Chapter 5:

International
Financial
Reporting
Standards:
Part II

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Learning Objectives
 Describe and apply the requirements of IFRS
related to the revenue and financial
instruments
 Explain and analyze the effect of major
differences between IFRS and U.S. GAAP
related to the financial reporting of revenue
and financial instruments

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Revenue recognition
 IAS 18, Revenue covers revenues from
 Sale of goods, rendering of services
 Interest, royalties
 Dividends
 U.S. GAAP
 200 authoritative pronouncements
 General Measurement Principle
 Fair value of consideration received or
 Receivable
 Multiple elements transaction
 Split transaction into multiple elements or
 Combine multiple transactions into one

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Revenue recognition
 Sale of Goods—5 Criteria together
 Transfer of significant risks and rewards to buyer
 No effective control maintained or management
involvement
 Can measure revenue reliably
 Probable future economic benefits flow to seller
(Cash , AR)
 Selling costs can be measured reliably (Exp:
transportation)
 Rendering of Service
 Revenue recognized in proportion to extent of
services rendered (In IFRS)
 U.S. GAAP
 Percentage-of-completion for service contracts not 5-4
Exp:

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Exp:

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Revenue recognition
 Interest, Royalties and Dividends
 Interest
 Recognized on effective yield basis
 Royalties
 Recognized on accrual basis
 Based on relevant agreement
 Dividends (declaration date)
 Recognized when shareholder’s right to payment
established
 Exchange of Goods or Services
 If similar—no gain or loss
 If dissimilar—recognize fair value of what is
received adjusted for cash paid or received
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Revenue recognition
 Construction Contracts: Revenues and
expenses recognized using the percentage-of-
completion (POC) method
 Two types
 Fixed-price contract
 Cost-plus contract
 Cost-plus contract
 Economic benefits flow to the entity
 Contract costs
 Clearly identified
 Reliably measured
 Fixed-price contract
 Revenues measurable
 Costs and stage of completion measurable

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IAS 18, Revenue
 IASB-FASB Revenue Recognition Project
 Both boards working since 2002
 June 2010—joint Exposure Draft “Revenue from
Contracts with Customers”
 5 steps: IFRS 15 effective January 2018
 Identify the contract
 Identify separate performance obligations in the
contract
 Determine the transaction price
 Allocate the transaction price to the separate
performance obligations
 Recognize the revenue allocated to each
performance obligation when the entity satisfies
each performance obligation

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Financial Instruments
 Standards
 IAS 32, Financial Instruments: Presentation
 IAS 39, Financial Instruments: Recognition and
Measurement
 IFRS 7, Financial Instruments: Disclosure
 IFRS 9, Financial Instruments—issued in
November 2009 to replace IAS 39—effective
2015
 Definitions
 IAS 32—a financial instrument is any contract
that gives rise to both a financial asset of one
entity and a financial liability or equity
instrument of another entity
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Financial Instruments (securities)
 Definitions
 IAS 32—a financial instrument gives rise to
 Financial asset of one entity
 Financial liability or equity instrument of another entity
 Financial asset
 Cash
 Contractual right to:
 Receive cash or other financial asset
 Exchange financial assets or financial liabilities
 under potentially favorable conditions
 An equity instrument of another entity
 A contract that will or may be settled in entity’s own
equity instruments and is not classified as an equity
instrument of the equity

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Financial Instruments
 Financial liability
 A contractual obligation to
 Deliver cash or another financial asset
 Exchange financial assets or financial liabilities
 Under potentially unfavorable conditions
 A contract that will or may be settled in the
entity’s own equity instruments

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Financial Instruments
 Liability or Equity
 IAS 32
 Financial instruments to be classified
 As financial liabilities or
 Equity or both
 Compound Financial Instruments
 Both a liability and equity element (e.g.
convertible bond)
 Split accounting
 With and without method

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Financial Instruments
 Classification of Financial Assets and Liabilities
 Classification of financial asset:
 Fair value through profit or loss (FVPL): includes financial assets that are
held trading purposes (profit or loss from them ---- IS)
 Held-to-maturity investments: includes financial assets with fixed or
determinable payments and fixed maturity
 Loans and receivables: includes financial assets with fixed or determinable
payments that do not have a price that is quoted in an active market
 Available-for-sale financial assets: includes all financial assets that are
classifies as available for sale and not classified in one of other categories.
(Gian or loss from evaluating available for sale --- OCI)
 Financial liabilities:
 Fair value through profit or loss (FVPL): includes financial liabilities that
are held for trading purposes
 Measured at amortized cost: includes accounts payable, notes payable,
bonds payable, and deposits from customers
 Measurement of Financial Instruments
 Initial—fair value (normally = amount paid or received)
 Subsequent—cost, amortized cost, or fair value (Available for sale)

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Financial Instruments
 Available-for-Sale Financial Asset Denominated
in a Foreign Currency
 Two components
 The change in fair value in the foreign currency
 A foreign exchange gain or loss
 From exchange rate changes
 Impairment
 IAS 39 requires assessment of impairement
 Derecognition
 Appropriate if
 Contractual rights to the cash flows expired
 Financial asset has been transferred

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Exp:

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Financial Instruments
 Derivatives
 Derivatives are financial instruments such as
options, forwards, futures, and swaps whose
value changes with change in a specified
interest rate, financial instrument price,
commodity price, foreign exchange rate, index,
credit rating, or other variable.
 IFRS 39 requires that
 Derivatives to be measured at fair value
 Receivables to be measured
 Initially at fair value
 Subsequently, at amortized cost using effective
interest method
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