a document
or from the entity’s practices. Defined contribution plans are retirement benefit plans
under which amounts to be paid as retirement benefits are determined by
contributions to a fund together with investment earnings thereon.

Defined benefit plans are retirement benefit plans under which amounts to be paid
as retirement benefits are determined by reference to a formula usually based on
employees’ earnings and/or years of service. Funding is the transfer of assets to an
entity (the fund) separate from the employer’s entity to meet future obligations for
the payment of retirement benefits.

For the purposes of this Standard the following terms are also used:

Participants are the members of a retirement benefit plan and others who are entitled
to benefits under the plan.

Net assets available for benefits are the assets of a plan less liabilities other than
the actuarial present value of promised retirement benefits.

Actuarial present value of promised retirement benefits is the present value of the
expected payments by a retirement benefit plan to existing and past employees,
attributable to the service already rendered. Vested benefits are benefits, the rights
to which, under the conditions of a retirement benefit plan, are not conditional on
continued employment.

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International Accounting Standard 27 (IAS 270:

Consolidated and Separate Financial Statement

Objective:

The objective of IAS 27 is to enhance the relevance, reliability and comparability

of the information that a parent entity provides in its separate financial statements
and in its consolidated financial statements for a group of entities under its control.
The Standard specifies:

(a) the circumstances in which an entity must consolidate the financial statements of
another entity (being a subsidiary);

(b) the accounting for changes in the level of ownership interest in a subsidiary;

(c) the accounting for the loss of control of a subsidiary; and

(d) the information that an entity must disclose to enable users of the financial
statements to evaluate the nature of the relationship between the entity and its
subsidiaries.

International Accounting Standard 28 (IAS 28):

Investment in Associates

Introduction:

International Accounting Standard 28 Investments in Associates replaces IAS 28

Accounting for Investments in Associates (revised in 2000) and should be applied
for annual periods beginning on or after 1 January 2005. Earlier application is
encouraged.

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The Standard also replaces the following Interpretations:

• SIC-3 Elimination of Unrealized Profits and Losses on Transactions with

Associates.

• SIC-20 Equity Accounting Method—Recognition of Losses.

• SIC-33 Consolidation and Equity Method—Potential Voting Rights and

Allocation of Ownership Interests.

Scope:

The Standard does not apply to investments that would otherwise be associates or
interests of ventures in jointly controlled entities held by venture capital
organizations, mutual funds, unit trusts and similar entities when those investments
are classified as held for trading and accounted for in accordance with IAS 39
Financial Instruments: Recognition and Measurement. Those investments are
measured at fair value, with changes in fair value recognized in profit or loss in the
period in which they occur.

Furthermore, the Standard provides exemptions from application of the equity

method similar to those provided for certain parents not to prepare consolidated
financial statements. These exemptions include when the investor is also a parent
exempt in accordance with IAS 27 Consolidated and Separate Financial Statements
from preparing consolidated financial statements), and when the investor, though
not such a parent, can satisfy the same type of conditions that exempt such parents).

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International Accounting Standard 29 (IAS 29):

Financial Reporting in Hyperinflationary Economies

This Standard shall be applied to the financial statements, including the

consolidated financial statements, of any entity whose functional currency is the
currency of a hyperinflationary economy.

International Accounting Standard 31 (IAS 31):

Interests in Joint Ventures Introduction

IN1 International Accounting Standard 31 Interests in Joint Ventures (IAS 31)

replaces IAS 31 Financial Reporting of Interests in Joint Ventures (revised in 2000),
and should be applied for annual periods beginning on or after 1 January 2005.
Earlier application is encouraged.

Scope:

The Standard does not apply to investments that would otherwise be interests of
ventures in jointly controlled entities held by venture capital organizations, mutual
funds, unit trusts and similar entities when those investments are classified as held
for trading and accounted for in accordance with IAS 39 Financial Instruments:
Recognition and Measurement. Those investments are measured at fair value, with
changes in fair value being recognized in profit or loss in the period in which they
occur. Furthermore, the Standard provides exemptions from application of
proportionate consolidation or the equity method similar to those provided for
certain parents not to prepare consolidated financial statements. These exemptions
include when the investor is also a parent exempt in accordance with IAS 27
Consolidated and Separate Financial Statements from preparing consolidated
financial statements, and when the investor, though not such a parent, can satisfy the
same type of conditions that exempt such parents.

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International Accounting Standard 32 (IAS 32):

Financial Instruments

Presentation Objective The objective of this Standard is to establish principles for

presenting financial instruments as liabilities or equity and for offsetting financial
assets and financial liabilities. It applies to the classification of financial instruments,
from the perspective of the issuer, into financial assets, financial liabilities and equity
instruments; the classification of related interest, dividends, losses and gains; and
the circumstances in which financial assets and financial liabilities should be offset.

The principles in this Standard complement the principles for recognizing and
measuring financial assets and financial liabilities in IAS 39 Financial Instruments:
Recognition and Measurement, and for disclosing information about them in IFRS
7 Financial Instruments: Disclosures. Scope This Standard shall be applied by all
entities to all types of financial instruments except:

(a) those interests in subsidiaries, associates and joint ventures that are accounted
for in accordance with IAS 27 Consolidated and Separate Financial
Statements, IAS 28 Investments in Associates or IAS 31 Interests in Joint
Ventures. However, in some cases, IAS 27, IAS 28 or IAS 31 permits an entity
to account for an interest in a subsidiary, associate or joint venture using IAS
39; in those cases, entities shall apply the disclosure requirements in IAS 27,
IAS 28 or IAS 31 in addition to those in this Standard. Entities shall also apply
this Standard to all derivatives linked to interests in subsidiaries, associates or
joint ventures.
(b) (b) employers’ rights and obligations under employee benefit plans, to which
IAS 19 Employee Benefits applies.

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(c) insurance contracts as defined in IFRS 4 Insurance Contracts. However, this
Standard applies to derivatives that are embedded in insurance contracts if
IAS 39 requires the entity to account for them separately. Moreover, an issuer
shall apply this Standard to financial guarantee contracts if the issuer applies
IAS 39 in recognizing and measuring the contracts, but shall apply IFRS 4 if
the issuer elects, in accordance with paragraph 4.

(d) of IFRS 4, to apply IFRS 4 in recognizing and measuring them.

(e) financial instruments that are within the scope of IFRS 4 because they contain
a discretionary participation feature. The issuer of these instruments is
exempt from applying to these features paragraphs 15–32 and AG25–AG35
of this Standard regarding the distinction between financial liabilities and
equity instruments. However, these instruments are subject to all other
requirements of this Standard. Furthermore, this Standard applies to
derivatives that are embedded in these instruments (see IAS 39).

(f) financial instruments, contracts and obligations under share-based payment

transactions to which IFRS 2 Share-based Payment applies, except for

(i) contracts within the scope of paragraphs 8–10 of this Standard, to which
this Standard applies, (ii) paragraphs 33 and 34 of this Standard, which shall
be applied to treasury shares purchased, sold, issued or cancelled in
connection with employee share option plans, employee share purchase
plans, and all other share-based payment arrangements.

This Standard shall be applied to those contracts to 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, with the exception of contracts that were entered into and

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 continue to be held for the purpose of the receipt or delivery of a non-financial
item in accordance with the entity’s expected.

purchase, sale or usage requirements:

There are various ways in which a contract to buy or sell a non-financial item
can be settled net in cash or another financial instrument or by exchanging
financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or
another financial instrument or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by
exchanging financial instruments, is not explicit in the terms of the contract,
but the entity has a practice of settling similar contracts net in cash or another
financial instrument, or by exchanging financial instruments (whether with
the counterparty, by entering into offsetting contracts or by selling the
contract before its exercise or lapse);

(c) when, for similar contracts, the entity has a practice of taking delivery of the
underlying and selling it within a short period after delivery for the purpose
of generating a profit from short-term fluctuations in price or dealer’s margin.

(d) when the non-financial item that is the subject of the contract is readily
convertible to cash. A contract to which (b) or (c) applies is not entered into
for the purpose of the receipt or delivery of the nonfinancial item in
accordance with the entity’s expected purchase, sale or usage requirements,
and accordingly, is within the scope of this Standard.

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International Accounting Standard 33 (IAS 33):

Earnings per Share

Objective:

The objective of this Standard is to prescribe principles for the determination

and presentation of earnings per share, so as to improve performance
comparisons between different entities in the same reporting period and between
different reporting periods for the same entity. Even though earnings per share
data have limitations because of the different accounting policies that may be
used for determining ‘earnings’, a consistently determined denominator enhances
financial reporting. The focus of this Standard is on the denominator of the
earnings per share calculation.

Scope:

This Standard shall apply to:

(a) the separate or individual financial statements of an entity:

(i) whose ordinary shares or potential ordinary shares are traded in a

public market (a domestic or foreign stock exchange or an over-the-
counter market, including local and regional markets) or

(ii) that files, or is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of
issuing ordinary shares in a public market; and

(b) the consolidated financial statements of a group with a parent:

(i) whose ordinary shares or potential ordinary shares are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter
market, including local and regional markets) or

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 (ii) that files, or is in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of
issuing ordinary shares in a public market.

An entity that discloses earnings per share shall calculate and disclose
earnings per share in accordance with this Standard.

When an entity presents both consolidated financial statements and separate

financial statements prepared in accordance with IAS 27 Consolidated and
Separate Financial Statements, the disclosures required by this Standard need be
presented only on the basis of the consolidated information.

An entity that chooses to disclose earnings per share based on its separate
financial statements shall present such earnings per share information only in its
statement of comprehensive income. An entity shall not present such earnings
per share information in the consolidated financial statements.

If an entity presents the components of profit or loss in a separate income

statement as described in paragraph 81 of IAS 1 Presentation of Financial
Statements (as revised in 2007), it presents earnings per share only in that
separate statement.

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International Accounting Standard 34 (IAS 34):

Interim Financial Reporting

Objective:

The objective of this Standard is to prescribe the minimum content of an

interim financial report and to prescribe the principles for recognition and
measurement in complete or condensed financial statements for an interim
period. Timely and reliable interim financial reporting improves the ability of
investors, creditors, and others to understand an entity’s capacity to generate
earnings and cash flows and its financial condition and liquidity.

Scope:

This Standard does not mandate which entities should be required to publish
interim financial reports, how frequently, or how soon after the end of an interim
period. However, governments, securities regulators, stock exchanges, and
accountancy bodies often require entities whose debt or equity securities are
publicly traded to publish interim financial reports. This Standard applies if an
entity is required or elects to publish an interim financial report in accordance
with International Financial Reporting Standards.

The International Accounting Standards Committee* encourages publicly

traded entities to provide interim financial reports that conform to the recognition,
measurement, and disclosure principles set out in this Standard. Specifically,
publicly traded entities are encouraged:

(a) to provide interim financial reports at least as of the end of the first half of
their financial year; and

(b) to make their interim financial reports available not later than 60 days after
the end of the interim period.
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 Each financial report, annual or interim, is evaluated on its own for conformity
to International Financial Reporting Standards. The fact that an entity may not
have provided interim financial reports during a particular financial year or may
have provided interim financial reports that do not comply with this Standard
does not prevent the entity’s annual financial statements from conforming to
International Financial Reporting Standards if they otherwise do so.

If an entity’s interim financial report is described as complying with

International Financial Reporting Standards, it must comply with all of the
requirements of this Standard. Paragraph 19 requires certain disclosures in that
regard.

International Accounting Standard 36 (IAS 36):

Impairment of Assets

Introduction

International Accounting Standard 36 Impairment of Assets (IAS 36)

replaces IAS 36 Impairment of Assets (issued in 1998), and should be applied:

(a) on acquisition to goodwill and intangible assets acquired in business

combinations for which the agreement date is on or after 31 March 2004.

(b) to all other assets, for annual periods beginning on or after 31 March 2004.
Earlier application is encouraged.

Objective:

The objective of this Standard is to prescribe the procedures that an entity

applies to ensure that its assets are carried at no more than their recoverable
amount. An asset is carried at more than its recoverable amount if its carrying
amount exceeds the amount to be recovered through use or sale of the asset.

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 If this is the case, the asset is described as impaired and the Standard requires
the entity to recognize an impairment loss. The Standard also specifies when an
entity should reverse an impairment loss and prescribes disclosures.

Scope:

This Standard shall be applied in accounting for the impairment of all assets,
other than:

(a) inventories (see IAS 2 Inventories).

(b) assets arising from construction contracts (see IAS 11 Construction

Contracts).

(c) deferred tax assets (see IAS 12 Income Taxes).

(d) assets arising from employee benefits (see IAS 19 Employee Benefits).

(e) financial assets that are within the scope of IAS 39 Financial Instruments:
Recognition and Measurement.

(f) investment property that is measured at fair value (see IAS 40 Investment
Property).

(g) biological assets related to agricultural activity that are measured at fair value
less estimated point of-sale costs (see IAS 41 Agriculture).

(h) deferred acquisition costs, and intangible assets, arising from an insurer’s
contractual rights under insurance contracts within the scope of IFRS 4 Insurance
Contracts.

(i) non-current assets (or disposal groups) classified as held for sale in
accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations.

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 International Accounting Standard 37 (IAS 37):

Provisions, Contingent Liabilities and Contingent Assets

Objective

The objective of this Standard is to ensure that appropriate recognition criteria

and measurement bases are applied to provisions, contingent liabilities and
contingent assets and that sufficient information is disclosed in the notes to enable
users to understand their nature, timing and amount. Scope This Standard shall
be applied by all entities in accounting for provisions, contingent liabilities and
contingent assets, except:

(a) those resulting from executory contracts, except where the contract is onerous;
(b) those covered by another Standard.

International Accounting Standard 38 (IAS 38):

Intangible Assets

Objective

The objective of this Standard is to prescribe the accounting treatment for

intangible assets that are not dealt with specifically in another Standard. This
Standard requires an entity to recognize an intangible asset if, and only if,
specified criteria are met. The Standard also specifies how to measure the
carrying amount of intangible assets and requires specified disclosures about
intangible assets.

Scope:

This Standard shall be applied in accounting for intangible assets, except:

(a) intangible assets that are within the scope of another Standard;

(b) financial assets, as defined in IAS 32 Financial Instruments: Presentation;

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(c) the recognition and measurement of exploration and evaluation assets (see
IFRS 6 Exploration for and Evaluation of Mineral Resources); and

(d) expenditure on the development and extraction of, minerals, oil, natural gas
and similar no regenerative resources.

International Accounting Standard 39 (IAS 39):

Financial Instruments: Recognition and Measurement

Objective

The objective of this Standard is to establish principles for recognizing and

measuring financial assets, financial liabilities and some contracts to buy or sell
non-financial items. Requirements for presenting information about financial
instruments are in IAS 32 Financial Instruments: Presentation. Requirements for
disclosing information about financial instruments are in IFRS 7 Financial
Instruments: Disclosures.

Scope:

This Standard shall be applied by all entities to all types of financial

instruments.

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International Accounting Standard 40 (IAS 40):

Investment Property

Objective

The objective of this Standard is to prescribe the accounting treatment for

investment property and related disclosure requirements.

Scope:

This Standard shall be applied in the recognition, measurement and disclosure

of investment property.

International Accounting Standard 41 (IAS 40):

Agriculture

Objective

The objective of this Standard is to prescribe the accounting treatment and

disclosures related to agricultural activity.

Scope:

This Standard shall be applied to account for the following when they relate
to agricultural activity:

(a) biological assets.

(b) agricultural produce at the point of harvest; and

(c) government grants covered by paragraphs 34–35.

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1.12.2 International Financial Reporting Standards (IFRS):

IFRS standards are International Financial Reporting Standards (IFRS) that

consist of a set of accounting rules that determine how transactions and other
accounting events are required to be reported in financial statements. They are
designed to maintain credibility and transparency in the financial world, which
enables investors and business operators to make informed financial decisions.

IFRS standards are issued and maintained by the International Accounting

Standards Board and were created to establish a common language so that financial
statements can easily be interpreted from company to company and country to
country.

IFRS are the standard in over 100 countries, including the EU and many parts of
Asia and South America. The United States, however, has not yet adopted them and
the SEC is still deciding whether or not they should move toward them as the official
standard of accounting.

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List of IFRS Standards:

IFRS vs. US GAAP

The largest difference between the US GAAP (Generally Accepted Accounting

Principles) and IFRS is that IFRS is principle-based while GAAP is rule-based.
Rule-based frameworks are more rigid and allow less room for interpretation,
while a principle-based framework allows for more flexibility.

There are pros and cons to both approaches, depending on how they are used. For
example, using a standard that fits within a “rule” but that clearly does not
represent the principle behind the standard can be a downside of the GAAP. While
conversely, taking an overly liberal interpretation of standards is a potential
drawback to the IFRS.
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IFRS 1: First Time Adoption of IFRS

• IFRS-1 requires an entity to comply with each IFRS effective at the reporting date
for its first IFRS financial statements. In particular, the IFRS requires an entity to do
the following in the opening IFRS balance sheet that it prepares as a starting point
for its accounting under IFRSs:

• Recognize all assets and liabilities whose recognition is required by IFRSs;

• Do not recognize items as assets or liabilities if IFRSs do not permit such

recognition;

• Reclassify items that it recognized under previous GAAP as one type of asset,
liability or component of equity, which are different type of asset, liability or
component of equity under IFRSs; and

• Apply IFRSs in measuring all recognized assets and liabilities.

Who is first time adopter?

• An entity’s first IFRS financial statements are the first annual financial statements
in which the entity adopts IFRSs, by an explicit and unreserved statement in those
financial statements of compliance with IFRSs. Opening IFRS Balance Sheet &
Comparative Balance Sheet

• An entity has to prepare an opening IFRS Balance Sheet at the date of transition
to IFRSs.

• This should be the starting point for its accounting under IFRSs.

• It is not required to present that opening balance sheet in its first IFRS based
financial statements.

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• However, to comply with IAS -1 “Presentation of Financial Statements”, an
entity’s IFRS based financial statements should include at least one year of
comparative information under IASB GAAP [ Para 36, IFRS1].

Example:

Company A proposes to prepare and present IFRS for the calendar year 2011, i.e.
Balance Sheet Date 31.12.2011. How should the company carry out transition?

Steps to be taken

• Prepare opening IFRS Balance Sheet as on 1.1.2011 – this is termed as transition

date; the beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial statements.

• The company has to present comparative information for one year, such
comparatives should be as per IASB GAAP – so it has to restate the accounts of
2010 as per IFRS.

• Prepare and present first IFRS based Financial Statements for 2011; it is the first
annual financial statements in which an entity adopts IFRSs by an explicit and
unreserved statement.

• Then effectively the company has applied IFRS on and from 1.1.2010.

• Accounting policies: Select its accounting policies based on IFRSs in force at 31st
Dec, 2011. 30.

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 Paras 7-9 of IFRS- 1 requires adoption of current version of IFRSs which would
enhance comparability because information in a first time adopter’s first financial
statements is prepared on a consistent basis over time and would provide
comparative information prepared using latest version of the IFRSs. Moreover, the
entity will get exemptions from applying certain standards as given in Paras 13-34B,
36- 36C and 37 of IFRS-1.

Actions at a Glance

• Recognize all assets and liabilities whose recognition is required by IFRSs.

• Do not recognize items as assets or liabilities which IFRSs do not permit.

• Reclassify items that it recognized under previous GAAP as one type of asset,
liability or component of equity, but are a different type of asset, liability or
component of equity under IFRSs.

• Carry out measurement of all assets and liabilities so recognized / re-classified in

accordance with IFRSs • Change in accounting policies.

• Applying exemptions: The first time adopter may elect for exemptions granted in
Paragraphs 13-25H and 36A-36C of IFRS-1.

Prohibition of retrospective application of some aspects of other IFRSs:

The first time adopter should follow the prohibition of applying retrospective
application relating to: i. Derecognizing of financial assets and financial liabilities,
ii. Hedge accounting, iii. Estimates, and iv. Assets classified as held for sale and
discontinued operations. [ Paragraphs 26-34B of IFRS-1].

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IFRS-2 Share Based Payments:

• IFRS-2 Share Based Payment was issued by the International Accounting

Standards Board in February 2004. The Standard has been effective since 2005.

• IFRS 2 requires an entity to recognize share-based payment transactions in its

financial statements, including transactions with employees or other parties to be
settled in cash, other assets, or equity instruments of the entity.

Types of Share Based Transactions:

These are of three types:

1. Equity-settled transactions for goods or services acquired by an entity.

2. Cash settled but price or value of the goods or services is based on equity
instruments of the entity and.
3. Transactions for goods or services acquired by the entity in which either the
entity can settle or supplier can claim settlement by equity instruments of the
entity.

Recognition of Share Based Payment:

The following are recognition criteria under Paras 7-9 of IFRS-2:

(i) The goods or services received or acquired in a share-based payment

transaction are recognized when the goods are obtained or as the services are
received. The entity shall recognize a corresponding increase in equity is
recognized if the goods or services were received in an equity-settled
transaction.

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(ii) The goods or services received or acquired in a share-based payment
transaction are recognized when the goods are obtained or as the services are
received. The entity shall recognize a corresponding increase in liability if the
goods or services were acquired in a cash-settled transaction. For example, in
case of employee stock option, it is difficult to assess the fair value of the
service rendered, and therefore, the transaction should be measured at fair
value of the equity.
(iii) The goods or services received in a share-based payment transaction may
qualify for recognition as an asset. If they are not so qualified, then they are
recognized as expense.
For example, inventories (which forms part of operating activities
acquired through a share based payment, the entity should pass the following
journal entries:
Purchases A/c Dr. To Equity Share Capital A/c (face value component)
To Securities Premium A/c (premium component)
Timing of Recognition:
• The term ‘service acquired or received has’ has wider connotation in the
context of ‘vesting period’ and ‘vesting condition’. If employees are granted
share options conditional upon the achievement of a performance condition
as well as length of service, the length of the vesting period would vary
depending on when that performance condition is satisfied and it would
available only to the eligible category of employees.
Example:
• An entity plans to grant 100 equity shares per employee of Class-I, 50
equity shares of per employee of Class –II and 30 equity shares per employee
of Class –III if PAT of company exceeds $ 1000 million on a cumulative
basis.
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• This benefit will be available only such employees who will continue till the
end of the financial year in which the target performance achieved.
• The entity would estimate the length the vesting period in terms of estimated
time required to achieve the performance, say 3 years, and percentage of
employees under different class who will continue till the end 3rd financial
year from the grant date.
Assume the following % of employees will continue:
Class –I: 90% of 100 employees,
Class –II: 80% of 200 employees and
Class –III: 70% of 800 employees.
The fair value per equity share as on the grant date is RO. 100.
Then initial value of the share based payment works out to be – RO.
33,80,000 [ 100 shares × 90% × 100 employees + 50 shares × 80% × 200
employees + 30 shares × 70% × 800 employees] × RO.100.
This will be allocated over three years which is the expected vesting period.
• In transaction of equity settled share based payment, if the counterparty is
not required to complete a specified period of service to be eligible to
unconditionally entitled to the grant then it is presumed that the required
service has been completed. So the transaction should be recognized in full
on the grant date [ Para 14, IFRS-2].
• There are generally situations in employee stock option that the eligible
employees should complete specified service period.
• In such a case the transaction should be recognized over the vesting period.
If the employee is granted share options conditional upon performance
condition (other than market condition), then the options vest during the
expected fulfilment period.
• Market conditions are adjusted in the fair value of option.
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IFRS 3: BUSINESS COMBINATIONS:
• A Business is integrated set of activities, and assets conducted and managed
for the purpose of providing (a) a return to investors and (b) lower costs or
other economic benefits to policyholders or participants. It is generally
consisting of inputs, processes, and resulting outputs that are or will be used
to generate revenue. A business can be part of a whole entity / company. But
a standalone asset may or not be a business. Paragraphs B 7-B12 of IFRS 3
explain various identification criteria of business.
• A Business Combination is an act of bringing together of separate entities
or businesses into one reporting unit. The result of business combination is
one entity (the acquirer) obtains control of one or more businesses. If an entity
obtains control over other entities which are not businesses, the act is not a
business combination.
Recognition of assets and liabilities:
“As of the acquisition date, the acquirer shall recognize, separately from
goodwill, the identify able assets acquired, the liabilities assumed and any
non-controlling interest in the acquire” [ Para 10, IFRS 3].
Check List:
• Identify assets and liabilities within the Framework for Preparation and
Presentation Financial Statements and;
• Check the liabilities which do not arise out of business combination;
• Recognize assets (like identifiable intangibles) which were not recognized
by the acquire since these were internally generated intangibles;
• Do not recognize any liability which constitute remunerations to the past
owners of the acquire or its employees for future services or which constitute
reimbursement of the acquirer’s acquisition costs;

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• Identification of assets or liabilities which are assumed because of pre-
existing relationship – the acquirer takes over the sundry debtors of the
acquire which was due by the acquirer for goods purchased or services
received. The acquirer takes over all assets and liabilities of the acquire
excluding cash. This example, debtors of the acquire should excluded from
the list of assets acquired as it was a pre-existing relationship.
• Consider exception of recognition principle for contingent liabilities stated
in Paras 22& 23, IFRS 3;
• Effect of deferred tax [ Paras 24-25, IFRS 3];
• Employee benefits [ Para 26, IFRS 3];
• Indemnification assets [ Paras 27-28, IFRS 3];
• Operating lease [ Paras B28-30, Appendix B, IFRS 3];
• Required Rights [Paras B35-36, Appendix B, IFRS 3];
• Share based awards [ Para 30, IFRS 3]
• Assets held for sale [ Para 31, IFRS 3]
IFRS 4: Insurance Contracts:
Objective:
The objective of this IFRS is to specify the financial reporting for
insurance contracts by any entity that issues such contracts (described in this
IFRS as an insurer) until the Board completes the second phase of its project
on insurance contracts. In particular, this IFRS requires:
(a) limited improvements to accounting by insurers for insurance contracts.
(b) disclosure that identifies and explains the amounts in an insurer’s
financial statements arising from insurance contracts and helps users of
those financial statements understand the amount, timing and uncertainty
of future cash flows from insurance contracts.

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Scope:

An entity shall apply this IFRS to:

(a) Insurance contracts (including reinsurance contracts) that it issues and

reinsurance contracts that it holds.

(b) Financial instruments that it issues with a discretionary participation

feature (see paragraph 35). IFRS 7 Financial Instruments: Disclosures
requires disclosure about financial instruments, including financial
instruments that contain such features.

This IFRS does not address other aspects of accounting by insurers, such
as accounting for financial assets held by insurers and financial liabilities
issued by insurers (see IAS 32 Financial Instruments: Presentation, IAS 39
Financial Instruments: Recognition and Measurement and IFRS 7), except in
the transitional provisions in paragraph 45.

An entity shall not apply this IFRS to:

(a) product warranties issued directly by a manufacturer, dealer or retailer

(see IAS 18 Revenue and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets).

(b) employers’ assets and liabilities under employee benefit plans (see IAS
19 Employee Benefits and IFRS 2 Share-based Payment) and retirement
benefit obligations reported by defined benefit retirement plans (see IAS
26 Accounting and Reporting by Retirement Benefit Plans).

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(c) contractual rights or contractual obligations that are contingent on the
future use of, or right to use, a non-financial item (for example, some
license fees, royalties, contingent lease payments and similar items), as
well as a lessee’s residual value guarantee embedded in a finance lease
(see IAS 17 Leases, IAS 18 Revenue and IAS 38 Intangible Assets).

(d) financial guarantee contracts unless the issuer has previously asserted
explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, in which case the
issuer may elect to apply either IAS 39, IAS 32 and IFRS 7 or this
Standard to such financial guarantee contracts. The issuer may make that
election contract by contract, but the election for each contract is
irrevocable.

(e) Contingent consideration payable or receivable in a business combination

(see IFRS 3 Business Combinations).

(f) Direct insurance contracts that the entity holds (ie direct insurance
contracts in which the entity is the policyholder). However, a cedant shall
apply this IFRS to reinsurance contracts that it holds.

For ease of reference, this IFRS describes any entity that issues an
insurance contract as an insurer, whether or not the issuer is regarded as an
insurer for legal or supervisory purposes. A reinsurance contract is a type of
insurance contract. Accordingly, all references in this IFRS to insurance
contracts also apply to reinsurance contracts.

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IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations:

Objective:

The objective of this IFRS is to specify the accounting for assets held for
sale, and the presentation and disclosure of discontinued operations. In
particular, the IFRS requires:

(a) Assets that meet the criteria to be classified as held for sale to be
measured at the lower of carrying amount and fair value less costs to sell,
and depreciation on such assets to cease; and
(b) (b) Assets that meet the criteria to be classified as held for sale to be
presented separately in the statement of financial position and the results
of discontinued operations to be presented separately in the statement of
comprehensive income.

Disposal group:

• It is a group of assets (and directly associated liabilities) which are to be

disposed of through a single transaction.

• The group includes goodwill acquired in business combination if the group

is a cash generating unit to which goodwill has been allocated in accordance
with the requirements of Paras 80-87 of IAS-36.

• A cash generating unit is the smallest identifiable group of assets that

generates cash inflow and that such cash inflow is largely independent of
other assets or group assets of the entity.

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Discontinued Operations:

A component of entity which is either disposed of or classified as held

for sale; and

• represents a major separate line of business or geographical area of

operations or

• is part of single coordinated plan to dispose of a major separate line of

business or geographical area of operations, or

• is a subsidiary acquired exclusively with a view to resale. Classification

criteria.

• management is committed to a plan to sell.

• the asset is available for immediate sale.

• an active programme to locate a buyer is initiated.

• the sale is highly probable, within one year of classification as held for sale
(subject to exceptions stated in Para 9, IFRS-5).

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

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

The criteria ‘sale is highly probable, within one year of classification as

held for sale’ needs are not evidenced when the management is indecisive
whether the particular asset will be sold or leased out.

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Basic principles:

• The basic principle of classifying ‘non-current assets held for sale and
disposal groups’ is that the carrying value is expected to be realized through
a sale transaction rather than through continuing use.

• Assets should be available for immediate sale in their present conditions

subject to only the terms and conditions which are usual and customary for
sales of such assets. Sale must highly probable.

Measurement & Presentation:

• Under this standard asset that meet the criteria to be classified as ‘held for
sale’ should be measured at the lower of carrying amount and fair value less
cost to sell, and it will not be required to charge depreciation on such assets.
These assets should separately have presented on the face of the balance
sheet. Result of ‘discontinued operations’ should have presented separately
in the Income Statement.

Classification criteria met after the balance sheet date:

• If the classification criteria for an asset or disposal group are met after the
balance sheet, the entity should not classify such asset or disposal group as
held for sale.

• If these criteria are met after the balance sheet date but before the
authorization of financial statements, information stated Para 41(a), (b) &
(d) of IFRS-5 should disclosed in notes. [ Para 41(a): description of non-
current assets; (b) description of the circumstance of sale, expected manner
and timing of sale and (d) reportable segment to which such assets are
presented in accordance with IFRS-8].

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IFRS 6: Exploration for and Evaluation of Mineral Assets:

The objective of this IFRS is to specify the financial reporting for the
exploration for and evaluation of mineral resources. In particular, the IFRS
requires:

(a) limited improvements to existing accounting practices for exploration

and evaluation expenditures.

(b) entities that recognize exploration and evaluation assets to assess such
assets for impairment in accordance with this IFRS and measure any
impairment in accordance with IAS 36 Impairment of Assets.

(c) disclosures that identify and explain the amounts in the entity’s financial
statements arising from the exploration for and evaluation of mineral
resources and help users of those financial statements understand the
amount, timing and certainty of future cash flows from any exploration and
evaluation assets recognized.

Scope:

An entity shall apply the IFRS to exploration and evaluation expenditures

that it incurs. The IFRS does not address other aspects of accounting by
entities engaged in the exploration for and evaluation of mineral resources.

An entity shall not apply the IFRS to expenditures incurred:

(a) before the exploration for and evaluation of mineral resources, such as
expenditures incurred before the entity has obtained the legal rights to
explore a specific area.

(b) after the technical feasibility and commercial viability of extracting a

mineral resource are demonstrable.

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IFRS 7: Financial Instruments-Disclosures:

The objective of this IFRS is to require entities to provide disclosures in

their financial statements that enable users to evaluate:

(a) the significance of financial instruments for the entity’s financial

position and performance.

(b) the nature and extent of risks arising from financial instruments to which
the entity is exposed during the period and at the end of the reporting period,
and how the entity manages those risks.

The principles in this IFRS complement the principles for recognizing,

measuring and presenting financial assets and financial liabilities in IAS 32
Financial Instruments: Presentation and IAS 39 Financial Instruments:
Recognition and Measurement.

This IFRS shall be applied by all entities to all types of financial

instruments, except:

(a) those interests in subsidiaries, associates and joint ventures that are
accounted for in accordance with IAS 27 Consolidated and Separate
Financial Statements, IAS 28 Investments in Associates or IAS 31
Interests in Joint Ventures.
However, in some cases, IAS 27, IAS 28 or IAS 31 permits an entity to
account for an interest in a subsidiary, associate or joint venture using
IAS 39; in those cases, entities shall apply the disclosure requirements
in IAS 27, IAS 28 or IAS 31 in addition to those in this IFRS. Entities
shall also apply this IFRS to all derivatives linked to interests in
subsidiaries, associates or joint ventures unless the derivative meets the
definition of an equity instrument in IAS 32.

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(b) employers’ rights and obligations arising from employee benefit plans,
to which IAS 19 Employee Benefits applies.

(c) insurance contracts as defined in IFRS 4 Insurance Contracts. However,

this IFRS applies to derivatives that are embedded in insurance contracts if
IAS 39 requires the entity to account for them separately. Moreover, an
issuer shall apply this IFRS to financial guarantee contracts if the issuer
applies IAS 39 in recognizing and measuring the contracts.

(d) of IFRS 4, to apply IFRS 4 in recognizing and measuring them.

(e) financial instruments, contracts and obligations under share-based

payment transactions to which IFRS 2 Share-based Payment applies.

This IFRS applies to recognized and unrecognized financial instruments.

Recognized financial instruments include financial assets and financial
liabilities that are within the scope of IAS 39. Unrecognized financial
instruments include some financial instruments that, although outside the
scope of IAS 39, are within the scope of this IFRS (such as some loan
commitments).

This IFRS applies to contracts to buy or sell a non-financial item that are
within the scope of IAS 39.

IFRS 8: Operating Segment:

The IFRS specifies how an entity should report information about its
operating segments in annual financial statements and, as a consequential
amendment to IAS 34 Interim Financial Reporting, requires an entity to
report selected information about its operating segments in interim financial
reports. It also sets out requirements for related disclosures about products
and services, geographical areas and major customers.

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 The IFRS requires an entity to report financial and descriptive
information about its reportable segments. Reportable segments are
operating segments or aggregations of operating segments that meet
specified criteria. Operating segments are components of an entity about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance. Generally, financial information is required
to be reported on the same basis as is used internally for evaluating operating
segment performance and deciding how to allocate resources to operating
segments.

Identify cation of segments:

The requirements of the IFRS are based on the information about the
components of the entity that management uses to make decisions about
operating matters. The IFRS requires identify cation of operating segments
on the basis of internal reports that are regularly reviewed by the entity’s
chief operating decision maker in order to allocate resources to the segment
and assess its performance. IAS 14 required identify cation of two sets of
segments—one based on related products and services, and the other on
geographical areas. IAS 14 regarded one set as primary segments and the
other as secondary segments.

A component of an entity that sells primarily or exclusively to other

operating segments of the entity is included in the IFRS’s definition of an
operating segment if the entity is managed that way. IAS 14 limited
reportable segments to those that earn a majority of their revenue from sales
to external customers and therefore did not require the different stages of
vertically integrated operations to be identified as separate segments.

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IFRS 9: Financial Instruments: Classify Cation and Measurement

The IASB’s overarching intent was to reduce the complexity inherent in

IAS 39. To achieve that, IFRS 9 uses a single approach to determine whether
a financial asset is measured at amortized cost or fair value, rather than
following the many different rules contained in IAS 39.

Applicability:

An entity shall apply this IFRS for annual periods beginning on or after
1 January, 2013. Features:

• Debt instruments are subject to “Business Models” and “Characteristics of

the financial asset” test to determine if they should be measured at
amortized cost and fair value.

• Debt instruments must meet both tests both tests to be measured at

amortized cost.

• All equity investments are measured at fair value either through profit or
loss or equity.

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 Chapter Two

International Accounting Standard (IAS 1)

Presentation of Financial Statements

In April 2001 the International Accounting Standards Board (Board) adopted IAS
1 Presentation of Financial Statements, which had originally been issued by the
International Accounting Standards Committee in September 1997. IAS 1
Presentation of Financial Statements replaced IAS 1 Disclosure of Accounting
Policies (issued in 1975), IAS 5 Information to be Disclosed in Financial Statements
(originally approved in 1977) and IAS 13 Presentation of Current Assets and Current
Liabilities (approved in 1979).

In December 2003 the Board issued a revised IAS 1 as part of its initial agenda
of technical projects. The Board issued an amended IAS 1 in September 2007, which
included an amendment to the presentation of owner changes in equity and
comprehensive income and a change in terminology in the titles of financial
statements.

In June 2011 the Board amended IAS 1 to improve how items of other income
comprehensive income should be presented. In December 2014 IAS 1 was amended
by Disclosure Initiative (Amendments to IAS 1), which addressed concerns
expressed about some of the existing presentation and disclosure requirements in
IAS 1 and ensured that entities are able to use judgement when applying those
requirements. In addition, the amendments clarified the requirements in paragraph
82A of IAS 1.

In October 2018 the Board issued Definition of Material (Amendments to IAS 1

and IAS 8). This amendment clarified the definition of material and how it should
be applied by:

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(a) including in the definition guidance that until now has featured elsewhere in
IFRS Standards;

(b) improving the explanations accompanying the definition; and

(c) ensuring that the definition of material is consistent across all IFRS Standards.

In January 2020 the Board issued Classification of Liabilities as Current or Non-

current (Amendments to IAS 1). This clarified a criterion in IAS 1 for classifying a
liability as noncurrent: the requirement for an entity to have the right to defer
settlement of the liability for at least 12 months after the reporting period.

In July 2020 the Board issued Classification of Liabilities as Current or Non-

current—Deferral of Effective Date which deferred the mandatory effective date of
amendments to IAS 1 Classification of Liabilities as Current or Non-current to
annual reporting periods beginning on or after 1 January 2023.

In February 2021 the Board issued Disclosure of Accounting Policies which

amended IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements. The
amendment amended IAS 1 to replace the requirement for entities to disclose their
significant accounting policies with the requirement to disclose their material
accounting policy information.

In October 2022, the Board issued Non-Current Liabilities with Covenants. The
amendments improved the information an entity provides when its right to defer
settlement of a liability for at least twelve months is subject to compliance with
covenants. The amendments also responded to stakeholders’ concerns about the
classification of such a liability as current or non-current.

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 Other Standards have made minor consequential amendments to IAS 1. They
include Improvement to IFRSs (issued April 2009), Improvement to IFRSs (issued
May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS
12 Disclosures of Interests in Other Entities (issued May 2011), IFRS 13 Fair Value
Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011),
Annual Improvements to IFRSs 2009–2011 Cycle (issued May 2012), IFRS 9
Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and
IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers
(issued May 2014), Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)
(issued June 2014), IFRS 9 Financial Instruments (issued July 2014), IFRS 16
Leases (issued January 2016), Disclosure Initiative (Amendments to IAS 7) (issued
January 2016), IFRS 17 Insurance Contracts (issued May 2017), Amendments to
References to the Conceptual Framework in IFRS Standards (issued March 2018)
and Amendments to IFRS 17 (issued June 2020).

2.1 Objective:

This Standard prescribes the basis for presentation of general purpose financial
statements to ensure comparability both with the entity’s financial statements of
previous periods and with the financial statements of other entities. It sets out overall
requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.

2.2 Scope:

an entity shall apply this Standard in preparing and presenting general purpose
financial statements in accordance with International Financial Reporting Standards
(IFRSs).

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 Other IFRSs set out the recognition, measurement and disclosure requirements
for specific transactions and other events. This Standard does not apply to the
structure and content of condensed interim financial statements prepared in
accordance with IAS 34 Interim Financial Reporting. However, paragraphs 15–35
apply to such financial statements.

This Standard applies equally to all entities, including those that present
consolidated financial statements in accordance with IFRS 10 Consolidated
Financial Statements and those that present separate financial statements in
accordance with IAS 27 Separate Financial Statements.

This Standard uses terminology that is suitable for profit-oriented entities,

including public sector business entities. If entities with not-for-profit activities in
the private sector or the public sector apply this Standard, they may need to amend
the descriptions used for particular line items in the financial statements and for the
financial statements themselves.

Similarly, entities that do not have equity as defined in IAS 32 Financial

Instruments: Presentation (eg some mutual funds) and entities whose share capital is
not equity (eg some co-operative entities) may need to adapt the financial statement
presentation of members’ or unitholders’ interests.

2.3 Definitions:

The following terms are used in this Standard with the meanings specified:
Accounting policies are defined in paragraph 5 of IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, and the term is used in this Standard
with the same meaning.

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 General purpose financial statements (referred to as ‘financial statements’) are
those intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular information needs.

Impracticable Applying a requirement is impracticable when the entity cannot

apply it after making every reasonable effort to do so.

International Financial Reporting Standards (IFRSs) are Standards and

Interpretations issued by the International Accounting Standards Board (IASB).
They comprise:

(a) International Financial Reporting Standards;

(b) International Accounting Standards;

(c) IFRIC Interpretations; and

(d) SIC Interpretations.

Material: Information is material if omitting, misstating or obscuring it could

reasonably be expected to influence decisions that the primary users of general
purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.

Materiality depends on the nature or magnitude of information, or both. An entity

assesses whether information, either individually or in combination with other
information, is material in the context of its financial statements taken as a whole.

Information is obscured if it is communicated in a way that would have a similar

effect for primary users of financial statements to omitting or misstating that
information. The following are examples of circumstances that may result in
material information being obscured:

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(a) Information regarding a material item, transaction or other event is disclosed in
the financial statements but the language used is vague or unclear;

(b) Information regarding a material item, transaction or other event is scattered

throughout the financial statements;

(c) Dissimilar items, transactions or other events are inappropriately aggregated;

(d) Similar items, transactions or other events are inappropriately disaggregated; and

(e) The understandability of the financial statements is reduced as a result of material

information being hidden by immaterial information to the extent that a primary user
is unable to determine what information is material.

Assessing whether information could reasonably be expected to influence

decisions made by the primary users of a specific reporting entity’s general purpose
financial statements requires an entity to consider the characteristics of those users
while also considering the entity’s own circumstances.

Many existing and potential investors, lenders and other creditors cannot require
reporting entities to provide information directly to them and must rely on general
purpose financial statements for much of the financial information they need.
Consequently, they are the primary users to whom general purpose financial
statements are directed. Financial statements are prepared for users who have a
reasonable knowledge of business and economic activities and who review and
analyses the information diligently. At times, even well-informed and diligent users
may need to seek the aid of an adviser to understand information about complex
economic phenomena.

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 Notes contain information in addition to that presented in the statement of
financial position, statement(s) of profit or loss and other comprehensive income,
statement of changes in equity and statement of cash flows. Notes provide
narrative descriptions or disaggregation’s of items presented in those statements
and information about items that do not qualify for recognition in those
statements.

Other comprehensive income comprises items of income and expense

(including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other IFRSs.

The components of other comprehensive income include:

(a) Changes in revaluation surplus (see IAS 16 Property, Plant and Equipment and
IAS 38 Intangible Assets);

(b) Re measurements of defined benefit plans (see IAS 19 Employee Benefits);

(c) Gains and losses arising from translating the financial statements of a foreign
operation (see IAS 21 The Effects of Changes in Foreign Exchange Rates);

(d) gains and losses from investments in equity instruments designated at fair value
through other comprehensive income in accordance IFRS 9 Financial Instruments;

(da) Gains and losses on financial assets measured at fair value through other
comprehensive income in accordance IFRS 9.

(e) The effective portion of gains and losses on hedging instruments in a cash flow
hedge and the gains and losses on hedging instruments that hedge investments in
equity instruments measured at fair value through other comprehensive income in
accordance with IFRS 9.

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(f) For particular liabilities designated as at fair value through profit or loss, the
amount of the change in fair value that is attributable to changes in the liability’s
credit risk (see IFRS 9).

(g) Changes in the value of the time value of options when separating the intrinsic
value and time value of an option contract and designating as the hedging instrument
only the changes in the intrinsic value (see IFRS 9).

(h) Changes in the value of the forward elements of forward contracts when
separating the forward element and spot element of a forward contract and
designating as the hedging instrument only the changes in the spot element, and
changes in the value of the foreign currency basis spread of a financial instrument
when excluding it from the designation of that financial instrument as the hedging
instrument (see IFRS 9);

(i) Insurance finance income and expenses from contracts issued within the scope
of IFRS 17 Insurance Contracts excluded from profit or loss when total insurance
finance income or expenses is disaggregated to include in profit or loss an amount
determined by a systematic allocation applying paragraph 88(b) of IFRS 17, or by
an amount that eliminates accounting mismatches with the finance income or
expenses arising on the underlying items, applying paragraph 89(b) of IFRS 17; and
(j) Finance income and expenses from reinsurance contracts held excluded from
profit or loss when total reinsurance finance income or expenses is disaggregated to
include in profit or loss an amount determined by a systematic allocation applying
paragraph 88(b) of IFRS 17.

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 Owners are holders of instruments classified as equity. Profit or loss is the total
of income less expenses, excluding the components of other comprehensive income.

Reclassification adjustments are amounts reclassified to profit or loss in the

current period that were recognized in other comprehensive income in the current or
previous periods.

Total comprehensive income is the change in equity during a period resulting

from transactions and other events, other than those changes resulting from
transactions with owners in their capacity as owners.

Total comprehensive income comprises all components of ‘profit or loss’ and of

‘other comprehensive income’.

Although this Standard uses the terms ‘other comprehensive income’, ‘profit or
loss’ and ‘total comprehensive income’, an entity may use other terms to describe
the totals as long as the meaning is clear. For example, an entity may use the term
‘net income’ to describe profit or loss.

The following terms are described in IAS 32 Financial Instruments: Presentation and
are used in this Standard with the meaning specified in IAS 32:

(a) Puttable financial instrument classified as an equity instrument (IAS 32)

(b) An instrument that imposes on the entity an obligation to deliver to another party
a pro rata shares of the net assets of the entity only on liquidation and is classified as
an equity instrument (IAS 32).

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2.4 Financial statements:

2.4.1 Purpose of financial statements:

Financial statements are a structured representation of the financial position and

financial performance of an entity.

The objective of financial statements is to provide information about the financial

position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions. Financial statements also show the
results of the management’s stewardship of the resources entrusted to it. To meet
this objective, financial statements provide information about an entity’s:

(a) Assets;

(B) Liabilities;

(C) Equity;

(d) Income and expenses, including gains and losses;

(e) Contributions by and distributions to owners in their capacity as owners.

(f) Cash Flows.

This information, along with other information in the notes, assists users of
financial statements in predicting the entity’s future cash flows and, in particular,
their timing and certainty.

2.4.2 Complete set of financial statements:

A complete set of financial statements comprises.

(a) A statement of financial position as at the end of the period.

(b) A statement of profit or loss and other comprehensive income for the period;

(c) A statement of changes in equity for the period.

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(d) A statement of cash flows for the period.

(e) Notes, comprising material accounting policy information and other explanatory
information.

(ea.) Comparative information in respect of the preceding period as specified in

paragraphs 38 and 38A.

(f) A statement of financial position as at the beginning of the preceding period when
an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its
financial statements in accordance with paragraphs 40A–40D.

An entity may use titles for the statements other than those used in this Standard.
For example, an entity may use the title ‘statement of comprehensive income’
instead of ‘statement of profit or loss and other comprehensive income’.

An entity may present a single statement of profit or loss and other

comprehensive income, with profit or loss and other comprehensive income
presented in two sections. The sections shall be presented together, with the profit
or loss section presented first followed directly by the other comprehensive income
section.

An entity may present the profit or loss section in a separate statement of profit
or loss. If so, the separate statement of profit or loss shall immediately precede the
statement presenting comprehensive income, which shall begin with profit or loss.

An entity shall present with equal prominence all of the financial statements in
a complete set of financial statements.

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 Many entities present, outside the financial statements, a financial review by
management that describes and explains the main features of the entity’s financial
performance and financial position, and the principal uncertainties it faces. Such a
report may include a review of:

(a) The main factors and influences determining financial performance, including
changes in the environment in which the entity operates, the entity’s response to
those changes and their effect, and the entity’s policy for investment to maintain and
enhance financial performance, including its dividend policy;

(b) The entity’s sources of funding and its targeted ratio of liabilities to equity; and
(c) The entity’s resources not recognized in the statement of financial position in
accordance with IFRSs.

Many entities also present, outside the financial statements, reports and
statements such as environmental reports and value added statements, particularly in
industries in which environmental factors are significant and when employees are
regarded as an important user group. Reports and statements presented outside
financial statements are outside the scope of IFRSs.

2.4.3 General features:

Fair presentation and compliance with IFRSs:

Financial statements shall present fairly the financial position, financial

performance and cash flows of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income
and expenses set out in the Conceptual Framework for Financial Reporting
(Conceptual Framework). The application of IFRSs, with additional disclosure when

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necessary, is presumed to result in financial statements that achieve a fair
presentation.

An entity whose financial statements comply with IFRSs shall make an explicit
and unreserved statement of such compliance in the notes. An entity shall not
describe financial statements as complying with IFRSs unless they comply with all
the requirements of IFRSs.

In virtually all circumstances, an entity achieves a fair presentation by

compliance with applicable IFRSs. A fair presentation also requires an entity:

(a) To select and apply accounting policies in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of
authoritative guidance that management considers in the absence of an IFRS that
specifically applies to an item.

(b) To present information, including accounting policies, in a manner that provides

relevant, reliable, comparable and understandable information.

(c) To provide additional disclosures when compliance with the specific

requirements in IFRSs is insufficient to enable users to understand the impact of
particular transactions, other events and conditions on the entity’s financial position
and financial performance.

An entity cannot rectify inappropriate accounting policies either by disclosure of

the accounting policies used or by notes or explanatory material.

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 In the extremely rare circumstances in which management concludes that
compliance with a requirement in an IFRS would be so misleading that it would
conflict with the objective of financial statements set out in the Conceptual
Framework, the entity shall depart from that requirement in the manner set out in
paragraph 20 if the relevant regulatory framework requires, or otherwise does not
prohibit, such a departure.

When an entity departs from a requirement of an IFRS in accordance with

paragraph 19, it shall disclose:

(a) That management has concluded that the financial statements present fairly the
entity’s financial position, financial performance and cash flows;

(b) That it has complied with applicable IFRSs, except that it has departed from a
particular requirement to achieve a fair presentation;

(c) The title of the IFRS from which the entity has departed, the nature of the
departure, including the treatment that the IFRS would require, the reason why that
treatment would be so misleading in the circumstances that it would conflict with
the objective of financial statements set out in the Conceptual Framework, and the
treatment adopted; and

(d) For each period presented, the financial effect of the departure on each item in
the financial statements that would have been reported in complying with the
requirement.

When an entity has departed from a requirement of an IFRS in a prior period, and
that departure affects the amounts recognized in the financial statements for the
current period, it shall make the disclosures set out in paragraph 20(c) and (d).

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 In the extremely rare circumstances in which management concludes that
compliance with a requirement in an IFRS would be so misleading that it would
conflict with the objective of financial statements set out in the Conceptual
Framework, but the relevant regulatory framework prohibits departure from the
requirement, the entity shall, to the maximum extent possible, reduce the perceived
misleading aspects of compliance by disclosing:

(a) The title of the IFRS in question, the nature of the requirement, and the reason
why management has concluded that complying with that requirement is so
misleading in the circumstances that it conflicts with the objective of financial
statements set out in the Conceptual Framework; and

(b) For each period presented, the adjustments to each item in the financial
statements that management has concluded would be necessary to achieve a fair
presentation.

For the purpose of paragraphs 19–23, an item of information would conflict with
the objective of financial statements when it does not represent faithfully the
transactions, other events and conditions that it either purports to represent or could
reasonably be expected to represent and, consequently, it would be likely to
influence economic decisions made by users of financial statements. When assessing
whether complying with a specific requirement in an IFRS would be so misleading
that it would conflict with the objective of financial statements set out in the
Conceptual Framework, management considers:

(a) Why the objective of financial statements is not achieved in the particular
circumstances.

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(b) How the entity’s circumstances differ from those of other entities that comply
with the requirement. If other entities in similar circumstances comply with the
requirement, there is a rebuttable presumption that the entity’s compliance with the
requirement would not be so misleading that it would conflict with the objective of
financial statements set out in the Conceptual Framework.

Going concern:

When preparing financial statements, management shall make an assessment of

an entity’s ability to continue as a going concern. An entity shall prepare financial
statements on a going concern basis unless management either intends to liquidate
the entity or to cease trading, or has no realistic alternative but to do so. When
management is aware, in making its assessment, of material uncertainties related to
events or conditions that may cast significant doubt upon the entity’s ability to
continue as a going concern, the entity shall disclose those uncertainties. When an
entity does not prepare financial statements on a going concern basis, it shall disclose
that fact, together with the basis on which it prepared the financial statements and
the reason why the entity is not regarded as a going concern.

In assessing whether the going concern assumption is appropriate, management

takes into account all available information about the future, which is at least, but is
not limited to, twelve months from the end of the reporting period. The degree of
consideration depends on the facts in each case. When an entity has a history of
profitable operations and ready access to financial resources, the entity may reach a
conclusion that the going concern basis of accounting is appropriate without detailed
analysis. In other cases, management may need to consider a wide range of factors
relating to current and expected profitability, debt repayment schedules and potential
sources of replacement financing before it can satisfy itself that the going concern
basis is appropriate.

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Accrual basis of accounting:

An entity shall prepare its financial statements, except for cash flow information,
using the accrual basis of accounting.

When the accrual basis of accounting is used, an entity recognizes items as

assets, liabilities, equity, income and expenses (the elements of financial statements)
when they satisfy the definitions and recognition criteria for those elements in the
Conceptual Framework.

Materiality and aggregation:

An entity shall present separately each material class of similar items. An entity
shall present separately items of a dissimilar nature or function unless they are
immaterial.

Financial statements result from processing large numbers of transactions or

other events that are aggregated into classes according to their nature or function.
The final stage in the process of aggregation and classification is the presentation of
condensed and classified data, which form line items in the financial statements. If
a line item is not individually material, it is aggregated with other items either in
those statements or in the notes. An item that is not sufficiently material to warrant
separate presentation in those statements may warrant separate presentation in the
notes.

When applying this and other IFRSs an entity shall decide, taking into
consideration all relevant facts and circumstances, how it aggregates information in
the financial statements, which include the notes. An entity shall not reduce the
understandability of its financial statements by obscuring material information with
immaterial information or by aggregating material items that have different natures
or functions.

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 Some IFRSs specify information that is required to be included in the financial
statements, which include the notes. An entity need not provide a specific disclosure
required by an IFRS if the information resulting from that disclosure is not material.
This is the case even if the IFRS contains a list of specific requirements or describes
them as minimum requirements. An entity shall also consider whether to provide
additional disclosures when compliance with the specific requirements in IFRS is
insufficient to enable users of financial statements to understand the impact of
particular transactions, other events and conditions on the entity’s financial position
and financial performance.

Offsetting:

An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an IFRS.

An entity reports separately both assets and liabilities, and income and expenses.
Offsetting in the statement(s) of profit or loss and other comprehensive income or
financial position, except when offsetting reflects the substance of the transaction or
other event, detracts from the ability of users both to understand the transactions,
other events and conditions that have occurred and to assess the entity’s future cash
flows. Measuring assets net of valuation allowances—for example, obsolescence
allowances on inventories and doubtful debts allowances on receivables—is not
offsetting.

IFRS 15 Revenue from Contracts with Customers requires an entity to measure

revenue from contracts with customers at the amount of consideration to which the
entity expects to be entitled in exchange for transferring promised goods or services.
For example, the amount of revenue recognized reflects any trade discounts and
volume rebates the entity allows.

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 An entity undertakes, in the course of its ordinary activities, other transactions
that do not generate revenue but are incidental to the main revenue-generating
activities. An entity presents the results of such transactions, when this presentation
reflects the substance of the transaction or other event, by netting any income with
related expenses arising on the same transaction. For example:

(a) An entity presents gains and losses on the disposal of non-current assets,
including investments and operating assets, by deducting from the amount of
consideration on disposal the carrying amount of the asset and related selling
expenses; and

(b) An entity may net expenditure related to a provision that is recognized in

accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets
and reimbursed under a contractual arrangement with a third party (for example, a
supplier’s warranty agreement) against the related reimbursement.

Frequency of reporting:

An entity shall present a complete set of financial statements (including

comparative information) at least annually. When an entity changes the end of its
reporting period and presents financial statements for a period longer or shorter than
one year, an entity shall disclose, in addition to the period covered by the financial
statements:

(a) The reason for using a longer or shorter period.

(b) The fact that amounts presented in the financial statements are not entirely
comparable.

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 Normally, an entity consistently prepares financial statements for a one-year
period. However, for practical reasons, some entities prefer to report, for example,
for a 52-week period. This Standard does not preclude this practice.

Comparative information:

Minimum comparative information Except when IFRSs permit or require

otherwise, an entity shall present comparative information in respect of the
preceding period for all amounts reported in the current period’s financial
statements. An entity shall include comparative information for narrative and
descriptive information if it is relevant to understanding the current period’s
financial statements.

An entity shall present, as a minimum, two statements of financial position, two

statements of profit or loss and other comprehensive income, two separate
statements of profit or loss (if presented), two statements of cash flows and two
statements of changes in equity, and related notes.

In some cases, narrative information provided in the financial statements for the
preceding period(s) continues to be relevant in the current period. For example, an
entity discloses in the current period details of a legal dispute, the outcome of which
was uncertain at the end of the preceding period and is yet to be resolved. Users may
benefit from the disclosure of information that the uncertainty existed at the end of
the preceding period and from the disclosure of information about the steps that have
been taken during the period to resolve the uncertainty.

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Additional comparative information:

An entity may present comparative information in addition to the minimum

comparative financial statements required by IFRSs, as long as that information is
prepared in accordance with IFRSs. This comparative information may consist of
one or more statements referred to in paragraph 10, but need not comprise a complete
set of financial statements. When this is the case, the entity shall present related note
information for those additional statements.

For example, an entity may present a third statement of profit or loss and other
comprehensive income (thereby presenting the current period, the preceding period
and one additional comparative period). However, the entity is not required to
present a third statement of financial position, a third statement of cash flows or a
third statement of changes in equity (ie an additional financial statement
comparative). The entity is required to present, in the notes to the financial
statements, the comparative information related to that additional statement of profit
or loss and other comprehensive income.

Change in accounting policy, retrospective restatement or reclassification

An entity shall present a third statement of financial position as at the beginning

of the preceding period in addition to the minimum comparative financial statements
required in paragraph 38A if:

(a) It applies an accounting policy retrospectively, makes a retrospective

restatement of items in its financial statements or reclassifies items in its financial
statements.

(b) The retrospective application, retrospective restatement or the reclassification

has a material effect on the information in the statement of financial position at the
beginning of the preceding period.

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 In the circumstances described in paragraph 40A, an entity shall present three
statements of financial position as at:

(a) The end of the current period.

(b) The end of the preceding period.

(c) The beginning of the preceding period.

When an entity is required to present an additional statement of financial position

in accordance with paragraph 40A, it must disclose the information required by
paragraphs 41–44 and IAS 8. However, it need not present the related notes to the
opening statement of financial position as at the beginning of the preceding period.

The date of that opening statement of financial position shall be as at the

beginning of the preceding period regardless of whether an entity’s financial
statements present comparative information for earlier periods.

If an entity changes the presentation or classification of items in its financial

statements, it shall reclassify comparative amounts unless reclassification is
impracticable. When an entity reclassifies comparative amounts, it shall disclose
(including as at the beginning of the preceding period):

(a) The nature of the reclassification;

(b) The amount of each item or class of items that is reclassified; and

(c) The reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall

disclose:

(a) The reason for not reclassifying the amounts, and

(b) The nature of the adjustments that would have been made if the amounts had
been reclassified.
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 Enhancing the inter-period comparability of information assists users in making
economic decisions, especially by allowing the assessment of trends in financial
information for predictive purposes. In some circumstances, it is impracticable to
reclassify comparative information for a particular prior period to achieve
comparability with the current period. For example, an entity may not have collected
data in the prior period(s) in a way that allows reclassification, and it may be
impracticable to recreate the information.

IAS 8 sets out the adjustments to comparative information required when an

entity changes an accounting policy or corrects an error.

Consistency of presentation:

An entity shall retain the presentation and classification of items in the financial
statements from one period to the next unless:

(a) It is apparent, following a significant change in the nature of the entity’s

operations or a review of its financial statements, that another presentation or
classification would be more appropriate having regard to the criteria for the
selection and application of accounting policies in IAS 8; or

(b) An IFRS requires a change in presentation.

For example, a significant acquisition or disposal, or a review of the presentation

of the financial statements, might suggest that the financial statements need to be
presented differently. An entity changes the presentation of its financial statements
only if the changed presentation provides information that is reliable and more
relevant to users of the financial statements and the revised structure is likely to
continue, so that comparability is not impaired. When making such changes in
presentation, an entity reclassifies its comparative information.

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Structure and content:

This Standard requires particular disclosures in the statement of financial position

or the statement(s) of profit or loss and other comprehensive income, or in the
statement of changes in equity and requires disclosure of other line items either in
those statements or in the notes. IAS 7 Statement of Cash Flows sets out
requirements for the presentation of cash flow information.

This Standard sometimes uses the term ‘disclosure’ in a broad sense,

encompassing items presented in the financial statements. Disclosures are also
required by other IFRSs. Unless specified to the contrary elsewhere in this Standard
or in another IFRS, such disclosures may be made in the financial statements.
Identification of the financial statements:

An entity shall clearly identify the financial statements and distinguish them
from other information in the same published document.

IFRSs apply only to financial statements, and not necessarily to other information
presented in an annual report, a regulatory filing, or another document. Therefore, it
is important that users can distinguish information that is prepared using IFRSs from
other information that may be useful to users but is not the subject of those
requirements.

An entity shall clearly identify each financial statement and the notes. In
addition, an entity shall display the following information prominently, and repeat it
when necessary for the information presented to be understandable:

(a) The name of the reporting entity or other means of identification, and any change
in that information from the end of the preceding reporting period.

(b) Whether the financial statements are of an individual entity or a group of entities;

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(c) The date of the end of the reporting period or the period covered by the set of
financial statements or notes.

(d) The presentation currency, as defined in IAS 21.

(e) The level of rounding used in presenting amounts in the financial statements.

An entity meets the requirements in paragraph 51 by presenting appropriate

headings for pages, statements, notes, columns and the like. Judgement is required
in determining the best way of presenting such information. For example, when an
entity presents the financial statements electronically, separate pages are not always
used; an entity then presents the above items to ensure that the information included
in the financial statements can be understood.

An entity often makes financial statements more understandable by presenting

information in thousands or millions of units of the presentation currency. This is
acceptable as long as the entity discloses the level of rounding and does not omit
material information.

Statement of financial position:

Information to be presented in the statement of financial position:

The statement of financial position shall include line items that present the
following amounts:

(a) Property, plant and equipment.

(b) Investment property.

(c) Intangible assets.

(d) financial assets (excluding amounts shown under (e), (h) and (i));

(da) Portfolios of contracts within the scope of IFRS 17 that are assets, disaggregated
as required by paragraph 78 of IFRS 17.

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(e) Investments accounted for using the equity method.

(f) Biological assets within the scope of IAS 41 Agriculture.

(g) Inventories; (h)trade and other receivables.

(i) Cash and cash equivalents.

(j) The total of assets classified as held for sale and assets included in disposal
groups classified as held for sale in accordance with IFRS 5 Non-current Assets Held
for Sale and Discontinued Operations.

(k) Trade and other payables.

(l) Provisions.

(m) Financial liabilities (excluding amounts shown under (k) and (l)).

(ma) Portfolios of contracts within the scope of IFRS 17 that are liabilities.
disaggregated as required by paragraph 78 of IFRS 17.

(n) Liabilities and assets for current tax, as defined in IAS 12 Income Taxes.

(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12.

(p) Liabilities included in disposal groups classified as held for sale in accordance
with IFRS 5.

(q) Non-controlling interests, presented within equity.

(r) Issued capital and reserves attributable to owners of the parent.

An entity shall present additional line items (including by disaggregating the line
items listed in paragraph 54), headings and subtotals in the statement of financial
position when such presentation is relevant to an understanding of the entity’s
financial position.

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When an entity presents subtotals in accordance with paragraph 55, those subtotals shall:

(a) Be comprised of line items made up of amounts recognized and measured in

accordance with IFRS.

(b) Be presented and labelled in a manner that makes the line items that constitute
the subtotal clear and understandable.

(c) Be consistent from period to period, in accordance with paragraph 45.

(d) Not be displayed with more prominence than the subtotals and totals required in
IFRS for the statement of financial position.

When an entity presents current and non-current assets, and current and non-
current liabilities, as separate classifications in its statement of financial position, it
shall not classify deferred tax assets (liabilities) as current assets (liabilities).

This Standard does not prescribe the order or format in which an entity presents
items. Paragraph 54 simply lists items that are sufficiently different in nature or
function to warrant separate presentation in the statement of financial position. In
addition:

(a) Line items are included when the size, nature or function of an item or
aggregation of similar items is such that separate presentation is relevant to an
understanding of the entity’s financial position; and

(b) The descriptions used and the ordering of items or aggregation of similar items
may be amended according to the nature of the entity and its transactions, to provide
information that is relevant to an understanding of the entity’s financial position. For
example, a financial institution may amend the above descriptions to provide
information that is relevant to the operations of a financial institution.

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 An entity makes the judgement about whether to present additional items
separately on the basis of an assessment of:

(a) The nature and liquidity of assets.

(b) The function of assets within the entity.
(c) The amounts, nature and timing of liabilities.

The use of different measurement bases for different classes of assets suggests
that their nature or function differs and, therefore, that an entity presents them as
separate line items.

For example, different classes of property, plant and equipment can be carried
at cost or at revalued amounts in accordance with IAS 16.

Current/non-current distinction:

An entity shall present current and non-current assets, and current and non-
current liabilities, as separate classifications in its statement of financial position in
accordance with paragraphs 66–76B except when a presentation based on liquidity
provides information that is reliable and more relevant. When that exception
applies, an entity shall present all assets and liabilities in order of liquidity.

Whichever method of presentation is adopted, an entity shall disclose the

amount expected to be recovered or settled after more than twelve months for each
asset and liability line item that combines amounts expected to be recovered or
settled:

(a) No more than twelve months after the reporting period.

(b) More than twelve months after the reporting period.

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 When an entity supplies goods or services within a clearly identifiable operating
cycle, separate classification of current and non-current assets and liabilities in the
statement of financial position provides useful information by distinguishing the net
assets that are continuously circulating as working capital from those used in the
entity’s long-term operations. It also highlights assets that are expected to be
realized within the current operating cycle, and liabilities that are due for settlement
within the same period.

For some entities, such as financial institutions, a presentation of assets and

liabilities in increasing or decreasing order of liquidity provides information that is
reliable and more relevant than a current/non-current presentation because the entity
does not supply goods or services within a clearly identifiable operating cycle.

In applying paragraph 60, an entity is permitted to present some of its assets and
liabilities using a current/non-current classification and others in order of liquidity
when this provides information that is reliable and more relevant. The need for a
mixed basis of presentation might arise when an entity has diverse operations.

Information about expected dates of realization of assets and liabilities is useful

in assessing the liquidity and solvency of an entity. IFRS 7 Financial Instruments:
Disclosures requires disclosure of the maturity dates of financial assets and financial
liabilities. Financial assets include trade and other receivables, and financial
liabilities include trade and other payables. Information on the expected date of
recovery of non-monetary assets such as inventories and expected date of settlement
for liabilities such as provisions is also useful, whether assets and liabilities are
classified as current or as non-current. For example, an entity discloses the amount
of inventories that are expected to be recovered more than twelve months after the
reporting period.

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Current assets:

An entity shall classify an asset as current when:

(a) It expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle.

(b) It holds the asset primarily for the purpose of trading.

(c) It expects to realize the asset within twelve months after the reporting period.

(d) The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve monts
after the reporting period.

An entity shall classify all other assets as non-current.

This Standard uses the term ‘non-current’ to include tangible, intangible and
financial assets of a long-term nature. It does not prohibit the use of alternative
descriptions as long as the meaning is clear.

The operating cycle of an entity is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents. When the entity’s
normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
Current assets include assets (such as inventories and trade receivables) that are
sold, consumed or realized as part of the normal operating cycle even when they are
not expected to be realized within twelve months after the reporting period. Current
assets also include assets held primarily for the purpose of trading (examples
include some financial assets that meet the definition of held for trading in IFRS 9)
and the current portion of non-current financial assets.

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 Current liabilities:

An entity shall classify a liability as current when:

(a) It expects to settle the liability in its normal operating cycle.

(b) It holds the liability primarily for the purpose of trading.

(c) The liability is due to be settled within twelve months after the reporting period.

(d) It does not have the right at the end of the reporting period to defer settlement
of the liability for at least twelve months after the reporting period.

An entity shall classify all other liabilities as non-current.

Normal operating cycle:

Some current liabilities, such as trade payables and some accruals for employee
and other operating costs, are part of the working capital used in the entity’s normal
operating cycle. An entity classifies such operating items as current liabilities even
if they are due to be settled more than twelve months after the reporting period. The
same normal operating cycle applies to the classification of an entity’s assets and
liabilities. When the entity’s normal operating cycle is not clearly identifiable, it is
assumed to be twelve months.

Held primarily for the purpose of trading or due to be settled within twelve months:

Other current liabilities are not settled as part of the normal operating cycle, but
are due for settlement within twelve months after the reporting period or held
primarily for the purpose of trading. Examples are some financial liabilities that
meet the definition of held for trading in IFRS 9, bank overdrafts, and the current
portion of non-current financial liabilities, dividends payable, income taxes and
other non-trade payables. Financial liabilities that provide financing on a long-term
basis (ie are not part of the working capital used in the entity’s normal operating

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cycle) and are not due for settlement within twelve months after the reporting period
are noncurrent liabilities.

An entity classifies its financial liabilities as current when they are due to be
settled within twelve months after the reporting period, even if:

(a) The original term was for a period longer than twelve months.

(b) An agreement to refinance, or to reschedule payments, on a long-term basis is

completed after the reporting period and before the financial statements are
authorized for issue.

Right to defer settlement for at least twelve months (paragraph 69(d))

An entity’s right to defer settlement of a liability for at least twelve months after
the reporting period must have substance and, must exist at the end of the reporting
period.

An entity’s right to defer settlement of a liability arising from a loan

arrangement for at least twelve months after the reporting period may be subject to
the entity complying with conditions specified in that loan arrangement (hereafter
referred to as ‘covenants’). For the purposes of applying paragraph 69(d), such
covenants:

(a) Affect whether that right exists at the end of the reporting period, if an entity is
required to comply with the covenant on or before the end of the reporting
period. Such a covenant affects whether the right exists at the end of the
reporting period even if compliance with the covenant is assessed only after the
reporting period (for example, a covenant based on the entity’s financial
position at the end of the reporting period but assessed for compliance only after
the reporting period).

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 (b) Do not affect whether that right exists at the end of the reporting period if an
entity is required to comply with the covenant only after the reporting period
(for example, a covenant based on the entity’s financial position six months
after the end of the reporting period).

If an entity has the right, at the end of the reporting period, to roll over an
obligation for at least twelve months after the reporting period under an existing loan
facility, it classifies the obligation as non-current, even if it would otherwise be due
within a shorter period. If the entity has no such right, the entity does not consider
the potential to refinance the obligation and classifies the obligation as current.

When an entity breaches a covenant of a long-term loan arrangement on or before

the end of the reporting period with the effect that the liability becomes payable on
demand, it classifies the liability as current, even if the lender agreed, after the
reporting period and before the authorization of the financial statements for issue,
not to demand payment as a consequence of the breach. An entity classifies the
liability as current because, at the end of the reporting period, it does not have the
right to defer its settlement for at least twelve months after that date.

However, an entity classifies the liability as non-current if the lender agreed by

the end of the reporting period to provide a period of grace ending at least twelve
months after the reporting period, within which the entity can rectify the breach and
during which the lender cannot demand immediate repayment.

Classification of a liability is unaffected by the likelihood that the entity will

exercise its right to defer settlement of the liability for at least twelve months after
the reporting period. If a liability meets the criteria in paragraph 69 for classification
as non-current, it is classified as non-current even if management intends or expects
the entity to settle the liability within twelve months after the reporting period, or

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even if the entity settles the liability between the end of the reporting period and the
date the financial statements are authorized for issue.

However, in either of those circumstances, the entity may need to disclose

information about the timing of settlement to enable users of its financial statements
to understand the impact of the liability on the entity’s financial position.

If the following events occur between the end of the reporting period and the date
the financial statements are authorized for issue, those events are disclosed as non-
adjusting events in accordance with IAS 10 Events after the Reporting Period:

(a) Refinancing on a long-term basis of a liability classified as current.

(b) Rectification of a breach of a long-term loan arrangement classified as current.

(c) The granting by the lender of a period of grace to rectify a breach of a long-term
loan arrangement classified as current.

(d) settlement of a liability classified as non-current.

an entity might classify liabilities arising from loan arrangements as non-current

when the entity’s right to defer settlement of those liabilities is subject to the entity
complying with covenants within twelve months after the reporting period. In such
situations, the entity shall disclose information in the notes that enables users of
financial statements to understand the risk that the liabilities could become repayable
within twelve months after the reporting period, including:

(a) Information about the covenants (including the nature of the covenants and
when the entity is required to comply with them) and the carrying amount of
related liabilities.

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(b) Facts and circumstances, if any, that indicate the entity may have difficulty
complying with the covenants—for example, the entity having acted during or after
the reporting period to avoid or mitigate a potential breach. Such facts and
circumstances could also include the fact that the entity would not have complied
with the covenants if they were to be assessed for compliance based on the entity’s
circumstances at the end of the reporting period.

Settlement:

For the purpose of classifying a liability as current or non-current, settlement

refers to a transfer to the counterparty that results in the extinguishment of the
liability. The transfer could be of:

(a) Cash or other economic resources—for example, goods or services.

(b) The entity’s own equity instruments.

Terms of a liability that could, at the option of the counterparty, result in its
settlement by the transfer of the entity’s own equity instruments do not affect its
classification as current or non-current if, applying IAS 32 Financial Instruments:
Presentation, the entity classifies the option as an equity instrument, recognizing it
separately from the liability as an equity component of a compound financial
instrument.

Information to be presented either in the statement of financial position or in the

notes:

An entity shall disclose, either in the statement of financial position or in the

notes, further sub classifications of the line items presented, classified in a manner
appropriate to the entity’s operations.

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 The detail provided in sub classifications depends on the requirements of IFRSs
and on the size, nature and function of the amounts involved. An entity also uses the
factors set out in paragraph 58 to decide the basis of sub classification.

The disclosures vary for each item, for example:

(a) Items of property, plant and equipment are disaggregated into classes in
accordance with IAS 16.

(b) Receivables are disaggregated into amounts receivable from trade customers,
receivables from related parties, prepayments and other amounts.

(c) Inventories are disaggregated, in accordance with IAS 2 Inventories, into

classifications such as merchandise, production supplies, materials, work in progress
and finished goods.

(d) Provisions are disaggregated into provisions for employee benefits and other
items.

(e) Equity capital and reserves are disaggregated into various classes, such as paid-
in capital, share premium and reserves.

An entity shall disclose the following, either in the statement of financial position
or the statement of changes in equity, or in the notes:

(a) For each class of share capital:

(i) The number of shares authorized.

(ii) The number of shares issued and fully paid, and issued but not fully paid.

(iii) Par value per share, or that the shares have no par value.

(iv) A reconciliation of the number of shares outstanding at the beginning and at

the end of the period.

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(v) The rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital.
(vi) Shares in the entity held by the entity or by its subsidiaries or associates.
(vii) Shares reserved for issue under options and contracts for the sale of shares,
including terms and amounts.
(c) A description of the nature and purpose of each reserve within equity.

An entity without share capital, such as a partnership or trust, shall disclose

information equivalent to that required by paragraph 79(a), showing changes
during the period in each category of equity interest, and the rights, preferences and
restrictions attaching to each category of equity interest.

If an entity has reclassified:

(a) A puttable financial instrument classified as an equity instrument.

(b) An instrument that imposes on the entity an obligation to deliver to another

party a pro rata shares of the net assets of the entity only on liquidation and is
classified as an equity instrument between financial liabilities and equity, it shall
disclose the amount reclassified into and out of each category (financial liabilities
or equity), and the timing and reason for that reclassification.

Statement of profit or loss and other comprehensive income:

The statement of profit or loss and other comprehensive income (statement of

comprehensive income) shall present, in addition to the profit or loss and other
comprehensive income sections:

(a) Profit or loss.

(b) Total other comprehensive income.

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(c) Comprehensive income for the period, being the total of profit or loss and other
comprehensive income.

If an entity presents a separate statement of profit or loss it does not present, the
profit or loss section in the statement presenting comprehensive income.

An entity shall present the following items, in addition to the profit or loss and
other comprehensive income sections, as allocation of profit or loss and other
comprehensive income for the period:

(a) Profit or loss for the period attributable to:

(i) Non-controlling interests, and

(ii) Owners of the parent.

(b) Comprehensive income for the period attributable to:

(i) Non-controlling interests, and

(ii) Owners of the parent.

If an entity presents profit or loss in a separate statement it shall present (a) in

that statement.

Information to be presented in the profit or loss section or the statement of profit

or loss:

In addition to items required by other IFRSs, the profit or loss section or the
statement of profit or loss shall include line items that present the following
amounts for the period:

(a) Revenue, presenting separately.

(i) Interest revenue calculated using the effective interest method.

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(ii) Insurance revenue (see IFRS 17); (aa) gains and losses arising from the de
recognition of financial assets measured at amortized cost.

(ab) Insurance service expenses from contracts issued within the scope of IFRS 17.

(ac)Income or expenses from reinsurance contracts held (see IFRS 17).

(b) finance costs.

(ba) Impairment losses (including reversals of impairment losses or impairment

gains) determined in accordance with Section 5.5 of IFRS 9; (bb) insurance finance
income or expenses from contracts issued within the scope of IFRS 17.

(bc) Finance income or expenses from reinsurance contracts held (see IFRS 17).

(d) Share of the profit or loss of associates and joint ventures accounted for using
the equity method.

(ca) If a financial asset is reclassified out of the amortized cost measurement

category so that it is measured at fair value through profit or loss, any gain or loss
arising from a difference between the previous amortized cost of the financial asset
and its fair value at the reclassification date (as defined in IFRS 9).

(cb) If a financial asset is reclassified out of the fair value through other
comprehensive income measurement category so that it is measured at fair value
through profit or loss, any cumulative gain or loss previously recognized in other
comprehensive income that is reclassified to profit or loss; (d)tax expense.

(ea) A single amount for the total of discontinued operations (see IFRS 5).

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Information to be presented in the other comprehensive income section:

The other comprehensive income section shall present line items for the
amounts for the period of:

(a) Items of other comprehensive income (excluding amounts in paragraph (b),

classified by nature and grouped into those that, in accordance with other IFRSs:

(i) Will not be reclassified subsequently to profit or loss; and

(ii) Will be reclassified subsequently to profit or loss when specific conditions are
met.

(b) The share of the other comprehensive income of associates and joint ventures
accounted for using the equity method, separated into the share of items that, in
accordance with other IFRSs:

(i) Will not be reclassified subsequently to profit or loss; and

(ii) Will be reclassified subsequently to profit or loss when specific conditions are
met.

An entity shall present additional line items, headings and subtotals in the
statement(s) presenting profit or loss and other comprehensive income when such
presentation is relevant to an understanding of the entity’s financial performance.

When an entity presents subtotals in accordance with paragraph 85, those

subtotals shall:

(a) Be comprised of line items made up of amounts recognized and measured in

accordance with IFRS;

(b) Be presented and labelled in a manner that makes the line items that constitute
the subtotal clear and understandable;

(c) Be consistent from period to period, in accordance with paragraph 45; and
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(d) Not be displayed with more prominence than the subtotals and totals required
in IFRS for the statement(s) presenting profit or loss and other comprehensive
income.

An entity shall present the line items in the statement(s) presenting profit or loss
and other comprehensive income that reconcile any subtotals presented in
accordance with paragraph 85 with the subtotals or totals required in IFRS for such
statement(s).

Because the effects of an entity’s various activities, transactions and other

events differ in frequency, potential for gain or loss and predictability, disclosing
the components of financial performance assists users in understanding the
financial performance achieved and in making projections of future financial
performance.

An entity includes additional line items in the statement(s) presenting profit or

loss and other comprehensive income and it amends the descriptions used and the
ordering of items when this is necessary to explain the elements of financial
performance. An entity considers factors including materiality and the nature and
function of the items of income and expense. For example, a financial institution
may amend the descriptions to provide information that is relevant to the operations
of a financial institution. An entity does not offset income and expense items unless
the criteria in paragraph 32 are met.

An entity shall not present any items of income or expense as extraordinary

items, in the statement(s) presenting profit or loss and other comprehensive income
or in the notes.

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Profit or loss for the period:

An entity shall recognize all items of income and expense in a period in profit
or loss unless an IFRS requires or permits otherwise.

Some IFRSs specify circumstances when an entity recognizes particular items

outside profit or loss in the current period. IAS 8 specifies two such circumstances:
the correction of errors and the effect of changes in accounting policies. Other
IFRSs require or permit components of other comprehensive income that meet the
Conceptual Framework’s definition of income or expense to be excluded from
profit or loss.

Other comprehensive income for the period:

An entity shall disclose the amount of income tax relating to each item of other
comprehensive income, including reclassification adjustments, either in the
statement of profit or loss and other comprehensive income or in the notes. An
entity may present items of other comprehensive income either:

(a) Net of related tax effects, or

(b) Before related tax effects with one amount shown for the aggregate amount of
income tax relating to those items.

If an entity elects alternative (b), it shall allocate the tax between the items that
might be reclassified subsequently to the profit or loss section and those that will
not be reclassified subsequently to the profit or loss section.

An entity shall disclose reclassification adjustments relating to components of

other comprehensive income.

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 Other IFRSs specify whether and when amounts previously recognized in other
comprehensive income are reclassified to profit or loss. Such reclassifications are
referred to in this Standard as reclassification adjustments.

A reclassification adjustment is included with the related component of other

comprehensive income in the period that the adjustment is reclassified to profit or
loss. These amounts may have been recognized in other comprehensive income as
unrealized gains in the current or previous periods. Those unrealized gains must be
deducted from other comprehensive income in the period in which the realized
gains are reclassified to profit or loss to avoid including them in total
comprehensive income twice.

An entity may present reclassification adjustments in the statement(s) of profit

or loss and other comprehensive income or in the notes. An entity presenting
reclassification adjustments in the notes presents the items of other comprehensive
income after any related reclassification adjustments.

Reclassification adjustments arise, for example, on disposal of a foreign

operation (see IAS 21) and when some hedged forecast cash flows affect profit or
loss (see paragraph 6.5.11(d) of IFRS 9 in relation to cash flow hedges).

Reclassification adjustments do not arise on changes in revaluation surplus

recognized in accordance with IAS 16 or IAS 38 or on remeasurements of defined
benefit plans recognized in accordance with IAS 19. These components are
recognized in other comprehensive income and are not reclassified to profit or loss
in subsequent periods. Changes in revaluation surplus may be transferred to
retained earnings in subsequent periods as the asset is used or when it is
derecognized (see IAS 16 and IAS 38).

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 In accordance with IFRS 9, reclassification adjustments do not arise if a cash
flow hedge or the accounting for the time value of an option (or the forward element
of a forward contract or the foreign currency basis spread of a financial instrument)
result in amounts that are removed from the cash flow hedge reserve or a separate
component of equity, respectively, and included directly in the initial cost or other
carrying amount of an asset or a liability. These amounts are directly transferred to
assets or liabilities.

Information to be presented in the statement(s) of profit or loss and other

comprehensive income or in the notes:

When items of income or expense are material, an entity shall disclose their
nature and amount separately. Circumstances that would give rise to the separate
disclosure of items of income and expense include:

(a)Write-downs of inventories to net realizable value or of property, plant and

equipment to recoverable amount, as well as reversals of such write-downs.

(b) Restructurings of the activities of an entity and reversals of any provisions for
the costs of restructuring.

(c) Disposals of items of property, plant and equipment.

(d) Disposals of investments.

(e) Discontinued operations.

(f) Litigation settlements.

(g) Other reversals of provisions.

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 An entity shall present an analysis of expenses recognized in profit or loss using
a classification based on either their nature or their function within the entity,
whichever provides information that is reliable and more relevant. Entities are
encouraged to present the analysis in paragraph 99 in the statement(s) presenting
profit or loss and other comprehensive income.

Expenses are sub classified to highlight components of financial performance

that may differ in terms of frequency, potential for gain or loss and predictability.
This analysis is provided in one of two forms.

The first form of analysis is the ‘nature of expense’ method. An entity

aggregates expenses within profit or loss according to their nature (for example,
depreciation, purchases of materials, transport costs, employee benefits and
advertising costs), and does not reallocate them among functions within the entity.
This method may be simple to apply because no allocations of expenses to
functional classifications are necessary. An example of a classification using the
nature of expense method is as follows:

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Revenue ××

Other income ××

Changes in inventories of finished goods and work in progress ××

Raw materials and consumables used ××

Employee benefits expense ××

Depreciation and amortization expense ××

Other expenses ××

Total expenses (××)

Profit before tax ××

The second form of analysis is the ‘function of expense’ or ‘cost of sales’

method and classifies expenses according to their function as part of cost of sales
or, for example, the costs of distribution or administrative activities. At a minimum,
an entity discloses its cost of sales under this method separately from other
expenses. This method can provide more relevant information to users than the
classification of expenses by nature, but allocating costs to functions may require
arbitrary allocations and involve considerable judgement. An example of a
classification using the function of expense method is as follows:

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Revenue ××

Cost of sales (××)

Gross profit ××

Other income ××

Distribution costs (××)

Administrative expenses (××)

Other expenses (××)

Profit before tax ××

An entity classifying expenses by function shall disclose additional information

on the nature of expenses, including depreciation and amortization expense and
employee benefits expense.

The choice between the function of expense method and the nature of expense
method depends on historical and industry factors and the nature of the entity. Both
methods provide an indication of those costs that might vary, directly or indirectly,
with the level of sales or production of the entity. Because each method of
presentation has merit for different types of entities, this Standard requires
management to select the presentation that is reliable and more relevant. However,
because information on the nature of expenses is useful in predicting future cash
flows, additional disclosure is required when the function of expense classification
is used. In paragraph 104, ‘employee benefits’ has the same meaning as in IAS 19.

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Statement of changes in equity:

Information to be presented in the statement of changes in equity:

The statement of changes in equity includes the following information:

(a) Total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling interests;

(b) For each component of equity, the effects of retrospective application or

retrospective restatement recognized in accordance with IAS 8; and

(c) For each component of equity, a reconciliation between the carrying amount at
the beginning and the end of the period, separately (as a minimum) disclosing
changes resulting from:

(i) Profit or loss;

(ii) Other comprehensive income; and

(iii) Transactions with owners in their capacity as owners, showing separately

contributions by and distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control.

Information to be presented in the statement of changes in equity or in the notes:

For each component of equity an entity shall present, either in the statement of
changes in equity or in the notes, an analysis of other comprehensive income by
item (see paragraph 106(d)(ii)). An entity shall present, either in the statement of
changes in equity or in the notes, the amount of dividends recognised as
distributions to owners during the period, and the related amount of dividends per
share.

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 In paragraph 106, the components of equity include, for example, each class of
contributed equity, the accumulated balance of each class of other comprehensive
income and retained earnings.

Changes in an entity’s equity between the beginning and the end of the
reporting period reflect the increase or decrease in its net assets during the period.
Except for changes resulting from transactions with owners in their capacity as
owners (such as equity contributions, reacquisitions of the entity’s own equity
instruments and dividends) and transaction costs directly related to such
transactions, the overall change in equity during a period represents the total
amount of income and expense, including gains and losses, generated by the
entity’s activities during that period.

IAS 8 requires retrospective adjustments to effect changes in accounting

policies, to the extent practicable, except when the transition provisions in another
IFRS require otherwise. IAS 8 also requires restatements to correct errors to be
made retrospectively, to the extent practicable. Retrospective adjustments and
retrospective restatements are not changes in equity but they are adjustments to the
opening balance of retained earnings, except when an IFRS requires retrospective
adjustment of another component of equity. Paragraph 106(b) requires disclosure
in the statement of changes in equity of the total adjustment to each component of
equity resulting from changes in accounting policies and, separately, from
corrections of errors. These adjustments are disclosed for each prior period and the
beginning of the period.

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Statement of cash flows:

Cash flow information provides users of financial statements with a basis to

assess the ability of the entity to generate cash and cash equivalents and the needs
of the entity to utilize those cash flows. IAS 7 sets out requirements for the
presentation and disclosure of cash flow information.

The notes shall:

(a) Present information about the basis of preparation of the financial statements
and the specific accounting policies used in accordance with paragraphs 117–124.
(b) Disclose the information required by IFRSs that is not presented elsewhere in
the financial statements.

(c) Provide information that is not presented elsewhere in the financial statements,
but is relevant to an understanding of any of them.

An entity shall, as far as practicable, present notes in a systematic manner. In

determining a systematic manner, the entity shall consider the effect on the
understandability and comparability of its financial statements.

An entity shall cross-reference each item in the statements of financial position

and in the statement(s) of profit or loss and other comprehensive income, and in
the statements of changes in equity and of cash flows to any related information in
the notes. Examples of systematic ordering or grouping of the notes include:

(a) Giving prominence to the areas of its activities that the entity considers to be
most relevant to an understanding of its financial performance and financial
position, such as grouping together information about particular operating
activities.

(b) Grouping together information about items measured similarly such as assets
measured at fair value.
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(c) Following the order of the line items in the statement(s) of profit or loss and
other comprehensive income and the statement of financial position, such as:

(i) Statement of compliance with IFRS.

(ii) Material accounting policy information.

(iii) Supporting information for items presented in the statements of financial

position and in the statement(s) of profit or loss and other comprehensive income,
and in the statements of changes in equity and of cash flows, in the order in which
each statement and each line item is presented; and

(iv) Other disclosures, including:

(1) Contingent liabilities (see IAS 37) and unrecognized contractual commitments.
(2) Non-financial disclosures, eg the entity’s financial risk management objectives
and policies (see IFRS 7).

An entity may present notes providing information about the basis of preparation
of the financial statements and specific accounting policies as a separate section of
the financial statements.

Disclosure of accounting policy information:

An entity shall disclose material accounting policy information. Accounting

policy information is material if, when considered together with other information
included in an entity’s financial statements, it can reasonably be expected to
influence decisions that the primary users of general purpose financial statements
make on the basis of those financial statements.

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 Accounting policy information that relates to immaterial transactions, other
events or conditions is immaterial and need not be disclosed. Accounting policy
information may nevertheless be material because of the nature of the related
transactions, other events or conditions, even if the amounts are immaterial.
However, not all accounting policy information relating to material transactions,
other events or conditions is itself material.

Accounting policy information is expected to be material if users of an entity’s

financial statements would need it to understand other material information in the
financial statements. For example, an entity is likely to consider accounting policy
information material to its financial statements if that information relates to
material transactions, other events or conditions and:

(a) The entity changed its accounting policy during the reporting period and this
change resulted in a material change to the information in the financial statements.
(b) The entity chose the accounting policy from one or more options permitted by
IFRSs—such a situation could arise if the entity chose to measure investment
property at historical cost rather than fair value.

(c) The accounting policy was developed in accordance with IAS 8 in the absence
of an IFRS that specifically applies.

(d) The accounting policy relates to an area for which an entity is required to make
significant judgements or assumptions in applying an accounting policy, and the
entity discloses those judgements or assumptions in accordance with paragraphs
122 and 125.

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(e) The accounting required for them is complex and users of the entity’s financial
statements would otherwise not understand those material transactions, other
events or conditions—such a situation could arise if an entity applies more than
one IFRS to a class of material transactions.

requirements of the IFRSs to its own circumstances provides entity-specific

information that is more useful to users of financial statements than standardized
information, or information that only duplicates or summarizes the requirements of
the IFRSs.

If an entity discloses immaterial accounting policy information, such

information shall not obscure material accounting policy information.

An entity’s conclusion that accounting policy information is immaterial does

not affect the related disclosure requirements set out in other IFRSs.

An entity shall disclose, along with material accounting policy information or

other notes, the judgements, apart from those involving estimations (see paragraph
125), that management has made in the process of applying the entity’s accounting
policies and that have the most significant effect on the amounts recognized in the
financial statements.

In the process of applying the entity’s accounting policies, management makes

various judgements, apart from those involving estimations, that can significantly
affect the amounts it recognizes in the financial statements. For example,
management makes judgements in determining:

(a) When substantially all the significant risks and rewards of ownership of
financial assets and, for lessors, assets subject to leases are transferred to other
entities.

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(b) Whether, in substance, particular sales of goods are financing arrangements and
therefore do not give rise to revenue.

(c) Whether the contractual terms of a financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest on the principal
amount outstanding.

Some of the disclosures made in accordance with paragraph 122 are required by
other IFRSs. For example, IFRS 12 Disclosure of Interests in Other Entities
requires an entity to disclose the judgements it has made in determining whether it
controls another entity. IAS 40 Investment Property requires disclosure of the
criteria developed by the entity to distinguish investment property from owner-
occupied property and from property held for sale in the ordinary course of
business, when classification of the property is difficult.

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 Chapter Three

Financial Statements as a components of accounting report

Financial statements refer to reports prepared to evaluate the performance,
financial health and the liquidity position of the business. Financial statements are
prepared using the transactions accounted in the books of the account. In simple
words, all the accounting data is consolidated into a financial statement in a manner
which is generally accepted and understood.

The date of that opening statement of financial position shall be as at the

beginning of the preceding period regardless of whether an entity’s financial
statements present comparative information for earlier periods.

If an entity changes the presentation or classification of items in its financial

statements, it shall reclassify comparative amounts unless reclassification is
impracticable. When an entity reclassifies comparative amounts, it shall disclose
(including as at the beginning of the preceding period):

(a) The nature of the reclassification;

(b) The amount of each item or class of items that is reclassified; and

(c) The reason for the reclassification.

When it is impracticable to reclassify comparative amounts, an entity shall

disclose:

(a) The reason for not reclassifying the amounts.

(b) The nature of the adjustments that would have been made if the amounts had
been reclassified.

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 Enhancing the inter-period comparability of information assists users in making
economic decisions, especially by allowing the assessment of trends in financial
information for predictive purposes. In some circumstances, it is impracticable to
reclassify comparative information for a particular prior period to achieve
comparability with the current period. For example, an entity may not have collected
data in the prior period(s) in a way that allows reclassification, and it may be
impracticable to recreate the information. IAS 8 sets out the adjustments to
comparative information required when an entity changes an accounting policy or
corrects an error.

Consistency of presentation:

An entity shall retain the presentation and classification of items in the financial
statements from one period to the next unless:

(a) It is apparent, following a significant change in the nature of the entity’s

operations or a review of its financial statements, that another presentation or
classification would be more appropriate having regard to the criteria for the
selection and application of accounting policies in IAS 8; or

(b) An IFRS requires a change in presentation.

For example, a significant acquisition or disposal, or a review of the presentation

of the financial statements, might suggest that the financial statements need to be
presented differently. An entity changes the presentation of its financial statements
only if the changed presentation provides information that is reliable and more
relevant to users of the financial statements and the revised structure is likely to
continue, so that comparability is not impaired. When making such changes in
presentation.

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 Traditionally, financial statements were prepared annually i.e. after the closure
of the accounting period. With modern-day business operations and requirements,
the business owners depend on the financial statements for decisions making. As a
result, businesses prepare financial statement monthly, quarterly and half-yearly as
well. The insights from the financial statements are reliable and help business
owners to make confident decisions.

In the present chapter, you will a study about the final accounts with adjustments.
After studying this unit, you will be able to understand the trading and profit & loss
account, balance sheet and key adjustments related to them. Every organization
prepares its final accounts after a particular period to know its financial results and
financial position. Final accounts mean profit & loss account and the balance sheet.
Profit & loss account also contains one more account, known as trading account, and
if the business is manufacturing any item or article, then Manufacturing account is
also there. All these accounts are prepared only after preparing trial balance.

3.1 Objectives of Preparing Financial Statements:

There are two objectives of preparing Final accounts:

- Know the operational results profit or loss during a particular period through
the profit & loss account which is also known as income statement.
- Ascertain the financial position of the business on a particular date through
the balance sheet, also known as financial position statement.

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3.2 Users of Financial Statements:

There are two types of persons interested in financial statements are:

3.2.1 Internal Users of Financial Statements: Users within the organization such
as:

♦ Marketing managers, production supervisors, finance directors and company

officers.

♦ Management is interested to take important decisions relating to fixing up the

selling prices and making future policies.

♦ Questions asked by internal users – What is the cost of manufacturing each unit of
product? Which product is the most profitable?

3.2.2 External users of Financial Statements: users who are outside the
organization such as:

Shareholders.

Investors (owners).

Creditors (suppliers and bankers).

Government.

External users may ask: How does the company compare in size and
profitability with competitors? Will the company be able to pay its debts as they
come due?

Shareholders: are very much interested in the financial statements. They are very
much interested in the welfare of the business. They can know the operational results
through such financial statements and the financial position of the business along
with the earning capacity of the business.

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 Investors: They are interested to know the earning capacity of business which
can be known through financial statements. They can also know the financial
soundness of the business through financial statements.

Creditors, Lenders of Money: The creditors and lenders of money etc. can also
know the financial soundness through financial statement. They have to see two
things are:

- Regularity of income.
- Solvency of the business so that their investment is risk free.

Government: Government is interested to formulate laws to regulate business

activities and also law relating to taxation etc. Financial statements help while
computing National Income statistics.

3.3 Types of Financial Statements:

The four main types of financial statements are:

 Income statement & Comprehensive Income statement.

 Financial Position Statement (Balance Sheet).

 Cash flow statement.

 Owner's equity statement.

3.3.1 Income Statement:

An income statement is one of the important financial statements of your business

that showcases the profit earned or losses incurred by your business during an
accounting period.

Thus, an income statement, also known as the trading and P&L account or
Revenue and Expense Summary, reveals the performance of your business entity for
a specific accounting period.
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 The profits earned or losses incurred by your business are assessed by subtracting
operating and non-operating expenses from the revenues generated by your business.

Accordingly, such a statement showcases your company’s revenues, costs, gross

profit, selling, and administrative expenses, other income and expenses, taxes, and
net profit in a standardized format.

Thus, an income statement basically summarizes revenues, expenses, gains, and

losses incurred by your business. Now, the income statement begins with the sales
generated by your business and moves down to determine the net profit earned or
net loss incurred by your business.

3.3.1.1 Purpose and Uses of Income Statement:

Income Statement provides the basis for measuring performance of an entity over
the course of an accounting period. Performance can be accessed from the income
statement in terms of the following:

 Change in sales revenue over the period and in comparison to industry.

 Change in gross profit margin, operating profit margin and net profit margin
over the period.

 Increase or decrease in net profit, operating profit and gross profit over the
period.

 Comparison of the entity’s profitability with other organizations operating in

similar industries or sectors.

 Income statement also forms the basis of important financial evaluation of an

entity when it is analyzed in conjunction with information contained in other
financial statements such as:

 Change in earnings per share over the period.

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  Analysis of working capital in comparison to similar income statement
elements.

3.3.1.2 Accounting Principles related income statement:

Accounting principles are the building blocks for GAAP. All of the concepts
and standards in GAAP can be traced back to the underlying accounting principles.
Some accounting principles come from long-used accounting practices where as
others come from ruling making bodies like the FASB.

It’s important to have a basic understanding of these main accounting principles as

you learn accounting. This isn’t just memorizing some accounting information for a
test and then forgetting it two days later. These principles show up all over the place
in the study of accounting. Trust me. After you know the basic accounting principles,
most accounting topics will make more sense. You will be able to reference these
principles and reason your way through revenue, expense, and any other
combination of problems later on in the study course.

The following are the most important Accounting Principles related income
statement:

 Revenue Recognition Principle: Revenue Recognition Principle – requires

companies to record revenue when it is earned instead of when it is collected.
This accrual basis of accounting gives a more accurate picture of financial
events during the period.

 Matching Principle: Matching Principle – states that all expenses must be

matched and recorded with their respective revenues in the period that they
were incurred instead of when they are paid. This principle works with the
revenue recognition principle ensuring all revenue and expenses are recorded
on the accrual basis.

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  Conservatism Principle: Conservatism Principle – accountants should always
error on the most conservative side possible in any situation. This prevents
accountants from over estimating future revenues and underestimated future
expenses that could mislead financial statement users.

 Consistency Principle: Consistency Principle – all accounting principles and

assumptions should be applied consistently from one period to the next. This
ensures that financial statements are comparable between periods and
throughout the company’s history.

3.3.1.3 Components of Income Statement:

Income statement comprises of the following main elements:

Revenue/ Sales Revenue:

Revenue includes income earned from the principal activities of an entity. So for
example, in case of a manufacturer of electronic appliances, revenue will comprise
of the sales from electronic appliance business. Conversely, if the same
manufacturer earns interest on its bank account, it shall not be classified as revenue
but as other income.

Cost of Sales /Cost of Goods Sold:

Cost of sales represents the cost of goods sold or services rendered during an
accounting period. Hence, for a retailer, cost of sales will be the sum of inventory at
the start of the period and purchases during the period minus any closing inventory.

In case of a manufacturer however, cost of sales will also include production costs
incurred in the manufacture of goods during a period such as the cost of direct labor,
direct material consumption, depreciation of plant and machinery and factory
overheads, etc.

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You may refer to the article on cost of sales for an explanation of its calculation.

Other revenues:

Other revenues consist of revenue earned from activities that are not related to
the entity’s main business. For example, other income of an entity that manufactures
electronic appliances may include:

 Gain on disposal of fixed assets.

 Interest income on bank deposits.

 Exchange gain on translation of a foreign currency bank account.

Distribution Cost:

Distribution cost includes expenses incurred in delivering goods from the business
premises to customers.

Administrative Expenses:

Administrative expenses generally comprise of costs relating to the management and

support functions within an organization that are not directly involved in the
production and supply of goods and services offered by the entity.

Examples of administrative expenses include:

 Salary cost of executive management.

 Legal and professional charges.

 Depreciation of head office building.

 Rent expense of offices used for administration and management purposes.

Other Expenses:

This is essentially a residual category in which any expenses that are not suitably
classifiable elsewhere are included.
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Finance Charges:

Finance charges usually comprise of interest expense on loans and debentures.

The effect of present value adjustments of discounted provisions are also included
in finance charges (e.g. unwinding of discount on provision for decommissioning
cost).

Income tax:

Income tax expense recognized during a period is generally comprised of the

following three elements:

 Current period’s estimated tax charge.

 Prior period tax adjustments.

 Deferred tax expense.

Prior Period Comparatives:

Prior period financial information is presented alongside current period’s financial

results to facilitate comparison of performance over a period.

It is therefore important that prior period comparative figures presented in the

income statement relate to a similar period.

For example, if an organization is preparing income statement for the six months
ending 31 December 2013, comparative figures of prior period should relate to the
six months ending 31 December 2012.

3.3.1.4 Example of Income Statement:

The Following is an illustrative example of an Income Statement prepared in

accordance with the format prescribed by IAS.

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Net sales

- Cost of goods sold

= gross income

- Operational expenses:
* selling & marketing expenses
* General expenses

= operational income

+ other revenues

- Other expenses

= net income

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 Net sales: The price of goods sold or services rendered during the accounting
period.
 Net sales = sales – (sales returns + sales discount).
 Costs of goods sold (COGS): The cost of component parts of what it takes to
make whatever it is a business sells.
 Cogs = [B. inventory + net purchasing (purchasing + purchasing expenses –
purchasing discount – purchasing returns) –E.inventory].
 Gross profit: Total revenue less COGS.
 Operating income: Gross profit less operating expenses.
 Operational expenses: includes:
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 a. Selling expenses such as: Salaries of sales men, sales transportation
expenses, advertising expenses.
b. General expenses: such as: salaries, rent, deprecation, ……
 Other expenses: interest expenses (debt), capital losses, …….
 Other revenue: interest expenses (credit), capital gains, revenues of
securities……………
 Income before taxes: Operating income less non-operating expenses
 Net income: Income before taxes less taxes.
 Earnings per share (EPS): Division of net income by the total number of
outstanding shares.
 Depreciation: The extent to which assets have lost value over time.
 EBITDA: Earnings before interest, depreciation, taxes, and amortization.

3.3.2 Comprehensive Income Statement:

Through the separation of ownership from management, the asymmetry of

information is inherent in the contemporary capital market and is because one of the
parties, management, is privileged in terms of information in relation to the other
party, the owner(s) of the capital. The reporting, both financial and non-financial, is
a key tool for eliminating information asymmetry.

The financial statements provide information on the achievements of the

company, its financial position and changes in its financial position. Non-financial
statements, in turn, create the information background to better understand the
financial statements. Financial statements are useful if they fulfil qualitative
characteristics, which include among others, comparability and understandability.
The use of International Accounting Standards / International Financial Reporting
Standards (IAS/IFRS) by companies involves a certain discretion in presenting
information in the financial statements.

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 The various forms of presenting information in the financial statements may in
turn affect the comparability of these reports. Therefore, research on the practical
use of the IFRS reporting guidelines seems valuable. Particularly strong research
potential seems to be in the presentation of components of other comprehensive
income by listed companies.

Comprehensive income is a determinant of a new economic era in which the

financial market is the dominant force.” The purpose of this study was to identify
the reporting practices of Polish and German companies in presenting the
components of other comprehensive income in their statements of changes in equity.
The content presented in this article was developed using studies of domestic and
foreign literature. The induction method was applied in the research process. The
survey examined the consolidated financial statements of the companies belonging
to the WIG 30 and DAX indices. To analyses the results of the study, the structure
similarity index was used.

3.3.2.1 Concept of Comprehensive Income:

Comprehensive income is “a company performance measure concept connected

with viewing profit as an increase in the health of the company’s owners.”

Comprehensive income is a change in equity that took place during the period as
a result of transactions and other events, other than those changes resulting from
transactions with owners in their capacity as shareholders. Comprehensive income
includes all components of the income statement (profit and loss account) and other
comprehensive income. It is therefore the sum of the traditional net income and the
capital income (associated with the capital gains and losses) recognized in equity,
bypassing the profit and loss account.

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 Entities applying IAS/IFRS are required to present in their financial statements
the components of other comprehensive income related in particular to: a) Changes
in revaluation surplus; b) Actuarial gains and losses on defined benefit plans; c)
Gains and losses arising from translating the financial statements of a foreign
operation; d) Gains and losses from investments in equity instruments measured at
fair value through other comprehensive income; e) Effective portion of gains and
losses in hedging instruments in a cash flow hedge; f) For particular liabilities
designated as at fair value through profit or loss, the amount of the change in fair
value that is attributable to changes in the liability’s credit risk. It should be noted
that an entity presents all items of income and expense recognized in a period in
a single statement of comprehensive income or in two statements: a statement
displaying components of profit or loss and a second statement beginning with profit
or loss and displaying components of other comprehensive income.

3.3.2.2 Elements of a Comprehensive Income Statement:

1.Income: Increased economic profits during the accounting period in the form of
increased assets or decreased debt resulting in an increase in capital, in addition to
related contributions from shareholders.

2. Expenses: A decrease in economic profits during the accounting period in the

form of a decrease or disposal of assets or an increase in debt resulting in a decrease
in capital, in addition to being related to contributions from shareholders.

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Total comprehensive profit and loss is divided into the following.

1. "Profit and loss" component Profit and loss is total revenue minus expenses, which
is not included in other components of comprehensive income.

2. "Other comprehensive income" component Other comprehensive income contains

items of income and expenses that are not recognized in profit and loss, as required
by other IFRS.

3.3.2.3 Other components of comprehensive income include the following.

1. Changes in the revaluation surplus of fixed assets and intangible assets.

Revaluation surplus is the difference between the revaluation value and the carrying
value of fixed tapes and intangible assets measured using a revaluation model.

2. Actuarial advantages and disadvantages over recognized defined benefit

programs. It consists of: Adjustment due to differences between actuarial
assumptions and reality, and Impact of changes in actuarial assumptions.

3. Profits and losses arising from the elaboration of the financial statements of
foreign entities.

4. Gains and losses from re-measuring financial assets categorized as available for
sale. These gains and losses are derived from unrealized gains and losses in the form
of the difference between the carrying value of financial assets available for sale and
their fair value at the financial reporting date.

5. Effective share of profits and losses of hedging instruments in the framework of

hedging cash flows.

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 The presentation of income and expenses in the comprehensive income statement
can be done by the company in several ways to provide relevant information for
users of financial statements. The Company may make changes to the terms used
and changes in the order of the items if this is necessary to explain financial
performance. For example, grouping by posts related to the company's main
operating activities with those derived from non-recurring activities. It is necessary
for readers of financial statements to assess the company's ability to generate flows
in which the future differs between elements derived from ordinary activities that
are commonly carried out by the company on a daily basis as the main operating
activity, and elements derived from activities that do not occur regularly.

3.3.2.4 Comprehensive Income Statement Format:

The Company may choose to present a comprehensive income statement in one

period in the form of one report (single form), namely a comprehensive income
statement or in the form of two reports (double form), consisting of separate income
and a comprehensive income statement starting with the current period's profit and
loss.

1.Comprehensive income statement of single form; In PSAK 1 (Revised 2009) the

Presentation of Financial Statements is regulated regarding the minimum items that
must be presented in the comprehensive income statement of single form, namely:

Revenue; Financial costs; The profit and loss portion of an associated or venture
entity recorded using the equity method; Tax burden; Profit and loss; Other
components of comprehensive income classified by nature; Another share of
comprehensive income of associated and venture entities recorded by the equity
method; Total comprehensive profit and loss.

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2. Double-form comprehensive income statement; If the company chooses to use the
dual-form report format, then the company prepares two reports. The first report is
the income statement for the current period and the second report is comprehensive
income which contains the current period's profit and loss and other comprehensive
income. The second report begins with the loss figure for the current period. The
minimum items that flows are presented in a separate income statement when using
a dual form format, namely: Revenue; Funding fees; The share of profit or loss from
associated and venture entities using the equity method; Tax burden; The amount of
after-tax profit and loss from discontinued operations and after-tax profit losses from
disposal of assets in the framework of discontinued operations; Profit and loss.

The Following is an illustrative example of a Comprehensive Income Statement

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3.3.3 Statement of Financial Position (Balance Sheet):

Statement of Financial Position, also known as the Balance Sheet, presents the
financial position of an entity at a given date.

A balance sheet is a financial document designed to communicate exactly how

much a company or organization is worth—its so-called “book value.” The balance
sheet achieves this by listing out and tallying up all of a company’s assets, liabilities,
and owners’ equity as of a particular date, also known as the “reporting date."

3.3.3.1 The Purpose of the Balance Sheet:

A balance sheet provides a summary of a business at a given point in time. It’s a

snapshot of a company’s financial position, as broken down into assets, liabilities,
and equity. Balance sheets serve two very different purposes depending on the
audience reviewing them.

When a balance sheet is reviewed internally by a business leader, key stakeholder,

or employee, it’s designed to give insight into whether a company is succeeding or
failing. Based on this information, an internal audience can shift their policies and
approach: doubling down on successes, correcting failures, and pivoting toward new
opportunities.

When a balance sheet is reviewed externally by someone interested in a company,

it’s designed to give insight into what resources are available to a business and how
they were financed. Based on this information, potential investors can decide
whether it would be wise to invest in a company. Similarly, it’s possible to leverage
the information in a balance sheet to calculate important metrics, such as liquidity,
profitability, and debt-to-equity ratio.

External auditors, on the other hand, might use a balance sheet to ensure a
company is complying with any reporting laws it’s subject to.

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3.3.3.2 Accounting Principles related to balance sheet:

 Historical Cost Principle: requires companies to record the purchase of

goods, services, or capital assets at the price they paid for them. Assets are
then remaining on the balance sheet at their historical without being adjusted
for fluctuations in market value.

 Full Disclosure Principle: requires that any knowledge that would materially
affect a financial statement user’s decision about the company must be
disclosed in the footnotes of the financial statements. This prevents companies
from hiding material facts about accounting practices or known contingencies
in the future.

3.3.3.3 Components of Statement of Financial Position (Balance Sheet):

It is comprised of the following three elements:

Assets:

An asset is defined as anything that is owned by a company and holds inherent,

quantifiable value. A business could, if necessary, convert an asset into cash through
a process known as liquidation. Assets are typically tallied as positives (+) in a
balance sheet and broken down into two further categories: current assets and
noncurrent assets.

Current assets: typically include anything a company expects it will convert into
cash within a year, such as:

 Cash and cash equivalents.

 Prepaid expenses.
 Inventory
 Marketable securities.
 Accounts receivable.
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 Noncurrent assets: typically include long-term investments that aren’t expected
to be converted into cash in the short term, such as:

 Land.
 Patents.
 Trademarks.
 Brands.
 Goodwill.
 Intellectual property.
 Equipment used to produce goods or perform services.

Because companies invest in assets to fulfill their mission, you must develop
an intuitive understanding of what they are. Without this knowledge, it can be
challenging to understand the balance sheet and other financial documents that speak
to a company’s health.

Liabilities:

A liability is the opposite of an asset. While an asset is something a company

owns, a liability is something it owes. Liabilities are financial and legal obligations
to pay an amount of money to a debtor, which is why they’re typically tallied as
negatives (-) in a balance sheet.

Just as assets are categorized as current or noncurrent, liabilities are categorized

as current liabilities or noncurrent liabilities.

Current liabilities:

Typically refer to any liability due to the debtor within one year, which may include:

 Payroll expenses.
 Rent payments.
 Utility payments.
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  Debt financing.
 Accounts payable
 Other accrued expenses.

Noncurrent liabilities:

Typically refer to any long-term obligations or debts which will not be due within
one year, which might include:

 Leases.
 Loans.
 Bonds payable.
 Provisions for pensions.
 Deferred tax liabilities.

Liabilities may also include an obligation to provide goods or services in the

future.

Owners’ Equity:

Owners’ equity, also known as shareholders' equity, typically refers to anything

that belongs to the owners of a business after any liabilities are accounted for.

If you were to add up all of the resources a business owns (the assets) and subtract
all of the claims from third parties (the liabilities), the residual leftover is the owners’
equity.

Owners’ equity typically includes two key elements. The first is money, which is
contributed to the business in the form of an investment in exchange for some degree
of ownership (typically represented by shares). The second is earnings that the
company generates over time and retains.

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3.3.3.4 Example of statement of financial position:

Statement of Financial Position at 31 December

Non-Current Assets

Property, plant and equipment 12,320

Right-of-use assets * 4,314

Intangible assets 368,712

Financial assets 1,033,795

Deferred tax assets 114,046

Total Non-current assets 1,533,187

Current assets

Receivables 38,442

Cash and cash equivalents 220,850

Total Current assets 259,292

Total assets 1,792,479

Owners' Equity

Issued and paid capital 600,000

Retained earnings (28,444)

Total Owners Equity 628,444

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Non-current liabilities

Borrowings 123,160

Total Non-current liabilities 123,160

Current liabilities

Lease liabilities 1,683

Other liabilities 1,024,480

Total Current liabilities 1,026,163

Total liabilities 1,149,323

Total Owners Equity & liabilities 1,792,479

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- 151 -
3.3.4 Statement of Cash Flows:

Statement of Cash Flows presents the movement in cash flows over the period as
classified under operating, investing and financing activities.

The purpose of a cash flow statement is to provide a detailed picture of what

happened to a business’s cash during a specified period, known as the accounting
period. It demonstrates an organization’s ability to operate in the short and long term,
based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

 Operating activities.
 Investing activities.
 Financing activities

3.3.4.1 Operating Activities:

Cash flow from operating activities presents the movement in cash during an
accounting period from the primary revenue generating activities of the entity.

For example, operating activities of a hotel will include cash inflows and outflows
from the hotel business (e.g receipts from sales revenue, salaries paid during the
year, but interest income on a bank deposit shall not be classified as such (the hotel’s
interest income shall be presented in investing activities).

Profit before tax as presented in the income statement could be used as a starting
point to calculate the cash flows from operating activities.

Following adjustments are required to be made to the profit before tax to arrive at
the cash flow from operations:

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 - Elimination of non-cash expenses (e.g. depreciation, amortization,
impairment losses, bad debts written off, etc.).
- Removal of expenses to be classified elsewhere in the cash flow statement
(e.g. interest expense should be classified under financing activities).
- Elimination of non-cash income (e.g. gain on revaluation of investments).
- Removal of income to be presented elsewhere in the cash flow statement (e.g.
dividend income and interest income should be classified under investing
activities unless in case of for example an investment bank).
- Working capital changes (e.g. an increase in trade receivables must be
deducted to arrive at sales revenue that actually resulted in cash inflow during
the period).

3.3.4.2 Investing Activities:

Cash flow from investing activities includes the movement in cash flow as a
result of the purchase and sale of assets other than those which the entity primarily
trades in (e.g. inventory). So for example, in case of a manufacturer of cars, proceeds
from the sale of factory plant shall be classified as cash flow from investing activities
whereas the cash inflow from the sale of cars shall be presented under the operating
activities.

Cash flow from investing activities consists primarily of the following:

 Cash outflow expended on the purchase of investments and fixed assets.

 Cash inflow from income from investments.

 Cash inflow from disposal of investments and fixed assets.

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3.3.4.3 Financing activities:

Cash flow from financing activities includes the movement in cash flow resulting
from the following:

 Proceeds from issuance of share capital, debentures & bank loans.

 Cash outflow expended on the cost of finance (i.e. dividends and interest
expense).

 Cash outflow on the repurchase of share capital and repayment of debentures

& loans.

3.3.4.4 Purpose and Importance of Cash Flows Statement:

Statement of cash flows provides important insights about the liquidity and solvency
of a company which are vital for survival and growth of any organization. It also
enables analysts to use the information about historic cash flows to form projections
of future cash flows of an entity (e.g. in NPV analysis) on which to base their
economic decisions. By summarizing key changes in financial position during a
period, cash flow statement serves to highlight priorities of management.

For example, increase in capital expenditure and development costs may indicate
a higher increase in future revenue streams whereas a trend of excessive investment
in short term investments may suggest lack of viable long term investment
opportunities. Furthermore, comparison of the cash flows of different entities may
better reveal the relative quality of their earnings since cash flow information is more
objective as opposed to the financial performance reflected in income statement
which is susceptible to significant variations caused by the adoption of different
accounting policies.

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 A cash flow statement tells you how much cash is entering and leaving your
business. Along with balance sheets and income statements, it’s one of the three
most important financial statements for managing your small business accounting
and making sure you have enough cash to keep operating.

First, let’s take a closer look at what cash flow statements do for your business,
and why they’re so important. Then, we’ll walk through an example cash flow
statement, and show you how to create your own using a template.

3.3.4.5 Why do you need cash flow statements?

So long as you use accrual accounting, cash flow statements are essential for three
reasons:

1. They show your liquidity that means you know exactly how much operating
cash flow you have in case you need to use it. So you know what you can
afford, and what you can’t.

2. They show you changes in assets, liabilities, and equity in the forms of cash
outflows, cash inflows, and cash being held. Those three categories are the
core of your business accounting. Together, they form the accounting
equation that lets you measure your performance.

3. They let you predict future cash flows. You can use cash flow statements to
create cash flow projections, so you can plan for how much liquidity your
business will have in the future. That’s important for making long term
business plans.

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3.3.4.6 Negative Cash Flow vs. Positive Cash Flow

When your cash flow statement shows a negative number at the bottom that
means you lost cash during the accounting period — you have negative cash flow.
It’s important to remember that, long-term, negative cash flow isn’t always a bad
thing. Some months you may spend cash in order to make money later on—by
investing in equipment, for example.

When you have a positive number at the bottom of your statement, you’ve got
positive cash flow for the month. Keep in mind, positive cash flow isn’t always a
good thing in the long term. While it gives you more liquidity now, there are negative
reasons you may have that money—for instance, by taking on a large loan to bail
out your failing business. Positive cash flow isn’t always a positive overall.

3.3.4.7 Statements of cash flow using the direct and indirect methods:

In order to figure out your company’s cash flow, you can take one of two routes:
The direct method, and the indirect method. While generally accepted accounting
principles (GAAP) approve both, the indirect method is typically preferred by small
businesses.

3.3.4.7.1 The direct method of calculating cash flow

Using the direct method, you keep a record of cash as it enters and leaves your
business, and then use that information at the end of the month to prepare a statement
of cash flow.

The direct method takes more legwork and organization than the indirect
method—you need to produce and track cash receipts for every cash transaction. For
that reason, smaller businesses typically prefer the indirect method.

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3.3.4.7.2 The indirect method of calculating cash flow

With the indirect method, you look at the transactions recorded on your income
statement, and then reverse some of them in order to see your working capital.
You’re selectively back tracking your income statement in order to eliminate
transactions that don’t show the movement of cash.

Since it’s simpler than the direct method, many small businesses prefer this
approach. Also, when using the indirect method, you do not have to go back and
reconcile your statements with the direct method.

In our examples below, we’ll use the indirect method of calculating cash flow.

How the cash flow statement works with the income statement and the balance
sheet?

You use information from your income statement and your balance sheet to create
your cash flow statement. The income statement lets you know how money entered
and left your business, while the balance sheet shows how those transactions affect
different accounts—like accounts receivable, inventory, and accounts payable.

So, the process of producing financial statements for your business goes.

Income Statement + Balance Sheet = Cash Flow Statement

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3.3.4.8 Example of a Cash Flow Statement:

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3.3.5 Statement of Changes in Equity:

Statement of Changes in Equity, often referred to as Statement of Retained

Earnings in U.S. GAAP, details the change in owners’ equity over an accounting
period by presenting the movement in reserves comprising the shareholders’ equity.

Movement in shareholders’ equity over an accounting period comprises the

following elements:

 Net profit or loss during the accounting period attributable to shareholders

 Increase or decrease in share capital reserves

 Dividend payments to shareholders

 Gains and losses recognized directly in equity

 Effect of changes in accounting policies

 Effect of correction of prior period error

3.3.5.1 Components of Statement of Changes in Equity:

Following are the main elements of statement of changes in equity:

Opening Balance:

This represents the balance of shareholders’ equity reserves at the start of the
comparative reporting period as reflected in the prior period’s statement of financial
position.

The opening balance is unadjusted in respect of the correction of prior period

errors rectified in the current period and also the effect of changes in accounting
policy implemented during the year as these are presented separately in the statement
of changes in equity (see below).

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Effect of Changes in Accounting Policies: Since changes in accounting policies are
applied retrospectively, an adjustment is required in stockholders’ reserves at the
start of the comparative reporting period to restate the opening equity to the amount
that would be arrived if the new accounting policy had always been applied

Effect of Correction of Prior Period Error:

The effect of correction of prior period errors must be presented separately in the
statement of changes in equity as an adjustment to opening reserves.

The effect of the corrections may not be netted off against the opening balance
of the equity reserves so that the amounts presented in current period statement might
be easily reconciled and traced from prior period financial statements.

Restated Balance: This represents the equity attributable to stockholders at the start
of the comparative period after the adjustments in respect of changes in accounting
policies and correction of prior period errors as explained above.

Changes in Share Capital: Issue of further share capital during the period must be
added in the statement of changes in equity whereas redemption of shares must be
deducted there from. The effects of issue and redemption of shares must be presented
separately for share capital reserve and share premium reserve.

Dividends: Dividend payments issued or announced during the period must be

deducted from shareholder equity as they represent distribution of wealth
attributable to stockholders.

Income / Loss for the period: This represents the profit or loss attributable to
shareholders during the period as reported in the income statement.

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Other Gains & Losses: Any other gains and losses not recognized in the income
statement may be presented in the statement of changes in equity such as actuarial
gains and losses arising from the application of IAS 19 Employee Benefit.

Changes in Revaluation Reserve: Revaluation gains and losses recognized during

the period must be presented in the statement of changes in equity to the extent that
they are recognized outside the income statement. Revaluation gains recognized in
income statement due to reversal of previous impairment losses however shall not
be presented separately in the statement of changes in equity as they would already
be incorporated in the profit or loss for the period.

Closing Balance: This represents the balance of shareholders’ equity reserves at the
end of the reporting period as reflected in the balance sheet.

3.3.5.2 Purpose and Importance of Statement of Changes in Equity:

Statement of changes in equity helps users of financial statement to identify the

factors that cause a change in the owners’ equity over the accounting periods.
Whereas movement in shareholder reserves can be observed from the balance sheet,
statement of changes in equity discloses significant information about equity
reserves that is not presented separately elsewhere in the financial statements which
may be useful in understanding the nature of change in equity reserves.

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3.3.5.3 Examples of Statement of Changes in Equity:

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 Chapter Four

Impairment of Assets According to IAS 36 Standard

The objective of this chapter to prescribe the procedures that an enterprise
applies to ensure that its assets are carried at no more than their recoverable amount.
An asset is carried at more than its recoverable amount.

According to Impairment of Assets standard if it's carrying amount of assets

exceeds the amount to be recovered through use or sale of the asset. If this is the
case, the asset is described as impaired and this Standard requires the enterprise to
recognize an impairment loss. This Standard also specifies when an enterprise
should reverse an impairment loss and it prescribes certain disclosures for impaired
assets.

4.1 Objective:

To prescribe the procedures that an entity applies to ensure that its assets are
carried at no more than its recoverable amount. An asset is carried at more than their
recoverable amount if its carrying amount exceeds the amount to be recovered
through use or sale of the asset. If this is the case, the asset is described as impaired
and the entity is required to recognize an impairment loss.

4.2 Scope:

This Standard shall be applied in accounting for the impairment of all assets,
other than:

(a) Inventories.

(b) Assets arising from construction contracts.

(c) Deferred tax assets.

(d) Assets arising from employee benefits.

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(e) Financial assets within the scope of IAS 39 Financial Instruments: Recognition
and Measurement.

(f) Investment property that is measured at fair value.

(g) Biological assets related to agricultural activity within the scope of IAS 41
Agriculture that are measured at fair value less costs to sell.

(h) Deferred acquisition costs, and intangible assets, arising from an insurer’s
contractual rights under insurance contracts within the scope of IFRS 4 Insurance
Contracts.

(i) Non-current assets (or disposal groups) classified as held for sale in accordance
with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
Effective Date:

An entity shall apply this Standard:

(a) To goodwill and intangible assets acquired in business combinations for which
the agreement date is on or after 31 March 2004; and

(b) To all other assets prospectively from the beginning of the first annual period
beginning on or after 31 March 2004.

4.3 Definitions:

- Recoverable amount: is the higher of an asset’s net selling price and its value in
use. On the other hand, the net selling price of asset and its value in use whichever
is higher.

- Value in use: is the present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its disposal at the end of its useful life.

OR

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Is the present value of estimated future cash flows expected to arise from the
continuing use of an asset and from its disposal at the end of its useful life, or a
reasonable estimate thereof”.

- Net selling price: is the amount obtainable from the sale of an asset in an arm’s
length transaction between knowledgeable, willing parties, less the costs of disposal.

- Costs of disposal|: are incremental costs directly attributable to the disposal of an

asset, excluding finance costs and income tax expense.

- An impairment loss: is the amount by which the carrying amount of an asset

exceeds its recoverable amount.

- Carrying amount: is the amount at which an asset is recognized in the balance

sheet after deducting any accumulated depreciation and accumulated impairment
losses thereon.

- Depreciation: is a systematic allocation of the depreciable amount of an asset over

its useful life.

- Depreciable amount: is the cost of an asset, or other amount substituted for cost in
the financial statements, less its residual value.

- Useful life: is either:

(a) The period of time over which an asset is expected to be used by the enterprise;
or

(b) The number of production or similar units expected to be obtained from the asset
by the enterprise.

- A cash generating unit: is the smallest identifiable group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows
from other assets or groups of assets.

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- Corporate assets: are assets other than goodwill that contribute to the future cash
flows of both the cash generating unit under review and other cash generating units.

- An active market: is a market where all the following conditions, exist:

(a) The items traded within the market are homogeneous;

(b) Willing buyers and sellers can normally be found at any time;

And

(c) Prices are available to the public.

4.4 Identifying an Asset that may be Impaired:

- An asset is impaired when the carrying amount of the asset exceeds its recoverable
amount.

- An enterprise should assess at each balance sheet date whether there is any
indication that an asset may be impaired. If any such indication exists, the enterprise
should estimate the recoverable amount of the asset.

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4.5 Indications that an Impairment Loss:

The following some of indications that an impairment loss may have occurred,
if any of those indications is present, an enterprise is required to make a formal
estimate of recoverable amount. If no indication of a potential impairment loss is
present, does not require an enterprise to make a formal estimate of recoverable
amount.

A. In assessing whether there is any indication that an asset may be impaired, an

enterprise should consider, as a minimum, the following indications:

4.5.1 External sources of information

(a) During the period, an asset’s market value has declined significantly more than
would be expected as a result of the passage of time or normal use;

(b) Significant changes with an adverse effect on the enterprise have taken place
during the period, or will take place in the near future, in the technological, market,
economic or legal environment in which the enterprise operates or in the market to
which an asset is dedicated;

(c) Market interest rates or other market rates of return on investments have
increased during the period, and those increases are likely to affect the discount rate
used in calculating an asset’s value in use and decrease the asset’s recoverable
amount materially;

(d) The carrying amount of the net assets of the reporting enterprise is more than its
market capitalization.

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4.5.2 Internal Sources of Information:

(a) Evidence is available of obsolescence or physical damage of an asset;

(b) Significant changes with an adverse effect on the enterprise have taken place
during the period, or are expected to take place in the near future, in the extent to
which, or manner in which, an asset is used or is expected to be used. These changes
include plans to discontinue or restructure the operation to which an asset belongs
or to dispose of an asset before the previously expected date; and

(c) Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.

9. The list of paragraph 8 is not exhaustive. An enterprise may identify other

indications that an asset may be impaired and these would also require the enterprise
to determine the asset’s recoverable amount.

10. Evidence from internal reporting that indicates that an asset may be impaired
includes the existence of:

(a) Cash flows for acquiring the asset, or subsequent cash needs for operating or
maintaining it, that are significantly higher than those originally budgeted;

(b) Actual net cash flows or operating profit or loss flowing from the assets that are
significantly worse than those budgeted;

(c) A significant decline in budgeted net cash flows or operating profit, or a

significant increase in budgeted loss, flowing from the asset;

OR

(d) Operating losses or net cash outflows for the asset, when current period figures
are aggregated with budgeted figures for the future.

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4.6 Measurement Recoverable Amount:

Recoverable amount is the higher of an asset’s net selling price and value in use.

4.6.1 Requirements for Measuring Recoverable Amount:

The following are some of requirements for Measuring Recoverable Amount,

these requirements use the term ‘an asset’ but apply equally to an individual asset or
a cash-generating unit. We can Measure Recoverable Amount of an asset according
to the following requirements:

1. It is not always necessary to determine both an asset’s net selling price and its
value in use. For example, if either of these amounts exceeds the asset’s carrying
amount, the asset is not impaired and it is not necessary to estimate the other amount.

2. It may be possible to determine net selling price, even if an asset is not traded in
an active market. However, sometimes it will not be possible to determine net selling
price because there is no basis for making a reliable estimate of the amount
obtainable from the sale of the asset in an arm’s length transaction between
knowledgeable and willing parties. In this case, the recoverable amount of the asset
may be taken to be its value in use.

3. If there is no reason to believe that an asset’s value in use materially exceeds its
net selling price, the asset’s recoverable amount may be taken to be its net selling
price. This will often be the case for an asset that is held for disposal. This is because
the value in use of an asset held for disposal will consist mainly of the net disposal
proceeds, since the future cash flows from continuing use of the asset until its
disposal are likely to be.

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4. Recoverable amount is determined for an individual asset, unless the asset does
not generate cash inflows from continuing use that are largely independent of those
from other assets or groups of assets. If this is the case, recoverable amount is
determined for the cash-generating unit to which the asset belongs, unless either:

(4.1) the asset’s net selling price is higher than its carrying amount; or

(4.2) the asset’s value in use can be estimated to be close to its net selling price and
net selling price can be determined.

5. In some cases, estimates, averages and simplified computations may provide a

reasonable approximation of the detailed computations illustrated in this Standard
for determining net selling price or value in use.

4.6.2 Measurement of Net Selling Price:

The best evidence of an asset’s net selling price is a price in a binding sale
agreement in an arm’s length transaction, adjusted for incremental costs that would
be directly attributable to the disposal of the asset.

If there is no binding sale agreement but an asset is traded in an active market,

net selling price is the asset’s market price less the costs of disposal.

The appropriate market price is usually the current bid price. When current bid
prices are unavailable, the price of the most recent transaction may provide a basis
from which to estimate net selling price, provided that there has not been a
significant change in economic circumstances between the transaction date and the
date at which the estimate is made.

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 If there is no binding sale agreement or active market for an asset, net selling
price is based on the best information available to reflect the amount that an
enterprise could obtain, at the balance sheet date, for the disposal of the asset in an
arm’s length transaction between knowledgeable, willing parties, after deducting the
costs of disposal. In determining this amount, an enterprise considers the outcome
of recent transactions for similar assets within the same industry. Net selling price
does not reflect a forced sale, unless management is compelled to sell immediately.

Costs of disposal, other than those that have already been recognized as
liabilities, are deducted in determining net selling price. Examples of such costs are
legal costs, costs of removing the asset, and direct incremental costs to bring an asset
into condition for its sale. However, termination benefits and costs associated with
reducing or reorganizing a business following the disposal of an asset are not direct
incremental costs to dispose of the asset.

Sometimes, the disposal of an asset would require the buyer to take over a
liability and only a single net selling price is available for both the asset and the
liability.

4.6.3 Measurement of Value in Use:

Estimating the value in use of an asset involves the following steps:

(a) Estimating the future cash inflows and outflows arising from
continuing use of the asset and from its ultimate disposal.
(b) Applying the appropriate discount rate to these future cash flows.

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4.6.4 Basis for Estimates of Future Cash Flows:

(a) Cash flow projections should be based on reasonable and supportable

assumptions that represent management’s best estimate of the set of economic
conditions that will exist over the remaining useful life of the asset. Greater weight
should be given to external evidence.

(b) Cash flow projections should be based on the most recent financial
budgets/forecasts that have been approved by management. Projections based on
these budgets/forecasts should cover a maximum period of five years, unless a
longer period can be justified.

(c) Cash flow projections beyond the period covered by the most recent
budgets/forecasts should be estimated by extrapolating the projections based on the
budgets/forecasts using a steady or declining growth rate for subsequent years,
unless an increasing rate can be justified. This growth rate should not exceed the
long-term average growth rate for the products, industries, or country or countries in
which the enterprise operates, or for the market in which the asset is used, unless a
higher rate can be justified.

4.6.5 Estimates of Future Cash Flows:

Estimates of future cash flows should include:

(a) Projections of cash inflows from the continuing use of the asset;

(b) Projections of cash outflows that are necessarily incurred to generate the cash
inflows from continuing use of the asset (including cash outflows to prepare the asset
for use) and that can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and

(c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the
end of its useful life.
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(d) Future cash flows should be estimated for the asset in its current condition.
Estimates of future cash flows should not include estimated future cash inflows or
outflows that are expected to arise from:

(e) A future restructuring to which an enterprise is not yet committed; or

(f) Future capital expenditure that will improve or enhance the asset in excess of its
originally assessed standard of performance.

Estimates of Future Cash Flows Should Not Include:

(a) Cash inflows or outflows from financing activities; or

(b) Income tax receipts or payments.

4.7 Requirements of Recognition and Measurement of an Impairment Loss:

The following are of requirements for recognizing and measuring impairment

losses for an individual asset.

A. If the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset should be reduced to its recoverable amount. That
reduction is an impairment loss.

B. An impairment loss should be recognized as an expense in the statement of

profit and loss immediately, unless the asset is carried at revalued amount in
accordance with another Accounting Standards.

C. An impairment loss on a revalued asset is recognized as an expense in the

statement of profit and loss. However, an impairment loss on a revalued asset is
recognized directly against any revaluation surplus for the asset to the extent that
the impairment loss does not exceed the amount held in the revaluation surplus for
that same asset.

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 D. When the amount estimated for an impairment loss is greater than the carrying
amount of the asset to which it relates, an enterprise should recognize a liability if,
and only if, that is required by another Accounting Standard.

E. the recognition of an impairment loss, the depreciation (amortization) charge

for the asset should be adjusted in future periods to allocate the asset’s revised
carrying amount, less its residual value (if any), on a systematic basis over its
remaining useful life.

F. If an impairment loss is recognized, any related deferred tax assets or liabilities

are determined under Accounting Standard (AS) 22, for Taxes on Income (see
Illustration 3 given in the Illustrations attached to the Standard).

4.8 Reversal of an Impairment Loss:

The following are some of requirements for reversing an impairment loss

recognized for an asset or a cash-generating unit in prior accounting periods. These
requirements use the term ‘an asset’ but apply equally to an asset.

A. An enterprise should assess at each balance sheet date whether there is any
indication that an impairment loss recognized for an asset in prior accounting periods
may no longer exist or may have decreased. If any such indication exists, the
enterprise should estimate the recoverable amount of that asset.

B. In assessing whether there is any indication that an impairment loss Recognized

for an asset in prior accounting periods may no longer exist or may have decreased,
an enterprise should consider, as a minimum.

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4.8.1 External sources of information:

(a) The asset’s market value has increased significantly during the period;

(b) significant changes with a favorable effect on the enterprise have taken place
during the period, or will take place in the near future, in the technological, market,
economic or legal environment in which the enterprise operates or in the market to
which the asset is dedicated;

(c) Market interest rates or other market rates of return on investments have
decreased during the period, and those decreases are likely to affect the discount rate
used in calculating the asset’s value in use and increase the asset’s recoverable
amount materially;

4.8.2 Internal sources of information:

(a) Significant changes with a favorable effect on the enterprise have taken place
during the period, or are expected to take place in the near future, in the extent to
which, or manner in which, the asset is used or is expected to be used. These changes
include capital expenditure that has been incurred during the period to improve or
enhance an asset in excess of its originally assessed standard of performance or a
commitment to discontinue or restructure the operation to which the asset belongs.

(b) Evidence is available from internal reporting that indicates that the economic
performance of the asset is, or will be, better than expected.

C. If there is an indication that an impairment loss recognized for an asset may no

longer exist or may have decreased, this may indicate that the remaining useful life,
the depreciation (amortization) method or the residual value may need to be
reviewed and adjusted in accordance with the Accounting Standard applicable to the
asset, even if no impairment loss is reversed for the asset.

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D. An impairment loss recognized for an asset in prior accounting periods should be
reversed if there has been a change in the estimates of cash inflows, cash outflows
or discount rates used to determine the asset’s recoverable amount since the last
impairment loss was recognized. If this is the case, the carrying amount of the asset
should be increased to its recoverable amount. That increase is a reversal of
impairment.

E. A reversal of an impairment loss reflects an increase in the estimated service

potential of an asset, either from use or sale, since the date when an enterprise last
recognized an impairment loss for that asset. An enterprise is required to identify the
change in estimates that causes the increase in estimated service potential. Examples
of changes in estimates include:

(1) A change in the basis for recoverable amount (i.e., whether recoverable amount
is based on net selling price or value in use);

(2) If recoverable amount was based on value in use: a change in the amount or
timing of estimated future cash flows or in the discount rate; or

(3) If recoverable amount was based on net selling price: a change in estimate of the
components of net selling price.

F. An asset’s value in use may become greater than the asset’s carrying amount
simply because the present value of future cash inflows increases as they become
closer. However, the service potential of the asset has not increased. Therefore, an
impairment loss is not reversed just because of the passage of time (sometimes called
the ‘unwinding’ of the discount), even if the recoverable amount of the asset
becomes higher than its carrying amount.

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4.9 Reversal of an Impairment Loss for an Individual Asset:
A. The increased carrying amount of an asset due to a reversal of an impairment
loss should not exceed the carrying amount that would have been determined
(net of amortization or depreciation) had no impairment loss been recognized
for the asset in prior accounting periods.
B. Any increase in the carrying amount of an asset above the carrying amount that
would have been determined (net of amortization or depreciation) had no
impairment loss been recognized for the asset in prior accounting periods is a
revaluation. In accounting for such a revaluation, an enterprise applies the
Accounting Standard applicable to the asset.
C. A reversal of an impairment loss for an asset should be recognized as income
immediately in the statement of profit and loss, unless the asset is carried at
revalued amount in accordance with another Accounting Standard (see
Accounting Standard (AS) 10, Accounting for Fixed Assets) in which case any
reversal of an impairment loss on a revalued asset should be treated as a
revaluation increase under that Accounting Standard.
D. A reversal of an impairment loss on a revalued asset is credited directly to
equity under the heading revaluation surplus. However, to the extent that an
impairment loss on the same revalued asset was previously recognized as an
expense in the statement of profit and loss, a reversal of that impairment loss is
recognized as income in the statement of profit.
E. After a reversal of an impairment loss is recognized, the depreciation
(amortization) charge for the asset should be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if any), on
a systematic basis over its remaining useful life.

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 Case Study No One:

The performance analysts at Al-Saad transportation and shipping company noticed

a decline in the revenues of the services provided by one of the company’s transport
fleets (a group of technically interrelated assets), which created an objective reason
to study the economic performance of the asset for the purpose of making the
appropriate decision about the asset. For the purposes of studying the current status
of the asset, the company provided the following information:

- The asset's historical cost EGP 4000000, accumulated depreciation EGP

1800000
- The asset can be sold currently at EGP 2000000, selling cost EGP 200000
- The asset can be operated for another 6 years remaining from the useful life
of the asset, during which the asset generates net cash flows respectively (from
the first year to the sixth year) as follows:
EGP 700000, EGP 600000, EGP 500000, EGP 400000, EGP 300000, EGP
200000
- The required rate of return (RRR) from the firm's management is %15
annually

Required: As a financial accountant, the firm's management has asked you to:

- Reconsidering the feasibility of the asset to make the appropriate

recommendation to the company’s management, either to sell the asset at
present time or to continue operating the asset.
- Developing the necessary accounting treatments in light of the appropriate
recommendation if you know that the discount rate data was as follows:

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 Year 1 2 3 4 5 6

Discount rate %10 0.909 0.826 0.750 0.682 0.601 0.524

Discount rate %15 0.870 0.756 0.658 0.572 0.497 0.432

Solution

First: Calculate The Book Value Or The Carrying Amount Of An Asset:

The Book Value of Asset = Historical Cost of Asset 4000000

(–) Accumulated Depreciation (1800000)

‫ـــــــــــــــــــــــ‬

B.V 2200000

Secondly: Comparison between Alternative of Selling or Using:

Alternative of Selling Alternative of Using(Usage Value)

Selling Price of 2000000 Year 1 2 3 4 5 6

Assets
(200000) Net Cash 700000 600000 500000 400000 300000 200000
(-) Cost of Selling
Flows
= The Net Selling
1800000 Discount 0.870 0.756 0.658 0.572 0.497 0.432
Price or The Fair
Rate
Value of Assets
%15

P. V Of 609000 453600 329000 228800 149100 86400

C.F

Total P. V Of C.F(Usage Value) 1855900

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Third: Compute Recoverable Amount of Asset:

Recoverable amount is net selling price of asset (1800000) or usage value of asset
(1855900) whichever higher.

SO: Recoverable amount of asset = 1855900

Recommendation: according to the above information the best alternative is using

of asset.

Accounting Treatment according to IAS 36 Standard: according to the above

information there is an impairment loss of asset value.

Impairment Loss of Asset Value is the amount by which the carrying amount of an
asset exceeds its recoverable amount.

Impairment Loss of Asset = Carrying amount - Recoverable amount

220000 – 1855900 = 344100

Fourthly: The Effect on the Financial Statements:

Income St

Other Expenses

Impairment Loss of Cars (344100)

Balance Sheet

Assets
Non- Current Assets
Cars 4000000
(-) Accu. Deprecation of Cars (1800000)
= Net Book Value of Cars 2200000
(-) Impairment Loss of Cars (344100)
= Recoverable Amount of Cars 1855900

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Case Study No Two:

The performance analysts at Al-Farouk shipping company noticed a decline in the

revenues of the services provided by one of the company’s assets, (Equipment)
which created objective reasons to study the economic performance of the asset for
the purpose of making the appropriate decision about the asset. For the purposes of
studying the current status of the asset, the company provided the following
information:

- The asset's historical cost EGP 4000000, accumulated depreciation EGP

1800000
- The asset can be sold currently at EGP 2000000, selling cost EGP 100000
- The asset can be operated for another 6 years remaining from the useful life
of the asset, during which the asset generates net cash flows respectively (from
the first year to the sixth year) as follows:
EGP 700000, EGP 600000, EGP 500000, EGP 400000, EGP 300000, EGP
200000
- The required rate of return (RRR) from the firm's management is %15
annually

Required: As a financial accountant, the firm's management has asked you to:

- Reconsidering the feasibility of the asset to make the appropriate

recommendation to the company’s management, either to sell the asset at
present time or to continue operating the asset.
- Developing the necessary accounting treatments in light of the appropriate
recommendation if you know that the discount rate data was as follows:

Year 1 2 3 4 5 6
Discount rate %10 0.909 0.826 0.750 0.682 0.601 0.524
Discount rate %15 0.870 0.756 0.658 0.572 0.497 0.432

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Solution:

First: Calculate The Book Value Or The Carrying Amount Of An Asset:

The Book Value of Asset = Historical Cost of Asset 4000000

(–) Accumulated Depreciation (1800000)

‫ـــــــــــــــــــــــ‬

B.V 2200000

Secondly: Comparison between Alternative of Selling or Using:

Alternative of Selling Alternative of Using(Usage Value)

Selling 2000000 Year 1 2 3 4 5 6

Price of
(100000) Net Cash 700000 600000 500000 400000 300000 200000
Assets
Flows
(-) Cost of
Selling 1900000 Discount 0.870 0.756 0.658 0.572 0.497 0.432
Rate %15
= The Net
Selling
Price or The
Fair Value
of Assets

P. V Of 609000 453600 329000 228800 149100 86400

C.F

Total P. V Of C.F(Usage Value) 1855900

Third: Compute Recoverable Amount of Asset:

Recoverable amount is net selling price of asset (1900000) or usage value of asset
(1855900) whichever higher.
- 182 -
SO: Recoverable amount of asset = 1900000

Recommendation: according to the above information the best alternative is using

of asset.

Accounting Treatment according to IAS 36 Standard: according to the above

information there is an impairment loss of asset value.

Impairment Loss of Asset Value is the amount by which the carrying amount of an
asset exceeds its recoverable amount.

Impairment Loss of Asset = Carrying amount - Recoverable amount

220000 – 1900000 = 300000

Fourthly: The Effect on the Financial Statements:

Income St

Other Expenses

Impairment Loss of Cars (300000)

Balance Sheet

Assets

Non- Current Assets

Equipment 4000000

(-) Accu. Deprecation of Cars (1800000)

= Net Book Value of Cars 2200000

(-) Impairment Loss of Cars (300000)

= Recoverable Amount of Cars 1900000

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 Chapter Five

International Financial Reporting Standard 15

Revenue from Contracts with Customers

5.1 Objective:

1. The objective of this Standard is to establish the principles that an

entity shall apply to report useful information to users of financial
statements about the nature, amount, timing and uncertainty of
revenue and cash flows arising from a contract with a customer.

Meeting the objective:

2. To meet the objective in paragraph 1, the core principle of this Standard

is that an entity shall recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for
those goods or services.
3. An entity shall consider the terms of the contract and all relevant facts
and circumstances when applying this Standard. An entity shall apply
this Standard, including the use of any practical expedients,
consistently to contracts with similar characteristics and in similar
circumstances.
4. This Standard specifies the accounting for an individual contract with
a customer. However, as a practical expedient, an entity may apply this
Standard to a portfolio of contracts (or performance obligations) with
similar characteristics if the entity reasonably expects that the effects
on the financial statements of applying this Standard to the portfolio

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 would not differ materially from applying this Standard to the
individual contracts (or performance obligations) within that portfolio.
When accounting for a portfolio, an entity shall use estimates and
assumptions that reflect the size and composition of the portfolio.

5.2 Scope:

An entity shall apply this Standard to all contracts with customers, except the
following:

(a) lease contracts within the scope of IFRS 16 Leases;

(b) contracts within the scope of IFRS 17 Insurance Contracts. However, an entity
may choose to apply this Standard to insurance contracts that have as their primary
purpose the provision of services for a fixed fee in accordance with paragraph 8 of
IFRS 17;

(c) financial instruments and other contractual rights or obligations within the scope
of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS
11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28
Investments in Associates and Joint Ventures; and

(d) non-monetary exchanges between entities in the same line of business to

facilitate sales to customers or potential customers. For example, this Standard
would not apply to a contract between two oil companies that agree to an exchange
of oil to fulfil demand from their customers in different specified locations on a
timely basis.

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 An entity shall apply this Standard to a contract (other than a contract listed in
paragraph 5) only if the counterparty to the contract is a customer. A customer is a
party that has contracted with an entity to obtain goods or services that are an output
of the entity’s ordinary activities in exchange for consideration. A counterparty to
the contract would not be a customer if, for example, the counterparty has contracted
with the entity to participate in an activity or process in which the parties to the
contract share in the risks and benefits that result from the activity or process (such
as developing an asset in a collaboration arrangement) rather than to obtain the
output of the entity’s ordinary activities.

A contract with a customer may be partially within the scope of this Standard and
partially within the scope of other Standards listed in paragraph 5.

(a) If the other Standards specify how to separate and/or initially measure one or
more parts of the contract, then an entity shall first apply the separation and/or
measurement requirements in those Standards. An entity shall exclude from the
transaction price the amount of the part (or parts) of the contract that are initially
measured in accordance with other Standards and shall apply paragraphs 73–86 to
allocate the amount of the transaction price that remains (if any) to each performance
obligation within the scope of this Standard and to any other parts of the contract
identified by paragraph 7(b).

(b) If the other Standards do not specify how to separate and/or initially measure one
or more parts of the contract, then the entity shall apply this Standard to separate
and/or initially measure the part (or parts) of the contract.

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 This Standard specifies the accounting for the incremental costs of obtaining a
contract with a customer and for the costs incurred to fulfil a contract with a customer
if those costs are not within the scope of another Standard (see paragraphs 91–104).
An entity shall apply those paragraphs only to the costs incurred that relate to a
contract with a customer (or part of that contract) that is within the scope of this
Standard.

5.3 Recognition:

The five revenue recognition steps of IFRS 15 – and how to apply them.

 1. Identify the contract.

 2. Identify separate performance obligations.

 3. Determine the transaction price.

 4. Allocate transaction price to performance obligations.

 5. Recognize revenue when each performance obligation is satisfied.

IFRS 15 became mandatory for accounting periods beginning on or after 1

January 2018. As entities and groups using the international accounting framework
leave the old regime behind, let’s look at the more prescriptive new standard.

Changes, which include replacing the concept of transfer of ‘risks and rewards’
with ‘control’ and the introduction of ‘performance obligations’ alongside extensive
disclosures, are likely to put more pressure on accountants and auditors to closely
evaluate client contracts and challenge directors' judgements.

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 Here, we summaries the following five steps of revenue recognition and
illustrative practical application for the most common scenarios:

1. Identify the contract

2. Identify separate performance obligations

3. Determine the transaction price

4. Allocate transaction price to performance obligations

5. Recognize revenue when each performance obligation is satisfied.

1. Identify the contract:

 Contract can have a written and non-written form or be implied (contract may not
be limited to goods or services explicitly mentioned in a contract, but also include
those expected to be delivered due to business practices or statements made)

 Should be approved by parties, and have a commercial basis

 Should create enforceable rights and obligations between parties

 Should have a consideration established taking into account ability and intention to
pay.

New contracts may arise when terms of existing contracts are modified. Contract
modifications:

 Could result in retrospective or prospective adjustments to an existing contract,

creation of a new contract alongside the old contract, or a termination of the original
contract and creation of a new contract

 New contract arises as a result of modifications if:

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o a new performance obligation is added to a contract. If a customer orders additional
units at a later date, the additional order is considered distinct, even if the order is
for identical goods

o the price at which the additional units are sold represents a standalone selling price
at the time of modification. This is a price at which the product would be sold on the
market, rather than a significantly different price, for example heavily discounted
despite the product being the same and of the same quality (for example to entice
more future business from that customer)

 Continuation of an existing contract arises when:

o no distinct goods or services are provided as part of the modification

o performance obligation can be satisfied at modification date – for example, a

customer negotiates a discount in relation to units already delivered, for example due
to unsatisfactory quality or service relating to the delivered units only

2. Identify separate performance obligations:

 A performance obligation is a distinct promise to transfer specific goods or services,

distinct from other goods or services.

 Performance obligation is distinct when its fulfilment:

o provides specific benefits associated with it, in its own right or together with other
fulfilled obligations.

o is separable from other obligations in the contract – goods or services offered are not
integrated or dependent on other goods or services provided already under the
contract; the obligation provides goods or services rather than only modifies goods
or services already provided.

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 The following are examples of circumstances which do not give rise to a
performance obligation:

 providing goods at scrap value.

 activities relating to internal administrative contract set-up.

Identifying performance obligations may result in unbundling contracts into

performance obligations, or combining contracts into a performance obligation, to
recognize revenue correctly.

Unbundling a contract may apply when incentives are offered at the time of sale,
such as free servicing or enhanced warranties. In this case servicing and warranties
are performance obligations that are distinct and revenue relating to them needs to
be recognized separately from the goods or services promised on the contract to
which they relate.

Circumstances which could result in contracts being combined:

 it is negotiated as a package with a single commercial objective

 consideration for one contract depends on the price or performance of the other
contract.

3. Determine the transaction price:

 Transaction price is the most likely value the entity expects to be entitled to in
exchange for the promised goods or services supplied under a contract.

 May include significant financing components and incentives and non-cash amounts
offered, which affect how revenue is recognized (see below).

Variable amounts of consideration:

 may arise as a result of discounts, rebates, refunds, credits, concessions, incentives,

performance bonuses, penalties, and contingent payments.
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 variable consideration is only recognized when it is highly probable that there will
not be a significant reversal in the cumulative amount of revenue recognized to date

 no revenue is recognized if the vendor expects goods to be returned.

o instead a provision matching the asset is recognized at the same time as the asset,
with an adjustment to cost of sales.

o the restriction results in a later recognition of revenue and profit (once there is
certainly the goods will not be returned) in comparison with current accounting

 variable consideration is measured by reference to two methods.

o expected value for the contract portfolio (for a large number of contracts), or

o single most likely outcome amount (if there are only two potential outcomes).

Adjustments for the effects of the time value of money (a ‘financing component’):

 if a financing component is significant, IFRS 15 requires an adjustment to be made

for the effect of implicit financing.

o cash received in advance from buyer – vendor to recognize finance cost and increase
in deferred revenue.

o cash received in arrears from buyer – vendor to recognize finance income and
reduction in revenue.

 no adjustment for a financing component is needed if payment is settled within one

year of goods or services transferred.

 the following do not give rise to a financing component (and hence no adjustment is
needed):

o customer has discretion over the timing of the transfer of control of the goods or
services.

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o consideration is variable and the amount or timing depends on factors outside of
parties’ control.

o the difference between the consideration and cash selling price arises for other non-
financing reasons (ie performance protection).

4. Allocate transaction price to performance obligations:

 Allocation is based on the standalone selling price of goods or services forming that
performance obligation.

Allocation of transaction price may include allocation of discounts, which are

applied:

 on a proportionate basis to all performance obligations based on the stand-alone

selling price of each performance obligation (observable or estimated), or

 to specific performance obligations only, if:

o observable evidence exists evidencing that the discount relates to those specific
obligations only; and;

o goods / services stipulated in the performance obligation are regularly sold as stand-
alone and at a discount; and;

o discount is substantially the same as the discount usually given when goods /
services are sold on a stand-alone basis.

Variable consideration is applied to a specific performance obligation if:

 terms relating to varying the consideration relate to satisfying that specific

performance obligation.

 amount of variable consideration allocated is what the entity expects to receive for
satisfying the performance obligation.

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 Contract modifications may require reassessment how consideration is allocated to
performance obligations.

5. Recognize revenue when each performance obligation is satisfied:

 The point of revenue recognition is the point when performance obligation is

satisfied, per each distinctive obligation.

 May result in revenue recognition at a point in time or over time Recognition over
time applies when:

 the customer simultaneously receives and consumes the asset/service as the vendor
performs the service, or;

 the vendor’s performance creates or enhances an asset (for example, work in

progress) that is controlled by the customer as the work progresses.

The vendor’s performance creates an asset, when:

 the asset has no alternative use to the vendor:

o the vendor is restricted from using the asset for any other purpose other than selling
it to that specific customer, for example.

o the asset is manufactured to specific specifications or delivery time, meaning that

from the point of commencement of asset creation, it is clear the asset is for a specific
customer.

o the entity cannot practically or contractually sell the asset to a different customer as
it would be practically and contractually prohibitive (for example would require a
costly rework, selling at a reduced price, or if customer can prohibit redirection).

o no such practical or contractual limitations would apply if the entity production is

that of identical assets in bulk, and those assets are interchangeable.

 the vendor has an enforceable right to be paid for work completed to date.
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 the vendor does not have an enforceable right to pay when, for example:

o terms of contract allow customer to cancel or modify the contract.

o the contract allows for circumstances where customer does not have to pay at all.

o the customer can pay an amount other than the value of the asset or service created
to date (ie compensation only).

o for a compensation to be treated as consideration and fulfil the condition of

enforceable right to be paid, the compensation would have to approximate the selling
price for the asset, or part of it equal to the proportion of work completed.

How to recognize revenue over time:?

 To the extent that each of the performance obligations has been satisfied. This can
be established using two methods:

o output method - direct measurement of the value of goods or services transferred to

date for example per surveys of completion to date, appraisals of results achieved,
milestones reached, units produced/delivered; or

o input method - based on measures such as resources consumed, costs incurred (but
see below re contract set up costs), number of hours per time sheets or machine
hours, which are directly related to the vendor's performance.

 Contract set up activities and preparatory tasks necessary to fulfil a contract do not
form part of revenue, and may meet capital recognition asset requirements (see
below).

Capitalization of costs associated with a sale contract (for example bidding costs,
sales commission).

 Only incremental costs of obtaining a contract (which would not have been incurred
if the contract had not been obtained) to be considered, for example:

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o direct sales commissions payable if contract is awarded – include.

o costs of running a legal department proving an across-business legal support

function – exclude.

 Capitalize – if expected to be recovered (contract will generate profits).

 Amortize on a basis that is consistent with the transfer of the goods or services
specified in the contract.

5.4 Disclosure:

The objective of the disclosure requirements is for an entity to disclose sufficient

information to enable users of financial statements to understand the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with
customers. To achieve that objective, an entity shall disclose qualitative and
quantitative information about all of the following:

(a)its contracts with customers.

(b)the significant judgements, and changes in the judgements, made in applying this
Standard to those contracts; and

(c) any assets recognized from the costs to obtain or fulfil a contract with a customer.
An entity shall consider the level of detail necessary to satisfy the disclosure
objective and how much emphasis to place on each of the various requirements.

An entity shall aggregate or disaggregate disclosures so that useful information

is not obscured by either the inclusion of a large amount of insignificant detail or the
aggregation of items that have substantially different characteristics.

An entity need not disclose information in accordance with this Standard if it

has provided the information in accordance with another Standard.

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5.4.1 Contracts with customers:

An entity shall disclose all of the following amounts for the reporting period
unless those amounts are presented separately in the statement of comprehensive
income in accordance with other Standards:

(a)revenue recognized from contracts with customers, which the entity shall disclose
separately from its other sources of revenue; and

(b) any impairment losses recognized (in accordance with IFRS 9) on any
receivables or contract assets arising from an entity’s contracts with customers,
which the entity shall disclose separately from impairment losses from other
contracts.

5.4.2 Disaggregation of revenue:

An entity shall disaggregate revenue recognized from contracts with customers

into categories that depict how the nature, amount, timing and uncertainty of revenue
and cash flows are affected by economic factors. An entity shall apply the guidance
in paragraphs B87–B89 when selecting the categories to use to disaggregate revenue.

In addition, an entity shall disclose sufficient information to enable users of

financial statements to understand the relationship between the disclosure of
disaggregated revenue (in accordance with paragraph 114) and revenue information
that is disclosed for each reportable segment, if the entity applies IFRS 8 Operating
Segments.

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5.4.3 Contract balances:

An entity shall disclose all of the following:

(a) the opening and closing balances of receivables, contract assets and contract
liabilities from contracts with customers, if not otherwise separately presented or
disclosed;

(b) revenue recognized in the reporting period that was included in the contract
liability balance at the beginning of the period; and

(c) revenue recognized in the reporting period from performance obligations

satisfied (or partially satisfied) in previous periods (for example, changes in
transaction price).

An entity shall explain how the timing of satisfaction of its performance

obligations relates to the typical timing of payment and the effect that those factors
have on the contract asset and the contract liability balances. The explanation
provided may use qualitative information.

An entity shall provide an explanation of the significant changes in the contract

asset and the contract liability balances during the reporting period. The explanation
shall include qualitative and quantitative information. Examples of changes in the
entity’s balances of contract assets and contract liabilities include any of the
following:

(a)changes due to business combinations;

(b) cumulative catch-up adjustments to revenue that affect the corresponding

contract asset or contract liability, including adjustments arising from a change in
the measure of progress, a change in an estimate of the transaction price (including
any changes in the assessment of whether an estimate of variable consideration is
constrained) or a contract modification;
- 197 -
(c)impairment of a contract asset;

(d) a change in the time frame for a right to consideration to become unconditional
(ie for a contract asset to be reclassified to a receivable); and

(e) a change in the time frame for a performance obligation to be satisfied (ie for the
recognition of revenue arising from a contract liability).

5.4.5 Performance obligations:

An entity shall disclose information about its performance obligations in

contracts with customers, including a description of all of the following:

(a) when the entity typically satisfies its performance obligations (for example, upon
shipment, upon delivery, as services are rendered or upon completion of service),
including when performance obligations are satisfied in a bill-and-hold arrangement;
(b) the significant payment terms (for example, when payment is typically due,
whether the contract has a significant financing component, whether the
consideration amount is variable and whether the estimate of variable consideration
is typically constrained in accordance with paragraphs 56–58);

(c) the nature of the goods or services that the entity has promised to transfer,
highlighting any performance obligations to arrange for another party to transfer
goods or services (ie if the entity is acting as an agent);

(d) obligations for returns, refunds and other similar obligations; and

(e) types of warranties and related obligations.

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Transaction price allocated to the remaining performance obligations.

An entity shall disclose the following information about its remaining

performance obligations:

(a) the aggregate amount of the transaction price allocated to the performance
obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting
period; and

(b) an explanation of when the entity expects to recognize as revenue the amount
disclosed in accordance with paragraph 120(a), which the entity shall disclose in
either of the following ways:

(i) on a quantitative basis using the time bands that would be most appropriate
for the duration of the remaining performance obligations; or

(ii)by using qualitative information.

As a practical expedient, an entity need not disclose the information in paragraph

120 for a performance obligation if either of the following conditions is met:

(a) the performance obligation is part of a contract that has an original expected
duration of one year or less; or

(b) the entity recognizes revenue from the satisfaction of the performance obligation.

An entity shall explain qualitatively whether it is applying the practical expedient

in paragraph 121 and whether any consideration from contracts with customers is
not included in the transaction price and, therefore, not included in the information
disclosed. For example, an estimate of the transaction price would not include any
estimated amounts of variable consideration that are constrained.

- 199 -
 5.5 Practical case:

January 2016 The Engineer Contracting Company contracted with a customer to

build a building worth EGP 5,000,000, based on the specifications specified by the
customer, and on land owned by and in the possession of the customer. It is expected
that work on the building will take three years, and according to the contract, the
company will issue invoices. Based on pre-determined installments.

Required:

In light of the International Financial Reporting Standard, revenue from contracts

with customers.

- Making the necessary entries in the company’s books.

- Explain the impact on the financial statements of the engineer company at the end
of each year of the contract.

If you know that:

2016 2017 2018

Construction costs during the year 1500000 1000000 1600000

Construction costs during previous years - 1500000 2500000

Actual cumulative construction costs 1500000 2500000 4100000

Estimated costs to complete construction during the 2250000 1500000 -

year

Total actual and estimated construction costs 3750000 4000000 4100000

Invoices issued during the year 1200000 2000000 1800000

Receipts collected during the year 1000000 1400000 2600000

- 200 -
 solution

Analysis

Step 1: Define the Contract - The contract is explicitly stated and agreed upon
between the two parties, the company and the customer

Step 2: Determine performance obligations - in this case - the company has

contracted one performance obligation, which is the constructive one.

Step 3: Determine the transaction price - The transaction price is 5,000,000 EGP.

Step 4: Allocate Transaction Prices - We have one performance obligation and one
transaction price and there is no problem with this.

Step 5: Recognizing Revenue - To determine the appropriate method for

recognizing revenue, we must conduct a test to determine the availability of one of
the three conditions mentioned in the standard, which are:

First condition: The customer obtains and consumes the benefits provided by the
company's performance whenever the performance occurs simultaneously.

The second condition: The asset controlled by the client is created, created, or
enhanced through the company.

Third condition: An asset is created or created that has no alternative disposition for
the company and that the company has an enforceable right to payment for
performance completed up to the latest date.

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2016:

1) Recording actual costs:

Works in progress/implementation 1,500,000

Cash

Bank

Inventory

Suppliers/ account payable 1,500, 000

wages payable

subcontractors

(Recording the costs incurred during the year 2016, which are direct costs, direct wages, direct
materials, and subcontractors)

2) Recording the value of the extracts owed by the client:

Accounts receivable 1,200,000

customer invoices for unfinished contracts (Customer Extracts) 1,200,000

(Recording customer invoices or extracts that were invoiced or issued during the year 2016)

3) Recording cash receipts from customers:

Cash /bank 1,000,000

Accounts receivable 1,000,000

(Receipts from the customer during the year 2016)

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(4) At the end of the year: matching costs with revenues:

Contract costs (actual costs during the year) 1,500,000

Works in progress/implementation 500,000

Contract revenues 2,000,000

Notes:

actual costs of the contract per year

 Completion percentage = ‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬

estimated costs of the contract per year

 Completion percentage 2016 = 1,500,000 ÷ (1,500,000 + 2,250,000) = 40%

 Estimated contract revenue = (contract value x completion percentage) - revenue

recognized in previous periods

 Estimated revenue for the contract in 2016 = 5,000,000 x 40% = 2,000,000

With regard to the statement of financial position, we must know that the work-
in-progress account is closed in a corresponding (reverse) account, which is the
customer invoices account for unfinished contracts or customer extracts for
unfinished contracts, and the same is true of the fixed asset account and the
accumulated depreciation account, as The accumulated depreciation account is
classified as a reverse account for the fixed asset itself. With the same methodology,
the account for customer invoices for unfinished contracts is classified as a reverse
account for the work-in-progress account.

- 203 -
 The question here is how being both accounts classified, the work-in-progress
account and the customer invoices account for unfinished contracts? To answer this,
from a practical perspective and to guide the accounting departments, these two
accounts have two different classifications, and the financial management person is
free to choose.

In some references, there is a possibility that both accounts (the work-in-progress

account and the customer invoices account for unfinished contracts) are classified
as a sub-classification under the inventory classification, and this classification is
mentioned in Kiso’s book, but by analyzing this classification, I found that this
classification contradicts logic, and that is because the business account Under
operation in contracting accounting, the project result is closed in terms of profit or
loss at the end of each financial period.

Therefore, the work-in-progress account has a balance at the end of each

period that is practically equal to the combined approved revenues for all years
calculated by the percentage of completion. Therefore, in practical terms, it can be
said that the works-in-progress account is equal to the combined approved
revenues, even if we deduct from it customer invoices for unfinished contracts.
Which may sometimes be called extracts, the result will be represented by the
difference between the total approved revenues and the total invoices, meaning
that the result will be represented by the unbilled revenues, the value of which may
be negative or positive. Hence, it is appropriate to include this value under the
classification of current assets instead. It is classified as a stock.

We can also classify them as a subcategory under the current assets classification

On the other hand, the auditor has other classifications to follow at the end of the
financial period, and these classifications are based on the level of the projects
themselves, as follows:
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The first case: If the work-in-progress account is larger than the customer invoices
account for unfinished projects, it is classified as a sub classification under current
assets.

The second case: If the work-in-progress account is smaller than the customer
invoices account for unfinished projects, it is classified as a sub classification under
current liabilities.

To clarify the previous cases.

Impact on the financial statements in 2016:

First: Statement of financial position:

Statement of financial position in 31. 12.2016

Current Assets:

Works in progress/implementation 2,000,000

Customer invoices for unfinishend contracts (1,200,000)

Excess work in progress over customer invoices for unfinished contract 800,000
(contract assets)

Second: Income statement:

Income statement at the period ended in 31.12.2016

Contract revenues 2,000,000

Contract costs (1,500,000)

Contract Gross profit 500,000

- 205 -
2017:

1) Recording actual costs:

Works in progress/implementation 1000,000

Cash

Bank

Inventory

Suppliers/ account payable 1000, 000

wages payable

subcontractors

(Recording the costs incurred during the year 2017, which are direct costs, direct wages, direct
materials, and subcontractors)

2) Recording the value of the extracts owed by the client:

Accounts receivable 2,000,000

customer invoices for unfinished contracts (Customer Extracts) 2,000,000

(Recording customer invoices or extracts that were invoiced or issued during the year 2017)

3) Recording cash receipts from customers:

Cash /bank 1,400,000

Accounts receivable 1,400,000

(Receipts from the customer during the year 2017)

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(4) At the end of the year: matching costs with revenues:

Contract costs (actual costs during the year) 1,000,000

Works in progress/implementation 125,000

Contract revenues 1,125,000

Notes:

actual costs of the contract per year

 Completion percentage 2017 = ‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬

estimated costs of the contract per year

 Completion percentage 2017 = 2,500,000 ÷ (2,500,000 + 1, 050,000) = 62.5%

 Estimated contract revenue in 2017 = (contract value x completion percentage) -

revenue recognized in previous periods

 Estimated revenue for the contract in 2017 =[5,000,000 x 62.5% - 2,000,000] =

1,125,000

Impact on the financial statements in 2017:

First: Statement of financial position:

Statement of financial position in 31. 12.2017

current Assets:

Works in progress/implementation 3,125,000

Customer invoices for unfinishend contracts (3,200,000)

Excess customer invoices for unfinished contract over work in progress 75,000
(contract liabilities)

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Second: Income statement:

Income statement at the period ended in 31.12.2017

Contract revenues 1,125,000

Contract costs (1,000,000)

Contract Gross profit 1000,000

2018:

1) Recording actual costs:

Works in progress/implementation 1600,000

Cash

Bank

Inventory

Suppliers/ account payable 1600, 000

wages payable

subcontractors

(Recording the costs incurred during the year 2018, which are direct costs, direct wages, direct
materials, and subcontractors)

2) Recording the value of the extracts owed by the client:

Accounts receivable 1,800,000

customer invoices for unfinished contracts (Customer Extracts) 1,800,000

(Recording customer invoices or extracts that were invoiced or issued during the year 2018)

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3) Recording cash receipts from customers:

Cash /bank 2,600,000

Accounts receivable 2,600,000

(Receipts from the customer during the year 2017)

(4) At the end of the year: matching costs with revenues:

Contract costs (actual costs during the year) 1,600,000

Works in progress/implementation 275,000

Contract revenues 1,875,000

Notes:

actual costs of the contract per year

 Completion percentage 2018 = ‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬

estimated costs of the contract per year

 Completion percentage 2018 = 4,100,000 ÷ (4,100,000 + -) = 100%

 Estimated contract revenue in 2018 = (contract value x completion percentage) -

revenue recognized in previous periods

 Estimated revenue for the contract in 2018 =[5,000,000 x 100% - 3,125,000] =

1,875,000

5) at the end of 2018:

customer invoices for unfinished contracts 5,000,000

Works in progress/implementation 5,000,000

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Impact on the financial statements in 2018:

First: Statement of financial position:

In the statement of financial position, no accounts appear, as the entry in the

previous entry has been reversed.

Second: Income statement:

Income statement at the period ended in 31.12.2018

Contract revenues 1,875,000

Contract costs (1,600,000)

Contract Gross profit 275,000

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 Chapter Six

Property, Plant and Equipment (IAS 16)

In April 2001 the International Accounting Standards Board (Board) adopted

IAS 16 Property, Plant and Equipment, which had originally been issued by the
International Accounting Standards Committee in December 1993.
IAS 16 Property, Plant and Equipment replaced IAS 16 Accounting for Property,
Plant and Equipment (issued in March 1982). IAS 16 that was issued in March 1982
also replaced some parts in IAS 4 Depreciation Accounting that was approved in
November 1975.

In December 2003 the Board issued a revised IAS 16 as part of its initial agenda
of technical projects. The revised Standard also replaced the guidance in three
Interpretations (SIC-6 Costs of Modifying Existing Software, SIC-14 Property,
Plant and Equipment—Compensation for the Impairment or Loss of
Items and SIC-23 Property, Plant and Equipment—Major Inspection or Overhaul
Costs).

In May 2014 the Board amended IAS 16 to prohibit the use of a revenue-based
depreciation method.

In June 2014 the Board amended the scope of IAS 16 to include bearer plants
related to agricultural activity.

In May 2017, when IFRS 17 Insurance Contracts was issued, it amended the
subsequent measurement requirements in IAS 16 by permitting entities to elect to
measure owner-occupied properties in specific circumstances as if they were
investment properties measured at fair value through profit or loss applying
IAS 40 Investment Property.

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 In May 2020, the Board issued Property, Plant and Equipment: Proceeds before
Intended Use (Amendments to IAS 16) which prohibit a company from deducting
from the cost of property, plant and equipment amounts received from selling items
produced while the company is preparing the asset for its intended use. Instead, a
company will recognize such sales proceeds and related cost in profit or loss.

Other Standards have made minor consequential amendments to IAS 16. They
include IFRS 13 Fair Value Measurement (issued May 2011), Annual
Improvements to IFRSs 2009–2011 Cycle (issued May 2012), Annual Improvements
to IFRSs 2010–2012 Cycle (issued December 2013), IFRS 15 Revenue from
Contracts with Customers (issued May 2014), IFRS 16 Leases (issued January
2016) and Amendments to References to the Conceptual Framework in IFRS
Standards (issued March 2018).

6.1 Objective:

The objective of this Standard is to prescribe the accounting treatment for

property, plant and equipment so that users of the financial statements can discern
information about an entity’s investment in its property, plant and equipment and
the changes in such investment. The principal issues in accounting for property, plant
and equipment are the recognition of the assets, the determination of their carrying
amounts and the depreciation charges and impairment losses to be recognized in
relation to them.

6.2 Scope:

This Standard shall be applied in accounting for property, plant and equipment
except when another Standard requires or permits a different accounting treatment.
This Standard does not apply to:

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(a) property, plant and equipment classified as held for sale in accordance with IFRS
5 Non-current Assets Held for Sale and Discontinued Operations.

(b) biological assets related to agricultural activity other than bearer plants (see IAS
41 Agriculture). This Standard applies to bearer plants but it does not apply to the
produce on bearer plants.

(c) the recognition and measurement of exploration and evaluation assets (see IFRS
6 Exploration for and Evaluation of Mineral Resources).

(d) mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.

However, this Standard applies to property, plant and equipment used to develop
or maintain the assets described in (b)–(d).

An entity using the cost model for investment property in accordance with IAS
40 Investment Property shall use the cost model in this Standard for owned
investment property.

6.3 Definitions:

The following terms are used in this Standard with the meanings specified: A
bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce.

(b) is expected to bear produce for more than one period.

(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.

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Carrying amount is the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.

Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that asset when initially recognized in
accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based
Payment.

Depreciable amount is the cost of an asset, or other amount substituted for cost, less
its residual value.

Depreciation is the systematic allocation of the depreciable amount of an asset over

its useful life.

Entity-specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life
or expects to incur when settling a liability.

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement.)

An impairment loss is the amount by which the carrying amount of an asset exceeds
its recoverable amount.

Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes.

(b)are expected to be used during more than one period.

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Recoverable amount is the higher of an asset’s fair value less costs of disposal and
its value in use.

The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if
the asset were already of the age and in the condition expected at the end of its useful
life.

Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset
by an entity.

The cost of an item of property, plant and equipment shall be recognized as an

asset if, and only if:

(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.

Items such as spare parts, stand-by equipment and servicing equipment are
recognized in accordance with this IFRS when they meet the definition of property,
plant and equipment. Otherwise, such items are classified as inventory.

This Standard does not prescribe the unit of measure for recognition, ie what
constitutes an item of property, plant and equipment. Thus, judgement is required in
applying the recognition criteria to an entity’s specific circumstances. It may be
appropriate to aggregate individually insignificant items, such as moulds, tools and
dies, and to apply the criteria to the aggregate value.

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 An entity evaluates under this recognition principle all its property, plant and
equipment costs at the time they are incurred. These costs include costs incurred
initially to acquire or construct an item of property, plant and equipment and costs
incurred subsequently to add to, replace part of, or service it. The cost of an item of
property, plant and equipment may include costs incurred relating to leases of assets
that are used to construct, add to, replace part of or service an item of property, plant
and equipment, such as depreciation of right-of-use assets.

Initial costs:

Items of property, plant and equipment may be acquired for safety or

environmental reasons. The acquisition of such property, plant and equipment,
although not directly increasing the future economic benefits of any particular
existing item of property, plant and equipment, may be necessary for an entity to
obtain the future economic benefits from its other assets. Such items of property,
plant and equipment qualify for recognition as assets because they enable an entity
to derive future economic benefits from related assets in excess of what could be
derived had those items not been acquired. For example, a chemical manufacturer
may install new chemical handling processes to comply with environmental
requirements for the production and storage of dangerous chemicals; related plant
enhancements are recognized as an asset because without them the entity is unable
to manufacture and sell chemicals. However, the resulting carrying amount of such
an asset and related assets is reviewed for impairment in accordance with IAS 36
Impairment of Assets.

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Subsequent costs:

an entity does not recognize in the carrying amount of an item of property, plant
and equipment the costs of the day-to-day servicing of the item. Rather, these costs
are recognized in profit or loss as incurred. Costs of day-to-day servicing are
primarily the costs of labor and consumables, and may include the cost of small
parts. The purpose of these expenditures is often described as for the ‘repairs and
maintenance’ of the item of property, plant and equipment.

Parts of some items of property, plant and equipment may require replacement at
regular intervals. For example, a furnace may require relining after a specified
number of hours of use, or aircraft interiors such as seats and galleys may require
replacement several times during the life of the airframe. Items of property, plant
and equipment may also be acquired to make a less frequently recurring
replacement, such as replacing the interior walls of a building, or to make a
nonrecurring replacement. Under the recognition principle in paragraph 7, an entity
recognizes in the carrying amount of an item of property, plant and equipment the
cost of replacing part of such an item when that cost is incurred if the recognition
criteria are met. The carrying amount of those parts that are replaced is derecognized
in accordance with the derecognized provisions of this Standard.

A condition of continuing to operate an item of property, plant and equipment

(for example, an aircraft) may be performing regular major inspections for faults
regardless of whether parts of the item are replaced. When each major inspection is
performed, its cost is recognized in the carrying amount of the item of property, plant
and equipment as a replacement if the recognition criteria are satisfied. Any
remaining carrying amount of the cost of the previous inspection (as distinct from
physical parts) is derecognized. This occurs regardless of whether the cost of the
previous inspection was identified in the transaction in which the item was acquired

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or constructed. If necessary, the estimated cost of a future similar inspection may be
used as an indication of what the cost of the existing inspection component was when
the item was acquired or constructed.

6.4 Measurement at recognition:

An item of property, plant and equipment that qualifies for recognition as an asset
shall be measured at its cost. Elements of cost The cost of an item of property, plant
and equipment comprises:

(a) its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity incurs
either when the item is acquired or as a consequence of having used the item during
a particular period for purposes other than to produce inventories during that period.
Examples of directly attributable costs are:

(a)costs of employee benefits (as defined in IAS 19 Employee Benefits) arising

directly from the construction or acquisition of the item of property, plant and
equipment.

(b)costs of site preparation.

(c) initial delivery and handling costs.

(d) installation and assembly costs.

(e) costs of testing whether the asset is functioning properly (ie assessing whether
the technical and physical performance of the asset is such that it is capable of being

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used in the production or supply of goods or services, for rental to others, or for
administrative purposes).

(f) professional fees.

An entity applies IAS 2 Inventories to the costs of obligations for dismantling,

removing and restoring the site on which an item is located that are incurred during
a particular period as a consequence of having used the item to produce inventories
during that period. The obligations for costs accounted for in accordance with IAS
2 or IAS 16 are recognized and measured in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

Examples of costs that are not costs of an item of property, plant and equipment
are:

(a)costs of opening a new facility.

(b) costs of introducing a new product or service (including costs of advertising and
promotional activities).

(c) costs of conducting business in a new location or with a new class of customer
(including costs of staff training).

(d)administration and other general overhead costs.

Recognition of costs in the carrying amount of an item of property, plant and

equipment ceases when the item is in the location and condition necessary for it to
be capable of operating in the manner intended by management. Therefore, costs
incurred in using or redeploying an item are not included in the carrying amount of
that item. For example, the following costs are not included in the carrying amount
of an item of property, plant and equipment:

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 (c) costs incurred while an item capable of operating in the manner
intended by management has yet to be brought into use or is
operated at less than full capacity.

(b) initial operating losses, such as those incurred while demand for
the item’s output builds up.

(c) costs of relocating or reorganizing part or all of an entity’s

operations.

Items may be produced while bringing an item of property, plant and equipment
to the location and condition necessary for it to be capable of operating in the manner
intended by management (such as samples produced when testing whether the asset
is functioning properly).

An entity recognizes the proceeds from selling any such items, and the cost of
those items, in profit or loss in accordance with applicable Standards. The entity
measures the cost of those items applying the measurement requirements of IAS 2.

Some operations occur in connection with the construction or development of an

item of property, plant and equipment, but are not necessary to bring the item to the
location and condition necessary for it to be capable of operating in the manner
intended by management. These incidental operations may occur before or during
the construction or development activities. For example, income may be earned
through using a building site as a car park until construction starts. Because
incidental operations are not necessary to bring an item to the location and condition
necessary for it to be capable of operating in the manner intended by management,
the income and related expenses of incidental operations are recognized in profit or
loss and included in their respective classifications of income and expense.

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 The cost of a self-constructed asset is determined using the same principles as
for an acquired asset. If an entity makes similar assets for sale in the normal course
of business, the cost of the asset is usually the same as the cost of constructing an
asset for sale (see IAS 2). Therefore, any internal profits are eliminated in arriving
at such costs. Similarly, the cost of abnormal amounts of wasted material, labor, or
other resources incurred in self-constructing an asset is not included in the cost of
the asset. IAS 23 Borrowing Costs establishes criteria for the recognition of interest
as a component of the carrying amount of a self-constructed item of property, plant
and equipment.

Bearer plants are accounted for in the same way as self-constructed items of
property, plant and equipment before they are in the location and condition necessary
to be capable of operating in the manner intended by management. Consequently,
references to ‘construction’ in this Standard should be read as covering activities that
are necessary to cultivate the bearer plants before they are in the location and
condition necessary to be capable of operating in the manner intended by
management.

6.5 Measurement of cost:

The cost of an item of property, plant and equipment is the cash price equivalent
at the recognition date. If payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is recognized as
interest over the period of credit unless such interest is capitalized in accordance
with IAS 23.

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 One or more items of property, plant and equipment may be acquired in exchange
for a non-monetary asset or assets, or a combination of monetary and non-monetary
assets. The following discussion refers simply to an exchange of one non-monetary
asset for another, but it also applies to all exchanges described in the preceding
sentence. The cost of such an item of property, plant and equipment is measured at
fair value unless (a) the exchange transaction lacks commercial substance or (b) the
fair value of neither the asset received nor the asset given up is reliably measurable.
The acquired item is measured in this way even if an entity cannot immediately
derecognize the asset given up. If the acquired item is not measured at fair value, its
cost is measured at the carrying amount of the asset given up.

An entity determines whether an exchange transaction has commercial substance

by considering the extent to which its future cash flows are expected to change as a
result of the transaction. An exchange transaction has commercial substance if:

(a) the configuration (risk, timing and amount) of the cash flows of the
asset received differs from the configuration of the cash flows of the
asset transferred.

(b) the entity-specific value of the portion of the entity’s operations

affected by the transaction changes as a result of the exchange.

(c) the difference in (a) or (b) is significant relative to the fair value of the
assets exchanged.

For the purpose of determining whether an exchange transaction has commercial

substance, the entity-specific value of the portion of the entity’s operations affected
by the transaction shall reflect post-tax cash flows. The result of these analyses may
be clear without an entity having to perform detailed calculations.

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 The fair value of an asset is reliably measurable if (a) the variability in the range
of reasonable fair value measurements is not significant for that asset or (b) the
probabilities of the various estimates within the range can be reasonably assessed
and used when measuring fair value. If an entity is able to measure reliably the fair
value of either the asset received or the asset given up, then the fair value of the asset
given up is used to measure the cost of the asset received unless the fair value of the
asset received is more clearly evident.

The carrying amount of an item of property, plant and equipment may be reduced
by government grants in accordance with IAS 20 Accounting for Government
Grants and Disclosure of Government Assistance.

6.6 Measurement after recognition:

An entity shall choose either the cost model in paragraph 30 or the revaluation
model in paragraph 31 as its accounting policy and shall apply that policy to an entire
class of property, plant and equipment.

Some entities operate, either internally or externally, an investment fund that

provides investors with benefits determined by units in the fund. Similarly, some
entities issue groups of insurance contracts with direct participation features and
hold the underlying items. Some such funds or underlying items include owner-
occupied property. The entity applies IAS 16 to owner-occupied properties that are
included in such a fund or are underlying items. Despite paragraph 29, the entity
may elect to measure such properties using the fair value model in accordance with
IAS 40. For the purposes of this election, insurance contracts include investment
contracts with discretionary participation features. (See IFRS 17 Insurance Contracts
for terms used in this paragraph that are defined in that Standard).

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 An entity shall treat owner-occupied property measured using the investment
property fair value model applying paragraph 29A as a separate class of property,
plant and equipment.

Cost model:

After recognition as an asset, an item of property, plant and equipment shall be

carried at its cost less any accumulated depreciation and any accumulated
impairment losses.

Revaluation model:

After recognition as an asset, an item of property, plant and equipment whose fair
value can be measured reliably shall be carried at a revalued amount, being its fair
value at the date of the revaluation less any subsequent accumulated depreciation
and subsequent accumulated impairment losses. Revaluations shall be made with
sufficient regularity to ensure that the carrying amount does not differ materially
from that which would be determined using fair value at the end of the reporting
period.

The frequency of revaluations depends upon the changes in fair values of the items
of property, plant and equipment being revalued. When the fair value of a revalued
asset differs materially from its carrying amount, a further revaluation is required.
Some items of property, plant and equipment experience significant and volatile
changes in fair value, thus necessitating annual revaluation. Such frequent
revaluations are unnecessary for items of property, plant and equipment with only
insignificant changes in fair value. Instead, it may be necessary to revalue the item
only every three or five years.

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 When an item of property, plant and equipment is revalued, the carrying amount
of that asset is adjusted to the revalued amount. At the date of the revaluation, the
asset is treated in one of the following ways:

(a) the gross carrying amount is adjusted in a manner that is

consistent with the revaluation of the carrying amount of
the asset. For example, the gross carrying amount may be
restated by reference to observable market data or it may
be restated proportionately to the change in the carrying
amount. The accumulated depreciation at the date of the
revaluation is adjusted to equal the difference between the
gross carrying amount and the carrying amount of the
asset after taking into account accumulated impairment
losses; or

(b) the accumulated depreciation is eliminated against the

gross carrying amount of the asset.

The amount of the adjustment of accumulated depreciation forms part of the

increase or decrease in carrying amount that is accounted for in accordance with
paragraphs 39 and 40.

If an item of property, plant and equipment is revalued, the entire class of property,
plant and equipment to which that asset belongs shall be revalued.

A class of property, plant and equipment is a grouping of assets of a similar nature

and use in an entity’s operations.

The following are examples of separate classes:

(a) land;

(b) land and buildings;

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(c) machinery;

(d) ships;

(e) aircraft;

(f) motor vehicles;

(g) furniture and fixtures;

(h) office equipment; and

(i) bearer plants.

The items within a class of property, plant and equipment are revalued
simultaneously to avoid selective revaluation of assets and the reporting of amounts
in the financial statements that are a mixture of costs and values as at different dates.
However, a class of assets may be revalued on a rolling basis provided revaluation
of the class of assets is completed within a short period and provided the revaluations
are kept up to date.

If an asset’s carrying amount is increased as a result of a revaluation, the increase

shall be recognized in other comprehensive income and accumulated in equity under
the heading of revaluation surplus. However, the increase shall be recognized in
profit or loss to the extent that it reverses a revaluation decrease of the same asset
previously recognized in profit or loss.

If an asset’s carrying amount is decreased as a result of a revaluation, the

decrease shall be recognized in profit or loss. However, the decrease shall be
recognized in other comprehensive income to the extent of any credit balance
existing in the revaluation surplus in respect of that asset. The decrease recognized
in other comprehensive income reduces the amount accumulated in equity under the
heading of revaluation surplus.

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 The revaluation surplus included in equity in respect of an item of property, plant
and equipment may be transferred directly to retained earnings when the asset is
derecognized. This may involve transferring the whole of the surplus when the asset
is retired or disposed of. However, some of the surplus may be transferred as the
asset is used by an entity. In such a case, the amount of the surplus transferred would
be the difference between depreciation based on the revalued carrying amount of the
asset and depreciation based on the asset’s original cost. Transfers from revaluation
surplus to retained earnings are not made through profit or loss.

The effects of taxes on income, if any, resulting from the revaluation of property,
plant and equipment are recognized and disclosed in accordance with IAS 12 Income
Taxes.

6.7 Depreciation:

Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.

An entity allocates the amount initially recognized in respect of an item of

property, plant and equipment to its significant parts and depreciates separately each
such part. For example, it may be appropriate to depreciate separately the airframe
and engines of an aircraft. Similarly, if an entity acquires property, plant and
equipment subject to an operating lease in which it is the lessor, it may be appropriate
to depreciate separately amounts reflected in the cost of that item that are attributable
to favorable or unfavorable lease terms relative to market terms.

A significant part of an item of property, plant and equipment may have a useful
life and a depreciation method that are the same as the useful life and the depreciation
method of another significant part of that same item. Such parts may be grouped in
determining the depreciation charge.

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 To the extent that an entity depreciates separately some parts of an item of
property, plant and equipment, it also depreciates separately the remainder of the
item. The remainder consists of the parts of the item that are individually not
significant. If an entity has varying expectations for these parts, approximation
techniques may be necessary to depreciate the remainder in a manner that faithfully
represents the consumption pattern and/or useful life of its parts.

An entity may choose to depreciate separately the parts of an item that do not
have a cost that is significant in relation to the total cost of the item.

The depreciation charge for each period shall be recognized in profit or loss
unless it is included in the carrying amount of another asset.

The depreciation charge for a period is usually recognised in profit or loss.

However, sometimes, the future economic benefits embodied in an asset are
absorbed in producing other assets. In this case, the depreciation charge constitutes
part of the cost of the other asset and is included in its carrying amount. For example,
the depreciation of manufacturing plant and equipment is included in the costs of
conversion of inventories (see IAS 2). Similarly, depreciation of property, plant and
equipment used for development activities may be included in the cost of an
intangible asset recognized in accordance with IAS 38 Intangible Assets.

6.7.1 Depreciable amount and depreciation period:

The depreciable amount of an asset shall be allocated on a systematic basis over

its useful life.

The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s)
shall be accounted for as a change in an accounting estimate in accordance with IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors.

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 Depreciation is recognized even if the fair value of the asset exceeds its carrying
amount, as long as the asset’s residual value does not exceed its carrying amount.
Repair and maintenance of an asset do not negate the need to depreciate it.

The depreciable amount of an asset is determined after deducting its residual

value. In practice, the residual value of an asset is often insignificant and therefore
immaterial in the calculation of the depreciable amount.

The residual value of an asset may increase to an amount equal to or greater than
the asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless
and until its residual value subsequently decreases to an amount below the asset’s
carrying amount.

Depreciation of an asset begins when it is available for use, ie when it is in the

location and condition necessary for it to be capable of operating in the manner
intended by management.

Depreciation of an asset ceases at the earlier of the date that the asset is classified
as held for sale (or included in a disposal group that is classified as held for sale) in
accordance with IFRS 5 and the date that the asset is derecognized. Therefore,
depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated. However, under usage methods of depreciation
the depreciation charge can be zero while there is no production.

The future economic benefits embodied in an asset are consumed by an entity

principally through its use. However, other factors, such as technical or commercial
obsolescence and wear and tear while an asset remains idle, often result in the
diminution of the economic benefits that might have been obtained from the asset.
Consequently, all the following factors are considered in determining the useful life
of an asset:

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(a) expected usage of the asset. Usage is assessed by reference to the asset’s expected
capacity or physical output.

(b) expected physical wear and tear, which depends on operational factors such as
the number of shifts for which the asset is to be used and the repair and maintenance
programmer, and the care and maintenance of the asset while idle.

(c) technical or commercial obsolescence arising from changes or improvements in

production, or from a change in the market demand for the product or service output
of the asset. Expected future reductions in the selling price of an item that was
produced using an asset could indicate the expectation of technical or commercial
obsolescence of the asset, which, in turn, might reflect a reduction of the future
economic benefits embodied in the asset.

(d) legal or similar limits on the use of the asset, such as the expiry dates of related
leases.

The useful life of an asset is defined in terms of the asset’s expected utility to the
entity. The asset management policy of the entity may involve the disposal of assets
after a specified time or after consumption of a specified proportion of the future
economic benefits embodied in the asset. Therefore, the useful life of an asset may
be shorter than its economic life. The estimation of the useful life of the asset is a
matter of judgement based on the experience of the entity with similar assets.

Land and buildings are separable assets and are accounted for separately, even
when they are acquired together. With some exceptions, such as quarries and sites
used for landfill, land has an unlimited useful life and therefore is not depreciated.
Buildings have a limited useful life and therefore are depreciable assets. An increase
in the value of the land on which a building stands does not affect the determination
of the depreciable amount of the building.

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 If the cost of land includes the costs of site dismantlement, removal and
restoration, that portion of the land asset is depreciated over the period of benefits
obtained by incurring those costs. In some cases, the land itself may have a limited
useful life, in which case it is depreciated in a manner that reflects the benefits to be
derived from it.

Impairment:

To determine whether an item of property, plant and equipment is impaired, an

entity applies IAS 36 Impairment of Assets. That Standard explains how an entity
reviews the carrying amount of its assets, how it determines the recoverable amount
of an asset, and when it recognizes, or reverses the recognition of, an impairment
loss.

Compensation for impairment:

Compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up shall be included in profit or loss when the
compensation becomes receivable. Impairments or losses of items of property, plant
and equipment, related claims for or payments of compensation from third parties
and any subsequent purchase or construction of replacement assets are separate
economic events and are accounted for separately as follows:

(a) impairments of items of property, plant and equipment are recognized in

accordance with IAS 36.

(b) DE recognition of items of property, plant and equipment retired or disposed of

is determined in accordance with this Standard.

(c) compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up is included in determining profit or loss when it
becomes receivable.

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(d) the cost of items of property, plant and equipment restored, purchased or
constructed as replacements is determined in accordance with this Standard.

Derecognition:

The carrying amount of an item of property, plant and equipment shall be

derecognized:

(a)on disposal.

(b) when no future economic benefits are expected from its use or disposal.

The gain or loss arising from the recognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognized (unless
IFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be
classified as revenue.

However, an entity that, in the course of its ordinary activities, routinely sells
items of property, plant and equipment that it has held for rental to others shall
transfer such assets to inventories at their carrying amount when they cease to be
rented and become held for sale. The proceeds from the sale of such assets shall be
recognized as revenue in accordance with IFRS 15 Revenue from Contracts with
Customers. IFRS 5 does not apply when assets that are held for sale in the ordinary
course of business are transferred to inventories.

The disposal of an item of property, plant and equipment may occur in a variety
of ways (eg by sale, by entering into a finance lease or by donation). The date of
disposal of an item of property, plant and equipment is the date the recipient obtains
control of that item in accordance with the requirements for determining when a
performance obligation is satisfied in IFRS 15. IFRS 16 applies to disposal by a sale
and leaseback.

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 If, under the recognition principle in paragraph 7, an entity recognizes in the
carrying amount of an item of property, plant and equipment the cost of a
replacement for part of the item, then it derecognizes the carrying amount of the
replaced part regardless of whether the replaced part had been depreciated
separately. If it is not practicable for an entity to determine the carrying amount of
the replaced part, it may use the cost of the replacement as an indication of what the
cost of the replaced part was at the time it was acquired or constructed.

The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds,
if any, and the carrying amount of the item.

The amount of consideration to be included in the gain or loss arising from the
derecognition of an item of property, plant and equipment is determined in
accordance with the requirements for determining the transaction price in paragraphs
47–72 of IFRS 15. Subsequent changes to the estimated amount of the consideration
included in the gain or loss shall be accounted for in accordance with the
requirements for changes in the transaction price in IFRS 15.

6.7 Disclosure:

The financial statements shall disclose, for each class of property, plant and
equipment:

(a) the measurement bases used for determining the gross carrying amount; (b)the
depreciation methods used.

(c) the useful lives or the depreciation rates used.

(d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.

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(e) a reconciliation of the carrying amount at the beginning and end of the period
showing:

(i) additions;

(ii) assets classified as held for sale or included in a disposal group classified as held
for sale in accordance with IFRS 5 and other disposals;

(iii)acquisitions through business combinations;

(iv) increases or decreases resulting from revaluations under paragraphs 31, 39 and
40 and from impairment losses recognized or reversed in other comprehensive
income in accordance with IAS 36;

(v) impairment losses recognized in profit or loss in accordance with IAS 36;

(vi) impairment losses reversed in profit or loss in accordance with IAS 36;
(vii)depreciation;

(viii) the net exchange differences arising on the translation of the financial
statements from the functional currency into a different presentation
currency, including the translation of a foreign operation into the presentation
currency of the reporting entity; and

(ix) other changes.

The financial statements shall also disclose:

(a) the existence and amounts of restrictions on title, and property,

plant and equipment pledged as security for liabilities.

(b) the amount of expenditures recognized in the carrying amount

of an item of property, plant and equipment in the course of its
construction.

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 (c) the amount of contractual commitments for the acquisition of
property, plant and equipment.

If not presented separately in the statement of comprehensive income, the financial

statements shall also disclose:

(a) the amount of compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in profit or loss; and
(b) the amounts of proceeds and cost included in profit or loss in accordance with
paragraph 20A that relate to items produced that are not an output of the entity’s
ordinary activities, and which line item(s) in the statement of comprehensive income
include(s) such proceeds and cost.

Selection of the depreciation method and estimation of the useful life of assets
are matters of judgement. Therefore, disclosure of the methods adopted and the
estimated useful lives or depreciation rates provides users of financial statements
with information that allows them to review the policies selected by management
and enables comparisons to be made with other entities. For similar reasons, it is
necessary to disclose:

(a) depreciation, whether recognized in profit or loss or as a part of the cost of other
assets, during a period.

(b)accumulated depreciation at the end of the period.

In accordance with IAS 8 an entity discloses the nature and effect of a change in
an accounting estimate that has an effect in the current period or is expected to have
an effect in subsequent periods. For property, plant and equipment, such disclosure
may arise from changes in estimates with respect to:

(a)residual values.

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(b) the estimated costs of dismantling, removing or restoring items of property, plant
and equipment.

(c)useful lives.

(d)depreciation methods.

If items of property, plant and equipment are stated at revalued amounts, the
following shall be disclosed in addition to the disclosures required by IFRS 13:

(a) the effective date of the revaluation.

(b) whether an independent value was involved.

(e) for each revalued class of property, plant and equipment, the carrying amount
that would have been recognized had the assets been carried under the cost model.

(f) the revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders.

In accordance with IAS 36 an entity discloses information on impaired property,

plant and equipment.

Users of financial statements may also find the following information relevant to
their needs:

(a) the carrying amount of temporarily idle property, plant and equipment.

(b) the gross carrying amount of any fully depreciated property, plant and equipment
that is still in use.

(c) the carrying amount of property, plant and equipment retired from active use and
not classified as held for sale in accordance with IFRS 5.

(d) when the cost model is used, the fair value of property, plant and equipment
when this is materially different from the carrying amount.

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6.8 Depreciation method:

The depreciation method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.

The depreciation method applied to an asset shall be reviewed at least at each

financial year-end and, if there has been a significant change in the expected pattern
of consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted for
as a change in an accounting estimate in accordance with IAS 8.

A variety of depreciation methods can be used to allocate the depreciable amount

of an asset on a systematic basis over its useful life. These methods include the
straight-line method, the diminishing balance method and the units of production
method. Straight-line depreciation results in a constant charge over the useful life if
the asset’s residual value does not change. The diminishing balance method results
in a decreasing charge over the useful life. The units of production method result in
a charge based on the expected use or output. The entity selects the method that most
closely reflects the expected pattern of consumption of the future economic benefits
embodied in the asset. That method is applied consistently from period to period
unless there is a change in the expected pattern of consumption of those future
economic benefits.

A depreciation method that is based on revenue that is generated by an activity

that includes the use of an asset is not appropriate. The revenue generated by an
activity that includes the use of an asset generally reflects factors other than the
consumption of the economic benefits of the asset. For example, revenue is affected
by other inputs and processes, selling activities and changes in sales volumes and
prices. The price component of revenue may be affected by inflation, which has no
bearing upon the way in which an asset is consumed. Impairment to determine
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whether an item of property, plant and equipment is impaired, an entity applies IAS
36 Impairment of Assets. That Standard explains how an entity reviews the carrying
amount of its assets, how it determines the recoverable amount of an asset, and when
it recognizes, or reverses the recognition of, an impairment loss.

There is a wide variety of depreciation method in use and all these methods are
based upon certain implicit assumptions though they all seek to distribute the cost of
the asset over its useful life. These methods can be classified under the following
groups:

6.8.1 Straight-Line Depreciation Method

Straight-line depreciation is a very common, and the simplest, method of calculating

depreciation expense. In straight-line depreciation, the expense amount is the same
every year over the useful life of the asset.

Depreciation Formula for the Straight Line Method:

Depreciation Expense = (Cost – Salvage value) / Useful life

Case: Consider a piece of equipment that costs $25,000 with an estimated useful life
of 8 years and a $0 salvage value. The depreciation expense per year for this
equipment would be as follows:

Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year

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6.8.2 Double Declining Balance Depreciation Method:

Compared to other depreciation methods, double-declining-balance

depreciation results in a larger amount expensed in the earlier years as opposed to
the later years of an asset’s useful life. The method reflects the fact that assets are
typically more productive in their early years than in their later years – also, the
practical fact that any asset (think of buying a car) loses more of its value in the first
few years of its use. With the double-declining-balance method, the depreciation
factor is 2x that of the straight-line expense method.

Depreciation formula for the double-declining balance method:

Periodic Depreciation Expense = Beginning book value x Rate of depreciation

Case: Consider a piece of property, plant, and equipment (PP&E) that costs $25,000,
with an estimated useful life of 8 years and a $2,500 salvage value. To calculate the
double-declining balance depreciation, set up a schedule:

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The information on the schedule is explained below:

1. The beginning book value of the asset is filled in at the beginning of year 1
and the salvage value is filled in at the end of year 8.

2. The rate of depreciation (Rate) is calculated as follows:

Expense = (100% / Useful life of asset) x 2

Expense = (100% / 8) x 2 = 25%

Note: Since this is a double-declining method, we multiply the rate of depreciation

by 2.

3. Multiply the rate of depreciation by the beginning book value to determine

the expense for that year. For example, $25,000 x 25% = $6,250 depreciation
expense.

4. Subtract the expense from the beginning book value to arrive at the ending
book value. For example, $25,000 – $6,250 = $18,750 ending book value at
the end of the first year.

5. The ending book value for that year is the beginning book value for the
following year. For example, the year 1 ending book value of $18,750 would
be the year 2 beginning book value. Repeat this until the last year of useful
life.

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6.8.3 Units of Production Depreciation Method:

The units-of-production depreciation method depreciates assets based on the total

number of hours used or the total number of units to be produced by using the asset,
over its useful life.

The formula for the units-of-production method:

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost –

Salvage value)

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Case: Consider a machine that costs $25,000, with an estimated total unit production
of 100 million and a $0 salvage value. During the first quarter of activity, the
machine produced 4 million units.

To calculate the depreciation expense using the formula above:

Depreciation Expense = (4 million / 100 million) x ($25,000 – $0) = $1,000

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6.8.4 Sum-of-the-Years-Digits Depreciation Method:

The sum-of-the-years-digits method is one of the accelerated depreciation

methods. A higher expense is incurred in the early years and a lower expense in the
latter years of the asset’s useful life.

In the sum-of-the-years digits depreciation method, the remaining life of an asset

is divided by the sum of the years and then multiplied by the depreciating base to
determine the depreciation expense.

The depreciation formula for the sum-of-the-years-digits method:

Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)

Consider the following example to more easily understand the concept of the sum-
of-the-years-digits depreciation method.

Case: Consider a piece of equipment that costs $25,000 and has an estimated useful
life of 8 years and a $0 salvage value. To calculate the sum-of-the-years-digits
depreciation, set up a schedule:

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The information in the schedule is explained below:

1. The depreciation base is constant throughout the years and is calculated as

follows:

Depreciation Base = Cost – Salvage value

Depreciation Base = $25,000 – $0 = $25,000

2. The remaining life is simply the remaining life of the asset. For example,
at the beginning of the year, the asset has a remaining life of 8 years. The
following year, the asset has a remaining life of 7 years, etc.
3. RL / SYD is “remaining life divided by sum of the years.” In this example,
the asset has a useful life of 8 years. Therefore, the sum of the years would
be 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36 years. The remaining life in the
beginning of year 1 is 8. Therefore, the RM / SYD = 8 / 36 = 0.2222.
4. The RL / SYD number is multiplied by the depreciating base to determine
the expense for that year.
5. The same is done for the following years. In the beginning of year 2, RL /
SYD would be 7 / 36 = 0.1944. 0.1944 x $25,000 = $4,861 expense for
year 2.

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Summary of Depreciation Methods

Below is the summary of all four depreciation methods from the examples above.

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 Chapter Seven

International Accounting Standards (IAS 2)

Inventories

In April 2001 the International Accounting Standards Board (Board) adopted IAS
2 Inventories, which had originally been issued by the International Accounting
Standards Committee in December 1993. IAS 2 Inventories replaced IAS 2
Valuation and Presentation of Inventories in the Context of the Historical Cost
System (issued in October 1975).

In December 2003 the Board issued a revised IAS 2 as part of its initial agenda
of technical projects. The revised IAS 2 also incorporated the guidance contained in
a related Interpretation (SIC-1 Consistency—Different Cost Formulas for
Inventories).

Other Standards have made minor consequential amendments to IAS 2. They

include IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial
Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39)
(issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued
May 2014), IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases
(issued January 2016).

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7.1 Objective:

The objective of this Standard is to prescribe the accounting treatment for

inventories. A primary issue in accounting for inventories is the amount of cost to
be recognized as an asset and carried forward until the related revenues are
recognized. This Standard provides guidance on the determination of cost and its
subsequent recognition as an expense, including any write-down to net realizable
value. It also provides guidance on the cost formulas that are used to assign costs to
inventories.

7.2 Scope:

This Standard applies to all inventories, except:

(a) financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS
9 Financial Instruments.

(b) biological assets related to agricultural activity and agricultural produce at the
point of harvest (see IAS 41 Agriculture).

This Standard does not apply to the measurement of inventories held by:

(a) producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
realizable value in accordance with well-established practices in those industries.
When such inventories are measured at net realizable value, changes in that value
are recognized in profit or loss in the period of the change.

(b) commodity broker-traders who measure their inventories at fair value less costs
to sell. When such inventories are measured at fair value less costs to sell, changes
in fair value less costs to sell are recognized in profit or loss in the period of the
change.

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 The inventories referred to in paragraph 3(a) are measured at net realizable value
at certain stages of production. This occurs, for example, when agricultural crops
have been harvested or minerals have been extracted and sale is assured under a
forward contract or a government guarantee, or when an active market exists and
there is a negligible risk of failure to sell. These inventories are excluded from only
the measurement requirements of this Standard.

Broker-traders are those who buy or sell commodities for others or on their own
account. The inventories are principally acquired with the purpose of selling in the
near future and generating a profit from fluctuations in price or broker-traders’
margin. When these inventories are measured at fair value less costs to sell, they are
excluded from only the measurement requirements of this Standard.

7.3 Definitions:

The following terms are used in this Standard with the meanings specified:
Inventories are assets:

(a) held for sale in the ordinary course of business.

(b) in the process of production for such sale.

(c) in the form of materials or supplies to be consumed in the production process or

in the rendering of services.

Net realizable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (See IFRS 13 Fair Value Measurement.)

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 Net realizable value refers to the net amount that an entity expects to realize from
the sale of inventory in the ordinary course of business. Fair value reflects the price
at which an orderly transaction to sell the same inventory in the principal (or most
advantageous) market for that inventory would take place between market
participants at the measurement date. The former is an entity-specific value; the
latter is not. Net realizable value for inventories may not equal fair value less costs
to sell.

Inventories encompass goods purchased and held for resale including, for
example, merchandise purchased by a retailer and held for resale, or land and other
property held for resale. Inventories also encompass finished goods produced, or
work in progress being produced, by the entity and include materials and supplies
awaiting use in the production process. Costs incurred to fulfil a contract with a
customer that do not give rise to inventories (or assets within the scope of another
Standard) are accounted for in accordance with IFRS 15 Revenue from Contracts
with Customers.

7.4 Measurement of inventories:

Inventories shall be measured at the lower of cost and net realizable value.

7.4.1 Cost of inventories:

The cost of inventories shall comprise all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition.

7.4.2 Costs of purchase:

The costs of purchase of inventories comprise the purchase price, import duties
and other taxes (other than those subsequently recoverable by the entity from the
taxing authorities), and transport, handling and other costs directly attributable to the

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acquisition of finished goods, materials and services. Trade discounts, rebates and
other similar items are deducted in determining the costs of purchase. Costs of
conversion The costs of conversion of inventories include costs directly related to
the units of production, such as direct labor. They also include a systematic
allocation of fixed and variable production overheads that are incurred in converting
materials into finished goods. Fixed production overheads are those indirect costs of
production that remain relatively constant regardless of the volume of production,
such as depreciation and maintenance of factory buildings, equipment and right-of-
use assets used in the production process, and the cost of factory management and
administration. Variable production overheads are those indirect costs of production
that vary directly, or nearly directly, with the volume of production, such as indirect
materials and indirect labor.

The allocation of fixed production overheads to the costs of conversion is based

on the normal capacity of the production facilities. Normal capacity is the production
expected to be achieved on average over a number of periods or seasons under
normal circumstances, taking into account the loss of capacity resulting from
planned maintenance. The actual level of production may be used if it approximates
normal capacity. The amount of fixed overhead allocated to each unit of production
is not increased as a consequence of low production or idle plant. Unallocated
overheads are recognized as an expense in the period in which they are incurred. In
periods of abnormally high production, the amount of fixed overhead allocated to
each unit of production is decreased so that inventories are not measured above cost.
Variable production overheads are allocated to each unit of production on the basis
of the actual use of the production facilities.

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 A production process may result in more than one product being produced
simultaneously. This is the case, for example, when joint products are produced or
when there is a main product and a by-product. When the costs of conversion of each
product are not separately identifiable, they are allocated between the products on a
rational and consistent basis. The allocation may be based, for example, on the
relative sales value of each product either at the stage in the production process when
the products become separately identifiable, or at the completion of production.
Most by-products, by their nature, are immaterial. When this is the case, they are
often measured at net realizable value and this value is deducted from the cost of the
main product. As a result, the carrying amount of the main product is not materially
different from its cost.

7.4.3 Other costs:

Other costs are included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition. For
example, it may be appropriate to include non-production overheads or the costs of
designing products for specific customers in the cost of inventories.

Examples of costs excluded from the cost of inventories and recognized as expenses
in the period in which they are incurred are:

(a) abnormal amounts of wasted materials, labor or other production costs.

(b) storage costs, unless those costs are necessary in the production process before
a further production stage.

(c) administrative overheads that do not contribute to bringing inventories to their

present location and condition.

(d) selling costs.

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 IAS 23 Borrowing Costs identifies limited circumstances where borrowing costs
are included in the cost of inventories.

An entity may purchase inventories on deferred settlement terms. When the

arrangement effectively contains a financing element, that element, for example a
difference between the purchase price for normal credit terms and the amount paid,
is recognized as interest expense over the period of the financing.

7.4.5 Cost of agricultural produce harvested from biological assets:

In accordance with IAS 41 Agriculture inventories comprising agricultural

produce that an entity has harvested from its biological assets are measured on initial
recognition at their fair value less costs to sell at the point of harvest. This is the cost
of the inventories at that date for application of this Standard.

7.4.6 Techniques for the measurement of cost:

Techniques for the measurement of the cost of inventories, such as the standard
cost method or the retail method, may be used for convenience if the results
approximate cost. Standard costs take into account normal levels of materials and
supplies, labor, efficiency and capacity utilization. They are regularly reviewed and,
if necessary, revised in the light of current conditions.

The retail method is often used in the retail industry for measuring inventories
of large numbers of rapidly changing items with similar margins for which it is
impracticable to use other costing methods. The cost of the inventory is determined
by reducing the sales value of the inventory by the appropriate percentage gross
margin. The percentage used takes into consideration inventory that has been marked
down to below its original selling price. An average percentage for each retail
department is often used.

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7.4.7 Cost formulas:

The cost of inventories of items that are not ordinarily interchangeable and goods
or services produced and segregated for specific projects shall be assigned by using
specific identification of their individual costs.

Specific identification of cost means that specific costs are attributed to identified
items of inventory. This is the appropriate treatment for items that are segregated for
a specific project, regardless of whether they have been bought or produced.
However, specific identification of costs is inappropriate when there are large
numbers of items of inventory that are ordinarily interchangeable. In such
circumstances, the method of selecting those items that remain in inventories could
be used to obtain predetermined effects on profit or loss.

The cost of inventories, other than those dealt with in paragraph 23, shall be
assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An
entity shall use the same cost formula for all inventories having a similar nature and
use to the entity. For inventories with a different nature or use, different cost
formulas may be justified.

For example, inventories used in one operating segment may have a use to the
entity different from the same type of inventories used in another operating segment.
However, a difference in geographical location of inventories (or in the respective
tax rules), by itself, is not sufficient to justify the use of different cost formulas.

The FIFO formula assumes that the items of inventory that were purchased or
produced first are sold first, and consequently the items remaining in inventory at
the end of the period are those most recently purchased or produced. Under the
weighted average cost formula, the cost of each item is determined from the
weighted average of the cost of similar items at the beginning of a period and the

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cost of similar items purchased or produced during the period. The average may be
calculated on a periodic basis, or as each additional shipment is received, depending
upon the circumstances of the entity.

7.4.8 Net realizable value:

The cost of inventories may not be recoverable if those inventories are damaged,
if they have become wholly or partially obsolete, or if their selling prices have
declined. The cost of inventories may also not be recoverable if the estimated costs
of completion or the estimated costs to be incurred to make the sale have increased.
The practice of writing inventories down below cost to net realizable value is
consistent with the view that assets should not be carried in excess of amounts
expected to be realized from their sale or use.

Inventories are usually written down to net realizable value item by item. In some
circumstances, however, it may be appropriate to group similar or related items. This
may be the case with items of inventory relating to the same product line that have
similar purposes or end uses, are produced and marketed in the same geographical
area, and cannot be practicably evaluated separately from other items in that product
line. It is not appropriate to write inventories down on the basis of a classification of
inventory, for example, finished goods, or all the inventories in a particular operating
segment.

Estimates of net realizable value are based on the most reliable evidence available
at the time the estimates are made, of the amount the inventories are expected to
realize. These estimates take into consideration fluctuations of price or cost directly
relating to events occurring after the end of the period to the extent that such events
confirm conditions existing at the end of the period.

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 Estimates of net realizable value also take into consideration the purpose for
which the inventory is held. For example, the net realizable value of the quantity of
inventory held to satisfy firm sales or service contracts is based on the contract price.
If the sales contracts are for less than the inventory quantities held, the net realizable
value of the excess is based on general selling prices. Provisions may arise from firm
sales contracts in excess of inventory quantities held or from firm purchase contracts.
Such provisions are dealt with under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

Materials and other supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will be incorporated
are expected to be sold at or above cost. However, when a decline in the price of
materials indicates that the cost of the finished products exceeds net realizable value,
the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net
realizable value.

A new assessment is made of net realizable value in each subsequent period.

When the circumstances that previously caused inventories to be written down
below cost no longer exist or when there is clear evidence of an increase in net
realizable value because of changed economic circumstances, the amount of the
write-down is reversed (ie the reversal is limited to the amount of the original write-
down) so that the new carrying amount is the lower of the cost and the revised net
realizable value. This occurs, for example, when an item of inventory that is carried
at net realizable value, because its selling price has declined, is still on hand in a
subsequent period and its selling price has increased.

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7.4.9 Recognition as an expense:

When inventories are sold, the carrying amount of those inventories shall be
recognized as an expense in the period in which the related revenue is recognized.
The amount of any write-down of inventories to net realizable value and all losses
of inventories shall be recognized as an expense in the period the write-down or loss
occurs. The amount of any reversal of any write-down of inventories, arising from
an increase in net realizable value, shall be recognized as a reduction in the amount
of inventories recognized as an expense in the period in which the reversal occurs.

Some inventories may be allocated to other asset accounts, for example,

inventory used as a component of self-constructed property, plant or equipment.
Inventories allocated to another asset in this way are recognized as an expense during
the useful life of that asset.

7.5 Disclosure:

The financial statements shall disclose:

(a) the accounting policies adopted in measuring inventories, including the cost
formula used.

(b) the total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity.

(c) the carrying amount of inventories carried at fair value less costs to sell.

(d) the amount of inventories recognized as an expense during the period.

(e) the amount of any write-down of inventories recognized as an expense in the

period in accordance with paragraph 34.

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(f) the amount of any reversal of any write-down that is recognized as a reduction
in the amount of inventories recognized as expense in the period in accordance with
paragraph 34.

(g) the circumstances or events that led to the reversal of a write-down of inventories
in accordance with paragraph 34.

(h) the carrying amount of inventories pledged as security for liabilities.

Information about the carrying amounts held in different classifications of

inventories and the extent of the changes in these assets is useful to financial
statement users. Common classifications of inventories are merchandise, production
supplies, materials, work in progress and finished goods.

The amount of inventories recognized as an expense during the period, which is

often referred to as cost of sales, consists of those costs previously included in the
measurement of inventory that has now been sold and unallocated production
overheads and abnormal amounts of production costs of inventories. The
circumstances of the entity may also warrant the inclusion of other amounts, such as
distribution costs.

Some entities adopt a format for profit or loss that results in amounts being
disclosed other than the cost of inventories recognized as an expense during the
period. Under this format, an entity presents an analysis of expenses using a
classification based on the nature of expenses. In this case, the entity discloses the
costs recognized as an expense for raw materials and consumables, labor costs and
other costs together with the amount of the net change in inventories for the period.

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7.6 Inventory systems:

There are two basic systems used to accounting for inventory: Periodic Inventory
system and Perpetual Inventory system.

7.6.1 Periodic Inventory System:

One of the simplest and oldest inventory management methods, the periodic
inventory system, like its name, calls for 'periodic' inventory counts after a set
timeframe. These periods can be decided according to you; it could range from a few
hours to monthly to annually. This type of method is generally used by small
companies that don't have many stocks to track or slow sales rate.

In the write up ahead, you would understand everything about the Periodic
Inventory Management method and whether you should choose this method or not.

7.6.1.1 Periodic Inventory System: Concept and Steps:

As opposed to the perpetual inventory system, in periodic inventory methods, the

inventory is not tracked each time a sale or a purchase is made. Here, inventory is
monitored at the beginning and end of the accounting period.

Periodic inventory management is about accounting stock for its valuation after
the designated time frame. Warehouse employees take a physical count of their
products periodically according to the set period.

The information gathered during the physical count is used for accounting and
balance the ledgers. Accountants then add the balance to the beginning inventory in
the next new period.

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 Calculation of the ending inventory, profits, and COGS are done at the end of
the year for periodic inventory by performing a count of stock physically. Businesses
utilize estimates like monthly, quarterly, and half-yearly reports that were recorded
a few times during the year.

General Ledger Account Inventory is not updated whenever the purchases of

goods to be resold are made. Instead, the temporary account purchases are debited.
For this, a temporary account is considered that begins each year with a zero balance.
And the ending balance is removed to another account at the end of the year.

Adjustments are made from purchasing goods to general ledger contra accounts.
Contra account offsets the balance in their related account and is considered in the
final statement.

Contra accounts generally consist of purchase discounts or purchases returns,

allowances accounts. Adding these accounts gives the total amount spent on
purchases.

Moreover, the delivery cost is also kept in a separate account from the central
inventory account. Companies track delivery costs related to incoming inventory in
Transport in accounts Freight in accounts.

All these costs eventually increase the value of the inventory. Refer to the table
below to understand how the accounts would look like in the periodic inventory
method.

 Periodic inventory system does not continuously keep track of the value of
inventory on hand and the cost of inventory sold (cost of goods sold).
 Instead, it calculates these amounts only once at the end of the accounting
period.

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  This conceptual difference results in practical differences between the
periodic and the perpetual inventory systems: Accounts used.
 A separate general ledger account is used for each type of inventory
transaction.
 Cost of goods sold transactions are ignored during the period and recorded
only at the end of the period.
 Merchandise inventory balance in the general ledger is not updated until the
end of the period and does NOT represent the value of inventory on hand.

7.6.1.2 Types of Industries Should Use Periodic Inventory System:

Generally, the industries with less amount of stock and fewer number warehouses
or probably only one warehouse should use this because there is a lot of physical
work involved in this type of inventory management. Small scale industries that have
just started can use this method provided they are aiming for slow growth.

Businesses that don't have a large number of frequent sales or purchases can also
adopt periodic inventory management. And, for companies that are willing to adopt
periodic inventory management methods, many periodic inventory management
software's help you track your inventory.

Milner beautifully explains: "We see many companies trying to implement

inventory management business systems that do not have the features or
requirements they need. The most important thing is to know what you need
precisely. When someone comes to sell you a system, their measures of success may
not be the same as your business's measure of success. Whether it is your business,
the sales business, or the hosting business, each has a different focus. So ensure
yours is the one that drives the sale.

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 For example, when you buy a car, you know what you want. The may have a
vehicle that does not exactly fit your request. His job is to persuade and sell you
more than you need. When you drive away, you realize you cannot operate the
vehicle effectively. As a buyer, beware. You should buy what you need and not an
approximation of what you think you want. Whether this happens as a matter of
choice or misunderstanding, it hardly matters. This is not a criticism but is reflective
of the industry."

Thus, you need to be very clear about the nature of your business before choosing
a type of inventory management method. At the end of this article, we will compare
the Perpetual and Periodic Inventory to give you a clearer picture.

7.6.1.3 Accounts used in periodic inventory system:

Instead of constantly updating the Merchandise Inventory account several

temporary accounts are used to record inventory transactions:

Account Description

Purchases Used to accumulate the value of all purchases of

merchandise made during the accounting period.

Purchase Returns Used to record a purchase return from a supplier.

Purchase Discounts Used to record discounts received for early payment.

Transportation In Used to record shipping charges paid by the buyer.

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Calculation Cost of Gods Sold (COGS) in periodic inventory system:

The formula to calculate the cost of goods sold in periodic inventory system as
follow:

COGS = total cost of Beginning inventory- Cost of ending inventory

Where:

The cost of beginning Inventory = Beginning inventory + Purchases.

For example: Ahmed company has a beginning inventory of $100,000, has paid
$150,000 for purchases, and its physical inventory count reveals an ending inventory
cost of $90,000.

The calculation of the cost of goods sold is:

$160,000 COGS =100,000 BI + $150,000 P– $90,000 EI

7.6.1.4 Cost Flow Assumptions in Periodic Inventory System:

Cost flow assumptions in periodic inventory management are somewhat similar

to perpetual inventory methods as far as formulas are concerned. However, the way
calculations are carried out is different because, in periodic inventory, there is no
continuous record of sales. Hence, the ledger tally accounts for purchases, and
transactions are not kept running.

Cost flow assumptions are used to find out the ending inventory and COGS that
will ultimately determine the efficiency of your inventory management techniques
and skills.

There are three types of cost flow assumptions in periodic inventory System
FIFO, LIFO, and WAC.

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7.6.1.5 FIFO in Periodic Inventory Management

First in First out (FIFO), this cost flow assumption method believes in
calculating the value of your ending inventory by presuming the fact that the
products purchased first are sold first. Hence, the remaining stock is the latest
purchases inventory. In periodic FIFO inventory, the businesses begin by physically
counting the inventory.

Case Study No One:

Farida Company uses a periodic inventory system. The company makes a physical
count at the end of each accounting period to find the number of units in ending
inventory. The company then applies a first-in, first-out (FIFO) method to compute
the cost of ending inventory. The information about the inventory balance at the
beginning and purchases made during the year 2021 is given below:

- Mar. 01: Beginning balance; 400 units, $18 per unit.

- Mar. 12: Purchases; 600 units, $20 per unit.

- Oct. 17: Purchases; 800 units, $22 per unit.

- Nov. 15: sold 1400 units, $ 25 per unit.

- Dec. 20: Purchases; 200 units, $24 per unit.

If you know the following:

- On December 31, 2021, 600 units were on hand according to physical count.
- The company uses a periodic inventory system to account for sales and
purchases of stock.
- First-in, First-out (FIFO) cost flow assumption is used.

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Required:

- Compute the Cost of ending inventory on December 31, 2021.

- Compute the Cost of goods sold during the year 2021.

- Record the above transactions in journal.

- show the effect of above transactions on financial statements.

Solution:

(1). Cost of ending inventory – FIFO method:

If the FIFO method is used, the units remaining in the stock represent the most
recent costs incurred to purchase the inventory. The cost of 600 units on December
31 would, therefore, be computed as follows:

Most Recent Cost; December 15, 2021 $ 4,800

200 units, $24 per unit

Add: Next Most Recent Cost; October 17, 2021 $ 8,800

400 units, $22 per unit

Total cost of 600 units in inventory on December 31, $ 13,600

2021(Ending Inventory)

(2). Cost of goods sold – FIFO method:

The cost of products sold can be calculated by using either the periodic inventory
formula method or the earliest cost method.

a. Formula method: Under the formula method, the cost of goods sold would be
computed as follows:

Cost of goods sold=beginning inventory +purchased–ending inventory.

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b. Earliest cost method: Under the earliest cost method, we would find the total
number of units sold during the period, and then we would calculate the cost of these
units using the earliest costs.

Number of units sold = Beginning inventory + Purchases – Ending inventory

= 400 units + 1,600* units – 600 units = 1,400 units

*600 + 800 + 200

The 1,400 units sold during the year would be costed using earliest costs as follows:

Cost of units on ; January 1, 2021 $ 7,200

400 units, $18 per unit

Add: Cost of units during the year

600 units purchased, $20 per unit $12,000
800 units purchased, $22 per unit $17,600
200 units purchased, $24 per unit $4,800 $ 34,400

Total cost of units in available for sale December $ 41,600

Less: Cost of units in Ending Inventory. ($ 13,600)

Total cost of goods sold during the year(COGS) $ 28,000

Effect on Financial Statements:

Income Statement

For the Year ending dec,31,2021

Net Sales (140025 35000

(-) Cost of Goods Sold (28000)

= Gross Profit 7000

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 Balance Sheet Dec,31,2021

Current Assets
Inventory 13,600

Journal Entries:

3.12.2021 Purchasing 12,000

Accounts payable 12,000
Purchased on account 600 20

10.17.2021 Purchasing 17,600

Accounts payable 17,600
Purchased on account 800 22

11.15.2021 Accounts Receivable 35,000

Sales 35,000
sales on account 1400 25

12.20.2021 Purchasing 4,800

Accounts payable 4,800
Purchased on account 200 24

7.6.1.6 LIFO in Periodic Inventory Management

Last in First out (LIFO) is a cost flow assumption technique that assumes the
inventory movement to be in a manner that the latest purchased products are sold
first. Similar to FIFO periodic inventory management, in LIFO as well, the
calculation begins with a physical count of inventory.

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Case Study No Two:

Salma Company has provided the following data about purchases and sales made
during the year 2021.

- Jan. 01: Beginning inventory; 1,000 units @ $16 per unit.

- Feb. 15: Purchased; 1,800 units @ $18 per unit.

- Apr. 15: Purchased; 1,000 units @ $20 per unit.

- Jul. 10: Purchased; 2,000 units @ $22 per unit.

- Aug .13. Sold 6000 unit, sales price $25 per unit.

- Oct. 20: Purchased; 1,500 units @ $24 per unit

If you know the following:

- According to a physical count, 1,300 units were found in inventory on December

31, 2021.

- The company uses a periodic inventory system to account for sales and purchases
of stock.

- Last-in, first-out (LIFO) cost flow assumption is used.

Required:

- Compute the Cost of ending inventory on December 31, 2021.

- Compute the Cost of goods sold during the year 2021.

- Record the above transactions in journal.

- show the effect of above transactions on financial statements.

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 Solution

Cost of ending inventory: Since the company is using the LIFO periodic system, the
1,300 units in ending inventory would be estimated using the earliest purchasing
costs. The computations are given below:

Earliest Cost; Ianuray,1 , 2021(Beginning inventory) $ 16,000

1000 units, $16 per unit

Add: Next Earliest Cost; February 15, 2021 $ 5,400

300 units, $18 per unit

Total cost of 1,300 units in inventory on December 31, $ 21,400

2021(Ending Inventory)

Cost of goods sold:

Cost of goods sold is equal to the cost of units sold during the year. It can be
computed using one of the two methods given below:

Formula method: Under the formula method, we would calculate the cost of
goods sold by deducting the cost of ending inventory (calculated above) from the
total cost of units available for sale during the period. The total cost of units available
for sale is equal to the cost of beginning inventory plus the cost of all units purchased
during the year. It can be expressed in the form of the following formulas or
equations.

Cost of goods sold = cost of units available for sale – Cost of units in ending inventory

Or

Cost of goods sold = [cost of units in beginning inventory + cost of units purchased
during the period] – Cost of units in ending inventory.

Number of units sold during the year = Units in beginning inventory + Units
purchased during the year – Units in ending inventory.
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= 1,000 units + 6,300* units – 1,300 units = 6,000 units

Cost of units on; January 1, 2021(begin inventory) $ 16,000

1000 units, $16 per unit

Add: Cost of units during the year:

1,800 units purchased, $18 per unit $32,400
1,000 units purchased, $20 per unit $20,000
2,000 units purchased, $22 per unit $44,000
1,500 units purchased, $24 per unit $36,000 $ 132,400

Total cost of units in available for sale December: $ 148,400

Less: Cost of units in Ending Inventory. ($21,400)

Total cost of goods sold during the year(COGS) $ 127,000

Effect on Financial Statements:

Income Statement
For the Year ending dec,31,2021

Net Sales (600025) 150,000

(-) Cost of Goods Sold (127,000)
= Gross Profit 23,000

Balance Sheet
Dec,31,2021

Current Assets
Inventory 21,400

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Journal Entries:

2.15.2021 Purchasing 32,400

Accounts payable 32,400

Purchased on account 18,00 18

4.15.2021 Purchasing 20,000

Accounts payable 20,000

Purchased on account 1000 20

7.10.2021 Purchasing 44,000

Accounts payable 44,000

Purchased on account 2000 22

11.15.2021 Accounts Receivable 150,000

Sales 150,000

sales on account 6000 25

12.20.2021 Purchasing 36,000

Accounts payable 36,000

Purchased on account 1500 24

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7.6.1.7 Weighted Average Cost in Periodic Inventory system:

WAC calculates the value of inventory by taking the average of the newest and
oldest stock.

The formula to calculate WAC is: WAC = [BI+P] Units for Sale

Case Study No Three:

Ahmed Company is a trading company that purchases and sells a single product –
product X. The company has the following record of sales and purchases of product
X for June 2021.

- June 01: Balance at the beginning of the month; 200 units @ $10.15.

- June 05: Purchased 800 units @ $10.25.

- June 07: Sold 400 units.

- June 12: Purchases: 600 units @ $10.40.

- June 14: Sales: 500 units

- June 20: Purchases: 400 units @ $10.50

- June 25: Purchases: 800 units @ $10.70

- June 26: Sales: 1,400 units

- June 28: Sales: 200 units.

- June 30: Purchases: 600 units @ $10.85

If you know the following:

- The company uses a periodic inventory system.

- Sales price $ 12 per unit.

- Weighted Average (WAC) cost flow assumption is used.

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Required:

- Compute the Cost of ending inventory on December 31, 2021.

- Compute the Cost of goods sold during the year 2021.

- Record the above transactions in journal.

- show the effect of above transactions on financial statements.

Solution:

Units Available for sale:

Date No of Units Cost Per Unit Total Cost

Jun. 01 200 $ 10.15 $ 2.030

Jun. 05 800 $ 10.25 $ 8.200

Jun. 12 600 $ 10.40 $ 6.240

Jun. 20 400 $ 10.50 $ 4.200

Jun. 25 800 $ 10.70 $ 8.560

Jun. 30 600 $ 10.85 $ 6.510

Total 3,400 - $ 35.740

Weighted average unit cost= $35,740 / 3,400 units = $10.51176 per unit

Ending inventory=units available for sale –units sold

= 3,400 units – (400 units + 500 units + 1,400 units + 200 units)

= 3,400 units – 2,500 units = 900 units

Cost of goods sold: 2,500 units' × $10.51176 = $26,279.40

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Cost of ending inventory: 900 units × $10.51176 = $9,460.60

Effect on Financial Statements:

Income Statement For the Year ending dec,31,2021

Net Sales (2,50012) 30,000

(-) Cost of Goods Sold (26,279.40)
= Gross Profit 3,720.6

Balance Sheet Dec,31,2021

Current Assets
Inventory 9,460.60

Journal Entries:

7.05.2021 Purchasing 8,200

Accounts payable 8,200
Purchased on account 8,00 10.25
7.07.2021 Accounts Receivable 4,800
Sales 4,800
sales on account 400 12
7.12.2021 Purchasing 6,240
Accounts payable 6,240
Purchased on account 600 1.40
7.14.2021 Accounts Receivable 6,000
Sales 6,000
sales on account 500 12
7.20.2021 Purchasing 4,200
Accounts payable 4,200
Purchased on account 400 10.5
7.25.2021 Purchasing 8,650
Accounts payable 8,650
Purchased on account 800 10.70
7.26.2021 Accounts Receivable 16,800
Sales 16,800
sales on account 1,400 12
7.28.2021 Accounts Receivable 24,000
Sales 24,000
sales on account 2,000 12
7.30.2021 Purchasing 6,510
Accounts payable 6,510
Purchased on account 600 10.850

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7.6.2 Perpetual Inventory System:

The perpetual inventory method of accounting inventory, as the name suggests,

is about tracking inventory 'perpetually' as it moves throughout the supply chain. In
this approach, warehouse managers keep a continuous track of inventory balances,
which means the stock is updated automatically every time an item is received or
sold through every point of sale.

 All inventory transactions are recorded in a single merchandise inventory

account in the general ledger.
 Cost of goods sold transactions are recorded as incurred throughout the
period.
 All inventory transactions are recorded as incurred, constantly updating the
value of inventory in the general ledger which represents the value of
inventory on hand.

7.6.2.1Types of business should use Perpetual Inventory System:

Huge businesses with multiple warehouses and large amounts of inventory

generally resort to perpetual inventory management methods. However, SMBs
looking to grow fastly also can adopt this method to track inventory.

Physically counting inventory or carrying out cycle count frequently is almost

next to impossible for a large scale industry with thousands and lakhs of SKUs.
Hence perpetual inventory tracking is the most app inventory management method.

For instance, let's assume you have a business of t-shirts and jackets. You keep
your inventory distributed in 8 warehouses. One day you get an order for a woolen
coat that has been very rarely asked, and it's a summer season.

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 What are you going to do? Well, if you are managing your inventory perpetually,
all you have to do is just sit and chill because the warehouse having that jacket will
get the notification about the order. They would do the rest of the job. It's as simple
as that since the systems are connected, and new data is flowing to each warehouse
manager through an interlinked system.

But if you have a periodic inventory management system, you will have to call
your warehouses and tell them to find that jacket and ship it. It would take more time
and cause problems. Another type of business that requires perpetual inventory
management methods is drop shipping companies. Their products move from the
manufacturer or supplier to customers all the time, and there are returns and
exchanges. Their inventory is always moving, and to know which product is in stock
and which one is not, they need to track the flow of inventory perpetually.

7.6.2.2 Accounts used in perpetual system:

Instead of constantly updating the Merchandise Inventory account several

temporary accounts are used to record inventory transactions:

Account Description

Merchandise Inventory Used to accumulate the value of all purchases or sales

of merchandise made during the accounting period,
purchase /sales return or allowance received from a
supplier, discounts payment/received for early
payment/receipt of an account and Transportation In.

Cost of Goods Sold Used to record the value of goods sold according to
evaluation method (FIFO, LIFO, and WAC).

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7.6.2.3 How a Perpetual Inventory Management Method Works

Whenever there is a sale of a product, the inventory management system attached

to POS immediately applies the debit to the main inventory across all channels if all
the channels are well connected. Similarly, whenever products are coming into the
inventory, the workers can scan those products' barcodes with RFID scanners, and
the inventory count gets updated instantaneously.

As soon as the change is applied, the inventory on hand changes, which allows
you to be well aware of your stock levels. Unlike the periodic inventory management
method, you can calculate the cost of goods sold frequently as the changes in the
inventory. However, even in the perpetual inventory management, you will
sometimes need to count stock to make sure that the virtual stock count aligns with
the real inventory whenever there are discrepancies in the on-hand stocks in real.

As far as accounting is concerned the perpetual inventory calculations are based

on three parameters:

 Real-time changes in the inventory.

 Changes due to discards or depreciation in inventory.
 Theft or shrinkage in the inventory.

Although, real-time data is the most noted parameter in perpetual inventory

Management method and alterations in the inventory due to discarding, depreciation,
and theft or shrinkage are often adjusted manually in the end while accounting.

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7.6.2.4 The Cost of Goods Sold (COGS)

In the perpetual inventory management method, the COGS is also calculated

perpetually. As the product gets sold, it increases the cost of sales, aka Cost of Goods
Sold (COGS). It encompasses the money invested in producing goods, along with
labor and material costs.

COGS = BI + P - EI

Where,

BI = Beginning Inventory

P = purchase for the period

EI = Ending inventory

COGS in perpetual inventory management are calculated after every sale, but you
can Figure it for a period using this formula.

7.6.2.5 Cost Flow Assumptions to Calculate COGS and End Inventory in

Perpetual Inventory System:

An inventory accounting method, cost flow assumption uses the real value of the
products from the beginning inventory period and the expenses done in purchasing
the new inventory in that period to calculate COGS and the ending inventory value.
There are three cost flow assumptions - FIFO, LIFO, and WAC (Weighted Average
Cost).

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7.6.2.6 FIFO Perpetual Inventory Method

FIFO (first in first out) is a method to account for an inventory in a way that the
stock purchased first will be sold first so that the leftover inventory is always the
recently purchased inventory. For the perpetual FIFO cost flow assumption, the
company records sales as they happen in the ledger. It is a cost flow estimation to
evaluate the stocks.

The significant difference in the ledger in a perpetual inventory method compared

to a periodic system is that the balance is a running tally of the value of sold units
and the total units.

The total unit cost transferred over to the balances happens when the stock sold
comes in. The value of the stock the company bought will be consistent throughout
its lifecycle in the company.

FIFO method should be used when the company is trying to show its immense
potential of earning huge profits. FIFO shows fewer COGS investments and a higher
bottom line.

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Case Study NO One: The Company has provided the following information about
commodity DX-13C and wants your assistance in computing the cost of commodity
DX-13C sold and the cost of ending inventory of commodity DX-.

 Jan. 01: Beginning inventory; 4000 units, $12 per unit.

 Mar.05: Purchases; 6000 units, $ 16 per unit.

 Apr. 17: Sales; 7000 units.

 Sep. 07: Purchases; 8000 units, $17 per unit.

 Nov. 11: Sales; 6000 units.

Required:

1. Prepare a FIFO perpetual inventory card.

2. Compute cost of goods sold and the cost of ending inventory using FIFO
method.

3. Prepare journal entries to record the above transactions under perpetual

inventory system.

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 Solution:

(1). FIFO perpetual inventory card:

(2). Journal Entries:

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(3). impact certain ledger accounts and the resulting financial statements:

If you are very perceptive, you will note that this is the same thing that resulted
under the periodic FIFO approach introduced earlier. So, another general
observation is in order: The FIFO method will produce the same financial statement
results no matter whether it is applied on a periodic or perpetual basis. This occurs
because the beginning inventory and early purchases are peeled away and charged
to cost of goods sold -- whether the associated calculations are done “as you go”
(perpetual) or “at the end of the period” (periodic).

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Non – Solution Case Study:

The Fine Electronics Company uses perpetual inventory system to account for
acquisition and sale of inventory and first-in, first-out (FIFO) method to compute
cost of goods sold and for the valuation of ending inventory. The company has made
the following purchases and sales during the month of January 2016.

 Jan. 01: Inventory at the beginning of the month; 2400 units $1,000 per unit.

 Jan. 04: Sales: 1600 units.

 Jan. 07: Purchases; 1200 units $1,020 per unit.

 Jan. 10: Purchases; 1000 units $1,050 per unit.

 Jan. 14: Sales; 1600 units.

 Jan. 23: Sales; 1200 units.

 Jan. 24: Purchases; 1200 units $1,060 per unit.

 Jan. 27: Purchases; 400 units $1,080 per unit.

 Jan. 29: Sales; 600 units.

Required:

1. Prepare journal entries to record the above transactions under perpetual

inventory system.

2. Prepare a FIFO perpetual inventory card.

3. Compute the cost of goods sold and the cost of inventory in hand at the end
of the month of January 2012.

4. Show the impact of above transactions on ledger accounts and

financial statements.
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7.6.2.7 LIFO Perpetual Inventory System:

Last in first out (LIFO) is the cost flow assumption that is used by business to
calculate the worth of their inventory. This method also uses the running ledger tally
for purchases and sales. The only difference is that here the last-placed stock is sold
first, and thus the leftover inventory is the inventory that was purchased first i.e. the
oldest one. The LIFO method is a great way to show higher COGS expenses and
lower net income. This method can be used in tough times and decrease tax
liabilities.

LIFO can also be applied on a perpetual basis. This time, the results will not be
the same as the periodic LIFO approach (because the “last-in” layers are constantly
being peeled away, rather than waiting until the end of the period).

Case Study No Two: Farida Company has provided the following data:

- Jan. 01: Beginning inventory; 4000 units, $12 per unit.

- Mar.05: Purchases; 6000 units, $ 16 per unit.
- Apr. 17: Sales; 7000 units.
- Sep. 07: Purchases; 8000 units, $17 per unit.
- Nov. 11: Sales; 6000 units.

Required:

1. Prepare a LIFO perpetual inventory card.

2. Compute cost of goods sold and the cost of ending inventory using
FIFO method.
3. Prepare journal entries to record the above transactions under perpetual
inventory system.

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(1) LIFO perpetual inventory card:

(2) Journal Entries:

108,000
108,000

6000

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(3) impact ledger accounts and the resulting financial statements:

7.6.2.7 Moving Average (MA) or Weighted Average Cost (WAC):

The average method can also be applied on a perpetual basis, earning it the name
“moving average”. This technique is considerably more involved, as a new average
unit cost must be computed with each purchase transaction.

Case No Three: Ahmed Company provided the following information:

- Jan. 01: Beginning inventory; 4000 units, $12 per unit.
- Mar.05: Purchases; 6000 units, $ 16 per unit.
- Apr. 17: Sales; 7000 units.
- Sep. 07: Purchases; 8000 units, $17 per unit.
- Nov. 11: Sales; 6000 units.
Required:
1. Prepare a WAC perpetual inventory card.
2. Compute cost of goods sold and the cost of ending inventory using
WAC method.

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(2) Journal Entries:

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(3) Impact ledger accounts and the resulting financial statements:

In summary:

 Under FIFO, unit costs are assigned to units sold in the order in which they
were incurred, regardless of which units were actually sold. The oldest or first-
in unit costs are used to calculate cost of goods sold; remaining unit costs are
assigned to the units in ending inventory.
 Under LIFO, unit costs are assigned to units sold in the reverse order of which
they were incurred, regardless of which units were actually sold. The most
recent or last-in unit costs are used to calculate cost of goods sold; remaining
unit costs are assigned to the units in ending inventory.
 Under Average Cost, an average cost for all units cost for all units in inventory
is calculated and used to value the units in both cost of goods sold and ending
inventory.

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7.7 Periodic vs. Perpetual Inventory system:

In the battle between the periodic inventory system vs. perpetual inventory system,
which one you should opt for, depends on your situation. As discussed above, both
perpetual and periodic inventory systems have their pros and cons, and selecting
between the two is contingent upon your business.

However, the underlying fact is that it is not possible to maintain accurate

inventory levels without a physical inventory count. 40% of large businesses will
work with a perpetual inventory system at separate outlets, but they will use the
periodic system at their core.

Another factor is scalability. If your business has been expanding gradually and
regular inventory counts seem confusing, then you can opt for the perpetual
inventory system for smooth inventory management.

For e-commerce sellers, selling on multiple channels, maintaining different

warehouses, a perpetual inventory system might make life easier.

However, regardless of the magnitude of your business, you will, at some point,
have to carry out a physical inventory count.

Refer to the below info graphic to read the differences between the Perpetual and
Periodic Inventory Management Method.

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 Index

Chapter One: Conceptual Framework of Accounting reporting. 3

Chapter Two: International Accounting Standard (IAS 1). 73

Chapter Three: Financial Statements as a components of accounting report. 127

Chapter Four: Impairment of Assets According to IAS 36 Standard(IAS 36). 163

Chapter Five: International Financial Reporting Standard (IAS 15). 184

Chapter Six: Property, Plant and Equipment (IAS 16). 211

Chapter Seven: International Accounting Standards (IAS 2). 246

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