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 Syllabus A: International sources of authority .............................................2

Syllabus A1. IASB and the regulatory framework ................................................................2
Syllabus A2 Fundamental ethical and professional principles ..............................................25
Fundamental Principles ...........................................................................25
Syllabus B: Elements of nancial statements ...........................................27
Syllabus B1. Revenue recognition ..................................................................................27
Syllabus B2. Property, plant and equipment ....................................................................45
Syllabus B3. Impairment of assets ..................................................................................90
Syllabus B4. Leases .....................................................................................................98
Syllabus B5. Intangible assets and goodwill ...................................................................121
Syllabus B6. Inventories ...............................................................................................130
Syllabus B7. Financial instruments ................................................................................132
Syllabus B8. Liabilities – provisions, contingent assets and liabilities ..................................180
Syllabus B9. Accounting for employment and post-employment bene ts ..........................187
Syllabus B10. Tax in nancial statements .......................................................................197
Syllabus B11. The effects of changes in foreign currency exchange rates .........................214
Syllabus B12. Agriculture .............................................................................................219
Syllabus B13. Share-based payment ...........................................................................221
Syllabus B14. Exploration and evaluation expenditures ...................................................246
Syllabus B15. Fair value measurement ..........................................................................252
Syllabus C: Presentation and additional disclosures ..............................255
Syllabus C1. Presentation of the SFP, and statement of P/L and OCI ...............................255
Syllabus C2. Earnings per share ..................................................................................272
Syllabus C3. Events after the reporting date ..................................................................285
Syllabus C4. Accounting policies, changes in accounting estimates ................................288
Syllabus C5. Related party disclosures .........................................................................291
Syllabus C6. Operating segments ................................................................................294
Syllabus C7. Reporting requirements of SMEs ...............................................................303
Syllabus D: Preparation of external nancial reports ...............................315
Syllabus D1. Preparation of group consolidated external reports ......................................315
Syllabus D2. Business combinations – intra-group adjustments .......................................352
Syllabus D3. Business combinations – fair value adjustments ..........................................356
Syllabus D4. Business combinations – associates and joint arrangements ........................367
Syllabus D5. Complete disposal of shares in subsidiaries ................................................377

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 Syllabus A: International sources of authority

012234*,'567'$508'3.9'/:-'+-;*23/)+1'<+3=->)+?

Syllabus A1. Discuss the need for international nancial reporting standards and possible
barriers to their development

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3.9'+-2"342-'".<)+=3/").'",';"@-.'/)'*,-+,

A regulatory framework regulates the behaviour of companies towards their investor

They increase users’ understanding of, and their con dence, in nancial statement

8-.-<"/,')<'39)#/".;'$%&0
• They are high-quality and transparent global standards that are intended to
achieve consistency and comparabilit

• Companies that use IFRS and have their nancial statements audited in
accordance with International Standards on Auditing (ISA) will have an enhanced
status and reputatio

• The International Organisation of Securities Commissions (IOSCO) recognise

IFRS for listing purpose

Thus companies that use IFRS need produce only one set of nancial statements
for any securities listing for countries that are members of IOSCO
• Companies that own foreign subsidiaries will nd the process of consolidation
simpli ed if all their subsidiaries use IFR

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 • Companies that use IFRS will nd their results are more easily compared with
those of other companies that use IFR

This would help the company to better assess and rank prospective investments
in its foreign trading partner

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1. Laws and regulation

2. IFRS training to nance staff and regulator

3. Greater complexity in the nancial reporting proces

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 Syllabus A1. Explain the structure and constitution of the IASB and the standard setting
process

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$./+)9*B/").

Limited liability companies are required by law to prepare and publish nancial
statements annually

The form and content of these accounts are primarily regulated by national
legislation

They must also comply with International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs)

5BB)*./".;'0/3.93+9,

International Accounting Standards were issued by the IASC from 1973 to 2000

They provide guidance as to how items should be shown in a set of nancial

statements both in terms of their monetary value and any other disclosures

They are a single set of high quality, understandable and enforceable global
standards

The IASB replaced the IASC in 2001

Since then, the IASB has amended some IASs and has proposed to amend others,
has replaced some IASs with new International Financial Reporting Standards, and
has adopted or proposed certain new IFRSs on topics for which there was no
previous IAS

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 5BB)*./".;',/3.93+9,'>-+-'9-@-2)#-9'<)+'/>)'=3".'+-3,).,

• To reduce subjectivit

• To achieve comparability between different organisation

Financial statements may not be described as complying with IFRSs unless they
comply with all of the requirements of each applicable standard and each applicable
interpretation

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The IFRS Foundation is an independent organisation having two main bodies, the
Trustees and the International Accounting Standards Board (IASB), as well as the
IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRS IC)

The IFRSF is governed by a board of 22 trustees

These trustees appoint the members of the IASB, IFRS IC and the IFRS AC

They also review annually the strategy of the IFRSF and the IASB and its
effectiveness, including consideration, but not determination, of the IASB's agenda

These trustees also raise the funds necessary to support the IFRSF

D:-'$./-+.3/").32'5BB)*./".;'0/3.93+9,'8)3+9'E$508F

The International Accounting Standards Board (IASB) is an independent, privately-

funded accounting standard-setter based in London, UK

There are 14 Board members, each with one vote

The IASB is committed to developing, in the public interest, a single set of high
quality, understandable and enforceable global accounting standards that require
transparent and comparable information in general purpose nancial statements. 

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 In addition, the IASB co-operates with national accounting standard-setters to

achieve convergence in accounting standards around the world

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International Financial Reporting Standards (IFRSs) are developed through an

international consultation process, the "due process” that involves interested
individuals and organisations from around the world

D:-'9*-'#+)B-,,'B)=#+",-,',"H',/3;-,I

1. IAASB reviews auditing developments and takes suggestions from interested

parties

2. Planning the project, including forming a 'working group' to advise the IASB and
its staff on the project

3. Developing and publishing the discussion paper for public comment

4. Draft standard produced and commented on by interested parties for a period of

120 days (Exposure period)

5. Project task force considers comments and amendments made if appropriate

If changes signi cant there may be another exposure period

6. Standard nalised and approved by meeting of IAASB at which there must be a

minimum of 12 members

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 7 a W n . m

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 Syllabus A1. Understand and interpret the Financial Reporting Framework

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)@-++"9-'3.1',/3.93+9,

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It sets out the concepts which underlie the accounts. It means that basic principles
do not have to re-debated for every new standard

• It is..

‘a constitution, a coherent system of interrelated objectives and fundamentals
which can lead to consistent standards and which prescribe the nature, function
and limits of nancial accounting and nancial statements

A:3/J,'"/,'#*+#),-C

The IASB’s Framework for the Preparation and Presentation of Financial Statements
describes the basic concepts by which nancial statements are prepared

• Serves as a guide in developing accounting standards

• Serves as a guide to resolving accounting issues that are not addressed directly
in a standard

(In fact IAS 8 requires management to consider the de nitions, recognition criteria,
and measurement concepts for assets, liabilities, income, and expenses in the
Framework.

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 A:3/'9)-,'"/'K2))?J'2"?-C

It includes the following

1. The objective of nancial statement

2. Underlying assumption

3. Qualitative characteristics of good informatio

4. Elements of F

5. Recognition of Element

6. Measurement of Element

7. Concepts of Capita

More on these in other sections

5+;*=-./,'<)+'3'B).B-#/*32'<+3=->)+?

• It may seem a very theoretical document but it has highly practical aims

• Without a framework then standards would be developed without consistency

and also the same basic principles would be continually examined. Perhaps even
sometimes with differing conclusions

• The IASB therefore becomes the architect of nancial reporting with a framework
as solid foundations upon which everything else relies

• Also without such a framework then a rules based system tends to come in
instead. The rules get added to as situations arise and nally become
cumbersome and unadaptable

• It also prevents political lobbyists from changing pressurising changes in

standards as the principles have already been agreed upon

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 0)'3'B).B-#/*32'<+3=->)+?'43,"B3221'#+)@"9-,'3'<+3=->)+?'<)+I

1. what should be brought into the account

2. when it should be brought into the accounts an

3. at how much it should be measure

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• Financial Statements are prepared for many different users - can one set of
principles be agreed by all

• Perhaps different users need different information and hence different

measurement bases and principle

• Even with framework principles - standards go through a huge analysis process,

for example the revenue recognition exposure draft has now been re-exposed

L55M'N'/:-'<+3=->)+?

• In some ways the framework tries to codify the current GAAP into new standards
- or at least current thinkin

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 Discuss ‘fair presentation’ and the accounting concepts/principles

(:3#/-+'6I'D:-'O4P-B/"@-')<'%".3.B"32'&-#)+/".;

!-<"."/").

The objective is to provide nancial information that is useful to present and potential
equity investors, lenders and other creditors in making decisions

The degree to which that nancial information is useful will depend on its qualitative
characteristics

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• A"9-'0B)#-

Its scope is wider than nancial statements. It is the objective of nancial
reporting in general

• Q,-+,

Financial reporting is aimed primarily at capital providers. That does not mean
that others will not nd nancial reports useful. It is just that, in deciding on the
principles for recognition, measurement, presentation, and disclosure, the
information needs of capital providers are paramount

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 • !-B",").'*,-<*2.-,,'N',/->3+9,:"#

 Decision usefulness to capital providers is the overriding purpose of nancial
reporting, as well as assessing the stewardship of resources already committed
to the entity

The ability of management to discharge their stewardship responsibilities

effectively has an effect on the entity’s ability to generate net cash in ows in the
future, implying that potential investors are also assessing management
performance as they make their investment decision

• (3#"/32'#+)@"9-+,'R'=3".'*,-+,

The Framework identi es equity investors, lenders and other creditors as ‘capital
providers’. Governments, their agencies, regulatory bodies, and members of the
public are identi ed as groups that may nd the information in general purpose
nancial reports useful. However, these groups have not been identi ed as
primary users

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The Boards note that users of nancial reports should be aware of the limitations of
the information included in such reports – speci cally, estimates and the use of
judgement

Additionally, nancial reports are but one source of information needed by those who
make investment decisions. Information about general economic conditions, political
events and industry outlooks should also be considered

Financial reporting should also include management’s explanations, since

management knows more about the entity than external users

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 (:3#/-+'TI'D:-'&-#)+/".;'-./"/1

The chapter on the Reporting Entity will be inserted once the IASB has completed its
re-deliberations following the Exposure Draft ED/2010/2 issued in March 2010

(:3#/-+'UI'V*32"/3/"@-'(:3+3B/-+",/"B,')<'Q,-<*2'%".3.B"32'$.<)+=3/").

W3".'M+".B"#2-

Financial information is useful when it is relevant and represents faithfully what it

purports to represent. The usefulness of nancial information is enhanced if it is
comparable, veri able, timely and understandable

Fundamental characteristics

"7 &[email protected]

Relevant information makes a difference in the decisions made by users

Therefore it must have a predictive value, con rmatory value, or both. The
predictive value and con rmatory value of nancial information are interrelated

Materiality is an entity-speci c aspect of relevance. It is based on the nature and/

or size of the item relative to the nancial report

""7 %3"/:<*2'+-#+-,-./3/").

General purpose nancial reports represent economic phenomena in words and

numbers. 

To be useful, nancial information must not only be relevant, it must also

represent faithfully the phenomena it purports to represent

This maximises the underlying characteristics of completeness, neutrality and

freedom from error

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 X.:3.B".;'B:3+3B/-+",/"B,I

1. Comparability (including consistency)

2. Timeliness

3. Reliable information

4. Veri ability

Helps to assure users that information represents faithfully the economic

phenomena that it purports to represent

It implies that knowledgeable observers could reach a general consensus

(although not necessarily absolute agreement) that the information does
represent faithfully the economic phenomena

5. Understandability

Enables users with a reasonable knowledge to comprehend the information

Q.9-+,/3.934"2"/1'",'-.:3.B-9'>:-.'/:-'".<)+=3/").'",I

• Classi e

• Characterise

• Presented  clearly and concisel

However, relevant information should not be excluded solely because it may be too
complex

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 D>)'B).,/+3"./,'/:3/'2"="/'/:-'".<)+=3/").'#+)@"9-9'".'*,-<*2'<".3.B"32'

+-#)+/,I

67 W3/-+"32"/1

Information is material if its omission or misstatement could in uence the

decisions that users make on the basis of an entity’s nancial information

Materiality is not a matter to be considered by standard-setters but by preparers

and their auditors

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The bene ts of providing nancial reporting information should justify the costs of
providing that information

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Decision usefulness seen as more important than the giving information about how
well the company is being looked after (Stewardship)

Although it may be said that stewardship is taken into account when talking about
decision usefulness - perhaps there should be a more speci c mention of it

Faithful representation has replaced reliability

This is even more vague and could lead to problems regarding treatment of some
items where substance over form exist

Should it encompass not for pro ts also

Why the split between fundamental and enhancing characteristics

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 Syllabus A1. Understand and interpret the Financial Reporting Framework

5BB)*./,'=*,/'+-#+-,-./'<3"/:<*221'/:-'#:-.)=-.3'"/'
#*+#)+/,'/)'+-#+-,-./

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67 0*4,/3.B-')@-+'<)+=

Faithful representation means capturing the real substance of the matter

T7 &-#+-,-./,'/:-'-B).)="B'#:-.)=-.3

Faithful means an agreement between the accounting treatment and the

economic phenomena they represent

The accounts are veri able and neutral

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XH3=#2-,

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An entity may sell some inventory to a nance house and later buy it back at a price
based on the original selling price plus a pre-determined percentage. Such a
transaction is really a secured loan plus interest. To show it as a sale would not be a
faithful representation of the transaction

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 ().@-+/"42-'S)3.,

Another example is that an entity may issue convertible loan notes. Management
may argue that, as they expect the loan note to be converted into equity, the loan
should be treated as equity. They would try to argue this as their gearing ratio would
then improve. However, it is recorded as a loan as primarily this is what it is

As noted previously, simply following rules in accounting standards can provide for
treatment which is essentially form over substance. Whereas, users of accounts
want the substance over form

The concept behind faithful representation should enable creators of nancial

statements to faithfully represent everything through measures and descriptions
above and beyond that in the accounting standard if necessary

S"="/3/").,'/)'%3"/:<*2'&-#+-,-./3/").

1. Inherent uncertaintie

2. Estimate

3. Assumption

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 Syllabus A1. Understand and interpret the Financial Reporting Framework

&-B);."/").'3.9'=-3,*+-=-./

&-B);."/").

Please remember this!!

For an item to be recognised in the accounts it must pass three tests

1. Meet the de nition of an asset/liability or income/expense or equit

2. Be probable

3. Be reliably measurable

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An asset is a resource controlled by the enterprise as a result of past events and

from which future economic bene ts are expected to ow to the enterprise

• S"34"2"/1

A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an out ow from the enterprise of
resources embodying economic bene ts

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 • X]*"/1

Equity is the residual interest in the assets of the enterprise after deducting all its
liabilities

• $.B)=-

Income is increases in assets (or decreases of liabilities) that result in increases

in equity, other than contributions from equity participants

• XH#-.,-

Expenses are decreases in assets or (incurrences of liabilities) that result in

decreases in equity, other than distributions to equity participants

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67 %3B/)+".;')<'+-B-"@342-,

Where debts are factored, the rm sells its debts to the factor. This may be a true
sale or just a means of getting cash in and so in effect a loan

It all depends on whether the debtors sold are still an asset to the company

The de nition of an asset refers to economic bene ts so whoever receives those

bene ts should hold the debtors as an asset

• XH3=#2-

 RCA (that ne academy) sells some of its debtors to a factor. The terms of
the arrangement are as follows

Factor charges 5% Interest on all outstanding debts every mont

Any bad debts are transferred back to RCA for a refund

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 • 0)2*/").

The best way to view this is by looking at who takes the risks. The risk of a
debtor is that they pay slowly and/or go bad

The 5% interest charge means that if the debtor is a slow payer, RCA pays
5% so takes the risk. Equally if the debt goes bad RCA takes the risk. So they
remain RCA debtors. The money from the so called sale is treated as a loan.
As the debtors pay the factor that is the loan being paid off

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This is where inventories are held by one party but are owned by another (for
example a manufacturer and car dealer arrangement

Often used in a ‘sale or return’ basis

• $,,*-

The issue is - to whom does the stock belong? Not the legal form but the
substance. Again look at who is taking most of the risks and it is they who
should have the stock on their SFP

• &",?,

Who takes the risk of obsolescence?

Who takes the risk of the sell on price falling?

Who takes the risk of the stock taking a long time to sell

XH3=#2-

Here’s an agreement between a car manufacturer (m) and a car dealer (d)

The price of vehicles is xed at the date of transfer. (Price fall risk taken by d)

D has no right to return unsold cars (obsolescence risk taken by d)

D pays m 2% a month on all unsold cars. (slow moving stock risk taken by d

Therefore the cars should be on D’s statement of nancial position

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 Syllabus A1. Explain the progress towards international harmonisation

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In the US the FASB issues their accounting standards and recently they also
recognised the need to follow a 'principles-based' approach to standard-setting (as
the IASB has always done

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In 2004 the IASB and FASB agreed to develop a common conceptual framewor

The IASB maintains a policy of dialogue with other key standard setters around the
world, in the interest of harmonising standards across the globe

Partner standard setters are often involved in the development of Discussion Papers
and Exposure Drafts on new areas

However, many fundamental disagreements exist between countries and

organisations about the way forward

A particular problem is the different reporting needs in developed (and non-

developed) countrie

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 83++"-+,'/)':3+=).",3/").

• Different purposes of nancial reporting - For tax assessment or investor

decision-making

• Different legal system

• Different user groups - In the USA investor and creditor groups are given
prominence, while in Europe employees enjoy a higher pro le

• Developing countries - these are lagging behind and need time to get the
principles in place rs

• Nationalism - ‘ours is better than yours

• Circumstances - such as hyperin ation, civil war, currency restrictio

• The lack of strong accountancy bodies - so lacking a will and drive for
harmonisatio

Advantages of global harmonisatio

1. Investors can easily compare international companies and investment across

borders is growin

2. Multinational companies would be easier to control and get investment, especially

the consolidation of foreign subsidiarie

3. A reduction in audit costs 


Governments of developing countries would save time and money if they could
adopt international standard

4. Tax authorities - It will be easier to calculate the tax liability of investors, including
multinationals who receive income from overseas sources

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 Syllabus A1. Account for the rst-time adoption of International Financial Reporting Standards.

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• be transparent for users and comparable over all periods presente

• provide a suitable starting point for IFRS accountin

• be generated at a cost that does not exceed the bene t

An opening IFRS based SFP (using the same accounting policies as the future IFRS
based FS) is needed at the date of moving to IFRSs. This is the suitable starting
point

D:-')#-.".;'$%&0'43,-9'0%M',:322777

1. recognise all assets and liabilities (where IFRSs say they should be recognised

2. not recognise assets or liabilities (where IFRSs say they should not be
recognised

3. Reclassify items (that IFRS say needs reclassi cation

4. apply IFRSs in measuring all recognised assets and liabilitie

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 S"="/-9'-H-=#/").,

Where the cost of complying is likely to exceed the bene ts to users of nancial
statements

&-/+),#-B/"@-'5##2"B3/").

This is applying IFRS to previous periods - this is restricted if it means management
judgements (about past conditions) are needed when the actual outcome is now in
fact known

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Needed to explain how the transition from previous GAAP to IFRSs affected the
entity’s reported nancial position, nancial performance and cash ow

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 012234*,'5T'%*.93=-./32'-/:"B32'3.9'#+)<-,,").32'#+".B"#2-,

Syllabus A2) Appraise and discuss the ethical and professional issues in
complying with accounting standards.

Fundamental Principle

Professional ethics could be examined as part of any question on the F8 exam. It is

very important that you know this section well.

The ACCA sets out a code of ethics for members and disciplinary action is taken
against those who fail to uphold them.

The 5 Fundamental principles and what they mean

Integrit

Members should be straightforward and honest in all business and professional

relationships.

Objectivity



Members should not allow bias, conflicts of interest or undue influence of others to
override professional or business judgements.

Professional Competence & Due Care




Members have a continuing duty to maintain professional knowledge and skill at a
level required to ensure that a client or employer receives competent professional
service based on current developments in practice, legislation and techniques.

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 Members should act diligently and in accordance with applicable technical and
professional standards when providing professional services.

Con dentiality



Members should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such
information to third parties without proper or specific authority or unless there is a
legal or professional right or duty to disclose.

Confidential information acquired as a result of professional and business

relationships should not be used for the personal advantage of members or third
parties.

Professional behaviour



Members should comply with relevant laws and regulations and should avoid any
action that discredits the profession.


In the exam question you may have to apply these to a case study - groovy
baby.

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 Syllabus B: Elements of nancial statements

012234*,'867'&-@-.*-'+-B);."/").

Syllabus B1. Explain and apply the principles of revenue recognition:

i. Identi cation of contracts
ii. Identi cation of performance obligations
iii. Determination of transaction price
iv. Allocation of the price to the performance obligations
v. Recognition of revenue when/as performance obligations are satis ed

&-@-.*-'&-B);."/").'R'$%&0'6^

A:-.'N':)>'=*B:'/)'&-B);.",-'&-@-.*-C

Here you need to go through the 5 step process

1. Identify the contract(s) with a custome

2. Identify the performance obligations in the contrac

3. Determine the transaction pric

4. Allocate the transaction price to the performance obligations in the contrac

5. Recognise revenue when (or as) the entity satis es a performance obligatio

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 Before we do that though, let’s get some key de nitions out of the way.

_-1'9-<"."/").,

• ()./+3B/

An agreement between two or more parties that creates enforceable rights and
obligations

• $.B)=-

Increases in economic bene ts during the accounting period in the form of

increasing assets or decreasing liabilitie

• M-+<)+=3.B-')42";3/").

A promise in a contract to transfer to the customer either

- a good or service that is distinct; o

- a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer

• &-@-.*-

Income arising in the course of an entity’s ordinary activities

• D+3.,3B/").'#+"B-

The amount of consideration to which an entity expects to be entitled in exchange

for transferring promised goods or services to a customer

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 Syllabus B1.
Explain and apply the principles of revenue recognition:
i. Identi cation of contracts
ii. Identi cation of performance obligations
iii. Determination of transaction price
iv. Allocation of the price to the performance obligations
v. Recognition of revenue when/as performance obligations are satis ed

Describe and apply the acceptable methods for measuring progress towards complete
satisfaction of performance obligations

Explain and apply the criteria for the recognition of contract costs

&-@-.*-'&-B);."/").'R'$%&0'6^'R'^',/-#,

Ok let’s now get into a bit more detail

0/-#'6I'$9-./"<1'/:-'B)./+3B/E,F'>"/:'3'B*,/)=-+

• The contract must be approved by all involve

• Everyone’s rights can be identi e

• It must have commercial substanc

• The consideration will probably be pai

0/-#'TI'$9-./"<1'/:-',-#3+3/-'#-+<)+=3.B-')42";3/").,'".'/:-'B)./+3B/

This will be goods or services promised to the custome

These goods / services need to be distinct and create a separately identi able
obligatio

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 • !",/".B/'=-3.,I

The customer can bene t from the goods/service on its own AN

The promise to give the goods/services is separately identi able (from other
promises

• 0-#3+3/-21'"9-./"<"342-'=-3.,I

No signi cant integrating of the goods/service with others promised in the

contrac

The goods/service doesn’t signi cantly modify another good or service promised
in the contract

The goods/service is not highly related/dependent on other goods or services

promised in the contract

0/-#'UI'!-/-+=".-'/:-'/+3.,3B/").'#+"B-

How much the entity expects, considering past customary business practice

• [3+"342-'().,"9-+3/").

If the price may vary (eg. possible refunds, rebates, discounts, bonuses,
contingent consideration etc) - then estimate the amount expecte

• However variable consideration is only included if it’s highly probable there won’t
need to be a signi cant revenue reversal in the future (when the uncertainty has
been subsequently resolved

• However, for royalties from licensing intellectual property - recognise only when
the usage occur

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 0/-#'`I'522)B3/-'/:-'/+3.,3B/").'#+"B-'/)'/:-',-#3+3/-'#-+<)+=3.B-'

)42";3/").,

If there’s multiple performance obligations, split the transaction price by using

their  standalone selling prices. (Estimate if not readily available

• G)>'/)'-,/"=3/-'3',-22".;'M+"B-

- Adjusted market assessment approach 


- Expected cost plus a margin approach 

- Residual approach (only permissible in limited circumstances)

• If paid in advance, discount down if it’s signi cant (>12m

0/-#'^I'&-B);.",-'+-@-.*-'>:-.'E)+'3,F'/:-'-./"/1',3/",<"-,'3'

#-+<)+=3.B-')42";3/").

Revenue is recognised as control is passed, over time or at a point in time

• A:3/'",'()./+)2

It’s the ability to direct the use of and get almost all of the bene ts from the asset

This includes the ability to prevent others from directing the use of and obtaining
the bene ts from the asset

• 8-.-<"/,'B)*29'4-I

- Direct or indirect cash ows that may be obtained directly or indirectl

- Using the asset to enhance the value of other assets

- Pledging the asset to secure a loa

- Holding the asset

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 • So remember we recognise revenue as asset control is passed (obligations

satis ed) to the customer



This could be over time or at a speci c point in time

XH3=#2-,'E)<'<3B/)+,'/)'B).,"9-+F')<'3',#-B"<"B'#)"./'".'/"=-I

1. The entity now has a present right to receive payment for the asset

2. The customer has legal title to the asset

3. The entity has transferred physical possession of the asset

4. The customer has the signi cant risks and rewards related to the ownership of
the asset; an

5. The customer has accepted the asset

()./+3B/'B),/,'R'/:3/'/:-'-./"/1'B3.';-/'43B?'<+)='/:-'B*,/)=-+

These must be recognised as an asset (unless the subsequent amortisation would

be less 12m), but must be directly related to the contract (e.g. ‘success fees’ paid to
agents)

Examples would be direct labour, materials, and the allocation of overheads  - this
asset is then amortise

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 Syllabus B1. Explain and apply the criteria for the recognition of contract costs.

Prepare nancial statement extracts for contracts with multiple performance obligations, some
of which are satis ed over time and some at a point in time.

M+-,-./3/").'".'<".3.B"32',/3/-=-./,

Show in the SFP as a contract liability, asset, or a receivable, depending on when

paid and performe

i.e.. Paid upfront but not yet performed would be a contract liabilit

M-+<)+=-9'4*/'.)/'#3"9'>)*29'4-'3'B)./+3B/'+-B-"@342-')+'3,,-/

1. A contract asset if the payment is conditional (on something other than time

2. A receivable if the payment is unconditiona

Contract assets and receivables shall be accounted for in accordance with IFRS 9

!",B2),*+-,

All qualitative and quantitative information about

• its contracts with customers

• the signi cant judgments in applying the guidance to those contracts; an

• any assets recognised from the costs to ful l a contract with a customer

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 Syllabus B1. Speci cally account for the following types of transactions:
(i) Principal versus agent;

$22*,/+3/").'6'R'5;-./')+'.)/C

An entity negotiates with major airlines to purchase tickets at reduced rate

It agrees to buy a speci c number of tickets and must pay even if unable to resell
them

The entity then sets the price for these ticket for its own customers and receives
cash immediately on purchas

The entity also assists the customers in resolving complaints with the service
provided by airlines. However, each airline is responsible for ful lling obligations
associated with the ticket, including remedies to a customer for dissatisfaction with
the service

G)>'>)*29'/:",'4-'9-32/'>"/:'*.9-+'$%&0'6^C

0/-#'6I'$9-./"<1'/:-'B)./+3B/E,F'>"/:'3'B*,/)=-+

This is clear here when the ticket is purchase

0/-#'TI'$9-./"<1'/:-'#-+<)+=3.B-')42";3/").,'".'/:-'B)./+3B/

This is tricky - is it to arrange for another party provide a ight ticket - or is it - to

provide the ight ticket themselves

Well - look at the risks involved. If the ight is cancelled the airline pays to reimburse

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 If the ticket doesn't get sold - the entity loses ou

Look at the rewards - the entity can set its own price and thus reward

On balance therefore the entity takes most of the risks and rewards here and thus
controls the ticket - thus they have the obligation to provide the right to y ticke

0/-#'UI'!-/-+=".-'/:-'/+3.,3B/").'#+"B-

This is set by the entit

0/-#'`I'522)B3/-'/:-'/+3.,3B/").'#+"B-'/)'/:-'#-+<)+=3.B-')42";3/").,'".'/:-'B)./+3B/

The price here is the GROSS amount of the ticket price (they sell it for

0/-#'^I'&-B);.",-'+-@-.*-'>:-.'E)+'3,F'/:-'-./"/1',3/",<"-,'3'#-+<)+=3.B-')42";3/").

Recognise the revenue once the ight has occurre

$22*,/+3/").'T'R'S)132/1'9",B)*./,

An entity has a customer loyalty programme that rewards a customer with one
customer loyalty point for every $10 of purchases

Each point is redeemable for a $1 discount on any future purchase

Customers purchase products for $100,000 and earn 10,000 point

The entity expects 9,500 points to be redeemed, so they have a stand-alone selling
price $9,50

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 G)>'>)*29'/:",'4-'9-32/'>"/:'*.9-+'$%&0'6^C

0/-#'6I'$9-./"<1'/:-'B)./+3B/E,F'>"/:'3'B*,/)=-+

This is when goods are purchase

0/-#'TI'$9-./"<1'/:-'#-+<)+=3.B-')42";3/").,'".'/:-'B)./+3B/

The promise to provide points to the customer is a performance obligation along

with, of course, the obligation to provide the goods initially purchase

0/-#'UI'!-/-+=".-'/:-'/+3.,3B/").'#+"B-

$100,00

0/-#'`I'522)B3/-'/:-'/+3.,3B/").'#+"B-'/)'/:-'#-+<)+=3.B-')42";3/").,'".'/:-'B)./+3B/

The entity allocates the $100,000 to the product and the points on a relative stand-
alone selling price basis as follows

So the standalone selling price total is 100,000 + 9,500 = 109,50

Now we split this according to their own standalone prices pro-rat

Product $91,324 [100,000 x (100,000 / 109,500] 


Points $8,676 [100,000 x 9,500 /109,500

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 0/-#'^I'&-B);.",-'+-@-.*-'>:-.'E)+'3,F'/:-'-./"/1',3/",<"-,'3'#-+<)+=3.B-')42";3/").

Of course the products get recognised immediately on purchase but now lets look at
the points.

Let’s say at the end of the rst reporting period, 4,500 points (out of the 9,500) have
been redeeme

The entity recognises revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and
recognises a contract liability of $4,566 (8,676 – 4,110) for the unredeemed point

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 Syllabus B1. Speci cally account for the following types of transactions:
(i) Principal versus agent;

5;-.B1

Agency is de ned in relation to a principal. What?! Well all this means is an owner
(principal) lets somebody run her business (manager)

The agent is doing this job on behalf of someone else

Footballers, lm stars etc all have agents. They work on behalf of the star. The star
hopes that the agent is working in their best interest and not just for their own
commission

M+".B"#32,'3.9'5;-./,

A principal appoints an agent to act on his or her behalf

In the case of corporate governance, the principal is a shareholder and the agents
are the directors

The directors are accountable to the principal

5;-.B1'(),/,

• A cost to the shareholder through having to monitor the director

• Over and above normal analysis cost

• A result of comprised trust in director

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 Syllabus B1. Speci cally account for the following types of transactions:
(ii) Repurchase agreements;

&-#*+B:3,-'5;+--=-./'R'a&-#)J

A Repo Agreement is a contractual arrangement between two parties

1. 5,,-/,')>.-+'E8)++)>-+')<'B3,:F

The assets owner sells securities (Financial assets) to an investo

2. $.@-,/)+'ES-.9-+')<'B3,:F

The investor buys securitie

The Assets owner sells the Financial assets  to investors, usually on an overnight

basis, and buys them back the following day at the same price, plus interest on the
sale proceed

Repurchase Agreements provide an opportunity for nancial institutions such as

banks or mutual funds to lend excess funds on a short term basis in a secure
manner

Based on IFRS 15,  the repurchase transaction should be treated as a nancing

arrangement that does not give rise to revenue

Therefore, no revenue would be recognised and the “sale proceeds” would be

treated as borrowing

The borrowing is to be treated as a nancial liability measured at amortised cos

In the books of the borrower, the bonds will be shown as an asset and the cash

received from the lender would be shown under the liability side as a “Borrowing
under repurchase agreement

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 5BB)*./".;'<)+

1. O.R4323.B-',:--/'E%".3.B"32'5,,-/,FI

If the nancial asset (Bond) is sold under a repurchase agreement, it cannot be
derecognised from the books as the transferor retains substantially all the risks
and rewards of ownership.

An accounting entry appears as secured loan and not as a “sell” transaction

Bonds given as collateral remain on the balance sheet

2. &-B);."/").')<',32-'#+)B--9,'3,'3'<".3.B"32'2"34"2"/1

DR Cash / CR Financial liabilit

3. M+)<"/'N'2),,'3BB)*./'E$./-+-,/F

Repo interest is treated as payment of interest on accrual basis

&-B);."/").')<'"./-+-,/'-H#-.,-

DR Interest expense / CR Financial liabilit

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 Syllabus B1. Speci cally account for the following types of transactions:
(iii) Bill and hold arrangements.

a8"22'5.9'G)29J'5++3.;-=-./,

A form of sales arrangement in which a seller of a good bills a customer for

products but does not ship the product until a later date

Revenue is normally only recognised when goods are shipped to the buyer

522')<'<)22)>".;'B+"/-+"3'=*,/'4-'=-/'4-<)+-'3'4"22'3.9':)29'/+3.,3B/").'>"22'

4-'322)>-9I

• The risks of ownership have passed to the buye

• The buyer has committed in writing to buy the good

• The buyer has requested that the seller hold the goods, and has a business
reason for doing s

• There is a scheduled delivery date for the goods that is reasonabl

• There are no remaining obligations that the seller must complet

• The goods cannot be used to ll orders from other customers, and so have been
segregate

• The goods must be complet

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 Syllabus B1. Speci cally account for the following types of transactions:
(iv) Consignment agreements

().,";.=-./')BB*+,'>:-.';))9,'3+-',-./'41'/:-"+'
)>.-+'E/:-'B).,";.)+F'/)'3.'3;-./'E/:-'B).,";.--FY'>:)'
*.9-+/3?-,'/)',-22'/:-';))9,7

The consignor continues to own the goods until they are sold, so the goods appear
as inventory in the accounting records of the consignor, not the consignee

The unsold goods will normally be returned by the consignee to the consignor

().,";.=-./'5BB)*./".;'R'$."/"32'D+3.,<-+')<'L))9,

When the consignor sends goods to the consignee, there is no need to create an
accounting entry related to the physical movement of goods

It is usually suf cient to record the change in location within the inventory record of
the consignor

D:-'B).,";.)+'=";:/'9)I

• Periodically send a statement to the consignee, stating the inventory that should
be on the consignee's premises

• Request from the consignee a statement of on-hand inventory at the end of each
accounting period when the consignor is conducting a physical inventory count

• It may also be useful to occasionally conduct an audit of the inventory reported by

the consignee

From the consignee's perspective, there is no need to record the consigned

inventory, since it is owned by the consignor

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 It may be useful to keep a separate record of all consigned inventory, for
reconciliation and insurance purposes

().,";.=-./'5BB)*./".;'R'032-')<'L))9,'41'().,";.--

When the consignee eventually sells the consigned goods, it pays the consignor a
pre-arranged sale amount

• The consignor records this prearranged amount 


DR Cash 

CR Sale

• It also remove the related amount of inventory from its records

DR Cost of goods sold


CR Inventor

• A pro t or loss on the sale transaction will arise from these two entries

• Depending upon the arrangement with the consignee, the consignor may pay a
commission to the consignee for making the sale

If so, this is

DR Commission expense

CR Accounts payabl

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 %+)='/:-'B).,";.--a,'#-+,#-B/"@-

A sale transaction triggers a payment to the consignor for the consigned goods that
were sold

• There will also be a sale transaction to record the sale of goods to the third part

DR Cash or accounts receivable


CR Sale

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 012234*,'8T7'M+)#-+/1Y'#23./'3.9'-]*"#=-./
Syllabus B2. De ne the initial cost of a non-current asset (including a self-constructed asset)
and apply this to various examples of expenditure, distinguishing between capital and revenue
items

(3#"/32'3.9'+-@-.*-'-H#-.9"/*+-

(3#"/32'-H#-.9"/*+-

Can be de ned as expenditure on productive assets e.g. non-current assets such as

buildings, lifts, heating, machinery, vehicles, and of ce equipment

This can be for expansion and/or to improve quality for pro tability purposes

Capital expenditure appears as a non-current asset in the statement of nancial

position. 

Depreciation is charged in the income statement as an expense

All the costs incurred in self constructed assets (a business builds its own non-
current asset) should be included as a non-current asset in the statement of nancial
position

&-@-.*-'XH#-.9"/*+-

This expenditure is on day to day items, i.e. where the bene t is received short
term. 

This includes salaries, telephone costs or rent. 

It is incurred for the purpose of trade, i.e. for expenditure classi ed as selling and
distribution expenses, administration expenses and xed charges or to maintain the
existing earning capacity of non-current assets

Revenue expenditure is included as an expense in the period in which it is incurre

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 (3#"/32'$.B)=-

Capital income is the proceeds from the sale of non-current assets and non-current
asset investment

&-@-.*-'$.B)=-

Revenue income is derived from the sale of trading assets and from interest and
dividends received from investments held by the business

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 (3#"/32'3.9'+-@-.*-'"/-=,

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 Z3/*+-')<'
W-3.".;
D+3.,3B/").

i. it increases the value of non-current asset

capital expenditur
ii. it improves the earning capacity of an asse
iii.e.g. purchase of computers, vehicles, building, land,
plant and machinery; stamp duty, registration fees,
solicitor’s fees, architect’s fees, installation charges;
tting of air conditioner in vehicles

i. it is incurred to maintain existing capacity of asse

ii. regular expenditur
revenue expenditure
iii.e.g. repairs and maintenance to machinery, electricity
cost for machinery, spare parts for machinery

i. it is income which is not earned out of the regular

operations of an entity, i.e. not realized by the sale of the
merchandise of the entit
capital receipt
ii. it is a receipt earned when an item of capital expenditure
is sol
iii. it decreases the value of non-current assets

i. it is a regular receipt/incom
ii. it decreases current asset
revenue receipt iii. it is a result of the sale of the entity’s merchandise and
other revenue items such as rent received or commission
received

Capital expenditure results in the appearance of a non-current asset in the statement

of nancial position of the business

Revenue expenditure results in an expense in the statement of pro t or loss

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 Syllabus B2.
De ne the initial cost of a non-current asset (including a self-constructed asset) and apply this
to various examples of expenditure, distinguishing between capital and revenue items

Identify pre-conditions for the capitalisation of borrowing costs

Describe, and be able to identify, subsequent expenditures that should be capitalised

$."/"32'&-B);."/").')<'MMX

A:-.',:)*29'>-'4+".;'MMX'"./)'/:-'3BB)*./,C

A:-.'/:-'<)22)>".;'U'/-,/,'3+-'#3,,-9I

1. When we control the asse

2. When it’s probable that we will get future economic bene t

3. When the asset’s cost can be measured reliabl

A:3/';-/,'".B2*9-9'".'a(),/a

1. Directly attributable costs to get it to work and where it needs to b

eg. site preparation, delivery and handling, installation, related professional fees
for architects and engineer

2. Estimated cost of dismantling and removing the asset and restoring the
site.

This is:

Dr PPE

Cr Liabilit

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 All at present valu

This will need discounting and the discount unwound:


Dr interest (with unwinding of discount) 

Cr liabilit

3. Borrowing costs

If it is an asset that takes a while to construct

Interest at a market rate must be recognised or imputed

S-/a,'2))?'3/'/:-'%*/*+-')42";3/-9'B),/,'".'9-/3"277

%*/*+-')42";3/-9'B),/,

Dr PPE

Cr Liabilit

at present valu

• The present value is calculated by discounting down at the rate given in the exa

eg. 100 in 2 years time at 10% = 100/1.10/1.10 = 82.

• So the double entry would be

Dr PPE 82.6

Cr Liability 82.6

However the LIABILITY needs unwinding.

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 • Unwinding of discount

Dr Interest

Cr Liabilit

Use the original discount rate (so here 10%

10% x 82.6 = 8.2

Dr Interest 8.26

Cr Liability 8.2

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 Syllabus B2. Calculate depreciation on:
– revalued assets, and
– assets that have two or more major items or signi cant components

!-#+-B"3/").

The depreciable amount (cost less prior depreciation, impairment, and residual
value) should be allocated on a systematic basis over the asset’s useful lif

&-,"9*32'[32*-'N'QXS

• Should be reviewed at least at each nancial year-en

• if expectations differ from previous estimates, any change is accounted

for  prospectively as a change in estimate

A:"B:'W-/:)9')<'!-#+-B"3/").',:)*29'4-'*,-9C

• It should re ect the pattern in which the asset’s economic bene ts are consumed
by the enterpris

G)>')</-.',:)*29'9-#+-B"3/").'=-/:)9,'4-'+-@"->-9C

• At least annuall

• If the pattern of consumption changes, the depreciation method should be

changed prospectively as a change in estimate

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 5BB)*./".;'/+-3/=-./

Depreciation should be charged to the income statemen

Depreciation begins when the asset is available for use and continues until the
asset is de-recognise

0";."<"B3./'#3+/,'3+-'9-#+-B"3/-9',-#3+3/-21

• If the cost model is used each part of an item of PPE with a signi cant cost (in
relation to the total cost) must be depreciated separatel

• Parts which are regularly replaced - depreciate separatel

The replacement cost is then added to the asset cost when recognition criteria
are me

The carrying amount of the replaced parts is de-recognise

W3P)+'$.,#-B/").,'<)+'<3*2/,'E-7;7'5"+B+3</F

The inspection cost is added to the asset cost when recognition criteria are me

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 constructe

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 5.'3,,-/'>"/:'3'B)=#).-./'".B2*9-9'>"/:'3'9"<<-+-./'QXSI

This could be something like Land and buildings - basically you should take the land
value away from the total cost and then depreciate the remainder over the UEL of
the building

• $22*,/+3/").

Buy House for 100,000. 


The land has a value of 40,000. 

UEL of building is 10 year

• 0)2*/").I

The value of the building itself is: 100,000 - 40,000 = 60,00

Depreciation would be:


Land 40,000 - zero depreciation

Building 60,000 / 10 years = 6,00

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 Syllabus B2. Identify pre-conditions for the capitalisation of borrowing costs

$50'TU'8)++)>".;'(),/,

8)++)>".;'(),/,

Let’s say you need to get a loan to construct the asset of your dreams - well the
interest on the loan then is a directly attributable cost

So instead of taking interest to the I/S as an expense you add it to the cost of the
asset. 

(in other words - you capitalise it

D:-+-'3+-'T',B-.3+"),':-+-'/)'>)++1'34)*/I

1. You use current borrowings to pay for the asse

2. You get a speci c loan for the asse

6F'Q,-'B*++-./'4)++)>".;,

This is looking at the scenario where we use funds we have already borrowed from
different sources

So, if the funds are borrowed generally – we need to calculate the weighted average
cost of all the loans we have generally

(I know you're thinking - how the cowing'eck do I work out the weighted average of
borrowings... aaarrgghh!)

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 Well relax my little monkey armpit - here's how you do it

1. Calculate the total amount of borrowing

2. Calculate the interest payable on these in tota

3. Weighted average  of borrowing costs = Divide the interest by the borrowing - et

voila

4. We then take this weighted average of borrowing costs and multiply it by any
expenditure on the asset

The amount capitalised should not exceed total borrowing costs incurred in the
period

$22*,/+3/").

5% Overdraft 1,000

8% Loan 3,000

10% Loan 2,00

We buy an asset with a cost of 5,000 and it takes one year to build - how much
interest goes to the cost of the asset

0)2*/").

Calculate the WA cost of the borrowings

1. Total Borrowing = (1,000+3,000+2,000) = 6,00

2. Interest payable = (50+240+200) = 49

3. 490/6,000 = 8.17

4. So the total interest to be added to the asset is 8.17% x 5,000 = 40

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 TF'L-/'3',#-B"<"B'2)3.

Ok well you would think this is easy - just the interest paid, surely?! But it’s not quite
that easy

It is the actual borrowing costs less investment income on any temporary

investment of the fund

So what does this mean exactly

Well imagine you need 10,000 to build something over 3 years. You borrow 10,000
at the start but dont need it all straight away

So the bit you dont need you leave in the bank to gain interes

So, the amount you could capitalise would be the interest paid on the 10,000 less the
interest received on the amount not used and left in the bank (or reinvested
elsewhere



0/-#,I

1. Calculate the interest paid on the speci c loa

2. Calculate any interest received on loans proceeds not use

3. Add the net of these 2 to 'cost of the asset

$22*,/+3/").

Buy asset for 2,000 - takes 2 years to build

Get a 2,000 10% loan

We reinvest any money not used in an 8% deposit account. 


In year 1 we spend 1,200

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 G)>'=*B:'"./-+-,/'",'399-9'/)'/:-'B),/')<'/:-'3,,-/C

1. Interest Paid = 2,000 x 10% = 20

2. Interest received = ((2,000-1,200) x 8%) = 6

3. Dr  PPE Cost (200-64) = 136


Cr  Interest Accrua

83,"B'$9-3

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 recognised as an expense

0)'>:3/'",'3'bV*32"<1".;'3,,-/Cc

It is one which needs a substantial amount of time to get ready for use or sale

This means it can’t be anything that is available for use when you buy it

It has to take quite a while to build (PPE, Investment Properties, Inventories and
Intangibles)

d)*'9).J/':3@-'/)'399'/:-'"./-+-,/'/)'/:-'B),/')<'/:-'<)22)>".;'3,,-/,I

1. Assets measured at fair value

2. Inventories that are manufactured or produced in large quantities on a repetitive

basis even if they take a substantial period of time to get ready for use or sale

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 A:-.',:)*29'>-',/3+/'399".;'/:-'"./-+-,/'/)'/:-'B),/')<'/:-'3,,-/C

Capitalisation starts when all three of the following conditions are met

1. Expenditure begins for the asse

2. Borrowing costs begin on the loa

3. Activities begin on building the asset e.g. Plans drawn up, getting planning etc

So just having an asset for development without anything happening is not

enough to qualify for capitalisatio

5+-'4)++)>".;'B),/,'P*,/'"./-+-,/C

It’s actually any costs that an entity incurs in connection with the borrowing of funds

So it includes

• Interest expense calculated using the effective interest method

• Finance charges in respect of nance lease

A:3/'34)*/'"<'/:-'3B/"@"/"-,',/)#'/-=#)+3+"21C

Well you should stop capitalising when activities stop for an extended perio

During this time borrowing costs go to the pro t or loss

Be careful though - If the temporary delay is a necessary part of the construction

process then you can still capitalise, e.g. Bank holidays etc

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 A:-.'>"22'B3#"/32",3/").',/)#C

Well, when virtually all the activities work is complete. This means up to the point
when just the nalising touches are left

Z8

• Stop capitalising when AVAILABLE for use. This tends to be when the
construction is nishe

• If the asset is completed in parts then the interest capitalisation is stopped on the
completion of each par

• If the part can only be sold when all the other parts have been completed, then
stop capitalising when the last part is complete

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 Syllabus B2.
State and appraise the effects of the IASB's rules for the revaluation of property, plant and
equipment

Account for gains and losses on the disposal of re-valued assets

5</-+'/:-'"."/"32'+-B);."/").'/:-+-'3+-'T'B:)"B-,I

(),/'=)9-2

• Cost less accumulated depreciation and impairmen

• Depreciation should begin when ready for use not wait until actually use

&-@32*3/").'=)9-2

Fair value at the date of revaluation less depreciatio

• $<'>-'<)22)>'/:-'+-@32*3/").'=)9-2'R':)>')</-.',:)*29'>-'+-@32*-C

Revaluations should be carried out regularl

For volatile items this will be annually, for others between 3-5 years or less if
deemed necessary

• O?'3.9'>:"B:'3,,-/,';-/'+-@32*-9C

If an item is revalued, its entire class of assets should be revalue

• 5.9'/)'>:3/'@32*-C

Market value normally is fair value

Specialised properties will be revalued to their depreciated replacement cost

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 5BB)*./".;'/+-3/=-./')<'3'&-@32*3/").

An increase in the revalued amount (above depreciated historic cost

Any increase above depreciated historic cost is credited to equity under the heading
"revaluation surplus" (and shown in the OCI

• DR Asset

CR equity - “revaluation surplus

5.'".B+-3,-'".'/:-'+-@32*-9'3=)*./'E*#'/)'9-#+-B"3/-9':",/)+"B'B),/F

is taken to the income statement

• DR Assets

CR I/

5'9-B+-3,-'9)>.'/)'G",/)+"B'B),/

Any decrease down to depreciated historic cost is taken to the revaluation reserve
(and OCI) as a debit

• DR equity - “revaluation surplus”


CR Asset

5'9-B+-3,-'4-2)>':",/)+"B'B),/

Any decrease below depreciated historic cost is debited to the income statemen

• DR Income statement

CR Asset

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 !",#),32')<'3'&-@32*-9'5,,-/

The revaluation surplus in equity - IS NOT transferred to the income statement - it

just drops into RE

It will, therefore, only show up in the statement of changes in equity

S-/e,'=3?-'.)'=",/3?-'34)*/'/:",'R'/:-'+-@32*3/").'39P*,/=-./,'B3.'4-'@-+1'/+"B?17

when you revalue upwards

1. the asset will increase .... therefor

2. the depreciation will increase ... and henc

3. the expenses will increase ..

4. This means smaller pro ts and smaller retained earnings just because of the
revaluation

Shareholders will not be impressed by this as retained earnings are where they are
legally allowed to get their dividends from

Because of this, a transfer is made out of the revaluation reserve and into retained
earnings every year with the extra depreciation caused by the previous revaluation

This, though, then causes more problems if the asset is subsequently impaired etc. -
but worry not - the COW has the answer

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 D:",'",'>:3/'1)*'9)'".'3'/+"B?1'2))?".;'+-@32*3/").']*-,/").I

67 (32B*23/-'/:-'!-#+-B"3/-9'G",/)+"B'(),/

This is basically what the asset would have been worth had nothing (revaluations/
impairments) occurred in the past

We do this because anything above this gure is a genuine revaluation and so

goes to the RR

Similarly anything below this is a genuine impairment and goes to the income
statement

T7 (32B*23/-'/:-'Z8['P*,/'4-<)+-'/:-'&-@32*3/").')+'$=#3"+=-./'".']*-,/").

3. Z)>'B32B*23/-'/:-'9"<<-+-.B-'4-/>--.',/-#'T'3.9'/:-'.->'Z8[ (the amount to be

revalued or impaired to)

This will be the debit or credit to the asset

The other side of the entry will depend on the depreciated historic cost calculated
in step 1

I know all that sounds tricky - so let’s look at an illustration

$22*,/+3/").

An asset is bought for 1,000 (10yr UEL).


2 years later it is revalued to 1,000. 

One year after that it is impaired to 400

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 A:3/'",'/:-'9)*42-'-./+1'<)+'/:",'"=#3"+=-./C

67 (32B*23/-'/:-'!-#+-B"3/-9'G",/)+"B'(),/

DHC would be 1,000 less 3 years of depreciation = 70

T7 (32B*23/-'/:-'Z8['P*,/'4-<)+-'/:-'$=#3"+=-./

NBV at date of impairment = 1000 NBV one year earlier. 


So 1,000 less depreciation of (1,000 / 8) = 125 = 87

U7 Z)>'B32B*23/-'/:-'9"<<-+-.B-'4-/>--.',/-#'T'3.9'/:-'3=)*./'/)'4-'"=#3"+-9'/)

Impair to 400

So from 875 to 400 - credit Asset 47

`7 5BB)*./".;'/+-3/=-./

Dr RR with any amount above the DHC of 700. So 875-700 = 175


Dr I/S with any amount below DHC of 700. So 700-400 = 30

Dr I/S 300

Dr RR 175

Cr PPE 47

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 Illustratio

1/1/20x2 an asset has a carrying amount of 140 and a remaining UEL of 7  years. No
residual value. The asset is revalued to 60 on 1/1/20x3

On 1/120x5 the asset is revalued to 11

67 (32B*23/-'/:-'!-#+-B"3/-9'G",/)+"B'(),/

DHC would be 140 - depreciation (140 / 7 years x 3 years)  = 8

T7 (32B*23/-'/:-'Z8['P*,/'4-<)+-'/:-'&-@32*3/").

The asset is revalued to 60 on 1/1/20x3

So 60 less depreciation of (60 / 6 x 2) = 4

U7 Z)>'B32B*23/-'/:-'9"<<-+-.B-'4-/>--.',/-#'T'3.9'/:-'3=)*./'/)'4-'+-@32*-9'/)

On 1/120x5 the asset is revalued to 11

So from 40 to 110 - DR Asset 7

`7 5BB)*./".;'/+-3/=-./

Cr RR with any amount above the DHC of 80. So 110-80 = 30


Cr I/S with any amount below DHC of 80. So 80-40 = 4

Dr PPE 70

Cr I/S 40

Cr RR 30


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 Syllabus B2. Calculate depreciation on:
– assets that have two or more major items or signi cant components

()=#).-./",3/").

[3+")*,'B)=#).-./,')<'3.'3,,-/'/)'4-'"9-./"<"-9'3.9'9-#+-B"3/-9'

,-#3+3/-21'"<'/:-1':3@-'9"<<-+".;'#3//-+.,')<'4-.-<"/,7

If a signi cant component is expected to wear out quicker than the overall asset, it is
depreciated over a shorter period

Then any restoring or replacing is capitalised

This approach means different depreciation periods for different components

Examples are land, roof, walls, boilers and lifts

So the depreciation re ects the effect of a future restoration or replacement

5'B:322-.;".;'#+)B-,,

due to.

• !"<<"B*2/"-,'@32*".;'B)=#).-./,

because it is unusual for the various component parts to be valued, so.

1. Involve company personnel in the analysi
2. Applying component accounting to all asset
3. How far the asset should be broken down into component
4. Any measure used to determine components is subjectiv
5. Asset registers may need to be rewritte
6. Breaking down assets needs ‘materiality', setting a de minimis limi

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 • A:-.'3'B)=#).-./'",'+-#23B-9')+'+-,/)+-9

The old component is de-recognised to avoid double-counting and the new

component recognised

• A:-+-'"/'",'.)/'#),,"42-'/)'9-/-+=".-'/:-'B3++1".;'3=)*./')<'/:-'+-#23B-9'#3+/')<'

3.'"/-=')<'MMX

Best estimates are required

A possibility is

• Use the replacement cost of the component, adjusted for any subsequent
depreciation and impairmen

• 5'+-@32*3/").

Apportion over the signi cant components

• A:-.'3'B)=#).-./'",'+-#23B-9

1. The carrying value of the component replaced should be charged to the

income statemen

2. The cost of the new component recognised in the statement of nancial

positio

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 D+3.,"/").'/)'$%&0

Use the ‘fair value as deemed cost’ for the asset

• The fair value is then allocated to the different signi cant parts of the asse

Componentisation adds to subjectivity

The additional depreciation charge can be signi cant

Accountants and other professionals must use their professional judgment when
establishing signi cance levels, assessing the useful lives of components and
apportioning asset values over recognised components

Discussions with external auditors will be key one during this process

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 Syllabus B2. Calculate depreciation on:
– assets that have two or more major items or signi cant components

XHB-#/").32'"/-=,';-/'9",B2),-9',-#3+3/-21

This is where disclosure is necessary in order to explain the performance of the

entity bette

D:-'ZO&W5S'3BB)*./".;'/+-3/=-./'",'/)I

• Show in the standard line in the I/

• Disclose the nature and amount in note

Xf(XMD$OZ0',*B:'3,'/:-,-'B3.':3@-'/:-"+')>.'$g0'2".-I

• Write down of inventories to net realisable value (NRV

• Write down of property, plant and equipment to recoverable amoun

• Restructuring cost

• Gains/losses on disposal of non-current asset

• Discontinued operations pro ts / losse

• Litigation settlement

• Reversals of provision

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 Syllabus B2. Apply the provisions of accounting standards relating to government grants and
government assistance

L)@-+.=-./';+3./,'3+-'3'<)+=')<';)@-+.=-./'
3,,",/3.B-7

A:-.'B3.'1)*'+-B);.",-'3';)@-+.=-./';+3./C

When there is reasonable assurance that

• The entity will comply with any conditions attached to the grant an

• the grant will be receive

G)>-@-+Y'$50'Th'9)-,'.)/'3##21'/)'/:-'<)22)>".;',"/*3/").,I

1. Tax breaks from the governmen

2. Government acting as part-owner


 of the entit

3. Free technical or marketing advic

5BB)*./".;'/+-3/=-./')<';)@-+.=-./';+3./,

!+'(3,:

The debit is always cash so we only have to know where we put the credit.

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 D:-+-'3+-'T'3##+)3B:-,'R'9-#-.9".;').'>:3/'/:-';+3./'",';"@-.'<)+I

• (3#"/32'L+3./'3##+)3B:I

(Given for Assets - For NCA such as machines and buildings

Recognise the grant outside pro t or loss initially

Dr Cas

Cr Cost of asset

or

Cr Deferred Incom

• $.B)=-'L+3./'3##+)3B:I

(Given for expenses - For I/S items such as wages etc



Recognise the grant in pro t or los

Dr Cash 

Cr Other income (or expense

(3#"/32'L+3./'3##+)3B:'R'3BB)*./".;'<)+'3,'i(+'(),/')<'3,,-/i

• Dr Cash Cr Cost of  asse

This will have the effect of reducing depreciation on the income statement and
the asset on the SF

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 • An Exampl

Asset $100 with 10yrs estimated useful life


Received grant of $5

Accounting for a grant received:


DR Cash $50

CR Asset $5

At the Y/E

Depreciation charge:

DR Depreciation expense (I/S) (100-50)/10yrs = $5

CR Accumulate depreciation $

(3#"/32'L+3./'3##+)3B:'R'3BB)*./".;'<)+'3,'i(+'!-<-++-9'$.B)=-i

• Dr Cash 

Cr Deferred Incom

This will have the effect of keeping full depreciation on the income statement and
the full asset and liability on the SF

Then...

Dr Deferred Income 

Cr Income statement (over life of asset

This will have the effect of reducing the liability and the expense on the income
statemen

• An Exampl

Asset $100 with 10yrs estimated useful life


Received grant of $5

Accounting for a grant received:


DR Cash $50

CR Deferred income $5

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 At the Y/E

Depreciation charge:

DR Depreciation expense (I/S) 100/10yrs = $10

CR Accumulate depreciation $1

Release of deferred income:


DR Deferred income 50/10yrs =$5

CR I/S $

That's all I'll say here as it is best seen visually and practically in the video :

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 Syllabus B2. Apply the provisions of accounting standards relating to government grants and
government assistance

L)@-+.=-./';+3./,'M3+/'T

().9"/").,

These may help the company decide the periods over which the grant will be earned

It may be that the grant needs to be split up and taken to the income statement on
different bases

()=#-.,3/").

The grant may be for compensation on expenses already spent

Or it might be just for nancial support with no actual related future costs

Whatever the situation, the grant should be recognised in pro t or loss when it
becomes receivable

Z8

If a condition might not be met then a contingent liability should be disclosed in the
notes. Similarly if it has already not been met then a provision is required

Z).R=).-/3+1';)@-+.=-./';+3./,

Think here, for example, of the government giving you some land (ie not cash)

To put a value on it - we use the Fair Value.  Alternatively, both may be valued at a

nominal amount

&-#31=-./')<';)@-+.=-./';+3./,

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 This means when we are not allowed the grant anymore and so have to repay it
back

This would be a change in accounting estimate (IAS 8) and so you do not change
past periods just the current one

• 5BB)*./".;'/+-3/=-./'EB3#"/32';+3./'+-#31=-./FI

• Dr Any deferred Income Balance or Dr Cost of asset


• Dr Income statement with any balanc

and CR cash with the amount repai

The extra depreciation to date that would have been recognised had the grant not
been netted off against cost should be recognised immediately as an expense

• 5BB)*./".;'/+-3/=-./'R'$.B)=-'L+3./'&-#31=-./

Dr Income statement

Cr Cas

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 Syllabus B2. Describe the criteria that need to be present before non-current assets are
classi ed as held for sale, either individually or in a disposal group

5,,-/,'G-29'<)+'032-

G)>'9)'>-'9-32'>"/:'"/-=,'".')*+'3BB)*./,'>:"B:'>-'3+-'.)'2).;-+';)".;'

/)'*,-Y'".,/-39'>-'3+-';)".;'/)',-22'/:-=

So, think about this for a moment.. Why does this matter to users

Well, the accounts show the business performance and position, and you expect to
see assets in there that they actually are looking to continue using

Therefore their values do not have to be shown at their market value necessarily (as
your intention is not to sell them

G-+-Y'/:)*;:Y'-@-+1/:".;'B:3.;-,j'>-'3+-';)".;'/)',-22'/:-=7

So maybe market value is a better value to use, but they haven’t been sold yet, so
showing them at MV might still not be appropriate as this value has not yet been
achieve

So these are the issues that IFRS 5 tried, in part, to deal with and came up with the
following solution.

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 Accounting Treatmen

0/-#'6'R'(32B*23/-'/:-'(3++1".;'5=)*./777

Bring everything up to date when we decide to sel

This means

- charge the depreciation as we would normally up to that date or


- revalue it at that date (if following the revaluation policy

0/-#'T'R'(32B*23/-'%['R'(D0

Now we can get on with putting the new value on the asset to be sold.

Measure it at Fair Value less costs to sell (FV-cts)

This is because, if you think about it, this is the what the company will receive

HOWEVER, the company hasn’t actually made this sale yet and so to revalue it now
to this amount would be showing a pro t that has not yet happene

0/-#'U'R'[32*-'/:-'5,,-/,':-29'<)+',32-

IFRS 5 says the new value should actually be

...The lower of carrying amount (step 1) and FV-CTS (step 2

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 0/-#'`'R'(:-B?'<)+'3.'$=#3"+=-./

Revaluing to this amount might mean an impairment (revaluation downwards) is

needed

This must be recognised in pro t or loss, even for assets previously carried at
revalued amounts

Also, any assets under the revaluation policy will have been revalued to FV under
step

Then in step 2, it will be revalued downwards to FV-cts

Therefore, revalued assets will need to deduct costs to sell from their fair value and
this will result in an immediate charge to pro t or loss

0*4,-]*-./'".B+-3,-'".'%3"+'[32*-C

• This basically happens at the year-end if the asset still has not been sol

A gain is recognised in the p&l up to the amount of all previous impairment

losses

Z).R9-#+-B"3/").

Non-current assets or disposal groups that are classi ed as held for sale shall not be
depreciated

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 A:-.'",'3.'3,,-/'+-B);.",-9'3,':-29'<)+',32-C

• Management is committed to a plan to sel

• The asset is available for immediate sal
• An active programme to locate a buyer is initiate
• The sale is highly probable, within 12 months of classi cation as held for sal
• The asset is being actively marketed for sale at a sales price reasonable in
relation to its fair valu

543.9).-9'5,,-/,

The assets need to be disposed of through sale. Therefore, operations that are
expected to be wound down or abandoned would not meet the de nition. Therefore
assets to be abandoned would still be depreciated

8323.B-',:--/'#+-,-./3/").

Presented separately on the face of the balance sheet in current asset

• 0*4,"9"3+"-,'G-29'<)+'!",#),32

IFRS 5 applies to accounting for an investment in a subsidiary held only with a

view to its subsequent disposal in the near future

• 0*4,"9"3+"-,'32+-391'B).,)2"93/-9'.)>':-29'<)+',32-

The parent must continue to consolidate such a subsidiary until it is actually

disposed of. It is not excluded from consolidation and is reported as an asset held
for sale under IFRS 5

So subsidiaries held for sale are accounted for initially and subsequently at FV-
CTS of all the net assets not just the amount to be disposed of

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 Syllabus B2. Describe the criteria that need to be present before non-current assets are
classi ed as held for sale, either individually or in a disposal group

Account for non-current assets and disposal groups that are held for sale

G-29'<)+',32-'9",#),32';+)*#

D:",'",'>:-+-'>-',-22'=)+-'/:3.'3',".;2-'3,,-/Y'".'<3B/'"/'=31'4-'3'>:)2-'

B)=#3.1

A 'disposal group' is a group of assets, possibly with some associated liabilities,

which an entity intends to dispose of in a single transaction

Any impairment losses reduce the carrying amount of the disposal group in the order
of allocation required by IAS 3

5'9",#),32';+)*#'>"/:'+-@-+,32')<'"=#3"+=-./'2),,-,

Normally the rule here is that an impairment under IFRS 5 can only be reversed up
to as much as a previous impairment

A disposal group may take up the advantage of some assets within the group using
up the unused Impairment losses on other assets

• Illustratio

Disposal group assets Asset 1 Asset 2 Asset 3

Previous impairment (100) (20) (30)

Nbv 80 90 100

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 Here the total nbv is 270

If by the year end the FV-CTS is now

Asset 1: 150, 

Asset 2: 100 and 

Asset 3: 15

Asset 1 it can be revalued to 150, increase of 70 as previous impairment was 10

Asset 2 can be revalued to 100, an increase of 10 as previous impairment was 2

Asset 3 could normally not be revalued to 150, an increase of 50 but only to 130 as
it’s previous impairment was only 3

However, it can also use any unused impairments of the other assets in it's disposal
group such as 10 from asset 2 and a further 10 from asset 1, and so can be revalued
up to 150

A:3/'"<'/:-'3,,-/')+'9",#),32';+)*#'",'.)/',)29'>"/:".'6T'=)./:,C

1. Normally, returns to PPE at the amount it would have been at had it not gone to
held for sale

2. Check for impairment

3. Or, keep in HFS if delay is caused by circumstances outside the control of the
entity e.g

Buyer unexpectedly imposes transfer conditions which extend beyond a yea

Or the market demand has collapsed

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 Syllabus B2. Discuss the way in which the treatment of investment properties can differ from
other properties.

Apply the requirements of international nancial reporting standards to investment properties

$50'`h'$.@-,/=-./'#+)#-+/1'M3+/'6

5'4*"29".;'E)+'23.9F')>.-9'4*/'.)/'*,-9'R'P*,/'3.'".@-,/=-./

D:-'4*"29".;'",'.)/'*,-9'"/'P*,/'=3?-,'B3,:'41I

1. its FV going up (capital appreciation) o

2. from rental incom

It might not even belong to the entity it could even be just on an operating lease

This is still an IP (if the FV model is used

This allows leased land (which is normally an operating lease) to be classi ed as

investment property

Land held for indeterminate future use is an investment property where the entity has
not decided that it will use the land as owner occupied or for short-term sal

5BB)*./".;'/+-3/=-./'<)+'/:-'&-./32'$.B)=-

1. Add it to the income statemen

2. Easy! (Even for a gonk like you!) :

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 5BB)*./".;'/+-3/=-./'<)+'/:-'%['".B+-3,-

• The difference in FV each year goes to the I/

• Double easy - double gonk

No depreciation is needed because it's not used :

L"@-'=-'-H3=#2-,')<'>:3/'B3.'4-'$.@-,/=-./'M+)#-+/"-,'B)>17

ok you asked for it

1. Land held for long-term capital appreciation rather than short-term sal

2. Land held for a currently undetermined future use

This basically means they haven't yet decided what to do with the lan

3. A building owned but leased to a third party under an operating leas

4. A building which is vacant but is held to be leased out under an operating leas

5. Property being constructed or developed for future use as an investment propert

O?',=3+/1'#3./,'R'>:3/'$0ZaD'3.'$.@-,/=-./'#+)#-+/1C

• Property intended for sale in the ordinary course of busines

(It's stock!

• Owner-occupied propert

• Property leased to another entity under a nance leas

• Property being constructed for third partie

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 M3+/,')<'#+)#-+/1

These can be investment properties if the different sections can be sold or leased
separately

• Mais oui, monsier/madam

For example, company owns a building and uses 4 oors and rents out 1. The
latter can be an IP while the rest is treated as normal PP

(3.'"/',/"22'4-'3.'$50'`h'$.@-,/=-./'#+)#-+/1'"<'>-'3+-'".@)2@-9'".'/:-'4*"29".;',/"22'41'

;"@".;',-+@"B-,'/)'"/C

Si Claro hombre/mujer - It´’s still an IAS 40 Investment property if the supply is small
and insigni cant

• If it’s a signi cant part of the deal with the tenant then the property becomes an
IAS 16 property

A:3/'"<'=1',*4,"9"3+1'*,-,'"/'4*/'$'9).J/C

Right ok - now your questions are getting on my nerves… but still - it’s an IAS 40
Investment property in your own individual accounts - because you personally are
not using it

However, in the group accounts it´s an IAS 16 property because someone in the
group is using it

..now enough of the questions already.. get back to facebook .

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 $.@-,/=-./'M+)#-+/1'M3+/'T

A:-.'B3.'>-'4+".;'3.'$.@-,/=-./'M+)#-+/1'"./)'/:-'3BB)*./,C

5,'>"/:'-@-+1/:".;'-2,-Y'3.'".@-,/=-./'#+)#-+/1',:)*29'4-'+-B);.",-9'>:-.I

1. It is probable that the future economic bene ts will ow; an

2. The cost of the investment property can be measured reliably

())2'R'3.9'3/':)>'=*B:'9)'>-',:)>'"/'3/'"."/"3221C

Initially measured at cost

D:",'".B2*9-,I

1. Purchase pric

2. Directly attributable costs, for example transaction costs (professional fees,

property transfer taxes

D:",'9)-,'.)/'".B2*9-I

1. Start-up cost

2. Operating losses incurred before the investment property achieves the planned
level of occupanc

3. Abnormal amounts of wasted labour, material or other resources incurred in

constructing or developing the propert

Z8

If the property is held under a lease then you must show it initially at the lower of

• Fair value an

• The present value of the minimum lease payment

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 O?',)':)>'9)'>-'@32*-'"/'3</-+'/:-'"."/"32'B),/C

You choose between two models

1. The IAS 16 cost mode

2. The fair value mode

The policy chosen should be applied consistently to all of the entity’s investment
property

If the property is held under an operating lease the fair value model must be
adopted

(),/'=)9-2

Basically as per IAS 16. The property is measured at cost less depreciation and
impairment losses (the fair value should still be disclosed though)

%3"+'@32*-'=)9-2

All investment properties should be measured at fair value at the end of each
reporting period

Changes in fair value added to / subtracted from the asset and the other side
recognised in the income statement

No depreciation is therefore ever recognised

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 $.@-,/=-./'#+)#-+/1'M3+/'U

(:3.;-'".'*,-
This bit deals with when we decide say to use it as a normal property instead of
renting it out or vice-versa etc

XH3=#2-,
67 A-')BB*#1'3.9',/3+/'/)'*,-'/:-'".@-,/=-./'#+)#-+/1

All owner-occupied property falls under IAS 16 - cost less depreciation and
impairment losses

If the FV model was being used then the FV at change of use date is the deemed
cost for future accounting

T7 0/3+/'9-@-2)#".;'3.'".@-,/=-./'#+)#-+/1'>"/:'/:-'"./-./").')<',-22".;'"/'>:-.'

<".",:-9

The property is to be sold in the normal course of business and should therefore
be reclassi ed as inventory and accounted for under IAS 2 Inventories

U7 0/3+/'9-@-2)#".;'3.'".@-,/=-./'#+)#-+/1'>"/:'/:-'"./-./").')<'2-//".;'"/')*/'>:-.'

<".",:-9

The property should continue to be held as an investment property under IAS 40

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 `7 A-'>-+-'*,".;'/:-'4*"29".;'4*/'.)>'>-'3+-';)".;'/)'2-/'"/')*/'>:-.'<".",:-9

Transfer to investment properties and account under IAS 40.


When we transfer it though (if FV model) we revalue it

Any revaluation here goes to the Revaluation reserve and OCI as normal (not the
income statement as under IAS 40)

^7 5'#+)#-+/1'/:3/'>3,')+";".3221':-29'3,'".@-./)+1':3,'.)>'4--.'2-/'/)'3'/:"+9'#3+/17

Transfer from inventory to investment properties

Here when the transfer is made, we revalue (if FV model) to FV and any
difference goes to the income statement

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 012234*,'8U7'$=#3"+=-./')<'3,,-/,

De ne and calculate the recoverable amount of an asset and any associated impairment
losses

Identify, circumstances which indicate that the impairment of an asset may have occurred

$50'Uk'$=#3"+=-./,

5'B)=#3.1'B3..)/',:)>'3.1/:".;'".'"/,'3BB)*./,':";:-+'/:3.'>:3/'
/:-1J+-'3B/*3221'>)+/:

“What they’re actually worth” is called the “Recoverable Amount”

So no asset can be in the accounts at MORE than the recoverable amount

Less is ne, just not more

So, assets need to be checked that their NBV is not greater than the RA

If it is then it must be impaired down to the R

0)':)>'9)'1)*'B32B*23/-'3'&-B)@-+342-'5=)*./C

There are 2 things an entity can do with an asse

1. Sell it o

2. Use i

$/'>"22')4@")*,21'B:)),-'/:-').-'>:"B:'",'=),/'4-.-<"B"32

So, you'll choose the higher of the followin

• FV-CT

(Fair value less costs to sell

• VI

(Value in use

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 0)'/:-':";:-+')<'/:-'%['R'(D0'3.9'[$Q'",'B322-9'/:-'&-B)@-+342-'3=)*./

$22*,/+3/").

In the accounts an item of PPE is carried at 100. 


It’s FV-CTS is 90 and its VIU is 80

• This means the recoverable amount is 90 (higher of FV-CTS and VIU

• And that the PPE (100) is being carried at higher than the RA, which is not
allowed, and so an impairment of 10 down to the RA is required in the accounts
(100 - 90

&-B);."/").')<'3.'$=#3"+=-./'S),,

An impairment loss should be recognised whenever RA is below carrying amount

The impairment loss is an expense in the income statemen

Adjust depreciation for future periods

G-+-a,',)=-'4)+".;'9-<"."/").,'<)+'1)*I

• %3"+'@32*-

The amount obtainable from the sale of an asset in a bargained transaction
between knowledgeable, willing parties

• [32*-'".'*,-

The discounted present value of estimated future cash ows expected to arise
from

- the continuing use of an asset, and fro

- its disposal at the end of its useful lif

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 &-B)@-+342-'5=)*./'".'=)+-'9-/3"2

%3"+'[32*-'S-,,'(),/,'/)'0-22

• If there is a binding sale agreement, use the price under that agreement less
costs of disposa

• If there is an active market for that type of asset, use market price less costs of
disposal

Market price means current bid price if available, otherwise the price in the most
recent transactio

• If there is no active market, use the best estimate of the asset's selling price less
costs of disposal (direct added costs only (not existing costs or overhead)

S-/a,'2))?'3/'[$Q'".'=)+-'9-/3"277

The future cash ows

• Must be based on reasonable  and supportable assumption

(the most recent budgets and forecasts

• Budgets and forecasts should not go beyond ve year

• The cash ows should relate to the asset in its current conditio

– future restructuring to which the entity is not committed and expenditures to

improve the asset's performance should not be anticipate

• The cash ows  should not include cash from nancing activities, or income ta

• The discount rate used should be the pre-tax rate that re ects current market
assessments of the time value of money and the risks speci c to the asse

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 $9-./"<1".;'3.'5,,-/'D:3/'W31'8-'$=#3"+-9

At each balance sheet date, review all assets to look for any indication that an asset
may be impaired. 

If there is an indication that an asset may be impaired, then you must calculate the
asset’s recoverable amount... to see if it is below carrying valu

if it is - then you must impair i

$22*,/+3/").

Asset has carrying value of 10

It has a FV-CTS of 9

It has a VIU of 9

It's recoverable amount is therefore the higher of the 2 = 95 and this is below the
carrying value in the books (100) and so needs impairment of 5

A:3/'3+-'/:-'".9"B3/)+,')<'"=#3"+=-./C

1. Losses / worse economic performanc

2. Market value decline

3. Obsolescence or physical damag

4. Changes in technology, markets, economy, or law

5. Increases in market interest rate

6. Loss of key employee

7. Restructuring / re-organisatio

Just to confuse you a little bit more, we do not JUST check for impairment when
there has been an indicator (listed above)

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 A-'32,)'B:-B?'/:-'<)22)>".;'5ZZQ5SSd'+-;3+92-,,')<'>:-/:-+'/:-+-'

:3,'4--.'3.'"=#3"+=-./'".9"B3/)+')+'.)/I

1. an intangible asset with an inde nite useful lif

2. an intangible asset not yet available for us

3. goodwill acquired in a business combinatio

&-@-+,32')<'3.'$=#3"+=-./'S),,

First of all you need to think about WHY the impairment has been reversed.

1. Discount Rate Changes

Here, no reversal is allowed. So if the discount rate lowers and thus improves the
VIU, this is not considered to be a reversal of an impairment

2. Other

The increased carrying amount due to reversal should not be more than what the
depreciated historical cost would have been if the impairment had not been
recognize

3. Accounting treatment

Reversal of an impairment loss is consistent with the original treatment of the

impairment in terms of whether recognised as income in the income statement or
OCI

&-@-+,32')<'3.'"=#3"+=-./'2),,'<)+';))9>"22'",'#+):"4"/-97

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 Syllabus B3. Describe what is meant by a cash-generating unit

State the basis on which impairment losses should be allocated, and allocate a given
impairment loss to the assets of a cash- generating unit.

(3,:'L-.-+3/".;'Q."/,

0)=-/"=-,'".9"@"9*32'3,,-/,'9)'.)/';-.-+3/-'B3,:'".<2)>,',)'/:-'
B32B*23/").')<'[$Q'",'"=#),,"42-

In such a case then the asset will belong to a larger group that does generate cash

This is called a cash generating unit (CGU) and it is the carrying value of this which
is then tested for impairmen

Recoverable amount should then be determined for the asset's cash-generating unit
(CGU

(LQ'R'5'+-,/3*+3./

For example, the tables in a restaurant do not generate cash

They do belong to a larger CGU though (the restaurant itself)

It is the restaurant that is then tested for impairmen

The carrying amount of the CGU is made up of the carrying amounts of all the assets
directly attributed to it

Added to this will be assets that are not directly attributed such as head of ce and a
portion of goodwill

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 $22*,/+3/").

A subsidiary was acquired, which included 3 cash generating units and the goodwill
for the whole subsidiary was 40



Each CGU would be allocated part of the 40 according to the carrying amount of the
assets in each CGU as follows

CGU 1 2 3
NBV 200 200 400
Goodwill 10 10 20

A CGU to which goodwill has been allocated (like the 3 above) shall then be tested
for impairment at least annually by comparing the carrying amount of the unit,
including the goodwill, with the recoverable amount of the CG

If the carrying amount of the unit exceeds the recoverable amount of the unit, the
entity must recognise an impairment loss (down to the unit’s RA

O+9-+')<'$=#3"+=-./

But the problem is what do you impair rst - the assets or the goodwill in the unit

D:-'"=#3"+=-./'2),,'",'322)B3/-9'".'/:-'<)22)>".;')+9-+I

1. Reduce any goodwill allocated to the CG

2. Reduce the assets of the unit pro rat

Note: The carrying amount of an asset should not be reduced below its own
recoverable amoun

$22*,/+3/").l

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 The following carrying amounts were recorded in the books of a restaurant

immediately prior to the impairment

Goodwill 100
Property, plant and equipment  100
Furniture and xtures  100

The fair value less costs to sell of these assets is $260m whereas the value in use is
$270



&-]*"+-9I'0:)>'/:-'"=#3B/')<'/:-'"=#3"+=-./

0)2*/").

Recoverable amount is 270 - so the CV of the CGU needs to be reduced from 300 to
270 = 3

This 30 reduces goodwill down to 7

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 012234*,'8`7'S-3,-,
Syllabus B4. Account for right of use assets and lease liabilities in the records of the lessee.

S-3,-,'R'!-<"."/").

$%&0'6k';-/,'+"9')<'/:-'O#-+3/".;'2-3,-'E>:"B:',:)>-9'.)'2"34"2"/1').'/:-'

0%MF7

So, every lease now shows a liability

Therefore, the de nition of what is a lease is super important (as it affects the
amount of debt shown on the SFP

Here is that de nition

5'B)./+3B/'/:3/';"@-,'/:-'+";:/'/)'*,-'3.'3,,-/'<)+'3'#-+")9')<'/"=-'".'-HB:3.;-'<)+'

B).,"9-+3/").

0)'2-/a,'9";'9--#-+

There's 3 tests to see if the contract is a lease

1. The asset must be identi able


This can be explicitly - it's in the contract

Or implicitly - the contract only makes sense by using this asset

(There is no identi able asset if the supplier can substitute the asset (and would
bene t from doing so)

2. The customer must be able to get substantially all the bene ts while it uses i

3. The customer must be able to direct how and for what the asset is use

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 XH3=#2-

A contract gives you exclusive use of a speci c ca

You can decide when to use it and for wha
The car supplier cannot substitute / change the ca

0)'9)-,'/:-'B)./+3B/'B)./3".'3'2-3,-C

!)-,'"/'#3,,'/:-'U'/-,/,C

1. $,'/:-+-'3.'$9-./"<"342-'3,,-/C

Yes the car is explicitly referred to and the supplier cannot substitute the ca

2. !)-,'/:-'B*,/)=-+':3@-',*4,/3./"3221'322'4-.-<"/,'9*+".;'/:-'#-+")9C

Ye

3. !)-,'/:-'B*,/)=-+'9"+-B/'/:-'*,-C

Yes he/she can use it for whatever and whenever they choos

So, yes this contract contains a lease because it's..

A contract that gives the right to use an asset for a period of time in exchange for
consideratio

XH3=#2-

A contract gives you exclusive use of a speci c airplan

You can decide when it ies and what you y (passengers, cargo etc.
The airplane supplier though operates it using its own staf
The airplane supplier can substitute the airplane for another but it must meet speci c
conditions and would, in practice, cost a lot to do s

0)'9)-,'/:-'B)./+3B/'B)./3".'3'2-3,-Cm

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 !)-,'"/'#3,,'/:-'U'/-,/,C

1. $,'/:-+-'3.'$9-./"<"342-'3,,-/C

Yes the airplane is explicitly referred to and the substitution right is not
substantive as they would incur signi cant cost

2. !)-,'/:-'B*,/)=-+':3@-',*4,/3./"3221'322'4-.-<"/,'9*+".;'/:-'#-+")9C

Yes it has exclusive us

3. !)-,'/:-'B*,/)=-+'9"+-B/'/:-'*,-C

Yes the customer decides where and when the airplane will

So, yes this contract contains a lease because it's..

5'B)./+3B/'/:3/';"@-,'/:-'+";:/'/)'*,-'3.'3,,-/'<)+'3'#-+")9')<'/"=-'".'-HB:3.;-'<)+'
B).,"9-+3/").


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 Syllabus B4. Account for right of use assets and lease liabilities in the records of the lessee.

83,"B'&*2-

S-,,--,'+-B);.",-'3'+";:/'/)'*,-'3,,-/'3.9'3,,)B"3/-9'2"34"2"/1').'"/,'

0%M'<)+'=),/'2-3,-,

G)>'/)'[32*-'/:-'S"34"2"/1

Present value of the lease payments, where the lease payments are
1. Fixed Payment

2. Variable Payments (if they depend on an index / rate

3. Residual Value Guarantee

4. Probable purchase Option

5. Termination Penaltie

G)>'/)'[32*-'/:-'&";:/')<'Q,-'3,,-/C
Includes the following
1. The Lease Liability (PV of payments

2. Any lease payments made before the lease starte

3. Any Restoration costs (Dr Asset Cr Provision

4. All initial direct cost

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 5</-+'/:-'"."/"32'W-3,*+-=-./'R'5,,-/
• Cost - depreciation (normally straight line) less any impairment

• Any subsequent re-measurements of the liabilit

5</-+'/:-'"."/"32'W-3,*+-=-./'R'S"34"2"/1
• Effective interest rate method (amortised cost

• Any re-measurements (e.g. residual value guarantee changes

XH3=#2-
3 year lease ter
Annual lease payments in arrears 5,00
Rate implicit in lease: 12.04
PV of lease payments: 12,00

5.,>-+
The lease liability is initially the PV of future lease payments - given here to be
12,00
Double entry: Dr Asset 12,000 Cr Lease Liability 12,00
The Asset is then depreciated by 4,000pa (12,000 / 3

The lease liability uses amortised cost

O#-.".; $./-+-,/'E$g0F'6T7h`n EM31=-./F (2),".;

12,000 1,445 (5,000) 8,445
8,445 1,017 (5,000) 4,463
4,463 537 (5,000) 0

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 XH3=#2-'R''[3+"342-'2-3,-'#31=-./,'E".B2*9-9'".'S-3,-'S"34"2"/1F
(Remember only include those linked to a rate or index

So the lease contract says you have to pay more lease payments of 5% of the sales

in the shop you're leasing - should you include this potential variable lease payment

in your lease liability

5.,>-+

No - because it is not based on a rate or inde

(They are just put to the Income statement when they occur

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 Syllabus B4. Account for right of use assets and lease liabilities in the records of the lessee.

[3+"342-'S-3,-'#31=-./,'-H3=#2-

10 year Lease contract

500 payable at the start of every yea

Increased payments every 2 years to re ect the change in the consumer price inde

The consumer price index was 125 at the start of year

The consumer price index was 130 at the start of year

The consumer price index was 135 at the start of year

(so these are variable payments based upon an index / rate

5Z0AX&'E$LZO&$ZL'!$0(OQZD$ZLF

Start of year 1

Dr Asset 500 Cr Cash 50

Dr Asset 4500 Cr Lease Liability 4500 (9 x 500

End of year 2

Asset will be 5,000 - 1,000 (straight line depreciation) = 4,00

Lease liability will be 8 x 500 = 4,00

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 End of year 3

Lease payments are now different - 500 x 135/125 = 54

So the lease liability will be 7 x 540 = 3,780

Asset will be 4,000 - 500 (depreciation) + 280 (remeasurement of Liability) = 3,78

(Please note that this example ignored discounting - which would normally happen
as the liability is measured as the PV of future payments

[3+"342-'#31=-./,'/:3/'3+-'+-3221'<"H-9'#31=-./,

These are included into the liability as they're pretty much xed and not variabl

e.g. Payments made if the asset actually operate

(well it will operate of course and so this is effectively a xed payment and not a
variable one

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 Syllabus B4. Account for right of use assets and lease liabilities in the records of the lessee.

D:-'S-3,-'D-+=

D:",'",'"=#)+/3./'4-B3*,-77

The lease liability = PV of payments in the lease term

G)>'",'/:-'S-3,-'D-+='B32B*23/-9C

• Period which can't be cancelle

• + any option to extend period (if reasonably certain to take up

• + period covered by option to terminate (if reasonably certain not to take up

0)'>:3/'9)-,'i&-3,).3421'(-+/3".i'=-3.C

Market conditions mean its favourable to do i

Signi cant leasehold improvements mad

High costs to terminate the leas

The asset is very important to the lessee (or specialised/customised to the lessee

M+)42-=

How do we 'weight' these factors that tell us whether the lessee is reasonably certain
to extend the term or not

Eg A agship store in a prime and much sought-after location

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 Signi cant judgement would be needed to determine whether the prime geographical
location of the store or other factors (for example termination penalties, lease hold
improvements, etc.) indicate that it is reasonably certain whether or not the lessee
will renew the store lease

A:-.'",'/:-'2-3,-'/-+='+-R3,,-,,-9C

It's very rare bu

1. When the lessee exercises (or not) an option in a different way than previously
was reasonably certain

2. When something happens that contractually obliges the lessee to exercise an

option not previously included in the determination of the lease term o

3. When something signi cant happens that affects whether it is reasonably certain
to exercise an option. This trigger is only relevant for the lessee (and not the
lessor)

XH3=#2-

A 10 year lease with an option to extend for 5 years

Initially, the lessee is not reasonably certain that it will exercise the extension option.
So the lease term is set for 10 years

After 5 years, they decides to sublease the building for 10 year

5.,>-+

Entering into a sublease is a signi cant event and it affects the entity’s assessment
of whether it is reasonably certain to exercise the extension option

So, the lessee must change the lease term of the head leas

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 Syllabus B4. Explain the exemption from the recognition criteria for leases in the records of the
lessee.

S-3,-,'R'XH-=#/").,

XH-=#/").,'/)'S-3,-,'/+-3/=-./

0)'.)>'>-'?.)>'/:3/'322'2-3,-'B)./+3B/,'=-3.'>-':3@-'/)',:)>

1. A right to use Asse

2. A Liabilit

So remember we said there was no longer a concept of operating leases - all lease
contracts mean we need to show a right to use asset and its associated liabilit

Well.. there are some exemptions.

XH-=#/").'6'R'0:)+/'D-+='S-3,-,

These are less than 12 months contracts (unless there's an option to extend that
you'll probably take or an option to purchase

1. Treat them like operating lease

Just expense to the Income Statement (on a straight line / systematic basis

2. Each class of asset must have the same treatmen

3. This exemption ONLY applies to Lessee

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 XH-=#/").'TI'S)>'[32*-'5,,-/,

e.g. IT equipment, of ce furniture with a value of less than $5,00

1. Treat them like operating lease

Just expense to the Income Statement (on a straight line basis

2. Choice is made on a lease by lease basi

3. This exemption ONLY applies to Lessee

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 Syllabus B4. Explain the exemption from the recognition criteria for leases in the records of the
lessee.

W-3,*+-=-./'XH-=#/").,

XH-=#/").'6I'$.@-,/=-./'M+)#-+/1

(if it uses the FV model in IAS 40

Measure the property each year at Fair Valu

XH-=#/").'T'R'MMX

(if revaluation model is used

Use revalued amount for asse

XH-=#/").'UI'M)+/<)2")'5##+)3B:

(Portfolio of leases with SIMILAR characteristics

Use same treatment for all leases in the portfoli

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 Syllabus B4. Explain the distinction between operating leases and nance leases from a lessor
perspective.
Account for operating leases and nance leases in the nancial statements of lessors

S-,,)+'5BB)*./".;'R'%".3.B-'S-3,-

S-,,)+'5BB)*./".;

$,'"/'3'%".3.B-'S-3,-')+'3.'O#-+3/".;'S-3,-C

If the majority of the risks and rewards are transferred to the lessee then it's a
nance leas

O/:-+'$.9"B3/)+,')<'3'%".3.B-'S-3,-

1. Ownership transferred at the en

2. Option to buy at the end at less than Fair Valu

3. Lease term is for majority of the asset's UE

4. PV of future lease payments is close to the actual Fair Value of the asse

5. The asset is specialised and customised for the lesse

%".3.B-'S-3,-'3BB)*./".;

Dr Lease Receivable Cr Asse

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 A:3/'=3?-,'*#'/:-'S-3,-'&-B-"@342-C

1. PV of lease payment

(Fixed receipts, Variable receipts (based on index / rate), Residual Value

guaranteed to receive, Exercise price to be received of any likely purchase option
from the lessee, Any penalties likely to be received from the lessee for early
termination

2. Unguaranteed Residual Valu

S-,,)+'R'%".3.B-'S-3,-'3BB)*./".;

Effective Interest Closing

Opening Lease Amounts Receive
Receive Lease
Receivable
Receivable
Dr Lease Dr Lease Receivabl Dr Cas Balancing
Receivabl Cr Interest Cr Lease Receivable gure
Cr PPE Receivable

S-,,)+'3BB)*./".;'"<'O#-+3/".;'S-3,-

Remember this is when the lessor keeps the risks and rewards of the asse
Accounting rule

Keep the Asset on the SFP as norma

Show lease receipts on the income statement (straight line basis

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 Syllabus B4. Account for operating leases and nance leases in the nancial statements of
lessors

S-,,)+'5BB)*./".;'R'O#-+3/".;'S-3,-

Ok - let´s have a think about thi

Remember that when we say operating lease - we mean the risks and rewards are
NOT taken by the lessee. So have we sold the asset or not

Revenue recognition tells us that when the risks and rewards for goods are passed
on then we have made a sale and can recognise the revenue

So, no the lessor has NOT in substance sold the asset. Therefore the lessor keeps
the asset on its SFP

Income from an operating lease (not including services such as insurance and
maintenance), should be shown straight-line in the income statement over the length
of the lease (unless the item is used up on a different basis - if so use that basis)

SFP Income statement

Keep the Asset there Operating Lease rentals received

Z-;)/"3/".;'B),/,'-/B7

Any initial direct costs incurred by lessors should be added to the carrying amount of
asset on the SFP and expensed over the lease term (NOT the assets life)

O#-+3/".;'S-3,-'$.B-./"@-,

The lessor should reduce the rental income over the lease term, on a straight-line
basis with the total of these

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 Syllabus B4. Account for sale and leaseback transactions in the nancial statements of
lessees.

032-'3.9'S-3,-43B?

Let’s have a little ponder over this before we dive into the details

So - the seller makes a sale (easy) BUT remember also leases it back - so the seller
becomes the lessee always, and the buyer becomes the lessor alway

0-22-+'\'S-,,--'E3</-+F
8*1-+'\'S-,,)+'E3</-+F

However, If we sell an item and lease it back - have we actually sold it? Have we got
rid of the risk and rewards

So the rst question is.

G3@-'>-',)29'"/'3BB)+9".;'/)'$%&0'6^C (revenue from contracts with customers

O#/").'6I'd-,'R'>-':3@-',)29'"/'*.9-+'$%&0'6^

This means the control has passed to the buyer (lessor now

But remember we (the seller / lessee) have a lease - and so need to show a right to
use asset and a lease liabilit

0/-#'6I'D3?-'/:-'3,,-/'EMMXF')*/

Dr Cas

Cr Asse

Cr Initial Gain on sale


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 0/-#'TI'8+".;'/:-'+";:/'/)'*,-'3,,-/'".

Dr Right to use asse

Cr Finance Lease / Liabilit

Dr/Cr Gain on sale (balancing gure

• How much do we show the Right to Use asset at?

The proportion (how much right of use we keep) of our old carrying amount

The PV of lease payments / FV of the asset x Carrying amount before sal

• How much do we show the nance liability at?


The PV of lease payment

XH3=#2-

A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000
and FV 1,80

The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears

The interest rate implicit in the lease is 4.5%, which results in a present value of the
annual payments of 1,45

The transfer of the asset to the buyer-lessor has been assessed as meeting the
de nition of a sale under IFRS 15

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 5.,>-+
Notice rst that the seller received 200 more than its FV - this is treated as a
nancing transaction

Dr Cash 20

Cr Financial Liability 20

Now onto the sale and leaseback

0/-#6I'&-B);.",-'/:-'+";:/R)<R*,-'3,,-/'R at the proportion (how much right of use

we keep) of our old carrying amoun

Old carrying amount = 1,00

How much right we keep = 1,259 / 1,800 (The 1,259 is the 1,459 we actually pay -
200 which was for the nancing

So, 1,259 / 1,800 x 1,000 = 69

0/-#'TI'(32B*23/-'%".3.B-'S"34"2"/1'R PV of the lease payment

Given - 1,25

So the full double entry is

Dr Cash 2,00

Cr Asset 1,00

Cr Finance Liability 20

Cr Gain On Sale 80

Dr Right to use asset 69

Cr Finance lease / liability 1,25

Dr Gain on sale 560 (balance

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 O#/").'TI'$/a,'.)/'3',32-'*.9-+'$%&0'6^

So the buyer-lessor does not get control of the asse

Therefore the seller-lessee leaves the asset in their accounts and accounts for the
cash received as a nancial liability

The buyer-lessor simply accounts for the cash paid as a nancial asset (receivable)

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 %*+/:-+'L*"93.B-').'S-3,-'3BB)*./".;

Some further guidance on measuring Right to use Asset

1. !",B)*./'+3/-
The lessee uses the discount rate the interest rate implicit in the lease - if this
rate cannot be readily determined, the lessee should use its incremental
borrowing rate (for similar amount, term & security

2. &-,/)+3/").'B),/,
This should be included in the initial measurement of the right-of-use asset and
as a provision. This corresponds to the accounting for restoration costs in IAS 16
Property, Plant and Equipment

If the expected restoration costs change - then the right-of-use asset and
provision is change

3. $."/"32'9"+-B/'B),/,
These are incremental costs that would not have been incurred if a lease had not
been obtained. e.g.  commissions or some payments made to existing tenants to
obtain the lease.

All initial direct costs are included in the initial measurement of the right-of-use asset

4. 0*4,-]*-./'=-3,*+-=-./
The lease liability is measured in subsequent periods using the effective interest
rate method.

The right-of-use asset is depreciated on a straight-line basis or another

systematic basis that is more representative of the pattern in which the entity

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 expects to consume the right-of-use asset.

The lessee must also apply the impairment requirements in IAS 36,‘Impairment of
assets’, to the right-of-use asset

Using straight-line depreciation (for the asset) and the effective interest rate (for the
lease liability) will mean higher charges at the start of the lease and less at the end
(‘frontloading’

But this might not properly re ect the economic characteristics of a lease contract
(especially for 'operating leases'.

It also means the carrying amount of the right-of-use asset and the lease liability
won't be equal in subsequent periods. The right-of-use asset will, in general, be
lower than the carrying amount of the lease liability

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 When should the lease liability be reassessed?

(only if the change in cash ows is based on contractual clauses that have been part
of the contract since inception) otherwise it's a modi cation not a reassessmen

Component of the lease liabilit Reassessment

Lease Term When? – If there is a change in the lease

term

How? – Re ect the revised payments using

a revised discount rate(the interest rate
implicit in the lease for the remainder of
lease term)
Exercise price of a purchase option When? – A signi cant event (within the
control of the lessee) affects whether the
lessee is reasonably certain to exercise an
option

How? – Re ect the revised payments using

a revised discount rate(the interest rate
implicit in the lease for the remainder of
lease term)
Residual value guarantee When? – If there is a change in the amount
expected to be paid.

How? – Include the revised residual

payment using the unchanged discount rate.
Variable lease payment (dependent When? – If a change in the index/rate
on an index or a rate) results in a change in cash ows.

How? – Re ect the revised payments based

on the index/rate at the date when the new
cash ows take effect for the remainder of
the term using the unchanged discount rate

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 012234*,'8^7'$./3.;"42-'3,,-/,'3.9';))9>"22
Syllabus B5. De ne the criteria for the initial recognition and measurement of intangible assets

A:3/'",'3.'$./3.;"42-'3,,-/C

Well, according to IAS 38, it’s an identi able non-monetary asset without physical
substance, such as a licence, patent or trademark

D:-'/:+--'B+"/"B32'3//+"4*/-,')<'3.'"./3.;"42-'3,,-/'3+-I

1. Identi abilit

2. Control (power to obtain bene ts from the asset

3. Future economic bene t

A:))3:'/:-+-'#3+/.-+Y'>:3/e,'"9-./"<"342-'=-3.CC

Well it just means the asset is one of 2 things

1. It is SEPARABLE, meaning it can be sold or rented to another party on its own

(rather than as part of a business) o

2. It arises from contractual or other legal rights

It is the lack of identi ability which prevents internally generated goodwill being
recognised. It is not separable and does not arise from contractual or other legal
rights

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 XH3=#2-,

• Employees can never be recognised as an asset; they are not under the control
of the employer, are not separable and do not arise from legal right

• A taxi licence can be an intangible asset as they are controlled, can be sold/
exchanged/transferred and arise from a legal right

(The intangible doesn’t have to be separable AND arise from a legal right, just
one or the other is enough)

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 Syllabus B5. Distinguish between goodwill and other intangible assets

De ne the criteria for the initial recognition and measurement of intangible assets

A:-.'B3.'1)*'+-B);.",-'3.'$5'3.9'<)+':)>'=*B:C

A-22'"/a,'/:-')29'+-2"3421'=-3,*+342-'3.9'#+)4342-'3;3".o

In posher terms..

1. When it is probable that future economic bene ts attributable to the asset will ow
to the entit

2. The cost of the asset can be measured reliabl

0)'3/':)>'=*B:',:)*29'>-',:)>'/:-'3,,-/'3/'"."/"3221C

Well thick pants - it’s obviously brought in at cost!!  Aaarh but what is cost I hear you
whisper in my big oppy cow-like ears.. well it’

• M*+B:3,-'#+"B-'#2*,'9"+-B/21'3//+"4*/342-'B),/,

Remember that directly attributable means costs which otherwise would not have
been paid, so often staff costs are excluded

S-/J,'.)>'2))?'3/',)=-',#-B"<"B'",,*-,'/:3/'B)=-'*#')</-.'".'/:-'-H3=I

• $5'3B]*"+-9'3,'#3+/')<'3'4*,".-,,'B)=4".3/").

Well this time, the intangible asset (other than goodwill ) should initially be
recognised at its fair value

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 If the FV cannot be ascertained then it is not reliably measurable and so cannot
be shown in the accounts

In this case by not showing it, this means that goodwill becomes higher

• &-,-3+B:'3.9'!-@-2)#=-./'(),/,

Research costs are always expensed in the income statemen

Development costs are capitalised only after technical and commercial feasibility
of the asset for sale or use have been established

This means that the enterprise must intend and be able to complete the
intangible asset and either use it or sell it and be able to demonstrate how the
asset will generate future economic bene ts

If entity cannot distinguish between research and development - treat as research

and expens

• &-,-3+B:'3.9'!-@-2)#=-./'5B]*"+-9'".'3'8*,".-,,'()=4".3/").

Recognised as an asset at cost, even if a component is research

Subsequent expenditure on that project is accounted for as any other research

and development cos

• $./-+.3221'L-.-+3/-9'8+3.9,Y'W3,/:-39,Y'D"/2-,Y'S",/,

Should not be recognised as assets - expense them as there is no reliable

measur

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 • ()=#*/-+'0)</>3+-

If purchased: capitalise as an IA

Operating system for hardware: include in hardware cos

If internally developed: charge to expense until technological feasibility,

probable future bene ts, intent and ability to use or sell the software, resources to
complete the software, and ability to measure cost

52>31,'-H#-.,-'/:-'<)22)>".;I

1. Internally generated goodwil

2. Start-up, pre-opening, and pre-operating cost

3. Training cos

4. Advertising and promotional cost, including mail order catalogue

5. Relocation cost

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 Syllabus B5. Explain the subsequent accounting treatment, including the principle of
impairment tests in relation to purchased goodwill

$./3.;"42-'5,,-/,'R'%*/*+-'W-3,*+-=-./

0)'>-'B3.'*,-'-"/:-+':",/)+"B'B),/')+'+-@32*3/").7

G",/)+"B'(),/'E3.9'3=)+/",-F
Generally intangible assets should be amortised over their useful economic life

1. If has a useful economic lif

Amortise over UE

Residual values should be assumed to be nil, except in the rare circumstances

when an active market exists or there is a commitment by a third party to
purchase the asset at the end of its useful life

2. If has an inde nite UE

Check for impairment every yea

There should also be an annual review to see if the inde nite life assessment is
still appropriate

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 &-@32*3/").'E3.9'3=)+/",-F

This model can only be adopted if an active market exists for that type of asset

Revaluing Intangibles is hard, because there is no physical substance, and so a

reliable measure is tricky

1. There MUST be an active market

2. The item MUST be unique

0)'>:3/J,'3.'K3B/"@-'=3+?-/JC

• Firstly I should mention that these are rare, but may exist for certain licences and
production quota

• These, though, are markets where the products are unique, always trading and
prices available to publi

XH3=#2-,'>:-+-'/:-1'=";:/'-H",/I

1. Milk quota

2. Stock exchange seat

3. Taxi medallion

These two tests make it very dif cult for any intangibles to be revalued so the historic
cost choice is by far the most common

If the revaluation model is adopted, revaluation surpluses and de cits are accounted
for in the same way as those for PP

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 Syllabus B5. Describe and apply the requirements of IFRSs to internally generated assets
other than goodwill (e.g. research and development)

&-,-3+B:'3.9'9-@-2)#=-./

&-,-3+B:'",'-H#-.,-9Y'!-@-2)#=-./'",')</-.'3.'3,,-/7

&-,-3+B:

Research is investigation to get new knowledge and understandin

• All goes to I/

!-@-2)#=-./

Under IAS 38, an intangible asset must demonstrate all of the following criteria

(use pirate as a memory jogger

1. Mrobable future economic bene t

2. $ntention to complete and use or sell the asse

3. &esources (technical, nancial and other resources) are adequate and available

to complete and use the asse

4. 5bility to use or sell the asse

5. Dechnical feasibility of completing the intangible asset (so that it will be available

for use or sale

6. Xxpenditure can be measured reliabl

Once capitalised they should be amortised

Amortisation begins when commercial production has commenced

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 O.B-'B3#"/32",-9'/:-1',:)*29'4-'3=)+/",-9

The cost of the development expenditure should be amortised over the useful life. 

Therefore, the cost of the development expenditure is matched against the revenue
it produces

Amortisation must only begin when the asset is available for use (hence matching
the income and expenditure to the period in which it relates)

It is an expense in the income statement

• Dr Amortisation expense (I/S)


Cr Accumulated amortisation (SFP

It must be reviewed at the year-end to check it still is an asset and not an expense

If the criteria are no longer met, then the previously capitalised costs must be written
off to the statement of pro t or loss immediately

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 012234*,'8k7'$.@-./)+"-,

Syllabus B6. Measure and value inventories

83,"B'$.@-./)+1

$.@-./)+"-,',:)*29'4-'=-3,*+-9'3/'/:-'2)>-+')<'B),/'3.9'.-/'+-32",342-'

@32*-

A:3/';)-,'"./)'aB),/aC

1. Purchase pric

2. Conversion cost

3. Costs to bring into current location & conditio

A:3/'9)-,'ZOD';)'"./)'aB),/a

• Abnormal amount

• Storage cost

• Administration overhead

• Selling cost

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 $22*,/+3/").

Item A has the following costs

Direct Labour 100

Raw Materials 200
Depreciation on production machines  10
Factory Manager wage 10
Other production Overheads 8
Admin Overheads  5

What is the 'cost

0)2*/").

32

Include everything except admin cost

Z-/'&-32",342-'[32*-

The net realisable value of an item is essentially its net selling proceeds after all
costs have been deducte

It is calculated as follows.

Estimated selling price  X

Less: estimated costs of completion  (X)
Less: estimated selling and distribution costs   (X)
X

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 012234*,'8p7'%".3.B"32'".,/+*=-./,
Syllabus B7. Explain the de nition of a nancial instrument

%".3.B"32'$.,/+*=-./,'R'$./+)9*B/").

O?Y')?Y'+-23H'3/'/:-'43B?'R'/:",'",'.)/'3,'439'3,'"/',--=,j'/+*,/'=-

!-<"."/").

• First of all it must be a contrac

• Then it must create a nancial asset in one entity and a nancial liability or equity
instrument in another

• Examples:

An obvious example is a trade receivable. There is a contract, one company has
the debt as a nancial asset and the other as a liabilit

• Other examples:

Cash, investments, trade payables and loans…

5.9'/:-'/+"B?"-+',/*<<j77

It also applies to derivatives nancial such as call and put options, forwards, futures,
and swaps

5.9'/:-'P*,/'#23".'>-"+9j7

It also applies to some contracts that do not meet the de nition of a nancial
instrument, but have characteristics similar to derivative nancial instruments

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 Such as precious metals at a future date when the following applies

1. The contract is subject to possible settlement in cash NET rather than by

delivering the precious meta

2. The purchase of the precious metal was not normal for the entit

The trick in the exam is to look for contracts which state “will NOT be delivered” or
“can be settled net” - these are almost always nancial instrument

D:-'<)22)>".;'3+-'ZOD'<".3.B"32'".,/+*=-./,I

Anything without a contract


e.g. Prepayment

Anything not involving the transfer of a nancial asset


e.g. Deferred income and Warrantie

&-B);."/").

The important thing to understand here is that you bring a FI into the accounts when
you enter into the contract NOT when the contract is settled. Therefore derivatives
are recognised initially even if nothing is paid for it initially

• 0*4,/3.B-')@-+'<)+=

Form (legally) means a preference share is a share and so part of equity.

HOWEVER, a substance over form model is applied to debt/equity classi cation.
Any item with an obligation, such as redeemable preference shares, will be
shown as liabilities

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 !-R+-B);."/").

This basically means when to get rid of it / take it out of the account

• 0)'1)*',:)*29'9)'/:",'>:-.I

o The contractual rights you used to have have expired/gon

• %)+'XH3=#2-

o You sell an asset and its bene ts now go to someone else (no conditions
attached

• d)*'!OZD'9-R+-B);.",-'>:-.77

o You sell an asset but agree to buy it back later (this means you still have an
interest in the risk and rewards later

D:-'9"<<-+-.B-'4-/>--.'-]*"/1'3.9'2"34"2"/"-,

IAS 32 Financial Instruments: Presentatio

establishes principles for presenting nancial instruments as liabilities or equity

• IAS 32 does not classify a nancial instrument as equity or nancial liability on

the basis of its legal form but the substance of the transaction

D:-'?-1'<-3/*+-')<'3'<".3.B"32'2"34"2"/1

1. is that the issuer is obliged to deliver either cash or another nancial asset to the
holder

2. An obligation may arise from a requirement to repay principal or interest or

dividends

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 D:-'?-1'<-3/*+-')<'3.'X]*"/1

has a residual interest in the entity’s assets after deducting all of its liabilities

• An equity instrument includes no obligation to deliver cash or another nancial

asset to another entity

• A contract which will be settled by the entity receiving or delivering a xed

number of its own equity instruments in exchange for a xed amount of cash or
another nancial asset is an equity instrument

• However, if there is any variability in the amount of cash or own equity

instruments which will be delivered or received, then such a contract is a nancial
asset or liability as applicable

5.'3BB)*./".;'/+-3/=-./')<'/:-'B)./".;-./'#31=-./,').'3B]*","/").')<'

/:-'Z($'".'3',*4,"9"3+1

• IAS 32 states that a contingent obligation to pay cash which is outside the control
of both parties to a contract meets the de nition of a nancial liability which shall
be initially measured at fair value

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 Syllabus B7. Determine the appropriate classi cation of a nancial instrument, including those
instruments that are subject to ‘split classi cation’ – e.g. convertible loans.

%".3.B"32'2"34"2"/"-,'R'(3/-;)+"-,

D:-+-a,').21'T'B3/-;)+"-,Y'%[DMS'3.9'5=)+/",-9'B),/77'd31o

Right-y-o, we’ve looked at recognising (bring into the accounts for those of you who
are a sandwich short of a picnic*) - now we want to look at HOW MUCH to bring the
liabilities in at

*A quaint old English saying - meaning you're an idiot :



We already dealt with this on a tricky convertible loan

Trust me this section is much easier

83,"B3221'/:-+-'3+-'T'B3/-;)+"-,')<'%".3.B"32'S"34"2"/1777

67 %3"+'[32*-'D:+)*;:'M+)<"/'3.9'S),,'E%[DMSF

This includes nancial liabilities incurred for trading purposes and also
derivatives

T7 5=)+/",-9'(),/

If nancial liabilities are not measured at FVTPL, they are measured at amortised
cost

The good news is that whatever the category the nancial liability falls into - we
always recognise it at Fair Value INITIALLY

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 It is how we treat them afterwards where the category matters (and remember here
we are just dealing with the initial measurement)

5BB)*./".;'D+-3/=-./')<'%".3.B"32'S"34"2"/"-,'EO@-+@"->F

Initially At Year-End Any gain/loss

FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost

0)'R'/:-']*-,/").'",'R':)>'9)'1)*'=-3,*+-'/:-'%[')<'3'2)3.CC

Well again the answer is simple - and you’ve done it already with compound
instruments. All you do is those 2 steps

STEP 1: Take all your actual future cash payments

STEP 2: Discount them down at the market rate



If the market rate is the same as the rate you actually pay (effective rate) then this
is no problem and you don’t really have to follow those 2 steps as you will just come
back to the capital amount…let me explai

10% 1,000 Payable Loan 3 years


     

Capital  1,000 x 0.751 = 751

Interest 100    x 2.486 = 249

Total                                 1,00



So the conclusion is - WHERE THE EFFECTIVE RATE YOU PAY (10%) IS THE
SAME AS THE MARKET RATE (10%) THEN THE FV IS THE PRINCIPAL - so no
need to do the 2 steps

Always presume the market rate is the same as the effective rate you’re paying
unless told otherwise by El Examinero

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 M),,"42-'Z3*;:/1'8"/,

M+-="*=').'+-9-=#/").

This is just another way of paying interest. Except you pay it at the end (on
redemption

e.g. 4% 1,000 payable loan - with a 10% premium on redemption

This means that the EFFECTIVE interest rate (the rate we actually pay) is more than
4% - because we haven’t yet taken into account the extra 100 (10% x 1,000) payable
at the end. So the examiner will tell you what the effective rate actually is - let’s say
8%

The crucial point here is that you presume the effective rate (e.g. 8%) is the same as
the market rate (8%) so the initial FV is still 1,000

!",B)*./').'$,,*-

Exactly the same as above - it is just another way of paying interest - except this
time you pay it at the star

e.g. 4% 1,000 payable loan with a 5% discount on issue

So again the interest rate is not 4%, because it ignores the extra interest you pay at
the beginning of 50 (5% x 1,000). So the effective rate (the rate you actually pay) is
let’s say 7% (will be given in the exam)

The crucial point here is that the discount is paid immediately. So, although you
presume that the effective rate (7%) is the same as the market rate (7% say), the
INITIAL FV of the loan was 1,000 but is immediately reduced by the 50 discount - so
is actually 95

NB You still pay interest of 4% x 1,000 not 4% x 95

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them.

%".3.B"32'S"34"2"/"-,'R'5=)+/",-9'(),/

0)Y'>-J@-'P*,/'2))?-9'3/'"."/"32'=-3,*+-=-./'E3/'%[F'Z)>'2-/J,'2))?'3/':)>'>-'

=-3,*+-'"/'<+)='/:-.').>3+9,j7

This is where the categories of nancial liabilities are important - so let’s remind
ourselves what they are

Initially At Year-End Any gain/loss

FVTPL Fair Value Fair Value Income Statement
Amortised Cost Fair Value Amortised Cost -

0)'1)*').21':3@-'T'+*2-,'/)'+-=-=4-+'R'B))2j

1. FVTPL

- simple just keep the item at its FV (remember this is those 2 steps) and put the
difference to the income statemen

2. Amortised Cost

- Amortised Cost is the measurement once the initial measurement at FV is don

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 5=)+/",-9'(),/

This is simply spreading ALL interest over the length of the loan by charging
the effective interest rate to the income statement each year

If there’s nothing strange (premiums etc) then this is simple. For exampl

10% 1,000 Payable Loa

Opening Interest to I/S Interest actually Paid Closing Loan on SFP

1,000 100 (100) 1,000

Z)>'2-/J,'=3?-'"/'/+"B?"-+



10% 1,000 Loan with a 10% premium on redemption . Effective rate is 12

Opening Interest to I/S Interest actually Paid Closing Loan on SFP

1,000 120 (100) 1,020



So in year 1 the income statement would show an interest charge of 120 and the
loan would be under liabilities on the SFP at 1,020. This SFP gure will keep on
increasing until the end of the loan where it will equal the Loan + premium on
redemption

5.9'/+"B?"-+',/"22j



10% 1,000 loan with a 10% discount on issue. Effective rate is 12

Opening Interest to I/S Interest actually Paid Closing Loan on SFP

900 108 (100) 908

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 $%&0'q'+-]*"+-,'%[DMS';3".,'3.9'2),,-,').'<".3.B"32'2"34"2"/"-,'/)'4-',#2"/'"./)I

1. The gain/loss attributable to changes in the credit risk of the liability (to be placed
in OCI

2. The remaining amount of change in the fair value of the liability which shall be
presented in pro t or loss

The new guidance allows the recognition of the full amount of change in the FVTPL
only if the recognition of changes in the liability's credit risk in OCI would create or
enlarge an accounting mismatch in P&L

Amounts presented in OCI shall not be subsequently transferred to P&L, the entity
may only transfer the cumulative gain or loss within equity

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 Syllabus B7. Determine the appropriate classi cation of a nancial instrument, including those
instruments that are subject to ‘split classi cation’ – e.g. convertible loans.

%".3.B"32'S"34"2"/"-,'R'B).@-+/"42-'2)3.,

A:-.'>-'+-B);.",-'3'<".3.B"32'".,/+*=-./,'>-'2))?'3/',*4,/3.B-'+3/:-+'/:3.'<)+=

Anything with an obligation is a liability (debt)

However we now have a problem when we consider convertible payable loans. The
‘convertible’ bit means that the company may not have to pay the bank back with
cash, but perhaps shares

So is this an obligation to pay cash (debt) or an equity instrument

In fact it is both! It is therefore called a Compound Instrumen

().@-+/"42-'M31342-'S)3.,

These contain both a liability and an equity component so each has to be shown
separately

• This is best shown by example

2% Convertible Payable Loan €1,00

• This basically means the company has offered the bank the option to convert the
loan at the end into shares instead of simply taking €1,00

• The important thing to notice is that that the bank has the option to do this

• Should the share price not prove favourable then it will simply take the €1,000 as
normal

%-3/*+-,')<'3'B).@-+/"42-'#31342-'2)3.

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 67 8-//-+'$./-+-,/'+3/-

The bank likes to have the option. Therefore, in return, it will offer the company a
favourable interest rate compared to normal loan

T7 G";:-+'%3"+'[32*-')<'2)3.

This lower interest rate has effectively increased the fair value of the loan to the
company (we all like to pay less interest ;-)

We need to show all payable loans at their fair value at the beginning

U7 S)>-+'2)3.'<";*+-'".'0%M

Important: If the fair value of a liability has increased the amount payable (liability)
shown in the accounts will be lower

After all, fair value increases are good news and we all prefer lower liabilities

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 G)>'/)'(32B*23/-'/:-'%3"+'[32*-')<'3'S)3.

So how is this new fair value, that we need at the start of the loan, calculated

Well it is basically the present value of its future cash ows

0/-#'6I'D3?-'>:3/'",'3B/*3221'#3"9'ED:-'3B/*32'B3,:<2)>,FI

Capital €1,000

Interest (2%)  €20 pa

Now let’s suppose this is a 4 year loan and that normal (non-convertible) loans carry
an interest rate of 5%

0/-#'TI'!",B)*./'/:-'#31=-./,'".',/-#'6'3/'/:-'=3+?-/'+3/-'<)+'.)+=32'2)3.,'EL-/'/:-'

B3,:<2)>,'M[F

Take what the company pays and discount them using the gures above as follows

Capital €1,000 discounted @ 5% (4 years SINGLE discount gure) = 1,000 x 0.823

= 82

Interest €20   discounted @ 5% (4 years CUMULATIVE)= 20 x 3.465 = 6

D)/32'\'rqTs
 

This €892 represents the fair value of the loan and this is the gure we use in the
balance sheet initially

The remaining €108 (1,000-892) goes to equity

Dr Cash 1,000

Cr Loan 892

Cr Equity 10

Next we need to perform amortised cost on the loan (the equity is left untouched
throughout the rest of the loan period)

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:

 The interest gure in the amortised cost table will be the normal non-convertible rate
and the paid will the amounts actually paid

The closing gure is the SFP gure each yea

Opening Interest Payment Closing

892 892 x 5% = 45 (1,000 x 2% = 20) 892 + 45 - 20 = 917
917 917 x 5% = 46 (1,000 x 2% = 20) 917 + 46 - 20 = 943
943 48 (1,000 x 2% = 20) 971
971 49 (1,000 x 2% = 20) 1,000

Now at the end of the loan, the bank decide whether they should take the shares or
receive 1,000 cash

O#/").'6I'D3?-'0:3+-,'E2-/,',31'`hh'Et6F',:3+-,'>"/:'3'W[')<'tUF

Dr Loan 1,000

Dr Equity 108

Cr Share Capital 400

Cr Share premium 708 (balancing gure

O#/").'TI'D3?-'/:-'(3,:

Dr Loan 1,000

Cr Cash 1,00

Dr Equity 108

Cr Income Statement 10

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 ().B2*,").

1. When you see a convertible loan all you need to do is take the capital and
interest PAYABLE

2. Then discount these gures down at the rate used for other non convertible
loans

3. The resulting gure is the fair value of the convertible loan and the remainder sits
in equity

4. You then perform amortised cost on the opening gure of the loan. Nothing
happens to the gure in equit

().@-+/"42-'M31342-'S)3.'>"/:'/+3.,3B/").'B),/,'R'--?o

Ok well remember our 2 step process for dealing with a normal convertible loan?
No?? Well you’re an idiot. However, luckily for you, I’m not so I will remind you :

Step 1) Write down the capital and interest to be PAI

Step 2) Discount these down at the interest rate for a normal non-convertible loa

Then the total will be the FV of the loan and the remainder just goes to equity.
Remember we do this at the start of the loan ONLY

Right then let’s now deal with transaction or issue costs

These are paid at the start

Normally you simply just reduce the Loan amount with the full transaction costs

However, here we will have a loan and equity - so we split the transaction costs pro-
rat

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 I know, I know - you want an example…. boy, you’re slow - lucky you’re gorgeou

eg 4% 1,000 3 yr Convertible Loan. 


Transaction costs of £100 also to be paid. 

Non convertible loan rate 10%

0/-#'6'3.9'T

Capital 1,000 x 0.751 = 751


Interest 40 x 2.486 = 99 (ish)

Total = 85

So FV of loan = 850, Equity = 150 (1,000-850

Now the transaction costs (100) need to be deducted from these amounts pro-rat

So Loan = (850-85) = 765


Equity (150-15) = 13

And relax…

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them.

%".3.B"32'5,,-/,'R'$."/"32'W-3,*+-=-./

D:-+-'3+-'U'B3/-;)+"-,'/)'+-=-=4-+I

Initial Year-end Difference goes

Category
Measurement Measurement where?

FVTPL FV FV Profit and Loss

FVTOCI FV FV OCI

Amortised
FV Amortised Cost -
Cost

%".3.B"32'3,,-/,'/:3/'3+-'X]*"/1'$.,/+*=-./,

e.g. Shares in another compan

These are easy - Just 2 categorie

• %[DMS

FVTPL = Fair Value through Pro t & Loss

These are Equity instruments (shares) Held for trading

Normally, equity investments (shares in another company) are measured at FV in

the SFP, with value changes recognised in P&

Except for those equity investments for which the entity has elected to report
value changes in OCI

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 • %[DO($

FVTOCI = Fair Value through Other Comprehensive Income

These are Equity instruments (shares) Held for longer ter

• NB. The choice of these 2 is made at the beginning and cannot be changed
afterward

There is NO reclassi cation on de-recognitio

%".3.B"32'5,,-/,'/:3/'3+-'&-B-"@342-'S)3.,

There are basically 3 types

1. Fair Value Through Pro t & Loss (FVTPL)

A receivable loan where capital and interest aren’t the only cash ow

2. FVTOCI

Receivable loans where the cash ows are capital and interest only BUT the
business model is also to sell these loan

3. Amortised Cost

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 5'<".3.B"32'3,,-/'/:3/'=--/,'/:-'<)22)>".;'/>)'B).9"/").,'B3.'4-'

=-3,*+-9'3/'3=)+/",-9'B),/I

67 8*,".-,,'=)9-2'/-,/I

Do we normally keep our receivable loans until the end rather than sell them on

2. (3,:<2)>,'/-,/

The contractual terms of the nancial asset give rise on speci ed dates to cash
ows that are solely payments of principal and interest on the principal
outstandin

In other words:

Are the ONLY cash ows coming in capital and interest

0)'>:3/',)+/')<'/:".;,';)'"./)'/:-'%[DMS'B3/-;)+1C

• If one of the tests above are not passed then they are deemed to fall into the
FVTPL categor

This will include anything held for trading and derivatives

$Z$D$5S'=-3,*+-=-./

• Good news! Initially both are measured at FV

Easy peasy to remember

The FV is calculated, as usual, as all cash in ows discounted down at the market
rate

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 %[DMS'B3.'4-I

1. Equity items held for trading purpose

2. Equity items not held for trading (but OCI option not chosen

3. A receivable loan where capital and interest aren’t the only cash ow

!-+"@3/"@-'3,,-/,'3+-'32>31,'/+-3/-9'3,':-29'<)+'/+39".;

$."/"32'+-B);."/").')<'/+39-'+-B-"@342-,

1. Trade receivables without a signi cant nancing component

Use the transaction price from IFRS 1

2. Trade receivables with a signi cant nancing component

IFRS 9 does not exempt a trade receivable with a signi cant nancing
component from being measured at fair value on initial recognition

Therefore, differences may arise between the initial amount of revenue

recognised in accordance with IFRS 15 – and the fair value needed here in IFRS

Any difference is presented as an expense

%[DO($'R'&-B-"@342-'2)3.,':-29'<)+'B3,:'3.9',-22".;

Interest revenue, credit impairment and foreign exchange gain or loss recognised in
P&L (in the same manner as for amortised cost assets

Other gains and losses recognised in OC

On de-recognition, the cumulative gain or loss previously recognised in OCI is

reclassi ed from equity to pro t or los

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them

%".3.B"32'3,,-/,'R'5BB)*./".;'D+-3/=-./

0)'>-':3@-'/:-,-'U'B3/-;)+"-,77

$."/"32' d-3+R-.9' !"<<-+-.B-';)-,'

(3/-;)+1
W-3,*+-=-./ W-3,*+-=-./ >:-+-C

FVTPL FV FV Pro t and Loss

FVTOCI FV FV OCI

Amortised
FV Amortised Cost -
Cost

Initially both are measured at FV

Now let's look at what happens at the year-end.

%[DMS'3BB)*./".;'/+-3/=-./

1. Revalue to F

2. Difference to I/

%[DO($'3BB)*./".;'/+-3/=-./

1. Revalue to F

2. Difference to OC

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 5=)+/",-9'B),/'3BB)*./".;'/+-3/=-./

1. Re-calculate using the amortised cost tabl

(see below

5.'XH3=#2-I

8% 100 receivable loan (effective rate 10% due to a premium on redemption

5=)+/",-9'(),/'D342-l

Opening Balance Interest (effective rate)  (Cash Received) Closing balance

100 10 (8) 102

The interest (10) is always the effective rate and this is the gure that goes to the
income statement

The receipt (8) is always the cash received and this is not shown in the income
statement - it just decreases the carrying amoun

Any expected credit losses and forex gains/losses all go to I/

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 Syllabus B7.
Determine the appropriate classi cation of a nancial instrument, including those instruments
that are subject to ‘split classi cation’ – e.g. convertible loans.

Discuss and account for the initial and subsequent measurement (including the impairment) of
nancial assets and nancial liabilities in accordance with applicable nancial reporting
standards and the nance costs associated with them.

()=#)*.9'".,/+*=-./,'E().@-+/"42-'2)3.,F

Be careful here as these are treated differently according to whether they are
receivable loans (assets) or payable loans (liabilities

This is because, if you remember, the amortised cost category for nancial assets
has 2 tests, whereas the amortised cost category for liabilities does not have an

D:-'T'/-,/,'<)+'#23B".;'3'<".3.B"32'3,,-/'"./)'/:-'3=)+/",-9'B),/'B3/-;)+1'3+-I

1. Business model - do we intend to keep (not sell) the loa

... presumably we do hold until the end and not sell it - so yes that test is passe

2. Cash ow test - Are the cash receipts capital and interest only

No - There is the potential issue of shares that we may ask for instead of the
capital back

For a receivable convertible loan - it fails the cash ow test - as one receipt may be
shares and not just capital and interes

Therefore a receivable convertible loan cannot be amortised cost and so is a FVTPL

ite

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 However, there are no such tests for liabilities, and so a payable convertible loan is
not held for trading and so falls into the amortised cost categor

Type Category
Receivable Convertible Loan FVTPL
Payable Convertible Loan Amortised Cost

5BB)*./".;'D+-3/=-./')<'34)@-'B3/-;)+"-,',*==3+1

Initial Year End

FVTPL FV FV
Amortised Cost FV Amortised Cost

5.'XH3=#2-I

2% Convertible Loan €1,00

You are also told the non-convertible interest rates are as follows

Start: 5%

End of year 1: 6%

End of year 2: 7%

End of year 3: 8

• As in the payable we need to calculate FV initially

We did this and it came to 892

• Then we perform amortised cost BUT also adjust to FV each year end as this a
FVTPL item

Here’s a reminder of what we had before (but with a new FV adj column added...

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 Opening Interest Payment FV adj Closing

892 45 -20 917
917 46 -20 943
943 48 -20 971
971 49 -20 1,000

0)'>-'.--9'/)'B:3.;-'/:-'B2),".;'<";*+-,'E3.9':-.B-')#-.".;'.-H/'1-3+F'/)'/:-'.->'

%['3/'-3B:'1-3+'-.97

Calculating the FV of a loan is the same as before.

• Step 1: Take all the CASH payments (capital and interest

• Step 2: Discount them down at the MARKET rat

• FV at end of year 1

Capital discounted = 1,000 / 1.06^3 (3 years away only now) = 840

Interest = 20pa for 3 years @ 6% = 20 x 2.673 = 53

Total = 89

• FV at end of year 2

Capital discounted = 1,000 / 1.07^2 (2 years away only now) = 873

Interest = 20pa for 2 years @ 7% = 20 x 1.808 = 36

Total = 90

• FV at end of year 3

Capital discounted = 1,000 / 1.08 (1 year away only now) = 926

Interest = 20pa for 1 year @ 8% = 20 x 0.926 = 19

Total = 94

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 0)'/:-'/342-'.)>'4-B)=-,777

Opening Interest Payment FV adj Closing

892 45 -20 -24 893
893 46 -20 -10 909
909 48 -20 +8 945
945 49 -20 +26 1,000

Remember interest goes to the income statement as does the FV adjustment als

The closing gure is the SFP receivable loan amoun

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them

%".3.B"32'$.,/+*=-./,'R'D+3.,3B/").,'B),/,

D+3.,3B/").'(),/,

There will usually be brokers’ fees etc to pay and how you deal with these depends
on the category of the nancial instrument..

%)+'%[DMS'R'/:-,-';)'/)'/:-'".B)=-',/3/-=-./7

%)+'-@-+1/:".;'-2,-'/:-1';-/'399-9g9-9*B/-9'/)'/:-')#-.".;'4323.B-7

So if it is an asset - it will increase the opening balanc

If it is a liability - it will decrease the opening balanc



Nb. If a company issues its own shares, the transaction costs are debited to share
premiu

$22*,/+3/").'6

A debt security that is held for trading is purchased for 10,000. Transaction costs are
500

• The initial value is 10,000 and the transaction costs of 500 are expensed

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 $22*,/+3/").'T

A receivable bond is purchased for £10,000 and transaction costs are £500

• The initial carrying amount is £10,500

$22*,/+3/").'U

A payable bond is issued for £10,000 and transaction costs are £500

• The initial carrying amount is £9,500

Note: With the amortised cost categories, the transaction costs are effectively being
spread over the length of the loan by using an effective interest rate which
INCLUDES these transaction cost

$22*,/+3/").I'D+3.,3B/").'B),/,

An entity acquires a nancial asset for its offer price of £100 (bid price £98

IFRS 9 treats the bid-offer spread as a transaction cost

1. If the asset is FVTPL

The transaction cost of £2 is recognised as an expense in pro t or loss and the

nancial asset initially recognised at the bid price of £98

2. If the asset is classi ed as amortised cost

The transaction cost should be added to the fair value and the nancial asset initially
recognised at the offer price (the price actually paid) of £100

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 D+-3,*+1',:3+-,

It is becoming increasingly popular for companies to buy back shares as another

way of giving a dividend. Such shares are then called treasury share

5BB)*./".;'D+-3/=-./

1. Deduct from equit

2. No gain or loss shown, even on subsequent sal

3. Consideration paid or received goes to equit

$22*,/+3/").

Company buys back 10,000 (£1) shares for £2 per share. They were originally
issued for £1.2

• Dr RE 20,000 Cr Cash 20,00

The original share capital and share premium stays the same, just as it would
have done if they had been bought by a different third part

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them

$=#3"+=-./')<'%".3.B"32'$.,/+*=-./,

XH#-B/-9'(+-9"/'S),,'=)9-2

D:",'3##2"-,'/)I

1. Amortised cost item

2. FVTOCI item

G)>'"/'>)+?,

• Signi cant increase in credit risk occurred? Show lifetime expected losse

• No signi cant increase in credit risk? Show 12-month expected losses onl

G)>'9)'1)*'B32B*23/-'/:-'XH#-B/-9'(+-9"/'S),,C

Q,-I

1. a probability-weighted outcom

2. the time value of mone

3. the best available forward-looking information

Notice the use of forward-looking info - this means judgement is needed - so it will be
dif cult to compare companie

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 0/3;-'6'R'5,,-/,'>"/:'.)',";."<"B3./'".B+-3,-'".'B+-9"/'+",?

For these assets

1. 12-month expected credit losses (‘ECL’) are recognised an

2. Interest revenue is calculated on the gross carrying amount of the asset (that is,
without deduction for credit allowance

12-month ECL are based on the asset’s entire credit loss but weighted by the
probability that the loss will occur within 12 months of the Y/

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 0/3;-'T'R'5,,-/,'>"/:'3',";."<"B3./'".B+-3,-'".'B+-9"/'+",?'E4*/'.)'-@"9-.B-')<'

"=#3"+=-./F

For these assets

1. Lifetime ECL are recognise

2. Interest revenue is still calculated on the gross carrying amount of the asset

Lifetime ECL come from all possible default events over its expected lif

Expected credit losses are the weighted average credit losses with the probability of
default (‘PD’) as the weight

0/3;-'U'R'5,,-/,'>"/:'-@"9-.B-')<'"=#3"+=-./

For these assets

1. Lifetime ECL are recognised an

2. Interest revenue is calculated on the net carrying amount (that is, net of credit
allowanc

In subsequent reporting periods, if the credit quality improves so there’s no longer a

signi cant increase in credit risk since initial recognition, then the entity reverts to
recognising a 12-month ECL allowanc

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 A:-+-'9)-,'/:-'"=#3"+=-./';)C

• The changes in the loss allowance balance are recognised in pro t or loss as an
impairment gain or los

0)'>:3/'9)'322'/:-,-'.->'+*2-,').'"=#3"+=-./'=-3.C

Impairments are now recorded BEFORE any actual impairment (except for FVTPL
items) due to the 12-month ECL allowance for all asset

The ECL model is more forward looking when calculating ECL

Entities with shorter term and higher quality nancial instruments are likely to be less
signi cantly affected

Higher volatility in the ECL amounts charged to pro t or loss, increasing as economic
conditions are forecast to deteriorate, meaning more judgement require

For companies, the ECL model will most likely not cause a major increase in
allowances for short-term trade receivables because of their short term nature

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 The provision matrix should help measure the loss allowance for short-term trade
receivables

()22-B/"@-'83,",

• If the asset is small it’s just not practical to see if there’s been a signi cant
increase in credit ris

So, you can assess ECLs on a collective basis, to approximate the result of using
comprehensive credit risk information that incorporates forward-looking
information at an individual instrument leve

0"=#2"<"-9'5##+)3B:

• This means no tracking changes in credit risk

Instead just recognise a loss allowance based on lifetime ECLs at each reporting
date, right from origination

The simpli ed approach is for trade receivables, contract assets with no

signi cant nancing component, or for contracts with a maturity of one year or
les

6TR=)./:'-H#-B/-9'B+-9"/'2),,-,

These are a portion of the lifetime ECLs that are possible within 12 month

The portion is weighted by the probability of a default occurrin

It is not the predicted (probable) defaults in the next 12 months. For instance, the
probability of default might be only 25%, in which case, this should be used to
calculate 12-month ECLs, even though it is not probable that the asset will default

Also, the 12-month expected losses are not the cash shortfalls that are predicted
over only the next 12 months. For a defaulting asset, the lifetime ECLs will normally

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 be signi cantly greater than just the cash ows that were contractually due in the
next 12 months

S"<-/"=-'-H#-B/-9'B+-9"/'2),,-,

These are from all possible default events over the expected lif

Estimate them based on the present value of all cash shortfall

So, basically, it’s the difference between

• The contractual cash ows An

• The cash ows now expected to receiv

As PV is used, even late (but the same) cash ows create an EC

For a nancial guarantee contract, the ECLs would be the PV of what it expects to
pay as guarantor less any amounts from the holde

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 Syllabus B7. Discuss and account for the initial and subsequent measurement (including the
impairment) of nancial assets and nancial liabilities in accordance with applicable nancial
reporting standards and the nance costs associated with them

$=#3"+=-./')<'%".3.B"32'$.,/+*=-./,R'$22*,/+3/").,

$22*,/+3/").'6

A company has a 5yr 6% receivable loan of $1,000,00

They expect credit losses of $10,000 pa

The present value (discounted at 6%) of these lifetime expected credit losses is
$42,124

The present value of the 12-month expected credit losses is $9,43

0)2*/").'R':)>'/)'9-32'>"/:'/:",'<".3.B"32'3,,-/

• On day 1

Dr Loan receivable $1,000,000


Cr Cash $1,000,00

• End of yr 1 - no signi cant increase in credit risk - show 12m ECL

Dr I/S Impairment loss $9,434


Cr Loss allowance in nancial position $9,43

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 • End of yr 1 - signi cant increase in credit risk - show re-estimate of lifetime
ECL

Let’s say the present value of the lifetime expected credit losses is $34,651

Dr I/S Impairment loss $25,217 (34,651 – 9,434)


Cr Loss allowance in nancial position $25,21

$22*,/+3/").'T

A company has a receivable loan of $1,000,000

They estimates that the loan has a 1% probability of a default occurring in the next
12 months

It further estimates that 25% of the gross carrying amount will be lost if the loan
defaults

How much should the 12m ECL be

0)2*/").I
= 1% x 25% x $1,000,000 = $2,50

$22*,/+3/").'U

An entity has a 10 yr 6% loan receivable of $1,000,000

On initial recognition the probability of default is 1%. Expected lifetime losses

$250,00

End of year 1 - probability of default increases to 1.5

End of year 2 - probability of default increases to 30% (but still no evidence of

impairment) - expected lifetime losses now $100,00

End of year 3 - probability of default increases further - expected lifetime losses now
150,000 (but still no evidence of impairment

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 End of year 4 - probability of default increases further - expected lifetime losses now
200,000 (but still no evidence of impairment

The loan eventually defaults at the end of Year 5 and the actual loss amounts to
$250,000

At the beginning of Year 6, the loan is sold to a third party for $740,00

How would this be dealt with under IFRS 9

0)2*/").

• Initial recognition

Dr Loan receivable – amortised cost asset   $1,000,000


Cr Cash $1,000,00

Dr I/S Impairment loss (1% x 250,000) $2,500


Cr Loss allowance in nancial position $2,50

• At the end of Year 1

Dr Impairment loss in pro t or loss (3,750 – 2,500) $1,250


Cr Loss allowance in nancial position $1,25

The new 12m ECL would be 1.5% x 250,000 = $3,750

Interest income 6% x 1,000,000 = $60,000

• At the end of Year 2

Dr I/S Impairment loss (100,000 - 3,750) $96,250


Cr Loss allowance in nancial position $96,25

Interest income 6% x 1,000,000 = $60,00

Notice that interest is still calculated on gross amoun

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 • At the end of year 3

Dr I/S Impairment loss (150,000 - 100,000) $50,000


Cr Loss allowance in nancial position $50,00

Interest income 6% x 1,000,000 = $60,00

• At the end of year 4

Dr I/S Impairment loss (200,000 - 150,000) $50,000


Cr Loss allowance in nancial position $50,00

Interest income 6% x 1,000,000 = $60,00

• At the end of year 5

Dr I/S Impairment loss (250,000 - 200,000) $50,000


Cr Loss allowance in nancial position $50,00

Interest income 6% x 1,000,000 = $60,00

From Year 6 onward, interest income would be calculated at 6% on the net

carrying amount of the loan $750,000

• Start of year 6

Dr Cash                  $740,000

Dr Loss allowance in nancial position – de-recognised $250,000

Dr Loss on disposal in pro t or loss   $10,000

Cr Gross loan receivable – de-recognised $1,000,00

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 Syllabus B7. Discuss the conditions that are required for a nancial asset or liability to be de-
recognised

!-R+-B);."/").')<'%".3.B"32'5,,-/,

!-R+-B);."/").')<'3'<".3.B"32'3,,-/')BB*+,'>:-+-I
1. The contractual rights to the cash ows of the nancial asset have expired
(debtor pays), o

2. The nancial asset has been transferred (e.g., sold) including the risks and
rewards

$22*,/+3/").'6

A company sells an investment in shares, but retains the right to repurchase the
shares at any time at a price equal to their current fair value

• The company should de-recognise the asse

$22*,/+3/").'T

A company sells an investment in shares and enters into an agreement whereby the
buyer will return any increases in value to the company and the company will pay the
buyer interest plus compensation for any decrease in the value of the investment

• The company should not de-recognise the investment as it has retained

substantially all the risks and reward

%".3.B"32'S"34"2"/1'!-R+-B);."/").

The risks and rewards transfer does not apply for nancial liabilities. Rather, the
focus is on whether the nancial liability has been extinguished

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 Syllabus B7.
Explain the conditions that are required for hedge accounting to be used.

Prepare nancial information for hedge accounting purposes, including the impact of treating
hedging arrangements as fair value hedges or cash ow hedges.

Describe the nancial instrument disclosures required in the notes to the nancial statements

G-9;".;'",'322'34)*/'=3/B:".;7

O4P-B/"@-
To manage risk companies often enter into derivative contract
• e.g. Company buys wheat - so it is worried about the price of wheat rising (risk)
• To manage this risk it buys a wheat derivative that gains in value as the price of
wheat goes up
• Therefore any price increase (hedged item) will be offset by the derivative gains
(hedging item

So, the basic idea of hedge accounting is to represent the effect of an entity’s risk
management activitie

$%&0'q'B:3.;-,
• IFRS 9 has made hedge accounting more principles based to allow for effective
risk management to be better shown in the account
• It has also allowed more things to be hedged, including non- nancial item
• It has allowed more things to be hedging items also - options and forward
• There also used to be a concept of hedge effectiveness which needed to be
tested annually to see if hedge accounting could continue - this has now been
stopped

Now if its a hedge at the start it remains so and if it ends up a bad hedge well the
FS will show thi

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 5BB)*./".;'().B-#/

The idea behind hedge accounting is that gains and losses on the hedging
instrument and the hedged item are recognised in the same period in the income
statemen

It is a choice - it doesn’t have to be applie

D:-+-'3+-'U'/1#-,')<':-9;-I
67 %3"+'@32*-':-9;-,

Here we are worried about an item losing fair value (not cash)

For example you have to pay a xed rate loan of 6%. If the variable rate drops to
4% your loan has lost value. If the variable rate rises to 8%, then you have
gained in fair val

Notice you still pay 6% in both scenarios - so the risk isn’t cash ow - it is fair
valu

T7 (3,:'<2)>':-9;-,

Here we are worried about losing cash on the item at some stage in the futur

For example, you agree to buy an item in a foreign currency at a later date. If the
rate moves against you, you will lose cas

U7 G-9;-,')<'3'.-/'".@-,/=-./'".'3'<)+-";.')#-+3/").

This applies to an entity that hedges the foreign currency risk arising from its net
investments in foreign operation

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 G-9;-9'"/-=,

The hedged item is the item you’re worried about - the one which has risk (which
needs managing

A hedged item can be

• A recognised asset or liability ( nancial or not

• An unrecognised commitmen

• A highly probable forecast transactio

• A net investment in a foreign operatio

They must all be separately identi able, reliably measurable and the forecast
transaction must be highly probable

A:-.'B3.'>-'*,-':-9;-'3BB)*./".;C

The hedge must meet all of the following criteria: (replacing the old 80-125% criteria

• An economic relationship exists between the hedged item and the hedging
instrument – meaning as one goes up in FV the other will go dow

For example, a UK company selling to US customers - enters into a $100 to £

futures contract which ends when the UK company is expected to receive $10

Here - the future $ receipt will be the hedged item and the futures contract the
hedging ite

In the above example it is an obvious economic relationship as it’s the same

amount and same timin

However, sometimes the amounts and timings won’t be the same so you may
use judgement as to whether this is actually a proper hedge or not - here
numbers could be use

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 • Credit risk doesn’t dominate the fair value change

So, after having established an economic relationship (above) - IFRS 9 just wants
to make sure that any credit risk to the hedged or hedging item wont affect it so
much as to destroy the relationshi

5BB)*./".;'/+-3/=-./

• %3"+'[32*-'G-9;-,

Gains and losses of both the Hedged and Hedging item are recognised in the
current period in the income statemen

• (3,:<2)>':-9;-,

Here the hedged item has not yet made its gain or loss (it will be made in the
future e.g. Forex

So, in order to match against the hedged item when it eventually makes its gain
or loss, the “effective” changes in fair value of the hedging instrument are
deferred in reserves (any ineffective changes go straight to the income
statement

These deferred gains/losses are then taken from reserves/OCI and to the income
statement when the hedged item eventually makes its gain or los

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 • G-9;-,')<'3'.-/'".@-,/=-./'".'3'<)+-";.'-./"/1

Same as cash- ow, changes in fair value of the hedging instrument are deferred
in reserves/OC

Normally individual company forex gains/losses are taken to the income

statement and foreign subsidiary retranslation gains/losses taken to the OCI/
Reserves

So, lets say a UK holding company has a UK subsid and a Maltese subsid. The
Malta sub also has loaned the UK sub some cash in Euros

Normally the UK sub would retranslate this loan and put the difference to the
income statement. Also the Maltese sub is retranslated and the difference taken
to OCI. Here, it is allowed for the UK sub to hold the translation losses also is
reserves (like a cash ow hedge) as long as the loan is not larger than the net
investment in the Maltese su

0#-B"32'B3,-,')<':-9;".;'"/-=,'>:"B:'+-9*B-'MNS'[)23/"2"/1

1. Options - time value element when intrinsic value of option is the

designated hedging  item

If the hedging item is an option - then the time value changes in that option will be
taken to the OCI (and equity

When the hedged item is realised, these then get reclassi ed to P&

2. Forward points - when the spot element of a forward contract is the

designated hedging item

If the hedging item is a forward contract then the forward points FV changes MAY
be taken to OCI, and again gets reclassi ed when the hedged item hits the I/

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 3. Currency basis risk

The spread from this can be eliminated from the hedge - and instead either be
valued as FVTPL or FVTOCI(with reclassi cation

$22*,/+3/").')<'3'%['G-9;-

5% 100,000 xed rate 5 year Receivable loan. (Current variable rates 5%).



Here we are worried that variable rates may rise above this - if they did then the FV
of this receivable would worsen

So we would have a FV loss

If the variable rates go lower, then we are happy (as we are receiving a xed rate)
and so the FV would improve

This company hedges against the variable rates going down - by entering into a
variable rate swap (This is the hedging item)

With this derivative, if variable rates rise we will bene t from receiving more but the
FV of our xed rate receivable loan will have lowered

These 2 should cancel themselves out

Market interest rates then increase to 6%, so that the fair value of the xed rate bond
has decreased to $96,535

As the bond is classi ed as a hedged item in a fair value hedge, the change in fair
value of the bond is instead recognised in pro t or loss

Dr Hedging loss Income Statement (hedged item) 3,465

Cr Fixed rate bond 3,465

At the same time, the company determines that the fair value of the swap has
increased by $3,465 to $3,465

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 Since the swap is a derivative, it is measured at fair value with changes in fair value
recognised in pro t or loss. Therefore, Entity A makes this journal entry

Dr Derivative (FVTPL) (hedging item) 3,465

Cr Hedging gain Income statement 3,465

Since the changes in fair value of the hedged item and the hedging instrument
exactly offset, the hedge is 100% effective, and the net effect on pro t or loss is zero

$22*,/+3/").'(3,:<2)>'G-9;-

Company has the euro as its functional currency. It will buy an asset for $20,000 next
year

It enters into a forward contract to purchase $20,000 a year´s time for a xed amount
(10,000)

Half way through the year (the company’s Year-end)  the dollar has appreciated, so
that $20,000 for delivery next year now costs 12,000 on the market

Therefore, the forward contract has increased in fair value to 2,00

0)2*/").

Dr Forward Asset 2,000

Cr Equity / OCI 2,000

When the company comes to pay for the asset, the dollar rate has further increased,
such that $20,000 costs 14,000 in the spot market

178 a W n . m

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 Therefore, the fair value of the forward contract has increased to 4,00

Dr Forward Asset 2,000

Cr Equity 2,000

The forward contract is settled

Dr Cash 4,000
Cr Forward Asset 4,000

The asset is purchased for $10,000 (14,000)

Dr Machine 14,000
Cr Accounts Payable 14,000

The deferred gain left in equity of 4,000 should eithe

Remain in equity and be released from equity as the asset is depreciated o

Be deducted from the initial carrying amount of the machine

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 012234*,'8r7'S"34"2"/"-,'u'#+)@",").,Y'B)./".;-./'3,,-/,'3.9'
2"34"2"/"-,
Syllabus B8.
De ne provisions, legal and constructive obligations, past events and the transfer of economic
bene ts

State when provisions may and may not be made, and how they should be accounted for

Explain how provisions should be measured

De ne contingent assets and liabilities – give examples and describe their accounting
treatment

M+)@",").,

5'#+)@",").'",'3'2"34"2"/1')<'*.B-+/3".'/"=".;')+'3=)*./
!)*42-'-./+1
• Dr Expense

Cr Provision (Liability SFP

$<'"/'",'#3+/')<'3'B),/')<'3.'3,,-/'E-7;7'!-B)==",,").".;'B),/,F
• Dr Asset

Cr Provision (Liability SFP

&-B);.",-'>:-.

1. There is an obligation (constructive or legal

2. There is a probable out o

3. It is reliably measurabl

180 a W n . m
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 5/':)>'=*B:C

The best estimate of the expenditur

67 S3+;-'M)#*23/").')<'$/-=,77

 ⇒  use expected values

T7 0".;2-'$/-=777

⇒  the individual most likely outcome may be the best estimate

Discounting of provision

• M+)@",").,',:)*29'4-'9",B)*./-9

Eg. A future liability of 1,000 in 2 years time (discount rate 10%

1,000 x 1/1.10 x 1/1.10 = 82

Dr Expense  826

Cr Provision 82

• D:-.'/:-'9",B)*./'*.>)*.9

Year 1

826 x 10% = 8

Dr Interest    83

Cr Provision 8

Year 2

(826+83) x 10% = 9

Dr Interest    91

Cr Provision 9

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 W-3,*+-=-./')<'3'M+)@",").

The amount recognised as a provision should be the best estimate of the

expenditure required to settle the present obligation at the end of the reporting
period

• M+)@",").,'<)+').-R)<<'-@-./,

o E.g. restructuring, environmental clean-up, settlement of a lawsui

o Measured at the most likely amoun

• S3+;-'#)#*23/").,')<'-@-./,

o E.g. warranties, customer refund

o Measured at a probability-weighted expected value

A company sells goods with a warranty for the cost of repairs required in the rst 2
months after purchase

Past experience suggests

88% of the goods sold will have no defect

7% will have minor defect

5% will have major defect

If minor defects were detected in all products sold, the cost of repairs will be
$24,000

If major defects were detected in all products sold, the cost would be $200,000

A:3/'3=)*./')<'#+)@",").',:)*29'4-'=39-C

(88% x 0) + (7% x 24,000) + (5% x 200,000) = $11,68

182 a W n . m

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 ()./".;-./'S"34"2"/"-,

• These are simply a disclosure in the account

• They occur when a potential liability is not probable but only possibl

(Also occurs when not reliably measurable

()./".;-./'5,,-/,

Here, it is not a potential liability, but a potential asset

The principle of PRUDENCE is important here, it must be harder to show a potential

asset in your accounts than it is a potential liability

This is achieved by changing the probability test

For a potential (contingent) asset - it needs to be virtually certain (rather than just
probable)

M+)434"2"/1'/-,/'<)+'()./".;-./'S"34"2"/"-,

• Remote chance of paying out - Do nothin

• Possible chance of paying out - Disclosur

• Probable chance of paying out - Create a provisio

M+)434"2"/1'/-,/'<)+'()./".;-./'5,,-/,

• Remote chance of receiving - Do nothin

• Possible chance of receiving - Do nothin

• Probable chance of receiving - Disclosur

• Virtually certain of receiving - create an asset in the account

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 Syllabus B8. Identify and account for:
– Onerous contracts
– Environmental and similar provisions

Discuss the validity of making provisions for future repairs or renewals.

0)=-'/1#"B32'-H3=#2-,

0#-B"<"B'/1#-,')<'#+)@",").

• Future operating losses

Provisions are not recognised for future operating losses (no obligation

• Onerous contracts

Recognised and measured as a provision (as there is a contract and so a legal

obligation

• Restructuring

&-,/+*B/*+".;'R'(+-3/-'3'#+)@",").'>:-.I

1. There is a detailed formal plan for the restructuring; an

2. There is a valid expectation in those affected that it will carry out the restructuring
by starting to implement that plan or announcing its main features to those
affected by it (this creates a constructive obligation

M+)@"9-').21'<)+'B),/,'/:3/'3+-I

• (a) necessarily entailed by the restructuring; and 


(b) not associated with the ongoing activities of the entit

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 M),,"42-'XH3='0B-.3+"),

• A3++3./"-,
Yes there is a legal obligation so provide. The amount is based on the class as a
whole rather than individual claims. Use expected value

• W3P)+'&-#3"+,
These are not provided for. Instead they are treated as replacement non current
assets. See that chapte

• 0-2<'$.,*+3.B-
This is trying to provide for potential future res etc. Clearly no provision as no
obligation to pay until re actually occur

• X.@"+).=-./32'()./3=".3/").'(2-3+3.B-
Yes provide if legally required to do so or other parties would expect the company
to do so as it is its known polic

• !-B)==",,").".;'(),/,
All costs are provided for. The debit would be to the asset itself rather than the
income statemen

• &-,/+*B/*+".;
Provide if there is a detailed formal plan and all parties affected expect it to
happen. Only include costs necessary caused by it and nothing to do with the
normal ongoing activities of the company (e.g. don’t provide for training,
marketing etc

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 • &-"=4*+,-=-./,
This is when some or all of the costs will be paid for by a different party

This asset can only be recognised if the reimbursement is virtually certain, and
the expense can still be shown separately in the income statemen

("+B*=,/3.B- M+)@"9-C
Accrue a provision (past event was the sale of
Warranties/guarantees 
defective goods) 
Accrue if the established policy is to give
Customer refunds
refunds 
Onerous (loss-making) contract  Accrue a provision 
Accrue a provision if the company's policy is to
Land contamination  clean up even if there is no legal requirement to
do so 
Future operating losses  No provision (no present obligation) 
No provision (there is no obligation to provide
Firm offers staff training 
the training) 
Major overhaul or repairs  No provision (no obligation) 
Restructuring by sale of an Accrue a provision only after a binding sale
operation/line of business  agreement 
Restructuring by closure of Accrue a provision only after a detailed formal
business locations or plan is adopted and announced publicly. A
reorganisation  Board decision is not enough 

186 a W n . m

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 012234*,'8q7'5BB)*./".;'<)+'-=#2)1=-./'3.9'#),/R-=#2)1=-./'
4-.-<"/,
Syllabus B9. Describe the nature of de ned contribution, and de ned bene ts schemes

Explain the recognition and measurement of de ned bene t schemes in the nancial
statements of contributing employers

Account for de ned bene t schemes in the nancial statements of contributing employers

M-.,").,'$./+)9*B/").

O4P-B/"@-')<'$50'6q

Companies give their employees bene ts - the most obvious being wages but there
are, of course, other things they may offer such as pensions

IAS 19 says that the bene t should be shown when earned rather than when paid

Employee bene ts include paid holiday, sick leave and free or subsidised goods
given to employees

0:)+/R/-+='X=#2)1--'8-.-<"/,

As we mentioned above, any bene ts payable within a year after the work is done,
(such as wages, paid vacation and sick leave, bonuses etc.) should be recognised
when the work is done  not when paid for

187 a W n . m

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 M+)<"/R,:3+".;'3.9'8).*,'M31=-./,

Recognise when there is an obligation to make such payments and a reliable

estimate of the expected cost can be made

$22*,/+3/").

Grazydays PLC give their employees 6 weeks of paid holiday each year, and
because they’re groovy employers, any holiday not taken can be carried forward to
the next year
• 5BB)*./".;'D+-3/=-./ 

Any untaken holiday entitlement should be recognised as a liability in the current
year even though it wouldn’t be taken until the next year

D1#-,')<'M),/R-=#2)1=-./'8-.-<"/'M23.,
There are two types

67 !-<".-9'()./+"4*/").'#23.

In this one the company just promises to pay xed contributions into a pension
fund for the employee and has no further obligations

The contribution payable is recognised in the income statement for that period

If contributions are not payable until after a year they must be discounted

T7 !-<".-9'8-.-<"/'#23.

This is a post-employment bene t that gives the company an obligation to pay a

de ned pension to its employees who have left

D:-'0%M'%";*+-

The present value of the obligation less FV of assets (in the pension fund)

188 a W n . m
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 Syllabus B9. Explain the recognition and measurement of de ned bene t schemes in the
nancial statements of contributing employers

Account for de ned bene t schemes in the nancial statements of contributing employers

!-<".-9'8-.-<"/'0B:-=-'R'D-+=,

!-<".-9'4-.-<"/'#23.

As we said in the intro - this is “A post-employment bene t that creates a

constructive obligation to the enterprise’s employees”

• The SFP shows the pension fund as it stands at the year end in terms of the
present value of the obligation less FV of assets

Let’s dig a little deeper to make some sense out of this

• The idea is that the company puts money into the fund, the fund spends that
money on assets

The assets make an EXPECTED return. The company hopes this return will pay
off the employees future pensions when they leave the company

• Of course, the fund will not always exactly match the pension liability. Therefore
there will either be a surplus or de cit on the SFP

S-/J,'2))?'3/',)=-'/-+=,'4-<)+-'>-'#*/'"/'322'/);-/:-+I

67 5B/*3+"32';3".,g2),,-,

These occur due to differences between previous estimates and what actually
occurred

These are recognised in the OCI

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 T7 M3,/',-+@"B-'B),/

Dr Income statement

Cr Pension Liabilit

This is a change in the pension plan resulting in a higher pension obligation for
employee service in prior periods

They should be recognised immediately if already vested or not

U7 M23.'B*+/3"2=-./,')+',-//2-=-./,

Curtailments are reductions in bene ts or the number of employees covered by

the pension

Any gain/loss is recognised when the curtailment occurs

`7 (*++-./',-+@"B-'B),/

Increase in pension liability due to bene ts earned by employee service in the

period

Dr Income statement

Cr Pension Liabilit

^7 $./-+-,/'B),/

The unwinding on the discount of the pension liability

Dr Interest

Cr Pension Liabilit

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 k7 XH#-B/-9'+-/*+.').'#23.'3,,-/,

This is the Interest, dividends and other revenue from the pension assets and is
now to be based on the return from AA-rated corporate bonds

This means companies cannot set expected returns according to the assets
actually held by the plan; it could encourage them to invest in more secure
vehicles than is currently the case, seeing as the potential higher return will no
longer be re ected in the accounts

The reason behind this is to improve transparency and consistency

Dr Pension Asset

Cr Interest receive

The Interest cost and EROA are netted off against each other. They use the
same discount rate

So if a fund has more assets than liabilities (a surplus) - it will have net interest
received

If a fund has more liabilities than assets (a de cit) - it will have net interest paid

p7 ()./+"4*/").,'/)'M-.,").'<*.9

This is simply the money that the company puts in to the fund - so the fund can
buy assets to generate an expected return

Dr Pension Asset

Cr Cas

r7 8-.-<"/,'#3"9

These are the actual pensions paid out to former employees

Paying the pensions means we reduce the liability, but we use the pension fund
to do it, so we reduce the pension asset also

Dr Pension Liability

Cr Pension Asse

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 O/:-+'S).;R/-+='8-.-<"/,'E-;'M+)<"/',:3+-,Y'4).*,-,F

A simpli ed application of the model described above for other long-term employee
bene ts

All past service cost is recognised immediately

D-+=".3/").'8-.-<"/,'E-7;7'&-9*.93.B1F

Amount payable only recognised when committed to either

1. Terminating the employment of employees before the normal retirement date; o

2. Providing bene ts in order to encourage voluntary redundancy

“Demonstrably committed” means a detailed formal plan without realistic

possibility of withdrawal

Discount down if payable in more than a year

X]*"/1'()=#-.,3/").'8-.-<"/,

No recognition for stock options issued to employees as compensation

Nor does it require disclosure of the fair values of stock options or other share-based
payment

$50'6q'K5,,-/'(-"2".;J

This stops gains being shown just because Past service costs (unvested) have been
deferred

It may be that there are net assets but not all can be recovered through refunds /
contributing less in the future

192 a W n . m

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 In such cases, deferral of past service cost may not result in a refund to the entity or
a reduction in future contributions to the pension fund, so a gain is prohibited in
these circumstances

0)Y'3.1'3,,-/'+-B);.",-9'".'/:-'4323.B-',:--/',:)*29'4-'/:-'2)>-+')<I

• the net total calculated; an

• the net total of

(i) past service costs not recognised as an expense; an

(ii) the present value of any economic bene ts available in the form of refunds
from the plan or reductions in future contributions to the plan

An asset may arise where a de ned bene t plan has been overfunded or in
certain cases where actuarial gains are recognised

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 Syllabus B9. Explain the recognition and measurement of de ned bene t schemes in the
nancial statements of contributing employers

Account for de ned bene t schemes in the nancial statements of contributing employers

!-<".-9'8-.-<"/'R'$22*,/+3/").

D:",'",'4-,/',--.').'/:-'@"9-)'R'4*/':-+-';)-,'".'/:-'>+"//-.'>)+9j7

$22*,/+3/").

• Pension Fund asset b/f 400


Pension Fund Liability b/f 600

Current service cost 100

Expected return on assets 10%

Discount rate 10%

Contributions paid (@ year-end) 80

Bene ts paid (@ year-end) 6

Actuarial c/f:  Pension Fund Asset 500


Pension Fund Liability 65

0)2*/").

• Current Service cos

Dr I/S 100

Cr Pension Liability 10

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 • Expected return on Asset

Dr Pension asset 40 (10% x 400)


Cr Interest 4

• Unwinding of discoun

Dr Interest 60 (10% x 600)


Cr Pension Liability 6

• Contributions Paid

Dr Pension asset 80


Cr Cash 8

• Bene ts paid

Dr Pension Liability 60


Cr Pension Asset 6

Having done those double entry we can see that assets have increased by 60 (400
to 460) and liabilities have increased by 100 (600 to 700) giving a net increase in the
SFP pension liability of 40.

We now compare the pension assets and liabilities gure (which is based upon
assumptions) to what has actually occurred

This is given in the actuarial gures c/f

So, the assets made an actuarial gain of 40 and the liabilities a gain of 50

This total gain of 90 is recognised in the OCI as a gain

The balance sheet is showing a liability of 240, less the re-measurement of 90,
equals 150 Liability

This matches what is actually in the pension fund (650- 500) = 150.


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 Syllabus B9. Describe the nature of de ned contribution, and de ned bene ts schemes

!-<".-9'()./+"4*/").'0B:-=-

0:)+/R/-+='X=#2)1--'8-.-<"/,

Bene ts payable within a year after work is done, such as wages, paid vacation and
sick leave, bonuses etc. should be recognised when work is done

Pro t-sharing and Bonus Payments

Recognise when there is an obligation to make such payments and a reliable

estimate of the expected cost can be made

!-<".-9'B)./+"4*/").'#23.

• The enterprise pays xed contributions into a fund and has no further obligations

• The contribution payable is recognised in the income statement for that period

• If contributions are not payable until after a year they must be discounted

196 a W n . m
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 012234*,'86h7'D3H'".'<".3.B"32',/3/-=-./,
Syllabus B10. Account for current tax liabilities and assets in accordance IFRSs

$.B)=-'D3H

(*++-./'/3H

The amount of income taxes payable or receivable in a perio

Any tax loss that can be carried back to recover current tax of a previous period is
shown as an asse

If the gain or loss went to the OCI, then the related tax goes there to

!-<-++-9'D3H

D:",'",'43,"B3221'/:-'=3/B:".;'B).B-#/7

Let´s say we have credit sales of 100 (but not paid until next year)

There are no costs

The tax man taxes us on the cash basis (i.e. next year)

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 The Income statement would look like this

Income Statement
Sales 100
Tax (30%) (0)
Pro t 100

This is how it should look

The tax is brought in this year even though it´s not payable until next year, it´s just a
temporary timing difference.

Income Statement SFP

Sales 100
Tax (30%) (30) Deferred tax payable 30
Pro t 100

$22*,/+3/").

• Tax Base

Let’s presume in one country’s tax law, royalties receivable are only taxed when
they are receive

• IFRS

IFRS, on the other hand, recognises them when they are receivabl

Now let’s say in year 1, there are 1,000 royalties receivable but not received until
year 2

The Income statement would show

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 Royalties Receivable 1000


Tax     (0) (They are taxed when received in yr 2

This does not give a faithful representation as we have shown the income but not the

related tax expense

Therefore, IFRS actually states that matching should occur so the tax needs to be

brought into year 1

Dr Tax (I/S)


Cr Deferred Tax (SFP provision

!-<-++-9'/3H').'3'+-@32*3/").

Deferred tax is caused by a temporary difference between accounts rules and tax

rules

One of those is a revaluation

Accounting rules bring it in now.


Tax rules ignore the gain until it is sold

So the accounting rules will be showing more assets and more gain so we need to

match with the temporarily missing tax

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 $22*,/+3/").

A company revalues its assets upwards making a 100 gain as follows

OCI SFP
PPE 1,000 + 100

Revaluation Gain  100 Revaluation surplus 100

This is how it should look

The tax is brought in this year even though it´s not payable until sold, it´s just a
temporary timing difference.

Notice the tax matches where the gain has gone to

OCI SFP
PPE 1,000 + 100
Deferred tax payable (30%) (30)
Revaluation Gain  100-30 Revaluation surplus 100-30

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 Syllabus B10. Outline the principles of accounting for deferred tax

Explain the effect of taxable and deductible temporary differences on accounting and taxable
pro ts

Identify and account for the IASB requirements relating to deferred tax assets and liabilities

Calculate and record deferred tax amounts in the nancial statements.

!-<-++-9'D3H'0B-.3+"),

So as we saw in the introductory section, deferred tax is all about matching

If the accounts show the income, then they must also show any related tax

This is normally not a problem as both the accounts and taxman often charge
amounts in the same period

The problem occurs when they don’t

We saw how the accounts may show income when the performance occurs, while
the taxman only taxes it (tax base) when the money is received

In this case, as nancial reporters we must make sure we match the income and
related expense

So this was a case of the accounts showing ‘more income’ than the tax man in the
current year (he will tax it the following year when the money is received)

So we had to bring in ‘more tax’ ourselves by creating a deferred tax liability

So, basically deferred tax is caused simply by timing differences between IFRS rules
and tax rules

Therefore IFRS demands that matching should occur i.e

Difference between Tax adjustment needed for Deferred

Double entry
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 Dr Tax (I/S)

More Income in I/S More tax needed Liability Cr Def Tax
Liability (SFP)

Hopefully you can see then that the opposite  also applies

Difference between IFRS Tax adjustment needed for Deferred Double

and Tax base matching to occur Tax  entry
Dr Def tax
asset

More expense in I/S Less tax needed Asset
Cr tax (I/
S)

In fact, the following table all applies

Difference Tax effect Difference

1 More Income More tax Liability
2 Less income Less tax Asset
3 More expense Less tax Asset
4 Less expense More tax Liability

Remember this “more income etc.” is from the point of view of IFRS. I.e. The
accounts are showing more income, as the taxman does not tax it until next year

We will now look at each of these 4 cases in more detail

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 (3,-'6

Difference Tax effect Deferred Tax

1 More Income More tax Liability

$,,*-
IFRS shows more income than the taxman has taken into account

XH3=#2-

Royalties receivable above

Double entry required:


Dr Tax (I/S)

Cr Deferred tax Liability (SFP

(3,-'T

Difference Tax effect Deferred Tax

2 Less Income Less tax Asset

  

$,,*-

IFRS shows less income than the taxman has taken into account

XH3=#2-

Taxman taxes some income which IFRS states should be deferred such as upfront
receipts on a long term contract

203 a W n . m
 

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 Double entry required:

Dr Deferred Tax Asset (SFP)

Cr Tax (I/S

This will have the effect of eliminating the tax charge for now, so matching the fact
that IFRS is not showing the income yet either.

Once the income is shown, then the tax will also be shown by

Dr Tax (I/S)

Cr Deferred tax asset (SFP

(3,-'U

Difference Tax effect Deferred Tax

3 More Expense Less tax Asset

$,,*-

IFRS shows more expense than the taxman has taken into account

XH3=#2-



IFRS depreciation is more than Tax depreciation (WDA or CA)

Double entry required:


Dr Deferred Tax Asset (SFP)

Cr Tax (I/S

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 $22*,/+3/").                               

IFRS TAX
Asset Cost 1,000 1,000
Depreciation (400) (300)
NBV 600 700



Simply compare 700-600 =10

100 x tax rate = deferred tax asse

(3,-'`

Difference Tax effect Deferred Tax

4 Less Expense More tax Liability

  

$,,*-

IFRS shows less expense than the taxman has taken into account

XH3=#2-



IFRS depreciation is less than Tax depreciation (WDA or CA)

Double entry required:


Dr Tax I/S

Cr Deferred Tax Liabilit

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 $22*,/+3/").             

IFRS TAX
Asset Cost 1,000 1,000
Depreciation (300) (400)
NBV 700 600

Simply compare 700-600 =10

100 x tax rate = deferred tax liabilit

Then multiply this by the tax rate (e.g. 30%) = 100 x 30% = 3

ZODX

In actual fact, the standard refers to assets and liabilities rather than more income
and more expense etc. Simply use the above tables and substitute the word asset
for income and expense for liability

Difference Tax effect Difference

1 More Asset More tax Liability
2 Less Asset Less tax Asset
3 More Liability Less tax Asset
4 Less Liability More tax Liability

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 M),,"42-'XH3=".3/").'-H3=#2-,')<'(3,-'6N'`

Accelerated capital allowances (accelerated tax depreciation) - see above

Interest revenue - some interest revenue may be included in pro t or loss on an

accruals basis, but taxed when received

Development costs - capitalised for accounting purposes in accordance with IAS 38

while being deducted from taxable pro t in the period incurred

&-@32*3/").,'/)'<3"+'@32*- 

In some countries the revaluation does not affect the tax base of the asset and
hence a temporary difference occurs which should be provided for in full based on
the difference between its carrying value and tax base

NOTE: Double entry here is:


Dr Revaluation Reserve with the tax (as this is where the “income” went)

Cr Deferred tax liabilit

%3"+'@32*-'39P*,/=-./,').'B).,)2"93/"). 

IFRS 3/ IAS 28 require assets acquired on acquisition of a subsidiary or associate to
be brought in at their fair value rather than carrying amount

The deferred tax effect is a consolidation adjustment - this is more assets (normally)
so a deferred tax liability. The other side would be though to increase goodwill. And
vice-versa

Q.9",/+"4*/-9'#+)<"/,')<',*4,"9"3+"-,Y'4+3.B:-,Y'3,,)B"3/-,'3.9'P)"./'@-./*+-,l



No deferred tax liability if Parent controls the timing of the dividend.

207 a W n . m

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 M),,"42-'XH3=".3/").'-H3=#2-,')<'(3,-'T'N'U

Provisions - may not be deductible for tax purposes until the expenditure is
incurred. 



Losses - current losses that can be carried forward to be offset against future
taxable pro ts result in a deferred tax asset

%3"+'@32*-'39P*,/=-./, 

liabilities recognised on business combinations result in a deferred tax asset where
the expenditure is not deductible for tax purposes until a later period

A deferred tax asset also arises on downward revaluations where the fair value is
less than its tax base. 

NOTE: Here, the deferred tax asset here is another asset of S at acquisition and so
reduces goodwill

Q.+-32",-9'#+)<"/,').'"./+3;+)*#'/+39".; 

the tax base is based on the pro ts of the individual company who has made a
realised pro t

THERE IS NO DEFERRED TAX EFFECT ON INITIAL GOODWILL

G)>'=*B:'9-<-++-9'/3HC

Deferred tax is measured at the tax rates expected to apply to the period when the
asset is realised or liability settled, based on tax rates (and tax laws) that have been
enacted by the end of the reporting period

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 No Discountin

Deferred tax assets are only recognised to the extent that it is probable that taxable
pro t will be available against which the deductible temporary difference can be
used

209 a W n . m
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 Syllabus B10. Identify and account for the IASB requirements relating to deferred tax assets
and liabilities

Calculate and record deferred tax amounts in the nancial statements.

W",B-223.-)*,'!-<-++-9'D3H'$/-=,

O.'3B]*"+".;'3'0*4,"9"3+1

Here you need to check the Net Assets at acquisition (from your equity table) and
compare it to the tax base of the NA (this will be given in the exam

Again you just look to see if the accounts are showing more or less assets and
create a deferred tax liability / asset at acquisition also. This will affect goodwill

$22*,/+3/").'6
H acquires 100% S for 1,000. At that date the FV of S’s NA was 800 and the tax
base 700. Tax is 30%

G)>'=*B:'",';))9>"22C

Goodwill
FV of Consideration 1,000
NCI -
FV of NA acquired -800
New Deferred tax liability

30
 (800-700) x 30%
Goodwill 230

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 Q.R+-="//-9'X3+.".;,')<'L+)*#'()=#3."-,
H always has the right to receive pro ts (and dividends from them) from S or A.
However not all pro ts are immediately paid out as dividends

This creates deferred tax as H will receive the full amount one day and when it does
it will be taxed. Therefore, a deferred tax liability should be created to match against
the pro ts shown from S and

However, for Subsidiaries only, H might control its dividend policy and have no
intention of paying dividends out and no intention of selling S either in the
foreseeable future

Therefore when this is the case NO deferred tax liability is created (this can not be
the case for Associates as H does not control A

Q.+-32",-9'M+)<"/'59P*,/=-./,
Here, the group makes an adjustment and decreases pro ts, in the group accounts
only

However, tax is charged on the individual companies and not the group. So, the
group accounts will be showing less pro ts and so the tax needs adjusting by
creating a deferred tax asse

The issue though is what tax rate to use - that of the selling company or that of the
buyer who holds the stock

IAS 12 says you should use the tax rate of the buye

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 0-//".;'O<<
A deferred tax asset can normally be set off against a deferred tax liability (to the
same tax jurisdiction) as the liability gives strong evidence that pro ts are being
made and so the asset will come to fruitio

Deferred Tax Liability 1,000

Deferred Tax Asset -800
NCI 200

If, however, the deferred tax asset is more than the liability then the deferred tax
asset can only be recognised if is probable that it will be recovered in the near futur

Deferred Tax Liability 1,000

Deferred Tax Asset -1,100
NCI NO SET OFF

212 a W n . m

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 Syllabus B10. Describe the general principles of government sales taxes (e.g. VAT or GST)

[5D

5,';))9,'#3,,'9)>.'/:-',*##21'2".-Y'/:-'#-+,).'>:)'-@-./*3221',*<<-+,'/:-'[5D'",'
/:-'-.9'*,-+

8*1".;'9)>.'/:-',*##21'B:3".
67 M+)9*B-+',-22,'/)'+-/3"2-+'<)+'6hh'v'Th'E[5DF

The Producer shows 20 output tax on its VAT return and pays it over to the
authoritie

Don't forget though that they received the 20 that they're paying over to the VAT
authorities so they are neutral tax payers

T7 &-/3"2-+',-22,'/)'B*,/)=-+'<)+'Thh'v'`h'E[5DF

The retailer shows 20 INPUT tax on its VAT return and 40 OUTPUT tax - it has to
pay the net 20 to the VAT authoritie

So, they paid 20 VAT to the producer, received 40 from the customer, and paid 20
to VAT authorities so they're neutral tax payers agai

U7 (*,/)=-+'#31,'T`h

Customer has paid the 40 VAT, so they have ultimately paid the 2 x 20 paid over
to the authorities earlie

OQDMQD'D5f'R'$ZMQD'D5f'\'M3"9')@-+'/)'3*/:)+"/"-,

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 012234*,'8667'D:-'-<<-B/,')<'B:3.;-,'".'<)+-";.'B*++-.B1'
-HB:3.;-'+3/-,
Syllabus B11. Discuss the recording of transactions and translation of monetary/non-monetary
items at the reporting date for individual entities in accordance with IFRSs

%)+-";.'XHB:3.;-'0".;2-'B)=#3.1

D+3.,3B/").,'".'3',".;2-'B)=#3.1
This is where a company simples deals with companies abroad (who have a different
currency)

The key thing to remember is that…


ALL EXCHANGE DIFFERENCES TO INCOME STATEMEN

So - a company will buy on credit (or sell) and then pay or receive later. The problem

is that the exchange rate will have moved and caused an exchange difference

Step 1: Translate at spot rate


Step 2: If there is a creditor/debtor @ y/e - retranslate it (exch gain/loss to I/S)


Step 3: Pay off creditor - exchange gain/loss to I/

$22*,/+3/").'6
On 1 July an entity purchased goods from a foreign country for Y$10,000. 

On 1 September the goods were paid in full

The exchange rates were: 


1 July $1 = Y$10 

1 September $1 = Y$9


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 (32B*23/-'/:-'-HB:3.;-'9"<<-+-.B-'/)'4-'".B2*9-9'".'#+)<"/')+'2),,'
3BB)+9".;'/)'$50'T6'D:-'X<<-B/,')<'(:3.;-,'".'%)+-";.'XHB:3.;-'&3/-,7

• 0)2*/").

Account for Payables on 1 July: Y$10,000/10 = 1,000


Payment performed on 1 September: Y$10,000 / 9 = 1,11

The Exchange difference: 1,000 - 1,111 = 111 los

$22*,/+3/").'T

Maltese Co. buys £100 goods on 1st June (£1:€1.2)


Year End (31/12) payable still outstanding (£1:€1.1)

5th January £100 paid (£1:€1.05

0)2*/").

$."/"32'D+3.,3B/").

Dr Purchases 120

Cr Payables 12

d-3+'X.9

Dr Payables 10

Cr I/S Ex gain 1

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 O.'#31=-./

Dr Payables 110

Cr I/S Ex gain   5

Cr Cash 10



Also items revalued to Fair Value will be retranslated at the date of revaluation and
the exchange gain/loss to Income statement

All foreign monetary balances are also translated at the year end and the differences
taken to the income statement

This would include receivables, payables, loans etc

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 Syllabus B11. Distinguish between reporting and functional currencies

Determine an entity’s functional currency

%)+-";.'B*++-.B1'R'-H/+3,

%)+-";.'(*++-.B1'R'XH3=".342-'Z3++3/"@-'N'W",B-223.-)*,'#)"./,

%*.B/").32'(*++-.B1

Every entity has its own functional currency and measures its results in that currenc

Functional currency is the one tha

in uences sales price


the one used in the country where most competitors are and where regulations are
made and

the one that in uences labour and material cost

If functional currency changes then all items are translated at the exchange rate at
the date of chang

M+-,-./3/").'(*++-.B1

An entity can present in any currency it chooses

The foreign sub (with a foreign functional currency) will present normally in the
parents presentation currency and hence the need for foreign sub translation rules

217 a W n . m
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!

 %)+-";.'B*++-.B1'9-32".;,'4-/>--.'G'3.9'0

There is often a loan between H and a foreign sub. If the loan is in a foreign currency
don’t forget that this will need retranslating in H’s or S’s (depending on who has the
‘foreign’ loan) own accounts with the difference going to its income statement

If H sells foreign S, any exchange differences (from translating that sub) in equity are
taken to the income statement (and out of the OCI)

!-<-++-9'/3H

There are deferred tax consequences of foreign exchange gains (see tax chapter).
This is because the gains and losses are recognised by H now but will not be dealt
with by the taxman until S is eventually sold

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 012234*,'86T7'5;+"B*2/*+-
Syllabus B12. Recognise the scope of international accounting standards for agriculture

Discuss the recognition and measurement criteria including the treatment of gains and losses,
and the inability to measure fair value reliably

Identify and explain the treatment of government grants, and the presentation and disclosure of
information relating to agriculture

5BB)*./".;'<)+'8")2);"B32'5,,-/,

S-3+.'41'!)".;o
Try our revolutionary new technique - where you literally learn by doing :

No teaching, nada

w*,/'<)22)>'/:-,-',"=#2-',/-#,I

1. Do the Quiz now Try and get as many right as possible - read the questions and
explanations carefully

2. Do the quiz again (next topic)

You should feel comfortable with Agriculture IAS 41 - and who would have thought
that half an hour ago? ;

Good luck

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 Syllabus B12. Report on the transformation of biological assets and agricultural produce at the
point of harvest and account for agriculture related government grants

L)@-+.=-./';+3./,'R'3;+"B*2/*+-

L)@-+.=-./';+3./,
2 types

67 Q.B).9"/").32';)@-+.=-./';+3./,

Unconditional government grants received in respect of biological assets

measured at fair value less costs to sell are recognised in pro t or loss when the
grant becomes receivable

T7 ().9"/").32';)@-+.=-./';+3./,

If such a grant is conditional (including where the grant requires an entity not to
engage in certain agricultural activity), the entity recognises the grant in pro t or
loss only when the conditions have been met

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 012234*,'86U7'0:3+-R43,-9'#31=-./
Syllabus B13. Understand the term ‘share-based payment’

Explain the difference between cash settled share based payment transactions and equity
settled share based payment transactions

Discuss the key issue that measurement of the transaction should be based on fair value

0:3+-'83,-9'M31=-./,'R'$./+)9*B/").

A:3/'",'3'08M'/+3.,3B/").C
A-22'<"+,/')<'322'"/'.--9,'/)'4-'<)+'+-B-"@".;';))9')+',-+@"B-,'3.9'".'+-/*+.'/:-'
B)=#3.1';"@-,I

1. Its own share

2. Cash based upon the price of its own share

Contracts to buy or sell non- nancial items that may be settled net in shares or rights
to shares are outside the scope of IFRS 2 and are addressed by IAS 32

D:-+-'3+-'U'/1#-,')<'0:3+-'43,-9'#31=-./77

These are.

67 X]*"/1R,-//2-9',:3+-R43,-9'#31=-./

This is where the company pays shares in return for goods and/or services
received

• Dr Expense

Cr Equit

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 T7 (3,:R,-//2-9',:3+-R43,-9'#31=-./

This is where cash is paid in return for goods and services received,
HOWEVER..the actual cash amount though is based on the share price

These are also called SARs (Share Appreciation Rights)

• Dr Expense

Cr Liabilit

U7 D+3.,3B/").,'>"/:'3'B:)"B-')<',-//2-=-./

A choice of cash or shares paid in return for goods and services received

• depends on choice made

[-,/".;'#-+")9

Often share based payments are not immediate but payable in say 3 years. The
expense is spread over these 3 years and this is called the vesting period

G)>'=*B:'/)'+-B);.",-C

So we have decided that share based payments (either shares or cash based on
share price) should go into the accounts

(Dr expense Cr Equity or Liability

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 We now have to look at the value to put on these

• O#/").'6I'!"+-B/'=-/:)9

Use the FV of the goods or services receive

• O#/").'TI'$.9"+-B/'=-/:)9

Use the FV of the shares issued by the compan

Equity settled - Use FV of shares @ grant date


Cash settled - Update FV of shares each yea

IFRS 2 suggests you choose option 1 - the FV of the goods/services

However, if the FV of these cannot be reliably measured then you should go for
option 2 - FV of shares issued

Strangely enough, option 2 is the most common. This is because share based
payments are often associated with paying employees

You cannot put a value on the work done by employees - except for the value of
what you pay them i.e. Option 2

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 Syllabus B13. Discuss the key issue that measurement of the transaction should be based on
fair value

Identify the principles applied to measuring both cash and equity settled share-based payment
transactions

Compute the amounts that need to be recorded in the nancial statements when an entity
carries out a transaction where the payment is share based

08M'R'X]*"/1'0-//2-9

D:",'",'>:-+-'#31=-./,'3+-'=39-'>"/:'3.'-]*"/1'".,/+*=-./',*B:'3,'3'

,:3+-')+'3',:3+-')#/").7

W-3,*+-=-./

• The FV of the product / service acquired (if possible

• FV of equity instrument issue

FV of Equity Instrumen

This is basically MARKET VALUE, taking into account the terms and market related
conditions of the offer

If there is no MV available, then the “Intrinsic Value” option is available. This is

basically the share price less the exercise price

However, if this is chosen then the accounting treatment below is slightly different. It
will need to be remeasured to the new intrinsic value each year - this will be very
rare

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 5BB)*./".;'D+-3/=-./

Dr Expense (or asset)


Cr Equit

The problem is we only do the above double entry once the item has ‘vested’ (i.e.
satis ed all conditions to be met to make the share payable

For example, if shares are issued for the purchase of a building, and the building is
available to use immediately, then it has vested immediately and you would Dr PPE
Cr Equity with the FV of the asset acquired

If, however, share options are issued, but only once employees have stayed in the
job for say 3 years, then this means they do not fully vest for 3 years. What you do
here, is recognise the expense as it vests - over what we call the ‘vesting period’. So,
in this example, you would calculate the full cost of the options at grant date and in
the rst year Dr Expense Cr Equity with 1/3 of that total

M+-B",-'W-3,*+-=-./

You take the best available estimate at the time of the number of equity
instruments expected to vest at the end

The value used for the share options throughout the vesting period remains at the
GRANT DATE value (with the exception of “intrinsic value” method above)

$22*,/+3/").

An entity grants 100 share options on its $1 shares to each of its 500 employees on
1 January Year 1

Each grant is conditional upon the employee working for the entity over the next
three years

The fair value of each share option as at 1 January Year 1 is $10

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 On the basis of a weighted average probability, the entity estimates on 1 January
that 100 employees will leave during the three-year period and therefore forfeit their
rights to share options

The following actually occurs

• – 20 employees leave during Year 1 and the estimate of total employee

departures over the three-year period is revised to 70 employees

– 25 employees leave during Year 2 and the estimate of total employee
departures over the three-year period is revised to 60 employees

– 10 employees leave during Year

0)2*/").

0/-#'6I

Decide if this is a cash or equity settled SBP - share options are equity settled (so Dr
Expense Cr Equity)

0/-#'TI

Decide whether to value directly or indirectly - these are for employees so indirectly

0/-#'UI

Calculate how many employees (and their share options each) are expected to be
issued at the end of the vesting period

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 d-3+'6I  

430 Employees expected to be left at end (500-70) x 100 (share options each) x $10
(FV @ GRANT date) x 1/3 (time through vesting period) = 143,30

d-3+'TI

 440 x 100 x $10 x 2/3 - 143,300 = 150,00

d-3+'UI

445 x 100 x $10 x 3/3 - 293,300 = 151,70

So you can see that the “costs” and so the entries into the accounts would be

Year 1: Dr Expense 143,300 Cr Equity 143,300


Year 2: Dr Expense 150,000 Cr Equity 150,000

Year 3: Dr Expense 151,700 Cr Equity 151,70

Notice that if you add these up it comes to 445,000

This is exactly our nal liability (445 x 100 x $10 x 3/3) - it’s just we’ve spread it over
the 3 years vesting period

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 Syllabus B13. Explain the difference between cash settled share based payment transactions
and equity settled share based payment transactions

Identify the principles applied to measuring both cash and equity settled share-based payment
transactions

Compute the amounts that need to be recorded in the nancial statements when an entity
carries out a transaction where the payment is share based

08M'R'(3,:'0-//2-9

D:-1'3+-')</-.'B322-9'b0:3+-'5##+-B"3/").'&";:/,'E05&,Fc

These are when a company promises to pay for goods or services for cash, however
the cash price is linked to the share pric

D:-'9)*42-'-./+1'",I

• Dr Expense

Cr Cash or Liabilit

If the payment is for a service stretching over a number of years (vesting period)
then the expense is recognised over the number of years and the liability is
calculated by taking into account the change in the share pric

$22*,/+3/").'6

1 Jan Year 1 - 100 share appreciation rights (SARs) given to each of the company’s
1000 employees

FV of these at grant date was £5

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 The employees had to be in service for 3 years to take the SA

End of year 1 - 100 employees had left and 140 more expected to leave by the end
of year 3. FV of SAR now £

End of year 2 -  40 employees left in the year and another 50 expected to leave in
year 3. FV of SAR now £

End of year 3 -  60 employees left and the FV of SAR is now £

0)2*/").

Year 1 - 760 (1,000 - 100 -140) x 100 x £6 x 1/3 = 152,000 (Dr Expense Cr Liability

Year 2 - 810 (1,000 - 100 - 40 - 50) x 100 x £8 x 2/3 = 432,000 - 152,000 = 280,000
(Dr Expense Cr Liability

Year 3 - 800 (1,000 - 100 - 40 - 60) x 100 x £7 x 3/3 = 560,000 - 432,000 = 128,000
(Dr Expense Cr Liability

Finally the 560,000 is pai

Dr Liability 560,000

Cr Cash 560,00

$22*,/+3/").'T

An entity grants 100 share options on its $1 shares to each of its 500 employees on
1 January Year 1

Each grant is conditional upon the employee working for the entity over the next
three years

The fair value of each share option as at 1 January Year 1 is $10

On the basis of a weighted average probability, the entity estimates on 1 January

that 100 employees will leave during the three-year period and therefore forfeit their
rights to share options

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 The following actually occurs:


– 20 employees leave during Year 1 and the estimate of total employee departures
over the three-year period is revised to 70 employees

– 25 employees leave during Year 2 and the estimate of total employee departures
over the three-year period is revised to 60 employees

– 10 employees leave during Year

Information of share price at the end of each year:


Year 1 10

Year 2 12

Year 3 1

0)2*/").

As this is cash settled then the double entry becomes Dr Expense Cr Liability and we
do not keep the value of the option @ grant date but change it as we pass through
the vesting period

• Y1: 430 x 100 x 10 x 1/3 = 143,300


Y2: 440 x 100 x 12 x 2/3 - 143,300 = 208,700

Y3: 445 x 100 x 14 x 3/3 - 623,000 x 3/3 - 352,000 = 271,00

• So you can see that the “costs” and so the entries into the accounts would be

Year 1: Dr Expense 143,300 Cr Liability 143,300


Year 2: Dr Expense 208,700 Cr Liability 208,700

Year 3: Dr Expense 271,000 Cr Liability 271,00

Notice that if you add these up it comes to 623,000

• This is exactly our nal liability (445 x 100 x $14 x 3/3) - it’s just we’ve spread it
over the 3 years vesting period

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 Syllabus B13. Identify the principles applied to measuring both cash and equity settled share-
based payment transactions

08M'>"/:'3'(:)"B-')<'0-//2-=-./

0:3+-R43,-9'#31=-./'>"/:'3'B:)"B-')<',-//2-=-./

X./"/1':3,'/:-'B:)"B-

Is there a present obligation to settle in cash

1. Yes

Treat as cash-settle

2. No

Treat as equity-settled


()*./-+R#3+/1':3,'/:-'B:)"B-

D:-'/+3.,3B/").'",'3'B)=#)*.9'<".3.B"32'".,/+*=-./'>:"B:'.--9,',#2"//".;'
"./)'9-4/'3.9'-]*"/1
• Debt Portion

This must be calculated rst..the FV of the cash option at grant dat

Then it is treated just like a normal cash-settled SB

• Equity Portion

This is the FV of the option less the debt portion calculated above at grant datem

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 $22*,/+3/").'6

An entity grants an employee a right to receive either 8,000 shares or cash to the
value, on that date, of 7,000 shares. She has to remain in employment for 3 years

The market price of the entity's shares is $21 at grant date, $27 at the end of year 1,
$33 at the end of year 2 and $42 at the end of the vesting period, at which time the
employee elects to receive the shares

The entity estimates the fair value of the share route to be $19

0:)>'/:-'3BB)*./".;'/+-3/=-./7

0)2*/").

The fair value of the cash route at grant date is: 7,000 × $21 = $147,000



The fair value of the share route is: 8,000 × $19 = $152,000 - 147,000 = $5,00

We then treat them as cash and equity settled SBPs as appropriate

Year Cash Equity I/S

1 7,000 x $27 x 1/3 = 63,000 5,000 x 1/3 = 1,667 64,667
2 7,000 x $33 x 2/3 = 154,000 5,000 x 1/3 = 1,667 92,667
3 7,000 x $42 x 3/3 = 294,000 5,000 x 1/3 = 1,667 141,667

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 X./"/1':3,'/:-'B:)"B-')<'",,*".;',:3+-,')+'B3,:

O#/").'6'R'O42";3/-9'/)'#31'B3,:

The entity is prohibited from issuing shares or where it has a stated policy, or past
practice, of issuing cash rather than shares

Treat as a cash-settled SB

O#/").'T'R'Z)/')42";3/-9'/)'#31'B3,:

Treat as if it was purely an equity-settled transaction

If on settlement, cash was actually paid, the cash should be treated as if it was a
repurchase of the equity instrument by a deduction against equity

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 Syllabus B13. Identify the principles applied to measuring both cash and equity settled share-
based payment transactions

[-,/".;'M-+")9

This is normally a set amount of time but sometimes it may be dependent upon a
condition to be satis ed

[-,/".;'().9"/").,

These are conditions that have to be met before the holder gets the right to the
shares or share option

D:-+-'3+-'T'/1#-,')<'[-,/".;'().9"/").I
67 Z).R=3+?-/'43,-9

Those not relating to the market value of the entity’s share

T7 W3+?-/'43,-9

Those linked to the market price of the entity’s shares in some wa

Z).RW3+?-/'[-,/".;'().9"/").,

Here only the number of shares or share options expected to vest will be accounted
for

At each period end (including interim periods), the number expected to vest should
be revised as necessary

$22*,/+3/").'6

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 An entity granted 10,000 share options to one director. The director had to work
there for 3 years, and indeed he di

Also to get the options, the director had to reduce costs by 10% over the vesting
period

At the end of the rst year, costs had reduced by 12%. By the end of the 2nd year,
costs had only reduced in total by 7%

By the end of yr. 3 though the costs had been reduced by 11

The FV of the option at grant date was $2

G)>',:)*29'/:-'/+3.,3B/").'4-'+-B);.",-9C

0)2*/").

The cost reduction target is a non-market performance condition which is taken into
account in estimating whether the options will vest. The expense recognised in pro t
or loss in each of the three years is

Yearly Charge Cumulative

(10,000 × £21)/3 years
Year 1 70,000
= 70,000
Year 2 (performance target not expected to
-70,000 0
be met)
(10,000 x $21)
Year 3 210,000
 = 210,000

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 W3+?-/'[-,/".;'().9"/").,

These conditions are taken into account when calculating the fair value of the equity
instruments at the grant date

They are not taken into account when estimating the number of shares or share
options likely to vest at each period end

If the shares or share options do not vest, any amount recognised in the nancial
statements will remain

W3?-'3.'-,/"=3/-')<'/:-'@-,/".;'#-+")9'3/'/:-'3B]*","/").'93/-

1. If vesting period is shorter than original estimate

Expense all the remainder in the year the vesting condition is complied wit

2. If vesting period is longer than the original estimate

Expense still using the original estimate of vesting perio

W3+?-/'3.9'.).R=3+?-/'43,-9'@-,/".;'B).9"/").,'/);-/:-+

Where both market and non-market vesting conditions exist, then as long as the non
market conditions are met the company must expense (irrespective of whether
market conditions are satis ed

So, where market and non-market conditions co-exist, it makes no difference

whether the market conditions are achieved

The possibility that the target share price may not be achieved has already been
taken into account when estimating the fair value of the options at grant date

Therefore, the amounts recognised as an expense in each year will be the same
regardless of what share price has been achieved

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 $22*,/+3/").'T

A company granted 10,000 share options to a director. He must work there for 3
years. He did this

Also the share price should increase by at 25% over the three-year period

During the 1st year the share price rose by 30% and by 26% compound over the
rst  two years and 24% per annum compound over the whole perio

At the date of grant the fair value of each share option was estimated at £1

G)>',:)*29'/:-'/+3.,3B/").'4-'+-B);.",-9C

0)2*/").

The director satis ed the service requirement but the share price growth condition
was not met

The share price growth is a market condition and is taken into account in estimating
the fair value of the options at grant date

Therefore, no adjustment should be made if there are changes from that estimated in
relation to the market condition. There is no write-back of expenses previously
charged, even though the shares do not vest

The expense recognised in pro t or loss in each of the three years is one third of
10,000 x £18 = £60,000

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 Syllabus B13. Identify the principles applied to measuring both cash and equity settled share-
based payment transactions

$%&0'T'0:3+-'43,-9'#31=-./,'9-<-++-9'/3H

!-<-++-9'/3H'"=#2"B3/").,

$,,*-

An entity recognises an expense for share options but the taxman offers the tax
deduction on the later exercise date

This is therefore an example of accounts showing more expenses (than the taxman
has allowed so far) and so a deferred tax asset occurs

The taxman may calculate his expense on the intrinsic value basis

This may offer a greater deduction (at the end) than our expense

This extra deferred tax asset is set off against equity (and OCI) not the income
statement

$22*,/+3/").

An entity granted 1,000 share options to an employee vesting 3 years later

The fair value of at the grant date was $3

Tax law allows a tax deduction of the intrinsic value of$1.20 at the end of year 1 and
$3.40 at the end of year 2

Assume a tax rate of 30%

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 0)2*/").
• Year 1

Accounts 1,000 x 1/3 x 3 = 1,00

Tax Has allowed

However, at the end he will allow 1,000 x 1/3 x 1.2 = 400




Therefore the deferred tax asset is capped at 400

So, the double entry is:


Dr Deferred Tax Asset (400x30%) 120

Cr Tax (I/S) 12

• Year 2 

Accounts 1,000 x 2/3 x 3 - 1,000 = 1,00

Tax 1,000 x 2/3 x 3.4 - 400 = 1.86

Therefore we have expensed 2,000 (1,000 + 1,000

The tax man will allow at the end 2,267 (400 + 1,867

So, the deferred tax asset should now be 2267 x 30% = 68

Of this only 2,000 x 30% = 600 should have gone to the income statement (to
match with the 2,000 expense)

The remaining 80 should have gone to equity.




Year

Income statement 

Expense 1,000

Tax (600 - 120) -48

Equity 

Share Options 2,000

Tax asset 8

Double entry 

Dr Deferred tax asset (680-120) 560

Cr Income statement 480

Cr Equity 8

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 Syllabus B13. Identify the principles applied to measuring both cash and equity settled share-
based payment transactions

$%&0'T'W)9"<"B3/").,'3.9'(3.B-223/").,

$%&0'T'W)9"<"B3/").,'3.9'(3.B-223/").,
D:-'-./"/1'=";:/I

• Reprice (modify) share options, o

• Cancel or settle the options

Equity instruments may be modi ed before they vest. 





For example, a fall in the actual share price may mean that the original option
exercise price is no longer attractive

Therefore the exercise price is reduced (the option is ‘re-priced’) to make it valuable
again. 




Such modi cations will often affect the fair value of the instrument and therefore the
amount recognised in pro t or loss. 


5BB)*./".;'/+-3/=-./

1. Continue to recognise the original fair value of the instrument in the normal way
(even where the modi cation has reduced the fair value

2. Recognise any increase in fair value at the modi cation date (or any increase in
the number of instruments granted as a result of modi cation) spread over the
period between the modi cation date and vesting date

3. If modi cation occurs after the vesting date, then the additional fair value must be
recognised immediately unless there is, for example, an additional service period,
in which case the difference is spread over this period

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 $22*,/+3/").'6

At the beginning of year 1, an entity grants 100 share options to each of its 500
employees over a vesting period of 3 years at a fair value of $15

Year 1: 

40 leave, further 70 expected to leave; share options repriced (as mv of shares has
fallen) as the FV had fallen to $5. After the repricing they are now worth $8

Year 2: 

35 leave, further 30 expected to leav

Year 3: 

28 leav

0)2*/").

The repricing has increased FV by (8-5) =

This amount is recognised over the remaining two years of the vesting period, along
with remuneration expense based on the original option value of $15

1. Year 1

Income statement & Equity


(500-110) x 100 x 1/3 x $15 = 195,00

2. Year 2

Income statement & Equity

[(500 – 105) × 100 × (($15 × 2/3) + ($3 × ½))]  454,250 - 195,00

Dr Expenses $259,250 

Cr Equity $259,25

3. Year 3

Income statement & Equity


[(500 – 103) × 100 × ($15 + $3 )  714,600 - 454,25

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 Dr Expenses $260,350

Cr Equity $260,35

$22*,/+3/").'T

An entity granted 1,000 share options at an exercise price of £50 to each of its 30
key management personnel

They had to stay with the entity for 4 year

At grant date, the fair value of the share options was estimated at £20 and the entity
estimated that the options would vest with 20 managers

This estimate didn’t change in year

The share price fell early in the 2nd year. So half way through that year they modi ed
the scheme by reducing the exercise price to £15. (The fair value of an option was
£2 immediately before the price reduction and £11 immediately after.

It retained its estimate that options would vest with 20 managers

G)>',:)*29'/:-'=)9"<"B3/").'4-'+-B);.",-9C

0)2*/").

The total cost to the entity of the original option scheme was: 1,000 shares × 20
managers × £20 = £400,000



This was being recognised at the rate of £100,000 each year

The cost of the modi cation is:


1,000 x 20 managers × (£11 – £2) = £180,00

This additional cost should be recognised over 30 months, being the remaining
period up to vesting, so £6,000 a month

The total cost to the entity in the second year and from then on is: £100,000 +
(£6,000 × 6) = £136,000.


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 (3.B-223/").,'3.9',-//2-=-./,

An entity may settle or cancel an equity instrument during the vesting period

Basically treat this as the vesting period being shortened

5BB)*./".;'/+-3/=-./

Charge any remaining fair value of the instrument that has not been recognised
immediately in pro t or loss (the cancellation or settlement accelerates the charge
and does not avoid it)

Any amount paid to the employees by the entity on settlement should be treated as a
buyback of shares and should be recognised as a deduction from equity

If the amount of any such payment is in excess of the fair value of the equity
instrument granted, the excess should be recognised immediately in pro t or loss

5'B3,:',-//2-=-./'=39-'/)'3.'-=#2)1--').'B3.B-223/").

• Dr Equity



Dr Income statement (excess over amount in equity)



Cr Cas

5.'-]*"/1',-//2-=-./'=39-'/)'3.'-=#2)1--').'B3.B-223/").

This is basically a replacement of the option and so is treated as a modi cation (see
earlier) at this value

Fair value of replacement instruments*  X




Less: Net fair value of cancelled instruments (X

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 $22*,/+3/").

2,000 share options granted at an exercise price of $18 to each of its 25 key
management personnel

The management must stay for 3 years

The fair value of the options was estimated at $33 and the entity estimated that the
options would vest with 23 managers

This estimate stayed the same in year



In year 2 the entity decided to abolish the existing scheme half way through the year
when the fair value of the options was $60 and the market price of the entity's shares
was $70

Compensation was paid to the 24 managers in employment at that date, at the rate
of $63 per option. 




G)>',:)*29'/:-'-./"/1'+-B);.",-'/:-'B3.B-223/").C

0)2*/").

The original cost to the entity for the share option scheme was: 2,000 shares × 23
managers × $33 = $1,518,000 


This was being recognised at the rate of $506,000 in each of the three years. 


At half way through year 2 when the scheme was abolished, the entity should
recognise a cost based on the amount of options it had vested on that date

The total cost is: 


2,000 × 24 managers × £33 = $1,584,000


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 After deducting the amount recognised in year 1, the year 2 charge to pro t or loss is
$1,078,000

The compensation paid is:  2,000 × 24 × $63 = $3,024,000


Of this, the amount attributable to the fair value of the options cancelled is: 

2,000 × 24 × $60 (the fair value of the option, not of the underlying share) =
$2,880,000


This is deducted from equity as a share buyback

The remaining $144,000 ($3,024,000 less $2,880,000) is charged to pro t or loss

(3.B-223/").'3.9'+-,",/3.B-

Where an entity has been through a capital restructuring or there has been a
signi cant downturn in the equity market through external factors, an alternative to
repricing the share options is to cancel them and issue new options based on
revised terms

The end result is essentially the same as an entity modifying the original options and
therefore should be recognised in the same way

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 012234*,'86`7'XH#2)+3/").'3.9'-@32*3/").'-H#-.9"/*+-,
Syllabus B14. Outline the need for an accounting standard in this area and clarify its scope

D:-'.--9'<)+'3.'3BB)*./".;',/3.93+9

XH#-.9"/*+-').'/:-'-H#2)+3/").'<)+Y'3.9'-@32*3/").')<Y'=".-+32'+-,)*+B-,'

",'.)/'B)@-+-9'41I

• IAS 16 – Property, Plant and Equipmen

• IAS 38 – Intangible Assets

This has meant that, entities should determine their accounting policies for
exploration and evaluation expenditures in accordance with the general
requirements of IAS 8 – Accounting Policies, Changes in Accounting Estimates and
Errors

D:-'!+3>43B?,I

1. Diversity of the acc. policies


This could lead to divergence of practice

2. Comparison

It is dif cult to compare the nancial statements with the competitors since they
use different accounting policies

The IASB issued IFRS 6 – Exploration for and Evaluation of Mineral Resources – to
achieve some level of standardisation of practice in this area

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 Syllabus B14. Give examples of elements of cost that might be included in the initial
measurement of exploration and evaluation assets

Describe how exploration and evaluation assets should be classi ed and reclassi ed

Describe the method of accounting speci ed by the IASB for the exploration for and evaluation
of mineral resources

Explain when and how exploration and evaluation assets should be tested for impairment

XH#2)+3/").'<)+'3.9'-@32*3/").')<'=".-+32'+-,)*+B-,

$%&0'k'XH#2)+3/").'<)+'3.9'X@32*3/").')<'W".-+32'&-,)*+B-,

Exploration for and evaluation of mineral resources is the search for mineral
resources after the entity has obtained legal rights to explore in a speci c area

W".-+32'+-,)*+B-,'B3.'4-I
1. Oi

2. Natural ga

3. Similar non-regenerative resource

XH#2)+3/").'3.9'-@32*3/").'-H#-.9"/*+-,
are expenditures incurred in connection with the exploration and evaluation of
mineral resource

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 Remember

These expenditures are incurred BEFORE the technical feasibility and

commercial viability of extracting a mineral resource IS DEMONSTRABLE

D-+=,

• D-B:."B32'<-3,"4"2"/1

is the ability of a business to complete the product under current technical

conditions

• ()==-+B"32'@"34"2"/1

is the ability of a business or product to compete effectively and to make a pro

5BB)*./".;'#)2"B"-,

The IFRS permits an entity to develop an accounting policy for exploration and
evaluation assets.

67 X./"/"-,'9-/-+=".-'/:-"+')>.'3BB)*./".;'#)2"B"-,

Entities should determine their accounting policies for exploration and evaluation
expenditures in accordance with IAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors

T7 _--#'/:-'5BB7'#)2"B"-,'B).,",/-./

IFRS 6 requires relevant entities to determine a policy specifying which

expenditures are recognised as exploration and evaluation assets and apply the
policy consistently

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 U7 (23,"<1'/:-'3,,-/,'3,'D5')+'$5

Entities shall consistently classify them as tangible or intangible according to

their nature

5,,-/,'+-B);."/").

5,,-/,'/)'4-'=-3,*+-9'3/'B),/'3/'+-B);."/").

When they are rst recognised in the balance sheet, exploration and evaluation

assets are required to be measured at cost.

The following as examples of expenditures that might be included in the initial

measurement of exploration and evaluation assets

• acquisition of rights to explor

• topographical, geological, geochemical and geophysical studie

• exploratory drillin

• trenchin

• samplin

• activities in relation to evaluating the technical feasibility and commercial viability

of extracting a mineral resource

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 %*/*+-'O42";3/").,

Where an entity incurs obligations for removal and restoration as a consequence of

having undertaken the exploration for and evaluation of mineral resources, those
obligations are recognised in accordance with the requirements of IAS 37 Provisions,
Contingent Liabilities and Contingent Assets

• This is:

Dr PPE

Cr Liability

All at present valu

This will need discounting and the discount unwound

Dr interest (with unwinding of discount) 


Cr liabilit

0*4,-]*-./'=-3,*+-=-./

After recognition, entities can apply either the cost model or the revaluation
model

&-B23,,"<1'/:-'3,,-/,777

When the technical feasibility and commercial viability of extracting a mineral

resource become demonstrable, at which point the asset falls outside the scope of
IFRS

$=#3"+=-./

Check whether there are any indications that an asset may be impaire

• If an impairment test is required, any impairment loss is measured in accordance

with IAS 36

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 $=#3"+=-./,'$.9"B3/)+,

• D:-'+";:/'/)'-H#2)+-':3,'-H#"+-9

if the period for which the entity has the right to explore in the speci c area has
expired during the period or will expire in the near future, and is not expected to
be renewed

• 0*4,/3./"@-'-H#-.9"/*+-'.)'#23..-9

substantive expenditure on further exploration for and evaluation of mineral
resources in the speci c area is neither budgeted nor planned

• !",B)./".*-'-H#2)+3/").

the entity has decided to discontinue exploration of mineral resources in the
speci c are

5'9-/3"2-9'"=#3"+=-./'/-,/'",'+-]*"+-9'".'/>)'B"+B*=,/3.B-,I

1. when the technical feasibility and commercial viability of extracting a mineral

resource become demonstrable, at which point the asset falls outside the scope
of IFRS 6 and is reclassi ed in the nancial statements; an

2. when facts and circumstances suggest that the asset's carrying amount may
exceed its recoverable amount

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 012234*,'86^7'%3"+'@32*-'=-3,*+-=-./
Syllabus B15. Explain the principle under which fair value is measured according to IFRSs

Identify an appropriate fair value measurement for an asset or liability in a given set of
circumstances

%3"+'[32*-

%3"+'@32*-'B).,"9-+,'/:-'B:3+3B/-+",/"B,')<'/:-'3,,-/

%)+'-H3=#2-
• The condition and location of an asse

• Any restrictions on the sale or use of an asse

This means that when revaluing its property, plant and equipment, an entity should
consider

the highest and best use of the asset

%3"+'@32*-'3,,*=-,'/:-',32-,'/3?-,'#23B-'".I
1. The Principal market

the market with greatest volume and level of activity for the asset or liabilit

2. The most advantageous market

The market that maximises the amount that would be received paid for the asse

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 [32*3/").'D-B:."]*-,

• Market approach

Prices from similar market transaction

e.g. quoted prices of listed equity, debt securities or futures, or market interest
rate

• Income approach

This converts future cash ows to a single discounted amount; e.g. discounted
cash ow models and option pricing model

• Cost approach

This re ects the amount required currently to replace the service capacity of an
asset, i.e. the current replacement cos

When measuring fair value, an entity is required to maximise the use of relevant
observable inputs and minimise the use of unobservable input

Level 1 Level 2 Level 3

Quoted prices in
active markets for Unobservable
De nition Observable inputs 
identical assets or inputs 
liabilities 
Current market rents for Projected cash
Share prices on a similar properties and market ows used to value
Example
stock exchange interest rates for the FV of an a none public
investment property  business 

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 G)>'9)-,'322'/:",'>)+?'".'#+3B/"B-C

E.g. An entity owns 10,000 ordinary shares in M &

Since there is an active market for these shares through the London stock exchange,
the entity must use a market approach (level 1 input)

However, the measurement of the fair value of an unlisted debt security may require
the use of an income approach, e.g. a discounted cash ow model using market
interest rate for similar debt securities (level 2 input) and market credit spreads
adjusted for entity-speci c credit risk (level 2 or 3 inputs)

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 Syllabus C: Presentation and additional

disclosures

012234*,'(67'M+-,-./3/").')<'/:-'0%MY'3.9',/3/-=-./')<'MgS'
3.9'O($
Syllabus C1. State the objectives of IFRSs governing the presentation of nancial statements

Describe the structure and content of statements of nancial position and statements of pro t
or loss and other comprehensive income including continuing operations

$50'6'M+-,-./3/").')<'%".3.B"32'0/3/-=-./,

D:-',/3/-=-./')<'#+)<"/')+'2),,'EMNSF

is de ned as the total of income less expenses, excluding the components of other
comprehensive incom

O/:-+'B)=#+-:-.,"@-'".B)=-'EO($F

comprising of items of income and expense (including reclassi cation adjustments)

that are not recognised in pro t or los

$%&0'B*++-./21'+-]*"+-,

• the statement of P&L and OCI to be presented as either one statement, being a
combined statement of P&L and OC

• or two statements, being the statement of P&L and the statement of

comprehensive income.


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 5.'-./"/1':3,'/)',:)>',-#3+3/-21'".'O($

• Those items which would be reclassi ed (recycled) to P&L an

• Those items which would never be reclassi ed (recycled) to P&L

The related tax effects have to be allocated to these sections

&-B23,,"<"B3/").'39P*,/=-./,

are amounts recycled to P&L in the current period which were recognised in OCI in
the current or previous periods

• An example of items recognised in OCI which may be reclassi ed to P&L are

foreign currency gains on the disposal of a foreign operation and realised gains
or losses on cash ow hedge

Those 20 items which may not be reclassi ed are changes in a revaluation surplus
under IAS 16 Property, Plant and Equipment, and actuarial gains and losses on a
de ned bene t plan under IAS 19 Employee Bene ts

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 Syllabus C1. Describe the structure and content of statements of nancial position and
statements of pro t or loss and other comprehensive income including continuing operations

D:-'=3".'<".3.B"32',/3/-=-./,

The principle nancial statements of a sole trader are the statement of nancial
position and the statement of pro t or loss

0/3/-=-./')<'%".3.B"32'M),"/").

The statement of nancial position is a list of all the assets owned and the liabilities
owed by a business as at a particular date. 

It is a snapshot of the nancial position of the business at a particular moment

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 0/3/-=-./')<'#+)<"/')+'2),,

A statement of pro t or loss is a record of revenue generated and expenditure

incurred over a given period

The statement shows whether the business has had more revenue than expenditure
(a pro t) or vice-versa (a loss

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 259 a W n . m

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 Syllabus C1. Describe the structure and content of statements of nancial position and
statements of pro t or loss and other comprehensive income including continuing operations

!-<"."/").,')<'5,,-/,'S"34"2"/"-,777

5,,-/,

An asset is a resource controlled by the entity as a result of past events and from
which future economic bene ts are expected to ow to the entity

Some assets are held and used in operations for a long time.  These are known
as non-current assets.

Other assets are held for only a short time.  They are likely to be realized within the
normal operating cycle or 12 months after the end of the reporting period. These are
classi ed as current assets.

S"34"2"/"-,

A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an out ow from the entity of resources embodying
economic bene ts

Some liabilities are due to be settled within the normal operating cycle or 12 months
after the end of the reporting period. These are classi ed as current liabilities. 

Other liabilities may take some years to repay – non-current liabilities.

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 (3#"/32'g'X]*"/1

Capital is the amount invested in a business by the owner.  This is the amount the
business owes to the owner.  In the case of a sole trader

(5M$D5S'\'500XD0'u'S$58$S$D$X0

(5M$D5S'\'ZXD'500XD0

In the case of a limited liability company, capital usually takes the form of shares.
Share capital is known as equity. The Framework de nes equity as “the residual
interest in the assets of the entity after deducting all its liabilities.

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 &-@-.*-

Revenue is the income for a period. It is the gross in ow of economic bene ts (cash,
receivables, other assets) arising from the ordinary operating activities of an
enterprise (such as sales of goods, sales of services, interest, royalties, and
dividends)

XH#-.,-,

Expenses arise in the course of the ordinary activities of the enterprise.  They

include, for example, cost of sales, wages and depreciation

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 Z)/-,

1. The top part of the statement of pro t or loss, i.e. Sales – Cost of Sales = Gross
Pro t, is called the Trading Account. It records the trading activities of the
business

2. Sundry income includes bank interest, rent receivable, income from investments

3. Carriage inwards is the cost of transport of goods into the rm and is therefore
added to the purchases gure

4. Carriage outwards is the cost of transport of goods out of the rm to its

customers, it is not part of the rm's expenses in buying the goods and is always
entered as an expense

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 Syllabus C1. Describe the structure and content of statements of nancial position and
statements of pro t or loss and other comprehensive income including continuing operations

0/3/-=-./,')<'<".3.B"32'#),"/").

0/3/-=-./')<'<".3.B"32'#),"/").'3,'3/'U6'W3+B:'Thfr

$'000

assets

non-current assets

property, plant and equipment x

other intangible assets x

----

current assets

inventorie x

trade receivables x

other current asset x

cash and cash equivalents x

----

----

/)/32'3,,-/, H

===

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 equity and liabilities

equity

share capital x

share premium account x

revaluation reserve x

retained earnings x

----

non-current liabilities

long term borrowings x

long term provisions x

current liabilities

trade payables x

short term borrowings x

current tax payable x

short term provisions x

----

/)/32'-]*"/1'3.9'2"34"2"/"-, H

===

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 Syllabus C1. Describe the structure and content of statements of nancial position and
statements of pro t or loss and other comprehensive income including continuing operations

0/3/-=-./')<'#+)<"/')+'2),,'3.9')/:-+'B)=#+-:-.,"@-'
".B)=-

0/3/-=-./')<'B)=#+-:-.,"@-'".B)=-

One of the statements introduced by IAS 1 (revised) is the statement of

comprehensive income. 

This statement presents all items of income and expense recognised in pro t or loss

together with all other items recognised in income and expense.

Entities may present all items together in a single statement or present two linked

statements – one displaying the items of income and expense recognised in the

statement of pro t or loss and the other statement beginning with pro t or loss and

displaying all the items included in ‘other comprehensive income’

Therefore, whereas the statement of pro t or loss includes all realised gains and

losses (e.g. net pro t for the year), the statement of comprehensive income would

include both the realised and unrealised gains and losses (e.g. revaluation surplus)

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 M+)<)+=3'6I'O.-',".;2-',/3/-=-./
0/3/-=-./')<'B)=#+-:-.,"@-'".B)=-'<)+'/:-'1-3+'-.9-9'U6'W3+B:'Thfr
20x8 20x7

$'000 $'000

revenue x x

cost of sales (x) (x)

------ ------

gross pro t x x

other income x x

distribution costs (x) (x)

administrative expense (x) (x)

nance costs (x) (x)

investment income x x

------ ------

pro t before tax x x

income tax expense (x) (x)

----- -----

pro t for the year x x

other comprehensive income:

gains on property revaluation x x

----- -----

/)/32'B)=#+-:-.,"@-'".B)=-'<)+'/:-'1-3+ H H

==== ====

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 M+)<)+=3'TI'D>)',-#3+3/-',/3/-=-./,
0/3/-=-./')<'#+)<"/')+'2),,'<)+'/:-'1-3+'-.9-9'U6'W3+B:'Thfr

20x8 20x7

$'000 $'000

revenue x x

cost of sales (x) (x)

------ ------

gross pro t x x

other income x x

distribution costs (x) (x)

administrative expense (x) (x)

nance costs (x) (x)

investment income x x

------ ------

pro t before tax x x

income tax expense (x) (x)

----- -----

#+)<"/'<)+'/:-'1-3+ H H

==== ====

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 0/3/-=-./')<'B)=#+-:-.,"@-'".B)=-'<)+'/:-'1-3+'-.9-9'U6'W3+B:'Thfr

20x8 20x7

$'000 $'000

pro t before tax x x

income tax expense (x) (x)

----- -----

#+)<"/'<)+'/:-'1-3+ H H

other comprehensive income:

gains on property revaluation x x

----- -----

/)/32'B)=#+-:-.,"@-'".B)=-'<)+'/:-'1-3+ H H

==== ====

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 Syllabus C1. Discuss the importance of identifying and reporting the results of discontinued
operations.

De ne and account for non-current assets held for sale and discontinued operations

!",B)./".*-9'O#-+3/").

5.'3.321,",'4-/>--.'B)./".*".;'3.9'9",B)./".*".;')#-+3/").,'"=#+)@-,'
/:-'*,-<*2.-,,')<'<".3.B"32',/3/-=-./,7

When forecasting ONLY the results of continuing operations should be used

Because discontinued operations pro ts or losses will not be repeated

A:3/'",'3'9",B)./".*-9')#-+3/").C
1. A separate major line of business or geographical are

or.

2. is part of a single co-ordinated plan to dispose of a separate major line of

business or geographical are

or.

3. is a subsidiary acquired exclusively with a view to resale

G)>'",'"/',:)>.').'/:-'$.B)=-'0/3/-=-./C
The PAT and any gain/loss on disposa

• A single line in I/

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 G)>'",'"/',:)>.').'/:-'0%MC
If not already disposed of yet

• Held for sale disposal grou

G)>'",'"/',:)>.').'/:-'B3,:R<2)>',/3/-=-./C
• Separately presente

• in all 3 areas - operating; investing and nancin

Z)'&-/+)3B/"@-'(23,,"<"B3/").

IFRS 5 prohibits the retroactive classi cation as a discontinued operation, when the
discontinued criteria are met after the end of the reporting perio

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 012234*,'(T7'X3+.".;,'#-+',:3+-
Syllabus C2. Recognise the importance of comparability in relation to the calculation of
earnings per share (EPS) and its importance as a stock market indicator

$50'UU'XM0'$./+)9*B/").

XM0'",'3'=*B:'*,-9'MX&%O&W5Z(X'3##+3",32'=-3,*+-

It is calculated as

PAT - Preference dividends / Number of shares

It is not only an important measure in its own right but also as a component in the
price earnings (P/E) ratio (see below

!"2*/-9'XM0
This is saying that the basic EPS might get worse due to things that are ALREADY in
issue such as

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 • Convertible Loan

This will mean more shares when converte

Share option

This will mean more shares when exercise

A:)':3,'/)'+-#)+/'3.'XM0C
• PLC

• Group accounts where the parent has shares similarly traded/being issue

EPS to be presented in the income statement

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 Syllabus C2. De ne earnings

$50'UU'XM0'R'-3+.".;,'<";*+-

D:",'",'43,"B3221'M+)<"/'3</-+'D3H

less preference dividend

*Be careful of the type of preference share though..

&-9--=342-'#+-<-+-.B-',:3+-,

These are actually liabilities and their nance charge isn’t a dividend in the accounts
but interest

• Do not adjust for these dividends

$++-9--=342-'#+-<-+-.B-',:3+-,

These are equity and the nance charge is dividend

• Do adjust for these dividend

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 Syllabus C2. Calculate the EPS in the following circumstances:
– where the number of issued ordinary shares is constant throughout the year.
– where the has been an issue of ordinary shares at fair value during the year.
– where there has been a bonus issue of ordinary shares/stock split during the year,
– where there has been a rights issue of ordinary shares during the year.
– where there has been more than one change in the number of issued ordinary shares
during the year

$50'UU'XM0'R'Z*=4-+')<',:3+-,

(32B*23/".;'/:-'>-";:/-9'3@-+3;-'.*=4-+')<')+9".3+1',:3+-,

The number of shares given in the SFP at the year-end - may not be the number of
shares in issue ALL year

So we need to know how many we had in issue on AVERAGE instead of at the end

Well if there were no additional shares in the year then obviously the weighted
average is the same as the year end - so no problem

However, if additional shares have been issued we’ve got some work to do as
follows (depending on how those shares were issued)

%*22'W3+?-/'M+"B-'",,*-')<',:3+-,

No problem here as the new shares came with the right amount of new resources so
the company should be able to use those new resources to maintain the EP

• No adjustment needed (apart from time

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 8).*,'N'&";:/,'$,,*-')<',:3+-,

More problematic, as the share were issued for cheaper (rights) than usual or for
free (bonus)

In both cases the company has not been given enough new resource to expect the
EPS to be maintained

This causes comparison to last year problems

• Adjust for these (Bonus fraction

• Pretend they were in issue ALL yea

• Change comparative (Pretend they were in last year too

So, how to calculate it is best explained by example

1st January 100 shares in issue


1st May Full market price issue of 400 shares

1st July 1 for 5 bonus issu

0)2*/").'

Draw up a table like this

DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE

Now ll in the rst 2 columns

DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE

1st Jan 100

1st May 500
1st July 600

Notice how this shows the TOTAL shares. Now ll in the timing of how long these
TOTALS lasted for in the year.

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 DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE

1st Jan 100 4/12

1st May 500 2/12
1st July 600 6/12



Finally look for any bonus issues and pretend that they happened at the start of the
year. We do this by applying the bonus fraction to all entries BEFORE the actual
bonus or rights issue

In this case the bonus fraction would be 6/5 - so apply this to everything before the
actual bonus issue

DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE

1st Jan 100 4/12 6/5

1st May 500 2/12 6/5
1st July 600 6/12  



Finally, multiply through and calculate the weighted average

DATE TOTAL SHARES TIME BONUS FRACTION WEIGHTED AVERAGE

1st Jan 100 4/12 6/5 40

1st May 500 2/12 6/5 100
1st July 600 6/12   300
        440

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 $50'UU'8).*,'",,*-

8).*,'",,*-

Additional shares are issued to the ordinary equity holders in proportion to their
current shareholding, for example 1 new share for every 2 shares already owned

No cash is received for these shares

!)*42-'X./+1

• Dr Reserves or Share premium


Cr Share Capita

IAS 33 pretends that the bonus issue has been in place all year - regardless of when
it was actually made

We do this by multiplying the totals before the issue by a “bonus fraction”

8).*,'%+3B/").'(32B*23/").'R'8).*,'",,*-

1 for 2 bonus issue - means we’ve now got 3 where we used to have 2 = 3/2 

2 for 5 - now got 7 used to have 5 = 7/5 

3 for 4 - now got 7 used to have 4 = 7/

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 XH3=#2-

1st Jan 100 shares in issue


1st July 1 for 2 bonus issue (i.e. 50 more shares

• Weighted Average number of shares

100 x 6/12 (we had a total of 100 for 6 months) = 50 x 3/2 (bonus fraction) = 7

150 x 6/12 (we had a total of 150 for 6 months) = 7

Total = 15

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 $50'UU'&";:/,'$,,*-

&";:/,'",,*-

5'+";:/,'",,*-'",I
• An issue of shares for cash to the existing ordinary equity holders in proportion to
their current shareholdings

• At a discount to the current market price. It is, in fact, a mixture of a full price and
bonus issue

So again we do the same as in the bonus issue - we pretend it happened all year
and to do this we multiply the previous totals by the bonus fraction

The problem is - calculating the bonus fraction for a rights issue is slightly different

XH3=#2-
2 for 5 offered at £4 when the market value is £1

So we are being offered 2 @ £4 = £

For every 5 which cost us £10 each = £5

So we now have 7 at a cost of £58 = 8.2

This is what we call the TERP (theoretical ex-rights price)

The bonus fraction is the current MV / TERP = 10 / 8.2

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 $50'UU'83,"B'XM0'#*//".;'"/'322'/);-/:-+

$50'UU'83,"B'XM0'#*//".;'"/'322'/);-/:-+

Step 1: Calculate the EARNINGS (PAT - irredeemable pref. shares

Step 2: Calculate Weighted average NUMBER OF SHARE

Divide one by the other

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 Syllabus C2. Explain the relevance to existing shareholders of the diluted EPS, and describe
the circumstances that will give rise to a future dilution of the EPS

Compute the diluted EPS in the following circumstances:

– where convertible debt or preference shares are in issue
– where share options and warrants exist

Identify anti-dilutive circumstances.

$50'UU'!"2*/-9'XM0

D:",'",'/:-'43,"B'XM0'39P*,/-9'<)+'/:-'#)/-./"32'-<<-B/,')<'3'B).@-+/"42-'
2)3.'EB*++-./21'".'/:-'0%MF'4-".;'B).@-+/-9'3.9')#/").,'EB*++-./21'".'
",,*-F'4-".;'-H-+B",-97

This is because these things will possibly increase the number of shares in the future
and thus dilute EPS

This is how these items affect the Basic Earnings and Shares

X3+.".;,
The convertible loan will (once converted) increase earnings as interest will no
longer have to be paid

So increase the basic earnings with a tax adjusted interest savings

0:3+-,
• Simply add the shares which will result from the convertible loa

Also add the “free” shares from a share optio

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 ().@-+/"42-'2)3.
• Add the interest saved (after tax) to the EARNINGS from basic EP

• Add the extra shares convertible to the SHARES from basic EP

O#/").,

Step 1 : Calculate the money the options will bring in


Step 2 : Calculate how many shares this would normally buy

Step 3 : Look at the number of shares given away in the option, compare it to those
in step 2 and these are the “free shares

We add the free shares to the SHARES gure from basic EPS

$22*,/+3/").

5% 800 convertible loan - each 100 can be converted into 20 shares (tax 30%)

100 share options @ $2 (MV $5

G)>'/)'B32B*23/-'$./-+-,/'03@-9'



5% x 800 = 40 x 70% (tax adjusted) = 2

G)>'/)'B32B*23/-'/:-'-H/+3'B).@-+/"42-',:3+-,'



800/100 x 20 = 16

G)>'/)'B32B*23/-'/:-'<+--',:3+-,'".',:3+-')#/")., 



Cash in from option $200, this would normally mean the company issuing (200/5) 40
shares instead of the 100, so there has effectively been 60 shares issued for ‘free’.
We use this gure in the diluted eps calculation

An alternative calculation is:


100 x (5-2) / 5 = 60

0)2*/").'s


Basic EPS     Convertible Loan       Share options

E 100               + 28

S 50               + 160               + 6

!"2*/-9'XM0'\'6Tr'g'Tph'\'h7`p'


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 Syllabus C2. Explain why the trend of EPS may be a more accurate indicator of performance
than a company’s pro t trend.

XM0'3,'3'#-+<)+=3.B-'=-3,*+-

XM0'",'4-//-+'/:3.'M5D'3,'3.'-3+.".;,'#-+<)+=3.B-'".9"B3/)+

Pro t after tax gives an absolute gur

An increase in PAT does not show the whole picture about a company's pro tabilit

Some pro t growth may come from acquiring other companie

If the acquisition was funded by new shares then pro t will grow but not necessarily
EP

So EPS trends show a better picture of pro tability than PA

Simply looking at PAT growth ignores any increases in the resources used to earn
the

The diluted EPS is useful as it alerts existing shareholders to the fact that future EPS
may be reduced as a result of share capital change

Where the nance cost per potential new share is less than the basic EPS, there will
be a dilutio

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 012234*,'(U7'X@-./,'3</-+'/:-'+-#)+/".;'93/-
Syllabus C3. Distinguish between and account for adjusting and non-adjusting events after
the reporting date

$50'6h'X@-./,'5</-+'D:-'&-#)+/".;'M-+")9

X@-./,'B3.'4-'39P*,/".;')+'.).R39P*,/".;7

We are looking at transactions that happen in this period, and whether we should go
back and adjust our accounts for the year end or not adjust and just put into next
year’s account

If the event gives us more information about the condition at the year-end then we
adjust

If not then we don’t

A:-.'",'/:-'i5</-+'/:-'&-#)+/".;'93/-i'#-+")9C

It is anytime between period end and the date the accounts are authorised for issue

• After the SFP date = Between period end and date authorised for issu

O?'3.9'>:1'",'"/'"=#)+/3./C
Well it may well be that many of the gures in the accounts are estimates at the
period end

However, what if we get more information about these estimates etc afterwards, but
before the accounts are authorised and published.. should we change the accounts
or not

The most important thing to remember is that the accounts are prepared to the SFP
date. Not afterwards.

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 So we are trying to show what the situation at the SFP date was. However, it may be
that more information ABOUT the conditions at the SFP date have come about
afterwards and so we should adjust the accounts.

Sometimes we do not adjust though

59P*,/".;'X@-./,
Here we adjust the accounts if

The event provides evidence of conditions that existed at the period en

Examples are.

1. Debtor goes bad 5 days after SFP date

(This is evidence that debtor was bad at SFP date also

2. Stock is sold at a loss 2 weeks after SFP date

3. Property gets impaired 3 weeks after SFP date

(This implies that the property was impaired at the SFP date also

4. The result of a court case con rming the company did have a present obligation
at the year end

5. The settling of a purchase price for an asset that was bought before the year end
but the price was not nalized

k7 The discovery of fraud or error in the yearm

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 Z).R59P*,/".;'X@-./,'R'/:-,-'3+-'9",B2),-9').21
These are events (after the SFP date) that occurred which do not give evidence of
conditions at the year end, rather they are indicative of conditions AFTER the SFP
dat

67 0/)B?'",',)29'3/'3'2),,'4-B3*,-'/:-1'>-+-'93=3;-9'#),/'1-3+R-.9'

(This is evidence that they were ne at the year-end - so no adjustment

T7 M+)#-+/1'"=#3"+-9'9*-'/)'3'<322'".'=3+?-/'@32*-,';-.-+3221'#),/'1-3+'-.9'

(This is evidence that the property value was ne at the year end - so no
adjustment required)

U7 D:-'3B]*","/").')+'9",#),32')<'3',*4,"9"3+1'#),/'1-3+'-.9

`7 5'<)+=32'#23.'",,*-9'#),/'1-3+'-.9'/)'9",B)./".*-'3'=3P)+')#-+3/").

^7 D:-'9-,/+*B/").')<'3.'3,,-/'41'<"+-')+',"="23+'#),/'1-3+'-.9

k7 !"@"9-.9,'9-B23+-9'3</-+'/:-'1-3+'-.9

Z).R39P*,/".;'-@-./'>:"B:'3<<-B/,'L)".;'().B-+.

Adjust the accounts to a break up basis regardless if the event was a non-adjusting
event

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 012234*,'(`7'5BB)*./".;'#)2"B"-,Y'B:3.;-,'".'3BB)*./".;'
-,/"=3/-,
Syllabus C4. Identify items requiring separate disclosure, including their accounting treatment
and required disclosures

Recognise the circumstances where a change in accounting policy is justi ed

De ne prior period adjustments and errors.

Account for the correction of errors and changes in accounting policies.

(:3.;-,'".'3BB)*./".;'#)2"B"-,'3.9'3BB)*./".;'
-,/"=3/-,

()=#3+3/"@-,'3+-'B:3.;-9'<)+'3BB)*./".;'MOS$(d'B:3.;-,').21

Changes in accounting estimates have no effect on the comparativ

Changes in accounting policy means we must change the comparative too to ensure
we keep the accounts comparable for trend analysi

5BB)*./".;'M)2"B1
!-<"."/").
“the speci c principles, bases, conventions, rules and practices applied by an entity
in preparing and presenting the nancial statements

An entity should follow accounting standards when deciding its accounting policie

If there is no guidance in the standards, management should use  the most relevant

and reliable polic

288 a W n . m
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 (:3.;-,'/)'5BB)*./".;'M)2"B1
These are only made if:

It is required by a Standard or Interpretation; or

It would give more relevant and reliable informatio

1. Adjust the comparative amounts for the affected ite

(as if the policy had always been applied

2. Adjust Opening retained earnings

(Show this in statement of changes in Equity too

5BB)*./".;'X,/"=3/-,
!-<"."/").
“an adjustment of the carrying amount of an asset or liability, or related expense,
resulting from reassessing the expected future bene ts and obligations associated
with that asset or liability

XH3=#2-,
Allowances for doubtful debts;

Inventory obsolescence;

Charge the useful economic life of property, plant and equipmen

(:3.;-,'".'5BB)*./".;'X,/"=3/-
1. Simply change the current year

2. No change to comparatives

M+")+'M-+")9'X++)+,
These are accounted for in the same way as changes in accounting polic

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 5BB)*./".;'/+-3/=-./
1. Adjust the comparative amounts for the affected ite

2. Adjust Opening retained earnings

(Show this in statement of changes in Equity too

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 012234*,'(^7'&-23/-9'#3+/1'9",B2),*+-,
Syllabus C5. De ne and apply the de nition of related parties in accordance IFRSs

Describe the potential to mislead users when related party relationships and transactions are
not disclosed appropriately

Explain the disclosure requirements for related party transactions.

$50'T`'&-23/-9'M3+/"-,

5'#3+/1'",',3"9'/)'4-'+-23/-9'/)'3.'-./"/1'"<'3.1')<'/:-'<)22)>".;'/:+--'
,"/*3/").,')BB*+I

D:-'U',"/*3/").,'3+-I

1. Controls / is controlled by entit

2. is under common control with entit

3. has signi cant in uence over the entit

D1#-,')<'+-23/-9'#3+/1

These therefore include

1. Subsidiarie

2. Associat

3. Joint ventur

4. Key managemen

5. Close family member of above (like my beautiful daughter pictured in her new
school uniform aaahhh

6. A post-employment bene t plan for the bene t of employee

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 Z)/'.-B-,,3+"21'+-23/-9'#3+/"-,

• Two entities with a director in commo

• Two joint venturer

• Providers of nanc

• A big customer, supplier et

Stakeholders need to know that all transactions are at arm´s length and if not then
be fully aware

Similarly they need to be aware of the volume of business with a related party, which
though may be at arm´s length, should the related party connection break then the
volume of business disappear also

!",B2),*+-,

• L-.-+32

o The name of the entity’s parent and, if different, the ultimate controlling part

o The nature of the related party relationshi

o Information about the transactions and outstanding balances necessary for an

understanding of the relationship on the nancial statement

• As a minimum, this includes

Amount of outstanding balances


Bad and doubtful debt informatio

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 • _-1'=3.3;-=-./'#-+,)..-2'B)=#-.,3/").',:)*29'4-'4+)?-.'9)>.'41I

o short-term employee bene t

o post-employment bene t

o other long-term bene t

o termination bene t

o share-based paymen

• L+)*#'3.9'$.9"@"9*32'3BB)*./,

1. Individual account

Disclose related party transactions / outstanding balances of parent, venturer or

investor

2. Group account

The intragroup transactions and balances would have been eliminated

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 012234*,'(k7'O#-+3/".;',-;=-./,
Syllabus C6. Discuss the usefulness and problems associated with the provision of segment
information

$%&0'r'0-;=-./32'&-#)+/".;'R'$./+)9*B/").

0-;=-./32'&-#)+/".;'E$%&0'rF'R'$./+)9*B/").

O4P-B/"@-')<'$%&0'r

The objective of IFRS 8 is to present information by line of business and by

geographical area

It applies to plcs and any entity voluntarily providing segment information should
comply with the requirements of the Standard

So why is it a good thing to have information by line of business and geographical

area?

Well, imagine you are an Apple shareholder.

You will naturally be interested in how well the company is doing.

That information would only make real sense though if it was broken down by
business area.

For example, if most of the pro ts were from i-Pods, then this would be worrying as
this market is in decline

You would want to know how they are doing in the desktop computer market, how
they are doing in the smartphone and tablet market as well as any new areas they
may be diversifying into

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 _-1'!-<"."/").,
8*,".-,,',-;=-./'E-7;7'"RM:).-',-;=-./FI
A component of an entity that

1. provides a single product or service an

2. is subject to risks and returns that are different from those of other business
segments

L-);+3#:"B32',-;=-./'E-7;7'X*+)#-3.'=3+?-/FI
A component of an entity tha

1. provides products and services an

2. is subject to risks and returns that are different from those of components
operating in other economic environments

May be based either on where the entity’s assets are located or on where its
customers are located

O#-+3/".;'0-;=-./
Engages in business (even if all internal), whose results are regularly reviewed by
the chief operating decision maker and for which separate nancial information is
available

1. Earns revenue and incurs expenses from a business activit

2. Is regularly reviewed by the chief decision maker when handing out resource

3. Has separate nancial info availabl

Therefore the head of ce is not an operating segment as it is not a business activity.

The idea behind the regular review part is that the entity reports on those segments
that are actually used by management to monitor the busines

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 5;;+-;3/".;'0-;=-./,
Operating Segments can be aggregated together only if

they have similar economic characteristics such as

1. Similar product / servic

2. Similar production proces

3. Similar sort of custome

4. Similar distribution method

5. Similar regulation

V*3./"/3/"@-'D:+-,:)29,
Any segment which meets these thresholds must be reported on

1. Pro t is 10% or more of all pro table segment

2. Assets are 10% or more of the total assets of all operating segment

&-#)+/342-'0-;=-./,
If the total EXTERNAL revenue of the operating segments reported on (meeting the

quantitative thresholds) is less than 75% of total revenue of the company then

additional operating segments results (those not meeting the quantitative thresholds)

are reported upon (until the 75% is met

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 $22*,/+3/").'

5 8 ( ! X %
External Revenue 220 300 75 55 60 710
Internal Revenue 60 15 5 10 90
Pro t 60 50 20 -11 14 133
Assets 5,000 4,000 300 300 400 10,000



A:"B:')<'/:-',-;=-./,'5RX',:)*29'4-'+-#)+/-9'*#).C'

5 8 ( ! X
Revenue 280 / 800 = 315 / 800 = 75 / 800 = 60 / 800 = 70 / 800 =
Test 35% Pass 39% Pass 9% Fail 7.5% Fail 9% Fail
60 / 144* = 50 / 144 = 20 / 144 = 14 / 144 =
Pro t Test
42% Pass 35% Pass 14% Pass 9% Fail
5,000 / 4,000 / 300 / 300 / 400 /
Assets Test 10,000 = 10,000 = 10,000 = 10,000 = 10,000 =
50% Pass 40% Pass 3% Fail 3% Fail 4% Fail


*Pro table segments only



A, B and C all pass one of the tests and so would be reported o

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 XH/-+.32'&-@-.*-'D-,/
A + B + C = 595 / 710 = 84% PASS (No more segments needed

!",B2),*+-,'<)+'-3B:',-;=-./
• Pro

• Total Assets and Liabilitie

• External Revenue

• Internal Revenue

• Interest income and expens

• Depreciatio

• Pro t from Associates and JV

• Ta

• Other material non-cash item

W-3,*+-=-./
This shall be the same as the one used when reporting to the chief decision maker. 

So it is the internal measure rather than an IFRS on

A reconciliation is then provided between this measure and the entity’s actual gures
for

1. Pro t (e.g. Allocation of centrally incurred costs

2. Assets & Liabilities

Also any asymmetrical allocations. 


For example, one segment may be charged depreciation for an asset not allocated
to i

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 IFRS 8 requires the information presented to be the same basis as it is reported
internally, even if the segment information does not comply with IFRS or the
accounting policies used in the consolidated nancial statements.

Examples of such situations include segment information reported on a cash basis

(as opposed to an accruals basis), and reporting on a local GAAP basis for
segments that are comprised of foreign subsidiaries

52/:)*;:'/:-'43,",')<'=-3,*+-=-./'",'<2-H"42-Y'$%&0'r'+-]*"+-,'-./"/"-,'/)'#+)@"9-'3.'

-H#23.3/").')<I
1. the basis of accounting for transactions between reportable segments

2. the nature of any differences between the segments’ reported amounts and the
consolidated totals

For example, those resulting from differences in accounting policies and policies for
the allocation of centrally incurred costs that are necessary for an understanding of
the reported segment information.

In addition, IFRS 8 requires reconciliations between the segments’ reported amounts

and the consolidated nancial statements

X./"/1'A"9-'!",B2),*+-,
1. External revenue for each product/servic

2. Totals for revenue made at home and abroa

3. NCA totals for those held at home and abroa

4. If 1 customer accounts for 10%+ of revenue this total must be disclosed

alongside which segment it is reported i

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 Syllabus C6. De ne an operating segment

$%&0'r'!-/-+=".".;'&-#)+/".;',-;=-./,

$%&0'r'!-/-+=".".;'&-#)+/".;',-;=-./,

$9-./"<1".;'8*,".-,,'3.9'L-);+3#:"B32'0-;=-./,

• An entity must look to its organisational structure and internal reporting system to
identify reportable segments.

In fact, the segmentation used for internal reports for the board should be the
same for external report

• Only if internal segments are not along either product/service or geographical

lines is further disaggregation appropriate

M+"=3+1'3.9'0-B).93+1'0-;=-./,

• For most entities one basis of segmentation is primary and the other is secondary
(with considerably less disclosure required for secondary segments

• To decide which is primary, the entity should see whether business or

geographical factors most affect the risk and returns.

This should be helped by looking at entity’s internal organisational and

management structure and its system of internal nancial reporting to senior
management

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 $22*,/+3/").

External Internal
Product Pro t Assets Liabilities
Revenue Revenue
The Nose picker 2,000 30 (100) 3,000 2,000
The Earwax
3,000 20 600 8,000 3,000
extractor
Other Products 5,000 50 1,050 20,000 14,000

A:"B:',-;=-./,',:)*29'4-'+-#)+/-9'*#).C

Let’s look at the 3 reportable segment tests:


10% of combined revenue = 1,010

10% of pro ts = 165

10% of losses = 10

10% of assets = 3,100

So

1. The Nose picker only passes the revenue test, it fails the pro ts test as a loss of
100 is less than 165 (165 is higher than 10), it fails the assets test.

It is still a reportable segment though as only 1 test needs to be passe

2. The Earwax extractor passes all 3 test

3. Other Products These are not separate segments and can only be added
together if the nature of the products are similar, as are their customer type and
distribution method.

So ordinarily these would not be disclosed. However we need to check whether

the 2 reported segments meet the 75% external revenue test

4. Currently only 5,000 out of 10,000 (50%).

Therefore additional operating segments (other products) may be added until the
75% threshold is reache

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 Syllabus C6. Identify reportable segments (including applying the aggregation criteria and
quantitative thresholds)

$%&0'r'M+),'3.9'().,

IFRS 8 follows what we call the “managerial approach” as opposed to the old “risks
and rewards” approach to determining what segments are

D:",':3,'/:-'<)22)>".;'39@3./3;-,I

1. Cost effective as data can be reported in the same way as it is in the managerial
accounts (though it does need reconciling

2. The segment data re ects the operational strategy of the busines

G)>-@-+'/:-+-'3+-'#+)42-=,'32,)I

1. It gives a lot of subjective responsibility to the directors as to what they disclos

2. Also the internal nature of how it is reported may actually make it less useful to
some users and lead to problems of comparabilit

3. There is also no de ned measure of pro t/loss in IFRS

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 012234*,'(p7'&-#)+/".;'+-]*"+-=-./,')<'0WX,
Syllabus C7. Outline the principal considerations in developing a set of nancial reporting
standards for SMEs

$%&0'<)+'0WX'R'$./+)9*B/").

The principal aim when developing accounting standards for small-to medium-sized
enterprises (SMEs) is to provide a framework that generates relevant, reliable and
useful information, which should provide a high-quality and understandable set of
accounting standards suitable for SMEs.

D:-').21'+-32'*,-+,')<'3BB)*./,'<)+'0WX,'3+-I

1. Shareholder

2. Managemen

3. Possibly governmen

IFRS for SMEs is a self-contained standard, incorporating accounting principles

based on existing IFRS, which have been simpli ed to suit SMEs.

If a topic is not covered in the standard there is no mandatory default to full IFRS

D)#"B,'.)/'+-3221'+-]*"+-9'<)+'0WX,'3+-'-HB2*9-9'3.9',)'/:-',/3.93+9'9)-,'.)/'

399+-,,'/:-'<)22)>".;'/)#"B,I

• Earnings per share

• Interim nancial reportin
• Segment reportin
• Insurance (because entities that issue insurance contracts are not eligible to use
the standard
• Assets held for sal

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 Good news!

The standards are relatively short and get the preparers to think.

IFRS for SMEs therefore contains concepts and pervasive principles, any further
disclosures may be needed to give a true and fair view.

It will be updated once every 2 or 3 years only

A:3/'",'3'0WXC

There is no universally agreed de nition of an SME.

As there are differences between rms, sectors, or countries at different levels of

development

Most de nitions based on size use measures such as number of employees,

balance sheet total, or annual turnover.

However, none of these measures apply well across national borders.

Ultimately, the decision regarding who uses IFRS for SMEs stays with national
regulatory authorities and standard-setters.

These bodies will often specify more detailed eligibility criteria.

If an entity opts to use IFRS for SMEs, it must follow the standard in its entirety – it
cannot cherry pick between the requirements of IFRS for SMEs and the full set

304 a W n . m

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 !"<<-+-./'*,-+,'-./"+-21

FRS users are the capital markets. So, quoted companies and not SMEs.

The vast majority of the world's companies are small and privately owned, and it
could be argued that full International Financial Reporting Standards are not relevant
to their needs or to their users.

It is often thought that small business managers perceive the cost of compliance with
accounting standards to be greater than their bene t.

Because of this, the IFRS for SMEs makes numerous simpli cations to the
recognition, measurement and disclosure requirements in full IFRS

XH3=#2-,')<'/:-,-',"=#2"<"B3/").,'3+-I

• Goodwill and other inde nite-life intangibles are amortised over their useful lives,
but if useful life cannot be reliably estimated, then 10 years

• A simpli ed calculation is allowed if measurement of de ned bene t pension plan

obligations (under the projected unit credit method) involve undue cost or effort

• The cost model is permitted for investments in associates and joint ventures

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 Syllabus C7. Discuss solutions to the problem of differential nancial reporting.

$%&0'<)+'0WX'9"<<-+".;'5##+)3B:-,

!"<<-+".;'3##+)3B:-,

Some argue having 2 sets of rules may mean 2 true and fair view

S)B32'L55M'<)+'0WXC

An alternative could have been for GAAP for SMEs to have been developed on a
national basis, with IFRS focusing on accounting for listed company activities.

Then though, SMEs may not have been consistent and may have lacked
comparability across national boundaries.

Also, if an SME wished to later list its shares on a capital market, the transition to
IFRS could be harder.

S",/'0WX'-H-=#/").,'".'/:-'<*22'$%&0C

Under another approach, the exemptions given to smaller entities would have been
prescribed in the mainstream accounting standard.

For example, an appendix could have been included within the standard, detailing
those exemptions given to smaller enterprises

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 0-#3+3/-'0WX',/3.93+9'<)+'-3B:'$%&0C

Yet another approach would have been to introduce a separate standard comprising
all the issues addressed in IFRS that were relevant to SMEs

5,'"/',/3.9,'.)>

Q,-+'<+"-.921

The standard has been organised by topic with the intention of being user-friendlier
for preparers and users of SME nancial statement

The standard also contains simpli ed language and explanations of the standards

X3,"-+'/+3.,"/").'/)'<*22'$%&0

It is based on recognised concepts and pervasive principles and it allows easier

transition to full IFRS if the SME later becomes a public listed entity.

In deciding on the modi cations to make to IFRS, the needs of the users have been
taken into account, as well as the costs and other burdens imposed upon SMEs by
the IFRS

(),/'8-.-<"/

Relaxation of some of the measurement and recognition criteria in IFRS had to be

made in order to achieve the reduction in these costs and burdens

307 a W n . m

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.

 0/->3+9,:"#'.)/',)'"=#)+/3./

Small companies pursue different strategies, and their goals are more likely to be
survival and stability rather than growth and pro t maximisation.

The stewardship function is often absent in small companies, with the accounts
playing an agency role between the owner-manager and the ban

5BB-,,'/)'B3#"/32

Where nancial statements are prepared using the standard, the basis of
presentation note and the auditor's report will refer to compliance with IFRS for
SMEs.

This reference may improve SME's access to capital

In the absence of speci c guidance on a particular subject, an SME may, but is not
required to, consider the requirements and guidance in full IFRS dealing with similar
issues.

The IASB has produced full implementation guidance for SMEs

IFRS for SMEs is a response to international demand from developed and emerging
economies for a rigorous and common set of accounting standards for smaller and
medium-sized enterprises that is much easier to use than the full set of IFRS. 

It should provide improved comparability for users of accounts while enhancing the
overall con dence in the accounts of SMEs, and reduce the signi cant costs
involved in maintaining standards on a national basis

308 a W n . m

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 Syllabus C7. Discuss reasons why the IFRS for SMEs does not address certain topics.

$%&0'<)+'0WX,'R'W3".'!"<<-+-.B-,'/)'<*22'$%&0

W3".'(:3.;-,
%".3.B"32',/3/-=-./,
• %*22'$%&0I'

A statement of changes in equity is required, presenting a reconciliation of equity

items between the beginning and end of the period
• $%&0'<)+'0WX,I'

Same requirement.

However, if the only changes to the equity during the period are a result of pro t
or loss, payment of dividends, correction of prior-period errors or changes in
accounting policy, a combined statement of income and retained earnings can be
presented instead of both a statement of comprehensive income and a statement
of changes in equity

8*,".-,,'B)=4".3/").,
• %*22'$%&0I'

Transaction costs are excluded under IFRS 3 (revised).

Contingent consideration is recognised regardless of the probability of payment

• $%&0'<)+'0WX,I'

Transaction costs are included in the cost of investment.

Contingent considerations are included as part of the cost of investment if it is

probable that the amount will be paid and its fair value can be measured reliably

309 a W n . m

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 XH#-.,-'+-B);."/").

• %*22'$%&0I

Research costs are expensed as incurred; development costs are capitalised and
amortised, but only when speci c criteria are met.

Borrowing costs are capitalised if certain criteria are met

• $%&0'<)+'0WX,I'

All research and development costs and all borrowing costs are recognised as an
expense

Z).RB*++-./'3,,-/,'3.9';))9>"22

• %*22'$%&0I'

For tangible and intangible assets, there is an accounting policy choice between
the cost model and the revaluation model.

Goodwill and other intangibles with inde nite lives are reviewed for impairment
and not amortised

• $%&0'<)+'0WX,I'

The cost model is the only permitted model.

All intangible assets, including goodwill, are assumed to have nite lives and are
amortised

310 a W n . m

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 $./3.;"42-'5,,-/,

• %*22'$%&0I'

Under IAS 38, ‘Intangible assets’, the useful life of an intangible asset is either
nite or inde nite.

The latter are not amortised and an annual impairment test is required

• $%&0'<)+'0WX,I'

There is no distinction between assets with nite or in nite lives.

The amortisation approach therefore applies to all intangible assets.

These intangibles are tested for impairment only when there is an indication

$.@-,/=-./'M+)#-+/1

• %*22'$%&0I

IAS 40, ‘Investment property’, offers a choice of fair value and the cost method

• $%&0'<)+'0WX,I'

Investment property is carried at fair value if this fair value can be measured
without undue cost or effort

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 G-29'<)+'032-

• %*22'$%&0I'

IFRS 5, ‘Non-current assets held for sale and discontinued operations’, requires
non-current assets to be classi ed as held for sale where the carrying amount is
recovered principally through a sale transaction rather than though continuing
use

• $%&0'<)+'0WX,I'

Assets held for sale are not covered, the decision to sell an asset is considered
an impairment indicator

X=#2)1--'4-.-<"/,'u'9-<".-9'4-.-<"/'#23.,

• %*22'$%&0I'

The use of an accrued bene t valuation method (the projected unit credit method)
is required for calculating de ned bene t obligations

• $%&0'<)+'0WX,I'

The circumstance-driven approach is applicable, which means that the use of an

accrued bene t valuation method (the projected unit credit method) is required if
the information that is needed to make such a calculation is already available, or
if it can be obtained without undue cost or effort.

If not, simpli cations are permitted in which future salary progression, future
service or possible mortality during an employee’s period of service are not
considered

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 $.B)=-'/3H-,

• %*22'$%&0I'

A deferred tax asset is only recognised to the extent that it is probable that there
will be suf cient future taxable pro t to enable recovery of the deferred tax asset

• $%&0'<)+'0WX,I'

A valuation allowance is recognised so that the net carrying amount of the

deferred tax asset equals the highest amount that is more likely than not to be
recovered.

The net carrying amount of deferred tax asset is likely to be the same between
full IFRS and IFRS for SMEs

• %*22'$%&0I'

No deferred tax is recognised upon the initial recognition of an asset and liability
in a transaction that is not a business combination and affects neither accounting
pro t nor taxable pro t at the time of the transaction

• $%&0'<)+'0WX,I'

No such exemption

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 • %*22'$%&0I'

There is no speci c guidance on uncertain tax positions.

In practice, management will record the liability measured as either a single best
estimate or a weighted average probability of the possible outcomes, if the
likelihood is greater than 50%

• $%&0'<)+'0WX,I'

Management recognises the effect of the possible outcomes of a review by the

tax authorities.

It should be measured using the probability-weighted average amount of all the

possible outcomes.

There is no probable recognition threshold

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 Syllabus D: Preparation of external nancial

reports

012234*,'!67'M+-#3+3/").')<';+)*#'B).,)2"93/-9'-H/-+.32'+-#)+/,

Syllabus D1. Explain the concept of a group and the purpose of preparing consolidated
nancial statements

Explain and apply the de nition of subsidiary companies

!-<"."/").')<'3',*4,"9"3+1

L+)*#'5BB)*./".;
M+-,-./3/").

According to IAS 1 accounts must distinguish between

1. Pro t or Loss for the perio

2. Other gains or losses not reported in pro ts above (Other Comprehensive

Income

3. Equity transactions (share issues and dividends

G-+-a,',)=-'?-1'9-<"."/").,I

().,)2"93/-9'<".3.B"32',/3/-=-./,I

The nancial statements of a group presented as those of a single economic entity.

Subsidiary: an entity that is controlled by another entity (known as the parent)

Parent: an entity that has one or more subsidiaries

Control: the power to govern the nancial and operating policies of an entity so as to
obtain bene ts from its activitie

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 $9-./"<"B3/").')<',*4,"9"3+"-,

Control is presumed when the parent has 50% + voting rights of the entity

Even when less than 50%, control may be evidenced by power.

• Getting the 50%+ by an arrangement with other investor

• Governing the nancial and operating policie

• Appointing the majority of the board of director

• Casting the majority of vote

It could also come from the parent controlling one subsidiary, which in turn controls
another.

The parent then controls both subsidiarie

M)>-+

So a parent needs the power to affect the subsidiary and as we said before this is
normally given by owning more than 50% of the voting right

It might also come from complex contractual arrangement

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 Syllabus D1. Explain the concept of a group and the purpose of preparing consolidated
nancial statements

L+)*#'5BB)*./".;'XH-=#/").,

A:)'.--9,'/)'#+-#3+-'B).,)2"93/-9'3BB)*./,C

Basically a parent company, one with a subsidiar

G)>-@-+'/:-+-'3+-'-HB-#/").,'/)'/:",'+*2-I

• The parent is itself a wholly owned subsidiar

• The parent is a partially (e.g. 80%) owned sub and the other 20% owners allow it
to not prepare consolidated account

• The parents shares are not publicly trade

• The parents own parent produces consolidated account

Sometimes a sub is purchased with a view to it being sold. 


In this case it is an IFRS 5 discontinued operatio

The group share of its pro ts are shown on the income statement and all of its
assets and liabilities shown separately on the SF

Z)/'[32"9'+-3,).,'<)+'-H-=#/").

1. A subsidiary whose business is of a different nature from the parent’s

2. A subsidiary that operates under severe long-term restrictions impairing the

subsidiary’s ability to transfer funds to the parent

3. A subsidiary that had previously been consolidated and that is now being held for
sale

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

Explain the need for using coterminous year- ends and uniform accounting polices when
preparing consolidated nancial statements and describe how it is achieved in practice

8*,".-,,'()=4".3/").,'R'83,"B,

D:-'#*+#),-')<'B).,)2"93/-9'3BB)*./,'",'/)',:)>'/:-';+)*#'3,'3',".;2-'
-B).)="B'-./"/17

0)'<"+,/')<'322'R'>:3/'",'3'4*,".-,,'B)=4".3/").C
• Well my little calf, it’s an event where the acquirer obtains control of another
business

• Let me explain, let’s say we are the Parent acquiring the subsidiary.

We must prepare our own accounts AND those of us and the sub put together
(called “consolidated accounts”

This is to show our shareholders what we CONTROL

83,"B'#+".B"#2-,

D:-'3BB)*./,',:)>'322'/:3/'",'B)./+)22-9'41'/:-'#3+-./Y'/:",'=-3.,I
1. All assets and liabilities of a subsidiary are include

2. All income and expenses of the subsidiary are include

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 Z).'B)./+)22".;'$./-+-,/'EZ($F
However the parent does not always own all of the above

So the % that is not owned by the parent is called the “non-controlling interest”

• A line is included in equity called non-controlling interests. This accounts for their
share of the assets and liabilities on the SFP

• A line is also included on the income statement which accounts for the NCI’s
share of the income and expenses

O.-'D:".;'1)*'=*,/'*.9-+,/3.9'4-<)+-'>-';)').
Forgive me if this is basic, but hey, sometimes it’s good to be sure

  G' 0'
Non Current Asset 500 600
Investment in S 200  
Current Assets 100 200
     
Share Capital 100 100
Reserves 300 400
     
Current Liabilities 100 50
Non Current Liabilities 300 250

Notice if you add the assets together and take away the liabilities for H - it comes to
400 (500+200+100-100-300

D:-+-'3+-'T'/:".;,'/)'*.9-+,/3.9'34)*/'/:",'<";*+-I
1. It is NOT the true/fair value of the compan

2. It is equal to the equity section of the SFPm

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 X]*"/1

• This shows you how the net assets gure has come about. The share capital is
the capital introduced from the owners (as is share premium)

• The reserves are all the accumulated pro ts/losses/gains less dividends since the
business started. Here the gure is 400 for H

Notice it is equal to the net asset

5B]*","/").'B),/,

• Where there’s an acquisition there’s probably some of the costs eg legal fees et

Costs directly attributable to the acquisition are expensed to the income

statement

• Be careful though, any costs which are just for the parent (acquirer)  issuing its
own debt or shares are deducted from the debt or equity itself (often share
premium)

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

Identify the circumstances in which a gain on a bargain purchase (negative goodwill) arises,
and its subsequent accounting treatment

0"=#2-'L))9>"22

L))9>"22

• When a company buys another - it is not often that it does so at the fair value of
the net assets only.

 

This is because most businesses are more than just the sum total of their ‘net
assets’ on the SFP.

Customer base, reputation, workforce etc. are all part of the value of the
company that is not re ected in the accounts.

This is called “goodwill

• Goodwill only occurs on a business combination. Individual companies cannot

show their individual goodwill on their SFPs

This is because they cannot get a reliable measure, This is because nobody has
purchased the company to value the goodwill appropriately.

 

On a business combination the acquirer (Parent) purchases the subsidiary -
normally at an amount higher than the FV of the net assets on the SFP, they buy
it at a gure that effectively includes goodwill.

Therefore the goodwill can now be measured and so does show in the group
accounts

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 G)>'",';))9>"22'B32B*23/-9C

On a basic level - I hope you can see - that it is the amount paid by the parent less
the FV of the subs assets on their SFP.

 

Let me explain.

  S
Non-Current Assets 1,000
Current Assets 400
   
Share Capital 100
Share Premium 100
Reserves 700
   
Current Liabilities 100
Non-Current Liabilities 400

In this example S’s Net assets are 900 (same as their equity remember).

This is just the ‘book value’ of the net assets.


 

The Fair Value of the net assets may be, say, 1,000.

 

However a company may buy the company for 1.200. So, Goodwill would be 200.

 

The goodwill represents the reputation etc. of a company and can only be reliably
measured when the company is bought out

Here it was bought for 1,200. Therefore, as the FV of the net assets of S was only
1,000 - the extra 200 is deemed to be for goodwill.

 


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 The increase from book value 900 to FV 1,000 is what we call a Fair Value
adjustment

83+;3".'M*+B:3,-

This is where the parent and NCI paid less at acquisition than the FV of S’s net
assets. This is obviously very rare and means a bargain was acquire

So rare in fact that the standard suggests you look closely again at your calculation
of S’s net assets value because it is strange that you got such a bargain and
perhaps your original calculations of their FV were wron

G)>-@-+Y'"<'/:-'B32B*23/").,'3+-'322'B)++-B/'3.9'1)*':3@-'".9--9';)/'3'43+;3".'/:-.'

/:",'",'ZOD',:)>.').'/:-'0%M'+3/:-+'"/'",',:)>.'3,I

• Income on the income statement in the year of acquisitio

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

Z($'".'/:-'L))9>"22'B32B*23/").

So far we have presumed that the company has been 100% purchased when
calculating goodwill.

 

Our calculation has been this

Consideration x
FV of Net Assets Acquired (x)
Goodwill x

Z).RB)./+)22".;'$./-+-,/,

Let’s now take into account what happens when we do not buy all of S. (eg. 80%)

 

This means we now have some non-controlling interests (NCI) at 20%

 

The formula changes to this

Consideration x
Z($' H'
FV of Net Assets Acquired (x)
Goodwill x

This NCI can be calculated in 2 ways:


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 1) Proportion of FV of S’s Net Assets

2) FV of NCI itsel

M+)#)+/").')<'%[')<'0J,'Z-/'5,,-/,'=-/:)9

This is very straight forward. All we do is give the NCI their share of FV of S’s Net
Assets..Consider this:

 

P buys 80% S for 1,000. The FV of S’s Net assets were 1,100.

 

G)>'=*B:'",';))9>"22C

Consideration 1,000
NCI 220
FV of Net Assets Acquired (1,100)
Goodwill 120

The NCI is calculated as 20% of FV of S’s NA of 1,100 = 22

b%3"+'[32*-'W-/:)9c')<'(32B*23/".;'Z($'".'L))9>"22

• So in the previous example NCI was just given their share of S’s Net assets.

They were not given any of their reputation etc.

In other words, NCI were not given any goodwill

• $'+-#-3/Y'*.9-+'/:-'#+)#)+/").3/-'=-/:)9Y'Z($'",'ZOD';"@-.'3.1';))9>"227

Under the FV method, they are given some goodwill

• This is because NCI is not just given their share of S’s NA but actually the FV of
their 20% as a whole (ie NA + Goodwill)

This FV gure is either given in the exam or can be calculated by looking at the
share price (see quiz 2)

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 P buys 80% S for 1,000. The FV of S’s Net assets were 1,100.  The FV of NCI at this
date was 250.

 

G)>'=*B:'",';))9>"22C

Consideration 1,000
Z($' T^h'
FV of Net Assets Acquired (1,100)
Goodwill 150

Notice how goodwill is now 30 more than in the proportionate example. This is the
goodwill attributable to NCI.

 

NCI goodwill = FV of NCI - their share of FV of S’s N

&-=-=4-+

Under the proportionate method NCI does not get any of S’s Goodwill (only their
share of S’s NA).

 

Under the FV method, NCI gets given their share of S’s NA AND their share of S’s
goodwil

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

X]*"/1'D342-

0J,'X]*"/1'D342-

As you will see when we get on to doing bigger questions, this is always our rst
working.

This is because it helps all the other workings.


 

Remember that Equity = Net asset

X]*"/1'",'=39-'*#')<I

1. Share Capita

2. Share Premiu

3. Retained Earning

4. Revaluation Reserv

5. Any other ‘reserve’

If any of the above is mentioned in the question for S, then they must go into this
equity table working

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 A:3/'9)-,'/:-'/342-'2))?'2"?-C

  5/'0%M'93/-' 5/'5B]*","/").' M),/'5B]*","/").'

0:3+-'(3#"/32' x x x

0:3+-'M+-="*=' x x x

&-/3".-9'X3+.".;,' x x x

D)/32' x x x

Remember that any other reserve would also go in here

0)':)>'9)'>-'<"22'".'/:",'/342-C

1. Enter the "Year end" gures straight from the SF

2. Enter the "At acquisition" gures from looking at the information given normally in
note 1 of the question.

Please note you can presume the share capital and share premium is the same
as the year-end gures, so you're only looking for the at acquisition reserves
gure

3. Enter "Post Acquisition" gures simply by taking away the "At acquisition" gures
away from the "Year end" gures

(ie. Y/E - Acquisition = Post acquisition

So let's try a simple example.. (although this is given in a different format to the
actual exam let's do it this way to start with).

 

A company has share capital of 200, share premium of 100 and total reserves at
acquisition of 100 at acquisition and have made pro ts since of 400. There have
been no issues of shares since acquisition and no dividends paid out

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 0:)>'/:-'X]*"/1'/342-'/)'B32B*23/-'/:-'.-/'3,,-/,'.)>'3/'/:-'1-3+'-.9Y'3/'3B]*","/").'

3.9'#),/R3B]*","/").s

ls

0)2*/").

  Z)>' 5/'5B]*","/").' M),/R5B]*","/").'

0:3+-'(3#"/32' 200 200 0

0:3+-'M+-="*=' 100 100 0

&-/3".-9'X3+.".;,' 500 100 400

D)/32' rhh' `hh' `hh'

%3"+'[32*-'59P*,/=-./,

Ok the next step is to also place into the Equity table any Fair Value adjustments

 

When a subsidiary is purchased - it is purchased at FAIR VALUE at acquisition.

 

Using the gures above, if I were to tell you that the FV of the sub at acquisition was
480.

Hopefully you can see we would need to make an adjustment of 80 (let’s say that
this was because Land had a FV 80 higher than in the books)

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   Z)>' 5/'5B]*","/").' M),/R5B]*","/").'

0:3+-'(3#"/32' 200 200 0

0:3+-'M+-="*=' 100 100 0

&-/3".-9'X3+.".;,' 500 100 400

S3.9' x 80 x

D)/32' rhh' `rh' H'

Now as land doesn’t depreciate - it would still now be at 80 - so the table changes to
this

l Z)>' 5/'5B]*","/").' M),/R5B]*","/").'

0:3+-'(3#"/32' 200 200 0

0:3+-'M+-="*=' 100 100 0

&-/3".-9'X3+.".;,' 500 100 400

S3.9' 80 80 0

D)/32' rrh' `rh' `hh'

If instead the FV adjustment was due to PPE with a 10 year useful economic life left
- and lets say acquisition was 2 years ago, the table would look like this

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 l Z)>' 5/'5B]*","/").' M),/R5B]*","/").'

0:3+-'(3#"/32' 200 200 0

0:3+-'M+-="*=' 100 100 0

&-/3".-9'X3+.".;,' 500 100 400

MMX' 64 80 -16

D)/32' rk`' `rh' Ur`'

The -16 in the post acquisition column is the depreciation on the FV adjustment. (80 /
10 years x 2 years).

 

This makes the now column 64 (80 at acquisition - 16 depreciation post acquisition)

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

Z($').'/:-'0%M

Z).R()./+)22".;'$./-+-,/,

So far we have looked at goodwill and the effect of NCI on this.. Now let’s look at
NCI in a bit more detail (don’t worry we will pull all this together into a bigger
question later)

$<'1)*'+-=-=4-+'/:-+-'3+-'T'=-/:)9,')<'=-3,*+".;'Z($'3/'3B]*","/").I

1. M+)#)+/").3/-'=-/:)9

This is the NCI % of FV of S’s Net assets at acquisition

2. %['W-/:)9

This is the FV of the NCI shares at acquisition (given mostly in the question)

This choice is made at the beginning

Obviously, S will make pro ts/losses after acquisition and the NCI deserve their
share of these

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 D:-+-<)+-'/:-'<)+=*23'/)'B32B*23/-'Z($').'/:-'0%M'",'3,'<)22)>,I

(this is the same gure as used in

NCI @ Acquisition x
goodwill*)
NCI % of S’s post acquisition pro ts/
x  
losses
NCI on the SFP x  

* This gure depends on the option chosen at acquisition (Proportionate or FV

method)

$=#3"+=-./

S may become impaired over time. If it does, it is S’s goodwill which will be reduced
in value rst. If this happens it only affects NCI if you are using the FV method

This is because the proportionate method only gives NCI their share of S’s Net
assets and none of the goodwill

Whereas, when using the FV method, NCI at acquisition is given a share of S’s NA
and a share of the goodwill

Z($').'/:-'0%M'%)+=*23'+-@",-9

(this is the same gure as used in

NCI @ Acquisition x
goodwill*)
NCI % of S’s post acquisition pro ts/
x  
losses
Impairment (x) (ONLY if using FV method)
Z($').'/:-'0%M' H'

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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

&-,-+@-,'(32B*23/").

0%M'L+)*#'&-,-+@-,

So far we have looked at how to calculate goodwill and then NCI for the SFP, now

we are looking at how to calculate any group reserves on the SF

There could be many reserves (eg Retained Earnings, Revaluation Reserve etc),

however they are all calculated the same wa

83,"B'$9-3

The basic idea is that group accounts are written from the Parent companies point of

view

Therefore we include all of Parent (P’s) reserves plus parent share of Subs post

acquisition gains or losses in that reserve

Let’s look at an example of this using Retained Earnings

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 $22*,/+3/").'6

P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 60

Now, P’s RE are 1,400 and S’s RE are 700

A:3/'",'/:-'&X').'/:-'0%M'.)>C

P 1,400  
S 80 (80% x (700-600)
  1,480  

It is worth pointing out here that all these workings only really to start to make sense
once you start to do lots of examples - see my videos for this

$=#3"+=-./

If Goodwill has been impaired then goodwill will reduce and retained earnings will
reduce too

G)>-@-+Y'/:-'3=)*./')<'/:-'"=#3"+=-./'9-#-.9,').'/:-'Z($'=-/:)9'B:),-.I

67 M+)#)+/").3/-'Z($'=-/:)9'

This means that NCI has zero goodwill, so any goodwill impaired all belongs to
the parent and so 100% is taken to R

T7 %['=-/:)9'

Here NCI is given a share of NCI, so also takes a share of the impairment.

Therefore the group only gets its share of the impairment in RE (eg 80%

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 $22*,/+3/").'T

P acquired 80% S when P’s Retained earnings were 1,000 and S’s were 600

Now, P’s RE are 1,400 and S’s RE are 700.

P uses the FV method of accounting for NCI and impairment of 40 has occurred
since

A:3/'",'/:-'&X').'/:-'0%M'.)>C

P 1,400  
S 80 (80% x (700-600)
Impairment (32) (80% x 40)
  1,448  



 


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 Syllabus D1. Prepare a consolidated statement of nancial position for a simple group (one or
more subsidiaries) dealing with pre and post- acquisition pro ts, non-controlling interests and
goodwill

Explain the need for using coterminous year- ends and uniform accounting polices when
preparing consolidated nancial statements and describe how it is achieved in practice

83,"B';+)*#,'R'0"=#2-'V*-,/").'6

Have a look at this question and solution below and see if you can work out where all
the gures in the solution have come from.

Make sure to check out the videos too as these explain numbers questions such as
these far better than words can.

  M' 0'
Non-Current Asset 500 600
Investment in S 200  
Current Assets 100 200
     
Share Capital 100 100
Reserves 300 400
     
Current Liabilities 100 50
Non-Current Liabilities 300 250

P acquired 80% S when S’s reserves were 80

M+-#3+-'/:-'().,)2"93/-9'0%MY'3,,*=".;'M'*,-,'/:-'#+)#)+/").3/-'=-/:)9'<)+'

=-3,*+".;'Z($'3/'3B]*","/").7

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 L))9>"22

Consideration 200
NCI 36
FV of Net Assets Acquired (180)
Goodwill 56

Z($

NCI @ Acquisition 36 (from goodwill working above)

NCI % of S’s post acquisition pro ts 64 (20% x (400-80))
Impairment (0) (20% x 0)
Z($').'/:-'0%M' 6hh'  

&-,-+@-,

P 300  
S 256 (80% x (400-80)
Impairment (0) (100% because proportionate method x 0)
  ^^k'  

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 L+)*#'0%M

  M' 0' L+)*#'

Non-Current Asset 500 600 6Y6hh'
Investment in S 200 L))9>"22' ^k'
Current Assets 100 200 Uhh'
      l
Share Capital 100 100 6hh'
Reserves 300 400 ^^k'
NCI     6hh'
      l
Current Liabilities 100 50 6^h'
Non-Current Liabilities 300 250 ^^h'

Z)/"B-

1) Share Capital (and share premium) is always just the holding company

2) All P + S assets are just added together

3) “Investment in S”..becomes “Goodwill” in the consolidated SFP

4) NCI is an extra line in the equity section of consolidated SF

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 Syllabus D1. Explain the need for using coterminous year- ends and uniform accounting
polices when preparing consolidated nancial statements and describe how it is achieved in
practice

83,"B'L+)*#,'R'0"=#2-'V*-,/").'T

  M' 0'
Non-Current Asset 500 600
Investment in S 120  
Current Assets 100 200
     
Share Capital 100 100
Reserves 220 400
     
Current Liabilities 100 50
Non-Current Liabilities 300 250

P acquired 80% S when S’s Reserves were 40.

At that date the FV of S’s NA was 150.

Difference is due to Land.

There have been no issues of shares since acquisition

P uses the FV of NCI method at acquisition, and at acquisition the FV of NCI was 35.
No impairment of goodwill

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 M+-#3+-'/:-'B).,)2"93/-9',-/')<'3BB)*./,7

0/-#'6I'M+-#3+-'0J,'X]*"/1'D342-

l Z)>' 5/'5B]*","/").' M),/R5B]*","/").'

0:3+-'(3#"/32' 100 100 0

&-/3".-9'X3+.".;,' 400 40 360

S3.9' 10 10 0

D)/32' ^6h' 6^h' Ukh'

Now the extra 10 FV adjustment now must be added to the PPE when we come to
do the SFP at the end

0/-#'TI'L))9>"22

().,"9-+3/"). 6Th

Z($ U^'EL"@-.F

%[')<'Z-/'5,,-/,'5B]*"+-9 E6^hF'<+)='0J,'X]*"/1'/342-

L))9>"22 ^'

0/-#'UI'!)'3.1'39P*,/=-./,'".'/:-']*-,/").

: NON

0/-#'`I'Z($

NCI @ Acquisition 35 (given)

NCI % of S’s post acquisition pro ts 72 (20% x 360 (from S’s Equity table)
Impairment (0) (20% x 0)
Z($').'/:-'0%M' 6hp'  

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 0/-#'^I'&-,-+@-,

P 220  
S 288 (80% x 360 (from S’s equity table))
Impairment (0) (80%  x 0)
  ^hr'  

0/-#'kI'M+-#3+-'/:-'<".32'0%M'E>"/:'322'39P*,/=-./,'".B2*9-9F

  P S Group
Non-Current Asset 500 600 1,110 (including 10 from S’s equity table)
Investment in S 120 Goodwill 5
Current Assets 100 200 300
       
Share Capital 100 100 100
Reserves 220 400 508
NCI     107
       
Current Liabilities 100 50 150
Non-Current Liabilities 300 250 550

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 Syllabus D1. Explain the subsequent accounting treatment, including the principle of
impairment tests in relation to purchased goodwill

$=#3"+=-./')<'L))9>"22

L))9>"22'",'+-@"->-9'<)+'"=#3"+=-./'.)/'3=)+/",-97

An impairment occurs when the subs recoverable amount is less than the subs
carrying value + goodwill

How this works in practice depends on how NCI is measured - Proportionate or Fair
Value method

M+)#)+/").3/-'Z($

Here, NCI only receives % of S's net assets

NCI DOES NOT have any share of the goodwill

1. Compare the recoverable amount of S (100%) to.

2. NET ASSETS of S (100%) +


Goodwill (100%

3. The problem is that goodwill on the SFP is for the parent only - so this needs
grossing up rs

4. Then nd the difference - this is the impairment - but only show the parent % of
the impairmen

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 XH3=#2-

H owns 80% of S. Proportionate NC

Goodwill is 80 and NA are 200


Recoverable amount is 24

How much is the impairment

0)2*/").

RA = 24

NA = 200 + G/W (80 x 100/80) = 100 = 30

Impairment is therefore 60

The impairment shown in the accounts though is 80% x 60 = 48

This is because the goodwill in the proportionate method is parent goodwill only.
Therefore only parent impairment is shown

%3"+'[32*-'Z($

Here, NCI receives % of S's net assets AND goodwill

NCI DOES now own some goodwill

1. Compare the recoverable amount of S (100%) to.

2. NET ASSETS of S (100%) +


Goodwill (100%

3. As, here, goodwill on the SFP is 100% (parent & NCI) - so NO grossing up
neede

4. Then nd the difference - this is the impairment - this is split between the parent
and NCI shar

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 XH3=#2-

H owns 80% of S. Fair Value NC

Goodwill is 80 and NA are 200


Recoverable amount is 24

How much is the impairment

0)2*/").

RA = 24

NA = 200 + G/W 80 = 28

Impairment is therefore 40

The impairment shown in P's RE as 80% x 40 = 32.


The impairment shown in NCI is 20% x 40 = 8

$=#3"+=-./'39P*,/=-./').'/:-'$.B)=-'0/3/-=-./

1. Proportionate NCI

Add it to P's expenses

2. Fair Value NCI

Add it to S's expense

(this reduces S's PAT so reduces NCI when it takes its share of S's PAT)

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 Syllabus D1. Prepare a consolidated statement of pro t or loss, statement of pro t or loss and
other comprehensive income and statement of changes in equity for a simple group (one or
more subsidiaries), including an example where an acquisition or disposal of an entire interest
occurs during the year and there is a non-controlling interest.

L+)*#'$.B)=-'0/3/-=-./

&*2-'6'R'599'5B+),,'6hhn

Like with the SFP, P and S are both added together. All the items from revenue down
to Pro t after tax; except for

1) Dividends from Subsidiaries


2) Dividends from Associate

&*2-'T'R'Z($

This is an extra line added into the consolidated income statement at the end. It is
calculated as NCI% x S’s PAT

The reason for this is because we add across all of S (see rule 1) even if we only
own 80% of S.

We therefore owe NCI 20% of this which we show at the bottom of the income
statement

&*2-'U'R'5,,)B"3/-,

Simply show one line (so never add across an associate).

The line is called “Share in Associates’ Pro t after tax”

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 &*2-'`'R'!-#+-B"3/").'<+)='/:-'X]*"/1'/342-'>)+?".;

Remember this working from when we looked at group SFP’s

l Z)>' 5/'5B]*","/").' M),/'5B]*","/").'

0:3+-'(3#"/32' 100 100 0

0:3+-'M+-="*=' 50 50 0

&-/3".-9'X3+.".;,' 430 250 180

MMX' 40 50 -10

D)/32' kTh' `^h' 6ph'

The -10 from the FV adjustment is a group adjustment. So needs to be altered on

the group income statement. It represents depreciation, so simply put it to admin
expenses (or wherever the examiner tells you), be careful though to only out in THE
CURRENT YEAR depreciation charge

&*2-'^'R'D"=-'5##)+/").".;

This isn’t dif cult but can be awkward/tricky. Basically all you need to remember is
the group only shows POST -ACQUISITION pro ts. i.e. Pro ts made SINCE we
bought the sub or associate

If the sub or associate was bought many years ago this is not a problem in this
year’s income statement as it has been a sub or assoc. all year

The problem arises when we acquire the sub or the associate mid year. Just
remember to only add across pro ts made after acquisition. The same applies to NCI
(as after all this just a share of S’s PAT).

For example if our year end is 31/12 and we buy the sub or assoc. on 31/3. We only
add across 9/12 of the subs gures and NCI is % x S’s PAT x 9/12

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 One nal point to remember here is adjustments such as unrealised pro ts /
depreciation on FV adjustments are entirely post - acquisition and so are NEVER
time apportioned

&*2-'k'R'Q.+-32",-9'M+)<"/

You will remember this table I hop

The idea of what we need to do How we do it on the SFP

Reduce Pro t of Seller Reduce SELLERS Retained Earnings
Reduce Inventory Reduce BUYERS Inventory

Well the idea stays the same - it’s just how we alter the accounts that changes,
because this is an income statement after all and not an SFP. So the table you need
to remember becomes

The idea of what we need to do How we do it on the SOCI

Reduce Pro t of Seller Increase SELLERS Cost of Sales
Reduce Inventory No adjustment required

Notice how we do not need to make an adjustment to reduce the value of inventory.
This is because we have increased cost of sales (to reduce pro ts), but we do this by
actually reducing the value of the closing stock.

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 0/3/-=-./')<'B:3.;-,'".'-]*"/1

The revised statement of changes in equity separates owner and non-owner

changes in equity. 

It includes only details of transactions with owners, with all non-owner changes in
equity presented as a single line – total comprehensive income

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 Syllabus D1. Explain and illustrate the effect of the disposal of a parent’s investment in a
subsidiary in the parent’s individual nancial statements and/or those of the group (restricted to
disposals of the parent’s entire investment in the subsidiary)

%*22'!",#),32

This is when we lose control, so we go from owning a % above 50 to one below 50

(eg 80% to 30%)

In this case we have effectively disposed of the subsidiary (and possibly created a
new associate)

As the sub has been disposed of - then any gain or loss goes to the INCOME
STATEMENT (and hence retained earnings)

Also, the old Subs assets and liabilities no longer get added across, there will be no
goodwill or NCI for it either

G)>'9)'1)*'B32B*23/-'/:",';3".')+'2),,C

Proceeds X
Net Assets (100%) (X)
Goodwill (X)
NCI X
FV of the remaining %  (if any) X
Gain/Loss X

A:3/J,'/:-'-<<-B/').'/:-'$.B)=-'0/3/-=-./C
Consolidated until sale; Then treat as Associate (if we have signi cant in uence)
otherwise a FVTPL investment
Show pro t on disposal (see above)

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 Syllabus D1. Explain and illustrate the effect of the disposal of a parent’s investment in a
subsidiary in the parent’s individual nancial statements and/or those of the group (restricted to
disposals of the parent’s entire investment in the subsidiary)

0*4,"9"3+1'3B]*"+-9'>"/:'3'@"->'/)'9",#),32

A subsidiary that is acquired exclusively with a view to its subsequent disposal is

classi ed on the acquisition date of the subsidiary as a non-current disposal group
'held for sale' (if it is expected that the subsidiary will be disposed of within one year
and the other IFRS 5 criteria are met with within three months of the acquisition date

(23,,"<"B3/").'3,'3'9",B)./".*-9')#-+3/").
A subsidiary classi ed as 'held for sale', is included in the de nition of a discontinued
operation, with treatment as follows

• $.B)=-',/3/-=-./'
Single Line “Discontinued operations” - PAT of the Sub + gain/loss on re-
measurement to held for sal
The income and expenses of the subsidiary are therefore not consolidated on a
line-by-line basis with the income and expenses of the holding company

• 0/3/-=-./')<'<".3.B"32'#),"/").
The assets and liabilities classi ed as 'held for sale' presented separately (the
assets and liabilities of the same disposal group may not be offset against each
other).
The assets and liabilities of the subsidiary are therefore not consolidated on a
line-by-line basis with the assets and liabilities of the holding company

• 0/3/-=-./')<'(3,:<2)>,
No need to disclose the net cash ows attributable to the operating, investing and
nancing activities of the discontinued operation (which is normally required) but
is not required for newly acquired subsidiaries which meet the criteria to be
classi ed as 'held for sale' on the acquisition dat

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 012234*,'!T7'8*,".-,,'B)=4".3/").,'u'"./+3R;+)*#'39P*,/=-./,
Syllabus D2. Explain why intra-group transactions should be eliminated on consolidation

Report the effects of intra-group trading and other transactions including:

– unrealised pro ts in inventory and non-current assets
— unsettled intra-group balances at the year- end
– intra-group loans and interest and other intra-group charges, and – intra-group dividends

$./+3RL+)*#'8323.B-,'N'$.R/+3.,"/'$/-=,

$./-+R;+)*#'B)=#3.1'4323.B-,

As with Unrealised Pro t - this occurs because group companies are considered to
be the same entity in the group accounts

Therefore you cannot owe or be owed by yourself

So if P owes S - it means P has a payable with S, and S has a receivable from P in

their INDIVIDUAL accounts

In the group accounts, you cannot owe/be owed by yourself - so simply cancel these
out

Dr Payable (in P)


Cr Receivable (in S)

The only time this wouldn’t work is if the amounts didn’t balance, and the only way
this could happen is because something was still in transit at the year end. This
could be stock or cash

You always alter the receiving company. What I mean is - if the item is in transit, then
the receiving company has not received it yet - so simply make the RECEIVING
company receive it as follows:m

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 0/)B?'".'/+3.,"/

In the RECEIVING company’s books

Dr Inventory

Cr Payable

(3,:'".'/+3.,"/

In the RECEIVING company’s books

Dr Cash

Cr Receivable

Having dealt with the amounts in transit - the inter group balances (receivables/
payables) will balance so again you simply

Dr Payable

Cr Receivable

$./+3R;+)*#'9"@"9-.9,

eliminate all dividends paid/payable to other entities within the group, and all
intragroup dividends received/receivable from other entities within the group

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 Syllabus D2. Report the effects of intra-group trading and other transactions including:
– unrealised pro ts in inventory and non-current assets

Q.+-32",-9'M+)<"/

The key to understanding this - is the fact that when we make group accounts - we
are pretending P & S are the same entity

Therefore you cannot make a pro t by selling to yourself

So any pro ts made between two group companies (and still in group inventory)
need removing - this is what we call ‘unrealised pro t’

Q.+-32",-9'#+)<"/'R'=)+-'9-/3"2

Pro t is only ‘unrealised’ if it remains within the group. If the stock leaves the group it
has become realised

So ‘Unrealised pro t” is pro t made between group companies and REMAINS IN

STOCK

XH3=#2-

P buys goods for 100 and sells them to S for 150. S has sold 2/5 of this stock

The Unrealised Pro t is: Pro t between group companies 50 x 3/5 (what remains in
stock) = 30

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 G)>'9)'>-'/:-.'9-32'>"/:'Q.+-32",-9'M+)<"/

If P buys goods for 100 and sells them to S for 150.

Thereby making a pro t of 50 by selling to another group company.

S sells 4/5 of them to 3rd parties

Unrealised pro t is 50 x 1/5 = 1

The idea of what we need to do How we do it on the SFP

Reduce Pro t of Seller Reduce SELLERS Retained Earnings
Reduce Inventory Reduce BUYERS Inventory

0)'>:1'9)'>-'+-9*B-'".@-./)+1'3,'>-22'3,'#+)<"/C

Well let’s say that S buys goods for 100 and sells them to P for 150 and P still has
them in stock

How much did the stock actually cost the group?

The answer is 100, as they are still in the group.

However P will now have them in their stock at 150.

So we need to reduce stock/inventory also with any unrealised pro t

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 012234*,'!U7'8*,".-,,'B)=4".3/").,'u'<3"+'@32*-'39P*,/=-./,
Syllabus D3. Explain why it is necessary for both the consideration paid for a subsidiary and
the subsidiary’s identi able assets and liabilities to be accounted for at their fair values when
preparing consolidated nancial statements

Compute the fair value of the consideration given including the following elements:
- Cash
- Share exchanges
- Deferred consideration
- Contingent consideration

W3?-',*+-'1)*'*,-'%[')<'().,"9-+3/").

().,"9-+3/").'",',"=#21'>:3/'/:-'M3+-./'#31,'<)+'/:-',*47

It is the rst line in the goodwill working as follows

FV of Consideration X
NCI X
FV of Net Assets Acquired (X)
Goodwill X

Z)+=32'().,"9-+3/").

This is straightforward. It is simply

Dr Investment in S

Cr Cash

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 %*/*+-'().,"9-+3/").

This is a little more tricky but not much. Here, the payment is not made immediately
but in the future. So the credit is not to cash but is a liability

Dr Investment in S

Cr Liability

The only dif culty is with the amount

As the payment is in the future we need to discount it down to the present value at
the date of acquisition

$22*,/+3/").'

P agrees to pay S 1,000 in 3 years time (discount rate 10%)

Dr Investment in S 751

Cr Liability 751 (1,000 / 1.10^3

As this is a discounted liability, we must unwind this discount over the 3 years to get
it back to 1,000. We do this as follows

Year 1 2 3
Dr Interest Cr Liability 75 84 91

()./".;-./'().,"9-+3/").

This is when P MAY OR MAY NOT have to pay an amount in the future (depending
on, say, S’s subsequent pro ts etc.). We deal with this as follows

Dr Investment in S

Cr Liability

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 522'3/'<3"+'@32*-

You will notice that this is exactly the same double entry as the future consideration
(not surprising as this is a possible future payment!)

The only difference is with the amount

Instead of only discounting, we also take into account the probability of the payment
actually being made

Doing this is easy in the exam - all you do is value it at the FV

(this will be given in the exam you’ll be pleased to know)

$22*,/+3/").'

1/1/x7 H acquired 100% S when it’s NA had a FV of £25m. H paid 4m of its own
shares (mv at acquisition £6) and cash of £6m on 1/1/x9 if pro ts hit a certain target

At 1/1/x7 the probability of the target being hit was such that the FV of the
consideration was now only £2m. Discount rate of 8% was used

At 31/12/x7 the probability was the same as at acquisition

At 31/12/x8 it was clear that S would beat the target

0:)>'/:-'9)*42-'-./+1'

Contingent consideration should always be brought in at FV. Any subsequent

changes to this FV post acquisition should go through the income statement

Any discounting should always require an winding of the discount through interest on
the income statemen

Double entry - Parent Compan

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 6g6gHp 

Dr Investment in S (4m x £6) + £2 = 26

Cr Share Capital 4

Cr Share premium 20

Cr Liability

U6g6TgHp 



Dr interest 0.16

Cr Liability 0.1

U6g6TgHr 



Dr Income statement 4 (6-2)

Dr Liability 2

Cr Cash

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 Syllabus D3. Prepare consolidated nancial statements dealing with fair value adjustments
(including their effect on consolidated goodwill) in respect of:
– Depreciating and non-depreciating non-current assets
– Inventory
– Deferred tax
– Liabilities
– Assets and liabilities (including contingencies), not included in the subsidiary’s own statement
of nancial position
Explain the subsequent accounting treatment, including the principle of impairment tests in
relation to purchased goodwill

L))9>"22'R'%[')<'Z5'E=)+-'9-/3"2F

L))9>"22

So let’s remind ourselves of the goodwill working

Consideration 800
NCI 330
FV of Net Assets Acquired (1,000)
Goodwill 130

We have just looked in more detail at the sort of surprises the examiner can spring
on us in the rst line “consideration” - now let´s look at the bottom line in more detail

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 %3"+'@32*-,')<'Z-/'5,,-/,'3/'5B]*","/").

Operating leases. If terms are favourable to the market - recognise as an asse

Internally generated intangibles would now have a reliable measure and would be
brought in the consolidated account

Remember both of these items would need to be depreciated in our equity table
working

contingent liabilities (see bottom of this page

$22*,/+3/").

1/7/x5 H acquired 80% S for 16m, nci measured at share of net assets. FV of NA
was 10m

S had a production backlog with a FV of 2m (uel 2 years) and unrecognised

trademarks with a FV of 1m. These are renewable at any time at a negligible cost

S made a pro t of 5m in the year to 31/12/x5

A:3/'>)*29';))9>"22'4-'".'/:-'B).,)2"93/-9'0%MC

Consideration 16
NCI 2.6
FV of Net Assets Acquired (13)
Goodwill 5.6

%[')<'Z5'>)+?".;

Per Accounts 10 + FV adj (2+1)  

M+)@",").32'L))9>"22

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 We get “provisional goodwill’ when we cannot say for certain yet what the FV of Net
Assets are at the date of acquisition

This is ne, we just state in the accounts that the goodwill gure is provisional.

This means we then have 12 months (from the date of acquisition) to change the
goodwill gure IF AND ONLY IF the information you nd (within those 12 months)
gives you more information about the conditions EXISTING at the year-end

Any information after the 12 month period (even if about conditions at acquisition)
does not change goodwill.

Any differences are simply written off to the income statement

So, in summary, the FV of NA can be altered retrospectively if within 12 months of

acquisition.

This means goodwill would change. Any alteration after 12 months is through the
income statement

$22*,/+3/").

A acquired 70% B on 1/7/x7, NCI measured at share of net assets acquired.

A provisional fair value only was used for plant and machinery of £8m (UEL 10yrs).

Goodwill was £4m.

The year-end of 31/12/x7 accounts were then approved on 25/2/x8

On 1/4/x8 the FV of the plant was nalised at 7.2m

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 G)>'>)*29'/:",'3<<-B/'/:-'B).,)2"93/-9'3BB)*./,C

Provisional goodwill is acceptable if disclosed as such in the accounts

The parent then has one year after acquisition to nalise the FV and alter goodwill.
Should the nalisation occur after one year - no adjustment is required to goodwill

Provisional Goodwill 4

59P*,/-9'L))9>"22

Original 4m + (0.8 x 70%) = 4.56

()./".;-./'2"34"2"/"-,
Normally these are just disclosures in the accounts.

However, remember that when a sub is acquired, it is brought into the accounts at
FV.

A contingent liability does have a fair value.

Therefore they must be actually recognised in the consolidated accounts until the
amount is actually paid

0)'/:-'+*2-,'3+-I

1. Bring in at the F

2. Measure afterwards at this amount unless it then becomes probable. As usual, a

probable liability is then measured at the full liabilit

Note. If it remains just possible then keep it at the initial FV until it is either written off
or paid

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 $22*,/+3/").

1/7/x6 P acquired all of S when it’s NA had a CV of £2m. However, they had
disclosed a contingent liability. This has a FV of £150,000

1/12/x7 this potential liability was paid at an amount of £200,000

G)>'3+-'/:-'3BB)*./,'3<<-B/-9C

Well we would bring it into the equity table (at acquisition column) in the workings at
its FV of 150. This would affect goodwill working accordingly

Keep it at this amount until it either becomes probable (show at full amount) or pai

Here it is paid so the year end would show no liability - and the post-acquisition
column +150. This would then affect the NCI and reserves working accordingly

The extra 50 paid will have already been taken into account when the full amount
was pai

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 Syllabus D3. Compute the fair value of the consideration given including the following
elements:
- Share exchanges

0:3+-'<)+'0:3+-'XHB:3.;-,

D:-,-'B3.'<)+='#3+/Y')+'322Y')<'/:-'B),/')<'".@-,/=-./'>:"B:'",'*,-9'".'/:-';))9>"22'

B32B*23/").7

Under normal circumstances, P acquires S’s shares by giving them cash, so the
double entry i

Dr Cost of Investment

Cr Cash

However this time, P does not give cash, but instead gives some of its own shares

If this exchange has yet to be accounted for, the double entry is always:

Dr Cost of Investment

Cr Share capital (with the nominal value of P shares given out)

Cr Share premium (with the premium

$22*,/+3/").

P acquired 80% of S shares via a 2 for 1 share exchange.

At the date of acquisition, the following balances were in the books of P and S

  P S
Share Capital $400 ($0.50) $400
Share Premium $100   $50

The share price of P was $2 at the date of acquisition. This has not been accounted
for.

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 0:)>'/:-'3BB)*./".;'/+-3/=-./'+-]*"+-9'/)'3BB)*./'<)+'/:-',:3+-'-HB:3.;-7

P acquired 80% of S’s shares.

The shares had a value of $400 but a nominal value of $0.50.

This means S has 800 shares in total. P acquired 80% x 800 = 640 shares

The share for share deal was 2 for 1.

So P gives 1,280 of its shares in return for 640 of S’s shares

P’s shares have a MV of $2 at this date so the “cost of investment is 1,280 x 2 =

2,56

Double entry

Dr Cost of Investment 2,560


Cr Share Capital (P) 1,280

Cr Share Premium (P) 1,280

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 012234*,'!`7'8*,".-,,'B)=4".3/").,'u'3,,)B"3/-,'3.9'P)"./'
3++3.;-=-./,
Syllabus D4. De ne associates and joint arrangements

5,,)B"3/-,

An associate is an entity over which the group has signi cant in uence, but not
control

0";."<"B3./'".<2*-.B-

Signi cant in uence is normally said to occur when you own between 20-50% of the
shares in a company but is usually evidenced in one or more of the following ways

• representation on the board of director

• participation in the policy-making proces

• material transactions between the investor and the investe

• interchange of managerial personnel; o

• provision of essential technical informatio

5BB)*./".;'/+-3/=-./

An associate is not a group company and so is not consolidated. Instead it is

accounted for using the equity method. Intercompany balances are not cancelled

0/3/-=-./')<'%".3.B"32'M),"/").

There is just one line only “investment in Associate” that goes into the consolidated
SFP (under the Non-current Assets section)

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 It is calculated as follows

Cost 400
Share of A’s post acquisition reserves 200

Less impairment (100)

  500

().,)2"93/-9'".B)=-',/3/-=-./

Again just one line in the consolidated income statement

Share of Associates PAT (-impairment) 100

Include share of PAT less any impairment for that year in associate

Do not include dividend received from A

What’s important to notice is that you do NOT add across the associate’s Assets and
Liabilities or Income and expenses into the group totals of the consolidated
accounts. Just simply place one line in the SFP and one line in the Income
Statement

Q.+-32",-9'#+)<"/,'<)+'3.'3,,)B"3/-

1. Only account for the parent’s share (eg 40%).

This is because we only ever place in the consolidated accounts P’s share of A’s
pro ts so any adjustment also has to be only P’s share

2. Adjust earnings of the selle

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 59P*,/=-./,'+-]*"+-9').'$.B)=-'0/3/-=-./

• If A is the seller - reduce the line “share of A’s PAT

• If P is the seller - increase P’s CO

59P*,/=-./,'+-]*"+-9').'0%M

• If A is the seller - reduce A’s Retained earnings and P’s Inventor

• If P is the seller - reduce P’s Retained Earnings and the “Investment in Associate”
lin

$22*,/+3/").

P sells goods to A (a 30% associate) for 1,000; making a 400 pro t. 3/4 of the goods
have been sold to 3rd parties by A

A:3/'-./+"-,'3+-'+-]*"+-9'".'/:-';+)*#'3BB)*./,C

Pro t = 400; Unrealised (still in stock) 1/4 - so unrealised pro t = 400 x 1/4 = 100. As
this is an associate we take the parents share of this (30%). So an adjustment of 100
x 30% = 30 is needed

59P*,/=-./'+-]*"+-9').'/:-'$.B)=-',/3/-=-./

P is the seller - so increase their COS by 30

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 59P*,/=-./'+-]*"+-9').'/:-';+)*#'0%M

P is the seller - so reduce their retained earnings and the line “Investment in
Associate” by 30

  H S A
PPE 300,000 100,000 160,000
18,000 shares in S 75,000    
24,000 shares in A 30,000    
Receivables 345,000 160,000 80,000
Share capital £1 250,000 30,000 60,000
Retained earnings 400,000 180,000 100,000
Trade payables 100,000 50,000 80,000

The retained earnings of S and A were £70,000 and £30,000 respectively when they
were acquired 8 years ago.

There have been no issues of shares since then, and no FV adjustments required.

The group use the proportionate method for valuing NCI at acquisition

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 M+-#3+-'/:-'B).,)2"93/-9'0%M

0)2*/").

0/-#'6I'X]*"/1'D342-

  Now At Acquisition Post-Acquisition

Share Capital 30,000 30,000 0
Retained Earnings 180,000 70,000 110,000
Total 210,000 100,000 110,000

0/-#'TI'L))9>"22

Consideration 75,000
NCI 40,000 (40% x 100,000)
FV of Net Assets Acquired (100,000) from equity table
Goodwill 15,000

H owns 18,000 of S’s share capital of 30,000 so 60%.

0/-#'UI'Z($

NCI @ Acquisition 40,000 (from goodwill working)

(40% x 110,000) (From equity
40 % of S’s post acquisition pro ts 44,000
table)
Impairment (0)  
NCI on the SFP 84,000  

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 0/-#'`I'&-/3".-9'X3+.".;,

P 400,000  
S 66,000 (60% x 110,000 (From Equity table)
A 28,000 (40% x 70,000 (100-30)
Impairment (0) (100% because proportionate method x 0)
  494,000  

0/-#'^I'$.@-,/=-./'".'5,,)B"3/-

Cost 30,000
Share of A’s post acquisition reserves 28,000 (from RE working)

Less impairment (0)

  58,000

%".32'3.,>-+'R'L))9>"22

  H S A Group
PPE 300,000 100,000 160,000 400,000
18,000 shares in S 75,000     15,000
18,000 shares in A 30,000   Investment in Associate 58,000
Receivables 345,000 160,000 80,000 505,000
Share capital £1 250,000 30,000 60,000 250,000
Retained earnings 400,000 180,000 100,000 494,000
NCI       84,000
Trade payables 100,000 50,000 80,000 150,000

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 Syllabus D4. Distinguish between joint operations and joint venture

Prepare consolidated nancial statements to include a single subsidiary and an associate or a

joint arrangement.

w)"./'[-./*+-,

5'P)"./'3++3.;-=-./'",'3.'3++3.;-=-./')<'>:"B:'/>)')+'=)+-'#3+/"-,'

:3@-'P)"./'B)./+)27

5'P)"./'3++3.;-=-./':3,'/:-'<)22)>".;'B:3+3B/-+",/"B,I

• The parties are bound by a contract, an

• The contract gives two or more parties joint control

A:3/'",'w)"./'()./+)2C

The sharing of control where decisions about the relevant activities need unanimous
consent

The rst step is to see if the parties control the arrangement per IFRS 10

After that, the entity needs to see if it has joint control as per paragraph above

Unanimous consent means any party can prevent other parties from making
unilateral decisions (about the relevant activities)

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 D1#-,')<'P)"./'3++3.;-=-./,

Joint arrangements are either joint operations or joint ventures

• 5'P)"./')#-+3/").

Here the parties have rights to the assets, and obligations for the liabilities,
relating to the arrangement.

They are called joint operators

• 5'P)"./'@-./*+-

Here the parties have rights to the net assets of the arrangement.

Those parties are called joint venturers

• (23,,"<1".;'P)"./'3++3.;-=-./,

This depends upon the rights and obligations of the parties to the arrangement.
Regardless of the purpose, structure or form of the arrangement

A joint arrangement in which the assets and liabilities relating to the arrangement
are held in a separate vehicle can be either a joint venture or a joint operation

A joint arrangement that is not structured through a separate vehicle is a joint

operation

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 %".3.B"32',/3/-=-./,')<'#3+/"-,'/)'3'P)"./'3++3.;-=-./

• w)"./'O#-+3/").,

A joint operator recognises

o its assets, including its share of any assets held jointl

o its liabilities, including its share of any liabilities incurred jointl

o its revenue from the sale of its share of the output of the joint operatio

o its share of the revenue from the sale of the output by the joint operation; an

o its expenses, including its share of any expenses incurred jointl

• A joint operator accounts for the assets, liabilities, revenues and expenses
relating to its involvement in a joint operation in accordance with the relevant
IFRS

• $22*,/+3/").

An of ce building is being constructed by A and B, each entitled to half the pro t

A has invoiced 300 and had costs of 280


B has invoiced 500 and had costs of 42

This shows that total sales are 800, total costs are 700 - so a pro t of 100 needs
splitting 50 each

A is currently showing a pro t of 20, and B of 80. Therefore A now needs to show
a receivable of 30 from B (and B a payable to A)

Revenue should be 400 each, so A needs an extra 100 and costs should be 350
each so an 70 is required

• Double entry for A


Dr Receivables 30

Cr Revenue 100

Dr COS 70

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 If an does not have joint control of a joint operation - it accounts for its interest in the
arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation

w)"./'[-./*+-,

The group accounts for this using the equity method (see associates)

(A party that does not have joint control of a joint venture accounts for its interest in
the arrangement in accordance with IFRS 9)

Q.+-32",-9'#+)<"/').',32-,'>"/:'w['R'32>31,'P*,/'/:-',:3+-'E-7;7'^hnF

• M'/)'w[

o Income Statement

Increase P’s CO

o SFP

Decrease P’s RE


Decrease Investment in J

• w['/)'M

o Income Statement

Decrease “Share of JV PAT

Decrease JV’s RE


Decrease P’s stoc

• No Elimination of Receivables and Payables to each othe

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 012234*,'!^7'()=#2-/-'9",#),32')<',:3+-,'".',*4,"9"3+"-,
Calculate the gain or loss on the complete disposal of shares in a subsidiary in the nancial
statements of the parent and the subsidiary.
Explain and illustrate the effect of the complete disposal of a parent’s investment in a subsidiary
in the parent’s individual nancial statements and/or those of the group.

%*22'!",#),32

D:",'",'>:-.'>-'2),-'B)./+)2Y',)'>-';)'<+)=')>.".;'3'n'34)@-'^h'/)').-'4-2)>'^h'

E-;'rhn'/)'UhnF7

$.'/:",'B3,-'>-':3@-'-<<-B/"@-21'9",#),-9')<'/:-',*4,"9"3+1'E3.9'#),,"421'B+-3/-9'3'

.->'3,,)B"3/-F7

5,'/:-',*4':3,'4--.'9",#),-9')<'R'/:-.'3.1';3".')+'2),,';)-,'/)'/:-'$Z(OWX'

0D5DXWXZD'E3.9':-.B-'+-/3".-9'-3+.".;,F7

52,)Y'/:-')29'0*4,'3,,-/,'3.9'2"34"2"/"-,'.)'2).;-+';-/'399-9'3B+),,Y'/:-+-'>"22'4-'.)'

;))9>"22')+'Z($'<)+'"/'-"/:-+7

How do you calculate this gain or loss

Proceeds X

Net Assets (100%) (X)

Goodwill (X)

NCI X

FV of the remaining %  (if any) X

Gain/Loss X

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 What’s the effect on the Income Statement

Consolidated until sale; Then treat as Associate (if we have signi cant in uence)

otherwise a FVTPL investment

Show pro t on disposal (see above).

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 Syllabus D5. Calculate the gain or loss on the complete disposal of shares in a subsidiary in
the nancial statements of the parent and the subsidiary.
Explain and illustrate the effect of the complete disposal of a parent’s investment in a subsidiary
in the parent’s individual nancial statements and/or those of the group.

0*4,"9"3+1'3B]*"+-9'>"/:'3'@"->'/)'9",#),32

A subsidiary that is acquired exclusively with a view to its subsequent disposal is

 classi ed on the acquisition date of the subsidiary as a non-current disposal group

'held for sale' (if it is expected that the subsidiary will be disposed of within one year

and the other IFRS 5 criteria are met with within three months of the acquisition date

Classi cation as a discontinued operatio

A subsidiary classi ed as 'held for sale', is included in the de nition of a discontinued

operation, with treatment as follows

• Income statement


Single Line “Discontinued operations” - PAT of the Sub + gain/loss on re-

measurement to held for sale


The income and expenses of the subsidiary are therefore not consolidated on a

line-by-line basis with the income and expenses of the holding company.


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)

 • Statement of nancial position


The assets and liabilities classi ed as 'held for sale' presented separately (the

assets and liabilities of the same disposal group may not be offset against each

other). 


The assets and liabilities of the subsidiary are therefore not consolidated on a

line-by-line basis with the assets and liabilities of the holding company.


• Statement of Cash ows


No need to disclose the net cash ows attributable to the operating, investing

and nancing activities of the discontinued operation (which is normally

required) but is not required for newly acquired subsidiaries which meet the

criteria to be classi ed as 'held for sale' on the acquisition date

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